Banco Bradesco SA
2007-12-31
Banco Bradesco SA
2006-12-31
Banco Bradesco SA
2004-12-31
2005-12-31
Banco Bradesco SA
2005-12-31
2006-12-31
Banco Bradesco SA
2006-12-31
2007-12-31
Banco Bradesco SA
2005-12-31
Banco Bradesco SA
2004-12-31
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The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The consolidated financial statements include various estimates and assumptions, including, but not limited to: the adequacy of the allowance for loan losses, estimates of fair value of certain financial instruments, depreciation and amortization, asset impairments, useful lives of intangible assets, tax valuation allowances, assumptions used for calculation of insurance reserves, pension plans, contingencies and reserves for potential losses from tax uncertainties. Actual results could differ from those estimates.
The allowance for loan losses represents management's estimate of probable losses inherent in the loan portfolio at each balance sheet date. Our evaluation on the adequacy of the allowance is based on regular reviews on individual loans, in accordance with SFAS 114, "Accounting for Impairment of a Loan by a Creditor";, as amended by SFAS 118 and on the aggregate analysis of homogeneous loans. The individual loan analysis considers a loan as impaired, when, in our opinion, all amounts due are no longer considered collectible, including accrued interest, in accordance with SFAS 114, "Accounting for Impairment of a Loan by a Creditor";, as amended by SFAS 118. We then measure impaired loans based on (i) present value of expected future cash flows discounted at the loan's effective interest rate or (ii) the fair value of the collateral if the loan is collateral dependent. The allowance is established through the difference between the carrying
value of the impaired loan and its value determined as described above. The aggregate loss analysis for groups of homogeneous loans is based on internal models, which consider a number of features including, but not limited to, the recent loss experience, current economic conditions, clients´ profiles and internal risk ratings. These models and inputs are frequently reviewed to take into consideration actual losses. Loans are charged-off against the allowance when the loan is considered uncollectible collected or is considered permanently impaired.
Equity investees and other investments, where we own between 20% and 50% of voting capital, are accounted for using the equity method of accounting, according to the Accounting Principles Board (APB) Opinion 18, "The Equity Method of Accounting for Investments in Common Stock";. Under this method, our share of results of the investee, as reported under U.S. GAAP, is recognized in the statement of income as "Equity in earnings (losses) of unconsolidated companies" and dividends are credited when declared to the "Equity investees and other investments" balance sheet account (Note 9).
Interests in companies of less than 20% with no readily determinable market value are recorded at cost (unless we have the ability to exercise significant influence over the operations of the investee, in which case we use the equity method) and dividends are recognized in income when received.
None of our investments in unconsolidated companies, analyzed on an individual basis, are considered significant for additional disclosures in our consolidated financial statements. When analyzed on an aggregate basis for the fiscal year ended December 31, 2007, they meet the criteria of relevant subsidiaries and thus, aggregate summary financial information is disclosed in Note 9.
Until December 31, 1997, Brazil was considered to be a highly inflationary environment and accordingly all balances and transactions prior to that date were remeasured at December 31, 1997 price levels. The index selected for this remeasurement was the General Price Index - Internal Availability (IGP-DI), which we consider to be the most appropriate index due to its independent source, long history of publication and its mix of wholesale, consumer and construction prices.
For purposes of the statement of cash flows, cash and cash equivalents include cash and due from banks, interest earning deposits in other banks and federal funds sold and securities purchased under agreements to resell, that have
original maturities of three months or less and present insignificant risk of changes in value.
December 31, 2006 2007
Cash and due from banks ............................................................................ 4,747 5,485
Interest-earning deposits in other banks .......................................................... 2,968 2,942
Federal funds sold and securities purchased under agreements to resell...................... 3,659 31,669
Total .................................................................................................... 11,374 40,096
In December 2007, the FASB issued SFAS 141 ("SFAS 141 (R)";) "Business Combinations";. This Statement replaces SFAS 141, "Business Combinations". SFAS 141(R) requires an acquiring entity to recognize all assets acquired, liabilities assumed, and any non controlling interest in the acquired entity at the acquisition date, at fair value as of that date. Also, requires that (i) the measuring stock consideration be based on the quoted market price as of the acquisition date and not on the date the deal is announced, (ii) the contingent consideration arising from a contract and noncontractual contingencies be measured and recognized as an asset or liability at fair value at the acquisition date with subsequent changes in fair value reflected in earnings and noncontractual contingencies that do not meet the more-likely-than-not criteria continue to be recognized when they are probable and reasonably estimable, and (iii) expensing of acquis
ition-related transaction and restructuring costs. The guidance is effective on a prospective basis for business combinations in which the acquisition date is on or after the first annual reporting period beginning on or after January 1, 2009.
In December 2007, the FASB issued SFAS 160 ("SFAS 160";), "Non-controlling Interests in Consolidated Financial Statements an amendment of ARB No. 51"; to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires the recognition of a non controlling interest as equity in the consolidated financial statements and segregated from the parent's equity. In addition, net income attributable to the noncontrolling interest must be included in the consolidated net income on the face of the income statement. In case a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary should be measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. We do not expect
that the adoption of this requirement to have a material impact on our consolidated financial position or results of operations.
In November 2007, the SEC issued Staff Accounting Bulletin No. 109 "Written Loan Commitments Recorded at Fair Value through Earnings"; ("SAB 109";), which requires that the expected net future cash flows related to servicing of a loan should be included in the measurement of all written loan commitments measured at fair value through earnings. The adoption of SAB 109 is on a prospective basis and effective for a loan commitments measured at fair value through earnings when are issued or modified after January 1, 2008. We are currently evaluating the potential impact of the adoption of this SAB 109. However, the adoption of this accounting pronouncement is not expected to have a significant impact on our consolidated financial condition and results of operations.
In February 2008, the FASB issued FASB Staff Position No. FSP 140-3, "Accounting for Transfers of Financial Assets and Repurchasing Transactions";, ("FSP 140-3"). FSP 140-3 addresses accounting for repurchase agreements related to previously transferred financial assets when the repurchase arrangement is between the same parties as the original transfer. This FSP presumes that an initial transfer of a financial asset and a repurchase agreement are considered part of the same arrangement under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and instead should be evaluated separately
under SFAS 140. This FSP is effective fiscal years beginning after November 15, 2008 and shall be applied prospectively to initial transfers and repurchase financings for which the initial transfer is executed on or after the beginning of the fiscal year this FSP is initially applied. We are currently evaluating the potential impact of the adoption of FSP 140-3.
In March 2008, the FASB issued SFAS 161 ("SFAS 161";), "Disclosure about Derivative Instruments and Hedging Activities, an amendment of FASB Statements No. 133";, which requires the enhancement of the current disclosure framework in Statement 133. The Statement requires that the objectives and strategies for using derivative instrumentsbe disclosed in the underlying risks and accounting designation. Disclosing the fair value of derivative instruments and their gains and losses in a tabular format should provide a more complete presentation of the location in an entity's financial statements of both the derivative positions existing at period end and the effect of using derivatives
during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity's liquidity from using derivatives. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We are evaluating the effects of the adoption of this statement on our consolidated financial statements and results of operations.
In April 2008, the FASB issued FASB Staff Position FSP 142-3, "Determination of Useful Life of Intangible Assets";("FSP FAS 142-3";), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141(R), and other U.S. generally accepted accounting principles (GAAP). This FSP applies regardless of the nature of the transaction that resulted in the recognition of the intangible asset, that is, whether acquired in a business combination or otherwise. In developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset, an entity shall consider its own historical experience in renewing or extending similar arran
gements. However, these assumptions should be adjusted for the entityspecific factors in paragraph 11 of Statement 142. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension (consistent with the highest and best use of the asset by market participants), adjusted for the entity-specific factors in paragraph 11 of Statement 142. We are currently evaluating the potential impact of the adoption of FSP FAS 142-3.
In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60." SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. SFAS 163 will be effective for fiscal years beginning after December 15, 2008
. We are currently evaluating the potential impact of the adoption of SFAS 163.
Interest earning assets and interest bearing liabilities are presented in the consolidated balance sheet at the principal amount outstanding plus accrued interest and monetary and exchange variation incurred. Such presentation is required since accrued interest and monetary (indexation) variations and exchange gains/losses are added to the outstanding principal each period for substantially all Brazilian real-based assets and liabilities.
The total interest and monetary and exchange variations accrued on the outstanding principal of assets was R$7,909 and R$8,273 at December 31, 2006 and 2007, respectively. Total interest and monetary and exchange variation accrued on outstanding principal of liabilities was R$4,835 and R$4,573 at December 31, 2006 and 2007, respectively.
Loans and leases are stated at amortized cost using the effective yield interest method, including interest receivable, origination fees and costs and monetary indexation (Note 2 (c)). Interest income is recorded on an accrual basis and is added to the principal amount of the loan in each period. The accrual of interest is generally discontinued on all loans that are not considered collectible as to principal or interest and for all loans 60 days or more overdue. Interest collections on such loans are recorded as reductions of the principal balance when collectibility is uncertain, otherwise income is recognized on a cash basis.
We provide vehicle and equipment financing to our customers through a variety of lease arrangements. Lease financing receivables are recorded at the aggregate of lease payments receivable plus the estimated residual value of the leased property, less unearned income.
Also, we have followed the policies prescribed by Statement of Position 03-3. "Accounting for Certain Loans or Debt Securities Acquired in a Transfer";, which addresses accounting for differences between contractual and expected cash flows from the purchaser's initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality.
Development and acquisition costs of software, included within premises and equipment, net relate to costs of internal
use software capitalized, in accordance with Statement of Position 98-1 "Accounting for computer software developed
or obtained for internal use.";
The costs that vary with and are related to the production of new insurance business are deferred to the extent that such costs are deemed recoverable from future profits.
Such costs include mainly commissions, cost of policy insurance and variable support service costs and are amortized over the expected life of the contracts in proportion to the premium income. Deferred acquisition costs are subject to recoverability testing at the end of each accounting period and, if not recoverable, are charged to expense.
We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes"; (SFAS 109) as interpreted by FIN 48, resulting in two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. These gross deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future reversals of temporary differences in the bases of assets and liabilities as measured by tax laws and their bases as reported in the financial statements.
Deferred tax assets are also recognized for tax attributes such as net operating loss carryforwards and tax credit carryforwards. Valuation allowances are then recorded to reduce deferred tax assets to the amounts management concludes are more-likely-than-not to be realized. Under FIN 48, income tax benefits are recognized and measured based upon a two-step model: 1) a tax position must be more-likely than- not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the largest amount of that position that is more-likely-than-not to be sustained upon settlement. The difference between the benefit recognized for a position in accordance with this FIN 48 model and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit (UTB). We accrue income-tax-related interest and penalties (if applicable) within income tax expense. We implemented FIN 48 on January 1, 2007 and it did not have any impact on our consolidated financial posi
tion.
Earnings per share are presented based on the two classes of shares issued. Both classes, common and preferred, participate in dividends on substantially the same basis, except that preferred shareholders are entitled to dividends per share 10% higher than common shareholders (Note 17). Earnings per share are computed based on the distributed dividends or interest on shareholders' capital and undistributed earnings of Bradesco after giving effect to the 10% preference, as though all earnings will be distributed. Weighted average shares are computed based on the periods for which the shares are outstanding.
On March 12, 2007, our Board of Directors approved a split of our capital stock. in which our shareholders were entitled to one new share for each existing share of the same class. On March 24, 2008, our Board of Directors approved a split of our capital stock, in which our shareholders were entitled to one new share for each two existing shares of the same class. Therefore, all related share amounts have been retroactively adjusted for all periods presented to reflect the stock split.
In addition, we considered the policies prescribed by EITF Issue 03-6,"Participating Securities and the Two-Class Method"; under SFAS 128, "Earnings per Share."
We are required to make employer contributions to INSS, a Brazilian Government Agency that manages social securities, retirement pension and other benefits. Such contributions, which are expensed as incurred, totaled R$647 in 2005, R$716 in 2006 and R$809 in 2007.
In addition, we make contributions to defined-benefit plans for our employees coming from acquired institutions. We account for these plans in accordance with SFAS 87 "Employers Accounting for Pensions". We adopted the revised SFAS 132 ("SFAS 132R";) that maintains the disclosure requirements of the original statement and requires additional disclosures for pension plan assets, expected benefit obligations, cash flows for future contributions and benefit payments and other relevant information. See Note 26 to the Consolidated Financial Statements for these disclosures.
In September 2006, the FASB issued SFAS 158. "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of the FASB Statements No 87, 88, 106, and 132(R)"; ("SFAS 158";). SFAS 158 requires the funded status of pension and other postretirement plans to be recorded on the balance sheet as of December 31, 2006 with a corresponding offset, net of tax effects, recorded in accumulated other comprehensive income (loss) within shareholder's equity. The requirement to recognize the funded status of a benefit plan and the
disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006. The effect of adopting SFAS 158 is not material and presented in note 26.
SFAS 158 also requires the measurement of the plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position, effective for fiscal years ending after December 15, 2008. The antecipated adoption of this requirement for the fiscal year ended December 31, 2007 did not have a material impact on our consolidated financial position or results of operations.
Fair values were estimated for groups of similar loans based upon type of loan, credit quality and maturity. The fair value of fixed-rate loans was determined by discounting estimated cash flows using interest rates approximating our current origination rates for similar loans. For most variable-rate loans, the carrying amounts were considered to approximate fair value. Where credit deterioration has occurred, estimated cash flows for fixed and variable-rate loans have been reduced to incorporate estimated losses.
The fair values for performing loans are calculated by discounting scheduled principal and interest cash flows through maturity using market discount rates and yield curves that reflect the credit and interest rate risk inherent in the loan type at each reporting date. The fair values for impaired loans are based on the discounting cash flows or the value of underlying collateral.
The non-performing loans were allocated into each loan category for purposes of fair value disclosure. Assumptions regarding cash flows and discount rates are determined using available market information and specific borrower information.
Derivatives other than trading and embedded derivatives
Derivative instruments are recognized as assets or liabilities in the balance sheet and measured at fair value, regardless of the purpose or intention to hold them in accordance with SFAS 133, "Accounting for Derivative Financial Instruments and Hedging Activities";, as amended by SFAS 137, 138 and 149. Changes in the fair values of an instrument are recognized in income or equity, depending on its designation and qualification as a fair value, cash flow or foreign currency hedge. In order to qualify as a hedge, the derivative must be: (i) designated as hedge of a specific financial asset or liability at the inception of the contract, (ii) effective at reducing the risk associated with the exposure to be hedged, and (iii) highly correlated with respect to changes in its fair value or in the related cash flows in relation to the fair value of or cash flows related to the item to be hedged both at inception and over the life of the contract. The Company has not adopted hedge accounting.
We identify bifurcatable embedded derivatives when all of the following criteria are met: (i) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the contract that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value with changes in fair value reported in earnings as they occur and (iii) a separate instrument with the same terms as the embedded derivative instrument would be a derivative instrument subject to the requirements of SFAS 133, as amended. These embedded derivative instruments are measured at fair value with gains and losses recognized in income at each reporting date.
In accordance with SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments"; (SFAS 155) hybrid financial instruments which contain an embedded derivative that would otherwise require bifurcation may be accounted for at fair value, with changes in fair value recognized in consolidated statement of income. The fair value would be applied on an instrument-by-instrument basis; however the election to apply fair value accounting is irrevocable.
Available for sale securities
Debt securities are classified based on management's intention at the date of purchase. Securities that are bought and held principally for the purpose of resale in the near term are classified as trading assets and are stated at fair value. Securities are classified as available for sale when, in management's judgment, they may be sold in response to or in anticipation of changes in market conditions, being carried at fair value with net unrealized gains and losses included in shareholders' equity on an after-tax basis. Average cost is used to determine realized gains and (losses) on sales of available for sale securities.
Amortization of premiums or discounts is recorded as interest using the effective yield method through the maturity date of the security.
Marketable equity securities, which are included as available for sale, are carried at fair value with net unrealized gains and losses included in shareholders' equity on an after-tax basis, until realization at which time the net realized gains (losses) are included in non-interest income (expenses).
Held to maturity securities
Debt securities for which there is intention and financial capacity for maintenance in portfolio through maturity are classified as held to maturity securities and recorded at purchase cost, plus the effective interest rate (yield method) through the maturity date of security.
Transfers of investments from trading and available for sale categories to the held to maturity category were accounted at fair value on the date of the transfer:
in the case of trading securities, prior gains and losses were previously recorded in the consolidated income statement;
in the case of available for sale securities, unrealized gains/losses are recorded in "Unrealized gains/losses on available for sale securities"; directly in shareholders' equity at the time of the transfer and are subsequently amortized over the period from the date of the transfer to the maturity of the security.
Other than temporary impairment
In determining whether or not impairment of a security (classified either as available for sale or held-to-maturity) is other than temporary, we use a combination of factors aimed at determining whether recovery of the value of a security is likely. These factors include, besides the duration and magnitude of impairment, a number of other unrelated factors, such as the likelihood, based on the historical behavior of the value of particular securities and our experience with them, that a decline in value will be recovered, as well as the likelihood that we will be unable to collect either principal or interest, due to: (i) filing by the issuer of a bankruptcy or debtor workout procedure; (ii) deterioration of the issuer's credit risk rating; or (iii) financial difficulties of the issuer, whether or not related to the market conditions in the industry in which it operates. In addition to the disclosures already required by SFAS 115, we have followed the policies determined by Emerging Issues Task Force ("EITF"
;) Issue 03-1, "The Meaning of Other than Temporary Impairment and Its Application to Certain Investments";, FASB Staff Position ("FSP";) SFAS 115-1 and SFAS 124-1.
For the majority of our foreign operations, the functional currency is the Brazilian real, in which case the assets and liabilities are remeasured, at current exchange rates from the local currency to the Brazilian real and the results of operations are remeasured at the average rate for the period. Losses and gains arising from the remeasurement process are included in current income.
Assets are classified as foreclosed assets and are included in other assets upon actual foreclosure or when physical possession of the collateral is taken, through agreement on court action.
Foreclosed properties are carried at the lower of the recorded amount of the loan or lease for which the property previously served as collateral, or the fair value of the property less estimated costs to sell. Prior to foreclosure, any write-downs, if necessary, are charged to the allowance for loan losses.
Subsequent to foreclosure, gains or losses on the sale of and losses on the periodic revaluation of foreclosed properties are recorded in income. Net costs of maintaining and operating foreclosed properties are expensed as incurred.
SFAS 141, "Business Combinations"; requires accounting for business combinations determining whether an acquired intangible asset should be recognized separately from goodwill, as well as additional disclosures relating to the primary reason for a business combination and the allocation of the purchase price by major balance sheet captions.
SFAS 142, "Goodwill and Other Intangible Assets"; requires that goodwill, including that acquired before initial application of the standard, is no longer amortized but is tested for impairment at least annually, using a two-step approach that involves the identification of "reporting units"; and the estimation of fair value. The reporting unit is the banking segment that is analyzed by the management on a regular basis.
The impairment test is performed in two phases. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an additional step has to be performed. This additional step compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.
Finite-lived intangible assets are generally amortized on a straight-line basis over the estimated period benefited. The client portfolios intangible asset is recorded and amortized over a period in which the asset is expected to contribute directly or indirectly to the future cash flows (between five and ten years). We review our intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets may not be recoverable, in which case its impairment charge is recognized on income immediately, according to SFAS 144.
Also, we have followed the policies prescribed by SFAS 147, "Acquisitions of Certain Financial Institutions";, which requires that business combinations involving depositary financial institutions within its scope, except for combinations between mutual institutions, be accounted for under SFAS 141.
We recognize an impairment loss only if the carrying amounts of long-lived assets to be held and used are not recoverable from their expected undiscounted future cash flows, pursuant to SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets";.
Fixed assets, mainly comprising certain bank branches, which were sold and subsequently leased by us for the purposes of continuing our operations, were recorded pursuant to SFAS 13 and SFAS 98, "Accounting for Leasing"; and SFAS 28 "Accounting for Sales Subject to Rental Contracts.";
We earn fee income from investment management, credit card, investment banking and certain commercial banking services. Such fees are recognized when the service is performed (investment and commercial banking) or over the life of the contract (investment management and credit card).
According to SFAS 5 "Accounting for Contingencies"; and Interpretation Nº 14 ("FIN 14";) "Reasonable Estimation of the Amount of a Loss,"; we recognize accruals in determining loss contingencies when the conditions known before the issuance of the financial statements show that: (i) it is probable that losses had been incurred at the date of the financial statements; and (ii) the amount of such losses can be reasonably estimated. We accrue our best estimate of probable losses.
We constantly monitor litigation in progress to evaluate, among other things: (i) its nature and complexity; (ii) the evolution of the proceedings; (iii) the views of our legal advisors; and (iv) our experience with similar proceedings. We also consider in determining whether a loss is probable and in estimating its amount:
a) The probability of loss from claims or events that have occurred on or before the date of the financial statements, but which come to our attention only after the date of the financial statements, but before the financial statements are issued; and
b) The need to disclose claims or events occurring after the date of the financial statements but before they are issued.
We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes"; (SFAS 109) as interpreted by FIN 48, resulting in two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. These gross deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future reversals of temporary differences in the bases of assets and liabilities as measured by tax laws and their bases as reported in the financial statements.
Deferred tax assets are also recognized for tax attributes such as net operating loss carryforwards and tax credit carryforwards. Valuation allowances are then recorded to reduce deferred tax assets to the amounts management concludes are more-likely-than-not to be realized. Under FIN 48, income tax benefits are recognized and measured based upon a two-step model: 1) a tax position must be more-likely than- not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the largest amount of that position that is more-likely-than-not to be sustained upon settlement. The difference between the benefit recognized for a position in accordance with this FIN 48 model and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit (UTB). We accrue income-tax-related interest and penalties (if applicable) within income tax expense. We implemented FIN 48 on January 1, 2007 and it did not have any impact on our consolidated financial posi
tion.
The accrual of interest is generally discontinued on all loans that are not considered collectible as to principal or interest and for all loans 60 days or more overdue. Interest collections on such loans are recorded as reductions of the principal balance when collectibility is uncertain, otherwise income is recognized on a cash basis.
Substantially all of our insurance contracts are considered short-duration insurance contracts. Premiums from shortduration insurance contracts are recognized over the related contract period. Premiums from long-duration contracts are recognized when due from the policyholders.
Reserves for insurance claims are established based on historical experience, claims in process of payment, estimated amount of claims incurred but not yet reported, and other factors relevant to the level of reserves required. Reserves are adjusted regularly based upon experience, with the effects of changes in such estimated reserves included in the results of operations in the period in which the estimated reserves were changed, and include estimated reserves for reported and unreported claims incurred.
Reserves for private pension plan are established based on actuarial calculations.
Certain products offered by us, such as pension investment contracts and funds where the investment risk is for the account of policyholders, are considered investment contracts in accordance with the requirements of SFAS 97, "Accounting and Reporting by Insurance Enterprises for Certain Long Duration Contracts and For Realized Gains and Losses from Sale of Investments,"; ("SFAS 97";). During the accumulation phase of the pension investment contracts, when the investment risk is for the account of policyholders, the contracts are treated as an investment contract.
During the annuity phase the contract is treated as an insurance contract with mortality risk. Funds related to pension investment contracts where the investment risk is for the account of policyholders are equal to the account value. Account values are not actuarially determined. Rather, account values are increased by the deposits received and interest credited (based on contract provisions) and are reduced by redemptions at the policyholders option.
In addition, we determine the need to record an additional liability for the contract feature when the present value of expected annuitization payment at the expected annuitization date exceeds the expected account balance at the annuitization date, in accordance with SOP 03-1 "Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts"; ("SOP 03-1";). The securities related to these pension investment contracts are classified as "trading securities"; and "available for sale securities"; in the consolidated financial statements.
In October 2005, the American Institute of Certified Public Accountants ("AICPA";) issued Statement of Position 05- 1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts"; ("SOP 05-1"). SOP 05-1 provides accounting guidance for deferred policy acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments";.
SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. The provisions of SOP 05-1 are effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The SOP 05-1 did not have a material impact on our financial condition and results of operations.
In September 2006, the FASB issued SFAS No 157 ("SFAS 157";), "Fair Value Measurements."; The Statement defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosure requirements regarding methods used to measure fair value and the effects on earnings. SFAS 157 clarifies that fair value is the amount that would be exchanged to sell an asset or transfer a liability, in an orderly transaction between market participants on the measurement date. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. We do not expect that the adoption of this requirement to have a material impact on our consolidated financial position or results of operations.
In February 2007, the FASB issued SFAS 159 ("SFAS 159";), "The Fair Value Option for Financial Assets and Financial Liabilities."; SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value and to provide additional information that will help investors and other users of financial statements to understand more easily the effect on earnings of the company's choice to use fair value. SFAS 159 is effective as of the first quarter of 2008. We are currently evaluating the impact of the adoption of SFAS 159 which depends on the nature and extent of items elected to be measured at fair value, upon initial application of the standards in 2008.
The liability for unpaid claims and claim adjustment expenses represents the amounts needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the balance sheet date. The estimated liability includes the amount of money that will be required for future payments of (a) claims that have been reported to the insurer, (b) claims related to insured events that have occurred but that have not been reported to the insurer as of the date the liability is estimated, and (c) claim adjustment expenses. Claim adjustment expenses include costs incurred in the claim settlement process such as legal fees; outside adjuster fees; and costs to record, process, and adjust claims.
Premium deficiency reserves are established. if necessary, when the liability for future policy benefits plus the present value of expected future gross premiums are determined to be insufficient to provide for expected future policy benefits and expenses and to recover any unamortized policy acquisition costs. During the regular course of our insurance activities, we reinsure a portion of the underwritten risk with IRB Brasil Resseguros S.A., a government controlled entity. The reinsurance agreement permits a recovery of a portion of losses from the reinsurer, although it does not discharge our primary liability as direct insurer of the risks reinsured. Reinsurance receivables as of December 31, 2006 and 2007 amounted to R$35 and R$55, respectively, and are included in "Other assets".
The liability for future compensation for employee vacations is accrued and expensed as earned by the employees.
Loans and leases are stated at amortized cost using the effective yield interest method, including interest receivable, origination fees and costs and monetary indexation (Note 2 (c)). Interest income is recorded on an accrual basis and is added to the principal amount of the loan in each period. The accrual of interest is generally discontinued on all loans that are not considered collectible as to principal or interest and for all loans 60 days or more overdue. Interest collections on such loans are recorded as reductions of the principal balance when collectibility is uncertain, otherwise income is recognized on a cash basis.
We provide vehicle and equipment financing to our customers through a variety of lease arrangements. Lease financing receivables are recorded at the aggregate of lease payments receivable plus the estimated residual value of the leased property, less unearned income.
Also, we have followed the policies prescribed by Statement of Position 03-3. "Accounting for Certain Loans or Debt Securities Acquired in a Transfer";, which addresses accounting for differences between contractual and expected cash flows from the purchaser's initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality.
Banco Bradesco S.A. (also referred as "we," the "Company" or "Bradesco"), a publicly traded company organized under the laws of the Federative Republic of Brazil, has its headquarters in Osasco, State of São Paulo, Brazil.
We are a multiple service bank under Brazilian banking regulations, operating principally in two segments. The Banking segment includes a wide variety of banking activities, servicing both retail and corporate customers and engaging in investment banking, international banking, consortia administration and asset management operations. The Insurance, Pension Plan and Certificated Savings plans segment relates to auto, health, life, casualty and property insurance, pension and certificated savings plans.
Our retail banking products include demand deposits, savings deposits, time deposits, mutual funds, foreign exchange services and a variety of financing operations including overdraft facilities, credit cards, installment loans and consortia administration. Corporate services include cash management and treasury services, foreign exchange operations, corporate finance and investment banking services, hedging programs and financing operations including working capital loans, leasing and installment loans. Such services are conducted primarily
in Brazilian markets but also include, to a lesser extent, cross-border services.
Brazilian corporations are permitted to attribute a tax-deductible interest charge on shareholders' equity. The notional interest charge is treated as though it was a dividend and is accordingly shown as a direct reduction of retained earnings in these financial statements. The related tax benefit is recorded in the income statement.
The Company utilizes certain financial arrangements to meet its funding and liquidity management through SPF entities. These SPF entities are generally funded with long-term debt (Note 14 (d)) and are paid down through the future cash flow of the underlying assets. The underlying assets are essentially current and future flows of (i) payment orders from individuals and corporations outside Brazil to individuals and corporations in Brazil on which we act as the paying bank and (ii) credit card bill receivables from purchases in Brazil from foreign cardholders.
We consolidated these SPF entities based on the policies issued by FASB Interpretation Nº 46 ("FIN 46") "Consolidation of Variable Interest Entities", revised in December 2003 ("FIN 46R").
Credit card fees, periodically charged to cardholders, net of related issuance costs, are deferred and recognized on a straight-line basis over the period that the fee entitles the cardholder to use the card.
The consolidated financial statements include the accounts of Banco Bradesco S.A. (parent company), its foreign
branches and all direct or indirect majority-owned subsidiaries, based on the concepts of the Accounting
Research Bulletin (ARB 51) "Consolidated Financial Statements";. All significant intercompany accounts and
transactions have been eliminated. In addition, the consolidated financial statements include account balances of
Variable Interest Entities ("VIEs";), of which we are the primary beneficiary, under FASB Interpretation 46R,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51";. Notes 2 (bb) and 14 (d).
Depreciation is computed on the straight-line method at the following annual rates: premises 4%; data processing equipment 20% to 50%; and other assets 10% to 20%.
We adopted the provisions issued by FASB Interpretation No 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others (FIN 45)."; The FIN 45, which clarifies previously issued accounting guidance and disclosure requirements for guarantees, expands the disclosures to be made by a guarantor in its financial statements about obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee.
The new requirements include the disclosure of the nature of the guarantee, the maximum potential amount of future payments that we could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. Significant guarantees that have been provided by us are disclosed in Note 22 (d).
In July 2003, the FASB issued SFAS 150. "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,"; which establishes standards for how an issuer measures certain financial instruments with characteristics of both liabilities and equity and classifies them in its statement of financial position..
Premises and equipment are recorded at cost (plus price-level restatements through December 31, 1997). Depreciation is computed on the straight-line method at the following annual rates: premises 4%; data processing equipment 20% to 50%; and other assets 10% to 20%.
We recognize an impairment loss only if the carrying amounts of long-lived assets to be held and used are not recoverable from their expected undiscounted future cash flows, pursuant to SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets";.
Fixed assets, mainly comprising certain bank branches, which were sold and subsequently leased by us for the purposes of continuing our operations, were recorded pursuant to SFAS 13 and SFAS 98, "Accounting for Leasing"; and SFAS 28 "Accounting for Sales Subject to Rental Contracts.";
For transactions classified as operating leases, relating to property sold for cash, only the portion corresponding to: (i) the positive difference between revenue determined at the time of the sale and the present value of the future lease to be paid is recognized immediately in income for the period, whereas (ii) the remaining portion is deferred over the corresponding rental contract terms, and (iii) exclusively in cases of loss, the amounts are recognized immediately. In cases where the sale is financed, income will be determined only as from the final maturity of the corresponding financing (Note 10) and subsequently recorded in accordance with the criteria described above. Gain or loss on cash sales not subject to lease contracts was recognized immediately in income for the year as "Other non-interest income";.
Federal funds sold and securities purchased under agreements to resell are treated as collateralized financial transactions and are recorded at the amounts at which the federal funds and securities were acquired or sold plus accrued interest. This classification also includes securities pledged under repurchase agreements mainly comprising Brazilian federal government securities. These securities present insignificant risk of changes in interest rates and may be subject to repledge agreements by the relevant counterparties.
a) Like other Brazilian financial institutions, we are required to maintain deposit funds with the Central Bank or to purchase and hold Brazilian federal government securities. in the form of compulsory deposits which are as follows:
December 31, 2006 2007
Non-interest earning (1) ................... 6,446 8,919
Interest-earning (2) ........................ 12,219 14,620
Interest-earning (3) ......................... 4,796 8,274
Total ........................................... 23,461 31,813
(1) Related to demand deposits.
(2) Mainly related to saving deposits.
(3) Time deposits deposited with the Central Bank in the form of Brazilian government securities.
b) The Brazilian government securities related to the compulsory deposits and accounted for under SFAS 115. were as follows:
Trading Available for sale Held to maturity
securities securities securities
2006 2007 2006 2007 2006 2007
Amortized cost.............. 4,795 7,773 - 511 - 6
Gross unrealized gains...... 1 - - - - -
Gross unrealized losses(1).. - (1) - (15) - -
Fair value..................... 4,796 7,772 - 496 - 6
Average balance............. 4,875 5,869
(1) No other than temporary losses have been identified for the gross unrealized loss amount. The amortized cost and the fair value of the securities, by maturity, were as follows:
December 31,
2006 2007
Amortized Fair Amortized Fair
cost value cost value
Due in one year or less ..................... 4,572 4,572 7,757 7,756
Due after one year through five years .. 223 224 533 518
Total .......................................... 4,795 4,796 8,290 8,274
The main risks related to financial instruments, which result from the Company's and its subsidiaries' business are: credit risk; market risk and; liquidity risk. Management of these risks is a process that involves different levels of the Company and covers several policies and strategies. Risk management policies are, in general, conservative, seeking to limit absolute losses to a minimum.
Credit Risk
Credit risk is the risk arising from the possibility of loss resulting from the non-receipt from counterparties or creditors of the amounts they have contracted with us to pay. Credit risk management requires a high level of discipline and control in terms of the analyses and operations conducted, and the preservation of the integrity and independence of processes.
Credit policy is designed to provide security, quality and liquidity in asset investments, and speed and profitability in our operations, minimizing the risks inherent to any credit operation. It also provides guidelines for the establishment of operational limits and/or the extension of the Company's credit. The Credit Department and Committees located in our Corporate Head Office assume a fundamental role in the execution of our Credit Policy, deciding on transactions which exceed branch limits and monitoring this core strategic activity.
Transactions are diversified and focused on creditworthy individuals and companies in good standing, and our transactions are typically supported by guaranties that are consistent with the risks assumed, with consideration given to purposes and terms of the credit extended. Automated credit approval systems were developed and are constantly being improved with the objective of facilitating and expediting the entire credit process as well as the analysis and issuance of opinions. The analysis of transactions involving less significant sums is conducted by "credit scoring"; systems.
Market Risk
Market risk is linked to the possibility of loss due to rate fluctuations relating to unhedged terms, currencies and indices in the Company's portfolio. The Company seeks to maintain a conservative policy with respect to exposure to market risks. The observance of the VAR (Value at Risk) limits set by senior management is monitored daily by an area that is independent from portfolio management. The models use volatilities and correlations that are calculated using statistical bases. These models are used in processes applied prospectively, in accordance with economic studies. The methodology applied and existing statistical models are validated daily using "backtesting"; techniques.
Additionally, a daily "Gap Analysis"; is undertaken, which measures the effect on the portfolio of changes in the internal interest rate curve and foreign exchange coupon curve (difference in interest paid over and above the foreign exchange variation). In addition to the monitoring, control and management of market risks, in compliance with Central Bank Regulations, the value at risk of fixed rate and foreign exchange positions of the Company's total portfolio, as well as the resulting capital requirement, is verified daily. Our analysis covers all financial assets and liabilities held in treasury, including our derivative instruments.
Liquidity Risk
Liquidity risk management is designed to control risk relating to the different unhedged settlement terms of the Company's rights and obligations. Knowledge and monitoring of this risk are crucial to enable the Company to settle transactions in a timely and secure manner. At Bradesco, liquidity risk management involves a set of controls, principally relating to the establishment of technical limits, and the positions assumed are constantly evaluated.
In our shareholders' general meeting held on March 10, 2005, we received the approval to acquire the shares held by the minority shareholders of Bradesco Seguros S.A. ("Bradesco Seguros";) through the issuance of shares in the amount of R$12, which was approved by the Central Bank on July 18, 2005. On April 15, 2005, through Banco Finasa, we acquired from Banco Morada S.A. and Morada Investimentos S.A. ("Grupo Morada";), the total capital stock of Morada Serviços Ltda. ("Morada Serviços";) for the total amount of R$80 paid in cash.
On July 26, 2005, we acquired 50% of the total capital of União de Lojas Leader S.A. ("Leader Magazine";), for the total amount of R$47 in cash.
On January 3, 2006, we acquired 89.35% of Banco do Estado do Ceará BEC's voting capital and 89.17% of BEC's total capital for the amount of R$700, with R$458 paid in cash and R$242 paid in government securities, the market value of which was equivalent to R$134 as of the date of the transaction. BEC's total capital was acquired afterwards at the São Paulo Stock Exchange - BOVESPA, for the amount of R$ 86. In November 2006, BEC was merged by Alvorada Cartões, Crédito, Financiamento e Investimento S.A..
On March 20, 2006, we signed an agreement with the controlling shareholders of American Express Company to acquire the total capital of its subsidiaries in Brazil (Banco American Express S.A., American Express Banco Múltiplo S.A., American Express do Brasil Tempo Ltda, and Inter American Express Arrendamento Mercantil S.A., (together referred as "Amex";). The transaction was concluded upon Central Bank approval on June 30, 2006 and upon payment of US$468, equivalent to R$1,001 paid in cash.
On May 15, 2006, we acquired the total capital of Bradesplan Participações S.A. ("Bradesplan";) for the amount of R$308 paid in cash.
On March 2006, we entered into an agreement with Lojas Colombo S.A. Comércio de Utilidades Domésticas, ("Lojas Colombo";) to acquire 50% of the total capital stock of Josema Administração e Participações S.A., parent company of Credifar S.A., Crédito, Financiamento e Investimento, ("Credifar";), a financial institution that has the exclusive rights to offer financial products and services to Lojas Colombo´s clients. We have consolidated Credifar in 2007, when the acquisition was approved by the Central Bank, and based on our primary beneficiary status. The acquisition was paid in cash in the amount of R$221. On January 23, 2007, we entered into an agreement with the shareholders of Banco BMC S.A. ("BMC";), to acquire 100% of its capital stock and its controlled subsidiaries BMC Asset Management Ltda. Distribuidora de Títulos e Valores Mobiliários, BMC Previdência Privada S.A. and Credicerto Promotora de Vendas Ltda. In accordance with the terms of
the agreement, we delivered 9,299,618 of our common shares and 9,299,514 of our preferred shares to BMC shareholders, as payment for the acquisition in the amount of R$790. In August 2007, the transaction was approved by the Central Bank.
1987000000
2006
BEC Amex Bradesplan Total
Cash and cash equivalents.................................. 503 50 - 553
Securities................................................. 724 189 10 923
Loans...................................................... 261 155 - 416
Goodwill .................................................. - 335 - 335
Intangible assets client portfolio ...................... 398 274 - 672
Other assets .............................................. 662 1,726 398 2,786
Deposits .................................................. (982) (166) - (1,148)
Loans...................................................... - (31) - (31)
Other liabilities.......................................... (888) (1,531) (100) (2,519)
Total consideration and fair value of net assets acquired.. 678 1,001 308 1,987
2163000000
139000000
2005
Morada Leader Bradesco Total
Seguros
Cash and cash equivalents ................................. - 47 - 47
Goodwill................................................... 50 20 - 70
Intangible assets client portfolio....................... 28 - - 28
Other assets .............................................. 2 7 - 9
Other liabilities.......................................... - (27) - (27)
Minority shareholders...................................... - - 12 12
Total consideration and fair value of net assets acquired . 80 47 12 139
1011000000
2007
BMC Josema Total
Cash and cash equivalents ................................. 41 - 41
Loans ..................................................... 1,238 113 1,351
Securities ................................................ 127 19 146
Goodwill .................................................. 234 - 234
Intangible assets client portfolio ...................... 281 167 448
Other assets............................................... 464 9 473
Deposits .................................................. (310) (65) (375)
Borrowings ................................................ (197) - (197)
Other liabilities ......................................... (1,088) (22) (1,110)
Total consideration and fair value of net assets acquired.. 790 221 1,011
2975000000
The Company utilizes certain financial arrangements to meet its funding and liquidity management through SPF entities. These SPF entities are generally funded with long-term debt (Note 14 (d)) and are paid down through the future cash flow of the underlying assets. The underlying assets are essentially current and future flows of (i) payment orders from individuals and corporations outside Brazil to individuals and corporations in Brazil on which we act as the paying bank and (ii) credit card bill receivables from purchases in Brazil from foreign cardholders.
We consolidated these SPF entities based on the policies issued by FASB Interpretation Nº 46 ("FIN 46") "Consolidation of Variable Interest Entities", revised in December 2003 ("FIN 46R").
Proceeds from sale of current and future flows of payment orders and credit cards bills received by the SPF entities are required to be maintained in a specified bank account until a certain minimum level is achieved. The amount subject to restricted withdrawal in the amount of R$1 in 2006 is considered "Restricted Cash" and presented as "Cash and due from banks"; in our consolidated balance sheet. As of December 31, 2007 this effect did not exist.
The following table summarizes the main characteristics of debts issued by the SPF entities:
December 31,
Asset securitized Maturity/date Currency Annual rate - % 2006 2007
Payment orders 2010 US$ 6.75 331 191
Payment orders(1) 2012 US$ 4.69 206 142
Payment orders 2014 US$ 5.57 - 5.89 - 1,612
Credit card bills(2) 2011 US$ 5.69 807 552
Total 1,344 2,497
(1) If the SPF entity fails to make a timely payment of accrued interest and/or principal, the investors have the benefit of a financial uarantee insurance policy provided by an unrelated insurance company.
(2) 44.618488% of the securities issued will be repaid through the future flows of credit card bills provided by the secondary beneficiary designated bank (Banco do Brasil S.A.). Therefore, since the SPF entity was consolidated in our financial statements, we have recorded R$308 as securitization of credit card bill receivables in "Other assets"; as of December 31, 2007 (2006 R$ 372).
On January 4, 2008, our Board of Directors approved the cancellation of 828,700 treasury common shares and 1,417.524 treasury preferred shares, representing its capital stock. On January 4, 2008, our Board of Directors approved a capital increase in the amount of R$1,200, through the issuance of 13,953,489 common shares and 13,953,488 preferred shares, to be subscribed for R$43.00 per share.
On January 21, 2008 we, through Bradesco Seguros S.A., entered into an agreement with Marsh Corretora de Seguros Ltda., with the purpose of acquiring the majority of shares of Mediservice Administradora de Planos de Saúde Ltda., for the amount of R$85. The operation is pending approval of the regulatory authorities.
On January 3, 2008, the Provisory Measure Nº 413 increased the Social Contribution rate for the financial segment, from 9% to 15% of the taxable income. This Measure causes an increase in Social Contribution becoming effective May 1, 2008 and has been submitted to the Brazilian Congress within regulatory timeframe. If this Measure is deemed unconstitutional by the Supreme Court, its effects will become null and void and corresponding tax credits shall be calculated using the 9% rate.
On March 6, 2008, we entered into an agreement with the shareholders of Ágora Holdings S.A. ("Ágora Holdings";), for the acquisition of Ágora´s total capital stock, through our subsidiary Banco Bradesco BBI S.A. ("BBI";). The operation will comprise the indirect transfer of 100% of the shares representing Ágora Corretora de Títulos e Valores Mobiliários S.A. ("Ágora Corretora";) capital stock to BBI. Ágora Corretora is a whollyowned subsidiary of Ágora Holdings. The payment of the operation, in an amount of approximately R$ 830, will be made upon the delivery, to Ágora Holdings' shareholders, of shares corresponding to approximately 8% of BBI´s capital stock, upon the closing of the transaction. This transaction makes Ágora Holdings into a whollyowned subsidiary of BBI. The operation is pending approval by the regulatory authorities.
On March 24, 2008, our Board of Directors approved a capital increase of R$2,800, through: a) the capitalization of a partial balance from the "Profits Reserve Statutory Reserve"; account, and b) a 50% share bonus, in which our shareholders were entitled to receive a new share per each 2 existing shares from the same class, on a free basis. This capital increase also takes into account shares subscribed in the capital increase approved on January 4, 2008. As a result, 511,644,460 common shares and 511,644,407 preferred shares were issued.
On March 31, 2008, we sold part of our interest in Visa Inc.´s capital stock through an IPO process that took place in the United States of America. We had a gain of approximately R$352 before income taxes in this transaction. The remaining 3.7 million shares that we still hold, correspond to US$163, based on the US$ 44.00 fixed price as established in the bookbuilding process. According to the IPO rules, this interest is subject to a lock-up period of 3 years.
In 2008, the Decree-Laws No. 6,339 and 6,345 increased the IOF (Tax on Financial Transactions) rate, which is a tax levied on foreign exchange, loan and insurance transactions, among others. This amendment became effective on January 4, 2008. As a financial institution, we have the responsibility to withhold the IOF incurred in our clients transactions.
We operate primarily in the banking, insurance, pension plan and certificated savings plans business. Banking operations include retail and corporate banking, leasing, international banking, private banking and investment banking activities. We carry out our banking operations through our own operations located in Brazil, foreign branches and majority-owned subsidiaries as well as equity investments in other companies. Additionally, we engage in insurance, pension plan and certificated savings plans activities through our majority-owned subsidiary, Bradesco Seguros S.A. and its affiliates.
The following segment information was compiled based on reports used by Senior Management to evaluate the segment performance and make decisions as to the allocation of resources for investment and other purposes. Our Senior Management uses a variety of information for such purposes including financial and non-financial information measured on different bases. In accordance with SFAS 131 "Disclosures about Segments of an Enterprise and Related Information,"; the information included below has been compiled from that prepared on the basis which is most consistent with that used in measuring the amounts included in the financial statements in accordance with Brazilian GAAP.
Principal segment assumptions for revenues and expenses include: (i) cash surpluses generated by the insurance. pension plan and certificated savings plans segment are retained by that segment resulting in an increased net interest income, (ii) salaries and benefits and administrative costs included within the insurance, pension plan and certificated savings plans segment consist of only costs directly related to those operations, and (iii) costs incurred in the Banking segment relating to branch network infrastructure and other overheads are not allocated.
Year ended December 31, 2005
Banking Insurance, Other operations, USGAAP
pension plan and adjustments, consolidated
certificated reclassifications
savings plans and eliminations
Interest income............................................... 25,060 5,939 (73) 30,926
Interest expense.............................................. (12,786) - 345 (12,441)
Net interest income .......................................... 12,274 5,939 272 18,485
Provision for loan losses .................................... (1,823) - - (1,823)
Insurance premiums............................................ - 9,928 (2,123) 7,805
Pension plan income .......................................... - 2,386 (2,009) 377
Certificated saving plans..................................... - 1,420 (1,420) -
Equity in earnings (losses) of unconsolidated companies....... 176 81 (71) 186
Other income.................................................. 7,813 1,143 216 9,172
Salaries and benefits ........................................ (4,824) (359) (15) (5,198)
Administrative expenses ...................................... (4,219) (463) 235 (4,447)
Insurance claims ............................................. - (6,730) 1,229 (5,501)
Changes in provisions related to insurance, pension plan,
certificated savings plans and pension investment contracts .. - (6,841) 2,902 (3,939)
Pension plan operating expenses .............................. - (2,507) 2,002 (505)
Insurance and pension plan selling expenses .................. - (1,055) 14 (1,041)
Other expense................................................. ( 4,049) (678) (92) (4,819)
Income before income taxes and minority interest ............. 5,348 2,264 1,140 8,752
Identifiable assets........................................... 164,821 49,295 (7,522) 206,594
Year ended December 31, 2006
Banking Insurance, Other operations, USGAAP
pension plan and adjustments, consolidated
certificated reclassifications
savings plans and eliminations
Interest income............................................... 27,771 6,476 24 34,271
Interest expense.............................................. (13,039) - 170 (12,869)
Net interest income .......................................... 14,732 6,476 194 21,402
Provision for loan losses .................................... (3,770) - 3 (3,767)
Insurance premiums............................................ - 11,212 (3,091) 8,121
Pension plan income .......................................... - 2,650 (1,859) 791
Certificated saving plans..................................... - 1,418 (1,418) -
Equity in earnings (losses) of unconsolidated companies....... 296 106 (178) 224
Other income.................................................. 9,243 1,258 216 10,717
Salaries and benefits ........................................ (5,543) (504) (40) (6,087)
Administrative expenses ...................................... (4,962) (498) 237 (5,223)
Insurance claims ............................................. - (7,347) 1,223 (6,124)
Changes in provisions related to insurance, pension plan,
certificated savings plans and pension investment contracts .. - (7,904) 3,705 (4,199)
Pension plan operating expenses .............................. - (2,164) 1,604 (560)
Insurance and pension plan selling expenses .................. - (1,140) 288 (852)
Other expense................................................. (4,761) (651) (281) (5,693)
Income before income taxes and minority interest ............. 5,235 2,912 603 8,750
Identifiable assets........................................... 206,349 61,021 (8,099) 259,271
Year ended December 31, 2007
Banking Insurance, Other operations, USGAAP
pension plan and adjustments, consolidated
certificated reclassifications
savings plans and eliminations
Interest income............................................... 30,000 6,577 (68) 36,509
Interest expense.............................................. (12,901) - 163 (12,738)
Net interest income .......................................... 17,099 6,577 95 23,771
Provision for loan losses .................................... (4,617) - 1 (4,616)
Insurance premiums............................................ - 12,556 (3,713) 8,843
Pension plan income .......................................... - 2,447 (1,892) 555
Certificated saving plans..................................... - 1,556 (1,556) -
Equity in earnings (losses) of unconsolidated companies....... 434 79 (106) 407
Other income.................................................. 12,777 1,948 (649) 14,076
Salaries and benefits ........................................ (6,105) (510) (154) (6,769)
Administrative expenses ...................................... (5,846) (581) 191 (6,236)
Insurance claims ............................................. - (7,391) 1,379 (6,012)
Changes in provisions related to insurance, pension plan,
certificated savings plans and pension investment contracts .. - (9,661) 4,680 (4,981)
Pension plan operating expenses .............................. - (2,037) 1,559 (478)
Insurance and pension plan selling expenses .................. - (1,247) 90 (1,157)
Other expense................................................. (7,511) (265) 1,670 (6,106)
Income before income taxes and minority interest ............. 6,231 3,471 1,595 11,297
Identifiable assets........................................... 275,081 72,449 (13,021) 334,509
We enter into financial derivative instruments contracts with various counterparties to manage our overall exposures as well as to assist customers in managing their exposures. Such derivatives are summarized as follows:
Notional amounts
December 31,
2006 2007
Interest rate futures contracts:
Purchases ................................. 765 5,078
Sales...................................... 37,457 33,277
Foreign currency futures contracts:
Purchases ................................. 3,959 6,212
Sales...................................... 14,439 14,196
Futures contracts others:
Purchases ................................. - 59
Sales...................................... 54 25
Interest rate option contracts:
Purchases ................................. - 3,312
Sales...................................... - 2,983
Foreign currency option contracts:
Purchases ................................. 540 1,149
Sales...................................... 472 1,947
Option contracts - others:
Purchases ................................. - 322
Sales...................................... - 862
Foreign currency forward contracts:
Purchases ................................. 1,243 1,465
Sales...................................... 475 1,873
Forward contracts - others:
Purchases ................................. - 16
Sales...................................... 369 81
Swap contracts:
Asset Position:
Interest rate swaps........................ 9,237 13,660
Currency swaps ............................ 4,070 19,096
Liability Position:
Interest rate swaps........................ 2,408 8,090
Currency swaps ............................ 10,775 24,348
Net unrealized gains (losses) included in trading assets at December 31, 2006 and 2007 were R$23 and R$(65), respectively.
The net change in the unrealized gains (losses) on trading securities held as of December 31, 2005, 2006 and 2007, included in non-interest income, were R$90, R$(82) and R$(88), respectively.
Trading securities presented above include securities pledged as collateral that amounted to R$821 and R$3,331 at December 31, 2006 and 2007, respectively.
Derivative positions presented above represent the fair values of interest rate, foreign exchange, equity and commodity-related products, including financial forward settlement and option contracts and swap agreements associated with our financial derivative instruments trading activities.
Interest rate, currency and cross-currency interest rate swaps are contracts in which a series of interest rate cash flows of a single currency or interest or principal payments in two different currencies are exchanged for a contractual period. The notional amount represents the basis on which the cash flows are determined. The risks associated with swaps relate to the potential inability or unwillingness of the counterparties to perform according to the contractual terms and the risk associated with changes in market conditions due to changes in interest rates and the exchange rate of currencies. The total credit exposure associated with interest rate and currency swaps was R$303 and R$359 at December 31, 2005 and 2006, respectively.
We enter into financial derivative instruments contracts with various counterparties to manage our overall exposures as well as to assist customers in managing their exposures. Such derivatives are summarized as follows:
Interest rate, currency and cross-currency interest rate swaps are contracts in which a series of interest rate cash flows of a single currency or interest or principal payments in two different currencies are exchanged for a contractual period. The notional amount represents the basis on which the cash flows are determined. The risks associated with swaps relate to the potential inability or unwillingness of the counterparties to perform according to the contractual terms and the risk associated with changes in market conditions due to changes in interest rates and the exchange rate of currencies. The total credit exposure associated with interest rate and currency swaps was R$584 and R$1,134 at December 31, 2006 and 2007, respectively.
Interest rate and currency futures and interest rate forwards are contracts for the delayed delivery of an instrument at a specified price or yield. The notional amounts represent the face value of the underlying instrument for which daily cash settlements of the price changes are made. The credit risk associated with futures contracts is minimized due to daily cash settlements. Futures contracts are also subject to the risk of changes in interest rates or the value of the underlying instruments.re contracts for the delayed delivery of an instrument at a specified price or yield. The notional amounts represent the face value of the underlying instrument for which daily cash settlements of the price changes are made. The credit risk associated with futures contracts is minimized due to daily cash settlements. Futures contracts are also subject to the risk of changes in interest rates or the value of the underlying instruments. The total credit exposure associated with interest rate forwards was R$107 at Decem
ber 31, 2005.
1134000000
Credit risk is the risk arising from the possibility of loss resulting from the non-receipt from counterparties or creditors of the amounts they have contracted with us to pay. Credit risk management requires a high level of discipline and control in terms of the analyses and operations conducted, and the preservation of the integrity and independence of processes.
Credit policy is designed to provide security, quality and liquidity in asset investments, and speed and profitability in our operations, minimizing the risks inherent to any credit operation. It also provides guidelines for the establishment of operational limits and/or the extension of the Company's credit. The Credit Department and Committees located in our Corporate Head Office assume a fundamental role in the execution of our Credit Policy, deciding on transactions which exceed branch limits and monitoring this core strategic activity. Transactions are diversified and focused on creditworthy individuals and companies in good standing, and our transactions are typically supported by guaranties that are consistent with the risks assumed, with consideration given to purposes and terms of the credit extended. Automated credit approval systems were developed and are constantly being improved with the objective of facilitating and expediting the entire credit process as well as the analysis and issuance of op
inions. The analysis of transactions involving less significant sums is conducted by "credit scoring"; systems.
Off-balance sheet credit instruments
As part of our lending operations, we enter into various off-balance sheet credit instruments with our customers which are summarized as follows:
Contractual amounts
December 31,
2006 2007
Commitments to extend credit. including credit cards ...... 38,482 54,253
Financial guarantees....................................... 14,791 24,296
Other letters of credit.................................... 242 361
Unfunded commitments to extend credit including credit cards are contracts for a specified time period and at variable rates to lend to a customer who has complied with predetermined contractual conditions. The guarantees are conditional commitments issued by us to assure the performance of a customer to a third party in borrowing arrangements.
The maximum potential credit risk on undrawn commitments, standby and commercial letters of credit is equal to the contractual amounts shown above if the counterparty does not perform under the contract. Generally, these contracts expire without being drawn upon; therefore, the contractual amounts are not indicative of the actual credit exposure or future cash flow requirements for such commitments. The fair value of the obligation undertaken in issuing the guarantee at inception is typically equal to the net present value of the future amount of premium receivable under the contract. To mitigate credit risk, we may require the counterparty to pledge collateral in the form of cash, securities or other assets to support the extension of credit similar to the collateral required for our lending operations.
Financial guarantees
The following is a summary of the carrying values for the financial guarantees and other letters of credit, mentioned before:
December 31,
2006 2007
Maximum Carrying Maximum Carrying
payout/ value payout/ value
Notional Notional
Financial guarantees ...................................... 14,791 29 24,296 74
Other letters of credit.................................... 242 1 361 2
The carrying value includes amounts deferred and to be recognized in income over the life of the contract and amounts accrued for inherent losses in accordance with SFAS 5, "Accounting for Contingencies"; and FIN 45.
Financial guarantees are conditional loan commitments issued by us to guarantee the performance of a particular customer in relation to a third party. In general, we are guaranteed the right of return against the customer to recover any amounts paid under these guarantees. In addition, we may retain amounts in cash or other highly liquid guarantees to secure the commitments. The contracts are subject to the same credit rating process used to grant other credits.
Standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Standby letters of credit are subject to management's credit evaluation of the customer.
Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. We issue commercial letters of credit to facilitate foreign trade transactions. These instruments are shortterm commitments to pay a third-party beneficiary under certain contractual conditions for the shipments of goods. The contracts are subject to the same credit evaluations as other extensions of credit.
December 31,
2006 2007
Deferred tax assets, net (Note 16) .............................. 4,759 4,683
Credit card operations .......................................... 5,215 5,804
Restricted escrow deposits for taxation and labor matters........ 3,542 4,517
Taxes available for offset ...................................... 1,395 1,475
Insurance premiums receivable ................................... 1,328 1,325
Negotiation and intermediation of securities..................... 709 1,378
Deferred policy acquisition costs(1)............................. 565 641
National property system ........................................ 405 453
Securitization of credit card bill receivables (Note 14 (d))..... 372 308
Prepaid expenses ................................................ 169 183
Foreclosed assets, net .......................................... 161 195
Other ........................................................... 467 2,429
Total ........................................................... 19,087 23,391
(1) Commissions paid to insurance brokers on trade of insurance products, private pension plans and certificated savings plans.
Trading Securities
Fair value
December 31, Average balance
2006 2007 2006 2007
Mutual funds ............................................. 28,549 36,532 24,002 32,231
Brazilian government securities........................... 31,150 16,741 15,732 14,815
Corporate debt securities................................. 1,040 1,846 896 769
Brazilian sovereign bonds................................. 55 36 77 45
Bank debt securities ..................................... 1,263 956 384 3,188
Foreign government securities ............................ 94 1,901 112 324
Total ........................................................ 62,151 58,012 41,203 51,372
Derivative financial instruments ......................... 584 1,134 796 1,415
Total trading account assets.............................. 62,735 59,146 41,999 52,787
Net unrealized gains (losses) included in trading assets at December 31, 2006 and 2007 were R$23 and R$(65), respectively.
The net change in the unrealized gains (losses) on trading securities held as of December 31, 2005, 2006 and 2007, included in non-interest income, were R$90, R$(82) and R$(88), respectively.
Trading securities presented above include securities pledged as collateral that amounted to R$821 and R$3,331 at December 31, 2006 and 2007, respectively.
Derivative positions presented above represent the fair values of interest rate, foreign exchange, equity and commodity-related products, including financial forward settlement and option contracts and swap agreements associated with our financial derivative instruments trading activities.
Available for Sale Securities, at Fair Value
Amortized Gross Gross Fair
cost unrealized unrealized value
gains losses
December 31, 2006
Brazilian government securities.......................... 15,644 1,068 - 16,712
Brazilian sovereign bonds................................ 1,312 237 - 1,549
Corporate debt securities ............................... 2,048 83 (1) 2,130
Bank debt securities..................................... 45 9 - 54
Foreign government securities............................ 9 - - 9
Marketable equity securities ............................ 2,549 1,035 (159) 3,425
Total.................................................... 21,607 2,432 (160) 23,879
December 31, 2007
Brazilian government securities.......................... 21,657 1,722 (189) 23,190
Brazilian sovereign bonds................................ 361 77 - 438
Corporate debt securities ............................... 1,307 59 (2) 1,364
Bank debt securities..................................... 69 11 - 80
Marketable equity securities ............................ 2,385 2,219 (23) 4,581
Total.................................................... 25,779 4,088 (214) 29,653
In 2005, 2006 e 2007, we recorded R$49, R$64 and R$26, respectively, as other than temporary losses and they were written off and recorded as non-interest income.
No other than temporary losses have been identified for the remaining gross unrealized losses as of December 31, 2007 and 2006.
At December 31, 2006 and 2007 there were no securities of a single issuer, or group of related companies, for which the fair value exceeded 10% of shareholders' equity.
Realized gains and losses on securities are calculated based on the average cost method. The components of gains and losses realized on available for sale securities were as follows:
Year ended December 31,
2005 2006 2007
Gross gains ............................................. 833 1,338 1,575
Gross losses ............................................ (86) (181) (119)
Net gains ............................................... 747 1,157 1,456
The amortized cost and fair value of available for sale securities, by maturity, were as follows:
December 31,
2006 2007
Amortized Gross Gross Fair
cost unrealized unrealized value
gains losses
Due in one year or less.................................. 294 323 2,364 2,446
Due after one year through five years ................... 7,619 7,907 6,387 6,522
Due after five years through ten years .................. 10,275 10,531 6,029 6,283
Due after ten years ..................................... 870 1,693 8,614 9,821
No stated maturity (marketable equity securities)........ 2,549 3,425 2,385 4,581
Total ................................................... 21,607 23,879 25,779 29,653
Available for sale securities presented above include securities pledged as collateral that amounted to R$12 and R$736 at December 31, 2006 and 2007, respectively.
Additionally, available for sale securities presented as "Federal funds sold and securities purchased under agreements to resell"; amount to R$3,899 at December 31, 2007, with a market value of R$4,198, basically consist of Brazilian government securities (maturities between 3 and 10 years). At December 31, 2006 these securities amounted to R$2,825, with a market value of R$3,106.
Held to Maturity Securities
The amortized cost and fair value of held to maturity securities were as follows:
Amortized Gross Gross Fair
cost unrealized unrealized value
gains losses
December 31, 2006
Brazilian government securities.......................... 2,188 736 - 2,924
Brazilian sovereign bonds................................ 1,040 263 - 1,303
Foreign government securities............................ 37 - - 37
Total.................................................... 3,265 999 - 4,264
December 31, 2007
Brazilian government securities.......................... 2,643 1,103 (10) 3,736
Brazilian sovereign bonds................................ 288 47 - 335
Foreign government securities............................ 50 - - 50
Total.................................................... 2,981 1,150 (10) 4,121
The amortized cost and market value of held to maturity securities, by maturity, were as follows:
December 31,
2006 2007
Amortized Gross Gross Fair
cost unrealized unrealized value
gains losses
Due in one year or less.................................. 37 37 3 4
Due after one year through five years................. - - 265 283
Due after five years through ten years ............... 966 1,205 226 229
Due after ten years ..................................... 2,262 3,022 2,487 3,605
Total ................................................... 3,265 4,264 2,981 4,121
At December 31, 2007, we recorded securities pledged as collateral in our portfolio of held to maturity securities in the amount of R$3. At December 31, 2006, no securities pledged as collateral were recorded in our portfolio of held to maturity securities.
In addition, held to maturity securities recorded as "Federal funds sold and securities purchased under agreements to resell"; in a amount of R$578 at December 31, 2007, with a market value of R$665 comprise mainly Brazilian sovereign bonds (maturities from 3 to 10 years). At December 31, 2006, there were no securities recorded as "Federal funds sold and securities purchased under agreements to resell"; in our held to maturity securities portfolio.
The following table sets out our securities by denomination:
December 31,
2006 2007
Amortized Percentage Amortized Percentage
cost cost
Amortized
cost Percentage
Brazilian currency (reais) .............................. 2,188 67% 2,643 89%
Indexed to and denominated in foreign currency ... 1,077 33 338 11
3,265 100% 2,981 100%
Fair
value
December 31, 2006
Brazilian government securities.......................... 2,924
Brazilian sovereign bonds................................ 1,303
Foreign government securities............................ 37
Total.................................................... 4,264
December 31, 2007
Brazilian government securities.......................... 3,736
Brazilian sovereign bonds................................ 335
Foreign government securities............................ 50
Total.................................................... 4,121
Year ended December 31,
2005 2006 2007
Gross gains ............................................. 833 1,338 1,575
Gross losses ............................................ (86) (181) (119)
Net gains ............................................... 747 1,157 1,456
Fair
value
December 31, 2006
Brazilian government securities.......................... 2,924
Brazilian sovereign bonds................................ 1,303
Foreign government securities............................ 37
Total.................................................... 4,264
December 31, 2007
Brazilian government securities.......................... 3,736
Brazilian sovereign bonds................................ 335
Foreign government securities............................ 50
Total.................................................... 4,121
Available for Sale Securities
1456000000
21607000000
Amortized Gross Gross Fair
cost unrealized unrealized value
gains losses
December 31, 2006
Brazilian government securities.......................... 2,188 736 - 2,924
Brazilian sovereign bonds................................ 1,040 263 - 1,303
Foreign government securities............................ 37 - - 37
Total.................................................... 3,265 999 - 4,264
December 31, 2007
Brazilian government securities.......................... 2,643 1,103 (10) 3,736
Brazilian sovereign bonds................................ 288 47 - 335
Foreign government securities............................ 50 - - 50
Total.................................................... 2,981 1,150 (10) 4,121
December 31,
2006 2007
Amortized Gross Gross Fair
cost unrealized unrealized value
gains losses
Due in one year or less.................................. 37 37 3 4
Due after one year through five years................. - - 265 283
Due after five years through ten years ............... 966 1,205 226 229
Due after ten years ..................................... 2,262 3,022 2,487 3,605
Total ................................................... 3,265 4,264 2,981 4,121
Held to Maturity Securities
4121000000
1150000000
2981000000
Equity Investees and Other Investments
December 31,
Company
December 31,2007 2005 2006 2007
Voting Equity in Investment Equity in Shareholders´ Net income Investment Equity in
ownership % earnings earnings Equity (losses) earnings
(losses) (losses) (losses)
BES Investimentos do Brasil S.A... 20.00 4 23 5 207 96 32 10
Biu Participações S.A. (1) .......... 33.84 - - - 3 12 1 4
Cia. Brasileira de Meios de
Pagamento VISANET............... 39.76 162 173 236 616 881 245 351
Cia. Brasileira de Soluções e
Serviços Visavale................ 35.20 3 17 9 77 37 21 7
CPM Holding Ltd. .................. 49.00 (19) 2 (80) 67 51 33 25
Serasa S.A. (1)..................... - 24 61 29 - - - 10
Other Investments (2) ............ - 12 251 25 429 -
Total................................. 186 527 224 761 407
(1) On June 2007, we sold 18.1% interest of the total capital of Serasa S.A. to Experian Brasil Aquisições Ltda. The gross gain on sale of the mentioned participation was R$ 599. The remaining interest in the shareholders' equity of Serasa was contributed to BIU, a newly created entity where we obtained 33.84% participation and whose other shareholders also contributed shares of Serasa to BIU. BIU had as of December 31, 2007 a 24.69% participation in Serasa.
(2) Including mainly our investments in preferred shares of Celta Holdings S.A - 51.4%, of IRB- Brasil Resseguros S.A - 42.5% and CPM Braxis S.A - 31.8%, as well as other investments.
The following table sets forth, on a combined basis, aggregated summary financial information for our equity investees and other investments.
December 31, 2007
Current assets........................................................ 4,525
Non-current assets .................................................. 922
Current liabilities ..................................................... 3,729
Non-current liabilities ................................................ 1,280
Gross Profit........................................................... 2,513
Profit before income taxes ......................................... 1,961
Net income............................................................ 1,417
In 2007, we recorded a gross gain mainly from the partial sale of our investments (i) in Serasa, in the amount of R$599, (ii) in Bovespa R$253 and (iii) in BM&F ("Future and Commodities Exchange";) R$263. The remaining balance of our investments in Bovespa and BM&F was classified as "available for sale securities, at fair value";.
Dividends, including interest on shareholders' capital, received from the equity investees above were as follows:
Year ended December 31,
2005 2006 2007
Companhia Brasileira de Meios de Pagamento - Visanet...... 89 211 278
Serasa S.A. ........................................................ 16 22 2
Biu Paricipações S.A................................................ - - 17
Others................................................................ 5 3 4
Total ................................................................ 110 236 301
As of December 31, 2007, the above investments were not regularly traded on any stock exchange.
Premises and Equipment, Net
December 31,
2006 2007
Furniture and equipment............................. 1,770 1,681
Leased equipment.................................... 1,690 1,846
Data processing equipment........................... 1,581 1,713
Buildings ................................................. 822 859
Development and acquisition costs of software.... 565 628
Land...................................................... 496 508
Leasehold improvements.............................. 453 559
Vehicles................................................... 28 28
Others .................................................... 7 7
Less: accumulated depreciation and amortization .(4,412) (4,282)
Total....................................................... 3,000 3,547
Depreciation and amortization expense were R$712, R$534 and R$746 for the years ended December 31, 2005, 2006 and 2007, respectively.
We have entered into leasing agreements, primarily related to data processing equipment, which are accounted for as capital leases. Under this accounting method both an asset and an obligation are recorded in the financial statements and the asset is depreciated in a manner consistent with our normal depreciation policy of owned assets.
In 2002 and 2003, certain bank branches were sold through public auctions as part of a disposal program. These comprised cash transactions or installment sales financed by the Bank. There were no sales of bank branches through public auctions in 2006 and 2007.
At the same time, these branches were leased to us for the purpose of continuing our business operations and were accounted for mostly as operating leases. Only the financed sales were maintained as fixed assets, reflecting the possibility of repossession in the event of default by the purchaser.
Future liabilities for the payment of leases related to financings for the following five years are as follows:
For the year ending December 31, Lease expense
2008 ............................................. 2
2009 ............................................. 2
2010 ............................................. 2
2011 ............................................. 2
2012 ............................................. 2
Total ............................................. 1
508000000
859000000
1681000000
628000000
-4282000000
-746000000
Goodwill and Other Intangible Assets
(a) Goodwill
The changes in the carrying amount of goodwill as a result of our acquisitions (Note 1 (b)) for the years ended December 31, 2006 and 2007 are as follows:
Banking
segment
Balance as of December 31, 2005 ................................................... 332
Amex acquisition ....................................................................... 335
Balance as of December 31, 2006 ................................................... 667
BMC acquisition.......................................................................... 234
Balance as of December 31, 2007 ................................................... 901
The banking segment, in which we allocated the acquisitions, is tested annually for impairment of goodwill. We did not identify any impairment losses to be recorded in 2006 and 2007.
(b) Other intangible assets
The net carrying amount of finite-lived intangible assets subject to amortization are related to: existing clients deposits and relationship portfolios of R$ 1,623 and R$ 1,722 and amounts paid to acquire exclusive rights for rendering banking services of R$ 540 and R$ 1,253, at December 31, 2006 and 2007, respectively.
The net carrying amount of finite-lived intangible assets for the year ended December 31, 2006 and 2007 are as follows:
Segments
Banking Insurance, pension Total
plans and certificated
savings plans
Balance as of January 1, 2006............................ 1,542 12 1,554
Acquisition of BEC........................................... 398 - 398
Acquisition of AMEX......................................... 274 - 274
Acquisition of rights for rendering banking services ... 367 - 367
Amortized during the year ................................ (425) (5) (430)
Balance as of December 31, 2006 ........................ 2,156 7 2,163
Acquisition of BMC........................................... 281 - 281
Acquisition of Josema....................................... 167 - 167
Acquisition of rights for rendering banking services .... 984 - 984
Amortized during the year ................................ (616) (4) (620)
Balance as of December 31, 2007 ....................... 2,972 3 2,975
-620000000
5391000000
2416000000
Amortization
For the year ended December 31, expense
2008 ........................................................ 647
2009 ........................................................ 565
2010 ........................................................ 541
2011 ........................................................ 466
2012 ........................................................ 301
5391000000
901000000
901000000
5391000000
Year ended December 31,
2005 2006 2007
At beginning of year................................... 4,063 4,964 6,552
Provision for loan losses .............................. 1,823 3,767 4,616
Loan charge-offs ....................................... (1,603) (2,816) (4,281)
Loan recoveries ......................................... 681 637 882
Net charge-offs......................................... (922) (2,179) (3,399)
At end of year........................................... 4,964 6,552 7,769
-4281000000
882000000
At December 31, 2006 and 2007 there were no securities of a single issuer, or group of related companies, for which the fair value exceeded 10% of shareholders' equity.
Amortized Gross Gross Fair
cost unrealized unrealized value
gains losses
December 31, 2006
Brazilian government securities.......................... 2,188 736 - 2,924
Brazilian sovereign bonds................................ 1,040 263 - 1,303
Foreign government securities............................ 37 - - 37
Total.................................................... 3,265 999 - 4,264
December 31, 2007
Brazilian government securities.......................... 2,643 1,103 (10) 3,736
Brazilian sovereign bonds................................ 288 47 - 335
Foreign government securities............................ 50 - - 50
Total.................................................... 2,981 1,150 (10) 4,121
December 31,
2006 2007
Amortized Gross Gross Fair
cost unrealized unrealized value
gains losses
Due in one year or less.................................. 37 37 3 4
Due after one year through five years................. - - 265 283
Due after five years through ten years ............... 966 1,205 226 229
Due after ten years ..................................... 2,262 3,022 2,487 3,605
Total ................................................... 3,265 4,264 2,981 4,121
December 31,
2006 2007
Deferred tax assets, net (Note 16) ................................ 4,759 4,683
Credit card operations ............................................... 5,215 5,804
Restricted escrow deposits for taxation and labor matters..... 3,542 4,517
Taxes available for offset ........................................... 1,395 1,475
Insurance premiums receivable .................................... 1,328 1,325
Negotiation and intermediation of securities..................... 709 1,378
Deferred policy acquisition costs(1)............................... 565 641
National property system .......................................... 405 453
Securitization of credit card bill receivables (Note 14 (d))..... 372 308
Prepaid expenses .................................................. 169 183
Foreclosed assets, net ............................................ 161 195
Other ................................................................ 467 2,429
Total ................................................................. 19,087 23,391
(1) Commissions paid to insurance brokers on trade of insurance products, private pension plans and certificated savings plans.
December 31,
2006 2007
Commercial:
Industrial and others ............................. 32,604 44,380
Import financing ................................... 1,465 2,179
Export financing.................................... 12,934 15,342
Leasing .............................................. 3,842 8,097
Construction ........................................ 519 1,634
Individuals:
Overdraft ............................................ 1,263 1,881
Real estate .......................................... 1,326 1,571
Financing (1)......................................... 28,828 38,791
Credit card........................................... 2,652 2,330
Rural credit.......................................... 7,399 9,032
Foreign currency loans ............................ 1,546 2,529
Public sector ........................................ 62 94
Non-performing loans .............................. 4,284 5,277
Total loans........................................... 98,724 133,137
(1) Consisting primarily of automobile financing and direct consumer financing.
Year ended December 31,
2005 2006 2007
At beginning of year...................................... 4,063 4,964 6,552
Provision for loan losses ................................. 1,823 3,767 4,616
Loan charge-offs ......................................... (1,603) (2,816) (4,281)
Loan recoveries ........................................... 681 637 882
Net charge-offs............................................ (922) (2,179) (3,399)
At end of year.............................................. 4,964 6,552 7,769
6552000000
4616000000
-3399000000
-4281000000
882000000
Brazilian Central Bank Compulsory Deposits
a) Like other Brazilian financial institutions, we are required to maintain deposit funds with the Central Bank or to purchase and hold Brazilian federal government securities. in the form of compulsory deposits which are as follows:
December 31,
2006 2007
Non-interest earning (1) .................. 6,446 8,919
Interest-earning (2) ....................... 12,219 14,620
Interest-earning (3) ....................... 4,796 8,274
Total ......................................... 23,461 31,813
(1) Related to demand deposits.
(2) Mainly related to saving deposits.
(3) Time deposits deposited with the Central Bank in the form of Brazilian government securities.
b) The Brazilian government securities related to the compulsory deposits and accounted for under SFAS 115. were as follows:
Trading securities Available for sale Held to maturity
securities securities
2006 2007 2006 2007 2006 2007
Amortized cost................. 4,795 7,773 - 511 - 6
Gross unrealized gains........ 1 - - - - -
Gross unrealized losses(1).... - (1) - (15) - -
Fair value........................ 4,796 7,772 - 496 - 6
Average balance............... 4,875 5,869
(1) No other than temporary losses have been identified for the gross unrealized loss amount.
The amortized cost and the fair value of the securities, by maturity, were as follows:
December 31,
2006 2007
Amortized Fair Amortized Fair
cost value cost value
Due in one year or less ........................ 4,572 4,572 7,757 7,756
Due after one year through five years ...... 223 224 533 518
Total .............................................. 4,795 4,796 8,290 8,274
Other Liabilities
(a) Breakdown of other liabilities
December 31,
2006 2007
Pension plan investment contracts................................... 30,948 37,947
Insurance claims and pension plans reserves....................... 12,787 14,616
Litigation (Note 23 (b)) ................................................. 7,125 9,091
Credit card operations.................................................. 4,482 6,018
Certificated savings plans.............................................. 2,307 2,491
Unpaid claims and claim adjustment reserves (Note 15 (b)) ...... 2,821 2,738
Payment orders to be settled.......................................... 2,039 2,092
Interest on shareholders' capital payable............................ 187 2,194
Negotiation and intermediation of securities ......................... 857 1,457
Taxes on income......................................................... 1,031 1,239
Labor related liabilities................................................... 900 1,120
Foreign exchange portfolio, net....................................... 428 607
Social security program reserve....................................... 16 382
Taxes other than on income........................................... 275 262
Collection of third-party taxes, social contributions and other ... 196 267
Others .................................................................... 3,684 4,358
Total....................................................................... 70,083 86,879
(b) Changes in unpaid claims and claim adjustment reserves
December 31,
2005 2006 2007
Balance at the beginning of the year............................. 1,838 2,383 2,821
( - ) Reinsurance recoverables(1) ................................ (62) (53) (35)
Net balance at January 1 .......................................... 1,776 2,330 2,786
Incurred related to:
current year.......................................................... 5,705 5,963 6,462
prior years............................................................ 279 396 399
Total incurred ........................................................ 5,984 6,359 6,861
Payments related to:
current year.......................................................... 5,004 5,442 5,970
prior years............................................................ 426 461 994
Total payments ...................................................... 5,430 5,903 6,964
Net balance at December 31 ...................................... 2,330 2,786 2,683
( + ) Reinsurance recoverables(1)................................ 53 35 55
Balance at the end of the year ................................... 2,383 2,821 2,738
(1) Reinsurance recoverables are recorded as "Insurance premiums receivable"; in "Other assets";.
Commitments and Contingencies
(a) Assets under management
We manage a number of assets and customer portfolios that are available to institutional investors and the general public. These assets are not included in our consolidated balance sheet. Fees are generally charged monthly, representing approximately 0.88% (2006 0.89%) per annum of the market value of the assets under management. The total assets under management, at December 31, 2006 and 2007 were R$139,905 and R$163,963, respectively, in investment fund portfolios and R$7,203 and R$13,523, respectively, in customer portfolios.
(b) Litigation
In the normal course of business, we are involved in various legal proceedings arising out of our operations. We are subject to challenges from tax authorities regarding amounts of tax due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. The probable losses recognized in our consolidated financial statements are related to litigation matters related to (i) inflation adjustments and (ii) legality of certain taxes and contributions.
The remaining litigation matters, considered as possible under our judgment based on information available, are related to tax assessments in the amount of R$161 as of December 31, 2007 (R$103 in 2006), which we believe are inconsistent with existing law and, therefore, are not recognized in our consolidated financial statements.
Resolution of these issues is not expected to have a significant impact on our financial position or results of operations.
Like many other Brazilian banks, we are defendants in various labor suits by employees. These suits are related to compensation and indemnification for employees who have been laid off as a result of our recent acquisitions of financial institutions and their integration into our structure. Management continually monitors and evaluates the impact of current events and circumstances on the estimates and assumptions used in the recognition of probable losses.
We also face a number of civil matters, which primarily consist of claims for pecuniary damages, such as (i) to collect on unpaid financial instruments, (ii) in relation to returned checks and (iii) in reporting adverse claims arising from credit information to credit reporting agencies. None of these claims is individually significant.
The other labor suits and civil matters, to which we are a party, are subject to many uncertainties and the outcome of any individual matter is not predictable with assurance. Although the final resolution of any such matters could have a material effect on the consolidated operating results for a particular reporting period, we believe that it would not materially affect our consolidated financial position.
The changes in the provision during the periods were as follows:
Year ended December 31,
Tax litigation 2005 2006 2007
At beginning of year ......................... 3,003 3,540 5,046
Business combinations......................... - 275 160
Indexation charges............................ 224 509 387
Provisions...................................... 434 815 1,009
Reversal. ...................................... (49) (51) (305)
Payments...................................... (72) (42) (25)
At end of the year............................ 3,540 5,046 6,272
Year ended December 31,
Labor litigation 2005 2006 2007
At beginning of year ......................... 835 814 1,259
Business combinations........................ - 190 5
Provisions...................................... 406 726 705
Reversal. ...................................... (51) (50) (33)
Payments...................................... (376) (421) (462)
At end of the year............................ 814 1,259 1,474
Year ended December 31,
Civil litigation 2005 2006 2007
At beginning of year ......................... 460 506 820
Business combinations......................... - 153 47
Provisions....................................... 179 427 784
Reversal. ...................................... (14) (61) (143)
Payments...................................... (119) (205) (163)
At end of the year............................ 506 820 1,345
Total provision............................... 4,860 7,125 9,091
Long-term Debt
December 31,
2006 2007
Local onlendings ....................................... 11,642 14,087
Subordinated notes .................................. 11,949 15,850
Non-convertible debentures.......................... 2,603 2,595
Debt issued under securitization of payment orders
and credit card bill receivables (Note 14 (d)) ...... 1,344 2,497
Euronotes................................................ 1,235 810
Mortgage notes ......................................... 841 867
Obligations under capital leases ...................... 430 874
Foreign currency loans (1) ............................ 78 1,335
Total..................................................... 30,122 38,915
(1) On December 3, 2007, we made a foreign currency loan in the amount of JPY 79,205, corresponding to R$ 1,283. The maturity date of this transaction is November 26, 2008 and interest amounts are paid quarterly at Libor rate.
(a) Local onlendings
Local onlendings represent amounts borrowed from Brazilian agencies for loans to Brazilian entities that invest primarily in premises and equipment. Such amounts are due in monthly installments through 2027 and bear fixed interest between 6.9% and 16.0% per annum, plus variable interest based on the Taxa de Juros de Longo Prazo (Federal Government long-term interest rate determined on a quarterly basis, or "TJLP") and Taxa Referencial de Juros (reference interest rate, or "TR";) respectively. These borrowings are primarily from Banco Nacional de Desenvolvimento Econômico e Social - BNDES (National Economic and Social Development Bank) and Fundo de Financiamento para Aquisição de Máquinas e equipamentos Industriais - FINAME (National Industrial Equipment Finance Authority) in the form of credit lines.
(b) Subordinated notes
December 31,
Maturity/date Original term Currency Interest % 2006 2007
(in years)
2008 7 R$ 100% CDI(1)+ 0.75% 619 616
2011 5 R$ 102.5% CDI(1) 104% CDI(1) 4,995 5,608
2011 10 US$ 10.25% 319 265
103% CDI(1)
100% CDI(1) + 0.344%
IPCA + (7.102% - 7.632%)
2012 5 R$ - 3,327
100% CDI(1) + 0.75%
100% CDI(1) + 0.87%
2012 10 R$ 100% CDI(1) 102.5% CDI(1) 3,360 3,770
2012 10 Yen 4.05 291 241
2013 10 US$ 8.75 1,080 896
2014 10 US$ 8.00 639 592
No stated maturity(2) US$ 8.87 646 535
Total ...................................................................................... 11,949 15,850
(1) Brazilian benchmark interest rate.
(2) On June 3, 2005, perpetual subordinated debt was issued in the amount of US$ 300. With interest paid on a quarterly basis as from September 3, 2005.
(c) Non-convertible debentures
December 31,
Maturity/date Original term Currency Interest % 2006 2007
2011 6 R$ 102% - CDI 2,603 2,595
Total ...................................................................................... 2,603 2,595
(d) Debt issued under securitization of payment orders and credit card bill receivables
As from 2003, we securitize current and future flows of (i) payment orders from individuals and corporations outside Brazil to individuals and corporations in Brazil on which we act as the paying bank and (ii) credit card bill receivables from purchases in Brazil by foreign cardholders.
The Long-term debt issued by the SPF entities and sold to investors is expected to be repaid through the future flows of funds provided by both payment orders and credit card bills. We are obligated to redeem the debt if certain specified events of defaults or of early termination occur.
Proceeds from sale of current and future flows of payment orders and credit cards bills received by the SPF entities are required to be maintained in a specified bank account until a certain minimum level is achieved. The amount subject to restricted withdrawal in the amount of R$1 in 2006 is considered "Restricted Cash" and presented as "Cash and due from banks"; in our consolidated balance sheet. As of December 31, 2007 this effect did not exist.
The following table summarizes the main characteristics of debts issued by the SPF entities:
December 31,
Asset securitized Maturity/date Currency Annual rate - % 2006 2007
Payment orders ....... 2010 US$ 6.75 331 191
Payment orders(1) ... 2012 US$ 4.69 206 142
Payment orders ....... 2014 US$ 5.57 - 5.89 - 1,612
Credit card bills(2) .... 2011 US$ 5.69 807 552
Total..................... 1,344 2,497
(1) If the SPF entity fails to make a timely payment of accrued interest and/or principal, the investors have the benefit of a financial guarantee insurance policy provided by an unrelated insurance company.
(2) 44.618488% of the securities issued will be repaid through the future flows of credit card bills provided by the secondary beneficiary designated bank (Banco do Brasil S.A.). Therefore, since the SPF entity was consolidated in our financial statements, we have recorded R$308 as securitization of credit card bill receivables in "Other assets"; as of December 31, 2007 (2006 R$ 372).
(e) Euronotes
Range of annual December 31,
Maturity/date Currency coupon rates - % 2006 2007
2007 US$/R$ 4.26 17.50 1,006 -
2008 US$ 4.38 -12.29 206 548
2010 US$/R$ 14.80 14 258
After 2010 US$ 5.39 6.39 9 4
Total ....................................................................... 1,235 810
(f) Mortgage notes
Mortgage notes are generally issued with maturities up to one year and bear interest rates of TR plus interest between 10.0% and 11.0% p.a.
(g) Long-term debt maturity
December 31,
2006 2007
Due within one year........................ 6,660 8,395
From 1 to 2 years .......................... 5,211 6,912
From 2 to 3 years .......................... 2,091 613
From 3 to 4 years .......................... 1,319 11,571
From 4 to 5 years .......................... 5,920 6,692
Over 5 years................................ 8,275 4,197
No stated maturity ......................... 646 535
Total.......................................... 30,122 38,915
(g) Long-term debt maturity
December 31,
2006 2007
Due within one year........................ 6,660 8,395
From 1 to 2 years .......................... 5,211 6,912
From 2 to 3 years .......................... 2,091 613
From 3 to 4 years .......................... 1,319 11,571
From 4 to 5 years .......................... 5,920 6,692
Over 5 years................................ 8,275 4,197
No stated maturity ......................... 646 535
Total.......................................... 30,122 38,915
15850000000
December 31,
2006 2007
Import and export financings ........... 4,440 6,073
Commercial paper.......................... 1,225 1,915
Other ........................................ 44 1
Total ........................................ 5,709 7,989
Import and export financings represent credit lines available to finance imports and exports by Brazilian companies, typically denominated in foreign currency.
At December 31, 2007 interest rates applicable to short-term borrowings were between 4.69% and 5.51% per annum (2006 4.87% and 5.83%) for import and export financings, and 4.78% and 6.24% per annum (2006 5.06% and 7.11%) for commercial paper. Average borrowing rates in 2006 and 2007 were 5.53% and 5.36% per annum, respectively.
(d) Financial guarantees
The following is a summary of the carrying values for the financial guarantees and other letters of credit, mentioned before:
December 31,
2006 2007
Maximum Carrying Maximum Carrying
payout/ value payout/ value
Notional Notional
Financial guarantees .............. 14,791 29 24,296 74
Other letters of credit............. 242 1 361 2
The carrying value includes amounts deferred and to be recognized in income over the life of the contract and amounts accrued for inherent losses in accordance with SFAS 5, "Accounting for Contingencies"; and FIN 45.
Financial guarantees are conditional loan commitments issued by us to guarantee the performance of a particular customer in relation to a third party. In general, we are guaranteed the right of return against the customer to recover any amounts paid under these guarantees. In addition, we may retain amounts in cash or other highly liquid guarantees to secure the commitments. The contracts are subject to the same credit rating process used to grant other credits.
Standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Standby letters of credit are subject to management's credit evaluation of the customer.
Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. We issue commercial letters of credit to facilitate foreign trade transactions. These instruments are shortterm commitments to pay a third-party beneficiary under certain contractual conditions for the shipments of goods. The contracts are subject to the same credit evaluations as other extensions of credit.
As part of our lending operations, we enter into various off-balance sheet credit instruments with our customers which are summarized as follows:
Unfunded commitments to extend credit including credit cards are contracts for a specified time period and at variable rates to lend to a customer who has complied with predetermined contractual conditions. The guarantees are conditional commitments issued by us to assure the performance of a customer to a third party in borrowing arrangements.
The maximum potential credit risk on undrawn commitments, standby and commercial letters of credit is equal to the contractual amounts shown above if the counterparty does not perform under the contract. Generally, these contracts expire without being drawn upon; therefore, the contractual amounts are not indicative of the actual credit exposure or future cash flow requirements for such commitments. The fair value of the obligation undertaken in issuing the guarantee at inception is typically equal to the net present value of the future amount of premium receivable under the contract. To mitigate credit risk, we may require the counterparty to pledge collateral in the form of cash, securities or other assets to support the extension of credit similar to the collateral required for our lending operations.
Pension Plans
We sponsor defined-benefit pension plans, which supplement benefits that the Brazilian government social security system provides to employees of Bradesco and its Brazilian subsidiaries. The pension plans were established solely for the benefit of eligible employees and directors, and their assets are held independently of Bradesco. During 2001, participants of the defined benefit plan for Bradesco employees joined a new defined contribution plan (PGBL). Our plan for the year ended December 31, 2004 and 2006 includes BEM and BEC defined benefit pension plans as a result of their acquisitions on February 10, 2004 and January 3, 2006, respectively. Our contributions to the PGBL plan in 2007 totaled R$ 340 (2006 - R$316).
Our policy is to fund the pension plans through contributions based on payroll, adjusted periodically pursuant to recommendations of the Fund's external actuary. At December 31, 2007 our contribution represents 5.0% (2006 5.2% and 2005 4.8%) of payroll, and employees and directors contribute amounts of at least 4% (2006 4% and 2005 4%) of their salaries.
The pension plan's assets are mainly invested in government and private securities, marketable equity securities and properties.
Employees and directors who withdraw from the pension plans for any reason receive the minimum benefit based on past contributions in a single lump sum installment.
BEC, BEM and Banco Alvorada plans are measured annually.
As discussed in Note 2(t), in September 2006 the FASB issued SFAS Nº 158. This statement requires an employer on a prospective basis to recognize the overfunded or underfunded status of its defined benefit pension and postretirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. We adopted this requirement, along with the required disclosures, on December 31, 2006. The effects of the adoption as well as the related disclosure requirements are presented below:
The adjustments from the adoption of SFAS 158 affected our consolidated balance sheet as follows:
Alvorada, BEM and BEC plans
Year ended
2006
Before application of SFAS 158
Prepaid pension cost ........................................ 55
Accrued pension liability ................................... (65)
Adjustments
Prepaid pension cost ........................................ 14
Accrued pension liability ..................................... 8
Deferred tax liability......................................... (7)
Accumulated other comprehensive income ............... 15
After aplication of SFAS 158
Prepaid pension cost ......................................... 69
Accrued pension liability .................................... (57)
Deferred tax liability.......................................... (7)
Accumulated other comprehensive income ................ 15
Based upon the report of the pension plan's external actuary, changes in the benefit obligation and plan assets and the amounts recognized in the consolidated financial statements are as follows:
Alvorada, BEM and BEC plans
Year ended
2005 2006 2007
(i) Projected benefit obligation:
At beginning of year........................... 442 454 712
Business acquisition............................ - 240 -
Service cost ..................................... 1 1 5
Benefits paid ................................... (36) (38) (58)
Interest cost .................................... 48 49 70
Plan changes..................................... - 2 -
Adjustment from date change................. - - 13
Actuarial loss (gain) ............................ (1) 4 (13)
At end of year .................................. 454 712 729
(ii) Plan assets at market value:
At beginning of year........................... 448 486 724
Business acquisition ........................... - 194 -
Contributions received:
Employer ......................................... 1 2 4
Employees ....................................... 1 1 2
Current return on plan assets ................ 72 79 123
Adjustment from date change.................... - - 12
Benefits paid .................................... (36) (38) (58)
At end of year ................................... 486 724 807
(iii) Funded status:
Excess of plan assets over projected
benefit obligation acquired.................... (32) (12) (79)
Unrecognized net gain (loss)................... (1) - -
Amounts recognized in the
balance sheet, net.............................. (33) (12) (79)
Net pension (benefit) cost includes the following components:
Alvorada, BEM and BEC plans
Year ended
2005 2006 2007
Projected benefit obligation:
Service cost........................................................... 1 5 5
Interest cost.......................................................... 48 70 72
Amortization of prior service cost .................................. - 1 (3)
Expected return on assets......................................... (51) (72) (81)
Expected participant contribution................................... - (2) (1)
Net periodic pension cost (benefit) ................................ (2) 2 (8)
Prepaid pension costs and accrued pension liabilities are included in "Other assets"; and "Other liabilities"; respectively, in our Consolidated Statements of Financial Position.
The amounts recognized in our balance sheets are as follows:
2006 2007
Assets
Prepaid pension cost ............................................. 69 102
Liabilities
Accrued pension liability .......................................... 57 23
Net asset recognized, end of year.............................. 12 79
The amount recognized in accumulated other comprehensive income, which totaled R$ 15 at December 31, 2006 and R$ 58 at December 31, 2007, net of taxes, as a result of the implementation of SFAS 158, relates to actuarial gains.
The amount in accumulated other comprehensive income expected to be recognized as a component of a net periodic cost in 2007 total R$1 and refers to amortization of prior services cost.
Assumptions used to determine our benefit obligation and net periodic benefit cost at and for the years ended October 31, 2006 and December 31, 2007 were (1):
Alvorada plan BEM plan BEC plan
2006 2007 2006 2007 2006 2007
Assumed discount rate............................. 10.2% 10.2% 10.2% 10.2% 10.2% 10.2%
Expected long-term rate of return on assets.... 10.2 10.2 10.2 10.2 10.2 10.2
Rate of increase in compensation levels ......... 7.1% 7.1% 7.1% 7.1% 7.1% 7.1%
(1) Including a 4.0% p.a. inflation rate and an actual discount rate of 6.0% p.a..
The rationale behind the used long-term rate of return on plan assets is the following:
Based on the asset managers mid to long-term expectations.
Private and Brazilian Government bonds, which are a very significant segment of the invested portfolio of Alvorada, BEM and BEC, earn interest above inflation plus interest of 8% p.a. and maturities from short to longterm.
The asset mix of Alvorada Plan is of more than 71% and 59% in government bonds in 2006 and 2007, respectively, and more than 80% and 79% in government bonds in the case of the BEM Plan in 2006 and 2007, respectively and more than 76% and 61% in government bonds in the case of BEC plan in 2006 and 2007 and the remainder assets in stocks for all the plans.
Our pension plan weighted-average asset allocations in 2006 and 2007, by asset category are as follows:
Alvorada plan assets BEM plan assets BEC plan assets
2006 2007 2006 2007 2006 2007
Categorias de ativo
Equity securities.......................................... 0.6% 0.4% 1.6% 4.7% 6.3% 0.0%
Debt securities ........................................... 94.0 94.4 95.5 92.1 84.7 90.8
Real estate................................................ 3.9 3.5 0.8 0.2 5.4 5.7
Other....................................................... 1.5 1.7 2.1 3.0 3.6 3.5
Total........................................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
The benefit payments, which reflect expected future services projected, to be made by us are:
For the year ended December 31, Pension plan benefits
2008 ........................................................ 52
2009 ........................................................ 54
2010 ....................................................... 56
2011 ........................................................ 59
2012 ........................................................ 62
2013 - 2017 .............................................. 362
Total ....................................................... 645
The contributions related to the private pension plans of Alvorada, BEM and BEC, to be made by us in 2008, are estimated at R$0.3, R$1.5 and R$4.1, respectively.
Alvorada, BEM and BEC plans
Year ended
2005 2006 2007
(i) Projected benefit obligation:
At beginning of year........................... 442 454 712
Business acquisition............................ - 240 -
Service cost ..................................... 1 1 5
Benefits paid ................................... (36) (38) (58)
Interest cost .................................... 48 49 70
Plan changes..................................... - 2 -
Adjustment from date change................. - - 13
Actuarial loss (gain) ............................ (1) 4 (13)
At end of year .................................. 454 712 729
Alvorada, BEM and BEC plans
Year ended
2005 2006 2007
(ii) Plan assets at market value:
At beginning of year........................... 448 486 724
Business acquisition ........................... - 194 -
Contributions received:
Employer ......................................... 1 2 4
Employees ....................................... 1 1 2
Current return on plan assets ................ 72 79 123
Adjustment from date change…............... - - 12
Benefits paid .................................... (36) (38) (58)
At end of year ................................... 486 724 807
Alvorada, BEM and BEC plans
Year ended
2005 2006 2007
(iii) Funded status:
Excess of plan assets over projected
benefit obligation acquired.................... (32) (12) (79)
Unrecognized net gain (loss)................... (1) - -
Amounts recognized in the
balance sheet, net.............................. (33) (12) (79)
Alvorada, BEM and BEC plans
Year ended
2005 2006 2007
Projected benefit obligation:
Service cost........................................................... 1 5 5
Interest cost.......................................................... 48 70 72
Amortization of prior service cost .................................. - 1 (3)
Expected return on assets......................................... (51) (72) (81)
Expected participant contribution................................... - (2) (1)
Net periodic pension cost (benefit) ................................ (2) 2 (8)
The benefit payments, which reflect expected future services projected, to be made by us are:
For the year ended December 31, Pension plan benefits
2008 ........................................................ 52
2009 ........................................................ 54
2010 ....................................................... 56
2011 ........................................................ 59
2012 ........................................................ 62
2013 - 2017 .............................................. 362
Total ....................................................... 645
The contributions related to the private pension plans of Alvorada, BEM and BEC, to be made by us in 2008, are estimated at R$0.3, R$1.5 and R$4.1, respectively.
54253000000
Years ended December 31,
2005 2006 2007
Fees charged on checking account services ......................... 1,563 1,879 2,108
Asset management fees................................................. 1,070 1,245 1,455
Collection fees ............................................................ 718 751 859
Credit card fees ........................................................... 562 929 1,273
Interbank fees............................................................. 271 290 321
Fees for receipt of taxes ................................................. 190 237 237
Financial guarantees....................................................... 109 143 197
Consortium management ................................................. 149 202 256
Other(1) ..................................................................... 489 703 1,113
Total .......................................................................... 5,121 6,379 7,819
(1) None of the items included in "other"; is significant on an individual basis.
Years ended December 31,
2005 2006 2007
Third-party services ....................................................... 1,049 1,343 1,820
Financial system services.................................................. 624 634 658
Communication.............................................................. 644 738 923
Transport.................................................................... 409 523 509
Rents ........................................................................ 319 343 353
Advertising and publicity................................................... 342 443 557
Maintenance and repairs .................................................. 291 312 292
Data processing............................................................. 240 329 467
Office supplies .............................................................. 171 165 189
Water, electricity and gas................................................. 141 158 172
Other ........................................................................ 217 235 296
Total ........................................................................ 4,447 5,223 6,236
Fair Value of Financial Instruments
SFAS 107 "Disclosures About Fair Value of Financial Instruments," requires disclosure of the estimated fair values of financial instruments. The fair value of a financial instrument is the amount at which instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. Quoted market prices, if available, are utilized as estimates of the fair value of financial instruments. Because no quoted market prices exist for certain of our financial instruments the fair values have been derived based on management's assumptions, the amount, timing of future cash flows and estimated discount rates. The estimation methods for individual classifications of financial instruments are described with more details below. Different assumptions could significantly affect these estimates. Accordingly, net realizable values could be different from the estimates presented below.
In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of the Company.
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheet for cash, due from banks and short-term investments approximate their fair values. Short-term investments include: interest-earning deposits in other banks and federal funds sold and securities purchased under resale agreements, all of which generally have original maturities of 3 months or less and present insignificant risk of changes in value because of interest rate changes.
Trading assets, including derivatives and available for sale securities
These assets are reported in the consolidated balance sheet at estimated fair value. Fair value is generally based on quoted prices in active markets or quoted market prices for similar assets or liabilities. If these market prices are not available, fair values are estimated based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques, for which the determination of fair value may require significant management judgment or estimation.
For derivative instruments, where practical, quoted market prices are used to determine fair value of these instruments. The fair value of swaps is determined using discounted cash flow modeling techniques using yield curves, reflecting the appropriate risk factors. Inputs obtained to build up the yield curves are obtained mainly from BM&F and the secondary market. These yield curves are used to determine the fair value for currency swaps, interest rate swaps and swaps based on other risk factors. The fair value of futures and forward contracts is also determined on quoted market prices on the exchanges of exchanges-traded derivatives or using similar methodologies to those described for swaps. The fair value of options is determined on mathematical models, such as Black & Scholes, using yield curves, implied volatilities and the fair value of the underlying asset.
Current market prices are used to valuate the implied volatilities.
Held to maturity securities
Held to maturity securities are carried at amortized cost. Fair values are estimated according to the assumptions described on note 2 (e). See Note 6 for further details regarding the amortized cost and fair values of held to maturity securities.
Loans, net of allowance for loan losses
Fair values were estimated for groups of similar loans based upon type of loan, credit quality and maturity. The fair value of fixed-rate loans was determined by discounting estimated cash flows using interest rates approximating our current origination rates for similar loans. For most variable-rate loans, the carrying amounts were considered to approximate fair value. Where credit deterioration has occurred, estimated cash flows for fixed and variable-rate loans have been reduced to incorporate estimated losses.
The fair values for performing loans are calculated by discounting scheduled principal and interest cash flows through maturity using market discount rates and yield curves that reflect the credit and interest rate risk inherent in the loan type at each reporting date. The fair values for impaired loans are based on the discounting cash flows or the value of underlying collateral.
The non-performing loans were allocated into each loan category for purposes of fair value disclosure.
Assumptions regarding cash flows and discount rates are determined using available market information and specific borrower information.
The following table presents the carrying amounts and estimated fair values for loans:
December 31,
2006 2007
Carrying Fair Carrying Fair
amount value amount value
Commercial:
Industrial and others ........................................ 31,205 31,615 42,895 43,179
Import financing ............................................... 1,463 1,463 2,171 2,171
Export financing .............................................. 12,847 12,847 15,281 15,281
Leasing ......................................................... 3,806 3,806 8,038 8,038
Construction .................................................... 479 479 1,598 1,598
Individuals:
Overdraft....................................................... 1,757 1,757 1,899 1,899
Real estate ..................................................... 1,280 1,281 1,485 1,486
Financing (1) ................................................... 28,888 27,783 37,850 37,956
Credit card ..................................................... 2,432 2,432 2,529 2,529
Rural credit ..................................................... 7,410 7,405 9,006 9,001
Foreign currency loans ....................................... 1,543 1,539 2,522 2,492
Public sector .................................................... 62 62 94 94
Total loans, net of allowance for loan losses .............. 92,172 92,469 125,368 125,724
(1) Consists primarily of automobile financing and direct consumer financing.
Deposits
The fair value of fixed-rate deposits with stated maturities was calculated by discounting the difference between the cash flows on a contractual basis and current market rates for instruments with similar maturities. For variable-rate deposits, the carrying amount was considered to approximate fair value.
The following table presents the carrying amounts and estimated fair values for deposits:
December 31,
2006 2007
Carrying Fair Carrying Fair
amount value amount value
Deposits from customers:
Demand deposits ................................................ 21,081 21,081 29,423 29,423
Savings accounts ................................................ 27,613 27,613 32,813 32,813
Time deposits ..................................................... 34,941 34,922 35,733 35,729
Deposits from financial institutions............................. 290 290 372 372
Total deposits .................................................... 83,925 83,906 98,341 98,337
Short-term borrowings
The carrying values of federal funds purchased and securities sold under repurchase agreements. commercial paper, import and export financing and other short-term borrowings, approximate the fair values of these instruments.
Long-term debt
Fair values for long-term debt were estimated using a discounted cash flow calculation that applies interest rates offered in the market for similar maturities and terms.
The following table presents the carrying amounts and estimated fair values for long-term debt:
December 31,
2006 2007
Carrying Fair Carrying Fair
amount value amount value
Local onlendings ................................................ 11,642 11,605 14,087 13,993
Subordinated notes ............................................. 11,949 12,562 15,850 16,161
Non-convertible debentures................................... 2,603 2,603 2,595 2,595
Debt issued under securitization of payment
orders and credit card bill receivables ....................... 1,344 1,344 2,497 2,497
Euronotes........................................................ 1,235 1,249 810 781
Mortgage notes.................................................. 841 841 867 867
Obligations under capital lease................................ 430 430 874 874
Foreign currency loans ........................................ 78 78 1,335 1,349
Total.............................................................. 30,122 30,712 38,915 39,117
Off-balance sheet financial instruments
The fair value of commitments to extend credit is estimated based on the fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the present credit quality to the counterparties. The fair values of standby and commercial letters of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate the agreements or otherwise settle the obligations with the counterparties. The fair value of derivatives is included with trading assets. Note 22(b) for the notional value and estimated fair value of our off-balance sheet derivative financial instruments.
Shareholders' Equity
(a) Capital and shareholders' rights
(i) Capital
The Special Stockholders' Meeting held on March 12, 2007 resolved on a R$3,800 increase in the capital stock, raising it from R$14,200 to R$18,000, by using part of the balance in the account "Profit Reserves Statutory Reserve";, assigning to the Company's stockholders, free of charge, as a bonus, one (1) new stock of the same type for each stock owned. 1,000,679,724 non-par registered, book-entry stocks were issued, 500,042,656 of which were common stocks and 500,637,068 were preferred stocks.
All share amounts presented above are demonstrated before the split of our capital stock of March 24, 2008.
In our Extraordinary General Shareholders´ Meeting held on August 24, 2007, we approved a capital increase of R$ 790, from R$ 18,000 to R$ 18,790, through the issuance of 18,599,132 new book-entry nominative shares, with no par value, with 9,299,618 common shares and 9,299,514 preferred shares. This increase happened as a result of the merger of BMC shares, which belonged to the former BMC shareholders, into Bradesco, making BMC one of our wholly-owned subsidiaries. There was another capital increase in the amount of R$ 210 reaching R$ 19,000, through the capitalization of a partial balance from the "Profits Reserve Statutory Reserve"; account, with no issuance of shares. These transactions were approved by the Central Bank on September 28, 2007. All share amounts presented above are demonstrated before the split of our capital stock of March 24, 2008.
On March 24, 2008, our Board of Directors approved a split of our capital stock, in which our shareholders were entitled to one new share per each two existing shares of the same class, on a free basis. Therefore, all related share amounts have been retroactively adjusted for all periods presented to reflect the stock split, whereby one new share was received in exchange for each share held.
At December 31, 2007, Bradesco's outstanding capital, adjusted by the stock split approved on March 24, 2008, consists of 1,514,005,545 voting common shares and 1,514,005,389 non-voting preferred shares with no par value. Preferred shares carry no voting rights but have priority over common shareholders in the reimbursement of capital in the case of liquidation, up to the amount of capital represented by such preferred shares, and the right to receive a minimum dividend per-share 10% greater than that distributed per-share to common shareholders. All shareholders are entitled to receive, in total, a mandatory dividend of at least 30% of Bradesco's annual net income as stated in the statutory accounting records adjusted for transfers to and from reserves. None of our outstanding obligations are exchangeable or convertible into equity securities and as a result, diluted earnings per share do not differ from net income per share.
(ii) Treasury shares
Treasury shares are recorded at cost, which approximates market prices at the date of purchase. Treasury shares cancelled are recorded as a reduction of unappropriated retained earnings. Treasury shares are held for subsequent sale or cancellation.
(iii) Additional paid-in capital
Additional paid-in capital consists of premium on the initial issuance of shares less capitalization of such amounts.
(b) Appropriated retained earnings
Statutory reserve
Under the Corporate Law, Bradesco and its Brazilian subsidiaries are required to appropriate 5% of their annual statutory earnings, after absorbing accumulated losses, to a legal reserve, which is restricted as to distribution. The reserve may be used to increase capital or absorb losses, but may not be distributed as dividends.
(c) Unappropriated retained earnings
Any income remaining after the distribution of dividends on the statutory records of the Company and appropriations to statutory reserves is transferred to the reserve for future investments. Such reserve may be distributed in the form of dividends upon approval of the shareholders.
Accordingly, the difference as compared to retained earnings in the U.S. GAAP financial statements represents the effect of interperiod differences between U.S. GAAP and Brazilian GAAP, which will become distributable only when recognized under Corporate Law.
(d) Dividends (including interest on shareholders' capital)
Dividends are calculated on net income as determined by the financial statements prepared in accordance with Brazilian GAAP. Dividends are payable in Brazilian reais and may be converted into United States dollars and remitted to shareholders abroad provided that the non-resident shareholder's ownership is registered with the Brazilian Central Bank.
(e) Comprehensive Income
Year ended December 31,
2005 2006 2007
Net income reported in statement of income .............................. 6,310 6,462 7,908
Unrealized holding gains arising during the period:
Unrealized gains on available for sale securities............................ 422 2,228 2,696
Less reclassification adjustment for (gains) losses on
available for sale securities included in net income ........................ (747) (1,157) (1,456)
Defined benefit plans ........................................................... - - 65
Other comprehensive income before tax.................................... (325) 1,071 1,305
Income tax related to items of other comprehensive income (loss) ...... 44 (338) (577)
Other comprehensive income (loss), net of tax............................. (281) 733 728
Comprehensive income.......................................................... 6,029 7,195 8,636
Accumulated other comprehensive income is as follows:
Year ended December 31,
2005 2006 2007
Balance at the beginning of the year ...................... 693 412 1,160
Current period change:
Unrealized gains (losses) on available
for sale securities. net of taxes .............................. (281) 733 685
Defined benefit plans ............................................. - 15 43
Balance at the end of the year ............................... 412 1,160 1,888
Regulatory Matters
The Bank is subject to regulation by the Central Bank, which issues directions and instructions regarding currency and credit policies for financial institutions operating in Brazil. The Central Bank also determines minimum capital requirements, fixed asset limits, lending limits, accounting practices and compulsory deposit requirements, and requires banks to comply with regulations, based on the Basel Accord as regards capital adequacy.
The Basel Accord requires banks to have a ratio of capital to risk-weighted assets of a minimum of 8%. At least half of total capital must consist of Tier I Capital. Tier I, or core capital, includes equity capital less certain intangibles. Tier II Capital includes, subject to certain limitations, asset revaluation reserves, general loan loss reserves and subordinated debt, and is limited to the amount of Tier I Capital. However, Brazilian banking regulations: (i) require a minimum capital ratio of 11%, (ii) do not permit general loan loss reserves to be considered as Capital, (iii) specify different risk-weighted categories, and (iv) impose a deduction from Capital corresponding to possible excess in fixed assets over the limits imposed by the Central Bank.
The following table sets forth our required capital ratios (in percentages) based on the Brazilian GAAP financial statements.
December 31,
2005 2006 2007
In accordance with the Basel Accord applicable to Brazil
Tier I Capital ......................................................... 11.50% 11.58% 10.24%
Tier II Capital.......................................................... 3.73 4.90 3.73
Total Capital.......................................................... 15.23 16.48 13.97
Minimum required by Brazilian Central Bank ...................... 11.00% 11.00% 11.00%
Currently, the Central Bank does not limit the amount of dividends that may be paid subject to the capital requirements set forth above. As of each reporting date, we were in compliance with all capital requirements imposed by the Central Bank.
Actual
13.97
10.24
Other Non-Interest Income and Expenses
Years ended December 31,
2005 2006 2007
Other non-interest income:
Net gains in foreign exchange transactions ....................... 294 43 48
Recovery of expenses................................................ 77 122 46
Rental income........................................................... 22 21 10
Other(2)................................................................. 483 635 1,003
Total non-interest income............................................. 876 821 1,107
Other non-interest expense:
Taxes on services, income and other taxes........................ 1,753 2,042 2,327
Litigation(1) ............................................................ 344 324 509
Monetary variation and exchange loss, net........................ 562 608 1,459
Branch network losses................................................ 291 265 130
Loss (gain) on sale of foreclosed assets, unconsolidated
investments and premises and equipment, net (3)................ 9 (27) (1,200)
Credit card bonus...................................................... 50 101 162
Asset management expenses ....................................... 44 38 23
Other(2)................................................................ 701 1,378 1,330
Total non-interest expenses ........................................ 3,754 4,729 4,740
(1) Includes only those items not recognized specifically in personnel or tax expenses, registered in specific accounts.
(2) None of the items included in "other"; is significant on an individual basis.
(3) In 2007, we recorded a gross gain mainly from the partial sale of our investments (i) in Serasa, in the amount of R$599, (ii) in Bovespa R$253 and (iii) in BM&F R$263. The remaining balance of our investments in Bovespa and BM&F was classified as "available for sale securities, at fair value";.
Income Tax and Social Contribution
We and each of our subsidiaries file separate company tax returns for each fiscal year. Income taxes in Brazil comprise federal income tax (rate of 15% plus an additional of 10%) and social contribution (rate of 9%), which is an additional federal tax, applicable to all periods presented.
The amounts reported as income tax expense in the consolidated financial statements are reconciled to the statutory rates as follows:
Years ended December 31,
2005 2006 2007
Income before income tax and social contribution..................................... 8,752 8,750 11,297
Adjusted for: equity in earnings of unconsolidated companies ...................... (186) (224) (407)
Adjusted tax basis ......................................................................... 8,566 8,526 10,890
Tax expense at statutory rates .......................................................... (2,912) (2,899) (3,703)
Non deductible expenses/(non-taxable income) ........................................ 29 (35) 89
Tax benefit on interest attributed to shareholders' capital paid...................... 522 523 539
Non-deductible exchange losses on foreign assets.................................... (165) (171) (606)
Foreign exchange variation adjustment on available for sale securities ............ 69 (23) 99
Reversal of prior year allowance for non-realization of deferred tax assets....... 17 116 107
Deferred tax assets acquired from purchase of a non operating entity ............ - 53 -
Others........................................................................................ 9 163 123
Income tax expense ....................................................................... (2,431) (2,273) (3,352)
The major components of the deferred tax accounts in the consolidated balance sheet are as follows:
December 31,
2006 2007
Provisions not currently deductible, mainly
allowance for loan losses and contingencies ............................ 5,579 6,416
Tax loss carryforwards ....................................................... 618 761
Other temporary differences ............................................... 175 190
Total gross deferred tax assets............................................. 6,372 7,367
Allowance for non-realization ............................................... (98) (37)
Total deferred tax assets ................................................... 6,274 7,330
Temporary non-taxable gains, mainly relating to mark-to-market
adjustment on securities, derivative financial instruments............... 827 1,391
Temporary non-taxable gains, mainly relating to leasing ................ 239 518
Other temporary differences ................................................ 449 738
Total deferred tax liabilities.................................................. 1,515 2,647
Net deferred tax asset, included in other assets (Note 12) ............. 4,759 4,683
Net deferred income taxes include brazilian tax loss carryforward, which have no expiration dates, available for offset against future taxable income. Carryforward losses are available for offset within any year up to 30% of annual income before taxes, determined in accordance with Brazilian Tax Rules. For tax loss carryforward recorded by subsidiaries or foreign branches there is no limit as to offsetting.
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48, no increase or decrease in the liability for unrecognized tax benefits was recognized. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1, 2007 2,391
Additions based on tax positions related to the current year 509
Business combination 77
Balance at December 31, 2007 2,977
The above balance at the end of the year represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods (except interest accrued and penalties).
We recognize interest accrued and penalties related to unrecognized tax benefits, in the total amount of R$ 214 for the year ended December 31, 2007, in other non-interest expense. The Company had approximately R$1,594 for the payment of the interest and penalties accrued at December 31, 2007.
As of December 31, 2007, we have been involved in several tax disputes, including judicial lawsuits and administrative proceedings, mainly relating to the constitutionality and legality of certain taxes imposed on us by the Brazilian government, among which the most relevant are related to: (i) questioning of CSLL required from financial institutions in the reference years from 1995 to 1998 by rates higher than the ones applied to general legal entities, not complying with the constitutional principle of isonomy, representing R$ 1,296; (ii) lawsuit to allow the deduction, for purposes of determination of the calculation basis of due IRPJ and CSLL, of the amount of the effective and definite losses, total or partial, suffered from 1997 to 2006, in the reception of credits, regardless of the compliance with the conditions and terms provided for in articles 9 to 14 of Law No. 9,430/96 which only apply to the provisory losses, in the amount of R$ 575; and (iii) a lawsuit for the non-collection of CSLL from 1996
to 1998, years in which some companies of Bradesco Organization did not have employees, since the subsection I, article 195, of the Federal Constitution provides for that this contribution is only due by employers, in the amount of R$ 480.
Although it is possible that a change in the gross balance of unrecognized tax benefits may occur in the next 12 months of December 31, 2007, quantification of an estimated range cannot be made at this time due to the uncertainty of the potential outcome of outstanding issues in Brazilian courts. However, we do not anticipate any adjustments would result in a material change to its financial position.
We file income tax returns in the Brazilian federal jurisdiction, the major tax jurisdictions in which we and our subsidiaries operate, and should be no longer subject to examinations by Brazilian tax authority for tax years before 2003.
On March 24, 2008, our Board of Directors approved a split of our capital stock, in which our shareholders were entitled to one new share for each two
existing shares of the same class. Therefore, all related share amounts have been retroactively adjusted for all periods presented to reflect the stock split,
whereby one new share was received in exchange for each two shares held. At December 31, 2007, our capital were represented by 1,010,165,730 voting
common shares with no par value, 1,010,754,450 non-voting preferred shares with no par value, 828,700 treasury common shares and 1,417,524 treasury
preferred shares.
On March 12, 2007, our Board of Directors approved a split of our capital stock, in which our shareholders were entitled to one new share for each existing share of the
same class. Therefore, all related share amounts have been retroactively adjusted for all periods presented to reflect the stock split, whereby one new share was received
in exchange for each share held.
On March 24, 2008, our Board of Directors approved a split of our capital stock, in which our shareholders were entitled to one new share for each two existing shares
of the same class. Therefore, all related share amounts have been retroactively adjusted for all periods presented to reflect the stock split, whereby one new share was
received in exchange for each two shares held.
None of our outstanding obligations are exchangeable or convertible into equity securities and as a result, diluted earnings per share do not differ from net income per
share.