Banco Bradesco S.A. (BBD) Q4 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Banco Bradesco's Fourth Quarter 2018 Earnings Results Conference Call. This call is being broadcasted simultaneously through the Internet on the website, banco.bradesco/ir-en. In that address, you can also find the presentation available for download. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to the future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Banco Bradesco and could also result to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Carlos Firetti, Market Relations Department Director. Please, Mr. Carlos, you may proceed.

Hello, everyone. Welcome to our conference call for discussion of our fourth quarter results. We have today with us participating in the call Octavio de Lazari, Bradesco's Chief Executive Officer; Andre Cano, Executive Vice President; Vinicius Albernaz, Chief Executive Officer of the Group of Bradesco Seguros; and Nianda Miranda, Executive Officer and Investor Relations Officer. To start the call, I turn the floor to Andre.

Thank you very much. Good afternoon. Hello, everyone. Thank you all for joining our fourth quarter 2018 earnings conference call. 2018, as you know, was marked up by dismal activity in global markets as well as the Brazilian markets. This was led by several political and economic disturbances that affected our economy. This combination prevented the economy as a whole from growing faster with [indiscernible] below 2017's 1% growth and the unemployment rate above 11.5%. Despite of this challenging scenario, Bradesco remains flexible, focused and seeks to present on healthy and strong and solid operational for, in financial performance. The bank was well positioned and with the right strategy to grow. This allowed us to expand our own portfolio, increase our services revenues and decrease our risk cost and keep the overall costs at very decent levels. We can say, generally speaking, that we were with costs below inflation. Operating cost remains uncontrolled and we partially absorbed the impact from the collective labor agreement, resulting in costs growing below inflation, as I have mentioned before. On page 3 of our presentation, we can see that, in 2018, we had a record net income of BRL21.6 billion, up 13.7% 13.4% year-on-year. Besides that, we had a solid operational profit above 24.9% year-on-year. It was an incredible year for us. Turning to page 4, we can see we had several foreign initiatives in the past month. Among them, we'd like to highlight the following. First of all, the renewal of our brand, which allows us to be more flexible in our visual communication and reflects our values as well as our deep level of technology and mobility. We also have experienced the flexible evolution of BIA, our unique artificial intelligence platform. And we were able to achieve the important milestone of 500,000 clients on Next. Just to give you a flavor, last week we reached 575,000 clients. On page 5, we can say that very beginning of this year, our Executive President, Mr. Lazari, announced the redesigning of our senior management structure. As you can see on page 5, we've reduced the number of executive vice presidents down to 4 from 6. This movement is speeding up the decision process and boosts the corporation and synergies among our several arms of the organization. Furthermore, we improved our client segmentation, seeking to provide an even more customized, deeper and comprehensive set of services to our customers. Client [indiscernible] organization is the center of everything that we do. The bank is now with the following organizational structure. Wholesale bank that is comprised of large corporate, corporate, corporate one, prime brokerage, investment bank, global markets, securities, foreign exchange and international private bank divisions. It is headed by Marcelo Noronha. High net worth clients and treasury comprises of prime top-tier clients dedicated divisions [indiscernible] brokerage houses, wealth management and treasury divisions headed by [indiscernible]. Retail comprised of branches, digital branch platform, [indiscernible] express, digital channels and cards led by [indiscernible]. And finally, control and business support structure that's comprised of technology, human resources, finance and risk and other operational areas [indiscernible] led by [indiscernible]. You can see on page 6 that we are improving our customer experience dramatically. It's a permanent goal of ours and we had a number of important initiatives as we have pointed out at this page. We seek to better understand our customer needs. We improved the speed and the convenience of our services. The products and services portfolio became more and more tailor made for our customers' needs. As a result, our NPS index is improved around 20% in 2018 when compared to 2017. As we have just described on page 7, these amount to our largest efforts in technology and to, the idea is to provide a better experience to our customers. We are in the bank wars and the cutting-edge position with the use of artificial intelligence in the financial markets. 8.3 million customers have already used BIA, with around 73.2 million interactions. BIA is a multiplatform, which, it comprises Bradesco app, Next, WhatsApp, Google Assistant, among others. The evolution has been very, very fast. The accuracy of answers is around 90% today, and it tends to enhance even more and faster. BIA has a wide range of applications. We use it to assist our managers, clients and use it to execute transactions. Just as we did in the previous quarter, on page 8, we present some key figures from our digital channels. We highlight Next with achieving 500,000 clients by the end of 2018. But as I had just mentioned, we reached 575,000 last week, and we expect to reach 1.5 million clients by the end of 2019. 77% of our clients who joined Next were not Bradesco's clients, so we are enhancing our base of clients. So we are achieving our goals there. The number of BIA interactions made by our customers through WhatsApp keeps growing faster and faster. Only in the fourth quarter of 2018 there were 5.2 million interactions. The volume of loans remitted through mobile and Internet improves steadily. In 2018, the figure expanded 63% for individuals and 76% for companies. The number of digital clients, including mobile and Internet bank, but especially more and more mobile, reached 15.3 million, which represents incredible 53% of our checking account clients. Turning to page 9. We point out that we maintain our focus on growth, customization and efficiency of our business model, searching continuously for more profitable business models that fulfill our clients demands. In the past 2 years, the number of digital clients grew by 25%. We have already made an important adjustment in our network and we continue to adjust it. We will continue to close some branches or transform them to point of sale as the case may be. We are just looking for profitable branches and points of sale, which allow us to reduce costs without losing transactions with our clients. The size of branches might be smaller. We expect to achieve 1.5 million clients in the digital platforms by the end of this year. Due to our increasing technology and embedded processes, managers assist 3x more clients, increasing clients' profitability up to 40%. And as the economy recovers, we have the opportunity to improve the use of our network strategy throughout Brazil, as we are the only bank that is present now [indiscernible] of the country. On page 10, we can see that our shares operation presented an important decrease in claims as a result of important measures we've taken in previous years. We have redesigned several pricing models and focused on portfolios that have higher profitability. In the healthcare segment, for instance, we have ongoing initiatives for cost control, such as negotiations with hospitals, which makes the business more sustainable in the long run. We highlight investments in primary treatment. By the end year, we shall have 23 units of [indiscernible]. We have the [indiscernible] client segment as part of our wealth management and investment strategy. Finally, I would like to highlight that we have several initiatives focused on the experience of our customers, for instance, the extension in the offering through digital channels. Turning to page 11, we can see here that the brokerage house environment remains positive, and we are gaining momentum there. We've concluded investments in the platforms of our brokerage houses [indiscernible] in order to meet clients' utmost demands. We have just launched other's new platform, which has been completely redesigned to provide a friendly and comprehensive experience to our clients. Our brokerage houses have a potential market of 1.3 million clients from our prime and private segments, besides the 300,000 clients that we already have. We remain both [indiscernible] on our wealth management strategy and bringing further [indiscernible] throughout 2019. Finally, on page 12, we'd like emphasize the great added value we bring to the Brazilian society from the total added value of BRL61 billion generated in 2018, 34% was paid in tax and 30% in compensation to our employees. This year Fundacao Bradesco has invested BRL607 million in [indiscernible] activities benefiting 94,000 students. We are permitted to invest up to BRL650 million in 2019. Thank you very much. Now I'll turn the call over to Carlos Firetti, who will continue over presentation section of the financial data.

Okay. Thank you, Andre. So now we start the analysis of our numbers. In Slide 14, we have a summary of our numbers. Many highlights will be provided is the strong increase in our operating income in the fourth quarter compared to the same period last year, 33% and for full year '18 an expansion of 25% of our operating income. Net income grew around 20% in the quarter, 13.4% for '18. And our return on equity reached 19.7% in the quarter and return on assets, 1.7% extending from 1.6%. In Slide 15, we have the evolution of our net income. Since the first quarter '17, we moved to a new level in the last 2 quarters, closed the fourth quarter, as I said, at 19.7%. We will keep working for expanding our level of returns. On Slide 16, we have our loan origination. We have been presenting this chart for more than a year and basically, we consistently show expansion of loan origination in individuals and companies in the fourth quarter compared to the same period in '17. Originations in the business grew 23%, while, for companies, it's growing at 37.5%. The quality of these originations have been very good, given all the changes and improvements we have in our models and origination, and that is the basis for our positive view on credit quality going forward. In Slide 17, we have our loan book. Basically, it grew 7.8% in '18. The individual portfolio was the main highlight, growing at 11%, with the main lines at payroll loans, real estate financing, mortgage, car loans. And also highlights for personal loans that accelerated throughout this year, reaching 18%, basically with improvements in our process originating the product and also changing some characteristics in the product. In the companies segment, the growth was 6.1%, 10.1% for SMEs, 4.5% for large companies. The profile of growth is exactly what we have been saying, higher growth for retail operations, individual SMEs and less growth for large corporates, where we continue to focus to be the main bankers for our clients. Serve them on their credit needs, but not necessarily doing only loans through our balance sheet. We can use capital markets. We can originate for sale, and that is the approach focusing mostly on capital discipline and on the returns of our operation. In Slide 18, we have our net interest income. We had a very good performance this quarter with an increase in net interest income of 6.6%. The asset liability management line increased basically due to the normalization of markets in the fourth quarter kind of compensating the same movement but on the negative side we had in the second quarter. In insurance, we also had an improvement, more like normalizing the performance with the inflation index changing with IPCA, the retail inflation coming is higher than the wholesale inflation [indiscernible] ICPA. On credit, basically, we keep benefiting from increasing origination, increasing the portfolio. We had some contraction in spreads. We think that's part of the environment, but we feel the change in mix and the strong growth in terms of volume should allow us to keep growing our net interest income from credit throughout '19. In terms of credit quality, we continue on a good trend. The delinquency for individuals and SMEs keeps going down. For, now, almost 7 consecutive quarters, the delinquency for corporates has been still flattish on a relatively high level. We believe we're going to see improvement in this line throughout '19, considering that we believe we are at the end of the cycle for corporate and most of this delinquency is caused by a few companies. On page 20, we had this quarter some increase in the NPL creation. This increase comes mostly from the SME operation that had an increase in the fourth quarter. We believe this is explained by a group of companies and also by some seasonally, in fact, if you analyze the SME delinquency in the operation actually it had the same increase last year. And also we can say the base for the third quarter was relatively low. So the size on the increase is also driven by the fact the third quarter was relatively low. In terms of cost of risk, we remain at a very good level. We believe we still have some room for reducing the cost of risk as a percentage of the portfolio going forward. In terms of the coverage ratio of 90 days, delinquency increased a little bit more to 245%. We believe this large coverage will be used as we continue growing our loan book and also when the NPL ratio stabilizes and growth actually helps to consume more of this coverage. And also the excess provisions, we should consume these provisions or use these provision in the transition for IRFS-9. This doesn't change the coverage ratio, it will remain high. But it is part of the transition for the new standard. Page 22 sees our sales group grow, grew 5.2% in 2018. The main highlight in fees come from checking accounts, asset management, the consortiums and from brokerage service. In page 23, our operating expenses, we kept a strong level of discipline throughout '18 with total costs growing 1.7% in the year, inside the range of our guidance. The administrative fees increased 0.8% and personnel 2.5%, remembering that, in personnel, we had the increase of salaries for banking workers in September at a rate of 5%, and this is responsible for part of the impact we see, especially in the fourth quarter. We should keep decreasing costs and we believe we will remain as like we've highlighted for the bank. We reduced in the, in '18 132 branches. If we consider the points of service we closed that would make a reduction of 228 points of service, closed branches. So we should continue adjusting our branch network in the coming years, always focusing on the profitability and returns of those branches. On page 24, our insurance operation that had a very good fourth quarter with earnings growing to 26.7% on a year-on-year basis, 22% in the quarter. The earnings for the insurance company expanded at 15.4% in 2018. The return of insurance company was 22.3% in the fourth quarter and 20% for '18 as a whole. In the Slide 25, you can see the operating numbers for the insurance company. The main driver for this good performance is the improvement in terms of claims. Total claims went down again. Again, we have seen this reduction in consecutive quarters, it reached 70.4% reduction of 200 basis points comparing to the third quarter. And as a consequence, the combined ratio also improved in an important way in the fourth quarter. One of the main drivers in terms of segments, in terms of reduction in claims come from the health insurance segment where the managers we have been adopting in the company are producing effects helping to keep claims under control, also, benefiting from the improvement in the economic cycle. In page 26, we have our capital ratios. We increased our total Tier 1 to 13.7% in, for the fourth quarter '18. That's an increase of 150 bps a year, comparing to the third quarter. We had an increase of 90 bps in the common equity Tier 1. And also we issued 81 in the fourth quarter. The difference was in the Brazilian market through private placements. It amounted BRL4.2 billion, and this capital was already approved by the central bank to compound, to be included in our Tier 1. In page 27, we have a slide on the reclassifications of our income statement that are going to be the base for our reportings part in the first Q '19. Basically, the main changes are the transference of the margin from insurance from the margin line to the insurance line. So what you will, you're going to see from now on is the reporting of operating and financial income of insurance in the same line. What makes this line represent more the operations of the insurance company and should be less brought up. Also, we reduced the other operating income line, transferring part of its component to the margin, that will be the, is an appropriate classification and also transference of the small amounts to provision expenses and also services. Basically, as I said, this is the new way of reporting. We produced a solid set of data where you're going to be able to use in your models. And the important information here, our guidance applies to this new classification. It's especially for the insurance line in the margins. In the Slide 28, we have our guidance. First, the comparison between our revised guidance and the actual performance. Basically, considering the revised guidance, the underlying needs for insurance premiums and meeting all the other lines. For 2019, the new guidance for loan growth is a growth of between 9% and 13%; for the financial margin for the total NII from 4% to 8%; for fee and commissions 3% or 7%; operating expenses 0% to 4%; the income from insurance that, as I said, includes the margin, the return classification of the margin, 5% to 9%; and finally, for provision expenses, a range going from BRL11.5 to BRL14.5. So with this, I conclude the presentation of the results, and now I open for questions.

[Operator Instructions] Our first question comes from Mr. Carlos Macedo from Goldman Sachs.

I have a couple of questions. First one on your guidance for provisions. I'm just trying to understand, I'm not sure if you said something, you said about the underlying income with loan growth and in the coverage that you have on the NPLs now, 245% is very high. Even this quarter, I mean, your required provisions went down but your generic provisions, which are more at the discretion of the bank, they went up. Just trying to understand how the unbundle will happen, if it's just going to be fueled by the growth of the portfolio and things like that and how IFRS 9 will affect it. Second question on margins. From your guidance, it appears that margins, you expect margins to decline sequentially in 2019. Could you talk a little about that? I know that the change in the mix is pretty possible, but you didn't forecast it. You have a tightening of the margins. Is it going to be just the strength passing through the back book from the front book? How is that going to take place?

Okay, Carlos. First question on provisions, expenses. Basically, we, the trends for provisions remain positive. We believe we had some one-offs in terms of provisions during 2018 that, in our view, in terms of the ticket from this one-off, they shouldn't repeat in the same levels. We continue to have the impairments. They amounted almost BRL1 billion. We believe there's room for seeing reductions there. But I think what gives more confidence for us is that, looking to the originations, we see the performance of the vintage doing very well. We believe, considering this performance, we are not normalized in terms of the level of provisions our portfolio should require. The growth demands, at some point, more provisions but we believe that the growth is of normalization and the absence of one-offs and also the lower impairments should compensate for it. In terms of margins, we believe, in 2018 we will continue to see some compression in spreads. I think that's the trend. That's the consequence of passing through the improvement in terms of cost of risk in an environment where we believe all the vectors will be willing to grow. We don't think the final reduction in the credit NII will be very big. We believe the mix during the year can help us to offset part of that movement. But when you look to the total margins, it also should be affected by the reduction in the margins or in the NII from the asset liability management or in the new classification, the margin from the market, considering that, in our view, the, as of today, the amount of which results to be appropriated in '19 should be smaller than we have appropriated in '18. So the, our, the, so the mix is, the margin from credit reduces probably not as much, and we have, as of today, a perception that there's also some reduction in the margin from the asset liability management.

Okay. And just a follow up then, if you can, talk a little bit about the IFRS-9 implementation. How do you expect that to take place and timing and the impact for Bradesco?

Can you repeat the beginning of your question? I lost it.

The IFRS 9 implementation, and how you expect that to take and the impact for Bradesco?

Okay. As of today, the expectation, this is not totally defined, the expectation that the full implementation should have be for 2021, sorry, 2020. And, but basically, there's kind of a gradual implementation of some aspects. In our view, the implementation will not require more provisions. Basically, we have enough. Considering the overall provision, the implementation doesn't change the coverage. Basically, the only thing is how, especially the additional provision is classified. So we believe we are in a very good position. There is no major impact coming from, or there's no impact coming from the provisioning side.

Okay. But could it increase, starting in 2020, when you implement it, will it increase the provision, given that its expected loss and you're moving more into consumer, which has longer duration. Could you increase the amount of provisions you have to make on your current basis? Or should we expect more of the same relative to what, 2019?

We don't, basically, in terms of the balance, as I said, you, we just reclassify. In terms of the flow, I think we are ready to do the provisions on the appropriate level for the flow of new provisions.

Our next question is coming from Mr. Mario Pierry of Bank of America.

Couple of questions as well. First, on your loan growth guidance of 9% to 13%. Can you give us a little bit more color on the breakdown of this growth, which products are you most excited about? Also, if you can share with us how does this compare for your expectations for industry growth, given the public sector banks in Brazil seem to be reducing the size of their balance sheets. So I was wondering if you're embedding any market share gains here on loan growth? The second question is related to fees. Basically the mid-point of your guidance, we're seeing fees growing roughly in line with inflation. Even though you do have some room here to change your fee for the old HSBC Brazil clients. So I was wondering, also, if you can give us a little bit more color on the guidance and why it's only growing in line with inflation.

Okay.

Okay. This is André speaking. Basically, we do not provide any specific guidance for every line of our corporate credit portfolio. But overall, what I can tell you is that regarding to our fee issues is that we shall see a very strong growth from individuals as well as SMEs. Regarding the corporate size, we are about to see a more competitive environment. We expect the local debt capital markets to provide most of the funds, especially for the high-graded companies. And we shall be able to be fast to provide solutions and then to rewrite our portfolio and strategy to markets. That's how we plan to be competitive in this scenario. Regarding to market share, we share your vision. Regarding to state-owned banks, so we guess we shall have room to get more market share here.

Also, one thing that is very important in all guidance lines, in term of our lines is, basically, we should keep a very high level of capital discipline. Our view in terms of credit is really have returns in the operations for that. As Andre said, we can originate [indiscernible] basically looking for maximization of return. We've been considering that as a banker of companies in Brazil, it's always important to serve our clients.

Okay. And, no, that's clear. And then the question on fees.

Oh, sorry. In terms of fees, we, the main pressure we see comes from the payment side. You guys follow us what's going on in terms of the competitive environment on the acquiring business, and that is impacting our credit card fees. It represents roughly 8.5% of total fees. So it's, this is the main fact. Also, as you guys know, there's the cap in the interchange for that. That was established last year and was, it started to be valid in October '18. That's going to have a full year impact. The impact is not huge, but it contributes to eroding a little bit the overall growth for this line. We have opportunities. We believe the volume of business, considering the stronger and stronger economy, should help us in cash management, in terms of credit, in many lines. But considering the environment, I think it's appropriate to be cautious. I think, the 5% in the middle of the range for this guidance, it sounds to us appropriate for the moment.

Our next question is coming from Mr. Marcelo Telles of Credit Suisse.

I have 2 questions. The first one, regarding your insurance performance, I mean, you seem to be, improve your insurance operation quarter-after-quarter, and we saw a further decline in your claims ratio. So I'm wondering if you still see room for further improvement in your claims ratio down the road. I mean, can you think of it more like a late-cycle situation. Seems like your provisions were, you'd still be operating with a relatively high number. And what do you think that 70% that you had in the quarter, I know there's volatility on a quarterly basis, but what should be, a year that would, could as a benchmark for your loss ratios in the insurance operation. And the, and my second question is, we've seen, it's a more, it's kind of a broader question, we've seen like these very significant changes in the management teams throughout different public sector companies, including of course, Caixa Economica Federal. There has been a lot of talk about a new, or Caixa Economica becoming a dealer, with their inefficiencies, becoming like a better bank going for a significant increase in deposit penetration with its client base. And I'm wondering if you think there is, this will pose a risk, in your view, for private sector banks and for you specifically and if there is any overlap in adjusting your client base and the client base of Caixa Economica Federal. That sort of thing that you think could make the competitive environment tougher down the road?

Okay, thank you. Marcelo, let me start with your last question, then I will make some comments on insurance and transfer to Vinicius. So basically, regarding the changes in the public sector banks, I think, provided that they operate in a rational way and don't provide subsidized loans, a competition is always good. We think that doesn't pose a major risk. They are already a large bank. They have becoming more efficient and basically operation rationally. It's all, it's good. We don't see there's a, that's a problem. We, what was a problem was subsidized loans or subsidized [indiscernible] that somehow fostered a competition that, in our view, was not necessarily help. On the insurance, Vinicius will complement, but I think there were a lot of measures already implemented. They are working in many different fronts, improving the operation in terms of volatiles, in terms of profits. They have done a lot in terms of health insurance, and there's still more to go. But one thing that I will highlight is, especially, health, it still didn't see growth. I think the economy just reached kind of an inflection point, and employment started to stabilize. That helped in terms of claims because we have, we don't have the new unemployment, unemployed people that actually have coverage and they have for some time and generate very high levels of claims. So probably we still have room for capturing growth, especially in the health insurance segment. Vinicius?

Yes, just to add to what Firetti mentioned. Indeed, I mean, we still see room for growth. Actually, employment has just stabilized, and we are beginning to see room for increasing employment. And I think that should affect positively our health operation. Also, it is a combination, I mean, roughly you've seen in terms of the decline in the loss ratio. The combination of measures that have been taken in the company for quite some time now and that are maturing and are working basically on 2 fronts. One side is more competitive, more competitiveness in terms of products, and then we have the changing of our focus and also focusing on the regional aspects and creating new products that are more competitive. And also, on the efficiency side, as Firetti already mentioned, we have several fronts in terms of negotiation with providers of moving from a traditional fee-for-service model to more value-based type of initiatives with our providers. So we still see room for further efficiency gains there. So even though, of course, we, I mean this is a risky and volatile environment, and we still believe that there are structural reasons to believe in this process. In terms of auto, which has been also seen a return to double-digit returns in terms of return on equity. We have been focusing on more, in better portfolios with better returns and focusing on growing in terms of return on good portfolios. So there's a clear focus on internal equity here, a clear focus on growing those lines of products that can deliver the right return to the company.

I have 1 extra question, if I may. This one is related to margins, to NII. We saw in the quarter very nice growth with better mix, and the NII, the credit NII didn't really grow in the quarter. Is it possible for you to share with us what are the segments that you saw some decline in credit spreads? And think of 2019, what are the loan segments that you see more pressure on the spreads?

Okay. Basically, we are still feeling a little bit the impact of the changes in the overdraft. And also, we have been producing more loans in some lines with lower rates, kind of, especially incentivating our own clients to take more loans with lower rates. One example also that has produced volume and of very good, with lower spreads is, for instance, in the personal loans, we have changed the product. We used to treat it as a product for which we granted limits as a percentage of the income. Now we treat it as a product installment, while we can lend for longer. And we sell this product mostly to clients we know, our base of clients, that's driving the growth in personal loans. But the average spread we have generated on it, it's lower from the original portfolio before we started with this product. But anyway, it's a product of a very high return. I think going forward, our expectation is that mix will help and will help to stabilize the average spread, the overall spread of the portfolio, the overall margin of the portfolio and the strong increase in volumes. We believe this will drive NII to the levels we presented in the guidance.

[Operator Instructions] Our next question is coming from Mr. Jason Mollin of Scotiabank.

Some of mine have been addressed. I wanted to ask first one on your outlook for taxes. You've heard about the proposal to end the interest on capital tax deductibility. We've heard that in the past as well. But perhaps we could also see some reduction in corporate tax rates and some changes in the tax on the dividends. What is Bradesco's base case scenario today, if you can provide some color? And my second question is on possible M&A. I saw some press headlines quoting Bradesco's CEO saying that Bradesco is looking at possible acquisitions amid privatizations. What kinds of investments will be interesting for Bradesco? Are there specific companies? And would Bradesco consider nonfinancial companies?

Okay. Jason, in terms of tax, we believe that, considering the, it's, the nominal tax rate of 40% that is expected right now. Our expected tax rate for '19 should be around 30%. There's some debates on taxes, I think, and all of them, you have a lot of information material In the press. We believe what has been discussed sounds positive, making the system more rational. But we don't see in these proposals an increasing tax rate, we see a rationalization. So, but for practical purpose, for estimates, we have to focus on what we know. As I said, the nominal tax rate is right now at 40%, what should lead the effective tax rate to 30%.

Thank you for your question. Regarding to M&A, we have present a very strong balance sheet, and we see here a lot of opportunity in the country. We do expect that, as the economy grows, we shall increase our [indiscernible] here and provide more and more services to our clients. Nevertheless, if we find out any specific opportunity that can enhance our platform to provide any sort of a specific search that we are not in state of the art, we are not prevented from it. But there's nothing in our radar screen right now.

Jason, only to compliment, we don't see anything large. As Andre has said, marginal things that complement portfolios, we'll be looking but nothing that really looks sizable at this moment. I think the comments made by Octavio was more on general terms. We are free to look, considering the rules applied after the acquisition of HSBC. So in theory, we don't have those restrictions. But nothing in the horizon.

Our next question is coming from Mr. Thiago Batista of Itau BBA.

I have just some questions about the payout ratio. Last year, the bank's payout ratio was around 40%. That was 52% in '17. And all of those payments were through IOC. So my question is what is the expected payout ratio that the bank is, what is the expected payout ratio for '19? How much the bank can pay? And if it will be everything through IOC ?

Okay, Thiago, thanks. As of, as you know, we have been paying mostly interest on capital over the last few years, and I think the base case scenario without any other discussion is we should continue paying interest on capital. I think that's the base case. I think we know we are, we have reached a level of capitalization that is very healthy. We've got already a little bit above the level of capital we have been saying we would be very comfortable with, that is 13.5%. But I think there's some, still some things on the horizon. First, we still have to go through the major reforms and the reforms that make the country long-term sustainable. We are getting into a new growth phase. That should bring opportunities to expand the loan book. So we are always, our board is always discussing, but what we have on table is we should keep interest in capital for this year.

Our next question is coming from Mr. Carlos Gomez of HSBC.

I have a question regarding your new presentation of the information that you announced. You have been previously trying to match it. In my numbers, that increases the continuation of insurance towards, that is, 37%, 38% of the total. So first I would like to understand the logic for the reclassification. Is it internal approving or is it something that regulators or auditors indicated to you as a better alternate? Second, going forward, how sensitive are these interest, these earnings of insurance to interest rate, in that it's positive or negative related to them?

Okay, Carlos. Basically, on your second question, the sensitivity for, of earnings to interest rate, basically, short term, as we have been saying, our results are positively impacted by lower rates. Basically, that makes the cost of funding to reprice faster. So a lower rate, short term has, produces positive impact. So I think that, longer term, for, considering that we would be earning lower interest rates on cheap assets, our working capital, then the impact of lower rates comparing to higher rates is negative. But shorter term, it tends to be positive. For sure, it depends on the positions of the treasury, et cetera. In terms of the, your first question, if I got it right, is about the reclassifications.

What is the rationale for the reclassification? And who is the driver? Is it internally because you are looking at the business differently? Or is it the auditors or the related? I bet you have full information percentage in income?

Yes. I think, and the rationale is basically that's kind of closer to the way we look through our numbers internally. Basically, we had some managerial classifications that we have been carrying for some time, and we always resist to make the changes, but the current changes make the numbers to be more aligned to what we have been looking at, to the evolution of our internal managerial numbers. It makes also the numbers easily, more easily compared with other peers. So basically, this is the main reason for the reclassification. On the insurance side, that is kind of, in terms of size, the most important, basically, we had problems in the former classifications that the operational part of the insurance results was in one line and the margin, for insurance and the margin. So that made especially the insurance line the operating result volatile. Sometimes, the trends were hard to explain, looking to align isolated results. Trust me, this new classification makes the understanding of numbers better.

Excuse me, ladies and gentlemen, if there are no further questions, I would like to invite the speaker for the closing remarks.

Thank you all for participating in our conference call. And we are very glad that we have such numbers, and we will remain very positive for 2019. Have a nice day.

That does conclude the Banco Bradesco's conference call for today. Thank you very much for your participation, and have a good day.