Banco Bradesco Sa American Depositary Shares

Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Banco Bradesco's 44th 2018 Earnings Results Conference Call.

This call is being broadcasted simultaneously through the Internet in the website bancos.bradesco.com. In that address, you can also find the presentation available for download.

we inform that all participants will only be able to listen to the conference call during this company's presentation.

After the presentation, there will be a question and answer session when further instructions will be given.

Should any participants need assistance during this call, please press star zero to reach the operators. 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 depends on circumstances that may or not may occur in the future. Investors should understand that general economic conditions industry conditions, and other operation factors could also affect the future results of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Carlos Siretchi, Market Relations Department Director. Please, Mr. Carlos, you may proceed. Hello, everyone. Welcome to our conference call for discussion of our first quarter results. We have today with us, participating in the call, Otávio de Lazari, Bradesco Chief Executive Officer, André Cano, Executive Vice President, Vinícius Aldenar, Chief Executive Officer of the group Bradesco Seguros, and Leandro Miranda. the Executive Officer, and congrats on your visit. To start the call, I turn the floor to Leandro. Thank you very much for that. Hello, everyone. Thank you all for joining our fourth quarter 2018 earnings conference call. 2018, as you know, was marked up by a deep volatility in global markets, as well as the Brazilian markets. This was led by a set of political and economic disturbances that affected our economy. This combination prevented the economy as a whole from growing faster, repeating the low 2017 1% growth and the unemployment rate of over 11.5%. Despite of this challenging scenario, Bradesco remained flexible, focused, and fit to present a healthy and strong and solid operation in financial performance. The bank was well-positioned and with the right strategy to grow. This allowed us to extend our loan portfolio, increase our services revenues, and decrease our risk costs, and keep the overall costs at very decent levels. We can say, generally speaking, that we work with costs below inflation. Operating costs remained uncontrolled, and we partially absorbed the impact from the collective labor agreement, resulting costs growing below inflation, as I have mentioned before. On page three, of our presentation, we can see that in 2018, we had a record net income of $31.6 billion, up 13.7% year-on-year. Besides that, we had a soundly operational profit, up 24.9% year-on-year. It was an incredible year for us. Turning to page four, we may 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 grant, which allow us to be more flexible in our visual communication and reflect our values, as well as our deep level of technology and modality. We also have experienced the fast evolution of VIA, our unique artificial intelligence platform. and we were able to achieve the important milestone of 500,000 clients on X. Just to give you a flavor, last week we reached 575,000 clients. On page five, we can say that The very beginning of this year, our Executive Vice President, Mr. Otage, announced the redesigning of our senior management structure. As you can see on page five, we reduced the number of Executive Vice Presidents down to four from six. These movements aimed at speeding up the decision process. and boost the cooperation among our several areas of the organization. Furthermore, we improve our client segmentation and even more customize it deeper and comprehensive set of services to our customers. Client is key here in this organization. It 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, Office 1, Prime Brokerage, Investing Bank, Global Markets, Securities, Foreign Exchange, and International Private Bank Divisions. It is headed by Marcelo Noronha. High Network Clients and Treasury, comprises of Prime, Prime Invest, Top Tier Clients, Dedicated Divisions, Bradesco and AdWord, Brokerage Houses, Wealth Management and Treasury Divisions, headed by Cassiano. Retail Bank, comprised of branches, Digital Brains Platform, Registro Express, Digital Channels and Cards led by Rico. And finally, Control and Business Support Structure that is comprised of technology, human resources, finance, and risk, and other operational areas, in this case here, led by André Cano. You can see on page six that we are improving our customer experience dramatically. It's a permanent goal of ours, and we have a number of important initiatives, as we have pointed out at this page. We seek to better understand our customer needs and improve the speed and convenience of our services. The products and services portfolio became more and more tailor-made for customer needs. As a result, our APS index has improved around 20% in 2018 when compared to 2017. As we have just described on page seven, views among our largest efforts in technology and through VIUs to provide a better experience to our customers. We are in the vanguard and cutting edge position in the use of artificial intelligence in the financial markets. 80.3 million customers have already used VIA with around 73.2 million interactions. VIA is a multi-platform. It comprises the Discord app, Next, WhatsApp, Google Assistant, among others. The evolution has been very, very fast. The accuracy of answers is around 90% today and tends to enhance even more and faster. Gia has a wide range of applications. We use it to assist our managers, clients, and even 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 Max with a 2,000 clients by the end of 2018, but I have to just mention we reached 575,000 last week. and we expect to reach 1.5 million clients by the end of 2019. Seventy-five percent of our clients who join Next were not Bradesco's clients, so we are enhancing our base of clients. So we are achieving our goals there. The number of deals interacted by our customers through WhatsApp keeps growing fast and fast. Only in the fourth quarter of 2018, there were 5.2 million interactions. The volume of loans released through mobiles and internet increased steadily. In 2018, the figure expanded 63% for individuals and 76% for companies. The number of digital clients, including mobile and internet banking, but especially more and more mobile, reaches 15.3 million, which represents an incredible 53% of our checking account clients. Turning to page nine, we point out that we maintain our focus on growth, customization, and efficiency of our business models. searching continuously for more profitable business models that fulfill our client's demands. In the past two years, the number of digital clients grew by 25%. We have already made important adjustments in our network and continue to adjust it. We will continue to close some branches or transform them to points 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 action 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 see three times more clients, increasing clients' profitability up to 40%. And as the economy recovers, we have the opportunity to improve the use of our network established throughout Brazil, as we are the only bank that is present in all municipalities of the country. On page 10, we can see that our insurance operation presented an important decrease in claims as a result of important measures we took in the 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 the investment in primary treatment. By the end of the year, we shall have 22 units of . We have been treating the patient plan 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 expansion in the offering through digital channels. Turning to Phase 11, we can see here that the brokerage house environment remains positive, and we are getting momentum there. We concluded the investors in the platforms of our brokerage houses, Agua and Radios Corretores, in order to meet clients' utmost demands. We have just launched Agoda's new platform, which has been completely redesigned to provide a friendly and comprehensive experience to our clients. Our brokerage houses have a population of 1.3 million clients from our Prime and Prime segments, besides the 300,000 clients that we already have. We will remain involved in fast-forwarding our wealth management strategy and bringing further news throughout 2019. Finally, on page 12, we'd like to emphasize the great added value we bring to the Brazilian society from the total added value of 61 billion reais generated in 2018, 34% were paid in tax, and 30% in compensation to our employees. This year, Fundação Bradesco has invested 607 million in its own offices, and you are permitted to invest up to 150 million reais in 2019. Thank you very much. Now I'll turn the call over to Carlos Figueiredo who will continue our presentation, especially on the financial data. Okay. Thank you, Leandro. So now we start the analysis of our numbers in slide 14. We have a summary of our numbers. Main highlight in this slide is the strong increase in our breaking income in the fourth quarter compared to the same period last year, 33%. and for full year 18, an extension of 25% of our incorporate 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, expanding from 1.6. In slide 16, we have the evolution of our net income since the first quarter 17. We moved to a new level in the last two quarters, closing the fourth quarter 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 these charts 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 originations for individuals grew 23%, while for companies it's growing at 37.5%. The quality of this origination has been very good, given all the changes and improvements we had in our models and origination, and that's the basis for our posted view on credit quality going forward. In slide 17, we have our loan book. Basically, it grew 7.8% in 18. The individual's portfolio was the main highlight, growing at 11%, with the main lines at payroll loans, real estate financing, mortgage, car loans, and also a highlight 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 this product. In the company 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, individuals, SMEs, and last growth for companies. 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's the approach focusing mostly on capital discipline and on the returns of our operations. 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. Insurance, we also had an improvement, more like normalizing the performance with the inflation index changing with IPCA, the retail emission coming is higher than the wholesale inflation measured by GPM. On credit, basically, we keep benefiting from increasing origination, increasing the portfolio. We had some compression stress. We think that's part of the environment, but we feel the changing mix and the strong growth in terms of volume should allow us to keep growing our net interest income from credit throughout 2019. In terms of credit quality, we continue on a good trend. The delinquents for individuals and SMEs keep going down for now almost seven consecutive quarters. The delinquents for corporates has been still flattish on a relatively high level. We believe we're going to see improvements in this line throughout 2019, considering that we believe we are at the end of the cycle for corporates, and most of the delinquents is caused by few companies. Page 20, we had this quarter some increase in the MTL 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 seasonal effects if you analyze the SME delinquents NPL creation 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 of the increase is also given by the fact that 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 coverage ratio of night-to-day delinquents, we increased a little bit more to 225%. We believe this large coverage will be used as we continue growing our logbook 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 provisions in the transition for IFRS 9. This doesn't change the coverage ratio. It will remain high, but is part of the transition for the new standard. Stage 22, fees, our fees grew 5.2% in 2018. The main highlighting 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. 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 deep cleaning costs and we believe this will remain as a good highlight for the bank. In 18, 132 branches, if we consider the points of service we closed, that would make a reduction of 228 points of service plus branches. So, we should continue adjusting our branch network. in the coming years, always focusing on the profitability and returns of the 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 the insurance company was 22.3% in the fourth quarter and 24.18 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. We reached 7.4% reduction of 200 base 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 measures we have been adopting in the company are producing effect, helping to keep claims under control, also benefiting from the improvement in the economic cycle. In Phase 26, we have our capital ratios. We increased our Total Tier 1 to 13.7% in the fourth quarter 18. That's an increase of 150 bps comparing to the third quarter. We had an increase of 90 bps in the common active tier one. And also we issued 81 bps in the third quarter. In the fourth quarter, the difference was in the Brazilian market to private placement. It amounted 4.2 billion reais, and this capital was already approved by the central bank to be included in our year one. In page 27, we have a slide on the re-classifications of our income statement that are going to be the base for our reporting starting the 1st to 19th. Basically, the main changes are the transference of the margin from insurance from the margin line to the insurance line. So what 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 Also, we reduced the order operating income line transferring part of its components to the margin that we believe is an appropriate classification and also transfers all the small amounts to provision expenses and also services. Basically, as I said, this is a new way of reporting. We produce a historic set of data where you're going to be able to use in your models. And the important information here, our applies to the new classification. especially for the insurance line and the model. In Daylight 28, we have our guidance. First, the comparison between our revised guidance and the actual performance, basically considering the revised guidance and meeting all the other lines. For 2019, the new guidance for loan growth is a growth of nine and 13% for the financial margin for the total NII from four to eight. For fee and commissions, three to seven. operating expenses zero to four, the income from insurance, that as I said, include the margin, the classification of the margin, five to nine. And finally, for provision expenses, a range going from 11.5 to 14.5. So with this, I conclude the presentation of the results and now I open for questions. Ladies and gentlemen, we will now initiate the question and answer session. If you would like to ask a question, please dial star 1.

If, at any point, your question has been answered, you may remove your question from the queue by pressing star 2 key.

Our first question came from Mr. Carlos Macedo from Goldman Sachs. Please, Mr. Carlos, you may proceed.

Thank you. Good afternoon, gentlemen. Thanks for taking our questions.

I have a couple of questions. First one, on your guidance for provisions, I'm just trying to understand, I'm not sure that you said something You said about the unwind that will come with loan growth. I mean, the coverage that you have on your NPL is now 245% and 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 that unwind 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 powerful, but you do forecast that you have a tightening of the margins. Is it going to be just the spreads passing through the back book from the front book? How is that going to take place? Thanks. Okay, Carlos, first question on provisions versus expenses. Basically, the trends for provisions remain positive. We had some one-offs in terms of provisions during 2018 that, in our view, in terms of the ticket for the one-off, they shouldn't repeat in the same level. We continue to have the impairments, they amounted almost a billion reais. 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. We will demand at some point more provisions, but we believe that the process of normalization and the absence of one-offs and also the lower impairment 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 a consequence of passing through the movement uh in terms of cost of risk in the environment where we believe uh all competitors will be willing uh to grow we don't think the the final reduction in the credit nii will be uh very big we believe the needs 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, as of today, the amount of results to be appropriated in 2018 should be smaller than we have appropriated in 2018. So, the nexus, the marginal 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 thank you i need to follow up then if you can just talk a little bit about the first line implementation how do you expect that to take place in timing and uh and the impacts of this can you repeat the beginning of your question i The first nine implementations.

Okay. And how you expect that to take place and the impact of the rest of it.

Okay. As of today, the expectation, this is not totally defined, the Expectation Act, the full implementation should be for 2021. Sorry, 2020. 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 provisions. The implementation doesn't change the coverage. Basically, the only thing is how uh especially the the additional provision is classified so we believe we are in a in a very good position there's no major impact coming from or there's no impact coming from the provision inside okay but could it could it increase you know starting in 2020 when you implement it Could you increase the provisions given that there's expected loss and you're moving more into consumer, which has, you know, longer durations? Could you increase the amount of provisions you have to make on a recurring basis, or should you expect more of the same relative to what, you know, 2019? We don't, basically, in terms of the balance, as I said, we just reclassified. In terms of the flow, I think we already do the provisions on a appropriate level for the flow of new provisions.

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

Please, Mr. Mario, you may proceed. Good morning, everybody. Congratulations on the results. A couple of questions as well. First, on your long 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 the balance sheets? So I was wondering if you were embedding any market share gains here on loan growth. The second question is related to fees. Basically, the midpoint 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 this guidance and why it's only growing in line of inflation. Thank you. Okay. Okay, this is Leandro speaking. Okay. 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 feelings is that we shall see a very strong growth from individuals as well as SMEs. Regarding the corporate side, we are about to see a more competitive environment. We expect the local debt debtor 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 provide to rewrite our portfolio and sell it to the 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 guidelines, internal guidelines, 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 Lando said, we can basically looking for maximization of returns Even considering that as a banker of companies in Brazil, it's always important to serve our clients.

Okay, and that's clear. And then the question on fees?

Oh, sorry. In terms of fees, the main pressure we see comes from the payment side. You guys follow 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... eight and a half percent of total fees so it's This is the main impact. Also, as you guys know, there's the cap in the interchange for debt that was established last year and was starting to be valid in October 2018. 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 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.

Thank you very much.

Our next question is coming from Mr. Marcelo Perez of Credit Suisse. Please, Mr. Marcelo, you may proceed. Hello, everyone, and congratulations again on the results and the strong guidance for 2019. I have two questions. regarding your insurance performance, and you seem to be improving your insurance operation, you know, quarter after quarter, and we saw, you know, 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, you know, like a late cycle, situation similar to provisions where you'd still be operating with a relatively high number. What do you think that 70% that you have in the quarter, I know there's volatility on a quarterly basis, but what should be a year that we could use as a benchmark for your loss ratio in your insurance operation? And my second question is, It's kind of a broader question. We've seen very significant changes in the management teams throughout different public sector companies, including, of course, Casio Economica Federal. There has been a lot of talk about Casio Economica becoming, dealing with their inefficiencies, becoming a better bank, going for you know, for, you know, seeking to increase, you know, the public penetration with its client base. And I'm wondering, you know, if you think, you know, there is, this would pose a risk in your view, you know, for private sector banks and for you specifically, and if there is, you know, any overlap, you know, between your client base and the client base of Caixa Econômica Federal, That's something 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 the NUSYS. 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. I would think that doesn't pose a major risk. They are a bank. They, if becoming more efficient, and basically operation rationally, it's good. You don't see that's a problem. What was a problem was subsidized loans or subsidized capital that somehow fostered a competition that in our view was not necessarily held. On the insurance, ministries will But I think there were a lot of measures already implemented. They are working in many different fronts, improving preparation in terms of altos, 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 will highlight is, especially health, we still didn't see growth. I think the economy just reached kind of an inflection point and employment started to stabilize the health in terms of claims because we don't have the new unemployment and employ people that actually have coverage and 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. Yeah, just to add to what Piretche 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, what we've seen in terms of the decline in loss ratio is a combination of measures that have been taken in the company, you know, for quite some time now and that are maturing and are working basically on two fronts. One side is a more competitive, more competitiveness in terms of products. I mean, we have been changing our focus and also focusing on the regional aspects and creating new products that are more competitive. And also on the efficiency side, as we actually already mentioned, we have several fronts in terms of negotiation with providers 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 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 better portfolios with better returns and focusing on growing in terms of return on good portfolio. So there's a clear focus on return on equity here, a clear focus on growing those lines of others that can deliver the right return to the company. Thanks a lot for your answers. I have one 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 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 declining in credit spreads and think of 2019, what are the low segments that you see more pressure on spreads? basically we're 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 incentivizing our own clients to take more loans with lower rates. One example also that has produced volumes of very good quality 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 this growth in personal loans, but the average spread is we have generated on it is lower than the original portfolio before we started with this product. But anyway, it's a product of very, very high returns. I think going forward, our expectation is that MIX will help and will help to stabilize the the average spread, overall spread of the portfolio, the overall margin of the portfolio, and the strong increasing volumes. We believe this will drive NII to the levels we presented in the guidance. It's very helpful, and thanks again, and congrats on the results. Thank you. I would like to remind you Just to ask a question, you just have to dial star 1 and to remove, dial star 2. Our next question is coming from Mr. Jason Holland of Scotia Bank. Please, Mr. Jason, you may proceed.

Thank you for the opportunity to ask questions. Some of mine have been addressed. But I wanted to add first one on your outlook for taxes. We'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 taxing dividends. What is Prudento'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 Berdesco's CEO saying that Berdesco's looking at possible acquisitions amid privatizations. What kinds of investments would be interesting for Berdesco?

Okay Jason, in terms of tax, we believe that considering the nominal tax rate of 40%, that is effective right now, our effective tax rate for 19 should be around 30%. There's some debates on taxes, I think, and all of them are you have a lot of information material on the press we believe what has been because sounds sounds positive making the system more rational, but we don't see in these proposals increasing tax rate. We see a rationalization. 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 presented very strong balance sheets and received a lot of opportunities in the country. We do expect that as the economy grows, we shall increase our 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 specific services that are not state-of-the-art, we are not prevented from it. But there's nothing in our radar screen right now. We don't see anything large as Leandro said. Marginal things that complement portfolios we will be looking but nothing that really looks sizable at this moment. I think the comment made by Otavio was more on general terms. We are free to look considering the rules applied after the acquisition of HSBC. So here we We don't have those restrictions, but nothing in the holidays.

Thank you very much. Thank you very much. Our next question is from Mr. Thiago Batista of Itaú BBA.

Please, Mr. Thiago, you may proceed. Hi, guys. I have just one question about payout ratio. Last year, the bank's payout ratio was around 40% versus 52% in 2017, and all of those payments were through IOC. So my question is, what is the expected payout ratio for 2019? How much the bank can pay, and if it will be everything through IOC? Okay, Tiago. I think 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 That's the base case, I think. We know we have reached the level of capitalization that is very health. 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 and a half. But I think there's still some some things on the horizon. First, we still have to go through the pension 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 we are always our board is always discussing uh but what we have on table is we should keep interest on capital for for this year okay perfect thank you our next question is coming from mr carlos gonz of hsbc please mr carlos you may proceed Hello, and congratulations on the results. I have a question regarding the presentation of the information that you announced. In my numbers, that increases the contribution of insurance to 37-38% of the total. So firstly, let's understand the logic for the reclassification. Is it internal trading, or is it something that regulators or auditors indicated to give a better way to do it? Second, going forward, how sensitive are these earnings of insurance to interest rates, and are they positively or negatively related to that? Thank you very much. Okay, Carlos, basically on your second question, the sensitivity of earnings to interest rates, basically short-term, as we have been saying, our results are positively impacted by lower rates. Basically, that makes sense. cost of funding to reprice factor so a lower rate short term uh it has produced this positive impact so i think that's longer term for considering that we would be earning lower interest rates on cheap assets or working capital than the impact of lower rates comparing to higher rates is negative. But shorter term, it tends to be busted. 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 regulator that do the information presented in a different way? Yeah, I think the rationale is basically that's kind of closer to the way we look to our numbers internally. Basically, we have 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 financial numbers. This makes also the numbers 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, is the most important. Basically, we have a problem in the former classification 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 breaking result, volatile. Sometimes the trends were hard to explain, looking to align isolatedly. So, trust me, this new classification makes the understanding of numbers better okay thank you 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. This concludes the Branco Bradesco conference call for today. Thank you very much for your participation, and have a good day.