Banco Bradesco Sa American Depositary Shares

Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Bradesco's first quarter 2020 earnings conference call. This call is being broadcasted simultaneously through the internet in the investor relations website, banco.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 the company's presentation. After the presentation, there will be a question and answer session when further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. 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 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 cause results to differ materially from those expressed in such forward-looking statements. Now, I'll turn the conference over to Mr. Carlos Piret, Market Relations Director.

Hello, everybody.

Welcome to our conference call for discussing our first quarter 2020 results. We have today with us our CEO, Otavio de Ladari, Jr., our CFO, André Rodrigues Cano, the CEO of Bradesco Seguros Group, Vinicius Aldenar, and our Executive Director and IRO, Leandro Miranda. After the presentation, we will run a question and answer session where you're going to be able to post your questions. Now, I turn the presentation to Leandro.

Thank you very much, Fidaccio. Good morning, everyone. I hope you and your families are well, and I welcome you on our conference call. Today, we'll discuss the results from the first quarter of 2020, and once again, talk about our position during this rather difficult time. This quarter has wound up quite different from what was taking place at mid-March, when we were performing very strongly in a number of lines, even above our guidance, as you may see ahead. The scenario was radically altered by the worsening of the COVID crisis in the second half of March. Nonetheless, we highlight that our balance sheet remains very strong. From the moment that the crisis rose to the scale that it is today, our priorities have changed completely. We focused on maintaining our services to our customers and keeping the bank fully operational. along with the well-being of our employees. And we are committed to supporting society in overcoming this crisis. All stakeholders are important, and we keep a very keen eye on each one of them. I'm proud to state that through the efforts of our entire team, the bank adapted quickly, above expectations indeed. and continue to operate in such extreme conditions, while always accounting for the safety of all people and customers as a primary parameter. To give you a reference, today more than 90% of our staff that normally work in our offices are now working from home. And 50% of the teams from our branch network, which we consider as an essential service, We are also striving to resolve any liquidity issues our customers may experience by initiating a process for rolling over debt that is matured for at least 60 days for small companies and individuals and opening a direct line of negotiation with large companies. We have also been working jointly with other banks and the Central Bank as well as on the NDS on structuring land into financial business payrolls, and we have discussed other measures with the Central Bank and Federal Bonds as well. As mentioned before, Godesco and all other banks have every interest and duty indeed to help customers emerge from these very difficult times with the capacity to fulfill their commitments and resume their lives without facing financial ruin. We also, as we mentioned in our COVID call, differently from previous crisis in which the financial sector was the main sponsor for the crisis, This time in particular, as our CEO has been telling over and over again, we are an important part of the solution, and we embrace these responsibilities. The view of the authority adhering to any projection at this time, especially considering that we still don't know for sure when the shutdown will end and how the pace of the resumption will be, we have decided to suspend our guidance for 2020. We will outline a new guidance when we have a sufficient clarity of the situation and our administration will decide on that. Meanwhile, we should stress that we do not see our ability to generate sustainable returns fundamentally altered. The operations are sound and good. In addition to the return on revenues and resolving loan issues, which will take place with the recovery of the economy and a return to normality, one of the ways to recoup our return is through an essential adjustment in cost. And we have done it very quickly. We have already performed quite well this quarter, thanks to the initiatives we took at the beginning of this year to control costs throughout 2020, as well as March due to the effect of the crisis in some lines. Nevertheless, our new experiences in managing the bank during this period should allow us to accelerate cost adjustments. We see even greater opportunities for adjustments in the branch network, through the use of new smaller formats as well as lower costs. The primary focus on conducting business and providing consultation to our, and providing advisors to our customers will seek to harness and train our talents in a new way to serve our customer base. Another key focus during this time was on risk management. In order to provide support to the country at this time, and to our society as a whole, it was important to keep the bank liquid and very well capitalized. We headed into the crisis of strong capital position and elevated liquidity levels We ended the first quarter of 2020, which already reflected a period of market surge with a comfortable 11.4% to 1 ratio. Furthermore, we saw an increase of 6% in deposits and customer funds, a clear plus to quality. Our extended loan portfolio had a strong growth, posting an increase of 5.1% over the quarter and 17% for the last 12 months. Part of this expansion can be explained by the effect of exchange rates, and part of it is due to a strong increase in demand, mainly from large companies at the beginning of the crisis. Our delinquency grew by 4 bits. We believe that we are preparing ourselves quite well in terms of credit provisions to face the impacts of the before that will be treated by the crisis. We have increased our access provision this quarter, posting a provision of 5.1 billion reais in our balance sheet to face the consequence of the pandemic of the credit. Our objective is to preserve our balance sheets. with similar measures taken by other global banks, especially the largest U.S. and European banks such as ourselves. As for our first quarter results, we posted an income of 3.8 billion reais, a decrease of nearly 40% over the 12 months, and a 4.5% in the quarter, with a return on equity in the quarter of 11.7%. Income and return for the quarter were adversely impacted by the excess low loss provision that we made this quarter, along with other effects related to market conditions. Now we turn to slide four, related to the suspension of our guidance for the year. Although it's not usual, in order to be more transparent, and included in the table or column with our performance in the month of January and February. I'd like to remind you that in the first two months of the year, we didn't have our full capacity as 60% of our general managers, account managers, investment advisors, bankers are on vacation. You can see that we had very strong numbers, even better than the guidance. except for the insurance business, mainly due to the financial results. Until February, the credit portfolio was growing by 2.4%, NII 11.7%, fees by 3.6%, costs, on the other hand, were dropping 0.1%, and we had a good performance in loan loss provisions. We decided to spend the guidance without presenting a new one, because pretty much we do not have clarity and a vision of all the facts that this virus may have over the economy. The outlook remains rather uncertain, and there is no cure for the virus or precise definition on the time of recovery for the economy. We established a new guidance, and we have a better capacity to provide an outlook, and our administration says so. Moving ahead, falling to slide five, design to provision and correct risk, you can see that when the scenario was becoming stressed, especially in the second half of March, we involved several areas of the bank in carrying out an in-depth study of the possible and uncertain future scenarios. As it was clear that the written upside curve would slow down and the delinquency speed up. and, in fact, increasing numerator and decreasing denominator. Two working groups were formed, one composed by the credit and credit recovery teams and the other one by the risk and economic teams. They both studied past crises, simulating the future impacts in delinquents and residents, both in retail and corporate credit. Despite our views in different methodologies, the results were pretty much the same. and it guided us in our provisioning measures to save the COVID crisis. Now, turning to slide six, we mapped the behavior of the mass market spread NPL in the global crisis of 2008 and the Brazilian crisis of 2016. Then we projected a very uncertain scenario for this COVID crisis. which affects all sectors in different scales. Our perception that booking additional access provisions to face future credit loss was necessary also, conformed by the other banks that release their earnings, especially in the United Europe. Now turning to slide seven. regarding to the provisions that we took in order to deal with this adverse economic scenario. In light of this study, we have already set up an excess provision of 4.9 billion, a total of 5.1 billion reais to cope with the effects of the pandemic on our pet portfolio. and we shall use it through the crisis. We believe this provision is suitable at this particular time and reflects information we have at this moment. We will continually be evaluating the need of provision for this crisis as we monitor the evolution of the economy as a whole and especially the health issues that we have here. The provision includes of $2.4 billion related to what we refer to internally as the provision for an adverse economic situation, which is part of our previously existing supplementary provision and will be used throughout the crisis. New supplementary provision for an adverse economic situation of $2.5 billion may distort it, and $200 million of required provisions carry out this quarter due to the effects of the crisis. Moving to the next slide, slide eight, you can see that we rapidly provided our customers as individuals and as small business with access to correct instruments, due date extensions through our digital channels, and through our managers. We use all of our network to help our clients. We were also the first bank to provide access to payroll funding for our clients. We have already extended more than 1 million transactions with instruments in the amount of 1.4 billion reais. We have been constantly evaluating the situation of our customers and offering the best solutions for each one of them, either a credit extension or a restructuring of the entire debt. It's worth to highlight that among the measures announced by the central bank, we have 24.1 billion reais of reserve requirements we need. But, although the number of 24.1 billion reais, we are able to originate 57 billion reais in new loans between March 16th and April 23rd, almost double more than we had in the requirements for this. Now, turning to slide nine, we have already spoken about our priority at the beginning of the crisis, taking care of our people, keeping our services running smoothly, assisting in overcoming the crisis and managing the risk that the new scenario has imposed on us, and keeping the bank capitalized and liquid. We can say that we have been successful in all of the three pillars of this initial phase. And we continue to work hard and we are confident that we are going to continue to be successful in our missions. We have set up a two-war operation in order to turn our business into a primarily home office-based activity. We have a small-scale structure in place, but we are able to expand it very, very quickly. Today, as I stated before, more than 90% of our employees that do not work at our branches are now working from home. We have to thank all of the teams involved in this process, our senior management, and especially our technology and systems staff, and also our branch teams for continuing to serve our customers in this essential activity for the population. Now moving to the financial results, we start here on page 11 to discuss the figures of the court, in which we have already experienced a major impact from the unfortunate events we faced in March, as well as the society as a whole worldwide. Our net income was 3.8 billion reais, a decrease of 39.8% over the last 12 months. Some of the factors that contributed to that drop included a supplementary provision for loan losses of 2.5 billion reais to address the COVID tax on loans, 200 million reais of required provision due to the crisis, a reduction of our margin with the market due to the effects of the price in the market and the mark-to-market effects, a decrease in the performance of our insurance company, primarily due to the lower financial results, consequence of positions in equity, and the mismatch of inflation and the index inflations, namely IPCA and IGPM, among others. Lower tax benefits due to a reduced provision for interest on capital in this quarter. Now turning to slide 12, our ROE in this quarter post a significant reduction, settling at 11.7% as a result of everything that we have just presented to you. And the same is going to be seen in our ROA. Our shareholders' equity was reduced by 3.1% in the quarter due to the negative impact of market-to-market of assets. So as the economy evolves and the markets get less volatile, we shall have also recover of the shareholder equity due to the market of the assets. Now turning to slide 13, the loan portfolio registered an expected growth of 17% year-on-year and 5.1% in the quarter, with 2.6% in individuals, 7.6% in large companies, and 4.4% in SMEs. Part of this growth can be explained by the effect of exchange rate fluctuations on the loan portion in dollars, meaning the large company's portfolio. Excluding the effects of exchange rate variations, our portfolio has grown by 2.4%. In addition, there was a strong increase in demand for loans by large companies in March, notably in the second half. Companies sought to set up a liquidity buffer at that time, but the situation has returned to normal. In the divisions and SMEs, the growth in the quarter largely reflects the strong performance we have been posting up to February. We expected a low slowdown in growth in the coming quarters, but we feel very difficult to foresee the size of the reduced demand for long. On slide 14, we can see that the total MII decreases by 6%. The porting increases by 2.9% year-on-year. The reduction in the port is related to the performance of the margin with the market. The margin with clients increases by 8.4% over 12 months, primarily as a result of the increasing loan volume. which more than offset the negative impact the regulatory tax limit interest rates. The margin of the market decreased at 37%, especially due to the impact of market volatility, and in this case here we are referring to market to market of our trading portfolio. Turning to slide 15, We have an increasing NPL creation this quarter, already reflecting the impact of the pandemic on the loan portfolio, and in the end of March, any specific cases in our profit segment, as well as the growth of the loan portfolio and the shift in the mix. It's worth mentioning that the NPL creation in the third and fourth quarter were already affected by a large part of credit that became due and was later renegotiated for which we correct the provisions. It's much easier to make a comparison if you make estimates. Our extended loan provision amounted to 6.7 billion reais, including the impact of the supplementary provisions of 2.5 billion reais, prior provisions of 200 million reais. They were pretty much done due to the effect of the crisis on credit. The provision in relation to the portfolio that we refer as cost of risk, which stood at 4.1%. Moving to slide 16, we're going to the linkage ratio over 90 days. Pretty much received and printed by 40 BICs. The reasons are the same as the ones you gave for the progression of the NPL creation. On the following slide, we can see that the 90-day NPL coverage ratio was 288% to the quarter. As you mentioned before, we have a provision of 5.1 billion reais for the adverse economic scenario. We shall consume these provisions throughout the crisis. what may reduce our coverage ratio in the following quarters. In addition to the construction of the provisional red bookings, we will constantly adjust our seminars to evaluate the necessity of new provisions. Now on the slide 18, we refer to the key income that we have in our different plans of business. As you can see, the fees decreased by 6.2% and increased over the 12-month period by 2.6%. We have experienced negative impacts on current income, which reduced by 7.1%, quarter over quarter, and 2.4% year-on-year, mainly impacted by CLE and interchange fees. We also had negative impacts in the lines of asset management and loan operation. The check on account, on the other hand, performed very well, nearly 7% year-on-year, mainly due to the increase of customer base. The brokerage services was positively impacted by the growth in volume in both institutional trading as well as digital trading for Agra. our investment house. We'd like to highlight the evolution we had in Agra, the Disco's new investment house, which has a complete portfolio of products and a redesigned platform, which is very user-friendly and a careful selection of the best investment projects in the market to a kind of investor profile. In addition, customers have access to specialized investment advisors, content provided by Agra research teams, And now, the largest JV is going to financial content with the Group Stable through the Investor Channel and also recommendation by market analysts who support in taking those decisions and invest. By the end of first quarter 2020, we reached 416,000 clients, a growth of 13.4% compared to the last quarter. a strong growth of more than 246% in accretion volume in the same period. Operating expenses on the following slide, slide 19, you can see that it operates very, very well in terms of operating with a reduction of 0.4% over the last 12 months. As our CEO has repeatedly said, we are aiming at having a 0% growth in 2020 as far as operating expenses are concerned. Sharp slowdown in annual growth related to administrative and personal expenses and strong reductions in both lines for the quarter. This performance is mainly due to the measures we have taken to reduce costs at the beginning of the year. Although our guidance for 2020 is from zero to four percent, our goal, as I mentioned, was zero growth. Additionally, the reduction of operation volumes in March has already had an impact on rolling our administrative expenses. We reduced it seven to eight branches in the first quarter, with expectances of closing more than 300 branches in 2020, then a reduction in the number of employees due to the voluntary dismissal program. As we mentioned earlier, the experiences we have lived in the environment of the COVID crisis, such as home office, a booster in the use of self-service by customers, and when both customers have opened a space for a profound restructuring the way we operate. we see room to expedite the conversion of branches into customer service points and cut back on traditional branches. For our staff that does not work in the branches, it's an opportunity to continue using home oxygen, reducing the amount of occupied space. Now, finally, moving to insured patient plans and capitalization bonds. In our last slide here, we can see that there was a major impact on the financial performance due to the effect of market volatility on the portfolios, especially on equity portfolio and multi-mark investment funds. In addition, we had the effects of the lower negative impact of the mismatch of IGPM that corrects our liability and IPCA that part of our which affects our ALM. On the one side, we know that the financial results will be a challenge. On the other side, we continue to see an important improvement in terms of operating performance, with a reduction in the loss ratio compared to 4-4-2019, which resulted in the improvement of the combined ratio. The insurance group has been monitoring the economy and business effects caused by the new pandemic effects. We understand that the importance of our product is an instrument to help and support the resumption of the families that may eventually be victimized. Several actions were taken to ensure that the best service is secured and adjusted to the reality presented. through an exclusive consent adjustment of the operation of the primary care clinics that since the beginning of the pandemic have been operating at extended hours and even in the weekends from Sunday to Sunday. The initiative also serves to relieve the demand for emergency care and images. At the beginning of the social measures, we started to observe changes in the behavior of events And at Breda Saoud, for example, if on the one hand there was a start to reduction in the elective procedures, on the other hand, it was already possible to see a gradual growth in emergency and hospitalizations due to the new virus. It's worth mentioning that these elective procedures should be resumed ahead, that social isolation is needed. Although it's premature to make any kind of projection at this time, regarding the future of the behavior of these events, It's estimated that their effects will tend to get worse in the coming periods. And we were cautious to make provisions on that. In auto insurance, the decrease in urban circulation caused a momentary change in the frequency of plane notice, motivated by the closing of the repair workshop as well as the beginning of the drop in the new vehicles. Reflecting the failure of new insurance and the focus towards policy renewals. Having said that, we open for the Q&A session, and we remain at your disposal. Thank you for your attention.

Thank you. We will now initiate the questions and answers section. If you would like to ask a question, please dial star 1. If at any point your question has been answered, you may remove the question from the queue by pressing star 2. Our first question comes from Mr. Mario Pierre with Bank of America. You may proceed.

Good afternoon, everyone. Thank you for your presentation. Let me ask two questions. Leandro, you mentioned that you expect, in the Portuguese call, that you guys expect the NPLs in this cycle to be higher than in the 2016 cycle. At the same time, you know the amount of provisions that you took this quarter two and a half billion reais you think that's enough to cover some of the expected increase but you know I'm just trying to put in 2.5 billion reais right because it doesn't seem like that much given the size of the crisis and if you are trying to anticipate some of the losses why not take a bigger provision So that's my first question, you know, like is this test enough and why don't you take more? And then my second question is related to your slides on page 26. We see that NPL creation in the SME segment more than doubled in one quarter. So I wanted to understand, you know, why are we seeing such an increase in NPL creation before the crisis even hits? And if there are any specific sectors or regions where you've seen this big pickup in NPL creation in the SME segment. Thank you.

Okay. Hi, Mario. First of all, the provision that we consider is not 2.5, but 5.1, because we had regions that were added to this. Otherwise, we would have increased it even more. We believe that this is a new crisis. We have never experienced anything like that. In each sense, we have been discussing to analysts and to our clients as a whole, and there is a common sense that no one knows when it's going to finish it, when it's going to be finished, and it

and clients if it's necessary.

Regarding NPL criteria creation in which a stronger growth than the rest, a couple of things to point out. First of all, we still haven't seen a full program for all the SMEs that we have seen in the country. We have taken care for 60 days, but the SMEs They have less liquidity than the large companies, and that's the reason why you see a faster NPL creation here. I don't know if any of my colleagues want to comment on that.

Yeah, just on the NPL creation for SMEs, adding to Leandro, what I said in the Portuguese call, basically this quarter we had about 500 million reais In New Yale, in the large SMEs, we have in the SME portfolio, SMEs up to 30 million reais. That is the retail part of the business that basically is running smoothly. But in the 500 million reais in annual revenues, basically we have three cases. One of them amounting 300 million reais that moved to state delinquents, all of them fully provisioned, and this is basically the main reason for this jump. The fourth quarter actually was lower, mostly given the...

The regularization of... some is more likely than also.

What level do you think should be appropriate in this cycle to maintain a coverage ratio of 190? Or given that this is a worse cycle, be more prudent to be more conservative and maintain the coverage ratio well above 200%?

Mario, as we always say, in your longer sentence,

and that we manage the coverage ratio.

The coverage ratio is much more than the coverage ratio moved to. That said, In the cycles, basically, you have normally a consumption of coverage in the sense that in the normal process of provisioning, you end up writing off uh uh parts of your provisions and in that process let's say the output of uh coverage tends to get lower all right guys thank you our next question comes from mr titula barca with goldman sachs you may proceed hi good afternoon everyone thank you for the call a couple questions also following up the

on the MPLs. Just to understand a little bit more, given, you know, first quarter was really just the last two weeks of March that were impacted by the crisis. So is it fair to assume that this increase in MPLs should get even worse as you see more of the impacts of the crisis? Just later, I guess, for the one-off that you mentioned and the increase in MPLs. I mean, Is it fair that that's going to continue to be at sort of a similar pace or even higher? I guess that's the first question. And then my second question is on capital. You know, we saw a significant reduction in the core tier one. I know part of that affects the market market and the growth in the portfolio. But if you can help us just think about that, I mean, your capital is okay now, but if you have another 200 basis points reduction in the core tier one, then it's maybe a different conversation. So given the level of growth that we saw in the quarter, the level of ROE, if you can just help us think about how you're thinking about your capital base, given all these things.

Thank you. Sure. And then to that too, We'd like to give a chance. Well, first of all, it's really unusual to make comments on the second quarter that is just coming, and we have a crisis that we all over the world have never faced before. So it's very difficult to tell you how we see the behavior from now on. But the good part of the second part is that we shall start seeing the cancellation of lockdown by several states, and we'll start to see some clients getting back to the game again. the most appropriate time to understand how we shall see the behavior of the MPL creation from now on. So we are not wishing to give a very good and clear answer to how it's going to be the behavior of the MPL creation from this point on.

Just to complement, basically, we said, the other said, or still said, that basically we believe this crisis may be, in terms of MPL, worse than the 2016-16 crisis. That implies, actually, that the risk that the MPL will continue to increase. for some more time. Basically, the MPL, what I'm saying about the specific cases, there is this 500 IRI already provisioned in SME. There's also something around 500 also fully provisioned that moved to NPL this quarter in corporate. So we have about a billion for which we already had provisions. And as you know, we had built provisions even in the fourth quarter last year. So this is kind of changed, made the acceleration in NPL faster. this quarter, probably than the normal pace otherwise. Probably the NPL, the cycle, should really be higher than this.

And the second part of your question regarding to our capital structure and shareholder's equity, it's important to highlight a significant part of this reduction in the shareholders' equity was the market effects on the securities that it has. So as we get a better environment from now on, we shall see recovery there as well. We do not plan to make any sort of capital increase. We do not plan to make any sort of capital shares buyback. So we believe that as the normal business gets back, We shall have the appropriate composition of our capital in the previous levels as we are profitable and we just are about to distribute the minimum dividends according to the central bank provisions and we shall keep it for quite a while.

Yeah. On top of that, we also should consume the tax credit from the hedging generated this quarter. I think we have a point that we have profitability for that. And also, long growth should blow down. Basically, the size of long growth we had this quarter is a mix of the good performance that we're presenting until February in terms of loan growth plus the extra demand we got from corporates.

This level of growth certainly is going to be slower for the rest of the year as a correction in loan demand. Great, thank you.

Thank you very much for your question. Yeah, no, that's very helpful. I mean, just one follow-up, I guess, on the first one. You know, I understand the uncertainty in trying to predict where the NPLs will end up. You have another month now since the end of the first quarter. So I guess I was also thinking in terms of the evolution from just the last two weeks of March and into April and how the NPL formation may, I don't know if you can give any color at this point, but just how that may have evolved or gotten worse or... or maybe leveled off at some point.

Yeah. At this point, we prefer not comment on the more recent trends. It's basically, it is, again, you know we have the renegotiations of laws for 60 days. This is providing a relief on the delinquents, given that you roll in this client, they don't go to MPLs. We also are working on all clients to provide them the best solution possible to be able to meet their obligations. And so I think it's an ongoing process that somehow mitigates the amount of MPLs. But I think it's still to... to open to say something.

As Otavio has previously said, if clients need, we are open to support them in providing additional renewal of six days or even to restructure their debt in a way to preserve their health and our clients. So at this extent, we are wide open to help clients and society as a whole.

Okay, thank you very much.

Thank you, Peter.

Our next question is coming from Mr. Jason Molling with Scotia Bank. You may proceed.

Hello, thank you very much. My question is somewhat of a follow-up on the provisioning levels made. And then you show on page 7 of your presentation that you had $2.4 billion in pre-existing funds provisions for adverse economic scenarios, that you created $200 million in provisions that would be required under traditional regulations, that my understanding is that the regulator would have allowed you not to make those because of restructuring in the quarter, plus this $2.5 billion that you've been discussing in new supplementary provisions. Now, I guess I'm trying to understand the decision-making process here. I understand it's not, as you've said many times, about reserve coverage, et cetera. But can you talk about making this? What are the implications for taxes, creating deferred tax assets, implications for dividend payments? Obviously, you recorded a much lower bottom line, but in my view, this is a prudent approach. conservative approach going into a crisis where we don't really know the real losses, what they're going to be, and what are the implications for just reversing going forward? Thank you.

Thank you very much for your question, David. And I guess we totally share your view regarding to the behavior in a crisis like that. We do have be conservative, to preserve our capital in order to serve our clients adequately. And there is a central bank saying that the banks are not allowed to distribute dividends higher than the minimum amount required. The law says that the minimum amount required is $35, but bylaws can stay differently. Our bylaws stay 30%. And we'll keep up with behaving and respecting the regulations. We shall not accept dividends higher than a cent. We have no... internal discussions on we believe that we shall have to leave this new environment, this new scenario to make adjustments in our provision as the case may be. The capital structure is very, very strong. We remain confident that we can help our clients to get back to the liquidity levels they need in order to get back to their basic activities.

I mean, maybe I can ask, I mean, again, it's not a metric. I know this is not how you make provisions or any bank does it, but it's an interesting reflection. If you look at the loan loss provisions created in the quarter, I think it was something like 46%. of the way I calculate NII, net interest income, was provisioned away. You have been running at around 25%. I looked in my model, and I think at the peak levels that I've seen probably in the last 15 years was something like 55% in one quarter, but really doesn't get much above where you provisioned this quarter. So is this kind of a limit when you look at Of course, it's based on what happens in the economy and the likelihood of your clients paying and their payment performance. But does this seem like, when you look at that kind of metric, that this is extraordinary and a level that is not expected?

First of all, you have to consider that we have established last quarter a provision for adverse market conditions. We did not expect to use it so soon, but fortunately we had a very good protection for that. So the way that we see is that you do have to take into account the whole 5.1 billion reais package because that was the sum of the protections that will face all the delinquencies and losses that we may have from now on. But, of course, this amount was, as we have pointed out, the result of the analysis of two different teams here, the credit as well as the risk and our economic teams that have put together with our senior management, we decided that this is the adequate provision at this time. According to the information and vision that we have, over the economy as a whole. So we do not take into a measure specifically the way that the NPL creation in the last fortnight, because pretty much it's extremely soon to say that. But if it proves to be right, we cannot keep it this way. If we have to be even stronger in terms of capital measurements and provisions, we are prepared to do so. But keep in mind that we have Previously, provisions for adverse market conditions such as this.

Thank you very much for the context and color. Much appreciated.

Take care, Jason. Thank you for your question.

Our next question comes from Mr. Thiago Batista with UBS.

Hi, guys. I have just one follow-up question about the capital position of the bank.

If not wrong, the bank was targeting in the past a Q1 ratio close to 13% or something around this level. It's fair to say that the bank continued with this, let's say, informal target or with this target of Q1 capital of around 13%. And if the bank, if you start to say that the bank payout ratio will be close to the minimum until the capital returns to this level. Oh, sorry, go ahead. Sorry, I have a question, a very, very small one. Can you comment a little bit how challenging is nowadays for Vadesco to sell insurance in the branch and also to sell fees? So how... important are the flow of individuals in the branch. That's for sure. Right now, we don't have this flow of individuals.

Maybe we can start with the second, then, answer the... Why don't we invite Vinicius? Yeah, we're going to invite Vinicius to answer the second one.

Hi, Thiago. Vinicius here. The branches are very important mostly for the sale of pension-related products, capitalization products, and life. They are very important. We have, of course, for life and for auto insurance, the presence of our insurance brokers in our branches. What we've been seeing in March, we didn't feel because we have a full month almost of normal operation. gradual decrease in business in the end of March. But what we've been going through right now is to be able to give our branch managers, sales people, financial advice, as well as our insurance brokers all the tools necessary for them to operate fully on a home office base, okay?

So we've been seeing this gradual improvement in sales of our sales force, of our different channels from home office.

But there is a considerable investment right now in digital, in CRM tools in order to give support to this sales force.

Tiago, regarding your first question on capital, basically I think the level of capital is constantly being evaluated by the bank. As you know, the regulator reduced recently the minimum capital requirement by 125 bits. consideration regarding what is the optimal capital surely takes into account the regulatory requirements in terms of minimum capital. On top of that, we have to consider that we are getting to a cycle where actually loan growth should be for some time much weaker than it was so far. So it allows us to Actually, we should use less capital going forward. And on top of that, we do believe we're going to consume relatively quickly the tax credits we have generated and are one of the main negative impacts in our capital this quarter. And also, we believe that part of the market-to-market uh should be uh should be uh reversed so so in that situation we in that uh in that scenario um we think we are in a very good position in terms of capital um we don't have a public target uh on on capital uh we haven't been discussed on those terms for for some time but Again, I think, given what I said, we are, in our view, in a very, very good position.

Okay. Thank you for actually taking this in, and thanks, Leandro. Thank you, Thiago.

Our next question is coming from Mr. Marcelo Telles with Credit Suisse. You may proceed.

Hi. Hello, everyone, and thanks for the opportunity.

Most of my questions have been answered, but I want to understand from you, what is the risk that you see in the large corporate sector at this point?

I know you have been focusing a lot on the SME and individuals.

And also, I just had a chance to see in the previous past that the you know that the central bank published yesterday and which was you know uh unique in terms of if you compare to others it's just that you know the the results right that the central bank did uh in your case i mean i wonder if you could share if you have done you know any stress test uh you know in light of the situation if you could share with us what you know your capital position will be but in a very, let's say, harsh scenario or in terms of impact of provisions as well across the risk, they'll be helpful. Marcelo, really, I'm not sure I understood quite well your question, given that your voice was not very clear, but I understand you asked about the health of the corporate loan book and the stress test that the central bank had run on the financial ability report yesterday. Those were the questions, basically. Okay. And my question related to the stress test is whether you have conducted a stress test you know as well and it would be possible to to share it with us you know what the uh what the results would be in terms of a capital position you know what vehicle stress scenario for increase in uh in provisions or anything like that yeah unfortunately we we have uh we constantly run our stress tested uh not only in crisis environments but uh basically constantly, but we don't share that. What I can say is our view that we are in a very comfortable position regarding the capital position is related to our stress test. We see for sure and at this moment when we don't even know when the economy will be up and running again. It's always hard, but basically our base case stress test really show that we are in a comfortable position. In terms of carbon, I don't know if you would like... In terms of corporates, we see the corporate book in a much better position at this time. What we saw was a run for liquidity in the beginning of the crisis, but companies are mostly held with a leverage. They haven't been investing too much. Some of them surely will face difficulties in terms of having their results and revenues cut, but in general, I would say companies with the proper amount of liquidity are going to be able to make it through the crisis. Basically, even The most complicated cases for Lava Jato actually have already been fully provisioned. Most of them we have even written off from our books. It's always possible we find some cases in a more difficult situation during the period of the crisis but I would say this time it's not going to be a large number as in the other crisis and in that sense we are prepared to help them to renegotiate to try to improve our positions in terms of collateral I think it's fair to say that the most difficult segment at this time doesn't seem to be the corporate segment.

And just to add to what Ferenc is saying, it's much more like an opportunity for us because basically the corporate was being financed by the capital markets. Therefore, we saw as an opportunity because we were able to charge very good spreads and to rebalance our portfolio risk as a whole. Thank you.

Our next question is coming from Mr. Henrique Navarro with Santander. You may proceed.

Hi. Thank you very much for the opportunity.

My question is on fees and commission. directly linked to the sale of banking products in both traditional channels and digital channels. So I would like to hear from you the number of branches that are closed right now. When do you expect to reopen the branches? From February to March, how has the impact in sales of banking products on traditional channels? And what was the positive impact on higher sales on digital channels? So anything you could shed a light and help us to understand the impact of the coronavirus on this 6 percent decline in these conditions on the first quarter, and then maybe we can try to understand what could be the impact for the next quarter. That's it.

Thank you. In terms of branches, Henrique, actually we didn't close any branches during the coronavirus crisis. Only the branches in the malls and the ones that we couldn't open, we kept all of them open in the places we could. So we operate We operate with half of the people in the branches in terms of staff and replace the staff every week. In terms of reduction in number of branches, in the first quarter we closed 78 branches that actually will be definitely closed. We expect to close this year more than 300 branches. In terms of digital channels, in our case, we have already a very high level of penetration of digital channels. I think we had about 17 million clients that were clients either of mobile or internet banks and with a very high level of usage. Due to the characteristics of the crisis, economy really is slowing down. We noticed actually that even though we see more clients active using the digital channels than usually internet or mobile, number of transactions actually reduced. Basically, people are buying less things, people are transferring less money in business, payment, etc. that's kind of the trend we have seen. I don't know, I may have lost part of your question. No, that's it.

I still have my question. The 6% decline in fees and commission income quarter over quarter, how much of that do you believe is related to the coronavirus?

I would say the reduction in credit cards It's pretty much related to coronavirus. It is the impact of the lower retail sales on Cielo in our exchange, in our interchange revenues that is basically based on The consortium operation may have some impact. Investment Bank, we were expecting a good quarter. Actually, the performance was not as good as expected, even though it was much better than last year. So maybe more clearly on credit cards and maybe investment banks.

Maybe a little bit also on asset management. Okay, thank you very much.

Thank you. Well, thank you all for your participation. I guess we finish the Q&A session.

Since there are no further questions, I would like to invite the speaker.

Thank you all for your participation in our Q&A session and for making the time to join us in our conference for this first quarter. Have a great day.

That does conclude Bradesco's conference call for today. Thank you very much for your participation. Have a good day.