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 second quarter 2020 earnings conference call. This call is being broadcasted simultaneously through the Internet in the Investor Relations website, www.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 Bank of the Davis 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 Firet, Director and Head of IR.

Hello, everybody. Welcome to our conference call for discussion of our second quarter results of 2020. We have today with us here in our headquarters, our CEO, Otavio de Latari, our Executive Vice President and CFO, André Cano, Vinicius Obranaz, the CEO of Bradesco Seguros, Leandro Miranda, our Executive Director and IRO. For starting the call, I turn the phone out to Leandro.

Thank you very much. Good morning, everyone. Welcome to our conference call on the results for the second quarter of 2020. The second quarter was certainly one of the most challenging quarters that we have experienced in the recent history of the bank, with the pandemic causing a strong impact on the economy and the loss of income by part of our clients and the Brazilian families as well. In a scenario like this, that we have never seen anything like that before, uh strong balance sheets uh the right provisions and liquidity are essential and those were the key pillars that uh we addressed this quarter we worked intensely in the adaptation of the bank to the new operating conditions facing the uncertainty as to the evolution of the pandemic and the pace of the reopening of the economy from may on Possibly with the contribution of the emergency aid and the beginning of the reopening in other countries, we have seen a significant improvement in the activity and the confidence of our people. Today, we face an economic scenario that remains challenging, but apparently the worst moment has already passed. This week, our economy has upgraded GDP for expectations to a decline of 4.5%. from the previous forecast of a decline of 5.9. In the quarter, we had the credit growth of 0.9% and 14.9% in 12 months, impacted mainly by the segment of companies. Among the various measures adopted by the Central Bank of Brazil, we had the release of officer reserves to the sum of 24 billion reais. However, Between April and June, we released 129 billion reais in new credits. One of the major highlights of the quarter was the process of extension of loan operations for clients who were not delayed at the end of February. The number of extensions totaled 61 billion reais. giving financial relief to our clients to get through the crisis. We will show you various details of extensions and collect quality in the coming slides, showing the positive vision that we have in relation to the extended loans. In this context, we continue to anticipate the effects of the crisis by strengthening the balance sheets with loan loss provisions at the bank and also provisions in the insurance company. Our expanded expenses of allowance for loan losses increased again this quarter, reaching 8.9 billion reais, reflecting the effort of anticipation made in the bank. In the insurance company, we constituted precautionary provisions to tally 1.1 billion reais in the first half of the year. We will also detail these numbers ahead. Costs were a strong highlight in the quarter, with a tight control in all areas. We will present the numbers in our structural cost reduction plan into more detail ahead. In addition, our liquidity continued to expand with an increase in the volume of funding by 83 billion reais in the first half of the year. The Common Equity Index increased 120 bits, recovering a significant part of the reduction we had in the first quarter of 2020. In slide three, we highlight our operations during the pandemic. We operate on multiple fronts, in which the main ones are well-being of our employees, support to clients, and measures to support society as a whole. In relation to our employees, one of the main measures has been to keep most of our employees working from home. Today, we have 94% of our employees who were based in offices before at home. They are working through home office in a much more productive way, and 50% of the branch employees and a weekly rotation system because in this case we are providing an essential service to society. We have imported 500,000 serological tests and are testing all the employees of the organization. We have already completed 57,000 tests. Our Viva Bay program provides our employees with the necessary support in the event of doubts about the contamination of employees and family members by pandemic. To our clients, we provide all the necessary support to get through these difficult periods. We extended more than 1.9 million of loan agreements, totalling 8.2 billion reais in installments. In addition, we have been at the forefront in programs of support for society with donations to combat the pandemic. Changing now to slide four, we are going to address the improvements and development of our digital channels. Due to social distance over the past few months, we have seen an acceleration of clients' digitalization trends. We added in the second quarter alone 1.4 million users of mobile banking. In addition, we added 900,000 account holders with digital profile. The crisis has led to a reduction of economic activities with negative impacts on the banking transactions in general. Even so, the transactions on mobile banking grew by 17% in the quarter and 33% in the last 12 months. On the other hand, there was a strong reduction in the volume of teller transactions in our branches. The reduction in the use of tellers by clients opened space for the transformation of our branches. Moving now to slide five, currently we have multiple fronts of digital transformation in Bradesco. The main one being the transformation of the traditional bank into a fully digital one. In this sense, we recently introduced our new app for mobile banks, an important development in comparison to the previous version. A faster experience and with customizable screens where clients highlight the functions they use most often. In this light, we highlight two strategies that we consider to be very important, Agora and Next. Agora Investimentos is an investment house for all clients who seek an open platform with a broad range of investment options. In 2020, Agora presented a strong growth of 32.4% in its client base. reaching 449,000 clients. The app of Agra is integrated in the app of Bradesco. And more recently, it was integrated in the app of Next on a single sign-on basis. We believe that there is an opportunity for relevant expansion of the client base of Agra. We currently have 50.6 billion reais in assets under custody in Agra. A growth of 7.7% is here. Considering that the Bovespa index shrank by 12%, this was a very significant growth. Next, our digital native bank with the free service remains on the trajectory of rapid growth. We reached 2.7 million clients in June 2020, and we are growing by 107,000 clients per month. We believe that we'll be able to reach 3.5 million clients by the end of 2020. We have seen a strong evolution of the volume of transactions carried out by Max clients in this semester. Approximately 30% of the client base uses Max as its main bank. Max has achieved a great evolution in its stores, evolving over the past year its score. This is reflected in the high NPS of Max, around 77.6. We are working on the segregation of Max from Bradesco. It will be a separate company with its own policies and management. Turning to slide six, we begin to detail the results. The results for this quarter remain pressured by the economic environment. The net income grew 3.2%. In the quarter, reaching 3.9 billion reais, but still 40.1% below in the annual comparison. The ROE presented a small expansion, reaching 11.9%, what we call an inflection point. It's still well below what is considered to be the optimal return level of the bank. The shareholder equity grew 4.3% in the quarter under positive effects of the retention of profits and revision of part of the negative market that we saw in the first quarter. Our total net interest income grew 15.3% in the quarter. The extended provision in the quarter totals 8.9 billion reais, a growth of 32.5% in the quarter. The income from insurance record grew 28.9% in the quarter, but it still remained 9.6% below 2019 in the same annual comparison, what gives us room to see it growing in a common and more regular economy. The fee and commission income remained quite pressured by the economic scenario, with a drop of 7.9% in the annual comparison. Finally, In operating expenses, we registered an excellent performance with a 5.5% drop in the annual comparison. We do intend to keep expenses down, even in nominal numbers in 2020 and 2021. Moving now to slide seven, we saw a slowdown in the origination of loans, mainly due to the reduction of demand in several lines. The line of large corporates grew 18.2% year-on-year. In S&Es, we had a growth of 11.7% in the year. Dropping the quarter in this line reflects a reduction of loan demand for the expansion of business, which is usually the main driver of growth. Payroll loans maintained a good growth of 14.2% year-on-year, with the demand from May onwards scaling up again. They maintain a strong growth in the state financing with an expansion of 18.8% year-on-year. The credit card portfolio declined 11.2% during the quarter, which reflects a reduction in the volume of transactions due to the pandemic. In the financing of vehicles, despite growing 8.7% year-on-year, there is a reflection of the strong reduction of card sales. which led to a drop of 4% in the quarter. We expect the long demand to resume in the second half of the reopening of the economy. In slide 8, we highlight the short performance in funding, with a growth of 14% of the net of compulsory reserves in the quarter and 39.3% in 12 months. we added a $3.2 billion to the fund in the first half of 2020. This reflects the movement of fiscal policy, which occurred in the period of pandemic that led us to receive significant volume of deposits. The loan-to-deposit ratio closed the quarter in 83%, an extremely comfortable level. We are happy with that. Highlighting, once again, what I have already mentioned, the first slide, the Brazilian Central Bank measures at the beginning of the pandemic, reducing compulsory reserves, and increasing the resource equivalent to 20.1 billion reais. In June of the year, we added not 24.1, but 38 billion to our loan portfolio in no amount of amortization, considering an origination of 129 billion reais. In slide 9, we share the diversification of our own portfolio. We have a diversified portfolio with low exposure to the sectors most affected by crisis. The portfolio in foreign currency represents only 7% of total, with funding always in the same currency. Therefore, we are fully hedged. we have the credit portfolio dips 9% covered by guarantees, whereby the coverage for individuals and SMEs is much, much higher. Turning now to slide 10, where is the provision for credit risk? Our extended cost of credit in the quarter reached 8.9 billion reais, a growth of 32.5% in the quarter, representing 5.4% of the portfolio. In the graph, we highlighted the average provision the first two quarters of the year was 7.5 billion reais, much higher than the quarterly average observed in 2019. of 3.5 billion reais, reflecting the effort of provisioning we are making by means of constitution of additional provision, also reflecting the required provision. We have probably already reached the peak of the cost of tracking the second quarter of 2020, with space for reductions in the coming quarters. And also, in the senior annual variation, depending, of course, on the extent and possible occurrence of case of the disease. The constitution of our provisions occurs due to the expectation of future losses in our loan portfolio. The provisions are based on our models, considering historical information and forecasts. We currently have a total provision of crack in our balance of 43.2 billion reais, which represents 9% of the loan portfolio. Remembering that Currently, we have a greater volume of operations with guarantees than in the crisis of 2008, as well as 2015-16, and therefore, much lower risk. We believe that we are all well provisioned at the moment. We will continue evaluating the scenario, and we will make new adjustments if and when necessary. Moving to slide 11. we can see the delinquency ratio showed a reduction across all lines, both for 90 days overdue and for 15 to 90 days overdue. The reduction at this time is due in large measure to the extension and renegotiations. In addition to the traditional delinquency ratio, we bring this quarter new information, duration excluding the credits that are 100% provisioned. with the income ratio in this concept being much, much lower, 1.2% for the total NPL, reinforcing the perception that we are very well provisioned. Changing to slide 12, the NPL creation score presents a significant reduction to 2.2 billion reais in the second quarter, also due to renegotiations in the sale of the loan portfolio already 100% provisioned. The reduction occurred in all segments of the loan portfolio. The provision that we made in the quarter represents very strong 398% of the NPL creation. Turning to slide 13, with the reduction of the NPL and the strengthening of the provision in the quarter, the coverage ratio for NPL over 90 days in the second quarter increased strongly, reaching 299% against 228% in the first quarter. We also show the coverage ratio for each segment of the portfolio. For individual ratios, it's 189%, 1,593% for large corporates, and 375% for SMEs. We also include in this chart another indicator of coverage excluding credits that are 100% provisioned. By this concept, the rate for total coverage would reach 602% compared with 425% in the previous quarter. Furthermore, we show the coverage ratio including the renegotiated portfolio to the non-performing loans. The coverage ratio in this concept would be 124%. All of these indicators show that we are very well covered with provisions to deal with the credit cycle, even in the worst case scenario. Moving on to slide 14. We see that one of the most important aspects of this crisis for the banking system has been the loan extensions, an instrument that we use to face the unique characteristics of this crisis. Part of our clients took the temporary loss of income and need time to rearrange their financial situations or wanted to maintain a position of greater liquidity during this period of uncertainty. A very interesting detail is that the average profile of clients who extend a loan is very close to the average profile of clients who remained up to date, confirming that these clients only become delinquent due to circumstantial issues. Considering the extended portfolio, 93% of clients did not show any significant delinquency in the last 12 months before the extension. 71% of the balance has a guarantee. 96% of loans have a rating between AA and C. And the average time of relationship with the bank of clients of the Renovation Portfolio is of 14 years. On June 30, our Exchange Portfolio totaled 61 billion reais with 1.9 million of operations extended and 8.2 billion reais in instruments extended. 50% of the extensions came from individuals and 50% from companies, with the largest line extended being the working capital with 33% of the total, followed by real estate financing with 29% of the total. Turning now to slide 15, where we address the renegotiated portfolio. In addition to the extensions, we have the traditional renegotiated portfolio. In June, our portfolio was composed by 4.8 billion reais in loans recovered from write-off, 100% provisioned, and 18.3 billion reais of other renegotiated loans. 65% of the renegotiations that occurred in this quarter were less than 90 days late. The renegotiated portfolio has 68.2% of provision. We believe that we have a very significant level of provisions in the renegotiated portfolio, sufficient with considerable new way to cover the potential loss in this portfolio. In slide 16, The total net income showed a strong growth of 15.1% in the quarter, leading to a growth of 9.2% in the semi-annual comparison. This behavior is explained by the strong performance of the market portion, the effect of recover of the various markets in which it operates. but also by the good performance of the client portion, which grew to the increasing volume with the strong expansion of loan portfolios in the last 12 months, despite the negative impact of the over-drafts rate at 8%, which negatively affected the spread of the portfolio. Moving to slide seven. One can see that the line of fees and commission income has proved to be one of the most affected by crisis to the system as a whole. The line of credit cards, the most important in our line of services, was firmly impacted by the reduction in the volume of transactions with cards and by our revenue mix with lower interest rates on the volume. Our perception is that the line of cards should recover with the reopening of the economy. In addition, we had a negative impact in the line of asset management with the reduction in the asset management rate of fixed-income firms and a reduction of the volumes managing these products as a consequence of the SILIC reduction. Additionally, we had a reduction in line of loan operations. In slide 18, In operating expenses, we had a good performance in the quarter. The operating expenses, including others, showed a decrease in the annual comparison of 5.5% and 3% in the semi-annual comparison. We had a maximum performance in the line of personnel, with a drop in the quarter of 11.9%. And also a decrease in the administrative expenses of 3.6%. The performance reflects the effort of reducing costs that we have had in recent months. And as we have already mentioned, we have made precautionary provisions in the insurance company in the amount of $261 million in the first quarter and $747 million in the second quarter, which are consolidating the bank in the line of other operating expenses. Addressing the line of cost by these provisions, the total cost would present a decrease of 6% in the quarter, with 7.6% in the annual change and 7.6% in the semi-annual comparison. Slide 19 would like to share with you some efficient levels that we have. related to cost of control. We are in the process of implementing a comprehensive program which will allow nominal cost reduction still in 2020 and keep on going in 2021. This program entails new initiatives and deepening of others. Among these initiatives are changes in the model of customer service, that should enable an acceleration of the network's rationalization process with acceleration reducing the number of branches and conversion into points of service. We use the model of home office intensively, which will bring us important benefits. In addition to change the administrative Finally, we will continue to seek reduction opportunities based on change of personal behavior. It should continue to bring benefits in the future. In slide 20, Bradesco Seguros presented in the semi-annual view a reduction in its income of 3.9%, which represents an ROE of 14.4%. The result of the insurance company was negatively impacted by the reduction of financial revenue, and possibly impacted by the reduction of claims. Additionally, there was a negative impact of the precautionary provisions, which totaled 1.1 billion reais in the semester. Despite a decline in the net income, the participation of insurance in the bank profit rose to 33% in the first half of 2020, with a much better performance from insurance in the period when compared to the bank. As highlighted in the graph, there was a sharp decrease in the claims ratio in most of the lines, especially health and output, which also reflected in the improvement of the combined duration. The provisions that I already mentioned made outside the line of technical provisions Seek to anticipate the potential risk of claims increase with the normalization of the company. Included in the graph are simulations of the provision effects in the claims and combined duration. Turning to slide 21. In relation to the basal ratio, we had a significant improvement in the quarter, with an increase of 120 bps in the common equity to 11.5%, and of 110 bps in the tier 1 deficit to 12.5%. We see the current rates at quite comfortable levels, but considering our retention of income and the current regulation distribution of dividends, which restricts our payouts at 3% of the adjusted income, the data ratio shall improve even further. In this quarter, we adopted some measures that should reduce the changes in capital in times of crisis. We reduced our positions in markets abroad to one-third of the position that we had in the first quarter, and consequently, the overhatch. Despite the neutralizing operation of foreign exchange risk, the moment of extreme volatility of the exchange negatively affects our capital by generation of excesses. We also transfer part of our position of securities for which we intend to carry over until the due date in the line of health and maturity. These should also avoid impacts on the capital arising from the market to market of the securities and the equity. Our liquidity ratios also remain very comfortable with the LCR at 170% and the NSFR at 120.6%. The final highlights here, to close the presentation, you can see slide 22. We'd like to give you some expectations on our performance in 2020. We feel that it is not yet appropriate to return with a formal guidance, since despite improvement in the scenario, there is still much uncertainty, but we are comfortable to share direction of the firm. We see our loan portfolio growing in 2020 above the financial system, which in accordance with the estimates of our economic area should grow by 5% in 2020. We see the net income growing in line with the loan portfolio. The line of fee and commission income must remain pressured by the economic scenario, but probably improving compared to the second quarter. The income from insurance should benefit with an error of low claims ratio, but remains pressured by the low interest. On the cost side, we shall have very positive news. We should have a reduction of costs in nominal terms in 2020 and in the next few years ahead. We must also have reductions with the implementation of our program for the reduction of costs. Finally, in relation to expenses with provisions, we can now say that we continue to have a conservative posture, but it's possible to say that considering the scenario that we see today, expenses will be lower in the second half compared to the first half of the year. In addition, we can say that the expenses with provisions should be significantly lower in 2021 in comparison with 2020. If the scenario does not change significantly, the peak of provision has already occurred in the first half of 2020, since we seek to anticipate the effects of the crisis. We now move to the Q&A section, and thank you very much for your attention so far.

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 your question from the queue by pressing star two. Our first question is coming from Mr. Jorge Curi of Morgan Stanley.

Hi. Good afternoon, everyone, and thanks for the call. Two questions, if I may. evidence, what estimates, what data are you looking at to have that view that we've seen the peak of NPF and provisions, or well, specifically the peak of provisions in this quarter, and that the second half should have lower provisions, you know, especially in the context of that large amount of loans that are under the different programs that have been restructured, and we still don't know how that's going to turn out once they expire. And your coverage ratio is not that high, really. I mean, it's 124% if you look at during the renegotiated loans. So can you share with us, you know, how are you, coming out to that conclusion that we've seen the worst and the next half should see lower provisions. And then my second question is on expenses, where your minus 7.6% decline in the first half of the year is quite impressive and several reps for that. Can you help us understand What, as you discussed, you expect nominal decreases this year and the next few years is minus 8%, sort of like probably above what could be a normal run rate over the next couple of years, given that you have some, you know, emergency costs in this period and maybe some low-hanging fruit, or is this kind of like what we could see for 2020 and 2021? Thank you.

Hi, Jorge Allende speaking. Well, pretty much in our first session, we have seen the behavior of our portfolio. And now, they've reduced the ratios around 3.5%. It has been the worst month. And from that point on, we pretty much have seen that the behavior of time repayment is really good. We have a second wave of the pandemic that is much, much stronger than what we have seen. all over the world, especially in China nowadays, we are confident that the peak has arrived past it. Regarding to expenses, we are committed to reduce expenses into nominal terms. And what allows us to believe that we are able to do so is pretty much the process that we are going through with a lot of reduction in expenses due to home office, less use of the branches, change branches into, point of services, we have been able to reduce transportation, we have been able to reduce safety in the branches too. Therefore, we are really committed to that and confident that we are going to be able to do it at least in 2020 and 2021. There is a slide here regarding to the levers that we are using reduce expenses that I think can give you a very good outline of the several measures that we intend to implement.

Jorge, only a compliment on the first answer from Leandro regarding your comment that the 124% coverage including renegotiated loans plus NPLs is not that high. Here, the loans, basically, we are excluding the NPLs that are in both portfolios, 90 days and also in the renegotiated portfolio. But I remind you, we have about 68%. of coverage with provisions in the renegotiated portfolio. If I remove loans that are already fully provisioned, and we have a lot, if you look at that chart, we present the renegotiated portfolio, we're going to see that 4.8 billion came from the write-off, recovered loans. These ones are fully provisioned and actually more than that, since we have 68% provision. If you adjust for the 100% provisioned loans, actually on the loans where we are not fully provisioned, this coverage would be much, much higher. So in that sense, 124 is pretty good considering what I just told you. Great. Thanks for the detailed responses.

Thank you, Jorge.

Our next question is coming from Marcos Assuncel of Itaú BVA.

Hi, good afternoon, everyone. My question is on the role of branches going forward. More of a long-term view here.

You mentioned a lot of KPIs on increased digitalization trends. So how do you see – and also you mentioned the levers in terms of efficiency. A couple of them are related to branches.

So how do you see the – the potential to reduce or to improve the efficiency on eliminating some branches as the client is becoming increasingly digital. Basically, as Otavio was pointing out, we have been able to change the original branches into business offices. And therefore, when you have such a model, you do not have to spend money with security. Security represents one-third of the cost of an expense. Despite of that, you are able to increase the amount of transactions that we have in our branch network. We also have already closed near 400 branches. and this number may increase even further this year. So, home office, the use of digital channel, as you have seen in our presentation, have increased dramatically, and give us all the confidence that our customer base is changing its behavior. Therefore, we have room for that. Right, and a quick question here on the FinTech side.

If you could comment after this pandemic, if you see them more as a risk than before, and also if you were able to have some opportunities in this market during the pandemic, there were a couple of news mentioning that you could be interested in some players.

If you could mention about that, it would be great. Thank you.

Well, we have a private equity and venture capital arm, so we are always open to good opportunities that can enhance our ecosystem, as well as with very good returns. We have invested heavily in all segments of technology with very good returns so far. And we are good in the way the bank is structured today. The organization is in a very good shape. But we'll continue to make such investments as opportunities come by. As you can see, we have all kinds of investments regarding the industry. It goes from Apparel to our cloud solutions. It goes to Webber. to technology, to platforms. So basically, we are wide open to that, and we do not plan to make any strategic acquisition implying controlling interest so far.

All right. Thank you very much.

Thank you.

Our next question is coming from Mr. Nicholas Riva of Bank of America.

Thanks very much for taking my question. I only have one question, and it's about your MPL ratio, which improved quite a bit, 70 basis points, quarter on quarter. That came, I think, as a surprise, given the environment. And I know that you talked about a lot of the relief measures you're doing for clients and restructuring a lot of loans. I wanted to ask you, for example, in this case, Did you restructure loans that were actually non-performing as of March, and then even that you restructured the loan, then it became performing as of June? Or otherwise, what really explains such a big improvement in the NPL ratio in the second quarter, given the very challenging economic environment?

Thank you. Hi. I'm Nicholas. Basically, as you said, this quarter we have expanded loans. They amounted to R$6,200, loans that basically were not late in March or were not late in February 29th. Basically, we also renegotiated. In this case, we call renegotiated loans the ones that were already late before March. So, we also renegotiated. You can see the renegotiated portfolio. When we renegotiate these loans, basically they become performing loans. I think that's the definition of a renegotiation. But also, this quarter, we... had write-offs. Some of the write-offs that impacted our MPL last quarter, sorry, some of the loans that impacted our MPL last quarter went naturally to write-off this quarter, and also a relatively small loan portfolio, something like 500 million reais that were already fully provisioned. So, basically, that's the driver for that. We are very confident that The quality of the renegotiated or the extended loans are very good. I think we presented that in the presentation. And in the case of the renegotiated loans, this portfolio is covered with 68% of provisions. So basically 68% of the entire renegotiated portfolio is covered by provisions. So it's a pretty sound portfolio.

Yeah, just to accentuate what Siddharth has said, you have to consider that pretty much we also sold some portfolios and the clients that decided to refinance, they represent around 96% of clients that used to pay their debt timely, which ranges from AA to C, and over 14 years of relationship with us. So pretty much we are confident on the quality of the portfolio. Thank you.

Okay. Thanks very much. Just one quick follow-up. These latest relief measures, Did you restructure any loan that was non-performing as of March, and therefore, you were able to reclassify that as performing, or did you also, or did these relief measures only apply to claims that were performing before the pandemic began?

Well, as I explained it, Nicolas, the loans that were performing until March, are the extended loans, are part of the $61 billion in extended loans. And we also restructured loans for our clients that were already late before March. These are in the renegotiated portfolio, and as I said, this portfolio is covered with 68% of provisions. Okay.

Thanks very much.

Thank you.

Our next question is coming from Mr. Henrique Navarro of San Amber.

Hi. Thanks for the opportunity.

It wasn't clear for me in the previous Q&A, when do you believe NPL should peak? I mean, shall it be this 4Q or first quarter 2020 story? That's my first question. The second question is on the strong improvement on medical loss ratio in radical insurgency and also on vehicle loss ratio.

uh how sustainable is that i'm looking forward it was a very strong number but looking forward what shall we expect mostly for the magical operation that's it thank you

Yeah, we think the peak should be around the first quarter. Basically, we have this extended loans, the negotiated loans. The extended loans will become, they will return to payments probably by October. And basically, Also, we shouldn't keep renegotiating loans for loans that were already renegotiated. So, I think the timing seems to be something around the first quarter. It could be maybe fourth quarter. It depends on a lot of variables. But I think fourth, maybe more to the first is... is a good guess at this point. Can you repeat your second question? I didn't hear properly part of it.

Okay, my second question was on the improvement in the medical loss ratio for Bradesco Insurance. How sustainable is that looking forward?

I think I'll pass that to Vinicius Aldernas. Thank you, Siret.

Thank you, Henrique, for your question. In regards to the medical loss ratio, we have to take into consideration that the second quarter, we had, in the second quarter, we had the full effect of the pandemic and the social distancing measures. And we definitely don't think this radical drop in medical loss ratio is going to be the normal or is going to be the recurring situation going forward. That's precisely why, and even though we don't have... you know yes the visibility uh to tell you uh how how this is going to come back i mean we we certainly believe that there is significant backlog of procedures that will uh have to be addressed also i mean you have to take into account that at the average cost of even you know the covid uh procedures are high in relation to others. So we think that going forward, it's definitely going to be an increase. And that's precisely why we were strengthening our balance sheet by creating these reserves that are not captured by your typical mathematical or actuarial models, we understand that the current visibility, the right procedure is to create these reserves in order to have a more normalized medical loss ratio, a more normalized result for this current quarter, okay?

Okay, thank you.

Our next question is coming from Mr. Jason Morley of Scotiabank.

Yes, hi. I have a question related to the first comment that you made in your presentation that the economic scenario remains challenging, but the worst moment apparently has passed and that the bank has not improved its outlook for economic growth or lack thereof or for real GDP. of minus 4.5. I think it was five something before, and I think the focus survey, the consensus is close to minus six. So not just in terms of the provisioning, because you made a lot of provisioning and you're saying that that could have peaked, but what are you seeing for the economy that gives you confidence that the worst has passed? And if you could put that in the context of what you're looking for, economic growth in 2021, Again, the survey by the Central Science Focus Survey has a lot of people from last week, I think just 3.5%. But you can talk about what's giving you confidence that the worst has passed and what kind of scenarios, what, I mean, clearly is a wild card, but what are you seeing that's giving you this confidence and what could derail this expectation? Thank you.

Thank you, Jason. The best person to answer that would be our chief economist. Unfortunately, he's not here, so I'm going to try to give a flavor of the main concepts that we have seen so far. Pretty much as we have also noticed all over the world, the economies are getting back on track much, much faster than initially imagined. And all the indexes that we use to measure confidence, production, consumption, and sales in Brazil, they have surpassed our best expectations so far. That's the reason why he has improved his view on GDP for this year, and he kept the view of GDP next year. But he's not alone. If you consider that the opinions of Most of the chief economists on the other banks are going to see that they're pretty much aligned. Therefore, we use those numbers to align our budgets and the way we see the economy improving. So far, we have been able, since May, because April was a very tough month, to see that the behavior in loans has been pretty much well, what allows us to be confident that the Brazilian economy is going to get back on track. Of course, no one knows if they're going to have a second wave of the pandemic, how strong will that be, what should be the impact. So pretty much we are aligning with the rest of the world regarding the expectations.

And what about the expectations for next year? What is your economist looking for? And is the rebound in line with that consensus of around 3.5% of GDP growth?

Yeah. Next year, Jason, basically you have these calls. Basically part of the – we have a drop. pretty much caused by the interruption of activities, a lockdown, as we have never seen before. Basically, I think the assumption there for the 3.5 is that we're not going to have a hard second wave. that will actually harm this natural recover that in our view is going to happen. Remember, we are shrinking 4.5 this year, we are growing 3.5 next year, we are not really going back to the same position So I think it's not hard to see that. The variable, as I said, is we don't have a bad second wave happening.

And does that anticipate reform coming through, tax reform? What is the bank looking for in terms of tax reform and other potential reforms in the upcoming quarters?

We understand that the tax reform will pass through. Of course, there are a lot of elements to be discussed in the Congress. You have seen that pretty much the politicians are in favor of the simplification of the reform. The bill shall be paid by the wealth, people, and companies in the society. And I guess the general levels that you have been discussing so far, they seem to be acceptable. Thank you, Diego. Thank you very much for your attention. Thank you.

Thank you very much.

Excuse me, ladies and gentlemen, since there are no further questions, I would like to invite the speakers for the closing remarks. Please wait while we reconnect the speaker's line. Excuse me, ladies and gentlemen. That does conclude the Desk's conference call for today. Thank you very much for your participation, and have a good day.