Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Bradesco's Q2 2019 Earnings Conference Call. This call is being broadcast simultaneously through the internet in the Investor Relations website, banco.bradesco/ir-en. 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 *0 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 Firetti, Market Relations Director.
Good afternoon, everybody. Welcome to Bradesco's Q2 20 19 Conference Call. We have today with us for the call our CEO, Octavio de Lazari, our Executive Vice President and CFO, André Cano, Bradesco Seguros CEO, Vinicius Albernaz, and our Executive Director and Investor Relations Officer, Leandro de Miranda. For starting the call, I turn now the floor to them.
Hello, everyone. Thank you all for joining our Q2 2019 Earnings Review Conference Call. We are very pleased to continue presenting solid results despite the many challenges facing the economy. Our business model and teams have shown flexibility and excellence to thrive in every single market that we play. We are proud of our accomplishments and confident that we shall keep this path as we accelerate our investments in people, technology, and services.
We'd like to thank all of our employees for this outstanding performance and continuous focus on serving our clients and communities. In addition, we have special thanks to our clients who have elected Bradesco as their bank of choice. The economy was far weaker than expected, what led us to lower again our 2019 GDP growth expectation. The increased volatility jeopardized the confidence level of consumption and investment, resulting in tougher environment for banking.
Despite the challenging short-term scenario, we are optimistic about the future. The pension reform does seem to be on track in the Congress, as it has already been voted and approved with major support in the first round in the lower house, which may allow companies to finally focus on their own long-term goals without being blurred by the macro fiscal uncertainty. We believe that investments and growth are likely to resume over the following months. Our sounding performance this quarter came as a consequence of several changes that we have been implementing for quite a while, which allowed us to grow the credit portfolio despite the economic scenario with excellent credit quality while maintaining our costs under control and with a great performance of our insurance operation. On page 3 , we bring some of our financial highlights.
First of all, an all-time high net income of BRL 6.5 billion, a growth higher than 25% year-on-year. The operational results grew 11.1% in the annual comparison. Our ROE reached 20.6% in the quarter, an expansion of 220 basis point, even with the strong expansion of our shareholders' equity in the quarter that grew 18.2% year-on-year to BRL 133.6 billion. The individuals portfolio is a highlight with a strong growth of 14.8% year-on-year. As expected, credit quality continued to improve with the over 90-day delinquency ratio falling 4 basis point , confirming our view of Bradesco optimal position for lending. Finally, our Tier 1 capital ratio reached strong 15%, a growth of 60 basis point this quarter and 360 basis point in the annual comparison.
Moving to page 4, we bring other highlights of the quarter. The first one is the strong growth in the individuals credit portfolio, with expanded 14.8% in the annual comparison. We are gaining market share in different lines, such as personal loans, payroll loans, mortgage, and auto financing. We are achieving this growth with excellent credit quality as shown by the new vintages. This growth is a reflex of the commitment and motivation of our teams, as well as the evolution of our processes and models.
The second highlight is the acquisition by $500 million of BAC Florida Bank that we have announced it in the beginning of the quarter. Our objective with this move is to strengthen our positioning in the high income segment, pretty much wealth management, offering to our customers checking accounts, cards, mortgage financing, and other services in U.S. The conclusion of the deal is pending regulatory approval, but we are very confident it shall come in the very near future.
The third highlight is in the main segment, which we were the first bank to launch the digital account. Credit origination through digital channels, mobile, and internet, had an expansion in the first half 2019, growing 53% in the individual segment and 44% in the company segment. Our checking account customer base continues to expand. In year comparison, we grew 1.1 million customers, and this last quarter, 400,000 customers. Finally, Next reached 1.1 million accounts in the quarter, and we are confident that they shall exceed their targets of 1.5 million customers by year-end. On page 5 , and on the next page, we bring some numbers of our operations in the digital arena. As mentioned in the previous slide, Next reached 1.1 million clients. 77% were not Bradesco's clients.
We aim to reach more than 1.5 million by the year-end. Our CEO is very confident that we shall reach even 2 million clients by year-end. In Bradesco Group, we closed this quarter with 16.4 million digital checking accounts clients, an expansion of 1.9 million in 12 months. As you can see on the next page, BIA Bradesco Inteligência Artificial, that's our artificial intelligence, had more than 144 million interactions. 1.4 million customers through WhatsApp. Credit origination through digital channels in individual segments totaled BRL 11.8 billion in the first half, a growth of 53% in the annual comparison. In the company segment, it totaled BRL 14 billion, a growth of 44%. These numbers show that our traditional banking clients are quickly adopting the digital channels even for credit products.
Turning to page 7 , a great pride of ours, Bradesco Foundation is one of the largest educational projects in the world. The foundation has a budget of approximately BRL 650 million, bringing benefits to more than 92,000 students with basic education of high quality. On page 8, we show the value that we add to the Brazilian society. In terms of value added, out of BRL 33 billion, 30% was state government and 29% to the compensation of our employees.
Moving to the financial results of the Q2 , we see here on page 10 the growth of the financial margin. In the annual comparison was 7.1%, and in the first half it was 5.6%, close to the center of our guidance. Expanded loan loss provision reduced to 3.2% in the quarter to BRL 3.5 billion, remaining on the upper part of our guidance.
We are doing really well on insurance operations with expansion in the operational result of 16.9% in the first half. Our net income grew 23.7% in the first half, and operational results 13.3% show a solid performance of the organization as a whole. We'll go into more details on the following page. Moving to page 11, our ROE grew again to 20.6%. This is the Q4 in a row with expansion in our return, even with our shareholders' equity presenting a significant expansion of 18.2% year-on-year. We understand that ROE may remain at these levels or even expand a little for some time, as our CEO has point out. Our ROA was 1.85%. On page 12, we may see that our credit portfolio grew 2.2% this quarter and 8.7% when compared to the same quarter last year.
Deceleration of the annual comparisons is mainly due to a larger comparison base in the Q2 2018. I would like to remind you that in the Q2 2018, there was a large expansion in the corporate portfolio, mainly due to devaluation of our currency by 16% and also due to a large transaction of BRL 5 billion that quarter with a great Brazilian company. As highlighted earlier in this call, the individuals portfolio presents a growth of 14.8% in the annual comparison, with highlights to personal loans, which is growing 29.2%. Payroll loans growing 33%, car financing growing 17.5%, and mortgage growing 15.9%. It's really an incredible year so far.
The good performance of the individual segment is a consequence of our market positioning, improvement in credit operations, evolution of credit models with intensive use of data, and our highly motivated sales force. In the company segments, in addition to the effect of the comparison base that we have already mentioned, the operations suffers from low level of investments by companies. We understand this line should pick up with the improvement in the economy. In the SMEs segments, the growth is also affected by reallocation. In the Q1 2019, of approximately BRL 6.7 billion in loans from the SME segments to the corporate segment as part of Bradesco's new segmentation companies, which increases the growth in the corporate portfolio and reduces in the SME portfolio. Turning to page 13, credit origination per business day continues to have a good evolution.
In the individual segment, the growth was 17.3% in the quarter and 39% year-on-year. In the company segment, the growth was also good, 15.4% in the quarter and 21.9% in the annual comparison. On page 14, we present our NII, which grew 2.7% in the quarter and 7.1% in the annual comparison. The highlight is on the NII for market operations. That presented a growth of 7.3% in the quarter and 25.9% in the annual comparison. The annual comparison is also impacted by the weak comparison base in the Q2 of 2018. The NII from client operations grew 1.9% in the quarter and 4.2% in the annual comparison. It benefits from the credit portfolio expansion, change in product mix, and a quantity of days in the quarter, offsetting the reduction in the average spreads.
We understand that this line will continue to present positive performance as a consequence of the growth in the credit portfolio, despite the trend of spreads contraction. We expect an acceleration of this line during the second half. Turning to delinquency ratios, on page 15, you can see that it continued to have a positive evolution in all segments in line with what we have been pointing out in previous quarters.
We still see the possibility for an improvement, but we are approaching the end of the normalization process of the credit cycle. We hope that it comes by the year-end. The strong loan growth in the individual segment reduced the room for improvements. As you can see on page 16, NPL creation increased this quarter, impacted mainly by individuals and corporate segments. In the individual segments, the impact is related to the growth of the portfolio.
Expanded loan loss provision improved to BRL 3.5 billion this quarter, representing 2.5% of the expanded credit portfolio, the best level ever in our historical series. We still see room for reduction in the provision levels in the coming quarters. The expansion in the individual credit portfolio reduces space for reductions, but should be compensated somehow by a positive impact to the financial margin. Fees are presented on page 17. The growth in the quarter was 2.6%, and the annual comparison 1.3%. The checking accounts line has a positive evolution, growing 9.5% in the annual comparison due to the growth in the customer base and evolution our segmentation. The pressure on fee income is related to cards revenue, which are pressured by the competitive environment on the acquiring business, and the reduction on debit cards interchange fees.
Asset management revenues, which are pressured by the reduction of management fees, loan operations revenues pressured by a reduction in the volumes of sureties and guarantees. We understand that 2019 is our year of adjustments in this line, we may resume growth in fee income by 2020 with a stronger economy and with an adjusted revenue base. We are positive with Brazil.
On page 18, we bring a table with our operational expense, which are above the guidance, presenting a growth of 6.2% in the first half. We had an excellent performance on administrative expenses, which grew 3.3% in the first half and 2.2% in the Q2 on a year basis. Below the inflation, the performance would be even better had it we made anticipation of payments due to discounts obtained in the negotiation of contracts, it's very positive for the bank as a whole.
In personal expenses, we had a growth of 9.1% in the first half. The main pressure comes from the non-structured portion, mainly from higher profit-sharing provisions related to Extraordinary Performance Program as we continue to make provisions assuming maximum performance and from higher provisions for labor claims. Expenses would be growing by 4.6% if we were to exclude the effects of this payment anticipation and higher profit-sharing provisions related to this Extraordinary Performance Program. Pretty much, we believe that we shall keep them below inflation as time goes by. Moving to page 19, insurance results, we had again this quarter a very good result, with operational results growing 16.9% in the first half and 11.6% in the annual comparison. The Bradesco Seguros net income was BRL 1.83 billion, a growth of 1% this quarter and 15.9% in the annual comparison.
Insurance premiums grew 3.3% year-on-year, with highlights of health insurance segment, which presented growth in number of customers. Technical provisions total BRL 265 billion, expanding 5.2% year-on-year. A few more topics on insurance are presented on page 20. In the annual comparison, net profit in the first half grew 16%, and ROE reached 23.6%. In the Q2 , overall claims ratio had an increase and reached 72.5%, but it's still lower than the same figure in the Q2 of 2018. The best way to see it is on a semi-annual basis. The main impact on the ratio was caused by health segment, mainly due to the lower impact in the Q1 as a consequence of Carnival in the end of quarter and due to the higher quantity of business day in the Q2 .
For a better comparison, as I have pointed out, we should consider that first half total claims ratio is reduced from 74.4% in the first half 2018 to 70.5% in the first half 2019. We are confident that claims ratio will have a better performance in 2019 than in 2018. Turning to page 21, our capital ratios continue to evolve, as you can see, organically through retained profits. Common Equity Tier 1 and Tier 1 both expanded 60 basis points in the quarter.
Finally, on page 22, we bring our guidance, which had no change. We understand that considering the full year, we will be within the guidance range on credit portfolio growth, total NII, expanded credit provision expenses, and fees. Our insurance operational results will be better than the top of guidance range, which is 9% growth. We shall increase it by far.
In the line of operating expenses, we are also being slightly above the range, with expenses growing a little bit more than 4% due to legal claims and also the compensation program that we have pointed out. In general terms, the current performance does not change the return targets in line the guidance initially released in January. Therefore, we now conclude the presentation. We are open for your questions. Thank you very much for your attention.
We will now initiate the questions- and- answers section. If you would like to ask a question, please dial *1 . If at any point your question has been answered, you may remove your question from the queue by pressing *2 . Our first question is coming from Mr. Tito Labarta with Goldman Sachs. You may proceed.
Hi. Good afternoon. Thanks for the call. A couple questions. First, in terms of your asset quality, it continued to improve and cost of risk improved, and you said it can improve a little bit further. Although you did mention that NPL creation increased a bit in the quarter. Just trying to understand the dynamics there a little bit. If we do see some further improvements, how much? When does it revert to when we think about the cost of risk, how much lower can you get in that, and what's a more normalized level as the year progresses? My second question in terms of fee income.
You continue to see pressure in the cards and asset management and also in collections. Just curious, particularly, I guess, in the card income there, we did see a slight pickup in the quarter. Do you think most of the pressure has subsided from the acquiring business? Cielo volumes were up a bit yesterday. Do you think the pricing pressure has now subsided so it makes you more comfortable with the card fee income business there? Thank you.
Tito, thank you very much for your questions. Firstly, on the asset quality, we are pretty much pleased with the growth that we have had in individuals and SMEs. That pretty much represents the healthier possible portfolio that we could have. When you compare our provisions level, you're going to see that pretty much we are decreasing the provisions either in relative or absolute terms. That means that the new vintages are by far better than the old ones. We believe that the asset quality is improving, and it shall continue this way, at least until year end. Regarding to NPL creation, we see that the provisions for an amount that is higher than 90 days, it's improving dramatically. The volumes, we do not see them growing in the individuals and SMEs when you compare to a relative analysis.
Therefore, we understand that we shall get more and more alpha when you compare the return of these two portfolios when compared to the provisions. We understand that the spreads are pretty much there to stay. Regarding to fees, we can make some sort of split here among the three issues that you have pointed out. Cielo, asset management, and underwriting. First of all, on asset management, we had an adjustment in the management and performance fee, but mainly on management fees due to the decrease in the base rate of the country. Right? Pretty much most of the portfolio was comprised of fixed income funds. Therefore, the management fees should be adjusted to the new reality of interest rates in the country.
Now we are changing the mix more and more to equity funds, to 'fundos multimercados' that are hybrid funds, including debt and equity. We expect the management fees to stay there in fixed income and to have an improvement in management fees to those new asset classes. As the environment in the country is getting lower returns and interest rates, we understand that clients will get eager to get higher returns and that new base of investments. On underwriting, we also benefit from a stable economy. We shall see more and more IPOs, more and more equity and debt offerings. Again, on Cielo, we understand that they have the right strategy.
We understand that they have said that they are there for dominance. They are willing to keep their market positioning and therefore they have made the sacrifices in their increase in their sales force. We are positive with their strategy and we provide the full support to the senior management.
Okay. Thank you . Just, I guess one follow-up on the asset management fees. With the expected further reduction in interest rates this year, that's already priced in, you think, or could there be a little bit more pressure just from-
We do not see more pressure. Pretty much the pressure that we have had in the last couple of years was due to the decrease in the base interest rates. Most of the funds, they are mutual funds or fixed income funds. In this case, they have to make adjustments. From this point on, we have pretty much reached a balance in the economy, a balance in the industry, and we expect this to get stable in the mutual and fixed income funds, to have a higher and wider offering of equity and hybrid funds, which shall increase the management fees and we hope the performance fees as we do our job properly.
Okay, thank you.
I would like to remind you that to ask a question, you just have to dial *1 . Our next question is coming from Mr. Jason Mollin with Scotiabank. You may proceed.
My first question is a follow-up on fees. I get that lower rates have put pressure on asset management fees. Can you talk about competition and new entrants for asset management, and could that be another leg of pressure on fees? We've seen your checking account fees actually grow for the first half of 2019 versus first half of 2018 by almost 8%. We've seen some new entrants cutting, offering free accounts. Do you think that we could see pressure there as well? That's been actually one of the saviors to get to this 2% growth for the first half 2019, almost 2% first half 2019 versus first half of 2018. Maybe also talk about, it's a smaller number, but what's driving the growth in the consortium management fees? Thank you.
Thank you, Jason, for the questions. Well, let's start from your first one that is regarding to the asset management fees, right? We believe that we had some pressure from our competition in the last two years, pretty much because we were one of the leaders in this industry. We presented new funds with adjusted management fees. We were in the process of making the adjustments. Right now, we have made all the adjustments when compared to the whole competition. We have this database and these intelligence, and we do it on a weekly basis. We do not see that we are lacking any sort of competitiveness features right now. We believe that we are ready to grow and our management fees shall not decrease any longer.
We expect that we shall have an inflow of funds to be managed by BRAM, especially because of the interest rate scenario we have in the country. We have seen how much domestic investors are active and how much retail has been and becoming more and more important, especially when you see the brokerage houses' movements bringing high net worth individuals to this game. Regarding to checking accounts, Octavio has made this point earlier, that the way we see it is that we shall present competitive packages to every single client of ours, but always take into account their profile, their needs.
We believe that those fintechs or new competitors, when they enter into the market they are not providing all the full service, all the full package that we present. In this sort of market, we have been more and more competitive. A very good example of that is that for the first year in a row, we have been able to grow in the traditional platform the number of net accounts. Pretty much we are having more and more clients in our branches, in our traditional bank, as well as in our native digital bank. If we are prepared to lose clients for a native digital bank, we shall be losing to Next. Our experience is not showing that.
Our experience is showing that we are growing both. Both platforms are very strong, and they are trying to serve better and better our clients. That is the reason why we are confident we shall keep on growing. Regarding to pressure and growth, we believe that as economy gets back on track, we shall see clients get more and more banking services. We are very well positioned, as you could see in the first semester, not only to get market share from state-owned banks, but also from the other private health banks. We are positive with the scenario, and as Brazil gets the level of growth that everybody's expecting, we shall be there on a very leading position.
That's helpful. In terms of your digital strategy, and thank you for the update on the digital customers and initiatives, can you tell us where Bradesco expects to see the greatest impact of the digital transformation in the next year or two? Is it in costs or revenues? Can you help us quantify the impact? Thank you.
Okay. First of all, we all used to think that technology would eliminate jobs. Experience has proven the other way around. Technology allow us to have different jobs, different revenue streams, and allow us to serve our clients even better. That's what our focus is on. Our focus is on our clients. Digital channels have allowed us to grow our client base even faster, have allowed us to serve our clients with better products, and are creating leverage to the managers in our branches to be focused more and more on investments and on new business. That's where we think that the technology will drive us. The technology will not only drive us to reduce fixed costs, but mainly to improve revenues and to get more and more competitive.
That's helpful. Thank you.
Thank you.
Once again, if you would like to ask a question, please dial *1 . Our next question comes from Mr. Nicolas Riva with Bank of America. You may proceed.
Yeah, thanks for taking my question. One question on income taxes, if you can remind us where we are in terms of the approval in Congress of increasing income taxes for the banks. When do you think this will go into effect? Also, what will be the impact on your capital from the one-time adjustment of your net deferred tax assets? Thanks.
Thank you. Thank you, Nicolas, for the question. We know that further discussions, but there's nothing on track or in process right now. The information we get so far is that the government is willing to increase activity, and if they decide to increase income tax on dividends, they will reduce our tax brackets. Their willingness is to keep the money inside the bank and to allow us to be more and more productive to the country and to our clients. By the end of the day, it's going to be a good benefit for society as a whole and for investors, because you do not need to get dividends. You can get capital gains, and you can sell your stock in the secondary market. You're going to be much better off.
On top of what Leandro said, the discussion on the social contribution, as you know, is part of the pension reform. It was already approved in the first round in the lower house, should be voted probably early August in the lower house. The approval, if they keep it, should be maybe September, October, the increase in the social contribution.
Okay. Thanks, Carlos. One thing, in terms of the amount, because there are some headlines in Bloomberg, I guess, from your Portuguese call about BRL 6 billion.
Yeah. Basically, from the increase in the social contribution, if it happens from 40 to 45, there is a revaluation of tax credit, and the value of this revaluation will be BRL 6.4 billion. Our amount of tax credit increased BRL 6.4 billion. There's no impact on BIS from this revaluation.
Yeah. Thanks very much, Carlos.
Thank you all. We are finishing the call.
Excuse me. Ladies and gentlemen, since there are no further questions, I would like to invite the speakers for their closing remarks.
Well, thank you all. We'd like to thank you once more for making the time to be with us. We are going to be open for questions and discussions afterwards, as our Investor Relations department is here to provide you on daily information as they have always done. Thank you so much. Have a great day.
Thank you. That does conclude Banco Bradesco's conference call for today. Thank you very much for your participation, and have a good day.