Good afternoon, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Banco Bradesco's third quarter 2018 earnings results conference call. This call is being broadcasted simultaneously through the Internet in the 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 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 result of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements. I'll turn the conference over to Mr. Carlos Firetti, Market Relations Director.
Hi, everyone. Welcome to our conference call for discussions of our third quarter results. We have today with us our Chief Executive Officer, Octavio de Lazari Jr., our Executive Director and Investor Relations Officer, Denise Pavarina, and Vinicius Albernaz, the CEO of Bradesco Seguros. To begin our presentation, I turn to Denise.
Good afternoon, everyone. Thank you for participating on our call. I'll present the main highlights for the quarter, and then I'll ask Firetti to complement the numbers, and Vinicius Albernaz for the insurance group results comment. Going to slide three. The third quarter was a good one, even with the volatile environment that we face. We reached BRL 5.5 billion of net income, 13.7% year-on-year growth. Our operating earnings, with a 24.5% growth year-on-year, showed the improvement we had in our operations. Our return on assets reached 19%, an expansion of 100 basis points in the last 12 months. If we look at the other side of the slide, our loan book continues to grow with improving quality. The delinquency ratio is in one of the lowest levels we ever had. Our Tier 1 ratio improved 80 basis points in this quarter. Going to slide four.
I would also call your attention to some of the 3rd quarter events and themes that have a major impact in our activities, among the list that it appears in this slide. I would call your attention to the mortgage lending that we have had in the first nine months, both in commercial and individual loans. This is a very important activity for us. It provides a long-term relationship with our clients, the possibility to sell a set of products. We were a leader even when compared to Caixa Econômica Federal, that traditionally was the leader. Secondly, the termination of the deal that we did with Fidelity. We are set to unify card processing, and we obtain synergies that we ramp up, reaching up to BRL 200 million per year from 2020 onwards. We also have acquired 65% of RCB shares.
It's a recovery company with objective not only to enter in this business, that can be very interesting for us, but also to increase our credit recovery efficiency up to 25%. We are improving the cross-sell capacity within our non-checking account customers, about 40 million today, looking for a more worthwhile and long-term relationship with this client and completing our platform, digital platform with digital wallet, as well as providing a full MAE platform under open banking concept, where we have already 257,000 users. Going to slide five. We have been adjusting our branch network, and this will be a continuous process, looking for more efficiency and cost reduction. This is also possible due to the growth we've had in the number of digital clients, a growth of 35% only in the last two years.
We'll continue to close or transform some branches into lighter branches or cashless branches, which will maintain our presence and therefore our clients, with a lower cost structure. In parallel, we are growing our digital platform, and we should reach 1.5 million clients by the end of 2019. These platforms allow our account managers to cover three times more clients, increasing by 4% the profitability year-over-year when we compare to the traditional branches. As we analyze case by case, we still see great opportunities in maintaining our presence locally in several regions, as we had in the payroll acquisition transaction Paraíba state, as an example, where we experimented a 6% increase in the credit portfolio and almost 44% growth in deposits.
In slide six, following the master trends, we have developed a few years ago an innovation ecosystem that has brought already a number of good improvements and strong innovation culture to Bradesco. Important in the disruptive scenario that financial services are facing nowadays. Our inovaBra habitat has already 60 companies and 180 startups, which have a relationship with us, either via collaboration, ideas exchange, as well as through investment with our venture capital firm. We have also the most advanced initiative in artificial intelligence in the Brazilian financial market with BIA, where 7.5 million clients already interact with BIA. Besides improving our clients' experience and reducing costs, our clients already can perform some interaction with BIA in order to see their statements and call for positions, and very soon they will be able to do transactions.
Continuing the slide seven, the number of digital clients that have the transactions has been increasing fast, as you can see in this chart. We reached 300,000 clients in our totally digital born bank Next, and we should reach 500,000 clients by the year end of 2018. If you consider also the opening of accounts digitally as Bradesco, not only Next, we have already opened 365,000 accounts together. In terms of transactions we had over the last two years, a fast expansion for individuals, companies also do most of their transactions via internet or mobile banking. We can see also in the chart the increase in loan origination, both for individuals and for companies. In the case of the individuals, we more than doubled the volume of loans via mobile internet, companies, we tripled the volume in the last two years.
If we go to slide eight, as you know, we have a complete solution in payments for our clients. We have already distributed to our clients 85,000 co-branded POS with Cielo e Mais , 123,000 Stelo unit, both incremental to Cielo's existing client base to face the new competition environment. We believe we are developing the best solution for the small business, our website, Meu Negócio, offers a full range of solutions and has already 350,000 users. A client, a main client, can enter in this platform and start their business, getting the registers they need, get accounting, advisory, and do their financial transactions. It's a complete platform to those clients. We also have a complete range of alternatives in digital wallets, as we can see in the chart.
I would call the attention to the usage of QR code that we are doing that will enable almost 200 million cell phones that have the NFC function to perform payments, which is the majority of Brazilian population. In slide nine, one of the points that were addressed that really needed to catch up, we feel that we are very well now addressed in this sense. We design a new strategy focusing on improving the experience of our clients in wealth management and these 1.3 million clients that we have. We also redesigned Ágora and services that Ágora and Bradesco Brokerage House provides to our 300,000 clients. That includes for all of the groups, includes recommended portfolios, investments as a general view, and pension plans also in terms of advisory.
The service is focused on the persona, not the simple profile, but it's a little bit deeper than the profile. We have been investing in tools and qualified people besides increasing the team that's attending those clients, either locally or globally. The last page, just to remind that Bradesco adds a great amount of value to the society. 2018 up to September, we added 45 billion BRL. This is due to, as we see in this chart, dividends, the government contribution to basically taxes, workers' remuneration, and profit reinvestment as a whole. The Bradesco Foundation, which is our main shareholder, but is very inspirational for us and a pride because they provide the students study from kindergarten through high school. We have provided, through Bradesco Foundation, just in 2017, to 97,000 students.
I would ask Firetti to detail the financial results, and I will be here also to answer any questions. Thank you.
Thank you, Denise. Going now to the highlights of our income statement. We had, as Denise pointed, a good result. Our earnings grew 6% in the quarter and is growing 13.7% year-on-year. First nine months accumulated at 11.1%. In the quarter, we reached a 19% ROE. We think a big highlight is the evolution of our operating income that in the quarter is growing year-on-year 24.8%. I think the improvement in the operational income gives a very good assessment on how we have improved our operations over the last quarters. Going to page 13, our Return on Equity, as I pointed, we reached 19%. We had a very good evolution considering the horizon since the fourth quarter 2016. We believe we have reached a new level of ROEs, and we still focus for keeping spending.
We believe that the economy, improvement in the economy, and the opportunities that will arise from it with more loan growth and also the maturity of many of our initiatives will allow us to actually look for higher profitability level. Page 14, we have our loan origination. We have been delivering for a while, very good levels of loan origination growth. Individuals in the third quarter, year-on-year, we have an expansion of 29.5%. For companies, loan origination is growing at a rate of 40.6%. The reduction in the quarter in companies is more related to a strong base in the second quarter due to some specific operations, but we continue seeing a very good pace of evolution in loan origination. In slide 15, we have our extended loan book. Our total loans are growing at 7.5% year-on-year.
In the quarter, we grew 1.5%, excluding the effects impact from the loan growth, loans increased 1.2% in the quarter and 5.6% year-on-year. The majority of the effects impact is on the corporate portfolio. We see individuals growing nicely at 8.1% year-on-year. Most of the lines in the individual's book is growing at high rates, exception for cards where we are growing actually nicely on the portfolio of clients of Bradesco, our own clients. The slowdown happens more on private label where we are still analyzing some adjustments. We believe we should go back to growth soon. In terms of SMEs, growing at 8.3% year-on-year. We see a good demand, and we believe this portfolio will keep expanding. On large corporates, this growth is explained by effects, also some specific operations.
We have appetite for operations in corporate, but keeping a very high level of discipline in using our capital. We believe that in a longer period, we're going to see individuals and SME loans growing more than corporates. Another important thing on loan growth, we believe a sizable part of the growth we have been presenting is due to the fact that we have been improving our credit score models, bringing more data and having better information for models and taking decisions. That has been allowing us not only to originate credits with good quality, but also to originate more because it gives us the security to actually underwrite more loans. In page 16, our net interest income is shrinking 1.6% in the first nine months of 2018.
The interest earning portion, that is the base of our guidance, is shrinking 2.2%, almost in the middle of our guidance as we had indicated. In the quarter, we had an expansion of 4% with an improvement in the insurance line and also in the asset liability line, and also increase in the credit intermediation, mostly due to the positive impact of loan volumes. Page 17, the 90-day NPLs remain as one of the biggest highlights. Right now, we have a big improvement in the SME book, where we had almost 70 basis points reduction in NPLs, basically with some companies in the segment actually paying some Non-Performing Loans. We think the quality of the SME book should remain quite strong, given that the new vintages keep performing very well.
Also, we have a good performance in individuals, where we had, as I mentioned, the positive impact of better vintage, also helped by the improvements we have been making in modeling. In corporate, the NPLs are still high. We believe over the coming quarters, over the coming year, we can see improvements in this line. The performance there is sometimes driven more by a few cases, but we believe that with the economy improving and looking to the profile of most of our exposures, we believe trends should be also positive on corporates. In the slide 18, we have on the top our NPL creations versus the gross provision expenses. Our provisions represented this quarter, 121% of the NPL formation.
This is in large portion due to the credit recoveries we had this quarter, where we had some of the recovery based on new loans that we bring back to our loan book, fully provisioned, and that increases provisions in the quarter. The NPL formation itself is doing quite well, remaining as a percentage of the loan book, very well-behaved. In the lower portion of the chart, we have the cost of risk. Basically, we remain at that 2.7% of the loan book. This is close to the lowest levels we have seen. We believe cost of risk can continue improving over the coming year. We potentially can go to levels below the bottoms we have seen in 2014. Page 19, we have our renegotiated portfolio. The total renegotiated portfolio has an increase of 30 basis points, but this is mostly due to the recovery of loans that were off-balance.
This increase in the renegotiated portfolio didn't affect NPLs. That can be seen when you look to the red line, that is the renegotiated portfolio of loans that were still in our book. This portfolio actually decreased in the third quarter by BRL 600 million. We remain quite well-provisioned in the renegotiated portfolio. In page 20, slide 20, the coverage ratio over 90 days increased to 243% in the third quarter from 230%. This is a very high level of coverage. We think the coverage is not a driver for provisioning in our bank. Basically, this increase has to do with the improvement in NPLs, and the fact that we have a buffer of BRL 6.9 billion of excess provisions that has been remaining intact in our balance sheet. We don't have any defined intentions of doing anything for reducing proactively coverage, but it's something we can always discuss.
Fees and commissions. Basically, we had an increase in the first nine months of 5.6%. The lines that presented the best performance was the custody and brokerage, with 10.9% growth year-on-year, despite the fact that it reduced in the quarter. We keep growing nicely in checking accounts. That is partially due to the synergies we have been able to capture from our acquisition. Also, asset management that is due to the efforts we have been making in our wealth management business. Slide 22. Our total expenses are growing at 0.9% in the first nine months. This quarter, we had the impact of the collective bargain of banking workers that happened in September. We believe our costs will remain well-behaved in the middle of our guidance from -2% to +2%, close to 0. We had an increase in the number of employees this quarter.
This is mostly due to some projects we have been investing on. One of the most important of them is the Meu Doutor Health Clinics. That is a project that we believe can, over time, help us to keep the costs in our health insurance operation under control. We kept reducing the number of branches, almost 50 branches this quarter. We keep focused on adjusting our branch network, closing some branches, but also converting branches in points of service where we can keep the business and at the same time, having a benefit in terms of costs. In slide 23, our slide on insurance. The net earnings of Bradesco Seguros is growing at 11.6% year-on-year, despite the fact that in the quarter we had a reduction of 7.6%.
We believe in the case of insurance, it's always better to look longer periods, since we have some variations in the quarter-by-quarter that are sometimes due to some specifics of the business dynamics. The ROE for Bradesco Seguros is at 19.1% in the first nine months of 2018. We, in terms of performance of premiums are showing a reduction of 3% in nine months this year. This is due to the weakness we have seen in the market, especially in the pension business and also some adjustments we have been making, especially in our health insurance. We reduced a lot the operation with fleets of cars and trucks, and this is what is causing this impact in auto insurance. In page 24, we have the two important ratios for insurance.
The claims ratio, that is going down for the second quarter in a row, reflecting the improvement in claims in other segments. I would like to highlight the improvement, especially in health, that is a result of the measures we have been taking to control the claims and costs in the health insurance operations, like negotiating with service providers, package of service that has been helping us to reduce the overall costs of the operation. Also call your attention on the combined ratio that has been improving for many quarters, reaching 84.1%. This is a very important indicator of the performance of insurance company, and we are delivering well on that. In slide 25, our BIS ratio, we have an increase in Q1 by 80 basis points this quarter.
This is due to earnings retention, also the effects of Central Bank Resolution 4,680 that changed the treatment on the tax credits from tax losses. Basically, it gave us 40 basis points in capital. We keep originating capital organically quite strongly, and we believe we will keep adding capital over the coming years, even considering we are growing more. Considering FX, if FX remains in the levels they are right now or below, actually, that could also help additionally capital since we could consume the tax credits from tax losses that are still in our balance sheet. That would also reduce risk-weighted assets of that particular item. To conclude, on page 26, we have our guidance. We have been delivering in almost all lines. The only one where we are below is on the insurance premiums, with total premiums in the year dropping 3.1%.
We feel we can approach the guidance range in the fourth quarter, considering it is by far the most important quarter in the year. The importance there is apart from premiums, actually, we are doing quite well on the operational results of insurance. Now I conclude the presentation and open to questions.
Ladies and gentlemen, we will now initiate the questions and answers section. If you would like to ask a question, please dial star one. If at any point your question has been answered, you may remove your question from the queue by pressing star two. Our first question comes from Mr. Carlos Macedo with Goldman Sachs. You may proceed.
Hi. Good afternoon, gentlemen. A couple of questions. I think the first question is about your provisions. You mentioned the highest probable coverage that we had in a long time at 240%. When you look at the breakdown of provisions, most of that is coming from growth in the generic provisions. we don't have any growth in the excess provision, and the required provision is basically declined. My question is there room for you to That's large part driven by your perspectives on credit worthiness, particularly on the corporate side, as that's where the generic provisions are being largely situated. Is there any perspective in improving or changing some of the credit perspectives there?
In other words, is there a room for you to be more positive about the ability of these large corporate borrowers to repay their debts and therefore lower the requirement for provision on a generic basis, which is something you could do? Second question, could you talk a little about margins? The credit margin declined this quarter. We saw similar things with your competitors, Itaú and Santander. Is there something specific here, something that attributed part of it to regulatory change, or is this just more pressure from competition? Thank you.
Okay. Thank you, Carlos. On generic provisions, Carlos, this quarter specifically, as we mentioned, and we put in a note in the release we recovered about three credits that amounted BRL 920 million. These credits came from a court recovery process. When we recovered them, actually, we made generic provisions because after recovering, they are performing loans and making these provisions, they are generic. This quarter, we had about BRL 900 million increase because of this credit recovery. It is not really something that relates to the dynamic of the portfolio. It is a specific thing on which actually we don't have control. We have to follow this rule. Overall, the trends on provision in credit quality remain quite strong, and we believe we should continue having improvements going ahead. Regarding margins, basically we see spreads in some lines going down.
Nothing actually dramatic, but going down gradually, and that's fair considering that we had a big reduction in the cost of risk, and banks as a whole are looking for growing more. What we believe is, basically, we have in some portfolios, a very good capacity of origination, like in mortgage, our position, the way we operate in payroll loans. overall margins, we believe the mix, especially when we have much bigger growth in individuals than SMEs as opposed to lower growth to corporate, this mix effect should help our margins. We believe from the current levels, we believe margins are probably likely to stay flat or even improve a little going forward considering mix.
Well, thanks, Rodrigo. Just going back to the first question. Even if you exclude that BRL 900 million, you're still up year-over-year on the generic, and I understand that it's a year-over-year look. Going out, what conditions would you need to see to start taking a more favorable view? That, I think, is the key question. Do you need to see GDP growth accelerate? Do you need to see pension reform? What should we think about that would lead maybe some reductions in the provisionary requirements for some of your corporate clients?
Basically, we need to see this client paying part of the debt. Actually, we have to see their actual credit capacity or credit quality clearly improving. You have to remember, we had a big crisis, that the corporate segment was especially affected. There were some renegotiations and most of the cases we got, we were able to strengthen our position in terms of collaterals. We think in some sectors, even though we see good signs that the companies are improving, we need to see much clearer signs that actually the companies are totally turning around before actually reviewing some of the provisions.
Okay, perfect. Thank you.
Our next question comes from Mr. Marcelo Telles with Credit Suisse. You may proceed.
Hi. Hello, everyone. Thanks for the time and congratulations on the strong results. I have a couple questions. The first one, now that we have elections behind us, how are you assessing your credit risk models? Do you think there is a chance that you might increase your risk appetite, with elections now behind? Is it possible to see loan growth for Bradesco, let's say, going to next year, growing it at double-digit rates in a scenario of a more benign economy, considering that this year you guys are already at 5.6% FX adjusted? That's my first question. The second question, regarding the threat of fee tax, how does Bradesco see it playing out for you? We know there has been some pressure on fees. It's very clear. I think all the banks that have reported so far, showing some fee pressure.
Do you think that's what we're going to continue to see down the road, or you anticipate potential threat on the credit side as well? Thank you.
Okay.
Hi, Marcelo. This is Denise. Starting by the risk appetite, we increment marginally the credit according to our models because they are able to capture the better performance of our clients. So we increase the appetite according to those models show, so we are not doing anything that too aggressive, but we follow the market. As you know, we like to lend money, we like to offer service to our clients, and so we will use all the instruments we have to increase the level of credit we have in a safe way. In terms of loan growth for next year, of course, we need to understand how this growth of the country will happen. Normally, we see elasticity being twice the GDP, so we can say something around 8%.
We are not giving guidance because this is something that we do in the beginning of the year, but it's possible, likely possible to have a number like that. In terms of fee pressures, you were asking about the competition that's affecting you and also the credit usage. Is that what you asked?
Yeah, exactly.
Of course, we see a lot of movements going around. We haven't seen in credit any special movement that could call our attention. In the other side, we are preparing all of our platforms to be able to provide credit to our clients in a more cheaper way for us, in the sense that we can offer the best price, best condition to our client. We don't see, but we are preparing ourselves to any challenge that we have to face in the market.
Marcelo, let me complement your questions. Regarding growth at two digits. For the full portfolio, it's hard to say. The corporate book could be growing less given that part of what's going to be, the reason it's going to go through capital markets, investment banking. In some portfolios, in maybe individuals, maybe small companies, we think actually there's conditions of actually accelerating growth. We have, as Denise said, risk appetite. Apart from that, as she mentioned, there's a big improvement in the credit models. We have been able to, given this improvement, given a better assessment of credit quality, we can approve more. This is part of what's going on. There is very important projects being finalized soon that could help us even more on that better assessment of credit quality. Therefore, even though we are not lowering the bar, we are actually approving more.
On fees, complementing what Denise said, this quarter, when you look to the performance, it was not really the best quarter in terms of fees, there are some specifics like investment banking. It was a particular weak quarter. There was not much activity, given the scenario. We think going ahead, this line can be a very strong one given what we expect and our position actually in the market. The fees are also being impacted by the cards line, where there's a lot of competition, especially in the acquiring business. We believe that with the acceleration of the economy, we're going to see the positive impact of volumes.
In terms of asset management, actually, given what Denise mentioned, our efforts in terms of wealth management, we are doing a lot of things that in our view, can actually allow us to grow more than the market, given that we can actually go more towards, we believe is our fair share in this market. I think, I wouldn't say necessarily the fee line is going to be very weak. We still believe we can have some decent growth there.
All right. Do you want more?
Yeah. The letters of credit and guarantees line, it was mostly due to some redemptions of some letters of credit. Maybe in a stronger economic activity, potentially we can have that line actually expanding. It's sometimes related to the investment bank activity.
That was very helpful. Thank you.
Our next question comes from Mr. Jason Molins with Scotiabank. You may proceed.
Hi, thank you very much. My question is on the balance sheet. Specifically this quarter, we saw another negative impact from the mark to market of the available-for-sale securities of about BRL 600 million, according to my calculation. This followed last quarter's BRL three and a half billion hit that doesn't go through the income statement. I'm just trying to understand. I understand what the mark to market of available-for-sale is. I'm looking in your balance sheet, I do see a large increase in the bonds and securities long-term of about BRL 40 billion, I see short-term reduction in BRL 12 billion. Just trying to understand the movement. In the third quarter, we didn't see. I'm just looking at long-term rates, a big decrease that we've seen now. Should we expect the book value to rebound if the markets stay where they are?
The way I'm really looking at this is to try and understand the trend in return on equity, because it is enough to change our calculation of that.
Okay. Thank you for the question, Jason. Basically, as you mentioned, the mark to market is related to the fact that the interest rate curve still moved up in the quarter. As you said, the improvements we saw in the scenario were not fully captured in the end of the third quarter. With the reduction in rates and better market conditions, yes, the values of the security increase. During the quarter and also last quarter, as a measure to protect our balance sheet in a scenario of volatility, we transferred some securities to held-to-maturity. Basically, with that, some of the mark-to-markets will not flow back immediately with the improvement in the market. We don't feel this is a problem because the nature of those securities, or the maturity is relatively short.
We will accrue the interest on that, we capture the higher value of those securities as we converge to maturity. The part of the book that is still available-for-sale, yes, we can see improvement in mark-to-market.
Would you say that the majority? I'm just looking at the short-term security declining BRL 12 billion and the long-term BRL 40. That wouldn't be the switch from available-for-sale to held-to-maturity in this case. That's the impact that I guess is going to impact the future valuation adjustment. What's going on? Is this a strategic shift in the balance sheet to put more bonds and securities there? Is this coming more from insurance than from the banking operation?
There wasn't any specific switch this quarter, Jason. Maybe I have to look further on the details of what you are saying. Basically, structurally, we didn't do anything new this quarter, apart from actually this change of part of the portfolio to held-to-maturity. Sometimes when we acquire a position, it's still in trading, it goes to other lines. I think it's better if we just talk and you show me specifically what we are referring to, I try to get an explanation.
That's very helpful. Thank you. We'll do that.
Thank you, Jason.
I would like to remind you that to ask a question, you just have to dial star one. Please hold while we poll for questions. Excuse me, ladies and gentlemen. Since there are no further questions, I would like to invite the speakers for their closing remarks.
First of all, I'd like to thank all of you for your time taking the call and to say that our balance sheet this quarter, and if we look at the nine months, have showed the efforts that we have been doing to work in several areas. As Octavio likes to say, we don't have a silver bullet. We do work in several lines, in several fronts in order to include the results, reducing costs, which will continue to be our effort. Bradesco, as being a bank that has a branch network spread throughout Brazil, is well prepared to take advantage of the growth of the economy if it comes for the next year. Thank you very much, and have a nice weekend.
That does conclude the Banco Bradesco's conference call for today. Thank you very much for your participation, and have a good day.