Good afternoon, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Banco Bradesco's second 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 six star zero to reach the operator. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the company.
They involve risks, uncertainties, and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Carlos Firetti, Market Relations Director.
Good afternoon, everybody. Welcome to our conference call to discuss our second quarter results. We have today with us our Chief Executive Officer, Mr. Octavio de Lazari, our Executive Vice President, André Costa Carvalho, our Executive Director and Investor Relations Officer, Denise Pavarina, and the CEO of Bradesco Seguros, Vinicius Albernaz. I turn now the presentation to Denise.
Good afternoon, everyone, and thank you for participating in this call. I'll comment some highlights for the quarter and then Firetti will present the figures in more detail. We start on screen number two. The net income reached BRL 5.2 billion in the second quarter, a growth of 1.2% if we compare to the previous quarter, and 9.7% compared to the second quarter, and also to the first half of 2018. The operational results had a very solid growth of more than 25% if we compare annually. The return on shareholders' equity in the quarter was 18.4%, in the first half, 18.5%. This result reflects in part the economic movement, but more than that, the adjustments that we made in our operation in spite of the market volatility that we had in the late May and June.
The extended credit portfolio presented a growth of 6% in the quarter and 4.5% in the annual comparison. A very good performance in both individual and corporate segments. In the corporate segment, the growth was 7.5% in the quarter, favored by some specific operations that we had in the segment of large corporates. Individual segment, what was very interesting was individually online. We refer this for the mass market portfolio of retail and current that are growing 9.5% in the year. As we have already anticipated in previous calls, we highlight the positive evolution that we have in credit quality. Delinquency ratios are decreasing, and in terms of the reduction of 50 basis points in the quarter and 100 basis points in relation to the same period of last year.
A consequence, the extended loan loss provision expenses had a further reduction with a drop of 11.7% in the quarter, and 36% if you compare annually. It's worth mentioning that expenses for both the loan loss provisions and impairment showed a reduction. The improvements in the latter quarter allowed us to reduce our guidance for loan loss provisions expenses, as well for them, that ranges now from BRL 13 billion to BRL 16 billion. We believe that at the end of the second half, our delinquency ratio will be back to the pre-crisis level. Operating expenses continue to perform well in comparison with the first half of the previous year, despite inflation that we had, the wages increase, and this is mainly a reflection of the adjustments that we made in our operation, our discipline regarding costs.
You know, we are always trying to optimize our operation and looking for cost reduction, and this is made mainly through the usage of technology. The physical presence optimization takes into consideration the convenience of our clients, the necessity of each place and then results in adaptation or reduction of our units. We intend to reduce for this year a total of 200 branches. If you look to the revenues compared with the fee and commission, they presented a growth of 3.7% in the quarter and 6.1% in the six months comparison, reflecting the revenue synergies in the sector and a greater offer of products to our customer base. I think I will show that we have done a very important work on expenses in the past, and now we can see the synergies on revenues starting to come.
In insurance operation, it will be commented by Vinicius Almeida Albernaz right after my presentation. I'll leave to him. Regarding our capital index, we have a reduction of 100 basis points in this quarter due to the volatility of the market, which impacted our shareholders' equity in the mark-to-market of our available for sale. We will explain the sales behavior. These are the main topics related to the results, now I would like to take your attention some of the initiatives we are putting focus on now, they will boost our customer bases and our businesses. There will be four of them. First of all, the Individual Micro Entrepreneur initiative. In this segment, we are providing a new product for our customers. We just launched a website called MEI, which stands for Individual Micro Entrepreneur.
In addition to the sale offers related to its product or acquired machine that's provided by Cielo. Next, as you know, our digital bank that focus on customers that seek for full digital and differentiated experience. We are very happy with the results. This quarter Next has reached already 180,000 acquired accounts, and our target for this year is to reach 400,000 new accounts. Bradesco POS. We distributed Bradesco POS to our acquiring customers with a package that differentiated our package and services that merge invention and other services provided by Cielo. Something that's very interesting that we are focusing on is the creation of what we call non-current account holder department. Actually, they are our clients. Many products that we provide but they do not have a cash account with us.
We are giving a different focus to that, and this department is going to develop many offers to explore and to attend better those clients. They have at least one of our products of the group as a whole. In a nutshell, we feel that the good results show the robustness of our operation. Considering these products that we just mentioned, we expect a very interesting future as the economic recovery is behind. Now I will give a chance to Firetti to provide the sales information this year.
Thank you, Denise. Starting on slide number three, the adjustments on our recurring net earnings. Basically, the main adjustment as in the previous quarter was the goodwill amortization. We amortized BRL 613 million. Our expectation for the year is BRL 2 billion, therefore, we expect a reduction in the level of amortization in the second half. In slide four, only a few comments on this slide. I will go into detail on the lines on the following slide. Basically, return on equity of 18.4% in the quarter. Our operating income show a strong growth of 25.7%. Return earnings grew 9.7%. Basically, as you can see, we have a higher tax rate this quarter. This is related to the creation of tax credit due to the tax variation that reduced our ability to consume tax credit for previously constituted at 40% and had this impact on the tax rate.
We can discuss that more in detail in the Q&A, if you wish. Going to slide number five, our net earnings, as I said, grew 9.7%, 32% of the results in the first half came from insurance. In slide six, we have some details on our net interest income. Our net interest income in the first half had a reduction of 3.8%. In the quarter, we had a reduction of 3.3%. We have a nice increase in credit intermediation, already reflecting the increase in volumes in our loan book. Also the overall favorable mix mostly coming from loans in the retail operation that have better margin. In the insurance margin, we have a reduction in NII for insurance, mostly due to the differential of indexation ratios in our assets and liability management for an insurance company.
Basically, we have a very high wholesale inflation that corrects our liabilities, while our assets have mostly bonds indexed to retail inflation. This differential represents a higher cost for us that reduced the margin for insurance. We can say this is a temporary impact, provided, as normally is the case, retail inflation comes higher than wholesale. Basically, we don't have this impact that is normally the case. In the asset liability management and others line, basically, we had the impact for results in the bond portfolio. I will talk a little bit more about markets when I talk about capital. We had this quarter, looking to the quarter isolatively, a volume in the credit margin, basically as a tab reflecting most of the better mix. In slide seven, we have our loan book. Focus on the bottom part of this slide, the extended loan book by segment.
You can see that we are growing above 9% in the retail portfolios, basically retail and prime, while we have a pick-up in growth for corporate. This is, as Denise mentioned, mostly due to effects. It explains a small part of this, mostly due to some specific operations in the corporate segment we originated this quarter and helped growth. We didn't change our view that corporate probably will not grow that much in the short-term, mostly because companies still didn't start an investment cycle. We remain with the same view. We believe retail should do better than corporate loans going forward. We had the first quarterly growth in the middle market portfolio for some time this quarter. Basically, we had an increase of 6% in our extended loan book in the quarter, 4.5% year-on-year. On slide eight, we have our extended loan book.
You can see there the lines there are growing more continuously. Payroll loans, where we have a big strength coming from the origination of payroll loans in our own branches, and also getting stronger in private sector payroll loans. Real estate financing, car loans. We have mostly this quarter an increase in all middle lines in the portfolio. In slide nine, we have the origination per business day. Our origination per business day grew 23% in the quarter in the annual comparison. For companies, we had an increase of 35.6%. In slide 10, we have our delinquencies ratios. It's one of the big highlights of the quarter and has been one of the highlights for the previous year. The delinquencies ratio of 90 days dropped almost 40 basis points this quarter.
We had improvement in SMEs that, despite the big improvement, still remains above the bottoms we have seen in the past. We believe we may see still a gradual improvement there. Individuals, we are getting closer to this part of bottoms, remember that we changed the mix, so it's possible to see some improvements there. In corporate loans, despite the improvement, it is still high. Probably it will take a little bit more time to see the delinquencies ratio there going back to the bottom that historically were around 0.5%, mostly because this segment tends to be impacted by specific cases or a few specific cases, even though most of the portfolio is in a much better shape. In slide 11, we have our gross provisions without considering impairment and the recovery compared to the NPL formation.
Our new provisions represented 112% of the NPL formation, denoting the consistency in our provisioning. In this lower part of this slide, we have our extended loan book in relation to the portfolio. We reached a ratio of 2.7%. It's a very low level, and it's basically in our view, the provision expenses will remain very well behaved. In slide 12, the NPL creation per segment. The total NPL creation continued reducing this quarter. We had reductions in corporate NPL creation, SMEs. For individuals, it remains stable this quarter. In slide 13, we have our coverage ratio. We reached 230% coverage over the 90-day NPL, a very healthy level. We believe this coverage will go down when we grow. With growth in our portfolio, we don't tend to revert additional provisions we have constituted in the past at this moment. Page 14, we have our renegotiated portfolio.
We had an increase in the total renegotiated portfolio by BRL 700 million this quarter. This is more like a, not a one-off, but it's driven mostly by the renegotiation of a few corporate loans. It's not a trend. These loans already had provisions, so basically it doesn't impact at all the dynamics for the extended provision expenses in our portfolio. It doesn't change the trend for NPL. Slide 15, we have our fees and commissions. Our fees grew on a year-on-year basis in the second quarter at a rate of 8.3%. Good performance from checking accounts, asset management from brokerage, and also investment bank that is clearly one of the big highlights in the quarter. The checking accounts performance, growing 8% in the first half, shows we have been able to capture more synergies from our acquisition, especially in the current account fees.
In slide 16, our total costs grew in the quarter year-on-year to 0.6%, for the first half, 0.1%. We had much higher increase in the administrative expenses, mostly related to the concentration of marketing expenses in the quarter, but also some impact from third-party services. We had this quarter an increase, a reduction year-on-year in personal expenses, 0.8%. The structural part of personal expenses dropped 4.1%, while the non-structural grew 13.9%. The main reason behind that are the very high level of provisions for labor lawsuits. This has been high because of the higher numbers of lawsuits filed against us due to the reduction in the number of employees we had. Recently also, the average provision we have been making for each case is still on a higher level.
We already see a lower flow of new lawsuits, and we believe as time goes by, since the provisions are made on a moving average, also the provision per lawsuit will be lower. We believe in the second half, the provisions for labor lawsuits can be materially lower, and that should help personal expenses. We continue in terms of branch network, we have a small reduction of eight branches. We continue with our target of closing around 200 branches in 2018. The efficiency ratio, 40.8% this quarter. The coverage ratio, that is basically fee revenue divided by cost, reached 8.3%. This is the best level we had for many quarters. I turn the presentation to Vinicius from Bradesco Seguros.
Thank you, Carlos. Good afternoon, everyone. The first half of 2018 figures show that the Brazilian insurance market is still feeling the effect of the general economic environment, with growth well below its potential. Despite this challenging scenario, the main performance indicators of Bradesco Seguros in the first half were positive. Our claims ratio showed an improvement of 70 basis points in the first half of the year in comparison to the same period last year, reaching 74.4%. In a similar manner, our commissions ratio improved by 100 basis points, reaching 8.9%. Our efficiency index, which completed its ninth consecutive quarter around 4%, has remained as the best of the market among the large insurers in Brazil, reflecting a strict control of our direct costs. As a result, our combined ratio has also shown an evolution of 100 basis points, reaching 85%.
In the same direction, despite a lower Selic rate and an increasing market volatility, our first half financial results exceeded approximately 5% than one observed in the same period of 2017. This strong operational performance has allowed the insurance group's net income, which totaled BRL 2.145 billion in the first half, to grow by 19% in comparison with the same period last year. The adjusted return on shareholders' equity was 19.6%. Our technical provisions exceeded BRL 252 billion, corresponding to around 27% of the Brazilian insurance market, of total provisions of the Brazilian insurance market, with total financial assets reaching BRL 280 billion. The total amount paid in benefits reached BRL 29 billion, corresponding to more than 230 million for working days. These figures translate the strength of Bradesco Seguros, whose revenue has maintained our market share around 25%.
We understand that insurance markets undergoing major changes, both in Brazil and the rest of the world. Changes that range from the demographic profile of the population to the introduction of new technology and forms of relationship with the client, in addition to the rise of a hyper-connected generation with very specific perspectives. We have been working with special focus in improving our internal processes, aiming not only at the development of new products, but also the continuous improvement of our pricing models, acceptance and management of claims, among other key aspects of essential to the insurer's activity. Therefore, in spite of the challenges, we still have the confidence we had at the beginning of the year. If on the one hand, the reduction of the Selic rate challenges our market concerning financial results, which is an integral part of the insurance business.
On the other hand, the modest recovery of the economy shown in the first half tends to create favorable conditions to support operating results going forward. We will continue to pursue gains of scale, administrative efficiency, while maintaining the excellence in our services, also promote the continued evolution of our multi-product distribution channels. Our ambition is to have a strong presence in all channels, delivering complete insurance solutions to all our generations of clients throughout their lifetime and protection needs. Thank you very much.
Thank you, Vinicius. Jumping to slide 19, we have our Basel ratio. We had a quarter variation in our capital by 100 basis points. As you can see, the main drivers for the variation were the mark-to-market in our available for sale securities portfolio that are mostly securities from our active target management and prudential adjustments that mean tax credit that we generated this quarter. On mark-to-market, only I remark here, the duration of our positions in this active target management for the bank are very short. They are limited to the horizon of the monetary policy. Our focus here is towards the accrual of interest from the position. As we get closer to the maturity of those securities, and considering that Selic didn't change, we continue with a positive accrual and the mark-to-market naturally reduces for the securities.
This should very soon go back to equity. I remind you our strong capacity of generating capital organically from our retained earnings. That is enough to offset even strong growth in risk-weighted assets as we had this quarter. We feel very comfortable with capital. Finally, in slide 20, we have our guidance. We revised the guidance for two lines. Insurance premium, we reduced the range from 4%-8% to 2%-6%, reflecting the fact that the market has underperformed in terms of growth and premiums. We feel we are in a better position to meet this guidance now. We revised the guidance for the expanded provision expenses from BRL 16 billion-BRL 19 billion to a range of BRL 13 billion-BRL 16 billion. We target here the middle.
If you annualize the first half, we would have BRL 14.6 billion in provisions, we are very comfortable on that. On the other line, for the extended loan book growth, we target the middle. For NII, we are comfortable with the middle, the -2% in this range, 0% to -4%. Fees and commissions the middle, operating expenses, we believe we can be on the mid-lower portion of the guidance for full year 2018. With that, I close my comments on the presentation and open for Q&A.
Thank you. Ladies and gentlemen, we will now initiate the questions and answer section. If you would like to ask a question, please dial star one. If at any point a question has been answered, you may remove your question from the queue by pressing star two. Our first question is coming from Mr. Carlos Macedo with Goldman Sachs. You may proceed.
Thank you. Good morning, everyone. I have a couple of questions. First question, thank you for updating the guidance. I want to talk a little about the margin growth guidance that you put, where you didn't change 0% to -4%, -3.8%. I think it's two questions around that. First is on the loan growth. You're moving to the upper side of the range here on the loan growth guidance and from everything that you've detailed from the origination, your retail book is starting to grow at a probably stronger pace in the second half of the year. Do you think there's upside to this growth on the retail side and could that have an impact on your margin, given that you had a negative effect on insurance this quarter and that you're going to have a better mix in the second half of the year?
Do you think that's something that could offset some of the headwinds you faced earlier in 2018?
We totally agree. We believe the mix can really help us. I think it started to help when you look on the quarterly variation. We already have an increase in the credit margin this quarter. Credit margin can improve. Basically insurance, we don't call it one-off, but the differential between wholesale and retail inflation shouldn't repeat. Basically the insurance growth should normalize and also the ALM, others also have room for normalize. Yes, we think mix can help. The growth in corporate this quarter, it's kind of, as I said, based on specific opportunities. We hope we have those same opportunities during the rest of the year, but most likely we go back to the same path in terms of growth for corporate as we had before, and maybe better, more to the end of the year. While the strength in retail probably will remain.
We always thought that we should be able to grow high single digits for this retail performance and we are there.
Okay, thank you. Thank you for that.
Our next question is coming from Mr. Jorge Kuri of Morgan Stanley. You may proceed.
Hi, good morning. Two questions, if I may. On your guidance for provisions that you reduced considerably. You are seeing faster growth in consumer loans for the second half, as you mentioned. When you initially set the guidance, I think the expectation for GDP growth in the beginning of the year was around 2.5%-3%. Consensus is probably around 1.5% now, so the economy is growing less. Unemployment is having improved but market expected early on, so it does seem that the macro environment is a bit worse than what you set your guidance on, and you're actually growing faster. We did see bad debt formation tick up quite meaningfully this quarter. We calculate 25% quarter on quarter.
Just want to understand what's allowing you to grow more provision less in an environment where NPLs, bad formation is picking up and the economy is growing much less than you expected early on this year. That is question one. Go ahead, sorry.
First, let's start with your comment on bad debt formation. I understand you include renegotiation in your bad debt formation calculation. That is the only difference to our calculation. That is basically the variation of NPL plus write-offs. As I pointed, the bad debt, the increase in renegotiations this quarter is due to very few companies we renegotiated for which we mostly have provisions. These renegotiations don't even impact the provisions, despite the fact that, yes, the renegotiated loans leave the NPL. In the retail and SMEs, actually, there's no impact from renegotiations and the trend you see there in terms of NPL creation, NPL is a real one. Systematically, I would say, we are doing very well in credit quality. Your point about GDP, it's fair. We started the year expecting something at 2.5% growth. We are seeing 1.5%, but it's interesting.
We saw very strong months in April, May, and June in terms of origination, very good quality. The businesses we originated were very good. We didn't reduce our credit standards. Basically, we still see demand. Maybe we have some impact going forward, some slowdown in the origination. We haven't seen that so far, but it may happen. We continue optimistic that actually, considering we are now very close to a very important event, and after that, we believe we may see a real acceleration in the economy. Eventually, we don't see a material deterioration in our world.
Just to add something, Jorge. What we see is that the team is much more prepared. We do have systems that put in front of the manager the offers they should do to each client in each moment. The credit can be contracted out via mobile, via ATM, internet banking. We are creating conditions to the client to access the credit easier, and also for the manager to offer in a more faster way, in more efficient way. Adding to what Firetti said, I think the two things together, and there are specific lines where we are growing faster, like the real estate, the auto financing, and the salaries related loans. Those are very focused by the manager to offer to our clients.
Great. Thank you. My second question is on net interest margins. I understood from your comments that you expect a better performance in the second half from an improvement in your lending mix and normalization of the insurance product. Could I ask what is the duration of your overall loan book? Because if yours looks similar to the overall industry, which is somewhere around 12-18 months, that means that credits that are going to come due in the second half of the year were issued with a level of Selic rate that was closer to 10% versus the 6.5% now. Your back book, front book repricing seems a bit challenging to expect a normalization in margins. Could you talk about that, please? Thank you.
You are right. Our loan book is about one year and a half, mostly. You are right, there is a repricing of the portfolio and the spread really when you look line by line, in some case, went down. The key thing here is the mix. Actually, we are growing more in retail loans and less in corporate, apart for this quarter that was, as I said, due to some specific operations. We are growing in retail, we are growing more companies than individuals. Basically, more companies have pretty good margins. Basically, this is the point. The substituting corporate loans for retail loans, even though you are right, there's this effect of repricing help margins together with the pickup in volume. Sorry, that will help, NII.
Okay. Thanks for your answers. Thank you very much.
You're welcome.
Our next question comes from Mr. Jason Mollin with Scotiabank. You may proceed.
Thank you. My first question is on loan growth and origination. You do show on slide nine of your presentation the origination by business day for individuals and companies. I think for individuals, it's pretty easy to understand. Can you help us follow what happened for companies because of the 17% devaluation Q on Q in the quarter? You do provide some details on foreign currency loans that we've looked at, but specifically, what would the origination be like if we exclude the impact on FX?
I don't have that information, Jason. I guess on origination, probably the impact is not really material. We can try to do something. There's an impact from FX in the overall portfolio growth. That I can give you. Basically, we do nominal terms 4.5%. Without the FX impact, it would be 3.2%.
That's helpful. I get it. I guess just comparing year-on-year, if you're comparing, I guess, in the quarter, I'm wondering if part of this origination. Clearly, I think part of the year-on-year-
is probably just looking at such a different level.
Yeah. It's fair to assume that probably it would still be growing anyway, but it's fair to assume that it may have this impact.
Thanks. My second question is on, you mentioned the book value evolution or the negative impact of the mark-to-market. You said that the duration of the security book is very short and that as these bonds mature you could actually have the losses reversed. Maybe some more color. What's a big hit in the quarter? We didn't see book value growth even after the BRL 5 billion in recurring earnings after we look at this mark-to-market. I guess we had this impact of prudential measures that we saw that also you show impacting the capital. If you can give us some color there as well. Should we expect, therefore, we don't know what's going to happen with volatility, but if you were to sell these securities available for sale, they would obviously, you would realize the loss.
No, yes. You realize the duration of that, as I said, it's not really long. For specific reasons, we will not give the duration, but we can say it matches the horizon of the monetary policy. We think those securities are really part of our liabilities management policy, how we invest, especially if it has [offset] some liability, we should take it to maturity. First, the accrual on that position is still positive despite the fact we had a negative mark-to-market given that actually pretty recent move. Basically, as we get closer to maturity, the mark-to-market, even if prices remain, rates remain the same level, actually the mark-to-market reduces. The tax credit didn't impact equity. It impacts the regulatory capital for BIS purpose, but it doesn't impact actually shareholder equity. It's only-
Where was that booked then? That was booked in that, we have that line, that prudential
You have that in the capital calculation. In the table we show the calculation of the capital for BIS. Tax credits go on the balance sheet, it's there, not in the equity. Actually, it reflects it in the equity somehow, but it does not affect shareholders equity. That mark-to-market, yes, is one of the shareholder equity components.
Okay. Thank you.
Our next question comes from Mr. Marcelo Telles with Credit Suisse. You may proceed.
Hi. Hello, everyone. Thanks for your time. I have two questions, if I may. The first one, I'd like to dig a little bit deeper on the insurance margin for the quarter. Now, as you mentioned, the margin was negatively affected by the mismatch between IGPM and IPCA. I just try to quantify that impact. Looking at your financials, I just want to confirm with you if the part, there is this mismatch is the BRL 22 billion of NTNs in your books as held to maturity in the insurance business? Because if that was the case, this 2% differential pretty much represents close to that BRL 440 million of NII in the quarter, which is quite meaningful. If you have those IGPM and IPCA aligning down the road, you could have a very significant pickup in NII down the road.
Do these calculations make sense to you, or I'm looking at something incorrect here? The second question is, your insurance operation, when you look at the operational result, at your insurance result and excluding, of course, the financial result, there was a very significant improvement in the quarter. As you mentioned, claims ratio improved, and it seems that a lot had to do in the health insurance. Going forward, do you think there is room for you to improve further? Where do you think you are in terms of claims ratio vis-a-vis what you see as the more recurring level? Thank you.
Okay. I'll start the answer. The mismatch in the insurance is really in terms of IGPM IPCA, it's much, much smaller than that. For specific reasons, we don't disclose, but the mismatch is more in the range of a couple of billions than actually the number we had. When you look to the position in inflation-linked bonds, you actually look the management of reserves and also the capital of the insurance company, not really only the management of this actuarial mismatch that's obviously on the pension business. You are right, as this is only to explain the nature of this negative impact from this mismatch, even though I'm kind of saying the magnitude is not the one you mentioned. Basically, we have liabilities in the insurance company, mostly related to traditional pension. We have assets covering, and this liability for part of the portfolio is IGPM plus something.
We had that with bonds, and basically, some of these bonds are IPCA with their inflation plus something. We have part of the liability covered by matching actually, but there is a gap. Basically, when IGPM is higher, we have expense that is higher than the revenues from the inflation-linked bonds. This is the source of this mismatch.
Should I say, Marcelo Ruiz is here. If I may add, of course, the government no longer issues government bonds linked inflation-linked to IGPM. In the past, we used to have most of our liabilities covered by, paid by government bonds inflation-linked to IGPM, which they have a natural schedule of redemptions. We had a big redemption back last year. That mismatch is part of our life since the government no longer issues that. Of course, at this point with this current mismatch weighing on the margin. We have to remember that, I think for a couple of years, the opposite happened. This is something that over the long term tends to converge, but there may be some periods of impact. Also, as Pedro said, part of the portfolio of inflation-linked bonds to IPCA, we also cover other liabilities.
We have liabilities linked to general inflation index as well, as well as long-term liabilities that in health or infrastructure warrant some sort of asset in this situation. As for your question on the operating results, I think that it's not only auto. Auto is an important part of that. As I mentioned, underwriting discipline and improving the mix of auto and P&C in general, looking for better results and better returns in that portfolio. Also, I have to say that we had a significant improvement in the claims ratio of the health business.
This is a trend that we believe continues the trend of the first quarter, and this is very positive, and it's caused by an improvement in employment in the current environment situation, but also is the result of several measures that were undertaken by the company in the last year or so in order to control losses, to control claims, and reflects a lot of those operational gains that we believe will be persistent going forward.
It's very helpful. Thank you.
You're welcome.
Our next question comes from Mr. Thiago Batista with Itaú BBA. You may proceed.
Yeah. Hi, guys. I have just one question about the insurance results, but this time the operation side of the insurance results. The results of insurance improved a lot this quarter. It's nothing wrong, this was the best quarter ever for the operating insurance results. Do you believe this level is, let's say, recurring? We can see this level of insurance results in coming quarters similar to this one. Also, if there is any one-off impact that explain this very strong insurance result.
There are some trends that we need to mention are, in our view, sustainable. The improvement in health, basically we did a lot of homework to really control costs. There's the stability of unemployment ratio. If we remember, we always said that in the increasing of unemployment, basically, we had an increase in frequency due to this, even though unemployment is now going down, actually more stable. We have benefits on insurance, on health insurance. We also have improvements in claims in other lines, also we have some improvements, or at least we have been keeping our administrative efficiency ratio.
Yes. I think, Thiago, it's important to mention that it's coming also from lower commercial ratios, expense ratios, commercial commission ratios, lower 50 costs. Also, you have to remember that this is a counterpart of the financial side. In insurance business, when the financial results go down given lower interest rates and this scenario, it's natural that you have an improvement in the operating results. I think you should take into account the two quarters combined compared to last year, let's say, the first half of 2018 compared to 2017. Of course, going forward, we believe that these improvements in processes that we have undertaken and as well as controlling of risk and discipline on the writing policies will continue to allow us to have better operating results.
Of course, we also easily deal, and we also need to the general environment and that has a big impact. We are, I think, in a very good position to capture continuing improvements in the general economic environment should it happen. But it is a risky business, of course. We should ensure that it is not that we can predict 100%.
No, perfect. Thank you.
Our next question comes from Mr. Mario Pierry with Bank of America. You may proceed.
Good afternoon, everybody. Congratulations on the results. Two questions here. First one is related to your new guidance for provisions. The midpoint of your guidance is BRL 14.5 billion. However, if I consider that you had already done BRL 7.3 billion in the first half, and you're running at BRL 3.4 billion per quarter now, it implies that you would be reaching closer to BRL 14 billion. Just wondering how conservative are you being on your guidance for provisions, and does it reflect maybe just being conservative because something could come up? Or should we be working with a figure then closer to the bottom of your guidance rather than the midpoint of your guidance? Second question is related to your headcounts and branch counts. As you've shown on your presentation, they are down about 7% year-on-year, but it seems like they have stabilized.
When we look at your efficiency ratio on page 17, your efficiency ratio is stable for the last five quarters at 41%. Part of that, I think, reflects the weak NII growth or the NII contraction that you're showing. I wanted to get a sense from you, is there more room for you to improve your costs? At what level do you think, or do you want your efficiency ratio to get to, let's say, by next year? Thank you.
Okay. First, on your question, I think we overall prefer to say that our target is the middle of the range. I think there are still a lot of things going on. I think there are some uncertainties. I think this 14.5 is already a very strong reduction. We think the trends overall in terms of credit costs are very positive ones, but really we prefer to commit only to the 14.5 that is actually already very good. In terms of efficiency, you are right, we did a lot. This quarter specifically, I wouldn't say one-off, but margin was impacted by The fact that we need the NII, probably we have a recovery soon on those specific lines, and part of the benefit improving efficiency has to come from revenue.
We did a lot in terms of reducing costs, basically the fact we didn't improve more was because the revenue scenario for a while was very hard. We expect revenues will from now on start to help more. We continue with our focus on costs. I think for this year, we expect to close more 200 branches. Probably the reduction in number of people will be lower, but it should still happen. There is also other fronts here in terms of trying to control expenses. For this year, probably as I said, the expenses should be in the mid-lower quarter of the guidance, zero to minus two. There's improvement in personal expenses only by having better labor lawsuits or lower labor lawsuits. That should happen in the second quarter.
We still see benefits on the cost front, we expect to start to see better numbers both on the revenue front and starting to capture more synergies.
Just to add, when I mentioned the adaptation of the branches, I think when we see that a place doesn't need necessarily to have a branch, what we do, we just change to a post of attendance where we don't have to have the security guard. The cost and the space that we are using. The cost reduces an average of 20% of what the branch had, what previously to this adaptation. What happens is that it did return on time. We don't see it at first, but it did return on time. We consistently evaluate, as I said, all the points we have and considering the business model we have of our national presence, this adaptation has to be done according to the needs of the place and the results that that place can bring to us.
This is something that we are very carefully looking at.
Okay. Thank you very much.
Our next question comes from Mr. Felipe Salomão with Citibank. You may proceed.
Hi. Good afternoon, everyone. I have a question about Cielo, to be more precise. Recent months have been challenging for Cielo. Competition has intensified, important executives have left the company, and the results are deteriorating despite the macro recovery. I'm sorry for asking a broad question, but how the bank as one of the controllers of Cielo is seeing the future of the company in the short to midterm? Should results continue to be under pressure, or are they expected to improve given that the SME loan portfolio growth is accelerating? Can you please also comment if the distribution of POS devices at branches has been accelerating since the launch of Stelo? Thanks. These are my questions.
Okay. Thank you, Felipe Salomão. We have to be careful here, in talking about Cielo. Overall, our view, for sure, you are totally right. In your reading, there is a change in the competitive environment in the acquiring business. Cielo had some advantages in the past that are not there anymore. There's a strong increase in the number of competitors. Cielo remains a great company. It's our partner for our initiatives in the acquiring business. We do with them our co-branded POS machine. We have been growing there in terms of number of POSs. Their POS is our vehicle for playing in the individual entrepreneurial business. That is a business that makes a lot of sense for us. We have been investing and positioning ourselves to be the most relevant player there.
We already have a big number of clients in that segment as clients of Banco Bradesco considering we have a lot of clients also in the bottom of the pyramid. We are really improving our offer to be even more competitive in that segment, offering the tools for attracting and providing the best service for the client. We are selling quite actively Cielo POS, the Banco Bradesco co-branded POS, as well, helping them in other situations. Basically, we are comfortable and think they will very soon overcome these pressures in revenues and in terms of market. We have so far considered both Cielo, the co-branded and Cielo machine, about 110,000 POS, we are quite active. We have just started on that.
Okay, thank you, Carlos Firetti. Thank you for your answer.
Our next question comes from Mrs. Natalia Costa with JPMorgan. You may proceed.
Hi, all. Thank you for the question. With regards to your capitalization, we saw this decline of 100 basis points quarter-over-quarter. I want to know first what to expect for the second-half of the year, if you think there is a chance that this will continue to go down. Secondly, if you're comfortable with the levels that you currently have, and if you are not, which would be the comfortable level of capitalization for you? These are my questions.
Yeah. Okay, Natalia, thank you for the question. Basically, we are comfortable with this level, but we understand, and I think everybody understands that actually we generate a lot of capital. We organically, through retained earnings, that should continue. This quarter we have, especially the corporate business and also due to effects and acceleration in loan growth, part of it is due to these specific issues. Even though we believe loan growth should continue, probably these effects are more like one-off. As I mentioned in the presentation, part of the impact or most of impact comes from mark-to-market in our securities portfolio. As most of these securities are short-term and as we converge to maturity and considering that basically we believe we recovered this mark-to-market to our capital.
Also, consumption of tax credits generated are also impacted just last some quarters ago, and we should consume a big part of it. Basically, we think our capital will naturally expand over the coming quarters. We have said we believe some sort of comfortable level would be something around 13.5 Tier 1, probably 12 principal capital plus the perpetual bond. We think we should get there in not that long considering all the trends, capital accumulation and actually recovering this mark-to-market that should naturally flow through to our balance sheet.
Okay. What about the core equity, like that 10.2% level? Is that something that you have in your mind or you think that gradually based on what you said, when the effects of the mark-to-market fade, we should gradually improve?
Yeah. Like I said, basically we naturally improve with this natural evolution plus earnings retention that we continue generating capital organically through earnings retention.
Okay. To reach the comfortable level of Tier 1, do you think about the issuance of AT1?
You say perpetual bonds?
Yes.
We always are attentive to this market, we don't have any plans at this moment for the issue. We are always looking.
Do you have space if you wish?
Yeah, if we wish, we could issue up to 70 basis more. We already have 80 basis in our issuance made here in Brazil.
Okay. Thank you.
Our next question comes from Mr. Carlos Gomez-Lopez with HSBC. You may proceed.
Sure, good morning. I know you probably answered these questions already, sorry for that. The first one is about the prudential adjustments that we see on page 19, 0.3% decline. I know that this is related to the Basel III implementation, that should have come in the first quarter as well. Can you tell why we saw another prudential adjustment in this quarter, and whether we should expect more in the coming quarters?
Carlos, the line is very poor. Let me ask your questions one by one. That is going to make it easier, okay?
Sure.
Okay. First, basically this prudential adjustment, it's something that adds to the prudential adjustment. I mentioned in the call, the prudential adjustment is increased in the stock of tax credit, mostly related to a tax variation on our hedging of external FX exposure. This quarter, given the level of Real depreciation, we had this tax credit, and that are deducted from our records. That's it. We should consume that over time.
Let me understand. You got movement in the currency. You have, because of your hedges, an increase in the tax credit, and that tax credit is more or less-
Yeah, I don't have any FX exposure. The only effect is really the effect there's duration of tax credit. Hello?
Yes, hello. The other question was actually the tax credit as well, and are you saying that is also related to the movement in the currency?
Carlos, would you mind to call me after the call? I'm really having trouble to understand, and maybe we can discuss that.
Okay. Thank you.
Excuse me, ladies and gentlemen. Since there are no further questions, I would like to invite the speakers for the closing remarks.
I would like to thank you, everyone, for participating on this call. As Diretor Guimarães and Carlos, we will be available for further questions later on. Thank you. Have a very nice day.
That does conclude Banco Bradesco's conference call for today. Thank you very much for your participation. Have a good day.