Bradesco was founded in 1943 as a retail bank for low-income customers. Its several acquisitions over the years ensured national coverage and consolidated its presence among Brazil’s largest banks. Bradesco is among the leaders in various financial segments. Its widespread distribution network of nearly 48,000 service locations and over 45,000 ATMs plays an important role in attracting a broad range of customers and depositors, as well as in providing the distribution of a diversified range of products.

At Dec. 31, 2010, Bradesco’s market share of the banking system was 12.4% of the loan portfolio, 18.4% of demand deposits, 14.3% of savings deposits, and 18.7% of the branches.As of December 2010, its banking operations had an extensive customer base, which held over 23 million checking and 41 million savings accounts. The banking operations provided 71% of FY10 net income. It also had nearly 22% of the credit card market in terms of invoiced revenue, with 89 million cards issued. In addition, the bank is the third largest investment fund manager in Brazil, with a market share of approximately 17%.

At June 30, 2011, Bradesco had nearly 62 million clients and employed over 98,000 employees. About 20% of the country’s pensioners receive their social security payments though Bradesco, which provides a large client base for products to be distributed. The group has been a leader in the development and implementation of data processing and electronic and Internet banking services in Brazil. Although it has international business facilities in eight countries, its overseas activities are not relevant.

In addition, the group’s insurance and private pension activities, which are conducted through Bradesco Seguros (international IFS rating ‘A–’/Outlook Stable), are an important part of the business that contributed 29% of FY10’s net income (36% of the net income in 2009). Bradesco Seguros, with over 36 million clients as of December 2010, had a market share of 24.7% of insurance, private pension plans, and capitalization.

Corporate Governance

Bradesco’s corporate governance practices are aligned with international standards although it has only one independent member on its board of directors. Given its listing on the NYSE (where it began trading Level I ADRs in 1997 and has traded Level II ADRs since 2001), it must follow SEC guidelines. Bradesco is also recognized as a financial holding company by the Federal Reserve Bank in the U.S. and has been listed on Madrid’s Latibex since 2001.

The board of directors comprises eight members, one of which is the current CEO; four others are former bank executives, including the chairman of the board who was Bradesco’s CEO from 1981 to 1999. There is also a minority shareholder representative and two members of the founding family. The current CEO was appointed in March 2009 and came from inside the group. No relevant changes to bank policies and operations were made at that time.

At June 30, 2011, the group is controlled by Fundação Bradesco (FB) through the Holding Cidade de Deus (HCD), which holds 48.66% of the bank’s voting capital. FB holds 17.06% of direct participation in Bradesco, and holding company NCF, which is also controlled by the FB, holds 8.2%. The founding family owns 21.9% of HCD. Around 3.6% of Bradesco’s voting capital is held by foreign banks (Banco Espírito Santo of Portugal holds about 1.1%, and UFJ Bank of Japan holds about 2.5%). The balance (22.5% of voting shares and 60% of total shares) is traded on various stock exchanges.

Strategy

Bradesco’s strategy is to maintain its strong position in the Brazilian financial system, working with a diversified franchise based on financial and insurance services. Despite the focus on organic growth and on the Brazilian domestic market, Bradesco has acquired some small-cap niche financial institutions both locally and abroad. In October 2009, Bradesco acquired Banco

Like its peers, Bradesco seeks to increase its business by emphasizing expansion in the retail segment and in small- and medium-sized companies (SMEs) that offer higher margins. The acquisitions of IBI in 2009 and Banco BMC S.A. (one of the largest lenders of payroll deductible loans in Brazil) in 2007 were in line with this strategy. Despite these segments presenting higher risk, the mix of these credits has migrated to safer products (payroll deductible loans, vehicle financing, and guarantee of receivables/contracts in companies).

In the credit card segment, despite being a product without guarantees, the bank has a long customer history, which enables it to adjust limits/margins in accordance with behavior/credit risk. In an attempt to continue to build these operations, Bradesco, in partnership with Banco do Brasil and Caixa Economica Federal, began offering credit cards under the Elo flag with the objective of reaching a 15% market share within five years and becoming the countries most complete payment platform.

The bank, which is already present in all cities within the national territory has been increasing its number of banking correspondents (currently over 29,000 with over 1,500 added in the 1Q11 alone). This correspondent network is known as Bradesco Expresso and consists of well-frequented businesses such as pharmacies and bakeries. Its 10-year partnership with the post office system (known as Banco Postal) will come to an end in January 2012 as Banco do Brasil placed the highest bid. Despite the loss of the contract, which enabled the bank to provide basic banking services through approximately 6,200 post office locations throughout the country, Bradesco is still expected to retain a portion of the nearly 5 million customers it gained over the past nine years. It is also expected to use the exclusive market intelligence regarding profitable regions to focus on opening competing service centers.

In anticipation of the contract loss, the bank had actively worked to expand its network of branches and banking correspondents and had been signing different operating agreements with medium- and large-sized retailers since 2004. This will help to ensure exclusivity in financings to their clients and aims at expanding the activities of the group in consumer credit. Also, in 2007, the bank further segmented its middle-market efforts, creating separate units to manage business with small- and medium-sized companies (SMEs). More recently, the bank turned its focus to the real estate credit, a business where it has operated for years, albeit on a small scale.

Performance

Fitch upgraded Brazil’s long- and short-term IDRs and country ceiling in April 2011 to ‘BBB’, ‘F2’, and ‘BBB+’, respectively, changing the Outlook to Stable from Positive. The ratings upgrade reflected the agency’s assessment that the potential rate of sustainable growth of the Brazilian economy had increased, which improved the medium-term fiscal outlook and endorsed the continued strengthening of its external liquidity position.. The government’s transition to the Dilma Rousseff administration was smooth, and the consensus on responsible macroeconomic policies remains well grounded. Furthermore, the Rousseff administration has shown signs of greater fiscal restraint, which, together with the prospects for healthy growth, is expected to enable reduction of Brazil’s heavy public debt burden.

• Continued strong performance stimulated by strong credit expansion since 2004 and improved efficiency.

• Sharp decline in 2010 loan loss provisioning expenses contributed to a significant increase in operating profit over previous years.

The Brazilian economy expanded at historically high rates in 2010 when GDP grew 7.5%. Fitch’s base scenario assumes that the tightening of macroeconomic policies currently being practiced should allow for a “soft landing” of the Brazilian economy, with economic growth of about 3.6% in 2011. Brazil’s external liquidity position has further strengthened following the global credit crisis. With external reserves currently exceeding USD300bn, the country continues to be among the strongest liquid external creditors in the ‘BBB’ category.

The bank’s efforts to control costs and the continued revenue increase have translated into better efficiency ratios as compared with its peers over the past few years. Management continues to invest heavily in infrastructure and information technology and telecommunications, as evidenced by the BRL14bn spent from 2006 to 2010 (with nearly BRL4bn spent in 2010 alone). Management believes there is still room for improvement and is estimating the 2011 expense to be BRL5bn. Personnel expenses have also continued to grow (BRL9.3bn in 2010, up 17% from 2009). During 1H11, the expense was BRL5.0bn. The increases are in part due to the continued growth in the number of employees, which at 1H11 reached 98,317 (a 12% increase over December 2009).

Loan Loss Provision Expense

The significantly lower loan loss provision expense in 2010 of BRL6.4bn was facilitated by the large loan loss provision made in 2009 (BRL11.2bn, which was well above the BRL6.6bn taken in 2008 and the BRL4.6bn of 2007). It also reflects improved asset quality, which was in turn aided by the improved economic scenario. For 1H11, a loan loss provision expense of BRL3.9bn was made. A future need for a higher level of loan loss provisioning cannot be ruled out as the increased loan portfolio booked in 2010 (up 21%) continues to season and as the higher interest rate levels are expected to negatively affect certain individual and corporate borrowers.

Outlook

After achieving most of it goals in 2010, Bradesco, like its private sector competitors, projected more conservative goals for 2011 as a result of the expected economic slowdown due in part to the macroprudential measures imposed by the government to keep inflation and potential credit bubbles and inflation under control.

Bradesco’s guidance for 2011 calls for the loan portfolio to increase 15%–19% (compared with the actual 2010 expansion of 23%). The bank projects higher growth in companies (20%–24% by SMEs and 11%–15% by large corporates). The forecast for individuals is 13%–17%. In terms of products, the largest segment growth is expected to be in the form of payroll deductible loans (30%–34%) followed by vehicles (10%–14%) and cards (9%–13%). Mortgage origination for the year was originally projected at BRL10bn but then further revised to BRL14bn. Given these forecasts, the bank’s expected growth in net interest income will be 18%–22%, while fee income is expected to grow 9%–13%. In Fitch’s opinion, these expectations are reasonable given the continued favorable economic scenario. However, the lower part of the range may be more likely due to the possibility of higher funding costs resulting from increased competition and, consequently, pressure on spreads.

Competition has been particularly strong and aggressive from public sector banks after the global financial crisis and, more recently, from local and international private banks. Bradesco’s strong and diversified franchise, together with its large scale, continuous investments in its technological platform, and investment in the quality of its workforce, mitigates these pressures and leaves the bank very well positioned to ensure continued satisfactory returns.

Risk Management

Bradesco’s risk management is centralized and overseen by a managing director who reports directly to the board of directors. The unit is subdivided into five areas: market and liquidity risk, operational risk, integrated and capital allocation risk, credit risk, and risk modeling. The bank’s major risk is credit risk, including its exposure to public and private sector securities. Market risk inherent in its foreign exchange and interest rate positions can be volatile, but the limits are very conservative.

Bradesco has been active in national and international markets that have generally been very receptive to its issues of subordinated debt and hybrid capital instruments. However, the bank remains committed to its policy of meeting regulatory capital requirements (11%), with Tier I capital recording a 13.1% ratio in December 2010 and a 12.9% ratio at 1H11. The total regulatory capital ratio was 14.7% in December 2010 and 14.7% at the end of 1H11. While lower than the earlier years, these ratios continue to compare well locally and internationally.

Fitch core capital, which is based on common equity and reserves less certain deductions, is Fitch’s primary measure of a bank’s capitalizaton. Under these definitions, Bradesco’s Fitch core capital/risk-weighted assets ratio decreased to 7.51% of risk weighted assets as of December 2010 from 7.62% in 2009. By the end of 1H11 this ratio was 7.76%. The significant difference between Bradesco’s regulatory capital ratios and Fitch’s core capital ratios is the deduction of the capital of the group’s insurance subsidiaries (mainly Bradesco Seguros) as follows: BRL13.0bn at June 2011, BRL12.4bn at December 2010, and BRL11.7bn at December 2009. This adjustment is made to improve the focus of our analysis on the banking operations even though these companies are well capitalized and consistently profitable.

As does most of its main competitors, Bradesco also carries a significant volume of tax credits on its balance sheet. A portion of these credits results from tax losses carried forward that are also deducted from core capital under Fitch’s methodology, with the balance primarily generated from temporary differences between provisions and their eventual realization/reversal. Other intangible assets are mainly relative to the goodwill of previous acquisitions and are also deducted from Fitch core capital.

Bradesco’s bylaws provide for a minimum distribution of 30% of net income after legal reserves. In 2010, the bank distributed 35% of its profit. Bradesco’s consistent profitability has enabled a good capacity of internal generation of capital, and its willingness to ensure Tier 1 capital above 11% has assured solid capitalization. Despite the relevant participation of the capital allocated, its insurance business is an important part of the bank’s diversified franchise and has presented consistent profitability. With good market positioning, the segment is well positioned for growth as Brazil’s insurance market continues to expand.

Fitch considers Bradesco’s capital ratios to be at appropriate levels considering its good profitability track record and limited historical losses.

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