The Efficiency Ratio⁽⁵⁾ stood at 42.7% in March 2012 (42.7% in March 2011) and the adjusted-to-risk ratio stood at 52.6% (52.1% in March 2011).

Taxes and contributions, including social security, paid or recorded in provision, amounted to R$5.689 billion, of which R$1.884 billion referred to taxes withheld and  collected from third parties and R$3.805 billion from Bradesco Organization activities, equivalent to 133.7% of Adjusted Net Income⁽¹⁾ .

Bradesco has an extensive customer service network in Brazil, comprising 7,612 service points (4,636 branches, 1,368 PABs - Banking Service Branches and 1,608 PAAs - Advanced Service Branches). Customers can also use 1,497 PAEs ATMs (Automatic Teller Machines) in companies, 38,065 Bradesco Expresso service points, 35,007 Bradesco Dia & Noite ATMs and 12,323 Banco24Horas ATMs.

Interest on Shareholders' Equity and Dividends were paid and recorded in provision to shareholders for income in the first quarter of 2012 in the amount of R$952 million, of which R$175 million was paid as monthly dividends and R$777 million was recorded in provision.

To provide for better understanding, comparison and analysis of Bradesco s results, we use the Adjusted Income Statement for analysis and comments contained in this Report on Economic and Financial Analysis, obtained from adjustments made to the Book Income Statement, detailed at the end of this

Press Release, which includes adjustments to non-recurring events shown on the previous page. Note that the Adjusted Income Statement serves as the basis for the analysis and comments made in Chapters 1 and 2 of this report.

(1) Income from Insurance, Pension Plan and Capitalization Bond Operations = Insurance Retained Premiums, Pension Plans and Capitalization Bonds - Variation in Technical Reserves of Insurance, Pension Plans and Capitalization Bonds Retained Claims Drawings and Redemption of Capitalization Bonds Selling Expenses with Insurance Plans, Pension Plans and Capitalization Bonds.

In the first quarter of 2012, Bradesco posted adjusted net income of R$2,845 million, up 2.7%, or R$74 million, from the previous quarter, mainly driven by: (i) growth in the financial margin, as a result of greater revenue from interest and non-interest portion; (ii) greater fee and commission income; (iii) lower personnel and administrative expenses; offset by: (iv) an increase in the allowance for loan losses; and (v) an increase in other operating expenses (net of other operating income).

In comparison with the same quarter a year earlier, adjusted net income increased by
R$107 million, or 3.9% in the first quarter of 2012, for Return on Average Shareholders’ Equity (ROAE) of 21.4%. The main reasons for this result are described below, in the analysis of the main items included in the income statement. 

Shareholders’ Equity stood at R$58,060 million in March 2012, up 13.2% on the balance in March 2011. The Capital Adequacy Ratio stood at 15.0%, 12.0% of which fell under Tier I Reference Shareholders’ Equity.

Total Assets came to R$789,550 million in March 2012, up 16.9% over March 2011, driven by the increase in operations and the expansion of business volume. Return on Average Assets (ROAA) reached 1.5%.

The Efficiency Ratio in the last 12 months⁽¹⁾improved by 0.3 p.p. over the previous quarter, reaching 42.7% in the first quarter of 2012. With regards to the quarterly ER, the indicator went from 45.1% in the fourth quarter of 2011 to 40.8% in the first quarter of 2012. The improvement in the ER was mainly driven by: (i) a decrease in personnel expenses, mainly resulting from the concentration of holidays in the quarter and lower expenses with management and employee profit sharing; (ii) lower administrative expenses, mainly due to the stabilization of expenses related to the expansion of new Service Points, in addition to the decrease in marketing and advertising expenses and those with outsourced services in the period; and (iii) growth in the financial margin and fee and commission income, which was mainly due to an increase in average business volume, resulting from accelerated organic growth, which began in the second half of 2011, and lower treasury gains.

The “adjusted to risk” ER, which reflects the impact of risk associated with loan operations⁽²⁾, reached 52.6% in the first quarter of 2012, a 0.4 p.p. improvement over the previous quarter. This was mainly the result of the aforementioned events, offset by an increase in delinquency ratio in the period.

The R$437 million increase between the first quarter of 2012 and the fourth quarter of 2011 was mainly due to:

·         a R$237 million increase in interest-earning operations, mainly due to higher gains with “Securities/Other” and “Insurance” margins; and

·         a R$200 million increase in the non-interest margin, due to greater “Treasury/Securities” gains.

Financial margin posted a R$1,333 million improvement between the first quarter of 2012 and the same period in 2011, for growth of 14.2%, mainly driven by:

·         a R$1,373 million increase in income from interest-earning operations due to an increase in business volume, mainly from:
(i) “Loans;” and (ii) “Securities/Other;” and

offset by:

·         lower income from the non-interest margin, in the amount of R$40 million, due to lower “Treasury/Securities” gains.

In March 2012, Bradesco’s loan operations totaled R$350.8 billion. The 1.5% increase in the quarter was due to growth of: (i) 2.4% in Small and Medium-sized Entities (SMEs); (ii) 1.2% in Corporations; and (iii) 0.9% in Individuals.

Over the last 12 months, the portfolio expanded by 14.6.%, driven by: (i) 20.6% growth in SMEs; (ii) 14.5% growth in Corporations; and (iii) 9.4% growth in Individuals.   

In the Individuals segment, the products that posted the strongest growth in the last 12 months were: (i) real estate financing; (ii) BNDES/Finame onlending; and (iii) payroll-deductible loans. In the Corporate segment, growth was led by: (i) real estate financing – corporate plan; (ii) operations bearing credit risk - commercial portfolio; and (iii) export financing.

In the first quarter of 2012, ALL expenses stood at R$3,094 million, up 16.3% from the previous quarter, mainly as a result of: (i) adequate provisioning levels in comparison with the estimated losses from certain operations with corporate customers in the fourth quarter of 2011; and (ii) increase in delinqueancy in the period.    

In comparison with the first quarter of 2011, ALL expenses in the same period in 2012 increased by 31.1%, mainly due to: (i) a 12.4% growth in loan operations - concept defined by Bacen, in the period; and (ii) greater delinquency in the period, especially among Individuals and SMEs.

The delinquency ratio of over 90 days posted a slight increase of 0.2 p.p. in the quarter, mainly due to: (i) a 0.3 p.p. increase in the SME ratio; and (ii) a 0.1 p.p. increase in the Individuals ratio.

(1) Concept defined by Bacen.

The following graph presents the evolution of the coverage ratio of the ALL for loans overdue for more than 60 and 90 days. In March 2012, these ratios stood at 146.6% and 181.7%, respectively, pointing to a comfortable level of provisioning.

The ALL, totaling R$20.1 billion in March 2012, was made up of: (i) R$16.1 billion required by the Brazilian Central Bank; and (ii) R$4.0 billion in additional provisions.

Net income in the first quarter of 2012 stood at R$905 million (R$860 million in the fourth quarter of 2011), a 5.2% increase, with an annualized Return on Shareholders’ Equity of 26.9%.

In comparison with the same period a year earlier, net income was up 18.9% in the first quarter of 2012.

In a year-on-year comparison, revenue in the first quarter of 2012 was down 15.4%, due to the concentration of pension plan contributions, which are historically paid in the last quarter of the year.

In the first quarter of 2012, total revenue increased by 20.0% over the same period in 2011, driven by the performance of all segments, which posted double-digit growth in the period.

Quarter on quarter, net income was up 5.2%, mainly as a result of: (i) improved financial result; and (ii) a reduction in general and administrative expenses, even when accounting for the collective bargaining agreement in the sector in January 2012.

Net income in the first quarter of 2012 was up 18.9% over the same period in 2011, mainly due to: (i) a 20.0% increase in revenue; (ii) improved equity income; and (iii) a reduction in general and administrative expenses, even when accounting for the collective bargaining agreement in the sector in January 2012.

With regards to solvency, Grupo Bradesco de Seguros e Previdência complies with all Susep rules, effective as of January 1, 2008, and has adjusted to meet global standards (Solvency II). The Group posted leverage of 2.1 times its Shareholders’ Equity in the period.

In the first quarter of 2012, fee and commission income came to R$4,118 million, up R$32 million over the previous quarter. This performance was driven by: (i) an increase in revenue from fund management; (ii) greater gains with capital market operations (underwriting / financial advisory); and (iii) greater revenue from custody and brokerage services; partially offset by: (iv) lower revenue from loan operations and card income, which are impacted by seasonality at the end of the year.

In comparison with the same period a year earlier, the R$608 million increase, or 17.3%, in fee and commission income in the first quarter of 2012 was mainly due to: (i) the performance of the credit card segment, driven by the growth in card base and revenue; (ii) higher income from checking accounts, which was a result of the growth in business volume and an increase in the checking account holder base, which posted net growth of 1.9 million accounts in the period;
(iii) greater gains with capital market operations (underwriting / financial advisory); (iv) greater income from fund management; and (v) greater income from loan operations, resulting from an increase in the volume of contracted operations and surety and guarantee operations.

In the first quarter of 2012, the R$262 million decrease from the previous quarter was due to the following:

·         structural expenses –  down R$64 million, mainly due to: (i) concentration of holidays, characteristic of the first quarter of the year; offset by: (ii) increased expenses with salaries, social charges and benefits, mostly due to a collective bargaining agreement in the insurance sector in January 2012; and

·         non-structural expenses – R$198 million decrease, mainly due to lower expenses with employee and management profit sharing.

In comparison with the same period a year earlier, the R$442 million increase in the first quarter of 2012 was mainly the result of:

·         R$355 million in structural expenses, resulting from: (i) increased expenses with salaries,  social charges and benefits, due to higher salary levels; and (ii) the net increase in the number of employees by 8,353 professionals, due to organic growth and the expansion of service points in the period; and

·         R$87 million in non-structural expenses, mainly driven by: (i) greater expenses with employee and management profit sharing; and (ii) greater expenses with the provision for labor claims.

In the first quarter of 2012, the 7.6% decrease in administrative expenses from the previous quarter was mainly the result of lower expenses with:
(i) marketing and advertising; (ii) outsourced services, mainly related to the end of the partnership with Empresa Brasileira de Correios e Telégrafos – ECT in December 2011 (Postal Bank); partially offset by greater expenses with: (iii) depreciation and amortization; (iv) data processing; (v) financial system services; and
(vi) expansion of service points by 3,038 points.

In comparison with the same period a year earlier, the 8.3% increase in the first quarter of 2012 was mainly due to: (i) contractual adjustments; (ii) an increase in business and service volume; and
(iii) the opening of 11,782 service points, made up of 985 branches, 10,416 Bradesco Expresso points and 381 other points, for a total of 62,749 service points on March 31, 2012.

Other operating expenses, net of other operating income, totaled R$996 million in the first quarter of 2012, up R$188 million over the previous quarter, and R$74 million in comparison with the same period in 2011.

Compared with the same quarter last year and the previous quarter, the increase in other operating expenses, net of other operating income, was mainly the result of greater expenses with: (i) the recording of operating provisions, particularly those for tax contingencies; and (ii) amortization of intangible assets due to acquisition of banking rights.

In the quarter-on-quarter comparison, income tax and social contribution expenses were up 18.3%, or R$227 million, from the previous quarter, due to a greater taxable result in the period. 

In the year-on-year comparison, the increase in these expenses is mainly the result of: (i) greater taxable result; and (ii) the termination of tax credits resulting from the increase in the social contribution rate from 9% to 15% in the first quarter of 2011.

Unrealized gains totaled R$16,130 million in the first quarter of 2012, a R$5,512 million increase from the previous quarter. This was mainly due to: (i) the appreciation of investments, particularly the Cielo investment, which saw a 28.0% increase in share value in the quarter; and (ii) the valuation due to mark-to-market accounting of securities in both fixed income and equities.

Economic activity indicators in the USA continued to present better-than-expected results in the first quarter of 2012, but failed to completely ward off uncertainties regarding the pace and sustainability of growth in the coming months. At the same time, doubts regarding the speed of Chinese growth led to a measure of discomfort, compounded by persistent uncertainties surrounding the country’s banking system and real estate market. Furthermore, fears of a financial meltdown in the eurozone were assuaged by the European Central Bank’s recent measures to promote liquidity in the region’s banking system - while renegotiation of Greek sovereign debt appears to successfully prevent the country from leaving the European monetary union.

Faced with these risks, global growth remained low, adversely impacting the confidence of the economic agents. This trend has had two relevant effects: (i) the normalization of monetary policy by the main central banks will most likely be delayed, ensuring high international liquidity; and
(ii) average commodity prices should also continue on a downward trajectory throughout 2012 thanks to the global deceleration tendency, despite short-term pressures, especially in relation to agricultural produce (unfavorable weather conditions) and oil (geopolitical tensions).

At the same time, despite the substantially reduced risk of a new global crisis in the financial sector, Brazil is still not immune to global events, although it is certainly much better prepared to face the materialization of existing risks than it was in 2008. Faced with a deteriorating international scenario and the current leveling off of domestic activity in the second half of 2011, the economic authorities have adopted a number of stimulus measures, including: (i) a series of interest rate reductions, which continued into the first quarter of 2012 and should advance in the current period; (ii) the partial reversal of the macroprudential measures adopted in December 2010; (iii) tax incentives for the consumer goods

Individuals 

Corporate 

SMEs 

Corporations 

Vehicles 

Cards ⁽²⁾ 

Real Estate Financing (origination) 

Payroll Deductible Loans 

Income from Loan Recovery classified under the item Financial Margin , Expenses with Discounts Granted classified under the item Other Operating Income/Expenses , and Expenses with Write-offs of Leasing Operations classified under the item Financial Margin were reclassified to the item ALL Expenses - Allowance for Loan Losses , and Tax Expenses were reclassified to Other Operating Expenses;  

Partial result of Derivatives used to hedge investments abroad, which simply cancels the tax effects (Income Tax/Social Contribution (IR/CS) and Social Integration Program/Contribution for Social Security Financing (PIS/Cofins)) of this hedge strategy in terms of Net Income; 

Income from Insurance, Pension Plan and Capitalization Bond Operations = Insurance, Pension Plan and Capitalization Bond Retained Premiums - Variation in Technical Reserves for Insurance, Pension Plans and Capitalization Bonds Retained Claims Drawings and Redemption of Capitalization Bonds Selling Expenses with Insurance Plans, Pension Plans and Capitalization Bonds. 

(1)      Expenses with Commission on the Placement of Loans and Financing were reclassified from the item “Other Operating Expenses” to the item “Financial Margin;”

(2)      Interest Income/Expenses from the Insurance Segment were reclassified from the item “Other Operating Income/Expenses” to the item “Financial Margin;”

(3)      Interest Income/Expenses from the Financial Segment were reclassified from the item “Other Operating Income/Expenses” to the item “Financial Margin;”

(4)      Income from Loan Recovery classified under the item “Financial Margin”, Expenses with Discounts Granted classified under the item “Other Operating Income/Expenses”, and Expenses with Write-offs of Leasing Operations classified under the item “Financial Margin” were reclassified to the item “ALL Expenses - Allowance for Loan Losses”, and Tax Expenses were reclassified to “Other Operating Expenses;”

(5)      Losses/Gains from the Sale of Foreclosed Assets/Investments classified under the item “Non-Operating Result” were reclassified to the item “ALL Expenses - Allowance for Loan Losses” / “Financial Margin;”

(6)      Income from Card Fees and Commissions, Insurance Premium Commissions and Insurance Policy Fees classified under the item “Other Operating Income/Expenses” were reclassified to the item “Fee and Commission Income;”

(7)      Credit Card Operation Interchange Expenses classified under the item “Other Operating Income/Expenses” were reclassified to the item “Other Administrative Expenses;”

(8)      Partial result of Derivatives used to hedge investments abroad, which simply cancels the tax effects (Income Tax/Social Contribution (IR/CS) and Social Integration Program/Contribution for Social Security Financing (PIS/Cofins)) of this hedge strategy in terms of Net Income;

(9)      For more information see page 8 of this chapter; and

(10)    Income from Insurance, Pension Plan and Capitalization Bond Operations = Insurance, Pension Plan  and Capitalization Bond Retained Premiums - Variation in Technical Reserves for Insurance, Pension Plans and Capitalization Bonds – Retained Claims – Drawings and Redemption of Capitalization Bonds – Selling Expenses with Insurance Plans, Pension Plans and Capitalization Bonds.

(1)      Expenses with Commission on the Placement of Loans and Financing were reclassified from the item “Other Operating Expenses” to the item “Financial Margin;”

(2)      Interest Income/Expenses from the Insurance Segment were reclassified from the item “Other Operating Income/Expenses” to the item “Financial Margin;”

(3)      Interest Income/Expenses from the Financial Segment were reclassified from the item “Other Operating Income/Expenses” to the item “Financial Margin;”

(4)      Income from Loan Recovery classified under the item “Financial Margin”, Expenses with Discounts Granted classified under the item “Other Operating Income/Expenses”, and Expenses with Write-offs of Leasing Operations classified under the item “Financial Margin” were reclassified to the item “ALL Expenses - Allowance for Loan Losses”, and Tax Expenses were reclassified to “Other Operating Expenses;”

(5)      Losses/Gains from the Sale of Foreclosed Assets/Investments classified under the item “Non-Operating Result” were reclassified to the item “ALL Expenses - Allowance for Loan Losses;”

(6)      Income from Card Fees and Commissions, Insurance Premium Commissions and Insurance Policy Fees classified under the item “Other Operating Income/Expenses” were reclassified to the item “Fee and Commission Income;”

(7)      Credit Card Operation Interchange Expenses classified under the item “Other Operating Income/Expenses” were reclassified to the item “Other Administrative Expenses;”

(8)      Partial result of Derivatives used to hedge investments abroad, which simply cancels the tax effects (Income Tax/Social Contribution (IR/CS) and Social Integration Program/Contribution for Social Security Financing (PIS/Cofins)) of this hedge strategy in terms of Net Income;

(9)      For more information see page 8 of this chapter; and

(10)    Income from Insurance, Pension Plan and Capitalization Bond Operations = Insurance, Pension Plan and Capitalization Bond Retained Premiums - Variation in Technical Reserves for Insurance, Pension Plans and Capitalization Bonds – Retained Claims – Drawings and Redemption of Capitalization Bonds – Selling Expenses with Insurance Plans, Pension Plans and Capitalization Bonds.