Banco Bradesco SA (BBD) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. We would like to welcome everyone to Banco Bradesco's Second Quarter 2008 Earnings Results Conference Call. This call will be conducted by Mr. Marcio Artur Laurelli Cypriano, Chief Executive Officer, Mr. Milton Vargas, Executive Vice President and Investor Relations Officer, Mr. Domingos Figueiredo de Abreu, Managing Director, Mr. Samuel Monteiro dos Santos Jr., Chief Financial Officer of Bradesco Seguros Insurance, and Mr. Jean Philippe Leroy, Department Director.

This call is being broadcasted simultaneously through the internet in the website www.bradesco.com.br/ir. In that address, you can also find a banner through which the presentation will be 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. At that time, further instructions will be given. (OPERATOR INSTRUCTIONS).

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the Company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they're related 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 will turn the conference over to Mr. Jean Leroy, Department Director. Mr. Leroy, you may proceed with your conference.

Thank you. Good morning and welcome to our second quarter earnings conference call. Let me now transfer the floor to Milton, CFO of Banco Bradesco, for the opening remarks.

Good morning, everyone, and welcome to our conference call. Bradesco posted a net income of BRL4.1 billion in the first half of 2008. This was an excellent result taking account first the total global economic scenario, second, the higher volatility in the market, and third, the jump in inflation which led to the Brazilian Central Bank to increase the base rate. Nevertheless, the Brazilian economy continues to grow in a consistent and sustainable basis, pointing to around 5% GDP growth this year.

Before transferring the floor to Jean, we will be conducting a detailed presentation. I would like to comment some highlights of Bradesco's recent performance. Our net interest income is expanding thanks to the strong growth of our loan book, which grew by almost 39% over the last 12 months. In the corporate segment, most of the demands have been driven by credit lines, focus on business expansion.

As for individuals, the highest growth rate derived by consumer finance operations, especially in vehicles, credit card, but also in mortgage and agriculture. Bradesco's loan portfolio continues to grow and its quality remains very sound, with more than 92 [base liquid consideration], is staying flat at 3.5% for the third consecutive quarter. Provisioning for those delinquent loans reached a comfortable 166% coverage.

Bradesco continues to invest in expanding its infrastructure. Over the last 12 months, we have increased our distribution by more than 4,900 points. We highlight the opening of 162 branches and 665 mini branches. In terms of the key and benefiting our customers in distribution network, we have almost finished to upgrade our hardware, software and telecommunications with state-of-the-art equipment.

We believe the IT improvement projects will be key for supporting the strong growth we expect Bradesco to achieve in the future. This project will enable Bradesco to move into the new operational extenders, increasing quality of service, agility and safety to our system. Additionally, we were the first movers in technology of the contactless card with Visa and we installed in more than 300 ATMs by master leaders of them.

Bradesco's operational efficiency has also improved as its cost-to-income ratio moved from 42 in June of 2007 to 41.3 in June of this year. Our insurance group boasted a net income of more than BRL1.4 billion, which represented 36% of Bradesco's net income. The send of our insurance company is based on a strategy of, first, relying on Bradesco's bank comprehensive distribution network, second, had a multi-line approach, and third, counting a very good relationship with brokers.

Finally, I would like to emphasize the fact that we continue to be very optimistic about the future and for attending the needs of our millions of customers who are intensifying investments in IT, training of our staff and continuously expanding our distribution network. We just approved internally the opening of broker-dealers up to the end of this year in Dubai, Tokyo and Hong Kong.

Let me now transfer the floor to Jean. Thank you very much.

Let us now move to slide number two. We are presenting in this slide Bradesco main highlights, comparing the first half of 2007 and 2008. Slide number three. Bradesco posted a net income of more than BRL2 billion in the second quarter of 2008, 5% higher than the previous quarters of BRL1.9 billion.

The main components to this performance derived from a, growth in net interest income as the loan book expanded strongly, b, good asset quality, which is reflected in the constitution of provisions we considered at the normal level, c, growth in business volumes and in the customer base essential for -- to helping to mitigate the effects of regulatory measures which affected more specifically fees, d, growth in operational expenses that we expanded in the beginning of the year based on the expansion and distribution and IT mentioned by Milton in his opening remarks.

Please note that all the analyses and ratios included in this presentation, in the press release and in the [fat] book consider net income adjusted by non-recurring events. Slide number four. In the first half of 2008, annual EPS calculated in a 12-month basis increased by 10.7%, standing at BRL2.48. I would like to draw your attention to the increase in the efficiency which moved from 42% in June 2007 to 41.3% despite all the capital expenditures mentioned before. Just to give you an example, in the second quarter, we added 447 distribution points, basically mini branches.

Slide number five. Bradesco's total assets surpassed the BRL400 billion mark, increasing by 13% in the quarter or around 40% over the last 12 months. The quarterly growth was mainly due to one, the increase in securities and interbank investments which jumped by BRL39 billion and two, to the loan book, which climbed by BRL9 billion. As for the adjusted net income, the annualized return on average equities stood at 27.2% and the annualized return on average assets averaged 2.1%. The reported REO stood at 28.6%.

In June 2008, the capital adequacy ratio stood at 12.9%. As of July 1, 2008, the new Basel agreement called Basel II came into force in Brazil. Making a simulation with the figures as of June 30, the new capital adequacy ratio would increase from the actual 12.9% to 13.9%.

On the top of that, if we emphasize the option of excluding of our total foreign investment, the hedges for the equity we own abroad, which is a possibility given by the Central Bank of Brazil, this ratio would jump to 16.7% and the potential increase in the loan portfolio, maintaining everything equal would be of BRL135 billion. In both cases, in Basel I and in Basel II calculation, the capitalization ratios give us a comfortable position in terms of operating leverage.

Slide number six. Unrealized gains of Bradesco and its subsidiaries totaled almost BRL4.2 billion in June 2008. Even with the volatility in the market which happened in the second quarter, these potential gains remained stable. It is important to remember that these gains do not include our participation in companies that are not listed, such as Serasa and VisaNet.

Slide number seven. Bradesco's net income breakdown is in line with the previous quarters. In the quarter, despite a slight reduction, the insurance segment accounted for a significant portion of Bradesco's total net income. It is worth noting that fees maintained its relative participation even after the realignment of fees in the individual segments.

Slide eight. In this slide, it is worth noticing that the operating results increased by 8% in the quarter and by 14% in the 12 months comparison. The 10% change in this quarter in other operating revenues and expenses refer to BRL58 million increasing sundry losses, BRL47 million increasing financial expenses and BRL9 million reduction in operating provisions.

Slide number nine. Thanks to the strong growth of loans, the net interest income increased by 9% in the quarter and by 17.9% over the last 12 months. The evolution of the non-interest earning line refers to the higher gains from treasury securities and stronger credit recoveries, actually, and the first quarter was weaker and out of the curve. It is also worth noting that the increase in the volume of operations continues to be an important factor since it has more than offset the fall in revenues derived by lower interest rates.

Slide number ten. On June 2007 and 2008 comparison, one can see that the net interest income from interest earning operations jumped by 19.3% thanks to the higher volume of loan operations as we mentioned in the explanation of the previous slide. Please note that this slide does not include treasury gains, gains from investments and effect of mark-to-market.

Slide number 11. In this slide, one can see that loan operation has been increasing the relative participation quarter-after-quarter and correspond to 69% of the net interest income vis-a-vis 65% as of June 2007. In this quarter, the increase in the base rate [the select] was responsible for the increase in the share of funding.

Slide number 12. We can see on the slide, the summary of the margin derived by loans. I would like to draw your attention to the back line in the middle which shows the net margin, which improved by 18% between June of 2008 and June of 2007.

Slide number 13. Bradesco's total loan portfolio reached, in June '08, BRL182 billion, representing a quarterly growth of 7% and 39% increase over the last 12 months, outbasing the market, which grew by 33.4% in the same period. Also in the last 12 months, new borrowers generated around BRL28 billion in new operations, thus being responsible for 25% of the increase in the loan book, excluding [assurancies], guarantees and credit card receivables.

It is important to emphasis that corporate demand for loans increased due to market conditions. As a result, Bradesco has been operating strongly with the various types of corporate loans. For example, working capital. This becomes clear when we look at the solid growth of loans to corporates.

Slide number 14 and 15. These slides show a breakdown of Bradesco's main credit line for individuals and companies. As one can see, there is a continuous growth of automobile financing and basically to direct landing and leasing credit lines. Bradesco has been focusing on new vehicles through leading operations, which accounted for 54% or BRL29 billion of the total consumer financing operations.

Also in the individual segment, Bradesco has been investing in new and improved services, including the new Bradesco [mall] and Bradesco rural sites that are already helping to boost mortgage and agricultural loans, which have risen by 11% and 10% respectively just in this quarter. The corporate segment loans for financing production performed extremely well.

Slide number 16. This slide shows the level of coverage of our provisions with regards to expected losses. In relation to the mandatory requirements of the Central Bank of Brazil, Bradesco post an excess of provisions of BRL1.2 billion. However, if we look at the effective expectation of losses for the next 12 months, the excess increases to BRL2.8 billion, a proof that we are extremely well provisioned.

Slide number 17. In the quarter, delinquencies remained stable, even with the slight increase in this ratio in the individual segments, due mainly to credit card and [vaco] financing. In the SME segment, the decline in this ratio shows that the substantial growth of this portfolio has not affected its quality.

Slide number 18. Bradesco's mortgage origination reached a record level of BRL3 billion in this first half of the year, a 94% evolution if compared to the first half of 2007 performance. Bradesco has an outstanding position in this segment with a 23% market share. In 2008, Bradesco financed more than 24,400 properties which represented 19% of the total homes financed in Brazil, a 90% evolution vis-a-vis the same period of 2007.

Slide number 19. In the first half of 2008, fees increased by 8%, mainly driven by one, credit account fees derived by the growth in the card base and by the 24% jump in the number of transactions and two, asset management fees, mainly due to the increase in assets under management. In the second quarter of 2008, these revenues remained stable despite the 18% decline in fees derived by loan operations as a result of the federal tariff restructuring in the individual segment.

Slide number 20. In relation to operating expenses, more precisely personnel expenses, the slight 2.6% increase in structural expenses in this quarter was due to the expansion of the distribution network. Just in this quarter Bradesco opened, as I said before, 449 new mini branches plus 24 branches and 36 mini branches inside companies. The non-structural expenses fell by 16% in this quarter due to lower labor provisions in the amount of BRL40 million and to a BRL25 million decline in profit sharing expenses and management bonuses.

The increase in administrative expenses was due partially to organic growth, higher business volume and investments in the IT area. It is worth noting that the percentage of expenses compared with total assets has been falling continuously, which we consider a good indicator of efficiencies. We are always strongly focused on cost control and improving operating efficiency despite investments in distribution expansion and quality improvements.

Slide 21. The coverage ratio reported a slight decline, basically due to higher IT investments, expansion of the distribution networks and to fee restructuring in the individual segments as from the first quarter 2008. Taking into consideration that this is an accumulated 12 months ratio, improvements normally tend to occur only after this period. However, we are counting on the growth in the operations and in the client base to anticipate this cycle.

Slide 22. On this slide, we show the improvement of funding with an outstanding performance of demand and savings deposits, segments in which we are the leaders among the Brazilian private banks. The strong expansion in timed deposits was due to funds, the solid loan book growth and to the impact of the new reserve requirements of 25% over funding operations of leasing companies. In the asset management segment, equities had the best performance, growing by 9.5% in the quarter and by 119% over the last 12 months.

Slide number 23. In order to provide a better understanding of our insurance, private pension plans and savings bond operation, we are presenting here in this slide a summary of our insurance group income statement. Slide 24. Revenues from insurance premiums, private pension plans and savings bonds reached BRL11.1 billion in the first half of this year, a 13% year-over-year growth representing a 24% market share with the data that are released up to May 2008. Given these results, Bradesco's insurance group remains top ranked in property and life insurance as well as in open pension plans.

Slides 25 and 26. Owned financial assets and technical reserve guarantees reached BRL71 billion, equivalent to 36.3% of the market. Let me add that these assets correspond to 80% of the pension plan and VGBL investment portfolios. Total assets grew by 14% over the last 12 months. Technical provisions reached BRL62 billion or 35.5% of the total insurance market, again with May 2008 figures.

We would like to draw your attention to the technical provisions in the health insurance segment which amounted to more than BRL3.3 billion. As [corporate] Bradesco has provisions, I would also like to point out that if current market conditions are maintained, especially in regard to the level of claims and the capability of adjusting premiums to keep pace with medical inflation, we do believe that our health provisions level is appropriate to the identified risks according to the respective technical notes.

Slide number 27. As you can see in this slide, we present two ratios related to the insurance efficiencies. On the top of the slide, on the left side, we can see the efficiency ratios which decreased by 0.2% in this quarter. Improvement of this ratio reflects the reduction of personnel and administrative expenses. Below, on the right side, we are presenting the combined ratio, which shows a slight decline in this quarter in spite of an improvement of 2.2% in the first half of 2008 vis-a-vis the same period of last year. This ratio indicates the real operational efficiency of the insurance group regarding claims control and underwriting costs.

Slide 28. On this slide, we present Bradesco's guidance for 2008. Once we are in the middle of the year, some guidance indicators were changed, as you can see. Concerning loans, we increased the growth perspective range from 21% to 25% to 24% to 29%. This increment was done due to the higher demand of large corporate clients -- of large corporate clients, sorry. By the way, I would also like to point out that the increase in operating expenses that you can see on this slide is due to the impact of the inflation rate, the IGPN on the top of administrative expense.

Slide 29. Here you can see our economic areas forecast for 2008 and '09 regarding GDP-based rates, inflation and the exchange rate. The highlight here is the base rate projection which should reach 14.75% by the end of this year, but should be declining in 2009.

In conclusion, we went through many challenges in this semester. Uncertainties derived by strong turbulence in the international financial market, higher inflation and interest rates which impact administrative and funding costs, creation of a new reserve requirement over funding, reaching up to 25% for the leasing funding derived for other ends, but leasing, readjustment of individual client fees including the extinction of the credit processing fees called TAC, increasing the IOS tax which impacts loans to individuals, increase of the social contribution from 9% to 15%.

So, in general terms and considering that we have many structural and expansion projects being implemented, we consider that Bradesco presented very good results in this quarter. We would like now to open the floor to your questions. Thank you.

Thank you. (OPERATOR INSTRUCTIONS).

Our first question comes from Mr. Jason Mollin from Goldman Sachs.

Hello, everyone. I have two questions. My first is related to the expansion and the distribution network of Bradesco that you highlighted. Can you quantify how much Bradesco spent on these investments in, let's say, branches and mini branches in the first half of the year? How much was expensed versus being capitalized and what we should expect on the second half of the year in terms of investment and what will go through the income statement?

And my second question is related to the net other expenses line which was over BRL1 billion in the second quarter and about BRL2 billion in the first half. Obviously, there are lots of moving parts in there and I know it's not easy. Well, for me it's not easy to forecast this, but is there any -- and this was -- the last two quarters have been a bit of an uptick from where it was in the past. Is this kind of the level that we should expect going forward? If you can comment on that. Thank you.

Hi, Jason. Responding your first question, we don't have the exact amount of these additional investments. First of all, in terms of IT, the IT improvement project is a project of around $1 billion and we roughly already invest approximately 70% -- of that. On the top of that, we usually invest $1 billion a year in IT. In terms of distribution, the average cost for opening a branch spans between BRL700,000 to BRL800,000. And we are planning to expand, basically over three years, approximately 500 branches. So, this has an impact on our cost.

But I cannot tell you precisely what would be the incremental cost for -- that we are passing through over the last year or at least over the last years. But definitely what we intend to do is a process of amortizing this cost on the longer period of time. And we expect the cost to income ratio to be relatively flat over the next 12 months. But after this 12 months, it will be beginning to move down from the actual 41%, 42% to around 37% in the range up to the next three years. So this will be, I would say, a guidance we could be giving you in terms of cost to income ratio.

In terms of the question that you have of other operating revenues and other operating expenses, I would say the range that we are passing through since this year has been moving up the net amount to more than BRL1 billion. It's very difficult to give you a precise direction for that because there are sometimes some expenses that are recurring that we include in other operating expenses that are difficult for us to predict going forward.

For example, sundry provisions and others that I mentioned in the explanation are difficult for us to predict. But in general terms, we have a level of net revenues and expenses which moved up definitely this year, but we cannot tell you precisely in which direction it's going to go. If it's going to grow more than that, we don't think so. It should be relatively stable. There are some expenses linked to civil provisions that might be occurring in the future that are again very difficult for us to project going forward.

Thanks, Jean.

Excuse me, our next question comes from Mr. [Jan Ismay] from [Natsky Capital].

Hi. I just had a couple of questions as well. The first one is just a confirmation question. On the split of net interest income, the non-interest element of 870, can I just confirm that just includes trading for the treasury gains as well as provision recoveries? The other question is just on the operating expense gross guidance. I saw that the top end of that has just been increased up to 17% year-on-year. With OpEx running at about 15% year-on-year in the first half, is that a sort of suggestion that you see that rate picking up towards the end of the year as we see more expansion costs coming through?

Hi. In terms of the -- this net interest income calculation, what we consider as non-interest would be a series of different items. You have the recoveries for loans. You have the effect of the mark-to-market of securities. You have the effect of trading gains. So, you have several pieces that take part into this calculation.

We basically just wanted to highlight that the level of this net interest income derived from non-interest has been, if we look over the quarterly explanation, higher. But historically speaking, if we analyze this portion of non-interest compared with the total net interest income, we have a range of participation of this between 8% and 15%. And actually, the highest was in the second quarter of 2007.

In this quarter of -- the second quarter, it was 13% as it was in the last quarter of 2007. And just to explain why it jumped out quarter-after-quarter, first of all, the sovereign risk was much higher in the first quarter, higher than in the last quarter of 2007 and also much higher than in the second quarter of '08. So, part of that was a higher sovereign risk in the first quarter. This also affected the stock exchange market. There was a decline in the [individual] index of 4% in the first quarter and an increase of 6% in the second quarter.

Third, you had more recoveries that usually happen in the second quarter -- BRL80 million more recoveries for loans, so comparing second with first quarter. And last but not least, a lower realization -- negative realization of some derivatives in the amount of around BRL31 million. So, just to reemphasize that the level of net interest income just derived by this non-interest part actually is not a record high. It's actually within the range. Just the first quarter was much weaker than that.

When you talk about the operating expenses, the operating expenses guidance is -- that we are showing in the slide number 28, we have a range of 11% to 17%, so a little bit higher and part of that because of the inflation -- the inflation has been moving up in Brazil because of increasing the staff of the bank because we are expanding the operations. So, this actually affects the cost.

So, the range will be a little bit higher. Instead of 10% to 16%, 11% to 17%. And just to give you an idea, we are going to have, in the third quarter, the annual agreement for increases of wages with our employees. And to give an idea, for every 1% of increase, which is approved between the banks and the labor part -- the labor union, we have BRL3.5 million more expenses. So, this is something that should not, per month -- so actually, this should not be changing dramatically our expenses going forward. But we, basically, are increasing a little bit the operational expenses for the second half of the year.

Fantastic. Thank you very much, Jean.

You're welcome. I'm sorry for the long explanation.

Actually, much appreciated. Thanks.

Thank you.

Excuse me, our next question comes from Mr. Saul Martinez from JPMorgan.

Hi. Good morning, Jean and Milton. A couple questions. First, I wanted to follow up on Jason's questions on the other operating expense line. In the -- just looking at the other operating expense line, it rose 31% sequentially in the first quarter. Second quarter was 40% above the levels you've seen in the fourth quarter of last year. And it's been one of the primary drivers as to why your recurring earnings momentum hasn't been better than what it is. And frankly, I don't really have a great sense for what's driving that increase.

And there's obvious -- I realize it's very difficult to forecast that and to look at that and there are numerous items in that. But obviously with that magnitude of an increase, there's something going on there that's driving up expenses. And can you just comment on that? What -- it may be even in general terms as to what's driving that -- what's been driving that expense line item up and if you can just give us a little bit of color as to what the primary factors have been there.

This was the first question.

That was the first question, yes.

Okay. So responding to your question, I would say -- what happens is that you have an increase of some specific expenses that are classified in other operational expenses. Some of them would be linked to civil provisions.

You have some customers which answer -- who answered with lawsuits against the bank to recover economic plans, kind of losses that they believe they have in their savings deposits and others. And we basically had to make provisions. Actually, the provisions were a little bit higher than we estimated. We thought that they were basically ending, but they continued to come. So, part of that would be more provisions, civil provisions.

On that question -- Jean, on that question, in the past you've normalized for that and you've taken that out of recurring earnings, the provisions for past economic plans. Is there a reason why you haven't this quarter?

Just a second, please. For the [greater] plan, basically the greater plan, basically the provisions were already done and it's okay. But there are some provisions for [their own] plan with are in the amount of around BRL100 million to BRL150 million per quarter, which could maybe continue. So, it's again, very difficult to predict if it's going to continue for how long. But probably, maybe over the next couple of quarters, so affecting just up to the end of this year, these provisions should be built and would not -- would no longer impact the 2009 numbers. So, it would be just maybe up to this end of this year.

Okay.

And another kind of pillar of provisions for expenses are linked to discounts that you give for loans that are classified in these other operating expense.

Okay. And that's great. Second, let me ask you just a follow-up question also on your expense guidance. Obviously, the wage negotiations are going to impact the second half results. In your 11% to 17% guidance, what are you kind of expecting for increases in wages?

Just a second. Sorry, Saul.

Yes, no worries.

Basically, last year we had a negotiation increasing the wages of the employees of the bank of around 6%. Obviously, this year we have more pressure on inflation than last year. But it is very difficult to give you a guidance if it's going to be the same or more. More pressure on inflation, but this is something that will be a negotiation between the banks and the union of employees.

Okay. All right. Thanks a lot, Jean.

Excuse me, our next question comes from Mr. Jorge Kuri from Morgan Stanley.

Hi. My question has been answered. Thank you.

Our next question comes from Mr. Mario Pierry from Deutsche Bank.

Good morning, everybody. I have two questions. The first one is on your tax rates. It seems like you chose not to activate some of your deferred tax credits in light of the higher social contribution tax. I just wanted to know what is the policy of the bank going forward? When do you plan on making this activation?

The second question has to do with the funding environments in Brazil. Clearly, you have been funding the bulk of your loan growth of the timed deposits. I was wondering about the evolution of your costs, of your timed deposits. I think, at the beginning of the year, your timed deposits were pretty much close to market rates. We heard March or April that for some banks, they had increased about 104% of CDI. So, just wanted to get an idea if you've seen some relief in that front. Thank you.

Hi, Mario. In terms of the -- this higher social contribution that banks have to pay since this quarter, actually, what we are doing is disembursing. We are paying that. But we are activating deferred tax assets, mainly to neutralize fully this impact. So, what we -- there is a cast disbursement impact, yes.

But on an accounting way, basically, you can neutralize this effect and in this quarter, we had around BRL200 million of higher expenses which were basically neutralized. And we have an increasing stock of deferred tax assets of BRL1.27 billion because they were calculated before at a rate of 9% and now, they are calculated in a rate of 15%. You can have, basically, access to that on the -- this information on the footnote number 34E -- E like England.

Okay. So -- I'm sorry, Jean. So, is that the policy going forward is just to activate enough to neutralize the quarterly impact? And then, the -- we are calculating an effective tax of 27% in the quarter. Is that the level you expect to see for the remainder of the year?

Look. These are two different items. First of all, we are questioning through lawsuits this higher social contribution. So, since we are questioning, we are basically -- every quarter that we have to disburse, we are going to have this usage of the tax -- deferred tax asset. This is one thing. If we look at the effective tax rate, there is zero impact on that. The only change is that the bottom line of the Company, the net income has been growing. But what helps most to reduce the effective tax rate is the usage of interest on capital.

The interest on the capital is set by the long-term interest rate and it's stable at around 6.3% a year. But the net income is growing. So theoretically speaking, the possibility to lower the effective tax rate will be shrinking because you have more net income, but with a stable long-term interest rate. So basically, the idea is to have the usage as much as we can.

But effectively, if we look at the posted numbers, you increase by roughly 1% the effective tax rate between the first and the second quarter. So, maybe the trend will be to be at least maintaining this level because you have still a growth in the bottom line, but with no increase in the long-term interest rate.

Okay.

To respond to your second question --

Just -- sorry, Jean. Just going back a little bit. Sorry. Like you said, you guys are questioning this increase in social contribution. When would you expect to get a final decision on this?

Just a second, please. Mario, sorry. First of all, when I say Bradesco's questioning, actually [Febrado] on the Union of Banks is questioning. They are questioning in the name of the banks. With the actual stock of deferred tax assets which increased by almost BRL1.3 billion, we would be able to neutralize for almost 24 months these effective higher social contribution. So, it's not possible for us to tell you what is going to happen with this loss. There is zero expectation of timing for that. But there are at least 24 months that we can continue to use this deferred tax asset to neutralize the social contribution.

Okay.

Okay?

Okay.

For the second question that you asked me, in terms of the environment, definitely loan books continue to grow strong and the funding is coming the most from timed deposits, more with institutional clients. So basically, part of that because of higher loan demand. We need more funding. But also because you have more with the requirements because every -- basically every month, you have to increase by 5% the collection of reserve requirements from releasing operations up to achieving 25% by the beginning of next year.

In terms of the cost of this funding, actually, the cost of funding has been relatively stable. In the beginning of the year, when the reserve requirement was launched, there was an impact yet on the cost of the funding. But since then, there is a requirement basically the impact of the reserve requirement was lower on the cost of the funding and the cost is relatively stable. But obviously, with institutional clients, the cost is closer to the [syndic] for a little bit higher than the syndic.

Great, Jean. Thank you very much.

You're welcome.

Our next question comes from Mr. Daniel Abut from Citigroup.

Good morning. My question is on asset quality. You said in your remarks that overall it has been stable. In page 17, when you give the details for different type of loans, we do see though a small slight increase in the delinquency rate for individual loans which went to 6.7% after being stable for a number of quarters.

I wanted you to talk and comment what trends do you expect to see in delinquency in individual loans going forward, particularly as you head to 2009. Because it's clear that you're expecting a much slower economy next year. If I'm not mistaken, you're now expecting only 3.5% GDP growth next year. So, much lower than this year than last. But also you continue to grow very fast. In most individual loan categories, you reiterate your guidance of about 25% to 30% growth this year for most of these lines. So, would you comment on expectations for quality in individual loans going forward?

Okay, Daniel. Basically, the delinquency ratio is stable for the bank as a whole, around 3.5%. And the delinquency for individuals, which basically moved up in the process up to December of 2006, but basically because of a change in the mix of the portfolio moving into different credit lines. So, there was also a kind of learning curve effect, for example, in private label cards in orders we had to understand better the application of the scorage system. And then, since that it has been relatively stable at 6.4%.

You -- I believe you remember in the first quarter, we mentioned that there was an increase in delinquency which was more geared towards the loans to motorcycles and we had to basically readapt to put into place again some double checking that we, for a period of time, we didn't have on some specific question that will basically impact still the delinquency ratio for individuals. So, what we are posing here at the 6.7% also takes into account this motorcycle credit portfolio. But it's very difficult for us to subtract from the delinquency ratio what is the effect, the full effect of this motorcycle delinquency ratio increase by the scorage that we are improving.

For the next year, again, Brazil is growing strong. We have more employment. We have a better employment and the delinquency -- the -- sorry, the unemployment ratio has been the lowest. For the next year, some economists say that some unemployment rate is going to increase. It's difficult to tell you by how much, but I believe what is important for you to know is that most of the credit lines that Bradesco is working with individuals, they have collaterals, like auto.

So -- or they directed into credit lines where the risk is much lower like the payroll deductible loans. So in general terms, this should be making the effect of Bradesco over the next year if you really have an increase in the unemployment rate being much more mitigated than maybe with other banks.

Is it fair to say, just to follow up, Jean, fair to say that you are not overly concerned about credit quality next year given the base of origination that you continue to do and that you expect to continue doing in the second half of this year?

Look, Daniel, it's fair to say that we are always concerned to have the best asset quality as we can. And obviously, if the situation is good, we will not be forgetting about the scorage, the investments on training and so. But for next year, I would say we are not so concerned that you could, we could see another wave of problematic loans coming into the banking system also because most of the banks have been investing massively in systems and in training.

Fair enough. Thank you, Jean.

Excuse me, our next question comes from Ms. [Liniella Aderland] from Credit Suisse.

Hi. Good morning. Thank you for the call. My question is about your capital ratio which has decreased a lot and I was wondering if this is a level that we're going to see for the next quarters. And I was also wondering what made you revise so much your guidance on the payroll deductible loans for this year. Thank you.

Hi. Basically, the level -- and we tried to explain that in the presentation, that we consider the capitalization ratio of Bradesco extremely sound. If we look at Basel II, it even increases. And if, on the top of that, we consider [a lot of] the Central Bank, it goes almost to 17%. So, this is much -- more than enough considering that the minimum ratio in Brazil is 11%. So, we are totally comfortable about the capitalization ratio.

In terms of the guidance that we giving for the payroll deductible loans, we changed the guidance from almost 100% to maybe even less than half of that because there were a series of changes in the legislation which affected the growth of the business. Also, there was a possibility to direct part of the loans to cards. That maybe you would be seeing part of this growth in the guidance of cards.

So, part of the growth of payroll deductible loans would be included in the card and not in the payroll deductible loan line itself. And we revised down to 35% to 45%. But we definitely will believe that we have a solid edge with the acquisition of BMC and that's very possibly, although the -- up to the end of this year or the beginning of next year, Bradesco and BMC together should be leaders in the payroll deductible loan business.

Okay. Thank you very much.

You're welcome.

Excuse me, our next question comes from Mr. Victor Galliano from HSBC.

Hi, Jean. Just a follow-up on that payroll deductible, first of all. So would it be fair to say that you're not going to be giving up market share by bringing down this guidance? It's more a question of how the market is going and how the market is growing in payroll deductible loans that this revised guidance reflects.

And then on my second question, on fee income, we see here the guidance is 5% to 8% for the full year. Would you be -- would you be thinking that the growth rate would slowing in the second half of the year and what can we expect to see in key areas like fee income from checking accounts and credit operations which have obviously been one of the more disappointing of the big size -- shall we say the big contributors to fee income?

Hi, Victor. Yes, you are correct. We will be growing less in payroll deductible loans, but we are going to grow our market share and the markets should be growing less than Bradesco will be. The approach of BMC and the distribution that BMC has and the expertise, obviously, are a solid edge that we have vis-a-vis the competition.

In terms of fees, we obviously, have a tougher year this year. We have been growing double digits during many, many years and people were used to it. And with the change of the legislation, basically, we had an impact. We changed the guidance and we performed, over the last 12 months, at the range of -- at the rate of 7.9% growth, which is inside the range that we have here. Maybe we have still some deceleration in the second half, but we are comfortable to say that we should be achieving in 2008 this guidance of 5% to 8%.

It's also important to tell you that 2008 is a transition year. From 2009 on, we will be able to grow again because we are going to grow the client base. We are going to grow, obviously, the businesses. Maybe Brazil is growing less its GDP -- 3.5% in 2009 than 2008, but it's still growing higher than the average growth of Brazil for many, many years. And also, we will try to increase the number of products per customer in a way to increase the service fees.

It's also a key driver on that as you -- as was mentioned, and you said our cards, we are growing definitely, massively the number of cards, the number of transactions and the fees that are generated from that. Asset management also is a very big component. And checking accounts will be from -- checking accounts and credit cards will be growing next year, but from a new basis because you have several fees that you used to charge before that you are not allowed to charge anymore. But you will be growing with volumes.

So fees, again, a transition year, but from 2009 on, you should see good performance again in fees. And then the coverage ratio comparing costs and fees which basically declined from almost 80% should be, probably, over the next 12 months, coming back to close to 80%.

Okay. Thank you.

Excuse me, ladies and gentlemen, since there are no further questions, I would like to invite Mr. Jean Philippe Leroy to proceed with his closing statements. Please, sir, go ahead.

Okay. Independently of being always open to more questions, if you want to call us, please feel free. Thank you for taking part in the conference call and if you have further doubts, please don't hesitate to call us. Thank you. Good-bye.

That does conclude the Banco Bradesco audio conference call for today. Thank you very much for your participation and have a good day.