Banco Bradesco SA
BOVESPA:BBDC4
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
12.23
17.55
|
| Price Target |
|
We'll email you a reminder when the closing price reaches BRL.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Banco Bradesco SA
You don't have any saved screeners yet
Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Bradesco's Second Quarter of 2020 Earnings Conference call. This call is being broadcast via the internet at banco.bradesco/ir, where you can find the presentation available to download as well. [Operator Instructions] After the presentation, there will be a Q&A session, where further instructions will be given.
Before proceeding, we would like to mention that forward-looking statements that might be made during this call in relation to the company's business perspective and operating and financial projections and targets are beliefs and assumptions of Bradesco's management as well as information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may also affect the future results of the company and lead to results that differ materially from those expressed in such forward-looking statements.
Now we would like to give the floor to Mr. Leandro Miranda, Executive Director and Investor Relations Officer.
Good morning, everybody, and welcome to our results conference about the second quarter 2020. Octavio, our CEO, will be making the presentation; and we also have André Cano here, our Executive VP; Vinicius Albernaz, CEO, Bradesco Seguros; and Carlos Firetti, Market Relations Director and Head of IR.
Thank you, Leandro. Good morning, everybody. Thank you very much for participating in our call about the results of the second quarter. And the second quarter was one of the most challenging quarters in our recent history of the bank because of this pandemic that is having a very strong impact on the economy and also on our clients and all Brazilians. And in a scenario -- an unprecedented scenario like this one, liquidity is fundamental and the new operating conditions are very important.
And with the control of the pandemic and the pace of opening of the economy as of May, probably with the contribution of the emergency aid and the beginning of the reopening in other countries, we started to see an improvement in the activity and in trust as well. Today, we see a still difficult economic scenario, but maybe we could say that the worst is already water under the bridge, depending on a second wave or a return of the pandemic.
On the first slide, we show you some highlights of the second quarter 2020 and also the first one. And our Chief Economist, Fernando Honorato, said that the expectation of the GDP improved from 5.9% drop to 4.5% drop. And in the quarter, we had a growth of credit of 0.9% and 14.9% in 12 months, driven especially by the segment of corporations or legal entities.
Amongst the many measures adopted by the Central Bank, we had the liberation of reserve requirements amounting to BRL 24 billion. Between April and June, we released BRL 129 billion in new credits. And one of the main highlights of the quarter was the process of extension of credit operations for clients that were not [ lended ] at the end of February. The total of extensions amounts to BRL 61 billion, giving comfort to our clients in order for them to cross this crisis or overcome the crisis.
And we will be showing you some details of these extensions, the quality of credit and showing the quality of credit for the next few slides, showing the relative comfort that we have vis-à-vis the extended credits. In this context, we continue to anticipate ourselves to the effect of the crisis, strengthening the balance sheet with credit position of the bank and conservative positions as well at the insurance company.
Our expanded provision expansion -- our expanded expense or loss of credit, BRL 8.9 billion, reflecting the efforts made by the bank and the insurance company. We made the cautionary provisions, amounting to BRL 1.1 billion in the quarter.
In the half year, we will be going into details. And another highlight of the quarter was the performance, of course, is the strong control in all areas. And later, we'll be talking in detail with our plans about cost reduction structurally. And our liquidity continues to expand, with the increase in the volume of funding, BRL 83 billion, in the half year. And the core capital ratio increased by 120 bps, recovery part of the reduction, with significant reduction that we had in the first quarter.
On the next page, we talk about our actions during the pandemic in many fronts, especially about the well-being of our people, our employees, support to our clients, support to society.
In relation to our employees, one of the main measures was the maintenance of most of them in home office. And this was the main measure. And today, 94% of our people who were in the offices are working from home. And 50% of those who work in the branches, they work in a weekly rotation system as we have to deliver this essential service to our population.
And another highlight, and that was very well received by our employees, was the fact that we imported 500,000 tests, COVID tests, and also the Fleury laboratory. And to test all the people in the organization, we have already carried out 57,000 tests. And our employees will be tested again when they are about to return to work in the offices, depending on the situation of the pandemic.
Our Viva Bem program gives our employees the necessary support and the follow-up in case of contamination by COVID, both for our employees and their families. And for our clients, we make available all the necessary support to cope with the crisis, and we extended BRL 1.9 million of credit contracts amounting to BRL 8.2 billion in installments. And we were players also in programs to support the society with donations to fight this pandemic.
On Page #4, a highlight for the digital channels. Due to the social distancing in the last few months, we saw an acceleration in the trend of digitalization of clients. This was consolidated, and we added, in the second quarter alone, 1.4 million users of mobile banking. And we added an additional 900,000 account holders with a digital profile in the last month. Over 100,000 people have opened an account within Banco Bradesco in the month of June and via -- not to mention the other channels.
And the crisis brought about the reduction in the economic activity, with a negative impact on bank transactions in general. And even in spite of that, the transactions with mobile banking grew by 17% in the quarter, 33% in the last 12 months. On the other hand, there was a strong reduction in the volume of transactions in our bank tellers. The reduction in the use of tellers by our clients opened an avenue for the deepening of the transformation of our branches.
Now going to Slide #5. We talked about the many fronts of digital transformation in Bradesco. And one of the main fronts today is the transformation of the traditional bank into mobile bank. And in this sense, recently, we introduced our new app for mobile banking, an important evolution vis-à-vis the previous version. And with a much faster experience, a customizable screen, and our clients can highlight their functions or the main functions that they use more frequently.
And also on this slide, as I said, we highlight 2 strategies that we consider as winning strategies. Ágora investments, our investment house for clients who want an open platform with many options. And Ágora, in 2020, had a growth of 22.4% in client base, reaching 449,000 clients. And the Ágora app is integrated into the Banco Bradesco app and more reach in the Internet. And we believe that there is an opportunity for our client base at Ágora. We have over BRL 50.6 billion in assets under custody at Ágora, a growth of 7.7% in the year. Know that the assets are not mainly equity.
And next, our native digital bank with a free service, also growing very steeply. We reached 2.7 million clients in June '20, and we believe that we might be able or we will be able to reach 3.5 million accounts by the end of this year. We see a strong evolution in the volume of transactions carried out by next slide just up here. 30% of the client base of next uses this digital bank as their main bank.
And next also got a very good assessment at the App Store as an evolution over the last year, and this reflects a very high NPS of 77.6. And as we said in the first quarter, we are working for the segregation of next Bradesco. And this will be a separate company with its own policies, its own manager, and we expect to do this by the end of this year.
And now going to Slide #6. We talk about the details of our results and our financial highlights of our balance sheet. And this balance is very well balanced. And with 4 essential actions that took place, and we identified at the beginning of this pandemic is: with the reduction in cost, a very rigorous one, I would say a radical one; and also new funds for the organization; new clients and new investments for the bank; and the fourth, growing credit with quality, very good quality credit. Because we have a very well-balanced balance sheet, not only because of the results and the indicators, but mainly because we show you what the company is doing, what we will be doing in the future.
On Slide #6, we have the financial highlights. And of course, we continue to be under pressure from the economic environment. Net income growing 3.2% in the quarter, BRL 3.9 billion, still 40.1% lower on a year-on-year; compared to ROE with a slight expansion reaching 11.9%, still lower than what we consider the ideal level. Shareholders' equity growing by 4.3% in the quarter under the positive effect of income retention and reversal of part of the mark-to-market that were negative in the first quarter.
NII growing by 15.3% in the quarter, and the expanded provisions reaching BRL 8.9 billion, a growth of 32% in the quarter. And the result of the insurance company recovered, growing by 29% for the quarter but remaining 9.6% lower than '19 on a half-year comparison. And fee income, still very much under pressure from the economic scenario. And finally, operating expenses highlights an excellent performance, with a drop of 5.5% on a year-on-year comparison.
Now going to Slide #7. We show a deceleration of the origination of credit in the quarter, [ very naturally ] with a reduction of demand in many different lines. Maybe in the large core -- large core growing by 18.2% year-on-year. But if we talk about PME (sic) [ SME ], we maintained a good growth of 11.7% per year, but with a natural drop in the quarter because this line reflects a reduction in the demand for credit, mainly for the expansion of businesses, which normally is the main driver for growth.
Payroll loans with a good growth, 14.2% a year, with a recovery of demand as of May. It started in May. And highlight is the maintenance of the strong growth in our real estate financing, growing by 18.8%. And 11.2% drop in our credit portfolio because of the reduction in the volume of transactions because of the pandemic, as we said. Sometimes we see even 35% reduction in transactions with credit cards. However, this has already been improving gradually. And we believe that the recovery will happen as soon as we reach a recovery in the economy. In vehicle financing, growing 8.7%; a reduction in the sale of cars brought this drop to 4%. And we expect that the recovery of credit demand in the second half comes with the reopening of the economy.
Now going to Slide #8, where we talk about funding. We had a significant performance in funding, 14% increase in net of funding for reserve requirement this quarter and 39.3% in 12 months. We added 83 -- over BRL 83 billion in the first quarter of 2020. And this reflects the movement that we call flight to quality that occurred in the pandemic that led us to receive a significant volume of deposits.
And another item is that the ratio of loans vis-à-vis funding, loan to deposit, closed the quarter at 83%, a very comfortable level. And once again, what I said in the first slide, the actions of the Central Bank to reduce reserve requirements at the beginning of pandemic, to release funds of BRL 24 billion for Bradesco S.A. liquidity. And this year alone, we added to our loan portfolio BRL 38 billion in net -- or in credit, net of amortization, considering originations of BRL 129 billion. That is to say, much more than the BRL 24 billion that were released in terms of the reserve requirement.
Now on Slide #9. We show the concentration of credit of Bradesco. On this slide, we show the diversification of our portfolio. The portfolio, totally diversified with the low exposure to sectors that are more impacted by the crisis. As you can see, we have a list here, 0.2%, for instance, airlines, et cetera. And the portfolio in foreign currency represents only 7% of the total, and the funding is always in the same currency, and our loan portfolio is covered by 59% by real guarantees. And if we look at the coverage for individuals and SME, the coverage is still much higher than that.
And now going to Slide #10, talking about provisions for credit risk. Our expense with expanded provision or credit risk reached, in the quarter, BRL 8.9 billion, with a growth of 32% in the quarter, representing 5.4% of the portfolio. We highlighted the average of the provision was BRL 7.5 billion, much higher than the quarterly average that we saw in 2019 that was BRL 3.5 billion.
And this reflects the methods for provisioning that we are carrying out by means of establishing a supplementary provision, but also reflected in the required provisions. Probably, we have already reached the peak of the cost of credit in the second quarter of '20, with room for further reduction in the next few quarters and also the variation, half-year variation, depending, of course, on the extension and the return of cases of the disease and the effect of the economy, of course.
The building of our provisions occur based on the expectation for future losses, future losses in our credit portfolio. Provisions are based on our models, considering the historic information and our perspective as well, a little of what we showed in the first quarter. And there was a study carried out by our risk area, taking the most impacted sectors of the year, and also in '16, '17, scenarios that were aggravated by the pandemic in a scenario that is unprecedented.
So today, we have a total credit provision on our balance sheet of BRL 43 billion, with 99% of the credit portfolio, which gives us a relative comfort. We are well positioned for any scenario that might happen, considering that we have a higher volume of operations with guarantees that -- than in the crises of 2008 and 2015, '16, and the risk is lower. So we are well positioned for the moment, and this will continue towards a greater scenario and making the necessary adjustments whenever necessary.
Moving now to Slide 11. The delinquency ratio show the reduction in all lines, both for 90 days overdue and 15-to-90 days overdue. The reduction at this time is due in large measure to the extensions and renegotiation. In addition to the traditional or total delinquency ratio that we show quarter-on-quarter, we also bring, this quarter, new information. It is the ratio, excluding the credits, 100% provisions, which is this chart on the right-hand side that you can see, ladies and gentlemen, in the upper part, over 90 days. So it will be lower, 1.2% for the total NPL, reinforcing the perception that we are very well positioned.
The NPL creation, now on Slide 12. What we can see this quarter is a significant reduction to BRL 2.2 billion in the second quarter, from BRL 7 billion to BRL 2.2 billion, also due to renegotiations and the sale of the loan portfolio, which was already 100% provisioned. The reduction occurred in all segments of the loan portfolio, and the provisions that we made in the quarter represented 398% of the NPL creation.
Now turning to Slide 13. Also important information with the reduction of the NPL and the strengthening of the provision in the quarter, the coverage ratio for NPL over 90 days in the second quarter increased strongly, reaching 299% against 228% in Q1.
We also show the coverage ratio for each segment of the portfolio. For individuals, ratio was 189%, and 375% for SMEs and 1,593% for large corporates. We also included in this chart another indicator of coverage, excluding credits, 100% provisioned. By this concept, the rate of total coverage would reach 602%, the first line of the chart, compared to 425% in the previous quarter.
Furthermore, we show the coverage ratio, including the renegotiated portfolio, to the nonperforming loans. The coverage ratio, the last line, the coverage ratio in this concept would be 124%. All of these indicators show that we are very well covered with provisions to deal with this cycle of credit.
Moving now to Slide 14. This is a totally new slide, by the way. For the benefit of transparency, we are only focusing on those information that had the installments postponed. One of the most important aspects of the crisis for the banking system has been the loan extensions, an instrument that we started to use to face the unique characteristics of the crisis.
Part of our clients suffered a temporary loss of income and need time to rearrange their financial situations or wanted to maintain a position of greater liquidity during this period of uncertainty. Now very interesting detail is that the average profile of clients who extended the loan is very close to the average profile of clients who remain up to date, confirming the thesis that these clients only became delinquent due to circumstantial issues.
So considering the extended portfolio, 60 days or -- which added 1.9 million payments with a total balance of the contract, but installments accounted for 8.9 million, 93% of these clients did not show any significant delinquency in the last 12 months. 71% of the balance has guarantee, real guarantee. 96% of these clients have a rating between AA and C, very good rating.
And another item is that these clients which extended have an average of 14 years of relationship with the bank, a long-standing relation with the bank and, therefore, delinquency is lower. 50% of the operations came from individuals, 50% from companies. So the line extended the -- in working capital were 32% of the total, with very good additional guarantee; followed by real estate financing, with nearly 30% of the total, 100% guarantee; and 52% to 54%, so all the operations with real guarantee.
Turning now to Slide 15. On Slide 14, we saw extended operations only. Now let us check the renegotiated portfolio as well. In June, our portfolio was composed of BRL 4.8 billion in loans recovered from write-off, 100% provisioned, and BRL 18.3 billion of other renegotiated loans. 65% of the renegotiations that occurred during the second quarter were less than 90 days late. So very recent debt and the percentage of success is much greater. And in June, the renegotiated portfolio had 68% of provision. Therefore, we believe that we have a very significant level of provisions in the renegotiated portfolio, enough with considerable leeway to cover the potential losses in this portfolio.
On Slide 16, the total net interest income, which is excellent news, it showed a strong growth of 11.1% in the quarter, leading to a growth of 9% in the semi-annual comparison. This behavior of NII is explained partly by the strong performance of the market portion, effect of recovery of the varying markets in which we are, but also owing to the good performance of the client portion, which grew due to the increase in volume, with a strong expansion of the loan portfolio in the last 12 months despite the negative regulatory impact offsetting the overdraft rate at 8%, which negatively affected the spread of the portfolio.
Moving now to Slide 17, addressing fee and commission income. This line proved to be one of the most affected by the crisis, particularly credit cards. The volume of transactions with cards and also the revenue mix will lower rates on the volume. However, our perception and the numbers in June and July show our perception that the line of card should recover with the reopening of the economy.
In addition, we had a negative impact in the line of asset management, with a reduction in the asset management rates of fixed funds and reduction of the volumes managed in these products as a consequence of Selic reductions, because many clients decided to have debentures, other securities and other types of investments, owing to the lower Selic rate. Additionally, we also had a reduction in the line of loan operations.
Slide 18 now will be addressing costs, which is one of the pillars, the key pillars in the organization. In operating expenses, we had a very adequate performance in the quarter. Operating expenses, including others, showed a drop in the annual comparison of 5.5%, and 3% in the semi-annual comparison. We had an excellent performance in the line of personnel, with a drop in the quarter of 12%, and also a drop in administrative expenses of 2.6%. This performance reflects the effort of reducing costs that we had in recent months.
As already mentioned, we've made precautionary provisions in the insurance company amounting to BRL 361 million in the first quarter and BRL 747 million in the second quarter, which are consolidated in the bank in the line of other operating expenses, which is the last line in blue that you can see on the left-hand side. So if you adjust the line of costs by these provisions, in the insurance company, the total costs represent a decrease of 6% in the quarter, 11.6% in the annual valuation and 7.6% in the semi-annual comparison.
Also, on the right-hand side, we can see significant improvement in operating efficiency, a reduction in the network of branch from 233 branches only this year. We use -- well, we committed ourselves to reduce 400, and the number will be even higher in 2020. And a reduction in the number of employees owing to the voluntary severance program, and the natural turnover that we have of the employees in the organization, around 7%.
Moving to Slide 19 now. Here we brought some levers of efficiency that we'd like to discuss with you, and certainly they will lead to a nominal drop of costs in 2020, 2021. And all the effects are already mapped, cost reduction and the structure and a nominal reduction of the costs. The program entails new initiatives and deepening of others which were already in course.
And I even mentioned the reduction in the number of clients who go to the branch. And now we can have a new structure and migrating more into digital channels, which will allow us to expedite and streamline what we do with the branch, reducing the number of branches, the points of service. And we use the model of home office intensively now that we learned how to work from home. And that will bring us important and very significant benefit to reduce our buildings, our structure, in addition to changes in administrative areas of the bank. And finally, we'll continue to see reduction opportunities based on changes of customer behavior, which should continue to bring possible benefits and significant benefits and cost reduction in the immediate future.
Now on Slide 20, addressing insurance. Bradesco Seguros, our insurance group, as you know, this is an important arm of the bank. And the income was naturally affected by the reduction -- financial reduction and also positively affected by the reduction in the loss of claims ratio. We also added precautionary provisions of BRL 1.1 billion. But despite the decline in the income, the share of insurance of the bank profit rose to 33% in the first half of 2020, showing the better performance from insurance and also in the period when compared to the bank.
As highlighted in the chart, there was a sharp decrease in the claims ratio in most of the lines, but especially health and auto, which also reflected in the improvement of the combined ratio, the provision that I mentioned made outside the line of technical provisions. In other words, those that are in the expense line that I mentioned 2 slides before, they seek to anticipate the potential risks of claims or loss ratio once the economy goes back to normal. People will have car crashes again, will start visiting the doctor again. And this is included in the chart, with simulations of provisions effect in the claims and combined ratios in the right-hand side of the chart.
Now moving to the end of my presentation, turning to Slide 21. We have good news to share. BIS ratio showed a significant improvement in the quarter, increase of 120 bps in the core equity to 11.5% and 110 bps in the Tier 1 capital to 12.5%. We see the current rates at quite comfortable levels. But considering our retention of income and the current regulation of the distribution of dividends, which restricts our payout to 30% of the adjusted income, BIS can improve even further.
This quarter, we adopted some measures that should reduce the variation of capital in times of crisis. We reduced our position in assets that brought to 1/3 of the position that we had in Q1 and, consequently, the overhedge. And despite being a neutralizing operation of the foreign exchange risk, a moment of extreme volatility of FX negatively affects our capital by the generation of tax assets. So we reduced by 1/3, and we also transferred part of our position of securities, which we intend to carry over until the due date to the line of held to maturity, which should also avoid impacts on the capital arising from the mark-to-market of securities in the equity. Our liquidity ratios also remain very comfortable, with the LCR at 170% and NSFR at 120%.
And to conclude our presentation, on Slide 22, I would like to give you some outlook for our performance in 2020. We feel it's not yet the right time to talk about a formal guidance. Despite the improvement in the scenario, there is too much uncertainty, but we are comfortable in providing a direction. For instance, we can see our loan portfolio will keep on growing in 2020 above the financial system. Our economists estimate that the loan market is expected to grow 5% in 2020, so we expect to go beyond that.
We see the net interest income growing in line with the loan portfolio. And the line of fee and commission income should remain pressured by the economic scenario, which probably will improve for the next 2 quarters vis-à-vis the second quarter. Income from insurance should benefit with a scenario of low claims ratio, but remains pressured naturally by low interest rates. And on the cost side, we have very positive news. We should have a reduction of costs in nominal terms in 2020. And in the next few years, we must also have reductions with the implementation of our program for the reduction of costs.
Finally, in relation to expenses with provisions, we can now say that we'll continue to have a conservative approach. But it's possible to assume that, considering the current scenario, expenses will be lower in the second half compared to the first half of the year. In addition, we can say that the expenses with provisions should be significantly lower in 2021, obviously, if the scenario -- if this scenario that we're going through, because it's too hard to say any magnitude right now, as long as there is no second wave. So this is what we expect to see for the second half of 2020.
Thank you very much for your attention. And now we give the floor to the Q&A session.
[Operator Instructions] Our first question comes from Giovanna Rosa with Bank of America.
I have 2 questions. Can you talk about the credit cost, please? Which was the variable that you used in order to read the current credit cost? And you talked about lower provisions for the second half of 2021, including the renegotiated portfolio, which isn't according to the history or the historic levels that you mentioned. And it seems to me that it should be higher, considering the level of renegotiations and also the economic deterioration that we see. So could you please go in depth into that and explain the reason why your current level of reserve should be adequate? And my second question has to do with the generation of revenues. You talked about the comparison with this credit, but the spread is going down and the environment is being more conservative right now.
Thank you very much for your questions. Regarding the cost of credit, Giovanna, the provisions that we made, you remember that, in the first quarter, I showed you a study made by our risk and our credit areas. And we consider these worst crisis, 2008, 2015 and 2016, and we aggregated this scenario, including this pandemic, which is still a big question mark. So the bank's capacity to generate results and generate income has to do -- which led us to make new positions in the second quarter.
But when we look at the operations that were postponed and we look at the profile of these clients, it's been very adequate so far. These are people that really are very responsive. So to save their operations, sometimes they need a longer term -- or maybe they need to renegotiate the debt or the term of the debt, but they are very good players.
So this is the reason why we are very comfortable about our levels of provision. They are very high, considering all debt. And we do have a very good level, and our coverage level, still 99%. It was 299%, and we reduced the long-term and the short-term delinquency as well. So of course, we will continue to observe this on a weekly basis and the payment of these installments. But we are very comfortable regarding our provision level, which is very adequate for the scenario of difficulty that could happen until the end of this year or the first quarter of next year.
Of course, the spreads are dropping, as you said so yourself, and fees also. But as I said, we believe that the worst has already -- is already water under the bridge because the lines of credit cards and charge cards, we had adopted 35% in the past, and I would say it. And another important factor is the flight to quality. That is to say we have more and more clients coming to the bank, making their investments with us. And they have over 2 million new accounts being opened in this period of difficulty last year. We -- that's the record of new openings or new accounts opened, not only Banco Bradesco, but also next, over 120,000 new ones.
So more and more clients coming on board, bringing with them their businesses, their investments and bringing the fees that they pay. So the scenario in -- also the reduction in other lines, this gives us a very good expectation in terms of gaining volume from these new clients that are coming on board on the organization. And we believe that it will be at least be able to keep our NII in line with our credit portfolio. Thank you very much.
[Operator Instructions] Our next question, Domingos Falavina, JPMorgan.
I would like you to talk about insurance, and you made a provision of BRL 150 million. But when you look at the loss ratio, the industry as a whole with the main business lines, they have [ defaulting ] consistently. And it seems to me that there should be some pressure coming from that. Also, for instance, in March and April -- and many things regarding health as well, health procedures, because they build up. It seems to me that this BRL 1 billion and something, and it seems to be, to me, a little bit conservative. But of course, there are some other factors besides mathematics. And with expenses not growing nominally in the last couple of years, I think this is quite an aggressive assumption.
Thank you very much. I will give the floor to Vinicius. He is the CEO of our insurance group, and he will be answering your question.
Domingos, in fact, we have a very strong history in the second quarter, with a relevant hike vis-à-vis the first quarter. In spite of the very small result, we see that this was based on nontypical situation, that is to say, both a [ nuisance ] and help because of the social distancing. And we believe that we have to normalize the results, and we do not see this as the current.
From the operational viewpoint, what we see is the degree of visibility that we have, and we work with this more challenging economic scenario as our assumption vis-à-vis our top line. And we believe that a significant part of the elective procedures that were not carried out in health, for instance, over the first quarter, they will come back. But we still have a very low visibility for that. So we do not have a time frame, but we believe that a major part of that will have to be done. And this will have an impact on the economic activity, and we still have to measure, ultimately, the results on our top line.
So in order to summarize, we believe that the premium revenues and contributions will come back. And the loss ratio will take the elevator, and the other will take the stairs, so to say. So it makes all the sense in the world to build these positions in order to normalize the results for the insurance group as a whole. Thank you, Domingos.
The next question is from Jorg Friedemann with Citibank.
I also have 2 questions. The first question is about extensions. You have BRL 61 billion, the last number I heard, the most current after you closed the quarter. It gave me the idea you could be close to BRL 65 billion. I would like to know if you confirm this number, and if you already begin to see customers who are moving away from grace period. What is the behavior of clients who left? In this sense, how many clients do you expect to leave the grace period after this quarter, end of the first semester? That's my first question. And second question, could you give us more color about the NII in the market? And to what extent is it structural, so we can work on these numbers down the road?
Jorg, thank you. Thank you for your question. With regards to extensions, you're right. The number is correct, BRL 65 billion in July, and it's becoming marginal now vis-à-vis the BRL 61 billion that we had before. Now an important thing about the question, by the way, a very timely question. 60% of extension -- and we could have another one, 65% of customers were in the first round. And the 65% who did not extend delinquency is 3.2%. So 35% in the second part of 60 days, which will be due depending on the month. I don't know if it was April or May, but will only be due in September, October or November. So that's what we said.
The characteristics of the clients who wanted to have an expansion or extension are -- they are very good payers. And for those who failed or maybe have lost their job, maybe we have to reorganize their financial lives. But the outlook to get the payments is very good. But naturally, we have to wait and see the effects and the magnitude of the effects of this pandemic. It's too early to say anything, but the scenario is good payers, good clients.
Octavio, can I just have a brief follow-up? This information is very important. You said 3.2% of NPL for customers who did not want to extend. Is it 60-day NPL?
No. No. Delinquency. Those who extend it -- let me start from scratch. Those who extended, the first installment was due in July. They paid April and May, and the first installment was due in June. They extended, and the first was due in July. So this is over-30-days delinquency, okay?
Perfect. It's clear.
And this is the delinquency rate that totals 3.2%.
Got it.
And the last question will be answered by Firetti. Firetti, what is the -- about the NII?
For NII, could you give us more color about the structural part so you can have a better estimate down the road?
Well, we do not disclose all the components. But within NII, with the market, we have commercial operations of the treasury, swaps, derivatives, et cetera. We also have ALM, which is basically assets and liabilities, and return on working capital of the bank and also a trading position that is pretty much based on flow trading. So these are the components of the margin, NII to the market.
ALM is structural. The appreciation of working capital and also the commercial area, that's for the last few years. So that's about it. These are the components.
[Operator Instructions] The next question is Eduardo Rosman with BTG Pactual.
I just wanted to ask you an update about participations or stake. I think you mentioned that for next, you intend to have a spinoff of the bank by year-end. I'd like to know what the idea is to have an IPO, and if it makes sense to have a key partner? Is there an update about Ágora as well? Does it make sense to have an Ágora spinoff?
And to Cielo, I'd like to know how you see the future of the company and if you believe the partnership is working with 2 banks or not. And what about you? You left the Board, but you're also being involved in the capital increase. So are you planning to increase your stake? And what about it? And I understand you also changed the investment rating or classification. So could you give us an update about the partnerships?
Eduardo, thank you for your questions. With regards to next, we are working on the preparation. It will be a fully independent company with its own CEO, CFO. The physical structure, the headquarters are fully separate from the bank, but it's 100% part of the organization. We have no intention of bringing any partners along, but we are always open to do business.
Now this company already has 2.7 million customers, and we expect to close the year with 3.5 million customers. If you think about digital banks in the past, $1,000 per customer, we're speaking of a company that will be worth $3.5 billion by year-end, which is nearly BRL 20 billion. It makes sense. It makes sense to go public one day.
We don't know if it's going to be fully separate. But that's a company which we intend to maintain with us in the organization. Ágora is a company that is led by Leandro, who is our Ágora Director. And we remodeled the whole structure. And the company is growing very significantly, and it's beginning to be a player with other key players in the market.
Does it make sense to spin it off?
Too early to say anything. We're still studying Ágora's structure. But Ágora is a company that will be increasingly more present in the life of Brazilian investors with its own team, consultants, experts in investments. So Ágora has its own path to take, and we'll be heavily investing in Ágora so it actually becomes one of the big companies in the market that can compete with any other in the market.
And Cielo, the partnership is great. It's the business that was disrupted and was dramatically changed by the regulation behind it. But acquiring is an important business to us. And it also adds to the way we serve our big clients and networks and retailers. So we'll continue having Cielo's business with us. To some extent, it is very important to us. So we keep the Cielo business.
And if it always boils down to investment, we have no other intentions. We will always aid investors because we have the insurance company, we have the insurance there. It's a very important cooperation in the earnings of our Bradesco organization. So we did have some challenges in the past, but shareholders, investors are always there, and that's only for investment purposes. And because we still believe in the business, we deem it would be reasonable for us or other shareholders to follow the private cash call and also investing there because the company is tackling its own problem, but it's nothing but investment to us. Thank you, Eduardo.
[ Gustavo Foz ] from Goldman Sachs.
I would like to have a follow-up. You talked a lot about expenses with provisions and credit costs. And based on the information that we have so far, do you believe that -- well, with what level of delinquency do you work? Why do you believe it has already reached a peak? What's the dynamic for delinquency right now? It dropped in this quarter based on the special conditions, et cetera. But what do you expect for NPL from now on? Should it open? Or should it go up suddenly or maybe gradually? Or what about up to the first quarter of 2021?
The second question has to do with expenses, operating expenses. We say that there could be a nominal drop in 2021 and the next years. But could you specify this? Do you have any plan regarding a further reduction in the number of branches? Could you give us some more information about that so that we may know whether there could really be a nominal drop, and based on what?
Thank you very much, Gustavo. With relation to delinquency, there has been a reduction. As we said before, we believe that the growth could be gradual, maybe reaching a peak in the first quarter of 2021, depending on whether a vaccine is found or not. But given the scenario today, looking at the snapshot and not a film, it should reach a peak in the first quarter of 2021.
With relation of the nominal drop, we have many actions that we are taking and putting in place. As we said before, the number will be higher than 400 branches, certainly. And besides, we will have a transformation in the ways that the branches work. Because of that, we will have a very major cost reduction. When you transform a branch into a business unit, you no longer need add 3 people for security, for instance, because it's got like BRL 10,000 programs for the bank in terms of security. So the structure changes will be strengthening this nominal drop that you referred to. Thank you very much, Gustavo.
Thiago Batista, UBS.
I have 2 questions. The first one has to do with the bank's capital. Octavio, you talked about the major reduction in the overhead. And with this major reduction in your overhead, what is the level of capital that you believe that is the ideal point, the optimal point, considering this reduction in overhead?
And the second question, in a few months, we will have the PEAC. How do you see the branches? Do you have more to gain in terms of cost reduction? And maybe you will be losing more because of the end of the [ tier, TED ] and other kinds of operations. So how do you see the scenario for that?
Thiago, regarding the bank's capital, at all moments, we try to improve the capital of the bank. We have the dividend payout of 30% now, so we will be improving 2.5 or 3, or the most adequate level, depending on the scenario that we expect to face. But going back to the levels of 2013, I don't know. Next year, we will go back to the level that we had before. And the PEAC is already a reality. And I think it's going to be important. I think it will be necessary. But I think that the utmost importance will not be the existence or nonexistence of [ the PEAC ]. It has to do with how we position ourselves in order to bring the others in a more effective solution for our clients.
Because the Central Bank will establish that it will be for the assets of our branch that have over 500,000 clients, so more important than PEAC is what I deliver to my client. So this is a trend in order to pay smaller amounts or making smaller transfer. You can do this with the PEAC. And this is not an absolute truth, which will take the -- the British market, for instance, 27% of the population is using this method. In the Indian market, another situation, because the people didn't have a bank account in India, so this was implemented. And with 30% utilization, Brazilians are part users. So the challenge that we have is how we adapt this to Bradesco so that our clients can do this through Bradesco and not through competitors. I think this is a major challenge.
The next question is Marcos Assumpção with Itaú BBA.
I'd like to give my question now with regards to the tax reform. I wonder if you could share your first impressions about the first part of the reform that was announced about the unification of fiscal things? And what do you expect to see for the future for the next parts still to be announced, including a potential tax on dividends, interest on equity and the increase of taxes for specific industries?
Marcos, the tax reform topic, while we cannot run away from it, not only a tax reform, it is a tax simplification system. The big problem we face in Brazil today is the amount of taxes that companies, not only small but large corporates, have to address on a daily basis. In the past, people would say, "This is in my area, I have 240 people just to handle with different taxes that we have all over the country, particularly with municipalities now regulating ISS or different taxes." So the tax framework in Brazil was quite complex.
And we know very well all the discussions that eventually we need to have with regulatory authorities, or even going to court in order to be protected from some lawsuits against us that have no ground whatsoever because we are compliant to the current legislation. So it's not only the cost -- it's not really the cost of the tax per se. The first decision of the tax reform is to increase our bank taxes, so we're going to pay more taxes, even more taxes. So it's not only the tax per se but the added cost you have in terms of staff, personnel, tax experts, lawyers, letter of guarantees, shortlists, in order to work and be protected with the current tax framework we have in Brazil.
As for the need, the real need for a tax simplification system or tax reform, we cannot -- we don't need to discuss that. Although directly, it's not beneficial for banks or to our companies, I would say that, indirectly, the cost or the cost reduction that we will have to handle in the future, when it comes to taxes in Brazil, will be very significant because the number of people involved is really large. Thank you, Marcos.
Anything about dividend, Octavio?
Now we are complying with a 30 -- with the Central Bank, 30% payout. So it will be at this limit set by the regulation, by the monetary authorities, and let's wait and see what happens next year. So we want to deliver, improve our results. And then we can share with shareholders so we can go back to normal. Thank you, Marcos.
Next question, [ Hernan Sugimoto ] with Santander.
A follow-up question about insurance. Vinicius made comments about BRL 747 million in order to go back to normal with the claims ratio, but is it only for health care purposes? This is where we expect to see an increase in procedures? Or is it spread over many segments? And the 71% normalization, it is lower than the historical figures. So do you think about claims ratio after pandemic being lower than historic levels? And if you think about capital abroad, you mentioned 1/3, are you comfortable at this level? Or should we expect to see a further reduction?
Thank you, [ Hernan ]. Vinicius speaking. We believe that, basically, the effect of this normalization applies to health care claims. However, we also believe there will be an impact in auto. For the future, we expect to see possibly an increase that may be even combined with some kind of worse social indicators. There's always an increase in the number of facts. And also the life insurance portfolio, despite the drop in claims, there was an increase in claims, specifically in the life insurance portfolio, particularly claims associated to the pandemic which were not originally priced. But we are speaking of a level of return over time, roughly speaking, associated to health care. And answering your question about the new normal level, we do believe there is a trend of seeing a drop in the claims ratio, considering these provisions. But we also believe that, prudentially speaking, with the information we have in hand today, the expected return of claims support the additional numbers that we've worked on. Thank you.
Hernan, with regards to capital abroad, we had a reduction. And it is good enough to face our operations abroad. So it is the adequate size. We don't need to touch it right now. It's correct to handle our business abroad. Thank you.
Thank you, folks. I would like to thank you all very much for your presence, for your participation, for your questions. And our team, Leandro, Firetti and everybody will remain at your disposal for any additional information. Thank you very much. Have a very good afternoon, and we wish you a very good day. Thank you.
Thank you very much. Bradesco's conference call has come to an end. We thank you very much for participating, and we wish you all a very good afternoon. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]