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Consolidated Financial Statements of the Prudential Conglomerate and Independent Auditors’ Report

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Consolidated Financial Statements of the Prudential Conglomerate and Independent Auditors’ Report

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Consolidated Financial Statements of the Prudential Conglomerate and Independent Auditors’ Report

 

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements of the Prudential Conglomerate.

 

8  December 2014

 

The accompanying notes are an integral part of these Consolidated Financial Statements of the Prudential Conglomerate.

 

Bradesco     9             

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Notes to Bradesco’s Consolidated Financial Statements of the Prudential Conglomerate are as follows:

Page

 

1)  OPERATIONS	11
2)  PRESENTATION OF THE FINANCIAL STATEMENTS	11
3)  SIGNIFICANT ACCOUNTING PRACTICES	13
4)  CASH AND CASH EQUIVALENTS	19
5)  INTERBANK INVESTMENTS	20
6)  SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS	21
7)  INTERBANK ACCOUNTS - RESERVE REQUIREMENT	29
8)  LOANS	31
9)  OTHER RECEIVABLES	41
10) OTHER ASSETS	43
11) INVESTMENTS	44
12) PREMISES, EQUIPMENT AND LEASING	45
13) DEFERED ASSETS	45
14) INTANGIBLE ASSETS	46
15) DEPOSITS, FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FUNDS FROM ISSUANCE OF SECURITIES	46
16) BORROWING AND ONLENDING	48
17) PROVISIONS, CONTINGENT ASSETS AND LIABILITIES AND LEGAL LIABILITIES - TAX AND SOCIAL SECURITY	49
18) SUBORDINATED DEBT	52
19) OTHER LIABILITIES	53
20) NON-CONTROLLING INTERESTS IN SUBSIDIARIES	54
21) SHAREHOLDERS’ EQUITY (PARENT COMPANY)	54
22) FEE AND COMMISSION INCOME	56
23) PAYROLL AND RELATED BENEFITS	56
24) OTHER ADMINISTRATIVE EXPENSES	56
25) TAX EXPENSES	57
26) OTHER OPERATING INCOME	57
27) OTHER OPERATING EXPENSES	57
28) NON-OPERATING INCOME (LOSS)	57
29) RELATED-PARTY TRANSACTIONS (DIRECT AND INDIRECT)	58
30) FINANCIAL INSTRUMENTS	60
31) EMPLOYEE BENEFITS	66
32) INCOME TAX AND SOCIAL CONTRIBUTION	67
33) OTHER INFORMATION	69

 

 

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Below are the primary direct and indirectly owned companies included in the consolidation:

 

(1)  The special purpose entity International Diversified Payment Rights Company is being consolidated. The company takes part in the securitization operation of future flow of payment orders received from overseas (Note 15d); and

(2)  Company proportionally consolidated, pursuant to CMN Resolution n^o 2723/00 and CVM Rule n^o 247/96.

 

 

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3)   SIGNIFICANT ACCOUNTING PRACTICES

a)   Functional and Presentation Currencies

 

Consolidated financial statements are presented in Brazilian reais, which is also Bradesco’s functional currency. Foreign branches and subsidiaries are mainly a continuation of activities in Brazil, and, therefore, assets, liabilities and profit or loss are translated into Brazilian reais using the appropriate currency exchange rate to comply with accounting practices adopted in Brazil. Foreign currency translation gains and losses arising are recognized in the period’s income statement in the lines “Derivative Financial Instruments” and “Borrowing and On-lending”.

 

b)   Income and Expense Recognition

 

Income and expenses are recognized on an accrual basis in order to determine the net income for the period to which they relate, regardless of when the funds are received or paid.

 

Fixed rate transactions are recorded at their redemption value with the income or expense relating to future periods being recorded as a deduction from the corresponding asset or liability. Finance income and costs are prorated daily and calculated using the compounding method, except when they relate to discounted notes or to foreign transactions which are calculated using the straight-line method.

 

Floating rate or foreign-currency-indexed transactions are adjusted for inflation and foreign exchange rates respectively at the end of the reporting period.

 

c)   Cash and cash equivalents

 

Cash and cash equivalents include: funds available in currency, investments in gold, securities sold under agreements to repurchase and interest-earning deposits in other banks, maturing in 90 days or less, which are exposed to insignificant risk of change in fair value. These funds are used by Bradesco to manage its short-term commitments.

 

Cash and cash equivalents detailed balances are presented in Note 4.

 

d)   Interbank investments

 

Unrestricted repurchase and reverse repurchase agreements are stated at their fair value. All other interbank investments are stated at cost, plus income earned up to the end of the reporting period, net of any devaluation allowance, if applicable.

 

The breakdown, terms and proceeds relating to interbank investments are presented in Note 5.

 

e)   Securities - Classification

 

·       Trading securities - securities acquired for the purpose of being actively and frequently traded. They are recorded at cost, plus income earned and adjusted to fair value with movements recognized in the Income Statement for the period;

 

·       Available-for-sale securities - securities that are not specifically intended for trading purposes or to be held to maturity. They are recorded at cost, plus income earned, which is recorded in profit or loss in the period and adjusted to fair value with movements recognized in shareholders’ equity, net of tax, which will be transferred to the Income Statement only when effectively realized; and

 

·       Held-to-maturity securities - securities for which there is positive intent and financial capacity to hold to maturity. They are recorded at cost, plus income earned recognized in the Income Statement for the period.

 

Securities classified as trading and available-for-sale, as well as derivative financial instruments, are recognized in the consolidated statement of financial position at their fair value. Fair value is generally based on quoted market prices or quotations for assets or liabilities with similar characteristics. If market prices are not available, fair values are based on traders’ quotations, pricing models, discounted cash flows or similar techniques to determine the fair value and may require judgment or significant estimates by Management.

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Classification, breakdown and segmentation of securities are presented in Note 6 (a to d).

 

f)    Derivative financial instruments (assets and liabilities)

 

Derivate instruments are classified based on the intent of the underlying instrument at the date of purchase, taking into consideration its use for possible hedging purposes.

 

Operations involving derivative financial instruments are designed to meet the Bank’s own needs in order to manage overall exposure, as well as to meet customer requests to manage their positions. Gains and losses are recorded in the income or expenses accounts of the respective financial instruments.

 

Derivative financial instruments used to mitigate risk deriving from exposure to variations in the Fair value of financial assets and liabilities are designated as hedges and are classified according to their nature:

 

·       Market risk hedge: the gains and losses, realized or not, of the financial instruments classified in this category as well as the financial assets and liabilities, that are the object of the hedge, are recorded in the Income Statement; and

 

·       Cash flow hedge: the effective portion of valuation or devaluation of the financial instruments classified in this category is recorded, net of taxes, in a specific account in shareholders’ equity. The ineffective portion of the hedge is recognized directly in the Income Statement.

 

A breakdown of amounts included as derivative financial instruments, in the balance sheet and off-balance-sheet accounts, is disclosed in Note 6 (e to g).

 

g)   Loans and leasing, advances on foreign exchange contracts, other receivables with credit characteristics and allowance for loan losses

 

Loans and leasing, advances on foreign exchange contracts and other receivables with credit characteristics are classified by risk level, based on: (i) the parameters established by CMN Resolution n^o 2682/99, which requires risk ratings to have nine levels, from “AA” (minimum risk) to “H” (maximum risk); and (ii) Management’s assessment of the risk level. This assessment, which is carried out regularly, considers current economic conditions and past experience with loan losses, as well as specific and general risks relating to operations, debtors and guarantors. Moreover, the days-past-due is also considered to rate customer risk as per CMN Resolution n^o 2682/99, as follows:

 

 

(1)  For transactions with terms of more than 36 months, past-due periods are doubled, as permitted by CMN Resolution n^o 2682/99.

 

Interest and inflation adjustments on past-due transactions are only recognized in the Income Statement up to the 59^th day that they are past due. As from the 60^th day, they are recognized off-balance sheet accounts and are only recognized in the Income Statement when received.

 

H-rated past-due transactions remain at this level for six months, after which they are written-off against the existing allowance and controlled in off-balance-sheet accounts for at least five years.

 

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Renegotiated transactions are held at the same rating as on the date of the renegotiation or classified in a higher risk rating. Renegotiations already written-off against the allowance and that were recorded in off-balance-sheet accounts, are rated as level “H” and any possible gains derived from their renegotiation are recognized only when they are effectively received. When there is a significant repayment on the operation or when new material facts justify a change in the level of risk, the operation may be reclassified to a lower risk category.

 

The estimated allowance for loan losses is calculated to sufficiently cover probable losses, considering CMN and Bacen standards and instructions, together with Management’s assessment of the credit risk.

 

Type, values, terms, levels of risk, concentration, economic sector of client’s activity, renegotiation and income from loans, as well as the breakdown of expenses and statement of financial position accounts for the allowance for loan losses are presented in Note 8.

 

Leasing

 

The leasing portfolio consists of contracts registered under Portaria 140/84, of the Ministry of Finance, which contains clauses: a) non cancellation; b) put option; and c) accrual based on floating or prefixed rates and accounted in accordance to the standards established by Bacen, as follows:

 

I-      Receivable Leases

 

Reflect the balance of receivable counter installments, updated according to the indexes and criteria established contractually.

 

II-    Lease deferred income and Guaranteed Residual Value (VRG)

 

Recorded at contract value, in contrast to the lease deferred income accounts and residual Value to be balanced, both presented by agreed conditions. The VRG received in advance is recorded in Other Liabilities – Lenders by Anticipation of the Residual Value, up to the maturity date of the contract. The present value adjustment of counter installments and receivable VRG of financial leasing operations is recognized as excess/insufficient depreciation on leased assets, aiming to align accounting practices. For operations that are 60 or more days past due, the appropriation to the income statements occurs when contractual installments are received, according to the CMN Resolution n^o 2682/99.

 

III-  Leased assets

 

Are stated at acquisition cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method, with the benefit of 30% reduction on the normal useful life of the asset, provided in the existing legislation. The main annual rates of depreciation used, which are the basis for this reduction, are as follows: vehicles and related, 20%; furniture and utensils, 10%; machinery and equipment, 10%; and other assets, 10% and 20%.

 

IV-  Losses on lease

 

The losses recorded in the sale of leased assets are deferred and amortized over the remaining term of the normal useful life of the assets, being demonstrated along with the Leased Asset (Note 8k).

 

V-    Excess (insufficiency) of depreciation

 

The accounting records of the leasing operations are maintained in accordance with legal requirements, specific to this type of operation. The procedures adopted and summarized in "II" to "IV" above differ from accounting practices provided in Brazilian corporate legislation, especially with regards to the accrual basis of accounting on recording revenue and expenses related to leasing contracts. As a result, according to Circular Bacen n^o 1429/89, the present value of the open counter installments has been calculated, using the internal rate of return of each contract, registering a revenue or expense of leasing, in contrast to excess or insufficiency of depreciation accounts, respectively, recorded in the Permanent Asset, aiming to suit leasing operations to an accrual basis of accounting (Note 8k).

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h)   Income tax and social contribution (assets and liabilities)

 

Deferred income tax and social contribution deferred tax assets, calculated on income tax losses, social contribution losses and temporary differences are recorded in “Other Receivables - Sundry” and the deferred tax liabilities on tax differences in leasing depreciation (applicable only for income tax) and mark-to-market adjustments on securities are recorded in “Other Liabilities - Tax and Social Security”.

 

Deferred tax assets on temporary differences are realized when the corresponding provision is used and/or reversed. Deferred tax assets on income tax and social contribution losses are used when taxable income is generated, up to the 30% limit of the taxable profit for the period. Deferred tax assets are recorded based on current expectations of realization considering technical studies and analyses carried out by Management.

 

The provision for income tax is calculated at 15% of taxable income plus a 10% surcharge. Social contribution on net income is calculated at 15% for financial institutions and insurance companies and at 9% for other companies.

 

Provisions were recorded for other income tax and social contribution in accordance with specific applicable legislation.

 

Pursuant to Law n^o 11941/09, changes in the criteria to recognize revenue, costs and expenses included in the net income for the period, enacted by Law n^o 11638/07 and by Articles n^o 37 and n^o 38 of Law n^o 11941/09, shall not affect taxable income, and, for tax purposes, accounting methods and criteria in force on December 31, 2007 are used. For accounting purposes, the tax effects of adopting the aforementioned laws are recorded in the corresponding deferred tax assets and liabilities.

 

The breakdown of income tax and social contribution, showing the calculations, the origin and expected use of deferred tax assets, as well as unrecorded deferred tax assets, are presented in Note 32.

 

i)    Prepaid expenses

 

Prepaid expenses are represented by funds already disbursed for future benefits or services, which are recognized in the profit or loss on an accrual basis.

 

Incurred costs relating to assets that will generate revenue in subsequent periods are recorded in the Income Statement according to the terms and the amount of expected benefits and directly written-off in the Income Statement when the corresponding assets or rights are no longer part of the institution’s assets or when future benefits are no longer expected.

 

Prepaid expenses are shown in detail in Note 10b.

 

j)    Investments

 

Investments in unconsolidated companies, where Bradesco has significant influence over the investee or holds at least 20% of the voting rights, are accounted for by the equity method.

 

Tax incentives and other investments are stated at cost, less allowance for losses/impairment, where applicable.

 

Subsidiaries and jointly-controlled entities are consolidated - the composition of the main companies can be found in Note 2. The composition of unconsolidated companies, as well as other investments, can be found in Note 11.

 

k)   Premises and equipment

 

Relates to the tangible assets used by the Bank in its activities, including those resulting from transactions which transfer risks, benefits and control of the assets to the Bank.

 

Premises and equipment are stated at acquisition cost, net of accumulated depreciation, calculated by the straight-line method based on the assets’ estimated economic useful life, using the following rates: real estate - 4% per annum; furniture and utensils and machinery and equipment - 10% per annum; transport systems - 20% per annum; and data-processing systems - 20% to 50% per annum, and adjusted for impairment, when applicable.

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The breakdown of asset costs and their corresponding depreciation, as well as the unrecorded surplus value for real estate and fixed asset ratios, is presented in Note 12.

 

l)    Deferred assets

 

It is stated at a cost of acquisition or net formation of their accumulated depreciation of 20% per annum, calculated by the straight-line method. From December, 2008, the new operations have been recorded in intangible assets in accordance with the Circular Letter in 3,357/08 of Bacen.

 

The values composition of the assets costs and their depreciation are presented in Note 13.

 

m) Intangible assets

 

Relates to the right over intangible assets used by the Bank in its activities.

 

Intangible assets comprise:                                                                                         

 

·       Future profitability/acquired client portfolio and acquisition of right to provide banking services: they are recorded and amortized over the period in which the asset will directly and indirectly contribute to future cash flows and adjusted for impairment, where applicable; and

 

·       Software: stated at cost less amortization calculated on a straight-line basis over the estimated useful life (20% to 50% p.a.), from the date it is available for use and adjusted for impairment, where applicable. Internal software development costs are recognized as an intangible asset when it is possible to show the intent and ability to complete and use the software, as well as to reliably measure costs directly attributable to the intangible asset. These costs are amortized during the software’s estimated useful life, considering the expected future economic benefits.

 

Goodwill and other intangible assets, including their changes by class, are presented in Note 14.

 

n)   Impairment

 

Financial and non-financial assets are tested for impairment.

 

Impairment evidence may comprise the non-payment or payment delay by the debtor, possible bankruptcy process or the significant or extended decline in an asset value.

 

An impairment loss of a financial or non-financial asset is recognized in the profit or loss for the period if the book value of an asset or cash-generating unit exceeds its recoverable value.

 

Impairment losses are presented in Notes 6d(10).

 

o)   Securities sold under agreements to repurchase

 

These are recognized at the value of the liabilities and include, when applicable, related charges up to the end of the reporting period, calculated on a daily prorated basis.

 

A breakdown of the contracts recorded in deposits and securities sold under agreements to repurchase, as well as terms and amounts recognized in the statement of financial position and income statement, is presented in Note 15.

 

p)   Provisions, contingent assets and liabilities and legal obligations - tax and social security

 

Provisions, contingent assets and liabilities, and legal obligations, as defined below, are recognized, measured and disclosed in accordance with the criteria set out in CPC 25, approved by CMN Resolution n^o 3823/09 and CVM Resolution n^o 594/09:

 

 

Bradesco     17          

 

·       Contingent assets: these are not recognized in the financial statements, except to the extent that there are real guarantees or favorable judicial decisions, to which no further appeals are applicable, classifying the gain as practically certain by confirming the expectation of receipt or compensation against another liability. Contingent assets with a chance of probable success are disclosed in the notes to the financial statements;

 

·       Provisions: these are recorded taking into consideration the opinion of legal counsel, the nature of the lawsuits, similarity with previous lawsuits, complexity and positioning of the courts, whenever the loss is deemed probable it requires a probable outflow of funds to settle the obligation and when the amount can be reliably measured;

 

·       Contingent liabilities: according to CPC 25, the term “contingent” is used for liabilities that are not recognized because their existence will only be confirmed by the occurrence of one or more uncertain future events beyond Management’s control. Contingent liabilities considered as possible losses should only be disclosed in the notes when relevant. Obligations deemed remote are not recorded as a provision nor disclosed; and

 

·       Legal obligations - provision for tax risks: results from judicial proceedings, which contest the applicability of tax laws on the grounds of legality or constitutionality, which, regardless of the assessment of the probability of success, are fully provided for in the financial statements.

 

Details on lawsuits, as well as segregation and changes in amounts recorded, by type, are presented in Note 17.

 

q)   Funding expenses

 

Expenses related to funding transactions involving the issuance of securities are recognized in the profit or loss over the term of the transaction and reduces the corresponding liability. They are presented in Notes 15c and 18.

 

r)    Other assets and liabilities

 

Assets are stated at their realizable amounts, including, when applicable, related income and inflation and exchange variations (on a daily prorated basis), less provision for losses, when deemed appropriate. Liabilities include known or measurable amounts, including related charges and inflation and exchange variations (on a daily prorated basis).

 

s)   Subsequent events

 

These refer to events occurring between the reporting date and the date the financial statements are authorized to be issued.

 

They comprise the following:

 

·       Events resulting in adjustments: events relating to conditions already existing at the end of the reporting period; and

 

·       Events not resulting in adjustments: events relating to conditions not existing at the end of the reporting period.

 

Subsequent events, if any, are described in Note 33.

 

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	December 31, 2014 - R$ thousand
Cash and due from banks in domestic currency	10,816,977
Cash and due from banks in foreign currency	3,685,973
Investments in gold	106
Total cash and due from banks	14,503,056
Interbank investments (1)	190,166,087
Total cash and cash equivalents	204,669,143

(1)  Refer to operations which mature 90 days or less from the date they were effectively invested and with insignificant risk of change in fair value.

 

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5)   INTERBANK INVESTMENTS

a)   Breakdown and maturity

 

 

b)   Income from interbank investments

 

Classified in the income statement as income on securities transactions.

 

 

6)   SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS

Information on securities and derivative financial instruments is as follows:

a)   Summary of the consolidated classification of securities by operating segment and issuer

 

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b)   Breakdown of the consolidated portfolio by issuer

 

22            December 2014                                                                                                                                                                                                                                                

 

c)   Consolidated classification by category, maturity and operating segment

 

I)    Trading securities

 

II)   Available-for-sale securities

 

III)  Held-to-maturity securities

 

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d)   Breakdown of the portfolios by financial statement classification

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(1)     Consistent with the criteria in Bacen Circular Letter n^o 3068/01 and due to the characteristics of the securities, we are classifying the derivative financial instruments, except those considered as cash flow hedges in the category Trading Securities;

(2)     These refer to investment fund and managed portfolio resources invested in purchase contracts with a commitment to re sale with Bradesco, whose owners are consolidated subsidiaries, included in the consolidated financial statements;

(3)     The investment fund quotas are presented according to the instruments comprising their portfolios and maintaining the classification used in the fund;

(4)     In compliance with Article 8 of Bacen Circular Letter n^o 3068/01, Bradesco declares that it has the financial capacity and intention to maintain held-to-maturity securities until their maturity dates. This financial capacity is disclosed in Note 30a, which presents the maturity of asset and liability operations;

(5)     On December 2014, the amount of R$ 17,003 thousand was reclassified from “Held-for-trading securities” to “Available-for-sale securities”;

(6)     The number of days to maturity was based on the maturity of the instruments, regardless of their accounting classification;

(7)     This column reflects book value after mark-to-market accounting in accordance with item (7), except for held-to-maturity instruments, whose fair value is higher than the original amortized cost for the amount of R$ 5,402 thousand;

(8)     The fair value of securities is determined based on the market price available at the end of the reporting period. If no market price quotation is available at the end of the reporting period, amounts are estimated based on the prices quoted by dealers, pricing models, quotation models or price quotations for instruments with similar characteristics; for investment funds, the original amortized cost reflects the fair value of the respective quotas. For investment funds, the original amortized cost reflects the fair value of the respective quotas;

(9)     For a better analysis of these items, consider the net exposure (Note 6e II); and

(10)   In the year ended December 31, 2014, there were no losses by impairment under the heading "equity securities", for the securities classified under the category "Available-for-sale securities".

 

e)   Derivative financial instruments

Bradesco carries out transactions involving derivative financial instruments, which are recorded in the statement of financial position or in off-balance-sheet accounts, to meet its own needs in managing its global exposure, as well as to meet its customer’s requests, in order to manage their exposure. These operations involve a range of derivatives, including interest rate swaps, currency swaps, futures and options. Bradesco’s risk management policy is based on the utilization of derivative financial instruments mainly to mitigate the risks from operations carried out by the Bank and its subsidiaries.

 

Securities classified as trading and available-for-sale, as well as derivative financial instruments, are recognized in the consolidated statement of financial position at their fair value. Fair value is generally based on quoted market prices or quotations for assets or liabilities with similar characteristics. Should market prices not be available, fair values are based on dealer quotations, pricing models, discounted cash flows or similar techniques for which the determination of fair value may require judgment or significant estimates by Management.

 

Quoted market prices are used to determine the fair value of derivative financial instruments. The fair value of swaps is determined by using discounted cash flow modeling techniques that use yield curves, reflecting adequate risk factors. The information to build yield curves is mainly obtained from the Securities, Commodities and Futures Exchange (BM&FBOVESPA) and the domestic and international secondary market. These yield curves are used to determine the fair value of currency swaps, interest rate and other risk factor swaps. The fair value of forward and futures contracts is also determined based on market price quotations for derivatives traded at the stock exchange or using methodologies similar to those outlined for swaps. The fair values of credit derivative instruments are determined based on market price quotation or from specialized entities. The fair value of options is determined based on mathematical models, such as Black & Scholes, using yield curves, implied volatilities and the fair value of corresponding assets. Current market prices are used to calculate volatility.

 

Derivative financial instruments in Brazil mainly refer to swaps and futures and are registered at the OTC Clearing House (Cetip) and BM&FBOVESPA.

 

Operations involving forward contracts of interest rates, indexes and currencies are contracted by Management to hedge Bradesco’s overall exposures and to meet customer needs.

 

Foreign derivative financial instruments refer to swap, forward, options, credit and futures operations and are mainly carried out at the stock exchanges in Chicago and New York, as well as the over-the-counter (OTC) markets.

 

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I)    Amount of derivative financial instruments recorded in balance sheet and off-balance-sheet accounts

 

 

Derivatives include operations maturing in D+1.

 

(1)  Includes cash flow hedges to protect CDI-related funding, totaling R$ 21,107,308 thousand (Note 6g); and

(2)  Includes specific hedges to protect foreign investments totaling R$ 37,598,682 thousand.

 

To obtain greater payment assurance for operations with financial institutions and customers, Bradesco established compensation and settlement agreements for liabilities within the National Financial System, in accordance with CMN Resolution n^o 3263/05.

 

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II)   Breakdown of derivative financial instruments (assets and liabilities) shown at original amortized cost and fair value

 

 

III) Futures, options, forward and swap contracts - (Notional)

 

 

IV) Types of margin offered in guarantee of derivative financial instruments, mainly futures contracts

 

 

V)  Revenues and expenses, net

 

 

 

28            December 2014

VI) Total value of derivative financial instruments, by trading location and counterparties

 

 

(1)    Comprised of operations carried out on the Chicago and New York Stock Exchanges and over-the-counter markets.

 

As of December 31, 2014, a total of 92.7% of counterparties are corporate entities and 7.3% are financial institutions.

f)    Credit Default Swaps (CDS)

In general, these represent bilateral agreements in which one of the parties purchases protection against the credit risk of a certain financial instrument (the risk is transferred). The selling counterparty receives remuneration that is usually paid linearly over the term of the agreement.

 

In the case of a default, the purchasing counterparty will receive a payment to offset the loss incurred on the financial instrument. In this case, the selling counterparty usually receives the underlying asset of the agreement in exchange for the payment.

 

On December 31, 2014, Bradesco had credit default swaps (CDS) with the following characteristics: (i) the amount of risk transferred under credit swaps whose underlying assets are “Brazilian government securities” is R$ (1,326,900) thousand; and (ii) the risk received in credit swaps whose underlying assets are “derivative with companies” is R$ 13,281 thousand, amounting to a total net credit risk value of R$ (1,313,619) thousand, with an effect on the calculation of required shareholders’ equity of R$ (71,519) thousand.

 

Bradesco carries out operations involving credit derivatives to better manage its risk exposure and its assets. The contracts related to credit derivatives transactions described above are due in 2019. The mark-to-market of the protection rates that remunerates the counterparty that received the risk totaled R$ (4,434) thousand. There were no credit events, as defined in the agreements, during the year.

 

g)   Cash flow hedge

Bradesco uses cash flow hedges to protect its cash flows from payment of interest rates on funds, which have a floating interest rate - the Interbank Deposit Rate (DI Cetip), thus converting them to fixed cash flows.

Bradesco has traded DI Future contracts at BM&FBOVESPA since 2009, using them as cash flow hedges for funding linked to DI. The following table presents the DI Future position, where:

 

(1)  The adjustment in shareholders’ equity is R$ 187,010 thousand, net of taxes.

 

The effectiveness of the hedge portfolio was assessed in accordance with Bacen Circular Letter n^o 3082/02.

 

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h)   Income from securities, insurance, pension plans and capitalization bonds and derivative financial instruments

 

7)   INTERBANK ACCOUNTS - RESERVE REQUIREMENT

a)   Reserve requirement

 

(1)  For further information regarding new rules on reserve requirement, see Note 33c.

 

b)   Revenue from reserve requirement

 

 

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8)   LOANS

Information relating to loans, including advances on foreign exchange contracts, leasing and other receivables with credit characteristics is shown below:

a)   By type and maturity

 

 

Bradesco     31          

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