Banco Bradesco (BBD) 20-F2020 FY Annual report (foreign)

TABLE OF CONTENTS

In this annual report, the terms “Bradesco”, the “Company”, the “Bank”, the “Bradesco Group”, “we”, the “Organization”, “our” and “us” refer to Banco Bradesco S.A., a sociedade anônima organized under the laws of Brazil and, unless otherwise indicated, its consolidated subsidiaries.

All references herein to “real”, “reais” or “R$” refer to the Brazilian Real, the official currency of Brazil. References herein to “U.S. dollars”, “dollar” and “US$” refer to United States dollars, the official currency of the United States of America (USA).

Our audited consolidated statement of financial position as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes , which are included under “Item 18. Financial Statements” of this annual report, were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

We use accounting practices adopted in Brazil for financial institutions authorized to operate by the Central Bank of Brazil (Banco Central do Brasil, or the “Central Bank of Brazil” or BCB) for certain purposes, such as performance assessment, decision-making, preparation of reports for Brazilian shareholders, filings with the Brazilian Securities and Exchange Commission (CVM), attendance and observation of limits and requirements of local regulators and determining dividend and federal income tax payments.

Some data related to economic sectors presented in this annual report was obtained from the following sources: B3 (Brasil, Bolsa, Balcão) or (B3); Brazilian Association of Credit Card Companies and Services (Associação Brasileira das Empresas de Cartão de Crédito e Serviços), or (ABECS); Brazilian Association of Leasing Companies (Associação Brasileira de Empresas de Leasing), or (ABEL); Brazilian Association of Financial and Capital Markets Entities (Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais), or (ANBIMA); Brazilian Health Insurance Authority (Agência Nacional de Saúde Suplementar), or (ANS); Central Bank of Brazil; Brazilian Bank of Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social), or (BNDES); National Association of Private Pension Plans and Life (Federação Nacional de Previdência Privada e Vida), or (FENAPREVI); Getulio Vargas Foundation (Fundação Getulio Vargas), or (FGV); and Private Insurance Superintendence (Superintendência de Seguros Privados), or (SUSEP).

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

References in this annual report to the “common shares” and “preferred shares” are to our common shares and preferred shares, respectively, and together our “shares”. References to “preferred share ADSs” in this annual report are to preferred share American Depositary Shares, each representing one preferred share. The preferred share ADSs are evidenced by preferred share American Depositary Receipts, or preferred share ADRs, issued pursuant to an Amended and Restated Deposit Agreement, dated as of December 11, 2015, by and among us, The Bank of New York Mellon, as depositary, and the holders and beneficial owners of preferred share ADSs evidenced by preferred share ADRs issued thereunder (the Preferred Share ADS Deposit Agreement).

References to “common share ADSs” in this annual report are related to common share American Depositary Shares, with each common share ADS representing one common share. The common share ADSs are evidenced by common share American Depositary Receipts, or common share ADRs, issued pursuant to an Amended and Restated Deposit Agreement dated as of December 11, 2015, by and among us, The Bank of New York Mellon, as depositary, and the holders and beneficial owners of common share ADSs evidenced by common share ADRs issued thereunder (the Common Share ADS Deposit Agreement and, together with the Preferred Share ADS Deposit Agreement, the Deposit Agreements).

References throughout this annual report to “ADSs” are to our preferred share ADSs and common share ADSs, together.

Throughout this annual report, we may indicate that certain information is available at different websites operated by us. None of the information on the websites referred to or mentioned in this annual report is part of or is incorporated by reference herein.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, or the “Securities Act”, and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”. These statements are based mainly on our current expectations and projections of future events and financial trends that affect or might affect our business. In addition to the items discussed in other sections of this annual report, many significant factors that could cause our financial condition and results of operations to differ materially from those set out in our forward-looking statements, including, but not limited to, the following:

·     the current instability in Brazilian macroeconomic conditions, together with political, economic and business uncertainties, as well as instabilities in global markets;

1 Form 20-F – December 2020

·     risks of lending, credit, investments and other activities;

·     our level of capitalization;

·     cost and availability of funds;

·     higher levels of delinquency by borrowers, credit delinquency and other delinquency events leading to higher impairment of loans and advances;

·     loss of customers or other sources of income;

·     our ability to execute our investment strategies, capital expenditure plans and to maintain and improve our operating performance;

·     our revenues from new products and businesses;

·     adverse claims, legal or regulatory disputes or proceedings;

·     inflation, fluctuations in the value of the real and/or interest rates, which could adversely affect our margins;

·     the effectiveness of our risk management policies;

·     increases in compulsory deposits and reserve requirements;

·     competitive conditions in the banking, financial services, credit card, payment methods, asset management, insurance sectors and related industries;

·     any failures in, or breaches of, our operational, security or technology systems;

·     the market value of securities, particularly Brazilian government securities;

·     the duration and severity of the novel coronavirus (Covid-19) outbreak and its impacts on the global and Brazilian economy and our business;

·     our ability to implement, in a timely and efficient manner, any measure necessary to respond to, or reduce the impacts of, the Covid-19 pandemic on our business, operations, cash flow, prospects, liquidity and financial condition;

·     effects from socio-environmental issues, including new and/or more stringent regulations relating to these issues; and

·     changes by the Central Bank of Brazil and others in laws and regulations, applicable to us and our activities, including, but not limited to, those affecting tax matters.

Words such as “believe”, “expect”, “continue”, “understand”, “estimate”, “will”, “may”, “anticipate”, “should”, “intend”, and other similar expressions identify forward-looking statements. These statements refer only to the date on which they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or any other event.

In light of these risks and uncertainties, the forward-looking statements, events and circumstances discussed in this annual report may not be accurate, and our actual results and performance could differ materially from those anticipated in our forward-looking statements. Investors should not make investment decisions based solely on the forward-looking statements in this annual report.

1 Bradesco

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

3.A. Selected Financial Data

We present below our selected financial data derived from our consolidated financial statements as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016, which have been prepared in accordance with IFRS as issued by the IASB. The financial data as of December 31, 2020 and 2019 and for the years ended 2020, 2019 and 2018 is derived from our consolidated financial statements included in this annual report. The financial data as of December 31, 2018, 2017 and 2016 and for the years ended December 31, 2017 and 2016 are derived from our consolidated financial statements, which are not included herein.

In 2019, we adopted IFRS 16 – Leases, replacing IAS 17 Leases, IFRIC 4, SIC 15 and SIC 27, establishing that lessees account for all leases according to a single model, similar to the accounting entry for financial leases in IAS 17. The adoption was mandatory starting from January 1, 2019 and as a result, certain tables in this annual report containing financial data, which were impacted by the adoption of IFRS 16 and the resultant consolidated amounts for 2019, are not comparable with prior periods. For further information, see Note 41 to our Financial Statements in “Item 18. Financial Statements”.

In 2018, we adopted IFRS 9 – Financial instruments, which replaced IAS 39, which established a new approach for the classification and measurement of financial assets and liabilities, impairment, which replaces incurred losses with expected losses and hedge accounting. This adoption had its effects applied as of January 1, 2018, as a result, in certain tables containing financial data in this annual report, in the cases impacted by the adoption of IFRS 9, the consolidated amounts for 2019 and 2018 are not comparable with prior periods.

The following selected financial data should be read together with the “Presentation of Financial and Other Information” and “Item 5. Operating and Financial Review and Prospects”.

3.B. Capitalization and Indebtedness

Not applicable.

3.C. Reasons for the Offer and Use of Proceeds

Not applicable.

3.D. Risk Factors

In light of the complexity of our business and the range of products and services offered to our customers in all segments of the market, we are exposed to various types of risks. This aim of this item is to present, in a non-exhaustive way, the material risks that may affect our activities or our shares.

Summary of Risk Factors

This section is intended to be a summary of more detailed discussions contained elsewhere in this Form 20-F. The risks described below are not the only ones we face. Our business, results of operations or financial condition could be harmed if any of these risks materialize.

Summary of Risks Relating to Brazil

Summary of Risks Relating to us and the Brazilian Banking Industry

We may experience increases in our level of past due loans as our loans and advances portfolio becomes more seasoned.

Summary of Risks Relating to our Risk Management and Other Risks

Summary of Risks relating to our shares, preferred share ADSs and common share ADSs

Risks Relating to Brazil

3.D.10 Macroeconomic risks

We continually monitor the macroeconomic risks that could materially impact our business, financial condition and results of operations. These risks are assessed through processes carried out through our governance structure.

3.D.10.01 Domestic Environment

3.D.10.01-01 Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the current Covid-19 pandemic, which had a significant impact on our 2020 results from the end of the first quarter.

The Covid-19 pandemic has generated great challenges and uncertainties worldwide, and Brazil has been strongly impacted both in terms of the number of cases and deaths. In the economic sphere, the government stimuli used throughout 2020, in scope and magnitude not seen before, contributed to the resumption of growth in the second half of 2020. Direct transfers of income, temporary suspension of certain taxes, incentives for the expansion of loans and the renegotiation of debts and subsidies, were some of the instruments used. Risks arising from the economic impacts of the Covid-19 pandemic allowed the Central Bank to reduce the basic interest rate from 4.5% per annum at the end of 2019 to 2.0% per annum at the end of 2020, the lowest historical level. This process has been corroborated by the increase of idleness of the goods and labor markets and by a deceleration in inflation. At the end of 2020, specific price pressures on electrical energy and food accelerated the inflation to the consumer: the Extended Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo – IPCA) ended the year with a high of 4.52%, above the center of the goal – determined by the National Monetary Council (CMN) at 4.0% - but still within the tolerance intervals. A process is expected for 2021, of reduction of part of the monetary stimuli, in a context of economic recovery. At the same time, the gross debt increased from 74% of the GDP at the end of 2019, to 89% at the end of 2020. Once the challenges posed by the Covid-19 pandemic are overcome, it is expected that the fiscal deterioration will be reversed. This premise is essential so that the expected process of normalization of the monetary policy may be gradual, keeping the financial conditions at comfortable levels.

At the end of 2020 and at the beginning of 2021, the resurgence of the Covid-19 pandemic, in Brazil and in the world, increased the short-term risks of the economic activity. As a result, a contraction of the domestic GDP is expected in the first quarter. Even though the base scenario has as premise an acceleration of immunization of the population in the coming months, a possible worsening of the Covid-19 pandemic could generate negative impacts on the business, especially in the service sector, employment, income and banking delinquency, with possible adverse consequences on on our results of operations and financial condition. Accordingly, a new round of the emergency aid (through a direct transfer of income to the most disadvantaged people), approved in March by the Congress, should minimize these impacts. The same proposal for renewal of the aid (Emergency PEC – Proposed Constitutional Amendment) brought some tax counterparts, for moments in which public spending is growing above established limits.

Once the expectation of advancement in the immunization of the Brazilian population is maintained, the scenario of the resumption of the economic activity throughout the subsequent quarters should still be present. A fundamental aspect for the materialization of this scenario is the improvement in perceptions especially in comparison to the fiscal policy, in an environment of increasing demand of society for the increase of public expenditure. The perspective that Brazil should go ahead at the beginning of the normalization of the monetary policy in relation to its peers and the expected resumption of the agenda of structural reforms, should contribute to the exchange rate appreciation over the coming months. The scenario of a gradual return to normality in the global economy and the maintenance of commodity prices at high levels tend to maximize this trend.

As a result of the various economic stimuli adopted, as discussed above, our loan portfolio expanded at a much higher rate. This was particularly evident in the growth of our portfolio of loans to companies. For 2021, we expect certain changes in the components of our growth, with an acceleration of loans for families and a deceleration in the loan portfolio for companies. However, we believe that the prospects remain favorable, with the institutions that integrate the National Financial System (SFN) remaining well capitalized and liquid. The delinquency indicators also remain relatively low as a result of the debt renegotiation. As a result of the Covid-19 pandemic, provision expenses increased in 2020, totaling R$25.8 billion, of which R$9.1 billion were in connection with the adverse economic scenario resulting from the Covid-19 pandemic. However, as we cannot guarantee the duration, future impacts or measures implemented by the government to combat the economic effects of the Covid-19 pandemic, we cannot assure that our financial and operating performance will not be adversely affected in the future.

3.D.10.01-02 The government exercises influence over the Brazilian economy, and Brazilian political and economic conditions have a direct impact on our business.

Abrupt changes in monetary or fiscal policies, which are not justified by changes in the economic scenario, can generate uncertainties about economic policy, leading to the deterioration of expectations, amplifying the volatility and negatively impacting the prices of domestic assets. In this sense, actions and signs of economic policy that are credible and transparent tend to maintain macroeconomic volatility at low levels.

Historically, the country’s political scenario has influenced the performance of the Brazilian economy and the political crises have affected the confidence of investors and the general public, which has resulted in a deceleration in the economy and greater volatility in the securities of Brazilian companies issued abroad. Any uncertainties about the economic policies, especially fiscal, can generate negative impacts on the prices of domestic assets, such as the depreciation of the currency, elevation of long rates of interest and the retreat of the stock exchange. In this sense, it becomes relevant to signalize the credible commitment on the part of the government, with decreasing trajectories for public debt.

Until the outbreak of Covid-19, the government had been following an economic agenda to reduce government spending, preparing the economy to compete in international markets, improving the commercial environment and promoting privatizations and infrastructure concessions. At the beginning of 2021, with the outbreak of the second wave of the Covid-19 virus, tax concerns returned to investors’ radar, with negative impacts on the domestic prices of assets. This process accelerated with the perception of greater interventionism of the government in state-owned companies.

Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business, results of operations and financial condition. In addition, uncertainties about the current Brazilian government can influence market perception of risk of foreign investment in Brazil, which in turn may adversely affect the market value of our securities. For example, the market value of Brazilian companies experienced volatility during the recent presidential elections. The current weakness in Brazilian macroeconomic conditions and market perception of certain economic and political risks and uncertainties relating to Brazil, including high-profile anti-corruption investigations, may have a material adverse effect on our financial condition and results of operations.

3.D.10.01-03       Brazil continues to experience political instability and macroeconomic recession, which can adversely affect us.

Brazil showed signs of incipient recovery from a recent prolonged economic recession at the beginning of 2020, when the serious economic consequences of the Covid-19 pandemic plunged the economy back into recession, with weaknesses and material imbalances continuing to threaten the macroeconomic stability and the future prospects of the Brazilian economy. The persistence or intensification of the economic crisis in Brazil and the uncertainty about whether the Brazilian government is prepared and willing to implement changes in the policy or regulations to address today's economic challenges can affect us adversely. The uncertainty about whether the Brazilian government will implement changes in policies and regulations can be aggravated by political instability.

Since 2014, Brazil has experienced a magnified economic and political instability derived from several investigations currently underway on allegations of money laundering and corruption, including the largest of these investigations, known as Operation Car Wash (Lava-Jato), which negatively impacted the Brazilian economy and the political environment and contributed to a decline in market confidence in Brazil.

The Brazilian markets have repeatedly experienced an increase in volatility due to the uncertainty related to investigations surrounding allegations of corruption. These are being conducted by the Federal Police and the Public Prosecution (Department of Public Prosecution) in Lava-Jato, Zealots, Greenfield, and Shooting Star investigations, among others. Members of the Federal Government and the Legislature, in addition to leaders of large corporations, are accused and, in some cases, indicted for corruption and other illegal activities. In addition, politicians and other public officials are being investigated for illegal conduct and unethical behaviors identified during these investigations.

As a result of these investigations, a number of politicians, including members of Congress and senior executives of large corporations and state-owned enterprises in Brazil, were arrested and convicted of various charges related to corruption, entered into leniency agreements with the Federal Public Prosecutor and/or resigned or were dismissed from their positions. The individuals involved in the investigations of Lava-Jato would have accepted a bribe by means of kickbacks in contracts awarded by the government to various companies of infrastructure, oil and gas and construction. The profits of these kickbacks allegedly financed the political campaigns of political parties, whose funds were not recorded or disclosed publicly. These resources would also have been intended for the personal enrichment of certain people.

The potential result of Lava-Jato, as well as of other investigations related to corruption in progress, is uncertain, but has already had an adverse impact on the image and reputation of the companies involved, as well as the general perception of the Brazilian market, economy, political environment and the Brazilian capital market. We do not control, and we cannot predict whether such investigations or allegations will lead to more political instability that could have a material impact on the Brazilian economy, our business, financial conditions and operating income and the market price of our shares, preferred share ADSs and common share ADSs.

3.D.10.01-04 If Brazil experiences substantial inflation in the future, our revenues and our ability to access foreign financial markets may be reduced.

Brazil has, in the past, experienced extremely high rates of inflation. Inflation and governmental measures to combat inflation have had significant negative effects on the Brazilian economy and have contributed to increased economic uncertainty and increased volatility in the Brazilian securities markets, which may have an adverse effect on us.

The memory of, and the potential for inflation, is still present, despite the monetary stability achieved in the mid-1990s, intensified as a result of the adoption of inflation targeting measures, with concerns that inflation levels might rise again. Current economic policy in Brazil is premised on a monetary regime which the Central Bank of Brazil oversees in order to ensure that the effective rate of inflation stays in line with a predetermined and previously announced target. Brazil’s rates of inflation reached 4.5% in 2020 and 4.3% in 2019, as measured by the Extended Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo – IPCA).

Faced with high expectations and high levels of economic inactivity, which had been gradually reducing since 2017, inflation had been maintained below the middle of the target, but it was above the center of the target in 2020 (4.0% for 2020). For 2021, an inflation target of 3.75% was set, with a tolerance interval of 1.50 percentage points above and below the target, by means of Resolution No. 4,671/18. Despite the short-term risks to economic activity, due to the worsening of the pandemic, the Central Bank began in March 2021 the process of normalizing monetary policy, with the basic rate rising from 2.0% to 2.75%, above expectations. In the assessment of the Monetary Policy Committee (Copom), the risk balance has become asymmetrical towards the direction of higher inflation. Accordingly, given that the Covid-19 pandemic will have temporary effects and given the risks to inflation, the Central Bank of Brazil signaled a "partial normalization" of monetary policy. Analysts' expectations point to an increase in interest rates in the coming months, but to levels below those observed in the recent history (14.25% in 2015). The evolution of the fiscal trends will play a relevant role in the magnitude of this increase, as has been explained by the Central Bank of Brazil.

Between the end of 2020 and the beginning of 2021, inflation concerns were more evident, reflected mainly by the increase in international prices of commodities and exchange rate depreciation. The discourse of the Central Bank of Brazil, whose independence was recently passed in February 2021, significantly changed, pointing to greater concern of the risks of secondary effects from price shocks. Thus, in March 2021, the process of normalizing monetary policy began, with an initial increase in the basic interest from 2.0% to 2.75%, which was greater than expected. This process of monetary normalization is expected to continue in 2021, reducing the stimulus of negative real interest, but without the expectation of returning to the levels of interest verified in 2015-2016, of 14.25% per year. Accordingly, we expect an increase in the final cost of credit in Brazil, which might be mitigated as competition intensifies.

If Brazil experiences inflation rate fluctuations in the future, our costs and net margins may be affected and if investor confidence lags, the price of our securities may fall. Inflationary pressures may also affect our ability to access foreign financial markets and may lead to counter-inflationary policies that may have an adverse effect on our business, financial condition, results of operations and the market price of our shares, ADSs preferred share ADSs and common share ADSs.

3.D.10.01-05 Changes in the base interest rate by the Central Bank of Brazil may materially adversely affect our margins and results of operations.

The economic impacts of the Covid-19 pandemic created the conditions available for the Central Bank of Brazil to reduce the basic interest rate to its lowest level in history, leveraging other actions of stimulus, tax and credit. This movement was possible due to a combination of risks of severe recession, anchoring of inflation expectations and adoption of monetary stimulus, in Brazil and in the world, in view of the expectations of an unprecedented crisis. The SELIC (Special System for Settlement and Custody) rate, which closed 2019 at 4.5%, was reduced to 2.0% in August 2020, where it remained until December 31, 2020. The monetary authority issued a forward guidance, signaling that the interest would be kept stable if certain predetermined conditions continued to be present, including the maintenance of the tax regime.

This process of reducing the SELIC to the lowest historical level was influenced by the high level of inactivity in the goods and labor markets, despite the initial strong exchange rate depreciation between April and May 2020, reflecting the risk aversion of investors in the most recent critical period of the Covid-19 pandemic. We have no control over the basic interest rates established by the Central Bank of Brazil or the frequency with which they are adjusted.

In January 2021, recognizing the increase in inflationary pressures, the Central Bank of Brazil withdrew its forward guidance, without yet generating an automatic increase in interest rates. In March, the institution begins the process of normalizing monetary policy, with the basic rate going from 2.0% to 2.75%. Despite the short-term risk associated to the outbreak of the pandemic in the country, this process is expected to continue in the course of the year, given the expectation of a resumption of economic activity in the coming quarters. The risk in relation to the high magnitude of the basic interest are very much associated with the fiscal evolution, which perceptions have deteriorated in the last months.

Increases in the basic SELIC interest rate fixed by COPOM may have an adverse effect on us, reducing the demand for our credit and increasing our funding costs, internal debt expenses and the risk of default by customers. Reductions in the SELIC rate may also have an adverse effect on us, reducing the interest income we earn on our interest-earning assets and reducing our revenues and margins. 

3.D.10.01-06 Developments and the perception of risk in Brazil and other countries, especially emerging market countries, may adversely affect the market price of Brazilian securities, including our shares, preferred share ADSs and common share ADSs.

The market value of securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including other Latin American and emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities from issuers based in Brazil. Crises in other emerging market countries may diminish investor interest in securities from issuers based in Brazil, including ours, which could adversely affect the market price of our shares, preferred share ADSs and common share ADSs.

3.D.10.01-07 Our investments in debt securities issued by the Brazilian government expose us to additional risks associated with Brazil.

We invest in debt securities issued by the Brazilian government. The trading price of these securities is affected by, among other things, market conditions in Brazil, the perception of Brazil and the related perception of the Brazilian government’s ability to repay principal and/or make interest payments. Accordingly, adverse developments or trends in any of these areas could have a knock-on adverse effect on the value of our securities portfolio, thereby affecting our financial condition and results of our operations, which may affect the market value of our shares, preferred share ADSs and common share ADSs.

3.D.10.01-08 Changes in taxes and other fiscal assessments may adversely affect us.

The government regularly enacts reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, the enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from the enactment of additional tax reforms have not been, and cannot be, quantified. There can be no assurance that these reforms will not, once implemented, have an adverse effect upon our business. Furthermore, such changes may produce uncertainty in the financial system, increasing the cost of borrowing and contributing to the increase in our non-performing portfolio of loans and advances.

In times of constantly changing fiscal trends, with increased public spending and public debt increasing as a proportion of GDP, interest rates may rise at a pace higher than expected, hampering loan expansion and increasing volatility. Moreover, the risk of changes in taxes and fiscal assessments may materialize as the government may target taxation towards certain sectors, such as the financial markets, with negative impacts on the results and investments of businesses operating in the segment, such as ours.

3.D.10.02 External Environment

3.D.10.02-01 Currency exchange variations may have an adverse effect on the Brazilian economy and on our results and financial condition.

Fluctuations in the value of the real may impact our business. After an extended period of appreciation, interrupted only in late 2008 as a reflection of the global crisis, the Brazilian real started to weaken in mid-2011, a trend which continued until mid-2016. After a brief period of stable exchange rates, the real was once again devalued against the U.S. dollar, which was intensified in 2020 because of the increased global aversion to risk, due to the Covid-19 pandemic. Looking at 2021, we expect a partial standardization of domestic monetary policy and certain progress in the reform agenda, resumption of the trajectory of sustainable public debt and a gradual return to normality in the global scenario tend to favor the appreciation of the Brazilian currency against the U.S. dollar. Weaker currency periods make certain local manufacturers (particularly exporters) more competitive, but also make managing economic policy, particularly inflation, increasingly difficult, even with a decelerated growth. A weaker real also adversely impacts companies based in Brazil with U.S. dollar indexed to and/or denominated debt.

If the Brazilian currency devalues or depreciates, we may incur losses on our liabilities denominated in, or indexed to, foreign currencies, such as our long-term debt denominated in U.S. dollars and loans in foreign currency, and experience gains on our monetary assets denominated or indexed to foreign currencies, since liabilities and assets are converted into reais. Consequently, if our liabilities denominated in, or indexed to, foreign currencies significantly exceed our monetary assets denominated in or indexed to foreign currencies, including any financial instruments entered into for hedging purposes, a large devaluation or depreciation of the Brazilian currency could significantly and adversely affect our financial results, and the the market value of our shares, preferred share ADSs and common share ADSs, even if the value of the liabilities has not changed in their original currency. In addition, our credit operations depend significantly on our ability to match the cost of funds indexed to the U.S. dollar with the rates charged to our customers. A significant devaluation or depreciation of the U.S. dollar may affect our ability to attract customers on these terms or to charge rates pegged to the U.S. dollar.

On the other hand, when the Brazilian currency appreciates, we may incur losses on our monetary assets denominated in, or indexed to, foreign currencies, such as the U.S. dollar, and we may experience reductions in our liabilities denominated in or indexed to foreign currencies, as liabilities and assets are converted into reais. Therefore, if our monetary assets denominated or indexed to foreign currencies significantly exceed our liabilities denominated or indexed in foreign currencies, including any financial instruments entered into for hedge purposes, a large appreciation of the Brazilian currency could be material and adversely affect our financial results, even if the value of monetary assets has not changed in their original currency.

3.D.10.02-02 The exit of the United Kingdom from the European Union could adversely impact global economic or market conditions.

The Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland (the UK), from the European Union granted to UK a transitional period until December 31, 2020, during which the UK was bound by the rules of the European Union (EU), although it was not a member state and remained in the single market, while the future terms of the UK’s relationship with the EU was being negotiated.

On December 24, 2020, the EU and the UK reached an agreement on the Trade and Cooperation Agreement (the Trade and Cooperation Agreement), which establishes the principles of relations between the EU and the UK after the end of the period of transition. The UK left the European Union on January 31, 2020 and the European Union Treaty and the Treaty on the Functioning of the European Union no longer apply to the UK. The European Commission has proposed to apply the Trade and Cooperation Agreement for a limited period until February 28, 2021, the date on which the Trade and Cooperation Agreement must be approved by the European Parliament.

Given the recent agreement on the wording of the Trade and Cooperation Agreement and its provisional application, from the date of filing of this report, the exact terms of the Trade and Cooperation Agreement, its practical application and the general relationship of the UK and the EU are not entirely clear. Any delays in the approval of the Trade and Cooperation Agreement by the European Parliament, their potential problematic provisions or their potential uncertain interpretation could significantly adversely affect the economic conditions either of the European or world market and could contribute to instability in the global financial markets and exchange rates. In addition, it would probably create legal uncertainty and divergent national laws and regulations. Any one of these effects, and others that could not be foreseen, may adversely affect our business, results of our operations, our financial condition, the market value of our shares, preferred share ADSs and common share ADSs.

3.D.10.02-03 Certain reference rates, including LIBOR and EURIBOR may be discontinued or reformed in the future – including the potential demise of LIBOR after 2021, and there may be risks associated with this discontinuation.

The London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR) and other interest rates or other types rates and indices deemed to be benchmarks are the subject of discussions and national and international regulatory proposals in progress for reform. Some of these reforms are already in force whilst others are yet to be implemented.

Regulation (EU) No. 2016/1011 (the EU Benchmark Regulation) and Regulation (EU) No. 2016/1011, because it is part of the domestic law of the United Kingdom due to the Law of Withdrawal from the European Union in 2018 (the UK Benchmark Regulation) apply to the provision of benchmarks, to the contribution of input data for a benchmark and for the use of a benchmark, in the EU and in the United Kingdom, respectively. The EU Benchmark Regulation and the UK Benchmark Regulation may have a material impact on any Notes linked to LIBOR, EURIBOR or any other fee or index of reference, in particular, if the methodology or other terms of reference are amended in order to comply with the terms of the EU Benchmark Regulation or the UK Benchmark Regulation, and such changes could (among other things) have the effect of reducing or increasing the rate or level, or affect the volatility of the published rate or level of the reference index. More broadly, any one of the proposals of national or international reform, or other, or the increase in the general regulatory scrutiny of references, could increase the costs and risks of administering or otherwise participating in the definition of a reference and complying with such regulations or requirements. Such factors may have the effect of discouraging market participants from continuing to administer or contribute to certain “benchmarks”, triggering changes in the rules or methodologies used in certain “benchmarks” or leading to the discontinuance or unavailability of quotations of certain "benchmarks".

As an example of such benchmark reforms, on March 5, 2021, the UK Financial Conduct Authority confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings and immediately after June 30, 2023, in the case of the remaining US dollar settings. The announcement indicates that the continuation of LIBOR on the current basis (or at all) cannot and will not be guaranteed after 2021. In addition, on November 29, 2017, the Bank of England and the FCA announced that, from January 2018, its working group on Sterling risk free rates has been mandated with implementing a broad-based transition to the Sterling Overnight Index Average (SONIA) over the next four years across sterling bond, loan and derivative markets so that SONIA is established as the primary sterling interest rate benchmark by the end of 2021.

On September 21, 2017, the European Central Bank announced that it would be part of a new working group responsible for the identification and adoption of a "risk-free overnight rate" that can serve as a basis for an alternative to the current benchmarks used in a variety of instruments and financial contracts in the Euro area. On September 13, 2018, the working group on the rates without risk of the Euro has recommended a new short-term rate for the Euro (€ STR) as the new rate without risk for the Euro area. The € STR was published for the first time on October 2, 2019. Although the EURIBOR has been reformed to comply with the terms of the Regulation of the Reference Index, it remains uncertain how long it will continue in its current form, or if it will be reformed or replaced by € STR or an alternative benchmark.

The elimination of LIBOR or any other reference rate, or changes in the form of management of any reference rate, may require or result in these benchmarks performing differently than in the past, or disappearing entirely, or having other consequences, which cannot be fully anticipated. Any of these developments and any future initiatives to regulate, reform or change the administration of referrals can result in adverse consequences for the return, value and market of loans, mortgages, bonds, derivatives and other financial instruments whose returns are linked to any reference, including those issued, financed or held by us.

3.D.20 Risks relating to us and the Brazilian banking industry

In face of the complexity of our business and the range of products and services offered to our customers in all segments of the market, we are exposed to various types of risks, either due to internal or external factors. Among the main types of risks, we highlight:

3.D.20.01 Market Risk

This relates to the possibility of financial loss due to changes in prices and interest rates of our financial assets, as our asset and liability portfolios may have mismatches in amounts, maturities, currency and indexes.

3.D.20.01-01 Losses in our investments in financial assets at fair value through profit or loss and at fair value through other comprehensive income may have a significant impact on our results of operations and are not predictable.

The fair value of certain investments in financial assets may decrease significantly and may fluctuate over short periods of time. As of December 31, 2020, the investments classified as “fair value through profit or loss” and as “fair value through other comprehensive income” represented 28.8% of our assets, and realized and unrealized gains and losses originating from these investments have had and may continue to have a significant impact on the results of our operations.

Eventually, investment prices in financial assets, which are supported by models, may not predict some more sharp fluctuations in market movements, so that the profitability of these operations is likely to, at certain times, cause negative effects on our profit and equity, despite the fact that reflect the investment policies, asset and liability management (ALM) and appetite for defined risks for the Organization.

3.D.20.01-02 Our trading activities and derivatives transactions may produce material losses.

We engage in the trading of securities, buying debt and equity securities principally to sell them in the short term with the objective of generating profits on short-term differences in price. These investments could expose us to the possibility of material financial losses in the future, as securities are subject to fluctuations in value. In addition, we enter into derivatives transactions, mainly, to manage our exposure to interest rate and exchange rate risk. Such derivatives transactions are designed to protect us against increases or decreases in exchange rates or interest rates. However, these investments and transactions may also expose us to the possibility of significant financial losses in the future, since they are subject to fluctuations in value.

3.D.20.02 Credit Risk

This is represented by the possible losses associated with the non-fulfilment of the borrower or counterparty’s respective financial obligations under any agreement, as well as the devaluation of the credit contract due to the deterioration in the borrower’s risk classification, the reduction in gains or remuneration, benefits gained in renegotiation, the recovery costs and other amounts related to the non-fulfilment of the counterparty’s financial obligations. In addition, it includes the Country/Transfer Risk, represented by the possibility of losses related to non-compliance with obligations associated with the counterparty or mitigating instrument located outside the country, including sovereign risk and the possibility of losses due to obstacles in the currency conversion of amounts received outside the country associated with the operation subject to credit risk. Counterparty Credit Risk is represented by the possibility of loss due to non-compliance by a given counterparty with settlement obligations related to transactions involving the trading of financial assets, including the settlement of derivative financial instruments or by the deterioration in the credit quality of the counterparty, and Concentration Risk is represented by the possibility of losses due to significant exposures to a counterparty, risk factor, product, economic sector or geographic region.

3.D.20.02-01 We may experience increases in our level of past due loans as our loans and advances portfolio becomes more seasoned.

Historically, our loans and advances to customers portfolios registered an increase due to new operations, interrupted in 2017 due to the recession in the Brazilian economy experienced during the year, and resuming growth in 2018. Any corresponding rise in our level of non-performing loans and advances may lag behind the rate of loan growth, as loans typically do not have due payments for a short period of time after their origination. Levels of past due loans are normally higher among our individual customers than our corporate customers.

Our delinquency ratio, calculated based on information prepared in accordance with accounting practices adopted in Brazil (BR GAAP), which is defined as the total loans overdue for over ninety days in relation to the total portfolio of loans and advances, decreased to 2.2% as of December 31, 2020, compared to 3.3% as of December 31, 2019. The reduction in the default rate continues to be related to the effects of the loan renegotiation policies we adopted throughout 2020, to give liquidity to our customers, aiming at the readjustment of their cash flows during the Covid-19 pandemic, in addition to the extension of loans in previous quarters, leading to a reduction in our level of past due loans. For further information about loan renegotiatons, see "Item 5.B. Liquidity and Capital Resources – 5.B.50 Capital Management".

Since December 2020, we believe we are seeing the return to historical levels of the loans overdue from 15 to 90 days, due to the normalization of the usual policies for granting and managing the credit portfolio, in addition to all methodological aspects and technical improvements in the credit concession processes.

Rapid loan growth may also reduce our ratio of non-performing loans to total loans until growth slows or the portfolio becomes more seasoned. Adverse economic conditions and a slower growth rate for our loans and advances to customers may result in increases in our impairment of loans and advances and our ratio of non-performing loans and advances to total loans and advances, which may have an adverse effect on our business, financial condition and results of operations.

3.D.20.02-02 We may incur losses associated with counterparty exposures.

We face the possibility that a derivative counterparty will be unable to honor its contractual obligations. Counterparties may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons. This risk may arise, for example, as a result of entering into swap or other derivative contracts under which counterparties have obligations to make payments to us, executing currency or other trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries. Such counterparty risk is more acute in complex markets where the risk of default by counterparties is higher.

3.D.20.02-03 We may face significant challenges in possessing and realizing value from collateral with respect to loans in default.

If we are unable to recover sums owed to us under secured loans in default through extrajudicial measures such as restructurings, our last recourse with respect to such loans may be to enforce the collateral secured in our favor by the applicable borrower. Depending on the type of collateral provided, we either have to enforce such collateral through the courts or through extrajudicial measures. However, even where the enforcement mechanism is duly established by the law, Brazilian law allows borrowers to challenge the enforcement in the courts, even if such challenge is unfounded, which can delay the realization of value from the collateral. In addition, the Covid-19 pandemic may also affect the timing of resumption and sale of collateral, due to restrictions on economic activities. Our secured claims under Brazilian law will in certain cases rank below those of preferred creditors such as employees and tax authorities. As a result, we may not be able to realize value from the collateral, or may only be able to do so to a limited extent or after a significant amount of time, thereby potentially adversely affecting our financial condition and results of our operations.

3.D.20.02-04 We may incur losses due to impairments on goodwill from acquired businesses.

We record goodwill from acquisitions of investments whose value is based on estimates of future profitability pertaining to business plans and budgets prepared by us. Annually, we assess the basis and estimates of profitability of the Cash-Generating Units (Unidades Geradoras de Caixa or UGC) in respect of which goodwill is allocated. These evaluations are made through cash flow projections based on growth rates and discount rates, with those projections then being compared to the value of goodwill in order to conclude whether there is a basis to record impairments in relation to these assets. However, given the inherent uncertainty in relation to predictions of future cash flow projections, we cannot provide assurances that our evaluation of goodwill will not require impairments to be recorded in future, which may negatively affect, the result of our operations, our financial condition and the market value of our shares, preferred shares ADSs and common shares ADSs.

3.D.20.03 Liquidity Risk

This is represented by the possibility of the institution not being able to fully meet its obligations, without affecting its daily operations and incurring significant losses, as well as the possibility of the institution not being able to trade a position at market price due to its significant size when compared to the usually traded volume or due to some market discontinuation.

3.D.20.03-01 Adverse conditions in the credit and capital markets, just like the value and/or perception of value of Brazilian government securities, may adversely affect our ability to access funding in a cost effective and/or timely manner.

Volatility and uncertainties in the credit and capital markets have generally decreased liquidity, with increased costs of funding for institutions. These conditions may impact our ability to replace, in a cost effective and/or timely manner, maturing liabilities and/or access funding to execute our growth strategy. We did not observe this impact as a result of the Covid-19 pandemic as our liquidity was mitigated by actions implemented by the Central Bank of Brazil, which reduced the need for compulsory deposits and avoided account holders withdrawing their money from the large banks.

Part of our funding originates from repurchase agreements, which are largely guaranteed by Brazilian government securities. These types of transactions are generally short-term and volatile in terms of volume, as they are directly impacted by market liquidity. As these transactions are typically guaranteed by Brazilian government securities, the value and/or perception of value of the Brazilian government securities may be significant for the availability of funds. For example, if the quality of the Brazilian government securities used as collateral is adversely affected, due to the worsening of the credit risk of the Brazilian government, the cost of these transactions can increase, making this source of funding inefficient for us. For further information about obligations for repurchase agreements, see “Item 5.B. Liquidity and Capital Resources – 5.B.20. Liquidity and Funding”.

If the market shrinks, which could cause a reduction in volume, or if there is increased collateral credit risk and we are forced to take and/or pay unattractive interest rates, our financial condition and the results of our operations may be adversely affected.

3.D.20.03-02 Changes in regulations regarding reserve and compulsory deposit requirements may reduce operating margins.

The Central Bank of Brazil has periodically changed the level of compulsory deposits that financial institutions in Brazil are required to abide by.

Compulsory deposits generally yield lower returns than our other investments and deposits because:

Rules related to compulsory deposits have been changed from time to time by the Central Bank of Brazil, as described in “Item 4.B. Business Overview – 4.B.70.02 Banking Regulations – 4.B.70.02-05 – Compulsory Deposits”.

As of December 31, 2020, our compulsory deposits in connection with demand, savings and time deposits and additional compulsory deposits were R$ 83.8 billion. Compulsory reserve requirements were used by the Central Bank of Brazil to control liquidity as part of monetary policy in the past, and we have no control over such imposition. Any increase in the compulsory deposit requirements may reduce our ability to lend funds and to make other investments and, as a result, may adversely affect us.

3.D.20.04 Insurance Risk 

Is the risk arising from an adverse economic situation, which contradicts both the expectations of the insurance company at the moment of agreeing on the insurance policies commercial terms, and the uncertainties that exist in the estimation of provisions, it includes the risk of pension funds, represented by the materialization of the need for emergency contributions to cover shortfalls of funds administered by Closed Complementary Social Security Entities (EFPC), for which we became responsible as a result of some of our previous business acquisitions.

3.D.20.04-01 Our losses in connection with insurance claims may vary from time to time. Differences between the losses from actual claims, underwriting and reserving assumptions and the related provisions may have an adverse effect on us.

The results of our operations depend significantly upon the extent to which our actual claims are consistent with the assumptions we used to assess our potential future policy and claim liabilities and to price our insurance products. We seek to limit our responsibility and price our insurance products based on the expected payout of benefits, calculated using several factors, such as assumptions for investment returns, mortality and morbidity rates, cancellations, conversion into pension income, administrative, operational, brokerage and claims expenses, persistency, and certain macroeconomic factors, such as inflation and interest rates. These assumptions may deviate from our prior experience, due to factors beyond our control such as natural disasters (floods, explosions and fires), man-made disasters (riots, gang or terrorist attacks), changes in mortality and morbidity rates as a result of advances in medicine and increased longevity, pandemics such as the Covid-19 pandemic, which can have a systemic effect on the business (particularly insurance products), or related and economic effects (other products), among others. Therefore, we cannot determine precisely the amounts that we will ultimately pay to settle these liabilities, when these payments will need to be made, or whether the assets supporting our policy liabilities, together with future premiums and contributions, will be sufficient for payment of these liabilities. These amounts may vary from the estimated amounts, particularly when those payments do not occur until well in the future, which is the case with certain of our life insurance products. Accordingly, the establishment of the related provisions is inherently uncertain and our actual losses usually deviate, sometimes substantially, from such estimated amounts. To the extent that incurred losses are less favorable than the underlying assumptions used in establishing such liabilities, we may be required to increase our provisions, which may have an adverse effect on our financial condition and results of our operations.

3.D.20.04-02 We are jointly liable for claims of our customers if our reinsurers fail to meet their obligations under the reinsurance contracts.

The purchase of reinsurance does not hold us harmless against our liability towards our customers if the reinsurer fails to meet its obligations under the reinsurance contracts. As a result, reinsurers’ insolvency or failure to make timely payments under these contracts could have an adverse effect on us, given that we remain liable to our policyholders.

3.D.20.05 Operational Risk

This is represented by the possibility of incurring losses from failures, deficiencies or the inadequacy of internal processes, people, systems and external events.

3.D.20.05-01 A failure in, or breach of, our operational, security or technology systems could temporarily interrupt our businesses, increasing our costs and causing losses.

One of our objectives is to provide adequate security for the proper running of the business and to achieve the objectives established in accordance with applicable laws and regulations, ensuring processes have efficient controls. We constantly invest in the improvement and evolution of safety controls, resilience, continuity and management of our information technology systems and as a result have created an environment with a high capacity to process data for our business operating systems and our financial and accounting systems.

Due to the nature of our operations, the wide range of products and services offered, and the significant volume of activities and operations performed, as well as the global context, where there is an ever-increasing integration among platforms, dependency on technology and on the internet, our information technology systems are exposed to various types of risks, due to internal or external factors.

Our capacity to maintain and implement our security systems depends on our capacity to attract and retain qualified professionals in various areas of activity, such as, but not limited to, the area of information technology (IT), which is undergoing a period of great demand on the part of employees in all markets (not restricted to the financial market). We cannot guarantee that we will succeed in attracting and retaining qualified staff to integrate our security systems, nor that there will be market demands for specific professionals (such as IT professionals), which may have a significant adverse effect on our operations and on our capacity to implement strategies.

We and other financial institutions, including governmental entities, have already experienced cyber security events in relation to our information technology systems. Due to the controls we have in place, we have not experienced any material loss of data from these attacks to date, neither from hardware nor from a data information loss perspective. However, considering the use of new technologies, the increasing dependency on the internet and the changing and sophisticated nature of cyber security events, it is not possible to predict all the means that will be used by individuals or organizations with harmful intent. As a result, all the risks mentioned above could result in customer attrition, regulatory fines, penalties or intervention, reimbursement or other administrative penalties and damage to our reputation.

3.D.20.06 Compliance Risk

This is the risk arising from legal or administrative sanctions, financial losses, damage to reputation and other damages, arising out of breach or failure to comply with the legal framework, the infra-legal regulation, recommendations of the regulator and self-regulator entities and codes of conduct and ethics applicable to our activities.

3.D.20.06-01 We may be subject to negative consequences in the event of an adverse judgment in the judicial proceedings related to Operation Zealots

Due to the so-called “Operação Zelotes” (Operation Zealots), which investigates the alleged improper performance of members of the Federal Administrative Council of Tax Appeals (Conselho Administrativo de Recursos Fiscais, or CARF), a criminal proceeding was opened against two former members of our Diretoria Executiva in 2016 and received by the 10th Federal Court of Judicial Section of the Federal District. The investigation phase of the process has already been completed, and we are currently awaiting the decision of the court of first instance. We are not party to this proceeding.

Our management conducted a careful internal evaluation of records and documents related to the matter and found no evidence of any illegal conduct carried out by our former representatives.

As a result of Operation Zealots, the General Internal Affairs of the Ministry of Finance (Corregedoria Geral do Ministério da Fazenda) initiated an administrative investigation to determine whether there are grounds to file an Administrative Accountability Proceeding (Processo Administrativo de Responsabilização, or PAR) against us. On February 3, 2020, the decision, given by the Official of the Ministry of Economy, was published in Section 2 of the Federal Official Gazette (Diário Oficial da União). The decision fully accepted the final report of the processing commission, the opinion of the National Treasury Attorney General’s Office and the Joint Order of the General Coordination of Management and Administration and of the Leadership of the Advisory and Judgment Division and expressly recognized a lack of evidence that we had promised, offered or given, directly or indirectly, an improper advantage to public agents involved in the operation, in accordance with article 5, section I, of Law 12,846 of 2013.

The progress of Operation Zealots and other on-going investigations or investigations that may be initiated in the future, any consequent events and the possibility of new accusations may negatively affect our reputation, our financial condition and the market value of our shares, preferred share ADSs and common share ADSs.

3.D.20.06-02 Financial institutions, such as us, may be subject to legal proceedings arising due to certain actions by third parties related to anticorruption, money laundering and terrorism financing (AML/TF).

Brazil’s anti-corruption agenda, which includes the prevention of money laundering and the financing of terrorism (AML/TF), include the lead of operations and investigations by regulatory and supervisory authorities. Despite our current unconditional commitment, engagement and our compliance with the applicable anti-corruption obligations (including internal policies), financial institutions, including ourselves, could be involved in such operations and investigations, including legal proceedings, as a result of the actions of individuals or legal entities including the inappropriate use of financial systems or other unlawful acts. Involvement in these actions, a risk inherent to the activities of financial institutions, may result in negative publicity for us, and any adverse judgement may negatively affect our financial condition, operational results and the market value of our shares.

In 2019, as part of operation “Câmbio Desligo”, a follow on from operation Lava-Jato, two of our former managers were investigated and indicted by the Public Prosecutor’s Office for alleged involvement in the opening and maintenance of current accounts for companies with irregularities. We subsequently conducted a thorough internal investigation and adopted the required governance measures as well as making ourselves available to the authorities to contribute to the verification of the facts.

3.D.20.06-03 Third parties may use us for criminal activities without our knowledge, which could expose us to additional liability and could have a material adverse effect on us.

We are required to comply with applicable anti-money laundering, or (AML), anti-terrorism, anti-bribery and corruption, sanctions and other laws and regulations applicable to us. These laws and regulations require us, among other things, to conduct full customer due diligence (including sanctions and politically exposed person screening) and keep our customer, account and transaction information up to date. We have implemented financial crime policies and procedures detailing what is required from those responsible. We are also required to conduct AML training for our employees and to report suspicious transactions and activity to appropriate law enforcement following full investigation by the corporate security area.

Financial crime has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML, anti-bribery, anti-corruption and sanctions laws and regulations are increasingly complex and detailed. The Basel Committee is now introducing guidelines to strengthen the interaction and cooperation between prudential and Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT supervisors). Compliance with these laws and regulations requires automated systems, sophisticated monitoring and skilled compliance personnel.

We maintain updated policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime related activities. However, such policies and procedures may not prevent third parties from using us (and our relevant counterparties) as a conduit for illegal activities, without our knowledge. Our ability to comply with the legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability. These require implementation and embedding within our business effective controls and monitoring, which in turn requires ongoing changes to systems and operational activities. Financial crime is continually evolving and, as noted, is subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities without our knowledge. In addition, we rely heavily on our employees and systems to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. Where we outsource any of our customer due diligence, customer screening or anti-financial crime operations, we remain responsible and accountable for full compliance and any breaches.If the necessary scrutiny and oversight of third parties to whom we outsource certain tasks and processes are not effectively applied,there remains a risk of regulatory breach.

Additionally, in 2015 and early 2016, pursuant to a new resolution issued by the United Nations Security Council, as well as recently enacted laws and regulations issued by the Brazilian Central Bank requiring the implementation of the aforementioned resolution in Brazil, additional compliance requirements were imposed on us and other financial institutions operating in Brazil, which relate to the local enforcement of sanctions imposed by the United Nations Security Council resulting from certain resolutions. We believe we already have the control and compliance procedures in place to satisfy such additional compliance requirements. However, we continue to evaluate their impact on our control and compliance procedures and whether adjustments will need to be made to our control and compliance procedures as a result.

If a financial institution, including us, is unable to fully comply with applicable laws, regulations and expectations, according to Brazilian Laws our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on such financial institution, including requiring a complete review of its business systems, day-to-day supervision by external consultants and ultimately the revocation of licenses.

The reputational damage to our business and global brand would be severe if we were found to have breached AML, anti-bribery, anti-corruption or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers’ data and bank products and services from being accessed or used for illegal or improper purposes.

In addition, we rely heavily on our relevant counterparties to maintain and apply their own appropriate compliance measures, procedures and internal policies. Such measures may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for illicit purposes (including illegal cash operations) without our (or our relevant counterparties’) knowledge. If a financial institution, including us, is associated with, or even accused of being associated with, breaches of AML, anti-terrorism, or sanctions requirements, our reputation could suffer and/or it could become subject to fines, sanctions and/or legal enforcement (including being added to “blocked lists” that would prohibit certain parties from engaging in transactions with it), any one of which could have a material adverse effect on our operating results, financial condition and prospects.

3.D.20.06-04 The government regulates the operations of Brazilian financial institutions and insurance companies. Changes in existing laws and regulations or the imposition of new laws and regulations may negatively affect our operations and revenues.

Brazilian banks and insurance companies are subject to extensive and continuous regulatory review by the government. We have no control over government regulations, which govern all facets of our operations, including the imposition of:

The regulatory structure governing banks and insurance companies based in Brazil is continuously evolving. Existing laws and regulations could be amended, the manner in which laws and regulations are enforced or interpreted could change, and new laws or regulations could be adopted. Such changes could have a materially adverse effect on our operations and our revenues.

In particular, the government has historically enacted regulations affecting financial institutions in an effort to implement its economic policies. These regulations are intended to control the availability of credit and reduce or increase consumption in Brazil. These changes may adversely affect us because our returns on compulsory deposits are lower than those we obtain on our other investments. Regulations issued by the Central Bank of Brazil are not subject to a legislative process. Therefore, those regulations can be enacted and implemented in a very short period of time, thereby affecting our activities in sudden and unexpected ways.

3.D.20.06-05 The Brazilian Constitution used to establish a ceiling on loan interest rates and if the government enacts new legislation with a similar effect in the future, our results of operations may be adversely affected.

Article 192 of the Brazilian Constitution, enacted in 1988, established a 12.0% p.a. ceiling on bank loan interest rates. However, since the enactment of the Brazilian Constitution, this rate had not been enforced, as the regulation regarding the ceiling was pending. The understanding that this ceiling is not yet in force has been confirmed by Súmula Vinculante No. 7, a final binding decision enacted in 2008 by the Brazilian Supreme Court (STF), in accordance with such Court’s prior understanding on this matter. Since 1988, several attempts were made to regulate the limitation on loan interest, and especially bank loan interest rates, but none of them were implemented nor have been confirmed by Brazilian superior courts.

On May 29, 2003, Constitutional Amendment No. 40 (EC 40/03) was enacted and revoked all subsections and paragraphs of Article 192 of the Brazilian Constitution. This amendment allows the Brazilian Financial System to be regulated by specific laws for each sector of the system rather than by a single law relating to the system as a whole.

With the enactment of Law No. 10,406/02 (or the Civil Code), unless the parties to a loan have agreed to use a different rate, in principle the interest rate ceiling has been pegged to the base rate charged by the National Treasury Office (Tesouro Nacional). There is currently an uncertainty as to whether such base rate which is referred to in the Civil Code is: (i) the SELIC rate, the base interest rate established by COPOM, which was 2.0% p.a. as of December 31, 2020 and 4.5% p.a. as of December 31, 2019; or (ii) the 12.0% p.a. rate established in Article 161, paragraph 1, of Law No. 5,172/66, as amended (Brazilian Tax Code), which is the default interest rate due when taxes are not paid on time.

3.D.20.06-06 Any substantial increase or decrease in the interest rate ceiling could have a material effect on the financial condition, results of operations or prospects of financial institutions based in Brazil, including us.

Additionally, certain Brazilian courts have issued decisions in the past, limiting interest rates on consumer financing transactions that are considered abusive or excessively onerous in comparison with market practice. Brazilian courts’ future decisions as well as changes in legislation and regulations restricting interest rates charged by financial institutions could have an adverse effect on our business.

On November 27, 2019, Resolution No. 4,765/19 was amended by the CMN that regulates overdraft facilities granted by financial institutions for a demand deposit account, providing, among other matters, the limit for the interest rates on the amount of the overdraft used. For further information, see “Item 4.B. Business Overview – 4.B.70 Regulation and Supervision – 4.B.70.02 Banking Regulations – 4.B.70.02-14 Use of the overdraft”. Since this is a very recent change, it is still unclear if this will affect our operating results positively or negatively.

3.D.20.06-07 We may incur penalties in case of non-compliance with data protection laws.

In August 2018, Law No. 13,709/18 – General Data Protection Law (LGPD, in Portuguese) was enacted, which creates a set of rules for the use, protection and transfer of personal data in Brazil, in the private and public spheres, and establishes responsibilities and penalties in the civil sphere. In addition to including existing rules on the subject, the LGPD followed the global trend of strengthening the protection of personal data, restricting its unjustified use, and guaranteeing a series of rights to holders of data, as well as imposing important obligations on so-called “treatment agents”. In particular, the LGPD was inspired by recent European legislation on the subject, reproducing central points of the Directive No. 95/46/EC and of the General Data Protection Regulation (GDPR).

The impact of this law has been significant as any processing of personal data will be subject to the new rules, whether physical or digital, by any entity established in Brazil, any entity who has collected personal data in Brazil, any individual located in Brazil – even if not residents – or any entity that offers goods and services to Brazilian consumers. In short, the adaptation to the LGPD required structural changes in our customer relationship, business partners, service providers and employees, and in virtually all internal areas of Brazilian companies. The LGPD has been in force since December 28, 2018 as regards the creation of the National Data Protection Authority (Autoridade Nacional de Proteção de Dados or ANPD), the public administrative body responsible for ensuring, implementing and supervising compliance with the LGPD and the National Council for the Protection of Personal Data and Privacy, created by Provisional Measure converted in 2019 into Law No. 13,583/19. The remainder of the law came fully into force without administrative sanctions on September 18, 2020. As a result of the Covid-19 pandemic, the National Congress approved Law No. 14,010/20 postponing the entry into force of Articles 52, 53 and 54 of Law No. 13,583/19 until August 1, 2021, concerning administrative penalties.

We operate in a preventive, detective and corrective manner in order to protect our own and our customers’ information. As a result, we have evolved our security framework in light of the new digital environment, with a focus on cyber security being key and a pillar of the technology and processes to establish data protection for our customers, resiliency, and structure for threat identification, detection, and response and recovery procedures in cases of cyber-attacks.

However, possible failures or attacks on our systems and processes of prevention, detection and/or correction in the fight against fraud and in providing information security, and the consequent non-compliance with applicable legislation, which may in turn negatively affect our reputation, our financial condition, the result of our operations and the market value of our shares, preferred shares ADSs and common shares ADSs. See item 3.D.20.05-01 “A failure in, or breach of, our operational, security or technology systems could temporarily interrupt our businesses, increasing our costs and causing losses”.

3.D.20.06-08 The STF is currently deciding cases relating to the application of inflation adjustments which may increase our costs and result in losses.

The STF, which is the highest court in Brazil and is responsible for judging constitutional matters, is currently deciding whether savings account holders have the right to obtain adjustments for inflation related to their deposits due to the economic plans Bresser, part of Verão, Collor I and Collor II, implemented in the 1980s and 1990s, before the Plano Real, in 1994. The trial began in November 2013 but was interrupted without any pronouncement on the merits of the subject under discussion by its Members. According to the institutions representing the savings account holders, banks misapplied the monetary adjustments when those economic plans were implemented, and should be required to indemnify the savings account holders for the non-adjustment of those amounts.

In addition, in connection with a related sentence, the Brazilian Supreme Court of Justice (STJ) decided, in May 2014, that the starting date for counting default interest for compensating savings account holders must be the date of summons of the related lawsuit (rather than the date of settlement of the judgment), therefore increasing the amount of possible losses for the affected banks in the event of an unfavorable decision by the STF.

In December 2017, with the mediation of the Executive branch’s attorney (Advocacia Geral da União or AGU) and the intervention of the Central Bank of Brazil, the representatives of the banks and the savings account holders entered into an agreement related to the economic plans aiming to finalize the claims and established a timeline and conditions for the savings account holders to accede to such agreement. The STF affirmed the agreement on March 1, 2018. This approval determined the suspension of legal actions in progress for the duration of the collective bargaining agreement (24 months). On March 11, 2020, the signatories to the Collective Bargaining Agreement agreed to an amendment extending the agreement for a further 60 months. The amendment was taken to the Supreme Court for approval, its extension was approved by the plenary of the court, on May 28, 2020, for a period of 30 months (renewable for a further 30 months), from March 12, 2020, to adhere to the terms of the agreement by means of a digital platform specially created for this purpose. As this is a voluntary settlement, which does not oblige the savings account holder to join, we are unable to predict how many savings account holders will accede to it.

3.D.20.07 Strategy Risk

Strategic risk is represented by the uncertainty in achieving the predetermined objectives. This may be due to adverse changes in the business environment, to the use of inappropriate assumptions in the decision-making process or the implementation of the strategy in a different way to what was planned.

3.D.20.07-01 The increasingly competitive environment in the Brazilian banking and insurance segments may have a negative impact on our business prospects.

The markets for financial, banking and insurance services in Brazil are highly competitive. We face significant competition in all of our main areas of operation from other large banks and insurance companies, both public and private, based in Brazil and abroad, in addition to new players, such as fintechs and startups that begin to operate with a differentiated and reduced level of regulation. It should be noted that major technology companies “bigtechs” are also strong competitors, seeking to invest in online payment systems and financial transactions tools by means of various types of applications. In addition, we note that the implementation of Open Banking in Brazil, in 2021 may further intensify this competition through the possibility of sharing information between institutions.

This competitive environment combined with the accelerated process of digital innovation observed in the sector may impact our speed of adaptation to this ecosystem and consequently the performance of certain lines of business, which may negatively affect our financial condition, the result of our operations and the market value of our shares, preferred share ADSs and common share ADSs.

3.D.20.08 Contagion Risk

This is represented by the possibility of financial loss resulting from relationships (contractual, or not) with subsidiaries, associates, parallel structures (which make investments in companies outside the insurance banking sector), controllers, investment funds, foundations, suppliers and partners, not consolidated in the Prudential Conglomerate.

3.D.20.08-01 Possible need of financial support for entities with which we interact, either by lack of capital and/or liquidity, relevant operational problems and by dependence on the provision of services performed by suppliers/partners, may negatively impact the performance of our business.

Due to the relationships we have with companies related to investment funds, we may decide to provide financial support for these entities if they run into financial difficulties, equity imbalances, a reduction in financial results, and insufficient liquid assets, among other situations. In addition, our reputation may be adversely affected as a result of any adverse situation occurring in entities in which we have invested.

In the relationship with suppliers/partners, due to the complexity of some services, we may become dependent or encounter difficulty replacing some suppliers/partners. We are also subject to operational risks that are beyond our control but that nonetheless may impact negatively on our operations, making the delivery of products and services to our customers more difficult. There is also the possibility of interruptions in the provision of our services due to the difficulty of finding replacements for some suppliers or other issues beyond our control arising from outsourced companies.

These situations may adversely affect our reputation, our financial condition, the result of our operations and the market value of our shares, preferred share ADSs and common share ADSs.

3.D.20.09 Cyber Risk

This is represented by the possibility of cyber incidents, including attacks, intrusions, and leaks that may compromise the confidentiality, integrity and/or availability of processes, assets and/or critical infrastructure.

3.D.20.09-01 Cyber risk in an environment of third parties/service providers, may cause temporary unavailability, loss or leakage of our information or disruption in data confidentiality/integrity and/or services.

CyberSecurity and its risk in relevant service providers in the Bradesco Organization, is treated at the highest strategic level, in the Board of Directors, Executive Board and in the Executive Committees of Risks, Risk Monitoring and AML-TF/Sanctions and Information Security/Cyber. In February 2020, cyber risk in relevant service providers was scaled as Very High and due to concern about the difficulty of visibility and monitoring on the control environment of relevant service providers. The possibility of loss, theft or alteration of data processed and stored in relevant service providers due to the exploitation of vulnerabilities and weaknesses in systems, devices, networks or other digital media in the third environment was considered to be elevated. (E.g. Ransomware)

The risk in service providers include so but not limited to: hacking into Information Technology systems and platforms by malicious third parties, infiltration of malware such as computers with viruses into our systems, intentional or accidental contamination of our networks and systems by third parties with whom we exchange data, unauthorized access to confidential customer data, and or organization data , and cyber attacks can cause service degradation and or outage that can result in business losses.

The Department of Corporate Security - Information Security for Third Parties, performs the prior analysis in the environment of third-party controls. New contracts and or renewal of relevant data processing and storage and cloud computing services contain specific cybersecurity clauses for the protection of Information Assets, including after termination of the contract.

Brazilian regulatory bodies have stepped up data leakage regulations that include high fines for non-compliance events with terms and conditions of the General Data Protection Law. A failure to protect data stored on our systems and third-party systems could adversely affect us. If the risk materializes in a cyber security incident, we have adequate capital allocation to the Organization's appetite.

3.D.20.10 Social and Environmental Risk

This is represented by the potential damage that we may cause to society and to the environment. The social and environmental risks associated with financial institutions are mostly indirect and stem from business relationships, including those with the supply chain and with customers, through financing and investment activities.

3.D.20.10-01 Funding for large projects carried out by customers can generate socio-environmental impacts that could affect our results and reputation negatively.

Across several sectors, we promote loan and financing operations, which may significantly affect an entire ecosystem, involving communities and the local flora and fauna. If a customer, in the development of their activities, causes environmental impacts, such as the contamination of soil and water pollution above the legally acceptable limit and/or is responsible for environmental disasters, it has a direct obligation to repair the damage caused financially. Consequently, depending on the magnitude of the socio-environmental impact, this customer can have their economic-financial structure compromised. Such events could adversely affect our reputation, financial condition, the result of our operations and the market value of our shares, preferred share ADSs and common share ADSs.

3.D.30 Risk Management

3.D.30.01 Our risk management structure may not be fully effective.

Our objective is to fully incorporate the risk management process into all of our activities, developing and implementing methodologies, models and other tools for the measurement and control of risks, looking to continuously improve them in order to mitigate the risks that we identify. However, there may be limitations to this risk management framework in foreseeing and mitigating all the risks to which we are subject, or may in the future become, subject. If our risk management structure is not completely effective in adequately preventing or mitigating risks, we could suffer material unexpected losses, adversely affecting our financial condition and results of operations. For more information on our risk management structure, see “Item 4.B. – Business Overview – 4.B.20.01 Corporate Process of Risk Management”.

3.D.40 Other Risks

3.D.40.01 A majority of our common shares are held, directly and indirectly, by one shareholder and our Board of Directors is composed of 09 members, including three independent members; accordingly, non-independent members may have conflicting interest with our other investors.

As of March 10, 2021, Fundação Bradesco directly and indirectly held 59.07% of our common shares. As a result, Fundação Bradesco has the power, among other things, to prevent a change in control of our company, even if a transaction of that nature would be beneficial to our other shareholders. Fundação Bradesco may also elect the majority of our Board of Directors, as well as approve related party transactions or corporate reorganizations. Under the terms of Fundação Bradesco’s bylaws, members of our Diretoria Executiva, that have been working with us for more than ten years serve as members of the board of trustees of Fundação Bradesco. The board of trustees has no other members.

Our Board of Directors has nine members, three of which are independent, in other words they are not associated with Fundação Bradesco, in accordance with the criteria included in Law No. 6,404/76, in the regulation issued by the CVM (Brazilian Corporate Law). Brazilian Corporate Law states that only individuals may be appointed to a company’s Board of Directors. Accordingly, there is no legal or statutory provision requiring us to have independent directors, however, to exercise good corporate governance, our Board of Directors has three independent directors. Since the majority of members are not independent, the interests of our Board of Directors may not always be aligned with the interests of part of our other shareholders and these holders do not have the same protections they would have if most of the directors were independent. Furthermore, our non-independent directors are associated with Fundação Bradesco and circumstances may arise in which the interests of Fundação Bradesco, and its associates, conflict with our other investors’ interests.

Fundação Bradesco and our Board of Directors could make decisions in relation to our policy towards acquisitions, divestitures, financings or other transactions, which may be contrary to the interests of our shareholders of common shares and have a negative impact on the interests of those shareholders. For more information on our shareholders, see “Item 7.A. Major Shareholders.

3.D.50 Risks relating to our shares, preferred share ADSs and common share ADSs

3.D.50.01 The Deposit Agreements governing the preferred share ADSs and common share ADSs provide that holders of such ADSs will only receive voting instructions if we authorize the depositary bank to contact those holders to obtain voting instructions; and there are also practical limitations on any ability to vote we may give such holders.

The voting rights of preferred share ADS holders and common share ADS holders are governed by the Deposit Agreements. Those Deposit Agreements provide that the depositary bank shall mail voting instructions to holders only if we authorize and direct the depositary bank to do so. If we do not provide that authorization and direction to the depositary bank, preferred share ADS holders and common share ADS holders will not be able to vote at our meetings, unless they surrender their preferred share ADSs or common share ADSs and receive the underlying preferred shares or common shares, as applicable, in accordance with the terms of the applicable Deposit Agreement.

In addition, there are practical limits on the ability of preferred share ADS and common share ADS holders to exercise any vote due to the additional procedural steps involved in communicating with such holders. For example, our shareholders will either be notified directly or through notification published in Brazilian newspapers and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. In contrast, preferred share ADS holders and common share ADS holders will not receive notice directly from us and cannot vote in person at the meeting. Instead, in accordance with the Deposit Agreements, the depositary bank will, if authorized and directed by us, send any notice of meetings of holders received by it from us to preferred share ADS holders and common share ADS holders, together with a statement as to the manner in which voting instructions may be given by holders. To exercise any such ability to vote, preferred share ADS and common share ADS holders must then instruct the depositary bank how to vote with the shares represented by their preferred share ADSs or common share ADSs. Because of this extra step involving the depositary bank, if and when we authorize and direct the depositary bank to mail voting information to preferred share ADS holders and common share ADS holders, the process for voting will take longer for preferred share ADS and common share ADS holders than for holders of our shares. Preferred share ADSs and common share ADSs for which the depositary bank does not receive voting instructions in good time will not be able to vote at a meeting.

3.D.50.02 Under Brazilian Corporate Law, preferred shareholders have limited voting rights, accordingly, preferred share ADS holders will have similar limitations on their ability to vote.

Under the Brazilian Corporate Law (Law No. 6,404/76, amended by Law No. 9,457/97, which we refer to as Brazilian Corporate Law) and our Bylaws, our preferred shareholders are not entitled to vote at our shareholders’ meetings, except in limited circumstances (see “Item 10.B. Memorandum and Articles of Association – 10.B.10 Organization – 10.B.10.04 Voting Rights”, for further information on voting rights of our shares). As such, in contrast to common shareholders, preferred shareholders are not entitled to vote on corporate transactions, including any proposed merger or consolidation with other companies, among other things.

As discussed above in “3.D.50.01 The Deposit Agreements governing the preferred share ADSs and common share ADSs provide that holders of such ADSs will only receive voting instructions if we authorize the depositary bank to contact those holders to obtain voting instructions; and there are also practical limitations on any ability to vote we may give such holders”, preferred share ADS holders will only be able to vote if we authorize and direct the depositary bank accordingly. As a result of the fact that preferred shareholders have limited voting rights, any ability to vote that we may extend to preferred share ADS holders corresponding to preferred shares pursuant to the applicable Deposit Agreement would be similarly limited.

3.D.50.03 The relative volatility and low liquidity of the Brazilian securities markets may substantially limit your ability to sell shares underlying the preferred share ADSs and common share ADSs at the price and time you desire.

Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in more developed countries, and these investments are generally considered more speculative in nature. The Brazilian securities market is substantially smaller and less liquid than major securities markets, such as the United States, and may be more volatile. Although you are entitled to withdraw our shares, underlying the preferred share ADSs and common share ADSs from the depositary bank at any time, your ability to sell our shares underlying the preferred share ADSs and common share ADSs at a price and time acceptable to you may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets such as the United States or other countries. The ten largest companies in terms of market capitalization, according to B3, accounted for 45.8% of the aggregate market capitalization as of December 30, 2020.

3.D.50.04 Our shares, preferred share ADSs and common share ADSs are not entitled to a fixed or minimum dividend.

Holders of our shares and, consequently, our preferred share ADSs and common share ADSs are not entitled to a fixed or minimum dividend. Pursuant to the Deposit Agreements, if the depositary (as holder of the common shares and preferred shares underlying the common share ADSs and preferred share ADSs) receives any cash dividend or distribution from us, it shall distribute a corresponding U.S. dollar amount, net of depositary fees and certain withholding tax adjustments as described in the Deposit Agreements, to holders of our common share ADSs and preferred share ADSs as promptly as practicable. However, if we do not pay dividends to holders of our common shares or preferred shares then there will be no payment of dividends to holders of our common share ADSs or preferred share ADSs.

Pursuant to our Bylaws, our preferred shares are entitled to dividends 10.0% higher than those of our common shares. Although under our current Bylaws we are obligated to pay our shareholders at least 30.0% of our annual adjusted net income, the shareholders attending our Annual Shareholders’ Meeting may decide to suspend this mandatory distribution of dividends if the Board of Directors advises that payment of the dividend is not compatible with our financial condition. Neither our Bylaws nor Brazilian law specify the circumstances in which a distribution would not be compatible with our financial condition, and our controlling shareholders have never suspended the mandatory distribution of dividends. However, Brazilian law provides that a company need not pay dividends if such payment would endanger the existence of the company or harm its normal course of operations.

In March 2013, CMN Resolution No. 4,193/13 was issued in an effort to further implement the Basel III Accord in Brazil. Pursuant to this rule, a restriction of dividend and interest payments on equity may be imposed by the Central Bank of Brazil in the event of non-compliance with the additional capital requirements established by the Central Bank of Brazil, as further described in “Item 4.B. Business Overview – 4.B.70 Regulation and Supervision – 4.B.70.02 Banking Regulations – 4.B.70.02-03 Capital adequacy and leverage”.

In light of the adverse economic consequences of the Covid-19 pandemic, Central Bank of Brazil issued Resolution nº 4,885/20, allowing remuneration of equity in the equivalent amount to 30% of the adjusted net income or the amount equivalent to the minimum mandatory dividend established by the Brazilian Corporate Law, in case of corporations, or that established into the articles of incorporation, in case of limited companies.

3.D.50.05 As a preferred share ADS holder and common share ADS holder you will have fewer and less well-defined shareholders’ rights than in the United States and certain other jurisdictions.

Our corporate affairs are governed by our Bylaws and Brazilian Corporate Law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Brazil. Under Brazilian Corporate Law, you and the holders of our shares may have fewer and less well-defined rights to protect your interests relative to actions taken by our Board of Directors or the holders of our common shares than under the laws of other jurisdictions outside Brazil.

Although Brazilian Corporate Law imposes restrictions on insider trading and price manipulation, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or markets in certain other jurisdictions. In addition, self-dealing and the preservation of shareholder interests may be less heavily regulated and what regulations are in place may not be as strictly enforced in Brazil as in the United States, which could potentially disadvantage you as a holder of our shares underlying preferred share ADSs and common share ADSs. For example, compared to Delaware general corporation law, Brazilian Corporate Law and practices have less detailed and well-established rules and judicial precedents relating to review of management decisions under duty of care and duty of loyalty standards in the context of corporate restructurings, transactions with related parties, and sale-of-business transactions. In addition, shareholders in Delaware companies must hold 5.0% of the outstanding share capital of a corporation to have valid standing to bring shareholder derivative suits, while shareholders in companies based in Brazil do not normally have valid standing to bring a class action.

3.D.50.06 It may be difficult to bring civil liability causes against us or our directors and executive officers outside of Brazil.

We are organized under the laws of Brazil, and all of our directors and executive officers reside outside the United States. In addition, a substantial portion of our assets and most or all of the assets of our directors and executive officers are located in Brazil. As a result, it may be difficult for investors to effect service of process within the United States or other jurisdictions outside of Brazil on such persons or to enforce judgments against them, including any based on civil liabilities under the U.S. federal securities laws.

3.D.50.07 If we issue new shares or our shareholders sell shares in the future, the market price of your preferred share ADSs and common share ADSs may be reduced.

Sales of a substantial number of shares, or the belief that this may occur, could decrease the market price of our shares, preferred share ADSs and common share ADSs, by diluting their value. If we issue new shares or our existing shareholders sell the shares they hold, the market price of our shares and therefore the market price of our preferred share ADSs and common share ADSs, may decrease significantly.

3.D.50.08 The payments on the preferred share ADSs and common share ADSs may be subject to U.S. withholding under the Foreign Account Tax Compliance Act (FATCA).

The United States has enacted rules, commonly referred to as FATCA, that generally impose a reporting and withholding regime with respect to certain U.S. source payments (including interest and dividends), gross proceeds from the disposition of property that can produce U.S. source interest and dividends and certain payments made by entities that are classified as financial institutions under FATCA. The United States has entered into an Intergovernmental Agreement regarding the implementation of FATCA with Brazil (the IGA). Under the current terms and conditions of the IGA, we do not expect payments made on or with respect to the preferred share ADSs or common share ADSs to be subject to withholding under FATCA. However, significant aspects of when and how FATCA will apply remain unclear, and no assurance can be given that withholding under FATCA will not become relevant with respect to payments made on or with respect to the preferred share ADSs or common share ADSs in the future. Similar to the FATCA, the Common Reporting Standard (CRS) is the instrument developed by the Convention on Mutual Assistance in Tax Matters of the Organization for Economic Cooperation and Development (OECD) and the Multilateral Competent Authority Agreement, applicable to the countries signatory to the norm. The financial institutions and entities subject to it should ensure the identification, investigation and reporting of information to the competent bodies. Prospective investors should consult their own tax advisors regarding the potential impact of FATCA and CRS. For more information about FATCA and CRS, see “Item 4.B. Business Overview – 4.B.70 Regulation and Supervision”.

3.D.50.09 You may be unable to exercise preemptive rights relating to our shares.

You will not be able to exercise preemptive rights relating to our shares underlying your preferred share ADSs and common share ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. Similarly, we may from time to time distribute rights to our shareholders. The depositary bank will not offer rights to you as a holder of the preferred share ADSs and common share ADSs unless the rights are either registered under the Securities Act or are subject to an exemption from the registration requirements. We are not obligated to file a registration statement with respect to the shares or other securities relating to these rights, and we cannot assure you that we will file any such registration statement. Accordingly, you may receive only the net proceeds from the sale by the depositary bank of the rights received in respect of the shares represented by your preferred share ADSs and common share ADSs or, if the preemptive rights cannot be sold, they will be allowed to lapse. You may also be unable to participate in rights offerings by us, and your holdings may be diluted as a result.

3.D.50.10 If you exchange your preferred share ADSs or common share ADSs for their underlying shares, you risk losing Brazilian tax advantages and the ability to remit foreign currency abroad.

Brazilian law requires that parties obtain registration with the Central Bank of Brazil in order to remit foreign currencies, including U.S. dollars, abroad. The Brazilian custodian for the shares must obtain the necessary registration with the Central Bank of Brazil for payment of dividends or other cash distributions relating to the shares or after disposal of the shares. If you exchange your preferred share ADSs or common share ADSs for the underlying shares, however, you may only rely on the custodian’s certificate for five business days from the date of exchange. Thereafter, you must obtain your own registration in accordance with the rules of the Central Bank of Brazil and the CVM, in order to obtain and remit U.S. dollars abroad after the disposal of the shares or the receipt of distributions relating to the shares. If you do not obtain a certificate of registration, you may not be able to remit U.S. dollars or other currencies abroad and may be subject to less favorable tax treatment on gains with respect to the shares. For more information, see “Item 10.D. Exchange Controls”.

If you attempt to obtain your own registration, you may incur expenses or suffer delays in the application process, which could delay your receipt of dividends or distributions relating to the shares or the return of your capital in a timely manner. The custodian’s registration and any certificate of foreign capital registration you may obtain may be affected by future legislative changes. Additional restrictions applicable to you, to the disposal of the underlying shares or to the repatriation of the proceeds from disposal may be imposed in the future.

ITEM 4. INFORMATION ON THE COMPANY

4.A. History and Development of the Company

We are a sociedade anônima organized under the laws of Brazil. Our headquarters are in Cidade de Deus, Vila Yara, 06029-900, Osasco, São Paulo, Brazil, and our telephone number is (55-11) 3684-4011. Our investor relations website is located at bradescori.com.br. Our New York Branch is located at 450 Park Avenue, 32^nd and 33^rd floors, New York 10022.

We were founded in 1943 as a commercial bank under the name “Banco Brasileiro de Descontos S.A.”. In 1948, we began a period of aggressive expansion, which led to our becoming the largest private-sector (non-government-controlled) commercial bank in Brazil by the end of the 1960s. We expanded our activities nationwide during the 1970s and became well established in both urban and rural markets in Brazil. In 1988, we merged with our real estate financing, investment bank and consumer credit subsidiaries to become a multiple service bank and changed our name to “Banco Bradesco S.A.”.

Since 2009, we operate in all Brazilian municipalities, and our large banking network enables us to be closer to our customers, thereby enabling our managers to develop knowledge surrounding economically active regions and other important conditions for our business. This knowledge helps us assess and mitigate risks in loans, among other risks, as well as to meet the specific needs of our customers.

Currently, we are one of the largest banks in Brazil in terms of total assets. We offer a wide range of banking and financial products and services in Brazil and abroad to individuals, large, mid-sized, small and micro enterprises and major local and international corporations and institutions. Our products and services comprise of banking operations such as: loans and advances, deposit-taking, credit card issuance, purchasing consortiums, insurance, capitalization, leasing, payment collection and processing, pension plans, asset management and brokerage services.

4.A.10 Acquisitions, divestments and other strategic alliances

4.A.10-01 Recent Acquisitions

In May 2019, we announced to the market that we entered into a Share Purchase Agreement with the controlling shareholders of BAC Florida Bank (BAC Florida), a bank that has offered various financial services in the United States for over 45 years, especially to non-resident high net worth Individuals.

In October 2020, we announced to the market that the acquisition was completed, taking control of the operations of BAC Florida, with the objective of expanding our investment offering in the USA to our high net worth (Prime) and Private Bank customers, in addition to other banking services, such as checking accounts, credit card and mortgages, also providing the opportunity to expand business related to corporate and institutional customers.

In December 2018, we and the Fidelity Group terminated our joint venture in BBC Processadora S.A. (formerly Fidelity Processadora e Serviços S.A.) (Processing Company). As a result, we became the sole shareholder of the Processing Company, which has a shareholders’ equity composed exclusively of the assets and liabilities relating to the provision of credit card processing services for our Organization. The operation (i) aimed to reduce the costs of processing and increase the efficiency of the credit card business; (ii) did not have any impact on our activities and customers; and (iii) did not involve any financial values. In addition, we and the Fidelity Group have maintained our association in Fidelity Serviços S.A., which continued to provide services to us with call center services, collection, fraud prevention, support and other related services. The association was only discontinued following the sale of Fidelity Serviços S.A. (currently Chain Serviços e Contact Center S.A.) by us.

4.A.10-02 Recent divestments

In September 2019, we signed a contract for the sale of all of the shares held in Chain Serviços e Contact Center S.A. (Chain) to Almaviva do Brasil Telemarketing e Informática S.A. Chain has as its objective the provision of call center and collection activities. The operation was approved by the competent authorities, and the transaction was closed on January 14, 2020, discontinuing our association with the Fidelity Group.

In June 2019, we entered into an agreement to sell our entire minority interest indirectly held in NCR Brasil – Indústria de Equipamentos para Automação S.A. to NCR Corporation. The operation was approved by the competent authorities, and the transaction was completed on October 28, 2019.

4.A.10-03 Other strategic alliances

In October 2018, we formalized a strategic partnership with RCB Investimentos S.A. (RCB), one of the principal credit management and recovery companies in Brazil, and with its controlling company PRA Group Brazil Investimentos e Participações, a company of the PRA Group Inc. (PRA Group), a global leader in the acquisition and management of non-performing credits. The transaction includes: (i) our acquisition of 65% of the shares issued by RCB, in which the founding members will remain as partners and managers of RCB, together with us; and (ii) the constitution of two FDICs (Investment Funds in Credit Rights) for the acquisition of non-performing loan portfolios, where the management of the recovery of these loans remain with RCB. The FIDCs will continue to be held by the PRA Group and the founders, with our minority participation. The transaction was approved by the Administrative Council for Economic Defense (CADE) and by the Central Bank of Brazil. The operation closed on December 20, 2018.

Our subsidiary, BRAM has developed important alliances. Something that is also increasingly important in the context of its internationalization strategy. Through personal management and agreements with partners, we offer Brazilian investors the opportunity to invest in fixed and non-fixed equity funds, balanced and alternative, with global, regional and thematic exposure, as well as global ESG (Environmental, Social and Governance) strategies. In Europe, BRAM offers funds domiciled in Luxembourg with different strategies under the Bradesco Global Funds family, launched in 2009, to overseas investors. In Japan, Mitsubishi UFJ Kokusai Asset Management (MUKAM), our partner since 2008, offers funds managed by BRAM to retail investors wishing to invest in the Brazilian market.

4.B. Business Overview

We operate and manage our business through two segments: (i) the banking segment; and (ii) the insurance, pension plans and capitalization bond segment.

4.B.10 Business strategy

Our strategy is based on delighting our customers. In 2020, we reviewed our corporate strategy to further align our actions towards a single direction: understanding the needs of our customers to meet their expectations and delivering an excellent service at all stages of our customer's interaction with us.

From this review, we based our strategy on four pillars that guide our trajectory towards business continuity (i) Customer – our inspiration; (ii) Digital Transformation – how we do what we do; (iii) People – our team; and (iv) Sustainability – made to last. Below, we present each one of our four pillars:

Our main goal is to earn admiration, trust and relationship of our customers, serving them with excellence, based on their needs and goals, to contribute to their achievements.

In order to accomplish this, we implemented a number of initiatives placing the customer at the center of our strategy, respecting their individuality and improving our knowledge of our customers with data intelligence and by offering complete business solutions.

We developed initiatives aimed at better understanding our customers and their expectations and requirements at every stage of their interaction with our organization. This enables us to provide tailor made offers in accordance with our customers ' profile to enhance the customer experience, integrate journeys and processes, supported by new real time decision technologies.

With the move to open banking, we allow our customers to check their balance and make payments to their account from alternative platforms, other than the traditional channels. One example is via PIX, an innovative payment method created by the Central Bank that allows customers to make payments, transfers and receive deposits at any time of the day.

Further, the MEI platform is a pioneering initiative that offers micro-entrepreneurs a portfolio of the financial and non-financial solutions they need to facilitate their day-to-day operations, including formalization, training, consulting and performance entrepreneurship, in partnership with startups and companies specializing in the subject.

In 2020, we acquired BAC Florida Bank in the United States through which we offer traditional banking services, such as a complete checking account, cards, credit operations and investments in the United States.

We have a digital mindset and outlook that allows our actions that we believe, contribute to simple, efficient, agile and innovative. We search to maximize our operational efficiency, encouraging the use of technology and innovation in our business models. Our strategy also highlights the management of expenditure, developing actions and projects aimed to optimize our operations and reducing the cost of providing services.

In the context of digital transformation, we aim to make the banking experience even more convenient, fast and secure for the customer. Innovation, agility, connectivity, modernization and security are fundamental drivers to achieve this and are present in our day-to-day operations. We are committed to maximizing value for our customers by developing a culture focused on continuous improvement and excellence. Our next digital bank is an example of this, complementing our ecosystem of solutions and offering an alternative value proposition for our customers that operate in a hyperconnected world. It also complements Bitz, a new group company that operates in the Brazilian digital wallet and payment accounts market. We also highlight inovabra, a hub for promoting startups, especially fintechs, which develop innovative solutions for the group's products and services. Ágora – Casa de Investimentos is our open platform of investment products for account holders and non-account holders with 100% digital onboarding through the Ágora app / website, Bradesco, next applications and Bradesco internet banking with more product options and specialized advice for each customer that makes their investments, with convenience and reliability.

In addition, the capabilities of BIA (Bradesco Artificial Intelligence) are increasingly sophisticated translating into a customer experience across our digital channels.

We want to be the employer of choice for high-performing professionals to progress their career. Our strategy is founded on the people who work here. We seek to continuously improve our ability to attract, train and retain appropriate talents in each of our business areas, with the goal of making our corporate strategy feasible.

We have an organizational culture based on ethics, transparency and respect for others and we have made significant investments to achieve an innovative, challenging and diverse working environment.

We highlight the importance of actions related to the health and well-being of our employees, through the Viva Bem Program, the employee incentive empowering our staff to volunteer through the Bradesco Volunteer Portal and the online platform, integra rh, enabling them to be protagonists of their own careers.

Our focus is to generate value for all our stakeholders and we are committed to growing in a diversified and sustainable manner, by a Corporate Governance that seeks considering the best balance between risk and return, a robust capital and liquidity structure and preparing of our organization for the new challenges. Further, the actions we take and our commitment to increasing diversity reaffirm our belief in the transformative potential of people, respecting individuality and plurality. Inclusion and financial education are important drivers for us.

We have commitments related to Social-Environmental Sustainability in order to contribute to the sustainable development of our company, evidenced by our launch of the Amazonia Plan, a partnership of Bradesco, Itaú and Santander, acting in the promotion of the development of the Amazonia region. In addition, we became the first Brazilian bank to join the Partnership for Carbon Accounting Financials (PCAF), a global initiative to measure carbon emissions generated by financial institutions.

4.B.20 Business management

In order to ensure our operational activities are aligned with our strategies, we have developed management processes that are aligned with best market practices and business models, including:

4.B.20.01 Corporate risk management processes

Risk management is of great strategic importance to us due to the increasing complexity of services and products and the globalization of our business. In August 2017, CMN Resolution No. 4,595/17 was amended to include provision for corporate compliance policies. Under this resolution, financial institutions authorized to operate by the Central Bank of Brazil should implement and maintain corporate compliance policies compatible with the nature, size, complexity, structure, risk profile and business model of the institution, in order to ensure the effective management of its compliance risk. Compliance risk must be managed in an integrated manner with all other risks incurred by the institution, in accordance with the specific rules. The rule also permits the drafting of a single compliance policy per conglomerate.

We exercise control over risks in an integrated and independent manner, preserving and valuing collective decision-making, devising and implementing methodologies, models and measure and control tools. We also promote the dissemination of our risk culture to all employees at all levels, from the business areas to the Board of Directors. Our Corporate Compliance Policy was approved at the meeting of our Board of Directors on December 26, 2017, whose last review, with amendments, was recorded at the meeting of the Board of Directors on December 23, 2020.

Our risk management processes ensure that risks are proactively identified, measured, mitigated, monitored and reported, as required for the complexity of our financial products and services and the profile of our activities.

4.B.20.01-01 Risk and Capital Management Structure

Our risk and capital management structures consist of several committees, commissions and departments that support the Board of Directors, the CEO, the CRO and the Diretoria Executiva in making decisions.

We have an Integrated Risk Management and Capital Allocation Committee (COGIRAC), which advises the Board of Directors in relation to the performance of its duties related to management policies and limits of exposure to risks, and to ensure we are compliant with the processes, policies, related rules and compliance with regulations and legislation applicable to the Organization.

The committee is assisted by the Executive Committees for: (i) Risk Monitoring; (ii) Risk Management; (iii) AML-TF/Sanctions and Information Security/Cyber Security; and (iv) Bradesco Seguros’ Risk Management, Actuarial Control and Compliance. There are also the Executive Products and Services Committee, and executive committees for our business units, whose tasks include suggesting limits for exposure to their related risks and devising mitigation plans to be submitted to COGIRAC and the Board of Directors.

Our governance structure also includes a Risk Committee, whose main objective is to evaluate our risk management framework and, eventually, to propose improvements.

COGIRAC and the Risk Committee assist the Board of Directors in the performance of its duties in the management and control of risks, capital, internal controls and compliance.

4.B.20.01-02 Credit risk

Credit risk is represented by the possible losses associated with the non-fulfilment of the borrower or counterparty’s respective financial obligations under any agreement, as well as the devaluation of the credit contract due to the deterioration in the borrower’s risk classification, the reduction in gains or remuneration, benefits gained in renegotiation, the recovery costs and other amounts related to the non-fulfilment of the counterparty’s financial obligations.

In addition, it includes the Country/Transfer Risk, represented by the possibility of losses related to non-compliance with obligations associated with the counterparty or mitigating instrument located outside the country, including sovereign risk and the possibility of losses due to obstacles in the currency conversion of amounts received outside the country associated with the operation subject to credit risk. Counterparty Credit Risk is represented by the possibility of loss due to non-compliance by a given counterparty with settlement obligations related to transactions involving the trading of financial assets, including the settlement of derivative financial instruments or by the deterioration in the credit quality of the counterparty, and Concentration Risk is represented by the possibility of losses due to significant exposures to a counterparty, risk factor, product, economic sector or geographic region, mitigation, etc.

Credit risk management is a continuous and evolving process of mapping, developing, assessing and diagnosing through the use of models, instruments and procedures that require a high degree of judgment, discipline and control during the analysis of operations in order to preserve the integrity and independence of the processes.

We seek to control our exposure to credit risk, which mainly relates to loans, credit commitments, financial guarantees provided, securities and derivative financial instruments.

In order to avoid compromising the quality expected from the portfolio, committees monitor all relevant aspects of the process of lending, concentration, collateral requirements, maturities, and other aspects.

We continually outline all the activities that can potentially generate exposure to credit risk, with the respective classifications regarding probability and size, as well as identifying managers, measurement and mitigation plans for those activities.

4.B.20.01-02.01 Credit Risk Management Process

The credit risk management process is conducted in a centralized manner for us as a whole. This process engages several areas, which ensure an efficient framework to provide for independent and centralized credit risk measurement and control.

Our Credit Risk monitoring area is actively engaged in improving customer risk rating models, following up large risks by periodically monitoring major delinquencies and the provisioning levels due to expected losses and level of capital against unexpected losses.

This area continuously reviews internal processes, including the roles and responsibilities, information technology training and requirements and periodic review of risk assessment, in order to incorporate new practices and methodologies.

4.B.20.01-02.02 Control and monitoring

Corporate control and monitoring of our credit risk take place in the credit risk unit of the Integrated Risk Control Department (DCIR). The department assists the Executive Risk Management Committee on discussions and implementation of methodologies to measure credit risk. Relevant issues discussed by this committee are reported to COGIRAC, which reports to the Board of Directors.

In addition to committee meetings, the department holds monthly meetings with officers and heads of products and segments to ensure they are informed about the evolution of the portfolio of loans, delinquency, adequacy of the provision for non-performing loans, credit recovery, gross and net losses, portfolio limits and concentrations, allocation of economic and regulatory capital and other items. This information is also reported monthly to the Executive Committee for Risk Monitoring and the Audit Committee.

The department also tracks each internal or external events that may significantly impact credit risk such as mergers, bankruptcies or crop failures and monitors sectors of economic activity in which we have the most representative exposures.

Both the governance process and limits are validated by COGIRAC, submitted for approval by the Board of Directors, and reviewed at least once a year.

4.B.20.01-03 Market Risk

Market risk is the possibility of a loss of income due to fluctuations in prices and market interest rate of the financial instruments retained by the Organization resulting from mismatched amounts, terms, currencies and indexes of our asset and liability operations.

This risk is identified, measured, mitigated, controlled and reported. Our exposure profile to market risk is in line with guidelines established by the governance process, with limits that are monitored on a timely and independent basis.

All operations exposing us to market risk are mapped, measured and classified according to probability and magnitude, with the whole process approved by the governance structure.

In line with the best practices of corporate governance and in order to preserve and strengthen our management of market and liquidity risks, as well as to meet the requirements of CMN Resolution No. 4,557/17, as amended, the Board of Directors approved the Market Risk Management Policy, which is reviewed at least once a year by the relevant committees and the Board of Directors itself, providing the main operational guidelines for accepting, controlling and managing market risk.

In addition to this policy, we have several specific rules that regulate the market risk management process, including:

·     classification of operations;

·     reclassification of operations;

·     trading in government or private securities;

·     use of derivatives; and

·     hedging.

4.B.20.01-03.01 Market Risk Management Process

Our market risk management process is managed on a corporate wide basis, ranging from business areas to the Board of Directors. This process involves several areas to ensure an efficient structure, with the measurement and control of market risk being performed centrally and independently. This process allowed us to be the first financial institution in the country authorized by the Central Bank of Brazil to use, since January 2013, in-house models of market risk to check the regulatory capital requirement. The management process is reassessed at least annually by the relevant committees and also approved by the Board of Directors itself.

4.B.20.01-03.02 Definition of limits

Proposed market risk limits are validated by specific committees for approval by COGIRAC, to be submitted to the Board of Directors depending on the characteristics of the business, which are separated into the following portfolios:

The trading portfolio is monitored by limits of:

·     Value at Risk (VaR);

·     results; and

·     financial exposure/concentration.

The risks of our banking portfolio are monitored through:

Market risk is controlled and monitored by an independent business unit, the DCIR, which calculates risk on outstanding positions on a daily basis, consolidates results and reports as required by the existing governance process.

In addition to daily reports, the positions of the trading portfolio are discussed every 15 days by the Treasury Executive Committee and the positions of the banking portfolio and liquidity reports are handled by the Treasury Executive Committee for the Management of Assets and Liabilities. In both forums, the results and the risks are evaluated and the strategies are discussed. Both the governance process and the existing limits are validated by COGIRAC and submitted for approval by the Board of Directors, which are reviewed at least once a year.

In case of any risk limit breach monitored by the DCIR, the head of the business unit in charge is informed of the limit usage and, in a timely manner, COGIRAC is called in order to make a decision. If the committee chooses to increase the limit and/or change or maintain the positions, the Board of Directors is called to approve a new limit or to review our strategy with regard to this particular risk.

For more information on how we evaluate and monitor market risk, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

4.B.20.01-04 Liquidity risk

Liquidity risk is represented by the possibility of the institution failing to effectively comply with its obligations, without affecting its daily operations and incurring significant losses, as well as the possibility of the institution failing to trade a position at market price, due to its larger size as compared to the volume usually traded or in view of any market interruption.

Understanding and monitoring this risk is crucial, especially for us to be able to settle transactions in a timely and secure manner.

4.B.20.01-04.01 Liquidity Risk Management Process

We manage our liquidity risk on a group-wide basis. This process involves a number of areas with specific responsibilities, and the liquidity risk is measured and controlled on a centralized and independent basis, with daily monitoring of available funds and compliance with liquidity levels, according to the risk appetite established by the Board of Directors, as well as the contingency and recovery plan for potential high-stress situations.

Our Policy for Liquidity Risk Management, approved by the Board of Directors, is mainly aimed at ensuring the existence of standards, criteria and procedures to guarantee the development of the Short-Term Liquidity Ratio (LCR – Liquidity Coverage Ratio), in compliance with Resolution No. 4,401/15, and Long-Term Liquidity Ratio (NSFR – Net Stable Funding Ratio), in compliance with Resolution No. 4,616/17, as well as the strategy and action plans for liquidity crisis situations. The policy and controls we established fully comply with CMN Resolution No. 4,557/17.

We also have rules for the daily monitoring of liquidity levels through a warning flag system that triggers the submission of reports and the actions to be taken given the risk presented.

Our liquidity risk is managed by the Treasury Department, based on the positions provided by the back-office controls positions, which provides liquidity information to our management and monitors compliance with established limits. The DCIR is responsible for the methodology of measurement, control over limits established by type of currency and company (including for non-financial companies), reviewing policies, standards, criteria and procedures, and drafting reports for new recommendations.

Since October 2017 we have used the Short-Term Liquidity Ratio (LCR) as a standard for internal management, as provided in the CMN Resolution No. 4,401/15 and the Central Bank of Brazil’s Circular No. 3,749/15, amended by Circular No. 3,986/20.

In the third quarter of 2018 we started monitoring structural long-term liquidity risk, through the NSFR, pursuant to CMN Resolution No. 4,616/17 and Central Bank of Brazil’s Circular No. 3,869/17.

Liquidity risk is monitored daily by business and control areas and at meetings of the Treasury Executive Committee for Asset and Liability Management, which controls liquidity levels. Additionally, COGIRAC and the Board of Directors monitor liquidity levels reports which are shared with the Risk Committee.

4.B.20.01-05 Operational Risk

Operational risk is represented by the possibility of incurring losses from failures, deficiencies or the inadequacy of internal processes, people, systems and external events.

4.B.20.01-05.01 Operational Risk Management Process

The Organization adopts the Three Lines of Defense model, which consists of identifying and assigning specific responsibilities to each department so that essential operational risk management tasks are performed in an integrated and coordinated manner. The following activities are carried out for that purpose:

These procedures are supported by a number of internal controls, validated on an independent basis in relation to their effectiveness and operations, to ensure acceptable risk levels in our processes.

Operational risk is controlled and monitored primarily by an independent area, the DCIR, and is supported by several areas that are part of the process of managing this risk.

On December 1, 2020, Circular No. 3,979/20 published by the Central Bank of Brazil came into force, which provides for the constitution of Base of Risks and Operating Losses (BRPO).

According to circular, the database must reflect the risk profile and management practices. Among the requirements, we highlight the periodic remittance, historical base formation (between five and 10 years), adoption of complete and robust layout, accounting traceability and the standardization of the structure for the collection and processing of information.

On October 29, 2020, Normative Instruction No. 33/20 was published establishing the procedures for forwarding information related to events of operational risk to the Regulator stated in the Circular.

All information must be kept at the available to the Central Bank of Brazil for at least 10 years, with the first remittance scheduled for June 2021 relative to the base date of December 2020.

4.B.20.02 Independent Validation of Management and Measurement Models of Risk and Capital

We employ regulatory models as well as internal models based on statistical, economic, financial, and mathematical theories and the expertise of specialists in the risk and provision management and in the capital measurement with the objective of synthesizing processes or complex issues from large quantities of information. The use of such models provides standardization, objectivity and efficiency to the decisions.

However, all models have inherent risks that can be derived from potential adverse consequences arising from decisions based on incorrect or obsolete estimates, improper calibration of parameters or inappropriate use of the risk models. In order to detect, mitigate and control these risks, there is the process of independent validation, which carefully evaluates various aspects, challenging the development process (which includes the assumptions adopted, the methodology and the results) and the use of models (including the quality of the input data, adherence to the regulatory requirements and the robustness of the environment in which they are implanted). The results are reported to the managers, Internal Audit, Model Evaluation Committee, Risk Control Committee, Risk Monitoring Executive Committee, Risk Committee and the Integrated Risk Management and Capital Allocation Committee (COGIRAC).

4.B.20.03 Internal controls

The efficacy of our internal controls is supported by trained professionals, well-defined and implemented processes and technology as determined by our business needs, in accordance with CMN Resolution No. 2,554/98, as amended.

Our internal controls methodology is based on the Frameworks issued by the COSO – Committee of Sponsoring Organization of the Treadway Commission ((Internal Control - Integrated Framework- 2013 and Enterprise Risk Management Integrated Framework - 2017) and based on the guidelines established by the Information Systems Audit and Control Association (ISACA) through the Control Objectives for Information and Related Technology (COBIT 5 - 2012).

The existence, and efficacy of controls that ensure the levels of risk in our processes are acceptable is certified by the area responsible for the execution of the adherence tests of the controls. The results of the adherence tests (residual risks) are inputs for the preparation of the Corporate Risk Guidelines, periodically conveyed to the Audit, Risk Monitoring and Risk Management Committees, as well as to the Board of Directors, to provide reasonable assurance that business transactions are carried out appropriately and achieve defined objectives, in accordance with external laws and regulations, internal policies, rules and procedures, as well as applicable codes of conduct and self-regulation.

4.B.20.04 Management and Processes in Cybersecurity

We consider cyber and information security at the highest strategic levels in order to protect our technological infrastructure against attacks, unauthorized access and malicious codes. We operate in a preventive, detective and corrective way to combat fraud and information security in order to protect the information of our Organization and of our customers.

Accordingly, we have developed our security framework, considering the new digital environment, where the focus on cybersecurity is a key aspect and one of the pillars of technology and processes, ensuring data protection for our customers, resilience, and structures to identify and detect threats, and have in place response and recovery procedures in the event of cyber-attacks.

With regard to the technical aspects, in order to prepare for and anticipate IT security and cyber threats, the IT department promotes continuous investments like the reformulation of the critical updates of servers and workstations, inspection of source codes in the development cycle, establishment of a lab for security tests and use of technology and tools.

We have systems to prevent attacks from external connections and the internet, systems for the analysis of fraudulent behavior, unauthorized access, malicious codes, analysis of network behavior, intrusion detection, firewall, antivirus and antispam systems, all of which provide protection for our IT systems. We continuously upgrade the security of our software and hardware, digital certification in WEB servers and the encryption equipment, in addition to performing frequent resilience tests.

We continuously monitor these measures and we have security operational centers (SOCs), focusing on the identification of potential vulnerabilities and establishing an active defense with the use of cognitive intelligence. Additionally, we have a cyber intelligence team working to identify threats and check the necessary corrective measures.

We adopt strict procedures to ensure its customer information is secure. The interactions and synergies between management and technical areas aim to create solutions to provide secure access to service channels and to minimize exposure. We have a range of security devices and technologies, including biometrics, chip cards, 2D digital validation/QR code and OTP devices (physical and cell phone token, etc.), which are used to prevent fraud and unauthorized access. Educating customers on cyber risks is a key component of our strategy in this regard. We have developed awareness campaigns through the customer channels and on social media. On our “seguranca.bradesco” website there are several guidelines for the public, including videos of the web series “Protect Yourself” with prevention tips on current key scams/fraud, which aims to improve the security barriers for users, since the risk of protection breach during access occurs precisely in the elements of the process that are out of reach by our management: the behavior and equipment of customers.

In conjunction with technical measures, we ensure that employees are prepared and engaged with the issue of cybersecurity. The culture of security is a fundamental basis for the measures, processes and technologies to be effective. For this reason, we invest in training and awareness for employees, associates and customers so they are aware of the issue and can be prepared and up to date for the inherent risks and threats.

We also have continuous training programs and other awareness campaigns on the aspects of security and an executive committee dedicated to the issue, which develops the strategies and ensures the development and effectiveness of actions, focusing on the protection of technological infrastructure against attacks, unauthorized access, theft of information and insertion of malicious codes.

The CMN amended Resolution No. 4,658/18 and Circular No. 3,909/18, with the aim of enhancing cyber security and data storage, and established principles and guidelines that seek to ensure the confidentiality, integrity and availability of data and information systems, through the implementation of policies for cyber security, in addition to the requirement of hiring processing and data storage services. In essence, the Resolution establishes (i) that the contracting of relevant processing and data storage services must be communicated within 10 days of the contract, as well as communicating any contractual alterations; and (ii) in the event of non-existence of an agreement for the exchange of information between the Central Bank of Brazil and the supervisory authorities of the countries where the services may be provided, authorization must be requested from the Central Bank of Brazil for the contract and relevant contractual alterations. We currently comply with the provisions of these rules. Furthermore, we observed the provisions of the Security Manual of Open Banking, which establishes the minimum security requirements for APIs (Application Programming Interface) and other systems related to Open Banking, of which we are compulsory participants according to Communication No. 36,480/20, instituted by BCB Normative Instruction No. 37/20.

As of July 1, 2021, Resolution No. 4,658/18 shall be revoked, being replaced by CMN Resolution No. 4,893/21, issued on February 26, 2021, which outlines cybersecurity policy and the requirements for hiring services for data processing & storage and cloud computing to be observed by institutions authorized to operate by the Central Bank of Brazil. Resolution No. 4,893/21 improves the current devices regarding the policy of cybersecurity, without changing its essence, which highlighted the need for financial institutions to document criteria that configure a crisis situation on grounds of a cyberattack and interruption of relevant services, in addition to the communication to the Central Bank of Brazil already provisioned.

In August 2018, Law No. 13,709/18 – General Data Protection Law (LGPD) – was enacted, which creates a set of rules for the use, protection and transfer of personal data in Brazil, in the private and public spheres, and establishes responsibilities and penalties in the civil sphere. In addition to including existing rules on data protection, the LGPD followed the global trend of strengthening the protection of personal data, restricting its unjustified use, and guaranteeing a series of rights to holders of data, as well as imposing important obligations on so-called “treatment agents”.

The impact of the law has been significant as any processing of personal data are subject to the new rules, whether physical or digital, by any entity established in Brazil, or who has collected personal data in Brazil, or individuals located in Brazil – albeit not residents – or, even, that offer goods and services to Brazilian consumers. In short, the adoption of the LGPD requires structural changes in virtually all internal areas of Brazilian companies. The LGPD has been in force since December 28, 2018 creating the ANPD, the public administrative body responsible for ensuring, implementing and supervising compliance with the LGPD and the National Council for the Protection of Personal Data and Privacy, created by Provisional Measure converted into Law No.13,583/19 in 2019, and came into force, without sanctions in August 2020. As a result of the Covid-19 pandemic, the National Congress approved Law No. 14,010/20 postponing the entry into force of articles 52, 53 and 54 of Law No. 13,583/19 concerning administrative penalties until January 2021.

4.B.20.05 Corporate security

Our Corporate Security Department’s mission is to promote security solutions by creating, implementing and maintaining rules and processes aligned with our business.

To achieve our objectives, we focus on Information Security and Cyber Security, Access Management, Prevention of Electronic, Debit Card and Documentary frauds. We also systemically implement security procedures in Electronic Channels, Systems and Information to assess and propose improvements. In addition, the department is responsible for Technical Opinions, in connection with strategic security issues, implementation of products, services, processes and AML/TF.

We highlight the main areas and activities:

In addition to the activities developed by the corporate security area, we have a department for fraud prevention, as part of our credit card area, whose mission is to provide security solutions aligned to our business, through the creation, implementation, and maintenance of preventive rules, processes and technologies. This fraud prevention department takes strategic action in respect of the security of the use and service channels, systems and processes of products, assessing and suggesting improvements. The department also issues technical opinions in connection with strategic security issues and the implementation of products, services or processes.

Among the main “Corporate Security Global Vision” responsibilities, we highlight the following:

4.B.20.06 Data processing

4.B.20.07 Bradesco Integrity Program

Our main corporate integrity commitments are:

These commitments are permanently upheld through the Bradesco Integrity Program, which corresponds to a set of mechanisms and measures made up by the Code of Ethical Conduct, the Corporate Anticorruption Policy and Standard, and other standards, as well as procedures, processes, and control established therein, aimed at preventing, detecting, and remedying any harmful acts of corruption and bribery, including fraud against the Government.

The program, supported by the Integrity and Ethical Conduct Committee and by the Board of Directors, determines the guidelines, responsibilities, procedures, and controls regarding gifts, freebies, meals, travel, accommodation and entertainment, sponsorship, third parties and due diligence, bids with the Brazilian Government, political contributions, relationships with government agents and Politically Exposed Person (PEP), merger and acquisition, licenses and permits, whistle blowing and non-retaliation against whistleblowers acting in good faith, in accordance with laws and regulations applicable in Brazil and in countries where we have business units.

The Integrity Program covers our managers, employees, interns, apprentices, suppliers, service providers, banking correspondents in Brazil, business partners, controlled companies and companies that are members of the Bradesco Organization in its interactions and daily decisions, highlighting our principles of high standards of conduct and ethics. We continuously evaluate the Program to align its governance with the best national and international anti-corruption practices.

We aim to continually promote an ethical culture and integrity based on the code of ethical conduct and integrity program, which has been implemented through dissemination, communication, training, raising awareness among administrators, employees, apprentices, interns, suppliers and the service providers. Accordingly, our Policies, Rules, Standards, Integrity Program, Manuals, Training and Systems are continuously revised.

In September 2020, we held the IV Meeting of Integrity Ambassadors (focal points) with departments and associated companies, which included participation from Diretoria Executiva and an internal lecturer. In September and December 2020, on the International Day against Corruption, with the partnership of Unibrad and the participation of Grupo Bradesco Seguros, we promoted Bradesco Virtual Integrity Week, with involvement from the Chairman of the Board of Directors and the Chief Executive Officer, both with video messages, external lecturers and panels of members of our Board of Directors.

4.B.20.08 Treasury activities

The main objective of the Treasury Department is to maximize results with available resources and managing risks, by complying with the limits set by our Senior Management and the guidelines issued by our integrated risk control unit.

The main activities are as follows:

4.B.20.09 Inovabra

Inovabra is the innovation ecosystem designed to support our corporate strategy, fostering innovation through collaborative work with employees, business areas, customers, companies, startups, technology partners, investors and mentors. The platform facilitates sharing future visions for business, accelerating the search for new solutions and materializing innovation in our Organization, with the aim of meeting the needs of our customers and ensuring the sustainability of our business in the long-term. Inovabra is composed of several complementary programs:

4.B.30 Business segment

The data for these segments was compiled from reports prepared for management to assess performance and make decisions on allocating funds for investments and other purposes. Our management uses various data, including financial data in conformity with BR GAAP and non-financial metrics compiled on different bases. For further information on differences between the results on a consolidated basis and by segment, see “Item 5.A. Operating Income – 5.A.20.01 Results of operations for the year ended December 31, 2020 compared with the year ended December 31, 2019”.

The following table summarizes our main gross revenues by segment for the periods indicated:

For further details of our segments, see Note 5 to our consolidated financial statements in “Item 18. Financial Statements”.

We do not break down our revenues by geographic regions within Brazil, and less than 5.0% of our revenues come from international operations. For more information on our international operations, see “4.B.30.01-02.10 International banking services”.

As of December 31, 2020, according to the sources cited in parentheses below, we were:

·     one of the leading banks in terms of savings deposits, with R$136.7 billion, accounting for 13.0% of Brazil’s total savings deposits (according to the Central Bank of Brazil);

·     the leader in BNDES onlendings, with R$6.2 billion in disbursements (according to BNDES);

·     one of the leaders in automobile financing loans, with a market share of 13.3% (according to the Central Bank of Brazil);

·     the leading bank in payments for over 11.6 million benefits to INSS retirees and beneficiaries, accounting for 32.1% of the total number of payments made by the INSS;

·     one of the leaders in leasing transactions in Brazil, with an outstanding amount of R$2.5 billion; through our subsidiary Bradesco Leasing S.A. Arrendamento Mercantil, or “Bradesco Leasing” (according to ABEL);

·     one of Brazil’s largest private fund and investment managers, through our subsidiary BRAM, with R$611.0 billion in assets under management (according to ANBIMA), taking into account managed portfolios;

·     one of the leaders in the third-party asset management business, with R$1.0 trillion in assets, of which R$429.2 billion are managed through our subsidiary and BEM DTVM (according to ANBIMA);

·     the leader in number of outstanding purchasing consortium quotas, through our subsidiary Bradesco Administradora de Consórcios Ltda., or “Bradesco Consórcios”, with 1,529,142 quotas in three segments, including: (i) automobiles and motorcycles, with 1,223,164 quotas; (ii) real estate, with 234,952 quotas; and (iii) trucks, with 71,026 quotas (according to the Central Bank of Brazil);

·     we were also highly ranked in Export, Import and Trade Finance; and

·     the largest company operating in the Brazilian insurance market, operating in all lines of this segment, with a 22.4% market share (according to SUSEP/ANS), through Grupo Bradesco Seguros, which mainly comprises: Bradesco Seguros S.A., or “Bradesco Seguros” and its subsidiaries: (i) Bradesco Vida e Previdência S.A., or “Bradesco Vida e Previdência”; (ii) Bradesco Capitalização S.A., or “Bradesco Capitalização”; (iii) Bradesco Auto/RE Companhia de Seguros S.A., or “Bradesco Auto/RE”; and (iv) Bradesco Saúde S.A., or “Bradesco Saúde”. The total revenues of Grupo Bradesco Seguros were R$73.7 billion in insurance premiums, pension plan contributions and capitalization bond income.

4.B.30.01 Banking

In our banking segment, we offer a range of products and services to our customers including deposit-taking, granting of loans and advance payments, debit and credit card services and capital market solutions, through our extensive distribution network.

We have a diverse customer base that includes individuals and small, mid-sized and large corporates in Brazil. Historically, we have cultivated a strong presence among the broadest segment of the Brazilian market, middle- and low-income individuals.

The following table shows the bank income statement and other selected financial data for our banking segment for the periods indicated.

4.B.30.01-01 Segmentation of Customers

To meet the needs of the biggest number of people we have democratized access to products and services, encouraging the process of financial inclusion, access banking services, social mobility and entrepreneurship. We do not make distinctions; we supply every customer with the same level of excellence and we continuously improve the way we provide services. We are aware of each customer’s profile and we have continuously improved the scale and diversification of our current model. These values extend to customers who are non-account holders, due to their significance and the potential of growth.

We have a segmented structure, for both individuals and companies, in order to offer flexibility and convenience in all areas in which we operate, ensuring we meet each customers’ needs.

Our customer base was composed of 70.2 million customers by the end of 2020.

The Corporate segment is responsible for serving business groups and focused on both large and medium-sized companies. Its offices are located in the main financial centers and with a value proposal based on physical proximity and relationship with customers, offers customized services with a national reach and counts on a highly skilled team to fulfill customers’ needs through a wide portfolio of products, structured solutions and financial services.

To anticipate the solutions, it is important to strengthen the relationship with customers and to deliver a robust value proposal, Corporate is highly segmented by sectors, markets, sizes, nature of the companies, among other criteria, and these segments are combined into four large areas:

Bradesco Private Bank offers exclusivity and works side by side with customers to maintain and manage family wealth across generations.

Designing innovative solutions to meet the ambitions and individual needs of each of our customers, we have a complete structure of Wealth Management involving liquid and illiquid assets, the best tools and investment structures to ensure the longevity of the family’s estate.

Customers have access to a complete platform, open and varied investments, local and international, exclusive funds, always counting on an experienced team of managers, economists and advisors, in addition to all of our business solutions including, among others, Banco de Investimentos BBI, Credit, Insurance, Broker, and Pension Plans.

Bradesco Private Bank currently has 13 offices located in: São Paulo, Rio de Janeiro, Belo Horizonte, Blumenau, Campinas, Curitiba, Fortaleza, Goiânia, Manaus, Porto Alegre, Recife, Ribeirão Preto and Salvador, thus ensuring a nation-wide presence, in addition to the support of the units abroad located in Cayman, New York, Luxembourg, London and Miami.

The Bradesco Varejo service network includes 3,049 branches, 708 business units, 3,915 service centers (PAs), 822 electronic service centers (PAEs) and 39,100 Bradesco Expresso units (banking correspondents), in addition to thousands of ATMs.

By being present in all Brazilian municipalities, Bradesco Varejo has a prominent role in the use of banking services by Brazilians, frequently being the first interaction, a customer has with a financial institution. In this way we contribute to the development of individuals and the communities where they live.

Bradesco Prime is tailored towards high-income individuals and operates across Brazil. Bradesco Prime uses a full relationship model to fit users' profiles and needs, providing access to effective financial planning and customized solutions evaluated by qualified professionals. Its mission is to be the customer's first choice bank, focusing on quality of service and the provision of appropriate solutions for its users.

Bradesco Prime has been, throughout its existence, investing in technology, in the improvement of relationships and in the training of its professionals. One of its main assets is to always provide the best experience to its customers. It established a prominent position in the Brazilian market of banking services for high-income customers and has consolidated its position as one of the largest banks in the segment.

In 2018, we created an area dedicated to strengthening the relationship with individual and corporate customers who used at least one of our products. By recognizing the customer’s profile and portfolio combination, we seek to provide financial products with personalized offers through both physical and digital channels.

The purpose of the area is to coordinate offers and approaches, as well as facilitate the access to financial products, creating new channels and experiences supported by innovation in processes and technology.

In 2019, we focused on the adequacy of proprietary channels of the bank to sell digital products to non-account holders, and we launched the sales portal in November 2019.

During 2020 we carried out adherence tests for the propensity models, using processes of continuous improvement focused on the commercial performance and analysis of the potential for consumption. The study was developed in conjunction with various areas and their distribution was performed by means of the digital channels of the Organization. The propensity (tendency) models currently used by the Department relate to the consumption of products, thus enabling us to be more assertive and efficient in the offer, adapting the product to the profile and moment of the customer's life.

Additionally, we made a further 16 products available to our customers digitally, thereby increasing our portfolio. In addition, we advanced in our discussions about the creation of the organizational marketplace and starting building this platform in 2021.

4.B.30.01-02 Products and banking services

In order to meet the needs of each customer, we offer the following banking products and services:

4.B.30.01-02.01 Deposit accounts

We offer a variety of deposit accounts to our customers, including:

As of December 31, 2020, we had 32.3 million checking account holders, 30.6 million of which were of individuals and 1.7 million of which were of companies. As of the same date, we had 69.9 million savings accounts.

In 2020, in line with Circular No. 3,988/20 creating procedures and additional conditions for the opening, maintenance and closure of deposit accounts by financial institutions, we must suspend the authorization of the respective representative, agent or proxy to the transactions of the deposit accounts of a company's ownership we hold, if some serious irregularities are verified in the registration of these agents in the Individual Taxpayer’s ID (CPF).

The following table shows a breakdown of our deposits from customers by type of product on the dates indicated:

4.B.30.01-02.02 Loans and advances to customers

The following table shows loans and advances to customers broken down by type of product on the dates indicated:

The following table summarizes concentration for our outstanding loans and advances to customers by borrower on the dates shown:

Our Brazilian foreign-trade related business consists of providing financial services to our customers in their export and import activities.

In import financing/refinancing, we directly transfer funds in foreign currency to foreign exporters, fixing the payment in local currency for Brazilian importers. In export financing, exporters obtain advances in reais on closing an export forex contract for future receipt of foreign currency on the contract due date. Export finance arrangements prior to shipment of goods/performance of services are known locally as Advances on Exchange Contracts or ACCs, and the sums advanced are used to manufacture goods or provide services for export. If advances are paid after goods/performance of services have been delivered, they are referred to as Advances on Export Contracts, or ACEs.

There are other forms of export financing, such as Export Prepayments, onlendings from BNDES-EXIM funds, Export Credit Notes and Bills (referred to locally as NCEs and CCEs), and Export Financing Program with rate equalization – PROEX.

Our foreign trade portfolio is funded primarily by credit lines from correspondent banks. We maintain relations with various American, European, Asian and Latin American financial institutions for this purpose, using our network of approximately 914 correspondent banks abroad, 37 of which credit/guarantee lines as of December 31, 2020.

As of December 31, 2020, we had 259.3 thousand financing contracts.

Housing loans are provided for: (i) the acquisition of residential and commercial real estate, and urban plots; and (ii) construction of residential and commercial developments.

Financings for the acquisition of residential real estate have a maximum term of up to 30 years and annual interest rates of 6.7% to 12.0% p.a., plus TR, while commercial real estate financings have a maximum term of up to ten years and annual interest rates of 10.5% to 15.0% p.a. plus TR. In addition, in 2020 we launched the pricing in savings rate plus 3.99% p.a.

Financings for construction, also known as the Businessman Plan, have a construction term of up to 36 months and interest rate of 8.5% to 16% p.a. plus TR, and a six-month grace period for the realization of transfers to borrowers. We also launched for that line the pricing with floating rates.

Central Bank of Brazil regulations require us to provide at least 65.0% of the balance of savings accounts in the form of housing loans. The remaining funds are to be used for financings and other operations permitted under the terms of the legislation in force.

The BNDES is the main instrument of the Federal Government to support entrepreneurs of all sizes, including individuals, in carrying out their plans for modernization, expansion and implementation of new business, with the potential of generating jobs, income and social inclusion in Brazil. Its portfolio has certain products and programs to provide government-funded long-term loans with different interest rates, focusing on economic development. We are one of the structuring agents of BNDES funds, to borrowers in several sectors of the economy. We determine the margin of return on the loans based on the borrowers’ credit. Although we bear the risk for these BNDES and Finame onlending transactions, these transactions are always secured.

In 2020, we disbursed R$6.2 billion, 94.5% of which were loaned to micro, small and medium-sized enterprises.

We are acting through partnerships in the consumer financing for the purchase of new and used vehicles for individuals and companies in the chain, which comprises assembler, dealers and consumers. In addition to offering these services through our extensive network of branches, Bradesco Financiamentos also offers loans and leasing for the acquisition of light vehicles, motorcycles, trucks, buses, machinery and equipment.

As of December 31, 2020, we had 5,289 active leasing agreements. According to ABEL, our leasing companies were among the sector leaders, with a 23.3% market share in Brazil, considering the current value of R$11.3 billion on the market portfolio.

Financial leasing involves trucks, cranes, aircraft, ships and heavy machinery. In this same period, 33.0% of our transactions were for vehicles (vehicle, bus, micro-buses and trucks).

We conduct our leasing transactions through our primary leasing subsidiary, Bradesco Leasing and also through Bradesco Financiamentos.

Line of credit destined to companies with the aim of covering expenses or investments inherent in the company’s working capital, such as: payment of 13th salary, stock renewal, training and other.

They are loans with a pre-approved limit to meet needs without a specific purpose. It also includes payroll-deductible loans to Social Security National Service (INSS) pension plan beneficiaries and retirees, to public servants and to the private sector.

The average term of these operations is 57 months and interest rates range from 1.5% to 3.0% p.a., as of December 31, 2020.

The provision of loans and financing to the agribusiness sector is carried out with resources:

The majority of loans have semiannual or annual payments with payment terms matched to periods of the harvest cycle. The guarantees are usually aligned with the property/mortgage and machines, the latter being valid for the financing of goods.

In April 2020, Law No. 13,986/20 was enacted allowing Bank Credit Bills (CCB) and Rural Credit Bills (CCR) to be issued in book-entry form, as an alternative to written form, whereby the Central Bank of Brazil is responsible for establishing the conditions for the electronic bookkeeping activity, authorizing its exercise and supervising the entities that will execute it. Accordingly, the Central Bank of Brazil issued Circular No. 4,036/20, which regulates the bookkeeping activities by financial institutions. Under these new standards, the financial institutions may only perform the bookkeeping of CCBs and CCRs representing their own loans, in which the bookkeeping issuance of the CCB and CCR will be carried out through the electronic bookkeeping system of the financial institutions.

We offer a comprehensive range of credit cards to our customers including Elo, American Express, Visa, MasterCard brands and private label cards, which stand out due to the extent of benefits and convenience offered to associates.

We earn revenues from our credit card operations through:

We offer our customers a complete line of credit cards and related services, including:

We hold 50.01% of the shares of Elopar, an investment holding company which investments include Alelo (benefit cards, prepaid and money card), Livelo (coalition loyalty program), as well as participations in Elo Serviços (method of payment brand) and Banco Digio (digital bank focused on credit card issuance and other financial products). We hold 30.06% of the shares of Cielo S.A.

We also have a card business unit abroad, Bradescard Mexico, one of the highlights of which is a partnership with C&A.

As of December 31, 2020, we had several partners with whom we offered co-branded and private label/hybrid credit cards. That has allowed us to integrate our relationships with our customers and offer our credit card customers banking products, such as financing and insurance.

The following table shows our volume of transactions and total number of transactions of credit cards for the years indicated:

The overdraft limit is a line of credit available on checking accounts with automatic renewal for emergencies when there is no available balance in the account. For corporate customers, we offer a business check to meet the emergency needs of companies.

Overdraft for companies is a revolving credit limit for corporate entities to meet the emergency needs of a customer. The limit of the overdraft for companies allows the negotiation of more attractive rates. However, in most cases, it requires a guarantee which can be; a surety, disposal of assets, guarantees of contracts or anticipation of receivables, and investments, among others.

In April 2020, the President of the Republic amended Provisional Measure No. 944/20 (PM No. 944/20), instituting the Emergency Employment Support Program, for the implementation of loans for entrepreneurs, corporations and cooperatives, with the exclusion of loan companies, to finance the payment of their payroll to their employees, converted into Law No. 14,043/20. Law No. 14,043/20 establishes the requirements for the lines of credit to be granted as part of the framework of the Emergency Program, which will cover the entire payroll of the contractor, for a period of four months, limited to the equivalent of up to two times the minimum salary per employee. The law also establishes the requirements that financial institutions must observe when lending under the program, which has (i) an interest rate of 3.75% per annum on the amount granted; (ii) a period of 36 months for the payment; and (iii) a grace period of six months to start paying, with capitalization of interest during this period.

As a result of the Provisional Measure No. 944/20, the CMN issued Resolution No. 4,800/20, later revoked by Resolution No. 4,846/20, which updated the provisions of Resolution No. 4,800/20 in line with conversion of PM No. 944/20 in Law No. 14,043/20. Such resolutions provide for guidelines, limits and conditions for participation in loans to finance as part of the framework of the Emergency Program. The financial institutions that participate in the Emergency Program will fund the payroll, and should observe the annual gross revenues of the entity financed, in addition to conditions relating to amounts, maturity and interest.

Our credit policy is focused on:

Our credit policy defines criteria for lending and setting operational limits. Credit decisions are made at the branch level and, if necessary, higher levels of authority including our Board of Directors depending on the rules in our internal policy. In reviewing loan applications, our Diretoria Executiva also approves the models of assessment and credit processes used by our branches and departments for each type of loan.

Our transactions are diversified and target individuals and companies that show ability to pay and stay in good standing. In all cases, we aim to have them secured by appropriate collateral for risks involved, from the point of view of uses of funds and repayment periods, as well as risk ratings. The Central Bank of Brazil’s risk rating system has nine categories ranging from “excellent” to “very poor”. In line with our commitment to the ongoing development of our methodologies, the credit risk rating for our customers /economic groups is based on a range of 18 levels, of which 14 represent accrual loans. This ensures greater adherence to the requirements set forth in the Basel Accords. For more information, see “Item 4.B. Business Overview – 4.B.70 Regulation and Supervision – 4.B.70.02 Banking Regulations – 4.B.70.02-11 Treatment of Loans and Advances”.

The lending limits set for our branches reflect size and collateral provided for loans. However, branches have no authorization to approve an application for loan from any borrower who:

We have credit limits for each type of loan and we pre-approve credit limits for our individual and corporate customers and presently extend credits to the public sector only under very limited circumstances. In all cases, funds are only granted once the appropriate body has approved the credit line.

We review the credit limits of our large corporate customers every 180 days. Credits extended to other customer, including individuals, small and medium-sized enterprises, are reviewed every 90 days.

Our maximum exposure per customer (e.g., individuals, companies or other economic groups) is determined by customer rating and the aggregate maximum exposure is limited to 15.0% of our Reference Equity.

Any cases in which the maximum level of exposure per customer exceeds the thresholds as set out in the table below or in which the total exposure equals or exceeds R$5.0 billion are required to be submitted to the Board of Directors for approval.

Our credit policy is continuously developing and as part of our risk management process, we continue to improve our credit granting procedures, including procedures to gather data on borrowers, calculate potential losses and assess applicable classifications. Additionally, we assess our institutional credit risk management in view of the recommendations by the Basel Accords, including:

For Individual customers, depending on the proposed collateral, the size of the branch and suitable credit parameters, branches may authorize loans of up to R$50,000. If the value and type of collateral are not within the limits established for approval at branch level, an application is submitted to the Credit Department and, if necessary, higher levels of authority.

The following table shows individual loan limits for approval by branch managers, depending on the value and type of collateral offered:

We use a specialized Credit Scoring evaluation system to analyze these loans, allowing us to build a level of flexibility and accountability, besides standardizing the procedures in the process of analyzing and deferring loans. All models are constantly monitored and revised whenever necessary. Our Credit Department has a dedicated team developing models and working on the continuous improvement of these tools.

We provide our branches with tools that allow them to analyze loans and advances for individual customers in a rapid, efficient and standardized manner and to produce the corresponding loan contracts automatically. With these tools, our branches can respond quickly to customers, keep costs low, and control the risks inherent to consumer credit in the Brazilian market.

The following table shows limits established for approval of loans to individuals outside the discretion of our branches:

For corporate customers, depending on the collateral proposed, the size of the branch and suitability in terms of credit parameters, loans of up to R$400,000.00 may be approved at the branch level. If value and type of collateral are not within the limits established for approval at the branch level, an application is submitted to the Credit Department and, if necessary, higher levels of authority.

The following table shows limits within which branch managers may approve business loans, depending on the amount and type of credit support offered:

The following table shows limits established for approval of loans to corporate customers outside the discretion of our branches:

In order to serve our customers’ needs as soon as possible and securely, the Credit Department uses segmented analyses with different methodologies and instruments for credit analysis in each segment, in particular:

We have a department that focuses on the collection and recovery of loans, seeking to reduce the rates of delinquency and losses, as well as to maintain our relationship with customers. By using our own statistical models, updated periodically, which separate debtors according to levels of risk and likelihood of payment, our collection strategies are more assertive and efficient.

Collection occurs sequentially through our network of branches, call centers, digital channels, and friendly and judicial collection offices. In addition, specialized regional teams tailor their operations and submit significant cases to the collective authority limits in the Commission or Executive Committee for Collection and Credit Recovery, respecting the governance of the established authority level.

4.B.30.01-02.03 Cash Management Solutions

These solutions, which can also be customized, facilitate our customers’ day-to-day tasks and help to generate more business. We also earn revenues from fees and investments related to collection, check custody, credit order, collection and payment processing services, and by funds in transit received up to its availability to the related recipients.

As an example, the franchising niche has a team of franchising specialists that, through their relationship with franchising companies, identify opportunities for financing and providing services to all franchisees and their employees. The partnership with the franchise networks occurs through structured commercial activities in synergy with the managing departments, commercial segments, and affiliated companies. The focus on the peculiarities of this sector creates a competitive and sustainable position by structuring appropriate solutions and, in particular, through the strategy of providing differentiated and specialized service. We have approximately 512 agreements in place with franchising companies, generating numerous opportunities to open new checking accounts and leveraging business with the respective franchisees.

Another important feature in this area is the support we provide towards the development of Local Production Groups (APLs), by providing service to businesses and assistance to these customers.

Participating in an APL strengthens the companies, because together they can form an articulated and important group for local development, allowing for greater competitive and sustainable advantages for micro and small businesses. Currently, we service 423 APLs throughout the country.

Microentrepreneurs use the MEI Portal in addition to products and services that fit their business, including free services provided by partners to meet their day-to-day needs.

4.B.30.01-02.04 Public authority solutions

We have a specific area dedicated to serving public administration, which offers specialized services to identify business opportunities and structuring customized solutions to entities and bodies of the Executive, Legislative and Judiciary branches at federal, state and municipal levels, in addition to independent governmental agencies, public foundations, state-owned and mixed companies, the armed forces (army, navy and air force) and the auxiliary forces (federal and state police forces).

Our exclusive website, developed for our customers, offers corporate solutions for federal, state and municipal governments for payments, receipts, human resources and treasury services.

Our commercial relationships with such public authorities are developed by specialized business managers located in distribution platforms throughout the country, which can be identified on our website. We have 9 Specialized Platforms to assist governments, capitals, courts, class councils, chambers, prosecutors, public defenders and the largest municipalities according to the Brazilian GDP, in addition to 35 Platforms that operate in the Retail sector providing services to the City Halls and other Authorities.

In 2020, we took part and were successful in payroll bidding processes sponsored by the Brazilian government. Furthermore, according to INSS, we continue to be leaders in payments of INSS benefits, with more than 11.5 million retirees and pensioners.

4.B.30.01-02.05 Management and administration of third-party funds

BEM DTVM and Bradesco provide fiduciary administration services to investments funds and managed portfolios, with regulatory responsibility for operation of investments funds.

BRAM also conducts the management of third-party resources, where it is responsible for investment decisions: 

BRAM manages third-party funds through:

The following tables show the equity of funds, as calculated under the applicable accounting standards required by the CVM for each type of fund, and portfolios, which are under our management, the number of investors and the number of investment funds and managed portfolios for each period:

The following tables show the equity of funds and portfolios, which are under administration, the number of investors, investment funds, portfolios and investment clubs for each period.

4.B.30.01-02.06 Services related to capital markets and investment banking activities

As our investment bank, Bradesco BBI is responsible for (i) originating and executing project financing operations; (ii) originating and executing mergers and acquisitions; (iii) originating, structuring, syndicating and distributing fixed income transactions of securities in Brazil and abroad; and (iv) originating, structuring, syndicating and distributing issuances of securities of equity in Brazil and abroad.

In 2020, Bradesco BBI received awards in the following categories: They are: “Best Investment Bank in Latin America” and “Best Fixed Income Investment Bank in Latin America” by Global Finance.

In 2020, Bradesco BBI advised customers in a total of 200 operations across a range of investment banking products, totaling approximately R$333.1 billion.

4.B.30.01-02.07 Investment Platform

We have an investment platform that aims to provide customers with differentiated investment advisory services, remotely and in person, covering all of Banco Bradesco's, Ágora Investimentos' and Pension Fund's products, considering the customer's needs and profile.

The investment advisory service, in addition to using the services of the branch network managers, has an investment specialist team. The customers also benefit from suggested portfolios that combine a diversity of financial products and are established monthly, based on the customer's profile and national and international market perspectives.

4.B.30.01-02.08 Intermediation and trading services

Ágora is an open and independent investment platform, which offers its own and third-party products to all types of investors (individuals or legal entities), account holders or non-account holders of Bradesco. Through the Ágora app or the agorainvestimentos.com.br website, it is possible to register completely digitally and online, and in a few minutes, the customer already has access to our platforms, reputing with curatorship in the selection of the best investment products on the market from a complete portfolio with more than 800 selected investment products so that our customers can invest with all security and convenience.

In addition, the Ágora customer has personalized advice, exclusive content, extensive coverage of companies listed on the stock exchange and information updated daily, including recommendations from our analysts and experts throughout the trading session, which assist in decision making to invest in various options according to their profile and objective, among more than 400 options between fixed income securities issued by the bank and privately, Tesouro Direto (Government or Treasury Bonds) and Public Securities; a diversified portfolio with more than 200 funds, gathering more than 70 renowned manager; exclusive COEs (Structured Operations Certificate) and private pension plans; in addition to our Home Broker that brings in an agile and dynamic way the entire stock market, futures, options, BDRs (Brazilian Depositary Receipts), ETFs and Real Estate Funds listed on B3.

Ágora also offers its clients the opportunity to enter the stock market, following their recommended stock portfolios, with 5 exclusive strategies (Top 10, Aggressive, Small Caps, Dividends and Top Green), whose criteria and indices are monitored and measured by the risk rating agency Standand & Poor's, being the only broker in the country to have this follow-up in recommended portfolios and we also offer the option to follow these strategies through exclusive funds with same strategies with initial application from R$ 1.00.

Over the last year Ágora has established relevant partnerships: it is the official investment house of next (with more than four million customers) and has consolidated a cross-platform project with Grupo Estado (with emphasis on the e-investor news portal), which offers high quality and independent content, capable of impacting about 31 million users.

At the end of 2020, Ágora reached 547,700 customers, with a growth of 49.2% compared to the end of 2019 (367,100 customers). In the same reference base, it reached R$ 62.4 billion in custody, representing a 9% growth in the period, maintaining the position of third largest retail broker in the country, according to the ranking of assets in the custody of individuals in B3.

In the Operational Qualifying Program (PQO) of B3, Ágora received the excellence seals (in Carrying Broker, Execution Broker and Retail Broker), indicating the high quality of its operational services rendered to the market and customers. Ágora also has the Certifies Seal, providing even more safety and transparency in the investments registered in B3.

In 2020, Bradesco S.A. CTVM, or Bradesco Corretora, provided services exclusively to the institutional segment, offering a full service of investment analysis which covers the main industries and companies in the Brazilian market, with a team composed of 36 sector specialists who fairly disclose their opinions to the customers by way of follow-up reports and instruction guides, with a wide range of projections and comparison multiples. Bradesco Corretora also has a team of its own economists dedicated to the customers’ specific demands, focused on the capital market. Over 450 reports, in English and Portuguese, are forwarded on a monthly basis to the most important investors domiciled in Brazil, the United States, Europe and Asia.

Bradesco Corretora has as its objective the mediation of the purchase and sale of shares, commodities futures contracts, financial assets, indexes, options, share rental, swaps and forward contracts, in the primary and secondary market, negotiations in B3 and in the organized over-the-counter market, which are tailored to the needs of large corporate and institutional investors.

Regarding B3 variable income markets in 2020, Bradesco Corretora traded R$647.4 billion and ranked ninth in Brazil in terms of total trading volume.

In addition, in the same period, Bradesco Corretora traded 316.9 million futures, forwards, swaps and options totaling R$20.3 trillion in B3. In 2020, Bradesco Corretora ranked ninth in the Brazilian market, in relation to the number of futures contracts, terms, swaps and options executed.

Bradesco Corretora remains adherent to the Operational Qualifying Program (PQO), maintaining the five excellence seals (Agro Broker, Carrying Broker, Execution Broker, Retail Broker and Nonresident Investor Broker), confirming the high quality of its future transactions and variable income markets. Bradesco Corretora is also certified by CETIP (Clearing House for the Custody and Financial Settlement of Securities, currently B3).

4.B.30.01-02.09 Capital market solutions

In 2020, we were one of the main providers of capital market services and we maintained our leadership position in the domestic and global market according to the ANBIMA’s ranking of custody of assets.

Among the main services we offer in this segment, we highlight: qualified custody of securities for investors and issuers, administrators of investment funds, clubs and managed portfolios; bookkeeping of securities (shares, BDRs, quotas of investment funds, CRIs and debentures); custody of shares backed by DR – Depositary Receipts, loan of shares, liquidating bank, depositary (Escrow Account – Trustee), clearing agent, tax and legal representation for non-resident investors, and fiduciary management for investment funds.

Bradesco Custódia has Quality Management System ISO 9001:2015 certifications and GoodPriv@cy certifications. We also hold an ISAE 3402 (International Standard on Assurance Engagements) certification, which includes the issuance of the Control Assurance report in a Service Provider Organization. These certifications expand our structures of controls, increasing the level of effectiveness and quality of processes.

As of December 31, 2020, the set of the services provided by us, which we call Bradesco Custódia was composed of:

4B.30.01-02.10 International banking services

As a private commercial bank, we offer a wide range of international services, such as foreign trade finance and foreign currency loans, foreign exchange operations and international sureties, lines of credit and banking.

As of December 31, 2020, we had 3 foreign Branches, 12 Subsidiaries and 2 Representative offices.

Recently, we concluded the acquisition of BAC Florida Bank and its subsidiaries to offer a complete platform of banking and investments products and services also in the United States.

Our International and Exchange Area in Brazil coordinates our international transactions with support from 12 operational units specialized in foreign exchange and 18 points of service which are part of the Bradesco Corporate Segment (Segmento Bradesco Corporate). This structure is located at major exporting and importing areas nationwide.

Our foreign branches and subsidiaries principally provide financing in foreign currency (particularly foreign trade finance operations) to Brazilian and non-Brazilian customers. Total assets of the foreign branches, considering the elimination of intra-group transactions, were R$40.3 billion, as of December 31, 2020, denominated in currencies other than the real. 

Funding required for financing of Brazilian foreign trade is primarily obtained from the international financial community, through credit lines granted by correspondent banks abroad. We issued debt securities in international capital markets, which amounted to R$29.0 billion (US$5.6 billion) during 2020 and funding transactions amounted R$13.6 billion (US$2.6 billion), as an additional source of funding.

The following is a brief description of our subsidiaries abroad:

The table below breaks down revenues (interest and similar income, and fee and commission income) from our Brazilian and foreign operations for the periods shown:

In January 2004, the United States Federal Reserve Bank authorized us to operate as a financial holding company in the United States. As a result, we may do business in the United States directly or through a subsidiary and, among other activities, may sell insurance products and certificates of deposit, provide underwriting services, act as advisors on private placements, provide portfolio management and merchant banking services and manage mutual fund portfolios.

See information in “Financing and Onlending Operations – Import and Export Financing”, item “4.B.30.01-02.02 Loans and advances to customers”.

In addition to import and export financing, our customers have access to a range of services and foreign exchange products such as:

4.B.30.01-02.11 Consortia

In Brazil, persons or entities that wish to acquire certain goods may set up a group known as a “consortium”. Consortia in Brazil are made up of pooled funds for the purpose of financing an acquisition. Consortia that are formed for the purchase of real estate, vehicles, motorcycles and trucks have a fixed term and quota, both previously determined by its members and are run by an administrator.

Bradesco Administradora de Consórcios manages groups of consortia and, as of December 31, 2020, registered total sales of 1,529,142 outstanding quotas; net income of R$1.4 billion; and fees from consortiums of R$1.9 billion. The company also manages a total volume of transactions of over R$80.2 billion.

4.B.30.02 Insurance, pension plans and capitalization bonds activities

We offer insurance products, pension plans and capitalization bonds through several corporate entities, which we refer to collectively as “Grupo Bradesco Seguros”, is a leader in the Brazilian insurance market.

The following table shows selected financial data for our insurance, pension plans and capitalization bonds segment for the periods indicated:

4.B.30.02-01 Insurance products and services, pension plans and capitalization bonds

With the objective of meeting the needs of each customer, we offer a range of products and services, such as:

4.B.30.02-01.01 Life and personal accident insurance

We offer life and personal accident insurance, as well as insurance against miscellaneous events, such as job loss, through our subsidiary Bradesco Vida e Previdência. As of December 31, 2020, there were 31.9 million life insurance policyholders.

4.B.30.02-01.02 Health insurance

The health insurance policies cover medical/hospital expenses. We offer health insurance policies through Bradesco Saúde for small, medium or large corporates wishing to provide benefits for their employees.

On December 31, 2020, Bradesco Saúde and its subsidiary Mediservice Administradora de Planos de Saúde S.A. (Mediservice) had more than 3.6 million beneficiaries covered by company plans and individual/family plans. Approximately 159 thousand companies in Brazil pay into plans provided by Bradesco Saúde and its subsidiaries, including 43 of the top 100 largest companies in the country.

Bradesco Saúde currently has one of the largest networks of providers of health services in Brazil. As of December 31, 2020, it included 11,128 laboratories, 17,657 specialized clinics, 15,302 physicians and 2,086 hospitals located throughout the country.

4B.30.02-01.03 Automobiles and property/casualty insurance

We provide automobile and property/casualty insurance through our subsidiary Bradesco Auto/RE.

Automobile insurance may cover losses arising from damage caused to the insured vehicle in cases of collision, larceny, theft and fire, in addition to injury to passengers and third parties. For automobile insurance directed at individuals and companies, we highlight the “Seguro Auto Light”, which is a 100% digital product, and “Bradesco Seguro Auto Correntista”, which is a product that offers discounts, benefits and exclusive coverage to account holders of Banco Bradesco.

Retail property/casualty insurance is for Individuals, particularly those with residential and/or equipment related risks and small and medium-sized enterprises whose assets are covered by multi-risk business insurance. Of the various property/casualty lines for individuals, our residential policy (Bilhete Residencial) is a relatively affordable and highly profitable product. For companies, Bradesco Auto/RE offers Bradesco Seguro Empresarial (business insurance), which is adapted to meet our customers’ and business needs, according to their industry sector, and “Bradesco Seguro Condomínio” customized according to the reality of each undertaking.

As of December 31, 2020, Bradesco Auto/RE had 1.6 million insured automobiles and 1.1 million property/casualty policies and notes, making it one of Brazil’s main insurers.

4B.30.02-01.04 Supplementary pension plans

We have managed individual and corporate pension plans since 1981 through our wholly-owned subsidiary Bradesco Vida e Previdência, which is now one of the leading pension plans manager in Brazil, as measured by investment portfolio and technical provision criteria, based on information published by FENAPREVI and SUSEP.

Bradesco Vida e Previdência offers and manages a range of individual and group pension plans. Our largest individual plans in terms of contributions known as VGBL and PGBL are exempted from paying taxes on income generated by the fund portfolio. For purposes of the income tax return, the PGBL enables its participants to deduct from their taxable income the amount of their contributions, up to a limit of 12.0% of the total gross income. The participants of these funds are taxed upon the redemption of quotas, and/or receipt of benefits.

As of December 31, 2020, Bradesco Vida e Previdência accounted for 20.6% of the supplementary pension plans in terms of contributions, according to SUSEP. On December 31, 2020, Bradesco Vida e Previdência accounted for 24.2% of all supplementary pension plan assets under management: 22.4% of VGBL, 22.5% of PGBL and 50.2% of traditional pension plans, according to FENAPREVI.

Brazilian law currently permits the existence of both “open” and “closed” private pension entities. Open private pension entities are those available to all individuals and companies wishing to join a benefit plan by making regular contributions. Closed supplementary pension plan entities are those available to discrete groups of people such as employees of a specific company or a group of companies in the same sector, professionals in the same field, or members of a union. Private pension entities grant benefits on the basis of periodic contributions from their members, or their employers, or both.

We manage open supplementary pension plans covering 2.9 million participants, totaling a balance of R$251.8 billion.

Under VGBL and PGBL plans, participants are allowed to make contributions either in installments or in lump-sum payments. Participants in pension plans may deduct the amounts contributed to PGBL up to 12.0% of the participant’s taxable income when making their annual tax declaration. Under current legislation, redemptions and benefits are subject to withholding tax. VGBL plan participants may not deduct their contributions when declaring income tax. At the time of redemption and/or when benefits are paid out, tax will be levied on the income accrued, pursuant to current legislation.

These plans can be employed either individually as well as in business plans. Individual plans represent 58.4% of the total number of participants and the business plans account for 15.6% of the technical provisions.

The plans being commercialized allow contribution, portability, redemption and conversion into income.

Bradesco Vida e Previdência also offers pension plans for corporate customers that are in most cases negotiated and adapted to the specific needs for this type of customers.

Bradesco Vida e Previdência earns revenues primarily from:

4.B.30.02-01.05 Capitalization bonds

Bradesco Capitalização is the leader among private sector capitalization bond companies, according to SUSEP and offers its customers capitalization bonds with the option of a lump-sum or monthly contributions. Plans vary in value (from R$20 to R$50,000), form of payment, contribution period, and periodicity of draws for cash prizes of up to R$1.4 million (net premiums). Plans are adjusted based on the Reference Rate (TR) plus interest over the value of the mathematical provision, which may be redeemed by the shareholder at the end of the grace period. As of December 31, 2020, we had around 7.0. million “traditional” capitalization bonds and around 16.5 million incentive capitalization bonds. Given that the purpose of the incentive capitalization bonds is to add value to the products of a partner company or even to provide an incentive for its customers to avoid delinquency, the plans are for short-terms and grace periods with low unit sales value. At the end of 2020, Bradesco Capitalização had approximately 23.5 million capitalization bonds and 2.5 million customers.

The investment grade rating of Bradesco Capitalização on a domestic scale is “brAA-/Stable/--”, assigned by S&P Global rating agency, as last reviewed on April 3, 2020.

4.B.40 Distribution channels

4.B.40.01 Banking

The following table shows our main distribution channels as of the dates indicated below:

4.B.40.02 Insurance, pension plans and capitalization bonds activities

We sell our insurance, pension plan and capitalization products through our website, our branches, brokers based in our network of bank branches and non-exclusive brokers throughout Brazil, all of whom are compensated on a commission basis. Our capitalization bonds are offered through our branches, the Internet, our call center, ATMs and external distribution channels.

The following table shows the distribution of sales of these products through our branches and outside our branches:

4.B.40.03 Partnerships with retail companies – Bradesco Expresso

“Bradesco Expresso” enables us to expand our share of the correspondent bank segment through partnerships with supermarkets, drugstores, grocery stores, department stores and other retail chains. These companies provide basic banking services like the receipt of utility bills, payment vouchers, withdrawals from current and savings accounts and social security benefits, and deposits, among others. The services are provided by employees at the relevant establishments, while decisions regarding granting of credit or opening of accounts are made by us.

The main services we offer through Bradesco Expresso are:

As of December 31, 2020, the Bradesco Expresso network totaled 39,100 service points, with an average of 36.1 million monthly transactions or 1.7 million transactions per business day.

4.B.40.04 Digital Channels

We offer various products and services anywhere and at any time through our digital channels Mobile App, Internet Banking, ATM, and Contact Center, aiming at the convenience, practicality and security for customers. In 2020, digital channels represented 98% of the transactions performed at Bradesco, highlighting the Mobile and Internet Banking channels, which represented 89% of this total.

Below is a brief description of our digital channels:

Among the products and services available through Mobile App, we highlight:

We can divide this communication platform into two main areas of access and dissemination of content:

Our corporate customers rely on our Net Empresa product to quickly and safely to get statements of their account balance, transfer amounts, send and receive instant payments (Pix), make investments, send files and undertake various other transactions. We also highlight for the MEI Website, which is an intuitive portal and dedicated to the Individual Microentrepreneur, with banking and non-banking solutions.

Our Self-service Network has 30,694 machines, of which 7,460 are banknote recycling machines with immediate deposit in cash and a further 159 with services for the purchase of U.S. dollars and Euros. And it still has functionality that facilitates the day-to-day operations of the customer such as withdrawals with the possibility of choosing the denomination of bank notes, quick withdrawal and email receipts.

In addition, our customers have access to 23,828 ATMs under the Banco24Horas Network to make the most common transactions and a “proof of life” feature for INSS (physical proof of pensioner status or survivor status to maintain the right to social benefits). This characterizes us as the Bank with the greatest offering on the Banco24Horas shared network.

They also have access to an advanced security technology: biometrics. Available in 100% of the machines of Own Network and Banco24Horas Network, which adds more convenience and agility in the service, because it allows the access and validation of transactions without a card.

In the electronic service, we provide a sophisticated service system powered by voice command, which provides customers the experience of doing what they want to do through simple voice commands, without the need for listening to various service options and having to choose them by typing the option on the telephone. The customer can request the desired service directly.

Through this channel we offer our main financial services, such as payments, transfers between Bradesco accounts, DOC/TED, investments, loan contracting, support and registration of the security device in the mobile, among others.

By calling Fone Fácil, customers can access other relationship centers, such as for credit cards, private pension plans, capitalization, private and internet banking, among others.

The tables below show the number of transactions carried out through digital channels, the loans authorized through these channels and the quantity of customers with a digital profile:

In 2020, 25.3% of the total loans authorized by us were made available via digital channels, autonomously by customers. In comparison with 2019, the volume of loans authorized through digital channels grew 29% for individuals and 7% for companies. The increase of 18 percentage points in the participation of the mobile channel for individuals stands out, with the total loans authorized for individuals in 2019 of 61% and increasing to 79% in 2020.

4.B.40.05 next

next is a 100% digital bank, with many free features. Its main mission is to be the best digital platform to make our customers' dreams come true.

It was developed as a 100% digital platform and interacts with users on a predictive basis depending on his or her behavior and using interactive and innovative tools, to offer the best user experience and customer relationship, with the aim of providing smart journeys of financial management, investments, and practicality in day-to-day operations, currently with the largest and most complete portfolio of financial solutions on the market and also Mimos (Pampering), a platform of benefits with over 260 brands and 860 offers. next uses the most modern Technology solutions, User Experience, Analytics and Artificial Intelligence.

Recently, next became an associate company of the Bradesco Organization, which gives it greater autonomy for the implementation of the models that a fintech needs, in addition to performing important and strategic movements seeking exponential and sustainable growth, as well as focusing on prioritizing customer relationship.

By the end of 2020, we surpassed 3.7 million accounts, 106% growth compared to 2019, being present in 100% of the municipalities in Brazil. Over the course of the year, customers executed more than 734 million transactions, a volume 95% higher than the previous year. This growth indicator demonstrates, in addition to opening accounts in a consistent way, customers are becoming more and more engaged with next.

At the beginning of 2021, Renato Ejnisman became the first CEO of the digital bank. An appointment that signals the intention to accelerate customer and revenue growth, broaden the diversity of next's quality offerings, and thereby provide a better service to our customers.

4.B.40.06 Bitz

Officially launched to the market on September 14, 2020, Bitz is a digital wallet that has a free payment account in which the balance yields 100% of the CDI. The App helps people who want a low-cost solution to pay and receive in a fully digital form and directly on their cell phone. Bitz has features, such as: payment and receipt directly from the cell phone, free TEDs, payment of bills, bank payment slips and top ups for cell phone, a free debit card to pay at any payment machine and a virtual card to make purchases on the internet and in the food, delivery, series, movies and music Apps that depend on a card number to operate. Bitz also offers sporadic cashback and a bonus that encourage the recurrent use, leveraging its growth in the wave of digitalization of financial services. Accordingly, Bitz becomes a new port of entry for the ecosystem of Bradesco products. In addition, Bitz is an alternative for those who before had no way of having a bank address via a payment account.

4.B.50 Seasonality

We generally have some seasonality in certain parts of our business. There is certain seasonality in our consumer financing business (including our credit card business, financing of goods and others), with increased levels of credit card transactions and financing of goods at the end of the year and a subsequent decrease of these levels at the beginning of the year. We also have certain seasonality in our fee collections at the beginning of the year, which is when taxes and other fiscal contributions are generally paid in Brazil. For our PGBL and VGBL business, seasonality happens at the end of the year, when the 13^th salary and profit sharing distributions are usually paid.

4.B.60 Competition

We face significant competition in all of our principal areas of operation, since the Brazilian financial and banking services markets are highly competitive.

The following table presents the market share of our main products and services in the periods indicated: