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DERIVATIVE FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2024
Derivative Financial Instruments  
DERIVATIVE FINANCIAL INSTRUMENTS

 

7)DERIVATIVE FINANCIAL INSTRUMENTS

 

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

 

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

 

Market-derived information is used in the determination of the fair value of derivative financial instruments. The fair value of swaps is determined by using discounted cash flow modeling techniques that use yield curves, reflecting adequate risk factors. The information to build yield curves is mainly obtained from B3 (the Brazilian securities, commodities and futures exchange), and the domestic and international secondary market. These yield curves are used to determine the fair value of currency swaps, interest rate and other risk factor swaps. The fair value of forward and futures contracts is also determined based on market price quotations for derivatives traded on an exchange or using methodologies similar to those outlined for swaps. The fair values of credit derivative instruments are determined based on market price quotation or prices received from specialized entities. The fair value of options is determined based on mathematical models, such as Black & Scholes, using yield curves, implied volatilities and the fair value of the underlying assets. Current market prices are used to calculate volatility. To estimate the fair value of the over-the-counter (OTC) financial derivative instruments, the credit quality of each counterparty is also taken into account, based on an expected loss for each derivative portfolio (Credit valuation adjustment).

 

The derivative financial instruments held by Bradesco in Brazil primarily consist of swaps and futures and are registered with B3.

 

Foreign derivative financial instruments refer to swaps, forwards, options, credit and futures operations and primarily traded at the stock exchanges in Chicago and New York, as well as the over-the-counter (OTC) markets.

 

Macro strategies are defined for the Trading (proprietary) and Banking portfolios. Trading Portfolio transactions, including derivatives, seek gains from directional movements in prices and/or rates, arbitrage, hedge and market-maker strategies that may be fully or partially settled before the originally stipulated maturity date.

 

The Banking Portfolio focuses on commercial transactions and their hedges.

 

Portfolio risk is controlled using information consolidated by risk factor; effective portfolio risk management requires joint use of derivatives with other instruments, including stocks and bonds.

               
  R$ thousands
On December 31, 2024 On December 31, 2023
Notional value Amortized cost Fair value adjustment Fair value Notional value Amortized cost Fair value adjustment Fair value
Futures contracts                
Purchase commitments: 211,703,083 -   -   -   164,372,715 -   -   -  
- Interbank market 178,029,255 -   -   -   132,161,908 -   -   -  
- Foreign currency 22,985,640 -   -   -   14,481,278 -   -   -  
- Other 10,688,188 -   -   -   17,729,529 -   -   -  
Sale commitments: 161,641,895 -   -   -   220,715,317 -   -   -  
- Interbank market (1) 95,605,090 -   -   -   163,879,990 -   -   -  
- Foreign currency (2) 48,246,297 -   -   -   49,212,584 -   -   -  
- Other 17,790,508 -   -   -   7,622,743 -   -   -  
                 
Option contracts                
Purchase commitments: 685,622,189 1,151,336 27,409 1,178,745 1,030,322,549 3,175,395 257,087 3,432,482
- Interbank market 529,190,365 504,563 34,350 538,913 928,351,318 2,354,374 -   2,354,374
- Foreign currency 3,949,723 156,053 (42,981) 113,072 4,580,443 77,305 20,244 97,549
- Other 152,482,101 490,720 36,040 526,760 97,390,788 743,716 236,843 980,559
Sale commitments: 672,980,325 (1,779,852) 123,200 (1,656,652) 1,022,551,043 (2,071,414) (165,205) (2,236,619)
- Interbank market 513,818,125 (440,226) -   (440,226) 919,050,649 (719,366) -   (719,366)
- Foreign currency 6,870,683 (220,375) (180,480) (400,855) 4,573,904 (68,382) 47,472 (20,910)
- Other 152,291,517 (1,119,251) 303,680 (815,571) 98,926,490 (1,283,666) (212,677) (1,496,343)
                 
Forward contracts                
Purchase commitments: 64,273,935 2,540,319 (11,634) 2,528,685 34,113,304 (855,134) (3,953) (859,087)
- Foreign currency 62,442,929 2,569,853 -   2,569,853 33,043,985 (849,505) (551) (850,056)
- Other 1,831,006 (29,534) (11,634) (41,168) 1,069,319 (5,629) (3,402) (9,031)
Sale commitments: 47,310,325 (1,099,617) (17,442) (1,117,059) 28,256,407 772,080 (8,496) 763,584
- Foreign currency (2) 46,463,548 (1,522,017) -   (1,522,017) 24,698,728 449,969 -   449,969
- Other 846,777 422,400 (17,442) 404,958 3,557,679 322,111 (8,496) 313,615
                 
Swap contracts                
Assets (long position): 1,080,360,424 9,792,714 3,841,711 13,634,425 786,364,992 6,973,332 828,588 7,801,920
- Interbank market 57,567,711 949,727 3,611,358 4,561,085 45,590,283 1,799,507 1,093,110 2,892,617
- Fixed rate 692,873,598 893,378 (513,808) 379,570 541,219,843 1,389,077 (5,992) 1,383,085
- Foreign currency 319,020,245 7,213,979 258,094 7,472,073 194,344,754 2,960,898 (345,557) 2,615,341
- IGPM (General Index of market pricing) 41,362 41,466 399 41,865 87,639 74,582 3,334 77,916
  R$ thousands
On December 31, 2024 On December 31, 2023
Notional value Amortized cost Fair value adjustment Fair value Notional value Amortized cost Fair value adjustment Fair value
- Other 10,857,508 694,164 485,668 1,179,832 5,122,473 749,268 83,693 832,961
Liabilities (short position): 934,060,342 (10,271,413) (702,357) (10,973,770) 783,299,290 (8,124,013) (907,138) (9,031,151)
- Interbank market 246,185,275 (1,575,404) (832,866) (2,408,270) 32,577,474 (1,721,999) (1,190,305) (2,912,304)
- Fixed rate 477,454,859 (221,059) (93,611) (314,670) 438,339,819 (1,734,296) (614,622) (2,348,918)
- Foreign currency 202,546,445 (7,735,810) 208,073 (7,527,737) 284,842,617 (2,985,854) (109,307) (3,095,161)
- IGPM (General Index of market pricing) 103,000 (157,830) (1,063) (158,893) 190,560 (238,476) (13,896) (252,372)
- Other 7,770,763 (581,310) 17,110 (564,200) 27,348,820 (1,443,388) 1,020,992 (422,396)
Total 3,857,952,518 333,487 3,260,887 3,594,374 4,069,995,617 (129,754) 883 (128,871)

Derivatives include operations maturing in D+1 (day after reporting date).

(1)Includes: (i) accounting cash flow hedges to protect DI-indexed funding totaling R$59,956,404 thousand (R$102,934,940 thousand on December 31, 2023); and (ii) accounting cash flow hedges to protect DI-indexed (Interbank Deposit Rate) investments totaling R$24,468,458 thousand (R$44,821,117 thousand on December 31, 2023); and
(2)Includes specific hedges to protect assets and liabilities, arising from foreign investments. Investments abroad total R$42,019,674 thousand (R$31,320,736 thousand on December 31, 2023).

 

Swaps are contracts of interest rates, foreign currency and cross currency and interest rates in which payments of interest or the principal or in one or two different currencies are exchanged for a contractual period. The risks of swap contracts refer to the potential inability or unwillingness of the counterparties to comply with the contractual terms and the risk associated with changes in market conditions due to changes in the interest rates and the currency exchange rates.

 

The interest rate and currency futures and the forward contracts of interest rates call for subsequent delivery of an instrument at a specific price or specific profitability. The reference values constitute a nominal value of the respective instrument whose variations in price are settled daily. The credit risk associated with futures contracts is minimized due to these daily settlements. Futures contracts are also subject to risk of changes in interest rates or in the value of the respective instruments.

 

Credit Default Swap – CDS

 

In general, these represent a bilateral contract in which one of the counterparties buys protection against a credit risk of a particular financial instrument (its risk is transferred). The counterparty that sells the protection receives a remuneration that is usually paid linearly over the life of the operation.

 

In the event of a default, the counterparty who purchased the protection will receive a payment, the purpose of which is to compensate for the loss of value in the financial instrument. In this case, the counterparty that sells the protection normally will receive the underlying asset in exchange for said payment.

 

   
  R$ thousands
On December 31, 2024 On December 31, 2023
Risk received in credit swaps - Notional 1,954,290 2,044,989
- Debt securities issued by companies 783,357 637,962
- Brazilian government bonds 714,560 808,158
- Foreign government bonds 456,373 598,869
Risk transferred in credit swaps - Notional (1,120,806) (1,297,469)
- Companies bonds (154,807) -  
- Brazilian government bonds (705,922) (706,830)
- Foreign government bonds (260,077) (590,639)

 

The contracts related to credit derivative transactions described above are due in 2029. There were no credit events, as defined in the agreements, during the period.

 

The Company has the following hedge accounting transactions:

 

Cash Flow Hedge

 

The financial instruments classified in this category, aims to reduce exposure to future changes in interest and foreign exchange rates. The effective portion of the valuations or devaluations of these instruments is recognized in a separate account of shareholders’ equity, net of tax effects and is only transferred to income in two situations: (i) in case of ineffectiveness of the hedge; or (ii) when the hedged item is settled. The ineffective portion of the respective hedge is recognized directly in the statement of income.

 

       
Strategy R$ thousands
Hedge instrument nominal value Hedge book value Accumulated fair value adjustments in shareholders' equity (gross of tax effects) Accumulated fair value adjustments in shareholders' equity (net of tax effects)
Hedge of interest receipts from investments in securities (1) 24,468,458 24,913,057 (147,831) (81,307)
Hedge of interest payments on funding (1) 59,956,404 61,308,525 258,194 142,045
Total on December 31, 2024 84,424,862 86,221,582 110,363 60,738
         
Hedge of interest receipts from investments in securities (1) 44,821,117 45,285,081 138,891 76,390
Hedge of interest payments on funding (1) 102,934,940 103,287,896 (779,599) (428,779)
Total on December 31, 2023 147,756,057 148,572,977 (640,708) (352,389)
(1)Refers to the DI interest rate risk, using DI Futures contracts in B3, Swaps and e FED funds, with the maturity dates until 2030, making the cash flow fixed.

 

In December 2021, Bradesco terminated some hedge accounting instruments to protect cash flows. The fair value changes of these hedging instruments, previously recorded in accumulated OCI, will be appropriated to profit or loss, according to the result of the hedged item. For the year ended December 31, 2024, the amount of R$689,508 thousand was reclassified to the statement of income, net of tax effects. The accumulated balance in OCI on December 31, 2024 is R$16,472 thousand, this amount will be appropriated to profit or loss until the year 2027.

 

There were no gains/(losses) related to the cash flow accounting hedge, recorded in profit or loss for the year ended December 31, 2024 and 2023.

 

Fair value hedge – Financial instruments classified in this category aim to offset the risks arising from the exposure to the fair value changes in the hedged item, with gain or loss being recognized in statement of income. The hedged object is adjusted at fair value and the effective portion of the valuations or devaluations recognized in statement of income. When the hedging instrument expires or is sold or in case of discontinuation of the hedge, any adjustment to the hedged item is recognized directly in statement of income.

 

       
Strategy R$ thousands
Hedge instrument nominal value Hedge object book value Accumulated fair value adjustments in shareholders' equity (gross of tax effects) Accumulated fair value adjustments in shareholders' equity (net of tax effects)
Debenture hedge 18,555 22,072 79 43
Total on December 31, 2024 (1) 18,555 22,072 79 43

(1) Referring to the risk of Debentures, using Swap contracts, with maturity dates through 2031. There were no strategies in this operation as of December 31, 2023.

 

There were no gains/(losses) related to the fair value accounting hedge, recorded in OCI, in the year ended December 31, 2024 and 2023.

 

Hedge of investments abroad

 

The financial instruments classified in this category, have the objective of reducing the exposure to foreign exchange variation of investments abroad, whose functional currency is different from the national currency, which impacts the result of the Group. The effective portion of the valuations or devaluations of these instruments is recognized in a separate account of accumulated OCI, net of tax effects and is only transferred to income in two situations: (i) hedge ineffectiveness; or (ii) in the disposal or partial sale of the foreign operation. The ineffective portion of the respective hedge is recognized directly in the statement of income.

 

       
Strategy R$ thousands
Hedge instrument nominal value Hedge object book value Accumulated fair value adjustments in shareholders' equity (gross of tax effects) Accumulated fair value adjustments in shareholders' equity (net of tax effects)
Hedge of exchange variation on future cash flows (1) 5,603,750 5,166,624 (1,536,225) (805,635)
Total on December 31, 2024 5,603,750 5,166,624 (1,536,225) (805,635)
         
Hedge of exchange variation on future cash flows (1) 4,477,297 4,149,708 (702,728) (368,528)
Total on December 31, 2023 4,477,297 4,149,708 (702,728) (368,528)
(1)For subsidiaries with functional currency is different from the Real, using Forward and Futures contracts of US dollar, with the objective of hedging the foreign investment referenced to MXN (Mexican Peso) and US$ (American Dollar).

 

 

The gains/(losses) related to the ineffectiveness of the hedge of foreign operations, recorded in profit or loss, for the year ended December 31, 2024 was R$(10,502) thousand (R$3,223 thousand in 2023).

 

 Unobservable gains on initial recognition

 

When the valuation depends on unobservable data any initial gain or loss on financial instruments is deferred over the life of the contract or until the instrument is redeemed, transferred, sold or the fair value becomes observable. All derivatives which are part of the hedge relationships are valued on the basis of observable market data.

 

The nominal values do not reflect the actual risk assumed by the Group, since the net position of these financial instruments arises from compensation and/or combination thereof. The net position is used by the Group particularly to protect interest rates, the price of the underlying assets or exchange risk. The result of these financial instruments are recognized in “Net gains/(losses) on financial assets and liabilities at fair value through profit or loss”, in the consolidated statement of income. 

 

Offsetting of financial assets and liabilities

 

A financial asset and a financial liability are offset and their net value presented in the Statement of Financial Position when, and only when, there is a legally enforceable right to offset the amounts recognized and the Group intends to settle them in a liquid basis, or to realize the asset and settle the liability simultaneously. The right of set-off is exercised upon the occurrence of certain events, such as the default of bank loans or other credit events.

 

The table below presents financial assets and liabilities subject to net settlement:

 

           
  R$ thousands
On December 31, 2024 On December 31, 2023
Gross amount Related amount offset in the statement of financial position Net amount Gross amount Related amount offset in the statement of financial position Net amount
Financial assets            
Interbank investments 178,260,906 -   178,260,906 186,599,349 -   186,599,349
Derivative financial instruments 19,834,985 -   19,834,985 15,413,349 -   15,413,349
              
Financial liabilities            
Securities sold under agreements to repurchase 165,916,852 -   165,916,852 169,570,218 -   169,570,218
Derivative financial instruments 16,240,611 -   16,240,611 15,542,220 -   15,542,220

 

 

In the years ended in 2024 and 2023, Bradesco did not offset any financial assets and financial liabilities in its Statement of Financial Position.