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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

The accompanying Notes are an integral part of these Financial Statements.

 

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The accompanying Notes are an integral part of these Financial Statements.

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

 

The accompanying Notes are an integral part of these Financial Statements.

 

8      December 2015

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The accompanying Notes are an integral part of these  Financial Statements. 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

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

 

		Page
1)	OPERATIONS	11
2)	PRESENTATION OF THE FINANCIAL STATEMENTS	11
3)	SIGNIFICANT ACCOUNTING PRACTICES	13
4)	CASH AND CASH EQUIVALENTS	19
5)	INTERBANK INVESTMENTS	20
6)	SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS	21
7)	INTERBANK ACCOUNTS – RESERVE REQUIREMENT	29
8)	LOANS	30
9)	OTHER RECEIVABLES	41
10)	OTHER ASSETS	43
11)	INVESTMENTS	44
12)	PREMISES AND EQUIPMENT AND LEASED ASSETS	45
13)	DEFERRED	45
14)	INTANGIBLE ASSETS	46
15)	DEPOSITS, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FUNDS FROM ISSUANCE OF SECURITIES	47
16)	BORROWING AND ON-LENDING	49
17)	PROVISIONS, CONTINGENT ASSETS AND LIABILITIES AND LEGAL LIABILITIES – TAX AND SOCIAL SECURITY	50
18)	SUBORDINATED DEBT	53
19)	OTHER LIABILITIES	54
20)	NON-CONTROLLING INTERESTS IN SUBSIDIARIES	54
21)	SHAREHOLDERS’ EQUITY (PARENT COMPANY)	54
22)	FEE AND COMMISSION INCOME	57
23)	PAYROLL AND RELATED BENEFITS	57
24)	OTHER ADMINISTRATIVE EXPENSES	57
25)	TAX EXPENSES	58
26)	OTHER OPERATING INCOME	58
27)	OTHER OPERATING EXPENSES	58
28)	NON-OPERATING INCOME (LOSS)	58
29)	RELATED-PARTY TRANSACTIONS (DIRECT AND INDIRECT)	59
30)	FINANCIAL INSTRUMENTS	61
31)	EMPLOYEE BENEFITS	63
32)	INCOME TAX AND SOCIAL CONTRIBUTION	65
33)	OTHER INFORMATION	67

 

 

10   December 2015

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1)      OPERATIONS

 

Banco Bradesco S.A. (Bradesco) is a private-sector, publicly traded company and universal bank that through its commercial, foreign exchange, consumer financing and housing loan portfolios carries out all types of banking activities which it is authorised to. The Bank is involved in a number of other activities, either directly or indirectly, through its subsidiaries, specifically leasing, investment banking, brokerage, consortium management, credit cards, real estate projects, insurance, pension plans and capitalization bonds. All these activities are undertaken by the various companies in the Organização Bradesco, working together in an integrated fashion in the market.

 

2)      PRESENTATION OF THE FINANCIAL STATEMENTS

 

The Financial Statements of the Prudential Conglomerate were prepared to comply with the requirements of Resolution No. 4,280/13, of the National Monetary Council (CMN) and additional rules of the Brazilian Central Bank (Bacen). Thus, specific requirements in the consolidation and/or combination of the entities listed in Resolution No. 4,280/13 determined by the CMN and Bacen were observed, which are not necessarily the same established by the corporate law and by the CMN or Bacen for other types of consolidation. In this sense, they cover the financial statements of Bradesco, and foreign branches, subsidiaries and investment funds, as requested in Resolution No. 4,280/13.

 

In the preparation of these Financial Statements of the Prudential Conglomerate intercompany transactions, including investments, assets and liabilities, revenue, expenses and unrealized profit were eliminated and net income and shareholders’ equity attributable to the non-controlling interests were accounted for in a separate line. For jointly controlled investments with other shareholders, assets, liabilities and income and loss were included in the consolidated financial statements of the Prudential Conglomerate according to the interest held in the shareholders’ equity of each investee. Goodwill on the acquisition of investments in subsidiary/associate companies or jointly controlled entities is presented in the investments and intangible assets lines (Note 14a).

 

The financial statements include estimates and assumptions, such as: the calculation of estimated loan losses; fair market value estimates of certain financial instruments; civil, tax and labor provisions; impairment losses of securities classified as available-for-sale and held-to-maturity securities and non-financial assets; and the determination of the useful life of specific assets. Actual results may differ from those based on estimates and assumptions.

 

Bradesco’s financial statements of the Prudential Conglomerate were approved by the Board of Executive Officers and by the Disclosure Committee on March 7, 2016.

 

We highlight the societies and the major investment funds, with direct and indirect participation, included in the financial statements of the Prudential Conglomerate:

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

(1)  The special purpose entity International Diversified Payment Rights Company is being consolidated. The company is part of a structure set up for the securitization of the future flow of payment orders received overseas;

(2)  Increase in equity interest through share acquisition in February and March 2015;

(3)  Company proportionally consolidated, pursuant to CMN Rule No. 4,280/13;

(4)  They have been part of the Prudential Conglomerate since January 2015; and

(5)  The investment funds in which Bradesco assumes or retains substantially the risks and benefits were consolidated.

 

 

12     December 2015

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3)   SIGNIFICANT ACCOUNTING PRACTICES

 

a)   Functional and presentation currencies

 

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

 

b)   Income and expense recognition

 

The result is calculated according to the regime of competence, which establishes that the revenues and expenses should be included in the calculation of the results for the periods in which they occur, always simultaneously to when they are correlated, regardless of being a receipt or payment.

 

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

 

Floating rate and foreign-currency-indexed contracts are adjusted to the interest and foreign exchange rates applicable at the end of the reporting period.

 

c)   Cash and cash equivalents

 

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

 

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

 

d)   Interbank investments

 

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

 

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

 

e)   Securities – Classification

 

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

 

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

 

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

 

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

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

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

 

f)    Derivative financial instruments (assets and liabilities)

 

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

 

Operations involving derivative financial instruments are designed to meet the Bank’s own needs in order to manage overall exposure, as well as to meet customer requests to manage their positions. The gains or losses are recorded in profit-and-loss and shareholders’ equity accounts.

 

Derivative financial instruments used to mitigate risk deriving from exposure to variations in the fair market value of financial assets and liabilities are designated as hedges when they meet the criteria for hedge accounting and are classified according to their nature:

 

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

 

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

 

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

 

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

 

Loans and leasing, advances on foreign exchange contracts and other receivables with credit characteristics are classified by risk level, based on: (i) the parameters established by CMN Resolution No. 2,682/99, which requires risk ratings to have nine levels, from “AA” (minimum risk) to “H” (maximum risk); and (ii) Management’s assessment of the risk level. This assessment, which is carried out regularly, considers current economic conditions and past experience with loan losses, as well as specific and general risks relating to operations, debtors and guarantors. Moreover, the days past due are also considered in the rating of customer risk as per CMN Resolution No. 2,682/99, as follows:

 

 

(1)  For transactions with terms of more than 36 months, past-due periods are doubled, as permitted by CMN Resolution No. 2,682/99.

 

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

 

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

 

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

 

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

 

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

 

Leasing

 

The portfolio of leasing operations consists of contracts firmed with the support of Decree No. 140/84, of the Ministry of Finance, which contains clauses of: (a) non-cancellation; (b) purchase option; and c) post-fixed or fixed restatement and are accounted for in accordance with the standards established by Bacen, as follows:

 

I-      Leases receivable

 

Reflect the balance of installments receivable, restated according to the indexes and criteria established by contractual agreement.

 

II-    Unearned income from leasing and Guaranteed Residual Value (GRV)

 

Recorded at the contractual amount, conversely to adjusted accounts of unearned revenues from leasing and Residual value to balance, both submitted through negotiated conditions. The GRV received in advance is recorded in Other Liabilities – Creditors by Anticipation of the Residual Value until the date of contractual termination. The adjustment at present value of the lease payments and the GRV receivable from the financial leasing operations is recognized as excessive/insufficient depreciation on leased assets, in order to reconcile the accounting practices. In operations whose delays are equal to or greater than 60 days, the appropriation to the result occurs upon receipt of contractual installments, in accordance with CMN Resolution No. 2,682/99.

 

III-  Leased fixed assets

 

It is recorded at acquisition cost, minus the accrued depreciations. The depreciation is calculated using the linear method, with the benefit of a 30% reduction in the normal life cycle of the asset, provisioned in the current legislation. The main annual rates of depreciation used, as base for this reduction, are the following: vehicles and the like, 20%; furniture and utensils, 10%; machinery and equipment, 10%; and other assets, 10% and 20%.

 

IV-  Losses on leases

 

The losses recorded in the sale of leased assets are deferred and amortized over the remaining normal life cycle of assets, and are shown along with the Leased Fixed Assets (Note 8k).

 

V-    Excessive (insufficient) depreciation

 

The accounting records of leasing operations are maintained as legal requirements, specific for this type of operation. The procedures adopted and summarized in items "II" to "IV" above differ from the accounting practices provisioned in Brazilian corporate law, especially concerning the regime of competence in the record of revenues and expenses related to lease contracts. As a result, in accordance with Bacen Circular No. 1,429/89, the present value of outstanding leasing installments was calculated, using the internal rate of return of each contract, recording a leasing revenue or expenditure, conversely to the entries of excessive or insufficient depreciation, respectively, recorded in Permanent Assets, with the objective of adapting the leasing operations to the regime of competence (Note 8k).

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

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

 

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

 

Deferred tax assets on temporary differences are realized when the difference between the accounting treatment and the income tax treatment reverses. Deferred tax assets on income tax and social contribution losses are realizable when taxable income is generated, up to the 30% limit of the taxable profit for the period. Deferred tax assets are recorded based on current expectations of realization considering technical studies and analyses carried out by Management.

 

The provision for income tax is calculated at 15% of taxable income plus a 10% surcharge. For financial companies, equated and of the insurance industry, the social contribution on the profit was calculated until August 2015, considering the rate of 15%. For the period between September 2015 and December 2018, the rate was changed to 20%, according to Law No. 13,169/15, returning to the rate of 15% as from January 2019. For the other companies, the social contribution is calculated considering the rate of 9%.

 

Due to the amendment of the rate, the Organização Bradesco constituted, in September 2015, a supplement to the tax credit of social contribution, considering the annual expectations of achievement and their respective rates in force in each period, according to the technical study conducted.

 

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

 

Changes in the criteria to recognize revenue, costs and expenses included in the net profit for the period, enacted by Law No. 11,638/07 and subsequent amendments were made fiscally by the new regime of the taxation in force instituted by Law No. 12,973/14.

 

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

 

i)    Prepaid expenses

 

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

 

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

 

In the case of the remuneration paid by the origination of credit operations to the banking correspondents related to credit operations originated during 2015, Bradesco opted to recognize 2/3 of the total value of compensation, pursuant to the provisions of Bacen Circular No. 3,738/14.

 

Prepaid expenses are shown in detail in Note 10b.

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j)    Investments

 

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

 

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

 

Subsidiaries entities are consolidated – the composition of the main companies can be found in Note 2. The composition of unconsolidated and jointly subsidiaries, as well as other investments, can be found in Note11.

 

k)   Premises and equipment

 

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

 

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

 

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

 

l)    Deferred assets

 

It is recorded at cost of acquisition or composition, net of their accrued depreciation of 20% per annum, calculated using the linear method. Since December 2008, the new operations have been recorded in intangible assets, in accordance with Circular Letter No. 3,357/08 of Bacen.

 

The composition of deferred assets is shown in Note 13.

 

m) Intangible assets

 

Corresponds to the acquired rights whose subjects are intangible assets intended for the maintenance of the company or exercised for this purpose.

 

Intangible assets comprise of:

 

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

 

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

 

Intangible assets and the movement in these balances by class, are presented in Note 14.

 

n)   Impairment

 

Financial and non-financial assets are tested for impairment.

 

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

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

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

 

Impairment losses are presented in Note 6c⁽¹⁰⁾,12 e 14.

 

o)   Securities sold under agreements to repurchase

 

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

 

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

 

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

 

Provisions, contingent assets and liabilities, and legal obligations, as defined below, are recognized, measured and disclosed in accordance with the criteria set out in CPC 25, approved by
CMN Resolution No. 3,823/09 and CVM Resolution No. 594/09:

 

·       Contingent Assets: these are not recognized in the financial statements, except to the extent that there are real guarantees or favorable judicial decisions, to which no further appeals are applicable, and confirmation of the capacity of the counterparty to pay or the ability of Bradesco to realize the asset via compensation against another liability upon which the gain is considered practically certain. Contingent assets with a chance of probable success are disclosed in the notes to the financial statements;

 

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

 

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

 

·       Legal Obligations – Provision for Tax Risks: results from judicial proceedings, which contest the applicability of tax laws on the grounds of legality or constitutionality, which, regardless of the assessment of the probability of success, are fully provided for in the financial statements.

 

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

 

q)   Other assets and liabilities

 

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

 

r)    Subsequent events

 

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

 

They comprise the following:

 

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

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

 

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

 

                                                             

4)     CASH AND CASH EQUIVALENTS

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

 

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

5)      INTERBANK INVESTMENTS

 

a)    Breakdown and maturity

 

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b)   Income from interbank investments

 

Classified in the income statement as income from operations with securities.

 

 

6)     SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS

 

Information on securities and derivative financial instruments is as follows:

 

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

 

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

b)      Consolidated classification by category, maturity and operating segment

 

I)    Trading securities

 

 

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II)   Available-for-sale securities

III) Held-to-maturity securities

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

c)      Breakdown of the portfolios by financial statement classification