Analysts at Credit Suisse have sounded the alarm over Brazilian
banks as credit default rates climb and interest rate spreads
squeeze profitability. The report focuses on
two problems within the industry
: slower growth than recent years and lower interest rate
[caption id="attachment_65147" align="alignright" width="300"
caption="Banco Bradesco, Caruaru, Brazil"]
Growth in consumer credit, upwards of 30% per year, and even
higher growth in the mortgage market helped Brazilian banks
withstand the global crisis in 2008.
credit growth looks to increase between 15-20%
at best. Even a campaign by President Rousseff this year to
'persuade' Brazilian banks to lower interest charged on loans will
probably not bring enough new customers to see credit growth in
excess of 20%.
The campaign by the President, as well as a benchmark SELIC rate
at historic lows, has also compressed the net interest margin that
Brazilian banks are able to collect. As this margin decreases,
banks will need to make up the loss in profitability with an
increase in loans.
Add to these two problems an
increase in default rates
that is starting to worry some analysts, something Emerging Money
covered Monday. Despite consumer defaults at 7.6% and auto
loan defaults increasing to 5.9%, Brazilian banks are slashing
rates to draw customers in an increasingly competitive market.
Both the mortgage and consumer markets are expected to grow this
year, which should help the banks increase revenues in absolute
terms even if margins will most likely suffer.
Banco Bradesco (
) trades for 10.6 times trailing earnings, slightly higher than its
historical average of 9.8 times. Second quarter earnings, due to be
released late-July, are already expected to be down 11% from the
same quarter last year.
Itau Unibanco (
) is relatively cheaper than its peers at 7.0 times trailing
earnings, well under its historical average of about 9.0 times.
Expectations are for second quarter earnings 8.5% lower than the
same period last year.
Both banks are down sharply over the last year with Banco
Bradesco outperforming in almost every time period but still highly
correlated with its larger peer. Dividend yields are above 4% for
either but will mean little if a negative earnings surprise drives
the shares down sharply.
As if the structural problems in the industry were not enough,
continued weakness in the real due to global market uncertainty
will act as a headwind to shares traded on the U.S. exchanges in
dollar terms. Investors may want to underweight the sector into
second quarter earnings to avoid any negative surprises.
Market growth and any rebound in the real may help Brazilian
banks recover later in the year but longer term growth will remain