December 2, 2021

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Banco do Brasil (BBAS3) posted a solid result and shows the stock is cheap, but "state risk" still divides analysts

Banco do Brasil (BBAS3) posted a solid result and shows the stock is cheap, but “state risk” still divides analysts

São Paulo – Among the four major publicly traded banks, there were expectations of Most analysts that Banco do Brasil (BBAS3) It will be a positive event in the third quarter – and the State Bank did not disappoint.

BB feet a Adjusted net income of R$5.1 billion in the third quarter of 2021, It represents a growth of 49.4% compared to the third quarter of 2020 and 2% higher than the second quarter of 2021. Compared to Refinitiv’s forecast for Banco do Brasil’s profit, which was R$4.496 billion, the result was 14.3% higher than forecast.

The numbers, in addition to the most positive day in the market, made the shares rise to 3.87% at the maximum for the day, although it eased in the afternoon from the top, closing practically stable, with a slight decrease of 0.14%, at a price of R$29.44 .

Return on equity (ROE) was 14.3% in the quarter, in line with the second quarter.

Services revenue, in turn, increased by 2.2% compared to the same period in the previous year, to reach R$ 7.28 billion, with a focus on management services and resource management.

As Levante Ideias de Investimentos highlights, the good profit result can be attributed mainly to the strong growth of net interest margin, 38.2% YoY. The Bank also showed good control over administrative expenses which remained practically stable compared to the same quarter of 2020.

The other positive point of the result was the delinquency rate dropping to 1.82%, which is much lower compared to the 2.43% presented in the third quarter of 2020, a moment affected by the pandemic.

The coverage ratio, which represents the percentage that the credit risk allowance can cover from bad loans, was also highlighted. It is especially monitored by market analysts, considering the scenario of a possible increase in defaults with the more difficult macroeconomic scenario. .

“After strong portfolio growth, BB increased its allocations, resulting in a coverage ratio of 323%, well above its private sector peers (250% from Santander, 297% from Bradesco and 234% from Itaú), XP highlights.

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This factor, linked to lower delinquency, according to XP, reinforces the view of home analysts that Banco do Brasil has a more secure portfolio and is better prepared for more challenging scenarios.

For Vitor Beni, Matthews Odagoel and Artur Alves, XP analysts, Banco do Brasil fared well in all respects, with its credit portfolio growth reflected in higher revenues, while its expenses remained low, resulting in an operating profit growth of 53% year-over-year. This is 19% above the homeowner’s expectations despite the increased provisions.

The company’s credit portfolio amounted to R$814 billion in September, an increase of 11.4% over the year-on-year comparison, with a focus on the personal loan segment which increased by 14.2%.

On the other hand, some analysts have pointed out non-recurring factors that led to such expressive figures. Bradesco BBI notes that performance was primarily driven by the higher net brokerage result (NII), with a 9.6% rise in higher Treasury gains, while the NII with clients was lower than expected by bank analysts. “We have doubts about the sustainability of the level of Treasury gains,” the analysts note.

Credit Suisse also believes that BB’s strong treasury results may decline somewhat in the coming quarters. However, he estimates that this could normalize to a higher level due to a better deposit margin based on higher rates.

BBI also notes that the overall asset quality showed positive fundamental trends, although the default rate benefited in part from the sale of corporate portfolios, while the coverage ratio remained at a high level.

Safra also emphasizes that although solid treasury and pension results do not appear to be very frequent, the good performance of other lines stands out, such as: credit volumes and their mix improvement, very healthy credit quality, light recovery of service revenue and decent cost control.

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After the release of third-quarter numbers, Banco do Brasil has improved its earnings forecast (guidance) for 2021, with portfolio growth expected from 8-12% to 14-16%, supporting a higher margin. Also net profit.

“Furthermore, we would like to highlight the following: 1) the Bank expects to continue to show strong growth in its rural portfolio throughout the year, confirming our vision for a more protected portfolio in relation to other banks and 2) the new earnings estimate that exceeds BB’s net income Our estimate for the year is R$18.8 billion, even at the lower end of guidance,” XP highlights. The new profits estimated by the Corporation are estimated between 19 billion Brazilian riyals and 21 billion Brazilian riyals for this year.

In a conference call, Jose Ricardo Forni, vice president of financial management at the state-owned bank, highlighted that BB intends to speed up disbursement of loans in the riskiest credit lines to increase profitability in the coming quarters.

Forney said the bank’s loan portfolio is expected to show high single-digit growth next year, driven mainly by the retail and small business sectors. He added that the default rate on BB loans should remain below the average for the financial system.

Cheap Rating X Country Risk

Looking ahead, the BBI highlights that “all eyes should be focused on how these fundamentals behave in a more challenging macro scenario in 2022,” amid the more challenging scenario, in which economists lower expectations for macroeconomic indicators…

But then, the political factor is on the radar. It is taken into account by credit analysts who, although estimating that a better-than-expected profit moment could be a catalyst for the role in the short term, prefer to position themselves in the sector in private banks considering next year’s presidential election. Thus, the Swiss bank maintains an asset-neutral recommendation, with a target price of R$38. Like credit, BBI maintains a neutral recommendation for BBAS3, with a target price of R$39.

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For Levante, the main catalysts for Banco do Brasil’s actions are primarily through a change in the perception of risk, which includes a change in perception regarding potential government intervention in the enterprise.

“We cannot forget the events of the beginning of the year, when, after an efficiency improvement programme, we had a negative public relations reaction, and the performance of the bank’s loan portfolio in a challenging year like 2022, since then, like other banks, we expect a return from default values to historical values,” notes the research team’s analysis team.

On the other hand, and mainly highlighting the valuation, Al-Safra reiterated his recommendation to buy BB, with a target price of R$48.00 for the end of 2022. “Currently, the bank’s actions are one of our preferences in this sector, due to a very low valuation (price above expected earnings). For 2022 a multiplier of 4.3 times, below the historical five-year average of 7.1 times), along with a strong expectation of earnings growth going forward,” the analysts assess. XP also reiterated its buy recommendation and target price of R$52 per share, as well as Bank of America, which has a target price of R$44 per share.

Analysts have been divided regarding BB stocks compared to private banks, although they see a good potential for valuation on paper. According to a compilation by Refinitiv, of the 17 homes covering BBAS3 assets, 8 have a neutral rating and 9 have a buy rating, with an average target price of R$43.96, or a potential increase of 49% over the two’s close – fair. Thus, between the cheap valuation and the approaching elections, analysts remain divided over the role.

(With information from Reuters)

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