Bradesco (BBDC4) for its results on the previous day, with profits slightly higher than expected when it is reached 6.821 billion Brazilian riyals in the first quarter of 2022 (1Q22). According to Refinitiv consensus with analysts, the bank was expected to post a profit of R$6.762 billion.
In addition, there was an indicative (forecast) revision with some data revised upwards, with more income from credit and fees expected and greater control over operating expenses in 2022, but also raising the expenditure forecast with provision for loss with defaults ( PDD extended).
Thus, the data set presented by the second largest private bank in Brazil was viewed in various ways by market analysts. BBDC4 shares were volatile at the start of the trading session, but closed 2.09% higher, at R$18.10, with investors also interested in announcing a share buyback program (up to 106.6 million notes, between preferred and popular, until November 6, 2023).
Morgan Stanley highlighted that the bank delivered strong results, driven by credit, high profit margins and cost control.
Credit activity remains strong, with a significant expansion in consumer credit (up 3% q/q and 23% yoy, especially given weak seasonality). Analysts say this, we believe, confirms management’s positive view of risk and default.
The rate of delinquency and provisions has increased, which Morgan notes will be highlighted by the most pessimistic. Delinquency was 3.2% in the first quarter of 22, an increase of 0.4 percentage points qoq and 0.7 percentage points qoq. The expanded provision for doubtful accounts (PDD) amounted to R$4.836 billion in the first quarter, an increase of 23.8% compared to the same quarter of 2020 and 12.9% compared to the fourth quarter of 21.
However, according to Morgan analysts, the arrears and provisions are only normalizing, back to pre-Covid levels, after a period of decline due to the large number of renegotiations made in 2020 and 2021. “Control,” they assess.
positive direction?
Morgan analysts viewed the revised guidance for 2022 as very positive: the bank now expects growth from the National Insurance Institute [margem financeira líquida] 18% risk-adjusted year-over-year, up from 9% before that — “also a strong statement about default expectations,” according to analysts.
Margin expectations with clients increased from a range of 8% to 12% to 18% to 22% and estimates of revenue growth from services provided for the year increased from 2% to 6% to 4% to 8%. Meanwhile, the expected increase in operating expenses this year has fallen from a range of 3% to 7% to 1% to 5%.
Expense projections with provision for loss in the event of default now range from R$17 billion to R$21 billion, compared to R$15 billion to R$19 billion in previous forecasts.
Growth estimates were maintained from 10% to 14% of the loan portfolio, although it grew by 18.3% in the first quarter. The projection of the result of insurance operations, from 18% to 23%, is also unchanged. In the first quarter, the increase was only 4.7%.
“According to our estimates, the new guidance suggests stronger net income growth for the year; in fact, using the midpoint of the new guideline range, net income would be R$32.6 billion (trade-neutral), an 11% increase over the previous R$29.4 billion. The new guidance is for net income growth of 24% year over year, up from 12% previously,” says Morgan.
On the other hand, Itaú BBA sees the new forecast with less optimism. The bank says the revised guidance for 2022 appears positive at first, but requires a second thought. House analysts believe that the NII’s upward review of the client’s R$5 billion could be matched by the lowest NII in the market.
Although the provisioning expenditure guidance is more realistic, it still appears a bit optimistic, given the rapid pace of deterioration in retail lag, they assess.
However, the bank maintains an outperformance rating for the paper, and a target price of R$26.75 compared to Thursday’s (05) price of R$17.73.
Looking at the numbers overall, BBA analysts noted that the positive features were loan portfolio growth, acceleration of net interest income, expense containment, and good numbers of services. The default rate was the weak point.
Credit Suisse notes that Bradesco’s result has been waiting with anticipation, also noting that many expected a very weak number that could affect the entire sector.
In the end, the quarter was in line with the guidance support for home estimates, with a stronger margin for customers despite higher provisions.
“Cost control is on the agenda and should be tougher, while more favorable forecasts for service charges should play an important role in the coming quarters,” analysts at the Swiss bank assess. The Bank continues to recommend Bradesco’s outperformance, highlighting the rating.
XP highlighted that the results of the first quarter of 22 were characterized by an increase in provisions and a lower coverage index, considering the numbers to be somewhat negative.
This is because despite the increase in provisions for bad debts (PDD), coverage ratio continued to decline sequentially with the previous quarter, reaching 235% in the quarter (down 25.5 percentage points in the quarter and 114 points year on year) and continued to lag in Repayment to gradually increase.
The loan portfolio, on the other hand, grew 2.7% in the quarter and 18.3% in the year, and is on track to deliver double-digit growth guidance for the year. This growth also contributed to the strengthening of the financial margin with clients, reaching R$15.8 billion (up 7% in the quarter and 19.6% in the year), which offset the decline in the National Insurance Market Operations Index (which closed the quarter at R$1.2 billion, down 43% in the quarter and 47% in the year).
XP was highlighted after a conservative view of the paper and a neutral recommendation, with a target price of R$26, still a 47% upside potential compared to Thursday’s close.
Conference call highlights
On an earnings call, Bradesco CEO Octavio De Lazzari Jr. stated that the company’s guidance has changed due to significant changes in scenarios throughout the first quarter of 2022, with the outbreak of an unexpected war. “Last year, there was still an expectation to control inflation,” and a possible drop in interest rates. However, the interest rate is now expected to remain high throughout 2022 and at least throughout the first half of 2023.
Because of these changes in the first quarter of 2022, Lazzari said, “the fundamentals were changing.” However, he said he did not change the guidance for credit operations because with growth and maintaining the current interest rate, the trend is to have less credit origin in high-growth portfolios in 2021, such as mortgage credit, which continued that year. R$2 billion and R$3 billion, and now it’s down to R$1 billion.
Credit growth guidance is between 10% and 14% due to higher interest rates and a strong double-digit growth base for 2021.
In addition, Lazzari said that medium and large companies should avoid long-term investments due to high interest rates. Now, taking credit by these firms is mainly for solving short-term needs.
The CEO also mentioned that the delinquency in the housing credit indicators is still small at 0.55% at the end of March. “Brazilians still have a dream in their possessions,” so such defaults rarely happen, unlike in other sectors, such as credit cards. “We don’t see any major concern in mortgage credit,” he said.
Regarding defaults, he noted that the biggest risk of price hikes lies in operations with high interest rates, such as credit cards. “More than just an increase, there is a normalization of defaults at higher levels,” he said, as was the case before the pandemic.
All expectations are for delinquency to resume after the lowest levels observed during the pandemic, the executive said. Now, there is a slowdown in new business and borrowing. He said that this leads to the belief that there will be growth in the cases of delinquency during the second quarter and stability at pre-pandemic levels.
He said that there is an improvement in credit models and analyzes that lead to the anticipation of this expected loss. Lazzari stated that the bank had previously faced scenarios of higher interest rates. Now, however, the most worrying thing is volatility, with very sharp rate growth.
He added that the loan portfolio’s delinquency rate should rise by up to 0.2 percentage points in the second quarter, and stabilize in the second half of the year.
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