The results of Brazil’s largest banks in the first quarter may help foresee the pace for the rest of the year, which is still a major unknown. On the one hand, the economy has been doing better than expected and credit growth has also surprised positively, which is likely to guarantee a good performance from January to March. On the other hand, high interest rates and inflation will lead to an expected increase in default rates throughout the year.
The projections of six banks collected by Valor indicate that Itaú Unibanco, Bradesco, Santander and Banco do Brasil (BB) are expected to have a combined profit of R$23.697 billion in the first quarter, up 0.5% from the fourth quarter – when there was a record – and an advance of 8.5% in comparison with the same period in 2021. The annual performance is expected to be the weakest since the fourth quarter of 2020, when numbers were still down due to the pandemic. The earnings season will begin next Tuesday, with Santander.
For UBS BB analysts, the default rate will be the most closely watched indicator in the financial statements. Still, they say that despite the expected deterioration in asset quality, banks are expected to show good operating trends, with year-over-year low-double-digit growth and improved margins for loans. There may be a small increase in provisions for bad debt, but some firms are likely to continue using some of the cushions built up in the pandemic, which would hold back that advance.
“We are positive about the dynamics of the results of Brazilian banks… Overall, we forecast earnings expansion for most of the banks we cover,” UBS BB said. Goldman Sachs takes a similar view, predicting resilient operating trends. “We expect Brazilian banks to sustain relatively stable ROEs as financial margins remain resilient and the cost of risk remains under control, with healthy loan growth, even if the default rate shows some deterioration.”
J.P. Morgan goes along the same lines, but with a slightly more cautious view. For the U.S. bank, the expected rise in defaults favors the large incumbent banks, which have a more diversified revenue base. “In Brazil, we see rising spreads, but asset quality worsening at the margin, in a potentially faster trend than initially anticipated.” According to the report, there could be sharper worsening in individual defaults, especially unsecured consumer loans and credit cards, which are under pressure as the year begins with high inflation and household debt also high.
“We believe that the deterioration in asset quality is likely to dominate the discussions and will probably prevail over strong net interest margin developments in the first quarter results. The first signs of how severe the scenario for Brazilian banks may be is expected to start to emerge in the first quarter,” Bradesco BBI analysts said.
Bank of America says that net interest income will probably benefit from a higher rate environment, although lower treasury earnings will limit total interest income growth to around 5%. They also warn about administrative expenses, which remain a point of concern, reflecting recent salary increases.
In a report in February, when the 2022 guidance was released, BofA said the discrepancies in projections made “Itaú came from Mars and Bradesco from Venus.” While Bradesco’s projections suggest 8% profit growth this year, Itaú’s forecasts indicate twice as much: 16%. “The 2022 guidances for Bradesco and Itaú include large disparities related to financial margin; bad debt provisions; revenues from tariffs and insurance; and effective tax rate. On the other hand, both indicated similar growth in loans and operating expenses,” the analysts said. Now, the first quarter results may give clues about who is right.
Itaú will probably have the highest year-over-year growth in profit, up 14.1% to R$7.3 billion. “We project total credit growth of 13.2% year over year. The retail portfolio is likely to remain robust, but with a different profile from previous quarters (growth in home loans may decelerate, while personal loans may expand faster),” UBS BB said. The analysts said that the recent appreciation of the Brazilian currency may have a negative impact on growth, since the bank’s portfolio in the rest of Latin America represents almost 25% of the total.
Bradesco will likely have a 3.7% expansion in profit, to R$6.754 billion. For Goldman Sachs, despite a solid 18% expansion in the portfolio, the financial margin is likely to fall in the transition from the fourth to the first quarter, and the default rate will rise. “Fee income and expenses are likely to be seasonally worse. We estimate expense growth to reach 10%, limiting profit expansion.”
For BB, estimates are for a 14.1% rise in profit, to R$5.604 billion. Analysts see a low level of provisions and the margin benefiting from the growth in lines with higher spreads. At the same time, Banco do Brasil’s pension fund Previ’s results are expected to make a significant positive contribution. “Given the higher risk quarter, we favor less risky operations, such as Banco do Brasil and Itaú, over Nubank and Santander,” J.P. Morgan said.
In the case of Santander, the forecasts indicate profit of R$4.039 billion, an improvement of 0.7% year over year. BTG foresees an increase of 41.3% in provision for doubtful debts. In addition, analysts point out that the result of treasury, which was very strong in an environment of low interest rates, is likely to lose strength with the increase in the Selic. “Santander ended the fourth quarter with a coverage ratio of 220% (the lowest among large Brazilian banks). We believe this will fall even more in the coming quarters,” UBS BB pointed out.
Source: Valor International