Analysts predict that Brazil’s four largest banks will report divergent performances
01/31/2023
Bank’s earnings season starting Thursday is expected to show an even stronger growth of credit portfolios in the fourth quarter of 2022 and batter financial margins. The big unknown factor is the impact of the court-supervised reorganization of retail giant Americanas on the delinquency rate and profits.
According to a survey of eight banks by Valor, the four largest publicly-traded banks – Itaú Unibanco, Bradesco, Santander, and Banco do Brasil (BB) – are likely to post a combined profit of R$23.3 billion, down 6.1% compared with the second quarter and 1.4% compared with the third quarter of last year. This figure, however, may turn out to be very different depending on the strategy that each bank adopts to provision for credit losses with the Americanas case. Not all analysts in the sample included this impact in their projections.
The lenders can make provisions in the balance sheets for the fourth quarter of 2022 or the first quarter of 2023, since the case broke out in early January. Some banks have already signaled that they intend to make the adjustment in last year’s results. There is no rule for this, but it is customary in the market to build a reserve of at least 50% of exposure to a client with a distressed loan.
Until the Americanas debacle, the banks’ financial statements were expected to show a slight increase in the delinquency rates. The delays had already been rising especially in the segments of individuals, in lines such as credit cards and overdrafts, and micro, small, and medium-sized companies. In the portfolios of large companies, the rates were close to zero, but the case of the retailer may change this.
The earnings season, which starts with Santander on Thursday, is also likely to show diverging results. Analysts expect Bradesco and Santander to see a sharp drop in profits, as they are more affected by the rise in defaults than their competitors. The perspective for Itaú and Banco do Brasil is much more positive, and they could set new records. BB is expected to post a 40% annual rise in profits.
Another factor that analysts will be watching closely is the guidance for 2023. Goldman Sachs said the scenario for Brazilian banks remains relatively positive, despite macroeconomic risks and asset quality. “However, political noise and an uncertain trajectory for interest rates may justify more conservative assumptions. Portfolio growth is likely to slow down, as indicated by the Brazilian Federation of Banks (Febraban) latest expectations of an 8% increase in 2023,” the U.S.-based bank told its clients in a report.
The Central Bank expects the stock of credit to grow 8.3% this year after a 14% advance in 2022 – the third year with a double-digit expansion.
According to J.P. Morgan, even if portfolio growth slows down, net interest income from customers is expected to remain resilient and grow faster than volumes, at least in the short term. “Banks are indeed becoming more risk averse and focusing on safer lines with lower spreads, but we believe this will be an issue for the bottom line over 2023 and will not impact Q4 2022 numbers.”
For Citi, the higher-than-expected margin in Q4 could make the metric outperform the portfolios this year, although some compression can be seen in Santander and Bradesco. The margin with the market, especially in the case of these two banks, should remain under pressure. “We expect this effect to continue in the coming quarters,” says XP.
Credit Suisse had already released a report stating that 2023 will be the year of the “great divergence” among the four largest listed banks. BB and Itaú are expected to do well, with a return on equity (ROE) of almost 20%, benefiting from high interest rates and good asset quality. Bradesco and Santander, on the other hand, are expected to disappoint, with returns of close to 15%, hurt by their margin with the market and greater exposure to retail, which tends to see higher delinquency rates.
According to Credit Suisse, the Americanas accounting scandal does not represent a systemic risk and Brazilian companies in general are still in good shape. Even so, the Americanas case is likely to represent the end of banks’ “honeymoon” with companies, where defaults remain very close to historic lows.
As Valor showed last week, the collapse of the retailer after the disclosure of a R$20 billion hole in its financial report will have an impact on the results of large banks. The effect may be comparable to what the institutions faced in the first quarter of 2020, the beginning of the pandemic, when they were forced to make strong provisioning. Industry sources say the Americanas case may match other large court-supervised reorganizations, such as phone carrier Oi and mining company Samarco.
Bank of America surveyed local and global investors and found that their biggest concern with Brazilian banks’ financial reports is asset quality (30% of mentions), followed by guidance disclosure (19%), provisions not related to Americanas (19%), margin with the market (10%) and margin with clients (9%). The retailer case appears only in seventh place, with 5% of the answers. “Investors expect BB to unveil the most optimistic guidance, while Bradesco is likely to be the most conservative. For 65% of respondents, the risk of greater political interference in BB is already reflected in its valuation,” says the survey.
Citi also points out that the new mark-to-market rule is likely to affect the banks’ fixed income securities portfolios. The impact will probably not affect the quarterly results, being reflected only in the financial reports.
According to analysts, the best result of the quarter will come from Banco do Brasil, which is now headed by Tarciana Medeiros in the new administration. “We see BB (less exposed to Americanas than private peers) recording the best fourth quarter and providing constructive guidance for 2023 … The new CEO made a good impression, the vice president nominations were positive, and BB confirmed a 40% payout in 2023,” says BTG.
Itaú’s financial margin is likely to continue benefiting from higher spreads, although portfolio expansion is expected to remain relatively stable after the bank’s decision to slow down supply. “We expect treasury results to remain unremarkable, reaching R$551 million. All this should lead to annual profit growth of 13%,” Santander analysts wrote.
Santander and Bradesco face the opposite situation. Both are expected to continue to suffer from negative market margin results, higher delinquency rates, and an increase in administrative costs. “We expect Santander Brasil’s profits to fall sharply in the fourth quarter, due to a combination of weak margins, still high provisioning charges, a negative treasury result and higher operating expenses (including higher tax rates),” said UBS BB.
However, the most negative expectations fall on Bradesco, which besides the unfavorable context is the bank with the greatest exposure to Americanas. “We see another blow to the bank’s earnings power for 2023,” Credit Suisse said. “The bank will not generate excess returns over its cost of capital until the second half of 2024.”
*By Álvaro Campos — São Paulo
Source: Valor International