Hospitals and labs return to profit

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The pandemic affected Brazilian health groups in different ways. Operators and insurance companies saw their profits jump to record levels last year due to the cancellation of elective procedures – even leading the sector to register for the first time in its history a medical deflation.

Hospitals, clinics, and diagnostic laboratories, on the other hand, suffered losses or had negligible profits, since the bill for patients affected by Covid-19 is lower when compared to the costs of high-complexity surgeries and exams.

In 2021, things changed. Patients who had not set foot in a doctor’s office for nearly a year went back for medical procedures and, in March, came the second wave of the pandemic, at a much greater intensity.

The impact is clear in the earnings reports for the second quarter of publicly held companies operating in the sector. Hospitals and laboratories reversed negative results while operators and insurers, who pay these medical bills, lost or saw their profits drop up to 92%.

“We had the best quarter last year and now we have the worst in the company’s history,” said CEO of healthcare operator NotreDame Intermédica Irlau Machado. The company posted a loss of R$48 million in the second quarter, compared to a profit of R$223 million a year earlier. The costs of Covid-19 totaled, between April and June, R$358 million, almost R$100 million more compared to the first quarter.

Insurer Porto Seguro Saúde also went from a positive result of R$50 million to a negative one of R$1.3 million. Health plan and hospital operator Hapvida’s net profit fell 62.5% between April and June. At SulAmérica, profit dropped 92.6% and at Bradesco Saúde, the reduction was 56.8%.

Among service providers, practically all companies listed on the stock exchange went from loss to profit this quarter. Rede D’Or, which had suffered a negative result of almost R$300 million, saw the bottom line rise to a profit of R$445.5 million. The same happened with Dasa, which reversed the loss of R$343 million to an adjusted net income of R$451.5 million. Fleury went from a loss of R$73.3 million to close the second quarter with a profit of R$65.5 million, even considering the cyberattack suffered at the end of June.

The expectation is that this scenario of resumption of medical procedures will continue in the coming months. The volume of exams in laboratories has been growing, which could mean future surgeries, and there is still a so-called stock of procedures not performed in the past that could happen. In addition, there is the possibility of complex cases arising from patients who have not had their check-ups in recent months. However, it is worth considering that there may be changes in this scenario if the Delta variant spreads significantly.

“The results reflect the second wave of Covid-19, it is a transitory impact, but it will still bring some small impact in the third quarter,” said a report by analysts from Credit Suisse.

The vertical operators Hapvida and Intermédica tend to benefit the most from the reduction in hospitalizations of patients affected by the new coronavirus. This is because they are reducing the infrastructure for these services. Hapvida, for example, had 1,600 beds for Covid at the height of the pandemic and, currently, it has about 100. There was also an 80% reduction in the number of staff who saw patients with the disease.

Among the paying sources, Bradesco Saúde is the one that had the greatest impact on the costs of Covid-19 in the second quarter. The bill reached R$1.8 billion, which reflected in a loss ratio of 95.1%, an increase of 25.1 percentage points over the same period in 2020.

“The net income in the quarter was impacted by the increase in the loss ratio, which was affected by the frequency of events related to Covid-19, due to the increased need for hospital medical care, diagnoses, consultations, hospitalizations, post-Covid-19 effects, resumption of elective procedures”, informs Bradesco’s results report.

Despite the negative numbers in the profitability of operators, the revenue of all grew due to acquisitions and entry of new users. Even in a scenario of high unemployment, the demand for health insurance has been growing as the population wants access to private healthcare in times of pandemic. In the last 12 months, considering June, the sector recorded 1.5 million new users of health plans, totaling 48.2 million — the highest number since mid-2016.

Source: Valor international

Banks likely to see higher profits in second quarter

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With a fairly low base of comparison in the second quarter of last year, when they were still making provisions to deal with the pandemic, Brazil’s largest banks are expected to report an almost 60% jump in profit for the April-June period. The expectation is that credit portfolios will continue to grow at a healthy pace and there will be a slight deterioration in nonperforming loans, which is more than normal given it was at historical lows due to the pauses in payments offered to customers. Financial margins, however, should remain under pressure amid increased competition, but the expansion of lines with larger spreads could ease this factor.

Itaú, Bradesco, Santander and Banco do Brasil should have a combined profit of R$21.5 billion in the second half, up 59.9% year over year, but a quarterly drop of 1.6%, a survey by Valor with eight analysts shows.

For J.P. Morgan analysts, the banks’ appetite to offer loans is growing as activity improves with the reopening of the economy and the advance of vaccination. They point out that data from the Central Bank indicate acceleration of loans, to 16% in May from an annual high of 14.5% in March, and among private-sector domestic banks this expansion is even stronger, of 24%. “Riskier products with higher spreads are growing faster, which can boost margins.”

The Itaú BBA points out that investors will be looking for signs of recovery in the financial margin, but that there should still be no substantial improvement in the second quarter. According to analysts, the period was still marked by mobility restrictions due to the pandemic and a stronger recovery in margins should come more in the second half of the year. “Increased confidence and normalization of household savings should drive demand for higher-return credit products. This will also be a better environment for banks to adjust prices upwards and compensate for the gradual increase in financing costs due to the Selic policy interest rate hike.”

Analysts point out, however, that a failure to improve the financial margin in the second half would undermine the profit forecasts for banks. Itaú BBA says this would fuel pessimists who argue that margin compression is more related to competition and regulation, and not so much to a lower Selic. “Brazil will enter phase two of open banking, probably increasing competition in the credit segment and casting long-term doubts if the recovery of spreads does not materialize. That is, if bank spreads do not improve with the growth of almost 6% of the GDP and a rate increase cycle of 4 percentage points, it will be more difficult to argue for a brighter future.”

“We have seen loans grow, but revenues, not so much,” Bruno D’Avilla, an analyst with Mauá Capital, said. “To be more optimistic about banks [stocks], revenue will need to grow more.” He expects a new round of portfolio expansion, with nonperforming loans still under control, below the pre-pandemic level, and that the level of provisions will fall. There will be great attention, therefore, on how the guidances will be for 2021 – whether there will be adjustment in these guidances or, at least, a change in the message about the prospect of meeting them.

XP analysts agree that higher stock prices of big banks in a “disruption” scenario caused by both regulatory interventions and increased competition are worrying. This assessment, coupled with the risks with open banking and more aggressive competition in the wholesale sector, led to a shift from optimistic to cautious. “While our recommendation for banks in June 2020 paid off, our hedging prices grew by an average of 26%, justifying a less optimistic view of the sector.”

For UBS, the financial margin should be almost stable in the comparison of the second with the third quarter, but with a better quality, that is, with a greater part formed by the margin with clients and a smaller portion of the financial results.

With portfolios growing strongly and margins relatively stable, the other focus is nonperforming loans. However, analysts point out that banks’ asset quality metrics should stay at low levels. UBS says Central Bank data showed a 0.2 percentage point increase in nonperforming loans in April and May. “Loans with more than 90 days in arrears should continue at a very low level, but with an uptrend, after ending the first quarter at 2.2%, only 0.05 percentage point above the historical low.”

Unlike what happened in the United States, where banks began to reverse provisions already in the first quarter, analysts do not believe in this possibility here. The expectation is that they will provision volumes below what goes into default, thus gradually consuming excess reserves. “Hedging began to fall in the first quarter of this year and this trend is expected to continue in the second,” says UBS.

Source: Valor international