XP updated its coverage for the banking sector, highlighting that, despite the still challenging macroeconomic scenario, it does not see so many impacts on the balance sheets of large financial institutions.
“Despite concerns about potential temporary increases in default for individuals, we see limited impact on the incumbent banks’ results as they have healthy coverage ratios and there is still room to expand their Net Interest Margin, thus limiting pressure on earnings. liquid”, evaluate analysts Renan Manda and Matheus Guimarães
Banco do Brasil (BBAS3) continues to be the top pick, with a buy recommendation, with a target price of R$57, largely due to a more defensive (and protected) portfolio against possible increases in delinquency.
Itaú (ITUB4), with a target price of R$31, also started to have a buy recommendation for the house, as analysts see that its portfolio is well positioned to grow, keeping delinquency under control.
The analysis team sees the competition gradually evolving over the next few years as fintechs mature in both size and product/service diversity. Meanwhile, the large banks in Brazil appear in a position to protect their market share, although in some cases there is some reduction in profitability.
Analysts also point out that, in general, Brazilian bank shares have outperformed the Ibovespa this year (with an average increase of 13% versus the Ibovespa’s fall), but there are still opportunities in the sector, especially BB and Itaú.
Manda and Guimarães see the state-owned bank trading at an excessively discounted valuation relative to peers. For ITUB4, it sees room for appreciation, mainly due to its industry-leading profitability and solid operating performance, despite its valuation premium over competitors (7.6 times the price-to-earnings multiple expected for 2022, versus 7 .3 to 7.7 times the pairs).
For Bradesco (BBDC4), the recommendation remains neutral (target price of R$ 22), while for Santander Brasil (SANB11) it is for sale, with a target of R$ 32, according to the analysts’ report.
Check below the XP table of recommendations for large Brazilian banks:
Regarding Bradesco’s thesis, although he believes that the bank’s operations are prepared to face macroeconomic challenges in the short term without significant impacts on its results, he sees limited appreciation potential for the stock.
Analysts also point out that, despite having greater exposure to loans from large corporations, Bradesco is one of the largest retail banks in Brazil and has been gradually increasing its exposure to consumer credit lines. The higher spread on these loans should benefit margin growth going forward, but these lines also have a higher risk profile and could lead the bank to increase provisioning.
In addition to Bradesco’s banking operations, the bank is also one of the largest insurance companies in Brazil. Although it contributes around 10% of its operating income, the insurance segment currently accounts for 23% of net income (reaching peaks above 30% in the past). “We believe the recent lower contribution was largely due to a momentary drop in pandemic-related profitability and a greater contribution from its banking operations. That said, we expect their insurance results to gradually improve in the future.”
Regarding Santander Brasil, the most negative view, leading to a sell recommendation, is due to: (i) a more restrictive approach to credit origination, with the portfolio growing less than its peers; (ii) lower coverage ratio (which represents the proportion in which the provision for credit risk is able to cover non-performing loans) among large Brazilian banks; (iii) lower tariff revenues.
Among the large Brazilian banks, Santander is the laggard in terms of fee income. In addition, in 1Q22 the
Santander presented below-average year-on-year growth (up 5.7% versus 6.6%). While fee-based businesses are under attack from fintechs, banks have been able to fend for themselves to keep this revenue profitable. “We see rates as crucial to maintain the pace of growth in net income”, assess the analysts.
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