Brazilian banks: getting attractive again

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Given all the concern over government intervention in Brazil’s economy recently, the following piece of news came as a pleasant surprise on Friday morning.

The Brazilian government has raised the maximum stake that foreign investors can hold in the country’s largest state-controlled bank, Banco do Brasil, to 30 per cent from 20 per cent previously. The limit was last raised from 12.5 percent in September 2009.

According to Banco do Brasil’s chief financial officer, Ivan Monteiro, the bank requested the change following a shift to the formula behind the country’s Bovespa index, which will weight companies by size rather than trading volumes.

This from Reuters:

The bank asked the government to raise the limit because it foresees greater demand for the shares after a rebalancing of Brazil’s benchmark Bovespa stock index in January, Chief Financial Officer Ivan Monteiro told Reuters on Friday, adding that the bank does not plan to ask for another increase in the limit.

A rebalancing of the Bovespa should give blue-chip firms such as Banco do Brasil a heavier weighting in the index, leading some institutional investors to increase their stake.

The move couldn’t have come at a better time, both for the bank and for investors.

The implementation of the Basel III capital rules has created yet another reason for the bank to want to strengthen its capital base. Analysts have also revised their recommendations on Brazil’s banks over recent weeks, advising investors to increase their holdings once again.

This from Santander:

After recommending caution with Brazilian banks for close to three years, we believe the sector is becoming attractive again…We expect a tapering of the policy of strong public sector loan growth, a policy that we believe has outlived its practical usefulness. This should allow private sector banks to get an increasing share of the admittedly slower loan growth in Brazil, allowing them to sustain low-double digit loan growth (at similar or faster aggregate rates than we saw over the past two years), as the brunt of the deceleration in loan growth in Brazil should accrue to public sector lenders. This change should have the collateral effect of improving industry spreads, particularly in consumer, SME, and working capital loans, allowing banks to post modest margin improvements over the next 12 months, a welcome break in the structural decline in NIMs in Brazil and alleviating pressure on ROEs for the industry.

Shares in Banco do Brasil is up 43 per cent over the past 12 months.

Related reading:
Brazil: is the worst in loan delinquencies over?, beyondbrics
Brazil credit boom: the end is NOT near, beyondbrics
Santander vs BBVA – a tale of two LatAm loan markets, beyondbrics
Banco do Brasil: borrower’s delight, beyondbrics

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