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It seems likely that we will look back on 2018 as the year that Bradesco finally turned itself around. The bank has long been outgunned across financial metrics by its larger competitor Itaú, but in recent quarters has also been surpassed by a resurgent Santander Brasil – at least in the crucial return on equity ratio.
But Bradesco’s management and analysts think this relegation should be temporary. The bank’s scale and, more importantly, its mix of businesses leave it positioned to outperform its competitors in 2019 if the Brazilian economy performs as positively as the consensus expects.
Third-quarter 2018 results back up this optimism. The bank’s earnings grew 6% during the quarter and 14% year on year, which was the strongest bottom line expansion among the large banks.
Following the announcement of the results, Bradesco’s president, Octavio de Lazari, predicted further growth next year.
“We have the appetite to continue to grow our credit portfolio and to grow a lot,” he said – though he declined to give any specific forecasts for either credit or earnings growth in 2019.
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| Octavio de Lazari |
Perhaps more importantly, the bank also had the best net interest margin versus non-performing loan performance ratio in the market, with core net interest income increasing by 4% while NPLs (90 days) fell by 30 basis points. In the bank’s critical small and medium-sized enterprise segment (to which it has a larger exposure than its competitors), it managed to cut NPLs by an impressive 74bp in the quarter – with corporate NPLs stubborn due to three specific large defaults.
The performance in SMEs is encouraging for the bank. The loan portfolio to this sector increased by 3.6% in the quarter (corporates by just 0.4% and the individuals segment by 1.8% quarter on quarter).
Bradesco’s overall loan portfolio is tilted more to the higher-returning segments than its competitors, which leads analysts to argue that it is best positioned to grow with the Brazilian economy.
BTG Pactual bank analyst, Eduardo Rosman, hailed the third quarter results as showing that the turnaround, “something investors have been waiting for some time”, has arrived.
“The big improvement in NPLs and particularly the better dynamics seen in the SME business line make us more positive on the prospects for the bank,” Rosman wrote in his third-quarter results report to clients. “In a scenario where Brazil’s GDP recovers, we tend to believe Bradesco’s ROE has room to expand and reduce the gap to its main competitor Itaú. It could also get back the number two ROE position recently lost to Santander.”
Bradesco’s ROE was 19.1% in the third quarter and Carlos Firetti, market relations director at Bradesco, thinks this level will more likely be a new floor rather than a peak.
“We believe we have reached a new level of ROEs and we still focus for expanding,” he says. “We believe that the economy, the improvement in the economy, the opportunities that will arise from it, with more loan growth, and also the maturity of many of our initiatives, will allow us to actually look for higher profitability levels.”
This outlook for profitability is one of the reasons that Credit Suisse’s bank analyst, Marcelo Telles, says Bradesco is his top pick among the privately held banks in Latin America.
He points to the strong performance in the bank’s insurance sector as a potential differentiator as Bradesco grows along with GDP. Net earnings in the insurance business grew by 11.6% year on year in the third quarter, despite a reduction in average premiums due to a soft insurance market. The strong performance is attributed largely to strong claims control.
The bank also demonstrates impressive cost control. Despite the quarter featuring the added costs from a collective bargaining agreement with its employees, total expenses rose by just 0.9% in the first nine months of the year.
Much of the cost control came from efficiencies generated by increasing digitization of the banking platforms. The bank expected to grow the customer base of its Next brand – a purely online bank – to 500,000 by the end of 2018.
This shift to digital enables rationalization of the more expensive physical branch network – Bradesco closed almost 50 branches in Brazil in the third quarter. It also continued to streamline other branches to lower operational costs.
The increase in loan origination both for individuals and for companies has continued to see strong growth. In the case of retail, Bradesco more than doubled the volume of loans taken via the internet, while in the corporate sector the bank has tripled volumes in the last two years.
There were some areas of weakness, such as fees generated by its investment bank, but that was in line with the industry.
