Bradesco – Brazil’s second largest bank – is used to playing second fiddle in terms of size and financial metrics to rival Itaú. However, in 2021, it was pushed into third place in terms of private sector return on equity (ROE), with 15.2% compared to Santander Brasil’s 18.9% and Itau’s 17.33%.
That has got to hurt.
Add in to the mix a resurgent Banco do Brasil with 15.7% ROE, which, according to consultancy Economatica, now puts Bradesco at lowly fourth spot. Bradesco faces a deep strategic challenge.
Analysts tend to focus on what the bank should do with its digital bank Next, a platform that Bradesco is deliberately building as a standalone from the main bank. The presumption is that a spin-off would release fintech-like valuations for the parent, though it would complicate the long-term capitalization of this customer base.
Insurance business
However, a more pressing question is being asked of its insurance business. Bradesco has long touted its outsized insurance business as a differentiator in the market and one that will, in the longer term as insurance purchasing becomes a greater part of the country’s financial services industry, drive better performance.
But the recent acquisition of health insurer SulAmérica by Rede D’Or presents a tactical challenge to Bradesco. The company is highly dependent on Rede D’Or hospitals, which account for almost 20% of its health insurance business’s hospital visits.
Rede D’Or has, therefore, not only gained scale with the acquisition of SulAmérica but also bargaining power in negotiations with Bradesco’s health insurance business.
Bradesco faces a choice: pursue vertical integration in the healthcare sector to protect itself from margin squeeze, or cash out
Essentially, Bradesco faces a choice: pursue vertical integration in the healthcare sector to protect itself from margin squeeze or cash out. Instinctively, Bradesco will likely want to twist – potentially by adding to its 25% stake in diagnostics and hospital company Fleury, or it could enter into negotiations with United Health (rumoured to be a motivated seller) to buy Amil.
However, in the cold light of day it might be tempting for Bradesco to consider an exit. Bank of America estimates that Bradesco’s health plan area is worth R$18 billion, using a profit projection of R$1.2 billion this year and using the same multiple that Rede D’Or paid for SulAmérica (15 times the price/earnings). And while this business accounts for only 4% of Bradesco’s profit, this amount of R$18 billion would be almost 10% of the bank’s market capitalization.
Bradesco has been talking up the potential of its health insurance business for years. But it may be that cashing out and refocusing on its core financial lines might be too tempting a short-run win to pass up.
