Banco do Brasil’s second quarter results led to an exclamation of shocked surprise from one Santander analyst, whose report carried the headline: ‘BBAS3 porrada!’ Depending on your translation of Brazilian slang, this may or may not be a palavrao (swear word) – a surprisingly complicated question, judging from the opinions of the Brazilians I polled on the subject – but it refers to a fight, or brawl.
What’s surely more certain is that the state bank’s surprising set of results will have turned the air blue at Bradesco. It’s one thing for Santander Brasil to have knocked Bradesco out of the top two Brazilian banks by profitability. It is quite another for state-run Banco do Brasil to report significantly superior return on equity (ROE): 20.6% when compared to Bradesco’s 18.1%.
And no-one saw it coming. Yes, Euromoney has been tracking the clear improvement in Banco do Brasil’s performance in recent years, awarding the institution the award for best banking transformation in Latin America in 2019. Recently, the steady improvement in cost management, which continued in the latest quarter, with expenses rising at a below-inflation annualized rate of 5.7%, has also attracted attention. But when Banco do Brasil announced second quarter profits of R$7.8 billion ($1.5 billion), that was 25% higher than the market’s consensus and above that of even the most optimistic forecast.
And that ROE of 20.6%? The best in 10 years. Banco do Brasil’s management team also upgraded its profit guidance for the year from between R$23 billion and R$26 billion to between R$27 billion and R$30 billion, which emphasized this is a sustainable momentum story – and not some accounting-driven short-term improvement.
If Bradesco’s management team wasn’t feeling the pressure prior to Banco do Brasil’s results, then it certainly will do now
Unsurprisingly, the market loved the result, and the stock jumped by 5% in early trading. Even though the share price had already risen by around 45% in 2022, it still trades at just 4x estimated earnings, compared to 7x for Bradesco, 7.5x for Santander Brasil and Itau at 8x.
If Bradesco’s management team wasn’t feeling the pressure prior to Banco do Brasil’s results, then it certainly will do now. The bank is in fourth place in the profitability league table, and seemingly unable to get back above the 20% ROE level that is expected of large Brazilian banks. There are now serious questions for Bradesco’s CEO Octavio de Lazari to answer.
Long-standing questions remain over Bradesco’s differentiated digital strategy and there will likely now be renewed scrutiny of the bank’s decision to create a standalone digital bank (Next) rather than develop integrated digital accounts within its traditional bank.
Given Bradesco’s broader physical footprint than its competitors, the decision to create an entirely new entity seems to have been driven by a desire to minimize cannibalization – as well as a reflection of management’s belief that digital banks operating within traditional banks don’t crystallize the same kind of valuations as pure digital entities.
Both these assumptions now look increasingly questionable. Not only has Itaú grown its Iti accounts to over 10 million clients – with less than 10% of those accounts being created by existing customers – but the valuations and multiples of digital banks have been falling while the market has become better at recognizing digital assets growing within incumbents.
Potential for friction
Maybe Bradesco’s real challenge isn’t strategy but culture. It’s hard, if not impossible, to gauge the real impact of its undeniably unique culture on its performance, but on the surface there is certainly the potential for friction. Traditionally, the bank is reluctant to recruit from mid-level and higher management elsewhere, preferring a model of recruiting junior bankers and promoting from within.
I remember the excitement that the acquisition of HSBC created within Bradesco – not so much about the acquisition of new clients, but of fresh banking talent. Is it a coincidence, private bankers at competing banks muse, that Bradesco’s private bank is led by Augusto ‘Guto’ Miranda, previously of HSBC?
Bradesco’s competitors have long said that the bank’s staffing culture and strategy have made it slower to adapt. After 12 years in Brazil, I have noticed the turnover of my contacts within Bradesco is noticeably lower than at other banks, but it is hard to quantify the linkage between culture and performance. Banco do Brasil’s recent performance has, however, served to reinforce the impression that the bank is stuck in the slow lane. The questions for those behind the wheel are likely to become increasingly uncomfortable.
