DTAs clear Brazil’s banks for take off
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DTAs clear Brazil’s banks for take off

A recent rule change means that Brazilian banks will be able to use tax credits related to provision expenses sooner – and the impact could be material.


There should be much for investors to like as Brazilian banks prepare for the reporting season, one that should show an increase in earnings momentum as they finish 2023.

Beyond the consensus for a buoyant 2024, there is a further uplift in 2025 that should provide another engine for growth – and one that analysts argue isn’t yet being priced in.

But first 2024. With the corporate default of Brazilian retailer Americanas having worked through the balance sheets of the large Brazilian banks – provisions made, losses written off – and the central bank in easing mode, the outlook for an improvement in defaults should benefit the banks’ credit portfolios.

The latest unemployment data also paints a rosy picture for the retail segment in Brazil, with December having the lowest print for nine years.

The change may sound dry and technical – and it is – but it could have a notable impact on banks’ capital and earnings

It will be interesting to see what guidance the banks give regarding non-performing loans (NPLs), but most analysts expect better credit quality to feed through into better profitability in the fourth quarter of 2023 – up around 30% from the same quarter in 2022.

That momentum should be sustained, with most banks’ management signalling that credit origination will pick up as risk appetite is whetted by the favourable credit environment.

There will be differentiation: Itaú and Banco do Brasil look set to report record earnings; Bradesco is under new leadership, as it attempts its long-awaited turnaround; and Santander Brazil should also be moving in the right direction.

Tax temptation

Investors tempted to go long on the sector might be additionally persuaded that the performance risk is to the upside thanks to a newly passed rule that governs the treatment of deferred tax assets (DTAs) from 2025.

Today, when Brazilian banks make provisions to cover delinquent loans, the tax authorities only recognize the tax shield from those losses when the bank ceases attempting to recover the loans, creating DTAs to be monetized after a long period.

These DTAs can represent 25% to 30% of Brazilian banks’ equity, and negatively impact profitability – as they are not remunerated – and weigh on their capital positions, increasing total risk-weighted loans (RWA)s.

The change means that, from April 2025, Brazilian banks will be able to use tax credits related to provision expenses sooner, materially reducing the creation of tax credits. In addition, the law establishes that existing DTAs can be consumed over 36 months.

The change may sound dry and technical – and it is – but it could have a notable impact on banks’ capital and earnings. A study by Citi, using the latest reported level of DTAs (3Q23), estimate the potential impact of deductibility on earnings going forward. The impacts are material. According to Citi, the new rules will boost Bradesco’s tier-1 capital by 77 basis points, Itaú’s by 47bp, Santander Brasil’s by 42bp and Banco do Brasil by 38bp.

The impact on earnings is similarly impressive, with Bradesco’s earnings in 2028 expected to be 11.5% higher simply due to the change in DTA treatment, when compared with 2024. Santander Brasil should see a 7.5% increase in earnings, while Itaú and Banco do Brasil will see a less dramatic, but still helpful, 5.0% and 4.3% uplift respectively.

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