Banco do Brasil strives to turn a corner
New management aims to rebuild core equity; attractive valuation if it avoids equity issuance.
The slow deterioration in state bank Banco do Brasil may be nearing an inflection point – much like the country’s wider economy. Tito Labarta, equity analyst at Deutsche Bank in New York, says that under new CEO Paulo Rogerio Caffarelli, who assumed control in May, the bank is showing small but important signs of recovery.
In August there were unconfirmed reports that it had mandated an investment bank to advise it on the sale of its stake in Argentina’s Banco Patagonia. The new focus on shedding non-core assets to rebuild regulatory capital also arguably led to its decision in October not to pursue its partnership with Banco Postal.
Labarta estimates that Bancodo Brasil’s 59% stake in Patagonia could boost the bank’s core tier-1 ratio by about 10 basis points from the current level of around 8.2%. Labarta upgraded the stock in August to ‘buy’. “It is starting to look like Banco do Brasil could potentially avoid issuing fresh equity, which has been the big concern of the market,” says Labarta.
“They seem to be managing that issue well and once there is more clarity about the credit cycle in Brazil then its valuation is supportive. The bank is still trading below book value and they have done some good work improving their capital and reducing risk weighted assets.”
However, Labarta’s caveat on the credit cycle is a big one. Although he believes Brazilian banks are near the bottom of the earnings cycle, saying, “we are close to a inflection point and banks can positively surprise as provisions begin to trend lower”, other analysts think risks remain skewed to the downside.
Credit Suisse believes that still-high leverage in the corporate sector remains a concern and may mean banks need to make higher-than-expected provisions. It estimates that ‘troubled large corporate debt’ accounts for more than 50% of all corporate debt (not including Petrobras).
“Brazilian banking system exposure to troubled debt has never been so high, estimated at R$434 billion, with only 19% provisioned, near the lowest coverage levels in 11 years and half of historical levels,” says Marcelo Telles, lead analyst in Credit Suisse’s report. “As a result the system’s equity has never been so exposed, with troubled corporate credit portfolio net of provisions accounting for 55% of the system’s aggregate equity, close to all-time highs and well above the 31% average.”
Labarta’s analysis is far from a consensus view. UBS, for its part, simply calls the bank “its least preferred [banking] name [in Brazil]”.