Santander Brasil begins to win converts to its turnaround story
Credit Suisse switches to outperform rating; Santander expected to quickly close the profitability gap with its peers.
|Santander Brasil’s CFO Angel Santodomingo
Credit Suisse believes 2017 will be seen as “a defining year” in the history of Santander Brasil.
Marcelo Telles, the Swiss bank’s equity analyst for the Brazil-listed bank, believes the perennially underperforming bank is achieving a strategic turnaround – and he expects that to feed into improving results this year and next.
“We remain confident with our bullish stance on Santander Brasil’s earnings outlook and the bank’s ability to finally narrow the profitability gap to private sector peers, mainly on the back of NII [net interest income] and fee revenue growth and revamped credit risk policies,” writes Telles in client report.
In an interview for Euromoney’s March issue, Santander Brasil’s CFO Angel Santodomingo outlined the bank’s multi-year turnaround strategy. That turnaround has been translating into stronger results – the bank has reported an increase in net profits in 11 of the past 12 quarters, with the rogue quarterly fall down to an impairment from provisioning.
“We identified where we had gaps in terms of products and we went out and either found good partners or we did acquisitions,” he said. “At the end of the day you need to acknowledge where you need help.”
The main additions were the 2014 acquisition of card payment processor Getnet, the acquisition of 60% of Banco Bonsucesso Consignado (payroll loans) in the same year and digital banking platform ContaSuper in 2016.
According to the bank, Getnet has been particularly important: it leads the market in terms of transaction processing speed – two days compared with the competition, which can take more than a week. This has been an effective spearhead to win new corporate clients: Getnet’s market share is now 10%, up from “almost scratch”, and Santodomingo expects it will reach 14% in the short term.
However, many analysts still don’t see the strong and consistent growth from Santander Brasil as the start of a change in the bank’s fortunes. Telles acknowledges his forecasts are “well above consensus” and predicts an increase of earnings of 28.1% for 2017 and 27.6% for 2018.
The improvement in asset quality over the past years is remarkable, going from the worst to one of the top performers - Marcelo Telles, Credit Suisse
Telles believes the discrepancy between his forecasts and that of his peers is because “the Street is underestimating the positive impact of the renewed strategy under the new leadership [which will] become clear already in 2017, when we expect ROE to improve from 11.6% in 2016 to 17.3%.”
In March, Euromoney identified that “Santander Brasil is the momentum story in a tough market” – with a strong valuation level the main challenge for investors looking to gain exposure to the turnaround story.
However, the bank’s stock price has fallen by 22% in the past 30 days. Telles argues this price fall is “the missing piece” for a compelling investment case.
Telles has a target price of R$30 ($9.65) – he trimmed it from R$32 for technical liquidity reasons when a major shareholder sold a block of shares in April – compared with its market price of around R$25, which he says means the bank is trading at 8.8-times 12-month forward price-to-earnings ratio and 1.5-times book value.
That, he deems “attractive in light of its 22.4% 2016-2019 CAGR [compound annual growth rate] and sustainable ROE of 19.4%, with an annual dividend yield of 9.4% for 2017-2018.”
Other banks are much less bullish. Local banks have significantly lower target prices: Brasil Plural at R$18.30, Bradesco at R$19.00 and Itaú at R$23.30. Credit Suisse is also the highest of all the international banks, with the data on Santander Brasil’s website stating the next highest target price is Citigroup, with its analyst Jorg Friedemann targeting R$23.00.
It will be interesting to see if the other analysts will begin to see the improving results as part of a fundamental shift of a turnaround story and move towards Telles.
For example, the bank has the highest NII growth among the Brazilian banks – which will be further boosted this year by a lower cost of funding due to the monetary easing cycle, as the bank does not fully hedge its loan/deposit mismatch, unlike Itaú, for example.
Telles also believes the bank’s improvement in asset quality has room to run, saying: “Santander Brasil’s asset quality metrics remained healthy throughout this credit cycle, with NPL [non-performing loan] formation decreasing 60 basis points in 2016.
“In our view, recent asset quality performance suggests that Santander is still bearing fruit from its de-risking efforts. The improvement in asset quality over the past years is remarkable, going from the worst to one of the top performers – and with solid NPL coverage.”
In March, Santodomingo also told Euromoney that the bank is benefiting from the Brazilian market, which has moved in the bank’s favour. The exit of HSBC and Citi has seen Santander Brasil as the last international bank in the region, despite its local listing.
“We have the luck that we are now the only international bank in Brazil and that opens a lot of doors that are not open to our peers,” he said, adding that the bank had seen a notable increase in revenues from intermediating trade and investment between China and Brazil.