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A year of inflection
“Black Friday was by far the biggest we have ever seen in terms of sales, showing a strong retail performance and consumers’ confidence,” says Leandro De Miranda, executive director at Bradesco and head of investor relations. “Since August, we have seen a return in consumer confidence and appetite for credit. Firms are also beginning to talk more frequently and seriously about new investments.”
Official data backs this up too. Brazilian GDP surprised on the upside in the third quarter of 2019 – up 0.6%, which sent economists scrambling to upgrade their projections for 2019 and 2020; Bradesco’s forecast is for 2.5% in 2020.
This breeds optimism at the second-biggest bank in the country.
It lost its second place in the return on equity rankings to Santander Brasil when it recorded 19.2% in the third quarter of 2019 compared with Santander’s 21.2% (and Itaú’s 22.8%). However, Bradesco’s third-quarter operating income is still a long way ahead of Santander’s – at R$9.1 billion ($2.2 billion), compared with R$5.4 billion.
The bank’s management says that there are good grounds for this optimism. Bradesco has by far the most diverse footprint in the country. Its presence in 4,600 municipalities can’t be matched by state-owned Banco do Brasil or Itaú, which remains concentrated in the south and east. It also has more clients than Itaú: 71 million compared with 55 million.
In Brazil, this physical coverage still matters, especially in the poorer and more remote areas of the country. Banks need to have presence to build the account base, and with these regions expected to grow faster than the more mature (and bank-heavy) regions, Miranda is excited about the opportunity to grow both deposits and credit.
“Bradesco is more weighted to the economy than any other bank in Brazil,” he says. “If growth comes back at the speed we predict – and is spread throughout the segments and geographical areas that we expect – then 2020 should be a year of outperformance for Bradesco.”
But the real future is digital, right?
Bradesco has a pretty good answer for this too.
At the end of 2017, it launched a standalone digital bank, Next, which has been growing rapidly: an average of 8,000 new clients a day, to reach an expected two million by the end of 2019. Its digital bank model – where growth is the target rather than profitability – has been hard to capture in traditional bank valuations, so it often isn’t included in analyst reports.
Octavio de Lazari
That is probably why, when Euromoney visited the bank’s headquarters in July 2019 and spoke to Mauricio Minas, member of Bradesco’s board responsible for the bank’s digital operations, and Jeferson Honorato, director of Next, they predicted that Next would either be spun off through an IPO or joint venture in 2020. That would likely give Bradesco’s share price a lift.
The bank has also been reconfiguring areas of weakness. In March 2019, Octavio de Lazari, chief executive of Bradesco since March 2018, outlined to Euromoney the areas for improvement and his revamping of senior management.
One area that needed attention was private banking; in May 2019 the bank announced the $500 million acquisition of BAC Florida to improve its offshore services offering.
Lazari also detailed his strategy to implement variable rewards incentives to encourage cross-selling, including in the bank’s insurance division.
The bank is also looking to reassure investors that it isn’t just reliant on growth, but has control of costs too; in 2019 it announced the closure of 150 branches, with 300 more planned for 2020.
However, the new rewards system has led to an immediate increase in costs. Despite record quarterly net profits in the second quarter of 2019, the bank’s shares underperformed the sector as analysts highlighted those increases, with operating expenditure growing by 6% year on year in Q2 (and 10% year on year in third quarter of 2019), as well as slack fee income growth at around 2% year on year (this improved to 4% in the third quarter).
And so the message from Lazari at the August investor day in Rio was the same as Miranda’s at the start of 2020: Brazil is entering a powerful cycle that will play to Bradesco’s built-in strengths.
For now, the market seems to be giving the bank a cautious pass. No one seems to doubt that Brazil is entering a new credit cycle or that Bradesco is particularly well suited to take advantage of it. The question is: will the cycle be strong enough to offset increased costs, lower fees and a falling net interest margin environment?