Brazilian Bank Stocks: Are They A Good Buy Now?

The Brazilian equity market entered the bear market territory recently. The IBovespa is down by 2.65% year-to-date. Banks have held up well compared to other Brazilian stocks listed on the US exchanges as shown in the table below.

CompanyTickerPrice on Dec 25, 2014Year-to-date change (%)Industry
GolGOL$5.4619.47%Travel & Leisure
EmbraerERJ$36.9514.82%Aerospace & Defense
BRF S.A.BRFS$23.4012.12%Food Producers
Itau UnibancoITUB$12.884.38%Banks
Banco BradescoBBD$13.074.31%Banks
Fibria CeluloseFBR$12.143.94%Forestry & Paper
Comp. Paranaense de Energia-COPELELP$13.543.04%Electricity
Banco BradescoBBDO$12.91-8.11%Banks
Telefonica BrasilVIV$17.59-8.48%Fixed Line Telecom.
CPFL EnergiaCPL$13.72-14.30%Electricity
Centrais Eletricas Brasileiras-EletrobrasEBR$2.19-15.44%Electricity
TIM ParticipacoesTSU$21.97-16.27%Mobile Telecom.
Banco Santander BrasilBSBR$5.02-17.70%Banks
Companhia Energetica de Minas Gerais-CEMIGCIG$4.93-17.70%Electricity
AMBEV S.AABEV$6.04-17.82%Beverages
Companhia Brasileira de Distribuicao-CBDCBD$36.47-18.36%Food &Drug Retailers
Centrais Eletricas Brasileiras-EletrobrasEBR$2.92-33.64%Electricity
Companhia Energetica de Minas Gerais-CEMIGCIG$5.13-37.44%Electricity
Petroleo Brasileiro-PetrobrasPBR$7.39-46.37%Oil & Gas Producers
Companhia Siderurgica Nacional-CSNSID$2.23-64.03%Indust.Metals&Mining

Source: BNY Mellon

Brazilian bank stocks may be attractive now for investors looking to gain exposure to Brazil. According to an article in Euromoney, banks in Brazil are offer strength to the economy and are performing better consider the economy is weak.

From the article:

Brazil’s banks have shrugged off the slow growth of their domestic economy and have been reporting strong growth despite macro-economic challenges.

The strong earnings season in Brazil’s banking system shows that the sector is ready to drive growth through renewed credit extension once the currency period of economic “re-adjustment” has been negotiated, Rubens Sardenberg, chief economist of Febraban, the banking association of Brazilian banks, told delegates to the Felaban conference in Medellin, Colombia in mid-November.

“The [Brazilian] banking system has tier-1 capital of 11% and core 1 and 2 combined of 12%: it is solid, capitalized and liquid despite the current challenges facing the economy,” said Sardenberg. “The banking system isn’t a source of weakness to the economy today, in fact it’s the opposite. It’s a potential strength, as a source of renewed growth through credit extension into the economy, once the readjustment comes and we start to have higher levels of growth again.”

In early November Itaú Unibanco’s third-quarter results showed the bank had its highest recurring return-on-equity (ROE) in nearly five years. The bank’s recurring profit was R$5.6 billion, with a 27.6% ROE, up 10% quarter-on-quarter. Adjusted net income hit R$5.3 billion, also up 10% quarter on quarter. Despite expectations of low growth this year (0.3%) and next (1.0%), according to a survey of 100 economists by the Brazilian Central Bank, Credit Suisse predicts earnings growth of 15% for the leading private and public banks. Profits have been buoyed by rising credit spreads as the country’s Selic rate goes through a further tightening cycle, with improving net interest margins.

Source: Brazil’s banks immune to struggling economy by Rob Dwyer, Dec 2014, Euromoney

Currently Itau Unibanco(ITUB) and Banco Bradesco(BBD) have dividend yields of 3.38% and 4.37% respectively.Banco Santander Brasil is a subsidiary of Spanish banking giant Banco Santander(SAN). The state-owned Banco do Brasil trades on the OTC market under the ticker BDORY and has declined 12.5% year-to-date.

Disclosure: Long BBD, ITUB and SAN

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