June 1, 2023
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BB (BBAS3) is higher, and Santander (SANB11) is lower: Analysts review the recommendations of “banks” after the balance sheets

The earnings season for large banks was important to further define market preferences with respect to these financial institutions.

After the results were published, Bradesco BBI raised the recommendation regarding Banco do Brasil shares (BAAS3), while Itaú BBA reinforced its preference for stocks within the sector and raised its target price for the assets. BBA, in turn, shortly after disclosing the balance sheet for Santander, lowered its stock recommendation.

Bank of America, in turn, highlighted the positive outlook for the sector in general, but lowered the target prices for the four largest banks listed on the Brazilian Stock Exchange, including Bradesco (BBDC4) and Itaú (ITUB4).

BBI raised its target price for Banco do Brasil shares from neutral to outperform (performance above market average, equivalent to buying), and also raised its target price for the asset from R$40 to R$45, or a potential uptick of 25.3% with respect to By the end of Wednesday (18).

For analysts Gustavo Schroden, Otavio Tanganelli and Eric Ito, the first quarter of 2022 provided a positive outlook for the year, when the bank should be able to maintain a low cost of risk, due to its defensive portfolio which has lower exposure to individuals in comparison with its peers. The bank’s net brokerage income is expected to improve as interest rates rise, leading to faster dividend expansion in 2022 and 2023.

In addition, they note that Banco do Brasil has one of the highest levels of CET-1 capital (the best-quality Basel index, indicating liquidity buffers) among large banks, which may support faster growth in loans offered.

The 2022 recurring net income estimated by Bradesco BBI of R$26.5 billion indicates a 26% growth in annual variance, 10% higher than the Bloomberg consensus. As a result, they indicated that Banco do Brasil should deliver a return on equity (ROE) of 17.5% in 2022 and 17.3% in 2023 (up from 15.8% in 2021). Thus, it will reduce the gap with its private peers to about 2 percentage points, compared to about 4 points in 2021.

With the earnings profile and return on equity clearly improving, analysts see Banco do Brasil’s current valuation as
Unfairly discounted, it is trading at multiples of 3.8 times its estimated price/earnings (P/E) ratio for 2022. That means a discount of 40% over its historical average and about 60% of its private peers.

Itaú BBA in turn raised its target price for BBAS3 shares from R$42 to R$47 (31% upside potential) and confirmed that BB is a better choice in the banking sector.

Net income estimate has been raised to R$27 billion, implying nearly 30% year-over-year growth and well above the upper end of the bank’s guidance range of R$23-26 billion. This stems from better credit quality and NII, as well as strict spending control.

“We expect such outperformance growth, consistency, and equity earnings of 17% for fiscal 2022 to close out the massive discount of around 50% of stocks currently trading against its peers.”

Read also: Bank defaults are rising and approaching the pre-pandemic level, but with a different impact between institutions

Analysts point out that BB’s Market’s NII Index has proven to be the most anticipated in the sector with the majority of it being floating rate bonds (eg government and corporate securities). Therefore, we estimate that the consolidated BB’s NII should increase by at least 15% year on year. This is twice as fast as compared to Santander and Bradesco, whose top customer NII has been compensated for by NII’s weakness in the market,” they noted.

On the other hand, at the end of last month, BBA lowered the Santander SANB11 unit recommendation from “neutral” (performance in line with the market average) for sale, lowering the target price from R$39.50 to R$31 (6%) lower than the previous day. to close).

“We estimate that the institution is entering a period of high delinquency, which is reversing it
Faster results than expected. Although the bank’s long-term history remains strong, we would prefer to avoid it for now,” noted Pedro Leduc and William Barangard, analysts at the bank.

For them, the pleasant first half results will likely be the strongest of the year. “We estimate that the provisions for losses and operating expenses should continue to grow, outpacing the increase in net revenue. Given this movement, we have reduced our estimate of net income for 2022 by 5% to R$14.7 billion, which means a return on equity of R$14.7 billion. 18.5%, buoyed by its low-cost business and high fees,” analysts assess.

Expectations for the default rate and provisioning expense worsened by 6% to R$20.6 billion, with a cost of risk of 4%. They noted that the retail debt default rate has already returned to pre-pandemic levels and short-term indicators point to increased default pressure at the beginning of the second quarter of 2022. They expect Santander to end the year with a non-performing loan rate of 3.6%, higher than the rate Pre-pandemic that is close to 3%, given the more risky product mix.

The overall coverage ratio (which measures the provisioning reserve on a bank’s balance sheet) of 215% is close to the historical average of about 200%, and should not be reconciled with the accelerating default rate. “Therefore, we expect results to worsen over the coming quarters,” they assess.

Trends to watch

Meanwhile, Bank of America cut target prices for shares of all major banks following the results, emphasizing the overall positive outlook for the sector. SANB11’s goal went from R$38 to R$37 (a 12% increase); From Itai, it rose from R$32 to R$30 (a rise of 20.5%); Bradesco, from R$25 to R$23 (up 17.6%); Banco do Brasil, from R$50 to R$46 (28% increase). Santander also considers the stock the “least favourite”: a neutral recommendation for SANB11 and a buy for others.

The positive outlook for the sector is based on “strong revenue generation prospects, based on an environment of high fees and attractive valuations”. Bank of America continues to monitor asset quality trends in the face of inflation pressures, high consumer indebtedness and weak macroeconomic trends, “although higher reserve coverage ratios give us some comfort that banks are prepared to face continued deterioration, and to return to pre-Covid levels.”

UBS BB also continued to have a positive outlook on Brazilian banks after the end of the balance sheet season. In the first three months of the year, analysts noted that earnings were in line with market expectations, with the exception of Santander, which was 3% higher than forecast but 0.2% lower than forecast.

Analysts confirm a preference for PN shares in Bradesco and Itaú, with a buy recommendation and related targets of R$25 (28% upside) and R$30 (20.5% up).

Thus, after the results, BB’s preference gained space, while Santander Brasil was seen with more reservations among analysts, while Itaú and Bradesco seemed to share preferences.

Credit Suisse, following the corporate balance sheet, reiterated the outperformance recommendation (performance above market average) with a target price of R$45 for BB, a 25.3% upside potential over the previous day’s close, and valuing the stock remains one of the top options. The bank is in this sector, along with Itaú (whose stake has a target price of R$32, or a potential appreciation of 28%). “We see the Bank of Brazil has the largest valuation disparity within the sector in Brazil, especially given the strong increase in profits,” their assessment said. For BBDC4, the recommendation also outperforms, with a target price of R$24 (or 23% higher) while, for Santander Brasil, the bid is neutral, though the target is R$42 (or a potential upside of 28.5%). . ).

XP analysts also reiterate that BBAS3 is the top pick for the sector after the balance sheet, with a buy recommendation with a target price of R$52 (45% up) while, for SANB11, the recommendation is a sell, with a target price of R$36 (or upside potential of R$36). 9%). For Itaú and Bradesco, the recommendation is neutral, with relevant target prices of R$28 (12.5% ​​up) and R$26 (up 33%).

Check out the recommendations for banking procedures, according to a compilation by Refinitiv:

company ribbon Purchase Recommendations impartial recommendations Sales recommendations average target price upside down*
Bank of Brazil BAAS3 13 1 0 47.78 Brazilian Real 33%
Bradesco BBDC4 12 3 0 25.18 Brazilian Real 29%
Itau ITUB4 10 5 0 30.78 Brazilian Real 24%
Santander San B 11 4 9 two 40.37 Brazilian Real 22%

* Regarding last Wednesday’s closing (18)

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