March 30, 2023

Santander is disappointed by a sliver of Americana

The bombshell from Americana is starting to show up on banks’ balance sheets, with Santander Brasil providing 30% of its exposure and reporting a result well below market estimates.

Net income for the fourth quarter was R$1.7 billion, below consensus by 38% and down 56% year-over-year.

With earnings waning, return on equity fell from 15.3% in the third quarter to 8.3% at the end of December. To give you an idea, Goldman Sachs expects a return on equity of 13.4% and JPMorgan is 14.3%.

For one analyst, the company’s recurring ROE should have been lower, since Santander took advantage of the tax credit this quarter.

“If we apply Santander’s average effective interest rate, which is about 35%, the profit would be R$1 billion, which is a return on equity of about 5%,” he said.

Santander also saw its gross interest margin drop by 0.6%, and its net interest margin (after provisions) fell by 19.3%. Services revenue grew just 2%, while operating expenses increased 7%.

Bad debts rose slightly, with 15-day non-performing debts up 0.2 percentage point and 90-day non-performing loans up 0.1 percentage point.

Without giving details on the matter, Santander hinted that it filed Americana status at Level E, which requires an appropriation of 30% credit.

For analysts, when the company filed for bankruptcy, the minimum savings it should have been was 50%, but banks are offering much more than that, around 70%.

“They did it so as not to impact too much in the quarter. But what is expected is that in the first quarter they provide another 40% of that exposure of R$3.5 billion,” said one analyst.

As the first bank to report, Santander is setting the tone for what other banks should do in the coming weeks — starting provisioning for Americana as early as the fourth quarter — but in some of them provisions are likely to be higher than 30%.

In addition to the Americana influence, Santander’s score also had other problems. The financial margin decreased in part due to the asset-liability mismatch strategy adopted by the Bank between 2020 and 2021.

With Selic very low in those years, the bank took a lot financing Fixed interest rates, with credit granted at fixed rates. While Selic was down, Santander made money with the strategy — but when the interest rate went up, the score turned around.

“They did too hedge of capital in the IPCA and not in the CDI. “Because we’ve had periods of deflation, this has hurt the Treasury score,” said one analyst.

On a call with the market earlier today, CEO Mario Liao said the new crops are coming in “better than the ones we were producing three or four quarters ago.”

“We have to understand that the market is cyclical,” said Mario. “We run the bank by cycles, not for this quarter or the next. Today, the cycle is generating pressure on revenue, but we are working to improve risk quality.”

Since the end of 2021, according to him, Santander has been more selective in terms of its risk appetite and rating of new crops.

Despite the improvement in portfolio quality, the risk It hurts the net financial margin, while losses on provisions continue to trend upwards, which should continue to pressure ROE in 2023,” wrote BTG’s Eduardo Rosman.

“Because of this policy being more selective and more focused on secured lines of credit and fewer working days, the average loan margin decreased by 0.52 points to 10.2%.”

With the weak result, BTG downgraded Santander to “sell,” saying that “after years of strong growth, the bank now appears to be “paying the bills.”

Santander is trading at 7.5 times its estimated earnings for next year and 1.1 times its book value.

Santander share prices fluctuated between highs and lows this morning. At about 1 p.m., the newspaper was up 0.7%.

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Santander comes in well below expectations and is putting pressure on other banks

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