As the outlook for economic growth in Brazil cools, banks that kept the quality of their loans sound in the second quarter are likely to see their shares rebound faster than those of rivals grappling with rising loan delinquencies. Second-quarter results reported by the banks laid bare diverging performances that eased a share slump for some and deepened it for others.
A rise in delinquencies and new household surveys signalling high indebtedness and debt-servicing expenses indicate that once-insatiable borrowers are nearing their limit for debt. In turn, cost and credit risk controls are gaining importance among investors over lending or profit growth.
Brazil's banking industry has long ranked among the world's most profitable. However, worries about accelerating inflation and a credit downturn in Latin America's biggest economy sparked a 23 percent drop in bank stocks this year, gauged by the MSCI Brazil Large Financials Index.
"Bank stocks performance will continue to be influenced by upcoming inflation data and asset quality indicators," said Marcelo Telles, a senior banking analyst with Credit Suisse Group in Sao Paulo. Analysts continue to bet on a gradual rise in defaults to historical averages. Loan delinquencies in Brazil have been below average since 2005, according to Credit Suisse.
Results at state-controlled Banco do Brasil and Banco Bradesco showed a mix of rising profits, stable or declining defaults and steady market share. Shares of both lenders rose after the results, proving investors' attraction to prudent growth stories.
In contrast, market darling Itau Unibanco and smaller rival Banco Santander Brasil posted disappointing results as expenses and provisions rose sharply, profit indicators weakened and the banks gave less-than-optimistic outlooks for delinquencies in their own loan books.
"Earnings surprises could help stock performance in a sector where the relation between risk and returns is not attractive at the moment," Allan Hadid, who as chief executive helps oversee $2.5 billion in assets for BRZ Investimentos in Sao Paulo, said in a recent interview. Some 4.5 percent of loans were delinquent more than 90 days at Itau Unibanco in the second quarter, up from 4.2 percent in the first quarter but down from 4.6 percent a year earlier. In the case of Bradesco, the ratio rose by 10 basis points to 3.7 percent in the period.
Defaults at Banco do Brasil, Brazil's biggest lender by assets, sank to 2 percent of total loans from 2.7 percent a year earlier. "The trend is that loan delinquencies remain for us at current levels through the second half" of the year, Banco do Brasil Chief Executive Aldemir Bendine said after unveiling the results.
As a result, investors who in the past were willing to pay a premium for Itau Unibanco's stock versus Bradesco's and Banco do Brasil's are changing their minds.
Itau Unibanco shares, Brazil's most widely traded financial stock, have fallen nearly 32 percent this year. Bradesco's have dropped 18 percent, while Banco do Brasil's have declined 21 percent in the period. Executives at Itau Unibanco, Brazil's largest private-sector bank, plan to rein in expenses and fine-tune lending policies for risky borrowers to ease profit worries that have pressured its shares close to two-year lows.
Nonperforming loans could increase by as much as 0.3 percentage points by year-end, but the bank will try to take provisions for bad loans at a slower pace to avoid hampering earnings, the executives have said. For the coming quarters, investors will shift focus from credit quality to signs of strain in the lenders' capital base. The implementation of Basel III rules for banks could become a driver for shares because it could trigger potential stock and bond sales to replenish their capital base, say analysts, including Victor Galliano of HSBC Securities.
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