Brazil slowdown to hamper recovery of bank shares

07 Nov, 2011

Investors who bet on a strong recovery in Brazilian bank shares by the end of the year may have to wait a little longer as the nation's slowing economy drags on profits and operational performance. The nation's four biggest listed banks reported weak lending and revenue in the third quarter, with net income boosted by one-time items including tax credits, asset sales and trading-related gains.
Third-quarter results came in stark contrast to those of past quarters when lenders unveiled solid loan growth, rising interest income and slower expense growth despite mild rises in consumer and corporate loan defaults.
Analysts spotted a deterioration in the quality of banks' earnings in the quarter - casting doubts over profit trends in one of Brazil's most profitable sectors. From now on, investors are likely to pay less attention to lenders' net income and focus on subtler indicators such as net interest margins, bad loan provisions and performance by segment.
"Earnings in the prior quarter came below the level that we would call normal for these banks," said Maclovio Pina, a senior banking analyst with Chicago-based Morningstar Inc. "These banks are facing some headwinds, which will limit their ability to present numbers of better quality."
The MSCI Brazil Large Financials Index, a gauge of market sentiment for the nation's biggest banks, has shed 5.2 percent since late October, when Banco Bradesco reported that large provisions for bad loans had put the brakes on third-quarter profit.
Pina said he is worried that earnings will soon begin to feel the pinch of Brazil's slowing economy, which could in turn hurt asset quality and pare back credit growth. The central bank's decision to lower interest rates to revive growth will crimp interest income and make fundraising tougher.
"The economic situation is finally taking its toll on banking earnings," said Joao Augusto de Frota Salles, an analyst with banking industry consultancy firm Riskbank.

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