Brazil’s favorite banks in the run-up to the second quarter balance sheets

If the accounting season of the large Brazilian banks were a race, we could say that the “athletes” arrive in the second quarter of 2022 in a condition very similar to the previous period.

According to analysts, the expectation is that individuals’ default will continue its escalation, affecting the banks’ credit portfolio growth. On the other hand, rising interest rates favor the institutions’ results.

Amidst this scenario, the positive and negative highlights should be the same as in the first quarter, with Banco do Brasil (BBAS3) and Itaú Unibanco (ITUB4) leading the way. Meanwhile, Bradesco (BBDC4) and Santander Brasil (SANB11) should stumble with a sharper worsening in defaults than their competitors.

As usual, Santander is the first to open the annual report season, releasing its results on July 28, before the market opens.

Next week, Bradesco publishes its balance sheet on August 4, and Itaú and Banco do Brasil release their numbers on August 8 and 10, respectively.

FINANCIAL SECTOR GIVES BACK GAINS

After showing a rebound in the stock market from March on, the financial sector at B3 has already given back almost all of its gains at the beginning of the year’s second half.

The IFNC, B3’s financial index, is at the same level as in early January. But the performance of the big banks on the stock exchange reinforces analysts’ expectations for the second quarter figures.

Banco do Brasil (BBAS3) detached from the others after the publication of the first balance sheet in May. Santander (SANB11) has a much weaker performance.

DELINQUENCY: THE STONE IN THE BANKS’ SHOES

Although the shares of the major banks continue with a buy recommendation by most analysts, the increase in delinquency has turned on a yellow light and should continue to be the main source of concern until the end of the year.

That is because the rise in inflation and, consequently, in interest rates are eroding the purchasing power of Brazilians. It has been reflected in the constant increase of defaults by individuals and micro and small companies.

According to Serasa Experian, Brazil’s number of people with their names in the red hit a record high in the historical series, reaching 66.1 million. At the same time, defaults by micro and small companies exceeded 5.5 million enterprises.

The corrosion of Brazilians’ income was evident in the first quarter results of the big banks, with all of them showing an increase in debts overdue for more than 90 days.

And it looks like history will likely repeat itself in the second quarter. Read below what to expect for the results of Santander, Bradesco, Itaú, and Banco do Brasil.

SANTANDER (SANB11)

• Balance sheet date: July 28 (before the opening)
• Projected Profit for Q2 2022: R$3.96 billion (US$741 million) (-4.98% vs. Q2 2021)*

As far as analysts are concerned, Santander should continue to be the least recommended paper to buy.

Among the banks, Santander was the one that showed the sharpest worsening in defaults in the first quarter. Debts overdue for more than 90 days rose from 2.1% to 2.9% compared to the same period last year.

Segmenting the analysis to individuals’ delinquency, the increasing pace was even stronger. It reached 4%, returning to the levels of March 2020, the beginning of the pandemic.

“Delinquencies should continue to deteriorate, albeit at a slower pace than in previous quarters, but still putting pressure on provision spending,” said Bank of America (BofA).

In a survey of investors, BofA found that most respondents (78%) expect Santander to have the worst results among the big banks.

As if this were not enough, Santander also suffered a “blackout” on the eve of the release of the results. All the bank’s services were offline for almost the whole day on Monday, July 25, from the application to the branches.

The bank reported later that the systems had been restored but did not provide details about what caused the outage. It is certainly a point that will be addressed in the results teleconference.

BRADESCO (BBDC4)

• Balance sheet date: August 4 (after closing)
• Projected profit for Q2 2022: R$6.77 billion (US$1.3 billion) (+7.5% vs. Q2 2021)*

Bradesco comes to release the 2Q22 results with expectations that profit will grow compared to the same period last year.

But analysts were left with one foot back with the bank after the first quarter results when defaults grew more than expected.

According to Goldman Sachs, profit should be impacted by a reduction in net interest income in the market.

The downward trend in default rates should continue, driven mainly by individual clients.

Since Bradesco is a retail client, it usually has greater difficulties dealing with inflation’s impacts and high interest rates, as does Santander.

On the other hand, any surprise for the better in the numbers of Brazil’s second-largest private company should boost BBDC4 shares, which have fallen behind in recent months.

After the first quarter results, the score of analysts covering Bradesco went from 17 to 15 buy recommendations for its shares. Even so, it remains the analysts’ favorite bank.

ITAÚ UNIBANCO (ITUB4)

• Balance sheet date: August 8 (after closing)
• Projected profit for Q2 2022: R$7.377 billion (US$1.4 billion) (+13% vs. Q2 2021)*

After posting a balance sheet that excited analysts at the beginning of the year, Itaú should show even more robust numbers in the second quarter compared to the same period last year, according to the Bloomberg consensus.

Analysts remain optimistic, even with the other results lines, because Itaú shows greater resilience than competitors such as Bradesco and Santander.

It is already expected that there will be a deterioration in total defaults, but nothing too dramatic, like in the previous period.

For JP Morgan, alongside Banco do Brasil, Itaú has the potential to present improving trends in asset quality.

According to Bloomberg’s consensus, Itaú has 14 buy recommendations for the stock, six maintenance recommendations, and only one sell recommendation.

BANCO DO BRASIL (BBAS4)

• Balance sheet date: August 10 (after closing)
• Projected profit for Q2 2022: R$6.203 billion (US$1.2 billion) (+23% vs. Q2 2021)*

The surprising first quarter result has excited analysts that follow Banco do Brasil, who estimate an increase of more than 20% in the profit recorded between April and June.

Despite obtaining record profits last quarter, Banco do Brasil has not revised its projections (guidance) for the year. But analysts expect this to happen now.

Of course, this is if the second quarter confirms that the result between January and March is a trend and not a one-time thing.

“Banco do Brasil, given its significant exposure to agribusiness and consigned credit, should report a lower increase in defaults than its peers, according to our estimates,” wrote Santander’s investment bank analysts.

With information from Seu Dinheiro