Leading Brazil’s Economic Crisis

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Brazil is currently one of the most intriguing emerging markets to buy from. This article is about Bango Pradesco (NYSE: BBB), the third largest bank in Brazil. H1 There is no doubt that banks will be under pressure in 2022 and 2023 as banks need to be more vigilant due to rising NPLs and deteriorating economic conditions. However, by offering digital products that can attract retail and corporate customers, Banco Bradesco can gain new sources of growth.

goods and travel

The Brazilian economy is poised to benefit significantly from rising commodity prices and enjoy moderate economic benefits from increased tourist arrivals. Restrictions Will be lifted later this year. Like other countries in the region, such as Chile, Peru and Colombia, Brazil’s economic fate is largely related to commodities. From Brazil Excellent exports These include soybeans (US$28.6 billion), iron ore (US$26.5 billion), crude oil (19.8 billion dollars) and sugar (8.95 billion dollars). Brazil exported a total of $214 billion in 2020 and was the world’s largest exporter of soy, green sugar, frozen beef, chemical pulp and poultry. Significantly, Brazil’s fate is not so tied to one category of goods, and has more power globally as the top exporter of key commodities.

Country

The first 2 exports

% Do Total

Brazil

Soy and iron ore

25.8%

Chili

Copper ore and refined copper

48.0%

Peru

Copper and gold ore

38.7%

Source: OECworld Export Profiles

While tourism officially represents just 3.7% of GDP, the figure would be 9.6% if indirect effects were added, the European Commission said. This will allow Brazil to benefit from the post-Covit economy, where tourism can once again flourish.

Brazil and emerging markets MSCI

One in Brazil Top 5 markets MSCI has very little weight in emerging markets compared to the top 4 countries. I plan to keep an eye on this as many events can change the game and enable the MSCI Emerging Markets area of ​​Brasil Grande. In the absence of the black swan phenomenon, there is still room for Brazil to approach 8-10% of its weight. Major banks like Banco Pradesco are easily positioned to capture some of this new potential capital.

MSCI

Bank of Brazil

Investing in banks is one of the most interesting ways to approach Brazil’s growth, especially with interest rates rising this year. Banco Bradesco is one of the largest banks in Brazil, ranked only by Banco de Brasil and Itaú Unibanco (ITUB). I think Banco Bradesco stands out in several ways, due to its positive NIM/low NPLs and its ability to reach retail consumers and SMEs. Brazilian banks are also very active in other countries, which is also the main growth engine.

bank balances

Stadista

NPLs in Brazil

NPLs are expected to increase significantly in 2021, with many banks experiencing an increase in NPLs in Q4 204 and Q1 2022. This is one of the key themes to watch for in the coming quarters as interest rate hikes and slower economic growth could raise NPLs. †

Loads of

S&P Worldwide

Banks are on track to deliver strong growth this year, driven by subdued credit growth and rising interest rates. However, NPLs could come under pressure in the second and third quarters of 2022, even as banks become more conservative in their commercial lending and consumer financing. It is important to look at the bank’s portfolio and see how it adapts to the new demands of SMEs and retail customers, as these will be the main growth drivers in the future.

Since NPLs are on the rise and growth has been slow this year, it’s best to compare stock price movements and ratings for 2016 to make sure you’re buying at or near historically low prices.

Historical Performance of BBD Shares

Banks in Brazil bottomed out in 2016 and banks will approach these levels in 2022-2023. However, Banco Bradesco seems to be the most attractive buy between $3-4/shares.

Industrial growth has already started

Growth will be a challenge for banks in Brazil between 2022 and 2023 as global economic conditions deteriorate. Only in Brazil is there credit growth. The expectation is 7.6%, 16.5% compared to the previous year. Even if Brazil doesn’t go through a recession in 2022, banks will be under enormous pressure to lend more and NPLs will already come under increasing pressure from rising inflation.

Pradesco Bank

I focus on Banco Pradesco as an easy way to access the Brazilian stock market. Despite the recent decline in quarterly performance, the bank still has a good loan portfolio, and management is looking for sources of new growth and to ensure the bank is competitive in a changing field.

credit portfolio

During the first quarter of 2022, Banco Bradesco managed to increase its corporate portfolio by 15.7% per year AND 22.6% of its consumer portfolio. Like other banks in Brazil, the retail segment is a strong growth engine and has an even lower penetration rate. Banks were able to take advantage of more NIMs by focusing on certain retail products such as credit cards.

market share

Banco Prodesco’s first quarter report

Credit cards (45.6%), real estate financing (23.3%) and SMEs (18.6%) are the three largest sources of growth. Banco Protesco managed to increase the number of account holders from 31.4 million in the first quarter of 2021 to 33.0 million in the first quarter of 2022. This number is only 15.5% of the population. It’s still low. 30% of the population No bank account.

SMEs: the main driver of growth

One thing I like about Banco Bradesco is that it covers 20% of SMEs on its client site. SMEs make a significant contribution to the Brazilian economy and there is ample growth potential for banks targeting this group. According to the OECD, SMEs account for 62% of total employment and 50% of Brazil’s national value. Although SME Banco Bradesco still has room to conquer this market as it relies more on fintechs than traditional banks in general and continues to adapt and acquire its product offering.

criminal cases

SMEs and personal loans currently have higher defaults.

NPLs

Pradesco Bank

Crimes, both over 90 days and over 15-90 days, are on the rise, but have not yet reached their late 2016 peak. Banco Pradesco’s NIM rose slightly from its current level of 6.1% in Q1 2021. Q1 2022. The Brazilian central bank raises interest rates by 6.7% from 11.75% last March, and Brazil and other emerging markets are likely to see additional rate hikes this year as inflation rises. That fact, coupled with the bank’s focus on high-yield retail products, could see its NIM rise slightly this year.

Brief reflections on the fintech disorder

Fintech disruption is an important topic in emerging markets and successful banks can adapt to the new demand for digital products for retail customers. Big banks like Banco Bradesco can still use their capital to compete with new fintechs and use the strong existing customer base to launch innovative products. Banco Bradesco has seen rapid growth in some of its digital offerings and recently acquired a digital bank from Banco do Brasil last year.

Name

Description

Development

Next one

Digital banking service aimed at millennials and Generation Z

151% growth of its customers in the first quarter of 2022

Avora Investimentos

Investment company (capital, fixed income, finance, etc.)

24% annual growth in customer base until 2022

pitts

digital payment company

920% annual growth

Worried

Digital banking Banco do Brasil was acquired

63% growth in the number of accounts

Source: Reuters / Banco Pradesco

It is also important to highlight that there are 34 million non-bankers in Brazil, meaning Banco Brodesco can double its customer base if it can provide relevant services to this entire market. But even a realistic goal, such as 20% of that amount, can yield significant financial results for the company. It’s also worth noting that, as seen in other frontier and emerging markets, non-bank consumers can jump in and choose to move directly to digital products. Kenya

Banco Bradesco has a very strong digital banking presence and is experiencing a rapid increase in the number of users using these services. The bank’s total mobile/internet transactions increased from 277.1 million in the first quarter of 2020 to 660 million in the first quarter of 2022.

digital development

Pradesco Bank

As credit cards and personal mortgages were the top two drivers of growth in the last quarter, it’s also clear that it’s counting on consumers to drive growth. In addition, companies cover 60% of their customer base, and fintech startups are more likely to target retail customers. Right now, Banco Pradesco appears to be winning on both fronts. More importantly, given Brazil’s large unbanked population, there is plenty of room for competitors to enter this space. The risks to the new fintechs are very low for Banco Bradesco, but they will certainly cause some disruption in the sector. Leading the estimated investment scenario of 2022 and 2023 is the main problem and the most relevant risk for banks, because bad things can happen.

Take Away

One of the main intriguing factors of Banco de Pradesco is its share price as they traded lower in 2008 and 2016. 2022 and 2023 will undoubtedly be the most challenging years for the Brazilian economy and the climate of the October 2022 elections will change. As I mentioned before, NPLs peak in 2016, so it’s best to use 2016 as a reference when deciding when to join. Banco Bradesco has historically outperformed the Capt ETF (EWZ) of iShares MSCI Brasil and its rival Itaú Unibanco.

overcoming colleagues

Management seems to be actively pursuing new development strategies and creating digital offerings to entice customers inside the fence. This is not to say that Banco Presco, the non-bankers in Brazil, will easily start to succeed with numerous product offerings. Banco Bradesco should certainly outperform the index and some of its competitors, even if the latest quarterly figures are less favourable.

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