Bloomberg Línea — A “perfect storm” is how the CEO of Brazilian ban Bradesco (BBDC4), Octavio de Lazari Junior, describes the retail bank’s scenario, which is experiencing an increase in defaults and expenditure, a reduction in margins with the market and the negative impact of deflation in the third quarter in the calculation of its assets.
The fourth quarter will likely continue to be challenging, with a possible sale of the bank’s credit portfolio and additional provision to cover the risk of debtors. But he is optimistic that “the storm” will pass.
In third quarter, Bradesco’s profit slid 22.8% year-on-year to 5.2 billion reais ($1 billion), with return on equity plummeting from 18.6% to 13% in 12 months. Analysts had already expected Bradesco’s result to disappoint in third quarter due to its profile as a retail bank, as it is more exposed to low-income clients, whose purchasing power has been eroded by high interest rates and inflation.
“Our defaults are well diagnosed: the defaults of individuals, micro and small companies accelerated in personal credit cards. We have already reduced approval a lot of cards for this segment of the public”, the bank’s CEO said during a conference call with journalists on Wednesday.
The increase in the number of defaults in the retail banking segment forced Bradesco sell a credit portfolio of 5 billion reais ($966.7 million). “We are scheduled to sell a portfolio in fourth quarter, but we are still reflecting. We have already made a round of prices, but there is a greater offer of portfolios on the market and the prices are more skewed. We have to evaluate if the price offered is interesting for us”, De Lazari Junior said.
In the face of such default pressure, which Bradesco foresees continuing until the first half of 2023, the Osasco-based bank has become more selective in issuing credit cards, and is preferring to expose itself to clients with a medium- and high-income profile, assessed as lower risk, he added.
Credit approval falls
The approval rate for credit applications in Q3 fell from 68% to 48% from second quarter, but the bank’s CEO said that it expects to be able to control the default indicators in fourth quarter.
The additional provision of one billion reais in third quarter should be repeated in fourth quarter, he said, but that there is no risk of contagion of that default to large companies.
“I don’t see a deteriorating outlook of credit for large companies, which are not very leveraged. There is no contamination of defaults from small companies to large ones. We made the provision of one billion reais out of caution, because delinquency accelerated quickly, and we are being conservative,” he said.
He also said he expects that the second half of 2023 will see an improvement in the economic perspectives, with an eventual cycle of reduction of the Selic [the central bank’s interest rate], currently at 13.75% per year, but he also pointed to the global challenges, such as an expected recession in the US and Europe.
The new government
As for the new government, which takes office on January 1, he said he does not expect big surprises in 2023, and that the country’s fiscal and budgetary issues are well diagnosed and that the economic team of the administration of President-elect Luiz Inácio Lula da Silva should find the best alternatives to accommodate the extra expenditure, estimated between 150 billion and 200 billion reais ($38.6 billion).
“The incoming economic team will be sensitive to Brazil’s problems in the fiscal issues, and things can be better than we are imagining if a scenario of an interest rate cut is confirmed,” he said.
As for the slight fall in the Basel index, which dropped 0.1 percentage point year-on-year to 13.6% in third quarter, Bradesco attributes the negative variation of its solvency ratio to the regulatory change of the Central Bank regarding the registration of tax credits with the hedge of assets abroad.
This change is foreseen in two stages (in June and December of this year). Bradesco informed that it is still above the regulatory minimum of 9.5% for Basel level 1 ratio.
Bradesco’s CEO also said that the bank decided to resize its neobanks (Bitz, Next and Digio) in face of a scenario of greater need for financial discipline with the increase in defaults.
What the analysts say
BB Investimentos reduced its buy recommendation to neutral for Bradesco’s shares after the release of the third-quarter balance sheet, cutting the price target from 24 reais ($4.64) per share to end 2023.
“The result was mainly affected by the strong escalation of expenses with provisions, given the increase in defaults in the period, and aggravated by the negative contribution of the financial margin with the market, with assets and liabilities responding unfavorably to the environment of rising interest rates,” BB Investimentos analyst Rafael Reis wrote in a report.
He added however that he remains optimistic about Bradesco, given the bank’s execution history, but sees it as being prudent to reduce the recommendation until there are signs of more favorable momentum.
“The fact that Bradesco has revised its own projections, including a substantially higher volume of provisions expenses, 25.5 billion to 27.5 billion reais for the year, from 17 billion to 21 billion reais previously, denotes that the magnitude of the deterioration has surprised even the bank itself,” he wrote.
“The annual growth of the credit portfolio, which in third quarter was already below the projections of 13.6%, and below those of the market, signals the slowdown in lending. This inevitably reflects on service revenues, which have already weakened, given the business model that is heavily dependent on credit,” Reis added.
Translated from the Portuguese by Adam Critchley