Itau Slides as Credit Suisse Says Defaults Hurting Brazilian Bank Profits
Itau Unibanco Holding SA (ITUB4), Latin America’s largest bank by market value, led declines for lenders in Sao Paulo after Credit Suisse Group AG cut its rating on concern higher costs for bad loans will crimp profits.
Itau, which was lowered to “neutral” from “outperform” by Credit Suisse, fell 1.8 percent to 31.58 reais at 4:15 p.m. New York time, adding to a 19 percent drop this year through yesterday. Credit Suisse cut its earnings forecasts for Brazilian banks by an average of 4 percent this year and 5 percent in 2012, according to a note sent to clients today.
Brazil’s banks have tumbled this year, with MSCI Inc.’s gauge of the nation’s financial shares posting the second- largest drop of 10 industries, after the central bank boosted interest rates, reserve requirements and taxes on consumer loans to slow credit growth. The fastest inflation in six years and higher delinquency rates will likely push the industry to set aside more cash for defaults, hurting margins, Marcelo Telles, an analyst at Credit Suisse, said in the note to clients.
“Short-term asset quality indicators will be key drivers due to the perception the Brazilian consumer is overleveraged and that Brazil is on the verge of an asset quality bust,” Telles wrote.
Brazil’s consumer default rate rose to 6.4 percent in May from 6.1 percent in April, while the default rate on company loans rose to 3.9 percent from 3.7 percent, the central bank said June 28. Total outstanding credit rose 1.6 percent in May, the fastest pace this year, to 1.804 trillion reais ($1.1 trillion).
“I’m more cautious on small and medium banks, where we could really see problems,” said Otavio Vieira, who helps manage 1.3 billion reais at Safdie Private Banking in Sao Paulo. “If inflation rises again, that eats up wages. You could see higher delinquencies among individuals.”
Banco Pine SA, a bank with a market value about 150 times smaller than Itau’s, has declined 29 percent this year through yesterday. The stock rose 1.7 percent to 10.83 reais today.
Banco Bradesco SA (BBDC4) and state-controlled Banco do Brasil SA (BBAS3) were reiterated “outperform” at Credit Suisse because their lower exposure to credit-card and individual loans should insulate them from rising delinquencies, according to the note.
Bradesco dropped 0.1 percent to 29.19 reais while Banco do Brasil lost 2 percent to 25.94 reais. The stocks have declined 10 percent and 16 percent, respectively, this year through yesterday.
“The adoption of a less orthodox monetary policy to curb inflation, concerns about Basel III and deterioration in short- term asset quality indicators fueled the sector’s de-rating,” Telles wrote, referring to global liquidity rules laid out last year by the Basel Committee on Banking Supervision. “But despite the significant underperformance, Brazilian banks also do not look cheaper versus banks globally.”
While Itau is trading at a 15 percent discount to its historical average of 10.4 times the 12-month profit estimate from Credit Suisse, the bank’s discount to global peers is in line with the average of about 0.8 percent, according to the note. The Sao Paulo-based lender’s second-quarter earnings are likely to present “weaker margins and higher provisions, which should trigger downward earnings revision by the street,” Telles said.
MSCI’s index of Brazilian financial shares is down 11 percent this year, a decline only surpassed by its measure of consumer-discretionary companies, which includes homebuilders and retailers and is down 12 percent.
“Overall we still see generally positive operating environment, though less favorable at the margin,” Telles said.
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