The one stock Brazil analysts say investors should buy is Banco Bradesco SA. (BBDC4)
Of the 24 analysts that rate Bradesco, the second-largest bank in Latin America by market value, 18 recommend buying, the most of any company on the benchmark Bovespa index, according to data compiled by Bloomberg. Banco do Brasil SA (BBAS3) and Itau Unibanco Holding SA, the biggest lender by market value, rank fourth and sixth among the index’s 67 members.
BlackRock Inc. (BLK) and Citigroup Inc. (C) say bank stocks will post the biggest gains in the second half of the year after Brazil cut the benchmark lending rate to record low, which should help lower default rates from a 30-month high. Policy makers led by central bank President Alexandre Tombini have cut the overnight rate by 5 percentage points to 7.5 percent in the past 12 months, more than any other Group of 20 nation.
“My biggest overweight is banks and consumer discretionary, because valuations are still attractive for those sectors,” said Jason Press, a Citigroup strategist for Latin America in New York, in a telephone interview. “We expect a consumer-led reacceleration of the Brazilian economy in the second half of this year.”
Bradesco trades at 12 times earnings, compared with 11 for Itau (ITUB4) and 5.9 for Banco do Brasil, according to Bloomberg data. The MSCI World/Banks Index is at a ratio of 15.
Bradesco, based in Osasco, gained 9.6 percent this year before today, putting its market value at 117 billion reais ($57 billion). Itau fell 4.4 percent and Banco do Brasil lost 1.3 percent. The Bovespa index rose 0.9 percent.
Bradesco fell 1.3 percent to 33.25 reais at 2:37 p.m. in the Sao Paulo trading, while Itau fell 1.8 percent to 31.92 reais and Banco do Brasil fell 1.4 percent to 22.14 reais.
After Bradesco, the Brazilian stocks that have the most buy recommendations are shopping-mall operator BR Malls Participacoes SA (BRML3) and retailer Cia Brasileira de Distribuicao Grupo Pao de Acucar (PCAR4) SA.
Growth in Brazil, the world’s largest developing economy after China, accelerated to 0.4 percent in the second quarter from the previous three months, the fastest pace in a year, the national statistics agency said today.
Bradesco declined to comment, according to an e-mail sent by its press office.
The monetary and fiscal stimulus should start to produce an effect in the second half the year, said Landers, who is also overweight in Brazilian consumer stocks. Interest-rate cuts have helped to fuel an 18 percent expansion in July outstanding credit to 2.18 trillion reais, according to a central bank report yesterday.
“The second half has to be better than the first one with all this government stimuli,” Landers said in a telephone interview from Princeton, New Jersey. “As the economy continues with full employment and salaries rising, consumers will get the urge to go back to consuming at higher levels than in the past year.”
Itau and Bradesco SA both boosted provisions for soured loans this year as rising inflation and slower economic growth eroded customers’ ability to make payments on time. In February, Itau Chief Executive Officer Roberto Setubal also told reporters that delinquencies may rise to 5 percent by the middle of this year. Rogerio Calderon, Itau’s head of investor relations, said on an April 24 earnings conference call the rate may rise for the next two quarters before falling at year-end.
Weak Growth Outlook
While banking shares may recover, they won’t outperform the market because economic growth isn’t strong, said Flavio Barros, a fund manager with Grau Gestao de Ativos, which oversees about 380 million reais in Sao Paulo.
“On average I expect banking stocks to move in tandem with the broader market,” Barros said in a telephone interview.
The consumer default rate rose to 7.9 percent in July from 7.8 percent in June, according to the central bank. The company loan default rate was unchanged last month at 4 percent. Tulio Maciel, the central bank’s chief economist, said yesterday default rates will decline as wages rise.
Lower interest rates and a more cautious approach from the banks to consumer lending may reduce pressure on default rates in the second quarter, BlackRock’s Landers said.
“The worst is over,” said Landers, adding that BlackRock has “important” positions in Bradesco, Itau and Banco do Brasil. “Growth rates will be slower, but nothing indicates that Brazil’s middle-class expansion story is at risk.”