Banco do Brasil’s Shares Sink Below Liquidation Value

Banco do Brasil Sinks Below Liquidation Value
The Banco do Brasil SA building stands in the skyline of Rio de Janeiro. Photographer: Dado Galdieri/Bloomberg

Banco do Brasil SA is trading below its liquidation value for the first time in almost nine years after Brazilian President Dilma Rousseff’s demand for lower borrowing costs sparked concern profit growth will stall.

Federally controlled Banco do Brasil fell 16 percent this year through yesterday in Sao Paulo trading, shrinking the Brasilia-based company’s market value to 57.3 billion reais ($28 billion), or about 3.8 percent below the bank’s book value of equity, data compiled by Bloomberg show. The last time the figure fell below book value, a gauge of what shareholders would receive if the bank were liquidated, was in August 2003.

Rousseff is turning up pressure on state-owned lenders to cut what she called unacceptable consumer borrowing rates after economic growth stalled in the first quarter. The threat lower rates pose to earnings comes as rising loan defaults and stricter regulatory requirements boost concern the company may need to raise capital.

“The pressure on state-owned banks to reduce loan spreads and increase credit may not come at a good moment as delinquency rates are high,” Mario Pierry, an analyst at Deutsche Bank AG in Sao Paulo, said in an interview. “The risk of a reduction in returns is big in an environment of growing capital needs.”

An official at Banco do Brasil declined to comment and asked not to be named in keeping with company policy. A representative for Rousseff also declined to comment.

Rate Announcements

Banco do Brasil said today it’s cutting mortgage rates by as much as 21 percent effective June 4. Yesterday the bank reduced other consumer borrowing costs following the central bank’s decision to lower its benchmark rate.

The nation’s two biggest private lenders by market capitalization, Sao Paulo-based Itau Unibanco Holding SA and Osasco-based Banco Bradesco SA, still trade above book value even after following Banco do Brasil in cutting some borrowing costs for consumers.

Itau trades at 1.75 times book value of equity and Bradesco’s price-to-book ratio is 1.95, data compiled by Bloomberg show. Banco Santander Brasil SA, the third-biggest bank, trades at 0.97 times book value, excluding 15.7 billion reais in goodwill related to its Banco ABN Amro acquisition. Santander shares fell this week after the Valor Economico newspaper damped speculation the company’s Spanish parent would sell a major stake in the unit. A Santander official declined to comment.

BTG Pactual

Grupo BTG Pactual, the Sao Paulo-based lender that went public last month, trades at 2.33 times book value even after the shares sank last month to as low as 24.5 reais, below the 31.25-real initial offering price on April 24.

“Investors bought the idea that BTG profits will grow much more than its peers on the developed markets,” Ricardo Almeida, a finance professor at the Insper business school in Sao Paulo, said in an interview. “The bank has a regional focus in countries that are still growing like Chile, Peru, Colombia, Mexico and Brazil.”

Banco do Brasil’s valuations are among the worst for the country’s biggest banks because the state interferes too much in the industry, Almeida said.

The lender’s purchase of a 49.99 percent stake in Banco Votorantim SA in 2009 is also raising questions about the company’s need for more capital, according to Deutsche Bank’s Pierry and Gustavo Schroden, an analyst at BES Securities Brasil in Sao Paulo.

‘Bigger Risk’

“Investors are perceiving a bigger risk in Banco do Brasil because of doubts regarding the quality of Banco Votorantim’s credit portfolio,” Schroden said.

Votorantim lost about 600 million reais in each of the past two quarters because of delinquent auto loans, Schroden said. The bank’s core capital ratio, a gauge of leverage that measures Tier 1 capital in relation to total risk-weighted assets, is 8.7 percent, which Schroden called low.

A Votorantim official declined to comment.

Even with concern about credit quality and capital needs, 16 of 24 analysts who follow Banco do Brasil recommend investors buy the shares.

“Banco do Brasil is a solid company with strong fundamentals and its shares are suffering because of circumstantial events like the European debt crisis and a lot of government interference,” said Pedro Galdi, equity strategist at brokerage firm SLW Corretora in Sao Paulo. He predicted the share price would rise when the economy rebounds.

Bank Earnings

Banco do Brasil’s earnings were unchanged last year at 11.7 billion reais after rising 15 percent in both 2009 and 2010. Analysts surveyed by Bloomberg estimate profit may drop 2 percent this year, the first decline since 2007.

Brazil’s economy expanded 2.7 percent last year, the second-worst performance since 2003. It grew 0.2 percent in the first quarter compared with the previous three months, weaker than the estimates of all but one of the 50 analysts surveyed by Bloomberg. The nation’s default rate on consumer loans climbed to 7.6 percent in January and February, the highest since December 2009.

New accounting rules from the Basel 3 agreement may further reduce Banco do Brasil’s capital just as the government steps up pressure on the bank to boost lending, according to Pierry. More than a third of the bank’s total capital is deferred tax assets, which can be used to reduce future income tax expenses. Basel 3 will restrict banks’ ability to count such assets toward capital.

“If the Brazilian central bank implements the new rules according to the international schedule, Banco do Brasil would need more capital injections soon,” Pierry said.

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