Bradesco’s Record Share Gap Signals Reversal: Corporate Brazil

The record premium that Banco Bradesco SA’s common shares have over preferred stock is puzzling analysts and investors who say the securities should be trading at a discount.

Bradesco’s common shares closed at 32.90 reais yesterday, or 4.30 reais more than the preferred stock, even though voting shares pay a dividend that’s almost 10 percent less. The common stock of the Osasco, Brazil-based company climbed 48 percent in the past year before today, the best performance of Brazil’s five biggest banks by market value, compared with a 5.6 percent gain for preferred shares.

More investors are buying Bradesco’s common shares after they were added to the MSCI Brazil Index in November and became part of Brazil’s benchmark Ibovespa index in May. Some pension funds and other institutional investors are required to hold predetermined amounts of stock included in major indexes.

“The logical situation here is for the common shares to be traded at a discount of 10 percent over non-voting stocks to reflect the lower dividend,” Otavio Vieira, a partner at hedge fund Fides Asset Management in Rio de Janeiro, said in a telephone interview. “This premium seems to be exaggerated.”

Common shares are now the most shorted banking stock in Brazil, signaling that investors expect the securities to fall. The ratio of borrowed shares is 13 percent, up from 6.2 percent at the start of the year, data compiled by Bloomberg show. The common shares declined 3.2 percent to 31.86 reais today, while the preferred stock was down 1.3 percent to 28.22 reais.

Bradesco declined to comment on the performance of the two classes of shares, according to an e-mailed statement.

Acquisition Target

The premium for common shares would be justified only if there were concern corporate governance was insufficient or if the bank was an acquisition target, Vieira said, adding that neither alternative is “on the radar.”

“There are no current reasons to justify” the premium, Banco Itau BBA SA’s analysts including Regina Longo Sanchez wrote in a research note on May 2, when the gap between the two securities was at 1.95 reais. Sanchez declined to comment further, according to Itau BBA’s press office.

The voting shares traded at a discount on almost every day from September 2007 until March, when they surged past preferred shares.

The bank started its American depositary receipts program backed by voting shares in March 2012, spurring an increase in the stock’s trading volume that allowed them to be included in the MSCI index for Brazil.

Adjusting Spreads

“Some funds follow the MSCI index and had to adjust their portfolios to include the ADRs, and Brazilian pension funds did the same once the voting shares were added to Ibovespa,” Carlos Daltozo, an analyst at Banco do Brasil SA in Sao Paulo, said in a telephone interview. “These spreads will tend to adjust to a 10 percent discount in the medium term according to the lower dividend.”

Voting shares’ average trading volume more than doubled this year from the same period in 2012, compared with a 10 percent increase for non-voting shares.

Regardless of the gap between voting and preferred shares, the outlook for Bradesco is positive because valuations are attractive, according to Nick Robinson, head of Brazilian equities at Aberdeen Asset Management Plc, which manages about $15 billion of Latin American shares.

Bank Exposure

“Buying banks is a way of gaining exposure to Brazil’s consumption growth without paying too much for it,” Robinson said by telephone from Sao Paulo. Bradesco is the top holding of Aberdeen’s Latin America Equity Fund, which gained 0.9 percent in the past year while the MSCI Latin America Index slumped 11 percent.

Aberdeen, with a 1.1 percent stake, is the largest investor in Bradesco’s voting shares after controlling shareholders, according to data compiled by Bloomberg.

Given that holders of preferred shares get a higher dividend, the voting stock probably won’t keep trading at a premium much longer, said Rodolfo Amstalden, an equity analyst at consulting firm Empiricus Research.

“The increased trading volume on the voting shares helps explain the recent outperformance, but I think this is more than priced in,” Amstalden said in a telephone interview from Sao Paulo. “At some point, this gap will start to narrow.”

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