World’s Cheapest Bank Is Still Too Pricey for Analysts Expecting Fire Sale

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Banco do Brasil
The Banco do Brasil SA building in downtown Sao Paulo, Brazil. Photographer: Dado Galdieri/Bloomberg

Banco do Brasil SA has always traded at a discount to its Brazilian peers. Now, it’s the world’s cheapest bank after the government started selling part of its stake.

Banco do Brasil, controlled by the federal government, trades at 5 times forecast earnings for the next 12 months. That’s the lowest ratio among the world’s top 100 banks by market value, which traded at an average of 11.5 times earnings, data compiled by Bloomberg show.

The state-run lender, Latin America’s biggest by assets, is tumbling after Brazil’s sovereign wealth fund sold 1 million shares last month, signaling the government may be preparing to tap the fund to finance its budget deficit. With 80 percent of the fund’s assets tied up in Banco do Brasil, withdrawing cash from the account would mean dumping more shares.

“The sale is very negative for shares,” Gilberto Tonello, an analyst at Grupo Bursatil Mexicano in Sao Paulo, said in a telephone interview Monday. “What are investors going to think? If the biggest shareholder is selling, then I want to get out before it does.”

Trading volumes surged 44 percent above the stock’s three-month average July 16 after Bloomberg reported the share sale. The Treasury later confirmed the transaction, calling it a “prudent move in light of the public sector’s fiscal-consolidation policy.”

The bank fell 0.1 percent Monday to 22 reais in Sao Paulo, bringing its four-day decline to 8.1 percent.

Officials at the bank and at the Finance Ministry declined to comment on the outlook for the shares.

Credit Ratings

President Dilma Rousseff’s administration has been boosting taxes and cutting expenses as she tries to narrow the biggest budget deficit in more than a decade and avert a downgrade that could endanger the country’s investment-grade status.

The government may ask the wealth fund to sell more Banco do Brasil shares to help finance the fiscal gap, said a person with direct knowledge of the matter who asked not to be identified because the plans aren’t public. The initial sale of 1 million shares represents less than 1 percent of the fund’s 2.66 billion-real ($832 million) stake in the bank.

For investors who can stomach the risk, Banco do Brasil is still worth betting on because of its dividends, said Karina Freitas, an analyst at Concordia brokerage. The lender is expected to pay 1.656 reais a share in 2016, yielding about 7.5 percent based on current prices, according to analyst estimates compiled by Bloomberg. That compares with a 4.4 percent payout for Itau Unibanco Holding SA, the data show.

“From a long-term perspective, we’re positive on the banking sector,” Freitas said from Sao Paulo. She’s one of nine analysts who rate the stock a buy. Thirteen say hold and one says sell.

Joao Pedro Brugger, a money manager at Leme Investimentos, which oversees about 500 million reais in assets, said the stock could decline further.

“The sale will put additional pressure on the share price,” Brugger said by phone from Florianopolis, Brazil. “It’s a significant volume.”

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