Banco do Brasil Tops Analysts’ Target on Card IPO Wager

Banco do Brasil SA is trading above analysts’ target price for the first time in four years amid speculation the bank, Latin America’s biggest by assets, is planning an initial public offering for its credit-card unit.

Banco do Brasil surged 33 percent in the past three months to 29.46 reais in Sao Paulo yesterday, rising above the 28.84-real average 12-month target price of 22 analysts surveyed by Bloomberg. The Brasilia-based lender trades at 1.4 times its book value, compared with 2.1 for Itau Unibanco Holding SA, the smallest gap in more than a year. “Solid” profit and IPO speculation are helping narrow the spread, said Joao Pedro Brugger, a portfolio manager at Leme Investimentos.

“There’s a perception that the stock is undervalued,” said Audrey Kaplan, head of international equities for Federated Investors Inc., which manages about $377 billion in assets including Banco do Brasil shares. “There’s a lot of hidden value there,” Kaplan said in a phone interview from New York. “I still see an upside.”

Banco do Brasil held the world’s largest initial offering of 2013 in April, an 11.5 billion reais ($5 billion) transaction for its BB Seguridade SA insurance unit. The lender is the best performer among banks on the Ibovespa benchmark index since Oct. 17, when Boris Molina, a New York-based analyst at Banco Santander SA, changed his recommendation to buy from the equivalent of sell, saying odds of an IPO for the BB Cartoes card business are about 50 percent.

Card Consideration

Banco do Brasil Chief Financial Officer Ivan Monteiro denied last month that the bank is considering an IPO for the credit-card unit or any other businesses. The bank declined to make further comments, according to a press official.

Santander set a 31.24-real price target for December 2014. Banco do Brasil is the only bank on the 72-company Ibovespa benchmark index trading above analysts’ target price.

“The potential IPO of BB Cartoes in 2014 would boost our valuation by 7 billion reais,” Santander’s analysts wrote. “The overly aggressive pricing and volume strategy of recent years is largely over, with positive implications for margins and asset quality.”

Santander’s analysts declined to make further comments on their report, according to a press official.

“Rumors of IPOs for other Banco do Brasil units, such as the card business, have been growing since the IPO of BB Seguridade,” Leme’s Brugger said today in a telephone interview from Florianopolis, Brazil. “I don’t know what the chances are of a credit-card unit IPO, but it would be as successful as the BB Seguridade offering.”

‘Hidden Value’

The federally controlled bank’s stakes in credit-card payment processor Cielo SA and insurance unit BB Seguridade offer “hidden value,” according to a JPMorgan Chase & Co. note to clients on Oct. 15. JPMorgan has a “conservative” 2014 target price of 28 reais.

Banco do Brasil is also benefiting as foreign investors boosted their stake in the bank to 19.4 percent in June from 17.5 percent a year earlier.

Last month, Banco do Brasil received authorization from the government to increase the maximum allowable foreign ownership to 30 percent from 20 percent. The last time Banco do Brasil traded above its target price was in October 2009, one month after the government allowed international investors to hold as much as 20 percent of the bank’s shares, up from a previous 12.5 percent limit.

Profit Estimates

While non-state-owned banks Itau and Banco Bradesco SA are restricting credit and posting record profits, federally controlled lenders Banco do Brasil and Caixa Economica Federal are boosting lending under pressure from the government to support a cooling economy. Analysts expect Banco do Brasil to post its smallest profit in more than three years after it reduced interest rates charged to clients following requests from President Dilma Rousseff.

That sort of political influence makes the bank’s shares “very cheap,” and explains why they trade at a discount to Itau and Bradesco, said Nick Robinson, head of Brazilian equities at U.K.-based Aberdeen Asset Management, which oversees about $15 billion of Latin American stocks, including Itau and Bradesco.

Banco do Brasil, which is about 59 percent owned by the federal government, has historically traded at a discount relative to peers because of political risk. The bank traded at an average price-to-book ratio of 1.5 in the past five years, which compares with an average of 2.5 for Itau and 2.3 for Bradesco, data compiled by Bloomberg show.

Officials at Itau and Bradesco declined to comment.

Management Stability

“Being a state-controlled bank, Banco do Brasil may not be run in the interest of shareholders,” Robinson said in a telephone interview, adding Aberdeen doesn’t invest in the company because of the political risk. “I think there is no stability in the management team.”

Banco do Brasil declined to comment on state control, as it’s in a so-called “quiet period” before earnings are released next week.

The company’s adjusted net income will probably drop to 2.49 billion reais in the third quarter from 2.66 billion a year earlier, according to eight analysts surveyed by Bloomberg.

Banco do Brasil carries the risk of political “interference,” including the appointment of a chief executive officer by the government, said Gerardo Zamorano, San Diego-based investment director at Brandes Investment Partners LP. Still, the IPO of BB Seguridade and the potential sale of the credit-card business are signals “there is value in the bank that is not fully realized,” he said.

Brandes has been a shareholder of Banco do Brasil since 2009, and is still purchasing the bank’s shares as it invests in undervalued companies, he said.

The insurance unit’s IPO “helps crystallize the hidden value in Banco do Brasil,” Zamorano said. “It helped the market realize there’s value there, and before it wasn’t appreciated as much.”

Before it's here, it's on the Bloomberg Terminal.