In a report sent to clients, HSBC analysts Victor Galliano and Mariel Santiago wrote that Brazilian banks are threatened by three main risks. They point to the fact that investors are still concerned about the rate cuts (combined with uncertainties surrounding the new savings rules) and that the banks may experience a scenario of moderate credit growth as the economy cools off.

In order to measure how these risks could have an impact on the banks’ shares, the analysts have simulated a “stress test” for banks by trimming 200 basis points of the projected return on equity (ROE) for 2013. And the analysts say that even with this simulated ROE “haircut” they clearly see the value of holding bank shares.

“Our preferred names are Itaú Unibanco, on the quality side, and Banco do Brasil as a value play,” the analysts said.

Both banks were rated as “overweight” by the analysts, while the other bank stocks were given a “neutral” rating.

For Itaú Unibanco, the analysts point out the lower than expected GDP growth as the main risk for the stock, which could be affected by the slow growth of credit and asset quality deterioration.

As for Banco do Brasil, the analysts warn on higher bank provisions due to higher default rates, which could put a lot of pressure on margins.

Risks

In HSBC’s view, investor sentiment on financial stocks was hit by the three risks looming the sector: the narrowing bank spreads, moderate credit growth and higher default rates.

All this comes from a scenario where the government strives to maintain a lower Selic rate, changes the rules of savings, and encourages the drop in interest rates charged by public banks (indirectly forcing private banks to do the same).

“There is much uncertainty about the returns of banks in an environment of lower interest rates, and the increasing default rates are not helping,” they said.

Below are their price forecasts and recommendations:

(Bank / Ticker / Current Price / Previous Target Price / Revised Target Price / Recommendation)

Bradesco BBDC4 R$ 29,5 R$ 34,5 R$ 32,5 neutral
Itaú Unibanco ITUB4 R$ 28,6 R$ 39,0 R$ 38,0 overweight
Banco do Brasil BBAS3 R$ 22,3 R$ 30,0 R$ 29,5 overweight
Santander SANB11 R$ 16,7 R$ 17,0 R$ 16,0 neutral
Banrisul BRSR6 R$ 18,0 R$ 23,5 neutral
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