(an excerpt from Valor Eonomico article written by Carolina Mandl and Karin Sato)

The group formed by the four largest listed Brazilian banks is expected to report a combined net profit of R$10.59 billion for the fourth quarter of 2012, 4.79% lower in comparison to the same period in 2011, according to analyst projections compiled by Valor for the earnings of Banco do Brasil, Itaú Unibanco, Bradesco and Santander.

Projections compiled by Valor take into consideration only the recurring items in the banks’ earnings statements. That’s why the reported net income, over which dividend distribution is based, can be significantly different. Itaú and Bradesco earnings, for instance, will be positively affected by the sale of stakes in credit bureau Serasa.

Issues that had been dogging banks since early 2012, such as loan defaults, government pressure to lower interest rates and low economic growth, were still affecting earnings in the last quarter. That’s the reason behind the contraction.

According to analyst expectations, only Bradesco, which opens the earnings season Monday, is likely to show a higher profit, of R$3 billion, or 8.85% higher in comparison to the same period of 2011. That’s the average projection from 19 securities firms. Less affected than competitors by loan delinquency and taking advantage of its insurance operation, Bradesco managed to show over 2012 better figures.

Meanwhile, the biggest decline is expected to be reported by Santander, of 13.1%, to R$1.43 billion, according to the estimate of eight firms. Loans in arrears are likely to hurt the bank’s earnings. “Investors should expect a disheartening quarter also because of poor credit quality,” says Barclays in a report to investors on Santander.

Still suffering with delinquency in loans to car buyers and to small and midsized companies, Itaú Unibanco is expected to report R$3.5 billion in net profit for the last quarter of 2012, according to the average projection of eight analysts.

For Banco do Brasil, the average projection of six securities firms is of R$2.65 billion in net profit, a decline of 10.89% from the fourth quarter of 2011. Deutsche Bank analysts expect continuing pressure on net interest margins due to lower interest rates and a weaker composition of the credit portfolio, the report says.

Despite the weaker adjusted earnings, the tone of analysts is not negative. “It’s important to see there’s a positive trend. Earnings should show that the path to improve loan-loss rates has been opened,” says Carlos Macedo, an analyst with Goldman Sachs. Less troubled loans mean lower charges with provisions, helping profits.

The two biggest private-sector banks in Brazil, Bradesco and Itaú, are expected to present a reduction in default rates, since they have higher quality assets in their portfolios. At Bradesco, loans with payments late over 90 days are expected to stay at 4%, 0.1 percentage point lower than in the third quarter, but still higher than the 3.9% of one year ago, Deutsche Bank estimates.

Itaú Unibanco’s delinquency rate is expected to fall to 5% in December from 5.1% in September, according to projections. “There’s a chance of a positive surprise in that line, as seen in the third quarter,” says a report from Banco Espírito Santo.

What may help reducing troubled loans is exactly something that greatly worried banks over the year. “Management at large private banks are optimistic about a trend of decline in default rates from the fourth quarter of 2012, and the biggest challenge in the sector, spread decline, is at least helping to attenuate the burden of debt service,” say HSBC analysts.

Only Santander is still likely to continue seeing a deterioration in asset quality, which will contribute to lower earnings. Deutsche Bank analysts say that default rates will grow, fueled by late payments from corporate borrowers affected by the economy’s slowdown during the year.

That’s not the only positive news that is expected to arise from balance sheets on the asset side. Analysts say that banks are expected to accelerate lending activity, after a very slow pace up to September.

Bradesco’s credit outstanding is expected to grow 4% in the fourth quarter of 2012 in comparison to the previous three months. From June to September, the expansion had only been 1.8%. At Itaú, growth is expected to be 3%, while it had been stagnant during the previous quarter. At Santander, credit is expected to have expanded even more in the same period, at 5%, compared to stability in the previous quarter.

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