Shares of Brazilian banks have suffered major sell-offs this year, owing to a fast growth in debt levels and consumer leverage, as well as rising inflationary pressures and weak job growth. The Extended National Consumer Price Index 15 (IPCA-15) reached 10.1% in September. As a result, the Brazilian central bank has raised interest rates to 6.25%—a 425bps increase—since March, and the highest since July 2019. 

However, because its last crisis prepared the country’s banks by de-risking their balance sheets and creating high loss reserves and better underwriting standards, the current challenges should be  manageable. In addition, according to Fitch Ratings, the performance of Brazil's banking sector has stabilized, with better capitalization and earnings supporting near-term profitability. The banking system's R$62 billion (USD11.2 billion) in aggregate net income in 1H21 increased by 53% year-over-year and was 3% higher than in 1H19. In 1H21, the median return on equity was 14.5%, up from 13.5% in 2020.

Furthermore, loan moratoria, government assistance, and regulatory forbearance should continue to cap the pandemic's overall impact on asset-quality deterioration. Given this backdrop, we think two fundamentally sound Brazilian banking stocks, Itau Unibanco Holdings S.A. (ITUB) and Banco Bradesco S.A. (BBD), could be worth adding to one’s watchlist.

Itau Unibanco Holdings S.A. (ITUB)

São Paulo-based ITUB offers a wide range of financial products and services in Brazil and worldwide. Retail Banking, Wholesale Banking, and Activities with the Market + Corporation are the bank’s three operational segments.

Last month, ITUB informed its stockholders and the market that it has been chosen to be included in the Dow Jones Sustainability World Index (DJSI World) portfolio for the 22nd consecutive year, making it the only Latin American bank to have been a part of this important index since its inception in 1999.

For the nine months ended September 30, 2021, ITUB's operating revenue increased 12.1% from its year-ago value to R$92.8 billion ($16.03 billion). Its net income grew 103.4% year-over-year to R$20.16 billion ($3.55 billion), while its EPS increased 102.9% year-over-year to R$2.05 ($0.36) over this period. In addition, its tier I capital increased 50 basis points to 12.9% over this period.

Analysts expect ITUB’s EPS to increase 37.8% in the current year and 11.8% next year. The $22.4 billion consensus revenue estimate for the current year represents a 15.3% increase from the same period last year.

Banco Bradesco S.A. (BBD)

BBD and its subsidiaries offer various banking products and services to individuals, corporations, and businesses in Brazil and internationally. The Osasco-based company operates in two segments: banking and insurance. The bank offers leasing, investment, private banking, brokerage, consortium management services, real estate products, pension plans, and capitalization bonds.

BBD’s trailing-12-months total revenue came in at R$82.37 billion ($14.51 billion). The company reported a trailing-12-months net income of R$15.84 billion ($2.79 billion) over this period, while its trailing-12-months net interest income amounted to R$71.17 billion ($12.54 billion).

The company’s EPS is expected to increase 25.6% in the current year and 10.2% next year. In addition, analysts expect its revenue to grow 3.9% year-over-year to $20.12 billion in the current year.

ITUB shares were trading at $3.72 per share on Wednesday morning, down $0.03 (-0.80%). Year-to-date, ITUB has declined -37.39%, versus a 24.75% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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