Bradesco to show profit surge
news.ft.com By Jonathan Wheatley Published: February 2 2003 20:03 | Last Updated: February 2 2003 20:03
A few months ago, Brazilian bankers were speaking darkly of the dangers the country faced if Luiz Inácio Lula da Silva of the leftwing Workers' party (PT) were elected president.
One month after Mr Lula da Silva took office, the sector could hardly be more ebullient.
Bradesco, Brazil's biggest private-sector bank by assets, is expected to announce healthy fourth-quarter profits today after starting the year in a mood of aggressive expansion.
On January 2, it became one of the first Brazilian companies to return to the capital markets, launching a nine-month international bond, raising US$250m - five times its initial offer - priced to yield 6.375 per cent.
On January 13, it surprised the markets by announcing that it would pay R$2.65bn (US$804m at the time) in cash and shares for the local operations of Spanish bank BBVA.
The acquisition helped it to defend its position as the largest private-sector bank against Itaú, its nearest rival.
It completed the month on January 28 by taking more than R$7bn in funds under management from US bank JP Morgan.
"The Lula government is putting its more liberal talk into practice and the banks like it," says Erivelto Rodrigo of Austin Asis, a Sa~o Paulo firm of banking analysts. "They're back in the market to buy scale."
Consolidation of the sector started in the mid-1990s, but the pace of change slowed last year. There was fear among investors, provoked by Lula's consistent lead in opinion polls before October's general elections, that a PT government might indulge in irresponsible spending and provoke a default on government debt.
So far, however, the PT seems committed to even more conservative economic policies than the previous centrist administration of president Fernando Henrique Cardoso.
Its proposals for a long-awaited overhaul of pensions, for example, go further than the reforms it obstructed in opposition.
Last month, the central bank raised its basic interest rate from 25 per cent to 25.5 per cent to combat the threat of inflation - a policy that the PT was calling disastrous as recently as December.
Surprised by the new government's orthodoxy, analysts have rushed to revise forecasts. Bear Stearns, a New York brokerage, upset many in Brazil last year by saying the country was "on the path to default". It now expects no credit event (default or restructuring) during 2003. Jason Mollin, Brazilian banking analyst, has upgraded Bradesco, along with Itaú and Unibanco, the other two big private-sector banks.
"The outlook is clear," he says. "Interest rates will remain high and that will enable banks to continue to achieve strong margins."
Mr Mollin expects Bradesco to report fourth-quarter profits of R$509m, up from R$420m in the third quarter, but down from R$610m a year earlier.
Sluggish growth, caused by currency devaluation and the general uncertainty, accounts for the year-on-year fall; growing optimism after the election, as the new government sets out its stall, accounts for the late surge.
Banks will continue to make much of their earnings this year from high returns on government debt. At the end of September 2002, exposure to government securities among the leading three private-sector banks was equal to 2.2 times shareholders' equity.
But the sector also faces restraints on growth in 2003. Interest rate spreads - the difference between borrowing and lending rates - remain among the highest in the world. While high spreads create big returns, they are also a brake on growth of lending and of the wider economy.
Among other things, a reduction in spreads requires a fall in delinquency rates - currently as high as 15 per cent. To achieve this, bankers hope the government will make progress on reforming bankruptcy laws that make foreclosure almost impossible.
Despite such restraints, optimism surrounding the new government has revitalised the sector.
"Bradesco and the other banks will certainly want to make more acquisitions," says Bruno Pereira, banking analyst at UBS Warburg in Rio de Janeiro. "The problem will be finding sellers."
One obvious target is Sudameris, owned by Intesa of Italy. Itaú was expected to buy it, but talks broke down after 11 months in November, when Itaú instead snapped up local bank BBA.
Unibanco could be next to make a bid. It was in talks to buy BBVA's operation when Bradesco made a bigger offer in December, in what was seen as a reaction to Itaú's purchase of BBA.
Unibanco seemed to have lost Sudameris to Itaú in similar circumstances a year earlier.
With foreign banks reducing their exposure to Brazil during the past year, there has been speculation that ABN Amro, the Dutch bank, could be next to leave.
However, Brazil still offers the prospect of much faster growth than developed markets. BBVA, in selling out, took a 4.5 per cent stake in Bradesco and a seat on its board. The foreigners could yet make a comeback.