This is not the document you are looking for? Use the search form below to find more!

Report home > Industry

Goldman Sachs report on Brazil Banks

0.00 (0 votes)
Document Description
Brazil Banks report May 9th
File Details
  • Added: May, 09th 2012
  • Reads: 161
  • Downloads: 0
  • File size: 620.18kb
  • Pages: 23
  • Tags: banks, brazil, finance
  • content preview
Submitter
  • Name: Roger
Embed Code:

Add New Comment




Related Documents

Coalcorp Kaufvertrag Goldman Sachs

by: Vladimir I, 120 pages

Coalcorp Kaufvertrag La Francia I+II Goldman Sachs

A REPORT ON PUBLIC INTEREST LAWYERING, LEGAL AID AND PARA LEGAL SERVICES- by Tezoswie Dowarah

by: Tezoswie Dowarah, 36 pages

A REPORT ON PUBLIC INTEREST LAWYERING, LEGAL AID AND PARA LEGAL SERVICES- by Tezoswie Dowarah

Goldman Sachs JBWere Asset Management Trade Management Policies

by: jenni, 2 pages

Goldman Sachs JBWere Asset Management Trade Management Policies

Investment Leader Joins Goldman Sachs JBWere Asset Management

by: beert, 2 pages

Investment Leader Joins Goldman Sachs JBWere Asset Management

Deep Research Report on Global and China Solar Back Sheet Industry 2012

by: ronethell, 10 pages

This research on Solar Back Sheet Industry having 163 Tables and Figures is a professional and in-depth research report on global and China Solar Back Sheet markets. Firstly, the report has ...

Deep Research Report on Global and China MBR Membrane Industry 2012

by: ronethell, 18 pages

This research on MBR Membrane industry having 359 Tables and Figures is a professional and in-depth research report on global and China MBR membrane markets. Firstly, the report has introduced MBR ...

2012 Deep Research Report on China Wind Turbine Control Systems Industry

by: ronethell, 14 pages

This report consisting of 199 Tables and Figures was published by QYResearch Wind Energy Research Center on Jul 2012. It was a professional and depth research report on China Wind Power Control ...

2012 Deep Research Report on China Wind Turbine Nacelle Cover Industry

by: comeonseo, 3 pages

2012 Deep Research Report on China Wind Turbine Nacelle Cover Industry is a professional and in-depth research report on China Wind turbine Nacelle Cover market.

2012 Deep Research Report on China Wind Bearing Industry

by: comeonseo, 3 pages

2012 Deep Research Report on China Wind Bearing Industry is a professional and in-depth research report on China Wind Bearing market.

2012 Deep Research Report on China Wind Turbine Gearbox Industry

by: ronethell, 18 pages

2012 Deep Research Report on China Wind Turbine Gearbox Industry is a professional and in-depth research report on China Wind Turbine Gearbox market.

Content Preview

May 9, 2012
Brazil: Banks


Equity Research
Getting over the hump: Insights from deconstructing auto NPLs bode well for ITUB/BBAS
Lax underwriting vs. cyclical NPLs
Updating estimates to reflect 1Q, guidance
Much of the pressure on asset quality being
We revise estimates to reflect 1Q2012 results,

COVERAGE SUMMARY
Price
experienced by the system is being driven by
updated macro assumptions, and provision
Ticker
May 08
Rating
In R$
NPLs on the auto portfolio originated in late 2010
expense guidance disclosed by banks following
Banco Bradesco
BBDC4.SA
R$29.60
Neutral
and early 2011 (particularly for Itau Unibanco and
results. In general, we lower EPS estimates in
Itau Unibanco Holding
ITUB4.SA
R$32.83
Buy
Banco Santander Brasil
SANB11.SA
R$15.95
Neutral
Banco do Brasil). As we get more data from banks
2012 (-2.9% on average) on higher provision
Banco do Brasil
BBAS3.SA
R$27.07
Buy
on these NPLs (especially 30-day NPLs on the first
expenses, and in 2013 (-6.2%) and 2014 (-2.3%)
Itausa
ITSA4.SA
R$9.86
Buy
In US$
installment), it increasingly appears that the
driven by lower expected base interest rates
Banco Bradesco (ADR)
BBD
$19.24
Neutral
Itau Unibanco Holding (ADR)
ITUB
$21.34
Buy
problems arose as a result of lax underwriting
(which hurt margins). For 2012, we continue to
Banco Santander Brasil (ADR)
BSBR
$10.25
Neutral
standards, which were then compounded by a
believe the second half could surprise positively.
12-month Target Prices
cyclical downturn. This in part explains how NPL
Target price
New
Previous
% chg
ratios could increase even as unemployment
Reiterate preference for ITUB and BBAS
In R$
Banco Bradesco
R$35.10
R$36.00
-2.5%
reached all-time lows.
We adjust our target prices to reflect our new
Itau Unibanco Holding
R$39.90
R$41.30
-3.4%
Banco Santander Brasil
R$18.90
R$19.50
-3.1%
estimates, on average lowering them by 3%. Itau
Banco do Brasil
R$34.60
R$35.40
-2.3%
Less pressure from provisions in 2013E
Unibanco and Banco do Brasil shares have de-
Itausa
R$12.10
R$12.63
-4.2%
In US$
Both Itau Unibanco and Banco do Brasil have
rated on asset quality fears and are trading close
Banco Bradesco (ADR)
$20.00
$20.60
-2.9%
taken measures to improve origination standards,
to the lowest multiples since the 2008 crisis. With
Itau Unibanco Holding (ADR)
$22.80
$23.60
-3.4%
Banco Santander Brasil
$10.80
$11.20
-3.6%
resulting in a significant decline in approval
the recovery we increasingly see for 2013, we find

Source: Goldman Sachs Research estimates.
ratings. As poorly originated loans become
the shares to be mispriced in absolute terms and
further past due, they will require more
relative to peers, and reiterate our Buy ratings. We

provisions, which will come mostly in 2012. But
maintain our Buy rating for Itausa (holding
for 2013 we expect much of the pressure to be
company composed mostly of Itau Unibanco) and
lifted, and consequently results to improve.
Neutral ratings for Bradesco and Santander Brasil.


Carlos G. Macedo
Goldman Sachs does and seeks to do business with companies
+55(11)3371-0887 carlos.macedo@gs.com Goldman Sachs do Brasil CTVM S.A.
covered in its research reports. As a result, investors should be aware
Wesley Okada
+55(11)3371-0875 wesley.okada@gs.com Goldman Sachs do Brasil CTVM S.A.
that the firm may have a conflict of interest that could affect the
Mariana Barros
objectivity of this report. Investors should consider this report as only a
+55(11)3372-0105 mariana.barros@gs.com Goldman Sachs do Brasil CTVM S.A.
single factor in making their investment decision. For Reg AC
Jason B. Mollin
+55(11)3371-0871 jason.mollin@gs.com Goldman Sachs do Brasil CTVM S.A.
certification and other important disclosures, see the Disclosure

Appendix, or go to www.gs.com/research/hedge.html. Analysts
employed by non-US affiliates are not registered/qualified as research

analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc.

Global Investment Research

May 9, 2012

Brazil: Banks

Overview: Significant value in ITUB and BBAS after breaking down auto NPLs
Brazilian large-cap banks (Itau Unibanco, Bradesco, Santander Brasil and government-controlled Banco do Brasil) are the largest
financial groups in Latin America. They operate mostly within Brazil, and are exposed to the potential and risks of their home market.
The potential lies in the still relatively low level of financial penetration (compared to developed peers), supported by a relatively
concentrated market structure. The risks lie in the growing pains of a developing market, including the effects of excessive
borrowing and the occasional episode of government intervention.
Growing pains in 2012. Developments in 1Q2012 have shown some of these growing pains. Banks are going through a cyclical
NPL crisis, which is in part associated with lax loan standards at the end of 2010 and early 2011 (particularly in auto loans). The
performance of auto loans originated in this period, when approval rates, loan to value and terms were higher, has been
significantly worse than historical averages, leading to a substantial increase in provisioning expenses (especially for Itau Unibanco
and Banco do Brasil subsidiary Banco Votorantim). The banks have largely addressed the underwriting issues, and new vintages
have shown improvement. While results for 2012 are set to suffer from higher provisions, we expect less pressure in 2013.
Profitability should recover in 2013. Based on this, we reiterate our confidence that profitability will normalize in 2013 after a down
year in 2012. Normalized provision expenses, partially offset by a base-interest-rate driven decline in margins, should allow ROAs to
expand 10-20 bp yoy, and push ROEs close to 20%. The sustainability of ROEs at the 20% level depends largely on the banks' ability
to improve operational efficiency, since we continue to believe that margins will contract over the next several years.
Favor Itau Unibanco and Banco do Brasil. In this context, we favor the banks that have suffered the most for the recent asset
quality concerns: Itau Unibanco and Banco do Brasil. Shares for both banks have experienced a significant de-rating and are now
trading at some of the lowest multiples since the 2008 crisis. With the recovery we increasingly see for 2013, we find the shares to
be mispriced in absolute terms and relative to peers, and reiterate our Buy ratings. We also have a Buy rating for Itausa, the holding
company that has Itau Unibanco as its main asset. We have Neutral ratings for Santander Brasil and Bradesco.
Updating estimates and price targets. We update our estimates to reflect 1Q results, new guidance given by management and
new macro assumptions with lower base interest rates for 2012 and 2013. Mostly driven by lower NIM and higher provision
expenses, we lower 2012E-2014E EPS by on average 2.9%, 6.2%, and 2.3%. The changes to our estimates lead us to adjust our 12-
month target prices, which on average decline by 2.8%.
Exhibit 1: We update our target prices and estimates for Brazilian large-cap banks
12-month target price
2012E EPS
2013E EPS
Multiples
Price as
%
Upside/
%
%
2013E
2012E
Rating
of 5/08/12
Previous
Current
change
Downside
Previous
Current
change
Previous
Current
change
P/E
P/BV
Local, in R$
Itau Unibanco
Buy
29.05

41.30

39
.90
-3.4%
37.3%
3
.31
3.13

-5.4%
3 .99
3 .84
-3.9%
7.6X
1.7X
Bradesco
Neutral
29.53

36.00

35
.10
-2.5%
18.9%
2
.88
2.79

-3.0%
3 .36
3 .17
-5.7%
9.3X
1.8X
Santander Brasil
Neutral
16.01

19.50

18
.90
-3.1%
18.1%
1
.84
1.81

-1.4%
2 .27
2 .07
-8.5%
7.7X
1.2X
Banco do Brasil
Buy
22.92

35.40

34
.60
-2.3%
51.0%
3
.65
3.58

-1.8%
4 .31
4 .02
-6.7%
5.7X
1.0X
Itausa
Buy
8
.80
12.63

12
.10
-4.2%
37.5%
1
.11
1.09

-1.7%
1 .27
1 .35
6.3%
6.5X
1.3X
ADR, in US$
Itau Unibanco
Buy
15.00

23.60

22
.80
-3.4%
52.0%
1
.90
1.78

-6.4%
2 .28
2 .19
-3.9%
6.8X
1.5X
Bradesco
Neutral
15.24

20.60

20
.00
-2.9%
31.2%
1
.66
1.59

-4.2%
1 .92
1 .81
-5.7%
8.4X
1.6X
Santander Brasil
Neutral
8
.20
11.20

10
.80
-3.6%
31.7%
1
.06
1.03

-2.5%
1 .30
1 .19
-8.5%
6.9X
1.0X
Source: Goldman Sachs Research estimates.
Goldman Sachs Global Investment Research
2

May 9, 2012

Brazil: Banks

Auto NPLs: Separating lax underwriting from the cycle
As more data comes out regarding auto finance, we become increasingly convinced that much of the current asset quality problems
facing some banks in Brazil (particularly Itau Unibanco and Banco do Brasil) were caused by lax underwriting standards in auto
loans, specifically between June 2010 and June 2011. While these problems will likely continue to weigh on earnings over the next
two to three quarters, we believe that 2013 should show a marked improvement.
The problem: Lax underwriting in late 2010 and early 2011
In mid-2010, real GDP growth for Brazil was above 6% yoy, the outlook for the global economy was improving and Brazilian banks
had significant appetite to expand loan books. The main vehicle for this expansion was auto loans, which were perceived to be
relatively safe given the real asset guarantee structure of the loans. So banks, led by Itau Unibanco and Banco do Brasil's subsidiary
Banco Votorantim, slightly lowered underwriting standards by: (1) increasing terms, (2) lowering loan to value, and (3) increasing
approval rates for new loans. Another factor was that banks started migrating away from used car financing, believing it to be
higher risk, and moving towards new car financing. However, with most origination focused on that segment, competition led to a
further erosion of underwriting standards.
This transformation is visible in the metrics for Banco Votorantim's auto loan portfolio. Given that the metrics are for average
portfolio, origination trends were likely even more strongly tilted in that direction. We believe that metrics for Itau Unibanco were
similar, with the exception that most of the origination was focused on new as opposed to used vehicles. Not surprisingly, system-
wide origination of auto loans increased significantly right through the middle of 2011.

Exhibit 2: Key metrics for Banco Votorantim auto loans indicate a slight
Exhibit 3: Originations of auto loans increased significantly through the
relaxation in underwriting standards in late 2010 and early 2011
middle of 2011
Average daily auto loan originations, R$ million
Metric
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11

600
Average term
50.0 50.0 52.0 50.8 48.4 48.8
(months)
500
% of used
400
vehicles out of
65.6% 77.2% 78.5% 70.1% 69.6% 69.1%
total
300
Average rate for
200
22.4% 22.4% 21.0% 23.9% 29.8% 28.3%
the vintage
100
Loan to value
65.6% 73.8% 74.9% 67.8% 67.9% 67.4%
0
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11


Source: Company data.
Source: Brazilian Central Bank.

Goldman Sachs Global Investment Research
3

May 9, 2012

Brazil: Banks

Changes to risk-weightings for consumer loans implemented by the Central Bank in late 2010 may have been a contributory factor.
They increased the capital requirements for longer duration loans, such as auto finance. To compensate for the additional capital,
banks increased lending rates on auto loans while approval rates did not change materially.
A final problem was a decline in the value of used cars, which started in early 2010. This decline reduced the incentive of borrowers
that obtained loans for new vehicles with high loan to value to pay their installments, given that the value of the down-payment
disappeared as soon as the car was driven off the lot.
The lower underwriting standards led the banks to give loans to borrowers that should not receive loans, a classic Type II error. The
strongest evidence of this is the percentage of first installments past due more than 30 days, which rose significantly in data
available for Banco Votorantim. In our view, missing payment on the first installment of a loan by more than 30 days is a clear
indicator that the loan will likely never be fully paid. These unpaid first installments eventually became full-blown NPLs, and the 90-
day NPL ratio for auto loans nearly doubled since February 2011.

Exhibit 4: Past due first installments on auto loans almost tripled in late 2010
Exhibit 5: ...Which was reflected on industry overall NPL figures, which
and early 2011 for Banco Votorantim...
increased consistently since December 2010
30-day past due first installment for Banco Votorantim auto loans
System-wide NPL ratios for auto loans

4.5%
6.0%
4.0%
5.5%
3.5%
5.0%
3.0%
4.5%
2.5%
4.0%
3.5%
2.0%
3.0%
1.5%
2.5%
1.0%
2.0%
0.5%
7
8
8
8
8
8
8
9
9
9
9
9
9
0
0
0
0
0
0
1
1
1
1
1
1
2
-
0
-
0
0
-
0
0
-
0
-
0
0
-
0
0
-
0
-
1
1
-
1
1
-
1
-
1
1
-
1
1
-
1
-
1
0.0%
c
r
-0
g
t-
c
r
-0
g
t-
c
r
-1
g
t-
c
r
-1
g
t-
c
9
9
9
9
0
0
0
0
0
0
0
0
0
0
0
0
1
1
1
1
1
1
1
1
1
un-
un-
un-
un-
De
Feb
Ap
J
Au
Oc
De
Feb
Ap
J
Au
Oc
De
Feb
Ap
J
Au
Oc
De
Feb
Ap
J
Au
Oc
De
Feb
-
0
-
0
-
0
-
1
-
1
-1
-
1
-
1
-
1
-
1
-
1
-
1
-
1
-1
-
1
-
1
-
1
p
t
-
0
v
c
n
b
r
-1
r
-1
y
n
l
-
1
g
p
t
-
1
v
c
n
b
r
-1
r
-1
y
n
l
-
1
g
p
15-30 day NPL
30-90 day NPL
>90 day NPL
Se
Oc
Ju
Ju
No
De
Ja
Fe
Ma
Ap
Ma
Ju
Au
Se
Oc
No
De
Ja
Fe
Ma
Ap
Ma
Ju
Au
Se


Source: Company data.
Source: Brazilian Central Bank.
Itau Unibanco and Banco do Brasil were hit the hardest by this. They were the fiercest competitors in the new car market, and where
we believe the approval rates for auto loans were the highest. We do not believe Bradesco was as strongly involved, as is shown by
the limited pressure on Bradesco's NPLs. Santander Brasil was not operating its auto loan business at full capacity, still integrating
operations from the merger with ABN Amro Real.
To us, this was an underwriting problem driven by competition and the perception of security created by the real guarantees of auto
loans. In a way, it was similar to the unsecured personal loan problems experienced in late 2005 and early 2006, when banks
aggressively extended personal loans to non-account holders through non-traditional banking outlets, hoping that the high spreads
would offset credit costs. When delinquency proved too strong to handle, banks shut these businesses down, and brands such as
Finasa, Fininvest, and Taii lost value. Much like that time, upon perceiving the problem banks have acted swiftly. However, auto
loans have a much longer duration than personal loans, prolonging the impact on the balance sheet and income statement.
Goldman Sachs Global Investment Research
4

May 9, 2012

Brazil: Banks

Addressing the problem: Good and bad news
Starting in the middle of 2011, banks (and Itau Unibanco and Banco Votorantim, specifically), started addressing the underwriting
issues. Approval rates dropped significantly, loan to values declined and terms shortened. Not surprisingly, auto loan origination
decelerated.

Exhibit 6: Terms for auto loans declined as underwriting standards tightened
Exhibit 7: ...leading to a deceleration in auto loan origination
System-wide terms for auto loans
System-wide average daily origination of auto loans, R$ million
590

600
570
500
550
400
530
300
510
200
490
470
100
450
0
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11

Source: Brazilian Central Bank.
Source: Brazilian Central Bank.
The good news is that the effects of the tougher lending standards had an immediate impact on asset quality. The percentage of
first installments past due quickly declined to historical averages for Banco Votorantim, and we believe the same applies to Itau
Unibanco. System-wide data started to show a deceleration in the pace of growth in auto NPLs, a trend we believe will intensify
throughout the year and lead to lower NPL ratios towards the end of 2012.

Exhibit 8: First installment NPLs for Banco Votorantim normalized...
Exhibit 9: ...leading early indicators of asset quality to improve
30-day past due first installment for Banco Votorantim auto loans
System-wide yoy growth for auto NPLs

4.5%
160%
140%
4.0%
120%
3.5%
100%
3.0%
80%
2.5%
60%
40%
2.0%
20%
1.5%
0%
1.0%
-20%
0.5%
-40%
8
9
9
9
9
0
0
0
0
1
1
1
1
2
0.0%
-
0
0
-
0
-
0
1
-
1
-
1
1
-
1
-
1
0
0
0
0
r
-
0
r
-
1
r
-
1
r
-
1
1
1
1
1
1
1
1
2
c
p
c
p
c
p
c
1
1
10
1
1
1
11
un-
un-
un-
l-
-
10
-
1
-
1
-
11
-
11
-
1
-
1
-
11
-
11
-
1
-
1
-
12
-
12
g
t-
v-
n
b
r-
y
n
l-
g
t-
v-
n
b
r
-1
De
Ma
J
Se
De
Ma
J
Se
De
Ma
J
Se
De
Ma
Ju
o
Ju
o
Au
Sep
Oc
N
Dec
Ja
Fe
Ma
Apr
Ma
Ju
Au
Sep
Oc
N
Dec
Ja
Fe
Ma
15-30 day NPL
30-90 day NPL
>90 day NPL

Source: Company data.
Source: Brazilian Central Bank.
Goldman Sachs Global Investment Research
5

May 9, 2012

Brazil: Banks

The bad news is that, despite a visible improvement on the margin, the effects of the nine-month period of poor underwriting will
likely still have a negative impact on 2012 results. The duration of the loans means that it takes longer for them to fall off the books.
In Brazil, Law 2,682 determines the amount of provisioning for consumer loans depending on how long they have been past due
(Exhibit 10). However, for loans with remaining terms that are longer than 36 months, the amount of time past due to provision
doubles (Exhibit 11). This means that, unlike shorter-term consumer loans, auto loans are only fully provisioned after 360 days (not
180) and only written off after 540 days (not 360). The non-performing auto book thus stays on the balance sheet for a longer time.
An additional complication is that as the terms on the loans decline below 36 months, provisioning must be accelerated so that they
comply with provisioning rules for shorter-term loans. This means that even though the amount of time the loan is past due does
not change at all, the amount of provisions necessary increases considerably. For instance, for a loan with more than 36 months
remaining in term and that is past due 121 days a bank would have to provision 10% of the balance, consistent with a "D" rating.
However, the instant the term of the loan declines to 36 months, the provisioning table changes, and the loan would now be
classified as "F" and the bank would have to provision 50% of the balance (Exhibit 10).
What this means is that even though we expect the absolute amount of NPLs to decline through the end of the year, largely as a
result of write-offs from the portfolios originated in late 2010, provision expenses are likely to remain high, as many of the loans
given out during the lax underwriting period move to remaining terms of under 36 months and have their provisioning accelerated.
This in part may explain the strong provision expense guidance given by Itau Unibanco following 1Q2012 results.

Exhibit 10: The amount of time to provision doubles for loans with remaining
Exhibit 11: Declining terms can lead to significantly higher provisioning
terms of over 36 months
Impact on provisioning of a loan past due 121 days moving from 37 months
Provisioning rules under law 2,682
remaining in term to 36
Number of days
Number of days
Percentage of
past due (<36
past due (>36
Rating
loan provisioned
month term)
month term)
100
100
AA 0%
0
0
A 0.5%
0
0
B
1.0%
15 to 30
30 to 60
C
3.0%
31 to 60
61 to 120
D
10.0%
61 to 90
121 to 180
50
E
30.0%
91 to 120
181 to 240
F
50.0%
121 to 150
241 to 300
10
G
70.0%
151 to 180
301 to 360
H
100.0%
over 180
over 360
37 months
36 months

Write-off
360
540


Source: Company data.
Source: Goldman Sachs Research estimates.
Goldman Sachs Global Investment Research
6

May 9, 2012

Brazil: Banks

Outlook for 2013 provisions seems much better
Despite the unfavorable outlook for the remainder of 2012, we have confidence in an improvement for 2013. Early data on new auto
loan vintages seems promising, and leading indicators of asset quality point in the right direction. Moreover, by early 2013 most of
the problem loans given out at the end of 2010 and early 2011 will have fallen off the books, allowing NPL ratios to improve and
provisioning expense growth to decelerate. It is important to separate the cyclical/secular provisioning, which is driven by macro
and structural reasons, from the underwriting-driven provisioning, which is the result of lax underwriting standards. Only the latter
is fully addressable by the banks, and can produce meaningful improvement in asset quality. Based on this, and the improvements
we believe are already in place, we expect provision expenses (particularly for Itau Unibanco) to remain flat in 2013 compared to
2012 (Banco Votorantim represents only a small part of Banco do Brasil's overall provision expenses), and that profitability levels
will partially normalize (offset by weaker expected margins).

Exhibit 12: We believe provision expenses in 2012 will be hit by underwriting-
Exhibit 13: We have provision expenses for Itau Unibanco flat in 2013,
driven provisions that will fade and not show up in 2013
allowing for a recovery in profitability
Sample composition of provision expenses
Provision expense forecast for Itau Unibanco

40,000
8.0%
35,000
7.0%
30,000
6.0%
25,000
5.0%
20,000
4.0%
15,000
3.0%
10,000
2.0%
5,000
1.0%
0
0
0
0
1
1
1
1
2
2
2
2
3
3
3
3
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0
0.0%
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2008
2009
2010
2011
2012E
2013E
2014E
Secular/cyclical
Underwriting-driven
Provision expenses (LHS)
Provision expenses as a % of avg. loans (RHS)


Source: Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
Goldman Sachs Global Investment Research
7

May 9, 2012

Brazil: Banks

1Q2012 review: Weakening asset quality is key theme
Results for 1Q2012 were uninspiring, with recurring ROEs declining almost across the board. The defining theme for the quarter was
poor asset quality, not only through increasing NPLs but also through a sequential increase in provision expenses, which limited
EPS expansion. Loan growth was also weak, in part for seasonal reasons and also driven by lower loan approval ratings by the
banks. Margins were mixed, through we believe that lower rates will inevitably lead to some compression through the year. Fee
income growth was weak, much of it seasonal. Seasonality on personnel and marketing expenses also helped admin expenses, but
an important part of the improvement was driven by efficiency gains.
Exhibit 14: Higher provision expenses hurt 1Q2012 results
Score card for 1Q2012 results
Delivered?
Total
Item
BBAS
BBDC
ITUB
SANB
Score
Comment
Loan growth was weak througout, the combination of a seasonally weaker quarter with a
Loan growth
Pass
No
No
No
0.5
cyclical downturn.
Adjusted for trading, repos and recoveries, Santander Brasil was the only bank to strength
Resilient margins
No
No
Pass
Yes
1.5
despite declining base rates.
Better asset
NPLs increased, leading to an even stronger increase in provision expenses. Guidance for
No
Pass
No
Pass
1.0
quality
future quarters was probably worst than the actual results.
Fee income
In a seasonally weak quarter, fee income growth disappointed across the board with the
No
No
No
Pass
0.5
growth
exception of Santander Brasil, where it is the least relevant on a relative basis.
Admin expenses
Seasonally favorable quarter for expenses (lower personnel and marketing expenses), yet
Yes
Yes
Yes
Pass
3.5
control
contraction was generally better than expected.
Results looked strongest for Santander Brasil, but the differences were not significant. The
Total
score
1.5 1.5 1.5 2.5
similarity was higher provisions and weak asset quality.

Source: Goldman Sachs Research.
Looking at the sequential evolution of results, it becomes clear that much of the improvement in 4Q2011 was driven by slightly
lower provision expenses, offset by seasonally higher admin expenses, the exact opposite of what happened in 1Q2012. Even
though there still is a visible difference in ROA (with Itau Unibanco at the top and Banco do Brasil at the bottom), ROEs seem to be
converging slightly below 20% (the exception is Santander Brasil, where the leverage is much lower). We still see pressure on ROEs
in 2Q2012, with provision expenses still high. However, we expect asset quality to start improving in 2H2012, lowering provision
expenses, though partially offset by weaker margins. See Exhibit 15.
Goldman Sachs Global Investment Research
8

May 9, 2012

Brazil: Banks

Exhibit 15: Weaker asset quality led to stronger provision expenses, offsetting efficiency gains and pushing ROA and ROE downwards
Quarterly data for the banks; total assets adjusted for repos
PROVISION EXPENSE TO AVERAGE
NON-FINANCIAL REVENUES/EXPENSES TO
NII TO AVERAGE ASSETS
ASSTES
AVERAGE ASSETS
ROA TO ROE
10.0%
-4.5%
-4.5%
3.0%
9.5%
-4.0%
-4.0%
9.0%
2.5%
-3.5%
-3.5%
8.5%
-3.0%
-3.0%
2.0%
8.0%
-2.5%
-2.5%
7.5%
1.5%
-2.0%
-2.0%
7.0%
6.5%
-1.5%
-1.5%
1.0%
6.0%
-1.0%
-1.0%
0.5%
5.5%
-0.5%
-0.5%
5.0%
0.0%
0.0%
0.0%
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
Itau Unibanco
Bradesco
Santander Brasil
Itau Unibanco
Bradesco
Santander Brasil
Itau Unibanco
Bradesco
Santander Brasil
Itau Unibanco
Bradesco
Santander Brasil
Banco do Brasil
Average

Banco do Brasil
Average
Banco do Brasil
Average
Banco do Brasil
Average

Lower base rates continue to have a negative
Provision expenses increased across the board,
1Q tends to be seasonally favorable for expenses
ROA in general declined again sequentially, hurt
effect on NII, with little relative help from trading
back to the levels of mid-2011, on the back of a
and negative for fee revenues, and 1Q2012 was
by higher provision expenses. There were not
gains. The outlier was Santander Brasil, though
slight increase in NPLs. NPL creation also
no exception. On the expense side, however, we
material changes to leverage, with the possible
we find it unlikely that NIM will withstand the
increased, maintaining the trend from late 2010.
believe part of the improvement was in addition
exception of Bradesco. ROE seems to converging
impact of lower base rates in 2H2012.
We expect improvement in 2H2012.
to the seasonal trend.
at below 20%, with improvement only in 2H2012.
Trading gains (ex-Banco do Brasil, R$ mn)
Provision expenses to average loans
Fee revenues to average assets
Leverage
3,000
-9%
4.0%
18X
-8%
2,500
3.5%
16X
-7%
-6%
3.0%
14X
2,000
-5%
2.5%
12X
-4%
1,500
-3%
2.0%
10X
1,000
-2%
1.5%
8X
-1%
500
0%
1.0%
6X
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
0
Itau Unibanco
Bradesco
Santander Brasil
Itau Unibanco
Bradesco
Santander Brasil
Itau Unibanco
Bradesco
Santander Brasil
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

Banco do Brasil
Average
Banco do Brasil
Average
Banco do Brasil
Average

NIM adj. for repos, recoveries and trading
90-day NPL ratio
Admin expenses to average assets
ROE
12.0%
10.0%
-6.0%
35%
9.0%
11.0%
30%
8.0%
-5.0%
10.0%
7.0%
25%
-4.0%
9.0%
6.0%
20%
5.0%
-3.0%
8.0%
4.0%
15%
-2.0%
7.0%
3.0%
10%
2.0%
6.0%
-1.0%
5%
1.0%
5.0%
0.0%
0.0%
0%
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
Itau Unibanco
Bradesco
Santander Brasil
Itau Unibanco
Bradesco
Santander Brasil
Itau Unibanco
Bradesco
Santander Brasil
Itau Unibanco
Bradesco
Santander Brasil
Banco do Brasil
Average

Banco do Brasil
Average
Banco do Brasil
Average
Banco do Brasil
Average

Loan growth, yoy
NPL creation (as a % of average loans)
Other expense/revenue to average assets
45.0%
12.0%
-4.5%
40.0%
-4.0%
10.0%
35.0%
-3.5%
30.0%
8.0%
-3.0%
25.0%
-2.5%
6.0%
20.0%
-2.0%
15.0%
4.0%
-1.5%
10.0%
-1.0%
2.0%
5.0%
-0.5%
0.0%
0.0%
0.0%
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
Itau Unibanco
Bradesco
Santander Brasil
Itau Unibanco
Bradesco
Santander Brasil
Itau Unibanco
Bradesco
Santander Brasil
Banco do Brasil
Average

Banco do Brasil
Average
Banco do Brasil
Average
Source: Company data.
Goldman Sachs Global Investment Research
9

May 9, 2012

Brazil: Banks

Compared to 4Q2011, it becomes clear that the pressure was driven by higher provision expenses and slightly lower NII, offset by
lower personnel and admin expenses. The only bank to show an improvement in ROA was Santander Brasil, though that was
mostly the result of a lower effective tax rate. See Exhibit 16.
Exhibit 16: Much of the decline in ROA in 1Q2012 was driven by higher provision expenses
Breakdown of ROE (assets adjusted for repos)
4Q2011
1Q2012
Difference
Itau
Santander
Banco do
Itau
Santander
Banco do
Itau
Santander
Banco do
Unibanco
Bradesco
Brasil
Brasil
Average
Unibanco
Bradesco
Brasil
Brasil
Average
Unibanco
Bradesco
Brasil
Brasil
Average
Interest income
15.1%
14.2%
13.0%
13.2%
14.0%
14.3%
13.3%
12.7%
13.0%
13.4%
-84 bp
-85 bp
-32 bp
-19 bp
-55 bp
Interest expense
-7.3%
-7.7%
-5.9%
-7.6%
-7.2%
-6.6%
-7.0%
-4.9%
-7.7%
-6.8%
74 bp
65 bp
97 bp
-11 bp
48 bp
NII before provisions expense
7.8%
6.5%
7.2%
5.6%
6.7%
7.7%
6.3%
7.8%
5.4%
6.7%
-10 bp
-21 bp
65 bp
-29 bp
-8 bp
Provisions expenses
-3.0%
-1.8%
-2.6%
-1.4%
-2.1%
-3.2%
-1.9%
-3.2%
-1.7%
-2.4%
-28 bp
-9 bp
-63 bp
-30 bp
-28 bp
NII after provisions expense
4.9%
4.8%
4.6%
4.2%
4.6%
4.5%
4.5%
4.6%
3.6%
4.2%
-38 bp
-30 bp
2 bp
-59 bp
-36 bp
Commission and fee income
2.8%
2.5%
2.1%
2.5%
2.5%
2.7%
2.3%
2.3%
2.5%
2.5%
-8 bp
-13 bp
20 bp
-5 bp
-4 bp
Insurance contribution
0.4%
0.6%
0.1%
0.3%
0.4%
0.4%
0.5%
0.1%
0.3%
0.3%
-4 bp
-7 bp
2 bp
-1 bp
-2 bp
Personnel expenses (including profit sharing)
-1.8%
-1.9%
-1.6%
-2.3%
-2.0%
-1.8%
-1.6%
-1.7%
-2.1%
-1.9%
-2 bp
27 bp
-8 bp
23 bp
12 bp
Other administrative expenses
-2.1%
-2.2%
-1.9%
-1.5%
-1.9%
-1.8%
-1.9%
-1.9%
-1.6%
-1.8%
24 bp
29 bp
0 bp
-5 bp
13 bp
Sales tax expenses
-0.6%
-0.7%
-0.6%
-0.6%
-0.6%
-0.6%
-0.6%
-0.7%
-0.5%
-0.6%
-2 bp
4 bp
-11 bp
4 bp
0 bp
Other income/expenses
-0.6%
-0.7%
-0.9%
-0.3%
-0.6%
-0.6%
-0.7%
-0.9%
-0.3%
-0.6%
0 bp
-2 bp
-4 bp
-2 bp
-2 bp
Operating income
3.0%
2.3%
1.7%
2.2%
2.4%
2.7%
2.4%
1.7%
1.8%
2.2%
-30 bp
9 bp
1 bp
-44 bp
-19 bp
Non-operating income and minority interest
-0.1%
0.0%
0.1%
0.0%
0.0%
-0.1%
0.0%
0.0%
0.0%
0.0%
3 bp
-1 bp
-2 bp
1 bp
0 bp
Income taxes
-0.9%
-0.7%
-0.3%
-0.7%
-0.7%
-0.7%
-0.8%
-0.1%
-0.5%
-0.6%
15 bp
-11 bp
17 bp
24 bp
11 bp
ROA
2.0%
1.6%
1.5%
1.5%
1.7%
1.9%
1.6%
1.6%
1.3%
1.6%
-12 bp
-2 bp
15 bp
-19 bp
-7 bp
Leverage
10.5X
12.1X
9.1X
14.1X
11.5X
10.3X
12.4X
8.7X
14.0X
11.4X
-0.2X
0.3X
-0.4X
0.0X
-0.1X
ROE
20.9%
19.8%
13.5%
21.2%
19.1%
19.3%
19.9%
14.3%
18.4%
18.2%
-161 bp
15 bp
74 bp
-279 bp
-98 bp
Source: Company data.
Goldman Sachs Global Investment Research
10

Download
Goldman Sachs report on Brazil Banks

 

 

Your download will begin in a moment.
If it doesn't, click here to try again.

Share Goldman Sachs report on Brazil Banks to:

Insert your wordpress URL:

example:

http://myblog.wordpress.com/
or
http://myblog.com/

Share Goldman Sachs report on Brazil Banks as:

From:

To:

Share Goldman Sachs report on Brazil Banks.

Enter two words as shown below. If you cannot read the words, click the refresh icon.

loading

Share Goldman Sachs report on Brazil Banks as:

Copy html code above and paste to your web page.

loading