Banking Sector Update Brazil M ARCH 1, 2010 Submitted by:
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Table of Contents KEY SECTOR HIGHLIGHTS.......................................................................................................................... 2 BANKING SECTOR OVERVIEW ................................................................................................................. 4 I. BANK LENDING ON A RISE DESPITE GLOBAL SLOWDOWN ........................................................................... 4 II. RETAIL LOANS OUTPACING GROWTH IN CORPORATE LOANS .................................................................... 5 III. IMPROVING OUTLOOK ON CREDIT QUALITY ............................................................................................. 5 IV. BANKS IN BRAZIL REMAIN WELL CAPITALIZED .......................................................................................... 6 V. PROFITABILITY DECREASED IN LINE WITH GLOBAL PEERS ............................................................................ 6 M&A ACTIVITY TO GAIN MOMENTUM IN 2010.................................................................................... 8 I. PLANO REAL LED THE CROSS-BORDER CONSOLIDATION DRIVE IN BRAZIL .................................................. 8 II. RECENT BANKING M&A DEALS AND OUTLOOK ....................................................................................... 8 VALUATIONS REMAIN ATTRACTIVE ...................................................................................................... 10 I. BRAZIL BANKS 窶天ALUATION ................................................................................................................... 10
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KEY SECTOR HIGHLIGHTS •
Improving economic conditions augur well for the banking sector. Brazil's GDP is expected to grow by 4.7% in 2010 after a mild contraction of 0.4% in 2009, according to the IMF estimates. Brazil's economy will benefit from improving domestic consumption, a pick-up in investment activity as well as a modest recovery in commodity prices. Unemployment levels remain stable, while wages are gradually ticking up. With more than 192 mn people, Brazil has the fifth largest population in the world. About 25% of the total population is under the age of 14, which is expected to drive domestic demand and economic growth. With Rio hosting the 2016 Olympic Games, foreign investments are likely to increase further. According to government sources FDI is likely to increase by 33% to USD 40bn in 2010. Given the strong government balance sheet and improving debt structure, Moody's upgraded Brazil's ratings from Ba1 to Baa3 and assigned a positive outlook in Sep 2009. Chart 1: Real GDP Growth Rate (in percentage) 18 14 10 6 2 -2
2006
2007
2008
2009E
2010E
2011E
2012E
-6 -10
Brazil Mexico
Argentina Peru
China Russia
India United States
Source: IMF WEO database
•
Banking activity remains robust. Despite the economic slowdown, the banking sector in Brazil witnessed a double digit growth in loans and deposits. Banking assets have grown over 20% p.a. in the 2005-2009 period, and is expected to grow at around 10% p.a. during the 2009-2013 period. Retail banking has grown at a CAGR of 27.6% in the 2004-2009 period. Healthy population growth and improving income levels have been primarily driving retail banking. While investments by businesses has remained subdued due to the recent economic uncertainty, stabilizing commodity prices and increasing foreign investments are likely to drive corporate banking in the near term.
•
Strong regulatory framework helped banks to weather the crisis. The banking sector in Brazil remains fundamentally strong and adequately capitalized (Capital Adequacy Ratio – 18.5% in 2009). To minimize the impact of recessionary pressures on the economy, the Central Bank injected around BRL 100bn in Sep 2008 and slashed the benchmark lending rate several times during 2009. This ensured that there were no liquidity issues in the financial
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system. With considerable improvement in the economic environment, the Central Bank may roll back some of the stimulus measures to rein inflation. We believe these are steps in the right direction and do not expect any significant downturn in lending activity. •
M&A activity likely to gain traction. The banking sector in Brazil is characterized by too many players, while a majority of the assets remain concentrated with a few banks. Given the large population, low banking penetration levels and improving economic environment, many foreign banks are planning strategic partnerships and acquisitions to gain access to this market. This in turn, is also forcing domestic players to consolidate in order to survive competitive pressures. Hence we believe M&A activity especially in the banking sector is likely to gain traction in the near term.
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BANKING SECTOR OVERVIEW The banking sector in Brazil is highly fragmented with over 170 banks which include savings banks, commercial banks, investment banks and development banks. However, the top four players, namely Banco do Brasil, Itau, Bradesco, and Santander, account for around three-fourth of the total banking assets. The banking sector in Brazil has been a facilitator and one of the prime beneficiaries of the economic growth over the past few years. While the Brazilian economy grew at a CAGR of 14% in the 2005-2009 period, the total assets of the banking sector grew at around 23% reaching over BRL 2,865bn in 2009. Banking assets in Brazil are expected to grow at a CAGR of around 10% during the 2009-2013 period.
I. Bank lending on a rise despite global slowdown Despite strong economic headwinds, credit growth for 2009 was 15% YoY. In fact, total outstanding loans increased from BRL 607bn in 2005 to around BRL 1,412bn in 2009, growing at a CAGR of around 23%. Penetration level (Credit to GDP ratio) increased from 28.1% in 2005 to about 45% in 2009. Brazilian Federation of Banks in its survey in Dec 2009 has estimated the lending activity to grow by 19.2% for 2010. However, we expect a moderate increase in lending volumes in the near term as the Central Bank is likely to initiate steps to tighten the monetary policy. Recently the Central Bank raised banking reserve requirements on term deposits. While the basic reserve requirements have been increased from 13% to 15%, the Central Bank has also restored additional demand requirements on cash and term deposits to 8% from 5% and 4%, respectively. These measures are expected to withhold about BRL 71bn from the economy. In January 2009, outstanding loans in Brazil grew by a modest 0.7% MoM to BRL 1.422 trillion (USD 780.5bn), representing 44.6% of GDP. Chart 2: Credit Growth and Banking Penetration 1500 1200 900
100%
92.1% 66.2%
75.1%
84.9% 80%
58.2%
60%
600 300
40%
28.1%
30.8%
34.7%
41.3%
45.0% 20%
0
0% 2005
2006 Total Credit (BRL bn)
2007 Banking Credit to GDP
2008
2009
Banking Assets to GDP
Source: Brazil Central Bank
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The drastic decrease in the provisioning to NPL ratio in 2009 was due to a very high increase in NPLs. We however expect the credit quality to improve going forward. In fact, NPL ratios were at 4.4% in December compared to 4.5% in November, a modest improvement. Loan delinquencies measured as a proportion of total loans or the average loan default rate, also edged marginally lower to 5.5% in January from 5.6% in December.
IV. Banks in Brazil remain well capitalized Banks in Brazil remain well capitalized with Capital Adequacy Ratio (CAR) well above the minimum level set by the regulatory authorities. The Central Bank of Brazil has defined the regulatory minimum CAR of 11%, which is much higher than the 8% required by Basel norms. Banks in Brazil have an average CAR of 18.5% which is much higher compared to its regional and global peers. Table 2: Capital Adequacy Ratio (in percentage) 2004
2005
2006
2007
2008
2009
Argentina
14.0
15.3
16.8
16.9
16.8
17.6
Brazil
18.6
17.9
18.9
18.7
18.4
18.5
Chile
13.6
13.0
12.5
12.2
12.5
13.6
Costa Rica
19.1
20.6
18.8
16.1
15.1
15.4
Mexico
14.1
14.3
16.1
15.9
15.3
15.2
Peru
14.0
12.0
12.5
12.1
11.9
12.9
Australia
10.4
10.4
10.4
10.2
10.9
11.4
Canada
13.3
12.9
12.5
12.1
12.7
10.3
India
12.9
12.8
12.3
12.3
13.0
NA
Russia
17.0
16.0
14.9
15.5
16.8
18.5
US
13.2
12.9
13.0
12.8
12.8
13.5
Note: Latest available figures for 2009
Source: Global Financial Stability Report 2009
V. Profitability decreased in line with global peers Ample liquidity and healthy consumer demand for credit have placed Brazil’s commercial banks among the most solid and profitable financial institutions in Latin America. Net interest income forms the major portion of the total income followed by other income which forms around 23%. However, with an average share of around 20%, fee income also remains a major contributor of total income. Banks in Brazil were in line with major banks globally, despite a recession driven decline in profitability. High NPLs and corresponding high provisions impacted profitability significantly. Loans to deposit ratio dropped sharply in 2008 to 78% from 85% in 2007, before increasing to 82% in 2009, which also impacted profitability. Lending spreads both on the individual and corporate loans decreased and also contributed to subdued earnings. Average spreads declined by 80 bps, to over 24% in December 2009, according to the data provided by the Central Bank. Going forward we believe the expected increase
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in interest rates to curb the rising inflation might lead to decrease in the credit growth and also tighten noose on profitability in the near-term. Table 3: Banking Returns (in percentage) ROE 2007
ROA
2008
2009
2007
2008
Argentina 11.0 13.4 15.6 1.5 1.6 Brazil 22.7 17.9 14.8 2.4 1.8 Chile 16.2 15.2 14.7 1.1 1.2 Costa Rica 13.4 14.3 12.4 1.5 1.8 Mexico 19.9 12.5 12.7 2.7 1.2 Peru 27.9 31.1 27.8 2.5 2.6 Australia 18.1 13.7 NA 1.0 0.7 Canada 16.1 9.1 9.5 0.8 0.4 India 13.2 12.5 NA 0.9 1.0 Russia 22.7 13.3 3.6 3.0 1.8 US 7.8 0.4 2.3 0.8 0.0 Source: Global Financial Stability Report 2009, HSBC. Note: Latest available figures for 2009
2009 1.9 1.6 1.1 1.6 1.2 2.3 NA 0.5 NA 0.5 0.2
Chart 4: Income Breakup: Interest, Fee and Other Income 100% 80% 60%
27%
23%
19%
21%
21%
18%
21%
21%
21%
22%
55%
56%
60%
57%
2003
2004
2005
2006
26%
25%
22%
18%
56%
52%
57%
2007
2008
9M 09
40% 20% 0%
Net Interest Income
Fee Income
Other Income Source: HSBC, Brazil Central Bank
Table 4: Summary Financials – 2009 (in BRL mn) Banco do Brasil
ITAU
BRADESCO
Santander Brasil
Banrisul
Total Assets
708,548.8
608,273.3
506,223.0
342,323.8
29,084.1
Loans & Advances
266,483.7
221,899.1
157,458.3
121,881.9
11,956.2
Total Deposits
325,945.3
188,725.8
170,321.0
112,708.8
16,279.8
Non Performing Assets
15,237.6
12,490.0
6,858.6
7,598.2
292.4
Net Interest Income
32,740.0
49,197.4
31,335.6
22,491.6
2,446.6
Net Interest Margin
6.5%
9.7%
7.9%
9.9%
10.1%
10,147.5
10,066.6
8,012.3
1,805.9
541.1
30.7%
21.3%
21.1%
3.2%
16.7%
Net Income Return on Equity Return on Assets
1.7%
1.6%
1.7%
0.5%
2.0%
Efficiency Ratio
58.5%
44.5%
65.3%
72.4%
60.9%
Capital Adequacy Ratio
13.3%
17.0%
17.8%
28.3%
17.5%
Source: Bloomberg, Brazil Central Bank
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VALUATIONS REMAIN ATTRACTIVE The Bovespa stock index gained 83% in 2009, its best performance since 2003, as domestic demand, government stimulus plans and rising commodity prices put the economy back on track. The index is currently trading at earnings multiple (PE) of 19.7x, with forward multiples of 13.1x and 10.6x for 2010 and 2011, respectively. We believe at current levels, Bovespa’s valuation looks attractive, compared to its regional and emerging peers. Table 6: Earnings Multiples (PE) of Stock Indices Country
Stock Exchange
2009
2010E
2011E
Brazil
BM&F Bovespa
19.7x
13.1x
10.6x
Mexico
Bolsa Mexicana de Valores
18.6x
15.8x
13.2x
India
Bombay Stock Exchange
24.6x
20.0x
15.7x
China
Shanghai Stock Exchange
32.3x
17.7x
14.8x
US
S&P 500 Index
18.8x
14.1x
11.8x Source: Bloomberg
The Brazilian financial index IFNCBV gained 79.4% in 2009, increasing from 1,888 in 2008 to 3,387 in 2009. The financial index is currently trading at a PE multiple of 13.9x, with forward multiples of 11.6x and 9.6x for 2010 and 2011 respectively. Chart 7: Index Performance – General and Financial Index (Rebased to 100) 140 120 100 80 60 40 20 Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
IBOV
Mar-09
Jun-09
Sep-09
Dec-09
IFNCBV
Source: Bloomberg
I. Brazil Banks –Valuation The Large-Cap Brazilian banks are trading at an average 2010E earnings multiple (PE) of 11.5x, 30% above the Mid-Cap banks average of 8.8x. On price to book value (P/BV), the Large-Cap banks are trading at average multiple of 2.0x on 2010E BV, 67% above the Mid-Cap bank average of 1.2x. This can be partly justified by higher profitability of large –cap banks over the mid-caps (18.3% vs. 12.7%). The valuation gap on 2011E P/BV is down to 64%, which can be partly justified by 60 bps reduction in ROE gap between the banks.
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Table 7: Brazil Banks Valuation Ticker
Price
Market Cap
(BRL)
(BRL mn)
P/E 2010E
P/B 2011E
2010E
ROE (%) 2011E
2010E
2011E
Large-Cap Banks BBDC4
31.00
96,198
11.3x
9.8x
2.1x
2.0x
20.5
21.0
Itaú Unibanco
Bradesco
ITUB4
36.01
146,926
12.6x
10.6x
2.7x
2.4x
23.4
23.2
Banco do Brasil
BBAS3
30.18
77,508
10.0x
8.9x
1.9x
1.7x
21.8
21.8
Santander Brasil
SANB11
21.35
81,139
Average
12.1x
9.4x
1.1x
1.1x
11.0
13.2
11.5x
9.7x
2.0x
1.8x
18.3
19.8
8.3x
6.7x
1.2x
1.0x
14.2
15.8
Mid-Cap Banks ABC Brasil
ABCB4
11.50
1,560
Cruzeiro do Sul
CZRS4
12.30
1,701
7.6x
7.6x
1.8x
1.6x
13.6
14.1
Daycoval
DAYC4
9.85
2,131
10.3x
9.0x
1.3x
1.2x
13.0
14.6
Paraná
PRBC4
9.85
924
7.8x
8.8x
1.1x
1.0x
11.6
12.3
Pine
PINE4
10.99
939
8.6x
6.7x
1.1x
1.0x
13.9
17.3
Sofisa
SFSA4
5.06
697
10.3x
5.3x
0.8x
0.8x
10.2
15.0
8.8x
7.3x
1.2x
1.1x
12.7
14.9
Average
Source: Bloomberg
Table 8: Regional Banks Valuation Country Banco Frances
Argentina
Price
Market Cap
(USD)
(USD mn)
2010E
2011E
2010E
2011E
2010E
2011E
BFR
6.08
1,087
11.7x
6.7x
4.3x
NA
18.7
18.9
Ticker
P/E
P/B
ROE (%)
Banco Macro
Argentina
BMA
25.96
1,514
8.6x
7.7x
NA
NA
22.5
22.5
GF Galicia
Argentina
GGAL
4.80
596
15.7x
12.1x
NA
NA
12.0
13.1
Banco de Chile
Chile
BCH
61.99
8,529
13.7x
11.7x
2.9x
2.6x
22.4
24.5
Santander Chile
Chile
SAN
64.07
11,621
14.1x
11.6x
3.8x
2.9x
26.8
26.9
Bancolombia
Colombia
CIB
46.38
9,135
15.5x
12.2x
2.3x
2.0x
18.3
20.9
Banorte
Mexico
GFNORTEO MM
3.74
7,540
13.3x
9.8x
2.1x
1.8x
15.8
18.7
Credicorp
Peru
BAP UN
78.10
6,229
11.9x
9.9x
2.4x
2.1x
21.8
21.9
13.1x
10.2x
3.0x
2.3x
19.8
20.9
Average
Source: Bloomberg
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