Fueled by high global commodities prices, Brazil’s economy should grow about 4 percent this year. But Banco Bradesco (BBD), the country’s fourth-biggest bank, expects lending growth to slow as government efforts to rein in a credit boom kick in.
Bradesco's loan book rose 23.1 percent in the second quarter, led by corporate loan disbursements that offset a deceleration in consumer loans. While the positive loan growth surprised the bank’s executives, Bradesco is bracing for a slowdown.
That’s partly because Brazilian households are already highly leveraged. But it’s also because actions taken by the government to slow credit growth, including raising interest rates, are starting to have an impact.
As a result, loans should rise between 13 percent and 15 percent this year, which is lower than Bradesco’s previous estimates. The government also introduced a tax on derivatives trading to mitigate the appreciation of the real which has hurt local banks.
Yet the business outlook remains promising, even as consumers gradually curtail borrowing, said CEO Luiz Carlos Trabuco.
Brazil’s credit boom helped Bradesco’s net income jump 15.8 percent to $1.85 billion in the second quarter from a year earlier.
Stricter risk assessment policies allowed Bradesco’s loan portfolio to “expand in a healthy manner," Trabuco said in a conference call. "An accommodation in growth rates is normal for an economy that should expand at a slower pace this year."
The bank set aside $1.52 billion to cover bad loans, 12.8 percent more than in the second quarter of 2010, but this increase was more a function of higher credit growth, said Roberto Attuch, head of Latin America equity research for Barclays Capital.
Still, loan defaults are expected to rise slightly in the rest of this year, said the bank’s president, Lazaro de Mello Brandao.
For now, analysts say, Bradesco is better positioned if credit costs rise than its rivals, Itau Unibanco Holding (ITUB) and Banco Santander Brasil (BSBR).
Bradesco "is the best positioned Brazilian bank to withstand higher credit costs in the current cycle," said Saul Martinez, a senior banking analyst with JPMorgan Securities, in a note to clients.
Unlike Brazilian companies in other sectors, Bradesco is not looking to expand internationally. But weak demand for credit in the United States and Europe amid fears of another recession could lead to consolidation in the domestic financial industry, said Brandao.
Bradesco’s ADR is currently trading near its 52-week low of $15.77. Analysts say it could be a bargain given the potential upside.
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