Banco Bradesco Earnings: Results Improve, but Credit Quality Continues To Deteriorate

No-moat-rated Banco Bradesco BBD reported first-quarter results that, while not impressive, were a significant improvement from a dismal fourth-quarter 2022. Banco Bradesco’s recurring net income fell 37.3% from last year but increased 168% from last quarter to BRL 4.28 billion. This translates to a return on average equity of 10.6%, below the bank’s historical average. As we incorporate these results, we do not plan to materially alter our fair value estimate for Banco Bradesco of $3.70 per ADR share. We view the shares as currently undervalued, though we note that the bank is clearly being affected by difficult economic conditions in Brazil.

Net interest income remains a sore spot for the bank, falling 2.4% from last year to BRL 16.6 billion. While banks typically benefit from rising rates, the speed and degree to which Brazil’s interest rates have risen has placed pressure on Bradesco’s net interest margins. Specifically, the returns on its market portfolio, the securities and nonloan interest-earning assets it keeps on its balance sheet, have not been able to keep up with its increasing cost of funds. The market portfolio reported net interest losses of BRL 312 million compared with net interest income of BRL 1.24 billion last year. This more than offset the stronger performance of the bank’s client portfolio, which reported an 7.3% increase in net interest income from last year to BRL 16.9 billion.

There are also clear signs that Brazil’s high interest rates are causing credit risks to increase. Provisioning for future credit losses rose to BRL 9.5 billion from BRL 7.1 billion last year. Bradesco’s over 90-day delinquency rate increased to 5.1% of total loans from 4.3% last quarter and 3.2% last year, causing its coverage ratio to decline to 182% from 235% last year. Our projections for Bradesco include higher credit costs in 2023 and 2024, but this will bear monitoring as unemployment in Brazil has begun to rise.