Bradesco: defaults will continue to rise in the coming months – 05/05/2023 – Market

Despite having exceeded market expectations with a profit of R$ 4.3 billion in the first quarter, Bradesco should still continue with the pressured results during the second quarter of the year. A structural improvement in performance should only occur during the second half of the year.

The assessment is made by the bank’s president, Octavio de Lazari Junior. “We see our performance in the second quarter still under pressure, mainly due to PDD (provisions for doubtful debts), but we reinforce the message that we see our results evolving throughout 2023, with a superior performance in the second half”, said the executive this Friday (5) during a conversation with journalists.

The PDD, which indicates the possible losses that the bank may suffer due to non-payment by defaulting customers, totaled R$ 9.517 billion in the first quarter, growth of 96.8% on an annual basis, but a drop of 36% at the margin.

The drop in the quarterly comparison was largely due to the fact that, in the last quarter of 2022, Bradesco’s PDD had jumped by more than 100%, due to provisions related to problems involving Americanas.

The bank’s president added that profit was positively impacted in the quarterly variation because there was no need for new provisions against an Americanas default, although, in general, provisions continue at relatively high levels.

Lazari Junior also said he had the expectation that, by June, the group of creditors would reach some kind of agreement with the retailer on outstanding debts of R$42.5 billion. “Perhaps [o acordo] not be the best for everyone, but at least what is possible and reasonable.”

The bank’s president also stated that the default rate should continue to rise throughout the second quarter, but with the expectation that the peak of late fees is nearing the end.

Bradesco’s default rate reached 5.1% at the end of the quarter, compared to 3.2% in the same period of 2022 and 4.3% in December.

According to the bank, defaults are concentrated among individuals and micro and small companies, segments that naturally suffer more in adverse scenarios of persistent inflation and high interest rates.

In the case of individuals, the rate of arrears over 90 days reached 6.3%, against 4.4% in the same month of the previous year and 5.5% in the last quarter.

Among micro, small and medium-sized companies, the default rate also rose, to 6.2%, compared to 3.6% a year ago and 5.3% in December.

Among large companies, delays were only 0.2%, against 0.1% in March and December 2022.

The first quarter, said the bank’s president, was marked by volatility in the markets, with discussions on interest rates and tax issues. “However, the quarter ended better, with a positive expectation generated by the new fiscal framework.”

Regarding the performance of the loan portfolio, the executive stated that the result for the first quarter reflected the policy adopted during the middle of last year, of a more cautious posture in granting credit, with a focus on more conservative lines.

“With this effect, it is natural that the credit grows less, but the moment is one of caution”, said Lazari Junior.

Bradesco’s credit portfolio ended March at R$879.28 billion, an increase of 5.4% on an annual basis and a decrease of 1.4% in the quarterly comparison. The result was below the guidance released by the bank for the year 2023, which indicates a portfolio expansion of between 6.5% and 9.5% for the year. “Throughout the year, we will return to the indicated range”, said the Executive.

Lazari Junior also said that the bank’s structural return has not changed significantly and that the management team is committed to delivering returns as in the past. “But we recognize that it will be a gradual recovery.”

The ROAE (annualized return on equity), an indicator that measures the profitability of the operation, reached 10.6%, compared to 18% in March 2022 and 3.9% in the fourth quarter of last year.

Despite exceeding expectations, analysts assess results as weak and below peers

Market analysts considered the bank’s numbers weak. “Bradesco reported bad results”, say analysts at Ativa Investimentos. They point out that defaults advanced at an even stronger pace than the already pessimistic expectations.

They also claim that, after two troubled quarters, the bank presented a result with net income above estimates. “However, when we analyze the portfolio quality data, we see that the challenges for this year continue and the bank should show great discipline in granting credit, making it difficult to meet the guidance.”

Analysts at Guide Investimentos say that, although Bradesco’s result came in above expectations, if there had not been the specific provision for the bank’s exposure to Americanas in the fourth quarter of 2022, profit would have been stable in the first quarter of the year.

“In the general balance, the result of the bank was very negative. The trend of growth of defaults continues to accelerate, without clear signs of cooling in the short term”, say the analysts of the Guide.

They also say that the sharp drop in market value in recent months may suggest that the bank is too cheap. However, in view of the recent performance well below that of their peers and the more challenging scenario projected for this year in the credit scenario, they assess that there are better options to position themselves in the sector, such as Itaú and Banco do Brasil.

“We consider that the bank’s general performance in the quarter was weak”, say analysts at XP Investimentos, who emphasize the slowdown in the pace of expansion of the credit portfolio, with growth below the guidance. “We expect a negative reaction to the stock and maintain our conservative view on the bank.”

Analysts at Genial Investimentos say that, despite the profit exceeding market projections, the result is still at levels well below what they believe to be a more normalized profit for Bradesco.

“On the positive side, we see progress in a gradual recovery of profitability that should help profit growth, especially from the second half of 2023”, point out the experts at Genial in a report.

They add that, despite the gradual improvement in profitability, they prefer banks like Itaú and Banco do Brasil, which they believe have outperformed in the current credit cycle.