profit exceeds projections and bank shows progress, but why did BBDC4 fall?

It is no exaggeration to say that the market’s eyes in the first quarter of 2024 (1Q24) earnings season for the “banks” were focused mainly on Bradesco (BBDC4). After very difficult quarters, changes in management and a “turnaround plan” that did not convince the market, the results released this Thursday morning (2) were highly anticipated to understand the path of the financial institution in search of a recovery.

The numbers brought good news. Although it was not a brilliant result, recurring net profit was above expected at R$ 4.2 billion, despite a drop of 1.6% in the annual comparison, presenting an increase of 46.3% in relation to that presented in the 4Q23.

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According to Bradesco itself, the quarterly improvement was the result of the drop in expenses with bad debt provisions and the results of Bradesco Seguros. On the other hand, the still under pressure financial margin prevented a stronger improvement in the numbers. Return on equity (ROE) was 10.2%, down 0.4 percentage points in one year, but up 3.3 percentage points (pp) in one quarter.

The market’s reaction to the balance sheet, however, started off timidly in this Thursday’s session, and the shares then suffered losses. The shares opened with a slight drop, which intensified throughout the day, although it eased during the session. BBDC4 shares fell by more than 2% (-2.26%, to R$13.68) and closed down 1.14%, to R$13.84, on a day of optimism for the Ibovespa , which rose 0.95% in the session.

But what explains this movement?

On the one hand, analysts highlighted that the financial institution had a good recovery in profitability. On the other hand, there were those who highlighted a still challenging revenue growth and several other question marks for the bank in its recovery path.

XP saw the numbers as weak and still far from the guidance for the year. Profit surpassed its projections by 11%, but the financial margin with customers remained under pressure due to the credit mix with lower spreads. The expanded credit portfolio grew by a modest 1.2%, well below the guidance floor. The quality of the credit portfolio was the positive highlight in all segments. Despite the low seasonality in 1Q, the non-performing loan ratio (NPL) over 90 days fell 30 basis points (bps) in the quarter.

Goldman Sachs pointed out that profit was 1% below what it expected, but was 9% above Bloomberg’s projection. ROE improved further benefiting from a low effective tax rate of 14% in 1Q24. “Despite having beaten the market consensus in relation to profits, we still observed smooth trends in revenue growth, particularly in the net financial margin (NII) of customers and the market, which would require an acceleration in the coming quarters to meet the guidance. Provisions were the main source of positive surprise, with asset quality showing sequential improvement and the coverage ratio [que representa a proporção que a provisão para risco de crédito é capaz de cobrir os créditos inadimplentes] remaining relatively stable at 164%”, assesses Goldman.

The American bank highlighted before the market opened that it believed that shares would react positively to financial results above projections, which did not happen, although it considered that the prospects for profit growth remain a question mark.

Profit, while it was slightly below what Goldman expected, was 11% above JPMorgan’s projection, with a strong recovery compared to 4Q23. “Both optimists (bullish) as well as pessimists (bearish) will have things to signal but, given the low expectations, we tend to have a positive first view”, assessed JPMorgan analysts.

On the positive side, analysts point out: (i) EBT (profit before taxes) exceeded by 20% with provisions lower than expected, while (ii) Bradesco is fulfilling its efficiency plan, closing branches, reducing the number of employees and own ATMs; (iii) asset quality has improved and (iv) the company is reaccelerating growth (i.e. especially in personal loans, up 10% quarter-on-quarter) and with JPMorgan also welcoming the increase in TPV (Volume Total Payments) of cards in the quarter, despite seasonality.

However, on the negative side, JPMorgan highlights that the so-called tier 1 capital (CET1), which is the best quality capital, fell 50 basis points, while revenues were weaker.

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Morgan Stanley, following the results, maintained its recommendation equivalent to purchase (exposure above the market average, or overweight) for Bradesco, highlighting that the strong quarterly profit growth and positive surprise relative to estimates were driven by much lower loan loss provisions – “an important cyclical component that we argue is recovering at Bradesco”, he pointed out.

After the release of the first impressions about the balance sheet, Morgan released another note highlighting three important negative views regarding the result that were circulating the market: i) that Bradesco is losing in importance, that is, it is no longer the first choice of customers when they need financial services; ii) it is growing in higher risk segments, notably personal loans for individuals and iii) the profit exceeding projections, according to some analyses, was higher than expected due to the drop in provisions.

However, regarding point i), analysts see that there is no metric on this, being something more “instinctive” than showing concrete data. Regarding point ii), Morgan highlights that the data does not support this view, since the loan portfolio for individuals increased by 2% on an annual basis – well below inflation. And, most importantly, the driver of this growth was payroll loans, which increased by 5%. Regarding iii) provisions decreased, but also because default rates decreased, while the coverage ratio remained stable. Thus, analysts reinforced the positive recommendation.