Worse quality? BB (BBAS3) continues to deliver good numbers despite considerations

Profit slightly above expectations and a return on equity (ROE) above 20% guided another quarter for Banco do Brasil (BBAS3), which has established itself alongside Itaú (ITUB4) as one of the “banks” with the most consistent numbers over the last few reporting seasons.

Recurring net profit was R$9.3 billion from January to the end of March, while the provision for doubtful debts (PCLD) totaled R$8.54 billion, and the gross financial margin was 25.7 billion. BB also announced that it approved the distribution of dividends of R$940.6 million in dividends and R$1.67 billion in interest on additional equity, amounts that will be paid on June 21, the institution informed.

The bank found defaults on operations overdue for more than 90 days at 2.9%, compared to 2.92% at the end of December, but above the 2.62% in the first quarter of 2023.

The movement occurred amid a growth in the expanded credit portfolio of 10.2% in the first quarter compared to the performance of a year before, to R$ 1.14 trillion, driven by the 15.5% increase in financing to the segment of agribusiness. The result left BB within estimates for the year, which foresee an increase of 8% to 12% in the credit portfolio and an expansion of 7% to 11% in the gross financial margin. The annualized profit, meanwhile, is at the low end of the “guidance” of R$37 billion to R$40 billion, while the PCLD is above the estimate for 2024 of R$27 billion to R$30 billion.

Market analysts make some considerations about the deterioration in the quality of results, but the majority still see the share as a good investment opportunity.

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“While the numbers were not as impressive as those we have seen in recent years, there are still notable highlights beyond the robust ROE: solid loan book growth, NPL [índice de inadimplência] stable in quarterly terms, administrative expenses growing below inflation in year-on-year terms and a solid capital position”, assess XP analysts.

The weaknesses, however, were lower client spreads, lower treasury results and pressured credit costs. For XP, although in line with its numbers, the quality of the first quarter results deteriorated slightly. On the other hand, Banco do Brasil reaffirmed its guidance, which it sees as a positive sign. “Still in relation to the guidance, our concern is only with provisions, since the rate for the quarter, if annualized, would be above the top of the indicative range. Finally, although it is not possible to categorically state that the first quarter could represent the beginning of a downward trend in BB’s results, we do not rule out a negative reaction for BBAS3 shares,” XP highlighted in a report before the market opened. The house reiterated a purchase recommendation with a target price of R$36.50 per share.

For Genial Investimentos, despite possible concerns about a normalization of Banco Patagonia’s performance and a potential deterioration in agricultural defaults, Banco do Brasil’s operations remain resilient with solid and consistent profit generation. The bank’s multiples remain at very attractive levels, with a price-to-earnings (P/E) multiple of just 4.1 times for 2024 and a P/PV (Price to Book Value) of 0.8 times for the same period , in addition to a generous dividend yield of 9.8%. Therefore, it reiterated its purchase recommendation with a target price of R$34.

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Itaú BBA highlighted that the quarter did not exceed projections due to volatility in “other” expense lines and a higher income tax rate. “Overall, it was a welcome quarter. Banco do Brasil grows faster than the industry, in a profitable and sustainable way. Guidance for 2024 is on track and 1Q24 alleviates market concerns around NIM (annualized managerial financial margin rate) and Agro”, assesses BBA, which reiterates a positive view, seeing growth in profits and potential revaluation of the valuation.

Bradesco BBI, in turn, has a neutral recommendation for BB shares, with a target price of R$32, highlighting a strong profit, but with concerns about customer margin and asset quality.

“The strong annual growth in consolidated financial margin continued to be driven by a high level of earnings at Banco Patagonia (despite the quarterly reduction). Furthermore, provision expenses remained at a high level, despite the quarterly drop, growing +45.9% year on year, and reflecting the deterioration in the formation of Non-Performing Loan (NPL) for individuals and in the default rate of 90 days for rural customers. In fact, we observed that provision expenses have been R$34 billion (annualized), which is above the maximum limit of the guidance. In summary, Banco do Brasil continued to report solid results and profitability, but we remain concerned about its margin with customers and the quality trends of its assets”, assesses BBI.

Morgan Stanley reinforces the chorus by pointing out that Banco do Brasil presented net profit above expectations, but the quality of the result was not good, as it was mainly driven by the market’s financial margin, not necessarily a recurring item. Meanwhile, top recurring items performed much worse than expected. “In fact, customers’ NII, loan loss provisions and rates fell short of market expectations by a wide margin. On the positive side, the growth of loans, defaults and expenses are heading in the right direction”, he pointed out, reinforcing a recommendation equivalent to purchase for the assets and a target price of R$45.

(with Reuters)