EUR 850.00 For Business Accounts Only

Morningstar | Strong Growth Unlikely to Persist for Bradesco, Shares Do Not Discount Political Turmoil

We believe macroeconomic and geopolitical concerns cast a shadow on Banco Bradesco and the entire Brazilian banking industry. Given Brazil’s current political and economic instability, we believe the risks require investors to demand a discount before investing. Brazil’s financial commitments to an aging population are the largest macroeconomic problem facing the country. As of early 2019, Brazil spends 13% of its GDP on private pensions to support a relatively young population—just 8% of Brazil’s population was 65 years or older at the time. By comparison, the G-20 nations spend an average of 8% on pensions as a percentage of GDP. According to the Organization for Economic Cooperation and Development, by 2050, 38% of Brazil’s population will be at least 65 years old, and by 2060 the country will spend 17% of its GDP on pensions.These commitments are likely to worsen the country’s dependence on debt over time. Brazil's debt/GDP has risen drastically in recent years, primarily because of rising pension costs. Though debt/GDP was just 52% in 2013, it has risen to over 74%. Domestic banks like Bradesco hold much of this debt. As of 2017, government securities accounted for 27% of Bradesco’s total assets and 330% of total equity. Though we take comfort that Bradesco hasn’t aggressively increased its lending (growing loans by only 5% on average in the past five years), Brazilian government bonds on the balance sheet have grown at a compounded rate of nearly 24% in the past five years, driven by growth in Bradesco’s insurance arm, whose assets have grown at an average rate of 14% over the past five years. Though Bradesco’s insurance arm accounts for only 13% of the bank’s total interest and fee revenue, it accounts for 24% of total assets. This gives us two conclusions: Investors should concentrate more on Bradesco’s insurance operations, and the bank’s returns will largely be driven by the performance of Brazilian government bonds. If Brazil cannot solve its pension situation, we believe rising interest rates are likely to affect the performance of the country’s bonds, and the banks that hold them.