Digital Acceleration And ESG Finance Will Strengthen Banking Prospects

Key Takeaways

• Digital transformation and advanced risk management are set to improve efficiency, asset quality, and support sustainable revenue and earnings growth.
  
• Focus on affluent clients, agribusiness lending, and sustainable finance positions the bank to capture new growth, diversify income, and enhance profitability.
  
• Soaring credit costs, regulatory shifts, and sector vulnerabilities threaten earnings, profitability, and competitive positioning, especially as digital transformation accelerates and agricultural risks persist.

Catalysts

Provides banking products and services for individuals, companies, and public sectors in Brazil and internationally.

• The ongoing digital acceleration-including the rollout of new AI-powered credit risk models, omnichannel CRM integration, and the scaling of agile teams from 32 to 100% of strategic business units by 2025-is expected to enhance customer acquisition, operational efficiency, and credit origination quality, which should drive higher net margins and sustainable revenue growth from 2026 onward.
  
• Banco do Brasil's targeted strategy to expand its footprint among Brazil's growing middle class and high-income individuals-through new products such as worker payroll loans, premium card launches, and dedicated high-net-worth client experiences-positions the bank to capture outsized loan growth and fee income opportunities, positively impacting top-line revenue and boosting net interest income.
  
• Strengthening of risk management via advanced analytics, AI-driven collection, and a "resilience matrix" for more selective origination is anticipated to lower future credit losses, particularly as the bank pivots originations toward more secured lines (e.g., payroll, collateral-backed loans), supporting improved asset quality and stabilizing earnings in a recovering cycle.
  
• The entrenched leadership in agribusiness lending, coupled with ongoing direct engagement with regulators to adjust for sector-specific needs (like the crop cycle and provision timing), ensures Banco do Brasil is well-placed to benefit from long-term agricultural growth, while upcoming cyclical normalization of delinquencies and NPLs (projected for 2026) is expected to drive a recovery in profitability and NII contribution from this segment.
  
• Investment in sustainable finance and leveraging ESG credentials, with emphasis on green finance mandates, are likely to attract new funding flows and preferred lending opportunities, supporting asset growth and diversifying revenue sources, which provides upside to both fee income and net earnings over the long term.

Banco do Brasil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco do Brasil's revenue will grow by 10.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.0% today to 29.6% in 3 years time.
• Analysts expect earnings to reach R$33.6 billion (and earnings per share of R$5.88) by about August 2028, up from R$24.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, up from 4.5x today. This future PE is greater than the current PE for the BR Banks industry at 6.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 27.29%, as per the Simply Wall St company report.

Banco do Brasil Future Earnings Per Share Growth

Risks

• Historic and unprecedented levels of delinquency in the agribusiness loan portfolio-well above even the bank's stress scenarios-are pushing credit costs sharply higher, increasing provisioning needs and pressuring both near-term and possibly longer-term earnings.
  
• Prolonged high delinquency among micro, small, and medium enterprises (MSMEs) combined with a persistently high Selic rate has forced significant loan renegotiation and triggered elevated credit costs, likely weighing on revenue growth, margins, and bottom-line profitability for an extended period.
  
• The new regulatory framework (Resolution 4966) requires provisioning for expected rather than incurred losses, resulting in accelerated and potentially higher provisioning cycles, which may suppress net income and depress reported profitability for several years, especially given the cyclicality and uncertainty of the agribusiness sector.
  
• Banco do Brasil's reliance on its extensive physical branch infrastructure, even as digital competitors and fintechs scale, presents a long-term cost and efficiency disadvantage that may negatively impact operational leverage and profitability, particularly as digital migration accelerates industry-wide.
  
• Ongoing exposure to weather events, commodity price volatility, and high leverage among agricultural clients leaves Banco do Brasil vulnerable to sector-specific shocks and policy risks, potentially leading to further provisioning spikes, unpredictable revenue, and increased volatility in earnings.

Valuation

• The analysts have a consensus price target of R$26.938 for Banco do Brasil based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$39.0, and the most bearish reporting a price target of just R$20.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$113.3 billion, earnings will come to R$33.6 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 27.3%.
  
• Given the current share price of R$19.8, the analyst price target of R$26.94 is 26.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.