Digital Disruption And Fintech Rivalry Will Expose Banking Vulnerabilities

Key Takeaways

• Slow digital adaptation and strong fintech rivals threaten competitiveness, further challenging revenue growth and eroding pricing power.
  
• Political influence, regulatory pressures, and exposure to volatile sectors heighten asset quality risks and restrict profitability.
  
• Digital transformation, government ties, and risk-controlled lending are boosting operational efficiency, client loyalty, and long-term earnings resilience, while broadening growth opportunities in Brazil.

Catalysts

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

• Accelerating digital disruption and the expanding market share of fintech competitors threaten Banco do Brasil's relevance, as their slower digital transformation risks continued erosion of fee-based revenue and impending loss of competitive pricing power.
  
• The rise of aggressive ESG frameworks and increasing scrutiny over state-owned banks is likely to restrict Banco do Brasil's access to global capital and funding, driving up long-term funding costs and weighing on net interest margins and overall profitability.
  
• Ongoing state control exposes the bank to political mandates and policy-driven lending, especially in volatile sectors like agribusiness, which skews risk management, intensifies credit losses, and could further compress net margins and cap earnings growth.
  
• Asset quality risks are set to persist, with heavy exposure to agribusiness and MSME segments in economically vulnerable regions driving above-plan delinquencies, elevated provision expenses, and unpredictable bottom-line performance for several years.
  
• Regulatory tightening, including advances like Resolution 4966 and stricter capital requirements, will necessitate increased provisioning and compliance expense, constraining lending growth, suppressing return on equity, and further pressuring the bank's long-term earnings power.

Banco do Brasil Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Banco do Brasil compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Banco do Brasil's revenue will grow by 8.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 28.4% today to 30.1% in 3 years time.
• The bearish analysts expect earnings to reach R$33.8 billion (and earnings per share of R$5.95) by about August 2028, up from R$24.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, up from 4.8x today. This future PE is greater than the current PE for the BR Banks industry at 6.2x.
• 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

• The bank's accelerated digital transformation, including implementation of AI-driven analytics and a scaled agile operating model, is expected to improve operational efficiency and reduce costs, which should help stabilize or increase net margins and earnings as digital competitiveness improves over time.
  
• Banco do Brasil's deep relationships with the public sector and government ownership provide ongoing access to low-cost deposits and favored status in public contracts, which tends to maintain a robust capital base and consistent net interest income, supporting earnings in the long term.
  
• The bank's strategic shift towards risk-controlled, secured lending (such as payroll loans and high-income segment expansion) is driving higher-quality loan origination, improving the risk-adjusted returns and offering resilience to credit losses, potentially leading to improved revenue and profit margins.
  
• Banco do Brasil's unmatched capillarity and leadership in agribusiness, MSMEs, and high-income clients, combined with investments in omnichannel CRM and customer advisory, are strengthening client loyalty and fee income diversification, supporting long-term revenue growth.
  
• With the emerging long-term trend of increasing bancarization and financial inclusion in Brazil, Banco do Brasil is well-positioned to capture new customers and expand its addressable market, fueling possible loan portfolio growth and elevated fee and interest income, which could drive both revenues and earnings higher over the coming years.

Valuation

• The assumed bearish price target for Banco do Brasil is R$20.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Banco do Brasil's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be R$112.4 billion, earnings will come to R$33.8 billion, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 27.3%.
  
• Given the current share price of R$20.65, the bearish analyst price target of R$20.0 is 3.2% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.