Fintech And Agribusiness Risk Will Threaten Stability Yet Prompt Adaptation

Key Takeaways

• Digital transformation and new tech investments may not fully offset pressure on margins and revenues from agile fintech competition and regulatory changes.
  
• Exposure to rural credit and demographic shifts introduce profitability risks, despite advantages in financial inclusion and agribusiness lending.
  
• Rising provisioning needs and regulatory changes, combined with sector concentration risks and increased competition, threaten profitability, asset quality, and future earnings sustainability.

Catalysts

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

• Although Banco do Brasil has been investing heavily in digital transformation and efficiency-such as expanding CRM, AI-driven analytics, and a new omnichannel operating model-its ability to translate these into higher net margins and sustainable earnings may be challenged by the rapid rise of digital banks and fintechs in Brazil, which can attract customers away from traditional banks and compress future fee-based income and operating margins.
  
• While rising financial inclusion and the expanding addressable market from Brazil's emerging middle class should theoretically support long-term loan book and revenue growth for Banco do Brasil, the growing demographic trend of an aging population and slowing birth rate could restrain future demand for consumer loans and mortgages, potentially capping revenue growth over time, especially after current headwinds subside.
  
• In spite of continued opportunities from foreign investment, trade integration, and Banco do Brasil's dominance in the agribusiness lending segment, the bank's large exposure to rural credit leaves it highly sensitive to sectoral downturns-recent spikes in agribusiness delinquencies (especially in soy/corn regions) and legal reorganizations have led to outsized provisions, impairing near-term earnings and potentially creating lingering asset quality risks that could drag on profitability if commodity cycles remain volatile.
  
• The push towards open banking and evolving payment ecosystems should allow Banco do Brasil to cross-sell and diversify its fee income, but these same changes are enabling nimbler fintech competitors and instant payment platforms like Pix to erode the bank's traditional sources of transactional fee income, which could further pressure non-interest revenue streams despite digital investment.
  
• Although digitalization and new risk models are expected to bring down cost-to-serve and improve loan underwriting over the long term, the recent implementation of Resolution 4966 and higher provisioning needs-especially as Brazil's regulatory environment grows increasingly stringent and unpredictable-may continue to compress net interest margins and earnings, with potential for further capital strain if macro or regulatory shocks persist.

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 6.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 33.3% today to 31.0% in 3 years time.
• The bearish analysts expect earnings to reach R$34.5 billion (and earnings per share of R$6.08) by about July 2028, up from R$30.8 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 6.7x on those 2028 earnings, up from 3.7x today. This future PE is greater than the current PE for the BR Banks industry at 5.7x.
• 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 26.52%, as per the Simply Wall St company report.

Banco do Brasil Future Earnings Per Share Growth

Risks

• The substantial increase in delinquency rates, particularly in Banco do Brasil's large agribusiness portfolio, combined with deteriorating credit quality across corporate, individual, and SME segments, raises concerns about rising provisioning expenses and potential loan losses, which could significantly pressure future earnings and compress net margins.
  
• New regulatory requirements, especially the implementation of Resolution 4966, have led to earlier recognition of credit losses, accelerated provisioning, and stricter rules for interest accrual and loan write-offs, resulting in one-off and potentially persistent negative impacts on net interest income and overall profitability.
  
• Prolonged high interest rates and volatility in the Selic rate have caused short-term funding costs to rise faster than loan repricing can compensate, leading to net interest margin compression and a potential drag on revenue and net income, especially during cycles of rapid monetary policy tightening.
  
• The bank's outsized exposure to the agribusiness sector-which is facing structural challenges such as commodity price declines, regional weather disruptions, and predatory legal practices encouraging court-mandated debt reorganizations-exposes Banco do Brasil to significant sector concentration risk, impacting asset quality and increasing capital charges against loan losses.
  
• While investments in digital transformation and efficiency initiatives are highlighted, ongoing uncertainty around regulatory changes, competitive threats from digital banks and fintechs, and the legacy challenges of state-owned governance could constrain operating leverage, increase compliance and technology costs, and ultimately weigh on long-term profitability and return on equity.

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$111.2 billion, earnings will come to R$34.5 billion, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 26.5%.
• Given the current share price of R$19.89, the bearish analyst price target of R$20.0 is 0.5% higher. 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.