Investments In Technology And Digital Transformation Will Drive Future Operational Efficiencies

Key Takeaways

• Strategic focus on the private payroll loan market and SME segment aims to enhance revenue and manage credit risk, boosting future earnings and margins.
  
• Investments in technology and sustainable banking are set to improve operational efficiencies and diversify revenue, aligning with sustainability trends.
  
• Rising delinquency and regulatory shifts in provisioning could strain Banco do Brasil's credit quality, reduce net margins, and impact profitability amidst competitive and economic pressures.

Catalysts

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

• Banco do Brasil's strategic growth in the individual segment, particularly focusing on expanding the private payroll loan market via the new eSocial platform, is expected to enhance revenue opportunities and reduce credit risk, thereby positively impacting future earnings.
  
• The bank's targeted growth in the SME segment, supported by government-backed credit lines such as FGO Pronampe, aims to capture market opportunities while managing risk, potentially leading to an increase in net interest margins.
  
• Investments in technology and digital transformation, coupled with a planned increase in the workforce focused on technology and cybersecurity, are expected to drive operational efficiencies, enhancing net margins over the long term.
  
• Banco do Brasil's advancements in sustainable banking, including leadership in the carbon credit market and expansion of its sustainable portfolio, are anticipated to contribute to diversified revenue growth, aligning with emerging market trends in sustainability.
  
• The potential for improvement in the agribusiness portfolio's credit quality, coupled with expectations of the largest harvest in Brazil's history, could lead to a reduction in nonperforming loans, thereby positively impacting earnings and capital efficiency.

Banco do Brasil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco do Brasil's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.5% today to 35.2% in 3 years time.
• Analysts expect earnings to reach R$42.9 billion (and earnings per share of R$7.52) by about March 2028, up from R$31.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.8x on those 2028 earnings, up from 5.2x 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 19.12%, as per the Simply Wall St company report.

Banco do Brasil Future Earnings Per Share Growth

Risks

• Rising delinquency in the agribusiness portfolio, with in-court reorganization cases representing a significant portion of nonperforming loans, poses a risk to BB's credit quality and could lead to higher provisioning, impacting net margins and overall earnings.
  
• The transition to new provisioning regulations (Resolution 4966), which involves expected loss methodology, requires significant adjustments and increased provisions, potentially reducing net income.
  
• Increased competition in the private payroll loan sector, which BB intends to enter aggressively, could lead to pressure on loan yields and affect net interest income, impacting BB’s revenue and profitability targets.
  
• Economic volatility and regulatory changes, such as the potential extension of agreements on economic plans, may lead to prolonged provisioning expenses and impact Banco do Brasil's capital allocation and payout strategies.
  
• The significant investments required for technology and cybersecurity, although aimed at improving digital capabilities, could strain operating expenses and efficiency ratios, potentially affecting net margins if revenue growth doesn't align.

Valuation

• The analysts have a consensus price target of R$34.515 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$45.0, and the most bearish reporting a price target of just R$26.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$121.8 billion, earnings will come to R$42.9 billion, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 19.1%.
• Given the current share price of R$28.5, the analyst price target of R$34.52 is 17.4% 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.