Cloud Migration And Generative AI Will Increase Productivity And Efficiency In The Future

Key Takeaways

• Bradesco's focus on digital transformation, including digital channels and process optimization, aims to increase efficiency and customer base for higher revenues and net margins.
  
• Strategic capital management and technology investments are designed to enhance productivity and profitability, driving steady growth in return on equity.
  
• Banco Bradesco faces challenges from macroeconomic conditions, competition in low-risk segments, and dependency on monetary policy, affecting margins and growth prospects.

Catalysts

Provides various banking products and services to individuals, corporates, and businesses in Brazil and internationally.

• The bank's ongoing transformation plan includes process optimization, digitalization, and enterprise agility, expected to boost operational efficiency and reduce the cost to serve, potentially improving net margins.
  
• Bradesco's strategic expansion in digital channels and platforms like Bradesco Expresso, which aims to enhance customer experience and expand the customer base, is anticipated to increase revenues through higher transaction volumes and enhanced customer retention.
  
• Continued growth in micro, small, and medium-sized company loans, along with cautious risk management strategies including more collateralized portfolios, may drive revenue growth while maintaining controlled credit risk, positively impacting net interest margins.
  
• Investments in technology modernization, such as cloud migration and the use of generative AI in business processes, aim to increase productivity and operational efficiency, likely resulting in cost savings which could improve earnings and net margins.
  
• Capital management strategies, including share buybacks and maintaining comfortable capital ratios, coupled with growth in fee income from insurance operations, are expected to support a steady increase in ROE (Return on Equity), thus positively influencing overall profitability.

Banco Bradesco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco Bradesco's revenue will grow by 25.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.9% today to 17.9% in 3 years time.
• Analysts expect earnings to reach R$28.1 billion (and earnings per share of R$2.97) by about March 2028, up from R$17.3 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 9.6x on those 2028 earnings, up from 7.6x today. This future PE is greater than the current PE for the US Banks industry at 6.1x.
• Analysts expect the number of shares outstanding to decline by 0.21% per year for 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 Bradesco Future Earnings Per Share Growth

Risks

• The guidance for 2025 indicates a cautious approach due to macroeconomic conditions, suggesting potential impacts on revenue growth and risk management, which could constrain net margins.
  
• With a 10.9% CET1 ratio slightly below peers, any further macroeconomic deterioration could pressure capital adequacy and potentially impact future growth and earnings.
  
• There's increased competition expected in lower-risk segments, and Bradesco’s heavy reliance on secured loans with lower spreads may limit margin improvements and profitability expansion.
  
• High exposure to monetary policy shifts, particularly relating to market NII, implies potential volatility in earnings, as growth could be affected if interest rate environments shift unfavorably.
  
• The bank has been undergoing transformation with significant investment in technology and organizational changes, which, if not yielding expected efficiencies, could increase operational expenses and pressure net margins.

Valuation

• The analysts have a consensus price target of R$15.169 for Banco Bradesco 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$19.0, and the most bearish reporting a price target of just R$11.4.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$157.6 billion, earnings will come to R$28.1 billion, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 19.1%.
• Given the current share price of R$12.3, the analyst price target of R$15.17 is 18.9% 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.