AI And Digital Banking Shift Will Drive Stronger Margins And Long-Term Earnings Power

Catalysts

About Banco Santander (Brasil)

Banco Santander Brasil is a leading universal bank in Brazil, providing retail, consumer finance, SME, corporate banking and capital markets services nationwide.

What are the underlying business or industry changes driving this perspective?

• Rapid scaling of the new One App as a multibank, open finance hub is deepening primacy, boosting daily engagement and cross selling, which should support faster client NII and fee revenue growth than loan volumes over the medium term.
• AI driven hyper personalization across sales, loyalty and collections is materially improving conversion, recovery rates and customer satisfaction, pointing to structurally higher fee income and lower cost of risk, lifting net margins.
• Strategic focus on higher quality segments such as SMEs, high income individuals and secured products like mortgages and home equity is remixing the book toward better risk return, sustaining double digit revenue growth with declining provisions and stronger earnings.
• Consumer finance and cards are growing at strong double digit rates while pulling over a million new to bank clients with very high NPS, creating a larger, more loyal base to monetize through insurance and payments, which should accelerate fee revenue and operating leverage.
• Group wide Think Global and technology platform initiatives, including exporting Brazil built solutions to other geographies, are lowering unit technology and back office costs and enabling reuse of innovation. This is supporting a path to a near 30 percent efficiency ratio and structurally higher ROE.

Assumptions

This narrative explores a more optimistic perspective on Banco Santander (Brasil) compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Banco Santander (Brasil)'s revenue will grow by 32.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 30.3% today to 19.2% in 3 years time.
• The bullish analysts expect earnings to reach R$22.0 billion (and earnings per share of R$5.42) by about December 2028, up from R$15.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$18.3 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, up from 8.6x today. This future PE is greater than the current PE for the US Banks industry at 7.9x.
• The bullish analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 22.38%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged environment of high domestic interest rates and an inverted yield curve could keep negative carry on long duration positions and depress market NII for longer than management anticipates, limiting the bank’s ability to expand revenue and weighing on earnings.
• Regulatory and policy changes in key subsidized or capped rate products, such as INSS payroll loans and FGTS linked lending, may continue to compress spreads and make entire product lines unattractive to originate, constraining loan growth and pressuring net interest margins.
• The strategic derisking of legacy and mass income portfolios, together with stricter renegotiation policies that favor upfront write offs, could keep credit costs structurally elevated while legacy books run down. This could delay the expected normalization in cost of risk and restrain net margins and earnings growth.
• Rising stress in smaller companies and select agribusiness and corporate names, combined with a still challenging macro backdrop, even if Selic gradually declines, could trigger fresh non performing loans beyond currently identified cases. This could drive higher provisions and weaken both revenue momentum and profitability.
• The long term shift to a more digital, AI driven, global platform model depends on sustained execution of cost and efficiency programs and group technology initiatives. Any delays or cost overruns in these structural transformations could prevent the bank from achieving its targeted near 30 percent efficiency ratio, limiting operating leverage and return on equity.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Banco Santander (Brasil) is R$42.9, which represents up to two standard deviations above the consensus price target of R$34.0. This valuation is based on what can be assumed as the expectations of Banco Santander (Brasil)'s future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$43.0, and the most bearish reporting a price target of just R$27.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be R$114.7 billion, earnings will come to R$22.0 billion, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 22.4%.
  
• Given the current share price of R$34.35, the analyst price target of R$42.9 is 19.9% 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.