Brazilian Banking Prosperity (BBD, ITU)

By Gregory S. Davis | October 16, 2006 AAA

The demand for commodities such as iron ore, steel and sugar has helped the Brazilian economy recover from its historical debt burden that previously contributed to keeping foreign investors away. Current Brazilian President, Luiz Inacio Lula da Silva, is expected to win in the 2nd round of the country's presidential elections on October 29th. Under his leadership Brazil is expected to continue to earn its label as an emerging market economy.

Brazil's #1 and #2 private banks, Banco Bradesco (BBD) and Banco Itau (ITU), have benefited from the country's economic recovery by meeting demands for mortgages, consumer loans, insurance and investments. Since January 2005, Banco Bradesco's stock price is up 200%, while Banco Itau is up 117%. Since the beginning of 2006 Banco Itau is up 30%, outpacing Banco Bradesco's 16% return. Besides the stellar stock returns, other similarities and differences between the two are worthy of investors' attention.

BBD-Chart.gif

Banco Bradesco is the largest non-government controlled bank in Brazil. Banco Bradesco's main business areas include its banking unit and its insurance, private pensions and savings bonds unit. Lower to middle income Brazilians, the majority of who will vote for Lula, make up the majority of its customer base. Banco Bradesco also has operations beyond Brazil's borders in Argentina, the U.S., Cayman Islands, and the United Kingdom.

Banco Itau divides its business lines into corporate banking, retail banking and a separate low-income consumer unit. Differing from Banco Bradesco, Banco Itau's prominence comes from its strength in corporate banking and wealth management. Earlier this year Banco Itau purchased Bank of America's (BAC) Brazilian operations in exchange for a 5.8% stake in the company. The acquired business focuses on high-net-worth individuals in Brazil. Differing from Banco Bradesco again, Banco Itau only operates within Brazil.

Differences aside, Banco Bradesco and Banco Itau do have very similar healthy stock valuations. Banco Itau sports a P/E ratio of 13.35 with a PEG ratio of 1.11 while Banco Bradesco's P/E is 11.56 with a slightly lower PEG ratio of 1.00. It's worth noting that a low PEG ratio points to very strong growth rates for both banking institutions.

However, if I had to choose I would go with Banco Bradesco. Earlier this year Banco Bradesco picked up American Express' (AXP) Brazilian card operations, which can help smooth its earnings should Brazil's economy hit any snags. In addition, Banco Bradesco pays a hefty 9.9% dividend while Banco Itau's current dividend is less than 1%. Banco Itau closed at $32.88 while Banco Bradesco closed at $35.75 on October 11th.

Brazil's domestic interest rate (SELIC) is still extremely high at 17.25%, but its central bank is committed to pushing that rate down as low as 12% by 2007. Lower interest rates will surely spur an increase in consumer loans as well as borrowed money for business investments. With a shrinking proportion of Brazilians living below the poverty line, commodities demand from developing countries, home grown debt relief and a budding middle class, Brazil is on track to keep its economy intact and both Banco Bradesco and Banco Itau stand ready to benefit from the resurgence.

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