Brazilian Banking Prosperity

By Investopedia Staff | November 09, 2010 AAA

The demand for commodities such as iron ore, steel and sugar has helped the Brazilian economy recover from the recession. This BRIC nation has become one of the favorite geographic regions for investors, but with much of the attention going to the resource compaines it could be time to shift attention to the financial sector.

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Brazil's #1 and #2 private banks, Banco Bradesco (NYSE:BBD) and Banco Itau (NYSE:ITUB), have benefited from the country's economic recovery by meeting demands for mortgages, consumer loans, insurance and investments. Over the past five years, Banco Bradesco's stock price is up 162%, while Banco Itau is up 88%. Since the beginning of the year Banco Itau is up nearly 12%, slightly outpacing Banco Bradesco's 9.3% return. Besides the stellar stock returns, other similarities and differences between the two are worthy of investors' attention.

Banco Bradesco is one of the largest banks 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. 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. Differences aside, Banco Bradesco and Banco Itau do have very similar healthy stock valuations. Banco Itau sports a P/E ratio of 11.61 with a PEG ratio of 1.05 while Banco Bradesco's five year average P/E is 12.5 with a PEG ratio of 1.50. It's worth noting that a low PEG ratio points to very strong growth rates for both banking institutions. (For more, see The P/E Ratio: A Good MArket-Timing Indicator)

Interestingly, in 2006 Banco Bradesco picked up American Express' (AXP) Brazilian card operations, which has proven to smooth its earnings. 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. (For more, see Investing In Brazil 101) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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