Global Research

29 October 2015

 

Bradesco

3Q15 small beat; NPL under control

3Q15 recurring net income 2.4% above our estimates (R$4,429mn)

Recurring net income was R$4,533mn, 1.2% above consensus' R$4,480mn. Recurring ROE was 20.9% (vs 21.1% in 2Q15 and 20.3% in 3Q14). This quarter, Bradesco had a R$2.3bn one-off gain from tax credit revaluation on the back of the 500bps hike in CSLL, allowing the bank to set aside additional loan-loss provisions of R$2.22bn. The positives: resilient NIM, higher fees/insurance result, relatively stable and lower effective tax rate. The negatives: higher provisions, higher opex and a lower Tier I. We expect a positive market reaction.

Mixed operating trends: Stronger margins, flat efficiency, and higher coverage

Loan growth was 3.1% qoq, 9.0% yoy (vs 7.9% yoy in 2Q15), driven by large corporates. NIM remained at 7.9% (higher average spread, but lower trading), culminating in NII growth of 11.8% yoy. Insurance results up 20.6% yoy (driven by life and pension) and fee growth up 13.1% yoy. Opex grew by 11.2% yoy in the quarter, above our estimates, driven by marketing expenses. NPLs (90D) went up 8bps qoq to 3.9% (driven by in individuals and SME) while provisions increased 8.5% qoq (+15.1% yoy). More encouraging, NPL 15-90 decreased 10bps qoq to 4.1%. Recurring LLP/loans increased 22bps qoq to 4.2% (largely due to the R$2.2bn additional provisions), pushing up NPL coverage ratio to 206% from 181%. Tier 1 ratio (under Basel III) decreased to 11.4% vs 12.8% in 2Q15, due to an increase of 6.0% in RWA and in prudential adjustments.

2015 guidance maintained: in line with UBSe; 2015e EPS growth of 12.9%

2015 guidance: 1) Loan growth of 5-9% (UBSe 5.0%), driven by individuals; 2) Net Interest Income growth 10-14% (UBSe 13.8%; +40bps NIMs); 3) Fee income growth 8-12% (UBSe 10.8%); 4) Opex growth: 5-7% (UBSe 6.3%); 5) Insurance premium growth 12-15% (UBSe 13.9%). We expect a 2015 ROE of 19.9%.

Valuation: Buy rating (PT R$31.9, Gordon growth model)

Bradesco is still generating strong NII growth as loan re-pricing continues, while NPL remains under control. With the additional provisions in the quarter, NPL buffer has risen to 175bps (from 1.13% in 2Q15). Bradesco trades at 6.1x 16e PE, and 1.1x 16e PBV, with an ROE of 18.5% vs Itau's 6.6x, 1.3x and 21.3%.

Equities

Americas

Banks, Ex-S&L

12-month ratingBuy

12m price targetR$31.90

PriceR$22.03

RIC:  BBDC4.SA BBG:  BBDC4 BZ

Trading data and key metrics

52-wk rangeR$34.17-21.01

Market cap.R$111bn/US$29.7bn

Shares o/s5,049m (PREF )

Free float62%

Avg. daily volume ('000)13,045

Avg. daily value (m)R$303.9

Common s/h equity (12/15E)R$92.5bn

P/BV (12/15E)1.2x

Tier 1 ratio13%

EPS (UBS, diluted) (R$)

UBS

Cons.

12/15E

3.43

3.53

12/16E

3.60

3.66

12/17E

3.93

4.14

Philip Finch

Strategist

philip.finch@ubs.com

+44-20-7568 3456

Frederic De Mariz

Analyst

frederic.de-mariz@ubs.com

+55-11-3513 6511

Mariana Taddeo

Analyst

mariana.taddeo@ubs.com

+55-11-3513 6512

Highlights (R$m)

12/12

12/13

12/14

12/15E

12/16E

12/17E

12/18E

12/19E

Revenues

65,119

67,543

75,431

84,925

91,825

97,622

105,145

113,401

Profit before tax

17,463

18,724

23,941

27,488

30,681

33,545

37,221

40,741

Net earnings (local GAAP)

11,381

12,011

15,089

17,279

18,186

19,819

21,884

25,896

Net earnings (UBS)

11,523

12,202

15,359

17,340

18,186

19,819

21,884

25,896

Tier 1 ratio %

11.0

12.3

12.9

12.8

13.0

13.3

13.4

13.6

EPS (UBS, diluted) (R$)

2.28

2.42

3.04

3.43

3.60

3.93

4.33

5.13

Profitability/valuation

12/12

12/13

12/14

12/15E

12/16E

12/17E

12/18E

12/19E

ROE (UBS) %

18.3

17.3

20.1

19.9

18.5

17.9

17.6

18.5

P/PPOP (diluted)

4.0

4.3

3.8

2.6

2.3

2.2

2.1

1.9

P/BV x

1.7

1.8

1.7

1.2

1.1

0.9

0.8

0.8

P/BV (UBS) x

2.0

2.1

1.9

1.4

1.2

1.1

1.0

0.9

P/E (UBS, diluted)

10.6

10.7

9.2

6.4

6.1

5.6

5.1

4.3

Net dividend yield %

3.5

3.1

3.6

5.3

5.7

6.2

6.9

8.1

Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of R$22.03 on 28 Oct 2015 18:41 EDT

 

Figure 1: 3Q15 Earnings Review – Main Highlights

Picture 3

Source: Company reports, Bloomberg and UBS estimates. Note: Bank’s methodology for ROE excludes mark-to-market impact of available-for-sale securities recorded under shareholders’ equity

Bradesco (BBDC4.SA)

Profit & Loss (R$m)

12/12

12/13

12/14

12/15E

% ch

12/16E

% ch

12/17E

12/18E

12/19E

Net income interest

43,793

43,286

48,295

54,968

13.8

59,879

8.9

62,758

67,089

72,190

Total non interest income

21,326

24,257

27,136

29,957

10.4

31,946

6.6

34,864

38,056

41,211

Total income

65,119

67,543

75,431

84,925

12.6

91,825

8.1

97,622

105,145

113,401

Total cash expenses

(34,642)

(36,774)

(38,833)

(42,550)

-9.6

(44,304)

-4.1

(47,331)

(50,976)

(54,968)

Pre-depreciation operating profit

30,477

30,769

36,598

42,375

15.8

47,521

12.1

50,291

54,169

58,433

Depreciation & amort (excl. goodwill)

0

0

0

0

-

0

-

0

0

0

Operating profit pre provisions

30,477

30,769

36,598

42,375

15.8

47,521

12.1

50,291

54,169

58,433

Total provisions

(13,014)

(12,045)

(12,657)

(14,887)

-17.6

(16,840)

-13.1

(16,746)

(16,948)

(17,692)

Operating profit post provisions

17,463

18,724

23,941

27,488

14.8

30,681

11.6

33,545

37,221

40,741

Income from associates & JVs (pre-tax)

0

0

0

0

-

0

-

0

0

0

Other pre-tax items

0

0

0

0

-

0

-

0

0

0

Profit before tax (UBS)

17,463

18,724

23,941

27,488

14.8

30,681

11.6

33,545

37,221

40,741

Exceptionals (incl goodwill)

0

0

0

0

-

0

-

0

0

0

Profit before tax

17,463

18,724

23,941

27,488

14.8

30,681

11.6

33,545

37,221

40,741

Tax

(5,872)

(6,425)

(8,469)

(9,923)

-17.2

(12,143)

-22.4

(13,298)

(14,817)

(14,213)

Profit after tax

11,591

12,299

15,472

17,566

13.5

18,538

5.5

20,247

22,404

26,528

Other post-tax items

(142)

(191)

(270)

(61)

77.4

0

-

0

0

0

Preference dividends

0

0

0

0

-

0

-

0

0

0

Minorities

(68)

(97)

(113)

(226)

-99.8

(352)

-55.8

(428)

(520)

(632)

Net earnings (local GAAP)

11,381

12,011

15,089

17,279

14.5

18,186

5.3

19,819

21,884

25,896

Net earnings (before pref divs)

11,381

12,011

15,089

17,279

14.5

18,186

5.3

19,819

21,884

25,896

Net earnings (UBS)

11,523

12,202

15,359

17,340

12.9

18,186

4.9

19,819

21,884

25,896

Per share (R$)

12/12

12/13

12/14

12/15E

% ch

12/16E

% ch

12/17E

12/18E

12/19E

EPS (local GAAP, basic)

2.25

2.38

2.99

3.42

14.5

3.60

5.3

3.93

4.33

5.13

EPS (UBS, diluted)

2.28

2.42

3.04

3.43

12.9

3.60

4.9

3.93

4.33

5.13

PPOP (diluted)

6.04

6.09

7.25

8.39

15.8

9.41

12.1

9.96

10.73

11.57

Net DPS

0.86

0.81

1.00

1.17

16.8

1.26

7.8

1.37

1.52

1.80

BVPS

13.87

14.05

16.14

18.33

13.5

20.67

12.8

23.22

26.04

29.37

BVPS (UBS)

12.24

12.24

14.47

15.74

8.8

17.87

13.5

20.19

22.76

25.82

Balance sheet (R$m)

12/12

12/13

12/14

12/15E

% ch

12/16E

% ch

12/17E

12/18E

12/19E

Banking assets (year end)

879,092

908,139

1,032,040

1,094,600

6.1

1,171,215

7.0

1,262,919

1,376,217

1,509,897

Banking assets (average)

820,312

893,616

970,090

1,063,320

9.6

1,132,907

6.5

1,217,067

1,319,568

1,443,057

Total assets (year end)

879,092

908,139

1,032,040

1,094,600

6.1

1,171,215

7.0

1,262,919

1,376,217

1,509,897

Risk weighted assets (RWA) (year end)

600,297

576,777

597,213

645,459

8.1

690,637

7.0

744,713

811,522

890,350

Risk weighted assets (RWA) (average)

537,235

588,537

586,995

621,336

5.9

668,048

7.5

717,675

778,117

850,936

Customer loans

270,461

301,374

323,498

338,466

4.6

353,927

4.6

378,717

418,322

471,185

Customer loans (average)

259,794

285,518

312,436

330,982

5.9

346,196

4.6

366,322

398,519

444,753

Interest earning assets (average)

565,300

594,581

648,265

699,961

8.0

746,181

6.6

803,827

871,116

948,617

Customer deposits

211,858

218,063

211,613

200,582

-5.2

210,313

4.9

224,171

244,784

271,287

Common s/h equity (year end)

70,047

70,940

81,508

92,537

13.5

104,358

12.8

117,240

131,465

148,297

Common s/h equity (average)

62,815

70,494

76,224

87,022

14.2

98,447

13.1

110,799

124,352

139,881

Total SHF (equity, pref & MI) (year end)

70,047

70,940

81,508

92,537

13.5

104,358

12.8

117,240

131,465

148,297

Total SHF (equity, pref & MI) (average)

62,815

70,494

76,224

87,022

14.2

98,447

13.1

110,799

124,352

139,881

Net tangible assets

61,777

61,794

73,037

79,475

8.8

90,219

13.5

101,936

114,900

130,366

Balance sheet structure (%)

12/12

12/13

12/14

12/15E

% ch

12/16E

% ch

12/17E

12/18E

12/19E

Loans / banking assets (year end)

30.8

33.2

31.3

30.9

-1.4

30.2

-2.3

30.0

30.4

31.2

Deposits / banking assets (year end)

24.1

24.0

20.5

18.3

-10.6

18.0

-2.0

17.8

17.8

18.0

Loans / deposits

127.7

138.2

152.9

168.7

10.4

168.3

-0.3

168.9

170.9

173.7

Total SHF / banking assets (year end)

8.0

7.8

7.9

8.5

7.0

8.9

5.4

9.3

9.6

9.8

Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.

Bradesco (BBDC4.SA)

Capital adequacy (R$m)

12/12

12/13

12/14

12/15E

12/16E

12/17E

12/18E

12/19E

Tier 1 capital

66,194

70,808

77,199

82,461

89,763

98,837

108,624

121,307

Total capital

97,061

95,804

98,605

101,974

110,252

120,351

130,137

142,820

Risk weighted assets (RWA) (year end)

600,297

576,777

597,213

645,459

690,637

744,713

811,522

890,350

Core tier 1 ratio %

11.0

12.3

12.9

12.8

13.0

13.3

13.4

13.6

Tier 1 ratio %

11.0

12.3

12.9

12.8

13.0

13.3

13.4

13.6

Total capital ratio %

16.2

16.6

16.5

15.8

16.0

16.2

16.0

16.0

Tangible equity

61,777

61,794

73,037

79,475

90,219

101,936

114,900

130,366

Equity / assets %

8.0

7.8

7.9

8.5

8.9

9.3

9.6

9.8

Tangible equity to tangible assets %

7.1

6.9

7.1

7.3

7.8

8.2

8.5

8.7

Asset quality (R$m)

12/12

12/13

12/14

12/15E

12/16E

12/17E

12/18E

12/19E

Non performing assets

14,455

13,651

14,779

17,106

19,111

19,635

20,700

21,638

Total risk reserves

21,299

21,687

23,146

25,488

28,284

30,335

31,670

32,024

NPLs / loans %

5.0

4.2

4.3

4.7

5.0

4.8

4.6

4.3

NPL coverage %

147.3

158.9

156.6

149.0

148.0

154.5

153.0

148.0

Provision charge / average loans %

5.0

4.2

4.1

4.5

4.9

4.6

4.3

4.0

Net NPAs / shareholders funds %

(9.8)

(11.3)

(10.3)

(9.1)

(8.8)

(9.1)

(8.3)

(7.0)

Profitability (%)

12/12

12/13

12/14

12/15E

12/16E

12/17E

12/18E

12/19E

Net interest margin (avg assets)

5.34

4.84

4.98

5.17

5.29

5.16

5.08

5.00

Provisions / operating profit

42.7

39.1

34.6

35.1

35.4

33.3

31.3

30.3

ROE (UBS earnings)

18.3

17.3

20.1

19.9

18.5

17.9

17.6

18.5

RoAdjE (UBS earnings & equity)

21.3

19.7

22.8

22.7

21.4

20.6

20.2

21.1

RoRWA (UBS)

2.16

2.09

2.64

2.83

2.77

2.82

2.88

3.12

RoA (UBS earnings)

1.41

1.38

1.59

1.65

1.64

1.66

1.70

1.84

Productivity (%)

12/12

12/13

12/14

12/15E

12/16E

12/17E

12/18E

12/19E

Cost income ratio

53.2

54.4

51.5

50.1

48.2

48.5

48.5

48.5

Cost / average assets

4.22

4.12

4.00

4.00

3.91

3.89

3.86

3.81

Compensation expense ratio

28.6

29.8

27.6

25.8

25.0

25.6

25.8

26.0

Growth (%)

12/12

12/13

12/14

12/15E

12/16E

12/17E

12/18E

12/19E

Revenue

12.4

3.7

11.7

12.6

8.1

6.3

7.7

7.9

Operating profit pre provisions

14.9

1.0

18.9

15.8

12.1

5.8

7.7

7.9

Net earnings (UBS)

2.9

5.9

25.9

12.9

4.9

9.0

10.4

18.3

Net DPS

3.3

-5.6

24.0

16.8

7.8

9.0

10.4

18.3

Total assets (year end)

15.4

3.3

13.6

6.1

7.0

7.8

9.0

9.7

Customer loans

8.6

11.4

7.3

4.6

4.6

7.0

10.5

12.6

Customer deposits

-2.6

2.9

-3.0

-5.2

4.9

6.6

9.2

10.8

Value (x)

12/12

12/13

12/14

12/15E

12/16E

12/17E

12/18E

12/19E

Market cap/revenues

1.9

1.9

1.9

1.3

1.2

1.1

1.1

1.0

Market cap/deposits

0.6

0.6

0.7

0.6

0.5

0.5

0.5

0.4

P/PPOP (diluted)

4.0

4.3

3.8

2.6

2.3

2.2

2.1

1.9

P/E (local GAAP, basic)

10.8

10.9

9.3

6.4

6.1

5.6

5.1

4.3

P/E (UBS, diluted)

10.6

10.7

9.2

6.4

6.1

5.6

5.1

4.3

Net dividend yield %

3.5

3.1

3.6

5.3

5.7

6.2

6.9

8.1

P/BV x

1.7

1.8

1.7

1.2

1.1

0.9

0.8

0.8

P/BV (UBS) x

2.0

2.1

1.9

1.4

1.2

1.1

1.0

0.9

Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.

Forecast returns

Forecast price appreciation+44.8%

Forecast dividend yield5.6%

Forecast stock return+50.4%

Market return assumption15.6%

Forecast excess return+34.8%

Statement of Risk

In addition to industry- and company-specific risk, there are potential risks
inherent in investing in emerging market countries. Potential emerging market

related risks include, but are not limited to, the volatile nature of the currency,

regulatory and socio-political risk, and abrupt potential changes in the cost of

capital and economic growth outlook. Valuations can also be affected by

"contagion" from developments in other emerging and developed markets.

Required Disclosures

This report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission.

Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

UBS Investment Research: Global Equity Rating Definitions

12-Month Rating

Definition

Coverage1

IB Services2

Buy

FSR is > 6% above the MRA.

49%

33%

Neutral

FSR is between -6% and 6% of the MRA.

40%

26%

Sell

FSR is > 6% below the MRA.

12%

18%

Short-Term Rating

Definition

Coverage3

IB Services4

Buy

Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.

less than 1%

less than 1%

Sell

Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.

less than 1%

less than 1%

Source: UBS. Rating allocations are as of 30 September 2015.
1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months.

KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months.

EXCEPTIONS AND SPECIAL CASES: UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows.

UBS Limited: Philip Finch. UBS Brasil CCTVM S.A.: Frederic De Mariz; Mariana Taddeo.

Company Disclosures

Company Name

Reuters

12-month rating

Short-term rating

Price

Price date

Bradesco5, 16

BBDC4.SA

Buy

N/A

R$22.03

28 Oct 2015

Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date

5.UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months.

16.UBS Securities LLC makes a market in the securities and/or ADRs of this company.

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.

Bradesco (R$)

Source: UBS; as of 28 Oct 2015

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