Banco Bradesco Earnings: Weak Net Interest Income and High Credit Losses Pressure Results

No-moat-rated Banco Bradesco BBD reported weak second-quarter results as strong performance from its insurance business was offset by lower net interest income and higher credit costs in its lending arm. Net revenue decreased 16.5% from last year to BRL 19.8 billion. Recurring net income decreased 35.8% from last year but increased 5.6% from last quarter, to BRL 4.5 billion. This translates to a return on average equity of 11.1%, below the bank’s historical average. As we incorporate these results, we do not expect to materially alter our fair value estimate of $3.70 per ADR share.

Net interest income was disappointing once again in the quarter, rising only 1.2% (less than the rate of inflation) from last year to BRL 16.6 billion. Additionally, Banco Bradesco reduced its guidance for 2023 net interest income growth to 2%-6% from 7%-11% as it faces continued headwinds. High interest rates and tighter credit standards have eaten into loan growth, with the bank’s loan book increasing just 2% to BRL 869 billion. With underwriting tightening in the face of deteriorating credit quality, we expect loan growth to remain low in the near term. That said, Brazil’s success in fighting inflation means interest rates will likely begin to decline soon, which will alleviate some of the pressure.

On a less positive note, Banco Bradesco’s credit costs continue to rise. Provisioning for future credit losses rose to BRL 10.3 billion in the second quarter from BRL 5.3 billion last year and BRL 9.5 billion last quarter. The bank’s over-90-day delinquency rate increased to 5.9% of total loans from 5.1% last quarter and 3.5% last year. Our current projections include higher credit costs in 2023 and 2024, though Brazil’s improving economic fortunes could mitigate the worst of the losses. We think the bank’s balance sheet is well positioned, with a Tier 1 capital ratio of 12.9%.