LONDON, January 24, 2013 /PRNewswire/ --
After enjoying years of robust growth, Brazilian banking industry went through a tough period last year. During the first three quarters of 2012, profit margins at Brazilian banks fell to the lowest levels in a decade. However, Brazilian banks saw a turnaround in the fourth quarter. All eyes are now set on banks' earnings, which will be kicked off by Banco Bradesco SA (NYSE: BBD) on January 28th, 2012. Itau Unibanco Holding S.A. (NYSE: ITUB), one of the biggest Brazilian banks, will report its quarterly results on February 5th. StockCall analysts have compiled a detailed technical analysis on Banco Bradesco and Itau Unibanco Holding, and these free reports can be downloaded at http://www.stockcall.com/registration
Decline in Default Rates to Benefit Brazilian Banks
While commodities export has been one of the drivers of the Brazilian economy, in recent years, the country has also seen a sharp rise in consumer spending. Consumer spending was driven by credit growth. The growth model worked well as the Brazilian economy expanded, however, as growth stalled last year, Brazilian banks saw a sharp rise in consumer-loan default rate.
In the third quarter of 2012, the Brazilian economy grew 0.6%. The trend, however, reversed in the fourth quarter of 2012. Recent data indicates that economic activity picked up in the fourth quarter of 2012. This augurs well for Brazilian banks such as Banco Bradesco and Itau Unibanco. See our technical and charting report on Banco Bradesco by signing up today at http://www.StockCall.com/BBD012413.pdf
Another encouraging development for Brazilian banks has been a decline in default rate. According to data released by Brazil's central bank last month, the country's consumer-loan default rate fell to 7.8% in November from 7.9% in October, the first drop in default rate in five months.
Falling Interest Rates
As the Brazilian economy saw a sharp slowdown in 2012, the Brazilian central bank implemented monetary easing measures to boost economic growth. The Brazilian central bank has cut the benchmark Selic rate to a record low 7.25%. More importantly, the central bank has pledged to keep interest rates low for a prolonged period.
While lower interest rates have helped in bringing down default rate, they are also hurting banks' net interest margins and profitability. This is because a decline in interest rates means tighter spreads for banks. It will be interesting to see how much of this has had an impact on bottom-line when Banco Bradesco and Itau Unibanco Holding S.A. [Free Technical Research Report on ITUB]  report their quarterly results in the next few days.
In order to boost lending, the Brazilian government is also putting pressure on banks to cut fees and lower rates. While the move will help in boosting economic growth, it will hurt Brazilian banks' profit margins.
Bradesco and Itau Unibanco Still Look Good
A decline in default rate is a good sign for Banco Bradesco and Itau Unibanco. However, the two banks will feel the pinch from record low-interest rates. Still Bradesco and Itau Unibanco look attractive, especially if the Brazilian economy continues to improve this year.
Both banks are reasonably valued at current level. While Itau Unibanco trades on a P/E ratio of 12.23, Banco Bradesco trades on a P/E ratio of 13.09.
Overall, the major concern for the Brazilian banking industry remains record low interest rates. However, a pickup in economic activity and a decline in default rates are an encouraging sign.
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