Selling Banco Bradesco – with regrets

Continued pessimism about Brazil's inflation prospects raises concerns about the country's big domestic banks.

By Jim J. Jubak Jan 27, 2011 7:06PM
Jim JubakThis is a very tough call.

If I owned more than one Brazilian bank stock, I might not sell Banco Bradesco (BBD) out of Jubak’s Picks today -- but I don’t.

If I had less exposure to Brazilian stocks in my Jubak's Picks portfolio, I might not sell Banco Bradesco -- but I own Cosan (CZZ), Gerdau (GGB), and AmBev (ABV) as well.

If I could sell just a part of my position in the stock, I would sell just part of the position -- but I can’t in Jubak’s Picks.

So today, Jan. 27, I’m selling Banco Bradesco out of this portfolio with a 5.8% loss since I bought it on Nov. 17, 2010. What has pushed my concern to action is continued pessimism among Brazilian analysts and economists about the inflation picture in Brazil. Economists have raised their 2011 inflation forecast for a seventh straight week to 5.53% from 5.42%. For 2012, the forecast rose to 4.54% from 4.5%.

Post continues after video:
I think this is a disturbing vote, not of "no confidence" but of "too-little confidence," in new central bank president Alexandre Tombini. Last week the Banco Central do Brasil raised its benchmark Selic interest rate by 0.5 percentage points to 11.25%. That apparently wasn’t enough to convince investors that the bank was serious about fighting inflation. Before the interest rate increase, analysts had speculated that Tombini would raise rates by 0.75 percentage points to establish his inflation-fighting credentials.

It now looks like he should have. In the aftermath of the decision, bond buyers in Brazil are dumping fixed-rate debt and snapping up inflation-linked bonds at the fastest rate in two years. The yield gap between inflation-linked bonds and fixed-rate two-year bonds climbed to 6.88 percentage points. That’s the biggest gap since November 2008.

The concern among bond buyers is that the bank’s half-point increase is a sign that the bank won’t raise rates fast enough to shut down inflation because of worries that higher domestic interest rates will push up the Brazilian real even further. The real is up 38% against the U.S. dollar since January 2009.

Inflation hit an annualized rate of 5.9% in December and is almost certain to go above the upper end of the central bank’s inflation target range of 6.5%.

The situation poses two dangers to Brazil’s big domestic banks. If inflation runs out of control, banks will see the value of current interest-paying assets decline. And if the central bank does slow the economy to fight inflation, banks will see loan delinquency rates increase.

I still like the long-term story for Brazil’s banks that is driven by the rise of Brazil’s middle class. But I think reducing risk now is prudent.

Most of the time, in most stock markets, deciding how to take risk to take off the table needs to take into account what else is on the table.

For example, if you owned Banco Bradesco and Itau Unibanco (ITUB), and you thought there was a significant difference between the two banks (and I do have a definite preference for Banco Bradesco over Itau Unibanco at the moment based on current loan-delinquency ratios), then you might sell Itau Unibanco entirely and leave your Banco Bradesco position alone. But if you only own Banco Bradesco and want to reduce your risk from Brazilian banks, then …

(You can see a little more of the flavor of this way of thinking in my post that begins "What if you’re wrong?")

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Banco Bradesco and Itau Unibanco as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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