Banco Bradesco: Banking on Brazil

With superior asset quality and conservative loan policies, this bank is the top play on Brazil's economic growth.

By TheStockAdvisors Jan 26, 2012 2:53PM
By Yiannis Mostrous, Global Investment Strategist

One of Brazil's most favorable characteristics is a strong banking system, a sector that should benefit as investment flows return to the country. 

Banco Bradesco (BBD) is our favorite bank to gain exposure to this sector. Banco Bradesco is Brazil's second-largest private bank, with over 40 million customers and more than 4,000 braches.

The lender controls around 15% of the market in term of assets. Banco Bradesco also boasts sizeable leasing, insurance, private pension funds, and asset management business lines.

The bank is famous for its superior asset quality and its conservative loan policies. As a result, its non-performing loan (NPL) ratio remains below 4%, and although this figure has been rising recently, the NPL ratio should continue to hover at this level.

Banco Bradesco's insurance business (30% of earnings) is one of the best run in the country. Additionally, this unit has shown resilience throughout the economic cycle and could offset a lackluster performance in the bank's other units as the global economy slows. 

The bank's insurance business controls 50% of the country's health insurance market, 28% of Brazil's life insurance market, 21% of the country's market for pension plans and 10% of the auto insurance market.

Rising incomes and the strength of Banco Bradesco's brand should drive customers to its insurance offerings. Insurance premiums represent only 3.4% of Brazil's gross domestic product, compared to about 7% to 8% in developed countries, leaving ample room for growth.

The lender has pursued an organic growth model in recent years that has raised operational expenses while offering a more stable growth pattern. This trend should continue in 2012.

The stock trades at 10.3 times trailing earnings and 2 times book value while offering a 22% return on equity.

Investors will also receive a 3.5% dividend yield that should cushion their portfolio during times of economic distress. A new addition to the Long-Term Holdings Portfolio, Banco Bradesco is a buy up to $20.

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