Banco do Brasil (BSP:BBAS3, Financial)(BDORY, Financial)(FRA:BZLA, Financial), the $25 billion Brazilian bank, delivered its first-quarter results a few weeks ago, and the largest bank in Brazil and Latin America (in terms of total assets) reported 2.6% total operating income to 23.1 billion Brazilian reals ($7.04 billion) and another 3.4% profit decline to 2.4 billion reals.
This was similar to the profitability it had in the first quarter of 2016 with a 10.2% margin.
Total return
Banco do Brasil ADR shares have outperformed the broader Standard & Poor's 500 index in the past year having provided 84.5% total gains compared with the index’s 19.2%. Still, the Brazilian bank returned just one-fifth of the index’s 15.4% total gains in the past half decade.
Valuations
Nonetheless, Banco do Brasil trades at a good discount compared to its peers. According to GuruFocus data, the bank had a trailing price-earnings (P/E) ratio of 9.7 times vs. industry median 14.6 times, a price-book (P/B) ratio 0.92 times vs. 1.2 times and a price-sales (P/S) ratio 1.2 times vs. 3.4 times.
The bank also had a trailing dividend yield of 1.57% with an 18% payout ratio.
Average 2017 sales and earnings-per-share expectations indicated forward multiples of 0.93 times and 7 times.
Banco do Brasil
According to filings, Banco do Brasil is a publicly traded company established under private law with both public and private shareholders, subject to the rules of Brazilian corporate law.
The bank, headquartered in Brasàlia, was founded in 1808 and is the oldest active bank in Brazil and one of the oldest banks in continuous operation in the world.
The Brazilian bank's business activities include the following:
- All manner of asset, liability and advisory services.
- Banking and financial services, including foreign exchange transactions and other services such as insurance, pension plans, capitalization bonds, securities brokerage, credit/debit card management, consortium management, investment funds and managed portfolios.
- All other types of transactions available to banks within Brazil´s National Financial System.
Financial metrics
Net interest margin
Net interest income is the difference between the revenue that is generated from a bank's assets and the expenses associated with paying out its liabilities (Investopedia).
In the first quarter Banco do Brasil’s net interest margin held steady at 4.8% (same as in first-quarter 2016).
Return on equity
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested (Investopedia).
ROE in the first quarter was at 11.5% vs. 11.9% in first-quarter 2016. ROE in the recent quarter is still markedly lower than 2015’s 16.1% figure.
Loan loss provision
Loan loss provision is an expense set aside as an allowance for uncollected loans and loan payments (Investopedia).
In the first quarter allowances for loan losses were 36% higher at 9.1 billion reals compared to the same period a year earlier.
NPL ratio
NPL ratio is the ratio of the amount of nonperforming loans in a bank's loan portfolio to the total amount of outstanding loans the bank holds (eHow).
A nonperforming loan (NPL) is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default (Investopedia).
In the first quarter delinquency ratio was at 3.89% compared to 3.5% in first-quarter 2016.
Capital adequacy in Tier 1 and revenue per risk weighted assets
Tier 1 capital
Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is intended to measure a bank's financial health and is used when a bank must absorb losses without ceasing business operations (Investopedia).
Under Basel III, the minimum tier 1 capital ratio is 6%, which is calculated by dividing the bank's tier 1 capital by its total risk-based assets.
In the first quarter Banco do Brasil’s Tier 1 ratio was 12.4% compared to 11.4% in first-quarter 2016.
On average, Banco do Brasil had three-year sales growth of 0.38%, profit decline of 20% and profit margin of 18.8% (Morningstar data).
Cash, debt and book value
As of December, Banco do Brasil had 115 billion reals in cash and 293 billion reals in debt, resulting in a debt-equity ratio of 3.49 times vs. 1.88 times in December 2015 (Morningstar data).
The bank also had a book value of 84 billion reals compared to 78.4 billion reals in 2015.
Cash flow
In fiscal 2016, cash flow from operations for the Brazilian bank declined by 38% to 23.2 billion reals as it recorded a significant amount, 29.6 billion reals, in outflows in relation to equity variations (1).
Capital expenditures, including acquisitions of intangible assets, were 4.5 billion reals leaving Banco do Brasil with 18.7 billion reals in free cash flow vs. 34.5 billion reals in 2015.
Despite its bounty in free cash flow, the Brazilian bank did not provide any dividend payouts in 2016; instead it spent minimally, or 157 million reals (0.8% of free cash flow), on share repurchases. Nonetheless, the bank also was a net debt payer having allocated 6.3 billion reals in debt repayments, net issuances, in 2016.
Conclusion
In the recent quarter, Banco do Brasil exhibited consistency in terms of declining profits in comparison to its recent fiscal years in operation.
NPL, a critical metric, also has slowly crept up while having had an increased overall debt. Nonetheless, the bank carried an acceptable financial health having based on Basel Tier requirements. The company also appeared to be a rather conservative dividend provider to its shareholders in recent years.
Asking 20% margin from the bank’s book value as of December would indicate a value of 67 billion reals – 16% decline from today’s market value of 80.2 billion reals.
In summary, Banco do Brasil is a pass.
Notes
(1) Annual report
Disclosure: I do not have any shares in any of the companies mentioned.
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