Bloomberg News

Banco do Brasil Dividend Yield Leads Americas: Corporate Brazil

July 16, 2012

Banco do Brasil SA is poised to pay the highest dividend yield in the Western Hemisphere as a lending surge sustains profit and shares plunge on investor bets that slowing economic growth may lead to more defaults.

The state-owned bank’s payouts to investors this year will equal 8.1 percent of its current share price, according to the median forecast of 11 analysts surveyed by Bloomberg, the highest ratio among the 80 largest companies by revenue in the Americas. That compares with a 6.7 percent yield for runner-up Vale SA, the world’s largest iron-ore producer. Automaker General Motors Co.’s forecast yield of 0.1 percent is the lowest among the ranked companies.

Banco do Brasil has declined in Sao Paulo trading this year on concern the quality of its loan portfolio is deteriorating as Brazil’s government pressures state-run banks to expand credit to shore up slowing economic growth. Outstanding credit in Brazil rose 18 percent in May from a year earlier to 2.14 trillion reais ($1.05 trillion) after the government cut interest rates and lowered banks’ reserve requirements.

“There is concern about default rates, which could indeed hurt the bank’s profitability levels, but at current prices the stock is still very attractive from a dividend point of view,” Wagner Salaverry, who helps oversee 5.5 billion reais including Banco do Brasil shares at Porto Alegre, Brazil-based Geracao Futuro Corretora de Valores SA, said in a phone interview.

Shares Fall

Brasilia-based Banco do Brasil, Brazil’s biggest bank by assets, has dropped 22 percent in Sao Paulo this year, making it the third-worst performance on the MSCI Brazil Financials Index. (MXBR) Itau Unibanco Holding SA (ITUB4) and Banco Bradesco SA (BBDC4), the second- and third-largest banks, have declined 15 percent and 3 percent, respectively.

Banco do Brasil’s loan portfolio grew 19 percent in the first quarter, helping shore up profits even as it cuts interest rates. Defaults on consumer loans totaled 3 percent in March, unchanged from a year earlier.

The nation’s consumer-loan default rates increased to 8 percent in May from 7.8 percent in April, the highest in 30 months, the central bank said in a report released on June 26. Economists surveyed by the central bank on July 6 forecast that growth in Brazil will slow to 2.01 percent this year, which would be the second-worst performance since 2003.

Profit Estimates

Banco do Brasil’s adjusted net income, which excludes one- time items, declined 7 percent to 2.7 billion reais in the first quarter from a year earlier. Profit will fall 15 percent this year to 11.2 billion reais, according to the average estimate of 16 analysts surveyed by Bloomberg. Analysts estimate Banco do Brasil will pay dividends of 1.51 reais per share this year, the equivalent of 39 percent of the per-share earnings forecast, and down 12 percent from last year.

Most of the dividend is paid to the federal government, which is the lender’s biggest shareholder with a 52 percent stake, according to data compiled by Bloomberg.

Under Dilma Rousseff’s administration, Brazil is turning up pressure on state-owned lenders to cut what she says are “unacceptable” consumer borrowing rates after economic growth stalled in the first quarter. The threat that lower rates pose to earnings makes Banco do Brasil a riskier investment, said Marc Sauerman, who helps manage about 650 million reais at JMalucelli Investimentos.

Cheaper Loans

“There are a lot of risks around Brazilian banks right now, especially when it comes to the government’s intentions to make loans cheaper,” Sauerman said by phone from Curitiba, Brazil. “The government wants banks to lower their interest rates, and they can do that through state-owned banks such as Banco do Brasil. It’s not clear how this could affect earnings.”

The presidential press office didn’t return an e-mailed request from Bloomberg News seeking comment.

Banco do Brasil’s shares trade at 4.5 times its reported earnings, compared with a ratio of 9.6 for Itau.

The bank’s dividend payments are in line with profitability, said Gustavo Henrique Santos de Sousa, the investor relations manager at Banco do Brasil in Brasilia.

“Our default rates are among the lowest in the industry, and our loan portfolio is expanding in line with our guidance,” Sousa said in a phone interview.

‘Risky Bet’

Banco do Brasil said on July 11 it cut interest rates it charges on certain loans to clients after the central bank reduced the benchmark Selic rate. Its average annual lending rate on personal loans was 33.2 percent in June, which compares with a 50.2 percent rate for Itau, according to data from the central bank.

“If default rates remain under control, then Banco do Brasil’s bet to lower interest rates to expand its loan portfolio may end up proving to be the right one,” Fausto Gouveia, who helps manage 380 million reais at Legan Administracao de Recursos in Sao Paulo, said in a phone interview. “But it depends on how quickly the Brazilian economy rebounds from the slowdown we’re seeing now. It’s a risky bet.”

To contact the reporter on this story: Ney Hayashi in Sao Paulo at ncruz4@bloomberg.net

To contact the editors responsible for this story: Jessica Brice in Sao Paulo at jbrice1@bloomberg.net; David Papadopoulos in New York at papadopoulos@bloomberg.net


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