Multiple positive factors point to outperformance of Brazil’s banks in 2019, but pensions reform risks remain.
UBS’s financial analyst Philip Finch believes that a potent mix of stronger than-expected-loan growth, improving net interest margins (as the country’s base rate, Selic, rises), a falling cost of risk (if pensions reform is passed) and improved efficiency ratios from branch rationalization will improve the profitability of Brazil’s leading banks.
Floating all these specific boats is the cyclical recovery of the Brazilian economy that should come this year. These strong numbers are based on expected growth of 3% (rebounding from a small recovery of 1.5% in 2018 and 0.5% in 2017 and a deep recession between 2014 and 2016).
As Finch notes, pensions reform is the key variable. All of the projections of 3%-plus growth are based upon the new administration of president Jair Bolsonaro being able to pass meaningful reform – and there have been encouraging noises that the new administration is making this social security reform a priority.
However, William Jackson, Capital Economics’ chief emerging markets economist, highlights the downside risks to this assumption: «The latest noises don’t mean pension reform is guaranteed. For one thing, it’s not clear that Bolsonaro himself is as committed to the reform as his economic team – it seems he has yet to sign off on the higher retirement ages being suggested and the shorter transition phase».
The politics are also obtuse: the plan will be politically unpopular and Jackson points out that it isn’t clear if the appetite exists within congress to push through unpopular and painful changes to the pension system.
Pensions notwithstanding, other banks are more bullish on this year’s macro-economic scenario: Bank of America Merrill Lynch forecasts growth of 3.5% in 2019 – above the 2.6% consensus – driven by «higher confidence indices and lower market rates, in our view, which should lead to a decline in unemployment rate and an improvement in credit market conditions, favouring especially private consumption and investment.»
Finch expects an average of 17.6% earnings growth for the large Brazilian banks in 2019, with return on equity improving 147 basis points to 19.5%.
Original story:Euromoney | Rob Dwyer