Since the COVID-19 pandemic, banks have been slowing down around the world. Slower loan growth, declining margins, and growing debt delinquencies have weighed on banks’ short-term earnings projections. Is it worthwhile to bet on Brazilian bank stocks Itau Unibanco(ITUB) or Banco Bradesco/BBD now, given this background? Our view is that shares of Brazilian banks suffered significant sell-offs in the past year due to rising inflation and low job growth. In September, 10.1% was recorded in the Extended National Consumer Price Index 15. (IPCA-15). As a result, the Brazilian central bank has raised interest rates to 6.25%—a 425bps increase—since March, and the highest since July 2019.

However, because its last crisis prepared the country’s banks by de-risking their balance sheets and creating high loss reserves and better underwriting standards, the current challenges should be manageable. Fitch Ratings says that Brazil’s bank sector is performing well with strong capitalization, earnings and a stable outlook. This will help to sustain near-term profitability. R$62 Billion (USD11.2 Billion) was the banking system’s aggregate net income for 1H21. This increase of 53% over 1H19 was 3% greater than 1H19. The median return on equity in 1H21 was 14.5%. This is an increase of 13.5% from 2020.

The pandemic should be contained by loan moratoria and government assistance. Given this backdrop, we think two fundamentally sound Brazilian banking stocks, Itau Unibanco Holdings S.A. (ITUB) and Banco Bradesco S.A. (BBD), could be worth adding to one’s watchlist.

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