Banco do Brasil shares have risen by 95% since 2022, but for most experts the performance still does not reflect the full potential of the institution founded by D. Pedro II 171 years ago.
Recently, BB's management reiterated its estimate of a profit of between R$37 billion and R$40 billion by the end of the year. If confirmed, we are talking about an increase of between 4% and 12% compared to 2023. In the first half of the year, R$18.8 billion has already been achieved, in line with the target.
When it comes to banks, the most closely watched financial indicator is return on equity (ROE). This means that if a bank were to liquidate its operations, it would have to return the money to its account holders and pay off its debts (such as the CDBs it issued). What is left is the institution's equity – basically billions and billions in assets such as government bonds. The fortune would have to be divided among the owners (the shareholders). In practice, then, this equity is the investment that the shareholders make in the bank to obtain a return.
From a market perspective, returns above 20% are a good sign of financial health. And BB is in that club. The ROE for the second quarter was 21.6%. Among the largest financial institutions in the country, it is behind Nubank (28%) and Itaú (22.4%), but well ahead of Santander (15.5%) and Bradesco (11.4%).
Carlos Daltozo, head of analysis at Eleven Financial, recalls that BB began to turn things around in 2022, after spending almost a decade delivering profitability below its main private competitors. Since then, the bank has been on the rise.
BB's gross financial margin ended the first half of this year at R$51.3 billion, an increase of 16.4% compared to the same period in 2023, which made the institution raise its expectations for the end of the year – from an increase of between 7% and 11% to a range between 10% and 13%.
This account represents the net result of financial intermediation operations – before the provision for credit risk, which is a capital reserve made by banks to cover possible default events (more on this later).
Rural producer: the lynchpin
Working with agribusiness is extremely important for BB. The segment represents more than a third of its credit portfolio, which grew 11.5% in 12 months (data from the end of June). Loans in the agribusiness category alone surpassed those for individuals and legal entities. And their growth was 16.6% in the same period.
All very well, if it weren't for the fact that defaults in agribusiness began to put pressure on BB's general accounts. This was the main trigger for the decision to adjust upwards the total volume of Provisions for Loan Losses (PCLD) estimated for 2024. The projection, which was R$27 billion to R$30 billion, rose to R$31 billion to R$34 billion. At the end of June, it was at R$16.3 billion.
In a conference call about the results, the bank's management sought to reassure analysts about the decision and stressed the need for caution. Geovanne Tobias, vice president of financial management and investor relations, highlighted that BB has been conducting specific campaigns to collect debts in general for months, which resulted in a record volume of credit recovery: R$3 billion in the second quarter.
Regarding the increase in provisions to cover possible defaults, Tobias explained that the current situation in the field is very different from when the budgets were made, at the end of 2023.
At the time, the country was experiencing record harvests, with agricultural commodity prices extremely favorable to producers – a scenario that changed throughout the year, with production losses and lower prices. This caused some customers to delay payments.
But how can we “motivate” people to settle their debts? To obtain funds for the next planting, for example, farmers need to settle their debts with the bank, explains Felipe Prince, vice president of internal controls and risk management at BB.
According to him, this segment is currently the one that demands the institution's greatest collection effort, with a team committed to promoting agreements and accelerating the granting of new loans. In July of this year, BB announced the largest Harvest Plan in its history, with R$260 billion earmarked for financing the 2024/2025 cycle, an amount 13% higher than the previous one.
Regarding the risks involved, Tobias states that the bank is fully capable of maintaining control over defaults. “We are calm because, even with the increased risk and the increase in provisions, we have delivered record results, with extremely attractive returns for Banco do Brasil shareholders.”
Bruno Benassi, an analyst at Monte Bravo, criticizes the increase in defaults at BB in general. It ended June at 3%, compared to 2.73% a year earlier. Regarding agribusiness, specifically, Benassi believes that the situation should return to “normal” levels, noting that, in recent years, favorable conditions for the segment have pushed the default rate to atypically low levels.
In June last year, the default rate in the agricultural portfolio was 0.58%. This year, it was 1.32% – that is, it grew, but remains well below the general rate.
Dividends and stock market momentum
At the beginning of the year, BB approved an increase in the share of net profit that will be distributed to shareholders in 2024, from 40% to 45%. This is what the financial market calls payout.
With an economic scenario that proved to be tight throughout 2024 (higher interest rates than expected, etc.), analyst Brian Flores, from Citi, questioned the institution about the possibility of a change in payout from now on. Tobias said that the bank continues to work with the 45% horizon – which represents good news for investors seeking a strategy based on dividends, an area in which BB usually excels.
Daltozo, from Eleven, believes that the bank may even surpass this mark if it maintains an ROE of around 20%. The expert believes that BB (BBAS3) shares should show a return with dividends at the end of this year (dividend yield) of 9%, the same level expected by Benassi, from Monte Bravo.
The indicator consists of the following: if the stock is quoted at R$30, and paid R$3 in dividends in the last 12 months, its dividend yield is 10%. For 2025, the estimates of these two experts are a return of 9% and 10.25%, respectively.
As for the projected target price for BB shares, an average considering the calculations of seven analysis houses (Bradesco BBI, BTG Pactual, Citi, Eleven, HSBC, Monte Bravo and XP) results in R$34.93. Taking into account the closing price of the share on September 18 (R$28.25), the potential appreciation, in a horizon of 12 to 15 months, is equivalent to 23.6% – which motivates five “buy” recommendations for the shares and two “neutral” recommendations by analysts.
“August and most worthy representatives of the nation”, said D. Pedro II to the Senate in 1853. “I recommend that you create a solidly constituted bank (…)”. Apparently, many experts agree that this premise of the emperor remains firm in the foundations of the bank.