7 Reasons To Consider Brazilian Banks

As Brazil continues to witness stellar economic growth, its financial sector appears to show signs of optimism and for good reason. 

First off, the Latin American nation has a healthy balance sheet.  Public sector debt is roughly 40% of GDP and the average capital adequacy ratio of Brazilian banks is 18.2%, as compared to 14.3% in the United States and 10% in China, states a report by Bank of America (BAC).

Additionally, Liam Denning of the Wall Street Journal states that Brazil is under-banked with outstanding mortgages equating to a mere 3% of GDP.  This compares to 72% in the US and 18% in China.  Additionally, deposits equate to 40% of GDP in Brazil, compared to 57% of GDP in the US and more than 100% of GDP in China. 

Another reason Brazilian banks are appealing is the robust expansion of the nation’s middle class.  In fact, Credit Suisse estimates that over the past five years nearly 22 million people have been added to Brazil’s middle class and is expected to continue to grow as the nation continues to prosper.  This increased wealth translates to higher disposable incomes which lead to an increased number of people acquiring the accoutrements of middle-class life, which further leads to an increased number of people requiring financing to obtain goods and services.  In fact, overall lending during the first half of 2010 has increased 19.7% in Brazil.

A fourth reason that Brazilian banks are attractive is that they remain relatively cheap.  Brazil’s third largest banking branch network, Banco Bradesco (BBD), is trading at roughly 2 times 2011 book value , whereas, small Brazilian banks are trading at an average of 1.1 times 2011 book value.  

Lastly, economic factors such as inflation, the labor market and defaults on consumer loans continue to abate.  Real interest rates are among the highest in the world at nearly 6%, the unemployment rate continues to fall, currently at 7%, and the percentage of personal loans which are 90 days or more past due continues to decline, reaching 6.6% in June 2010. 

Some ways to play Brazilian banks include the following:

  • Global X Brazil Financials ETF (BRAF), which is a pure play on Brazilian financial firms.
  • iShares MSCI Brazil (EWZ), which allocates 22.81% of its assets to financials.
  • Market Vectors Brazil Small-Cap ETF (BRF), which allocates nearly 21.6% of its assets to the financial sector.

Although an upside seems to exist in Brazilian financials, having an exit strategy which identifies specific price points at which upward trends could come to an end is important.  Such a strategy can be found at www.SmartStops.net.

Disclosure: Long BRF

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