Select Page

At the beginning of November I wrote that I’d recommend buying Banco Bradesco (BBD), Brazil’s second or third largest bank (depending on what you measure) if the bank’s New-York-traded ADRs fell to $20.

Well, they just about got there yesterday, November 16, closing for the day at $20.42, and the ADR is up just a little bit so far today, November 17.

So I think it’s time for a little bargain hunting here. I’m going to add these shares to Jubak’s Picks today. (The ADRs, by the way, are based on the bank’s preferred shares in Brazil.)

The bank reported third quarter earnings on October 27. Adjusted profit climbed by 40% from the third quarter of 2009 and by 5% from the previous quarter. That puts the bank’s annualized return on equity at 22.5%.

All this was still a bit short of analyst projections for the quarter. The difference between actual results of 2.52 billion reais (the plural for Brazil’s real) and analyst estimates of 2.55 billion reais came down to an 18% increase in expenses and weaker than expected loan growth.

The higher expenses came as the bank expanded its customer service network and increased advertising. Loan growth came to 4.2% from the previous quarter. Outstanding credit climbed 20% in September to a record and Banco Bradesco saw its loan portfolio expand by 19% from the same quarter in 2009. 

But most important to me and, I suspect, to most investors still counting the bad loans at banks around the world, the average default rate fell to 3.8% at the end of September from 4% in the second quarter. That kept the bank on a trend that has shown a constant decline in nonperforming loans since they peaked at 5% in September 2009.

The bank doesn’t look like it will have any trouble meeting the stricter standards of the new Basel III rules. Bradesco’s Tier 1 capital ratio was 13.5% at the end of the quarter.

I like this bank for its exposure to the domestic economy of Brazil. (Brazil’s central bank projects that the country’s economy will grow by 7.6% in 2010. Small and mid-sized companies make up the biggest share of the bank’s loan book at 40%. Individuals make up 35% of the loan book and big companies 25%.

I’m setting a target price of $28 an ADR by October 2011.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. As of the end of the September 2010 quarter, the fund owned shares of Banco Bradesco. You should not assume that the fund still owns a position in that stock. For a full list of the stocks in the fund as of the end of the most recent quarter see the fund’s portfolio at