24 June 2008
Brazilian Banks
Small caps: a new sub-sector
Mario Pierry, MBA
Research Analyst
(1) 212 250 6957
mario.pierry@db.com
Tito Labarta
Research Analyst
(1) 212 250 5944
tito.labarta@db.com
A road map to the small cap banks universe
The stock prices of the recently listed small cap Brazilian banks have performed
poorly since their IPOs and valuations appear attractive relative to the large cap
names. This report should serve as a road map to help investors distinguish
among several banks, as we include standardized summary financials and market
data for easy comparison.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
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DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Industry Analysis
Table of contents
Creation of a sub-sector ................................ Pages 3-4
Market information ........................................ Pages 5-8
Company descriptions................................. Pages 9-28
Global Markets Research Company
A relevant sub-sector has been created
Ten banks listed their shares on the Bovespa during an eight month period from
March to November 2007, raising R$7.7bn in capital and creating a sub-sector in
the financial space. These banks have a combined market capitalization of R$19bn
(US$11bn) and trade an average of R$33mn (US$21mn) per day. However, only
four of the ten banks have a market capitalization above US$1bn, and only three
stocks trade more than US$3mn per day.
Poor stock price performance
All of the recently listed small cap banks are trading below their IPO prices. On
average, the group has declined 27% from its offering price and is down 37%
from peak prices. We believe this weak performance reflects: 1) liquidity concerns,
as global risk aversion has increased, 2) “oversupply” of IPOs and resulting lack of
sell-side coverage, 3) changes in regulation, especially with regards to payroll
lending and asset sales, and 4) concerns related to funding costs in a rising
interest rate environment.
Small caps trade at a discount to large caps
The group appears attractively valued based on consensus estimates, trading at
6.5x 2008F P/E and 1.3x 2008F P/BV, or roughly at a 50% discount to the large cap
names. However, we caution about the shortfalls of using consensus estimates,
which for the small cap banks consist of only 3-4 analysts. Furthermore, we
believe there are certain execution risks, as consensus is forecasting EPS growth
of 45% per year from 2007-2009, well above our expectations of 16% for the
large cap names.

Table of Contents
Creation of a sub-sector.................................................................... 3
IPO wave .................................................................................................................................3
Not all banks are equal..............................................................................................................3
Market information ........................................................................... 5
Weak stock price performance .................................................................................................5
Poor liquidity of shares..............................................................................................................6
Earnings growth expectations...................................................................................................6
Valuation multiples appear attractive ........................................................................................7
Company descriptions ...................................................................... 9
ABC..........................................................................................................................................9
Banrisul ..................................................................................................................................11
Bic..........................................................................................................................................13
Cruzeiro do Sul........................................................................................................................15
Daycoval ................................................................................................................................17
Indusval..................................................................................................................................19
Panamericano .........................................................................................................................21
Parana ....................................................................................................................................23
Pine........................................................................................................................................25
Sofisa .....................................................................................................................................27

Creation of a sub-sector
IPO wave
During an eight month period from March to November 2007, ten banks listed their shares in
the Bovespa, raising R$7.7bn in capital and creating a sub-sector within the financials space.
Pine was the first company to list is shares in March, while Panamericano concluded the
process in November. On average, the stocks were valued at 4.2x trailing book value, or at
2.3x if we were to include the proceeds from the IPO; Figure 1.

Not all banks are equal
The small cap banks can be roughly divided into 3 categories, those focused on 1) SMEs, 2)
payroll loans, and 3) consumer finance. The “pure” SME banks (more than 90% of loans
directed to SMEs) are ABC, Bic, and Indusval. Panamericano is focused primarily in consumer
finance (~60% of loans), while Cruzeiro do Sul and Parana direct the bulk of their business to
payroll loans (~90% of loans). Meanwhile, Pine, Sofisa, Daycoval, and Banrisul have a more
diversified loan mix. Pine focuses on SMEs and payroll loans, Sofisa focuses on SMEs and
personal loans, and Daycoval has a better balance between payroll and consumer loans.
Finally, Banrisul has the most diversified loan mix; Figure 2.
We note that payroll loans, especially those directed to retirees and INSS pensioners, have
come under increased scrutiny from regulators recently, which could impact the profitability
of such segment. In particular, in an effort to reduce excessive indebtedness, loan limits have
been reduced and rates have been established.
In general, the small cap banks have a small retail network (ranging from 10-40 branches) and
thus rely mostly on time deposits and money markets for funding. Banrisul is the exception,
as its retail network exceeds 400 branches, and thus ~40% of its funding is composed of
“core” deposits (demand and savings deposits). We note that Panamericano, Cruzeiro do
Sul, and Pine rely heavily on “off balance sheet funding” or proceeds from the sale of their
loan portfolios; Figure 3. However, the Brazilian Central Bank recently established new
procedures for classification, accounting record, and disclosure of sales operations or
transfer of financial assets. Starting in January 2009, the seller of the assets will have to keep
the complete value of the transferred assets in the balance sheet, register the counterpart
liabilities, and appropriate the earnings or expenses according to the maturity of the loans,
thus diminishing their attractiveness.