The funding and liquidity challenges for
mid-cap banks are being addressed by a
pro-active Brazil central bank
􀀗 Liquidity threat being dealt with, but at
the expense of the mid-cap banks’
growth strategies
􀀗 Banco ABC Brasil upgraded to
Overweight (V) from Neutral (V), Indusval
and Sofisa downgraded to Neutral (V)
from Overweight (V)
Dealing with the funding squeeze
Liquidity and funding issues are being
addressed, but tougher climate ahead
Due to the actions of the Brazil central bank, the mid-cap banks
are benefitting from an injection of liquidity in the Brazilian
financial system, at a time when the credit crunch is biting.
Coaxed by new central bank directives relaxing reserve
requirements, larger banks are acquiring smaller banks’
portfolios, thereby transferring liquidity where it is most needed
in the financial system. These mid-cap bank portfolio disposals,
although welcome from a liquidity perspective, are necessary
acts of balance sheet de-leveraging that adversely impact loan
growth forecasts, and carry high discount rates that are applied
to loan assignments. These factors contribute to the poorer
prospects for mid-cap banks’ earnings, especially given the little
visibility on the (lack of) profitability for new loan assignments.
We believe that the current lower valuations of the mid-cap
banks – even when based on our conservative estimates –
reflect the sub-sector’s out of favor status. Price-to-value (PBV)
ratios for the mid-cap banks currently trade at a discount
ranging from 46% to 69%, compared to Unibanco itself, the
cheapest of the big-cap banks. Based on 2009 PE multiples, we
estimate that the mid-cap banks trade at multiples ranging from
a 47% discount to a 25% premium, relative to Unibanco. With
respect to ratings, we upgrade Banco ABC Brasil to Overweight
(V) from Neutral (V) seeing it as a defensive mid-cap bank
within the current difficult funding climate, and downgrade both
Banco Sofisa and Indusval to Neutral (V) ratings from
Overweight (V). The liquidity measure in our Brazil Mid-cap
banks scorecard on p. 7 highlights our three Overweight (V)
rated stocks.