We are continuing our Hold on Banco Bradesco S.A., or Bradesco (BBD), but raising our target price to $32. Bradesco is expected to report first quarter earnings on May 12, 2008. We are maintaining our 2008 EPADS estimate at $2.30. Revenues should benefit from growth in the lending portfolio, though net interest margins are declining and loss provisions should rise.
Bradesco reported fourth quarter earnings of R$1,854 million, up 15% from a year ago, but below consensus and our estimate, largely due to compensation costs growing more than expected. Other costs were generally well controlled, and the efficiency ratio improved 30 basis points to 41.8%. We believe the $0.85 indicated annual dividend, which provides a 2.8% yield, is safe.
In addition, increasing international interest rates are always a threat for emerging markets, particularly for Brazil, due to the large size of its public debt load. Furthermore, the changing political situation in Brazil, with charges of corruption hurting the ruling party, could produce economic instability, leading to negative investor sentiment, which could depress Brazilian stock prices as a whole.
Moreover, Bradesco's stock has witnessed strong gains, and we do not believe that Bradesco's valuation is particularly attractive. At its current price, Banco Bradesco's ADS are now trading at 12.9X the 2008 consensus earnings estimates and 11.2X the 2009 consensus estimates, with both years well above the industry medians of 10.2X and 8.7X, respectively, based on consensus estimates as shown in the table following.
We believe the shares are fairly valued at present. Banco Bradesco's estimated future growth rate of 11% is less than that of the industry, as is its dividend yield. Furthermore, the company's exposure to the volatile Brazilian economy adds to uncertainties. Our $32 price target represents a 14X P/E multiple of our 2008 estimated EPADS of $2.30.
Read the full analyst report on BBD.
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