We are continuing our Hold on Banco Bradesco S.A. (or Bradesco) (BBD), but cutting our target price to $19. In its second quarter report, Bradesco posted net earnings before nonrecurring items of R$2,002 million, up 11% year-over-year, but below our estimate due to a higher-than-expected effective tax rate.
Despite this, we are maintaining our 2008 EPADS estimate at $1.60 and raising our 2009 estimate to $1.90 from $1.88, due to a change in our FX assumptions from depreciation of the US$ against the Brazilian real. Revenues should benefit from growth in the lending portfolio, though net interest margins are declining and loss provisions should rise. We believe the $0.61 indicated dividend, which provides a 3.3% yield, is safe.
As a result of better economic conditions, the Brazilian credit business has been growing, and Bradesco has been able to take advantage of this improved economic environment. Due to Bradesco's successful segmentation strategy, it has experienced solid portfolio growth in consumer and small- and medium-size companies. During second quarter 2008, Bradesco's loan portfolio increased 37% over 2007's second quarter, reaching R$148 billion. We expect continued strong growth in upcoming quarters.
The bank continues to show strong profitability due to strict cost controls, growth in assets, solid fee income growth, increased credit portfolio, and remarkable growth in its assets under management. As expected, Brazilian retail banks benefited from the uncommon combination of increasing credit demand and higher local interest rates.
Read the full analyst report on BBD
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