Santander Brasil (SANB11) has a weak Q4 result, with more impacts than US; the stock is having a volatile day

The earnings season for banks has already started negatively, with Santander Brasil (SANB11) reporting data for the fourth quarter of 2022 (4Q22) below market consensus expectations. This despite the fact that the projections were already low for the bank, as an “effect” of Americanas (AMER3) on the balance sheet was already expected (Santander is one of the most exposed to the company’s debt) and because they had previously shown a large difference for some colleagues of the sector.

The bank revealed this Thursday morning (2) net income of R$ 1.689 billion for the fourth quarter of last year, down 46% from the previous quarter, as provisions for loan losses increased by 18.6% In the period.

The final result fell short of expectations, as the average forecast for the bank’s profit for the period was R$2.86 billion in the fourth quarter, according to data from Refinitiv.

The start of the session for Santander Brasil was volatile, with shares opening lower. However, as of 10:03 (Brasilia time), SANB11 units dropped 2.67%, to R$26.62, to later enter the auction. After exiting the auction, the assets eased their losses and started to rally slightly: as of 10:19 am, they were up 0.84%, to R$ 27.58. SANB11 was up nearly 3% but was soon back trading amid slight losses and gains by late morning.

In mentioning the provisions, the bank did not directly mention the Americanas (AMER3) case, but did point to a “subsequent event” in wholesale credit affecting this line of income, without mentioning the amount provisioned. According to the list of creditors, Santander Brasil has R$3.65 billion to receive from the retailer.

Return on equity (ROE) was 8.35% in 4Q22, down 7.3 percentage points over the quarter. In 2022 the index was 16.3%, 4.9 percentage points lower than in 2021.

Check out the results calendar for the 4th quarter 2022 of the Brazilian Stock Exchange

“In our view, Santander presented weak results in 4Q22, being heavily impacted by the Americanas debt shelving, which hurt the bank’s results,” XP analysts Renan Manda and Matheus Guimarães point out in a report.

Analysts point out that, on the one hand, the bank’s more selective approach to lending throughout 2022 has resulted in slower growth in its loan portfolio (+5.8% year-on-year), putting pressure on its financial margin (NII) in 4Q22 at R $ 12.5 billion (quarterly decrease of 0.6%). On the other hand, this cautious approach has allowed the bank to keep bad debt rates under control, with a slight increase in bad debt to still good levels at 3.1%.

XP stressed, in general, that it expects stocks to react negatively to weak results and reiterated its conservative view on the stock, with a neutral recommendation and a target price of BRL 34 per unit.

Itaú BBA stressed that results were weak in 4Q22, but stressed that profit was in line with its estimates.

In addition to the impact of Americanas on provisions, Santander highlighted subsequent weak operating trends.

Total gross margin decreased by 1% in the quarter due to narrowing spreads and still negative treasury results (negative 1.3 billion reais). Revenues from services are recovering, growing by 7% in the quarter, with better performances in insurance and cards; however, they were still below the house’s projected numbers.

90-day expected default increased 10 basis points in the quarter to 3.1%; which analysts estimate would have been 40 basis points without relevant portfolio allocations.

“We expect a negative reaction from equities, despite the already weak performance of banking stocks during the week,” the BBA assessed in a report before market opening. Analysts highlighted that a reading for other banks primarily links Bradesco (BBDC4) with an underperform rating (below market average performance, equivalent to sell), which is expected to present similar challenges, while Banco do Brasil (BBAS3) is expected to present a entirely different set of results due to different dynamics of credit quality and margins.

Also read: Santander does not disclose provisions for Americanas, but says drawee-risk trades will continue

Credit Suisse, in turn, points out that the profit was 27% lower than the house’s expectations, estimating a provision of R$ 1.1 billion for Americana, but with a negative highlight especially for the NIM (Net Interest Margin , or the net interest rate margin) lower than expected.

Morgan Stanley also highlights disappointing NIM, down 1% QoQ; “The company’s management has stressed that the change in mix towards lower risk assets is partly to blame,” the bank said.

The US bank also estimates that the company added R$1 billion in loan-loss provisions this quarter citing a “later event” and refers to Americanas, but stresses that it is difficult to figure out what the real exposure is, how much is set aside and to what extent this increase in provisions contributes to covering the overall exposure.

But he reiterates: “the leap in provisions actually seems to be driven by the Americans, given that the rest of the default numbers look good: the default ratio was 3.1%, against 3.0% in 3Q22 and the default ratio of the consumer remained stable at 4.3%. Rescheduled loans recorded the lowest quarterly increase in 12 months, ”he assesses.

However, he also stressed that equities would likely be under pressure today due to lower-than-expected numbers and a lack of visibility of what remains to hedge “American risk.”

Citi has also made its estimates of the “American impact” on the financial institution and points out that, even without it, Santander’s ROE would still be a weak 11%. Despite the initially contained default numbers, the analysts of the house underline that attention must be paid to the “formation of NPLs” (the change in the balance of overdue loans), which went from 4.3% in the third quarter to 5.6% in the fourth quarter, including a sold portfolio of R $ 600 million. This indicates a deterioration in the quality of the results, at a faster rate.

“Overall, the result reinforces our view that the period of Santander’s 20% ROE is over and the main question is what is the new sustainable ROE for the bank,” Citi assesses. This scenario should put stocks under pressure for a long time, analysts point out. Therefore, they maintain a neutral recommendation for the asset, with a target price of 29 BRL.

In the Bradesco BBI valuation, Santander Brasil presented mainly negative trends in 4Q22, with a negative trend of the margin with customers, due to a more conservative approach to credit.

“While the provisions have been significantly increased, we believe further provisions relating to the wholesale segment could have been higher given the bank’s credit exposure in the case. Despite the deterioration of only 10 basis points in the consolidated, we believe that the NPL index has been distorted again by significant renegotiation volumes and an active portfolio sale of approximately R$ 1.4 billion”, underline the bank’s analysts.

BBI analysts also point out that operating costs have come under pressure from the wage adjustment, which has led to a significant contraction in pre-tax profit. The bank has maintained a neutral rating for equities.

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