Banrisul BRSR6 BZ
December 25, 2008 - 9:30pm EST by
om730
2008 2009
Price: 5.40 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 2,200 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

At the current price of R$ 5.40 Banrisul (BRSR6 BZ on Bloomberg) stock offers the opportunity to buy an overcapitalized regional retail bank with a dominant franchise at an attractive valuation. Banrisul trades at 4 times earnings, 80% of book value, and  12% dividend yield, a significant discount to its larger peers. Long term, Brazil is a country with very attractive banking fundamentals.

Capitalization

Price           R$5.40

Shares         409 million

Mkt Cap     R$ 2,208 million

Description

Banrisul is a regional retail bank controlled by the State of Rio Grande do Sul, the fourth richest state in Brazil with a population of 11 million people. Banrisul was founded in 1928 as a state controlled bank, and, through the consolidation of several state controlled banks (most importantly the state development bank in 1992 and Caixa Estadual and CEE in 1997) became the largest retail bank in the State.

In 1998, due to years of bad lending practices and general mismanagement, Banrisul became insolvent. It was recapitalized under PROES, a federally sponsored program to restructure the States’ banking systems. In addition to the capital injection, the program forced extensive changes to internal controls and corporate governance and opened the door for an eventual privatization in July 2007. The State reduced its participation in the bank from 99% to 57% through the combined sale of existing and new shares.

Banrisul benefits from a privileged retail franchise which has enabled it to earn a very high return on equity (high teens, low 20’s) despite having a high BIS ratio, 18% in the most recent quarter.  The pillars of this competitive position are a low cost, stable funding base and dominant positions in two niche lending businesses: payroll lending and working capital financing of small and medium enterprises.

Banrisul has a sizable base of 2.9 million retail clients which enables it to fund itself at 92 to 93% of the inter-bank rate. Although small relative to the three largest Brazilian banks (ie Itau, Bradesco, Banco do Brasil), it benefits from having the largest retail network in the State.

 

Total

Capital (Porto Alegre)

Other Areas

Banrisul

389

55

334

Banco do Brasil

344

44

300

CEF

192

36

156

Bradesco

158

36

122

Itau

91

35

56

Santander

122

34

88

Unibanco

49

16

33

HSBC

52

15

37

ABN

35

13

22

As of 3Q08, Banrisul had R$ 24 billion in assets, R$ 7 billion in cash, R$ 10.5 billion of gross loans, R$ 9.6 billion of net loans, R$13.9 billion in deposits, and R$ 3 billion in book value. ROE for the quarter was 16%. NPL’s stood at 3.2%. Reserves to non performing loans stood at 275%. Charge offs to average loans were 2.3%. BIS ratio was 18%.  The total assets:equity ratio was 8: 1.

Consumer loans outstanding at 3Q08 were R$3.7 billion. Roughly two thirds of these consist of relatively low risk, high return payroll loans. As part of its payroll management business, Banrisul enters into exclusive contracts that enable it to lend to its clients’ employees and to deduct the payments directly from the employee’s paychecks, thus greatly reducing collection risk.

As the official agent of the state of Rio Grande do Sul, Banrisul does payroll management for all active and retired public sector employees. It also handles exclusively, tax collections and payments to suppliers of the state.

 

SME loans outstanding were R$5.3 billion. These are heavily weighted towards working capital loans and pre-payments of receivables. Here the bank’s distribution network and its ability to pre-pay receivables originated through its proprietary debit card, Banricompras, provide an important competitive advantage. Banricompras is one of the most actively used debit cards in the State. The rest of the loan book consisted of R$.7 billion in Agricultural loans and R$ .9 billion of mortgages.

Banrisul has maintained an ROE’s in the high to mid teens despite having a high BIS ratio and an inflated cost income ratio at 61%.  Asset quality is high. Reserves are consistently high relative to the level of non-performing loans and provisions consistently exceed charge offs.

Operating metrics

2004

2005

2006

2007

Total Assets

12,126

14,090

15,649

20,380

Gross Loans

5,625

5,973

6,357

8,024

Deposits

7,626

8,849

10,353

12,366

Shareholders Equity

1,026

1,143

1,295

2,790

Adjusted Net Income

239

259

275

373

Adjusted ROA

2.0%

2.0%

1.8%

2.1%

Adjusted ROE

26.2%

23.9%

22.5%

18.3%

NIM

11.8%

12.0%

10.8%

9.7%

Cost-to-Income Ratio

65.5%

64.2%

63.9%

61.2%

Non-performing Loans/ Gross Loans

6.6%

7.3%

6.8%

5.6%

Reserves/Non-performing Loans

207.1%

188.0%

195.3%

200.0%

Loan Loss Provisions/Average Loans

3.5%

3.8%

3.9%

3.1%

Charge-offs/Average Loans

2.4%

2.9%

3.5%

2.8%

Capital Ratio

17.5%

18.2%

20.2%

26.0%

Valution

Banrisul stock is interesting because it enables one to invest in a well capitalized bank with an attractive retail franchise at a significant discount to the large Brazilian private sector banks. It is inexpensive on an absolute and on a relative basis. Banrisul is a fraction of the size of its peers that operate on a national level, and it is controlled by the state. Therefore, it should trade at a discount. But the discount appears  excessive. It trades at .8x book versus 2.4x for Itau, 2.2x for Bradesco, and 1.3x for Banco do Brasil, the largest publicly traded state controlled bank.

Banrisul’s ROE has historically been in the high teens low 20% versus 25% for its large private and public sector peers. However, its tier 1 ratio, a measure of capital adequacy, is 18% versus 11% for the peer group.

As one can see from the table below, asset quality has been better than that of its largest peers.

Provision/Avg. Loans

Charge-off/Avg. Loans

 

2004

2005

2006

2007

2004

2005

2006

2007

Banrisul

3.5%

3.8%

3.9%

3.1%

2.4%

2.9%

3.5%

2.8%

Bradesco

3.5%

3.5%

5.0%

4.8%

3.5%

2.4%

3.2%

3.9%

Itau

3.7%

6.9%

8.9%

6.2%

4.1%

4.9%

4.8%

6.2%

Banco do Brasil

4.2%

4.8%

4.9%

3.7%

3.2%

3.3%

3.6%

0.6%

Unibanco

4.4%

5.9%

4.0%

4.9%

4.2%

4.4%

3.9%

At the current stock price, an investment in Banrisul combines four qualities: a low valuation, a high return on investment, a strong balance sheet, and logn term earnings  growth prospects.

Growth Opportunities

Management has embarked on an ongoing cost cutting program which encourages employees to opt for early retirement, targeting to reduce the cost to income ratio from the current 61% to a level closer to its peers around 52%.

There is room to grow fee income from the current 24% of total income to the 30% plus level achieved by the private sector banks. Management is addressing this issue by introducing new products, targeting cross selling opportunities, and raises prices of products for which it believes it is under charging.

Banrisul’s high BIS ratio (18%), low assets: equity ratio (8:1) and low loan to  deposit ratio (60%) are all supportive of long term loan growth. As the balance sheet growth, the bank will realize the benefit of operating leverage.

Risks

The biggest risk in the near term is a slowdown in loan growth accompanied by deterioration in asset quality. This is likely to happen in 2009, but it is largely discounted in current earnings estimates.  On the positive side, Banrisul is not coming off an extended period of excessive loan growth. Rio Grande do Sul in 2005 suffered a drought that led to a 5.4% contraction in the States’ GDP versus 2.3% growth in Brazil’s GDP that year. 2005 and 2006 were years of very low loan growth and a slight deterioration for asset quality. Loan growth did not resume until  2007.

Government mismanagement is not currently an issue, but one should monitor the relationship between Banrisul, and its controlling shareholder. In Brazil one has been able to generate attractive returns by investing in state controlled companies. Over time,  management, governance and transparency have improved rather than deteriorated in companies such as Petrobras, Cemig, Telebras, Banco do Brasil. These companies had poor disclosure and mediocre capital allocation fifteen years ago, but surprises have been to the upside in terms of improvements and the realization of hidden assets. This is Rio Grande do Sul’s first privatization, and the State government is interested in doing more in order to reduce the fiscal deficit. Furthermore, the State continues to be the largest shareholder.

Banrisul’s exclusive payroll management contract expires in 2011. It is not certain that it will be renewed.

The stock does not trade very well. This is a busted IPO and foreigners own 75% of the free float. There is an overhang, and local investors are aware of it therefore reluctant to buy the stock.

Management has not yet delivered on its plan. It remains to be seen whether management is capable of executing its plan.

Catalyst

There are no near term catalysts.
    sort by    

    Description

    At the current price of R$ 5.40 Banrisul (BRSR6 BZ on Bloomberg) stock offers the opportunity to buy an overcapitalized regional retail bank with a dominant franchise at an attractive valuation. Banrisul trades at 4 times earnings, 80% of book value, and  12% dividend yield, a significant discount to its larger peers. Long term, Brazil is a country with very attractive banking fundamentals.

    Capitalization

    Price           R$5.40

    Shares         409 million

    Mkt Cap     R$ 2,208 million

    Description

    Banrisul is a regional retail bank controlled by the State of Rio Grande do Sul, the fourth richest state in Brazil with a population of 11 million people. Banrisul was founded in 1928 as a state controlled bank, and, through the consolidation of several state controlled banks (most importantly the state development bank in 1992 and Caixa Estadual and CEE in 1997) became the largest retail bank in the State.

    In 1998, due to years of bad lending practices and general mismanagement, Banrisul became insolvent. It was recapitalized under PROES, a federally sponsored program to restructure the States’ banking systems. In addition to the capital injection, the program forced extensive changes to internal controls and corporate governance and opened the door for an eventual privatization in July 2007. The State reduced its participation in the bank from 99% to 57% through the combined sale of existing and new shares.

    Banrisul benefits from a privileged retail franchise which has enabled it to earn a very high return on equity (high teens, low 20’s) despite having a high BIS ratio, 18% in the most recent quarter.  The pillars of this competitive position are a low cost, stable funding base and dominant positions in two niche lending businesses: payroll lending and working capital financing of small and medium enterprises.

    Banrisul has a sizable base of 2.9 million retail clients which enables it to fund itself at 92 to 93% of the inter-bank rate. Although small relative to the three largest Brazilian banks (ie Itau, Bradesco, Banco do Brasil), it benefits from having the largest retail network in the State.

     

    Total

    Capital (Porto Alegre)

    Other Areas

    Banrisul

    389

    55

    334

    Banco do Brasil

    344

    44

    300

    CEF

    192

    36

    156

    Bradesco

    158

    36

    122

    Itau

    91

    35

    56

    Santander

    122

    34

    88

    Unibanco

    49

    16

    33

    HSBC

    52

    15

    37

    ABN

    35

    13

    22

    As of 3Q08, Banrisul had R$ 24 billion in assets, R$ 7 billion in cash, R$ 10.5 billion of gross loans, R$ 9.6 billion of net loans, R$13.9 billion in deposits, and R$ 3 billion in book value. ROE for the quarter was 16%. NPL’s stood at 3.2%. Reserves to non performing loans stood at 275%. Charge offs to average loans were 2.3%. BIS ratio was 18%.  The total assets:equity ratio was 8: 1.

    Consumer loans outstanding at 3Q08 were R$3.7 billion. Roughly two thirds of these consist of relatively low risk, high return payroll loans. As part of its payroll management business, Banrisul enters into exclusive contracts that enable it to lend to its clients’ employees and to deduct the payments directly from the employee’s paychecks, thus greatly reducing collection risk.

    As the official agent of the state of Rio Grande do Sul, Banrisul does payroll management for all active and retired public sector employees. It also handles exclusively, tax collections and payments to suppliers of the state.

     

    SME loans outstanding were R$5.3 billion. These are heavily weighted towards working capital loans and pre-payments of receivables. Here the bank’s distribution network and its ability to pre-pay receivables originated through its proprietary debit card, Banricompras, provide an important competitive advantage. Banricompras is one of the most actively used debit cards in the State. The rest of the loan book consisted of R$.7 billion in Agricultural loans and R$ .9 billion of mortgages.

    Banrisul has maintained an ROE’s in the high to mid teens despite having a high BIS ratio and an inflated cost income ratio at 61%.  Asset quality is high. Reserves are consistently high relative to the level of non-performing loans and provisions consistently exceed charge offs.

    Operating metrics

    2004

    2005

    2006

    2007

    Total Assets

    12,126

    14,090

    15,649

    20,380

    Gross Loans

    5,625

    5,973

    6,357

    8,024

    Deposits

    7,626

    8,849

    10,353

    12,366

    Shareholders Equity

    1,026

    1,143

    1,295

    2,790

    Adjusted Net Income

    239

    259

    275

    373

    Adjusted ROA

    2.0%

    2.0%

    1.8%

    2.1%

    Adjusted ROE

    26.2%

    23.9%

    22.5%

    18.3%

    NIM

    11.8%

    12.0%

    10.8%

    9.7%

    Cost-to-Income Ratio

    65.5%

    64.2%

    63.9%

    61.2%

    Non-performing Loans/ Gross Loans

    6.6%

    7.3%

    6.8%

    5.6%

    Reserves/Non-performing Loans

    207.1%

    188.0%

    195.3%

    200.0%

    Loan Loss Provisions/Average Loans

    3.5%

    3.8%

    3.9%

    3.1%

    Charge-offs/Average Loans

    2.4%

    2.9%

    3.5%

    2.8%

    Capital Ratio

    17.5%

    18.2%

    20.2%

    26.0%

    Valution

    Banrisul stock is interesting because it enables one to invest in a well capitalized bank with an attractive retail franchise at a significant discount to the large Brazilian private sector banks. It is inexpensive on an absolute and on a relative basis. Banrisul is a fraction of the size of its peers that operate on a national level, and it is controlled by the state. Therefore, it should trade at a discount. But the discount appears  excessive. It trades at .8x book versus 2.4x for Itau, 2.2x for Bradesco, and 1.3x for Banco do Brasil, the largest publicly traded state controlled bank.

    Banrisul’s ROE has historically been in the high teens low 20% versus 25% for its large private and public sector peers. However, its tier 1 ratio, a measure of capital adequacy, is 18% versus 11% for the peer group.

    As one can see from the table below, asset quality has been better than that of its largest peers.

    Provision/Avg. Loans

    Charge-off/Avg. Loans

     

    2004

    2005

    2006

    2007

    2004

    2005

    2006

    2007

    Banrisul

    3.5%

    3.8%

    3.9%

    3.1%

    2.4%

    2.9%

    3.5%

    2.8%

    Bradesco

    3.5%

    3.5%

    5.0%

    4.8%

    3.5%

    2.4%

    3.2%

    3.9%

    Itau

    3.7%

    6.9%

    8.9%

    6.2%

    4.1%

    4.9%

    4.8%

    6.2%

    Banco do Brasil

    4.2%

    4.8%

    4.9%

    3.7%

    3.2%

    3.3%

    3.6%

    0.6%

    Unibanco

    4.4%

    5.9%

    4.0%

    4.9%

    4.2%

    4.4%

    3.9%

    At the current stock price, an investment in Banrisul combines four qualities: a low valuation, a high return on investment, a strong balance sheet, and logn term earnings  growth prospects.

    Growth Opportunities

    Management has embarked on an ongoing cost cutting program which encourages employees to opt for early retirement, targeting to reduce the cost to income ratio from the current 61% to a level closer to its peers around 52%.

    There is room to grow fee income from the current 24% of total income to the 30% plus level achieved by the private sector banks. Management is addressing this issue by introducing new products, targeting cross selling opportunities, and raises prices of products for which it believes it is under charging.

    Banrisul’s high BIS ratio (18%), low assets: equity ratio (8:1) and low loan to  deposit ratio (60%) are all supportive of long term loan growth. As the balance sheet growth, the bank will realize the benefit of operating leverage.

    Risks

    The biggest risk in the near term is a slowdown in loan growth accompanied by deterioration in asset quality. This is likely to happen in 2009, but it is largely discounted in current earnings estimates.  On the positive side, Banrisul is not coming off an extended period of excessive loan growth. Rio Grande do Sul in 2005 suffered a drought that led to a 5.4% contraction in the States’ GDP versus 2.3% growth in Brazil’s GDP that year. 2005 and 2006 were years of very low loan growth and a slight deterioration for asset quality. Loan growth did not resume until  2007.

    Government mismanagement is not currently an issue, but one should monitor the relationship between Banrisul, and its controlling shareholder. In Brazil one has been able to generate attractive returns by investing in state controlled companies. Over time,  management, governance and transparency have improved rather than deteriorated in companies such as Petrobras, Cemig, Telebras, Banco do Brasil. These companies had poor disclosure and mediocre capital allocation fifteen years ago, but surprises have been to the upside in terms of improvements and the realization of hidden assets. This is Rio Grande do Sul’s first privatization, and the State government is interested in doing more in order to reduce the fiscal deficit. Furthermore, the State continues to be the largest shareholder.

    Banrisul’s exclusive payroll management contract expires in 2011. It is not certain that it will be renewed.

    The stock does not trade very well. This is a busted IPO and foreigners own 75% of the free float. There is an overhang, and local investors are aware of it therefore reluctant to buy the stock.

    Management has not yet delivered on its plan. It remains to be seen whether management is capable of executing its plan.

    Catalyst

    There are no near term catalysts.

    Messages

    No messages
      Back to top