Banco Bradesco's ROAE Breakthrough: A Structural Shift in Brazil's Banking Landscape

Banco Bradesco has crossed a critical financial threshold. In the fourth quarter of 2025, the bank's return on average equity (ROAE) reached 15.2%, marking the first time it has exceeded the bank's estimated cost of capital of 15%. This is not merely a quarterly beat; it is the culmination of a deliberate, multi-year transformation and a pivotal moment for the institution.

The achievement follows a powerful streak of operational momentum. Bradesco posted recurring net income of BRL 6.5 billion for the quarter, a 20.6% year-over-year increase, and this marks the eighth consecutive quarter of profit growth. The CEO, Marcelo Noronha, framed the result as a "cause and effect" of the strategic plan launched in early 2024. More importantly, he declared this level a new baseline. "Our ROE has exceeded our cost of capital," Noronha stated. "That is an important milestone. And our expectation is that profits will continue to grow, in each of the next quarters, in a gradual and safe manner, step by step." He explicitly called the 15.2% figure a "new floor," asserting that ROE will not fall below this level and that it is poised to rise further.

This shift redefines the bank's financial narrative. For years, Brazilian banks have operated in a high-cost capital environment, where returns often struggled to clear the hurdle rate. By finally clearing that bar, Bradesco signals that its investments in technology, commercial reorganization, and risk discipline are now generating tangible, sustainable value. The setup is now structural: the bank aims to compound returns through disciplined growth, not by chasing short-term margin spikes. The path forward, as Noronha emphasized, is one of consistency, with a commitment to maintaining asset quality and funding future competitiveness.

The Engine of Change: Segment Performance and Macroeconomic Context

The operational engine behind Bradesco's ROAE breakthrough is a deliberate expansion into higher-margin, digitally enabled segments. Growth is not a function of simple volume but of strategic repositioning. Management highlighted three pillars: digital retail, affluent banking, and SMEs. The bank ended 2025 with 19 million "fully digital" clients, a base it aims to nearly double to 40 million in 2026. This digital shift is a core cost driver, with the direct cost to serve clients on the digital platform reduced "by 40x". In affluent banking, the upgrade of more than 3.1 million clients and the expansion of the Principal segment to 62 offices demonstrate a push into premium, relationship-driven services. Meanwhile, the bank's SME market share rose to 16.6% by September, a gain attributed to a more digital and remote service model. This expansion is underpinned by a rebuilt credit structure, including a new credit business unit and the hiring of 250 professionals, which enabled loan portfolio growth of 11% in the quarter.

Yet this strategic investment comes with a near-term trade-off. The heavy spending to build capabilities in agribusiness and investment banking is currently pressuring results in more traditional, fee-sensitive areas. The bank's guidance for 2026 explicitly frames profit growth as being driven by revenues, with a midpoint target of nearly 10% growth, supported by credit expansion, fees, and insurance. This implies that cost discipline and fee income must offset other pressures. The CEO has made it clear that this investment is non-negotiable, stating the bank "will not give up investments to increase competitiveness for anything."

The macroeconomic context introduces a significant headwind. Management expects a likely decline in Brazil's benchmark Selic rate over 2026, which will pressure net interest margins. The bank estimates rates will end the year around 12%. This dynamic forces a recalibration of the profit engine. The strategy to maintain elevated returns hinges on the offsetting power of fee income and the cost efficiencies unlocked by digital transformation. CFO Cassiano Scarpelli pointed to the combination of commercial traction and strict cost control as providing comfort that ROE can remain elevated even in a lower-rate environment. The bank's plan is to compound returns through disciplined growth, not by chasing short-term margin spikes. The setup is now structural, with a commitment to consistency and asset quality as the foundation.

Competitive Realignment and Valuation Disconnect

Bradesco's ROAE milestone is not just an internal achievement; it signals a potential competitive realignment within Brazil's banking sector. The bank is aggressively targeting a larger share of the rural credit market through its AgriBiz strategy, a move that could disrupt the traditional dominance of state-owned lenders and specialized cooperatives. This expansion into agribusiness is a key pillar of its growth plan, aiming to leverage its digital infrastructure to capture a segment historically underserved by large private banks. The strategic intent is clear: use its new profitability floor to fund market share gains in a high-growth, high-margin niche.

Yet the market's reaction to the latest results reveals a deep-seated skepticism. Despite a revenue beat of 6.37% above forecast, the stock declined 2.25% in pre-market trading on a slight earnings per share miss. This disconnect underscores that investors are discounting the ROAE breakthrough, focusing instead on near-term execution risks and the sustainability of the new profit trajectory. The market is pricing in the high cost of Bradesco's transformation, where heavy investments in agribusiness and investment banking are pressuring other segments.

The primary near-term risk to this new profitability floor is margin compression from the expected decline in Brazil's benchmark Selic rate. Management anticipates rates will end 2026 around 12%, which will directly pressure net interest margins. The bank's plan to compound returns through disciplined growth now hinges on its ability to offset this pressure with fee income and the cost efficiencies from its digital transformation. If the rate cuts materialize faster or deeper than expected, the offsetting power of fees and cost savings may be tested, challenging the very sustainability of the 15.2% ROAE as a new baseline. For now, the market is waiting to see if the bank's strategic bets can hold up under a lower-rate regime.

Catalysts and Watchpoints for 2026

The thesis of sustained profitability growth now rests on a series of sequential validations. Investors must monitor the bank's ability to maintain its newly declared ROAE floor of 15% and see it rise quarter by quarter. The CEO has framed this as a new baseline, not a peak, and the bank's plan is explicitly designed for gradual growth through 2028. The first test is simple: can Bradesco deliver on its promise of "each of the next quarters" of profit growth? Any deviation from this steady climb would immediately challenge the structural nature of the breakthrough.

The most immediate macroeconomic pressure will be the impact of Brazil's likely decline in the benchmark Selic rate, which management expects to end 2026 around 12%. This will compress net interest margins, the traditional engine of bank profits. The bank's strategy to compound returns hinges on offsetting this compression with growth in fee income and the cost efficiencies from its digital transformation. Watchpoints here are clear: sequential trends in net interest margin and, more importantly, the pace of fee income growth. If the offset fails to materialize, the elevated ROE will be under direct threat.

Execution in targeted growth segments is another critical watchpoint. The bank's plan to nearly double its "fully digital" client base to 40 million in 2026 and expand its agribusiness and SME lending requires flawless implementation. Progress in these areas will signal whether the heavy investments in technology and credit restructuring are translating into commercial traction. Similarly, any material change in asset quality, particularly as the economy faces pressure, will be a red flag. The bank has maintained a stable 4.1% delinquency rate for four quarters, but this discipline is non-negotiable and must hold.

Finally, the performance of key profit drivers like insurance must remain robust. The insurance unit delivered a 24.3% ROE last quarter, contributing over 40% of group profits. Sustained strength here provides a crucial buffer. The bottom line is that Bradesco's path is one of disciplined, patient compounding. The bank has chosen to resist the market's pressure for acceleration, betting that its investments will pay off over the long term. For now, the market is waiting to see if this gradual, disciplined growth plan can hold up under the dual pressures of lower rates and the high costs of transformation.