Banco do Brasil: Riding Brazil’s Credit Surge Amid Regulatory Headwinds – A Buy at 12x P/B?

Banco do Brasil’s Q1 2025 earnings underscore a pivotal moment for Brazil’s largest state-owned bank: aggressive loan growth is fueling its expansion into a recovering economy, even as it grapples with rising non-performing loans (NPLs) and regulatory headwinds. While challenges loom, the bank’s dominant market position, attractive valuation, and strategic pivot toward sustainable credit and digital innovation position it to capitalize on Brazil’s rebound. For investors, the question is whether the risks are priced into its stock – and whether the upside justifies a buy now.

Loan Growth Surges, But at a Cost

Banco do Brasil’s total loan portfolio expanded by 14.4% year-on-year in Q1 2025 to R$1.27 trillion (US$222.8 billion), driven by robust demand from corporations (+22.4% YoY) and its core agribusiness segment (+9% YoY). This growth reflects Brazil’s economic recovery, with companies and farmers seeking credit to expand amid rising commodity prices and improved business sentiment.

Yet this growth comes with trade-offs. Agribusiness NPLs for loans overdue over 90 days rose to 3.04% in Q1 from 2.45% in late 2024, driven by 341 agribusiness firms filing for judicial recovery – a 38% YoY increase. While coverage ratios remain robust (184.8% for NPLs), the spike in defaults – alongside a 64% YoY surge in loan loss provisions – dragged net profit down 20.7% to R$7.37 billion (US$1.29 billion).

Valuation Discount Offers Margin of Safety

Despite the profit miss, Banco do Brasil trades at 0.9x book value, a steep discount to its historical average and peers like Santander Brasil (1.5x) and Itaú Unibanco (2.0x). This discount reflects fears over NPLs and regulatory risks, such as new accounting rules (CMN Resolution 4,966/2021) that delayed interest recognition and reduced net interest income by R$1 billion (US$175 million).

But the valuation gap also presents an opportunity. If the bank’s NPL trajectory stabilizes and Brazil’s economy avoids a hard landing, investors could see a re-rating. The bank’s 12% dividend yield further sweetens the deal, offering income even as the stock rebuilds momentum.

Strategic Shifts to Mitigate Risks

Banco do Brasil is responding to pressures by pivoting toward sustainable credit and digital banking, areas where its scale and customer reach give it an edge. For example:
- Agribusiness: The bank is digitizing loan underwriting and partnering with agribusiness cooperatives to improve risk assessment.
- Consumer lending: A push into digital wallets and mobile banking aims to reduce reliance on high-NPL individual loans.
- Cost discipline: While provisions rose, operating expenses grew only 3% YoY, underscoring efficiency gains.

These moves align with Brazil’s structural shifts: a government push for green infrastructure, rising digital adoption, and a commodities-driven economic upswing.

Key Risks to Monitor

• Agribusiness NPLs: A second consecutive drought or commodity price slump could worsen defaults.
• Regulatory Overhang: The CMN resolution’s impact on interest income remains unresolved, though the bank has already absorbed much of the hit.
• Macroeconomic Volatility: Brazil’s political uncertainty and inflation risks could crimp credit demand.

Investment Thesis: Buy with a 12-Month Target of R$24.50 (US$4.25)

At current prices (~R$19.60), Banco do Brasil trades at 0.9x 2025F book value, assuming moderate NPL resolution and economic growth. If the bank can stabilize NPLs and recover to 1.2x P/B – closer to its historical average and peer multiples – the stock could rise to R$24.50, a 25% upside.

Conclusion: A Patient Investor’s Play

Banco do Brasil is not a risk-free bet. Its agribusiness exposure is a double-edged sword, and regulatory hurdles remain. But its dominance in Brazil’s financial system, low valuation, and dividend yield make it a compelling contrarian play. For investors willing to bet on Brazil’s recovery and the bank’s turnaround, now is the time to take a position.

Rating: Buy
Target Price: R$24.50 (US$4.25)
Key Catalyst: Improved agribusiness NPL trends, rebound in 2025 harvest, or policy support for state banks.

Disclosure: This analysis is for informational purposes only and does not constitute financial advice. Always conduct independent research.