Brazil: Banrisul share sale disappoints

Hopes that the Brazilian state of Rio Grande do Sul would fully privatize its provincial bank Banrisul (Banco do Estado do Rio Grande do Sul) as part of its financial stabilization agreement with the federal government appear to have been dashed.

According to recent comments from the state’s governor José Ivo Sartori, the state will retain a majority holding in Banrisul.

In a speech to the state parliament, Sartori was clear in his aim for the state to maintain public ownership of Banrisul as “a service to the local population and the state economy”.

The state desperately needs to create revenues as it seeks an agreement on fiscal recuperation with officials in Brasilia.

As such, the state is planning a secondary offering of the bank – which could raise more than $2 billion – but the market had been expecting the state to cede majority control and the outstanding shares sold-off by nearly 11% in the session after Sartori’s comments.

Banrisul’s shares have been performing strongly – up by around 75% this year before the sell-off. And even though there was clear disappointment that the ownership structure won’t pass to private hands, analysts of the bank say its recent performance in public hands warrants appreciation.

JPMorgan was one of many banks that noted the likelihood of privatization of the Banrisul appeared to be lower in the short-term and the negative investor reaction would – coupled with anticipated increased liquidity from the secondary offering – lead to an overhang on the stock.

However, looking beyond the share issue, JPMorgan praised the bank’s recent operational improvements.

“We like Banrisul’s improving story with lower cost of risk and potential efficiency improvements from cost-cutting initiatives,” the bank outlined in an investor report. “We also see the bank as a good proxy for Banco do Brasil.”

Itaú BBA estimates that the follow-on offering could reach R$2.3 billion if the state reduces its holding to just over 50% – with about R$500 million-worth of non-voting share sales and R$1.8 billion from voting shares.

JPMorgan sees a sale of up to 31.5% of the bank’s current market capitalization – around R$2.6 billion.

BTG Pactual recently praised the bank’s second-quarter performance, which beat its pre-tax estimates by 11%, “indicating stronger earnings power potential for the quarters ahead”.

The bank grew loans by 3.7% year on year and reiterated its 3% to 7% loan growth guidance for 2017, which, if achieved, would mean the bank was growing its market share of the banking system.

Lower funding costs also helped to boost NIM by 20 basis points quarter on quarter and asset quality improved. 

However, potential investors might note a recent report from rating agency Moody’s, which lowered its outlook for the entire Brazilian banking system to negative from neutral. The main driver of the downgrade will be particularly pertinent to those studying a Banrisul follow-on: political uncertainty.

“Private consumption is driving a recovery in economic growth and loan demand, supported by sharply diminished inflationary pressures and lower domestic interest rates,” says the report’s lead author Ceres Lisboa, senior vice-president at Moody’s in São Paulo.

“However, growth will remain weak because corporate investment is still very low and unemployment high, while lingering political uncertainty could yet damage confidence and lead to negative policy implications for banks.”

Moody’s predicts GDP growth of 0.5% this year and 1.5% in 2018 and Lisboa paints a picture of positive but incipient growth dynamics that create downside risk if political instability increases.

The main political risk is, of course, the presidential election at the end of 2018.

Bankers in São Paulo say that investors have been aggressive in taking Brazilian asset risk this year as the economy improves and the international economy remains exceptionally benign for emerging-market risk.

They say there appears to be a consensus among domestic and international investors that if the government fails to pass meaningful pensions reform the next president will have little choice but to do so in 2019.

In the meantime, the market’s focus has switched from the government’s attempts to implement reforms to cut spending and moved on to growing revenues as the economic recovery gathers pace.

The market’s expectations of Brazilian GDP growth, as portrayed by the central bank’s weekly survey of economists in its Focus report, have increased in the past six central-bank surveys and now stands at 2.43%, with some notable economists expecting 3%.

However, Moody’s remains less convinced that the fiscal adjustment is a certainty after the next election.

“Fiscal consolidation remains a key challenge for Brazil, despite the more favourable scenario for interest rates and inflation,” writes Moody’s Lisboa.

“Fiscal imbalances would benefit from the approval of the social security reform in the short term, but a sustainable fiscal adjustment would depend on the commitment of a new government, to be elected in October 2018.”

She adds: “The uncertainties around the political landscape and policy options will continue to cloud domestic confidence.”