Santander Brasil (SANB11) frustrates again and stocks crash after Q3 review: what disappointed the market?

Once again responsible for opening the big banks’ earnings season, Santander Brasil (SANB11) disappointed with the delivery of a net profit significantly below consensus, due to a deterioration in net interest income combined robust growth in loss provisions. As a result, at 10:20 a.m. (Brasilia time), SANB11 assets fell by 5.79%, to R$28.31, after falling more than 7% in the first transactions, and led to further banks like Itaú (ITUB4), with less intensity. , and Bradesco (BBDC4) and Banco do Brasil (BBAS3), with greater intensity, falling.

Net profit for the period ended the quarter at R$3.1 billion, down 23.5% quarterly and down 28% year on year. The figure is well below the consensus of 3.6 billion reais. As a result, return on average equity ended the quarter at 15.6%, a decline of 5.2 percentage points (pp) and a Basel ratio of 14.5, a growth of 0.3 pp due to an increase in benchmark capital generated by the result for the period.

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Gross financial margin ended the quarter at 12.6 billion reais, a slight quarterly contraction of 1.4%. The decline is the result of a deterioration in the margin with customers of 1.0% to 14.1 billion reais, given a less aggressive product mix and, therefore, a lower average spread, 10.7% – a decrease of 0.76pp-, in parallel with the stabilization of the operating margin with a negative market at 1.5 billion reais, 2.1% more negative than last quarter, showing the high degree of sensitivity of the bank’s balance sheet to the evolution of interest rates , underlines Levante Ideias de Investimentos.

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Looking at the qualitative aspects of the portfolio, there was 0.11pp growth in total delinquencies (over 90 days), ending the quarter at 3.0%. The increase is 0.14 pp for Individuals at 4.3% and 0.11 pp for Businesses at 1.3%. It should be noted that the renegotiation portfolio increased by 11.7% during the quarter to reach R$35.4 billion.

Thus, to keep its cover balance practically stable at 226%, +2 percentage points, the bank recorded a quarterly increase in provision charges of 8.1%, despite an increase of R$130 million in collection income. credits written off, closing 3Q22 at 834 million reais. The bank pointed out that it had sold its portfolio at a loss.

Additionally, we recorded a 3.0% decrease in bank fees and service charges during the quarter, closing 3Q22 at R$4.7 billion. Among the segments that fell the most, the highlight was a 4.3% drop in cards to R$1.3 billion, due to lower interchange fee revenue caused by lower volumes invoicing during the quarter, in addition to a 2.4% decrease in % of current accounts. and 20.3% in fund management and consortia generating revenues of R$0.9 billion and R$0.3 billion, respectively.

Additionally, general expenses increased by 4.8% during the quarter, ending the period at R$5.7 billion. The result is driven by the 6.3% growth in personnel costs and profit-sharing, due to the increase in costs with remuneration and the impact of the collective agreement from September. As a result, there was a deterioration in the bank’s efficiency ratio, expense to revenue, which ended the quarter at 37.4%, 3.5pp above 2Q22.

“Overall, Santander delivered a disappointing result, again. Even with a default relatively in line with expectations, the bank is suffering from the evolution of interest rates and its impact on the margin with the market. At the same time, the margin with clients showed a considerable contraction in the spread, which is in line with the bank’s portfolio reorientation strategy, based on greater credit origination for lines with lower risk – less profitable – “, assess analysts at Raise.

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With a portfolio increase of 6.1% in large corporates, the bank increased its exposure in a segment which has a level of delinquency extremely below the historical average, but which still does not show signs of an increase in delinquency. margin. according to the latest Central Bank reports.

“That said, for future releases. it will be necessary to monitor the maintenance of this strategy to the detriment of spreads and if indeed the bank will be able to surf on any advantage since it is already positioned on a segment with lower risk in the face of an expected scenario of more unfavorable credit for the segment of individuals. , underline the analysts of the House.

XP points out that Santander’s weaker results can be attributed mainly to a lower-than-expected financial margin (NII) during the period, which put pressure on its results and led to a net profit 15% lower than the home projection and, therefore, to worse profitability in 3Q22.

“On the positive side, delinquency remained at controlled levels (3.0%), leading to a stable and healthy coverage rate of 226%”, assess the analysts, who already expected a negative reaction from stocks, maintaining a view conservative compared to Santander, with a sell recommendation and a target price of R$32.

For Bradesco BBI, Santander Brasil posted negative trends in 3Q22 in several balance sheet lines, such as margin with customers, due to a more conservative credit approach, while provisions still saw significant growth during of the quarter, reflecting still challenging asset quality.

Moreover, despite a deterioration of only 10 basis points on a consolidated basis, analysts believe that the default rate has again been distorted by high renegotiation volumes. Analysts also point to the sale of the portfolio at around 5 billion reais. “Finally, operating expenses were put under pressure by the readjustment of wages, which led to a significant contraction in pre-tax profit,” said the bank. BBI maintains a neutral recommendation for SANB11, with a target price of 34 BRL, still upside potential of 13% from the previous day’s close.

Leaders defend asset quality

On a conference call with analysts on third-quarter figures, Santander executives admitted results were below expectations, but said asset quality was in line with the bank’s projections. According to Mário Leão, CEO of Santander Brasil, the bank is able to “successfully anticipate economic cycles”.

Leão said the credit cycle is in its most difficult phase. “We reduced our risk appetite in the fourth quarter of 2021, but we are ready to accelerate again when we feel more confident,” he said.

Asset quality control is seen as an important step towards resuming credit expansion. The CEO points out that the old loan vintages are losing their share in the bank’s portfolio and that the new, healthier ones have improved the quality of the balance sheet, including in terms of delinquencies.

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Even adopting more caution in lending, the bank’s default levels continued to deteriorate, albeit steadily. Angel Santodomingo, CFO of Santander, explained that the negative pressure comes from retail and very small businesses. On the other hand, these past loans lose their relevance, including in the provisions.

Although the Central Bank has interrupted the monetary tightening cycle, Santander is still working with a scenario of high interest rates. “We believe that the growth of the economy next year will be apartment, with interest rates still high. We have to be aware that the economy will be even slower,” said Mario Leão.

He added that the bank’s portfolios should grow again at a faster rate when the Selic starts to fall. “But we’re already picking up growth in some portfolios right now.”

As long as interest rates remain high, spreads with the market will likely continue to be negatively affected in 2023, the bank’s chief financial officer said. In the third quarter of this year, this margin was negative at R$1.545 billion.

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