Is Banco Inter the next big buy on Brazil’s stock market?

. Jun 13, 2019
Is Banco Inter the next big buy on Brazil’s stock market?

Ever since shares of Magazine Luiza, a fairly unknown retailer from São Paulo’s countryside, rose 10,000 percent in just a handful of years, Brazilian traders have been on the look out for their new cash cow. Lately, Banco Inter, the only fintech listed on the São Paulo stock exchange, seemed to be a strong candidate for the role, but as the company begins making some corporate changes, investors are changing their stance toward it.

</span></p> <p><span style="font-weight: 400;">This week, Banco Inter has announced it will list its common shares on a follow-on offering, promoting a stock split—dividing all shares into six—and offering units. It will also move to Level 2 of the stock market, which comes with stricter governance rules. The company said it aims to provide more liquidity to its shares, improve its governance and sustain its accelerated growth. Banco Inter is also considering whether it will welcome a new “strategic investor” or offer new shares on the market.</span></p> <p><span style="font-weight: 400;">The fintech&#8217;s preferential shares (BIDI4) slid after the news, in a sign that investors may not be welcoming the plan. Since its IPO in May 2018, Banco Inter shares climbed an astonishing 250 percent. Now investors are wondering whether it would be wise to indulge in some profit-taking, or if the growth is just an appetizer of what&#8217;s to come.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-full wp-image-19157" src="" alt="banco inter share price" width="1200" height="800" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><span style="font-weight: 400;">According to Nord Research stocks analyst Bruce Barbosa, beyond providing funding for a rapidly growing company, the operations are actually giving investors a way out of the business. By offering units, it is easier to buy common shares, now held by the controllers—the Menin family, owner of homebuilder MRV and the chairman of the newly created </span><a href=""><span style="font-weight: 400;">CNN Brasil news channel</span></a><span style="font-weight: 400;">. </span></p> <p><span style="font-weight: 400;">“&#8217;Money to grow’ sounds better than saying ‘money to give a way out to shareholders,” said Mr. Barbosa, in an email to clients. </span></p> <p><span style="font-weight: 400;">But if Banco Inter is a promising business, why would people leave? For analysts, the stocks are too expensive amid an uncertain future for the company. </span></p> <p><span style="font-weight: 400;">Analysts often measure stock potential using multiples—the relation between the stock price and some fundamentals variables, such as profits or book value. Banco Inter (BIDI4) currently trades at 6.86 times its book value. Itaú Unibanco, the largest bank in Latin America, trades at 2.85 times its book value, according to website Fundamentus. For comparison, Banco Inter’s market cap is BRL 6.5 billion, while Itaú’s is BRL 341.18 billion.</span></p> <p><span style="font-weight: 400;">It is also noteworthy that f</span><a href=""><span style="font-weight: 400;">inancial services are under a huge transformation</span></a><span style="font-weight: 400;"> in Brazil, with the Central Bank changing its regulations and companies creating cut-throat competition—as we mentioned in our </span><a href=""><span style="font-weight: 400;">April 19 newsletter</span></a><span style="font-weight: 400;">, highlighting the so-called “POS wars”. One may wonder whether Banco Inter is a strong enough candidate to be at the forefront of an attack by larger established players, which could reduce its profitability or increase costs to retain customers. And, obviously, this kind of move reflects in the price of shares. </span></p> <p><span style="font-weight: 400;">Mr. Barbosa believes investors are paying for a future performance that may not actually come to pass. And he added: “by the time Itaú announces its battle plan against digital banks, BIDI will be a short-sell opportunity,” an operation in which investors profit from the downfall of a stock.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-full wp-image-19170" src="" alt="brazilian banks" width="1200" height="498" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <h2>Understanding Banco Inter</h2> <p><span style="font-weight: 400;">Banco Inter was initially created by the Menin family as Banco Intermedio, a traditional bank focused on mortgage and payroll loans. Those credit operations remain Banco Inter’s largest source of income—which is quite traditional for fintechs—though their services share on revenue has been growing. </span></p> <p><span style="font-weight: 400;">Currently, Banco Inter positions itself as a disruptive fintech, offering financial services in a cheap and efficient way. They don’t charge fees and customer service is entirely online, a stark contrast to the bureaucratic and expensive financial services in Brazil. As a result, the company experienced a 261 percent increase in digital accounts over a one-year period, reaching 1.9 million customers by the end of 2019’s first quarter. As of April, they had already reached the 2 million mark. </span></p> <p><span style="font-weight: 400;">They plan to keep on boosting that number through a new strategy to becoming a one-stop shop. As revealed at its latest earnings conference, Banco Inter plans to add features to its app, that will become a “</span><a href=""><span style="font-weight: 400;">complete marketplace for financial and non-financial services,”</span></a><span style="font-weight: 400;"> said CEO, João Vitor Menin.  </span></p> <h2>Growing pains</h2> <p><span style="font-weight: 400;">Eduardo Guimarães and Felipe Bevilacqua, stocks analyst and manager at Levante Investimentos research, respectively, are treating the plan with caution. </span><a href=""><span style="font-weight: 400;">In a video analysis</span></a><span style="font-weight: 400;">, they considered Banco Inter more similar to fintechs, such as PagSeguro, than to traditional banks, due to its focus on growth as opposed to profits. In their view, adding more and more non-core services attracts users, but does not necessarily translate into revenue. </span></p> <p><span style="font-weight: 400;">“It’s a beautiful story to tell, but what is the practical result? How much money does it create? None, it actually burns money. It is good for the customers, but terrible for the shareholders,” said Mr. Bevilacqua.</span></p> <p><span style="font-weight: 400;">They warn that for venture capital investors—a crucial audience for startups—sometimes it is more important to show exponential growth than it is to present profits, which is not good when it comes to sustaining a company’s operation in the long term.  </span></p> <p><span style="font-weight: 400;">Getting bigger also means having different challenges. Banco Inter </span><a href=""><span style="font-weight: 400;">has already suffered a data breach</span></a><span style="font-weight: 400;"> and, in the past few weeks, users have reported glitches. Mr. Guimarães warns that as the company grows, so do the costs and other operational expenses, such as data security and marketing, which reduces profitability.</span></p> <p><span style="font-weight: 400;">“Revenues per customer are falling and the cost of acquisition per customer is rising. They will have to spend more on advertising, communications,” he explained.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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