While the market waits anxiously for the pension reform to provide relief to the Brazilian economy, local investors are keeping one eye on the imminent earnings season to get some idea about how well the country’s companies are performing. This week, financial firms will draw all the attention, with two of the most important banks in the country reporting their first-quarter results.

According to analysts polled by newspaper Valor, Brazilian banks are set to show stronger earnings—despite the sluggish economy—reflecting a better credit performance and focusing on higher spread operations. As we explained in our April 24 newsletter, the banks’ driving force is the credit market for individual clients and small companies. As these markets are more concentrated, banks can keep their tariffs high—compensating for the reduction in the Selic benchmark interest rate to 6.5 percent per year.

</span></p> <p><span style="font-weight: 400;">Credit cards and installment credit are widespread, with over 77 percent of households exposed to them in some way. However, this doesn&#8217;t mean that Brazilians are able to pay them without delay. A recent survey shows that 25 percent of credit card users have unpaid card bills. Brazil&#8217;s average credit card annual percentage rate is 287 percent, some 44 times higher than the Selic rate.</span></p> <p><span style="font-weight: 400;">According to the estimates gathered by </span><i><span style="font-weight: 400;">Valor</span></i><span style="font-weight: 400;">, Itaú Unibanco, Banco do Brasil, Santander Brasil and Bradesco may reach a combined BRL 20.169 billion recurring net income in the period, 16 percent higher than Q1 2018.  So far, Bradesco, the first to report, </span><a href="https://g1.globo.com/economia/noticia/2019/04/25/bradesco-tem-lucro-liquido-de-r-58-bilhoes-no-1o-trimestre.ghtml"><span style="font-weight: 400;">lived up to expectations</span></a><span style="font-weight: 400;"> with a BRL 6.2 billion recurring net profit, 22.3 percent more than a year ago.</span></p> <h2>Brazil&#8217;s stock exchange follows the banks</h2> <p><span style="font-weight: 400;">Santander Brasil, which is the most profitable of the bank&#8217;s global operations, will follow on April 30. Bloomberg consensus estimates expect profits of BRL 3.246 billion profit, a 13.5-percent increase from Q1 2018. Next in line is Itaú Unibanco. Latin America largest private bank is set to release earnings on Thursday after trading hours. Consensus estimates gathered by Bloomberg foresee BRL 6.828 billion in profits. That would represent an 8.8 percent increase in yearly comparison.</span></p> <hr /> <p><img class="alignnone size-full wp-image-16417" src="https://brazilian.report/wp-content/uploads/2019/04/export-inMmQ-2.png" alt="brazilian banks" width="1200" height="800" srcset="https://brazilian.report/wp-content/uploads/2019/04/export-inMmQ-2.png 1200w, https://brazilian.report/wp-content/uploads/2019/04/export-inMmQ-2-300x200.png 300w, https://brazilian.report/wp-content/uploads/2019/04/export-inMmQ-2-768x512.png 768w, https://brazilian.report/wp-content/uploads/2019/04/export-inMmQ-2-1024x683.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/export-inMmQ-2-610x407.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><span style="font-weight: 400;">In a note to clients, analysts from XP consider that banks will be one the trimester’s highlights, but due to  “a positive carrying-over effect from previous results.” In fact, better credit performance has already been signaled by financial institutions </span><a href="https://economia.uol.com.br/noticias/estadao-conteudo/2019/02/05/tres-maiores-bancos-privados-lucram-13-mais-e-preveem-credito-com-mais-vigor.htm"><span style="font-weight: 400;">in their guidance for the year</span></a><span style="font-weight: 400;"> and is probably one of the most important aspects to watch. Also, investors will keep an eye on return on equity (ROE) metrics to find more about the banks&#8217; profitability, which matters as much as net profits themselves.  </span></p> <p><span style="font-weight: 400;">In Brazilian markets, it is important to follow banks’ performance even if you’re not a shareholder, due to their major role on Ibovespa stock exchange index. For example, Itau Unibanco’s preferred shares (ITUB4) represent 10.8 percent of Ibovespa’s theoretical portfolio—that means that any strong variation in these stocks may move the local market. </span></p> <h2>Conference calls also matter</h2> <p><span style="font-weight: 400;">Another highlight for the week is Natura. The beauty products manufacturer will report its earnings on May 2. So far, the company&#8217;s stock performance has been linked to the news cycle around its possible takeover of an Avon subsidiary. Shares have suffered since the company announced its intention of buying Avon&#8217;s struggling North American unit—which could jeopardize Natura’s finances, according to some analysts.</span></p> <p><span style="font-weight: 400;">After Avon announced a deal with LG Household and HealthCare, Natura’s shares (NATU3) went up 10 percent. Analysts say the LG deal reduces the risks in the acquisition of the remaining Avon assets—which could also lead to synergy in Latin America and Brasil, according to a Citi report </span><a href="https://www.infomoney.com.br/natura/noticia/8253621/natura-perde-disputa-por-operacao-da-avon-na-america-do-norte---e-mercado-comemora"><span style="font-weight: 400;">quoted by InfoMoney.</span></a></p> <p><span style="font-weight: 400;">For Itau BBA’s analysts, Natura </span><a href="https://epocanegocios.globo.com/Empresa/noticia/2019/04/natura-ainda-discute-aquisicao-da-avon-mas-negociacoes-estao-avancadas.html"><span style="font-weight: 400;">could even issue further shares</span></a><span style="font-weight: 400;"> to reduce debt. Investors will be eager to hear about any clues management may hint toward the operation in the company’s conference call.

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BY Natália Tomé Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.