February 15, 2017 / 11:30 AM / a year ago

ANALYSIS-Caffarelli-led turnaround garners investor nod for Banco do Brasil

SAO PAULO, Feb 15 (Reuters) - Regardless of whether Banco do Brasil SA misses quarterly profit estimates on Thursday, Chief Executive Officer Paulo Caffarelli has won the trust of investors betting he will be able to restore the earnings power of Brazil’s No. 1 bank by assets.

Shares in Banco do Brasil have risen 93 percent since the federal government put Caffarelli in command in late May. Many investors expect those gains to continue if he pushes ahead with cost cuts, loan repricing efforts and asset sales to avoid raising fresh capital.

Caffarelli’s plan to bring Banco do Brasil’s return on equity above fundraising costs has already made some analysts change their views on the stock. Over the past month, the number of “buy” recommendations rose to 11 from nine, with “sell” ratings staying unchanged at three, Thomson Reuters data showed.

While most of those analysts expect fourth-quarter profit will surprise on the downside following a recent downward revision in profitability estimates, some said a miss may be viewed with indifference as a slowly improving economy and Caffarelli’s revamping filter down the bank’s balance sheet.

“There’s a positive news flow around Banco do Brasil,” said Ivan Kraiser, who helps manage 2 billion reais ($641 million) in assets for Azimut Brasil. “A blip in earnings should hardly impact the market’s long-term view of a cleaner, stronger bank.”

The Brasília-based bank unveils fourth-quarter results early on Thursday. Caffarelli and his team are scheduled to discuss results later in the day.

President Michel Temer wants Caffarelli, like other CEOs at several state companies, to root out years of state interference that made Banco do Brasil too vulnerable to Brazil’s harshest-ever recession.

Currently, its shares are trading at 0.9 time book value, half the 1.8 times average valuation of private-sector peers Itaú Unibanco Holding SA, Banco Bradesco SA and Banco Santander Brasil SA.

Banco do Brasil’s return on equity is currently less than half Itaú’s 20.7 percent.

At such valuation, Caffarelli’s steps to reduce loan book risk and raise borrowing costs on loans closer to maturity could open room for further share price gains, analyst Marcelo Telles of Credit Suisse Securities said.


Recurring net income, or profit before one-time items, is forecast at 1.927 billion reais in the fourth quarter, down 18 percent from the prior three months. At that level, ROE could come in at around 8.5 percent - marking the longest quarterly streak of single-digit returns in at least a decade.

On Jan. 9, Caffarelli revised ROE estimates for 2016 for the second time. The move, which spooked some investors, allowed bulls to snap up Banco do Brasil shares at the fastest pace in at least six months, Thomson Reuters data showed.

Investors have increased their purchases of options to buy Banco do Brasil shares by 50 percent in the past month, data from financial bourse BM&FBovespa SA showed. The amount of shares borrowed to short-sell the stock had fallen to about 33.7 million last week from 36 million on Jan. 13.

Shares are up 12 percent in that period, “a sign that the mindset of markets has changed,” Azimut’s Kraiser said.

A Banco do Brasil employee for over 33 years, Caffarelli made his first big move as CEO in November when he unveiled plans to give 9,000 workers the chance to retire early and shut down over 400 branches. The plan could save the bank 1 billion reais a year.

His decision to cut the size of a payroll that, in some areas, is three times the size of private-sector peers, will enhance Banco do Brasil’s ability to generate capital organically. That is crucial to avoid raising fresh capital, Credit Suisse’s Telles said.

Caffarelli’s reversal of a deficit at pension fund Previ and his insistence not to hedge a mismatch between loans and deposits will bolster interest income, analysts said.

He also pressed ahead with the sale of Banco do Brasil’s stake in Kepler Weber SA - a first step toward divesting non-core activities to free up capital. Although he has ruled out intentions to sell part of the bank’s credit card unit, investors expect the bank to sell stakes in reinsurer IRB Brasil RE SA and other business in coming months.

Others point to Caffarelli’s record at the finance ministry and steelmaker Cia Siderúrgica Nacional SA as a proxy for his plans for the lender.

As deputy finance minister in the final year of President Dilma Rousseff’s first term, Caffarelli led a rescue plan for cash-strapped power utility firms. At CSN, he undertook an ambitious debt refinancing plan that led the steelmaker’s shares to almost triple within a year.

($1 = 3.1221 reais)

Editing by Daniel Flynn and Dan Grebler

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