Banco Bradesco S.A. BBD

Key data

The business

Bradesco is one of Brazil's two big private banks, with about R$2 trillion in assets, tens of millions of account holders, and a thousands-strong branch network it is steadily shrinking. Bolted onto the bank is Bradesco Seguros, one of Latin America's largest insurers, whose steady underwriting profit cushions the lending cycle. The money comes from three places: the spread on loans, insurance premiums net of claims, and account and card fees. The story here is a repair job. After lending too freely into 2022 and 2023, Bradesco swallowed heavy loss provisions, and a chief executive two years into the seat has pulled back risk appetite, leaned on collateral-backed lending like payroll loans and John Deere Bank's farm-equipment financing, and closed branches. The June quarter was the fourth in a row where that repair showed up in rising profit.

The numbers

Earnings have inflected. Diluted profit per ADR has climbed every quarter for a year, and after one miss last October the bank has printed in line each quarter since.

US$ per ADR, as reported. The shape matters more than any single figure: R$7.1 billion of recurring net income in June, up 3.5% from March, with trailing return on equity back to about 13.6% from a low-11% trough. Book value sits at R$17.15 per share.

Funding is where the strain shows.

Total funding grew 22% over the year, but the mix soured: cheap demand deposits, the money that costs the bank almost nothing, fell 26%, while expensive time deposits did the heavy lifting as a Selic rate near 15% pulls savers toward paid accounts. That is a slow squeeze on the lending spread even as the loan book grows.

Annualize the June quarter and Bradesco earns about $0.52 per ADR, about 6.7 times the price, at 1.3 times what the bank is worth on paper. Itaú, reportedly earning close to 20% on equity, commands 2.3 times. The whole gap is return on equity, not the multiple: at 13.6% and rising, Bradesco is priced roughly fairly against its own returns today, and cheap only if those returns keep climbing. Recurring profit held above the R$7 billion-a-quarter line that mattered, so the discount to Itaú is now the entire argument. This memo's read is that the four-quarter climb is a real return-on-equity recovery toward 15%, not a rate-cycle bounce, and the number that settles it is ROE crossing 15% while credit holds flat.

Management

The record is a turnaround being run, not yet won. Insiders were net sellers over the past year, about $3.5 million-equivalent sold against $2.0 million bought, but the largest single move was a buy: an officer, Julio Cesar Bueno, put about $2.0 million of his own money in on July 1, days after the June quarter closed. The largest sale, $2.6 million by Rogerio Camara in May, carries no disclosed plan status. Pay leans on Brazil's interest-on-capital payout, and the bank is capitalizing part of that into new shares, a routine but real trickle of dilution. Buybacks are not the story here, the dividend and the ROE recovery are. Management's credibility rests entirely on the next few quarters of credit.

How it fails or surprises you

Credit turns, not just drifts (downside). Over-90-day delinquency among small and mid-sized businesses is already rising, and John Deere Bank's farm loans concentrate maturities in June. If Brazil's high-rate squeeze pushes that drift into the unsecured book, provisions jump and the ROE climb stalls inside two quarters. The print: Stage 3 loans breaking above the roughly stable share held through the first half.

Cheap funding keeps draining (downside). Demand deposits fell 26% in a year. If that free money keeps leaving for paid time deposits, the lending spread narrows and interest income growth flattens even as loans grow, quietly capping the recovery. The print: demand-deposit balance and net interest income over the next two quarters.

The re-rate (right tail). If return on equity reaches Itaú-like mid-teens while credit holds, the 1.3-times book multiple has room toward 1.8, roughly a 40% gain on the shares before any strengthening of the real lifts the ADR further. The market pays nothing for this today because it does not yet trust the turnaround. The print: two straight quarters of ROE above 15%.

Closing thoughts

The market has already made its judgment. Bradesco sits at a deep discount to Itaú because investors are waiting to be shown the return on equity, not because they have missed something. This is a priced-in doubt that a specific print resolves. Recurring ROE crossing 15% for two quarters, with Stage 3 credit flat, converts the discount into a re-rating. An ambiguous print, ROE stuck near 13% while delinquencies creep, leaves it a cheap-looking bank that stays cheap, and the reader waits another quarter rather than pays up. The fatter tail is modestly to the upside, given four quarters of rising profit against a middling multiple, but the left tail is real and fast: a Brazilian credit cycle turns quicker than a loan book can be repositioned.

The bet is still that Bradesco keeps fixing itself, earning a little more each quarter from lending carefully and selling insurance to tens of millions of Brazilians, and that the country's punishing interest rates don't push too many borrowers into default. What breaks it is credit: the same borrowers who are paying today missing tomorrow when rates bite. Watch two numbers together, recurring return on equity and the Stage 3 delinquency trend. If ROE keeps climbing while credit holds flat, the discount is the opportunity. If credit rolls over first, the cheap book was a trap.