EM LATAM CREDIT: Banco Do Brasil: 2Q 2025 Earnings - Negative
(BANBRA; Ba1/BB/BB)
Disappointing earnings again for the 50% government owned bank as weakness in the agricultural loan portfolio (again) was further exposed with new regulatory guidelines for provisioning and for accruing interest on bad loans, though we don't see the news as materially damaging the credit profile and its a factor already known to the market for many months.
Cost of Risk doubled YoY as a third of the bank's loan portfolio is in agricultural loans which have seen a deteriorating trend in recent quarters but now the impact worsened by the new rules which no longer allow accrual of interest but merely accounting for interest on bad loans on a cash basis as it comes in while also increasing the provisioning rules for bad loans.
Overall for the loan book, PDLs > 90days increased 35bp sequentially and 121bp YoY to 4.21%. The NPL+90d ratio was still a healthy 179%, though down from 191% a year ago.
Capitalization also remained healthy at 13.27% for Tier 1, 26bp higher YoY, and 10.97% for CET1 unchanged QoQ but down 63bp YoY.
ROE was disappointing at 8.4%, down from 21.6% a year ago and 16.7% last quarter.
BANBRA 2030s were last quoted T+167bp, 14bp tighter QTD and 16bp tighter YTD. We observe that spread to the Brazil sovereign (BRAZIL; Ba1/BB/BB) was 53bp, close to the wides for the past 12 months while spread to best in class Itau 2030s was 30bp, also wides for the year so one could say the market has somewhat priced in those risks in the agribusiness loan book that keep weighing on results.
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