Banrisul S.A. (BRSR6.Brazil) is the largest bank in the Brazilian state of Rio Grande do Sul. Banrisul provides an array of financial services to consumers and businesses with the emphasis on traditional banking.
In a nutshell, Banrisul is a conservative well-capitalized bank with an attractive deposit-gathering franchise available at a very significant discount to both global and Brazilian peers.
Banrisul was founded in 1928 and over the ensuing years has grown to become the dominant banking institution in the state of Rio Grande do Sul.
Banrisul enjoys the premier competitive position in the region, owing to the bank’s first-class deposit-gathering franchise centered around a combination of reach and reputation. In addition, Banrisul boasts the leading position in the state with respect to payroll lending and working capital financing for small- and medium-sized businesses.
Banrisul boasts the largest deposit-gathering network in the state covering 99% of the population and has a 47% market share of deposits. As a result, Banrisul’s cost of deposits is almost 20% lower than that of the bank’s competitors.
Importantly, Banrisul complements its low-cost funding advantage with conservative underwriting practices in order to generate low-risk growth.
Banrisul has a well-diversified loan portfolio that is split between consumer and business lending on a roughly 60/40 basis.
The bulk of Banrisul’s consumer loans (over 3/4s) are structured on a “payroll deduction” basis to government employees. Since government workers generally enjoy stable employment and the payments are deducted directly from the borrowers’ paychecks, Banrisul faces substantially reduced collection risk with respect to the above loans.
The majority of Banrisul’s business loans (over 3/4s) represent state-specific working capital lending to small- and medium-sized businesses in which the bank has decades of expertise. This serves to contribute to a lower risk lending profile.
Due to the bank’s conservative lending philosophy, Banrisul’s long-term historic loan loss ratio has been just 3% vs. nearly 5% for the banks’ peers.
As a result of the advantages outlined above Banrisul produces enviable financial performance. Against the backdrop of the slumping economy over the past five years Banrisul significantly outperformed its peers by generating industry-leading net interest margins (8% vs. 3% industry average), returns on assets (over 1.7% vs. 0.5% industry average), and returns on equity (17% vs. 6% industry average).
Importantly, Banrisul enjoys a solid financial condition. The bank maintains a very prudent loan-to-deposit ratio of less than 80%, highlighting the high degree of stability of the bank’s funding structure. In addition, Banrisul is very well capitalized as evidenced by its BIS ratio of 17%, which is more than double the global regulatory minimum requirement of 8%.
Over time Banrisul experienced substantial growth in the underlying business value, as the bank consolidated its market position in the state of Rio Grande do Sul. For example, over the past 10 years Banrisul’s book value, which can be used as a conservative proxy for business value, has expanded at a 20% annual clip. (Importantly, the growth has been low-risk in nature as evidenced by the bank’s below-average long-term historical loan loss development and conservative funding profile.)
It is likely that the impressive growth in Banrisul’s underlying business value will continue going forward. While the rate might be somewhat slower, given that Banrisul’s end market is more saturated today than 10 years ago, the bank still has a long growth runway ahead of it.
First, as Brazil’s banking services penetration is about 1/3 of the developed markets’ penetration, the Brazilian banking services market will likely expand over time at an above-average pace.
Second, Banrisul is likely to increase its share of the banking services market over time with the introduction of new products and services. To that end the bank is actively developing additional income streams, such as payment processing, insurance, asset management, and bank cards. These complementary income streams are growing at a 25% annual rate and over time should meaningfully contribute to the growth of Banrisul’s business value.
Banrisul’s management team earns an “A” both with respect to operator skills and capital allocation skills.
With respect to operator skills, Banrisul’s management team has a long-term track record of growing book value at high rates in a low-risk manner. For example, the management team has expanded the bank’s book value nearly six-fold in the past 10 years while maintaining the loan loss ratio 35% below industry averages, preserving the capital ratio that is 2X greater than the global regulatory minimum, and keeping the low-to-deposit ratio well below 100%.
In addition, Banrisul’s management team has a track record of delivering on operational commitments that they make. Following privatization in 2007 the bank’s management set a goal of improving Banrisul’s cost efficiency and fee income contribution to reach industry averages. Over the ensuing years the management team delivered as they improved the bank’s Cost/Income ratio from 62% to less than 50% (vs. ~50% for the peers) and Fee Income as % of Total Income from 25% to 29% (vs. ~30% for the peers).
With respect to capital allocator skills, Banrisul’s management team has demonstrated willingness to share the bank’s superior economics with the shareholders through generous dividends. While Banrisul’s bylaws specify 25% minimum payout, the team has historically paid out over 40% of earnings annually. Thus, Banrisul’s management team has returned to the shareholders over the past five years nearly 40% of the current stock price.
Banrisul is subject to a couple of potential business risks, which are worth discussing:
The state government is the controlling shareholder of Banrisul, and, therefore, there is a risk that the bank will be mismanaged to the detriment of the non-government minority shareholders.
However, the bank is legislatively prohibited from lending to the state government and its entities. Further, public sector lending currently constitutes less than 1% of the bank’s total loans.
In addition, examining management’s track record over the past decade reveals that historically the shareholders were treated very well – the bank has significantly grown the underlying business value in a low-risk manner, delivered on its promises of improvements across the organization, and generously shared the fruits of success with the shareholders as evidenced by the 40% payout ratio.
Notably, Banrisul has an exclusive payroll and tax collection contract with the state, and there is a potential risk that the contract may not get renewed or may get renewed at a substantially higher cost to the bank. That said, it is unlikely that the state would be willing to play hardball when it comes to contract renewal, as doing so would hurt the state’s economic interest through a reduced value of its equity stake in Banrisul. Nevertheless, this risk is not something that can transpire in the near- to medium-term, as Banrisul has just renewed the contract through 2026.
A U.S. Dollar-based investor should also be concerned with potential currency risk. While Brazilian Real depreciation against the U.S. Dollar may have a short-term impact, over the long-term the impact is muted. Since the Brazilian economy is highly dollarized, any local currency depreciation is eventually reflected in higher inflation, thereby lifting banking assets to the pre-depreciation dollar equivalent (while also widening net interest margins). Hence, a dollar-based investor faces minimal negative impact over the long-term from any Brazilian currency depreciation.
The first-class banking franchise that Banrisul is can be purchased at a very significant discount to its underlying business value.
Banrisul is currently selling for just 65% of its book value, which represents a significant discount to the bank’s historical valuation of 1.5X BV to 2X BV. Banrisul’s current valuation also represents a significant discount to its Brazilian peers, which are currently trading at approximately 1.6X BV. Recent buyouts in the Brazilian banking space took place at a premium to book value even for second-rate banking institutions.
In addition, Banrisul is selling for less than 6X NFY EPS and has a 7% NFY Dividend Yield, both metrics discounting the historic economic slump in the bank’s core markets.
Adjusting Banrisul’s earnings to reflect a more normalized economic environment would indicate an even more attractive valuation of less than 4X earnings and an 11% Dividend Yield.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
- Sheer cheapness of the stock that trades at a significant discount to its intrinsic value
|Entry||10/10/2016 09:30 PM|
Thank you for your feedback. Please find below the answers to your questions:
Q: Looking at the NIM, ROE and ROA figures, those are like financial porn.
A: I would agree that the above metrics have little relevance to an investor over the short-term, which I define as one to three years. However, over longer stretches of time, say, five to 10 years, these metrics tend to reflect reality, especially if they are consistent with a bank's market position with respect to funding costs and lending practices.
How do those figures compare with other Brazilian banks?
A: Here is a cut-and-paste from Paragraph #11 of the VIC write-up: "Against the backdrop of the slumping economy over the past five years Banrisul significantly outperformed its peers by generating industry-leading net interest margins (8% vs. 3% industry average), returns on assets (over 1.7% vs. 0.5% industry average), and returns on equity (17% vs. 6% industry average)."
Q: Also, what's the story behind the state ownership?
A: Banrisul had been nearly 100% owned by the government of the state of Rio Grande do Sul from its founding in 1928 through 2007. In 2007 the state reduced its equity stake to 57% through a secondary offering of non-voting shares. The state is still the controlling shareholder of Banrisul.
Q: Is the bank limited to epanding into other states?
A: Not, it is not. However, I would not bank on successful expansion outside of Rio Grande do Sul, at least not over the next 10 years. There are strong banking franchises present in other states, and breaking their hold on the market is not something that can be done overnight (or at all).
|Entry||10/10/2016 09:57 PM|
Thank you for your feedback. Please find below the answers to your questions:
A) why do you think the stock was trading at 23% of BV back in January (Rouseff noise?? Petrobras concerns??), and what's changed?;,
A few reasons in no particular order:
- Lower liquidity compared to some of the other Brazilian banks;
- State ownership in the wake of Petrobras etc. concerns became a big liability in the eyes of the market participants (of course, unlike Petrobras, Banrisul did not misbehave, but most investors did not care to make a distinction);
- General negative sentiment towards Brazil due to a historical economic crisis engulfing the country;
- Woeful state of financial affairs in Rio Grande do Sul, suggesting tough times for Banrisul's core customer group (i.e. state employees);
- Concerns over whether the state would renew payrol/tax collection service contract with Banrisul and on what terms (the contract did get renewed, on terms slightly worse than the original contract, but the amount of economic value transfer was immaterial);
- More sellers than buyers.
Re: what has changed. There were no material changes aside from the contract renewal outlined above, which in itself was only marginally material at best.
B) and much more importantly, where was your write up when shares were at 23% of BV??
I keep asking myself this question every day. Once I come up with a good answer I will be sure to share. In the meantime I keep telling myself that "better late than never."
|Subject||Re: Re: Re: question|
|Entry||10/11/2016 06:03 PM|
Yes, in Brazil both executive officers and board members are personally liable for the misdeeds of the institutions which they run.
While effective, this provision is not 100% bulletproof. The more inventive folk still finds ways to circumvent the law by either transfering the personal assets to children or divorcing the spouse, transfering the assets to him/her, and continuing to live a married life in all but name.
As a sidebar, I find it ironic that an emerging market like Brazil is ahead of us here in the US in terms of banking regulations.