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However, because its last crisis prepared the country’s banks by de-risking their balance sheets and creating high loss reserves and better underwriting standards, the current challenges should be manageable. In addition, according to Fitch Ratings, the performance of Brazil’s banking sector has stabilized, with better capitalization and earnings supporting near-term profitability. The banking system’s R$62 billion (USD11.2 billion) in aggregate net income in 1H21 increased by 53% year-over-year and was 3% higher than in 1H19. In 1H21, the median return on equity was 14.5%, up from 13.5% in 2020.
Furthermore, loan moratoria, government assistance, and regulatory forbearance should continue to cap the pandemic’s overall impact on asset-quality deterioration. Given this backdrop, we think two fundamentally sound Brazilian banking stocks, Itau Unibanco Holdings S.A. (ITUB) and Banco Bradesco S.A. (BBD), could be worth adding to one’s watchlist.
