"It's different this time" might be the most dangerous words in
investing, but that's what a lot of people are saying about the credit
cycle in Brazil. The country's economy is showing a lot of troubling
signs that conditions are getting worse, with rising unemployment,
falling wages, and weak business confidence. Bad debts and provisions
are starting to tick up across the system and that is not good news for
banks like Itau Unibanco (NYSE:ITUB), Banco do Brasil (OTCPK:BDORY), Banco Bradesco (NYSE:BBD), or Banco Santander Brasil (NYSE:BSBR).
Maybe this cycle will indeed be different, as banks like Itau and
Bradesco have been more careful with underwriting leading into this
cycle, but investors should at least appreciate the risk of elevated
provisioning and weaker lending on earnings.
Specific to Itau, I thought this bank looked a little undervalued a year ago,
but the weakness in the Brazilian real pushed the stock down about 30%
from the time of that last article. That the local shares were up about
7% is small comfort when most readers have no choice but to invest in
the ADRs. In any case, these shares do still look undervalued and could
perhaps get a tailwind from currency if Brazil's economy strengthens,
but this is a situation with above-average risks.
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Will Brazil's Credit Cycle Be Different This Time For Itau Unibanco?
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