(Bloomberg) -- One year into his stint as head of Brazil’s second-biggest bank, Marcelo Noronha says he’s restructuring Banco Bradesco SA with more than just profits in mind.
“We’re moving a lot of things around at once, and it’s not just to increase profitability,” the chief executive officer said in an interview at Bloomberg’s headquarters in New York. Top of the list: remaking the firm to be competitive as interest rates rise and fintech powerhouses muscle their way into more businesses.
Noronha, 59, took over just after Bradesco’s delinquency rates and expenses for loan-loss provisions peaked in 2022 and 2023. Brazil’s biggest banks and fintechs had vastly expanded their credit-card portfolios during the pandemic and were struggling with payment delays. Adding to the headwinds, corporate filings for bankruptcy protection reached record levels, with retailer Americanas SA and power utility Light SA leading the pack last year.
Noronha started by fixing weaknesses in Bradesco’s credit portfolio, shaking up top management and closing about 1,000 branches. Third-quarter results showed what might be signs of a payoff: Recurring net income rose 13% to 5.23 billion reais ($906 million) from the same period a year earlier, beating analysts’ estimates.
And the bank’s return on average equity, a gauge of profitability, rose to 12.4% for the quarter from 11.3% a year earlier. That still lags behind competitors including Itau Unibanco Holding SA, at 22.7%, and Banco BTG Pactual SA’s 23.5%.
A “prolonged period of return on equity below the cost of equity – which has been rising in Brazil – will remain a pushback for investors,” analysts at JPMorgan Chase & Co. said in a report earlier this month. Still, they said, “we recognize the value of Bradesco’s franchise.”
Shareholders aren’t on board yet either. Preferred shares at Bradesco — the nation’s second-biggest bank by market value that’s not owned by the government — are down 19% this year, far worse than the 4.5% slump for Brazil’s benchmark Ibovespa equity index and Itau’s 1.9% advance.
Noronha, who joined Bradesco in 2003, got picked for the top job to help move the company in a new direction. He had already run several of the bank’s many businesses, including retail, wholesale and credit cards. Before joining the Osasco-based company, Noronha was an executive at the local unit of Spain’s Banco Bilbao Vizcaya Argentaria SA, which Bradesco bought in 2003.
Those experiences will come in handy as challenges again start to build. Brazil’s central bank is expected to continue raising interest rates, forcing local lenders to stick to a more careful approach to avoid a fresh wave of bad loans. That means a more modest expansion of their loan books and an emphasis on lower-risk clients, such as the rich, and safer segments, such as payroll lending or credit to small firms backed by the government.
But competition for those customers is fierce and spreads are tighter, reducing profitability.
“We are still working with an expansion of 9% in our loan books, but we have a much safer credit portfolio that gives us comfort to slow the growth rate a bit in an environment of greater stress,” Noronha said.
Bradesco’s net interest margin fell to 8.4% last quarter from 9.1% in the third quarter of 2023, and was “the biggest frustration in Bradesco’s third-quarter results,” according to Pedro Leduc, an analyst at Banco Itau BBA.
There’s “no date, day, or hour” for Bradesco’s ROE to climb above its cost of capital again, Noronha said, but investors should expect an improvement in the fourth quarter and beyond.
“We’re working to deliver increasingly better ROEs,” he said. “We’re growing, but we have our feet on the ground.”
Expenses climbed because of the branch closures, the need for more-specialized talent and higher technology investments — including for artificial intelligence. But the spending should help boost the bank’s competitiveness in the long run, according to Noronha.
Bradesco also spent to create a joint venture with Deere & Co. in Brazil, Banco John Deere, to expand in agribusinesses. And the bank completed a buyout of credit-card firm Cielo SA along with its partner, Banco do Brasil SA. Those two transaction should help boost profitability, Noronha said.
Eduardo Rosman, an analyst at BTG Pactual, praised Bradesco’s net interest income post-provisions in the third quarter, which were better than expected. But a more challenging outlook for NII growth given the higher central bank Selic rate and tightening lending spreads “might disappoint those hoping for a faster ROE recovery,” he said.
Noronha is in no rush.
“Our pace hasn’t changed,” he said. “We have a plan and we’re following it: It’s going to be step-by-step.”
--With assistance from Leda Alvim.
©2024 Bloomberg L.P.
