Banco do Brasil Shares Stay Under Pressure After BofA Sell Call

Banco do Brasil, Brazil's largest state-controlled bank, has seen its stock under pressure recently. Bank of America (BofA) reaffirmed its sell rating on the bank, citing worsening credit quality and rising non-performing loans. The bank's non-performing loan ratio, which measures loans overdue more than 90 days, reached 5.61% in the second quarter, up from 3.96% a year earlier and 5.05% three months prior.

This increase is due to a variety of factors, including farm loan delinquencies and credit-card delinquencies that doubled in a single quarter. Additionally, a labor strike that briefly shut down some of Banco do Brasil's branches added to the bank's troubles. BofA warned that the bank's expanded credit portfolio, totaling R$1.31 trillion (US$254.3 billion), grew only slightly over the previous quarter.

Despite posting a net profit of R$3.9 billion (US$757 million) for the quarter, Banco do Brasil's return on equity fell to 8.3%, below its cost of capital. BofA's caution is also due to a new government program for rural debt, Medida Provisória 1.376, which could lead to renegotiations of up to R$30 billion (US$5.82 billion) in loans.

While some recovery is expected by 2027, Banco do Brasil's return on equity is projected to remain below its cost of capital, keeping BofA's sell call intact.