Download Banco Bradesco S.A - University of Oregon Investment Group

December 3rd 2013
Financial
Banco Bradesco S.A
Ticker: BBD
Current Price: $13.27
Recommendation: Sell
Implied Price: $13.64
Investment Thesis
Company Logo
 Banco Bradesco is one of Brazil’s most stable banks, however
reductions in commodity exports has led to a slowdown of the economy not seen
in the last 20 years.
 As global interest rates begin to rise, triggered by tapering due early next
year, loan growth has been reduced from 18% to 11% as demand for higher
credit rates decreases.
 Events such as the 2014 World cup and 2016 Summer Olympics may
artificially inflate Brazil’s economy and potentially leave it volatile when
returning to post-event levels of spending.
 Large swings in currency exchange rates can severely impact Bradesco’s
ADR stock price. Deflation can be followed by high levels of inflation as seen in
the recent past with the Brazilian Real.
 Brazil’s economy has posted near double digit growth rates in 2010 and
has not been stressed with handling low levels of growth seen mid 2012 –
present. This is a cause for concern on how the central bank moves forward.
Covering Analysts: Justin Goschie
Email: [email protected]
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University of Oregon Investment Group
Business Overview
Banco Bradesco is the second largest publicly held bank in Brazil and pursuing
expansion branches in Argentina and more recently Mexico. Although Bradesco
has offices in New York, London, Hong Kong and Japan, more than 98% of
their main operational revenue is currently isolated to Brazil, making future
expansion critical to increase growth as Brazil’s economy begins to mature.
Banco Bradesco was founded by Amador Aguiar in 1943. Originally targeting
small farmers, landowners and retailers, the bank grew to Brazil’s largest private
bank in 8 years (1951). Bradesco has been the leader in developing technologies
across Latin America by introducing the first credit card and Internet Banking
Systems to emerging markets. Currently Bradesco provides a wide range of
financial products and services including credit cards, insurance and pension
plans, investment banking and asset management. Earnings are reported in two
main segments: Banking or Insurance, pension planning and asset management.
2012 Revenue was categorized as 43% loans and advances, 8% from fees and
commissions and 27% from insurance or pension plans. Banking is defined by
day-to-day trading gains/losses or broad investment transactions.
Banking and Financial Segments
As the primary revenue driver for Banco Bradesco, banking services, including
loans, brought in over 59% of revenue. 25.7 million checking accounts have
been opened by 2012. 4,686 branches service an ever-growing middle and lower
class. 48.6 million saving accounts are currently active amongst Bradesco’s
clients.
Accounting for nearly a third of total loan and advances, commercial loans
provide a stable and critical piece to Bradesco’s net interest income. Working
capital loans, investment lines and overdraft loans are some of the services
provided to commercial clients.
Bradesco’s real estate division is set to see an increase in both top and bottom
lines as interest rates rise and consumer confidence is regained. Even though
real estates services only hold a 7.7% stake in Bradesco’s total loan portfolio,
they are Brazil’s leading mortgage lender with a 35.1% market share.
Bradesco were the first bank to issue credit cards in Brazil, as stated above, and
they continue to be one of the largest card issuers with a base of 93.1 million
credit and private-labeled cards. Visa, American Express, Elo, MasterCard are
all accepted in over 200 countries. Fees from credit cards generate income by
issuance fees/annual fees, interest on balances, fees from withdrawals and cash
advances. Transactions in 2012 totaled 1,225,600,000 up from 959,100,000 in
2010.
Bradesco BBI is the direct subsidiary that coordinates the investment banking
divisions. In 2012, BBI advised customers on over 170 transactions totaling
R$155.4 Billion. Services are open to equities, fixed income, structured
operations, mergers and acquisitions, project financing and trading services.
Asset management is also under the same roof and includes 1,373 funds and 231
portfolios that provide services to 3.2 million investors.
Insurance, Pension and Saving Plans
Bradesco Seguros, the Insurance division of Banco Bradesco, is the largest
insurance provider in Brazil and in all of Latin America. 2012 numbers further
enhanced this by making Bradesco Seguros the largest in both revenue and
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technical provisions according to SUSEP and ANS. Products include health,
life, personal accident, auto and insurance for other assets reaching 31.3 million
policyholders.
Bradesco Saúde provides health insurance coverage to more than 3.9 million
beneficiaries covered by corporate or family plans. Approximately 57,000
companies in Brazil, including 50 of the top 100, use Bradesco Saúde and its
subsidiaries to provided plans to their employees. As of December 31, 2012,
health services included 9,475 labs, 12,163 specialized clinics, 14,445
physicians, and 2,552 hospitals located throughout Brazil.
Bradesco Vida e Previdência is the subsidiary that provides life and personal
accident insurance. Insurance can also be purchased to hedge against
miscellaneous events such as job loss. 23.5 million life insurance policyholders
were registered at year-end 2012.
Bradesco Auto/RE subsidiaries provide Auto, property and liability insurance
products. Bradesco aims to offer relatively affordable and highly profitable
products within this division. Many subsidiaries offer highly specialized teams
that provide tailor-made services and products to the need of each policyholder.
Transportation, engineering, operational and oil risk top this segment of 3.9
million people currently insured.
Insurance products are sold directly through brokers in Bradesco branded
branches and also through non-exclusive brokers throughout Brazil. Bradesco
pays brokers’ fees on a commission basis to all its 32,077 public brokers.
Insurance products can also be sold directly through their website.
Since 1981 Bradesco Vida e Previdência also offers pension plans and is
currently the leading plan manager in Brazil based upon SUSEP. Due to recent
tax relief (down to 12% of taxable income) and Brazilian law allowing private
pensions to continue receiving grant benefits to entities, sales have been up and
now included more than 2.3 million participants. (63.7% are individual plans)
Saving plans are strictly regulated by the Brazilian government and must meet
guidelines set by the Brazil Central Bank. 20% of saving account deposits must
be held in reserves at the Central Bank. These accounts carry interest annually at
6.2% plus a reference rate. This reference rate stems from an addition of 70% of
the SELIC rate. Demand deposits and time deposits are held to similar
requirements. Bradesco totaled 3.5 million registered savings plans in 2012.
Strategic Positioning
Bradesco has structured their corporation and vast subsidiaries to work in
different levels. First the bank structures separate divisions for banking,
insurance, pension plans, credit cards, investment banking, asset management,
etc. Depending on the segment, these divisions can be broken down by
individual or corporate income levels.
Bradesco positions their branches around or in post offices still seeing heavy
traffic in Brazil. ATM’s are position next to areas of shopping, businesses and
sometimes even inside a sponsored business/client. The goal is to be the most
accessible bank in Brazil. Quickly researching competition shows Banco
Bradesco is not in the strategic position it needs to make transactions/funds
readily available to all people of Brazil.
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However, Bradesco leads IT services for financials in Latin America. Internet
Banking Systems and mobile transactions have rapidly improved Bradesco’s
position to be accessible and a leader within their domestic industry. Security
enhancements in major markets have been led by Bradesco in the form of
adding biometric readers at ATMs to those clients who register for the service.
Innovation and catching up to mature economies and their banking applications
could set Bradesco apart from the competition for a short period. This edge is
not projected to hold long as Santander and other banks have quickly come up
with their own mobile banking and Internet-based products that will steal the
competitive advantage in coming months.
Bradesco’s achievements and recognition in recent years:
 Ranked 13th among 20 global banks (Bloomberg)
 The Most Valuable Brand in Brazil
 Consumer Award of Excellence in Customer Service
 Top 100 Sustainable Companies
The last point emphasizes a new path that Banco Bradesco is trying to build
upon. Every year the company now publishes their Sustainability Report that
brings a revised mission for the company to be more efficient in order to keep
shareholder wealth but also to increase stakeholder wealth by reducing their
environmental impact and wasted energy/resources. Social contributions are also
made for the betterment of Brazil’s environment into the future.
Business Growth Strategies
Organic Growth
Bradesco’s organic growth is closely linked to the national GDP growth given
the nature of the financial sector. Brazil has recently seen a rapid increase in
national wealth, 7th wealthiest economy as of 2012, due to an improving lower
and middle class and also discoveries of vast energy deposits offshore.
However, Brazil’s recent surge is coming to end and a slowing economy is
expected. Energy deposits have been underperforming since 2012. Oil and
natural gas output have posted 16th months of decline and famously made Eike
Batista lose $33 Billion in as little as a year and half. Forecasts of 2.7% - 3%
have been advised for year-end 2013 and projected to be upper-bounded at
3.5% - 3.75% as Brazil matures.
Due to the slowing economy, Bradesco could potentially look for higher growth
in the increasing lower and middle class as a significant population looks for
financial security and credit. New clients could be collected as national wealth
spreads and new money is invested. Another possible growth generating strategy
could be in geographical expansion. Successfully implementing their brand
extensions in Argentinean and Mexico banking system may generate growth.
Acquisition Growth
To complement organic growth, Bradesco constantly seeks opportunities for
strategic alliances and selective acquisitions to help consolidate their position as
one of the leading financial institutions. Bradesco plans on expanding in
consumer financing, investment banking, broker dealing and insurance markets.
Recent partnerships with Banco do Brasil and Caixa Econômica Federal is
examples of growth opportunities in credit and pre-paid cards (consumer
financing). Recent insurance acquisitions include Odontoprev, increasing
presence in dental care plans and further cementing leadership in insurance.
Bradesco plans to continually focus on asset quality, potential operating
synergies, and industry know-how through acquisition growth.
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Other notable acquisitions:
 Banco do Estado – right to provide services to the State of Rio de
Janeiro. (Payroll, supplier payroll, collection of state taxes)
 Ibi Services S. de R.L México – exclusive joint sale of financial
products and services through C&A Mexico chain stores.
Industry
Background
Banks are crucial in the world economy to provide capital and financial services
to businesses or individuals to maximize their potential and act as an
intermediary to allocate capital in the economy. Banks take deposits from
corporations or individuals and in return offer secure storage of funds and pay
interest to the depositors. Some capital is keep as reserves, both internally and at
a domestic central bank to satisfy requirements, but most deposits are used to
create loans that generate revenue. In today’s economy, banks have become
vastly more sophisticated and have developed instruments for debt and equity
that generates generous amounts of profits. The banking industry is highly
fragmented and includes segments such as retail banking, corporate and
investment banking, and asset and wealth management. Investment banks
provide corporations a way to raise capital (IPOs). Asset managers and pension
planners provide products for planning for the future and retirement. Banks in
these industries usually set fees based on past performance and client benefits.
As with any industry, performance captures a larger clientele base.
Key factors for banks:
 Introduce innovative products: Technology driven
 Risk management for consumer confidence
 Outsource specific non-banking activities
 Branches used to promote financial products, not just processing
 Satisfy consumer demands in local markets and provide attractive rates
 Hedge against risks by utilizing financial instruments
 Economies of scale
Overview
The global outlook for the banking industry in the short-run faces uncertainty
due to the 2007-2009 subprime mortgage crisis. Volatility has been present
globally as economies regain pre-recession levels. The industry is forecasted to
climb to an estimated $163,068 billion by 2017 with a CAGR of 8% over the
next five years. The abundance of cheap credit and government programs
artificially helping economies through bond programs causes concern looking
forward.
The outlook for the financial sector in Brazil has been changing rapidly.
Moody’s recently reported a stable outlook for the foreign sector but dismisses
rising growth rates moving forward. Brazil has already adjusted regulations for
capital requirements while tightening the industry’s standards and increased the
presence of state-run banks.
Brazil’s banks will also get an added boost when the country hosts the 2014
World Cup and 2016 Summer Olympics. This period is projected to help
revenues by increasing credit card fees and transactions as tourists and locals
will increase spending during these major events. Renovations and new
infrastructure will also aid in the coming years. Historically these events have
hurt local economies in the long run with the exception of London in 2012.
Brazil must manage their economy when returning to normal after such events.
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Macro factors
Interest rates heavily influence banks decision-making and profits. Most banks
face interest rates established by a domestic central bank. In Brazil, SELIC is
used to set interest rates and is equivalent to America’s federal fund rate.
Despite intuition, rising interest rates do not mean financials will increase
margins. Only banks where the rates they charge borrowers rise more quickly
than their own cost of funding will be more profitable. When valuing banks, you
should be more concerned with the interest spreads rather than the general
interest rates going forward. Another concern with rising interest rates is the law
of supply and demand. As borrowing costs increase for the consumer, demand
for loans will decrease as a result. Brazil traditionally keeps higher interest rates
compared to global rates due to inflation but not too high as they try to keep
GDP growth stable.
Inflation is another key macro factor that influences the financial sector. Data
from the Federal Reserve shows a decrease in bank lending during inflationary
periods. Brazil as seen several problems regarding inflation in the past and had
to introduce a new currency 25 years ago to stop hyperinflation during the late
80’s. The past 10 years still sees abnormal inflation in the Brazilian Real.
During august 2013, Brazil’s central bank announced a currency intervention
program that will provide $60 billion of cash and insurance to foreign exchange
markets by year-end. In this case, deflation is the concern as the real slips to five
year lows. This will become vital to the ADR American stock price and is
explained later in the Excess Return model section.
Unemployment rates can be a valuable indicator for financial sectors as well. As
unemployment rates rise in an economy, credit losses could balloon
unpredictably because of high defaults. It is increasingly difficult to find safe
and credit worthy clientele in this environment and banks will increase reserves
for bad-loans. Unemployment rates have historically taken multiple periods, if
not years, to recover to historic averages making this one of the most fearful
indicators within the financial sector. Brazil’s unemployment seems stable
reaching 2015 forecasts at 5.3% but in an emerging marketing can be hard to
evaluate.
Competition
Due to intensive consolidation in the past few years, competition in banking
services has increased and has led to a decrease in profits attainable by the
industry. New state-run banks are also disrupting the financial sector in Brazil.
Consolidation amongst the largest institutions is a direct result of firms trying to
become more diversified and gain a competitive advantage. Bradesco is one of
these firms and is trying to create synergies between their subsidiaries. Merging
together has also helped cut administration costs. In 2008, Itau and Unibanco
merge creating the largest bank at the time in terms of assets.
Brazilian banks have always benefited from organic growth when Brazil was
rapidly expanding; however competition is becoming severe due to a decline in
growth rates. Banks are stressing the importance of technology services and
diverse products making the industry have less bargaining power to consumers.
As the market becomes more consolidated, the four main banks will set targets
on each other and market share will be ever more important in the future
The big four Brazilian Banks are: Banco Bradesco, Banco de Brazil, Itaú
Unibanco and Banco Santander.
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Management and Employee Relations
Luiz Carlos Trabuco Cappi, CEO
Mr. Trabuco began in the company in 1969. He was appointed CEO in 2010.
Prior to becoming the new CEO, Trabuco held various board seats across
different subsidiaries owned by Banco Bradesco including CEO of Banco
Seguros, one the company’s largest subsidiary.
Lazaro de Mello Brandao, Chairman
Mr. Brandao has served as chairman since March 1999. He started his career at
Banco Bradesco back in 1942 and has worked his way up within the company
ranks.
Compensation
In 2012, the Executive Officers of Bradesco and its subsidiaries were paid a total
of R$ 344.8 million without stock options.
Management Guidance
Guidance set by management has historically been bullish to actual fiscal
numbers. The Brazilian economy has seen massive inflation, protests, and large
swings in unemployment numbers that creates massive error margins in
forecasts for financials as they rely heavily on macro factors.
Recently the Brazilian economy has settled into some trends you can justify
predictions on. In 2013 alone, management has trimmed guidance numbers
twice to accommodate a slowing economy. This can be found over the history of
Bradesco and management guidance only holds weight after Q3 and after being
reduced by several hundred basis points. Many analysts believe guidance should
be taken at the most conservative estimates to represent actuals for Bradesco.
Portfolio Strategy and History
Banco Bradesco is currently held in two of the three UOIG portfolios. BBD was
originally pitched and bought in October of 2011.
Tall Firs
Banco Bradesco currently holds a 2.86% weight in the portfolio as of fiscal year
end 2012. 1200 shares were purchased at a cost basis of $21,849.60 and has
yielded a purchase return of -3.89%. Bradesco does not fit the overall portfolio
strategy seeking value. As this report will conclude, BBD is fairly valued in the
market and is subject to volatility in the Brazilian Real that cannot be hedged
away using current positions in Tall Firs.
Svigals
Management purchased 145 Banco Bradesco shares at a cost basis of $2,525.15.
Total return for BBD has yielded 1.81%. Based upon the strategy of the Svigals,
growth and value tilt, Bradesco sees limited growth as the Brazilian economy
begins to slow and does not stay in line with the portfolio’s goals.
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Recent News
“Brazil Central Bank Says Banks Face $65 Billion Loss” (Nov 22 nd 2013) –
Brazilian banks may have to spend R$149 billion to support consumers seeking
to recover deposits lost in economic overhaul more than two decades ago. 25%
of the financial system capital would be impacted. The lawsuit stems from
Brazil’s efforts to control hyperinflation from 1986 to 1994. The government
froze bank deposits, introduced new currency and reduced returns on savings
accounts. – Bloomberg
“Bradesco says state bank competition will limit options” (Oct 22 nd 2013) –
BBD is grappling with hefty bond losses and weak credit demands and expects
intense competition form state-run banks to limit any attempt to raise borrowing
costs and offset slower growth in interest income. Despite higher domestic
interest rates, a mix of less risky types of credit should continue driving down
net interest margins going forward. - Reuters
“Bradesco cuts revenue forecast a second time” (Oct 21 st 2013) – Banco
Bradesco trimmed its projections for interest income growth this year for the
second straight quarter to account for sagging demand for new credit in Latin
American countries. Net interest income is now forecasted to be 1%-3% for the
year. Lack luster growth in loan books to be the cause. – Reuters
“Brazil is no bargain” (Sept 3rd 2013) – Emerging markets have been in a
tailspin since May when Ben Bernanke hinted that the fed would cut bond
purchases. The Bovespa is down 10% after recovering from a 21% decline from
May to July. Banco Bradesco hit rock bottom in May 2013 in contrast to U.S
banks reaching multi-year highs. Brazil is in a decline and few companies show
signs that the worst is over. – MarketWatch
Catalysts
Upside




Increase in credit card fees/transactions due to major world events
including 2014 World Cup and 2016 Summer Olympics
Increased wealth in lower and middle class households
Growing demand for insurance products
Stability in the financial sector
Downside




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Volatility in the Brazilian real (Inflation)
Rising interest rates in Brazil may hurt loan demand as costs mount
Increased competition from State-run banks may reduce margins
Reducing commodity exports may effect Brazil economy growth
U.S Fed tapering quantitative easing
Comparable Analysis
Constructing a valuation by using comparable analysis for a financial company
is difficult. Common multiples such as EV/EBIT, EV/EBITDA and EV/Net
Income are not applicable to financial firms. Enterprise Value is difficult to
determine due to their complex capital structures and reporting structures.
Because EV and operating metrics cannot be used to provide a platform for
comparable analysis, the industry uses equity multiples such as Price/Book or
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Price/Earnings. Price/Tangible Book Value was also used to gauge financials
real tangible equity in order to get a better understanding of what the equity
could be valued out in the future.
Comparable companies were chosen based on a variety of macro and firm
specific characteristics. Banco Santander (BSBR) and Itaú Unibanco (ITUB)
were first given consideration because both capture the macro environment in
Brazil. They are also Banco Bradesco’s main competitors under the same rules
and guidelines set by the domestic Central Bank. Screening for comparable
banks in foreign markets were then done by growth rates projected for Revenue
and Earnings Per Share (EPS) for years 2014 and 2015. Projections were used to
create a forward comparable analysis opposed to an LTM comparable due
interest rates and many macro factors quickly changing as the global economy
recovers from the 2007-2009 recession. After similar growth rates were
screened, banks from India (IBN) and Chile (BCH) were chosen to be
comparables. Inflation, GDP YoY growth, unemployment rates, and lastly
interest rates were similar to the state Brazil is currently in and more critically,
what is forecasted into the future. Lastly, Royal Bank of Canada (RY) was
chosen to capture a maturing economy that Brazil is expected to settle into the
near future. RY also captured a near identical Tier 1 Capital Adequacy Ratio.
T1CAR represents a bank’s financial strength, capturing core capital to credit
risks by evaluating risk-weighted assets. All comparable firms used Basel
Committee on Banking Supervision guidelines in setting their formals for asset
risk weights.
Banco Santander S.A (Brazil) – 30%
“Banco Santander S.A. operates as a full-service bank in Brazil and
internationally. It operates in three segments: Commercial Banking, Global
Wholesale Banking, and Asset Management and Insurance. The Commercial
Banking segment provides traditional banking services primarily for retail
customers, enterprises, and corporations through its branch network. This
segment offers current accounts, saving accounts, and time deposits; loans to
individual customers, including consumer finance, checking account overdraft
loans, personal loans, and payroll loans; credit cards; loans to small and
medium-size businesses (SMEs); agricultural loans; mortgages; leasing;
insurance and asset management products; private retirement plans; and cash
management services for SMEs. Banco Santander (Brasil) S.A. was founded in
1957 and is headquartered in Sao Paulo, Brazil.” – Yahoo Finance
Itaú Unibanco Holdings S.A (Brazil) – 30%
“Itaú Unibanco Holding S.A. provides various financial products and services in
Brazil and internationally. Its products include personal loans, overdraft
protection, payroll loans, vehicle loans, credit cards, mortgage and agricultural
loans, real estate and working capital loans, and trade note discount and export;
investment products, such as pension plans, mutual funds, time deposits,
demand deposit accounts, savings accounts, and capitalization plans; and
insurance products, including life, home, credit/cash cards, vehicles, and loan
protection, as well as exchange and brokerage services. The company also
provides investment options; private retirement plans; and investment capital
loans, inventory financing, trade financing, foreign currency services, equipment
leasing services, letters of credit, and guarantees, as well as collection and
electronic payment services. The company was formerly known as Itaú
Unibanco Banco Múltiplo S.A. and changed its name to Itaú Unibanco Holding
S.A. in April 2009. The company was founded in 1944 and is headquartered in
Sao Paulo, Brazil. Itaú Unibanco Holding S.A. operates as a subsidiary of Itausa
- Investimentos Itau S.A.” – Yahoo Finance
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Banco de Chile (Chile) – 5%
“Banco de Chile provides traditional banking products and specialized financial
services to large corporations, small and mid-sized businesses, and individuals
in Chile. The company offers various deposit products, including current
accounts, demand deposits, savings accounts, and time deposits. Its loan
products portfolio comprises installment, residential mortgage, and nonresidential mortgage loans; commercial loans, including short and long term
loans, working capital loans, and project finance; leasing contracts; factoring
and foreign trade loans; and consumer loans, such as installment loans, credit
cards, and lines of credit and other loans. The company also offers liquidity
management, debt instruments, foreign trade, derivative contracts, and leases, as
well as corporate finance solutions; and public and private securities
underwriting services, and payment and collection services. Banco de Chile was
founded in 1893 and is headquartered in Santiago, Chile. Banco de Chile
operates as a subsidiary of LQ Inversiones Financieras S.A.” – Yahoo Finance
ICICI Bank Ltd (India) – 20%
“CICI Bank Limited, together with its subsidiaries, provides banking and
financial services to corporate and retail customers in 19 countries, including
India. It primarily offers commercial banking, retail banking, project and
corporate finance, working capital finance, insurance, venture capital and private
equity, investment banking, broking, and treasury products and services. The
company provides current and savings accounts, term deposits, fixed and
recurring deposits, outward remittances, and salary accounts; credit, debit,
prepaid, and corporate cards; and home, commercial vehicle, personal, and car
loans, as well as loans against securities. It also offers life, travel, health, car,
two wheeler, home, and student medical insurance products; demat accounts;
and investment products, such as mutual funds, gold, bonds, foreign exchange,
and initial public offerings, as well as senior citizens savings schemes. ICICI
Bank Limited was founded in 1955 and is based in Mumbai, India.” – Yahoo
Finance
Royal Bank of Canada (Canada) – 15%
“Royal Bank of Canada, a diversified financial service company, provides
personal and commercial banking, wealth management, insurance, corporate and
investment banking, and transaction processing services worldwide. It operates
through five segments: Personal & Commercial Banking, Wealth Management,
Insurance, Investor & Treasury Services, and Capital Markets. The Personal &
Commercial Banking segment provides personal and business financial services,
and cards and payment solutions. It offers a suite of financial products and
services to its individual and business clients through branch, automated teller
machines, online, and telephone banking networks, as well as through
proprietary sales professionals. Royal Bank of Canada was founded in 1864 and
is headquartered in Toronto, Canada.” – Yahoo Finance
Multiples were weighted according to industry standards. Price/Book (50%) was
weighted the most, as this is the most important metric within the financial
sector. Price/Earnings (30%) was weighted less but still contributed nearly a
third to the implied price. The remaining weight was given to Price/Tangible
Book (20%) due to the belief of better indicating future equity book value.
Effects of foreign currency fluctuations were improved by converting foreign
currency book value of equity from SEC Filings to the Brazilian Real. Exchange
rates used for BRL/CLP, BRL/INR, and BRL/CAD can be found in appendix 1
by the implied price. All values were then converted into USD to keep it
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consistent with posted ADR American prices found on American stock
exchanges used to calculate the numerator (Price) in the multiples. Due to this,
the implied price derived from the comparable analysis might prove to be
diluted from a true, accurate price. This was taken into consideration and is
represented by weighting the analysis 30 percent in the final implied price for
Banco Bradesco.
Discounted Cash Flow Analysis
The Discounted Cash Flow model is generally used during an analysis of a firm.
While this is typically the way our analyst use for valuations, it is very difficult
to construct DCF models for financials for a variety of reasons. The first reason
is because financials do not report traditional data according to GAAP standards
and have their own set of rules. One major difference is financials value bank
assets at their market price instead of book price normally found in GAAP.
Financials must have the ability to adjust for loan losses so they average out
over time. Secondly, debt is used more as a raw material instead of a source of
capital. Large swings in deposits and company debt make equity the only thing
you need to consider. Due to this disparity only capital at a financial institution
is defined as equity. This makes weighted average cost of capital and enterprise
value render useless from a valuation view. Other reinvestment items such as
capital expenditure and working capital are thrown out due to banks having
minimal expenditures for buildings. Banks do reinvest in intangible assets but
their capital expenditures are negligible on cash flow statements and show little
depreciation. Working capital is also difficult to project due to the nature of
financial structures. Large and volatile swings in current assets or liabilities due
to timing difference in loans outstanding and customer deposits arise.
Due to the nature of these problems we cannot estimate cash flows accurately.
We are not able to estimate cash flows without estimating reinvestment and we
are not able to measure expected future growth, as the reinvestment rate cannot
be determined. Therefore, a DCF model should not be used to value financial
institutions.
Excess Return Analysis – (in Brazilian Real)
An excess return model uses CAPM as the discount rate when valuing a firm
because the only thing you value is equity and not the total firm value. Because
you are not valuing debt, WACC provides no use in our model. WACC would
put the cost of capital at unrealistic low values.
In an excess return model, the value of the firm can be written as the sum of the
capital currently invested in the firm and discounted excess returns the firm
expects in the future. Inherently the model considers where the firm will put
investments in the future after dividends are considered and retained earnings
are added back in.
The valuation of the firm solves for net income and takes away equity cost of
capital, taken as cost of equity (CAPM) of the book value of the firm. The
excess equity is then discounted by the CAPM to find the present value of the
excess equity return. Book value of equity is recalculated every year, pulling
form the ending balance in the prior year less dividends and added retained
earnings.
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University of Oregon Investment Group
To find the value of equity, the present value of the discounted excess return is
added to the current book value of equity and the terminal value of excess
returns, taken as:
NI11 – (Cost of Equity11)*(BV of Equity11)
Cost of Equityt-Terminal Growth Rate
This will yield the terminal value, which will then be discounted by the CAPM
to the appropriate year.
ADRs
Bradesco is listed in Brazil on the Ibovespa. Being a foreign company, Bradesco
is listed on US exchange only as an ADR; meaning US investors are paying for
a right to a foreign registered company. ADRs carrying no voting rights and are
reported in the foreign currency and then exchanged back to the dollar.
Exchange rates are always current in the prices of listed ADRs causing an
overwhelming importance of currency fluctuations in the day-to-day stock price.
This explains why numbers are modeled in the Brazilian Real and then the
implied price is taken at the current exchange rate of the USD/BRL. To offer a
supplement to restricted voting rights, Bradesco gives U.S investors access to
their preferred shares, resulting in a 10% more weighting for earnings and
dividends than common stock.
ADRs can include outside risks not found in the U.S. Political risks can cause
instable characteristics reflected on the stock price. Brazil has recently seen
protests and government acceptance is coming off of low levels in metro areas
and may cause Bradesco’s stock price to become volatile. Other risks include
devalued currency, moving the price down even if Bradesco has been
performing well. Inflationary risk can also be classified within currency risks.
Beta
A variety of betas were calculated using 5 year Daily, 5 year Weekly, 3 year
Weekly, 3 Year Daily, 1 year Daily and 3 or 5 year Daily Hamada and Vasicek
betas regressed against the S&P 500 index and weighted accordingly to give
Bradesco’s overall beta of 1.45.
Hamada betas use comparable companies’ respected D/E ratio and tax rate to
reach an unlevered beta. After taking the weighted average of the unlevered
betas, you re-lever using Bradesco’s D/E ratio and tax rate to reach an industrylevered Bradesco beta.
Vasicek betas again target an industry-weighted beta. After regressing
compareables and weighting their betas, you compare variances between the
industry and Bradesco. More weighting is given to the one with a smaller
variance.
Betas regressed against the Ibovespa (^BVSP) were not used because it would
of lead to a misleading valuation from a biased CAPM. The reason being is
capturing the true beta of Bradesco would not reflect the ADR purchased in the
states and would over compensate for country risks if we left values in the
Brazilian Real. The Brazilian Real will capture most of the country risk.
UOIG 12
December 3rd, 2013
University of Oregon Investment Group
Interest Income Model
Interest income was calculated using the balance sheet approach to give the most
accurate projections. Average balances of interest-bearing assets and liabilities
were taken and then projected off guidance or historical growth rates. Deviations
away from historical growth rates were caused by forecasted macro factors in
Brazil out to 2018. Also taken into consideration was a maturing competitive
environment and the number of people needed loans would stabilize and can be
reflected in decreasing growth rates reaching the terminal year.
As part of the main thesis, interest rates are steadily increased in the projections
and make up the forecasted average yield. Taking the projected average balance
of interest-bearing assets (revenue) and liabilities (expenses) and multiplying by
your forecasted yields gives revenue and expenses looking forward. Net interest
income was then calculated and provisions for loan losses were trended down
from historical averages based on Bradesco reaching all-time low delinquency
ratios and Brazilian default ratios projected to decline.
Non-Interest Income Model
Non-interest income was broken down and consolidated into revenue and
expense line items that could be projected. The model mainly consists of
operational revenue/expenses from credit cards, asset management,
trading/banking, insurance, and personnel/administrative expenses. Other
revenue/expense generating activity was categorized as “other.” Line items were
projected out from guidance, historical growth, research or macro factors during
the valuation.
Dividend Payout
Projecting out dividends was done by using a historic payout ratio since 2009,
which yielded a payout ratio of 34%. The rate was steadily increased towards
the terminal year to keep the historic book value to loan ratio around 12.5%. If
the ratio falls below this level then it may signify a poor tier 1 ratio and a
potential liquidity problem. If the ratio becomes too high, then Bradesco is
holding excess capital and the money would be better served in the form of
dividends to shareholders than held by Bradesco.
Terminal Discount Rate
The 10-year U.S T-bill was used as the long-term risk free rate, which yields
2.76% in the market.
Excess Return Conclusion
The excess return model yields an overvaluation of 0.47% for Bradesco. During
the month of August the Brazilian Real suffered five-year lows against the dollar
making the final implied price bearish. As the Brazilian central bank stimulates
the Real, the final implied price would increase, keeping trending dollar
inflation constant. The effect exchange rates have on the implied price can be
seen in the sensitivity tables at the end of the report.
UOIG 13
December 3rd, 2013
University of Oregon Investment Group
Recommendation
This valuation results in a sell for both Tall Firs and Svigals portfolio. By
weighting the excess return model by 70% and the comparable model by 30%,
Bradesco is undervalued by 2.82%. This is within the margin of error, and the
undervalued final implied price gives our positions no room to grow. Because of
this, Banco Bradesco does not fit our value and growth style portfolios and is to
heavily dependent on exchange rates that cannot be hedge away.
Bradesco is one of the most stable financial institutions in Brazil. However,
Brazil is poised to see economic slowdown as commodities fall and suspend
macro growth rates. Rising interest rates have already been accounted for in the
current market price so this yields no real advantage in the coming years. Major
world events such as the 2014 World Cup and 2016 Summer Olympics may
artificially inflate the economy in Brazil and as seen all to often in the past, tend
to hurt economy once they return to post-event levels. These risks are too much
to ignore and funds should be utilize for a less volatile, more undervalued
position. This is why the recommendation is a sell.
Implied Price
Undervalued/(Overvalued)
Terminal Growth Rate
13.21
2.3%
2.3%
3.0%
3.8%
4.5%
(0)
2.3%
2.3%
3.0%
3.8%
4.5%
2.13
14.23
14.23
14.48
14.77
15.14
2.13
7.23%
7.23%
9.09%
11.32%
14.07%
2.23
13.59
13.59
13.83
14.11
14.46
8.95%
2.33
12.98
12.98
13.21
13.48
13.81
2.43
12.45
12.45
12.67
12.92
13.24
2.53
11.96
11.96
12.17
12.41
12.72
Exchange Rate
Exchange Rate
Terminal Growth Rate
2.23
2.42%
2.42%
4.20%
6.33%
2.33
-2.16%
-2.16%
-0.47%
1.57%
4.07%
2.43
-6.18%
-6.18%
-4.56%
-2.60%
-0.20%
2.53
-9.88%
-9.88%
-8.32%
-6.44%
-4.14%
UOIG 14
December 3rd, 2013
University of Oregon Investment Group
Appendix 1 – Comparable Analysis
Comparables Analysis
(R$ in Thousands)
Stock Characteristics
Current Price
50 Day Moving Average
200 Day Moving Average
Beta
Size
Short-Term Debt
Long-Term Debt
Diluted Basic Shares
Market Capitalization
Growth Expectations
% Revenue Growth 2014E
% Revenue Growth 2015E
% EPS Growth 2014E
BBD
BSBR
BCH
IBN
Banco Santander
ITUB
Itau Unibanco
Holding
Banco de Chile
ICICI Bank
RY
Royal Bank of
Canada
Banco Bradesco
Max
$86.78
$90.80
$88.24
$1.39
Min
$6.46
$6.87
$6.54
$0.89
Median
$35.86
$34.41
$35.88
$1.33
Weight Avg.
$27.65
$27.97
$27.13
$1.28
$13.27
$14.28
$13.76
1.45
30.00%
$6.46
$6.87
$6.54
1.33
30.00%
$14.07
$14.79
$13.87
1.38
5.00%
$86.78
$90.80
$88.24
0.89
20.00%
$35.86
$34.41
$35.88
1.39
15.00%
$66.52
$66.97
$62.79
0.96
361,924,000
103,347,000
4,518,380
95,788,800
5,590,000
14,827,000
155,290
13,476,066
147,426,000
63,916,000
1,440,000
25,723,178
210,355,900
66,302,050
2,889,249
45,969,258
307,846,000
78,525,000
3,817,413
50,657,068
259,983,000.0
64,369,000
3,981,916
25,723,178
361,924,000
103,347,000
4,518,380
63,573,603
5,590,000
14,827,000
155,290
13,476,066
6,952,000
63,916,000
576,980
20,690,503
147,426,000
16,418,000
1,440,000
95,788,800
12.30%
15.10%
13.50%
4.80%
7.44%
6.80%
7.30%
10.10%
11.10%
7.31%
10.69%
11.73%
9.82%
10.07%
13.60%
4.80%
10.10%
13.20%
7.30%
10.20%
13.50%
8.20%
9.28%
9.60%
12.30%
15.10%
11.10%
5.40%
7.44%
6.80%
15.30%
6.70%
9.50%
11.15%
13.40%
9.50%
12.40%
6.70%
15.30%
7.91%
10.50%
2.12%
25.42%
18.64
2.77
5.60%
3.11%
.94%
6.38%
9.82
0.28
1.55%
4.62%
1.44%
17.29%
13.15
0.84
3.98%
4.00%
1.34%
14.25%
13.39
0.949
4.05%
7.09%
1.37%
18.22%
13.5
0.36
4.55%
NA
1.22%
6.38%
13.15
0.28
4.40%
10.50%
1.44%
18.70%
13.67
0.84
5.60%
4.62%
2.12%
25.42%
11.59
2.77
2.93%
3.11%
1.45%
14.30%
9.82
0.67
1.55%
NA
0.94%
17.29%
18.64
2.27
3.98%
13.23
18.30
12.30
7.33
12.91
13.10
% EPS Growth 2015E
Profitability Margins
Net Interest Margin
ROA
ROE
Financial Leverage
Dividend Per Share
Dividend Yield
Credit Metrics
Tier 1 Capital Adequacy Ratio
Operating Results
Net Income
Net Interest Income
2012 Book Value of Equity
18.30
7.33
12.91
14.09
$ 8,305,328
$ 23,724,629
$ 45,790,393
$ 1,119,825
$ 2,338,035
$ 3,750,655
$ 1,845,983
$ 12,819,520
$ 33,144,978
$ 4,535,493
$ 14,187,109
$ 29,739,017
$
$
$
5,713,034
20,610,596
31,155,629
$
$
$
1,845,983
14,773,231
34,853,712
$ 7,792,620
$ 23,724,629
$ 33,144,978
$
$
$
1,119,825
2,338,035
3,750,655
$ 1,710,611
$ 2,989,607
$ 11,416,594
$ 8,305,328
$ 12,819,520
$ 45,790,393
2012 Tangible Book Value of Equity
Multiples
P/BE
P/TB
P/E
$ 36,129,380
0
3.59x
3.74x
13.93x
$ 3,605,371
0
0.74x
1.23x
8.16x
$ 20,871,179
#NUM!
1.92x
2.04x
12.03x
$ 23,475,920
0
1.65x
1.93x
11.38x
$
27,768,880
$
20,871,179
$ 31,105,240
$
3,605,371
$ 11,416,594
$ 36,129,380
1.81x
1.81x
12.10x
2.09x
2.65x
11.53x
1.63x
1.82x
8.87x
Multiple
P/BE
P/TB
P/E
Implied Price (USD $)
Current Price
Undervalued
0.74x
1.23x
13.93x
1.92x
2.04x
8.16x
3.59x
3.74x
12.03x
Implied Price
Weight
13.49
50.00%
14.04
20.00%
17.03
30.00%
$14.66
Exchange Rate (USD/BRL)
2.3345
13.27
Foreign Echange Rates
10.48%
BRL/CLP
BRL/INR
BRL/CAD
227.261
UOIG 15
27.1259
0.4591
December 3rd, 2013
University of Oregon Investment Group
Appendix 2 – Excess Return Model
Excess Return Model
(R$ in thousands)
2009A
2010A
2011A
2012A
2013E
2014E
2015E
2016E
2017E
2018E
Net Interest Income
$
27,190,512
$
32,771,291
$
35,611,286
$
43,492,965
$
44,630,110
$
47,198,265
$
50,655,413
$
54,258,281
$
58,031,875
$
61,560,944
Net Interest Income After PLL
$
16,380,901
$
27,015,166
$
27,315,135
$
31,982,786
$
32,507,058
$
33,800,361
$
35,735,313
$
37,213,312
$
38,676,458
$
40,456,515
% Growth
64.92%
1.11%
17.09%
1.64%
3.98%
5.72%
4.14%
3.93%
4.60%
9,394,538
10,834,333
12,804,795
13,957,227
15,680,944
17,562,657
20,056,555
22,262,776
24,711,681
19.7%
15.3%
18.2%
9.0%
12.4%
12.0%
14.2%
11.0%
11.0%
2,212,733
(608,270)
2,110,113
3,376,181
4,389,035
5,047,390
5,552,129
5,996,300
6,356,078
% of income
Net fee and commission income
7,847,382
% Growth
Net gains/(losses) on financial assets helf for trading
5,983,781
% Growth
Net gains/(losses) on financial assets available for sale
757255
% Growth
Income from insurance and pension plans
60.0%
30.0%
15.0%
10.0%
8.0%
6.0%
1,516,779
1,365,101
1,269,544
1,180,676
1,098,029
1,021,167
-0.4%
-51.6%
419.0%
-20.0%
-10.0%
-7.0%
-7.0%
-7.0%
-7.0%
3,076,175
1,413,016
1,632,283
2,834,573
4,183,972
5,523,304
6,636,077
7,303,919
45.0%
19.3%
-54.1%
15.5%
73.7%
47.6%
32.0%
20.1%
10.1%
728,867
577,053
682,122
870,662
1,044,794
1,253,753
1,504,504
1,805,405
2,166,486
2,599,783
-20.8%
18.2%
27.6%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
7,828,125
5,833,854
10,327,155
8,865,636
9,707,871
10,678,659
11,746,524
12,921,177
14,213,295
15,634,624
% Growth
Total Non-Interest Income
446.9%
1,895,974
2,577,730
% Growth
Other non-interest income
-127.5%
365,302
1,778,016
% Growth
Equity in the earnings of associates
-63.0%
754,416
-25.5%
$
24,923,426
$
% Growth
21,350,324
77.0%
$
-14.3%
24,676,817
-14.2%
$
15.6%
27,960,196
9.5%
$
13.3%
31,235,135
10.0%
$
11.7%
36,202,065
10.0%
$
15.9%
41,314,592
10.0%
$
14.1%
47,039,245
10.0%
$
13.9%
52,372,961
10.0%
$
11.3%
57,627,251
10.0%
% of income
Total Income
$
41,304,327
$
% Growth
Personnel expenses
$
70,002,426
$
77,049,905
$
84,252,558
$
91,049,419
$
98,083,766
9.3%
8.1%
7.7%
(7,334,164)
(8,794,017)
(11,150,970)
(11,656,422)
(12,239,243)
(12,912,401)
(13,622,584)
(14,371,826)
(15,090,417)
(15,844,938)
19.9%
26.8%
4.5%
5.0%
5.5%
5.5%
5.5%
5.0%
5.0%
(8,138,058)
(9,761,445)
(11,477,134)
(11,900,383)
(12,525,153)
(13,214,037)
(13,907,773)
(14,603,162)
(15,333,320)
(16,061,653)
19.95%
17.58%
3.69%
5.25%
5.50%
5.25%
5.00%
5.00%
4.75%
(1,516,529)
(1,966,433)
(2,120,335)
(2,538,260)
(3,045,912)
(3,502,799)
(4,028,219)
(4,632,451)
(5,327,319)
(6,126,417)
29.7%
7.8%
19.7%
20.0%
15.0%
15.0%
15.0%
15.0%
15.0%
(897,638)
(682,961)
2,625,813
(951,385)
(665,970)
(599,373)
(539,435)
(485,492)
(436,943)
(393,248)
-23.9%
284.5%
-136.2%
-30.0%
-10.0%
-10.0%
-10.0%
-10.0%
-10.0%
(10,852,765)
(11,836,517)
(15,185,857)
(17,394,300)
(19,133,730)
(21,621,115)
(24,431,860)
(27,608,002)
(30,437,822)
(33,481,604)
12,565,173
$
% Growth
Income and social contribution taxes
63,742,193
10.1%
9.1%
$
$
9.8%
% Growth
Income Before Income Taxes
59,942,982
6.3%
% Growth
Other non-interest expense
$
15.3%
% Growth
Net gains/(losses) of foreign currency transactions
51,991,952
7.5%
% Growth
Depreciation and amortization
$
17.1%
% Growth
Administrative expenses
48,365,490
(4,264,330)
15,324,117
28.3%
$
14,683,469
14.5%
$
15,502,232
10.0%
$
16,132,185
13.0%
$
18,152,702
13.0%
$
20,520,034
13.0%
$
22,551,625
10.3%
$
24,423,598
10.0%
$
26,175,906
22.0%
-4.2%
5.6%
4.1%
12.5%
13.0%
9.9%
8.3%
7.2%
(5,271,924)
(3,594,027)
(4,150,538)
(4,517,012)
(5,445,810)
(6,156,010)
(6,765,488)
(7,327,079)
(7,852,772)
Tax Rate
33.94%
34.40%
24.48%
26.77%
28.00%
30.00%
30.00%
30.00%
30.00%
30.00%
Net Income Attributed to Noncontrolling Interest
(17,836)
(112,618)
(131,388)
(60,124)
(63,742)
(70,002)
(77,050)
(84,253)
(91,049)
(98,084)
% of TR for Noncontrolling Interest
Net Income
-0.04%
$
8,283,007
-0.23%
$
% Growth
9,939,575
-0.25%
$
20.0%
10,958,054
-0.10%
$
10.2%
11,291,570
0.10%
$
3.0%
11,551,431
0.10%
$
12,636,889
0.10%
$
14,286,974
0.10%
$
15,701,885
0.10%
$
17,005,469
0.10%
$
18,225,050
2.3%
9.4%
13.1%
9.9%
8.3%
7.2%
Equity Cost
7,902,593.32
8,747,049.97
9,667,358.71
10,703,882.29
11,838,710.02
13,063,984.96
Excess Equity Return
3,648,837.88
3,889,838.69
4,619,615.37
4,998,002.76
5,166,759.33
5,161,065.36
103%
114%
127%
141%
156%
Cumulated Cost of Equity
Present Value Excess return
$
Beginning BV of Equity
Cost of Equity
Equity Cost
Ending BV of Equity
Net Income
71,346,390.00
$
8,283,007
$
Dividend Pay Out Ratio
Dividends Paid
Retained Earnings
$
8,283,007
$
9,939,575
$
10,958,054
$
11,291,570
3,554,260
$
$
3,647,178
$
3,552,434
$
3,306,176
174%
$
2,973,209
71,346,390.00
78,970,334.59
87,279,088.89
96,637,056.91
106,882,536.90
11.08%
11.08%
11.08%
11.08%
11.08%
11.08%
7,902,593.32
8,747,049.97
9,667,358.71
10,703,882.29
11,838,710.02
13,063,984.96
78,970,334.59
$
3,411,179
11,551,431
87,279,088.89
$
12,636,889
96,637,056.91
$
14,286,974
106,882,536.90
$
15,701,885
117,944,594.71
117,944,594.71
$
17,005,469
129,790,877.42
$
18,225,050
29%
33%
34%
34%
34.25%
34.5%
34.75%
34.95%
35%
(2,914,982.00)
(3,568,337.00)
(3,839,385.00)
(3,927,486.61)
(4,328,134.37)
(4,929,006.06)
(5,456,405.05)
(5,943,411.54)
(6,378,767.61)
7,024,593
$
7,389,717
$
7,452,185
$
7,623,945
$
8,308,754
$
9,357,968
$
UOIG 16
10,245,480
$
11,062,058
$
11,846,283
December 3rd, 2013
University of Oregon Investment Group
Appendix 3 – Interest-Earning Assets & Liabilities
Balance Sheet Growth
(R$ in thousands)
Loans and advances to banks
2009A
2015E
2016E
2017E
2018E
64,545,465
75,900,028
79,159,989
87,075,988
97,089,727
108,740,494
122,333,055
137,013,022
152,769,520
.85%
17.59%
4.30%
10.00%
11.50%
12.00%
12.50%
12.00%
11.50%
17.91%
64,053,338
9.39%
194,680,442
14.11%
18.26%
62,407,194
12.11%
234,942,522
20.68%
18.72%
8.59%
262,855,317
11.88%
18.06%
8.95%
291,769,402
11.00%
18.15%
9.20%
328,240,577
12.50%
18.15%
9.50%
372,553,055
13.50%
18.10%
9.60%
427,504,631
14.75%
17.95%
9.75%
487,355,279
14.00%
17.85%
9.85%
550,711,465
13.00%
17.80%
87,326,233
89,784,000
100,109,160
108,117,893
121,092,040
135,623,085
150,541,624
167,101,203
11.45%
32,879,788
-2.57%
10.25%
34,888,119
39.93%
10.39%
2.81%
8.72%
11.50%
8.85%
8.00%
9.10%
12.00%
9.20%
12.00%
9.25%
11.00%
9.28%
11.00%
9.50%
33,549,814
66,915,243
73,606,767
78,023,173
82,704,564
87,253,315
91,921,367
96,517,435
6.11%
-3.84%
99.45%
10.00%
6.00%
6.00%
5.50%
5.35%
5.00%
9.58%
3,778,920
10.05%
9.62%
9.75%
9.85%
10.10%
10.35%
10.70%
11.00%
4,510,835
3,657,763
3,840,651
4,186,310
4,646,804
5,181,186
5,802,929
6,557,309
-3.76%
19.37%
-18.91%
5.00%
9.00%
11.00%
11.50%
12.00%
13.00%
11.60%
70,498,746
8.00%
16.13%
11.65%
11.75%
11.85%
11.95%
12.10%
12.35%
75,623,917
94,667,517
111,234,332
133,481,199
162,179,657
197,048,283
239,413,664
287,296,397
35.08%
7.27%
25.18%
17.50%
20.00%
21.50%
21.50%
21.50%
20.00%
9.70%
11.60%
9.60%
9.85%
10.00%
10.20%
10.25%
10.60%
11.00%
32,553,623
59,239,456
48,722,266
51,401,991
54,486,110
58,054,950
61,973,659
66,311,816
71,119,422
306.11%
81.98%
-17.75%
5.50%
6.00%
6.55%
6.75%
7.00%
7.25%
8.81%
10.32%
7.82%
8.00%
8.50%
8.50%
8.75%
8.75%
9.00%
494,975
518,296
546,918
572,897
600,109
628,614
658,474
689,751
722,514
4.35%
4.71%
5.52%
4.75%
4.75%
4.75%
4.75%
4.75%
4.75%
64,001,712
% Growth
Average Yield
Loans and advances to customers
% Growth
Average Yield
Financial assets held for trading
% Growth
Average Yield
Financial assets held for sale
7.96%
170,608,470
% Growth
Average Yield
Investments held to maturity
9.61%
3,926,680
% Growth
Average Yield
Assets pledged as collateral
11.18%
52,190,117
% Growth
Average Yield
Central Bank compulsory deposits
8.74%
8,015,947
% Growth
Average Yield
Other interest-earning assets
6.67%
474,363
% Growth
Average Yield
Total Interest Earning Assets
% Growth
Average Yield
Interbank Deposits
Funding in open market
Borrowings and onlendings
Saving deposits
Time deposits
Funds from securities issued
Subordinated debt
Insurance and pension plans
12.86%
12.96%
13.10%
13.18%
13.19%
13.28%
13.42%
471,502
542,227
607,295
680,170
765,191
862,753
974,911
-12.95%
-30.23%
30.76%
15.00%
12.00%
12.00%
12.50%
12.75%
13.00%
7.45%
106,591,802
12.95%
128,494,578
10.30%
152,354,820
10.45%
10.65%
10.80%
10.95%
11.10%
11.20%
185,872,880
227,694,278
280,063,963
345,878,994
428,025,255
530,751,316
32.01%
20.55%
18.57%
22.00%
22.50%
23.00%
23.50%
23.75%
24.00%
9.36%
33,869,850
10.89%
44,962,370
7.72%
8.95%
9.15%
9.20%
9.25%
9.35%
9.45%
47,408,499
50,253,009
54,775,780
61,074,994
68,556,681
77,469,050
87,733,699
16.54%
32.75%
5.44%
6.00%
9.00%
11.50%
12.25%
13.00%
13.25%
2.51%
47,792,922
12.85%
55,515,889
4.96%
62,758,934
5.00%
5.30%
5.60%
5.90%
6.15%
6.30%
71,231,390
81,203,785
92,775,324
106,227,746
122,161,908
141,097,004
21.46%
16.16%
13.05%
13.50%
14.00%
14.25%
14.50%
15.00%
15.50%
6.20%
95,818,484
6.76%
122,328,948
5.77%
117,810,860
5.90%
6.10%
6.25%
6.35%
6.50%
6.60%
-3.33%
27.67%
-3.69%
8.69%
9.15%
6.41%
11,501,257
28,260,014
50,848,755
45.68%
145.71%
79.93%
6.35%
8.81%
6.76%
24,410,454
25,335,543
32,278,136
15.62%
3.79%
27.40%
8.29%
11.00%
8.94%
76,641,029
89,762,154
107,519,858
15.50%
17.12%
19.78%
7.94%
7.47%
122,523,294
4.00%
6.55%
59,747,287
17.50%
6.85%
36,474,294
13.00%
9.00%
130,099,028
21.00%
7.55%
127,424,226
4.00%
6.75%
66,916,962
12.00%
7.00%
41,398,323
13.50%
9.20%
157,419,824
21.00%
7.80%
132,839,756
4.25%
7.00%
75,281,582
12.50%
7.30%
47,090,593
13.75%
9.35%
188,510,239
19.75%
8.00%
138,817,545
4.50%
7.20%
85,068,187
13.00%
7.45%
53,683,276
14.00%
9.45%
225,458,246
19.60%
8.15%
145,411,378
4.75%
7.50%
96,127,052
13.00%
7.60%
61,333,143
14.25%
9.50%
264,349,794
17.25%
8.20%
152,681,947
5.00%
7.60%
108,623,569
13.00%
7.65%
70,226,448
14.50%
9.60%
309,289,259
17.00%
8.25%
10.68%
80,746,939
9.38%
29,061,740
4.50%
39,349,069
6.23%
99,119,118
9.04%
7,894,818
9.56%
21,113,340
8.22%
66,354,013
% Growth
Average Yield
Total Interest Earning Liabilities
7.73%
$ 344,232,714
% Growth
Average Yield
7.00%
7.00%
7.00%
7.00%
910,600,178 $ 1,037,575,688 $ 1,179,049,451 $ 1,332,795,265
13.23%
13.94%
13.64%
13.04%
14.41%
% Growth
Average Yield
7.00%
804,225,098 $
11.76%
360,575
% Growth
Average Yield
7.00%
719,611,188 $
11.34%
13.75%
% Growth
Average Yield
2014E
516,805
% Growth
Average Yield
2013E
13.93%
% Growth
Average Yield
2012A
593,677
% Growth
Average Yield
2011A
7.45%
7.21%
7.87%
6.86%
$ 396,150,415 $ 463,847,484 $ 571,611,101 $ 646,309,013 $
17.09%
23.23%
13.07%
% Growth
Average Yield
2010A
8.13%
$ 397,142,603
$ 495,020,071
7.43%
$ 571,451,364
$
656,743,410
$
757,440,473
$
878,316,621
$ 1,024,455,866
$ 1,195,740,332
$ 1,401,378,152
15.37%
24.65%
15.44%
14.93%
15.33%
15.96%
16.64%
16.72%
17.20%
7.81%
9.45%
6.94%
7.40%
7.67%
7.89%
8.07%
8.24%
8.37%
UOIG 17
December 3rd, 2013
University of Oregon Investment Group
Appendix 4 – Net Interest Income Model
Interest Revenue
(R$ in Thousands)
2009A
Loans and advances to banks
2010A
5,096,837
2011A
2012A
2013E
2014E
2015E
2016E
2017E
2018E
6,059,777
9,194,044
6,800,239
7,793,301
8,932,255
10,330,347
11,743,973
13,358,770
15,047,798
18.89%
51.72%
-26.04%
14.60%
14.61%
15.65%
13.68%
13.75%
12.64%
35,552,902
43,975,833
47,460,302
52,956,146
59,575,665
67,432,103
76,737,081
86,992,917
98,026,641
16.35%
23.69%
7.92%
11.58%
12.50%
13.19%
13.80%
13.36%
12.68%
2,212,121
1,489,851
1,080,916
918,779
780,962
663,818
564,245
479,608
407,667
-35.78%
-32.65%
-27.45%
-15.00%
-15.00%
-15.00%
-15.00%
-15.00%
-15.00%
6,398,665
9,076,069
7,831,848
8,859,661
9,838,728
11,140,468
12,545,135
13,970,263
15,874,614
-12.78%
41.84%
-13.71%
13.12%
11.05%
13.23%
12.61%
11.36%
13.63%
3,161,328
3,342,997
3,373,070
6,434,573
7,176,660
7,685,283
8,353,161
9,030,718
9,835,586
10,616,918
5.75%
0.90%
90.76%
11.53%
7.09%
8.69%
8.11%
8.91%
7.94%
438,812
438,485
360,835
589,835
447,436
491,891
550,646
619,152
702,154
809,828
-0.07%
-17.71%
63.46%
-24.14%
9.94%
11.94%
12.44%
13.41%
15.33%
4,561,679
6,862,222
8,744,459
9,090,234
10,956,582
13,348,120
16,542,325
20,197,449
25,377,848
31,602,604
50.43%
27.43%
3.95%
20.53%
21.83%
23.93%
22.10%
25.65%
24.53%
534,676
2,869,307
6,112,337
3,808,229
4,112,159
4,631,319
4,934,671
5,422,695
5,802,284
6,400,748
436.64%
113.02%
-37.70%
7.98%
12.63%
6.55%
9.89%
7.00%
10.31%
35,707
40,774
37,540
40,103
42,008
44,003
46,093
48,283
50,576
1.04%
14.19%
-7.93%
6.83%
4.75%
4.75%
4.75%
4.75%
% Growth
Loans and Advances to Customers:
- Loan operations
30,556,168
% Growth
- Leasing transactions
3,444,554
% Growth
Financial Assests:
- For trading
7,335,837
% Growth
- Available for sale
% Growth
- Held to maturity
% Growth
Pledged as collateral
% Growth
Compulsory deposits with Brazilian Central Bank
% Growth
Other financial interest income
35,338
% Growth
Total Interest Income
$
55,165,229
$
% Growth
63,772,183
$
15.60%
82,367,272
$
29.16%
83,133,716
$
0.93%
93,260,826
$
12.18%
105,326,231
$
12.94%
119,991,541
$
13.92%
136,906,542
$
14.10%
156,567,713
4.75%
$
14.36%
178,837,393
14.22%
Interest Expense
(R$ in Thousands)
2009A
2010A
2011A
2012A
2013E
2014E
2015E
2016E
2017E
2018E
Deposits from Banks:
- Interbank deposits
63,381
38,521
46,693
48,582
56,662.75
64,676.87
73,458.35
83,788.43
95,765.59
-39.22%
21.21%
4.05%
16.63%
14.14%
13.58%
14.06%
14.29%
14.02%
7,570,414
9,981,262
13,996,866
11,756,969
16,635,623
20,834,026
25,765,885
31,993,807
40,020,361
50,155,999
31.85%
40.23%
-16.00%
41.50%
25.24%
23.67%
24.17%
25.09%
25.33%
1,308,893
851,093
5,775,844
2,349,470
2,512,650
2,903,116
3,420,200
4,044,844
4,764,347
5,527,223
-34.98%
578.64%
-59.32%
6.95%
15.54%
17.81%
18.26%
17.79%
16.01%
2,964,110
3,754,755
3,623,935
4,202,652
4,953,431
5,798,458
6,745,462
7,940,524
9,312,402
20.99%
26.67%
-3.48%
15.97%
17.86%
17.06%
16.33%
17.72%
17.28%
8,962,897
8,329,374
11,198,180
7,551,805
8,025,276
8,601,135
9,298,783
9,994,863
10,905,853
11,603,828
-7.07%
34.44%
-32.56%
6.27%
7.18%
8.11%
7.49%
9.11%
6.40%
754,943
730,443
2,490,536
3,439,688
4,092,689
4,684,187
5,495,555
6,337,580
7,305,656
8,309,703
-3.25%
240.96%
38.11%
18.98%
14.45%
17.32%
15.32%
15.28%
13.74%
1,735,641
2,022,578
2,787,681
2,884,331
3,282,686
3,808,646
4,402,970
5,073,070
5,826,649
6,741,739
16.53%
37.83%
3.47%
13.81%
16.02%
15.60%
15.22%
14.85%
15.71%
5,128,627
6,083,511
6,705,431
7,985,971
9,822,477
12,278,746
15,080,819
18,374,847
21,676,683
25,516,364
% Growth
- Funding in the open market
% Growth
- Borrowings and onlending
% Growth
109,190.02
Deposits from Customers:
- Saving deposits
2,449,921
% Growth
- Time deposits
% Growth
Funds from securities issued
% Growth
Subordinated debt
% Growth
Insurance and pension plans
% Growth
Total Interest Expense
18.62%
$
27,974,717
$
31,000,892
$
27,190,512
$
32,771,291
% Growth
Net Interest Income
10.22%
$
46,755,986
$
35,611,286
10.82%
% Growth
19.10%
$
39,640,751
$
43,492,965
50.82%
23.00%
$
48,630,716
$
44,630,110
(15.22%)
25.01%
$
58,127,965
$
47,198,265
22.68%
22.82%
$
69,336,128
$
50,655,413
19.53%
21.84%
$
82,648,261
$
54,258,281
19.28%
17.97%
$
98,535,838
$
58,031,875
19.20%
8.67%
22.13%
2.61%
5.75%
7.32%
7.11%
6.95%
6.08%
(11,510,179)
(12,123,052.47)
(13,397,904.56)
(14,920,100.01)
(17,044,968.27)
(19,355,417.33)
(21,104,429.54)
259,225,907
310,842,550
342,015,306
378,845,390
425,330,304
481,293,549
549,837,686
624,368,301
4.61%
2.22%
2.67%
3.37%
3.20%
3.15%
3.10%
3.10%
3.10%
% Growth
$
19.02%
(8,296,151)
234,610,182
16,380,901
61,560,944
20.52%
Loans outstanding
$
$
(5,756,125)
(10,809,611)
Net-Interest Income (after PLL)
117,276,448
19.22%
Provision for Loan Losses
% of Loans
17.71%
$
27,015,166
64.92%
$
27,315,135
1.11%
$
31,982,786
17.09%
$
32,507,058
1.64%
$
33,800,361
3.98%
$
35,735,313
5.72%
UOIG 18
$
37,213,312
4.14%
$
38,676,458
3.93%
703,480,985
3.00%
$
40,456,515
4.60%
December 3rd, 2013
University of Oregon Investment Group
Appendix 5 – Non-Interest Income Model
Non-Interest Income Model
(R$ in thousands)
Net fee and commission income
% of Total Income
% Growth
Net gains/(losses) on financial assets helf for trading
% of Total Income
% Growth
Net gains/(losses) on financial assets available for sale
% of Total Income
% Growth
Premiums retained from insurance and pension plans
% of Total Income
% Growth
Equity in the earnings of associates
% of Total Income
% Growth
Other non-interest income
% of Total Income
% Growth
Total Non Interest Income
% Growth
2009A
7,847,382
7.66%
5,983,781
5.84%
757,255
.74%
24,118,550
23.55%
728,867
.71%
7,828,125
7.64%
$
Non-Interest Expense Model
($ in thousands)
Personnel expenses
% of Expenses
% Growth
Administrative expenses
% of Expenses
% Growth
Depreciation and amortization
% of Expenses
% Growth
Changes in insurance provisions and pension plans
% of Expenses
% Growth
Retained claims
% of Expenses
% Growth
Selling expenses on insurance and pension plans
% of Expenses
% Growth
Net gains/(losses) of foreign currency transactions
% of Expenses
% Growth
Other non-interest expense
% of Expenses
% Growth
Total Non-Interest Expense
% Growth
47,263,960
$
2009A
(7,334,164)
9.28%
(8,138,058)
10.29%
(1,516,529)
1.92%
(12,780,545)
16.17%
(8,329,154)
10.54%
(1,230,835)
1.56%
(897,638)
1.14%
(10,852,765)
13.73%
$
(51,079,688) $
2010A
9,394,538
8.50%
19.72%
2,212,733
2.00%
-63.02%
754,416
.68%
-0.37%
27,994,116
25.33%
16.07%
577,053
.52%
-20.83%
5,833,854
5.28%
-25.48%
46,766,710 $
-1.1%
2011A
10,834,333
7.83%
15.33%
(608,270)
(.44%)
-127.49%
365,302
.26%
-51.58%
34,315,543
24.82%
22.58%
682,122
.49%
18.21%
10,327,155
7.47%
77.02%
55,916,185 $
19.6%
2012A
12,804,795
8.54%
18.19%
2,110,113
1.41%
446.90%
1,895,974
1.27%
419.02%
40,176,745
26.81%
17.08%
870,662
.58%
27.64%
8,865,636
5.92%
-14.15%
66,723,925 $
19.3%
2013E
13,957,227
8.16%
9.00%
3,376,181
1.97%
60.00%
1,516,779
.89%
-20.00%
48,212,094
28.18%
20.00%
1,044,794
.61%
20.00%
9,707,871
5.67%
9.50%
77,814,946 $
16.6%
2014E
15,680,944
8.01%
12.35%
4,389,035
2.24%
30.00%
1,365,101
.70%
-10.00%
57,131,331
29.17%
18.50%
1,253,753
.64%
20.00%
10,678,659
5.45%
10.00%
90,498,824 $
16.3%
2015E
17,562,657
7.82%
12.00%
5,047,390
2.25%
15.00%
1,269,544
.57%
-7.00%
67,557,799
30.07%
18.25%
1,504,504
.67%
20.00%
11,746,524
5.23%
10.00%
104,688,420 $
15.7%
2016E
20,056,555
7.77%
14.20%
5,552,129
2.15%
10.00%
1,180,676
.46%
-7.00%
79,549,309
30.84%
17.75%
1,805,405
.70%
20.00%
12,921,177
5.01%
10.00%
121,065,250 $
15.6%
2017E
22,262,776
7.54%
11.00%
5,996,300
2.03%
8.00%
1,098,029
.37%
-7.00%
92,873,818
31.46%
16.75%
2,166,486
.73%
20.00%
14,213,295
4.82%
10.00%
138,610,702 $
14.5%
2018E
24,711,681
7.36%
11.00%
6,356,078
1.89%
6.00%
1,021,167
.30%
-7.00%
106,804,891
31.79%
15.00%
2,599,783
.77%
20.00%
15,634,624
4.65%
10.00%
157,128,223
13.4%
2010A
(8,794,017)
9.83%
19.90%
(9,761,445)
10.91%
19.95%
(1,966,433)
2.20%
29.67%
(14,272,242)
15.95%
11.67%
(9,577,429)
10.71%
14.99%
(1,566,715)
1.75%
27.29%
(682,961)
.76%
-23.92%
(11,836,517)
13.23%
9.06%
2011A
(11,150,970)
9.67%
26.80%
(11,477,134)
9.95%
17.58%
(2,120,335)
1.84%
7.83%
(18,212,405)
15.80%
27.61%
(11,168,612)
9.69%
16.61%
(1,858,351)
1.61%
18.61%
2,625,813
(2.28%)
284.47%
(15,185,857)
13.17%
28.30%
2012A
(11,656,422)
9.49%
4.53%
(11,900,383)
9.69%
3.69%
(2,538,260)
2.07%
19.71%
(23,326,101)
18.99%
28.08%
(13,123,833)
10.68%
17.51%
(2,313,795)
1.88%
24.51%
(951,385)
.77%
-136.23%
(17,394,300)
14.16%
14.54%
2013E
(12,239,243)
8.57%
5.00%
(12,525,153)
8.77%
5.25%
(3,045,912)
2.13%
20.00%
(28,224,582)
19.76%
21.00%
(15,486,123)
10.84%
18.00%
(2,869,106)
2.01%
24.00%
(665,970)
.47%
-30.00%
(19,133,730)
13.40%
10.00%
2014E
(12,912,401)
7.86%
5.50%
(13,214,037)
8.04%
5.50%
(3,502,799)
2.13%
15.00%
(32,458,270)
19.76%
15.00%
(18,273,625)
11.12%
18.00%
(3,564,864)
2.17%
24.25%
(599,373)
.36%
-10.00%
(21,621,115)
13.16%
13.00%
2015E
(13,622,584)
7.20%
5.50%
(13,907,773)
7.35%
5.25%
(4,028,219)
2.13%
15.00%
(37,327,010)
19.72%
15.00%
(21,608,562)
11.42%
18.25%
(4,438,256)
2.35%
24.50%
(539,435)
.29%
-10.00%
(24,431,860)
12.91%
13.00%
2016E
(14,371,826)
6.58%
5.50%
(14,603,162)
6.69%
5.00%
(4,632,451)
2.12%
15.00%
(42,926,061)
19.66%
15.00%
(25,552,124)
11.70%
18.25%
(5,547,820)
2.54%
25.00%
(485,492)
.22%
-10.00%
(27,608,002)
12.64%
13.00%
2017E
(15,090,417)
6.00%
5.00%
(15,333,320)
6.10%
5.00%
(5,327,319)
2.12%
15.00%
(49,364,971)
19.64%
15.00%
(30,215,387)
12.02%
18.25%
(6,657,383)
2.65%
20.00%
(436,943)
.17%
-10.00%
(30,437,822)
12.11%
10.25%
2018E
(15,844,938)
5.49%
5.00%
(16,061,653)
5.56%
4.75%
(6,126,417)
2.12%
15.00%
(55,782,417)
19.32%
13.00%
(35,729,695)
12.38%
18.25%
(7,988,860)
2.77%
20.00%
(393,248)
.14%
-10.00%
(33,481,604)
11.60%
10.00%
(58,457,759) $
(68,547,851) $
(83,204,479) $
(94,189,819) $
(106,146,483) $
(119,903,698) $
(135,726,938) $
(152,863,562) $
(171,408,832)
14.4%
17.3%
21.4%
13.2%
12.7%
13.0%
UOIG 19
13.2%
12.6%
12.1%
December 3rd, 2013
University of Oregon Investment Group
Appendix 6 –Excess Return Model Assumptions
Excess Return Model Assumptions
Tax Rate
Risk Free Rate
Beta
Market Risk Premium
% Equity
% Debt
Cost of Debt
CAPM
Exchange Rate (USD/BRL)
Considerations
30.00% Terminal Growth Rate
3.00%
2.76% Terminal Value
37,918,071
1.45 PV of Terminal Value
21,844,008
5.75% Sum of PV Free Cash Flows
16,890,176
100.00% Excess Equity Value
38,734,184
0.00% Current Book Value
78,970,335
N/A Market Capitalization
117,704,519
11.08% Fully Diluted Shares
3,817,413
2.3345 Implied Price (Brazilian Real $)
30.83
Implied Price (USD $)
13.21
Current Price
13.27
Overvalued
Final Implied Price
(0.47%)
Price Target Weight
Excess Return Model
13.21
70.00%
Forward Comparables Analysis
14.66
30.00%
Price Target
$13.64
Current Price
13.27
Undervalued
2.82%
UOIG 20
December 3rd, 2013
University of Oregon Investment Group
Appendix 7 – Beta Analysis
Vasicek Beta
Company
Banco Santander
Itau Unibanco Holding
Banco de Chile
ICICI Bank
Royal Bank of Canada
HDFC Bank Ltd.
U.S Bancorp
Wells Fargo
Beta
Variance
Weight
Vasicek Beta
Beta
1.37
1.54
0.76
1.68
1.09
1.46
1.56
2.00
5 Year Daily
Weighting
SD
0.0503
0.0380
0.0352
0.0501
0.0262
0.0418
0.0451
0.0528
20.00%
20.00%
7.50%
10.00%
7.50%
15.00%
15.00%
5.00%
Industry
Banco Bradesco
1.44
0.0019
1.46
0.0013
40%
1.45
60%
Banco Santander
Itau Unibanco Holding
Banco de Chile
ICICI Bank
Royal Bank of Canada
HDFC Bank Ltd.
U.S Bancorp
Wells Fargo
Beta
Variance
Weight
Vasicek Beta
Beta
1.37
1.54
0.76
1.68
1.09
1.46
1.56
2.00
0.0025
0.0014
0.0012
0.0025
0.0007
0.0017
0.0020
0.0028
Hamada Beta
Beta
Weighting
D/E
Banco Santander
Itau Unibanco Holding
Banco de Chile
ICICI Bank
Royal Bank of Canada
HDFC Bank Ltd.
U.S Bancorp
Wells Fargo
1.37
1.54
0.76
1.68
1.09
1.46
1.56
2.00
25.00%
25.00%
10.00%
10.00%
10.00%
10.00%
5.00%
5.00%
501.14%
626.90%
237.70%
277.80%
169.00%
129.50%
132.90%
117.10%
9.43%
18.56%
10.37%
25.57%
21.73%
30.09%
28.94%
31.97%
SD
0.0503
0.0380
0.0352
0.0501
0.0262
0.0418
0.0451
0.0528
20.00%
20.00%
7.50%
10.00%
7.50%
15.00%
15.00%
5.00%
Industry
Banco Bradesco
1.44
0.0019
1.46
0.0013
40%
1.45
60%
Tax Rate Unlevered Beta
552%
28.00%
Weighted Average Unlevered Beta
5 Year Daily
Weighting
5 year Daily
Company
Banco Bradesco
Levered Banco Bradesco Beta
Vasicek Beta
Company
Variance
Variance
0.0025
0.0014
0.0012
0.0025
0.0007
0.0017
0.0020
0.0028
0.42
1.46
2.11
Hamada Beta
5 year Daily
Company
Beta
Weighting
D/E
Banco Santander
Itau Unibanco Holding
Banco de Chile
ICICI Bank
Royal Bank of Canada
HDFC Bank Ltd.
U.S Bancorp
Wells Fargo
1.37
1.54
0.76
1.68
1.09
1.46
1.56
2.00
25.00%
25.00%
10.00%
10.00%
10.00%
10.00%
5.00%
5.00%
501.14%
626.90%
237.70%
277.80%
169.00%
129.50%
132.90%
117.10%
9.43%
18.56%
10.37%
25.57%
21.73%
30.09%
28.94%
31.97%
Tax Rate Unlevered Beta
552%
28.00%
Weighted Average Unlevered Beta
Banco Bradesco
Levered Banco Bradesco Beta
0.25
0.25
0.24
0.55
0.47
0.77
0.80
1.11
0.25
0.25
0.24
0.55
0.47
0.77
0.80
1.11
0.42
1.46
2.11
UOIG 21
December 3rd, 2013
University of Oregon Investment Group
Appendix 8 – Sensitivity Analysis
Implied Price
Undervalued/(Overvalued)
Risk Free Rate
13
2.36%
2.56%
2.76%
2.96%
3.16%
(0)
2.36%
2.56%
2.76%
1.40
14.33
13.97
13.63
13.31
13.01
1.40
8.02%
5.30%
1.43
14.07
13.73
13.40
13.09
12.80
1.43
6.05%
3.44%
1.45
13.82
13.49
13.18
12.88
12.60
1.45
4.16%
1.48
13.58
13.26
12.96
12.67
12.40
1.48
1.50
13.35
13.04
12.75
12.48
12.22
1.50
Adjusted Beta
Adjusted Beta
Risk Free Rate
Implied Price
2.96%
3.16%
2.73%
0.31%
(1.99%)
0.97%
(1.35%)
(3.56%)
1.65%
(0.71%)
(2.95%)
(5.07%)
2.34%
(0.06%)
(2.33%)
(4.48%)
(6.53%)
0.60%
(1.71%)
(3.89%)
(5.96%)
(7.93%)
Undervalued/(Overvalued)
Risk Free Rate
13.21
2.28%
2.48%
2.76%
2.88%
3.08%
(0)
2.28%
2.48%
2.68%
2.88%
3.08%
0.048
17.23
16.68
15.98
15.70
15.26
0.048
29.83%
25.73%
21.91%
18.33%
14.99%
0.053
15.43
15.00
14.45
14.22
13.87
0.053
16.25%
13.04%
10.02%
7.18%
4.50%
0.058
14.00
13.66
13.21
13.03
12.74
0.058
5.52%
2.94%
0.50%
(1.80%)
(3.98%)
0.063
12.85
12.57
12.20
12.05
11.81
0.068
11.91
11.67
11.37
11.24
11.04
Market Risk
Premium
Market Risk
Premium
Risk Free Rate
0.063
(3.15%)
(5.26%)
(7.26%)
(9.16%)
(10.97%)
0.068
(10.29%)
(12.04%)
(13.71%)
(15.30%)
(16.82%)
Undervalued/(Overvalued)
13
2.0%
Terminal Growth Rate
2.5%
3.0%
3.5%
1.40
13.29
13.45
13.63
13.83
14.06
1.43
13.08
13.23
13.39
13.58
13.79
1.45
12.88
13.02
13.17
13.34
13.54
1.48
12.69
12.82
12.96
13.11
13.29
1.50
12.50
12.62
12.75
12.90
13.06
(0)
2.0%
1.40
0.16%
1.35%
1.43
(1.41%)
1.45
(2.91%)
1.48
1.50
4.0%
2.69%
4.22%
5.97%
(0.30%)
0.94%
2.35%
3.95%
(1.89%)
(0.75%)
0.55%
2.03%
(4.37%)
(3.42%)
(2.37%)
(1.17%)
0.19%
(5.77%)
(4.90%)
(3.92%)
(2.82%)
(1.58%)
Implied Price
Undervalued/(Overvalued)
Terminal Growth Rate
Terminal Growth Rate
13.21
2.3%
2.3%
3.0%
3.8%
4.5%
(0)
2.3%
2.3%
3.0%
3.8%
4.5%
2.13
14.23
14.23
14.48
14.77
15.14
2.13
7.23%
7.23%
9.09%
11.32%
14.07%
2.23
13.59
13.59
13.83
14.11
14.46
8.95%
2.33
12.98
12.98
13.21
13.48
13.81
2.43
12.45
12.45
12.67
12.92
13.24
2.53
11.96
11.96
12.17
12.41
12.72
Exchange Rate
Exchange Rate
Terminal Growth Rate
2.5%
3.0%
3.5%
4.0%
Adjusted Beta
Adjusted Beta
Implied Price
2.23
2.42%
2.42%
4.20%
6.33%
2.33
-2.16%
-2.16%
-0.47%
1.57%
4.07%
2.43
-6.18%
-6.18%
-4.56%
-2.60%
-0.20%
2.53
-9.88%
-9.88%
-8.32%
-6.44%
-4.14%
UOIG 22
University of Oregon Investment Group
December 3rd, 2013
Appendix 9 – Sources
SEC Filings
Bradesco Company Investor Relations page
Company presentations
Press releases
Earnings call transcripts
IBIS World
Factset
Trading Economics
Bloomberg
Yahoo Finance
Reuters
Google Finance
Financial Times
Morning Star
FinViz
Damodaran Publications
UOIG 23