Bank Bradesco SA(prefer share ADS)

Banco Bradesco reported strong second-quarter earnings, with net revenue increasing 10.3% year over year to BRL 37.6 billion, while net income rose 16.2% to BRL 7.1 billion. These results translate into a return on average equity of 16.2%, up from 14.6% last year.

Why it matters: While Banco Bradesco had great, broad-based results this quarter, nothing in the quarter materially changed our view on the company. Client net interest income grew 15.7% since last year, driven primarily by double-digit commercial loan growth across multiple categories. Fees were muted during the quarter, and we expect this to persist throughout 2026. Controlled operating expense growth of 3.4% was another core driver. A key area to watch is the credit and macro environments that caused Banco Bradesco to increase provisioning by nearly 23% in the first half of the year. The elevated Selic rate is pressuring businesses, and increasing household debt levels are creating stress in the consumer portfolio.

The bottom line: We anticipate increasing our current $3.50 per ADR share fair value estimate for no-moat-rated Banco Bradesco by a mid-single-digit percentage. After this expected increase, we view shares as fairly valued. The bulk of the increase should come from the time value of money since our last update and foreign exchange rate movements. We may also make slight adjustments in loan volumes and provisions, but this shouldn't have a major impact on our valuation. We anticipate top-line growth of about 6.7% annually, driven mostly by net interest income, or NII, growth. On the expense side, increased fintech competition can incentivize the bank to invest more heavily as it tries to move upmarket. If this scenario fully plays out, this could be a material threat to the bank's profitability over time.

We are increasing our fair value estimate for Banco Bradesco to $3.69 per ADR share from $3.50. Around $0.14 of the increase comes from the time value of money since our last update and foreign exchange rate movements. The rest of the positive adjustment comes from higher near-term net income projections as the bank has had a strong start to 2026. We assume a $1/BRL 5.1 exchange rate as of Aug. 7, 2026.

In recent years, Banco Bradesco's net interest margin has faced major headwinds as the bank dealt with pressures from funding costs rising faster than the yield in the loan book. However, as time has passed, net interest margin has recovered, providing a significant tailwind to net interest income growth. While falling inflation has raised prospects for lower interest rates, we expect Banco Bradesco to maintain healthy net interest margins. We expect the bank's net interest margin to dip to 4.1% in 2026 as rates fall, before stabilizing around 4.26% by 2030.

With declining NIM over the past few years, Bradesco has pivoted toward higher-margin small and medium enterprises and personal lending, in tandem with an increased focus on fee income. Bradesco has grown its fee income by the lower double digits over the last decade, but we believe those days are over with increasingly stringent regulation and competition from nonbank financial institutions. In particular, we expect the bank's deposit service fees and payment processing income to face major headwinds, a consequence of increasing competition from fintech firms. This should be offset by strong performance from the firm's insurance business, which has remained a highlight of the firm's results during its recent struggles. All in all, we see fee income increasing more in line with nominal GDP growth in the future, forecasting a mid-single-digit growth rate over the next five years.

Loan growth was strong in 2025 thanks to a significant increase in consumer and small-business lending. While we do expect some deceleration from the pace seen in recent quarters, we do not expect anything like the shrinking loan balances seen in 2023.

We use a cost of equity of 12.5%. This includes a base cost of equity of 8.3%, to which we add a 4.2% country risk premium.

In our view, Banco Bradesco has no economic moat. Ongoing political and economic instability in Brazil, a more hostile approach from regulators, and increased competition are eroding the value of its competitive position, which in the past allowed Banco Bradesco to often enjoy strong returns. The Brazilian banking system is highly concentrated, with the five largest banks controlling the majority of assets. Moreover, the major Brazilian banks also dominate the payment, asset management, and brokerage industries. Banco Bradesco, in particular, also benefits from being the largest insurer, with the majority of its policies and products being sold through its bank branch network. However, in our view, this strong position is needed to provide a margin of safety for returns, as the amount of instability and risk associated with Brazil’s economy and regulatory environment creates volatility and uncertainty in bank results. While Bradesco has often been able to earn returns above its cost of capital, aided by non-interest fee income from its credit card and deposit services segments as well as its insurance business, the bank has also seen its returns dip below its cost of capital as shifting economic, political, and regulatory trends impact its business. It's a theme that we expect to continue for the foreseeable future as Brazil sees the return of high inflation and political uncertainty while preexisting budgetary problems remain.

To make matters worse, the Brazilian central bank has become intent on supporting disruption of the major banks' position, with increased competition in the financial system being a stated goal of the institution. With no improvement in Brazil’s unstable operating environment in sight, an intrusive regulatory environment that has become more hostile to Banco Bradesco’s margins, and signs of erosion of Banco Bradesco’s competitive position in certain segments, we cannot establish confidence that Banco Bradesco will be able to reliably generate returns above its cost of capital, leading us to give Banco Bradesco a no-moat rating.

In our opinion, bank moats are typically achieved through cost advantages (either through superior funding sources or operational cost structure), switching costs, and the banking system in which the company operates. Banco Bradesco has typically had a lower cost of funding than Itaú, its closest private competitor. As a result of lower funding costs, the bank has typically enjoyed strong net interest margins. As a result of its strong lending results, offset by weaker fee and commission revenue, Banco Bradesco has an efficiency ratio that is generally in line with its peers and major US banks.

In our view, strong lending results are necessary for Bradesco to compensate for Brazil’s volatile economic conditions and increasingly unfavorable regulatory climate. This is problematic as there are signs that Bradesco's competitive position is weakening, particularly in the insurance market, and the Brazilian central bank has made increasing competition in the Brazilian financial system a key policy priority.

The Brazilian central bank has become a major proponent of the open banking movement, requiring banks to create the infrastructure and capability necessary to transfer financial data to an external firm at a client's request. In November 2020, the central bank also rolled out the highly successful Pix payment system to offer instantaneous financial transfers to compete with existing payment methods, like credit and debit cards. Firms with more than 500,000 accounts are required to support the payment system, and adoption has been rapid, with more than 6 billion transactions from over 110 million users in the first year. This represents a meaningful competitive threat to Bradesco’s card and account services revenue (which includes internal and external transfer fees), particularly since Brazilian merchants are allowed to price discriminate based on payment method and the central bank has intentionally charged low fees for the service. Overall, the central bank’s efforts to create competition have been wildly successful, with the fintech giant, Nu, becoming a major competitive presence in the Brazilian banking industry in a matter of years.

Outside of direct competition through the state-owned banks, which control roughly one-third of banking assets, the Brazilian government involves itself in the Brazilian financial system through a number of regulations. Beyond the more typical reserve requirements, lenders in Brazil face a number of mandatory lending requirements, for example, 65% of deposits in savings accounts must be used on real estate-related lending as well as preset interest rates for payroll loans. The intrusion of political goals into the regulatory regime facing Brazilian banks represents an additional operating challenge for the major banks, particularly since regulations in Brazil tend to change quickly and often.

All in all, while there are elements of strength to Banco Bradesco’s position, given its scale in the Brazilian financial system, that position appears to be weakening in a period where the challenges facing the bank have only grown. While Bradesco still has the ability to earn more than its cost of capital in a good year, and 2021 and 2022 were good for the bank, we expect this to be more difficult to achieve going forward as the operating environment for banks in Brazil remains challenging and Bradesco has less room for error as its insurance and other noninterest income sources lose ground. We also do not expect the increased regulatory attention being placed on the major banks to dissipate, creating the potential for more burdensome regulatory changes. As a result, we give Banco Bradesco a no-moat rating.

Bradesco's credit costs have been improving for over a year now, setting the stage for better performance.

Inflation in Brazil has moderated since its peak, reducing the macroeconomic risks facing Banco Bradesco.

Bradesco's loan growth has accelerated in recent quarters, and improving economic conditions could provide additional upside.

Bradesco's credit quality and net interest margin have materially underperformed peers' in recent years. This underperformance could persist.

Bradesco could see greater competition from disruptive fintech firms, which are benefiting from central bank-led initiatives.

As a result of impressive returns, Brazil's banks are increasingly in the crosshairs of regulators and politicians, who may limit a bank's ability to increase returns.