Interest rates are rising worldwide as central banks try to slow down the increasing inflation in the post-pandemic economy. Recently, the Federal Reserve approved a 25 basis point rate hike to combat multi-decade high inflation. However, most analysts believe this is only the beginning, and more interest rate hikes are ahead. As a result, a higher interest rates environment implies distinct benefits for the banking sector, enabling banks to earn higher interest income. 

Furthermore, the global banking market had a $8.2 trillion market cap as of Q3 2021 and is expected to grow significantly. This growth rate will be achieved due to the increasing number of customers and digital-driven advancement in banking products to meet customers’ needs. 

With that in mind, today I’ll analyze and compare two bank stocks, Banco Bradesco S.A. (BBD) and Itaú Unibanco Holding S.A. (ITUB), to determine which stock is currently a better buy.

Founded in 1943, BBD is a diversified bank that offers multiple banking products and services for individuals, corporations, and businesses in Brazil and worldwide. Based in São Paulo, Brazil, ITUB operates as a diversified bank through its key three segments: Retail Banking, Wholesale Banking, and Activities with the Market + Corporation.

Year-To-Date (YTD), shares of BBD gained about 29%, and ITUB stock soared 47% over the same period.  

Recent Developments 

On January 13th, Itau Unibanco announced that it had signed a deal to acquire Ideal Holding Financeira S.A with its subsidiaries based in Sao Paulo, Brazil. The transaction will consist of two parts over five years. Initially, ITUB plans to purchase 50.1% of Ideal´s voting capital, paying about 650 million reais ($117 million). The company retains the right to buy the remaining 49.9% stake after five years. Itau CEO Milton Maluhy said, “Clients from different segments, like iti or Itau Corretora, will be able to access the same products through the platforms they prefer.”

Recent Financial Performance & Analysts Estimates

On February 9th, Banco Bradesco reported earnings for the fourth quarter of 2021. In Q4, its net interest income rose 1.8% year-over-year to R$16.96 billion ($5.58 billion). Besides, BBD managed to beat analysts’ revenue estimates by $191.88 million. The company’s recurring net income has been reported at R$6.61 billion, showing a 2.8% year-over-year decrease. Consequently, BBD reported Non-GAAP EPS of $0.13, standing in line with consensus.

BBD is scheduled to distribute a monthly dividend of $0.003 per unit on March 2nd, in line with the previous. The stock has a forward annual payout of $0.05, which translates to a dividend yield of 1.03%. Also, the bank continues to be well-capitalized with a common equity tier ratio of 12.5%, which is well above the regulatory requirement of 8%. 

For the first quarter, analysts expect BBD’s EPS to remain flat on a year-over-year basis, standing at $0.13. Additionally, an $5.50 billion average revenue estimate for the current quarter indicates an 11.60% YoY growth.

In the fourth quarter of 2021, Itau Unibanco’s revenue was up 14.6% on a year-over-year basis to R$33.44 billion ($6.31 billion), beating analysts’ estimates by $483.69 million. The bank’s recurring earnings stood about 45% higher year-over-year at R$26.88 billion ($4.82 billion). Its GAAP EPS has been reported at R$0.64 ($0.13), in line with Wall Street estimates. 

Itau Unibanco improved its efficiency ratio to 43%, down 640 basis points from the year-ago value of 49.4%, reflecting increased profitability. ITUB also plans to reward its shareholders with a forward annual dividend payout of $0.04, translating to a 0.75% dividend yield.

Currently, Wall Street expects ITUB’s earnings to advance 15.26% in the first quarter of 2022 to $0.14. Besides, analysts forecast that its 1Q2022 revenue will rise to $6.55 billion, implying a 25.44% year-over-year increase. 

Comparing Valuations

In terms of Forward P/E, ITUB is currently trading at 9.29x, which is higher than BBD, whose multiple is presently standing at 8.02x. However, both banks trade with discounts compared to the sector’s median of 11.65x. When it comes to the Forward Price/Book multiple, ITUB’s P/B multiple of 1.91x is about 33% higher than BBD’s 1.44x.

Finally, ITUB is estimated to show higher revenue (YoY) and ROE (YoY) growth of 50.90% and 79.56%, respectively. These growth numbers exceed the BBD figures by 32% and 197%, respectively. 

Conclusion

The global banking industry is estimated to benefit from a higher interest rates environment, which aims to fight inflation. While both BBD and ITUB are expected to gain, I believe ITUB is more attractive at current levels because of its superior financials, promising M&A activity, and higher forward growth rates that justify its relatively richer valuation.

BBD shares were trading at $4.47 per share on Wednesday morning, up $0.06 (+1.36%). Year-to-date, BBD has gained 31.00%, versus a -5.44% rise in the benchmark S&P 500 index during the same period.

About the Author: Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. More...

More Resources for the Stocks in this Article