The stocks currently have relative low valuations and should benefit from Brazil's robust economic growth.
As noted in our investment guide to Brazil, the country's banks will benefit from improving credit quality and delinquency rates in both individual and commercial loans. The nation's unemployment rate has been declining, and corporate profits have been increasing.
On his June 10 'Mad Money' TV program, Jim Cramer said that the best bets on the long-term growth of Brazil's middle class are banks, along with utilities and the food-and-beverage sector. The country's middle class now stands at 49% of the overall population, compared with around 39% five years ago.Loan growth will likely expand at a compound annual growth rate (CAGR) of 25% over the next three years, according to Goldman Sachs (GS). Banco Bradesco guided the company's loan portfolio to grow between 21% and 25% this year, driven by property loans and certain specific lines, especially payroll deductible loans. Last week, Goldman upgraded Itau Unibanco, the largest Brazilian bank by market value, to buy from neutral on valuation. During May 2010, Bank of America (BAC) sold its 5.4% stake in Itau Unibanco, a move that triggered broader selloffs in Itau stock, creating a buying opportunity. Meanwhile, UBS issued a buy recommendation on Banco Santander (Brasil) on its attractive valuation. The stock is trading at a 10% discount to the average of private bank peers and has a higher dividend yield of 5.9%, according to UBS. UBS is neutral on Banco Bradesco because its analysts view the stock's valuation as less attractive. However, Bank of America/Merrill Lynch upgraded Banco Bradesco to buy from neutral last week. Itau Unibanco has surpassed Citigroup (C) and Goldman Sachs in Brazil bond underwriting. Brazil banks held up better during the financial crisis than their foreign counterparts. Currently, four Brazil banks are among the top 10 underwriters, the most since 1999, according to Bloomberg. During July, shares of Itau Unibanco surged 18.4%, while Banco Bradesco gained 18.0% and Banco Santander (Brasil) rose 20.6%. The three stocks currently have price-to-earnings ratios of 13.0, 12.3, and 12.4, respectively. Those ratios are less than the 13.7 P/E ratio of 13.7 for Brazil's Bovespa index. They're also less than the P/E ratios of 26.8 for India's HDFC Bank (HDB), 18.4 for ICICI Bank (IBN), 14.7 for Chile's Banco Santander (SAN) and 13.7 for Japan's Mitsubishi UFJ Financial Group (MTU).