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Brazilian Banks Poised to Capitalize on Economic Expansion

The country has proved resilient in times of stress, and its financial institutions appear to be attractive long-term investments.

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We think that Brazil's economy will outperform developed nations' growth and that the Brazilian banks we cover are well positioned to take advantage of this expansion. Even with our tepid economic growth expectations, we think Brazil's growing middle class and substantial untapped credit demand will benefit Brazilian banks. Naturally, risks abound, such as growing inflation, a possible spike in unemployment and credit costs, and deceleration in the Chinese, U.S., and Western European economies. The best-run banks, such as  Banco Bradesco (BBD) and
 Itau Unibanco (ITUB), have proved to be quite resilient in the past and would be able to navigate another crisis successfully, in our opinion. However, we think the best risk/reward profile currently belongs to  Banco Santander Brasil (BSBR), which trades at a much wider discount to our fair value estimate than the others do.

Fundamentals Support Positive Outlook for Brazilian GDP
Compared with our view of other countries, we have a positive outlook on Brazil's economy. After a slow near-term recovery, we think Brazil's GDP will grow around 3.5% in the medium term. Growth in investment, combined with an expanding middle class, an acceptable unemployment rate, and controlled inflation, should keep pushing the economy forward, in our opinion. This is nowhere near the 7.5% real GDP growth achieved in 2010, and actually below the five- and ten-year trailing averages.

Morningstar Analysts does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.