These 2 Brazilian Banks Will Stay Ahead of the Pack

By Markets Fool.com

Ita and Bradesco built a huge moat in the financial sector in Brazil. Leading technology, territorial scope, market concentration and political influence all combine to provide outstanding results from competitors.This is even clearer after the last earnings season. Among private banks, no matter the indicator, both are in the top performance, especially in profitability and operational efficiency.

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Macroeconomic conditions are crucial for banks performance. In case the international agencies downgrade Brazilian credit rating, providing the loss of investment grade, it could impact private banks results. Even though it is improbable that Ita and Bradesco will not be a good investment in the coming years. Both institutions became profitable giants managing uncertain political and economic scenarios - they can solidify a competitive advantage.

After a local currency stabilization in 1994, several competitors were saved by the Central Bank and acquired for the leaders, specially for Bradesco and Ita. Hard times in macroeconomic conditions used to be a fertile market: both enjoyed those periods to make new acquisitions or to dominate other markets, producing value for the shareholders. Nowadays both banks are able to provide amazing ROE - Return on Equity- for the shareholders in comparison to global banks:

Besides the ability to manage complex macroeconomic scenarios, both banks have enormous influence in economic directions. Newly elected president Dilma invited Luiz Carlos Trabuco, current CEO of Bradesco, to be the new Finance Minister of her new government. After his refusal, Dilma tapped Joaquim Levy, principal of Bradesco Asset Management. Brazil has an uncomfortable fiscal situation that will require good professionals to put the country on track, but it is far from a catastrophic situation.

Independently of the scenario, Ita and Bradesco have done their homework. Net income broke records quarter after quarter, specially due to operational efficiency, and the profit per employee shows how both banks have been scaling up the business. For sure, the price of shares seems always expensive; it is necessary to wait a fair price for a wonderful business. Bargains could never happen for the next decade.

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Comparing the ROE with big local players like Santander and Banco do Brasil (BVMF:BBSA3), Bradesco and Ita reached 19% and 24% respectively,Santander got 8% and Banco do Brasil 15%.

Besides the dominance in banking, other relevant markets maintain the duopoly. In the credit card segment, the acquirers Cielo (CIOXY) and Rede control around 80% of the market and not coincidently, their major shareholders are Bradesco and Ita.

Will digital evolution affect the leaders?

Since the entrance of new companies using only internet as distribution channel for financial products, the traditional retail banks have been threatened. Lending Club, Moneysupermarket (NYSE:MONYl), Google , Apple are challenging the competitors from the establishment for a new relationship with customers.

Hard regulation and political power from main banks could affect financial innovation and avoid consumer access in a first moment. Products, as peer to peer lending, will not be permitted until governmental approval, which will give time to the current traditional players organize their participation in this new method. Financial innovation in Brazil will probably reinforce the moat of traditional players and will not be disruptive or threatening for status quo.

Foolish bottom line

Shareholders of Itau and Bradesco do not need to be worried about political uncertainty, inflation, increase in interest rates or financial innovation. Both have been facing adverse situations since the foundation and know how to use it to improve even more their dominant position.

Resilient business for adversal economics conditions and protected against new competitors, Itau and Bradesco seems an obvious investment for the long term in Brazil.

Besides a positive perspective for Brazil, Ita has an interesting strategy in Latin America. Since the merge with Unibanco, the bank decided to add the expression Big Dream in the culture of the Company and started a consolidation process in Latin America. Its growth mindset intends to reduce Brazil dependency, use the high brand awareness and scale up the highly efficient operation. It can build one of the most powerful banks in the world and bring awesome return to Foolish investors.

The article These 2 Brazilian Banks Will Stay Ahead of the Pack originally appeared on Fool.com.

Paulo Marchetti has no position in any stocks mentioned. The Motley Fool recommends Apple and Google (C shares). The Motley Fool owns shares of Apple and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.