Mostro nas próximas páginas um relatório de valuation em inglês desenvolvido por

mim, foi realizado dentro da NavaInvest, startup que estou ajudando a crescer
entregando análises e relatórios, estou compartilhando como uma maneira de
mostrar meu conhecimento prático. É uma análise do tradicional Banco do Brasil o
qual eu considerei estar descontado na bolsa de valores no momento que fiz este
relatório. 01/08/2022
 VALUATION REPORT

Thesis highlights

Credit payment
One of the best % in the sector, the last NPL is below the industry
average. That means the credit analysis team is doing a good
job, and the bank is retaining more profit if compared with other
institutions, building a portfolio with solid clients.

Excellent Upside and profitable sector

Sector has great upside in today’s scenario, vast potential to
be explored.

Dividend payout
Highest dividend payout in the sector.

Digital side
The BB is getting inside of the digital world competing with big
fintech’s like Nubank, entering the metaverse as well, with a
Banco do Brasil building in the virtual world.
Assumptions
Good control of expenses.
The last results are showing that Banco do Brasil is handling Free risk Rate BR 12%
the expenses very well, even lowering it.
Price Risk 5%
Cost of Equity (KE) 17%
Risk points
Perpetual Growth 4%
Credit portfolio is highly concentrated in the Agribusiness which
tends to be more influenced by the commodities prices.

Macroeconomic risk: If the country is associated with bigger risk, so

is Banco do Brasil, tending to fall on price.

High competition from bigger banks and fintech’s.

VALUATION R E P O R T by Nava Invest

Summary

The banking sector……………………………………………3

The company……………………………………………….…..9
Financial analysis and valuation…………………………..13
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VALUATION R E P O R T by Nava Invest

The banking sector

There are some great opportunities for growth in Brazil’s banking sector today.

Credit to GDP

The first factor that sustains this growth is the proportion of borrowing to GDP

The chart below suggests that there is space for credit expansion as the economy is
developing.

Figure 1: Proportion of credit to GDP last quarter of 2021.

200
178.4 173.9
180
160
137.7 137.1
140
120 109.5
100
80 71.4

60
40
20
0
China Switzerland Australia Sweden Canada Brazil

Credit to GDP

Source: BIS Statistics

Access to banks
The second point holding the assumption is a survey made by Locomotiva Institute, showing
that 34 million people don’t even have a bank account or are underbanked.

Figure 2: Percentage of Brazilians unbaked or under-banked.

100%
90% 86%
80%
70%
60%
50%
40%
30%
20%
7.50% 6.50%
10%
0%
Banked Unbanked Under-banked

Source: Locomotiva Institute

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VALUATION R E P O R T by Nava Invest

There are 16 million unbanked people and 17.7 million under-banked.

That amount translates to approximately 15% of the total population which handles BRL 347
billion per year.

That fact sustains the assumption that there’ll be organic growth in the whole sector once
those people start using banks.

Digitalization

Another factor is digitalization. Banks changed drastically in Brazil in the last few years,
today 80% of bank transactions are made in digital ways.

Figure 3: Number of agencies closed from March 2021 to March 2022

4089 3985

3312
3041 2948
2834

2119
1787

364 332
104 207

2021 2022 Closed Agencies

Banco do Brasil Bradesco Santander Itaú

This change comes as good for banks. It’s an incentive to reduce the high number of
agencies, consequently reducing expenses as well.

Profitability

The banking sector in Brazil is divided into very few large banks and fintechs.

When
VALUATI O N Ryou
E P put
O R Tthe
byfour of the
Nava largest
Invest traditional banks together, including Banco do Brasil,
these have a good piece of market share.

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Figure 4: Market share of biggest traditional banks.

45
38.58
40
35
30
25
20
15 11.34 11.83
10 7.58 7.83
5
0
2021 TOTAL 2021
Banco do Brasil Bradesco Itaú Santander Total

Source: Result release

These big banks can work with more elevated fees due to their credibility, this translates into
higher profit margins than other common banks.

Credit Portfolio

Some risk factors are key to investing in good financial institutions, there are three factors to
the credit portfolio that every investor has to monitor carefully:

Non-performing Loans (NPL)

Provision for credit losses (PCL)
Portfolio Quality

The figure below shows the NPL of the four biggest traditional banks over 90 days, we can
see that the NPL from these banks is about 2% to 3%.

Figure 5: NPL % March 2022, over 90 days.

3.5

2.5

1.5

0.5

0
VALUATION R E P O R T by Nava Invest
Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22

Banco do Brasil Bradesco Itaú Santander

Source: Bank’s results release

In this case the lower the NPL the better, NPL means the clients and companies that don’t
repay their borrowings.

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The second important point is the PCL, the higher the PCL the better because we can have
more clearance of how the credit portfolio is going to perform.

The higher it is, the smaller the chances that the losses surpass the profits.

And the contrary is also true, with a smaller PCL the profits may be more unstable.

Banco do Brasil has historically a smaller PCL than other banks. However, this can be
explained due to the fact it’s a state bank, in case of problems Banco do Brasil can have the
support of the government.

Figure 6: PCL % from 2018 to 2021

450

400

350

300

250

200

150

100

50

0
2018 2019 2020 2021
Banco do Brasil Bradesco Itaú Santander
Source: Bank’s results release

The third point is to analyze the portfolio quality. To do that we have to look for two factors,
the concentration % of the portfolio in types of clients (individuals/companies) and second to
look at the ratings.

VALUATION R E P O R T by Nava Invest

Figure 7: Concentration between Individual's credit portfolio/companies Dez/ 2021

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120

100

80 39 40.5
60.5 59
60

40
61 59.5
20 39.5 41

0
Banco do Brasil Bradesco Itaú Santander

Individuals Companies

Source: Bank’s results release

As you can see Banco do Brasil concentrates most part of its portfolio on individuals.

Usually when a bank has a higher individuals concentration means it has a riskier portfolio.
However, the bank can gain more lending to a person than to companies in general.

For one thing, the period that a person has to repay the borrowing is lower than for
companies, and the bank can charge a higher interest.

Companies tend to be less profitable to banks, the bigger the company size the tendency is
to be less worthwhile.

The third important factor when analyzing the portfolio quality is its rating.

Down below we can see the company portfolio rating of the biggest financial institutions of
SFN(National Financial System in Brazil)

Figure 8: Rating

VALUATION R E P O R T by Nava Invest

Source: Bacen

As we can see Banco do Brasil has great exposure nationally.

This can benefit a lot as well as bring downside to the bank.

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The upside is that in a scenario of economic recovery BB can grow a lot, on the other hand,
it makes the bank fragile to new recessions.

BIS Ratio

The BIS Ratio is used to measure the leverage level of the bank is in.

The core business of banks is to lend credit, gaining interest in exchange. Banks need to
leverage themselves to do that, but they have to be good at it to develop a solid operation.

BIS ratio is composed of two numbers:

Capital / Risk Weighted Assets = BIS Ratio

Compares the total amount of capital to the total amount of money landed to clients.

The higher this ratio the better, meaning that the institution is healthy financially.

Brazil’s central bank demands an 11% BIS ratio at least, for any financial institution.

Figure 9: BIS ratio major Brazil banks

BIS Ratio
25

19.3
20

15.2 14.7 14.3

15

10

0
2022

Banco do Brasil Bradesco Itaú Santander

Source: Data Banco

VALUATION R E P O R T by Nava Invest

The Company

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Banco do Brasil is a state bank, with 50% of the stock owned by the government and 50%
on the free float divided between foreign capital, domestic, and treasury.

Ownership structure

Source: Banco do Brasil

Banco do Brasil is the only bank listed on the “Novo Mercado” (which suggests good
corporate governance practices.)

Its ordinary stock is under the code BBSA3.

It also is on the American stock exchange under the code BDORY.

The administrative board of Banco do Brasil is composed by 4 Members indicated of the

ministry of economy, 2 members indicated by non-controlling stockholders, one member
elected by the employees, and the last one chosen by Brazil’s central bank.

Credit Portfolio
As addressed in the sector analysis part, the major part of Banco do Brazil’s credit portfolio
is composed of individual persons, 61%, as the 39% left is composed of companies of all
sizes, and the government. Inside this portfolio, the Agribusiness stands out if you compare
it to other banks’ portfolios.

One
VALUATI ON factor
R E P Othat
R T reduces
by Navathe risk of non-payment for this percentage of people on the credit
Invest
portfolio is that a big part of this 61% is payroll loans, in this case, the payment is discounted
straight from the source(the salary of the borrower), reducing the NPL risk.

Figure 10: Credit portfolio Individuals

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120

100
17.2 20.7 21.8

80
15.1 14.7 18.7

60 23 20.6 17.5

40

46.7 48.9 48
20

0
2019 2020 2021

Payroll Loans Real estate financing Credit Card Others

Source: Banco do Brasil

As addressed on the first page the high exposure to agribusiness can be a risk due to
commodities prices.

The portfolio is exposed to some specific commodities as shown below

Figure 11: Commodities Agribusiness

Meet

17.4 Milk

40.3 Machines and implements

7.1

Soy
16.7

5.3 Corn
13.2

VALUATION R E P O R T by Nava Invest

Others

Source: Banco do Brasil

The 39% of the credit portfolio is concentrated mostly in big companies which once again is
a good point because big companies are always going to be more reliable than small size
ones.

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Figure 12: Companies Credit portfolio Dez/20 to Dez/21

40
35.5
35 32.5

30 28.2 28.8

25
19.6 20.4
20 18.4
16.7
15

10

0
2020 2021

Large companies Governament MPME Others

Another positive fact is as we saw in the rating portfolio in the sector analysis, more than
50% of company clients are rated AA or A which are the highest scores.

VALUATION R E P O R T by Nava Invest

Risk Points

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Government

2022 elections can influence the price of the company, a new government can lead to
uncertainties, making the company suffer as half of Banco do Brasil is controlled by the
state. Another point is, the government may adopt policies that directly affect Banco do
Brasil's operations and diverge from the interests of investors, leading to a decrease.

Cybersecurity incidents

Due to the nature of its activities, Banco do Brasil operates in an environment subject to
cybersecurity failures and incidents, based on Information Technology (IT), which also
includes the equipment used by employees in remote work and the environments of
integrated suppliers to the Bank's internal environment.

High regulation

Banks are highly regulated due to their economic importance. These measures can affect
the performance of the institution.

Sensible to Interest rate

The economic interest rate is a key factor in the bank’s margin, when this interest is low, the
margins tend to follow the same path.

High Competition with digitalization fintechs

A new trend of fintechs is happening in Brazil’s financial market, these fintechs are famous
for charging less from clients, that is a risk because Banco do Brasil has to adapt to keep
going with its market share piece.

Less PCL

Due to its historic low PCL in scenarios where you can’t see where the economy is going,
like in recessions, it’s difficult to have a clean expectation of profits, it’s more volatile.

Agribusiness portfolio

As said Banco do Brasil has a very high exposition in the agribusiness which can lead to
also high exposition on commodities prices.
VALUATION R E P O R T by Nava Invest

Financial analysis and valuation

Valuation

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To find the intrinsic value of Banco do Brasil we’ve utilized two models: First the ratio P/BV
and second a discounted dividend model (DDM).

P/BV Ratio

Utilizing the book value as a proxy of cash flow can be a good move, given that most of its
assets are marked to market constantly.

The Price to Book Value (P/BV) ratio is a measurement of how much an investor pays for a
stock over its book value.

Book value is the total tangible net assets in the balance sheet of a company after deducting
its liabilities. In other words, it is the net worth per share.

The Price to Book Value ratio compares the market price of a stock to its book value to
assess whether the stock price is over the book value and by how much or whether it is
trading below its book value.

First, we have to realize that Banco do Brasil is used to having a lower P/BV than its
competitors.

Many things can lead to that, but in this specific case is because half of the company is
controlled by the government. When a company is controlled by the state the stockholders
usually have a higher level of mistrust, leading to a historically lower ratio.

The average for this ratio negotiated by BBAS3 looking 10 years back, is 1,2x.

Today’s share price is being negotiated at the price of 35,68 by a P/BV of 0,70.

If you compared this ratio with the historic one, you have an intrinsic value of 61,16.

The P/BV average negotiated by the competitors is 1,6x.

Assuming Banco do Brasil become a private company like its competitors, it is fair to think
that the company would have a similar P/BV to the other players. In a private scenario with
this today’s numbers, Banco do Brasil would have an intrinsic value of 81,55.

We
VALUATI O Nget
REanP Oupside
R T byofNava
71% Invest
if the company continues to be controlled by the state and an
upside of 129% if it becomes private considering the P/BV ratio as the metric.

Dividend discounted model

Given that Banco do Brasil is known for its dividend payment is fair to assume that the
company is going to keep with the payments to the stockholders, this is why I used this
model of valuation, having the dividends as a base.

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The first step is to calculate the Cost of Equity (KE) to discount the expected dividends to a
present value.

We utilized 12,48% as free risk rate BR added with 5% of price risk with a total KE of
17,48%

Figure 13: Assumptions of DDM

Source: Nava Invest

To estimate the dividend growth for the next year we considered the annual growth of the
last 5 years.

Revising the last payments, we got that in the last 5 years Banco do Brasil’s payments to
stockholders had a solid growth of 25%.

We assumed that until 2026 these payments will grow at a rate of 25% a year and after this,
they’ll have a perpetual growth of 4% which is today’s expected inflation.

Figure 14: DDM forecasted until 2026

VALUATION R E P O R T by Nava Invest

Source: Nava Invest

These assumptions result in an intrinsic value of 45,72, which is a 28% upside looking at
dividends.

DCF models are extremely sensitive to two variables Perpetual growth and Cost of Equity.

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To verify how the intrinsic value fluctuates when the Perpetual growth and KE are changed,
we can do a sensibility model.

Figure 15: Sensitivity analysis

Source: Nava Invest

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VALUATION R E P O R T by Nava Invest

Conclusion

The baking sector has solid drivers that historic have given great gaining opportunities to
stockholders.

Banco do Brasil is in a scenario that can benefit its profits, and its value. We believe that the
company is underpriced.

Just by looking at the greatest indicator for measuring banks, the P/BV, we can see that
Banco do Brasil has a good advantage over any other bank.

A solid upside of 71% as mentioned, and in a scenario of privatization can go even further
with a 129% upside.

Despite having this mistrust as being a company controlled by the state, Banco do Brasil has
delivered very positive results.

By the end the last year, the company was able to raise its net income by 51.4% closing the
year in R$ 21 billion.

This great year was a result of credit businesses, services, good control of administrative
expenses and some measures to improve the efficiency, one example of this is the closing
of some branches as said.

The credit portfolio also grew 17,5% in one year closing 2021 with R$ 875 billion, a result
never seen before.

The NPL of the total portfolios was very low compared to other players in the sector.

Agribusiness is the major driver of this credit portfolio and we believe that the tendency is to
grow even more than the last year, workers from this business know Banco do Brasil is an
Agri Bank, that’s an important advantage.

To sum up we believe Banco do Brasil is not only delivering great results but also, has a
great potential for growth in the next years, keeping that same line of operation.

On this report we saw that the baking sector in Brazil has a lot to grow yet and one of the
institutions that you can take advantage of this growth is Banco do Brasil.

The company is attractive looking at a dividend side point as well as ratios like P/BV.

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Our recommendation is to buy at a price range of R$ 35 – R$40 with a target price of R$55.

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