Banco Bradesco Is Growing In Rural And SME Into A Credit Tightening Cycle

Banco Bradesco reported strong 2Q25 results, with net income up 28% and revenues up 15%, primarily driven by cost leverage. However, this growth is largely fueled by increased lending to higher-risk Small and Medium Enterprises (SMEs) and rural sectors, raising concerns given deteriorating credit conditions in Brazil and the bank's historical tendency for risk accumulation. While current Non-Performing Loans (NPLs) appear stable, the bank has guided for decelerated loan growth in FY25. Despite a seemingly attractive current valuation, the analyst maintains a 'Hold' rating, citing an unappealing cycle-adjusted yield of approximately 13% and elevated tactical risks, suggesting a cautious stance.

Analysis

Banco Bradesco's 2Q25 results present a conflicting picture of strong current performance overshadowed by significant forward-looking risk. On the surface, the bank delivered impressive results, with net income surging 28% year-over-year, driven by a 15% increase in revenues and effective cost control that limited OpEx growth to 6%. However, this growth is directly tied to a 13% expansion of its loan portfolio, which occurred amid deteriorating credit conditions in Brazil. The risk is concentrated in specific, vulnerable sectors: of the R$100 billion in new loans, 25% was allocated to rural credit and 20% to SMEs, with SME lending alone growing 25% YoY. This strategy is concerning given that the rural sector faces headwinds from rising rates and lower crop prices, while the SME segment historically carries the highest NPLs. Although current risk metrics like NPLs appear stable, the bank's own guidance for a deceleration in loan growth to mid-single-digits in FY25 signals an expected slowdown in earnings. The valuation, while appearing cheap at under 7x earnings, is less compelling on a cycle-adjusted basis, which estimates a total yield of 13%, a figure deemed insufficient compensation for the heightened tactical risks of a potential credit downturn.

Key Decisions for Investors

• Investors should look beyond the strong headline earnings growth and focus on the underlying credit risk, as performance is heavily reliant on aggressive lending to the vulnerable SME and rural sectors.
• Monitor leading risk indicators such as Non-Performing Loan (NPL) formation rates and the size of the restructured portfolio, as the current stability may not hold given the deteriorating credit environment in Brazil.
• Factor the company's guidance for a sharp deceleration in loan growth for FY25 into valuation models, as this implies the current 28% net income growth is unsustainable.
• Consider a neutral 'Hold' stance due to the unfavorable risk/reward profile, as a potential rise in credit losses could create a more attractive entry point at a lower valuation in the future.