Goldman Sachs Upgrades Santander Mexico, Banrisul On Doorstep Of LatAm Financials Earnings Season

In a report published Tuesday, Goldman Sachs analyst Carlos G. Macedo said that with the earnings season beginning on July 21 for Latin American financial firms, growth trends in the region are expected to have been weaker, indicating weaker economic activity across the Latin American countries. Among the Brazilian banks, analyst Carlos G. Macedo upgraded the rating on

to Buy. "We expect corporate NPLs to accelerate as the economic downcycle deepens, with some negative trends for SME NPLs as well, though NIM should support ROE," analyst Macedo stated, while adding that the 2Q results were expected to reflect sequential weakening of the aggregate NPL ratio, "for the first time in several quarters." The pressure is likely to come to a large extent from past due loans to corporate houses, which is expected to lead to higher provisioning. However, margins are expected to be robust, driven by higher benchmark rate levels. Stronger margins are likely to provide support to earnings. According to the Goldman Sachs report, "Valuation, which seems attractive at first glance, reflects levels of profitability that we believe are unsustainable – a mid-cycle ROE level would translate to multiples that are closer to historical levels and more comparable to regional peers." The analyst believes that Banrisul's valuation is attractive, while expecting a potential rise in ROE as well as solid shareholder returns. Among the Mexican Banks, analyst Carlos G. Macedo upgraded the rating on

to Neutral, while also upgrading the Mexican banking sector to Neutral due to expectations of improved growth in 2H "due to a weaker base for growth as well as the potential benefit of a rate hike." However, the analyst also expressed concern regarding a potential hike in rates, given that this is not factored into the forecasts. On the other hand, Mexican banks are not expected to post robust loan growth for 2Q, mostly due to weakness in the underlying economy. "As a result, trends mainly should reflect slightly improved continuations from 1Q, with EPS being stronger (on the back of better margins and greater efficiency) but still unimpressive," analyst Macedo added. Although Santander Mexico's share price has declined 15.3 percent since February, the management is committed to achieving 18 percent ROE by 2017, which the analyst believes could be challenging.