Goldman Reinstates Coverage Of Banco Bradesco Following Acquisition Of HSBC Brazil

Goldman Sachs reinstated coverage of Banco Bradesco SA (ADR) BBD at Neutral and price target of $9.30 following its R$16 billion acquisition of HSBC Brasil.

"By our calculations, the NPV of the acquisition of HSBC Brasil is R$4.2 billion, with R$3.1 billion coming from the tax benefit related to the amortization of goodwill. This corresponds to less than 3% of Bradesco's market cap, and we see it as largely priced in," analyst Carlos Macedo wrote in a note.

Macedo noted that the gains from the tax savings associated with goodwill amortization are more than offset by the opportunity cost of the amount Bradesco paid for the asset.

The analyst targets ROE for HSBC Brasil at just under 17 percent in 2019 and expects the transaction being accretive to earnings only in the first quarter of 2017.

Bradesco management hopes to reduce the cost base at HSBC Brasil by an additional 30 percent. The analyst expects the actual synergies would be lower given restrictions of the antitrust authority.

"A 20% to 30% range would represent an additional R$850-1,300 million per year in net income. A 15% to 25% increase in fee revenues for HSBC Brasil would represent an additional R$250-415 million per year in net income for the combined entity," Macedo continued.

"With the bank trading at risk-adjusted multiples that are aligned with those of local and regional peers, with see upside and downside risks as balanced," the analyst added.