In an article in the newspaper Valor Econômico, Patrick Jenkin reports that European banks can be considered "zombies", representing a challenge for international investors. The author draws on the acclaimed Boston Consulting Group 's report on these institutions.

What would happen if a similar study were carried out in Brazil?

The report is based on the axiom that companies that are trading below their book price should be liquidated , and their values ​​returned to shareholders . With 73% of European banking institutions trading below their book value , we see that the glamorous world of banking is no longer the same.

But what is happening with the Banks?

Firstly, in my studies of the sector, we see the migration of the traditional business model to digital platforms. Nowadays, for example, we even have the White Label format available to any entrepreneur interested in creating their own bank, something that was never seen before; allowing for an explosion of new digital banks.

Secondly, global interest rates have reached historic lows. In a detailed statistical analysis , as discussed in another article , it was possible to prove that interest rates are not in the process of rising , but rather returning to levels considered normal from a statistical point of view. As is widely recognized, rising interest rates are directly associated with higher bank spreads , resulting in more robust profits .

Are there zombie banks in Brazil?

I did a little research as soon as I read the report to check this situation, and I was surprised by what I found.

Image: Price in relation to book value. Image: WG

If we take into account the publicly traded banks that I have in my system, totaling 21 companies; We observed that 8 of them, that is, 38% of these companies, are currently being traded at prices below book value, exclusively here in Brazil.

What could have caused this asymmetry between price and cost?

Here in Brazil, a good part of the banks belong to federal or state governments, which generates the perception that a significant portion of the sector carries an additional degree of risk , especially in election years. This leads investors to demand premiums, resulting in discounted share prices and resulting in low P/Bv ratios.

In other words, it becomes challenging for the investor , who seeks to build a reserve for future generations, to face such significant fluctuations in prices in banks associated with the government . Investors understand the complexity of this dynamic and, for this reason, prefer private sector companies , regardless of whether they are overvalued or not.

Want to know about my sector analysis or a specific company? Contact Wagner Geremia.

Image by: Unsplash/ @etiennemartin