B3 Securities Should Include Best Insurance and Payment Companies, Says UBS Bank

RIO DE JANEIRO, BRAZIL – The performance of Stone and PagSeguro’s shares draws attention in the payments sector in 2019. The two companies, with shares listed in the US market, rose 111 and 61 percent in dollar terms in the year up to December 12th. The trajectory contrasts with the sluggishness of Cielo, whose shares are at zero to zero, with a slight decrease of one percent (in real) in the period.

Mid-payment companies are leading the financial sector in Latin America this year, according to the Swiss bank UBS, leading the exchanges and the insurance companies. Bank shares are not included in this classification.

Although it is expected that Stone and PagSeguro will follow a positive trend in 2020, the great prominence in the sector should come from B3 securities, given that a “structurally low” SELIC rate should continue to benefit the capital market. B3SA3 shares have already climbed 77 percent in the year until December 12th.

In addition, the B3 faces low competition in its market in the short term, stresses UBS, while the payments sector should continue to face “intense” competition.

Among the positive factors for the company is the migration of fixed income assets to variable income, the launch of public offerings and the greater share of individual investors. However, the bank expects competition for the B3 in the capital market to emerge in 2021.

“Management has reinforced its focus on clients, aiming to improve the experience and maximize and strengthen the core business in the long term. The main goals of the B3 are to identify and understand customer needs (working closely with them) and address them efficiently and effectively,” says UBS in a report exclusively for the company.

Although it focuses on the B3 in the purchasing sector, UBS’s recommendation is to buy Stone and PagSeguro, and neutral for Cielo. In the bank’s opinion, Stone should continue to grow rapidly in the small and medium-sized enterprise market, leveraged by its business model, and PagSeguro is well positioned to maintain its leadership position.

Insurance companies also on the rise

Among insurers, UBS analysts recommend buying for IRB and BB Seguridade. The preference for the former is based on the prospect of high growth, with growing profits. In turn, the price of BB Seguridade attracts the expectation of dividend payments, but the bank considers that a low SELIC rate weighs on the insurance companies’ revenues.

UBS also recommends that investors in financial companies as a whole keep an eye on the course of the tax reform. According to the bank, these companies have distributed approximately R$2.9 billion (US$725 million) in the form of interest on equity in 2018, which would have reduced the payment of taxes by six percentage points that year. The bank estimates that the extinction of the tax exemption for interest on equity would have reduced the companies’ profits by an average of seven percent in 2018.

According to the bank, the companies most exposed to this risk are the B3 and Porto Seguro.

Optimism over banks

After releasing a report in November with an optimistic outlook for Brazilian banks, UBS reiterated its position in another report released on Monday. Among the institutions, the preference falls on Bradesco.

“We reiterate our view that Bradesco is the cheapest option to leverage on the country’s economic upturn since the bank is more exposed to Brazil,” wrote the analysts, who believe that the current premium of about 20 percent of Itaú over Bradesco should shrink in 2020.

UBS also assessed investors’ hesitation in relation to the banks’ shares.

“Our view is that investors are waiting for a sturdier growth of profits to have a more positive view for Brazilian banks. (…). But following the GDP indicators released in December which were stronger than anticipated, we expect a slow change in the consensus toward greater optimism with the growth of the banks’ profit rates”.

Source: InfoMoney