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Bolsonaro's win turns Banco do Brasil into investor darling

[SAO PAOLO] Jair Bolsonaro's rise to the presidency has made Banco do Brasil a favorite among investors hoping to profit from the new administration.

The nation's largest state-owned lender has become a go-to name for those seeking to bet on pledges of improved governance and asset sales, which could bring the bank's profitability closer to its non-state-owned peers. It also has the added advantage of not being dependent on commodities, seen as a potential downside to another state-run giant, Petroleo Brasileiro.

While the incoming government has already said that Banco do Brasil itself won't be privatised, new chief executive officer Rubem Novaes mentioned he would sell non-core assets and possibly seek partners for some of the lender's "crown jewels." In the past, when the bank needed to raise capital, it spun off and sold pieces of its insurance and credit card businesses.

"Privatisations would be the icing of the cake, but they aren't quite necessary for us to see an appreciation in state-owned companies," said Joao Braga, the co-head of equities at XP Asset Management, one of the nation's top-performing fund managers in the past year.

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The optimism is widespread among both the buy and the sell sides. Felipe Guerra, a founding partner at Legacy Capital Gestao de Investimentos, said asset sales could "unlock hidden value" and make the bank soar past other lenders. Morgan Stanley's analysts cited similar reasons in selecting the bank as one of their top 10 picks in Latin America, while a Bank of America Merrill Lynch survey of fund managers showed the most crowded trades in the region were being "long Brazil financials" and "long Brazil state-owned companies" - with Banco do Brasil fitting both bills.

Banco do Brasil has already made strides to become more efficient in the past two years. Profitability increased to more than double what it was when Michel Temer took office as President in 2016 as the bank implemented a voluntary dismissal program, stepped back from corporate credit and gave a boost to its fee-generating businesses.

The incoming administration promises that it won't turn back to the days of meddling in the bank's policies are also helping assuage investors. During Aldemir Bendine's tenure, from 2009 to 2015, the lender started charging less for loans than its non-state-owned peers as part of a government push for cheaper lending.

Though the benefits of improved governance are pretty much a consensus, not everyone is convinced selling assets is a good thing. Citigroup analysts Jörg Friedemann and Gabriel Nobrega downgraded the bank to neutral last month, saying divestments could impair profitability. They note that since the lender sold a stake in insurance unit BB Seguridade SA, the measure has never returned to the levels of its non-state owned peers.

Bahia Asset Management, one of the Brazilian hedge-fund firms that had most new money coming in in 2018, also has Banco do Brasil as its main bet in stocks. The 17.3 billion reais (S$6.3 billion) firm has been scooping up financial shares, especially of the state-run lender, on hopes loans will grow as the economy recovers, which in turn will boost revenue, at the same time as the new government pushes for improved governance.

"It's also a very cheap stock," said Gustavo Daibert, a partner responsible for equities strategies at the firm said. Banco do Brasil trades at 1.3 times its book value, while rivals Itau Unibanco Holding SA and Banco Bradesco trade at 2.8 and 2.4, respectively. "It may not get to those levels, but getting to something around 1.6 times would already be a significant improvement," he said.

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