Reports from Morgan Stanley and JPMorgan, covered by InfoMoney this Monday (Nov 9), show that fund managers have cut their exposure to banks following the election. With concerns growing over a deterioration in credit quality by 2027, only Itaú (ITUB4) and BTG Pactual (BPAC11) still look defensive. For investors holding Bradesco or Banco do Brasil, it means the market sees no rush to return to those stocks.
Why Is the Market Cutting Bank Exposure After the Election?
The core issue is credit. Both JPMorgan and Morgan Stanley highlight growing concerns over rising defaults in credit cards, personal loans, small and midsize business lending, and private-payroll deducted loans. The reports describe fund managers adopting a more defensive stance amid fiscal uncertainties, economic slowdown risks, and fears of a deteriorating credit cycle by 2027.
The nature of the debate has also shifted. Before the vote, the market wanted to know which stocks would benefit most from the outcome. Now, the discussion centers on which institutions are best positioned to protect their earnings in a harsher economic environment. Investors are increasingly working with the following scenario:
GDP growth near zero and inflation above 6% in 2027projection from investors consulted by Morgan Stanley, which describes the setup as stagflation
The pessimism goes beyond simply trimming positions. Morgan Stanley noted that some investors have eliminated bank stocks from their portfolios entirely, even after recent price drops. Still, JPMorgan does not view the outlook as a disaster, continuing to believe Brazilian banks can grow their earnings in 2027—albeit at a more modest pace—while favoring those with cleaner balance sheets and stronger capital. That leaves a very short list of stocks still holding a place in portfolios.
Which Banks Do Investors Prefer, and Which Are They Avoiding?
Itaú leads, BTG comes in second, and the rest lag behind. The table below combines insights from both bank reports regarding manager positioning with recent revisions from other brokerages over the past few weeks. The ranking remains remarkably consistent across different sources.
| Bank | Manager View (Morgan Stanley and JPMorgan) | Recent Brokerage Revisions |
|---|---|---|
| Itaú (ITUB4) | Consensus: growing earnings, robust dividends, lower default rates than peers | Citi top pick; JPMorgan buy; Safra downgraded to neutral |
| BTG (BPAC11) | Second preference with less consensus; corporate credit remains a concern | Morgan Stanley cut the stock from its model portfolio in late October |
| Nubank (ROXO34) | Divided: market share gains weighed against default risks and slower growth | Safra buy and top pick, with price target cut from $19 to $15 |
| Bradesco (BBDC4) | Heavy skepticism, few bulls even after the sell-off | Neutral at Citi, Safra, and JPMorgan; Itaú BBA cut to market perform |
| Banco do Brasil (BBAS3) | Among the least favored | Sell rating at Citi and Safra |
BTG's position carries a notable contradiction. Managers label it defensive because it generates revenue across multiple business lines (investment banking, asset management, lending). Yet Morgan Stanley itself dropped the stock from its model portfolio—along with B3 and XP—due to its sensitivity to a cooling capital markets environment. In this context, "defensive" simply means "relative to other banks," rather than immune to broader market pressures. To understand why fund managers changed their minds so quickly, it helps to look back at the past month.
What Has Changed Since the October Rally?
Nearly everything. In early October, banks led a broader stock market rally, as we covered in our report on the Ibovespa crossing 206,000 points. After the runoff vote, sentiment reversed sharply. The timeline unfolded as follows:
The slowdown in credit growth is already showing up in the data. According to central bank figures cited by JPMorgan, total credit outstanding reached R$ 7.444 trillion in September, up 8.6% over 12 months, compared to 9.3% in August. Annual credit card expansion slowed to 8%, down from a range of 11% to 13%. Loans past due by more than 90 days held steady at 5% system-wide. The primary concern is the trajectory: the U.S. bank points to deteriorating credit performance specifically within credit cards and private payroll-deducted loans.
Keeping interest rates higher for longer helps bank net interest margins in the short term, but it squeezes borrowers, eventually translating back onto bank balance sheets as provisions for loan losses. This explains the shift away from Bradesco, which in October appeared to be a strong recovery candidate, as we discussed following BBDC4's rally after its capital increase. JPMorgan projects Bradesco's return on equity (ROE) to slip from roughly 15% in 2026 to 14% in 2027, with earnings growing by just 2%. That raises the question: is Itaú, the sector's consensus favorite, worth its current price?
Does Itaú's Dividend Justify Passing on Fixed Income?
On its own, no. The investment case rests on the bank's underlying quality. For this year, JPMorgan estimates Itaú's dividends will total between R$ 30 billion and R$ 35 billion, translating to a dividend yield of 7% to 8%. Its balance sheet reinforces its reputation: in the third quarter, ROE reached 23.6%, while non-performing loans past due over 90 days stood at 2.0%. Rivals lagged significantly behind, with Santander ending the period at an 11.9% ROE and Bradesco at 16.1%. However, Itaú's ROE dipped from 24.3% in the previous quarter, and its earnings growth rate slowed.
Run the math using the current Selic rate. A Brazilian certificate of deposit (CDB) yielding 100% of the CDI benchmark returns close to 13.6% annually. After deducting the 15% withholding tax applicable to maturities over two years, the net yield comes out to roughly 11.6% (our estimate). Itaú's 7% to 8% dividend yield falls about 4 percentage points short of that figure. To make up the difference, investors need to rely on earnings growth and capital appreciation—precisely what the latest reports suggest will become much harder to achieve by 2027. Investors holding Itaú are paying for earnings predictability, and the market agrees. Those holding Bradesco or Banco do Brasil are betting that the bad news is already priced in, though Wall Street houses still see no immediate catalyst for a turnaround.
What about Nubank? Investors remain divided between its potential to capture further market share and the risks of slower growth, rising defaults, and decelerating credit expansion. Its earnings report on November 12 should help clarify that debate. For readers tracking foreign exchange, it is worth noting that Nubank's Brazilian depositary receipts (ROXO34) also fluctuate with the U.S. dollar, which surged following the runoff election, as we explored in our analysis of the dollar and stock market moves after Lula's victory.
Finally, consider B3 and XP. Both stocks struggle in a high-interest-rate environment, but they have regained appeal among fund managers through dividends and share buybacks. These represent yield plays rather than growth stories. So what could change this dynamic in the months ahead?
Key Indicators to Watch Through Early 2027
System-wide default rates: loans past due over 90 days currently sit at 5%. A steady increase driven by credit cards and private-payroll loans would confirm 2027 concerns and weigh more heavily on Bradesco, Banco do Brasil, and Nubank.
BTG (Nov 10) and Nubank (Nov 12) earnings: LSEG consensus estimates point to a R$ 5.2 billion profit for BTG and $1.09 billion for Nubank. Missing expectations out of the gate would damage their defensive status.
Credit growth pace: the banking system's loan portfolio is expanding at 8.6% annually. If growth drops toward the 6% to 7% range, JPMorgan's projected "modest profit growth" turns into stagnation.
Itaú maintaining performance: stable delinquency levels would keep its ROE above 23% and support projected dividend payouts. A sharp spike would break the sector's final remaining consensus.
The takeaways from both reports apply to the entire banking sector. The market isn't telling investors to dump banks entirely; it is telling them to choose institutions capable of weathering a tougher credit environment. For now, that shortlist contains only two names.
