By Guillermo Parra-Bernal

By Guillermo Parra-Bernal

SAO PAULO (Reuters) - Investors have been puzzled by a 170 percent rally in shares of Banco Santander Brasil SA over the past year that made it Latin America's most expensive bank. Now, some are gearing up to bet against a stock whose value seems unrealistic in comparison to larger peers.

None of the 19 analysts covering Santander Brasil recommend the stock as a "buy," Thomson Reuters data showed. Investors shorting Santander Brasil pay about 21 times what they do to bet against larger rivals Itaú Unibanco Holding SA or Banco Bradesco SA, according to data from financial bourse BM&FBovespa SA.

Still, the bank's tiny free float, a large base of passive shareholders such as exchange-traded funds, and efforts by the bank's treasury to defend the stock have so far hindered short-sellers, investors such as Gustavo Gato of Explorador Capital Management LLC said.


Shares in the sector are up 80 percent on average in the past year - half Santander Brasil's gain - amid hopes that the harshest recession on record is drawing to an end. As Brazil's largest foreign lender prepares to unveil fourth-quarter results on Thursday, investors are looking at how to take advantage of those price disparities.

"Markets are struggling to figure out what is supporting Santander Brasil's valuations," said Gato, who helps oversee $400 million in Latin American equities for Explorador in São Paulo.

With Santander Brazil's return on equity trailing equity fundraising costs, investors pay about 2 times book value to buy stock in the local subsidiary of Spain's Banco Santander SA <SAN.MC>. They could pay less for Itaú <ITUB4.SA> and Bradesco <BBDC4.SA>, which trade between 1.8 times and 2 times book value and have consistently delivered return on equity almost twice those of Santander Brasil's.

"Santander Brasil has been printing good operational improvement in most metrics in the past couple of years but its valuation is difficult to justify," said Domingos Falavina, a banking industry analyst with JPMorgan Securities.

Even if Chief Executive Officer Sérgio Rial presents outstanding quarterly results, putting Santander Brasil's ROE closer to a 17 percent target for next year, numbers "are unlikely to perform a miracle and support current valuations," said Adeodato Volpi Netto, head of research at São Paulo-based Eleven Financial.

Units of Santander Brasil, a blend of the bank's common and preferred shares, shed 1.6 percent to 31.24 reais on Tuesday, paring back their year-to-date gains to 10.2 percent. They touched about 11.6 reais in Sept. 2015, when Rial was appointed CEO.


The bank's investor relations division declined to comment, citing a mandatory quiet period ahead of the release of quarterly results.

Santander Brasil kicks off the earnings reporting season for Brazil's private-sector banks on Thursday. Bradesco is slated to report results on Feb. 2 and Itaú will do so on Feb. 7.

Analysts expect fourth-quarter net income before one-time items of 1.613 billion reais ($509 million) at Santander Brasil, unchanged on a year-on-year basis but 13 percent down from the third quarter, according to consensus estimates compiled by Thomson Reuters.

Return on equity is forecast at 11.9 percent, below the 13.1 percent ROE posted the prior quarter, the estimates showed.

Some analysts, including Banco Bradesco BBI's Rafael Frade, have said Rial has driven a successful turnaround since he took the helm in Sept. 2015.

A seasoned dealmaker who had started earlier that year as chairman of Santander Brasil before switching to the executive role, Rial has focused on improving customer experience and making sure loans and financial services are priced correctly.

Santander Brasil has raised credit card, account management and payment settlement fees faster than rivals, while tightening expenses. Under Rial, it has grown successfully in profitable areas such as investment banking and card payment processing.

Still, higher taxes risk biting into part of Santander Brasil's recent profit improvement, Eleven's Volpi said. Insufficient scale may prevent it from taking on rivals more assertively, Explorador's Gato added.

Deploying capital for acquisitions seems tougher now that larger rivals have gobbled up Brazil's last available takeover targets, he said. That, in the long run, could hinder Rial's ability to cut the gap with Itaú and Brasdesco, both said.

(Additional reporting by Bruno Federowski in São Paulo; Editing by Chizu Nomiyama)

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