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Two Brazilian Banks to Keep on Your Watch List

Despite potential short-term pain, Bradesco and Itau Unibanco show long-term promise.

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Amid a global crisis that stemmed from the financial sector, we see strength in two Latin American banks:  Banco Bradesco (BBD) and  Itau Unibanco (ITUB). Apart from their own structural sturdiness, we think Brazil's relatively resilient economy will help sustain these two banking giants' long-term profitability.

To find the foreign financial services firms with the best prospects among our coverage list, we set up a simple screen consisting of basic criteria using Morningstar's  Premium Stock Screener tool. Our selection for this screen focuses on profitability (giving some leeway for the most recent periods) and competitive strength, or our economic moat.  Click here to see the results.

We think that after 15 years of progressive reforms, Brazil's economy is more mature and stable than other emerging-market economies and that social unrest is far less likely in this Southern country than in many others. Nonetheless, nobody will deny that this will be a particularly difficult year for Brazil's economy. Shrinking exports and lower spending by individuals will weigh heavily at least for the rest of the year, in our opinion. However, inflation is not shooting up through the roof as in the past, a condition that has allowed the central bank to cut interest rates to counter the downward cycle (see Chart 1).

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Maclovio Pina does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.