HSBC downgrades Experian on Brazil risk

HSBC downgraded Experian to ‘reduce’ from ‘buy’ and cut the price target to 1,140p from 1,290p.

It noted that Brazil’s leading banks are working to create a Positive credit bureau, a move that creates significant medium-term uncertainty and will impair market expectations of longer-term growth.

“Brazil’s largest commercial banks namely Banco do Brasil, Caixa Economica Federal, Itau, Unibanco, Bradesco and Banco Santander are working to set up a Positive credit bureau that will compete with Experian. These players will have a stake in the bureau,” HSBC said.

It pointed out that several of these banks historically owned Serasa and eventually sold it to Experian.

In 2012, Experian paid $1.5bn for the remaining 29.9% stake of Serasa to the banks.

“We think this was a move by the banks to protect their market shares, avoid a potential increase in customer churn, and as a result keep the spreads in a fairly consolidated banking market such as Brazil.”

HSBC said Experian was likely to argue that building up such a database will take time and in the near term, the move may not impact earnings.

“Further, at the time of the deal in 2012, Experian had signed both Positive and Negative data supply deals with the banks. The question becomes if the business is sustainable in the longer term? After all, the banks represent key data suppliers as well as customers for Experian in Brazil.”

The bank said this market development poses a multiple de-rating threat. .HSBC had previously argued Experian shares could re-rate to 20x price-to-earnings multiple as the company delivered on management's strategy of capital discipline and a more defensive earnings profile than expected.

“However, given that the market is likely to adjust its longer term growth assumptions, we reduce our target multiple to 17x (CY 2016e, last 5 year average).”

At 1017 BST, Experian shares were down 1.8% to 1,233p.