Shares of Itau Unibanco (
) are down over 5% this morning as traders digest news that the
quality of Brazil's leading investment bank's balance sheet is
indeed deteriorating, taking profits down with it.
[caption id="attachment_57259" align="alignright" width="300"
caption="The Central Bank of Brazil"]
ITUB dropped as far as $15.71 today after its quarterly earnings
call set off already smoldering disappointments from analysts and
The problem? ITUB is setting aside an extra $590 million this
quarter to cover bad loans, which have soared to a dangerous 5.1%
of its overall loan portfolio.
That money would ordinarily have been booked as profit. If not
for the need to allocate it to loss provisions instead, ITUB's
earnings -- released yesterday -- would have actually beaten
With that narrow miss in the background, traders were listening
to today's call for guidance on whether this is a short-term glitch
in Itau underwriting or the first sign of a more serious erosion in
Brazilian credit quality.
What they got, unfortunately, was the worst-case scenario.
While ITUB believes the third quarter will be significantly
better in terms of borrower defaults, it still expects to set aside
6% more money to cover losses than it did for the first
In other words, the "new normal" will not be as bad as what the
bank is currently experiencing, but the relatively strong credit
conditions Itau and other Brazilian banks enjoyed last year are not
coming back soon.
With the government
into accepting lower-quality borrowers in order to drum up consumer
spending, it isn't likely that stronger internal controls can make
the problem go away.
As Itau compliance chief Rogerio Calderon said on the call, "it
is hard for us right now to foresee an end to this situation."
As it is, defaults at ITUB are running at their highest levels
since late 2009, when the country was still recovering from the
global credit crunch.
Shares of rivals Bradesco (
), Santander Brasil (
) and Banco Brasil (
) are also down this morning in sympathy.
ITUB is now testing its lowest levels since October. The next
support is at $14.50.