In an effort to boost its payroll debit loans business, Brazil's
Itau Unibanco Holding SA
), through its subsidiary, Itau Unibanco S.A. has entered into a
joint venture (JV) agreement with Banco BMG S.A. The JV will be
called Banco Itau BMG Consignado S.A. and will offer payroll
deductible loans across the country.
Itau Unibanco will have a 70% controlling stake in this JV while
BMG will hold the remaining 30%. A majority of the members of the
Board of the JV would be appointed by Itau. The JV will commence
its business with an initial capital stock of R$ 1 billion ($492
Moreover, the agreement terms entails Itau Unibanco to offer up
to R$300 million per month as funding for BMG's Payroll Debit Loan
operation for a term of five years.
Itau Unibanco aspires to be a leader in the payroll loans
industry and expects its JV to originate a total payroll loan
portfolio of R$12 billion in the next two years. The deal would
also help the company in offering its banking products to
approximately 3 million new customers.
We believe that for Itau Unibanco, which is experiencing a rise
in default rates on its loans, the move to boost the low risk
payroll deductible loans business is a strategic fit. Notably,
payroll deductible loans refer to loans which are being offered to
clients who have a payroll account, where their salaries are
deposited in the bank offering the loan.
The bank has the authoritative power to deduct the monthly
instalments directly from the payroll account. Hence, the risk is
low with such loans and chances of default reduce meaningfully.
Itau Unibanco's solid business model, this strategic JV, a
diversified product mix, growing service fees, cost controls and
expanded credit portfolio are encouraging. But we believe that
besides asset quality concerns, increasing competition and the
stressed conditions in the Brazilian economy pose risks.
Itau Unibanco's shares retain a Zacks #5 Rank, which translates
into a short-term Strong Sell recommendation. However, its closest
Banco De Chile
) retains a Zacks #3 Rank, implying a short-term Hold
BANCO DE CHILE (BCH): Free Stock Analysis
BANCO ITAU -ADR (ITUB): Free Stock Analysis
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