We are downgrading our recommendation on
Itau Unibanco Holding S.A.
) based on concerns related to its limited top-line growth as
well as weak asset quality.
Itau Unibanco's recurring earnings in third quarter 2012 of R$3.4
billion ($1.7 billion) were down 4.8% sequentially and 13.4% year
over year. The company experienced revenue headwinds and elevated
level of provisions for loan losses.
Operating revenues at Itau Unibanco in the reported quarter
reflected a fall in the financial margin, impacted by the drop in
the SELIC rate. Moreover, the company experienced reduced growth
of higher risks and spread portfolios.
Though Itau Unibanco's diversified product mix and cost control
efforts are encouraging, we believe that the low interest rate
environment, tepid economic recovery and weak asset quality
remains an impediment to the enhancement of its profitability.
The economy in Brazil, the domestic market of Itau Unibanco, is
recovering at a sluggish pace. While the government is
making efforts to send stimuli though economic policy in order to
revive activity throughout the year, the intensity of such a
revival is usually less than anticipated.
Moreover, with elevated concerns about the foreign scenario and
its possible impact on the domestic activity, the Central Bank of
Brazil continued to reduce the SELIC rate in the first nine
months of 2012. However, this decrease in the SELIC rate
adversely impacted Itau Unibanco's net interest margin, which
fell both sequentially and year over year in the reported quarter
With increased growth in the loan portfolio of lower risk and
spread, the pressure on margins is anticipated to continue.
Hence, with such a backdrop, our concern remains for the overall
growth prospects of Itau Unibanco.
Also, weak asset quality remains a major concern for Itau
Unibanco. Given the company's rapid loan growth over the last
five years and expansion into lower-income markets (such as
individuals and micro, small, and mid-sized companies) we expect
asset quality metrics to remain stretched in the upcoming
Especially, the vehicle loan category is experiencing significant
increase in default levels and it poses a risk as this
constitutes a significant portion of the company's total credit
portfolio. We believe the higher level of provisions would affect
its overall profitability going forward.
Itau Unibanco's shares retain a Zacks #5 Rank, which translates
into a short-term Strong Sell recommendation. However, its
Banco Bradesco S.A.
), retains a Zacks #3 Rank, implying a short term Hold
BANCO BRADESCO (BBD): Free Stock Analysis
BANCO ITAU -ADR (ITUB): Free Stock Analysis
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