We are downgrading our recommendation on
Itau Unibanco Holding S.A.
) to Underperform from Neutral based on the deterioration in its
First Quarter Results
Itau Unibanco's first-quarter 2012 net income came in at
R$3.4 billion ($1.9 billion), below the prior-quarter
earnings of R$ 3.7 billion ($2.0 billion) and year-ago earnings of
R$ 3.5 billion ($2.1 billion). Excluding
non-recurring items, Itaú Unibanco reported first-quarter
earnings of R$ 3.5 billion ($2.0 billion), down 5.4% sequentially
and 2.6% year over year.
Results of Itau Unibanco reflect the impact of rising default
levels in the Brazilian economy. The company has increased its
provision expenses that resulted in a fall in its profitability.
However, on the positive side, it grew its operating revenues
modestly and continued to lower its non-interest expenses.
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 quarters.
Notably, in the first quarter of 2012, Itau Unibanco has
experienced a rise in default levels on its loans and its
nonperforming loan ratio continues to show an increasing trend.
Especially, the vehicle loan category is experiencing a significant
increase in default levels and this remains a concern as this
constitutes a significant portion of the company's total credit
As a result, Itau Unibanco's management expects an increase in
provisions in the upcoming quarters (in the first quarter it was
R$6 billion, in the second quarter it is expected in the range of
R$6 billion to R$6.4 billion, and in the third quarter between
R$6.5 billion and R$7.1 billion.) We believe this increase in
provisions would temper its overall profitability going
While Itau Unibanco's solid business model, diversified product
mix, growing service fees, cost controls and expanded credit
portfolio are encouraging, we believe that besides asset quality
concerns, increasing competition and the stressed conditions in the
Brazilian economy pose risks.
Itau Unibanco's shares are maintaining a Zacks #5 Rank, which
translates into a short-term Strong Sell recommendation. However,
its closest peer
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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