Itau Unibanco Reports Strong 4Q - Analyst Blog

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Brazil's Itau Unibanco Holding S.A. ( ITUB ) reported fourth-quarter 2012 recurring earnings of R$3.5 billion ($1.7 billion), up 2.9% sequentially but down 5.4% year over year. The company continued to experience elevated levels of provisions for loan losses.

Including non-recurring items, Itau Unibanco's fourth-quarter 2012 net income came in at R$3.49 billion ($1.7 billion), slightly above the prior-quarter earnings of R$3.37 billion ($1.7 billion) but below the year-ago earnings of R$3.68 billion ($2.0 billion).

For full year 2012, recurring earnings were R$14.0 billion ($7.2 billion), down 4.1% year over year. Moreover, net income stood at R$13.6 billion ($7.0 billion), down 6.8% year over year.

Operating revenues of R$19.9 billion ($9.7 billion) at Itau Unibanco in the reported quarter were up 2.1% sequentially and 1.5% year over year. The sequential decline primarily reflected a fall in the financial margin, impacted by a drop in the SELIC rate.

Moreover, the company experienced reduced growth of higher risks and spread portfolios. Yet, the declines were partly mitigated by a sequential drop in provisions for loan losses, though non-interest expenses recorded a sequential upsurge.

Managerial financial margin slipped 3.1% sequentially and 4.6% year over year to R$12.4 billion ($6.0 billion). Net interest margin with clients dipped 110 basis points sequentially and 150 basis points year over year to 9.5% in the reported quarter, mainly due to the decrease in the SELIC rate, reduction in cash due to the acquisition of a minority interest in Redecard and higher growth in the loan portfolio of lower risk and spread.

Banking Service Fees and Income from Banking Charges moved up 10% sequentially to R$5.5 billion ($2.7 billion). Moreover, it advanced 7.8% year over year. Revenue from insurance, pension plans and capitalization operations rose 6.7% sequentially and 14.3% year over year to R$1.6 billion ($0.8 billion).

Itau Unibanco's non-interest expenses were R$8.5 billion ($4.1 billion) in the reported quarter, up 4.9% sequentially but down slightly on a year-over-year basis. Notably, the company experienced a 4.7% increase in administrative expenses though personnel expenses dropped 2.2% from the prior quarter.

In the quarter under review, the efficiency ratio reached 46.6%, reflecting an increase of 110 basis points from the prior quarter. The expenses for provisions for loan losses at Itau Unibanco decreased 3.4% sequentially but moved up 3.6% year over year to R$5.7 billion ($2.8 billion).

The nonperforming loan ratio (loan transactions more than 90 days overdue) was 4.8% in the reported quarter, decreasing 30 basis points sequentially and 10 basis points year over year.

Itau Unibanco's credit portfolio, including endorsements and sureties, reached R$426.6 billion ($206.9 billion) as of Dec 31, 2012, inching up 2.2% from the prior quarter and 7.5% from the year-ago period.

As of Dec 31, 2012, Itau Unibanco's total assets amounted to R$1.0 trillion ($0.5 trillion), up 5.6% from the end of the prior quarter and 19.1% from the comparable prior-year period.

Moreover, annualized recurring return on average equity increased to 19.3% in the reported quarter from 18.5% in the prior quarter and 21.8% in the year-ago quarter. The Bank for International Settlements (BIS) capital ratio was 16.7%, down 80 basic points sequentially but up 30 basis points year over year.

Outlook

For the year 2013, the company expects expenses for provision for loan and lease losses to range between R$19 billion ($9.4 billion) and R$22 billion ($10.8 billion). Moreover, non-interest expenses are expected to improve in the range of 4% to 6%, while total credit portfolio to grow in the range of 11% to 14%.

Recent Development

During 2012, Itau Unibanco acquired 49.98% of Redecard through a Tender Offer completing the purchase of 100% shares. The total amount invested in the acquisition of Redecard's outstanding shares was R$11.75 billion.

In Oct 2012, Itau Unibanco sold its remaining stake of 601,403 shares of Serasa to Experian. Therefore, the company experienced an income before taxes of R$1.5 billion in the fourth quarter of 2012.

Moreover, through the association with Banco BMG S.A., established on Jul 9, 2012, Itau Unibanco targets to achieve a leading position in the offer, distribution and sale of payroll loans in Brazil. The company expects more significant results from this deal in the first quarter of 2013.

In Conclusion

Though Itau Unibanco's diversified product mix, growing service fees, cost control and expanded credit portfolio are encouraging, we believe that weak asset quality remains a major concern for Itau Unibanco. Given the company's rapid loan growth over the last six years and expansion into lower-income markets, we expect asset quality metrics to remain stretched in the upcoming quarters.

In addition to asset quality concerns, increasing competition and the stressed conditions in the Brazilian economy pose risks.

Itau Unibanco currently carries a Zacks Rank #3 (Hold). Among other foreign banks, UBS AG ( UBS ), Westpac Banking Corporation ( WBK ) and Credit Suisse Group ( CS ) carry a Zacks Rank #2 (Buy).



CREDIT SUISSE (CS): Free Stock Analysis Report

BANCO ITAU -ADR (ITUB): Free Stock Analysis Report

UBS AG (UBS): Free Stock Analysis Report

WESTPAC BK ADR (WBK): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: BIS , CS , ITUB , UBS , WBK

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