We are upgrading our recommendation on Brazil's
Itau Unibanco Holding S.A.
) to Neutral from Underperform, based on its efforts to diversify
and reduce its risk profile.
Second Quarter Results
Itau Unibanco's second-quarter 2012 net income came in at R$3.3
billion ($1.7 billion), below the prior-quarter earnings of R$3.4
billion ($1.9 billion) and year-ago earnings of R$3.6 billion ($2.3
billion). The decline stemmed from elevated levels of provisions
for loan losses.
However, excluding non-recurring items, Itaú Unibanco reported
second-quarter earnings of R$3.6 billion ($1.8 billion), up 1.2%
sequentially and 8.1% year over year on higher operating revenues.
The company's results reflect the impact of rising default levels
in the Brazilian economy, resulting in credit quality
Itau Unibanco's solid business model, a diversified product mix,
growing service fees and expanded credit portfolio are impressive.
As a premier banking brand in Brazil, Itau Unibanco Holding has a
large branch network in geographic areas where economic activities
However, 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 and loan loss provisions to remain at
elevated levels in the upcoming quarters
The vehicle loan category is experiencing a significant increase
in default levels, and this remains a concern as it constitutes a
significant portion of the company's total credit portfolio.
To address such issues, Itau Unibanco is lowering its credit
portfolio of car financing from R$60 billion by the end of 2011 to
R$50 million-R$52 billion in 2012. Moreover, the company's move to
boost the low risk payroll deductible loans business across the
country is a strategic fit.
Recently, Itau Unibanco Holding SA, through its subsidiary, Itau
Unibanco S.A. entered into a joint venture (JV) agreement with
Banco BMG S.A. In this JV, Itau Unibanco will have a 70%
controlling stake while BMG will hold the remaining 30%.
The company expects its JV to originate a total payroll loan
portfolio of R$12 billion in the next two years. The deal would
also help it offer its banking products to approximately 3 million
Notably, payroll deductible loans refer to loans that 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
authority to deduct the monthly installments directly from the
payroll account; hence, such loans bear low risk and the chances of
default is also less.
However, besides asset quality concerns, increasing competition
and the stressed conditions in the Brazilian economy pose as risks.
Hence, we find the risk/reward profile for Itau Unibanco somewhat
balanced and hence have upgraded its long term recommendation to
Itau Unibanco's shares retain a Zacks #4 Rank, which translates
into a short-term Sell recommendation. Its closest peer
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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