Itau Unibanco Holding S.A.
) 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
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.
Itau Unibanco's results reflect the impact of rising default
levels in the Brazilian economy, resulting in credit quality
deterioration. The company recorded higher levels of provision
expenses, and this led to a fall in the company's profitability.
However, on the positive side, the company grew its operating
Operating revenues of R$20.3 billion ($10.4 billion) at Itau
Unibanco were up 1.8% sequentially and 11.7% year over year.
Managerial financial margin advanced 1.2% sequentially and 13.0%
year over year to R$13.5 billion ($6.9 billion). Net interest
margin with clients fell 30 basis points sequentially and 70 bps
year over year to10.9% in the reported quarter, mainly due to the
decrease in the SELIC rate.
Banking Service Fees and Income from Banking Charges moved up
1.5% sequentially and 8.7% year over year to R$5.1 billion ($2.6
billion). Revenue from insurance, pension plans and capitalization
operations grew 0.3% sequentially and 14.6% year over year to R$1.5
billion ($0.7 billion).
Itau Unibanco's non-interest expenses were R$8.4 billion ($4.3
billion) in the reported quarter, up 3.2% sequentially and 5.5%
year over year. Notably, the company experienced a 6.7% increase in
administrative expenses while personnel expenses grew 1.3%.
The rise in administrative expenses stemmed from seasonal
factors and elevated marketing expenses in the quarter, in addition
to the standardization of accounting criteria for depreciation
between group companies. Moreover, increase in expenses with
employee terminations and labor claims primarily related to the
impacts of the restructuring process carried out at the company
contributed to the uptick in personnel costs.
In the second quarter, Itau Unibanco's efficiency ratio reached
45.0%, reflecting an increase of 50 basis points from the prior
Provisions for loan losses at Itau Unibanco decreased 0.7%
sequentially but moved up 17.3% year over year to R$6.0 billion
($3.1 billion). Elevated default levels of the vehicle, personal
loan (primarily instalment payment plans and overdraft accounts) as
well as small and middle market company portfolios contributed to
this high level of provisions.
The nonperforming loan ratio (loan transactions more than 90
days overdue) reached 5.2% in the reported quarter, increasing 10
bps sequentially and 70 bps year over year. This marked the fifth
consecutive quarter of increase in the nonperforming loan
Itau Unibanco's credit portfolio, including endorsements and
sureties, reached R$413.4 billion ($211.2 billion) on June 30,
2012, increasing 3.2% from the prior quarter and 14.8% year over
As of June 30, 2012, Itau Unibanco's total assets amounted to
R$888.8 billion ($454.2 billion), down 0.9% from the end of the
prior quarter. However, total assets were up 12.0% from the
comparable period in the prior year.
However, recurring return on average equity decreased to 19.4%
in the reported quarter from 20.0% in the prior quarter and 20.4%
in the year-ago quarter. The Bank for International Settlements
(BIS) capital ratio was 16.9%, up 80 bps both sequentially and year
Itau Unibanco lowered its credit portfolio growth expectations
for 2012. It now anticipates its credit portfolio to grow 13-15%
excluding vehicles. The company is lowering its credit portfolio
and car financing from R$60 billion by the end of 2011 to R$50
million-R$52 billion in this segment. This compares with the prior
expectations of credit portfolio growth of 14-17%.
Itau Unibanco currently projects a rise in provision expenses
for loan losses in the remaining quarters of 2012. Loan loss
provision expenses are expected to be R$ 6.0 billion-R$ 6.5 billion
in the third quarter and R$ 5.7 billion-R$ 6.2 billion in the
Itau Unibanco expects an increase in banking service fees and
result from insurance, pension plan and capitalization operations
to be 10- 12%. Non-interest expense is likely to grow in the range
of 3.5-6.5%, compared to the prior expectation of 4-8% rise. The
company, however, maintained its prior expectation of a 200-300
basis point improvement in the efficiency ratio.
In July, in an effort to boost its payroll debit loans business,
Itau Unibanco Holding SA, through its subsidiary, Itau Unibanco
S.A. 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%. The majority of 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.
Itau Unibanco's solid business model, this strategic JV, a
diversified product mix, growing service fees, cost control 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.
Moreover, 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
installments directly from the payroll account. Hence, the risk is
low with such loans and chances of default reduce meaningfully.
Itau Unibanco's shares retain a Zacks #3 Rank, which translates
into a short-term Hold recommendation. Its closest peer
Banco De Chile
) also retains a Zacks #3 Rank.
BANCO DE CHILE (BCH): Free Stock Analysis
BANCO ITAU -ADR (ITUB): Free Stock Analysis
To read this article on Zacks.com click here.