Brazil’s Itau Unibanco Holding S.A. (NYSE:ITUB - News) has reported second quarter 2011 net income of R$3.60 billion ($2.3 billion), which surpassed R$3.53 billion earned in the prior quarter and R$3.17 billion in the year-ago quarter. However, excluding non-recurring items, Itau Unibanco reported second quarter 2011 earnings of R$ 3.317 billion, down 8.8% sequentially but up 0.6% year over year.
The sequential decrease reflects increased provisions for loan losses and higher expenses. This was partially offset by an improvement in both interest and fee income.
Itau Unibanco’s net interest income increased 4.3% sequentially and 14.1% year over year to R$ 11.249 billion. The sequential improvement reflects an increase in its credit portfolio. Fee income advanced 4.6% sequentially and 11.1% year over year to R$4.672 billion.
Itau Unibanco’s non-interest expenses were R$7.971 billion in the reported quarter, up 3.7% sequentially and 11.7% year over year. The sequential growth primarily reflects an increase in administrative expenses, mostly in third-party services, facilities, data processing and telecommunication expenses.
Efficiency ratio deteriorated to 48.3% in the reported quarter from 47.8% in the prior quarter and 48.0% in the year-ago quarter.
Expenses for provision for loan and lease losses at Itau Unibanco were R$5.107 billion, reflecting an increase of 16.6% from the prior quarter and 29.1% from the year-ago period. The sequential raise was driven by an increase in non-performing loans in the over 90 days delinquency range that was experienced in the portfolio of very small and small companies, in particular.
The overall delinquency level (credit transactions more than 90 days overdue) was 4.5% in June 2011, up 30 basis points (bps) from the prior period but down 10 bps year over year.
Itau Unibanco’s credit portfolio, including endorsements and sureties, reached R$360.107 billion on June 30, 2011, increasing 4.4% and 22.3% from the prior quarter and the same date of the prior year, respectively.
Itau Unibanco’s consolidated assets totaled R$ 792.5 billion, up 1.8% sequentially and 22.4% year over year. However, return on average equity fell to 22.2% in the reported quarter from 22.7% in the prior quarter and 23.4% in the year-ago quarter. The BIS capital ratio was 16.1%, flat sequentially and up from 15.7% in the year-ago quarter.
In the domestic market of Itau Unibanco, the economic activity continued to slow down. The expectations of consumers and business people remain less optimistic. Discretionary government spending has shown a slowdown, contributing to an activity scenario that is less dynamic. Growth in industrial production has slowed compared to the prior-year period.
The credit market showed a modest growth over the first half of 2011, with limited recovery after the macroprudential measures were adopted by the government at the end of 2010. The company expects the credit growth to remain modest in the second half, with the slowdown of the economy.
Going forward, we believe that its solid franchise and diversified product mix would support its earnings. However, the slowdown in the economy and the credit quality concerns remain the downsides.
Itau Unibanco’s shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation. However, its closest peer Banco De Chile (NYSE:BCH - News) retains a Zacks #2 Rank, implying a short-term Buy recommendation.
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