By Guillermo Parra-Bernal and Natalia Gómez
SAO PAULO, Oct 29 (Reuters) - Itaú Unibanco Holding SA reported much higher-than-expected third-quarterearnings on Tuesday as efforts to focus on the least risky loansegments helped drive down defaults, cut provisions and boostinterest and fee income.
São Paulo-based Itaú Unibanco, Brazil's largestnon-government lender, said recurring profit, which excludesone-time items, was 4.022 billion reais ($1.84 billion), abovethe average estimate of 3.782 billion reais in a Thomson Reuterspoll of eight analysts.
Compared with the prior quarter, recurring profit was up 11percent, the fastest pace of earnings growth in five quarters.Itaú shares rose as much as 3.7 percent to a more than two-yearhigh of 34.64 reais, their biggest jump in more than two months,on optimism that Brazil's No. 1 bank by market value isregaining luster after performing poorly for several quarters.
The results underscore Itaú's ability to outperform rivalsas years of subpar economic growth and feeble demand for creditamong indebted consumers are hurting the banking sector. Thehigher-than-expected earnings also suggest that the bank isbenefiting from a yearlong policy implemented by Chief ExecutiveOfficer Roberto Setúbal to avoid riskier loans and streamlinecosts, rather than just the effects of a recent uptick ineconomic activity.
"As we've highlighted in numerous times in past research,Itau has dramatically altered its credit risk profile in recentyears," said Saul Martínez, senior financial industry analystwith JPMorgan Securities in New York. "This is contributing tovery good asset quality evolution."
Management plans to discuss third-quarter earnings in aconference call later on Tuesday.
As of Monday, Itaú stock was up 16.4 percent this year,compared with a 9.3 percent decline in Brazil's benchmarkBovespa stock index.
Overall results turned out robust. Controls in sales,general and administrative expenses more than compensated for ajump in payroll costs, and lower charges on bad loans partlyoffset the impact of a higher tax rate.
A gain on return on equity surprised analysts, since thismeasure of how well a bank uses shareholders' money has fallenat rival banks.
Itaú's ROE rose for the fourth consecutive quarter, to 20.9percent, well above the 19.6 percent estimated in the poll. Thiswas the highest level for the ratio since the last quarter of2011.
"Profitability is impressive in a difficult macro backdrop,"Martínez said.
Net interest margin, or the average interest rate charged onloans, taking into account risk-weighted assets, rose for thesecond consecutive quarter, to 6.5 percent, the highest level ina year. The increase helped boost net interest income despiteItaú's cautious approach to loan disbursements.
Net interest income also rose for the second straightquarter, reaching 11.84 billion reais, after lending-relatedrevenue and income from trading financial securities recovered.The indicator rose 2.3 percent on a sequential basis, but fell7.7 percent from a year earlier.
The bank's loan book rose 2.6 percent in aquarter-on-quarter basis to 456.56 billion reais, above the 450billion reais expected in the poll. On an annual basis, loandisbursements grew 9.3 percent, within the bank's target of 8percent to 11 percent credit expansion for this year.
While analysts said the bank was well positioned to meetthat forecast, loan book growth is not coming at the expense ofasset quality.
Loans in arrears for more than 90 days, a benchmark fordelinquencies, fell to 3.9 percent of Itaú Unibanco's loan book.Analysts looked for the default ratio to reach 4.1 percent.
"Itau is delivering good earnings momentum," wrote PhilipFinch, a strategist with UBS Securities in London. "Thefaster-than-expected asset quality improvement provides scopefor provisions to come in below guidance, with furtherearnings-per-share upside potential."
Boosting profit, provisions for bad loans slumped 7.6percent to 4.53 billion reais, still above expectations of 4.25billion reais.
Fee income rose 3.6 percent from the prior quarter to 5.59billion reais, below expectations of 5.69 billion reais. Despitea jump in employees' wages, operating expenses rose less than 1percent to 8.70 billion reais, slightly above estimates in thepoll.
- Financials Industry