Itau Unibanco Stays Neutral


We have reiterated our Neutral recommendation on Itau Unibanco Holding S.A. (ITUB) following a detailed analysis of the company’s fourth quarter and full year 2011 earnings results in light of the current economic environment.

Itau Unibanco reported fourth quarter adjusted earnings of R$3.75 billion ($2.1 billion), down 4.9% sequentially but up 10.2% year over year. While Itau Unibanco experienced an increase in its net interest and fee income, a rise in expenses offset that. Additionally, credit quality also deteriorated in the quarter.

For full year 2011, Itau Unibanco reported earnings of R$14.6 billion ($8.8 billion), up 12.4% year over year. This was driven by improvements of 14.5% in net interest income, 11.4% in fee income and 29.3% in results from insurance, pension plans and capitalization.

Itau Unibanco also announced that it will pay up to R$11.77 billion ($6.8 billion) for the outstanding 336.4 million common shares, equivalent to 49.98% of Redecard's total share capital, after the company acquires the latter. Redecard is a credit-card networking services provider. The buyout is anticipated to have no impact on the company’s cash flow.

Going forward, we believe that Itau Unibanco’s solid business model, diversified product mix, growing service fees, cost controls and expanded credit portfolio would support its earnings.

However, Itau Unibanco’s stressed asset quality, increasing competition and the volatility of the Brazilian economy pose as risks. Therefore, we have reiterated our Neutral recommendation on the stock.

Itau Unibanco’s shares are maintaining a Zacks #2 Rank, which translates into a short-term Buy recommendation. However, its closest peer Banco De Chile (BCH) retains a Zacks #4 Rank, implying a short-term Sell recommendation.

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