Itau Unibanco's Earnings Growth Continues

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Brazil’s Itau Unibanco Holding S.A. (ITUB) reported fourth-quarter 2013 recurring earnings of R$4.7 billion ($2.1 billion), up 34.3% year over year. Including non-recurring items, net income came in at R$4.6 billion ($2.0 billion), up 31.4% year over year.

The year-over-year increase was primarily attributed to reduced expenses for provision of loan and lease losses and increased managerial financial margin along with higher banking service fees and income from banking charges. However, elevated non-interest expenses were the headwinds.

For full-year 2013, recurring net income came in at R$15.8 billion ($7.3 billion), up 12.9% year over year. Including non-recurring items, net income was R$15.7 billion ($7.3 billion), up 15.4% year over year.

Performance in Detail

Operating revenues of R$20.9 billion ($9.2 billion) at Itau Unibanco in the reported quarter climbed 5% on a year-over-year basis. Managerial financial margin inched up 0.8% year over year to R$12.7 billion ($5.6 billion). Annualized net interest margin with clients decreased 70 basis points year over year to 9.1% in the reported quarter.

Banking Service Fees and Income from Banking Charges moved up 17.6% year over year to R$6.0 billion ($2.6 billion) in the final quarter. Revenues from insurance, pension plans and capitalization operations declined 4.5% from the prior-year quarter to R$2.1 billion ($0.9 billion).

Itau Unibanco’s non-interest expenses came in at R$9.4 billion ($4.1 billion), up 10.6% year over year. However, expenses for provisions for loan and lease losses at Itau Unibanco decreased 26.3% on a year-over-year basis to R$4.2 billion ($1.8 billion).

In the quarter under review, the efficiency ratio reached 48.7%, reflecting an increase of 210 basis points from the prior-year quarter. An increase in the efficiency ratio reflects a downturn in profitability.

The nonperforming loan ratio (loan transactions more than 90 days overdue) was 3.7% in the reported quarter, decreasing 110 basis points year over year. Moreover, nonperforming loans declined 14.2% year over year to R$15.1 billion ($6.6 billion).

Itau Unibanco’s credit portfolio, including endorsements and sureties, reached R$483.4 billion ($204.6 billion) as of Dec 31, 2013, up 13.3% from the prior year.

As of Dec 31, 2013, Itau Unibanco’s total assets amounted to R$1.11 trillion ($0.47 trillion), up 9.0% from the end of the prior year. Assets under administration stood at R$628.3 billion ($265.9 billion), up 11.8% year over year.

Moreover, annualized recurring return on average equity increased to 23.9% in the reported quarter from 19.3% in the prior-year quarter.

Outlook

For the year 2014, the company expects loan loss provision net of recovery to range from R$13 billion ($5.4 billion) – R$15 billion ($6.3 billion). Moreover, non-interest expenses are expected to increase in the range of 10.5% – 12.5%, while excluding the impact of Credicard, the range stands at 5.5% – 7.5%.

Moreover, total credit portfolio is expected to increase in the range of 10% – 13%, while banking service fees and revenue of insurance, pension plan and capitalization are expected to rise in the range of 12% – 14%. Efficiency ratio is expected to improve 50 to 175 basis points.

Itau Unibanco & CorpBanca Merger

Recently, Itau Unibanco inked a deal to acquire 33.58% controlling interest in Chile-based bank CorpBanca (BCA) in a stock-plus-cash offer. The deal is expected to close by the end of 2014, subject to approval by shareholders along with regulatory approvals in Brazil, Chile, Colombia, Panama and the United States.

According to the terms of the deal, Itau Unibanco will add cash amounting to $652 million in its Chile unit, Banco Itaú Chile, which will subsequently merge with CorpBanca and its major stakeholder Corp Group. Further, CorpBanca will issue 172 billion shares as part of this deal. Also, Itau Unibanco will control units of both companies in Columbia.

The deal is expected to drive pre-tax cost savings of around $100 million per year for a period of three years. The one-time integration cost is projected at around $85 million. In addition to the cost savings, substantial growth in revenues is expected from this merger, benefiting both the companies.

In Conclusion

Itau Unibanco’s diversified product mix, increasing operating revenues and expanded credit portfolio are encouraging. Additionally, we believe that the improving asset quality remains a positive catalyst for Itau Unibanco.

Moreover, the recent merger will help enhance Itau Unibanco’s footprint in Chile as it penetrated the market back in 2007 through the acquisition of the operations of BankBoston. Later in 2011, it also acquired HSBC’s premium banking operations. Further, this will aid the company to gain a greater market share in Latin America with its entry into Peru and Central America, apart from its presence in Chile, Columbia, Argentina, Paraguay and Uruguay.

However, increasing competition, elevated expenses and the stressed conditions in the Brazilian economy pose risks.

Itau Unibanco currently carries a Zacks Rank #4 (Sell). Some better-ranked foreign banks that are worth considering include Shinhan Financial Group Company Limited (SHG) with a Zacks Rank #1 (Strong Buy), while Deutsche Bank AG (DB) and Barclays PLC (BCS) carry a Zacks Rank #2 (Buy).

Read the Full Research Report on BCS
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Read the Full Research Report on ITUB
Read the Full Research Report on SHG


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