Itau Unibanco's (ITUB) Strategic Buyouts Aid Amid High Costs
Itaú Unibanco Holding S.A. ITUB is expected to benefit from its strong network of franchises and strategic buyouts. Growth in commissions and fees, and results from insurance operations are expected to drive top-line growth in the near term. However, stressed macroeconomic conditions and mounting expenses are the major headwinds. Its weak credit quality and intense competition remain concerns.
Itaú Unibanco has a large branch network in geographic areas with high economic activities. The branches are concentrated in Southeast Brazil and as part of its internationalization strategy, the company has a presence in Argentina, Chile, Paraguay and Uruguay. ITUB has also expanded its presence in Colombia and Panama, following the merger between Banco Itaú Chile and CorpBanca in April 2016.
Moreover, ITUB has been fortifying its footprint in Brazil and abroad over the years through its strategic buyouts. In April 2022, the company acquired an 11.4% equity stake in XP Inc. In January 2022, it inked a deal to acquire Ideal Holding and completed the first phase of the deal on Mar 31, 2023.
In March 2020, it completed the first phase of acquiring a 52.96% stake in Zup IT Servicos, though the second and third phases are expected to be completed in the upcoming years. These and past acquisitions are expected to support ITUB's top-line growth in the upcoming quarters.
The company also displayed growth in commissions and fees, and results from insurance operations. It witnessed a compound annual growth rate (CAGR) of 4.6% over the last three years ended 2022. Given the company’s preeminent position in the asset management and investment banking businesses in Latin America, and growth opportunities in the insurance space, the metric is likely to improve in the upcoming period and support revenues. Management expects commissions and fees, and results from insurance operations to be up 7.5-10.5% in 2023.
Further, it has maintained a healthy credit portfolio and witnessed a CAGR of 16.5% over the last three years ended 2022. The uptrend continued in the first quarter of 2023. The company has been trying to reduce its loan portfolio exposure in higher volatile segments. Such efforts are likely to strengthen its credit portfolio in the future. It expects its credit portfolio to grow 6-9% in 2023.
Analysts are also optimistic regarding Itaú Unibanco’s earnings growth potential. The Zacks Consensus Estimate for ITUB’s 2023 earnings has been revised 1.4% upward over the past 60 days. The company currently carries a Zacks Rank #3 (Hold).
Over the past six months, shares of the company have gained 25.5% compared with the industry’s 6.1% growth.
Image Source: Zacks Investment Research
However, ITUB's expenses have remained elevated over the past several years. The metric witnessed a CAGR of 4.3% over the last three years ended 2022, and the trend continued in the first quarter of 2023. Overall expenses are expected to remain elevated because of client centricity and as the company continues to invest in the bank’s digital transformation, which will hinder the bottom-line growth in the near term. Management expects non-interest expenses to grow 5-9% in 2023.
ITUB has exhibited deterioration in its credit quality. The cost of credit charges also witnessed a CAGR of 21.2% over the last three years ended 2022. The uptrend continued in the first quarter of 2023. The worsening economic outlook amid recessionary fears is expected to affect credit quality in the near term. The bank expects costs of credit of R$36.5-R$40.5 billion for 2023.
Itaú Unibanco faces significant competition from other large Brazilian and international banks. Competition has gained momentum as a result of recent consolidations among financial institutions in Brazil and owing to new regulations. This could have detrimental effects on lending volumes and margins. Additionally, any recession in the Brazilian economy and slow growth in Latin America remain concerns as they affect the operational efficiency and profitability of the company.
Stocks Worth Considering
A couple of better-ranked foreign bank stocks worth considering are UBS Group AG UBS and BNP Paribas BNPQY, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for UBS Group AG’s current-year earnings has been revised 60.6% downward over the past 30 days. Its shares have gained 5.5% in the past six months.
Earnings estimates for BNP Paribas for 2023 have been revised 15.3% upward over the past 60 days. In the past six months, BNPQY shares have rallied 6.8%.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
UBS Group AG (UBS) : Free Stock Analysis Report
Itau Unibanco Holding S.A. (ITUB) : Free Stock Analysis Report
BNP Paribas SA (BNPQY) : Free Stock Analysis Report
