Itau Unibanco Posts Impressive Q1 Earnings - Analyst Blog

Brazil's Itau Unibanco Holding S.A. ITUB reported first-quarter 2014 recurring earnings of R$4.5 billion ($1.90 billion), up 29% year over year. Including non-recurring items, net income came in at R$4.4 billion ($1.86 billion), up 25.7% 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 headwind.

Performance in Detail

Operating revenues of R$20.7 billion ($8.7 billion) at Itau Unibanco in the reported quarter climbed 10% on a year-over-year basis. Managerial financial margin increased 8.7% year over year to R$12.5 billion ($5.3 billion). Annualized net interest margin with clients decreased 20 basis points year over year to 8.9% in the reported quarter.

Banking Service Fees and Income from Banking Charges moved up 18.3% year over year to R$6.1 billion ($2.6 billion) in the first quarter. Revenues from insurance, pension plans and capitalization operations declined 2.3% from the prior-year quarter to R$2.1 billion ($0.9 billion).

Itau Unibanco's non-interest expenses came in at R$9.0 billion ($3.8 billion), up 9.2% year over year. However, expenses for provisions for loan and lease losses at Itau Unibanco decreased 13.9% on a year-over-year basis to R$4.3 billion ($1.8 billion).

In the quarter under review, the efficiency ratio reached 47.7%, reflecting a decrease of 30 basis points from the prior-year quarter. A decrease in the efficiency ratio reflects an upswing in profitability.

The nonperforming loan ratio (loan transactions more than 90 days overdue) was 3.5% in the reported quarter, decreasing 100 basis points year over year. Itau Unibanco's credit portfolio, including endorsements and sureties, reached R$480.1 billion ($202.8 billion) as of Mar 31, 2014, up 10.6% year over year.

As of Mar 31, 2014, Itau Unibanco's total assets amounted to R$1.11 trillion ($0.49 trillion), up 7.6% from the end of the prior-year quarter. Assets under administration stood at R$626.7 billion ($276.6 billion), up 7.7% year over year.

Moreover, annualized recurring return on average equity increased to 22.6% in the reported quarter from 19.1% in the prior-year quarter. As of Mar 31, 2014, BIS ratio reached 15.6%, down 330 basis points year over year.

Outlook

For the year 2014, the company expects loan loss provision net of recovery to range from R$13 billion ($5.6 billion) – R$15 billion ($6.4 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.

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 with Chile-based bank CorpBanca BCA in a stock-plus-cash offer 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 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 #2 (Buy). Other better-ranked foreign banks include Banco Macro S.A. BMA, Grupo Financiero Galicia S.A. GGAL and ICICI Bank Ltd. IBN. All these 3 carry a Zacks Rank #1 (Strong Buy).