Overseas Presence Might Drive Itau Unibanco's Revenues

Sao Paulo-based Itau Unibanco Holding S.A. ITUB is likely to experience higher investment banking revenues outside Brazil; as disclosed by Banco Itau BBA S.A. ("Itau BBA"), the company's investment banking arm, on Wednesday.

Amid a challenging macroeconomic backdrop due to the scandalous Petrobas corruption scam as well as concerns over a credit rating downgrade, business confidence in Brazil is at an all time low. As a result, capital market activity, including share and bond issues, has been largely subdued.

According to data compiled by Bloomberg, the country's investment banking revenues have nosedived 51% so far this year; and is likely to end the year 15–20% below the 2014 tally. Notably, Itau Unibanco forecasts Brazil's real GDP growth to be negative 1.7% in 2015.

However, Itau Unibanco, which derived nearly 30% of total revenue from overseas operations in other Latin American countries, is witnessing increasing demand for banking and financial services, particularly in Mexico.

Itau Unibanco in Focus

As part of its efforts to internationalize the bank, Itau Unibanco recently offered $1.8 billion to win the approval of Chile-based CorpBanca's BCA shareholders for the merger deal inked in Jan 2014. Further, the company looks forward to tap the booming Mexican economy by obtaining a broker-dealer license in July this year. At the same time, it remains focused on building its European franchise as well.

Notably, Mexican economy is predicted to grow 2.7% in 2015, almost 10 times the expected growth rate in the Latin American region as a whole.

Bottom Line

We believe increasing overseas presence can prove to be a vital inflection point for Itau Unibanco, and help it mitigate the current downturn in domestic economy. However, Brazilian economy is expected to improve during the second half of 2015. This is because Petrobas, the major company whose long-delayed earnings acted as a major concern, finally released its results last week. Also, it came up with a new scaled-back investment plan.

Currently, Itau Unibanco carries a Zacks Rank #3 (Hold).

BBVA Banco Francés S.A. BFR and Sumitomo Mitsui Financial Group, Inc. SMFG are better-ranked stocks in the same industry space, both sporting a Zacks Rank #1 (Strong Buy).

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