Itau Unibanco (ITUB) Q2 Earnings Jump on High Revenues

Driven by strong top-line performance, Brazil's Itau Unibanco Holding S.A. ITUB reported first-quarter 2015 recurring earnings of R$6.1 billion ($2.0 billion), up 22% year over year. Including non-recurring items, net income came in at R$6.0 billion ($1.95 billion), up 22.4% year over year.

The year-over-year rise was primarily attributed to increased operating revenues, elevated 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$25.3 billion ($8.2 billion) at Itau Unibanco in the reported quarter climbed 14.5% on a year-over-year basis. Managerial financial margin increased 19.1% year over year to R$16.2 billion ($5.3 billion). Annualized net interest margin with clients came in at 9.6%, up from 9.4% in the prior-year quarter.

Banking Service Fees and Income from Banking Charges moved up 9% year over year to R$6.9 billion ($2.2 billion) in the first quarter. Revenues from insurance, pension plans and capitalization operations inched up slightly from the prior-year quarter to R$2.2 billion ($0.72 billion).

Itau Unibanco's non-interest expenses came in at R$10.0 billion ($3.25 billion), up 4.2% year over year. Moreover, expenses for provision for loan and lease losses at Itau Unibanco increased 23.6% on a year-over-year basis to R$5.5 billion ($1.8 billion).

In the quarter under review, the efficiency ratio reached 42.9%, reflecting a decrease of 460 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 3.3% in the reported quarter, decreasing 10 basis points year over year. Itau Unibanco's credit portfolio, including endorsements and sureties, reached R$531.7 billion ($168.3 billion) as of Jun 30, 2015, up 9% year over year.

As of Jun 30, 2015, Itau Unibanco's total assets amounted to R$1.23 trillion ($0.39 trillion), up 10.8% from the end of the prior-year quarter. Assets under administration stood at R$709.1 billion ($224.5 billion), up 11.7% year over year.

Moreover, annualized recurring return on average equity increased to 24.8% in the reported quarter from 23.7% in the prior-year quarter. As of Jun 30, 2015, estimated BIS ratio reached 17.2%, up 120 basis points year over year.

Outlook

For the year 2015, the company expects loan loss provision net of recovery in the range of R$15 billion – R$18 billion. Moreover, non-interest expenses are expected to increase in the range of 7% – 10%.

Moreover, the total credit portfolio is expected to increase in the range of 3% – 7%, while banking service fees and revenue of insurance, pension plan and capitalization are expected to rise in the range of 9.5% – 11.5%. Managerial financial margin is expected to grow in the range of 14.5%–17.5%.

In Conclusion

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

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

Competitive Landscape

The Royal Bank of Scotland Group plc RBS reported second-quarter 2015 earnings attributable to shareholders of £293 million ($448.6 million) compared with £230 million ($387.3 million) in the prior-year comparable period. Results were driven by profit from discontinued operations, reflecting an upswing in the market value of Citizens' shares and elevated impairment releases. However, higher restructuring, litigation and conduct costs and reduced non-interest income were on the downside.

Deutsche Bank AG DB reported net income of €818 million ($904.5 million) in the second quarter of 2015, rising over twofold from the prior-year quarter. The bank reported profit before income taxes of €1.2 billion ($1.3 billion), up 34% year over year. Lower provision for credit losses along with higher revenues were the positives. However, higher non-interest expenses due to litigation provisions were a concern.

Mitsubishi UFJ Financial Group Inc. MTU reported net income of ¥277.7 billion ($2.28 billion) for the first quarter (ended Jun 30) of fiscal year ended Mar 31, 2016, up 15.5% year over year. For the quarter, rise in net interest income and fee revenues were the tailwinds. Further, increased gross profits along with strong loan and deposit growth were the positives. However, increase in G&A expenses negatively impacted the results.

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