Itau Unibanco (ITUB) Q4 Earnings Rise on Top-Line Growth

Driven by strong top-line performance, Brazil's Itau Unibanco Holding S.A. ITUB reported fourth-quarter 2015 recurring earnings of R$5.8 billion ($1.5 billion), up 1.8% year over year. Including non-recurring items, net income came in at R$5.7 billion ($1.5 billion), up 3.6% year over year.

Results reflected elevated operating revenues, increased managerial financial margin along with higher revenues from insurance, pension plans and capitalization operations. However, increase in non-interest expenses was the headwind.

For full-year 2015, recurring net income came in at R$23.8 billion ($7.25 billion), up 15.5% year over year. Including non-recurring items, net income was R$23.4 billion ($7.13 billion), up 15.8% year over year.

Performance in Detail

Operating revenues of R$26.7 billion ($6.9 billion) at Itau Unibanco in the reported quarter climbed 12.2% on a year-over-year basis. Managerial financial margin increased 14.3% year over year to R$16.7 billion ($4.3 billion). Annualized net interest margin with clients came in at 10.9%, up from 10.4% in the prior-year quarter.

Revenues from insurance, pension plans and capitalization operations increased 2.1% from the prior-year quarter to R$2.3 billion ($0.60 billion).

Itau Unibanco's non-interest expenses came in at R$11.1 billion ($2.9 billion), up 9.9% year over year. Moreover, expenses for provision for loan and lease losses at Itau Unibanco increased 32.6% on a year-over-year basis to R$6.1 billion ($1.6 billion).

In the quarter under review, the efficiency ratio reached 45.5%, reflecting a decrease of 100 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, increasing 40 basis points year over year. Itau Unibanco's credit portfolio, including endorsements and sureties, reached R$548.1 billion ($142.3 billion) as of Dec 31, 2015, up 4.3% year over year.

As of Dec 31, 2015, Itau Unibanco's total assets amounted to R$1.36 trillion ($0.35 trillion), up 12.4% from the end of the prior-year quarter. Assets under administration stood at R$765.1 billion ($195.9 billion), up 14.5% year over year.

Yet, annualized recurring return on average equity decreased to 22.3% in the reported quarter from 24.7% in the prior-year quarter. As of Dec 31, 2015, estimated BIS ratio reached 17.8%, up 90 basis points year over year.

Outlook

For the year 2016, the company expects loan loss provision net of recovery in the range of R$22 billion – R$25 billion. Moreover, non-interest expenses are expected to increase in the range of 5% – 7.5%.

Moreover, the total credit portfolio is expected to increase in the range of 0.5% – 4.5%, while commissions and fees are expected to rise in the range of 6% – 9%. Managerial financial margin with clients is expected to grow in the range of 2%–5%.

In Conclusion

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.

Though Itau Unibanco's diversified product mix, increasing operating revenues and expanded credit portfolio are encouraging, increasing competition, elevated expenses and the stressed conditions in the Brazilian economy pose risks.

Itau Unibanco currently carries a Zacks Rank #5 (Strong Sell).

Competitive Landscape

Including certain one-time expenses, Deutsche Bank AG DB reported net loss of €2.1 billion ($2.3 billion) in the fourth quarter of 2015 that compared unfavorably with net income of €441 million ($550.5 million) in the prior-year quarter. Loss before income taxes came in at €2.7 billion ($3.0 billion), which compared unfavorably with income of €253 million ($315.8 million) in the prior-year quarter.

Mitsubishi UFJ Financial Group Inc. MTU reported profits attributable to owners of parent of ¥852.3 billion ($7.0 billion) for the first nine months (ended Dec 31) of fiscal year ended Mar 31, 2016, down 8.1% year over year. For the period under review, an increase in general and administrative (G&A) expenses and decreased gross profits negatively impacted the results. However, a rise in net interest income and fee revenues served as the tailwinds.

HDFC Bank Ltd.'s HDB third-quarter fiscal 2016 (ended Dec 31) net profit was INR33.57 billion ($0.51 billion), up 20.1% year over year. HDFC Bank's quarterly results continued to reflect top-line growth with both net interest income and non-interest revenues witnessing improvement. However, elevated operating expenses as well as provisions marginally weighed on the results.

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