Balanced View on Itau Unibanco - Analyst Blog

On Jun 16, 2014, we issued an updated research report on Itau Unibanco Holding S.A. ITUB. This foreign bank recently reported impressive first-quarter 2014 results. Results were primarily aided by increased managerial financial margin along with higher banking service fees and income from banking charges. However, elevated non-interest expenses were the headwind. Though the company shows stability in its fundamentals, we remain cautious due to the current economic uncertainty across the industry.

Itau Unibanco 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. However, with continuously rising general and administrative expenses, the company is exposed to operational risks. Expenses rose 8.6% year over year in first-quarter 2014.

The economy in Brazil, the domestic market of Itau Unibanco, is recovering at a sluggish pace. Based on the stable economic environment in 2013, the Brazilian GDP increased to 2.3% from 1.0% in 2012. Moreover, the government is making efforts to send stimuli through the economic policy in order to revive activity throughout 2014. Such progress will aid in improving the business prospects of the company.

Itau Unibanco enjoys a large deposit base, reflecting its strong funding position. During first-quarter 2014, deposits increased 16.6% and loans surged 9.9% year over year.

Itau Unibanco is moving ahead with its strategy to internationalize the bank in Latin America, and became the leader in customer satisfaction. In Jan 2014, the company announced the merger of its Chilean operation with CorpBanca, awaiting regulatory approvals. This operation will make Itau Unibanco the fourth largest bank in Chile and the fifth largest in Colombia. Such moves will definitely boost the company's profitability.

Despite strong fundamentals, we believe there are certain issues that may create pressure on the company's financials in the near term. These include sluggish economic growth, regulatory pressure along with elevated competition and litigation issues.

The Zacks Consensus Estimate for 2014 increased 3.6% to $1.43 per share, over the last 60 days. However, for 2015, the Zacks Consensus Estimate declined 1.3% to $1.53 per share, over the same time frame. Hence, the company carries a Zacks Rank #3 (Hold).

Some Foreign Banks to Consider

Some better-ranked foreign banks include BBVA Banco Franc BFR and The Royal Bank of Scotland Group plc RBS with a Zacks Rank #1 (Strong Buy), while Banco Bilbao Vizcaya Argentaria, S.A. BBVA carries a Zacks Rank #2 (Buy).