Brazil’s Itau Unibanco Holding S.A. (ITUB) reported second-quarter 2014 recurring earnings of R$5.0 billion ($2.24 billion), up 38.9% year over year. Including non-recurring items, net income came in at R$4.9 billion ($2.19 billion), up 36.1% 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$22.1 billion ($9.89 billion) at Itau Unibanco in the reported quarter climbed 15.1% on a year-over-year basis. Managerial financial margin increased 17.2% year over year to R$13.6 billion ($6.09 billion). Annualized net interest margin with clients remained in line with the prior-year quarter and came in at 8.9%.
Banking Service Fees and Income from Banking Charges moved up 16.7% year over year to R$6.3 billion ($2.82 billion) in the second quarter. Revenues from insurance, pension plans and capitalization operations declined slightly from the prior-year quarter to R$2.2 billion ($0.98 billion).
Itau Unibanco’s non-interest expenses came in at R$9.6 billion ($4.30 billion), up 11.6% year over year. However, expenses for provision for loan and lease losses at Itau Unibanco decreased 8.2% on a year-over-year basis to R$4.5 billion ($2.01 billion).
In the quarter under review, the efficiency ratio reached 47.1%, reflecting a decrease of 200 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 3.4% in the reported quarter, decreasing 80 basis points year over year. Itau Unibanco’s credit portfolio, including endorsements and sureties, reached R$487.6 billion ($221.17 billion) as of Jun 30, 2014, up 9.5% year over year.
As of Jun 30, 2014, Itau Unibanco’s total assets amounted to R$1.11 trillion ($0.50 trillion), up 5.1% from the end of the prior-year quarter. Assets under administration stood at R$634.6 billion ($287.84 billion), up 4.3% year over year.
Moreover, annualized recurring return on average equity increased to 23.7% in the reported quarter from 19.3% in the prior-year quarter. As of Jun 30, 2014, BIS ratio reached 16.0%, down 230 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 ($5.69 billion) – R$15 billion ($6.56 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
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 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.
Itau Unibanco currently carries a Zacks Rank #1 (Strong Buy).
Competitive Landscape
The Royal Bank of Scotland Group plc’s (RBS) first-half 2014 profit from continuing operations came in at £1.92 billion ($3.20 billion), highlighting an over twofold rise from £696 million ($1,074.9 million) in the prior-year comparable period. Results were driven by lower loan impairment losses and reduced operating expenses. Additionally, the results reflected higher net interest income. However, reduced non-interest income hampered the results to a certain extent.
HDFC Bank Ltd.’s (HDB) first-quarter fiscal 2015 (ended Jun 30) results recorded a net profit of INR22.33 billion ($0.37 billion), up 21.1% year over year. The results benefited from a rise in net interest income. Moreover, deposit and loan balances continued to show improvement. However, higher operating expenses and fall in non-interest revenues were causes of concern. Again, credit quality was a mixed bag.
Impacted by a disappointing top-line performance, Deutsche Bank AG (DB) reported net income of €238 million ($326.4 million) in the second quarter of 2014, down from €335 million ($437.4 million) in the prior-year quarter. However, decreased expenses, lower provision for credit losses and a strong capital position were the positives.
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