Driven by strong top-line performance, Brazil’s Itau Unibanco Holding S.A. (ITUB) reported third-quarter 2014 recurring earnings of R$5.5 billion ($2.42 billion), up 37.5% year over year. Including non-recurring items, net income came in at R$5.4 billion ($2.37 billion), up 35% 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$23.3 billion ($10.24 billion) at Itau Unibanco in the reported quarter climbed 18.9% on a year-over-year basis. Managerial financial margin increased 22% year over year to R$14.4 billion ($6.33 billion). Annualized net interest margin with clients came in at 9.4%, up from 9.1% in the prior-year quarter.
Banking Service Fees and Income from Banking Charges moved up 10% year over year to R$6.6 billion ($2.9 billion) in the third quarter. Revenues from insurance, pension plans and capitalization operations jumped 9% from the prior-year quarter to R$2.4 billion ($1.06 billion).
Itau Unibanco’s non-interest expenses came in at R$9.8 billion ($4.31 billion), up 12.6% year over year. However, expenses for provision for loan and lease losses at Itau Unibanco decreased 4.4% on a year-over-year basis to R$4.7 billion ($2.07 billion).
In the quarter under review, the efficiency ratio reached 45.5%, reflecting a decrease of 270 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 3.2% in the reported quarter, decreasing 70 basis points year over year. Itau Unibanco’s credit portfolio, including endorsements and sureties, reached R$503.3 billion ($221.3 billion) as of Sep 30, 2014, up 10.2% year over year.
As of Sep 30, 2014, Itau Unibanco’s total assets amounted to R$1.16 trillion ($0.48 trillion), up 6.9% from the end of the prior-year quarter. Assets under administration stood at R$646.2 billion ($265.1 billion), up 3.8% year over year.
Moreover, annualized recurring return on average equity increased to 24.7% in the reported quarter from 20.9% in the prior-year quarter. As of Sep 30, 2014, BIS ratio reached 16.6%, down 140 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 – R$15 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 #2 (Buy).
Competitive Landscape
UBS AG (UBS) reported third-quarter 2014 net income attributable to shareholders of CHF 762 million ($834.2 million), which compared favorably with the prior-year quarter earnings of CHF 577 million ($619.1 million). The results were driven by elevated net interest income (up 21% year over year) and increased net fee and commission income (up 12% year over year).
Deutsche Bank AG (DB) reported net loss of €92 million ($122 million) in the third quarter of 2014, compared with income of €51 million ($67.5 million) in the prior-year quarter. Notably, in the reported quarter, the bank recorded income tax expense of €358 million ($474.9 million), primarily due to non-tax deductibility of certain litigation charges compared with income tax benefit of €33 million ($43.7 million) in the prior-year period.
The Royal Bank of Scotland Group plc’s (RBS) impressive earnings for third-quarter 2014 attributable to shareholders came in at £896 million ($1.5 billion) compared with loss of £828 million ($1.28 billion) in the prior-year comparable period. Notably, results included litigation and conduct costs of £780 million ($1.3 billion).
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