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Itau Unibanco (ITUB) Stock Up on Impressive Q2 Earnings

Itau Unibanco Holding S.A. ITUB posted recurring earnings of R$6.2 billion ($1.9 billion) in second-quarter 2017, up 10.7% year over year. Including non-recurring items, net income came in at R$6.0 billion ($1.87 billion), up 9.1% year over year.

Following the impressive earnings release, shares were up around 1.1% on the NYSE.

Results displayed a decrease in revenues and a solid balance-sheet position. Higher expenses and lower managerial financial margin were headwinds.

Revenues Slightly Down, Costs Rise, Capital Position Solid

Operating revenues came in at R$27.2 billion ($8.5 billion) in the reported quarter, slightly down on a year-over-year basis.

Managerial financial margin edged down 1.1% year over year to R$17.4 billion ($5.4 billion). However, commissions and fees were up 2.8% year over year to R$8.0 billion ($2.5 billion).

Non-interest expenses came in at R$11.6 billion ($3.6 billion), up 1.2% on a year-over-year basis. However, expenses for provision for loan and lease losses plunged 21.9% on a year-over-year basis to R$4.9 billion ($1.5 billion).

In the quarter under review, the efficiency ratio was 45.7%, reflecting an expansion of 80 basis points (bps) from the prior-year quarter. An increase in the efficiency ratio indicates decreased profitability.

The non-performing loan ratio (loan transactions more than 90 days overdue) was 3.2% in the reported quarter, contracting 40 bps year over year. Itau Unibanco’s credit portfolio, including endorsement, private securities and sureties, reached R$587.3 billion ($178.4 billion) as of Jun 30, 2017, down 3.5% year over year.

As of Jun 30, 2017, Itau Unibanco’s total assets amounted to R$1.45 trillion ($0.44 trillion), up 3.7% from the end of the year-ago quarter. Assets under administration were R$998.2 billion ($303.2 billion), up 19.5% year over year.

Annualized recurring return on average equity increased to 21.5% in the reported quarter from 20.6% in the year-earlier quarter. As of Jun 30, 2017, estimated BIS III ratio was 14.5%, up 40 bps year over year.

Outlook

For 2017, the company expects loan losses and impairment in the range of R$14.5–R$17 billion. Moreover, non-interest expenses are anticipated to increase in the range of 1.5–4.5%.

In addition, the total credit portfolio is projected in the range of 0.0–4.0%, while commissions and fees are likely to climb 0.5%–4.5%. Managerial financial margin with clients is estimated in the range between -4.0% and -0.5%.

Our Viewpoint

Results of Itau Unibanco highlight a decent quarter. Furthermore, the company’s future prospects look encouraging as it remains focused on building strategies to expand inorganically. In addition, the merger with CorpBanca has fortified its footprint in Latin America.  Nevertheless, increasing competition, elevated expenses and stressed conditions in the Brazilian economy pose significant risks.

Itau Unibanco currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Deutsche Bank AG DB reported net income of €466 million ($512.4 million) in second-quarter 2017, significantly up on a year-over-year basis. Income before income taxes more than doubled to €822 million ($903.9 million) on a year-over-year basis. Cost management and reduction in provisions were positive factors. However, lower revenues due to trading slump were an undermining factor. Notably, net new money inflows were recorded during the quarter.

UBS Group AG UBS reported second-quarter 2017 pre-tax operating profit of CHF 1.68 billion ($1.71 billion) on an adjusted basis, up around 1% from the prior-year quarter. Results displayed increase in net interest income (up 22% year over year), along with net fee and commission income (up 5% year over year), partially offset by lower trading income (down 23% year over year). Notably, the quarter benefited from the company’s consistent focus on expense management.

Among other foreign banks, The Royal Bank of Scotland Group plc RBS is scheduled to report June quarter-end earnings on Aug 4.

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