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Itau Unibanco (ITUB): Stock Hit by Dismal Q1 Earnings

Brazil’s Itau Unibanco Holding S.A. ITUB lost 6.76% on NYSE after it reported first-quarter 2016 recurring earnings of R$5.24 billion ($1.34 billion), down 10.3% year over year. Including non-recurring items, net income came in at R$5.18 billion ($1.33 billion), down 9.6% year over year.

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

Performance in Detail

Operating revenues of R$25.9 billion ($6.6 billion) in the reported quarter reflected an improvement of 4% on a year-over-year basis. Managerial financial margin increased 3.8% year over year to R$16.6 billion ($4.3 billion). Annualized net interest margin with clients came in at 10.9%, up from 10.5% in the prior-year quarter.

Revenues from insurance, pension plans and capitalization operations increased 1.2% from the prior-year quarter to R$2.1 billion ($0.54 billion).

Itau Unibanco’s non-interest expenses came in at R$10.2 billion ($2.6 billion), up 3.4% year over year. Moreover, expenses for provision for loan and lease losses increased 31.1% on a year-over-year basis to R$7.2 billion ($1.8 billion).

In the quarter under review, the efficiency ratio was 43%, reflecting a decrease of 20 basis points (bps) from the prior-year quarter. A decrease in the efficiency ratio increased profitability.

The non-performing loan ratio (loan transactions more than 90 days overdue) was 3.9% in the reported quarter, increasing 90 bps year over year. Itau Unibanco’s credit portfolio, including endorsements and sureties, reached R$517.5 billion ($132.8 billion) as of Mar 31, 2016, down 4.8% year over year.

As of Mar 31, 2016, Itau Unibanco’s total assets amounted to R$1.28 trillion ($0.35 trillion), down around 1% from the end of the prior-year quarter. Assets under administration stood at R$807.3 billion ($222.2 billion), up 16.2% year over year.

Yet, annualized recurring return on average equity decreased to 19.9% in the reported quarter from 24.5% in the prior-year quarter. As of Mar 31, 2016, estimated BIS ratio was 17.7%, up 240 bps year over year.

Outlook

For 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 band of 0.5%–4.5%, while commissions and fees are estimated to increase 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 where it had forayed in 2007 through the acquisition of the operations of BankBoston. Later in 2011, it acquired HSBC’s premium banking operations. Further, this will help the company gain better market traction 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 and increasing operating revenues are encouraging, increasing competition, elevated expenses and the stressed conditions in the Brazilian economy pose risks.

Itau Unibanco currently carries a Zacks Rank #3 (Hold).

Competitive Landscape

The Royal Bank of Scotland Group plc RBS reported first-quarter 2016 loss attributable to shareholders of £968 million ($1.4 billion) as compared with a loss of £459 million in the prior-year quarter. Results included payment of the final Dividend Access Share (DAS) dividend of £1,193 million to the U.K. Government.  

Deutsche Bank AG DB reported net income of €236 million ($260.3 million) in the first quarter of 2016, down 57.8% year over year. Income before income taxes came in at €579 million ($638.6 million), down 60.9% year over year. The quarterly results were impacted by lower revenues and higher provisions. However, the reduction in non-interest expenses was a positive.

UBS Group AG (UBS reported first-quarter 2016 net profit attributable to shareholders of CHF 707 million ($711.7 million), down 64.2% year over year. The results were impacted by a 53% year-over-year decrease in net trading income and 7% drop in net fee and commission income, partially offset by a 5% increase in net interest income.

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