Itau Unibanco (ITUB) Expansion Plans On Track: Time To Buy?

We issued an updated research report on Brazil’s Itau Unibanco Holding S.A. (NYSE:ITUB) on Jun 7.

In May, the company reported disappointing first-quarter 2016 results. Notably, the Sao Paulo-based lender saw a 10.3% year-over-year fall in earnings to R$5.24 billion ($1.34 billion). Increase in non-interest expenses was a headwind. However, higher operating revenues, increased managerial financial margin along with higher revenues from insurance, pension plans and capitalization operations were recorded.

Despite posting a disappointing quarter, the stock jumped almost 44% year-to-date.

Itau Unibanco has a solid funding position as well as loan-making potential which enhance its long-term prospects. The company enjoys a large deposit base with R$266.3 billion in first-quarter 2016. Moreover, loans and leases stood at R$517.5 billion as of Mar 31, 2016, with expectations of an increase of 0.5%–4.5% in 2016. Such a bullish trend represents continued organic growth for the company.

Additionally, amid growing concerns over profitability in the Brazilian economy, Itau Unibanco is making efforts to internationalize the bank.

In this regard, the company recently completed the merger of its Chilean operation with CorpBanca which led to the formation of a major bank in Latin America. Further, in the domestic market, the company acquired an 89.08% stake in debt collection company – Recovery do Brasil Consultoria S.A. – which is likely to help Itau Unibanco gain a strong foothold in Brazil's booming non-performing debt collection industry.

Further, Itau Unibanco exhibited steady efforts in improving its credits quality. In 2011, the company initiated a policy for mitigating risk in credit granting. Notably, the company continues to witness improvement of the default rate due to the change in the credit profile of the portfolio.

Nevertheless, increasing investments and expansion measures will drive expenses, thereby raising the operational risks for the company.

Over the past 30 days, the Zacks Consensus Estimate for earnings per share remained stable at 91 cents and 99 cents for 2016 and 2017, respectively. Itau Unibanco currently carries a Zacks Rank #2 (Buy).

Stocks to Consider

Other foreign banks worth considering include Bank of Montreal (TO:BMO) , Royal Bank of Canada (NYSE:RY) and Canadian Imperial Bank of Commerce (TO:CM) . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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