Itau Unibanco (ITUB) Q1 Earnings Impress On Higher Revenues

Itau Unibanco Holding S.A. (NYSE:ITUB) posted recurring earnings of R$6.4 billion ($1.97 billion) in first-quarter 2018, up 3.9% year over year. Including non-recurring items, net income came in at R$6.3 billion ($1.94 billion), up 3.3% year over year.

Results displayed higher revenues, lower provisions and a solid balance-sheet position. Elevated expenses and reduced managerial financial margin were headwinds.

Revenues Up, Provisions Fall, Costs Escalate

Operating revenues came in at R$27.4 billion ($8.4 billion) in the reported quarter, slightly up on a year-over-year basis.

Managerial financial margin slipped 2.3% year over year to R$17 billion ($5.2 billion). However, commissions and fees were up 8.7% year over year to R$8.5 billion ($2.6 billion).

Non-interest expenses came in at R$11.7 billion ($3.6 billion), up 6.1% on a year-over-year basis. Expenses include the consolidation of Citibank’s retail operations in Brazil. However, expenses for provision for loan and lease losses plunged 23.8% year over year to R$4.1 billion ($1.3 billion).

In the quarter under review, the efficiency ratio was 45.9%, reflecting expansion of 230 basis points (bps) from the year-earlier quarter. An increase in this ratio indicates decreased profitability.

The non-performing loan ratio (loan transactions more than 90 days overdue) came in at 3.1% in the reported quarter, contracting 30 bps year over year. Itau Unibanco’s credit portfolio, including endorsement, private securities and sureties, reached R$601.1 billion ($181.9 billion) as of Mar 31, 2018, up 2.4% year over year.

As of Mar 31, 2018, Itau Unibanco’s total assets amounted to R$1.52 trillion ($0.46 trillion), up 7.8% from the end of the year-ago quarter. Assets under administration were R$1.03 trillion ($0.31 trillion), up 19.4% year over year.

Annualized recurring return on average equity climbed to 22.2% in the reported quarter from 22% recorded in the year-earlier quarter. As of Mar 31, 2018, estimated BIS III ratio came in at 14.4%, in line with the prior-year quarter.

Outlook

For 2018, including the impact of Citibank’s operations, the company expects costs of credit in the range of R$12-R$16 billion. Also, non-interest expenses are expected to escalate in the band of 0.5-3.5%.

In addition, the total credit portfolio is projected at 4-7%, while commissions and fees are likely to climb 5.5-8.5%. Managerial financial margin with clients is estimated between -0.5% and 3%. Financial marginal with the market is estimated between R$4.3 and R$5.3 billion. Effective tax rate is estimated in the 33.5-35.5% range.

Our Viewpoint

Results of Itau Unibanco highlight an encouraging quarter. Furthermore, the company’s future prospects look encouraging as it remains focused on building strategies to expand inorganically. In addition to this, the merger with CorpBanca has fortified its footprint in Latin America, while acquiring Citibank’s operations has aided growth. Nevertheless, heightening competition, escalating expenses and stressed conditions in the Brazilian economy pose significant risks.

Itau Unibanco currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Deutsche Bank AG (NYSE:DB) reported net income of €120 million ($147.5 million) in first-quarter 2018, which tanked 79% on a year-over-year basis. Income before income taxes plunged 50.8% year over year to €432 million ($531 million). Lower revenues, mainly due to exchange-rate movements, were an undermining factor. Moreover, expenses escalated in the reported quarter. Notably, net asset outflows were recorded during the quarter. However, reduction in provisions was a positive.

Barclays (NYSE:BCS) incurred first-quarter 2018 net loss attributable to ordinary equity holders of £764 million ($1.06 billion). Net income attributable to ordinary equity holders was £190 million ($248 million) in the prior-year quarter. Results for the reported quarter included £1.4 billion charges related to settlement of residential mortgage-backed securities case with the U.S. Department of Justice and charges of £400 million relating to payment protection insurance.

UBS Group AG (NYSE:UBS) reported first-quarter 2018 net profit attributable to shareholders of CHF 1.5 billion ($1.6 billion), up around 19% from the prior-year quarter. Results displayed rise in net fee and commission income (up 3% year over year) and higher net interest income (up 3% year over year). Nevertheless, the quarter underlined elevated expenses.

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