Itau Unibanco (ITUB) Q4 Earnings Impressive, Costs Escalate

Itau Unibanco Holding S.A. (NYSE:ITUB) posted recurring earnings of R$6.3 billion ($1.9 billion) in fourth-quarter 2017, up 8.6% year over year. Including non-recurring items, net income came in at R$5.8 billion ($1.8 billion), up 5.5% year over year.

Results displayed lower provisions and a solid balance-sheet position. Lower revenues, elevated expenses and reduced managerial financial margin were headwinds. Therefore, investors were disappointed on escalating expenses, leading the stock to decline 3.5% on the NYSE following the release.

Revenues Dip, Provisions Fall, Costs Escalate

Operating revenues came in at R$27.5 billion ($8.5 billion) in the reported quarter, down 4.8% on a year-over-year basis.

Managerial financial margin slipped 11.6% year over year to R$16.7 billion ($5.1 billion). However, commissions and fees were up 8.3% year over year to R$8.6 billion ($2.6 billion).

Non-interest expenses came in at R$12.4 billion ($3.8 billion), up 3.8% on a year-over-year basis. However, expenses for provision for loan and lease losses plunged 23.7% on a year-over-year basis to R$4.4 billion ($1.4 billion).

In the quarter under review, the efficiency ratio was 48.6%, reflecting expansion of 380 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% in the reported quarter, contracting 40 bps year over year. Itau Unibanco’s credit portfolio, including endorsement, private securities and sureties, reached R$557.7 billion ($168.3 billion) as of Dec 31, 2017, down nearly 1% year over year.

As of Dec 31, 2017, Itau Unibanco’s total assets amounted to R$1.5 trillion ($0.45 trillion), up 5.4% from the end of the year-ago quarter. Assets under administration were R$969.9 billion ($292.7 billion), up 19.1% year over year.

Annualized recurring return on average equity climbed to 21.9% in the reported quarter from 20.7% recorded in the year-earlier quarter. As of Dec 31, 2017, estimated BIS III ratio came in at 15.5%, expanding 120 bps year over year.

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 range of 0.5-3.5%.

In addition, the total credit portfolio is projected in the range of 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 projected in the range of 33.5-35.5%.

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, reduced revenues 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

UBS Group AG (NYSE:UBS) reported fourth-quarter 2017 net profit attributable to shareholders of CHF 955 million ($967.7 million) on an adjusted basis, up around 25.2% from the prior-year quarter. Results exclude deferred tax expense. Including deferred tax expense, net loss attributable to shareholders came in at CHF 2.2 billion ($2.23 billion) compared with net income of $636 million recorded in the prior-year quarter.

Deutsche Bank AG (NYSE:DB) reported net loss of €2.2 billion ($2.6 billion) in the fourth quarter compared with net loss of €1.9 billion ($2.3 billion) incurred in the year-ago quarter. The results were affected by non-cash charge of €1.4 billion resulting from a valuation adjustment on its deferred tax assets due to the tax reform.

ICICI Bank Ltd.’s (NYSE:IBN) net profit plunged 32% year over year to INR16.50 billion ($258 million). Results were adversely impacted by fall in non-interest income and a slight rise in operating expenses. However, increase in net interest income (reflecting rise in loans) and lower provisions were the tailwinds.

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