Why Is Itau Unibanco (ITUB) Up Despite Bleak Q3 Earnings?

Itau Unibanco Holding S.A. (NYSE:ITUB) posted third-quarter 2016 recurring earnings of R$5.60 billion ($1.72 billion), down 8.9% year over year. Including non-recurring items, net income came in at R$5.39 billion ($1.66 billion), down 9.7% year over year.

However, Itau Unibanco has gained more than 3% on the NYSE following its earnings release. The price reaction perhaps reflects investors’ positive sentiment in the stock as the company recorded growth in commissions and fees and reiterated 2016 outlook.

Results were mainly affected by lower managerial financial margin and higher expenses. However, the quarter highlighted a strong balance-sheet position.

Revenues Down, Costs Rise; Strong Capital Position

Operating revenues came in at R$27.6 billion ($8.50 billion) in the reported quarter, down 2.4% on a year-over-year basis.

Managerial financial margin decreased 5.5% year over year to R$17.7 billion ($5.45 billion). Annualized net interest margin with clients came in at 10.2%, up from 9.6% in the prior quarter.

However, commissions and fees were up 7.7% year over year to R$7.8 billion ($2.41 billion).

Non-interest expenses came in at R$12.4 billion ($3.81 billion), up 7.4% year over year. Moreover, expenses for provision for loan and lease losses increased 2.9% on a year-over-year basis to R$6.2 billion ($1.90 billion).

In the quarter under review, the efficiency ratio was 48.6%, exhibiting an expansion of 430 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 3.9% in the reported quarter, increasing 90 bps year over year. Itau Unibanco’s credit portfolio, including endorsement, private securities and sureties, reached R$605.1 billion ($185.80 billion) as of Sep 30, 2016, down 11% year over year.

As of Sep 30, 2016, Itau Unibanco’s total assets amounted to R$1.40 trillion ($0.43 trillion), down 3% from the end of the prior-year quarter. Assets under administration stood at R$902.1 billion ($277.1 billion), up 20.3% year over year.

Annualized recurring return on average equity decreased to 19.9% in the reported quarter from 24.1% in the prior-year quarter. As of Sep 30, 2016, estimated BIS ratio was 14.6%, up 220 bps year over year.

Outlook Reaffirmed

For 2016, the company expects loan loss provision net of recovery in the range of R$23 billion – R$26 billion. Moreover, non-interest expenses are anticipated to increase in the range of 2%–5%.

Moreover, the total credit portfolio is projected in the range between -10.5% and -5.5%, while commissions and fees are likely to increase 4%–7%. Managerial financial margin with clients is estimated in the range between -2.5% and 0.5%.

Our Viewpoint

Results of Itau Unibanco do not reflect a solid quarter. However, the company’s growth prospects look encouraging as it remains focused on building strategies to expand inorganically. Also, the merger with CorpBanca fortified the company’s footprint in Latin America. Nevertheless, increasing competition, elevated expenses and the stressed conditions in the Brazilian economy pose significant risks. Notably, over the past six months , the company has gained around 25% on the NYSE.

BANCO ITAU -ADR Price

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.

Performance of Other Foreign Banks

Among other foreign banks, Barclays (LON:BARC) PLC (NYSE:BCS) third-quarter 2016 net income from continuing operations was £509 million ($668.2 million), up 5% from the year-ago quarter. Also, pre-tax earnings of £837 million ($1.10 billion) surged 35% year over year. Rebound in bond trading and encouraging investment banking performance were the primary reasons for improved earnings. Further, a rise in net interest income acted as a tailwind. However, these were not enough to support revenues, which continued to be hurt by disposal of assets. Also, a rise in credit impairment charges and higher operating expenses were the undermining factors.

Surprising markets, Deutsche Bank AG (NYSE:DB) reported net income of €278 million ($310.2 million) in third-quarter 2016, compared to a loss of €6 billion ($6.70 billion) in the prior-year period. Income before income taxes came in at €619 million ($690.6 million), as against a loss of €6.1 billion ($6.80 billion) in the year-ago quarter. Results largely benefited from strength in sales and trading (debt) revenues and the company’s continued cost-control moves. However, on the down side, the quarter recorded higher provisions.

UBS Group AG (NYSE:UBS) reported third-quarter 2016 pre-tax operating profit of CHF 1.30 billion ($1.33 billion) on an adjusted basis, up 32.7% from the prior-year quarter. While results reflected increase in net trading income, it witnessed a decline in net interest income and net fee and commission income. Notably, the quarter benefited from the company’s continued focus on expense management. However, the Swiss banking giant’s net profit attributable to shareholders of CHF 827 million ($847.3 million), tumbled 60% year over year.

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