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Itau Unibanco (ITUB): Dismal Q2 Earnings on High Expenses
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Brazil’s Itau Unibanco Holding S.A. (ITUB - Free Report) posted second-quarter 2016 recurring earnings of R$5.58 billion ($1.59 billion), down 9% year over year. Including non-recurring items, net income came in at R$5.52 billion ($1.57 billion), down 7.7% year over year.
Results displayed decreased managerial financial margin along with lower revenues from insurance, pension plans and capitalization operations. Additionally, the increase in non-interest expenses was a headwind. However, results reflected strong balance sheet position.
Stable Revenues; Costs Escalate; Strong Capital Position
Operating revenues of R$26.5 billion ($7.55 billion) in the reported quarter was almost in line on a year-over-year basis. Managerial financial margin decreased 3.5% year over year to R$16.6 billion ($4.73 billion). Annualized net interest margin with clients came in at 10.8%, up from 10.7% in the prior-year quarter.
Revenues from insurance, pension plans and capitalization operations decreased 5.6% from the prior-year quarter to R$2.1 billion ($0.60 billion).
Itau Unibanco’s non-interest expenses came in at R$11.4 billion ($3.25 billion), up 8% year over year. Moreover, expenses for provision for loan and lease losses increased 9.9% on a year-over-year basis to R$6.3 billion ($1.8 billion).
In the quarter under review, the efficiency ratio was 46.7%, exhibiting an increase of 350 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 3.6% in the reported quarter, increasing 60 bps year over year. Itau Unibanco’s credit portfolio, including endorsement, private securities and sureties, reached R$608.6 billion ($185.2 billion) as of Jun 30, 2016, down 5.4% year over year.
As of Jun 30, 2016, Itau Unibanco’s total assets amounted to R$1.40 trillion ($0.43 trillion), up 4.7% from the end of the prior-year quarter. Assets under administration stood at R$835.2 billion ($254.2 billion), up 17.8% year over year.
Yet, annualized recurring return on average equity decreased to 20.1% in the reported quarter from 24.7% in the prior-year quarter. As of Jun 30, 2016, estimated BIS ratio was 18.1%, up 90 bps year over year.
Outlook
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 expected in the band of -10.5%–5.5%, while commissions and fees are estimated to increase 4%–7%. Managerial financial margin with clients is expected in the range of -2.5%–0.5%.
In Conclusion
The merger with Chile-based bank CorpBanca (BCA), in a stock-plus-cash offer, enhanced Itau Unibanco’s presence in Chile where it had ventured in 2007 through the acquisition of the operations of BankBoston. Later in 2011, it acquired HSBC’s premium banking operations. Further, this has helped the company gain better market traction in Latin America with its entry into Peru and Central America, apart from its foothold in Chile, Columbia, Argentina, Paraguay and Uruguay.
Though Itau Unibanco’s diversified product mix and solid capital levels are encouraging, increasing competition, elevated expenses and the stressed conditions in the Brazilian economy pose significant risks.
Itau Unibanco currently carries a Zacks Rank #2 (Buy).
Competitive Landscape
Deutsche Bank AG (DB - Free Report) reported net income of €20 million ($22.6 million) in the second-quarter 2016, significantly down on a year-over-year basis. Income before income taxes came in at €408 million ($460.7 million), down 66.8% year over year. Lower revenues and higher provisions hurt the results. However, the reduction in non-interest expenses was a positive factor.
UBS Group AG (UBS - Free Report) reported second-quarter 2016 net profit attributable to its shareholders of CHF 1.03 billion ($1.06 million), down 14% year over year. The results were impacted by a 22% year-over-year decrease in net interest income and a 7% drop in net fee and commission income, partially neutralized by a 15% increase in net trading income.
Another foreign bank – The Royal Bank of Scotland Group plc is expected to release results on Aug 5.
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Itau Unibanco (ITUB): Dismal Q2 Earnings on High Expenses
Brazil’s Itau Unibanco Holding S.A. (ITUB - Free Report) posted second-quarter 2016 recurring earnings of R$5.58 billion ($1.59 billion), down 9% year over year. Including non-recurring items, net income came in at R$5.52 billion ($1.57 billion), down 7.7% year over year.
Results displayed decreased managerial financial margin along with lower revenues from insurance, pension plans and capitalization operations. Additionally, the increase in non-interest expenses was a headwind. However, results reflected strong balance sheet position.
Stable Revenues; Costs Escalate; Strong Capital Position
Operating revenues of R$26.5 billion ($7.55 billion) in the reported quarter was almost in line on a year-over-year basis. Managerial financial margin decreased 3.5% year over year to R$16.6 billion ($4.73 billion). Annualized net interest margin with clients came in at 10.8%, up from 10.7% in the prior-year quarter.
Revenues from insurance, pension plans and capitalization operations decreased 5.6% from the prior-year quarter to R$2.1 billion ($0.60 billion).
Itau Unibanco’s non-interest expenses came in at R$11.4 billion ($3.25 billion), up 8% year over year. Moreover, expenses for provision for loan and lease losses increased 9.9% on a year-over-year basis to R$6.3 billion ($1.8 billion).
In the quarter under review, the efficiency ratio was 46.7%, exhibiting an increase of 350 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 3.6% in the reported quarter, increasing 60 bps year over year. Itau Unibanco’s credit portfolio, including endorsement, private securities and sureties, reached R$608.6 billion ($185.2 billion) as of Jun 30, 2016, down 5.4% year over year.
As of Jun 30, 2016, Itau Unibanco’s total assets amounted to R$1.40 trillion ($0.43 trillion), up 4.7% from the end of the prior-year quarter. Assets under administration stood at R$835.2 billion ($254.2 billion), up 17.8% year over year.
Yet, annualized recurring return on average equity decreased to 20.1% in the reported quarter from 24.7% in the prior-year quarter. As of Jun 30, 2016, estimated BIS ratio was 18.1%, up 90 bps year over year.
Outlook
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 expected in the band of -10.5%–5.5%, while commissions and fees are estimated to increase 4%–7%. Managerial financial margin with clients is expected in the range of -2.5%–0.5%.
In Conclusion
The merger with Chile-based bank CorpBanca (BCA), in a stock-plus-cash offer, enhanced Itau Unibanco’s presence in Chile where it had ventured in 2007 through the acquisition of the operations of BankBoston. Later in 2011, it acquired HSBC’s premium banking operations. Further, this has helped the company gain better market traction in Latin America with its entry into Peru and Central America, apart from its foothold in Chile, Columbia, Argentina, Paraguay and Uruguay.
Though Itau Unibanco’s diversified product mix and solid capital levels are encouraging, increasing competition, elevated expenses and the stressed conditions in the Brazilian economy pose significant risks.
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Itau Unibanco currently carries a Zacks Rank #2 (Buy).
Competitive Landscape
Deutsche Bank AG (DB - Free Report) reported net income of €20 million ($22.6 million) in the second-quarter 2016, significantly down on a year-over-year basis. Income before income taxes came in at €408 million ($460.7 million), down 66.8% year over year. Lower revenues and higher provisions hurt the results. However, the reduction in non-interest expenses was a positive factor.
UBS Group AG (UBS - Free Report) reported second-quarter 2016 net profit attributable to its shareholders of CHF 1.03 billion ($1.06 million), down 14% year over year. The results were impacted by a 22% year-over-year decrease in net interest income and a 7% drop in net fee and commission income, partially neutralized by a 15% increase in net trading income.
Another foreign bank – The Royal Bank of Scotland Group plc is expected to release results on Aug 5.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>