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On Feb 13, 2013, we uplifted our long-term recommendation on Itau Unibanco Holding S.A. (ITUB - Analyst Report) to ‘Neutral’ from ‘Underperform’ attributed to the completion of the acquisition of Redecard along with improved earnings performance.

Though its diversified product mix and cost control efforts are encouraging, we believe that the low interest rate environment and weak asset quality remains a major concern for growth of its profitability.

Why the Upgrade?

On Feb 5, 2013, Itau Unibanco reported fourth-quarter 2012 recurring earnings of R$3.5 billion ($1.7 billion), up 2.9% sequentially. Operating revenues of R$19.9 billion ($9.7 billion) at Itau Unibanco were up 1.8% sequentially.

The sequential upsurge was driven by the increase in banking service fees and income from banking charges and insurance operations, which was offset by the decrease in financial margin with clients, and the decrease of 6.5% in loan and retained claim losses, net of recovery.

Following the earnings announcement, the Zacks Consensus Estimate for 2013 has gone up 0.6% to $1.70 per share. With the upswing in the Zacks Consensus Estimate for 2013, the company now has a Zacks Rank #3 (Hold).

Other Positives

During 2012, Itau Unibanco acquired 49.98% of Redecard through a tender offer completing the purchase of 100% shares. The total amount invested in the acquisition of Redecard’s outstanding shares was R$11.75 billion. Therefore, the acquisition enables Itau Unibanco in offering products and services to the bank’s clients and expanding business to a number of Brazilian municipalities.

Moreover, the company has made sufficient progress in controlling costs, with the efficiency ratio falling to 45.4% in 2012 from 51.2% in 2007. Such efforts to improve the bottom line augur well going forward.

Other Major Foreign Banks to Consider

Besides HSBC, other foreign banks that are currently performing well include Banco Bilbao Vizcaya Argentaria, S.A. (BBVA - Snapshot Report), Bank of Montreal (BMO - Snapshot Report) and Shinhan Financial Group Company Limited (SHG). All these companies carry a Zacks Rank #1 (Strong Buy).

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