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Brazil’s Itau Unibanco Holding S.A. (ITUB - Analyst Report) reported first-quarter 2013 recurring earnings of R$3.5 billion ($1.7 billion), slightly up sequentially but down 0.9% year over year. The company experienced reduced levels of provisions for loan losses.

Including non-recurring items, Itau Unibanco’s first-quarter 2013 net income came in at R$3.47 billion ($1.7 billion), marginally lower than the prior-quarter earnings of R$3.49 billion ($1.7 billion) but above the year-ago earnings of R$3.43 billion ($1.9 billion).

Operating revenues of R$18.8 billion ($9.4 billion) at Itau Unibanco in the reported quarter declined 5.5% sequentially and 3.6% year over year. The sequential fall primarily reflects reduced banking service fees and income from banking charges and a fall in the managerial financial margin, which was impacted by a drop in the SELIC rate.

Moreover, the year-over-year decline reflected lower financial margin, partially offset by elevated banking service fees and income from banking charges.

Managerial financial margin slipped 8.6% sequentially and 12.8% year over year to R$11.5 billion ($5.7 billion). Net interest margin with clients dipped 70 basis points sequentially and 230 basis points year over year to 9.1% in the reported quarter, mainly due to the decrease in the SELIC rate, reduction in cash due to the acquisition of a minority interest in Redecard and variation in the loan portfolio mix.

Banking Service Fees and Income from Banking Charges moved down 0.5% sequentially to R$5.1 billion ($2.5 billion). However, it advanced 18.8% year over year. Revenues from insurance, pension plans and capitalization operations dipped 3.4% sequentially but rose 5.9% year over year to R$1.4 billion ($0.7 billion).

Itau Unibanco’s non-interest expenses came in at R$8.3 billion ($4.1 billion) in the reported quarter, down 2.5% sequentially but up 4.1% on a year-over-year basis. Notably, the company experienced an 8.5% rise in personnel expenses though administrative expenses dropped 7.3% from the prior quarter.

In the quarter under review, the efficiency ratio reached 48%, reflecting an increase of 140 basis points from the prior quarter and 360 basis points from the prior-year quarter. An increase in the efficiency ratio reflects a decline in profitability. However, expenses for provisions for loan losses at Itau Unibanco decreased 14.0% sequentially and 20.5% year over year to R$4.9 billion ($2.4 billion).

The nonperforming loan ratio (loan transactions more than 90 days overdue) was 4.5% in the reported quarter, decreasing 30 basis points sequentially and 60 basis points year over year.

Itau Unibanco’s credit portfolio, including endorsements and sureties, reached R$434.2 billion ($217.0 billion) as of Mar 31, 2013, inching up 1.4% from the prior quarter and 6.9% from the year-ago period.

As of Mar 31, 2013, Itau Unibanco’s total assets amounted to R$1.03 trillion ($0.5 trillion), up 1.4% from the end of the prior quarter and 14.7% from the comparable prior-year period. Assets under administration stood at R$581.9 billion ($287.3 billion), up 3.5% sequentially and 10.9% year over year.

Moreover, annualized recurring return on average equity decreased to 19.1% in the reported quarter from 19.3% in the prior quarter and 20.0% in the year-ago quarter. The Bank for International Settlements (BIS) capital ratio was 17.7%, up 100 basic points sequentially and 160 basis points year over year.

Outlook

For the year 2013, the company expects expenses for provision for loan losses to range from R$19 billion ($9.5 billion) – R$22 billion ($11.0 billion). Moreover, non-interest expenses are expected to increase in the range of 4% – 6%, with total credit portfolio in the range of 11% – 14%.

Further, banking service fees and revenue of insurance, pension plan and capitalization are expected to elevate in the range of 15% –18%.

In Conclusion

Itau Unibanco’s diversified product mix, cost control and expanded credit portfolio are encouraging. Additionally we believe that improving asset quality remains a positive catalyst for Itau Unibanco. However, increasing competition and the stressed conditions in the Brazilian economy pose risks.

Itau Unibanco currently carries a Zacks Rank #3 (Hold). Among other foreign banks, Deutsche Bank AG (DB - Analyst Report), Westpac Banking Corporation (WBK) and The Toronto-Dominion Bank (TD - Snapshot Report) carry a Zacks Rank #2 (Buy).

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