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Itau Unibanco Ratings Affirmed by Moody's, Outlook Stable

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Itau Unibanco Holding S.A.’s (ITUB - Free Report) local currency issuer rating at Ba3 along with the senior and subordinated debt ratings have been affirmed by Moody’s Investors Service. The outlook on the company’s ratings has remained stable.

Further, the ratings agency has affirmed long-term local currency deposit rating at Ba2, long-term foreign currency deposit rating at Ba3 and the Brazilian national scale deposit rating at for Itau Unibanco’s banking subsidiary, Itau Unibanco S.A. Also, the bank's ba2 standalone baseline credit assessment (“BCA”) has been reiterated.

Ratings Rationale

The subsidiary’s ba2 BCA affirmation is reflective of the bank’s fundamental credit strengths, which include a solid balance sheet, reflecting its large but low-cost funding base, ample liquidity, stable asset quality and adequate capitalization. Also, its efficient risk management profile supports asset quality performance through the cycle, while its broad franchise provides ample access to funding and liquidity.

Moody’s rating action also takes into account expectations that asset quality and profitability might decline because of the coronavirus outbreak-induced mayhem. Also, the subsidiary’s capitalization is a relative credit weakness but the rating agency expects it to improve in the coming quarters.

Moody’s is concerned that record-low interest rates and strengthening competition in some of its core businesses might affect its earnings resilience under more challenging operating conditions, including reduced business activity and higher credit provisions.

Per management, due to uncertainties about the length and depth of the economic slowdown and recovery, it is difficult to assess whether year-to-date loss provisions will be sufficient to absorb the coming credit losses. Additional substantial provisions might hurt profitability and result in reduced internal capital generation capacity.

Also, Moody’s is of opinion that given the bank's sizable market share of 20.9% of system deposits as of March 2020, a high level of government support is expected. Yet, this provides no incentive for a rating upgrade, as Itau's BCA is already at the same level as Brazil's Ba2 sovereign rating.

What Could Trigger Ratings Upgrade or Downgrade?

Itau Unibanco’s ba2 BCA and ratings are at the same level as Brazil's Ba2 bond rating and thus any upward movement on the ratings is unlikely in the absence of a sovereign ratings upgrade.

However, Itau Unibanco’s BCA can be downgraded if its capital declines materially as a result of growing asset risks and credit costs that could impact profitability beyond expectations. Also, an increase in non-performing loans as a result of increasing risk appetite or deterioration in the bank's liquidity could lead to a downgrade of the bank's BCA.

Further, the subsidiary’s debt and deposit ratings are at the same level as Brazil's government bond rating Ba2, and therefore, a downgrade of the sovereign rating could lead to a downgrade of its standalone BCA as well as deposits and debt ratings.

Shares of Itau Unibanco have lost 50.4% year to date compared with the 31.9% decline of the industry.



The company currently carries a Zacks Rank #4 (Sell).

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