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Neutral on Itau Unibanco

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On Nov 6, 2013, we reiterated our long-term recommendation on Itau Unibanco Holding S.A. (ITUB - Free Report) at Neutral based on the company’s diversified product mix, increasing operating revenues and expanded credit portfolio. Moreover, improvement in the Brazilian economy would act as a catalyst. However, increasing competition and undisciplined expense management pose risks.

Why Neutral?

On Oct 30, 2013, Itau Unibanco reported third-quarter 2013 recurring earnings of R$4.0 billion ($1.75 billion), up 11.1% sequentially. Including non-recurring items, Itau Unibanco’s third-quarter 2013 net income came in at R$3.99 billion ($1.74 billion), up 11.5% sequentially.

The sequential increase was primarily attributed to reduced expenses for allowance of loan and lease losses and increased managerial financial margin along with higher banking service fees and income from banking charges. However, elevated non-interest expenses were the headwinds.

The economy in Brazil and the domestic market of Itau Unibanco, is recovering at a sluggish pace. Based on the economy improvement to date in 2013, the Brazilian GDP is expected to be 2–2.5% in 2013, higher than 2012. Such progress will aid in improving the company’s business prospects.

Though provision for loan and lease losses decreased in the first three quarters of 2013 for Itau Unibanco, it has been increasing since the last 4 years with an elevated level of net charge-offs. Notably, for the year 2013, the company expects expenses for provision for loan and lease losses to range between R$19 billion ($9.5 billion) and R$22 billion ($11.0 billion).

Following the earnings announcement, the Zacks Consensus Estimate for 2013 has gone up 2.2% to $1.39 per share, over the last 30 days. For 2014, the Zacks Consensus Estimate has moved up 3.3% to $1.55 per share, over the same time frame. Hence, the company carries a Zacks Rank #2 (Buy).

Other Foreign Banks to Consider

Some other foreign banks worth considering include Deutsche Bank AG (DB - Free Report) and Westpac Banking Corp. (WBK - Free Report) with a Zacks Rank #1 (Strong Buy), while Bank of Montreal (BMO - Free Report) carries a Zacks Rank #2 (Buy).

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