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Itau Unibanco (ITUB) Q2 Earnings Impress, Costs Escalate

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Itau Unibanco Holding S.A. (ITUB - Free Report) posted recurring earnings of R$6.4 billion ($1.78 billion) in second-quarter 2018, up 3.2% year over year. Including non-recurring items, net income came in at R$6.2 billion ($1.72 billion), up 3.3% year over year.

Results display higher revenues, lower provisions and a solid balance-sheet position. However, elevated expenses and reduced managerial financial margin were headwinds.

Revenues Improve, Provisions Fall, Costs Up

Operating revenues came in at R$28 billion ($7.8 billion) in the reported quarter, up 2.9% on a year-over-year basis.

Managerial financial margin slipped slightly year over year to R$17.3 billion ($4.8 billion). However, commissions and fees were up 8.6% year over year to R$8.7 billion ($2.4 billion).

Non-interest expenses came in at R$12.3 billion ($3.4 billion), up 6.1% on a year-over-year basis. However, expenses for provision for loan and lease losses fell 13.7% year over year to R$4.3 billion ($1.2 billion).

In the quarter under review, the efficiency ratio was 47.1%, reflecting expansion of 140 basis points (bps) from the year-earlier quarter. An increase in this ratio indicates decreased profitability.

The non-performing loan ratio (loan transactions more than 90 days overdue) came in at 2.8% in the April-June quarter, contracting 40 bps year over year. Itau Unibanco’s credit portfolio, including endorsement, private securities and sureties, reached R$623.3 billion ($160.8 billion) as of Jun 30, 2018, up 6.1% year over year.

As of Jun 30, 2018, Itau Unibanco’s total assets amounted to R$1.54 trillion ($0.4 trillion), up 6.2% from the end of the year-ago quarter. Assets under administration were R$1.05 trillion ($0.27 trillion), up 16.7% year over year.

Annualized recurring return on average equity climbed to 21.6% in the reported quarter from 21.5% recorded in the year-earlier quarter. As of Jun 30, 2018, estimated BIS III ratio came in at 13.2%, compared with 13.5% in the prior-year quarter.

Outlook

For 2018, including the impact of Citibank’s operations, the company expects costs of credit in the range of R$12-R$16 billion. Also, non-interest expenses are expected to escalate in the band of 0.5-3.5%.

In addition, the total credit portfolio is projected at 4-7%, while commissions and fees are likely to be up 5.5-8.5%. Managerial financial margin with clients is estimated between -0.5% and 3%. Financial marginal with the market is estimated between R$4.3 and R$5.3 billion. Effective tax rate is estimated in the 33.5-35.5% range.

Our Viewpoint

Results of Itau Unibanco highlight an encouraging quarter. Furthermore, the company’s future prospects look encouraging as it remains focused on building strategies to expand inorganically. In addition to these, the merger with CorpBanca has fortified its footprint in Latin America, while acquiring Citibank’s operations has aided growth.

Nevertheless, heightening competition, escalating expenses and stressed conditions in the Brazilian economy pose significant risks.
 

Itau Unibanco currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

UBS Group AG (UBS - Free Report) reported second-quarter 2018 net profit attributable to shareholders of CHF 1.28 billion ($1.30 billion), up around 9% from the prior-year quarter. Results displayed rise in net fee and commission income (up 2% year over year) and strong capital position. However, the quarter reflected elevated expenses and lower net interest income (down 30%).

Deutsche Bank AG (DB - Free Report) reported net income of €401 million ($467 million) in second-quarter 2018, which tanked 13.7% from year-ago quarter. Income before income taxes plunged 13.5% year over year to €711 million ($828.1 million). Lower revenues and higher expenses were the key undermining factors. Moreover, provisions for credit losses increased. Notably, net asset outflows were recorded during the quarter. However, strong capital position was a positive.

Among others, The Royal Bank of Scotland Group plc (RBS - Free Report) will report June quarter-end results on Aug 3.

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