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Rising Costs Hurt Itau Unibanco's Bottom Line: Time to Sell?

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We issued an updated research report on Itau Unibanco Holding S.A. (ITUB - Free Report) on Jun 16. The company is witnessing rising expenses, owing to investment in digitalization, which is likely to impact profitability. Also, competition from other big Brazilian banks remains concerning. However, organic and inorganic growth strategies are likely to bolster its performance.

The company’s Zacks Consensus Estimate for the current year has been revised nearly 7% downward over the past 30 days. The company currently carries a Zacks Rank #4 (Sell).

Shares of Itau Unibanco have lost 45.4% year to date compared with the 32.5% decline of the industry.



The company’s expenses have continued to rise over the last few years. Notably, general and administrative expenses have flared up over the past few years. Moreover, the company’s ongoing investment in digitalization of its services and focus to enhance customers’ satisfaction will likely keep the expenses elevated. Continuation of such a trend will remain a hindrance to bottom-line growth in the near term.

Also, Itau Unibanco faces intense competition from other large Brazilian and international banks. This along with new regulations issued by the National Monetary Council, which facilitates the customers’ ability to switch business between banks, is likely to have detrimental effects on the lending volumes and margins of the company.

Further, regulatory changes for the domestic banking sector were released, such as new rules for implementation of the Basel III framework in Brazil, including further modifications to capital requirement models. These changes might affect Itau Unibanco’s operations and profitability.

However, Itau Unibanco’s strategy to expand its operations in Brazil and internationally is encouraging. Also, ongoing investments in technology will aid in the improvement of processes, reduce costs and increase productivity gains. Notably, in order to meet the growing digital banking trend and offer card-related services to its clients, the bank partnered with PayPal Holdings (PYPL - Free Report) .

Further, the company’s benefits from diversified and strong funding base, as is evident from rising deposits and assets under administration. Notably, it holds a debt level of $135.7 billion as of Mar 31, 2020, which has been decreasing over the past few quarters. Therefore, we believe Itau Unibanco has less likelihood of default of interest and debt repayments if the economic situation worsens.

Stocks to Consider

Bank of Hawaii Corporation’s (BOH - Free Report) 2020 earnings estimates have been revised 17.6% upward over the past 60 days. This Zacks Rank #2 (Buy) company’s shares have lost 32.5% over the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings estimates for First Republic Bank (FRC - Free Report) have moved 2% north over the past 60 days for the ongoing year. The company’s shares have declined 8.5% over the past six months. It carries a Zacks Rank of 2 at present.

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