BCH Banco de Chile

Brazil’s Itau Unibanco Holding S.A.’s (ITUB) fourth-quarter 2011 net income came in at R$3.7  billion ($2.0  billion), below the prior quarter earnings of R$ 3.81 billion ($2.3 billion) and year-ago earnings of R$ 3.90 billion ($2.3  billion).

Excluding non-recurring  items, Itaú Unibanco reported fourth quarter earnings of R$ 3.75 billion ($2.1 billion), down 4.9% sequentially but up 10.2% year over year.

While Itaú Unibanco experienced an increase in its net interest and fee income, a rise in expenses offset that. Additionally credit quality also deteriorated in the quarter.

For full year 2011, Itaú Unibanco reported earnings of R$ 14.6 billion ($8.8 billion), up 12.4% year over year. This was driven by improvements of 14.5% in net interest income, 11.4% in fee income and 29.3% in results from insurance, pension plans and capitalization.

Itau Unibanco’s net interest income in the fourth quarter of 2011 increased 1.3% sequentially and 10.6% year over year to R$ 11.966 billion. Fee income advanced 5.5% sequentially and 13.2% year over year to R$5.088 billion.

Non-interest expenses were R$ 8.547 billion in the reported quarter, up 1.7% sequentially and 1.9% year over year. Notably, the company experienced an increased level of operating activities in the fourth quarter and opened 82 fully equipped branches in Brazil (123 for the full year). Administrative expenses increased in the quarter primarily due to the costs associated with the facilities and remodeling for the new Itaú Unibanco branch model. However, personnel expenses reported a drop in the quarter.

During the fourth quarter, the efficiency ratio reached 47.3%, reflecting a decrease of 20 basis points from the prior quarter, as a result of the 2.1% increase in operating revenues, partially offset by the 1.7% increase in expenses from the prior quarter. The efficiency ratio, however, decreased 460 basis points from the comparable quarter prior year.

Loan losses, net of recovery, totaled R$ 3,880 million in the fourth quarter, up 6.1% sequentially, as a result of an increase of R$ 482 million in expenses for allowance for loan losses, that amounted to R$ 5,453 million. This was driven by the residual impact of the post office and bank workers’ strikes, rises in default levels, increases in the loan portfolio and the increased amount of loan renegotiation of loans already written off as losses. It was partially offset by an uptick in loan recovery due to the receipt of the 13th month pay (bonus salary) in Brazil.

The overall delinquency level (loan transactions more than 90 days overdue) reached 4.9% in December 2011, increasing 20 basis points sequentially and 70 bps year over year.

Credit portfolio, including endorsements and sureties, reached R$397.012 billion on December 31, 2011, increasing 3.9% and 19.1% from the prior quarter and the same date of the prior year, respectively.

Itaú Unibanco’s consolidated assets totaled R$851.3 billion, up 1.7% sequentially and 13.3% year over year. However, recurring return on average equity decreased to 21.8% in the reported quarter from 23.5% in the prior quarter and 23.0% in the year-ago quarter. The Bank for International Settlements (BIS) capital ratio was 16.4%, up 90 bps sequentially and 100 bps year over year.

Itaú Unibanco also announced that it will pay up to R$ 11.77 billion ($6.8 billion) for the outstanding 336.4 million common shares, equivalent to 49.98% of Redecard's total share capital. Redecard is a credit-card networking services provider. The buyout is anticipated to have no impact on the company’s cash flow.

Going forward, we believe that Itaú Unibanco’ssolid franchise and diversified product mix would support its earnings. However, the slowdown in the economy and credit quality concerns remains the downsides.

Itau Unibanco’s shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation. However, its closest peer Banco De Chile (BCH) retains a Zacks #4 Rank, implying a short-term Sell recommendation.

 
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