2023-11-15 15:00:04 ET
Summary
- Itaú Unibanco's Q3 performance shows impressive efficiency, reporting an ROE exceeding 21%.
- The Brazilian private bank maintains robust asset quality with stable NPL ratios at 3%.
- Despite challenges like modest credit growth, the exit from Itaú Argentina is not expected to impact 2023 profitability significantly.
- Itaú's shares trade attractive multiples, supporting a bullish thesis with a target price of $6.61 per share.
My bullish outlook on Brazilian bank Itaú Unibanco (ITUB) is based on the quality and effective management of its assets, as reflected in its remarkable efficiency, leading to the highest Return on Equity ((ROE)) among its private domestic peers.
Amidst a challenging credit environment in Brazil during the first half of the year, characterized by persistently high default rates and a persistently challenging economic context with interest rates remaining elevated, Itaú has demonstrated consistent performance in recent quarters. The bank has maintained a healthy delinquency rate compared to other direct domestic peers.
In its third-quarter results, Itaú once again reported robust efficiency metrics, boasting an ROE exceeding 21%. The bank has managed to keep its Non-Performing Loans (NPL) stable, potentially indicating a turning point for the upcoming quarters. Despite some concerns, such as the modest growth in the credit portfolio, Itaú's overall results were positive, devoid of significant surprises. This reinforces the bullish thesis that Itaú remains the most efficient private bank among its peers and is traded at an attractive valuation.
Itaú Unibanco's Q3 Earnings
In the third quarter of 2023, Itaú reported a recurring net income of R$9.04 billion, showing a quarter-over-quarter growth of 3.4% and a year-over-year growth of 11.9%. The bank's profitability, measured by Return on Equity ((ROE)), remained consistently high at 21.1%, marking a 0.1 percentage point increase from the previous quarter and the last year.
However, the accounting net income was lower, totaling R$7.5 billion, reflecting a year-over-year decrease of 11.1% and a quarter-over-quarter decrease of 4.3%. This decline was primarily attributed to a non-recurring event related to the sale of Banco Itaú Argentina, which had a negative impact of R$1.2 billion on profit. The bank revised its guidance for 2023 due to this non-recurring event, although the revision was necessary to reflect the discontinuation of operations in Argentina (sold in August).
It's important to note that the sale of the Argentina unit for US$50 million resulted in a non-recurring loss of R$1.2 billion. When adjusted for the adverse impacts of inflation and exchange rate variation, this loss affected Itaú's equity. The nominal profit of R$578 million from the Argentina unit for the first seven months of 2023 negatively impacted R$113 million on the bank's equity when adjusted for inflation and exchange rate variations.
A positive highlight is the stability of the delinquency rate above 90 days at 3% and the improvement in short-term delinquency (between 15 and 90 days) to 2.3%, indicating a potential turning point in the coming quarters.
The cost of credit showed improvement for the first time since the deterioration in mid-2021, with a quarter-over-quarter contraction in this series of increases, excluding the provision made in the fourth quarter of 2022 for the Americanas case.
The Provision for Doubtful Debts ((PDD)) retracted nominally quarter-over-quarter, reinforcing signs of improved asset quality. Tariff revenues improved sequentially, and the insurance result continued to be a highlight in terms of growth. Additionally, the retail business's profitability (Return on Capital Employed - ROCE) improved substantially, increasing by 1.2 percentage points quarter-over-quarter and 2.4 percentage points year-over-year, reaching 18.8%.
On the other hand, credit growth remained modest, expanding by just 1% quarter-over-quarter and 4.7% year-over-year. Excluding Argentina's R$4 billion portfolio, growth would remain weak at 0.9% quarter-over-quarter and 2.8% year-over-year. Another negative highlight in the credit portfolio was the contraction in credit cards and payroll loans compared to the previous quarter.
Despite growth well above the credit portfolio's, the margin with clients slowed, growing 2.5% quarter-over-quarter and 9.3% year-over-year. This slowdown was justified by the higher average volume of credit, a higher margin of liabilities, a higher number of calendar days, and higher results with structured operations in the Wholesale segment.
The margin with the market was weaker this quarter, falling to R$715 million compared to R$1.07 billion last quarter. This decline was negatively impacted by lower gains on the trading desk in Brazil and the deconsolidation of Banco Itaú Argentina. In the annual comparison, the margin with the market expanded by 38.6%.
Itaú's IR
For 2024, I anticipate accelerating the bank's loan portfolio growth as risk appetite strengthens in some business lines. Additionally, there will likely be a tariff relief, especially with more vigorous activity in the capital markets. Regarding costs, I highlight the positive trend in the cost of credit, with provisions ((PDD)) more under control. Based on these factors, It's possible to project a net profit of around $40 billion by 2024, representing an increase of about 10% year-over-year, with a stable ROE between 20% and 21%.
Still the Best Private Brazilian Bank
Itaú Unibanco's latest quarterly report again underscores its leading position among Brazil's private banks, showcasing much more robust indicators than its domestic peers, Bradesco ( BBD ) and Banco Santander (Brasil)( BSBR ). In Q3, Itaú was the only bank to expand its loan portfolio while maintaining a significantly higher Return on Equity ((ROE)), showcasing its efficiency.
Despite facing adverse events in recent years, such as the bear market in 2022, coupled with increased domestic competition over the last decade, Itaú has consistently sustained a healthy level of profitability. This resilience is attributed to the solid execution capacity of its top management, demonstrating its ability to achieve greater efficiency and keep the bank at the forefront of profitability in the industry.
Loan Portfolio (R$ bi) | Loan Portfolio Growth (YoY) | Delinquency Rate | Expanded ALL (R$ bi) | Coverage Ratio | ROE | CET1 | Basel | |
Itaú Unibanco | 1163 | 4.7% | 3% | -9.3 | 209% | 21.1% | 14.6% | 16.3% |
Bradesco | 877.5 | -0.6% | 5.6% | -9.1 | 182.5% | 11.4% | 13.4% | 12.9% |
Santander Brasil | 502.6 | 0.7% | 3% | -5.6 | 230% | 13.1 % | 11.2% | 14.3% |
In my assessment, Itaú Unibanco's valuation remains attractive, trading at a forward price-to-earnings ratio of 7.2x for 2024, representing a 19% discount compared to its historical average. Additionally, Itaú carries a price-to-book ratio premium of 1.5x compared to its peers, reflecting the perceived higher quality of its assets. However, it's worth noting that this discount might be overstated, particularly when considering potential factors such as the cessation of interest on equity (JCP) and the risks associated with a potential cap on revolving interest rates. These elements could potentially exert pressure on Itaú Unibanco's shares shortly.
Seeking Alpha
Regarding dividends, according to Bradesco BBI's estimate for this year, Itaú is expected to distribute around R$16.2 billion in profits, projecting a payout of 48%. This equates to a dividend yield of 5.4%, aligning closely with Seeking Alpha's estimate . Assuming an annual dividend per share of $0.33 (bearing in mind Itaú distributes dividends monthly) and applying a Return on Investment ((ROI)) of 5%, this would imply a price of $6.61 per share, representing an 8% upside potential compared to the current market value of $6.11 as of November 15th.
The Bottom Line
In summary, Itaú Unibanco's third quarter was characterized by maintaining robust asset quality, with non-performing loan ratios (NPL) above 90 days remaining stable at 3.5%, below the general market average. This performance allowed the bank to marginally reduce provisions to R$9.3 billion, a decrease of 1.9% compared to 2Q23, and still in line with NPL creation.
The loan portfolio saw a modest quarter-over-quarter increase of 1%, contributing to a slowdown in its annual growth to 4.7% from 6.2% in the last quarter. This decline is noteworthy and could be interpreted as a cautionary signal, given that the current pace is slightly below the lower limit of the bank's guidance.
There are a few other points to monitor, including the quarterly deceleration of Net Interest Income ((NII)) and the exit from Itaú Argentina. However, I believe the exit from Itaú Argentina should not significantly impact the bank's profitability in 2023.
Itaú's shares continue to trade at attractive multiples, supported by its superior efficiency compared to its peers and consistent dividend distributions. This reinforces my bullish thesis, with a target price for Itaú set at $6.61 per share.
For further details see:
Itaú Unibanco: Q3 Earnings, Top Quality And Above-Average Efficiency