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Morningstar | Itau's 2Q Performance Remains Stable Despite Brazil's Labor Strike and Slower Economy

In the face of labor strikes and Brazil’s weakening economy, Itau Unibanco saw stable performance in the second quarter. For the period, Itau's recurring net income was BRL 6.4 billion, in line with the previous quarter and a 3.5% increase from the previous year. Despite Brazil’s shaky economy, Itau continues to perform. Annualized financial margin with clients held steady for the third consecutive quarter at 9.9% notwithstanding lower Brazilian interest rates. That said, financial margin is still down from 10.3% a year ago. Even though Brazil’s economy is struggling, Itau's credit quality improved during the quarter. There were two key offsets in the quarter, lower credit provisions and significantly higher tax payments. Nevertheless, we are still cautious on the Brazilian economy and at some point, we believe the country’s struggles will begin to affect the bank’s performance and are surprised the bank has performed so well despite the trucker strikes and slowing economy. We’ll be maintaining our fair value estimate of $8 per ADR share.

As mentioned, Itau’s credit performance has remained resilient in the face of a struggling economy. At the end of the second quarter, the 90-day nonperforming loan ratio stood at 2.8%, a 30-basis-point improvement from the previous quarter and a 40-basis-point improvement from last year’s second quarter. This improvement in delinquencies led Itau to a 19.5% decrease in credit costs from the previous year. For the second quarter, Itau’s provisions to total loans was 3.4%. In comparison, this is 160 basis points lower than two years ago when Brazil was mired in a recession. Despite lower provisions, Itau’s coverage ratio increased to 248% from 236% in the previous quarter. Though Brazil has returned to GDP growth, we are still surprised that Itau’s credit quality has remained so strong despite a weak economy.

For Brazilian banks, fee income continues to be a bright spot and a major source of growth. While Itau’s fee income increased by only 2.3% from the previous quarter, it has grown 8.6% from the previous year. Much of that has been driven by higher asset management revenue as a result of increasing assets under management and better performance fees.

Finally, loan growth was unaffected by Brazil’s trucker strike, in fact, we suspect loan growth may have been given a temporary boost. Itau’s loan portfolio grew by 4.7% from the previous quarter. The bank’s commercial lending contributed the most to growth as export-import financing grew by almost 12% while working capital loans grew by nearly 4%.