UPDATE 1-Itaú's return on equity to top 20 pct next year -source

Tue Dec 10, 2013 9:27am EST

By Guillermo Parra-Bernal and Aluísio Alves

SAO PAULO Dec 10 (Reuters) - Return on equity at Itaú Unibanco Holding SA is likely to surpass 20 percent next year as Brazil's largest bank by market value benefits from lower delinquencies and bad loan provisions and climbing interest income, a source with direct knowledge of the situation told Reuters.

ROE, a measure of profitability that estimates how well a bank spends shareholders' money, could "easily reach" readings above 22 percent - above the bank's 20 percent informal target, said the source, who declined to be identified because next year's projections are yet to be defined.

"The bank finds itself in a sweet spot at the moment because it has room to post ROE readings above 20 percent in the short run," the source said. ROE could be about 2 percentage points higher should income from trading of securities revert to levels seen in recent years, the source said.

In the third quarter, Itaú's ROE rose for a fourth straight quarter, to 20.9 percent, well above the 19.6 percent estimated in a Thomson Reuters poll of analysts.

The 2014 estimates underscore Itaú's ability to outperform rivals even as weak economic growth and feeble demand for credit among indebted consumers hamper Brazil's banking sector. The expectations for a jump in profitability readings suggest the bank is benefiting from Chief Executive Roberto Setúbal's decision to avoid riskier loans and streamline costs.

According to the source, Itaú's loan book is expected to grow about 12 percent next year as it steps up lending in less risky credit segments such as mortgage lending. Itaú estimates lending expanded 8 to 11 percent this year.

The bank usually unveils official forecasts for 2014 in late January or early February, when it releases fourth-quarter and annual earnings data.

DE-RISKING

Preferred shares of Itaú, the bank's most widely traded class of stock, seesawed in early-morning trading. The stock is up 7 percent this year, compared with a 16 percent decline in Brazil's benchmark Bovespa index.

The bank has achieved every goal of Setúbal's lending de-risking strategy, established a little less than two years ago, the source said, a sign that Itaú will not seek to grow its loan book aggressively in coming years. The strategy is also allowing São Paulo-based Itaú to keep lowering bad loan provisions and fan a recovery in net interest income, the source noted.

As a result, net interest income prior to the booking of bad loan provisions could rise between 5 percent and 6 percent in 2014, the source said. At the same time, loan loss provisions could remain flat to moderately lower in nominal terms - a result of improved asset quality trends, the source noted.

Even if Brazil's banking system experiences an across-the-board decline in interest rates, Itaú is positioned to mitigate the impact of slow economic growth and any other cyclical problem afflicting credit markets, the source added.

Setúbal has said that making the lender more cost-efficient should partially offset the effects of Itaú's strategy shift - which is growing in segments that charge less interest on loans but offer less default risk. Sales, general and administrative expenses are likely to keep growing at a level close to annual inflation of about 6 percent in Brazil, the source said.

Fee income, or revenue from financial services from cards and insurance to investment banking advisory services and asset management, is expected to post a double-digit expansion next year, the source said, putting it "around 10 percent."

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