(Corrects U.S. dollar conversion of recurring net income in
paragraph 3 to $1.74 billion, not $1.74 billion reais. Removes
word "reais" after U.S. dollar figure)
* Recurring profit $1.74 bln
* Cost controls, lower provisions bolster earnings
* Operating expenses fall 2.5 percent
By Guillermo Parra-Bernal
SAO PAULO, April 30 Profit at Itaú Unibanco
Holding SA , Brazil's largest bank by market
value, beat estimates in the first quarter as lower bad loan
provisions and expenses helped offset flagging revenue trends
that are likely to extend into coming quarters.
Itaú's results suggested profit was boosted by a year-long
policy to avoid riskier loans, not the effects of an improving
economy. Itaú's net interest margin - average interest earned on
loans - declined for the sixth straight quarter, and the bank's
shares fell 1.1 percent.
The São Paulo-based banking giant on Tuesday reported
recurring net income, a measure of profit excluding one-time
items, of 3.51 billion reais ($1.74 billion), up just 0.3
percent from the 2012 fourth quarter. A Thomson Reuters poll of
11 analysts expected recurring profit of 3.45 billion reais.
Brazil's banks have suffered in the face of government
pressure to cut borrowing costs, a reluctance among indebted
consumers to borrow, and two years of flagging activity. Last
year, profits in the industry fell for the first time in 15
years as banks focused on less-risky types of credit that charge
lower spreads, the difference between the interest rate on a
bank loan and the cost of funding.
Itaú's results reinforced the view that profitability trends
in the banking sector remain fragile, even after defaults fell
from record highs last year. Itaú's smaller rivals Banco
Bradesco SA and Banco Santander Brasil SA
last week reported credit growth below estimates for this year,
with steep declines in revenue.
"Itaú's results are consistent with our views that the bank
should be able to compensate for net interest margin compression
with improved asset quality and operational efficiency gains,"
said Mario Pierry, head of equity research with Deutsche Bank
Itaú Chief Executive Roberto Egydio Setúbal has said that
making the lender more cost-efficient should partially offset
the effects of low borrowing costs in Brazil and flagging demand
for credit among households. His focus on caution is beginning
to pay off as Itaú is choosing financial health over growth in
an environment of extreme uncertainty for banks.
IS CAUTION PAYING OFF?
Profit suffered little from a plan to restate some income
over the past two years. Yet interest income fell for the third
quarter in a row, securities trading declined more than
expected, and loan disbursements grew slightly below estimates
on an annual basis.
Net interest income, or revenue from lending transactions,
slid 6.8 percent, while trading of securities dropped 32
percent. Fee income fell for the first quarter in a year,
reflecting declining activity in investment banking, asset
management and cooling credit card purchases.
Net interest margin, known as NIM, began to stabilize after
six quarters of dramatic declines. Risk-weighted NIM, or
interest earned taking into account the credit risk embedded,
fell to a multi-year low of 5.9 percent in the first quarter
from a revised 6 percent in the prior three months and 7.3
percent a year earlier.
The bank revised higher its estimates for growth in fee
income this year, to a range of 15 percent to 18 percent,
compared with 11 percent to 14 percent previously.
Bolstering profit, Itaú slashed bad-loan provisions by 12.1
percent to 4.42 billion reais, below estimates of 4.62 billion
reais. The bank sees provisions totaling between 19 billion
reais and 22 billion reais this year, below analysts' average
forecast of 24 billion reais.
Operating expenses fell 2.5 percent to 8.28 billion reais in
the first quarter, below expectations of 8.41 billion reais.
Loans in arrears for 90 days or more, an industry benchmark
for defaults, slipped to the equivalent of 4.5 percent of
outstanding loans, from 4.8 percent in the prior quarter.
Analysts had expected a so-called default ratio of 4.7 percent.
"Itaú massively outperformed its private peers on asset
quality this quarter," Marcelo Henriques, an analyst with BTG
Pactual Group, wrote in a client note.
But the bank saw a spike in short-term defaults, an
indication that asset quality is suffering as households and
companies remain overleveraged. Loans in arrears between 15 and
90 days jumped to 4 percent of total loans in the three months
ended in March, the first quarter of worsening delinquencies in
($1 = 2.01 Brazilian reais)
(Reporting by Guillermo Parra-Bernal; Editing by Jeffrey
Benkoe, Grant McCool and John Wallace)