By Guillermo Parra-Bernal
SAO PAULO Feb 4 Rising borrowing costs,
declining defaults and an unexpected jump in loan disbursements
drove record profit for Itaú Unibanco Holding SA in the fourth
quarter, even after expenses at Brazil's largest private-sector
bank exceeded expectations.
Recurring net income, or profit excluding one-off items,
came in at a record 4.680 billion reais ($1.95 billion) in the
quarter, up 16.4 percent from the prior three months, according
to a securities filing on Tuesday. A Thomson Reuters poll of
seven analysts predicted profit of 4.144 billion reais.
On a quarterly basis, recurring profit rose at its fastest
in nine quarters. Loan book expansion was the strongest in three
years, delinquencies fell for a sixth straight quarter and net
interest income reached the highest level in a year - taking
most analysts in the poll by surprise.
The stunning results led shares of Itaú to post their
biggest gain in 2 -1/2 years. Analysts at Grupo BTG Pactual
raised their recommendation on Itaú to "buy," saying earnings
data partially offset concerns over a weak economy in Brazil.
"Itau Unibanco is clearly ahead of the pack," wrote Credit
Suisse Securities analyst Marcelo Telles in a client note.
Fourth-quarter results "came to confirm Itaú is turning the
business around very successfully."
The results underpin the success of Chief Executive Officer
Roberto Setubal's strategy in the past 18 months, consisting of
growing in mortgages and payroll loans rather than riskier
credit, and controlling expenses. Setubal, Itaú's CEO since
1994, is steering the bank through three years of flagging
economic growth and rising household debt.
"We are reaping what we sowed in recent years," Setubal said
in a news conference at Itaú's São Paulo headquarters. "We are
prepared to grow in a consistent, sustainable way going
Return on equity (ROE) - a gauge of profitability that
measures how well a bank spends shareholder money - jumped to
23.9 percent in the fourth quarter, the highest in three years.
The poll expected ROE, as the indicator is known, of 21 percent.
GETTING A LIFT
ROE could fluctuate or even move downwards this year,
because of market turmoil that could impact Itaú's
trading-related income line, Setubal said.
Preferred shares in Itaú gained as much as 6 percent, the
highest intraday jump since Sept. 1, 2011. Shares in smaller
rivals Banco Bradesco SA and Banco Santander Brasil
SA, whose prices fell last week as their quarterly
results let investors down, got a lift from Itaú's jump.
Borrowing costs are rising in Brazil as part of central bank
efforts to head off accelerating inflation. As a result,
risk-adjusted net interest margin, or the average rate at which
Itaú lends money, climbed to 6.9 percent in the fourth quarter
from 6.5 percent in the prior three months.
Net interest income, or revenue from loan-related
transactions, rose to a higher-than-expected 12.703 billion
reais due to higher rates. Fee income, or revenue from financial
services, rose 8 percent on a quarterly basis.
Loan book, fee income and expense growth estimates that Itaú
released on Tuesday also indicate that earnings momentum will
continue into 2014, analysts said.
Itaú forecasts loan book growth - or credit - to rise
between 10 percent and 13 percent this year. Bad loan provision
expenses could total between 13 billion reais and 15 billion
reais this year. Based on the mid-point of Itaú's guidance,
Telles, the Credit Suisse Securities analyst, expects Itaú's net
profit to rise 21 percent this year.
Loan book growth, which had been modest during the first
nine months of the year, accelerated in the fourth quarter -
signaling that higher rates in Latin America's largest economy
are beginning to offset lending risks. Outstanding loans at Itaú
rose 5.9 percent in the quarter to 483.40 billion reais.
Credit card and large corporate loans drove growth in Itaú's
loan book during the quarter, followed by rising disbursements
of mortgage and payroll loans, the filing said. Loans across
Latin America jumped too.
Last year, credit rose 13.3 percent, exceeding the bank's
guidance of 8 percent to 11 percent loan book expansion.
Sales, general and administrative expenses rose at a faster
pace than analyst estimates in the quarter, thanks to charges
related to the integration of merchant acquiring unit Rede.
For 2013, SG&A expense growth of 7.4 percent surpassed the
bank's own estimate between 4 percent and 6 percent, the filing
said, citing the impact of Rede integration and a jump in
payroll costs stemming from a new wage accord with unions.
Itaú seeks growth for the indicator between 5.5 percent and
7.5 percent excluding charges from the integration of consumer
finance company Credicard, which it bought from Citigroup Inc.
Loan loss provisions surprised on the upside, despite a
reduction in the loan default ratio. Provisions were 4.191
billion reais, above the poll's estimate of 3.981 billion reais.
Defaults for more than 90 days fell for a sixth straight
quarter, hitting 3.7 percent of the bank's loan book. The poll
expected a so-called loan default ratio of 3.8 percent.