With severe deterioration in credit quality showing some signs of halting, Itau Unibanco's ITUB third-quarter provisions for loan losses remained flat with the second quarter. This, along with an increase in interest income and a slight decline in noninterest expense, helped propel the bottom line 10% higher than in the second quarter, allowing the bank to post earnings of BRL 2.7 billion ($1.5 billion). The firm's results are well within our expectations, and we are not changing our fair value estimate. In our view, the comeback of Brazilian consumers is just starting to surface, and corporations still lag in credit quality, since these are still being affected by the global economic crisis. Total nonperforming loans (NPLs) past due 90 or more days continued their year-long ascent, going from 5.4% of loans in the second quarter to 5.9%. However, most of the increase was due to bad business loans (NPL ratio of 4.1%, up a whole percentage point from June), as loans to individuals did not deteriorate (NPL ratio flat at 8.1%). We think some optimism is warranted as early delinquencies (loans past due 60-90 days) in both consumer and business portfolios dropped. That said, the 8.1% NPL ratio in individual loans is quite high and, given that this portfolio has around 40% of total loans, losses are bound to remain elevated for some time, in our view. In sync with these losses, provisions should stay lofty--and drag on earnings--as the firm replenishes its reserves, in our opinion.Although we think Itau Unibanco still has plenty of loan losses to digest, we believe it is adequately capitalized. The company's tangible common equity and Tier 1 capital ratios were 7.4% and 13.1%, respectively (versus 7.3% and 13.2% in the second quarter).
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Analyst Notes
08-12-09 | 11:59AM Itau Unibanco Holds Up
07-09-09 | 9:36AM Reducing Brazilian Banks' Uncertainty
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