Itaú Unibanco Earnings: Rising Net Interest Income and Stable Credit Costs Drive Strong Results

No-moat Itaú Unibanco ITUB reported solid third-quarter earnings that were largely in line with our expectations. The bank’s operating revenue increased 8.1% from last year and 1.8% from last quarter to BRL 39.5 billion. Meanwhile, recurring managerial results increased 11.9% year over year to BRL 9 million, which translates into a return on equity of 21.1%. As we incorporate these results, we do not plan to materially alter our $5.40 per-share fair value estimate and we see the shares as roughly fairly valued.

The increase in revenue was primarily due to higher interest income, which increased 9.9% from last year to BRL 26.3 billion. Interest income growth was driven by higher loan balances and expanding net interest margins. Total loans increased 4.7% from last year to BRL 1.15 trillion, or 5.7% when adjusted for exchange-rate movements. The bank’s consumer lending led the way, with personal loans and mortgages growing 17.9% and 12.1%, respectively. On the other hand, the firm’s lending outside Brazil continues to struggle, with Latin American loans falling 0.7% from last year. The mix shift toward Itaú's higher-yielding consumer loans helped support margin expansion, with the bank’s NIM increasing from 8.6% last year to 8.9%.

Itaú maintained its run of good credit results during the third quarter. Over 90-day nonperforming loans were 3% of total loans, 0.2% higher than last year, but flat sequentially. Total credit costs increased to BRL 9.3 billion from BRL 8 billion last year, but were down from BRL 9.4 billion last quarter. We still see the potential for higher credit costs for Itaú in 2024 as interest rates are still high and economic risks remain. However, there are clear signs of credit stabilization and with inflation well below its peak there is potential upside to our projections for the bank.