Itaú Unibanco Earnings: Credit Quality Impresses, but Loan Growth Shows Signs of Deceleration

No-moat-rated Itaú Unibanco ITUB reported solid first-quarter results. The bank continues to deliver strong loan growth and surprisingly resilient credit results, given high interest rates and rising unemployment in Brazil. Itaú reported operating revenue of BRL 37.4 billion, 13.4% higher than last year and 1.1% lower than last quarter. Net income increased 14.6% year over year and 10% from last quarter to BRL 8.4 billion, which translates to a return on equity of 20.7%. As we incorporate these results, we do not plan to materially alter our $4.90 per ADR share fair value estimate.

Itaú's loan growth remained strong during the first quarter, though there are signs of deceleration in the bank’s Brazilian operations, which make up the bulk of its business. Total loans increased 11.7% year over year to BRL 1.153 trillion, an acceleration from the 11.1% annual increase reported last quarter. However, total Brazilian loans increased only 0.6% from last quarter and 11.2% from last year, a deceleration from the 14.2% annual rate seen last quarter. Growth was weakest in Itaú's corporate loans, which grew only 7.2% from last year to BRL 350 billion. While the first quarter came in better than we had anticipated thanks to strong lending outside Brazil, we do expect Itaú's loan growth to decelerate due to high interest rates and a weakening Brazilian economy.

That said, Itaú's credit quality was better than we had expected in the first quarter. Over-90-day nonperforming loans were 3.4% of total loans, 0.5% higher than last year but flat with last quarter. Credit costs increased to BRL 9.1 billion from BRL 7 billion last year, though lower than the BRL 9.8 billion reported last quarter, which included BRL 1.3 billion in provisioning tied to a single firm. We do expect credit to deteriorate in Brazil, but with a coverage rate of 212% and a common equity Tier 1 ratio of 12%, Itaú is in an excellent financial position to withstand higher losses.