Itau Falls as Profit Misses Estimates on Higher Provisions

Itau Unibanco Holding SA, Brazil’s biggest bank by market value, fell to the lowest in more than two years as second-quarter profit missed analysts’ estimates amid higher provisions to cover soured loans.

Itau declined 5.8 percent to 29.58 reais ($18.89) at the Sao Paulo market close today, its lowest price in two years. It posted the fourth-biggest decline on the 67-company Bovespa index. The shares have lost 26 percent this year, while rival Banco Bradesco SA slipped 12 percent.

Net income climbed 14 percent to 3.6 billion reais, or 79 centavos per share, from 3.17 billion reais, or 70 centavos, a year earlier, the Sao Paulo-based bank said today in a regulatory filing. Adjusted earnings per share, which excludes one-time items, were 73 centavos, compared with the mean estimate of 82 centavos by eight analysts in a Bloomberg survey.

Financial shares in emerging markets are underperforming counterparts in developed countries as default rates have started to rise after a credit boom in the past two years. In Brazil, equities have underperformed the Bovespa index, and Itau has been punished the hardest because of measures by the Brazilian government to curb credit and increased risk-aversion on global markets, said Marco Saravalle, an analyst at Coinvalores Corretora de Valores in Sao Paulo.

‘Buy Opportunity’

“Itau shares have suffered excessively in part because the bank is more dependent on external financing at a time when the global market environment isn’t that positive,” Saravalle said in a phone interview. “But we see this as a buy opportunity, and we will reaffirm our buy recommendation on the stock, which is still our favorite.”

Credit-loss provisions rose 29 percent to 5.11 billion reais compared with 3.96 billion reais in the same period a year ago, according to Itau’s statement. In the first quarter, provisions were 4.38 billion reais.

The default rate, a measure of payments at least 90 days overdue, rose to 4.5 percent at the end of June from 4.2 percent in the first quarter. The rate was 4.6 percent in the year-earlier period.

Itau doesn’t expect a “significant increase” in its default rate this year, investor relations director Rogerio Calderon said in a conference call with journalists today.

“There was a small deterioration in the second quarter but levels are still low, and we expect stability in the next two quarters,” Calderon said.

Itau’s total lending expanded 22 percent in the second quarter to 360.1 billion reais, compared with the same period a year earlier, and total assets increased 22 percent to 792.5 billion reais, the company said.

16% to 20% Credit Growth

Calderon said Itau’s credit portfolio growth will probably reach the center of the bank’s 16 percent to 20 percent lending expansion guidance for 2011. The bank, led by Chief Executive Officer Roberto Setubal, 56, said last quarter it expected its loan portfolio to expand 15 percent to 20 percent in 2011, slower than last year’s 21 percent.

Brazil’s central bank has tightened lending and increased the benchmark interest rate, making it harder for consumers in Latin America’s biggest economy to pay debts, as credit has expanded at an annual rate of 20 percent and inflation has reached a six-year high. Brazilians used a record 26 percent of disposable income to make loan payments, according to Banco Central do Brasil.

The central bank raised lenders’ capital requirements in December and increased interest rates five times this year to 12.5 percent.

Narrower Margins

Marcelo Telles, an analyst with Credit Suisse Group AG, said in a July 26 note to clients that he expected Itau’s earnings would “disappoint” investors. He cut his rating on the bank to “neutral” from “outperform,” citing estimates for narrower margins and higher loan-loss provisions.

Outstanding credit in Brazil increased 20 percent in June from a year earlier, led by a 50 percent rise in mortgage lending. Credit expanded 1.6 percent in June to 1.834 trillion reais, matching the highest rate of the year set in May, the central bank said last week. Unemployment near record lows, an increase in wages and the nation’s highest levels of consumer confidence have fueled demand for retail and corporate loans.

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