Itau as Worst-Performing Stock Still Tempting Analysts

Itau as Biggest Loser Still Tempting Analysts
Itau declined 0.7 percent in Sao Paulo trading this year before today as borrowers stung by a second straight year of slowing economic growth missed more debt payments. Photographer: Dado Galdieri/Bloomberg

Itau Unibanco Holding SA, the worst-performing stock among the largest Brazilian banks this year, is the one analysts say will fare the best as the economy rebounds.

Analysts’ consensus rating, a gauge of share-price expectations, is 4.29 for Sao Paulo-based Itau, the highest score for a financial company in the benchmark Bovespa index, according to data compiled by Bloomberg. The consensus is calculated by converting each analyst’s recommendation into a number from one to five.

Itau declined 0.7 percent in Sao Paulo trading this year before today as borrowers stung by a second straight year of slowing economic growth missed more debt payments. Brazil’s economy will probably expand 3.3 percent in 2013, compared with 1 percent this year, according to a central bank survey of economists. Itau will benefit more than lenders such as Banco Bradesco SA, said Mario Pierry, an analyst at Deutsche Bank AG.

“Itau’s shares have a bigger correlation with economic cycles than Bradesco’s, and will perform better if the pace of growth picks up,” Pierry said in an interview in Sao Paulo. “Bradesco now has a better valuation than Itau, and because of that Itau has more room for improvement.”

Itau, whose 147.7 billion market value makes it Latin America’s biggest bank, trades at 9.6 times its 2013 estimated earnings, compared with 10.5 for Bradesco and 6.5 for Banco do Brasil SA, according to data compiled by Bloomberg. Itau’s shares trade 13 percent below analysts’ average 12-month target price of 38.87 reais.

Itau’s stock was little changed at 33.70 reais at 11:15 a.m. in Sao Paulo trading, in line with the benchmark Bovespa index.

‘Difficult Year’

Brazilian banks have underperformed their global and Latin American peers as President Dilma Rousseff pushed lenders to cut interest rates and reduce profits to “civilized” levels. State-owned Banco do Brasil suffers the most from such government intervention in the banking industry, Pierry said.

“Itau had a very difficult year with the increase in delinquencies of our auto-loan book,” Rogerio Calderon, the bank’s head of investor relations, said in a telephone interview in Sao Paulo. “This subtracted quality from our results and reduced the share price.”

Bradesco, Brazil’s second-biggest bank, advanced 16 percent this year through yesterday, the top performer among the 10 biggest banks in Brazil. Bradesco has a 4.17 consensus rating, compared with 3.77 for Brasilia-based Banco do Brasil and 2.32 for Santander. Bradesco’s market capitalization of 133.3 billion reais is 14.4 billion reais below Itau’s, down from a gap of 48 billion reais in February.

‘Diversified Business’

“Bradesco has a more diversified business,” Pierry said, noting that about a third of the bank’s revenue comes from insurance. Pierry said Bradesco is also less exposed to default-rate increases on credit cards and auto loans than Itau.

Officials at Banco do Brasil and Bradesco declined to comment on the recommendations, according to e-mailed statements.

As interest rates fell and economic growth cooled, Itau reduced its headcount by 8.4 percent to 97,030 at the end of the third quarter from a year earlier, according to its most recent earnings statement.

“The current analyst recommendation shows the market sees we took the appropriate measures, and next year will be better than this year,” Calderon said.

“Itau has proved it’s capable of reducing costs, and is on track to deliver operating-expenses growth below inflation this year and the next,” Credit Suisse Group AG analysts in Sao Paulo, including Marcelo Telles, wrote in a note to clients last month.

Auto Loans

Credit Suisse raised its recommendation for Itau to neutral from underperform on Nov. 30. Itau will also benefit from cost synergies related to its acquisition of card-processing company Redecard SA in October, Credit Suisse said. The neutral rating means Credit Suisse expects the stock’s total return will be in line with market benchmarks in a range of 10 percent to 15 percent during the next 12 months.

Itau has been more selective on auto loans as delinquency rates reached 5.2 percent at the end of the second quarter, the highest since the fourth quarter of 2009. In July, the bank said it plans to reduce its portfolio of auto loans, the nation’s biggest, to as low as 50 billion in December from 60.1 billion reais a year earlier.


The pullback means Itau is lagging behind Brazil’s largest banks on loan expansion, said Carlos Daltozo, a bank analyst at Banco do Brasil. Itau’s loan portfolio advanced 9.3 percent in the 12 months through September to 417.6 billion reais, compared with 12 percent for Bradesco and 21 percent for Banco do Brasil.

“Our recommendation is for Bradesco,” Daltozo said in a telephone interview from Sao Paulo. “Bradesco anticipated all these adjustments before Itau.”

Itau’s focus on lower risk will affect earnings this quarter and next, he said.

The nationwide default rate on personal and business loans for payments at least 90 days overdue remained at a record 5.9 percent from July to October, before dropping to 5.8 percent last month, according to Brazil’s central bank.

“The November delinquency figures may be a signal that the delinquency cycle is over, meaning the banks will post an improvement on provisions,” Eduardo Nishio, an analyst at brokerage Brasil Plural SA in Sao Paulo, said in a telephone interview. “Itau is the bank in Brazil that suffered more this year and may post the best recovery as the economy rebounds.”

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