Itau Slumps as Provisions Expected to Climb Further in 2016

  • Fourth-quarter profit beats estimates on higher fee revenue
  • Shares fall as much as 7.5 percent, leading financials lower

Itau Unibanco Holding SA, Latin America’s largest bank by market value, slumped as much as 7.5 percent after reporting an increase in provisions for bad loans for the fourth quarter. Profit topped analysts’ estimates.

The shares fell 6.8 percent to 23.74 reais at 3:49 p.m. in Sao Paulo after the company said it expected provisions for 2016 to range between 22 billion reais ($5.5 billion) and 25 billion reais. The bank set aside 18.1 billion reais to cover bad loans in 2015, it said in a regulatory filing Tuesday, a 39 percent increase from the previous year that was higher than the top of its forecast.

Bad loans are rising with Brazil facing the worst recession in a century and unemployment and inflation at a decade high. Itau’s delinquency rate advanced to 3.5 percent from 3.1 percent. If the bank hadn’t transferred some portfolios of non-performing loans, the delinquency rate would have climbed to 3.7 percent in the fourth quarter, according to the filing. 

“Credit quality remains a concern,” Banco Bradesco SA analysts including Rafael Frade wrote in a report to clients Tuesday. “Deterioration was seen across the board, as the main lines worsened on a quarter-over-quarter basis.” 

Itau expects delinquency rates to rise a “little more” this year because of the economic deterioration, Chief Executive Officer Roberto Setubal, 61, told reporters in Sao Paulo Tuesday.

Net Income

Fourth-quarter recurring net income, which excludes one-time costs, advanced 1.9 percent to 5.77 billion reais from 5.66 billion reais a year earlier, the Sao Paulo-based bank said. Nine analysts surveyed by Bloomberg had expected profit to be unchanged.

Itau has been increasing revenue from service fees as lending growth slows. The bank’s expectations for the loan portfolio this year range from a decrease of 0.5 percent to growth of 4.5 percent, after a 4.6 percent expansion in 2015. Revenue from services rose 12 percent to 7.65 billion reais in the fourth quarter from a year earlier.

In December, Itau agreed to pay 640 million reais for Grupo BTG Pactual’s stake in the distressed-asset-management firm Recovery do Brasil Consultoria SA. Itau also said it would pay 570 million reais to acquire 70 percent of the 38 billion reais of non-performing loans owned by BTG.

“The acquisition may help Itau to improve its credit recovery levels,” Setubal told reporters, adding that Itau had used Recovery services before the acquisition. “Itau aims to use Recovery much more intensively from now on.”

Additional Dividend

The bank will pay an additional dividend of 0.1980-real a share and an additional interest on capital of 0.4564-real a share, according to a separate regulatory filing Tuesday. It will buy back as many as 50 million preferred shares and as many as 10 million voting shares, it said in a separate filing. Itau declined 22 percent in the past year, compared with an 18 percent drop for the Ibovespa benchmark index.

Last week, Bradesco, Latin America’s second-biggest lender by market value, also beat analysts’ estimates as fourth-quarter adjusted net income rose 10 percent to 4.56 billion reais. The Osasco, Brazil-based bank said bad-loan provisions jumped 27 percent in the fourth quarter from a year earlier and will rise again this year.

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