Itau Seen Beating Major Brazil Banks on Return on Equity

Itau Unibanco Holding SA, Latin America’s largest bank by market value, probably posted the highest fourth-quarter return on equity among the top Brazilian banks after spending less on bad-loan reserves.

Itau, which reports results Feb. 4, is likely to say ROE was about 20.8 percent, according to the average estimate of four analysts in a Bloomberg poll, the highest among the nation’s 10 biggest banks surveyed by analysts. Return on equity is a gauge of profitability that measures how well the Sao Paulo-based company reinvests shareholder money.

Bad-loan provisions are falling at Itau and Osasco-based Banco Bradesco SA, which reports earnings tomorrow, after they shifted away from riskier auto financing to avoid rising defaults. Loans overdue more than 90 days reached 3.9 percent in May 2012 before dropping to 3.1 percent in November, according to data from Brazil’s central bank, which started compiling the figures in March 2011.

“As privately-owned banks are very selective in giving new credit, delinquency rates are declining,” Pedro Galdi, an analyst at SLW Corretora in Sao Paulo, said in a telephone interview. “Itau may be the one that will post the highest return on equity.”

Officials at Itau and Bradesco declined to comment before earnings are released, and asked not to be named in keeping with company policies.

Itau’s profitability is rising as it reduces credit risk and bad-loan provisions, said Andre Riva Gargiulo, an analyst at brokerage Grupo Bursatil Mexicano SA in Sao Paulo.

Credit Quality

“There is a structural change in the Brazilian bank industry, with privately owned lenders focusing on credit quality instead of growth,” Riva said in a telephone interview.

Itau’s share price doesn’t yet reflect changes the company has made to the risk profile of its loan portfolio, Riva said. Shares of the company have fallen 5 percent in the past year, compared with a 20 percent decline for Bradesco and 20 percent drop for Brazil’s Ibovespa benchmark index.

Itau reduced its auto loan book in 2012 by 15 percent from the previous year, while it formed a payroll-loan joint venture with Banco BMG SA. Vehicle loans overdue more than 90 days reached 7.23 percent in June 2012 before dropping to 5.31 percent in November, according to the central bank, which started compiling the figures in March 2011.

Provisions at Itau may have fallen below 19 billion reais ($7.8 billion) in 2013, the lower end of the bank’s forecast of 19 billion to 22 billion reais, Rogerio Calderon, Itau’s investor relations director, said in October. In the previous year, provisions were 23.6 billion reais, according to the company.

Provision Charges

Deutsche Bank AG expects Itau’s non-performing loans in the last three months of 2013 to improve for a sixth consecutive quarter, while 2013 provision charges may be below 19 billion reais, analysts including Mario Pierry wrote in a note to clients Jan. 21.

Itau’s fourth-quarter recurring net income, which excludes one-time items, will climb to 4.26 billion reais from 3.5 billion reais a year earlier, according to the average estimate of six analysts surveyed by Bloomberg. Bradesco’s adjusted net income, which also excludes one-time items, will probably rise to 3.17 billion reais from 2.92 billion reais, according to a Bloomberg survey of seven analysts.

As credit quality at non-state-owned banks in Brazil improves, lending has remained muted, Votorantim Corretora analysts including Flavio Yoshida wrote in a Jan. 24 report. Itau’s portfolio of loans expanded 9.7 percent at the end of December from year earlier, according to Votorantim estimates.

Loan Growth

Itau’s “vehicle loan book continues to take a toll on the loan portfolio expansion,” the analysts said.

Itau’s net interest income improved in the fourth quarter, at a time loan expansion continue to be “thin,” according to analysts at Banco Safra SA. Net interest income is the revenue from interest earned on assets compared with payments to depositors.

“Itau remains our top pick,” wrote the analysts, who expect ROE of 21.1 percent for the bank. “The bottom line is that the positive momentum seen in 3Q13 should be maintained in 4Q13.”

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