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Brazilian Bank Itau Falters on Costs

By Julian Dowling   |   Monday, 01 Aug 2011 01:34 PM

São Paulo-based Itau Unibanco Holding (ITUB) is Latin America’s largest bank by market value and one of Brazil’s largest private lenders, but Itau’s stock has plummeted since Credit Suisse cut its rating to neutral from outperform over concerns higher costs for bad loans will dampen profits.

Itau rode Brazil’s strong economic recovery to an impressive first quarter in 2011 with total loans growing 22 percent, higher than the central bank's mandated range of 10 to 15 percent through March.

Credit growth boosted Itau’s net income to $2.25 billion in the quarter, up 9.3 percent year-on-year. However, provisions grew 15 percent over the same period and credit growth could be slower going forward on interest rate hikes and the central bank's monetary curbs.

The company’s second quarter results are due Aug. 2.

Brazilian authorities have been trying to cool an economy that grew 7.5 percent in 2010 and is expected to grow an additional 4.5 percent this year. Growth put upward pressure on prices and the appreciation of the real in the first half of 2011 made it harder for exporters to compete abroad, so the central bank intervened.

In July, it raised the nation's benchmark Selic rate 25 basis points to 12.5 percent, the fifth increase this year. It also has increased reserve requirements and taxes on consumer loans to slow credit growth.

But the country’s banks have suffered as a result. Credit Suisse cut its earnings forecasts for Brazilian banks, including Itau’s main competitors Bradesco (BBD), Banco Santander Brasil (BSBR) and Banco do Brasil (BDORF), by an average of 4 percent this year and 5 percent in 2012.

The fastest inflation in six years and higher delinquency rates will likely push banks to set aside more cash for defaults, which could hurt margins, said Marcelo Telles, an analyst at Credit Suisse, in a note to clients.

“Short-term asset quality indicators will be key drivers due to the perception the Brazilian consumer is overleveraged and that Brazil is on the verge of an asset quality bust,” wrote Telles.

Banking on Brazil

Even if Brazil’s credit bubble is about to burst, Itau’s ADR, currently trading near its 12-month low, could be a good buy for investors eyeing the country’s long-term growth prospects. In June, analysts said the bank had an upside potential of around 34 percent in the next 12 months.

Itau was the result of the merger between Banco Itau and Unibanco in 2008. It has been rated the most powerful Brazilian brand by the survey firm Millward Brown and named Sustainable Bank of the Year in 2011 by the Financial Times and the World Bank’s IFC.

It provides a variety services including small business banking, credit cards, retail banking, asset management, and brokerage products.

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São Paulo-based Itau Unibanco Holding (ITUB) is Latin America s largest bank by market value and one of Brazil s largest private lenders, but Itau s stock has plummeted since Credit Suisse cut its rating to neutral from outperform over concerns higher costs for bad loans...

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