Itaú Unibanco Holding S.A.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Itaú Unibanco Holding S.A. is a Brazilian financial holding company, one of the largest private financial institutions in Latin America, offering a range of financial products and services including banking, investments, credit and insurance.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Itaú Unibanco Holding S.A. (ITUB) is a diversified financial institution operating primarily in Brazil and Latin America.

  • Revenue Distribution: ITUB’s revenue is divided primarily into Retail Banking, Wholesale Banking, and Activities with the Market and Corporations. Retail banking focuses on serving individuals and small businesses. The Wholesale Banking segment provides services to large corporations and institutional clients. Activities with the Market and Corporations includes treasury services, trade finance, FX operations and other market activities. For 2022, retail operations accounted for approximately 46% of the revenue, wholesale operations 30%, and market operations 24%.
  • Industry Trends: The banking industry in Brazil is undergoing significant transformation driven by regulatory changes, digital adoption, and increased competition. The rise of fintechs challenges traditional banking models and forces established players to adapt quickly. The region has also been experiencing instability, partially driven by political turmoil.
  • Margins: While interest rates have risen sharply, and with it the profitability for banks, but also costs. ITUB’s net interest margin has been fairly steady, but is being impacted by the macroeconomic conditions.
  • Competitive Landscape: ITUB competes with other major banks in Brazil, such as Banco do Brasil, Bradesco, and Santander. They have a significant presence of foreign institutions and well as increasing competition from FinTech companies. Scale and efficiency are important elements of the competitive environment. ITUB’s advantage arises in their large scale, diverse and loyal customer base and strong brands.
  • What makes ITUB different: A prominent player in Latin America’s financial industry, ITUB is one of the few that is diversified in services and products as well as geographic regions. In the last years, they have aggressively pursued to improve digitalization of their operations. However, even though the digitization has improved, they still face the challenge of increased competition in Brazil and also having to face more compliance costs with a shifting regulatory environment. In a recent trend they are now focusing on “sustainable profitability”.
  • Recent Concerns / Controversies and Management’s response: In recent calls, management highlighted challenges regarding high inflation, volatility in the Brazilian market, and the impact of potential recessions. The management team has made emphasis in their approach for long-term investment and to focus on the intrinsic value of businesses as a way to make them less susceptible to macroeconomic concerns and market volatility.

Financial Deep Dive

  • Profitability:
    • Net income attributable to the owners of the parent company increased from R$ 17,333 million in 2021 to R$ 26,670 million in 2022, mainly due to increase in net interest income and insurance claims.
    • Earnings per share have grown from R$ 2.72 per share in 2021 to R$ 4.74 in 2022.
  • Balance Sheet Health:
    • ITUB has a robust balance sheet with a substantial amount of total assets (R$ 2,323 Billion as of December 31, 2022), as well as a strong level of cash. The liabilities are also significantly large at R$ 2,140 billion.
    • The common equity Tier 1 ratio was 13.7% in 2022 and 13.6% in 2021, also is a sign of a healthy level of capitalization and solvency.
  • Capital Structure:
    • The current market structure (not book value) is at approximately 45% debt and 55% equity. ITUB is seeking to bring that down as the interest rates environment makes leverage less effective.
  • Key Financials:
    • Total revenues have been stable or have increased, and net income has grown, but cost of credit has impacted the bottom line.
    • The average ROE was 16.8% in 2021 and 12.4% in 2022. The ROIC was around 13% for the most recent year.
    • The company has a large amount of loans and lease operations, but are carefully classified by risk and delinquency.

While ITUB seems to have a strong financial position, they have been dealing with higher taxes, credit risk and also exposure to foreign exchange rates, that are affecting their bottom line. The company must adapt to a challenging macroeconomic environment and increased regulatory scrutiny. However, ITUB has been managing its growth without having to make radical changes in the capital structure.

Moat Analysis: 3 / 5

ITUB has a narrow but resilient moat based on brand and switching costs, but it is not very large.

  • Intangible Assets: ITUB’s brand is very strong in Latin America, and particularly in Brazil, which does give them a competitive advantage due to consumer trust and loyalty. In addition, there are also some elements that could create a regulatory moat, as they deal with highly regulated businesses. However, these aren’t significant barriers to entry. The main reason is that switching costs for banking customers aren’t that high.
  • Switching Costs: As is with many banks, ITUB has a good advantage in the sense that switching costs exist for clients that have built a good relationship with it, but these switching costs can’t compare with other industries that have very specific switching costs such as technology and specialized industrial sectors. However, the company does benefit from this dynamic.
  • Network Effect: As with other banks, ITUB has a very specific network effect, in which more users translates to better services, and the company benefits from it, but they are not in a strong positive feedback loop that can be classified as a wide moat.
  • Cost Advantages: There is some scale advantage derived from its size in the Latin American region, that allows them to maintain a better efficiency than some smaller competitors, but this is not an enormous difference when compared to some other banks, specifically in the US market.

Understandability: 2 / 5

Due to its nature, a financial institution is inherently complex to understand.

  • Banking Operations: The numerous services that banks provide make it complex to understand what the company is really doing. There are several parts to consider such as deposits, lending, trading, and investing.
  • Financial Reporting: Financial statements are always complex, even more for financial companies, since they have many specific line items and accounting rules. Furthermore, the currency exchange and macroeconomic environment can make it more challenging to predict the results.
  • Macroeconomic Considerations: Since banks are so intrinsically linked to the market environment, macroeconomic forces affect them deeply, and they add even more layers of unpredictability.

Balance Sheet Health: 4 / 5

ITUB shows a resilient balance sheet despite the recent challenges.

  • Strong Capitalization: The company has maintained a good CET1 ratio, which shows a good cushion of capital.
  • Managing the Debt: The company has been focused on decreasing the use of debt in its capital structure, and also is focusing on long-term assets and liabilities.
  • Potential Areas of Weakness: Though, in recent earnings call, the management made it clear that they recognize the risks regarding credit default, and are working on increasing coverage. Also, as with every financial institution, macroeconomical factors such as high inflation, currency volatility and uncertainty could affect their stability and performance.

Summary: While ITUB faces certain challenges arising from the market environment, their profitability and financials are in a solid position, and their moat can provide stability to earnings in the long term.