- I consider that Itaú Unibanco’s (NYSE:ITUB) digital financial institution iti Itaú will additional enhance its buyer base by specializing in a youthful goal group that has not but opened a banking account.
- Attributable to its sturdy model picture, which has been constructed all through 97 years of historical past and pushed by its digital transformation course of in addition to the sturdy buyer development of its digital financial institution, I anticipate Itaú Unibanco to have the ability to compete efficiently in opposition to conventional banks, digital banks and fintechs sooner or later.
- The utilization of relative valuation fashions such because the P/E Ratio exhibits that Itaú Unibanco is presently undervalued.
- In my view, the Itaú Unibanco inventory is a purchase. Itaú Unibanco has a really sturdy market place in Brazil and is more and more specializing in the digital sector, which guarantees development prospects.
Business Overview of the Brazilian Banking Sector
Itaú Unibanco is a Brazilian full-service financial institution with 97 years of historical past. It’s the largest Brazilian financial institution by way of income. Working via greater than 4,100 bodily branches, the corporate has a presence in 18 completely different international locations worldwide (focusing primarily on Latin America). With greater than BRL 2 trillion belongings beneath administration (AUM), Itaú Unibanco is the biggest personal asset supervisor in Latin America.
In a earlier article for Searching for Alpha, during which I wrote concerning the Brazilian funding dealer XP Inc (XP), I gave an introduction to the Brazilian banking sector. For that cause, I’ll solely briefly cowl the subject right here: In Brazil, the 5 largest banks (Itaú Unibanco, Bradesco (BBD), Banco do Brasil (OTCPK:BDORY), Caixa Econômica Federal and Banco Santander Brasil (BSBR)) handle 82% of all belongings inside the nation.
Enterprise Mannequin of Itaú Unibanco
Itaú Unibanco’s enterprise models might be divided into the next: credit score, buying and selling, insurance coverage & providers and extra capital. From its credit score enterprise unit, Itaú Unibanco generated income of BRL 67.9 billion in 2021 in comparison with BRL 62.7 billion in 2020, leading to a rise of 8.3%. With the enterprise unit of insurance coverage & providers, the financial institution generated income of BRL 55.6 billion in 2021 in comparison with BRL 50.3 billion in 2020, representing a rise of 10.5%.
The information exhibits us that the 2 enterprise models of credit score and insurance coverage & providers symbolize Itaú Unibanco’s most necessary enterprise areas, as they’re the place most income is generated.
Income of Itaú Unibanco’s enterprise models
Itaú Unibanco’s Aggressive Benefits
In 2008, Itaú merged with Unibanco and subsequently consolidated its main place amongst personal banks in Brazil.
In keeping with Interbrand, Itaú was the strongest model in Brazil in 2021. A examine performed by Model Finance additionally got here to the identical conclusion, with Itaú Unibanco being the one Brazilian firm on their record of the five hundred most precious manufacturers on this planet. Compared to 2020, the Brazilian financial institution gained 53 positions within the 2021 report and is presently the 335th most precious model on this planet.
In January 2022, Itaú Unibanco introduced the acquisition of 100% of the shares of the digital funding dealer Perfect Holding Financeira S.A. In keeping with Itaú Unibanco, this funding strengthens the dedication to their clients of in search of transformative options in a market that’s quickly increasing.
From my standpoint, this acquisition is an extra step ahead for Itaú Unibanco on their path to digital transformation. The acquisition permits the corporate to additional increase its digital choices so as to have the ability to compete efficiently in opposition to the digital banks and fintechs in Brazil.
Moreover, Itaú Unibanco has simply agreed as we speak to accumulate management of Avenue, which is a brokerage that goals to offer Brazilians with entry to overseas markets. Itau Unibanco will purchase 35% of Avenue for the quantity of about 493 million reais ($92 million).
I see Itaú Unibanco’s broad distribution community of 4,100 branches together with its monumental model energy as a long-term aggressive benefit over conventional banks corresponding to Banco do Brasil or Bradesco, and digital banks like Nubank.
Itaú Unibanco’s income development in 2021 in comparison with 2020 (the working income of Itaú Unibanco elevated from BRL 114.785 billion in 2020 to BRL 125.601 billion in 2021), demonstrates their steady and strong enterprise mannequin in addition to the wonderful market place the financial institution has inside Brazil. Pushed by the fast-growing buyer base of its digital financial institution and considering Itaú Unibanco’s sturdy aggressive benefits and wonderful market place within the Brazilian banking sector, I consider they may proceed to develop within the coming years.
Progress Alternatives via Itaú Unibanco’s Digital Transformation and its Digital Financial institution
Itaú Unibanco is repeatedly bettering the providers in its digital areas so as to have the ability to compete with the normal banks and fintech corporations. In 4Q21, 63% of all merchandise bought by Itaú Unibanco’s clients had been made digitally, in line with the financial institution.
Itaú Unibanco’s digital financial institution affords its purchasers an account with no annual charges and during which they will perform all their banking wants by way of the app. All through its digital financial institution, Itaú Unibanco goals to supply youthful clients a much less bureaucratic and extra personalised banking expertise.
The corporate can be together with playing cards which can be freed from annual charges in its product portfolio. For instance, it has eliminated the payment from its Ayrton Senna Platinum card. That is one other means that Itaú Unibanco competes with the digital banks and fintechs by reducing charges with a purpose to be extra aggressive.
With open finance, which was launched by the digital financial institution within the second quarter of 2021, purchasers got the opportunity of viewing their mixture steadiness inside the banking app. In keeping with the financial institution, sooner or later will probably be doable to consolidate the steadiness with different monetary establishments.
In 4Q21, the digital financial institution iti Itaú acquired 4.7 million new clients, 86% of which had no prior relationship with Itaú Unibanco. This excessive determine is an indication that the corporate is succeeding in attracting new clients fairly than current clients switching from Itaú Unibanco to its digital providing. On the finish of 1Q22, Itaú Unibanco’s digital financial institution already reached a complete variety of round 16.7 million clients.
Knowledge from a examine performed in January 2021, confirmed that about 16.3 million Brazilians don’t presently have a checking account. The examine additionally revealed that almost all of individuals with no checking account are ladies between the age of 18 and 29 years. By way of its digital financial institution, Itaú Unibanco is aiming to method this goal group. The truth that such a lot of individuals in Brazil do not but have a checking account signifies the expansion potential which Brazilian banks, usually, nonetheless have.
In my view, Itaú Unibanco is properly positioned inside the conventional banking sector resulting from its sturdy model picture and its broad buyer base. Moreover, it’s aggressive within the digital banking and fintech sector resulting from its low payment choices by way of their digital financial institution, focused at a youthful group. Based mostly on these elements, I assume that the financial institution will proceed its income development sooner or later.
Relative Valuation Fashions
Itaú Unibanco’s P/E (FWD) Ratio
Itaú Unibanco’s P/E Ratio is presently 7.1. In comparison with their common P/E Ratio of the final 5 years (which is 11.34) that is 37.35% decrease. This indicator means that the corporate is presently undervalued.
When evaluating Itaú Unibanco’s P/E Ratio of seven.10 with the sector medium of 10.04, we will see one other indicator suggesting that the corporate is presently undervalued. Itaú Unibanco’s present P/E Ratio is 29.26% under the sector medium.
Itaú Unibanco’s Value / Ebook (FWD) Ratio
The Value / Ebook Ratio of Itaú Unibanco is 1.34. That is 24.06% greater than the sector medium of 1.13. Evaluating Itaú Unibanco’s present Value / Ebook Ratio of 1.34 with its common Value / Ebook Ratio of the final 5 years, we will see that it is presently 35.81% decrease, thus, indicating an undervaluation of the corporate’s inventory.
Itaú Unibanco’s Return on Widespread Fairness (TTM)
Itaú Unibanco’s Return on Widespread Fairness is presently 18.48%. When put next with the sector median of 12.46%, this demonstrates the large profitability of the financial institution in relation to stockholders’ fairness. Itaú Unibanco’s Return on Widespread Fairness is 48.29% greater than that of the sector median. Itaú Unibanco’s greater Return on Widespread Fairness compared to the sector median is an indicator that the corporate is working with a larger monetary effectivity than most of its rivals. That is one other indicator that strengthens my purchase score of the Itaú Unibanco inventory.
Itaú Unibanco In keeping with the Searching for Alpha Issue Grades
The Searching for Alpha Issue Grades underline the attractiveness of Itaú Unibanco. The main Brazilian financial institution is ranked with an A by way of Progress, an A+ by way of Profitability and with an A by way of Revisions. For Valuation and Momentum, the financial institution will get a C+. Beneath you may see the overview of the Searching for Alpha Issue Grades:
Itaú Unibanco in line with the Searching for Alpha Quant Ranking
In keeping with the Searching for Alpha Quant Ranking, Itaú Unibanco is presently a robust purchase. That is yet one more indicator displaying the attractiveness of the corporate. Beneath you may see the score of Itaú Unibanco in line with the Searching for Alpha Quant Ranking:
One of many most important dangers I see for Itaú Unibanco is the rising competitors from digital banks and fintechs. For instance, The digital financial institution Nubank (NU) is rising strongly and already has greater than 40 million clients. I see Nubank as one in all Itaú Unibanco’s most important rivals within the coming years, particularly resulting from the truth that they’ve fascinating affords from the client’s standpoint. For instance, they don’t cost any account administration charges. Moreover, the financial institution is backed by star investor Warren Buffet. Parallel to Itaú Unibanco’s digital financial institution, Nubank additionally goals to give attention to a youthful goal group who’re but to open a banking account.
One other danger for Itaú Unibanco is credit score danger. Attributable to the truth that greater than 50% of its income derives from the granting of loans, a doable enhance in defaults may have an effect on the profitability of the financial institution.
As already talked about in my article concerning the Brazilian funding dealer XP, I see the forex as an extra danger for buyers outdoors of Brazil when investing in an organization from South America’s largest nation. A possible depreciation of the Brazilian actual represents a danger for the investor.
Ought to inflation proceed to stay excessive in Brazil, the true may depreciate additional in opposition to the greenback. In keeping with the Brazilian Institute of Geography and Statistics (IBGE), the inflation index of the nation was 10.06% in 2021. This inflation was primarily pushed by excessive gasoline costs as a result of greater price of crude oil. Nevertheless, in 2022, Itaú Unibanco calculates a decrease inflation charge of about 5.5%.
Moreover, a declining GDP in Brazil might be one of many causes for future depreciation of the true in opposition to the greenback. In 2020, for instance, GDP in Brazil declined by 3.9%, after being affected by the coronavirus outbreak. For 2022, Itaú Unibanco presently expects a GDP discount of 0.5% compared to 2021.
The Backside Line
Totally different relative valuation fashions such because the P/E Ratio counsel that Itaú Unibanco is presently undervalued. When evaluating Itaú Unibanco’s P/E Ratio of seven.10 with the sector medium of 10.04, we will see that the corporate’s present P/E Ratio is 29.26% under the sector medium, indicating that the inventory is presently undervalued.
In my view, the inventory of Itaú Unibanco is presently a purchase. Itaú Unibanco already has a really sturdy market place in Brazil and has been capable of construct an financial moat as a result of sturdy model picture it has constructed all through its 97 years of historical past. Pushed by its digital transformation course of and the sturdy buyer development of its digital financial institution iti Itaú, I anticipate the corporate to efficiently compete in opposition to the normal banks, digital banks and fintech corporations in Brazil over the long-term. Based mostly on these causes, I see Itaú Unibanco as a long-term funding. Nevertheless, particularly as a result of forex dangers, as talked about above, I’d suggest that you do not make investments greater than 3% of your funding portfolio.
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