Itau Chief Setubal Sees 15% Jump in 2012 Profit Driven by Brazil Rate Cuts

Profit at Itau Unibanco Holding SA (ITUB4), Latin America’s largest bank, may jump 15 percent next year as interest-rate cuts in Brazil reduce loan delinquencies, Chief Executive Officer Roberto Setubal said.

“We’ll have a period of reduction in the interest rates and this will help to reduce delinquencies, and improve economic conditions in general,” Setubal, 56, said in an interview yesterday at his office in Sao Paulo. “So it’s very positive for credit and positive for banks.”

Net income, which fell short of analysts’ estimates in the second quarter, will climb at least 10 percent this year, he said. Recurring net income, similar to profit from continuing operations and excluding one-time items, rose 7.6 percent in the first half of 2011 to 6.96 billion reais ($4.1 billion) from the same period last year. Setubal said he targets profit growth of 15 percent to keep return on equity higher than 20 percent.

Brazil’s central bank surprised economists by cutting interest rates last month and signaled it will continue to reduce borrowing costs in the world’s second-largest developing economy after China. That may reverse a surge in delinquencies that crimped second-quarter profit and led to a 29 percent increase in funds set aside to cover bad loans, Itau said in an Aug. 2 statement.

Itau preferred stock rose 47 centavos, or 1.7 percent, to 28.75 reais in Sao Paulo, the third biggest gain in the benchmark Bovespa index, which was flat today. Itau’s holding company Itausa-Investimentos SA added 1.6 percent to 9.55 reais, the fourth-biggest gain. Itau has dropped 28 percent this year, compared with declines of 12 percent at Banco Bradesco SA (BBDC4) and 19 percent for the Bovespa index.
Default Rates

The Brazilian central bank reduced the Selic rate to 12 percent from 12.5 percent after all 62 economists surveyed by Bloomberg had predicted no change.

Itau plans to boost lending by 15 percent annually, more than triple the rate of economic growth Setubal expects in the years to come, he said. Loans climbed 21 percent to 317 billion reais in the second quarter from the same period last year.

The default rate, a measure of payments at least 90 days overdue, rose to 4.5 percent at the end of June from 4.2 percent in the first quarter, Itau said last month. The bank forecast that the rate would increase 20 to 30 basis points in the second half of the year.

The delinquency rate “is pretty much under control,” Setubal said. “Next year will be a better year, and we already see signs of that.”
Acquisitions on Hold

While Itau is seeking to expand operations in Latin America to diversify revenue, Setubal said he’s postponing plans to make acquisitions outside of Brazil because the stock is undervalued relative to takeover targets. About 90 percent of Itau’s business is in Brazil.

“Given relative valuations, the asset prices in Latin America and in the United States are expensive,” he said. “For us, it would be very costly to do an acquisition outside Brazil right now.”

In Chile, Itau is adding 10 to 16 branches this year to a network of 60, he said. The bank recently hired Barbara Angerstein from Celfin Capital SA to set up a Chilean equity research department aimed at institutional clients. Itau is also opening offices or applying for banking licenses in Colombia and Peru, he said.

Itau has no plans to buy assets outside of the Americas, Setubal said, even as the European debt crisis caused the price of banks in that region to tumble.

The acquisition of Unibanco – Uniao de Bancos Brasileiros SA, completed in March 2009, will continue to help cut costs in the coming years, Setubal said.

“We have this integration in Itau and Unibanco and we could not really capture all the synergies that were possible,” he said. “Now that we have one bank, the target is to make it more efficient.”