LatinFinance - November/December 2016 - 14

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The accolades reflect an institution at the top of its game. The
Bank of the Year in Brazil came down to Itaú and Banco Bradesco -
the third-largest emerging markets bank, after Russia's Sberbank,
according to UBS' calculations. Itaú took the crown in spite of a small
dip in net income, thanks to a strengthening capital base.
"Itaú has an excellent record of performance through crises
and recessions here in Brazil," says Edgard Dias, banking analyst at
Standard & Poor's. "It still has a very good performance."
While Itaú has weathered the past months of economic crisis in
Brazil, now it must contend with a dramatic shift as a result of the
country's new government. On the bright side, GDP is set to expand,
albeit just a smidge, in 2017, ending two years of deep recession.
"Itaú and Bradesco are well positioned to grow next year," says
Ceres Lisboa, Brazilian banks analyst at Moody's. "They have

CHANGE AT THE TOP: A replacement for Itaú Unibanco chief executive
Roberto Setúbal is expected to be announced in early 2017

anticipated a lot of the potential asset risk problems that they saw
over the past 18 months and they have a pretty robust reserves buffer
to absorb potential losses that might come next year."
But the economic growth is set to come in tandem with other
major changes in the economy. Falling interest rates, from the
current level of 14.25%, are likely to complicate the outlook for
lenders. In particular, lower rates will make it difficult for Itaú to
maintain returns on equity in the high-teens to low 20% area, says
Falavina.
"In Brazil, financial institutions pay 45% taxes, versus 34% for any
other corporates," says Falavina. "So to retain high profitability with
an unusually high tax bracket in a compressing yield environment, it
becomes very challenging."
New growth
Credit from commercial banks has slowed over the past six to eight
months in inflation-adjusted terms, says Dias at S&P. "Itaú has
presented a flat portfolio, which in real terms represents a decline,"
he says.
Yet the bank is already reaching a turning point, says Setúbal.
Delinquency rates have begun to stabilize and market volatility is

14 L ATINFINA NCE.COM - November/December 2016

ROBERTO SETÚBAL, ITAÚ UNIBANCO

"THE BANK HAS MANY EXECUTIVES
PREPARED TO BECOME THE NEXT
CEO. I'LL STILL BE ON THE BOARD,
SO THE TRANSITION WILL BE VERY
SMOOTH"
waning, he says.
"We have been reducing the credit portfolio because of demand
and the weak economy and credit restrictions," Setúbal says in an
interview conducted in late September. "But the last two months,
we've seen more of a stabilization, not the drop we were observing
before. So we believe by year-end we'll probably have an increase in
the portfolio from the point we're at today."
Itaú has adjusted the makeup of its loan book in recent years to
build resilience against the economic downturn, sharply increasing
the proportion of its assets in payroll lending. Repayments on payroll
loans are deducted from the borrower's paycheck before the money
hits their bank account, making them a particularly robust addition
to a lender's portfolio. That shift has helped Itaú's non-performing
loan (NPL) rate as some of the country's large corporates have
renegotiated lending.
"Itaú and others were facing asset quality problems and
profitability pressure due to the economic situation of Brazil," says
Dias. "They are trying to renegotiate some loans with companies that
need room to breathe in this environment.
"Itaú has grown from a very small portion of its portfolio in
[payroll deductible loans]. They have used this credit growth to
replace loans that are riskier where they are facing the greatest
pressure on NPLs: vehicle financing, SMEs - that's the sector facing
the biggest pressure - and the large corporates."
Setúbal lists the economic changes as one of the two main
hurdles his successor will have to face - the other being the fintech
revolution. But he argues the economy is more of an opportunity
than a challenge.
"This would mean much stronger growth in Brazil. Confidence
would increase a lot. So we would see more room for privatization
and foreign investment.
"It would be, in my view, a great economic moment. And the
role of the bank in this new era would be one of intermediating,
especially foreign investors with local investment opportunities."
Itaú has room to increase lending to large infrastructure projects,
he adds, saying it is "a matter of spread and risks".
"With the new government, the amount of subsidies will reduce
substantially. It will be much closer to market rates. This offers
opportunity for the local private banks to also participate. This
would be something that would be a change from more recent years.
And we would be definitely willing to participate."
Yet taking advantage of a retreat of the state-owned lenders,
such as development bank BNDES, will not be straightforward. The
government-backed lenders can offer credits at rates that are simply
off the table for privately-held banks, says Lisboa at Moody's.
"All the banks are saying they want to participate in these
[infrastructure] projects," she says. "However, we need to see what
the prices are going to be: they can't compete with subsidized loans.
That might not be a feature of these programs any longer, but we
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