Itau Unibanco (NYSE:ITUB) is the leading bank in Brazil in terms of profits and market capitalization. It has the highest ROE (1Q ROE of 23.6%) amongst its large retail bank peers in the country and is one of the largest components for the Ibovespa index. Multiples are relatively high compared to long term historical averages, but we see potential upside if medium term growth prospects strengthen on the back of the passage of structural reforms. Even if reforms are delayed, the bank should continue to deliver solid earnings going forward - and paying much of it out as dividends.
Multiples: Steady for now and potential for expansion
Multiples have generally held since last macro trigger (elections)
Much of what happens to ITUB shares is driven by the perception of Brazil with foreign investors, as it relates to both currency and sovereign risk. The presidential elections in October 2018 served as an important catalyst for Brazilian bank shares and the Brazilian equity markets in general. Jair Bolsonar, the winner in the election, campaigned on a platform of pushing through many much needed reforms, including pension and fiscal, and of reducing the size of the Brazilian state (through efficiency improvement programs and privatizations). This crowding in of the private sector led to stronger expectations for GDP and earnings growth, which helped push multiples higher.
Since then, and in particular since President Bolsonaro took office, the pace of reforms has disappointed. This is largely because pension reform – the one seen as the most important – has not been approved. This sluggishness in approving this key reform has lowered expectations for investments and economic activity, which has led to a less favorable view on earnings growth.
A closer look at multiples, however, shows that expectations regarding value have maintained the high level attributed to shares
