Analysis: Is Brazil’s Itaú bank ready to compete with fintechs?

RIO DE JANEIRO, BRAZIL – Last week, Itaú Unibanco (ITUB4) held an Investor Day, delivering its main messages regarding the future, amid a very disruptive scenario for the banking sector. The signals were perceived as positive, with the bank seeking to convey an image of innovation and growth. However, analysts who attended the event had different perspectives on what to expect from the initiatives of Brazil’s largest private bank.

Investment advisor Bradesco BBI pointed out that there were two main messages from management: i) the bank should accelerate growth, and ii) it is incorporating a digital mindset, but still with physical ramifications.

In addition, management sees regulatory asymmetries favoring smaller digital banks/fintechs, while reinforcing its commitment to efficiency.

The guidance (projections) for 2021 was reiterated, it is worth noting, despite the strategy of accelerating growth. Loan growth should range between 5.5% and 9.5%, supported by individuals (home, auto and consumer loans). The margin with clients should grow between 2.5% and 6.5%, while the margin with the market should be close to the upper limit of the guidance range, between R$4.9 billion and R$6.4 billion. Meanwhile, provision charges should be at the lower end of the guidance range of between R$21.3 billion and R$24.3 billion. Moreover, fee revenues should grow by 2.5%-6.5%, while operating expenses may range from -2 to +2%. Finally, the effective tax rate should stand between 34.5%-36.5%.

Gustavo Schroden and Otavio Tanganelli, analysts at Bradesco BBI, point out that management was vocal in saying that the bank should accelerate its growth by focusing on rapid expansion of its customer base and interactions, and extending the length of customer relationships.

Furthermore, it pointed out that the bank should have a digital mindset, although its physical branches will still be available to customers. The expectation is that increased digitalization of the bank’s operations should support growth, through new products, better customer experience, more interactions, and longer customer relationships.

The focus on accelerating growth should occur while the institution balances revenues from lending (which requires more capital) and services (which requires less capital), aiming to preserve profitability. Management added that the dividend should remain at 25% in 2021 while the bank strengthens its capital base.

Itaú also regards the Latin American subsidiaries as complementary businesses: the challenges of improving operations in Chile and Colombia (CorpBanca), stating that there are no short-term expansion ambitions in the region.

With respect to competition, although the bank has recognized the emergence of new banks/digital fintechs with good products and services, they see a regulatory asymmetry that could favor the growth of new/smaller players. However, management believes that as these competitors gain systemic relevance, they should be regulated more, like the big players. Thus, they point out, competition is likely to be “fairer” in the future.

They also stressed the commitment to efficiency, automation and optimization should be key pillars for cost control, with 16 efficiency fronts in progress, 1,200 initiatives already planned and 400 under implementation. “It is important to note that management expects to reduce costs nominally and sequentially over the next 3 years. The bank had savings of R$500 million in the first quarter 2021 compared to the fourth quarter 2020, which were invested in new products/services,” BBI points out.

Schroden and Tanganelli highlight a positive outlook on the bank’s strategy to accelerate growth and incorporate a digital mindset, as this could prepare the bank to compete with new/smaller players/fintechs.

This is because the main gaps between large/traditional banks and new/smaller players/fintechs lie in agility and flexibility to develop new products and services, and in terms of customer experience. Thus, the digital mindset present in new players is key to this development.

“However, we note that implementing this strategy should be a major challenge, as changing the culture of a bank the size of Itaú is no easy task. In addition, we believe that physical branches impact the bank’s competitiveness. As such, although we recognize the message as positive, it is still a big challenge”, say the analysts, who recommend ITUB4 shares as neutral, with a target price of R$33 for each share, representing an increase of only 2.2% in relation to closing on Friday, June 4.

Among the most optimistic are Credit Suisse and Morgan Stanley, which have a buy recommendation for the bank’s assets.

In a brief comment on Investor Day, Credit Suisse highlighted Itaú’s greater focus on growth, pointing out that the net interest income (NII) of customers should increase due to higher credit growth and better mix. Credit Suisse has an outperform recommendation for R$39, or an increase of about 21% over the June 4 close.

Morgan Stanley has an overweight recommendation for ADRs (shares traded on the New York Stock Exchange), with a price target of US$7.50 per share, placing the assets as top picks among large banks. The target price is US$7.50, or an 18.3% increase from Friday’s close.

Morgan analysts Jorge Kuri, Jorge Echevarria, Eugenia Sanchez, Felipe Martinuzzo assess that Itaú is ahead of other banks in the process of adjusting its business model to compete with fintechs.

They believe that Itaú’s strategy and operational capabilities represent a competitive advantage, and that the bank is striving to maintain its leadership in Brazil. Thus, it is well positioned to benefit from the country’s credit growth period, driven by the combination of low interest rates and pent-up demand for loans.

The bank says it sees room for a positive surprise with the net interest margin, as the market has, in its assessment, an overly pessimistic view on competition from fintechs, and does not consider current liquidity, improved credit mix.

Morgan Stanley is also optimistic about cultural changes and efficiency-focused initiatives, with Itaú closing the gap with fintechs through digital solutions, user experience, product breadth and pricing.

The analysts highlight that the bank is a leader in PIX adoption, with about 20% share in volumes, and is well ahead in open banking initiatives, as well as having developed “iti,” a payments app launched in 2019 and expected to reach 15 million users by the end of the year.

It also emphasizes cost reduction with the rationalization of bank branches, which should help improve operating costs as revenues rebound.

Overall, market analysts are split on the attractiveness of the bank’s shares amid the challenging environment for the sector: according to Refinitiv’s compilation, of fifteen investment houses that cover the share, eight recommend the equivalent of buy, while seven recommend maintenance. The average target price is R$34.43, which corresponds to a potential increase of 7% over Friday’s close.