Itaú Unibanco Holding S.A. — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual Form 20-F, not a standalone Q4 filing; quarterly Q4 figures are not separately presented in the supplied text. Financial statements are audited and prepared under IFRS as issued by the IASB, with amounts principally in millions of Brazilian reais.
Business context
Itaú Unibanco is a Brazil-based financial holding company with operations in 18 countries and territories. Its principal activities are retail banking, wholesale and investment banking, consumer credit, insurance, private pensions, asset management, payments and market activities. The group is controlled by IUPAR, which owned 51.7% of common shares and 26.1% of total share capital at year-end.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenues | R$117,079 million | R$104,200 million | +12.4% |
| Net interest income | R$69,350 million | R$60,705 million | +14.2% |
| Non-interest income | R$47,729 million | R$43,495 million | +9.7% |
| Expected losses and claims | R$18,567 million expense | R$10,182 million expense | +82.4% |
| Net income | R$27,813 million | R$25,639 million | +8.5% |
| Net income attributable to parent | R$27,113 million | R$24,907 million | +8.9% |
| Net interest margin | 4.5% | 4.7% | Down 0.2 percentage points |
| Return on average equity | 21.6% | 20.4% | Up 1.2 percentage points |
| Total assets | R$1,637,481 million | R$1,552,797 million | +5.5% |
| Total loans and leases | R$585,791 million | R$536,091 million | +9.3% |
| Total deposits | R$507,060 million | R$463,424 million | +9.4% |
| Total stockholders’ equity | R$149,465 million | R$150,466 million | -0.7% |
Cash flow, liquidity, capital and credit quality
- Net cash from operating activities was R$35,224 million, compared with R$29,758 million in 2018.
- Net cash used in investing activities was R$38,723 million, while net cash used in financing activities was R$21,302 million. Cash and cash equivalents declined to R$70,811 million from R$95,558 million.
- The operational liquidity reserve was R$172,938 million at December 31, 2019. The average liquidity coverage ratio was 149.1% and the net stable funding ratio was 122.2%, both above the applicable 100% minimum.
- The Common Equity Tier 1 ratio was 13.2%, Tier 1 ratio was 14.4% and total Basel capital ratio was 15.8%. The total capital ratio declined from 18.0% in 2018, primarily because of higher risk-weighted assets and dividends or interest on capital.
- The 90-day non-performing loan ratio was 3.4%, down from 3.5%. The allowance for expected losses was R$37,508 million, equal to 6.4% of total loans and 159.2% of non-accrual loans.
- Capital expenditures were R$4,312 million, including R$2,691 million of intangible-asset expenditures, and were funded with internal resources.
Material changes versus 2018
- Loan growth was concentrated in individuals, up 13.1%, and micro, small and medium-sized businesses, up 25.3%; the corporate portfolio increased 2.6%.
- Expected-loss expense rose sharply because of retail portfolio growth and deterioration in certain Latin American corporate exposures, partly offset by improved Brazilian corporate credit quality.
- Funding shifted toward deposits and financial credit bills. Deposits increased 9.4%, while securities sold under repurchase agreements declined 22.3%.
- Net interest income benefited from fair-value adjustments and loan growth, but lower interest rates reduced yields. The SELIC rate ended 2019 at 4.5%, compared with 6.5% at year-end 2018.
- Non-interest income benefited from higher asset-management fees, current-account services, brokerage activity and a R$1,991 million gain associated with XP Inc.’s initial public offering.
- General and administrative expenses rose 6.0%. The company recorded R$2,385 million related to a voluntary severance program. Excluding that item, general and administrative expenses increased 1.9%, below 2019 IPCA inflation of 4.3%.
- Employees declined to 94,881 from 100,335, and Brazil branches declined to 3,158 from 3,530. Digital account openings and digital-channel usage continued to expand.
Guidance, outlook, risks and unusual items
- The filing does not provide formal earnings or revenue guidance for 2020. Management identified the Brazilian and Latin American economic environment, regulation, interest rates, foreign exchange, inflation, credit quality and COVID-19 as key factors affecting future results.
- The filing, dated April 27, 2020, states that COVID-19 could reduce Brazilian GDP by 2.5% in 2020, versus a prior estimate of 1.8% growth. Management could not reasonably estimate the pandemic’s ultimate impact on future results, cash flows or financial condition.
- COVID-19 risks include higher defaults and expected-loss provisions, market and trading losses, funding and liquidity pressure, reduced access to capital markets, operational disruption, remote-working and cybersecurity risks, and lower customer activity.
- Brazilian authorities temporarily reduced the capital conservation buffer, restricted certain dividends and share repurchases, eased some provisioning requirements and introduced liquidity and employment-support programs. These measures applied after year-end and did not affect 2019 results.
- Material legal and tax exposures include R$21,454 million of provisions for civil, labor, tax and other matters, plus possible-loss tax proceedings totaling R$28,959 million. A São Paulo municipal tax assessment received in November 2019 was approximately R$4 billion; management stated that relevant tax proceedings were assessed as remote or otherwise adequately provisioned.
- The group has significant exposure to Brazilian government securities. Their book value was R$324,637 million and market value was R$327,681 million at year-end, representing approximately 20% of total assets and 67.1% of the securities portfolio.
- Other notable developments included the December 2019 XP Inc. IPO, the planned acquisition of Zup for approximately R$575 million with closing of the first tranche in March 2020, and subsequent senior and perpetual subordinated debt offerings in early 2020.
Investor verification points
- Verify the effect of COVID-19, subsequent loan moratoria and government relief programs on 2020 credit quality, provisioning, liquidity and capital ratios.
- Reconcile IFRS results with Brazilian GAAP and recurring managerial results, particularly the treatment of hedging tax effects, XP gains, provisions and other non-recurring items.
- Monitor retail and Latin American loan growth against non-performing loans, Stage 2 and Stage 3 migration, expected-loss coverage and write-offs.
- Assess sensitivity to Brazilian government debt, SELIC and other interest-rate changes, foreign exchange movements and sovereign-credit conditions.
- Review the potential outcomes and provisioning coverage for the R$4 billion São Paulo ISS assessment, economic-plan savings litigation, labor claims and possible-loss tax proceedings.
- Confirm the timing, regulatory approvals, funding and capital impact of the Zup transaction and the planned increase in Itaú’s XP Inc. interest.
- Review post-year-end dividend restrictions, capital-buffer changes, debt issuance terms and any effect on shareholder distributions or funding costs.