2018 Will Have Challenges, But Itau Unibanco Poised For A Return To Growth

This latest downturn in Brazil has been a challenging one for the banking sector, and management at Itau Unibanco (ITUB) has consistently overestimated loan growth and underestimated credit deterioration. That notwithstanding, management has steered this bank well through a tough period, and the shares have done well in 2017 as conditions in Brazil continue to improve.

2018 is likely to be a challenging year for the banking sector, as loan growth is likely to improve but not enough to offset compression to net interest margins. With likely limited options to reduce costs and cost of risk, I would expect earnings growth to be "meh" in 2018, but with a much stronger outlook for 2019 and 2020. Further complicating this outlook is the presidential election cycle in Brazil and its potential impact(s) on the cost of capital.

I think Itau Unibanco can beat the S&P 500 over the next couple of years, but I think the likely returns (low teens) are pretty well offset by the risks, so I wouldn't call this a slam-dunk buy. As a quality play on Brazil, and Brazil's return to growth, though, it's not a bad longer term holding to consider and especially on dips/pullbacks.

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2018 Will Have Challenges, But Itau Unibanco Poised For A Return To Growth