Bank Will Use AI To Reduce Incidents By 99% And Improve Client Experience

Key Takeaways

• Significant ESG financing growth and tech investments are projected to enhance revenue, attract investors, and improve net margins through better client experiences.
  
• Strategic client migration and robust financial management are expected to boost engagement, revenue, earnings per share, and maintain strong ROE.
  
• Rising costs and increased competition, coupled with exchange rate volatility and higher taxes, could significantly pressure Itaú Unibanco's future earnings and growth.

Catalysts

Engages in various financial products and services in Brazil and internationally.

• Itaú Unibanco plans to significantly increase its ESG-related loans and financing transactions from R$400 billion to R$1 trillion by 2025, which could enhance revenue and attract more ESG-focused investors.
  
• The bank is investing in technology and AI, enabling a 99% reduction in higher-impact incidents and improving client experiences, which can expand customer base and improve net margins.
  
• Completion of the One Itau project aims to migrate 15 million clients to a new platform, potentially increasing engagement and cross-selling opportunities, positively affecting revenue and margins.
  
• The bank's robust cost management and capital allocation strategy, including systematic dividend payouts and buyback plans, are expected to enhance earnings per share and maintain strong ROE.
  
• Continued growth in the credit portfolio, especially in segments like SMEs and secured loans, along with improved credit quality, could lead to increased financial margins and reduced credit costs.

Itaú Unibanco Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Itaú Unibanco Holding's revenue will grow by 16.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.3% today to 26.4% in 3 years time.
• Analysts expect earnings to reach R$55.9 billion (and earnings per share of R$5.39) by about February 2028, up from R$41.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, up from 8.1x today. This future PE is greater than the current PE for the US Banks industry at 6.1x.
• Analysts expect the number of shares outstanding to decline by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.02%, as per the Simply Wall St company report.

Itaú Unibanco Holding Future Earnings Per Share Growth

Risks

• The guidance for non-interest expenses suggests a potential increase above revenue, attributed to technological investments or core costs pressured by inflation, which could impact net margins.
  
• The projected GDP growth for 2025 is lower due to monetary tightening, which could dampen loan portfolio growth and, consequently, impact revenue.
  
• Competition, particularly in middle to high-income segments and from fintechs like Nubank, could pressure spreads and reduce earnings in retail banking.
  
• A higher effective tax rate guided for 2025 could reduce net earnings compared to previous years.
  
• The impact of exchange rates on financial margins and portfolio growth suggests potential volatility in earnings, particularly if the FX effects are not managed effectively.

Valuation

• The analysts have a consensus price target of R$40.423 for Itaú Unibanco Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$46.0, and the most bearish reporting a price target of just R$30.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$212.0 billion, earnings will come to R$55.9 billion, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 19.0%.
  
• Given the current share price of R$33.92, the analyst price target of R$40.42 is 16.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.