UPDATE 1-Itaú sees ROE above cost of risk despite sharp profit drop

miércoles 3 de febrero de 2016 12:56 GYT

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By Guillermo Parra-Bernal

SAO PAULO Feb 3 (Reuters) - Returns at Itaú Unibanco Holding SA will end the year slightly above the cost of capital, meaning that Brazil's No. 1 bank by market value will create value for shareholders even as the country grapples with a deep recession, Chief Executive Officer Roberto Setubal said on Wednesday.

The economic and political challenges facing Brazil have raised the cost of capital, the opportunity cost of making an investment, to about 18 percent from 16 percent a few quarters ago, Setubal told investors on a conference call to discuss fourth-quarter results.

Based on estimates unveiled on Tuesday, recurring net income at Itaú could fall an average 15 percent this year under an effective tax rate of 35 percent, executives said. That would be the biggest profit decline in years, underscoring the challenges facing Setubal ahead of his retirement next year.

Under those estimates, loan disbursements could shrink while loan-loss provisions could rise up to 38 percent this year, with 95 percent of that being set aside in Brazil. Setubal's focus will be to strengthen Itaú's balance sheet to underpin earnings growth when Brazil's economy begins to recover, most likely next year.

Return on equity, a measure of how well a bank is spending shareholder money, could fall slightly below 20 percent this year, closer to the cost of capital, executives said, when investors asked about the outlook.

"We are trying to be realistic here," Setubal said. "We are positive that ROE will remain slightly above the cost of risk this year and improve" in subsequent years.

Return on equity slipped to 22.3 percent last quarter from 24 percent in the third quarter and 24.7 percent a year earlier. Many analysts expect ROE to fall to near 18 percent this year.   Continuación...