Itau Unibanco

Itaú Unibanco reported strong second-quarter earnings, with 4.7% year-over-year revenue growth, while net income grew 8% from last year to BRL 12.1 billion. These results translate to a return on average equity of 24.3%, up from 23.3% in the prior-year quarter.

Why it matters: While Itaú had a great quarter, consistent with recent quarters, the bank has not exhibited anything we think would materially alter our long-term view of the bank. Shares traded up in the low single digits during after-hours trading following the Aug. 4 release. By our estimates, improvements in financial margins with clients drove over 70% of the year-over-year revenue growth in this solid quarter. As interest rate impacts were practically neutral, 9.6% loan growth was the driver, with about 57% of that coming from corporate lending in just Brazil. Current account fees for individuals and payment and collection fees have been under pressure, down 21.4% and 7.3%. We anticipate further near-term pressure on these areas as Itaú follows through with its strategy to waive certain fees to bolster cross-selling opportunities.

The bottom line: We don't plan to change our $7.70 per ADR fair value estimate for no-moat Itaú Unibanco after incorporating second-quarter results. We view shares as fairly valued at current prices. We plan to make near-term changes to drive stronger balance sheet growth through corporate and very small- to middle-market lending. This should be almost entirely offset by stronger deposit growth, lower fees, commissions, and insurance income from the lowered guidance. We still maintain our long-term assumptions, including a top-line compound annual growth rate of about 6.5%, driven mostly by strong net interest income performance from high-single-digit loan growth and relatively controlled expenses around 5.5%.

Our fair value estimate is $7.70 per ADR share, based on a real/US dollar exchange rate of 4.93.

Itaú's noninterest income has faced material headwinds in recent years from falling banking service fees, with current account fees falling 16.8% in 2025. Banking fees have historically been highly lucrative for major Brazilian banks, as limited competition has allowed the industry to charge high fees for basic services.

However, Itaú faces increased competition from new fintech firms, such as Nubank, and the central bank's Pix payment system, which has gained rapid adoption in Brazil, reducing the ability to charge these fees and pushing the firm to expand its lower-cost digital banking offerings. While we anticipate revenue from this segment will decrease at a slower rate going forward, we do not see it ever recovering to its old highs.

This negative pressure is being offset by strong performance from the bank's card services and insurance businesses. With card issuance, the firm's largest source of noninterest income, up 5.1% and insurance revenue up 17% in 2026, we still see room for healthy growth for Itaú, despite increased competition. We expect noninterest income to increase at a 5% compound annual rate over the next five years, up from 3.3% from 2021 to 2024.

Over the next five years, we forecast average loan growth of 6.9%, below the bank's historical average, as high interest rates will be a headwind to loan growth. We expect higher loan growth from the bank's higher-margin consumer lending products, which should act as a tailwind for net interest margins. We expect the efficiency ratio to be in the low 50s by 2030.

In our valuation, we use a cost of equity of 12.5%. This includes a base cost of equity of 9%, to which we add a 3.5% country risk premium.

In our view, Itaú Unibanco does not have an economic moat, as the value of its competitive position, which in the past allowed Itaú to irregularly enjoy strong returns, is being eroded by a more hostile approach from regulators and increased competition

The Brazilian banking system is highly concentrated, with the five largest banks controlling the majority of assets. The major Brazilian banks also dominate the payment, asset management, and brokerage industries with a substantial position in insurance as well. This dominance in the Brazilian financial system places the major Brazilian banks in a strong competitive position, but this strong position is needed in order to provide a margin of safety for returns, as the substantial amount of instability and risk associated with Brazil's economy and regulatory environment causes bank results to be volatile. While Itaú has often been able to earn returns above its cost of capital, aided by noninterest fee income from its large asset management and deposit services segments, the bank has also seen its returns dip below its cost of capital on a somewhat regular basis as shifting economic, political, and regulatory trends affect its business. This is a theme that we expect will continue for the foreseeable future as political uncertainty and budgetary problems remain, while a hostile regulatory environment for Brazilian banks has helped drive increased competition from financial technology lenders.

In our opinion, bank moats are typically achieved through cost advantages (either through superior funding sources or operational cost structure), switching costs, and the banking system in which the company operates. Itaú has typically had a higher cost of funding than Banco Bradesco, though the bank is more in line with its state-controlled peers in this regard.

Itaú compensates for this with substantial noninterest income, which makes up over 50% of its after-provision net revenue. The bulk of this is generated through account fees, asset management fees, and card interchange/merchant acquiring revenue; these three line items account for just under 35% of total revenue. Margins in this segment of Itaú's business typically outperform its lending arm, though the two are connected as cross-selling is a key feature of Itaú's overarching consumer strategy. The fee structure behind its bank accounts is lucrative for Itaú, with high fees for basic services, particularly for accounts with low balances. However, this revenue source has been shrinking in recent years as competitive pressure from online banks pushes down pricing.

Itaú must also contend with Brazil's volatile economic conditions and increasingly unfavorable regulatory climate There are signs that Itaú's competitive position is weakening, and the Brazilian central bank has made increased competition in the Brazilian financial system a key priority. While asset management fees continue to rise, Itaú's market share has trended lower over time. This decline has been offset by a significant increase in industrywide assets under management, but the increased size of the Brazilian investment market has drawn international attention, with BlackRock rolling out new exchange-traded fund products in the country in 2021. Itaú and the other major Brazilian banks still control a large portion of the distribution channel for investment products, slowing the impact of competitive encroachment, but we see no reason to believe that the Brazilian market will be immune from fee compression over time.

The Brazilian central bank has been a disruptive force within the Brazilian financial system. In November 2020, the central bank rolled out the highly successful Pix payment system to offer instantaneous financial transfers to compete with existing payment methods, like credit and debit cards. Firms with more than 500,000 accounts are required to support the payment system and adoption has been rapid, with more than 6 billion transactions from over 110 million users in the first year. This represents a meaningful competitive threat to Itaú's card and account services revenue (which includes internal and external transfer fees), particularly since Brazilian merchants are allowed to price discriminate based on payment method and the central bank has intentionally set low fees for the service. While the damage from these elements has been modest so far, as card income and asset management fees continue to benefit from secular tailwinds industrywide, these new challenges are still in their early stages and account fee revenue has already begun to stagnate, with annual growth falling from low double digits in the past to low single digits.

Outside of direct competition through the state-owned banks, which control roughly one-third of banking assets, the Brazilian government involves itself in the Brazilian financial system through a number of regulations. Beyond the more typical reserve requirements, lenders in Brazil face a number of mandatory lending requirements. For example, 65% of deposits in savings accounts must be used on real estate-related lending, as well as preset interest rates for payroll loans. The intrusion of political goals into the regulatory regime facing Brazilian banks represents an additional operating challenge for the major banks, particularly since regulations in Brazil tend to change quickly and often.

While there are elements of strength to Itaú's position, given its scale in the Brazilian financial system, that position appears to be weakening in a period where the challenges facing the bank have only grown. Itaú still has the ability to earn more than its cost of capital under favorable conditions; its strong 2025 results are a demonstration of this. However, generating excess returns will be more difficult going forward as the operating environment for banks in Brazil is a challenging one and Itaú has less room for error. As a result, we give Itaú a no-moat rating.

Economic growth and employment in Brazil could be stronger than expected, creating potential upside for Itaú.

Itaú has been able to expand its foreign lending operations, diversifying the bank and reducing its exposure to the volatile Brazilian market.

Despite higher interest rates, credit losses in Brazil remain under control, allowing Itaú to generate good returns on its lending operations.

Itaú could see greater competition from disruptive fintech firms, which are benefiting from central bank-led initiatives.

High interest rates in Brazil could increase the credit risks that Itaú faces.

Itaú faces a hostile regulatory environment and competition in payments from the government-run Pix payment system, which could affect its noninterest income.