UPDATE 1-Brazil's Itau Unibanco profit dives as loan defaults loom

(Adds return on equity, loan book)

By Carolina Mandl

SAO PAULO, May 4 (Reuters) – Brazil’s largest lender, Itau Unibanco Holding SA, posted weaker-than-expected quarterly earnings on Monday after setting aside 10.1 billion reais ($1.82 billion) in reserves in anticipation of a potential wave of coronavirus-led loan defaults.

Itau Unibanco’s first-quarter recurring net income, which excludes one-off items, fell 43.1% from a year earlier to 3.912 billion reais ($706 million), and below an estimate by Refinitiv of 6.242 billion reais ($1.13 billion).

The Sao Paulo-based bank’s loan-loss provisions almost tripled from a year earlier, according to a securities filing.

The bank’s management said in a statement that the outlook for both companies and consumers had deteriorated since mid-March, when the coronavirus outbreak started gaining momentum in Brazil.

Profit was also hit by lower trading gains and hedging, which came in down 38.9% year-on-year, at 760 million reais.

Itau’s return on equity fell to 12.8%, its lowest in at least the past five years. While Itau is normally the top ranked among Brazilian lenders according to the measure of profitability, it fell behind Santander Brasil in the latest quarter, as its rival decided to set aside less money for expected loan losses.

Itau’s core capital ratio also dropped to 10.3% from 13.2% in the previous quarter.

Its loan book was mainly boosted by corporate loans in the first quarter, as big companies have sought credit to strengthen their cash positions to help weather impacts stemming from the coronavirus pandemic.

The lender’s loan book grew by 8.9% from December, but excluding exchange rate fluctuation, it went up 2.7% in the quarter.

Its 90-day loan default rate was roughly stable at 3.1% in the first quarter.

In a move to help consumers and small companies cope with the coronavirus crisis, Itau is allowing clients to defer debt payments for up to six years.

Chief Executive Candido Bracher will discuss the bank’s outlook on Tuesday morning in calls with analysts and journalists.

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