Uniao de Bancos Brasileiros SA (ADR) (UBB)

NetscribeBanking (93.30) Submitted: 3/26/07 5:23 AM : Start Price: $86.54 UBB Score: -8.38

Unibanco is a full-service financial institution providing wide range of financial products & services to diversified individuals and corporate customers throughout Brazil. Its businesses comprise segments: Retail contributing 80% of revenues, while Wholesale, Insurance, Pension Plans and Wealth Management making up for the remaining. Unibanco and its associated companies Fininvest, LuizaCred, PontoCred & Tecban offer a network of 17,000 points of service. Its international network consists of branches in Nassau and the Cayman Islands; offices in New York; banking subsidiaries in Luxembourg, Cayman Islands & Paraguay; and a brokerage firm in New York


For December 2006, revenue rose by 11% due to increase in loans, leasing operations, insurance & marketable securities. But net income fell by 5% reflecting increased loan, personnel, administrative, provision for income tax & profit sharing expense. The bright spot is that operations are beginning to reflect improving profitability as it trimmed its efficiency ratio by 5 percentage points in 2005, boosting its return on equity to 17%. But its net interest margins on corporate lending are underwhelming 3%, although retail loans deliver a 27.6% margin. Company’s strategy is to provide retail customers with more product and loyalty programs. For instance, its SuperPoupe concept, a time-deposit certificate for customers increased deposits to 50% from 40% of total liabilities.


Recent growth plans include acquisitions to bolster retail operations & offer wider retail products, thus it acquired HiperCard & Creditec to extend credit facilities to individuals. While the positives of the Bank are its initiative like SuperPoupe and Tarifa Zero offer, a fee discount for loyal customers that has shown promising results and could boost low-cost deposit growth. Moreover room for loan growth in Brazil & its high interest rates provide amazing opportunities for profits. But inefficient operations, high cost structure, and poor asset quality drive Unibanco's poor profitability and have led to returns below the cost of capital, averaging just 14.3% over the past five years thus rendering the shares an extremely risky proposition.

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