Time to Bank on Banco Itau?

Put a solid year on the books for Banco Itau (NYSE: ITU). The recently released fourth-quarter and fiscal 2006 results weren't earth-shattering, but they showed that Banco Itau has a strong and improving franchise.

For the year, Banco Itau grew its net income by 23.4% if the impact from the acquisition of the BankBoston operations isn't included. With those acquisition charges included, net income declined by 17.9%. But perhaps the best way to look at Itau's performance is by what the bank defines as recurring net income, which increased 13.8% in total and 12.4% on a per-share basis. The earnings increase was driven by an 11.7% increase in net interest income and a 19.8% increase in non-interest income (primarily banking service fees). Non-interest expenses grew by only 18%, allowing the bank to make some headway in its efficiency ratio, which declined to 47.6% from last year's 50.3%.

Banco Itau's strength in auto lending and credit cards continues to stand out, and the loan growth in these areas, as well as loans to small businesses, accounted for most of the growth in the bank's loan portfolio for the year. Deposit growth was also impressive at 21.1%, with the bulk of that growth coming in low-cost demand deposits.

If there's a caveat to all this growth, it's that small businesses and consumer lending generally carry a bit more risk than loans to larger, well-capitalized corporations. Banco Itau continues to see non-performing loans in the range of 5% of all loans, and given its growth in these areas, the growth in its loan loss provision has needed to keep pace, which it has. Overall, I see Banco Itau's loan loss provisions and reserve for loan losses being adequate, given the level of non-performance and charge-offs.

Banco Itau has very good growth prospects, though I believe a fair portion of these prospects is currently priced into the shares. It's also important to note that like Banco Bradesco (NYSE: BBD) and Unibanco (NYSE: UBB), Banco Itau has the bulk of its operations in Brazil, which has had some fairly severe economic ups and downs over the years. So while Banco Itau is well-run, I think it makes sense to temper any enthusiasm with a good, hard look at the broader economy before jumping in. I also recommend looking at Banco Itau in comparison to its Brazilian competitors, as well as ABN Amro (NYSE: ABN) and HSBC (NYSE: HBC) for their sizable presence in Brazil.

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At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. He was ranked 73rd out of 22,692 CAPS investors. The Motley Fool has an ironclad disclosure policy.