Itaú Unibanco Holding S.A. (ITUB)

How it makes money

Revenue is mostly net interest income — the difference between interest earned on loans and interest paid on deposits and funding — plus fees from cards, asset management, insurance and investment banking. Brazil's benchmark Selic interest rate has an outsized effect: when it rises, lending spreads widen but loan demand and credit quality can weaken. Retail banking generates most of group revenue, but wholesale banking, serving corporations and private banking clients, produces a large share of profit relative to its size.

Revenue by segment

As Brazil's largest private bank, Itaú holds current accounts, cards, loans and investments for millions of customers who rarely move an entire banking relationship elsewhere once payroll, bills and credit history are attached to it. Scale also lowers its cost of funding relative to smaller rivals, though digital-only entrants are chipping away at fees and simple transaction business.

Lending volumes and credit quality move with Brazil's economic cycle: falling interest rates and GDP growth encourage borrowing, while high inflation, a weak real or political instability raise defaults and funding costs. Because ratings agencies cap Brazilian banks at the sovereign's own credit rating, a downgrade of Brazil itself can raise Itaú's funding costs regardless of its own performance.

Key risks

• Brazil macroeconomic and political volatility — The bank's results depend heavily on Brazil's economic and political conditions — inflation, the Selic interest rate, exchange-rate swings and the government's own debt affect loan demand, defaults and funding costs directly.
• Ratings capped by Brazil's sovereign rating — Credit ratings assigned to Itaú Unibanco are constrained by Brazil's own sovereign rating; a downgrade of the country can force a matching downgrade of the bank, raising its cost of capital and funding.
• Credit risk in the loan book — The bank carries a large loan portfolio and must continuously provision for defaults; deterioration in borrowers' creditworthiness during an economic downturn directly reduces earnings and capital ratios.