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UPDATE 2-Brazil's Itau mulls XP brokerage stake spin off; earnings fall

(Adds Itau results)

SAO PAULO, Nov 3 (Reuters) - Brazil’s Itau Unibanco Holding SA said it has been considering spinning off most of its 46% stake in investment platform XP Inc and selling the rest, according to a securities filing on Tuesday.

Itau may issue shares equivalent to 41.05% of XP, which has a market capitalization of $23 billion, to form a new entity that would ultimately be listed. Itau, which on Tuesday also reported lower quarterly earnings, could also sell a 5% stake in XP to boost its capital ratios.

The filing does not mention a reason for the plan, which is subject to board approval.

A source close to the discussions said Itau hoped to unlock value in the bank’s XP stake that is not reflected in Itau’s share price, and reduce potential conflict between the two entities.

When Itau first invested in XP in 2017, it was planning to acquire a controlling stake, but Brazil’s central bank objected, citing competition concerns. The regulator said at the time that Itau would need to seek approval to buy an additional 12.5% of XP in 2022.

Itau’s move could make it easier to increase its stake in XP in the future, as the analysis of antitrust issues could be different under this new structure, another source said. Still, it remains unclear whether Itau would actually seek an increase.

The potential spinoff follows a public spat in June, when Itau cited alleged conflicts of interest among independent investment advisers who are the bulk of XP’s workforce. Both institutions compete for investors.

RESULTS

The news came as the bank announced third-quarter profit that slightly beat analysts’ estimates. Still, recurring net income fell 29.7% to 5.030 billion reais.

Loan loss provisions jumped 40.6% from a year earlier, to 6.319 billion reais, but were down from the prior quarter.

Itau’s 90-day default ratio dropped 0.5 percentage points, to 2.2%, as borrowers were given forbearance of up to 180 days under government measures adopted in the early months of the pandemic.

Net interest income, a measure of earnings on loans minus deposit costs, fell 4.8% from the previous quarter as Itau has refinanced many clients at lower credit margins during the coronavirus crisis.

Itau’s loan book grew 4.4% in the quarter, driven by mortgages, car loans and small and large companies.

Fee income grew 12% in a rebound after the easing of coronavirus lockdown measures.

The Sao Paulo-based bank’s return on equity, a gauge of profitability, came in at 15.7%, showing some recovery from the previous quarter.

Itau’s results illustrate the challenges facing incoming Chief Executive Milton Maluhy, who will replace Candido Bracher on Feb. 2.

Reporting By Carolina Mandl; Editing by Christian Plumb and Richard Chang

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