Itaú Unibanco Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 8 speakers on the call.

Operator

Hello. Good morning, everyone. My name is Henato Luly, and I'm the Head of Investor Relations and Market Intelligence at ITAU Unibug. Thank you very much for attending this conference to discuss our earnings for the Q2 of 2023, which we are broadcasting directly from our office here at Fadia Lima Avenue in Sao Paulo. Today's event will be divided into 2 parts.

Operator

In the first part, Milton will detail our quarterly performance and earnings. This will be followed by a Q and A session during which analysts and investors will have the opportunity to interact directly with us. I'd like to give you some instructions so that we make the best use of our time today. For those who are watching on our website, there are 3 audio options on the screen. The entire content in Portuguese, the entire content in English or in the original audio.

Operator

In the first two options, there is simultaneous translation. To choose your options, just click on the flag that is in the upper left corner of your screen. As always, Questions can also be sent via WhatsApp. To do this, just click on the button on the screen. For those who are watching on our website or alternatively send a message to the number 119782557 98.

Operator

Our presentation today is available for download on the website screen as well as on our IR website. I will now hand over to Milton, who will start the earnings presentation, and I'll be back later to moderate the Q and A session. Milton, the floor is yours. Good morning, everybody. Welcome to our earnings presentation for the Q2 of 2023.

Operator

Thank you, Henato. I'll get straight to the figures. We have a very direct presentation today in order to give you an overview of the figures, pick out some highlights. And at the end, we'll talk about guidance. So let's get started.

Operator

This Quarter, we've delivered BRL8.7 billion in earnings, which represents a growth of 3.6% with a very strong ROE profitability of 8.9%, 21.5% in Brazil. In our opinion, these are 2 very strong results. The margin with clients grew by 3.7 percent to reach BRL24.9 billion. And as you will see from the figures, this is a core result with little impact from working capital. In terms of margin with the market, this was yet another very strong quarter.

Operator

You're aware of the challenges faced in this area. But despite these, We've been able to continue to deliver quarter after quarter, seeing 65% growth. The delinquency ratio is stable with a growth of 0.1 percentage points as we've been anticipating for several quarters, meaning these are entirely in line with our expectation and consistent with the information we provided to you in the past. The efficiency ratio is 39.6% on a consolidated basis. And in Brazil, we reached the lowest ratio ever, which is great news and was driven by the key top line growth and cost control.

Operator

We'll get into a bit more detail on both of these agendas a little later. As for our loan portfolio, I've set out to you on past calls that the adjustments that have been made to this portfolio such as derisking in some segments, which were significant to our delinquency ratio and cost of credit. As such, It's only natural that we're seeing the portfolio's growth decelerate somewhat. We managed to obtain 0.6% growth in the quarter in the individual loans portfolio and 8.9% year on year, only slightly below double digits. In the SMEs portfolio, the volume was virtually flat given the impact of foreign exchange rates on these portfolios, especially in the middle market.

Operator

Year on year, growth was 4.4%. In Latin America, The figures reflect the impact of changes in foreign exchange rates. And if not for this impact, the consolidated figures would have grown by 1.3% quarter over quarter and by 7% year over year. So the key point we can take away from portfolio figures is that we've never stopped growing. At any point in the cycle in terms of both number of clients and target segments.

Operator

We also did all of this while derisking the portfolio. To give you an example, we saw a reduction in the credit card portfolio during the quarter, which was very much by design. We decided to make a key intervention in the Polio, especially in those channels we call the open sea, where we noticed accelerated delinquency rates, over offering of products and a very high level of debt service burden. Digitalization also has driven an expansion in the number of credit cards. Until recently, we had an average of 1.7 cards per individual, whereas currently, we have 4 cards per individual in the market, which indicates an oversupply.

Operator

Despite all this effort and I'll talk more about delinquency rates in a while, but suffice to say that during this quarter, we've started turning things around. We don't show a breakdown by portfolio, but note that the credit card NPL has already reduced by 20 basis points this quarter with the portfolio decelerating. This shows how important it was to make these adjustments in a timely manner. Now in other segments such as middle and high income and higher revenue businesses, both in retail and wholesale, with more resilient clients in the cycle. We've continued to grow well above double digits and in the more affluent segments at more than 20%.

Operator

So clearly growth has not gone away. Obviously, we're coming from a more challenging credit environment, but we're starting to see positive signs. And we'll continue to reach to and anticipate these cycles, so we can continue to deliver sustainable results and good profitability. In terms of financial margin with clients, the key message is that most of the result came from our core business. As you can see, working capital accounted for BRL 2,800,000,000 last quarter and BRL 2,900,000,000 this quarter, representing only a slight change.

Operator

So most of these earnings are consistent with the core margin with clients. So this is great news for our margin with yet another quarter of growth. When we look at the annualized average margin rate, we see a quarter on quarter expansion to 8.8% in this quarter from 8 point 4% in the Q2 of last year. And even adjusted for risk, we managed to maintain at the same level. I would also remind you that in the 4th quarter of 2022, considering everything we said about credit costs and ratios.

Operator

We have the impact of that large retail, of which you are already aware. When we look at the margin in Brazil, the story is similar. We saw quarter on quarter NIM growth to 9.6% from 9.2% in the Q2 of 2022. And in terms of the risk adjusted margin, we also see a recovery. This is great news since despite all the challenges and portfolio adjustments, We kept increasing our margin with clients.

Operator

As for the margin with the market, as I'd already anticipated, we had a very good quarter. Since in both the last quarter and the preceding ones, We've been running at an average of BRL600 1,000,000 per quarter. In the current quarter, we reached BRL1.1 billion with growth both in Brazil and Latin America and at a slightly lower hedging cost of our capital ratio. As the interest rate gap closed a little, We ended up having a slightly lower hedging cost. So another sound quarter and despite the existing interest rate challenges, We've been able to take advantage of the opportunities.

Operator

I'd like to spend some time on this slide since here we need to explain in detail some assumptions. The main message here is a discussion of Itau Unibanco's sensitivity to interest rate cycles. There are those who understand exactly how our sensitivity changes throughout the cycle. There are those who have questions and there are those who think that we could be more sensitive in an interest rate cut cycle than in a hike cycle. There are several views.

Operator

What we have sought to do here is provide a summary of how our NIM evolves during a long interest rate cycle. We've normalized certain impacts. First, we matched the NIM, that is, we brought together the margin with the market and our margin with clients because after all, the interest rate cycle affects both. 2nd, we've eliminated some effects from the historical perspective to get a comparison basis. We've normalized the overdraft cap, eliminated the impact of the over hedge, which is important.

Operator

And the hedging cost of the capital ratio, which I was talking about just now, is also gone. It may have some sensitivity to interest, but this has nothing to do with the bank's core business. We made 2 further adjustments. 1 was in the Q4 of 2019 since this was the last pre pandemic quarter

Speaker 1

where

Operator

we had a 100 baseline and we adjusted to fixed mix. That's because as we change the mix over time, this naturally changes our NIM. If we have a more secured portfolio, we get a lower NIM. And if we have a clean portfolio, a higher NIM. Then what we wanted to show was the sensitivity to interest in our NIM as a function of the interest rate cycle.

Operator

By locking in a 100 baseline, you will see that when we go back to 20 team. We see reasonable stability. We go from 105, we go to 102, we go through 99, 102 again, and we get to 100. Interest went from 14% to 6% and kept reducing to reach 3%. Here in 2020, we introduced a program called Travesia, which naturally had a strong impact on the NIM because of renegotiations with our clients.

Operator

So this helps understanding that the main impact comes from the Travesia program. As we can see, interest rates continue to fall, then they go back up. But our NIM remains pretty stable. What is the message we want to get across here? It's about our ability to manage risk and the risk factors to which our balance sheet is exposed and is sensitive.

Operator

We use this type of risk management across all our business lines, whether in the margin with clients or the management of our products and commercial portfolios and above all in the management of risk factors within the Treasury Department. In the margin with the market and as you've seen, we have been able to manage risks very well. Therefore, we do not go long only in our positions, regardless of whether we are in an interest rate hike or cut cycle. We actively manage risk factors at the bank. We have a very dynamic approach to risk management, and these are the results produced throughout the cycle.

Operator

I think I've made this clear, but of course, the IR team is available to answer any questions and clarify details. But I hope this material has been a little Clear how interest sensitive our NIM is. In commissioning fees and results from insurance operations, we expected a slightly more robust performance fee from capital markets activity in the first half 2023, then we actually got. And I'll talk a little bit about that in the guidance later. Nevertheless, we were able to grow quite strongly in the credit and debit cards with a year on year increase of 10.9 percent with a 22% in the acquirer earnings.

Operator

Our acquiring business reached a volume of BRL 208,000,000,000 and a 22% growth in revenue. So we're having a very special year in the hedgy business. But when we look at asset management, we see a drop in the quarter year on year. While reminding you that typically the effects of performance fees are recognized in the Q2. But this was a weaker 6 month period in terms of performance fees for the industry as a whole.

Operator

And for us, it was no different. We're already starting to see stronger activity for the second half of the year and an expectation of recovery, but it may not be enough for us to make up for what we weren't able to capture in the first half. And here I'm talking about the whole industry, which went through a tougher market this year. On the advisory services and brokerage front, We kept on performing very well in terms of investment banking, leading most of the transactions that came to the market with huge transactions, primarily follow ons. We also maintained a key leadership role in the DCM market.

Operator

However, it's very important to make clear that during this first half year, Volumes in the fixed income capital market fell by 45%, in effect showing much weaker activity in the market than we had anticipated. Looking at the second half, we can already see a rebound, but perhaps not enough to offset the market volume drop in the first half. As for ECM, activity was also resumed and we've been discussing this with the market. So we have positive expectations going forward. The last item I wanted to address are the earnings from our insurance, Pension and Premium Bonds Operations, which grew by 2.9% in the quarter and 17.5% year on year.

Operator

When we look at premiums earned, we grew by 12%. And the recurring results in our core insurance business showed less volatility with a very satisfactory loss ratio in the segments that represent less volatility and bring more profitability overall posted year on year growth. Last year, our recurring insurance results grew by 50%. And this year, we've already grown 24%. This shows that our strategy has been successful and that we found a way to expand our insurance operations, which have been a major contributor to delivering and creating value.

Operator

Finally, in terms of fund management, We posted growth of 4.7 percent both in the open platform and in our own products. We've continued to expand our funding. I think that was the headline message here. I'll spend a few minutes talking about credit. First, when we look at the NPL 15 to 90 days, whether in Brazil, Latin America or overall, we see similar figures.

Operator

But more important than the 2.5% obtained is the trend since we don't see any big impact on short term delinquency, either in Brazil or in Latin America, which is great news. The overview for Brazil illustrates a key point I mentioned to you last quarter, which is that we did expect this increase since there's a seasonality effect in the Q1, which historically tends to drive delinquency ratios, while the Q2 tends to see a recovery. In the last couple of years, this hasn't happened because of the pandemic, which is something we had already talked about. But the key issue here, which I mentioned on the last call is that we expected to recover about 10 basis points in the short term delinquency, and that's what ended up happening. I've already mentioned several times, but I'd like to stress again the extent to which we have been able to predict and anticipate the bank cycles and to make projections using the tools we have available.

Operator

I think this is very important, not only in terms of transparency to you, but also for our management and decision making ability. We have great news regarding the NPL 15 to 90 days in Brazil for SMEs, which remains stable. We have no specific concerns in this regard. As for the large corporate index, the changes are small, and I don't think this is a fair indicator for large corporates. When we look at the consolidated figures here in the NPL 90 days.

Operator

We see a slight increase of 10 basis points in Brazil and an increase of 10 basis points on a consolidated basis and also a decrease of 10 basis points in Latin America, as I mentioned in the first slide. The key thing here is how we break down this information. We've been telling you for a few quarters since the end of last year that at the start of the year, we were going to stabilize the 90 day NPL of individuals. And in the Q1 of this year, we'd already have stabilized this delinquency ratio. As you can see here, in fact, the NPL 90 days was stable, and this implies 2 further effects.

Operator

First, I had said that we could expect a change of about 10 basis points, and we've been able to work within that estimate. Our expectation going forward remains the same, more or less 10 basis points, which is a more positive expectation compared to this, especially in the Q4. The second effect, which is particularly important and which I've just commented on, is a natural slowdown in portfolios due to decisions that were made several quarters ago. Thus, the denominator effect of the ratio does not favor us. Still, we've been able to stabilize significantly the delinquency ratios of individuals.

Operator

The NPL 90 days for SMEs in Brazil shows an increase that is totally within our expectations. We have no concerns on this front. And I wanted to make this very clear to you. When we project what may come in the next two quarters, our best expectation is stability with a more positive than a negative outlook. This means that looking to the future, I believe we have more chance of surprising you positively than negatively.

Speaker 2

To give you

Operator

a good overview of this trend, stability is a good goal for us to pursue, especially since the short term delinquency rate is stable. We are very comfortable with our delinquency ratios among SMEs. And while in large corporates, as I've just said, this isn't the best indicator. It's still at its lowest level in the NPL 90 days series. As shown in the previous slide, especially for individuals in Brazil, The credit card portfolio has already reversed its trend despite the drop in its balance.

Operator

We saw a drop of 20 basis points in the delinquency rate, which is quite a positive development and is very much in line with what we'd have hoped to see given the number of interventions we've made in this portfolio throughout the cycle. The cost of credit came highly in line, totaling BRL9.4 billion and a cost of credit over portfolio ratio of 3.3%. I'd remind you that the Q4 of 2022 was affected by the retailer event already mentioned. Thus, we continue operator levels very similar to pre pandemic and in line with the expected stabilization we've been talking about for a long time. The coverage ratio did not show any variation and remained very stable at 212%.

Operator

In the Retail segment, our coverage ratio was far above what we were operating at on average. Looking back at the pre pandemic time, accordingly, our balance sheet shows a very healthy coverage and protection level. Our balance sheet, our provision for loan losses and our portfolio are very well protected. As you can see here, and we have continued to make a provision for our NPL formation, as you may have noticed.

Speaker 1

We do

Operator

not manage our balance sheet based on our NPL formation, but our expected loss models have led us to recognize a provision of approximately 100 percent of the NPL formation, which also shows that we've been delivering significant results with, in our opinion, an adequate level of provision. Our non interest expenses grew by 7.5% year over year. I would remind you that the last quarter was a more difficult one and is usually a quarter with lower costs. As a result, Total non interest expenses grew by 4.1% in Brazil.

Speaker 3

I

Operator

would draw your attention to the efficiency ratio as we remained in the margin by reducing our efficiency ratio, which saw a performance of 39.6% on a consolidated basis and 37.7% in Brazil. Based on the same logic I've been talking about a lot, which involves a focus on the top line, a focus on costs, higher productivity and more investment in technology. We were able to achieve results. Looking now at investments, our challenge has always been to come in well below inflation in the core costs of the bank. And we've been able to do this quarter after quarter.

Operator

And in terms of investments, we continue to invest in our platforms, while upgrading and expanding our businesses. Basically, what we're not going to do is stop investing in the future because of worries about the outcome in the next 3 or 6 months. We will keep investing heavily in the franchise, strong in the experience of our clients and in all business expansions that will bring long term results to Itau Unibanco. We talk a lot about digital transformation, cultural transformation and efficiency. We found a way to try perhaps make it acceptable to you what has been our journey in these areas.

Operator

I think this table pretty much summarizes the message that I'm trying to get across. Maybe it makes it a little clearer. This is a vision of how we serve our clients proactively and reactively. When clients get in touch and there are 30,000,000 interactions per month, you can see that it grows,

Speaker 1

but it

Operator

grows much less than proactive services. What is the message here? Firstly, our ability to predict, to anticipate, to record everything that our clients actually say. Our artificial intelligence models and our ability to retain these interactions or have them through digital channels is already at 92%. We talk to clients much more proactively while trying to help them on a journey, trying to spell out a need or a security event and trying to anticipate any problems.

Operator

And we've been to do this with a significant increase in volume. We've already managed to reach a degree of stability between quarters, but with a material drop in the cost per unit. If we look at the Index 100 graph, we saw a 52% drop in the period from 2020 to today, which shows the results of the huge technological effort and Investment we've been making here at the bank to improve the client experience. Our NPS was 71 points, which is an increase of 9 points compared to 2020 and reflects the digital and cultural transformation, client centricity and the delivery of very powerful results so far. We recorded 210,000,000 proactive calls made per quarter.

Operator

Currently, 100% of our contacts are recorded and qualified on our modernized platform, where we can centrally read using robots consisting of both artificial intelligence and models to understand the clients' risk of problems or suitability for business. This has generated a lot of business for the bank. So these proactive interactions are not only service, They are everything that generates earnings in digital channels. Currently, we can perform 90% of account approvals via branches automatically. In addition, we performed 95% of automated approvals through our digital channels without any type of intervention.

Operator

And we posted a 99.9% decrease in the time required to open an account. Previously, it took us 28 hours, which didn't make any sense. But this has had a lot to do with our installed structure and legacy systems. After upgrading these, we were able to open an account in 4 minutes. So this is a key change, especially in terms of client experience and perception.

Operator

And here, we've also chosen a very important journey, which is the mortgage loan journey. The degree of digitalization increased by 87 percentage points. And speaking of experience and client centricity, We've been able to make at least half the volume of private credit production of mortgage loans with the best NPS in the market. This shows that once again this investment, this vision and this transformation have generated and produced material outcomes. In capital, I think we have great news to share with you.

Operator

Our Tier 1 capital ratio was 12.2%, which represents a growth of 20 basis points, as you can see here. For this quarter, we are bringing pro form a figures. The pro form a table has 2 columns. First, I think you've heard a lot about the new Basel model, Credit Risk, New Weightings. We did an extensive job here at the bank from which we've already benefited at the beginning of the month in 80 basis points of capital.

Operator

This is a very relevant effect for us. We were talking about 50 basis points, and this was our best estimate. Of course, when we introduced the weightings, when we managed to understand the standard in detail and could dive into the processes, We found 80 basis points of opportunity here, which is very significant news. Another highlight is that we have continued evolving our internal models. And this also at the beginning of the month resulted in a benefit of 0.2%.

Operator

This shows that we are growing by 1% in the CET1 core capital from 12.2% to 13.1%. Our core capital is 13.1% and our total capital is 14.7%. What we do not have yet and will be a negative issue for capital and for the as a whole, not only in Brazil, but worldwide is Basel 3 operational risk for which the Central Bank is currently writing the applicable standard. We've already looked into the public consultation and carried out simulations, but our best expectation is that we have to wait until the end of the year for further details. Possibly the new standard will be implemented by 2025, but we still don't know if it will be phased in, although we hope so.

Operator

Naturally, we will have to share the expected impacts with you. But I think overall, the news in terms of capital is quite positive as we have really completed a cycle of continuous evolution in our capital ratios. Last but not least, I'd like to pass on a few messages about our guidance. The first is that we maintained our guidance in almost every line. This means that the ranges that were previously stipulated still meet our current best projections.

Operator

This shows the predictability, transparency and the ability to look through the cycle in terms of every kind of impact and how we are managing the bank's balance sheet. This way pretty much everything is kept unchanged in the guidance. What we are reviewing here is the best information available to date and it indicates that we in fact had a higher degree of optimism that didn't here realize in terms of service and insurance revenue. We expected stronger activity in the first half of the year, both in performance fees and in the investment banking operation. As I told you just now, the volumes were a little lower than and Banking Operations.

Operator

As I told you just now, the volumes were a little lower, and we thought it would be better to revise the growth forecast, which we previously estimated at between 7.5% and 10.5% to between 5% and 7%, which represents our best estimate today. We've made a smaller adjustment to the effective tax rate, which we expected to be between 28.5% 31.5%. And now we expect between 27% and 29%. We are very thorough, and we thought that for transparency's sake, it was worth making this adjustment to make our best expectations clear to you. In the second half of the year, in the commissions and fees and results from insurance operation line, we expect an increase in activity, not enough to recover what was in the guidance, but we expect a better second half with more activity.

Operator

And despite these changes in the structure, our expectation is that what was implied in our net Income for the bank wouldn't change from what we're looking at for our best projections today. Accordingly, our best earnings expectation remains the same, just with a slightly different structure. But with the bottom line still very much in line with our expectations at the beginning of the year. Before I join Hinato for the Q and A, I'd like to thank you on behalf of Itau Unibanco myself, of course, and on behalf of all our teams for the recognition you've given us that institutional investor. We were very honored by that recognition, both on the buy side and the sell side.

Operator

We came first in all eight categories, which was very nice for us. We were in those positions last year and achieved them again this year.

Speaker 1

I would

Operator

like to tell you that this naturally fits us with pride and only increases our sense of responsibility. Of course, we are happy, but it is our nature to be down to earth, humble and without any type of conceit. What we really want is to continue delivering, managing the bank in the best possible way and more than that to maintain a very close relationship with you, investors and analysts, our clients and stakeholders.

Speaker 1

But I

Operator

would especially like to thank you, our investor base and our base of analysts who do an exquisite job. So all feedback that comes from you who are in contact with the Investor Relations department. The feedback that we receive on calls or on a daily basis is very valuable for us to continue evolving. We've always wanted you as partners in this evolution, and I think we are seeding in that. So once again, a special thank you to all of you and also to my Investor Relations team who also do a really excellent job.

Operator

I'd like to finish by saying to all stakeholders who are watching us that I think this was yet another sound quarter, and we have the opportunity to share our earnings with you. We've talked about clients, about culture, about digital transformation, which we've tried to make just a little more tangible. We want to say again that for us, it is a never ending game. It's not just one quarter. It's the next and the next and the next.

Operator

We are here for the long term. There are long term decisions and we are not trying to optimize just the next quarter's earnings. What we want is in fact to build a platform, a bank, a capable bank, as we've done throughout our whole history to deliver sustainable earnings and strong performance in our view, given the existing scenario and challenges. So thank you again. I will now join Renato for the Q and A, And then we will be able to discuss a little more about your questions, challenges and considerations.

Operator

Again, thank you very much, and we'll see you shortly.

Speaker 1

Well, we will start now. Milton, it's nice to have you here. We're going to start with a Q and A session now. Remember that we do it in 2 languages. We will answer the question in the language that We get the question.

Speaker 1

If you want the translation, we have the audio in Portuguese and English. Please choose your language. Once again, the questions can be submitted via WhatsApp, the number 97825 5,798, +5,011 as well. Now we have the questions. I'm actually going to take the microphone.

Speaker 1

I'm going Ask you a question that has to do with the yesterday's operational event. A lot of our partners were affected by the intermittent availability of our system. So I thought that it was very Good that we started Q and A and asked you what happened? How did we solve it? And what did we learn?

Speaker 1

Thank you, Renato. Thank you. Excellent question to start. Well, I'm going to begin by saying that the war that happened, well, yesterday actually, I would like to apologize to all of you, investors, clients, partners, Stakeholders that were impacted. Of course, we work every single day so that events such as these do not happen again.

Speaker 1

And if they should happen, we try to recover as quickly as we can. There was an internal platform in the bank that degradated the entire environment. So we took a bit longer than what we wanted to actually recover the environment. It was something very specific. I think that we have a very important learning.

Speaker 1

This is a part of the evolution of the bank, the transformation of itself To learn how to deal with situations such as these, we have a lot of resilience, calm, and we have to recognize That we are not perfect, that we need to advance. And we have learnings that remain. The glass is have full I would like to apologize therefore. Well, thank you, Milton. Let's talk to the analyst.

Speaker 1

We have Enrique Navarro from Santander. Hi, Enrique. Welcome. Hi. Thank you very much for the opportunity.

Speaker 1

Congratulations on the results. Actually, Milton, I wanted to for you to shed some light in 2024. We here in the bank, we updated our model with the numbers of the second quarter. You delivered Everything as expected. It wasn't very difficult to analyze.

Speaker 1

And well, looking at 2024, I can see 10%, 24%, 10%, 15% of growth in the revenue. This is this growth. Some investors that we talk to, they're not so sure of the growth. There is a doubt about how we're going to behave with the market, The interest rate, the margins of the clients in the second quarter we saw that we have a deceleration of the credit. I mean the provisions, banking fees, it's a bit weaker.

Speaker 1

So I believe that the first question Milton is, Well, without trying to get the guidance beforehand, do you agree that Itau would be able to deliver 10%, 15% for revenue in 2024. And where are you going to get that from? What are the indices that are going to make a difference in 2024? Well, thank you, Enrique. Let me start.

Speaker 1

We are continuing to be positive and optimistic About the scenario and evolution of the bank. The margin improved. The Q1, there were challenges, as you know, challenges in the capital markets, In the credit portfolio people, well, we've been working over the last few quarters, the future, the impact there, The performance fees as well, the portfolios naturally in the aggregate, they grew less. As you can observe, That was by design. So when we look at the results of the portfolio, we are very comfortable because we are leaving a cycle of adjustments that are very important.

Speaker 1

Post pandemic, a normalization of delinquency. So we are positioning the bank in a very important position. If it wasn't For the derisking of the portfolio, our delinquency indices would be 180 points above what we have. So The strategy was adequate. We do the bottom line management as well.

Speaker 1

We don't look at an isolated A line of course, top line is important. It shows strength, engagement, the capacity to extract value. But we have to work in the other two lines with the same emphasis. Our expectation is that the cost of credit may be peaked. And we hope for a PDD expense that is Well, nominally, I'm not talking about a delay.

Speaker 1

Of course, we have the events in the wholesale. We have this. And well, in the part of costs, I imagine that we have an efficiency work that we are doing. Naturally, we're going to seek to have a balance between the capacity to generate value. In the portfolios, we've been growing In several core segments for the bank, above 20%, the non aggregated number doesn't help because if you just look at the portfolio of Credit cards, any adjustment will impact the whole, but even in the credit card, we have been growing in the target clients.

Speaker 1

So this is our capacity to choose the moment of the cycle that we are working with. Looking up ahead, We're going to have a second quarter that is good, more market activities, more activities for the assets, For the portfolios, and we can see a pipeline that is important in the wholesale with structured operations that can help in the 2nd semester. And that is the work that is very important to review the strategy of wholesale Of retail actually as a whole, separating the individuals from companies. We have an ROE of each business. We did the inflection for 2 And my opinion is that we're going to improve step by step the profitability of retail in Assacao.

Speaker 1

So retail with better Profitability, wholesale, still very strong delivering results. The cost of credit agenda is stable. So I think that level of the cost of credit nominally is falling behind. And of course, wholesale, We have uncertainties, the margins of the market, the results and the cost of credit is always available. But we always we're hoping for a more benign Credit cycle for wholesale in comparison to the beginning of the year.

Speaker 1

So we have conditions. We have conditions to deliver a good profitability. I believe that we can See 2024, if it's going to be 10%, 15%. We don't know the number yet. We're working with the numbers.

Speaker 1

We're beginning the budgeting of the bank over the next Few months, and we're going to have a better vision of our capacity. But directionally, our expectation is to get into the year good, 2024, Regardless of the crisis, and we know how to work with the cycles. Either we are more sensitive to one cycle or the other, that opinion. Well, if you look at the margin over the market through the cycle with all the interest rate curves, we were always capable of delivering the results regardless of the moment of the curve that we're working with. So we do not believe in a single direction.

Speaker 1

And this capacity to manage actively the risk factors and the balance sheet Has allowed us to deliver earnings very solid, and we are going to continue to do so. Thank you. Very good, Milton. And now we have the second question. Renato Meloni from Autonomous.

Speaker 1

Renato, please take the floor. Thinking about the capital position that is very comfortable and the growth that hasn't really taken acceleration, what is your Thank you for the question. To be very direct, We have a great recovery in the capital levels over the 1st last quarters. We have an organic growth, improving profitability, earnings. And in the turn of the quarter, we have the benefits.

Speaker 1

Basilea, the risk of credit, 80 basis points, the improvement of the internal models. Now our risk appetite from the Board is 11.5% and maybe 1.5%, 13%. Therefore so the most important thing in the second quarter is that we know the details of the Basilea III operational risk guidelines. It led us to it leads us to believe that we're going to get the information in the Q2. We're waiting for the data so we can have a better projection.

Speaker 1

Now directionally, yes, there is an expectation in the payout increase. It is not our objective to retain the results with the capital beyond And that necessary has to do with the opportunities of growth, the opportunities for capital allocation. So we are always looking at that. We're doing our plans, Looking at the scenario that is longer in the capital, but there is an increment in the payout. And we're going to publish that information as soon As we have the data, the operational risk in our best estimation might impact 100 basis points in the bank.

Speaker 1

It can be more. It depends on the norm of the operational risk. And we anticipate that in our projection, but we are very optimistic. And The idea is before the payout, we should do that in a second semester. As soon as we have the data, we can share it with you.

Speaker 1

Thank you, Milton.

Speaker 2

Next question we have with us from Morgan Stanley, Jorge Curi. Hi, Jorge. Good to see you. Thanks for joining our call today.

Speaker 4

Hi, everyone. Good morning and congrats on the numbers. I wanted to ask you about the tax reform And there's a discussion about eliminating the IOC tax, as well as potentially reducing the Corporate tax rate and taxing dividends. IOC has according to your disclosures, IOC has represented a 10% tax break for you guys over the last 5 years on average. So in a scenario in which Indeed, the IOC is eliminated and the corporate tax rate doesn't change much.

Speaker 4

What Can you do to offset that 10 percentage point hit on your profitability that will go out the window with IOC.

Speaker 3

Jorge, good to see you again. Thank you for your question. Let me go there. Our view today is constructive about the IOC. We don't know yet how the second phase Of this tax reform will be designed and discussed in the Congress, especially in the Congress.

Speaker 3

But we know and we understand that the IOC has an important role, especially for a segment like ours that pays the higher tax, Not only locally, but also worldwide compared to other banks and other sectors in the world. So I think the government has that very clear, understands the impact of the IOC, especially for banks due to the capital base that we need. It's not a tax planning is because the level of capital we need to retain in the operation has to do with regulatory issues. So that's why we have a very Capital intense activity in Brazil. So our view is that we have to wait and see.

Speaker 3

Of course, we always heard The idea is to be a neutral reform, talking about the IOC. So if there is any change in the IOC, we heard about the ACE That it's something that it's a practice in Europe, especially and you know that. There are other ways of doing that. You have somehow to reduce the corporate task. Otherwise, I think it's going to produce an effect that it's not positive at the end of the day for the society because you have a risk to pass through to the prices And the cost of credit might back in the IOC, I think will be a repricing in the industry as a whole.

Speaker 3

So We are constructive. So at this point, if you ask me, I think the government will try to do something very, very balanced and neutral in terms of tax impact for us and for the industry. So this is our view. I'm talking about the financial industry due to the impact and The level of tax that we already pay, the level of corporate tax that we have in Brazil, 45% plus the other taxes that we have, it goes more than 45%. So I think the IOC has an important benefit, especially for the price of credit and impacting the consumption in the activity, so on and so forth.

Speaker 3

So I'm constructive [SPEAKER DOCTOR. HELEN COLLINS:]

Speaker 4

Helmut Schmale:] Thank you, Milsdon.

Speaker 1

Next question, we have Daniel Vas from Credit Suisse. Hello. Welcome. Thank you for the opportunity to ask the question. Now I wanted to direct for the credit for the retail.

Speaker 1

The portfolio is growing 9% per year still. So there is a high income. Average income is growing double digits, right? So we have that massification operation. So I wanted to understand the profile of the curve in those segments.

Speaker 1

Can you continue to grow double digits in the high income? And thinking about the mass, should there be an improvement in the risk indicators? What is the strategy of Itau To regain the share in that segment or not gaining the segment, not gaining anything in that segment. If you can give me that opinion, thank you. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Well, thank you for the opinion.

Speaker 1

And the question, there are a few things. Well, we are growing above double digits in the target high income. Well, of course, that there is a lower demand than what we want than it could have been. So there is a cycle of reduction of rates. The demand tends to grow since these are clients with less credit demand.

Speaker 1

So they take Credit in a very specific line, the increase of the demand will come and there will be a natural elasticity with the interest rate. We can see that we're growing. And it's not a credit. It's the engagement. It's important to leave the lever of the credit because the stand alone credit, it's a lever.

Speaker 1

It's a lever for the penetration of the engagement with our clients. And what creates value is the vision of the client and the relationship as a whole. So we can see In the wholesale, an opportunity in the retail, an opportunity to grow in individuals and companies. We have an opportunity to advance In clients, we didn't explore the full client, full bank offerings for the client. We always service a client with 1 product, a variation of 1 product, the relationship with the client.

Speaker 1

But we have the modernization of the platform. And without these solutions, we couldn't do this engagement and this cross sale that is so important. Well, give a full bank experience where the basis of the clients that already have a relationship with the bank and we know the behavior. So this is a great opportunity that we see. We have a lot of work done there.

Speaker 1

Well, thinking about the Itau Day, we've already given an opinion, And we will continue having results on that. And should there be anything relevant, we will implement it. We will discuss this with you. And yes, I think that credit will be a lever. There are opportunities for expansion.

Speaker 1

And even in the segments, we have to be careful with the simplification Of the high, medium and low income because for every public, there is a way to serve to provide services and Seek opportunities even in the low income, it doesn't mean that we left. And we still have an important role in our portfolio. We did a derisking that is important that that released 180 delinquency points and that could have impacted our results, but we still have 20%, 25% And the client that has lower income, then we have a very close relationship. We have the JVs or the financial with The retailers and of course, we can work that client with a correct product, correct risk and we believe in that. And in a more benign scenario Up ahead, if it happens, and we are here to make the decisions every single day, and we will obviously grow in our business.

Speaker 1

And we will accelerate where we have to accelerate, taking care that we can deliver a performance that is sustainable throughout the cycle. So we are optimistic. We know that individuals is something that will have increases in profitability in the near future. That's what we hope. Thank you.

Speaker 1

So next question will be from Yuri Fernandes, JP Yuri Fernandes from JPMorgan. Hi, hi, everyone. Thank you for the results. I got a question about the networks. I think that you're the leaders of the market.

Speaker 1

We don't have the share because we don't have the industry data, but it seems You're the leaders. So I wanted to see your strategy of the ready or network. We We see an increase in the revenue, but we know that this is very competitive. I know that you have a customer centricity or opinion, And we have to separate just the acquiring products, but we have this elite cuts that should benefit the Industry. So being very practical, what is your opinion enterprise?

Speaker 1

The network should be more aggressive. So can you give us some color in that operation? Thank you, Yuri. I think that the numbers Vax publishes the numbers On August 10, the data will be public. We will know the results.

Speaker 1

But I wanted to tell you a few things. Individually, we have to look at the balance of The network, we cannot compare anymore because right there for some time, it's not a vehicle that is separate, Independent of the bank and it is something that is completely integrated. And a couple of to our strategy, we talked That in Itau Dei, this is reporting directly to with Andrea Rodriguez, and it is completely integrated in the structure. So This is the vision of the client, yes, if we're going to be leaders, a second, that's not what moves us. It's not the market share per market share.

Speaker 1

And I can say that I've sat in there in that chair 10 years ago. I was there. And I know that dynamic. I know how much the invoicing of big companies affect us. And our strategy has not been Renting market share or gaining market share because if that's the fight, this is a fight for price, this is a fight for negative Margins were contribution with the only objective is to increase the market share, and this is not our objective.

Speaker 1

And that's why we gave more disclosure And the growth of revenues than the market share itself. I think the market share is a consequence of our capacity to for Capillary to be close to the clients to deliver value. We've done the very important review of the strategy of Rede of the network that is very good. We have an integration with the Bank of Retail, which is working and this is not brute force. This is the important thing.

Speaker 1

It's not getting more people, more effort All the time because that doesn't solve it because these are not discussions that happen. We need a value proposition. We need to understand the need of the client. And really, The network is not a standalone mono liner. It's not a company that is independent.

Speaker 1

And this is a Value proposition with the relationship with the client. It has an important role for several other business lines. Having 100% of the acquiring business is a competitive advantage and very few can do the intervention that we can. So we are very optimistic with the advances. This is going to be a great year for Breede.

Speaker 1

We are going to have a great growth in results in the bank as a whole. We do not see the cannibalization. If the dispute is for market share, naturally, we will see the renting of market share that will happen and we will not take part in that. This is not our spirit. Our spirit is to create long term solutions that are sustainable, always integrated with the value proposition for the client.

Speaker 1

We're very optimistic we've been having popularity under target segments. That's what we seek. We could reprice with all the events of increase of interest rates, Reviews that were done all throughout time and with an NPS level and thresholds much higher than what we saw. So we are very optimistic with the evolution of Brady as a whole. Thank you very much.

Speaker 1

Next question, We have Rafael Frade from Citibank. Welcome. Hello, everyone. Milton, I think that you did a very clear case on the capacity your capacity throughout the cycle of always managing, well, the reduction and increase of the interest rates and the financial margin. But recently, quarter per quarter, we've seen the margin with the liabilities that is indicated by you as a beneficiary of the increase of the spread.

Speaker 1

[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] And there, well, that line we are going to see the opposite with the reduction of the interest rate. So how should we think about that? Is this going to not allow the reduction of NIMs or there will be Higher impact, saw the margin of the liability. It was very significant. And maybe it can be You know, a buy in with the reduction of the interest rates.

Speaker 1

Thank you. Well, liability is something that is very present in our capacity. In our work of attracting resources, we In our work of attracting resources, we always capture investments and resources of clients and there is a double effect. It's not just a select Great. But the volume effect that we've done, we have an increase in the platform of the offerings.

Speaker 1

We have a migration with for the Fixed income with interest rates, we have more products of fixed income in the bank. And We are ready to have the client without conflicts due to the profitability of the product. Now the way that we do the hedging Of our liabilities, it doesn't allow us to be susceptible for the short term movements. One side or the other, we had the pass Through of the interest of the increase in the interest rates, we didn't capture that in the line because we do a dynamic hedging with the Long deadlines and several vertices and we managed that all throughout the cycle. So on the side of the increase, We didn't capture 100% of the increase.

Speaker 1

That was a process that is still happening. And when we get into a reduction cycle, it also Well, it's a long cycle. So we can have those effects captured. So that allows us to have flexibility And time, so we can do the active management. And at the moment that the interest rates drop, on the other hand, you start to have a better capillarity.

Speaker 1

In credit, you have other opportunities that the cycle has cross sells with insurance. For example, if you see the one that takes a loan, it's associated to the Credit. So the more credit you capillary, the most, the more you get that since you have a reduction in adjustment in the portfolio, Naturally, you have the insurance business that grows 25%. It had in the Q1, a bit of a slowdown in the loans. So the opportunities are one side and the other.

Speaker 1

And so that's when you look at the long series, we have cycles of Increase in interest rates and drop in interest rates and we could defend. And the adjustment that it makes of the wholesale and the retail mix in retail, the adjustment of credit That happens slow case by case for the working capital adjustments that we do as well. So the bank Can anticipate these events and protect itself in situations of more skewed cycles one side or the other. So We always have an additional challenge on one side or the other, and this is the compensation that we will do in the management of the portfolio. Thank you, Milton.

Speaker 1

Next question, Mario Pierry, Bank of America. Hi, Mario. Congratulations on the results. My question is also on the regulatory side. Well, we continue to hear a lot of satisfaction on the government on the interest rates of the credit cards.

Speaker 1

I know that the banks are working, But it seems that the news is always in the newspapers. Every single week, there is a dissatisfaction of the government. So I wanted to understand On the potential, well, the interest rates of the credit cards, how are the talks, how do you expect That this will be developed. And also, I wanted to explore more of the impact of the Desenrolla impact. How do you think that it impacts your operations?

Speaker 1

Thank you very much, Mario. Thank you for your question. Good to see you. Let me give you a few comments. First of all, the cap of the credit card, it's not a cap.

Speaker 1

It's rotary credit rotary Credit in the interest rates of the credit card. What we invested the most over the last few months Was simply in being able to share with the market. It's not the banks. The market is the government, is the central bank, The well, the retailers, all the stakeholders, I mean, so we can start with a common point From all of us, the instruction necessary to do that diagnosis is important. Fevre Aban, some banks did the work.

Speaker 1

Fevre Aban is taking part in this process, Discussing in a very open way this. And I think that this was very positive and constructive. Congress, government, regulatory, well, we have Retail, everybody credit card companies, everybody knows about the challenges that we have. Some numbers, we talk about the interest rates of the rotary, 400%. Well, rotary of credit card in the individual's portfolio international is 3% of the results.

Speaker 1

So if we have We have another 2%. We're discussing 3% of the whole portfolio. No client is 12 months in that rate because the regulation of the central bank defines that after 30 days, you have to offer something better, more deadlines, better conditions. So the client in the rotary, it's on average 18 days staying at the credit card. So that Rate is virtual.

Speaker 1

It's simply annualized, but it's not the real rate that is practiced. But it's the one that is published and it generates the discomfort. Another information in Brazil that is relevant. 75% of the credit card portfolio does not pay for the interest. Well, 25% pay.

Speaker 1

When you go to other economies in the well, you can see that the 70% pays for this interest And 30% doesn't. So there is a cross subsidy. And I talk about this, every single business will try to do its interpretation. We want to leave An unstable balance to a stable balance in credit cards. So what we want, and I say this, I just talked about Rede.

Speaker 1

Well, you mentioned that we took over. Well, we're going to see the numbers. Well, let you see that we are the biggest issuance Issuer and acquiring business in the country. We are saying this from a we want to solve something that is structural. I'm not going to Defend, well, the receivables in the because RayDay has installments.

Speaker 1

Well, we have to build a solution that is good for everyone, that is good for the consumer, that is sustainable, that is good for retail. I think that it has to be good for everyone. I think that this is the north. We had great talks. We are working in that direction.

Speaker 1

We do not believe that the cap is the best path. The impact is very relevant. It's not good. It's not good for the regulator, for the A ministry of the economy is not good for retailers because this is an artificial lever. So let's Work with the root cause and this is what we believe.

Speaker 1

Our best information is that we are going to work over the next 90 days In a multidisciplinary group to deliver a solid proposition for the Central Bank, for the economy for the Ministry of Economy And the business well, so we can advance. This is not easy, And we are optimistic that there are mechanisms to advance. And this is what we Defend the stable equilibrium with all the parties, Ministry of Finance, etcetera. Well, thank you. The next question is Bernardo Goodman from XP.

Speaker 1

Good morning. So we can navigate the next two quarters within the same range within the new range that was published Considering a replenishing of the activities, we are expecting good activities in the 2nd semester, but not enough that we can recover in the 1st semester. So basically, three lines that are suffering here. We have the activity of the market of Investment Banking, the capital markets, all that you commented. We have the performances of the funds.

Speaker 1

We are going through a process of more difficult activities in the funds. It's more difficult to win with the market with the high volatility. And in the second semester, we Well, the performance fee, it depends on the market, the positions, the managers. It's very difficult to foresee. There is a third effect Has to do with the credit, which is the insurance for the loans.

Speaker 1

It is intrinsic. It is very much involved in the operation of ForCredit. So as the credit activity restarts, we have an expansion also of the loans. We do not think that this is going to be enough for recovery the recovery of the 1st 6 months of the year. So I don't see a change in the guidance in the next quarters.

Speaker 1

I would love to come here and say that we are reviewing the guidance going up, but this is The best information that we have today. But now within the geography that has been said between 57, which is what we published, I think it's reasonable that the bank is going to be within those thresholds. Any positive surprises, I think that the range will accommodate. Milton, before we give the floor to Gustavo, I well, Mario Petri asked 2 questions about the capital of the rotary and desunrolla. [SPEAKER UNIDENTIFIED

Speaker 3

COMPANY REPRESENTATIVE:] And if you can answer about Desenrolla.

Speaker 1

Mario, well, let's go back to the point, sorry. Desenrolla is two points that are important. First, the engagement of the clients is very good. The awareness level that was created is very solid. And we've seen we realized that there is an increasing demand in several channels seeking those agreements.

Speaker 1

We renegotiated over 200,000 contracts. We actually had Have about 600,000 individuals that are on the blue, no longer on the red. And the number maybe is even over 700,000 individuals. So the effect on the bank, we are going to see The dynamics in September, the bids on the range 1. On the range 2, the stimulus is already there.

Speaker 1

So we expect Something in the range 1, this is not going to be sufficiently enough from the standpoint of the bank To fit away the cost of credit or the delinquency indicators, I don't think that there's going to be a material impact, but I think it's positive for the Society has an impact that is relevant for the clients and they help them in the very difficult post pandemic cycle. So yes, we expect the result. I do not see materiality in the results in terms of financial highlights. I'm very uncertain because we're going to know the how the dynamic of the business is going to be from September onwards. Maybe I can give you in the future more contracts information, more volume information, but what economically that means, we have to wait for the next quarter because I need more data.

Speaker 1

Okay. Thank you, Milton. And now we go to the next question. Gustav Schroden, Bradesco. Welcome.

Speaker 1

Hi, Renato. I'm Milton. Thank you for the opportunity. I wanted to change gears. Let's talk about efficiency.

Speaker 1

I think that the bank has done An excellent work in that, well, if you look at a number of 37% of efficiency for a bank of your size and robustness Avida, it really calls your attention to the numbers. Milton, I wanted to understand if there is a target. Is there is any objective here that we can work with for the next 2, 3 years In terms of efficiency, can we think about 35%, something in that matter? I know that there is a right of the side of the revenue, But getting the revenue as it is, just thinking about cost, can you still do something Maybe to seek the 35% or even something lower. Thank you, Gustavo.

Speaker 1

I think that in India, our objective is to continue To improve, if you ask me if it's 35%, 36%, where is the stabilization, it Depends on the dynamic of cost and revenue. We're working diligently. I think that the revenues have followed us all throughout The cycle and the agenda for costs as well. So that's why we have the core costs that we show and we absorb the run the bank, the inflation. We saw the cost of customer service.

Speaker 1

The reduction is very relevant. So the investment, digital investment of the bank has for as an objective to deliver the best value proposition, a better experience for the clients and offering that is More customized, but also we have the objective of the cost of service in a market that is ever more competitive. So we need to advance. I'm not talking about a remote bank. No, this is not it.

Speaker 1

But being a digital company is to service the clients in an optimized ways And in a way that technology allows you to do so. So we are still in a redundancy phase, operationally speaking. As you migrate to the cloud, you still have systems legacy in the data centers that are old, so you have operational efficiencies that will be captured. We still have opportunities for advances in the business model structure, the model of service for the clients. I'm optimistic.

Speaker 1

I think that this is an agenda that we will continue to work with, with a lot of emphasis quarter After quarter. And we regardless of the top line, cost is something that an agenda that has to be present all throughout every day. So So once again, I'm constructive. I don't know if the stability will be 35%, 36%, where it will land, but that's the ballpark. And time will tell.

Speaker 1

It will really depend on the dynamic of top line. And another thing is that when we give the disclosure of costs, We first get all the costs in there. So we have expenses. We don't have expenses and other expenses. It's all expenses.

Speaker 1

So the other segment that is important, the numbers can be seen is that within our cost agenda, we do not forego all the provisions that are adequate, All the PROs, the labor expenses, I mean, all of that is cost for the organization, But always with a provisioning level that is very adequate. If you look at our patrimony lines, our restaurant lines, well, That delivery of cost has no relation with the reduction of structural provisions that we understand that are important for the bank. So regardless, we continue to deliver powerful results and advance. So I think that it's important that we understand our provisions in this different lines. And we can follow-up on those lines.

Speaker 1

We have solidity on the long term, even though that might sacrifice and efficiency indicator from 1 quarter to another. Thank you. Next question, Thiago Batista, UBS. Welcome. Welcome.

Speaker 1

Well, thank you, actually. My question is credit card. Well, You commented that you had a drop, beefs. I mean, we can see the EAH, the first drop in the first So I wanted to understand if that drop in the clients was because of a change in the mix in the high income Or is it the same base and you could see that improvement? Well, also with that, when I look at the profitability of your business.

Speaker 1

That this quarter was single digit. I think it was 10% and then it dropped quarter on quarter. So it was single digit this quarter. That improvement in profitability goes through credit card. Is credit card relevant Hector in credit.

Speaker 1

Well, several questions here. Let me do a deep dive then. We look at the financial system, national system, an expansion of the delinquencies above 90 days. So when we look at well, ours, we reduced it 20 basis points. So we are outside of the curve of the behavior of the market.

Speaker 1

So the portfolio drops also nominally, the finance also drops. And the So it shows that the denominator effect has a role and we still reduced. Well, there is a mix effect that is very important. I think that we did derisking of the portfolio and we are growing in the segments that we have a level of return that is more healthy for the portfolio. So the new Works that are going to be produced all throughout time, this takes time.

Speaker 1

It's difficult for you to take to change the portfolio So we have the mix that is important here for the derisking of the portfolio than Just looking at the same base and imagining how it would work. And since our low income operation in the end has one of the levers is a credit card. And as I said, if we kept a constant mix, credit card has a role in that mix, we would have worsened our delinquency indicators It's been 180 points and lower profitability and the business of credit cards has to be separated. So the with the with the checkings, it's been growing. It's been it's very adequate.

Speaker 1

We're very happy with the results. With a market that is the open ocean, we have an adjustment in the portfolio. It suffers less. And the finance in the middle of the path, but both businesses in the lower capital cost, Not the account holder, the others. So our work is to regain the so we can go back to the hurdle of the capital that takes some time.

Speaker 1

And that was a big offender of our credit. Well, the size of our portfolio is disproportionate in regards to the market, in regards to individuals And the size of our portfolio, if you consider Carefore Bank, 30% of market share. So this is a very relevant number that generates higher impacts. The credit activity in the business model, we published 10%. So it's not single digit, but it's For the chart, 10%.

Speaker 1

On the other hand, we have an important expansion in the revenues of services and insurance, showing that the credit The credit card for the mono liner or the one that doesn't have a full bank offering, it's very dependent on credit. But for the other businesses, The credit is an important lever for the cross sell, so we can capture all of the value creation in the revenues of insurance and Services and the other big opportunity that I just mentioned. Our expectation is that we can work this base leaving a vision that is not full bank to a full bank with clients that we have records and that we know And they have CAC that are close to 0 there of the organization. And what we have to do is increment the businesses. So here We have an opportunity.

Speaker 1

It's not just a challenge from the credit standpoint. Business opportunities that are very strong and we maybe have the biggest biggest basis of clients that are already of the bank that are not explored. And we have an integrated, modernized platform, and we can do so. Thank you, Milton. Now next question from Rosman, BTG.

Speaker 1

Good morning, everyone. My question is a follow-up of Thiago's question and also the answer of Milton About the client of the Open Ocean, Open Sea, we've seen the banks suffering with the Open Ocean. The finance, there is a digital bank that has performed better so far. So I wanted to understand what is the relevance of that client That is the Open Ocean, Open Sea and the results of Itau Bank. I think the number is small, if you can quantify it, please.

Speaker 1

And How do you work to transform this client in a full bank being the main one? Do you need a migration to apps? The system is ready for that. All the technological background is ready and set up. If you can tell us more about that theme.

Speaker 1

Sure. Pleasure to see you, Rosman. I think that the first message here that I think that is important to share Is that, that client, if you look at the bottom line of the bank, the last line, it's a client that added very little value To the results, it's much less RGO than what we've seen in these typically operations in the past would always return the cost of capital. So it's a detractor for the ROE, but it helps and generates value in terms of scalability for the operational results. And obviously, with this cycle, the external channel is more challenging, not just for credit card, business vehicles, other businesses that depend on the exclusively on the external channel.

Speaker 1

So there is a reduction And the contribution for these clients for the bank is specifically in terms of profitability. Even though there is a positive Income, the profitability as an offender. So we could regardless, we could absorb all these effects in the balance sheet as you can see. So I see that on the other hand, there are opportunities for you to transform a client that you have a single opinion or view of a product and then we can engage in The client and you can be the main bank of the client and not the accessory bank because the accessory bank, we have an effect in credit card term of sudden death. So you have a client that is using your credit card until the day that they cannot pay.

Speaker 1

They get the credit card in the drawer and they are going to use the other six Credit cards that they have. So the relationship and the engagement with the company is key. If you're a bank, they are centralized, We have the day to day, we have mechanism of debit in the account holder and you have an integrated work with the client, you also benefit from the Cost of credit, you tend to be the last bank that are not naturally going to do a not yet updated payment. So they tend to preserve, Of course, the income of the client is the income of the client, but they try to preserve their relationship with the organization and the bank that is the main bank. So to me is a theme of being the main bank.

Speaker 1

You need a technological solution. Sure. You do not do that with brute force. It's not a call center. It's not going to be in an app trying to do a phishing.

Speaker 1

No, no, no. The phishing in the sense of trying to originate a transaction with that client. It's not going to work. But if you build an integrated experience, and this is the work that we've been doing, it doesn't matter if the client gets in with a channel, with a product. And what is the product They chose to do a relationship with the bank.

Speaker 1

You end that logic that the checking account is the only center Of relations with the client. You have a credit card. You have savings. I mean, the customer will start the relationship From where they want to start, if you can, through my super app, you can do an integrated offering for the client, the way they work, it changes, the efficiency changes. And this is what we believe.

Speaker 1

We are not there yet. There is an important work happening, But we will get there. And this might be a watershed moment. We never had the tools and the technology to do that capture to do this integration. So now I think that we have a solution that is much better to generate that engagement with our clients.

Speaker 1

And a client that is known with a behavior score, the client that we have sufficient data to do credit decisions. So I am The contribution can be important and I think that the client that contributes very little in terms of bottom line because of the cost of credit. They have an important role And the cost of credit as a whole, and this is the biggest offender. The portfolio that most offender the cost of credit is the credit card portfolio. So We are delivering our cost of credit of this size with the biggest portfolio in the market, 2x maybe the 2nd place, A big difference and still working with the cost of credit that the operation can absorb.

Speaker 1

So this shows how much opportunity we have on the other hand, so we can advance. Thank you, Milton.

Speaker 2

With us Tito Labarto from Goldman Sachs. Hello, Chitu. Thanks for joining the call.

Speaker 5

Hi. Thanks, Renato. Hi, Milton. How are you both? Thank you for the call and taking my question.

Speaker 5

My question just some a little more color on the NII, very good performance on both the market NII and the client NII This quarter, I guess, in the context of rates coming down now, how should we think, one, about the market in AI and How that will evolve in a lower rate environment, but also the client NII, right, as you potentially accelerate loan growth into next year, Should the client and I grow or benefit from a lower rate environment as you grow the loan book more and maybe the mix Potentially help if asset quality begins to improve. So just to think about both the marketing client and I in the context of a lower rate environment into next year.

Speaker 3

Thank you, Tito. Good to see you. I think a little bit in what I was mentioning before, I think You have to look both sides, okay? The investment side and also the credit side. And we've been able to deliver a good performance Throughout the cycle because we've been balancing a lot the portfolio in decisions like that.

Speaker 3

So in one way, you have Some positives from the investment side with the interest rate going up. You have more volumes with the interest rate going up. But then when you go in a Cycle when you have a reduction of the interest rate, you will see an opportunity in credit coming in front of us Where you can calibrate, you can bring a more balance to the mix of the portfolio, you can take more risk, you can go to product, The mix of the retail can change, the mix of the wholesale can change. So then it's always a play of taking a little bit more risk in a scenario that allows you to do so with Better spread than in the other side you may lose a little bit of the benefits on the investments on the liability side. So This is the balance that we've been pursuing.

Speaker 3

I think in the mid to long term, it's better for us To work in an environment where we have a lower interest rate. So it's not true when they say that interest rate, high interest rate is good for the banks. It is good in the short term. You have some benefits in the short term, but the cost of credit and the capability to increase portfolio reduced so strongly, the cost of credit increase and the capability decrease That at the end of the day, on the balance of that, you have more negatives than positives. So you have less projects, the wholesale market It's not so active.

Speaker 3

So we are positive. And I think in the downturn, we will see more activity in the downturn of the cycle, in the reduction of the interest rate And the economy evolving in the coming quarters, we see more positives than negatives. And then if we have to adjust the structure, the cost, the portfolio, we will do so whenever we feel comfortable to improve Our performance, so I'm positive about that. And then we have to look at the adjusted NII or adjusted NIM to understand how we can manage throughout the cycle. And the NII, there's 2 impacts, especially for this year.

Speaker 3

One of them is the average balance of the portfolio. So we cannot look at the picture at the end of the cycle, at the end of the quarter, Because we still have an average balance higher than what we see, especially when the portfolio reduces. And in the 2nd semester, we expect more activity in general. We see a good pipeline on the wholesale side where we can bring More economics to the operation and this will benefit as well our NII. That's why we keep comfortable in our NII even though the mix may change a little bit.

Speaker 2

Thanks, Milton. Actually, for the next two questions as well, we're going to say in English As the next question comes from Nicolas Riva from Bank of America.

Speaker 6

Hi, Renato, and hi, Milton. Thanks for the chance to ask questions. I have two questions. The first one on capital. So Milton, you alluded to these positive impact you're getting on capital beginning July First, from some changes in operational risk, lower operational risks, and you estimated the positive impact of 100 basis points.

Speaker 6

If you can Provide a bit more color on actually what is changing regarding operational risks. So that's my first question. And then my second question, I know that I have been asking I think Natalia has also asked this in past earnings calls. But if I wanted to ask I wanted to confirm if the strategy around the call options On the Tier 1 and the Tier 2 bonds still hold in the sense that with the Tier 2 bonds, with the 2029s and the 2,030 ones, If we should still expect that what's most likely to happen is that you would call these bonds, being that they start losing capital treatment if not called. And 2 with the 81 bonds, if we should expect that in that case, you would only call them once you can issue a new perp Very similar coupons to the ones you're currently paying on the burps.

Speaker 6

Thanks.

Speaker 3

Yes. No, thank you. So on the operational risk, it's your first question. I think there was a public consultancy coming from the regulator telling us How and this is not a Brazilian discussion. This is a basal discussion.

Speaker 3

And of course, there are some specific items for Brazil and some discussions that we are having with the regulator as well to avoid double accounting for some specific topics. Just to give you an idea, When we do labor provisions and when we do tax provisions, at the end of the day, some operational risk. But as those are 2 very relevant lines for the bank, We do on expected loss provision, we provision in the balance sheet. So there is a discussions in the Central Bank, if there is this ILM That's an index that can be 1 or can be more than 1 depending on how the Central Bank regulates that. That we say that is a double accounting because whenever I provision and I expect that loss model, I take it from capital.

Speaker 3

So if I take that in consideration, when I look my Statistical loss going back, then I will be double accounting. That's why we discuss this ILM equals to 1. And then the Central Bank can regulate the level of provisions in Pillar 2 of Basilea in Basel guaranteeing that we have the sufficient capital for those lines and those specific provisions. So I think this is the major impact. It's an evolution on the regulation, has to do a lot with your historical, has to do with new models.

Speaker 3

I think it's an evolution that is happening worldwide. It makes sense And we believe so, but with some comments that of course the industry throughout Fibre and also the banks have been Conversation is very constructive with the regulators. So let's wait and see. Our base case is 100 basis points. If it's the worst case, could be 180, this could be a number, but we work much more with 100 basis as the base case Due to all the discussions and the logic behind this evolution on the Basel III operational risk.

Speaker 3

And now talking about the bones, It keeps the same strategy. So whenever we get close to the co option, we will understand if it's better to access market or If it's an economic perspective, it's better not to exercise the call. This is what we've been communicating to the market, anticipating including Anticipating the communication guarantee that we've been very transparent on that. And on the Tier 2, the same way around, as you just mentioned, If we start to lose the capital benefit because of the 5 years close to the maturity, then we start to reduce 20% per year. Then we will decide if it's an expensive or not Tier 2.

Speaker 3

We don't have an issue relevant issue in capital as you can see in our figures. We are very comfortable with the level of capital that we have. So on the economic side, this will be the key lever To make the decision, we will keep pricing. It's difficult to say anticipate. The market may change.

Speaker 3

The interest rate may change. But today, it's worth Not to exercise the call, we can do that at least 150 basis points 200 basis points lower Then if we would go to the market, especially in a market that's been a lot of discussions after the Credit Suisse event, 81. So we don't see a very open market for that and we don't know what level of price new instruments will be priced. So we'll be monitoring the market. And if it's the case, we will or not exercise the call.

Speaker 3

We will be depending many issues, many Levers, but the cost is the most relevant one.

Speaker 2

Thanks, Mitu. And just before we move to the next and last question, I just want to acknowledge that we got a question via WhatsApp from Alexa Huther from Jefferies. And she was asking the same question about the AT1s. Therefore, we would pass the question to you, but because Nicolas already asked, so we're going to take that as answered. Synergies, exactly, efficiency.

Speaker 2

Right. So the last but not least, we have with us Carlos Gomez Lopez from HSBC. Hi, Carlos. Good to see you. Thanks for joining the call.

Speaker 7

Thank you for extending the call and taking my question. So I'm going to a minor issue. It's also about tax. Can you comment on the possible effects of the first tax reform, the reform on indirect taxation and whether It changes how you manage the bank or in the future what your expected cost base? Maybe do you see anything tangible there?

Speaker 7

And also related to tax, as part of a tax discussion, is there a possibility that they will review the way in which your foreign subsidiaries And therefore, how you envision your foreign business? Thank you.

Speaker 3

Well, thank you, Carlos. Good to see you again. Thank you for your question. On the VAT reform, we have to separate the bank, I would say, 3 major Business lines, all services fees and so on, we are in the general provision. So Whatever it's the rate, if it's 25%, that's what's been saying.

Speaker 3

We don't have the numbers defined yet. We'll be paying 25% on services and fees. And it's going to be exactly like any other company, a drugstore or anyone. So what makes this complete make complete sense. But then we have 2 other provisions that we are in a special regime that's to be regulated.

Speaker 3

One of them is the spread. As you know, In no country, in any country, there was the VAT was implemented, the spread is not taxed. And today, just to give you a number, the cost of credit, the rate that we charge from our clients, 20% of that is explained By the physical things which is the actual regime where we pay 4.65% over the spread. So the VAT On that side, what we've been hearing is that the idea is not to enhance or to increase that through the VAT, because imagine what would happen If the 4 65% goes to 25%, even if it's in a non cumulative regime, it's still a huge increase. So this is not the idea.

Speaker 3

This is what we've been hearing because this will produce the worst possible effect that will go to price And then we will impact very strongly the activity. So this is the second one. And the third one, it's the payment Ecosystems and it's in a special regime as well. And it's very easy to explain. So we were discussing about interest rate on credit cards.

Speaker 3

But imagine if the VAT impact the interchange, you don't have any pass through but interest rate on the credit card business. So that's why we want to have a special discussions because there is no pass through through the cycle in the chain on the VAT over interchange. So the idea is that we can take a look on that. Otherwise, we may have to gross up that from the brands and to have a new Interchange fees published or you will go to the interest rate on the revolving on the installments without with interest. So it can produce a very strong impact.

Speaker 3

So that's the idea why it's separate. So Let's see. We still have the discussion on the senate. If there is any change, it will come back to the lower chamber. So we have to wait and see to understand the real impact.

Speaker 3

But mostly it will make the activity a little bit more expensive. There is no other way Of doing so, so most part of that will go to price. There is a pass through, okay? And on the other side, on the reform, We don't have at this moment very deep knowledge about what will be the second chapter of the tax reform. We have to wait and see.

Speaker 3

There's a lot of discussions going on. I think the focus and the priority is to approve the actual The one that it was approved already in the lower chamber. So let's wait and see, so we can have a little bit more color. There is a project law that is in the Congress, but it's an old one. So we imagine that some reforms, Some changes will be done by the technical team and a lot of discussions in the coming months involving all the segments, the sectors.

Speaker 3

[SPEAKER IGNACIO CUENCA ARAMBARRI:]

Speaker 2

So

Speaker 1

So 14 questions, that was the last question. And with that, we will close the Q and A, But also we will call the earnings call. But before we say goodbye, we're going to answer all questions that we received via WhatsApp. We've Got a lot of questions. Thank you very much for all of you that were in our call.

Speaker 1

Milton, the floor is yours for your final thoughts. Thank you. It's always a great pleasure. Thank you once again For being here, taking part in our call. And it's good that we have an open communication, transparent communication.

Speaker 1

I just Thank you about the recognition that we got and with a lot of humility. This is the word. Everybody is Certain of the challenges, everybody is working with a lot of energy to continue to deliver the results and Surprising Our Customers. This is our agenda for transformation. So thank you for your time, for your questions.

Speaker 1

Always, I would like to thank the 100,000 YouTubers that do a strong work with high levels of energy. And we are at a special moment, very happy with what we delivered, but certain that this is a never ending game. It's not going to be over the next This quarter is going to be over the next few quarters, we're going to discuss the perspective. The provocations are always welcome with focus and discipline and Energy, so we can deliver that level of profitability and performing above the average of the market. Thank you very much.

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Key Takeaways

  • Posted BRL 8.7 billion of net income in Q2’23 (+3.6% YoY) with ROE of 8.9% (21.5% in Brazil), while core NIM rose to 8.8% and market margin jumped 65% YoY.
  • Kept asset quality on track with a stable consolidated 90-day NPL (+10 bps), a 20 bps drop in credit-card NPL, and a cost of credit at 3.3% of portfolio.
  • Lifted efficiency to 37.7% in Brazil (39.6% consolidated) through disciplined cost control and digital investments that cut account opening times by 99.9% to 4 minutes.
  • Grew loan portfolio selectively: individual loans +8.9% YoY, SMEs +4.4%, while derisking high-delinquency “open-sea” credit-card segments to protect asset quality.
  • Bolstered capital with a CET1 ratio of 12.2% (pro forma 13.1% post-Basel revisions) and reaffirmed full-year guidance, adjusting fee income growth to 5–7% and tax rate to 27–29%.
A.I. generated. May contain errors.
Earnings Conference Call
Itaú Unibanco Q2 2023
00:00 / 00:00