Itau Unibanco Q1 2025 Earnings Report

Itau Unibanco EPS Results

• Actual EPS: N/A
• Consensus EPS: $0.16
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Itau Unibanco Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $43.61 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Itau Unibanco Announcement Details

• Quarter: Q1 2025
• Date: 4/30/2025
• Time: Before Market Opens
• Conference Call Date: N/A
• Conference Call Time: N/A

Itaú Unibanco Holding S.A. offers a range of financial products and services to individuals and corporate customers in Brazil and internationally. The company operates through three segments: Retail Banking, Wholesale Banking, and Activities with the Market + Corporation. It offers current account; loans; credit and debit cards; investment and commercial banking services; real estate lending services; financing and investment services; economic, financial and brokerage advisory; and leasing and foreign exchange services. The company also provides property and casualty insurance products covering loss, damage, or liabilities for assets or persons, as well as life insurance products covering death and personal accident. It serves retail customers, account and non-account holders, individuals and legal entities, high income clients, microenterprises, and small companies, as well as middle-market companies and high net worth clients. The company was formerly known as Itaú Unibanco Banco Múltiplo S.A. and changed its name to Itaú Unibanco Holding S.A. in April 2009. The company was incorporated in 1924 and is headquartered in São Paulo, Brazil. Itaú Unibanco Holding S.A. operates as a subsidiary of IUPAR - Itaú Unibanco Participações S.A.

Itau Unibanco Q1 2025 Earnings Call Transcript

Key Takeaways

• Recurring managerial result of BRL 11.1 bn, up 2.2% QoQ and 14% YoY, with consolidated ROE of 22.5% and 23.7% in Brazil.
• Efficiency ratio hit a record low of 36% in Brazil (38.1% consolidated), supported by 3% QoQ revenue growth and disciplined cost control.
• NIM reached 9.0% (6.1% risk‐adjusted), the highest since Q4 2019, as NII with clients grew 3% QoQ to BRL 29.4 bn.
• Credit quality remains robust with stable NPL ratios and a flat cost of credit at 2.6%, despite first-quarter seasonality and portfolio reclassifications.
• NII with market totaled BRL 900 m, boosted by exceptional trading gains, but management warns this may not recur and capital hedge costs could rise.

Presentation

[Renato Lulia, Group Head of Investor Relations & Market Intelligence at Itaú Unibanco]

Hello. Good morning, everyone. I am Renato Luria, and it is a pleasure to have you joining us at another Itau Nibanco quarter earnings conference. Milton will explain our performance and earnings for the first quarter of twenty twenty five in a new format from Itau BBA's auditorium at Faria Lima headquarters in Sao Paulo. Then we will host a Q and A session in which analysts and investors will be able to interact directly with us from the studio, which is right next door to the auditorium.

[Renato Lulia, Group Head of Investor Relations & Market Intelligence at Itaú Unibanco]

I would like to give you some instructions to make the most of today's meeting. For those of you who are accessing this via our website, there are three options for audio on the screen, the entire content in Portuguese, the entire content in English or in the original audio and we will have simultaneous translation in the first two alternatives. To choose your option, all you have to do is click the flag at the top left corner of your screen. Today's presentation is available for download on the hot side screen and also as usual on our Investor Relations website. That is it for now from me.

[Renato Lulia, Group Head of Investor Relations & Market Intelligence at Itaú Unibanco]

Now I will hand over to Milton and we will meet later next door in the studio for the Q and A session. Milton, over to you.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Good morning. Welcome to yet another earnings presentation. Let's talk about the earnings for the first quarter of twenty twenty five with two key changes. First, we have changed the presentation format itself to make it easier for you to understand it and to deep dive. And I will also talk about some disclosure changes we have made both in the credit portfolio chart and the service and insurance revenue breakdown.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

In addition, throughout the presentation, I will also highlight the impacts of implementing Resolution four thousand nine sixty six in the Brazilian GAAP accounting practice and I think I will be sharing good news. Now I will get straight to the point starting with the results highlights. This traditional chart shows the managerial recurring earnings, ROE, both in Brazil and on a consolidated basis, pretax earnings, NII with clients and efficiency and capital ratios. Moving forward, this quarter we delivered a recurring managerial result of BRL11.1 billion, a very sound result with a 2.2% growth compared to the last quarter and almost 14% year over year. When we translate this result into profitability, in the first quarter of twenty twenty five, we delivered a return on equity of 22.5% on a consolidated basis and 23.7% in the operation in Brazil.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Both indicators grew on a quarterly and annual basis. By adjusting ROE by risk appetite capital, which is 11.5% for the operation in Brazil, we get a 25.9% ROE. This indicator is more comparable with our peers, given that our capital ratio is still slightly above our risk appetite. On a consolidated basis, our ROE is 24.4%. So we continue to deliver very sound profitability, very high returns and very positive earnings for the quarter.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Even more importantly, we should look at the quality of our result, its composition. I mean the results from the inside out. EBIT grew 6.5% in the quarter compared to the fourth quarter of last year and 16% year over year, reaching BRL16.7 billion. This means that EBIT grew more than BRL1 billion quarter over quarter. Our margin with clients was BRL29.4 billion, also a very sound result, growing 3% compared to the last quarter of twenty twenty four and almost 14% year over year.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

In addition, we were able to deliver the lowest efficiency ratio threshold in the bank's history at 36% and naturally taking into consideration first quarter seasonality, this is also the best first quarter in the bank's history in terms of efficiency ratio. We closed at 38.1% on a consolidated basis, a major improvement compared to the fourth quarter and a slight year over year improvement. As for the operation in Brazil, this represents a two forty basis points improvement and we also posted an improvement of almost 100 basis points year over year, all this while maintaining a very sound capital base. We closed the quarter with a 12.6% CET1 by offsetting absorbing regulatory impacts and the payment of the additional dividends incurred in the quarter, which consumed 110 basis points of capital. Therefore, on a pro form a basis, by adjusting for the impact of the additional dividends in the fourth quarter, we posted an expansion of 30 basis points compared to December 2024.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Compared to March 2024, we posted a lower CET1. I will now present to you the credit portfolio performance. As you can see, the individual's loan book grew 8.6%, the SME credit portfolio grew 17.7%, and the large corporate loan book grew 13%. I am going to make some comments to explain some of the changes we have made to the credit portfolio chart so that you can understand them better. There was no change in the individual's loan book whatsoever.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

This portfolio grew 8.6 driven by the growth in credit cards, personal loans, vehicles financing, and mortgage, while payroll loans are still under pressure due to the interest cap for the INSS beneficiaries portfolio. The payroll loan origination for INSS beneficiaries has naturally reduced given the level of funding costs. Further, the finance credit card portfolio in the quarter grew 8%. In the last quarter, there was an increase in the volume of transactions due to end of year shopping. And now at the beginning of the year, part of this portfolio begins to be financed, thus starting to yield interest and this affects our margin significantly as well.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Now, I will put a little more emphasis on some changes. The first point is that we have also adjusted past figures for comparable reasons. Let me now comment on the most relevant changes. We had an important agribusiness portfolio, which we had always classified as large corporates because this was the segment where this business was managed. However, over time, this portfolio has been segmented into different companies.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

We reclassified these companies to the SMEs portfolio based on their annual revenue. We have disclosed all the details in the footnote to the credit portfolio chart. We have also included in the chart the receivables investment funds, which at the end of the day are securities established for credit purposes. We have also included the exposures to financial institutions when we have these banks as clients. This does not consider the certificates of interbank deposits or CDIs to manage liquidity in the system.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Here, we consider credit like instruments with these banks. We have also included in this chart the credit like transactions operated by our trading. Again, you have all the details disclosed in the footnote to the credit portfolio chart. So if you analyze the portfolio, you will see that the SMEs loan book posted a drop of 2% in the quarter. The portfolio of large corporates drops 1.8% and the total of Brazil drops 0.8%.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

However, it's important to exclude the FX effects on the portfolio as a whole. Instead of falling 1.7%, the total portfolio would have fallen 0.2% excluding FX impacts. This shows the portfolio sensitivity to foreign exchange fluctuations. Instead of falling 2%, the SME's portfolio would have fallen 0.6% excluding FX impacts. And the large corporates portfolio would have dropped 0.5% and not 1.8%.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Instead of falling 5.5%, the Latin America portfolio would have fallen 1.3% excluding FX impacts. The average balance of the credit portfolio is what impacts NII for the period. The chart that I will show you next highlights this message. So when we look at the average balance of the credit portfolio, individuals posted growth of 2.1%, SMEs grew 5.5%, and large corporates was up 2.1. So the average balance for the period grew 2.3%.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

And this is what generates revenue and consequently net interest margin. This takes away a little of the seasonality and the FX rate effects that I explained in the previous chart. The average balance, therefore, is the best information available to analyze the NII. Next, we present the traditional margin chart where we show the NII figures in billions of reals at the top and below the NIM, which is the annualized average margins. I will start by focusing on the NII with clients in which we have two major effects.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

The first one is the working capital, which posted results of BRL 3,200,000,000.0 in the previous quarter. And now for the first quarter of twenty twenty five, it has generated results of BRL 4,000,000,000. When we look at the spread sensitive margin related to the loan portfolio, that is the core margin, we have a few effects. The higher volume had a positive impact of BRL300 million out of BRL900 million in total growth as shown here on this slide. As regards the product mix, for example, the increase in finance credit card portfolio, which I showed earlier affects the mix because this is a portfolio with a higher spread.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

The segment's mix between large corporates, SMEs and individuals also impacts this line along with the product mix within these segments. All of these affect this line and resulted in a positive result being posted for the quarter. We have consolidated the spreads and the liability margin impacts. By spread here, we considered both credit portfolio spreads and also the liability margin spread from which we have also obtained a positive effect. A key issue to be considered in the NII is the calendar effect.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

This quarter, we had fewer working days and fewer calendar days. This has affected both the asset side or the credit side and the liability side of the business, depending on the metric used and how we manage and monitor them. The calendar effect shows that this seasonality removes BRL500 million from our earnings. We would have posted very strong growth if not for this seasonality due to the calendar effect. Analyzing the impact shown in the bar, Latin America and others, we have had both positive and negative effects.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

This line also recorded the positive effect of about BRL100 million due to the stop accrual change with the implementation of Resolution four thousand nine sixty six. This effect is included in this line named others, and I will detail it soon when we talk about the margin. We have always been very disciplined in managing the stop accrual. Therefore, the effect of the change in stop accrual from sixty to ninety days was positive for our margin, not negative. This is a key point to be taken into consideration.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Moving on to the annualized average margin, here are some highlights. First, there was a significant increase in the consolidated NIM that reached 9% and a significant increase in the risk adjusted NIM that reached 6.1%. This dotted line in the 5.8% is just to remind you that in the third quarter of last year, there was a credit provision reversal amounting to BRL500 million before tax related to the case of that retailer currently under Chapter 11. This layout helps you analyze the trend over time. This is the best risk adjusted margin we have ever posted since the fourth quarter of twenty nineteen, which is the quarter immediately preceding the first quarter of the pandemic.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

The story is no different for the operation in Brazil. We have reached NIM of 9.8% and risk adjusted NIM of 6.6%. The one off effect from the retailer we just talked about stands out more because the transaction is booked in Brazil, which again shows an important margin recovery trend. I always tell you that the way the bank is managed is reflected in the risk adjusted margin. Growing revenue generating margin is challenging with a certain degree of difficulty.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Our focus is on making the risk adjusted NIM grow because that is what remains at the end of the day net of the cost of credit. Moving on to the NII with the market. We can see a steep increase for the first quarter to BRL900 million in total broken down into BRL1.2 billion in Brazil, BRL200 Million in Latin America and a capital ratio hedge cost with a negative impact of BRL500 million. The next question would be, come on Milton, the midpoint of the guidance release for the 2025 earnings is BRL2 billion. In the first quarter, you made practically half of this total.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Were you conservative in your guidance for 2025 results on NII with the market? What is your view on it? Well, we reiterate the 2025 guidance. We had an exceptional trading result in the first quarter, which may not be repeated going forward. We monitor our ability to create value and generate alpha in trading, and this quarter was above average.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

So obviously, we are working hard to deliver better results. In addition to that, the capital ratio hedge cost is expected to rise a lot over the next few quarters. Therefore, we will still see these effects on the NII with the market, which leads us to expect that we should end the year a little above the midpoint of the guidance, which is R2 billion based on our best current projection. This is still our best expectation. We continue to work on it.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Projecting the margin with the market is hard. Despite our track record, we anticipate that some effects, especially the capital ratio hedge cost, will widen given the interest rate spread, but we reiterate our guidance. I know this question will come up, but I wanted to anticipate this issue while presenting the NII with the market. Next, we present the commissions, fees, and results from insurance chart where we have made some changes. I have been telling you for several quarters now that we have been reconsidering the way we disclose the acquiring business results.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Since it makes no sense to disclose them separately from payments results, let's not forget that part of the acquiring business revenue is recorded in this chart and the other portion is recorded as NII with clients. The portion of acquiring results recorded as NII has not changed, but we have consolidated the acquiring results recorded in the commissions and fees chart under payments and collections. As of now, the credit and debit cards results consider only the issuance operation. In addition to the acquiring business, we also consolidated under payments and collections, the revenue from tariffs collected from corporate clients as packages. Before, it was consolidated in the current account services line.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

This change was made to better reflect the way we manage the bank. All in all, we brought to the payments and collections line the acquiring business results that were considered in the credit and debit cards line and also the tariffs collected from corporate clients' packages, which were in the current account services line before. Therefore, card issuance business results were isolated and the same to current account results for individuals. These are the main disclosure changes. We have also a second order effect, which I'd already anticipated when we disclosed the 2025 guidance at the beginning of the year regarding some deferrals that would be made in some of 2025 these lines when applying Resolution 4,966.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

If we excluded this effect from Resolution 4,966, we would have grown 6.5% year over year instead of growing 5.6% as presented in the chart. Revenue growth depends a lot on the economic activity. We posted a weaker DCM since it was record high last year. We have been able to deliver earnings from asset management, but the performance fee is only recorded in the second and fourth quarters. So there is a seasonal effect in the first quarter when we compare it with the fourth quarter.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Our growth in commissions, fees and insurance is well within expectations and very sound, in line with what we have been seeing in terms of activity momentum. Better momentum in the capital market and even in the asset management business itself will certainly create more opportunities. The insurance operation has been at a very sound growth level and after several years of expansion, we continue to find opportunities to improve our results and the insurance business. Next, I am going to talk about the cost of credit and the delinquency rates. I will first address the short term NPLs both on a consolidated basis and in Brazil, and then we will talk about the long term NPLs.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

And here, we already have some adaptations emerging from Resolution 04/1966. Starting with the short term NPLs, when we look at the consolidated figure, we see that it is very well behaved. Let's not forget that usually this quarter shows greater pressure on short term NPLs, especially because this is a period when households have more taxes to pay, school tuition and some end of year shopping payments are pushed forward to the first quarter. As a result, seasonally this quarter puts a little more pressure on short term NPLs. I'm going to show you the breakdown of the figures for the operation in Brazil and you will see that our short term NPLs are very well behaved when compared to previous quarters.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Here we introduced the short term NPL ratio by also including securities in the denominator. This is the new methodology introduced by Resolution 04/1966 and shows that the ratios also continue to be well behaved. When we look at the short term NPLs of individuals, we see they increased by 26 basis points. Last year, this increase was lower and we have still observed some effects of the portfolio derisking. However, when we compare this ratio to the historical average, this increase is at a level below this average, which is very sound and consistent.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

It was no different for SMEs. The NPL was very well behaved and I will show you details of it in a moment. And the ratio adjusted by securities also shows a very low short term NPL ratio. Naturally, the figures for large corporates are lower. I always tell you that it is much better to analyze the credit portfolio considering loan by stage instead of the NPLs, especially for large corporates.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Probably, you would ask me about the long term NPLs, so I'm going to answer it right away. We continue to have very well behaved NPL ratios, the best in the bank history in all segments, and here we also show the ratios adjusted by securities. When we zoom in the operation in Brazil, you will see that there was a drop in the ninety day NPL ratio for individuals. This is the best ratio ever. In the SMEs business, we also see a major improvement in this ratio adjusted by securities.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

And you see that there was a discontinuity since we had been operating between 2.32.5% levels. And here we have two relevant pieces of information. This ratio at these low levels between 1.61.8% is not sustainable for two reasons. First, because of the production volume both in the fourth quarter of twenty twenty four and the first quarter of twenty twenty five boosted the denominator and also because of the portfolio mix, which was built up mainly with government programs with grace period. Therefore, the denominator is affected by a higher credit portfolio, while the numerator overdue loans is not.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

This effect will normalize throughout the year and our best expectation is that it will return to the levels of the third quarter of twenty twenty four and back, absolutely well behaved and within our appetite without any kind of specific concerns, naturally considering today's data and market inputs. But just to make it clear to you, over the next few quarters, we will see a normalization of this ratio, which in fact due to this effect is much lower than our actual expectation. In terms of cost of credit, it reached BRL9 billion in nominal terms. The cost of credit over the total loan book reached 2.6% considering the new credit portfolio, which is flat when compared to the previous quarter. For comparison purposes, it is best to consider 2.7 in the first quarter of twenty twenty five, which considers the same criteria for the loan book as the historic series.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

When we go to the write offs, we can also see a relevant effect resulting in a drop. We have done the derisking process over the years. So first, you go through the short term NPLs, then the long term NPLs, and then you get to the write offs. Therefore, we have not changed any criteria and this is very important to keep in mind. Resolution four thousand nine sixty six currently effective allow some additional degree of freedom, especially to address the write offs and to recognize a provision of 100%.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Our vision remains exactly the same. Despite the degree of freedom, we have kept our logic unchanged since this is our best expectation of recoverability or actual loss on a given loan. Therefore, as a general rule, we continue to use three hundred sixty day terms. Resolution four nine six six breaks down by product clusters, but the main message for you is that there has not been any change in criteria. Had we changed the criteria, the write off would have been longer, it would take more time, and the NPL ratios would have gone up, but we would have had a momentary benefit from better credit costs.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

So by doing a back test, if we had applied the degree of freedom of resolution four nine six six to our 02/2024 credit cost, we would have had a cost of credit 10% lower than last year's, which is not small. Therefore, we didn't change the criteria. We continue to be very disciplined and to manage the bank based on expected losses and not on incurred losses. We continue to take into consideration our best expectation of loss materialization, and therefore three sixty days is the statistically best input we have to support the write off criterion that we have been using. And it is much more consistent with our management.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

At this point, I'd like to take a break since this is a new chart, and I have some messages to pass on to you. From now on, we will start tracking credit quality for stages two and three. So I'm going to zoom in on each of these stages, not only to show how our portfolio is distributed, but also to show the coverage by stage. Let's start with stage two. We see that 8% of the individual's portfolio in Brazil is classified in stage two, as well as 1.8% of corporate portfolio, 4.6% of Latin America and 4.3 of the total portfolio.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

And the additional data introduced is what we call coverage by stage, which is a very important indicator. It's the balance of allowances for expected loss for the portfolio classified at that specific stage. In this case, we have an allowance balance for the individual's portfolio of 26% classified in stage two, which was 24.5% last quarter. The first message to get across is that this is a major change in the way we handle the stages and we have some degree of freedom or discretion in how to carry out this rating. Since the bank has always worked with expected losses and this is why at the end of the year, there was no impact on the cost of credit and on stockholders' equity because of the change in methodology.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

We just maintain the expected loss and not the incurred loss approach. This difference is very important. And how do you observe this? If we add up the stage two portfolio and the stage three portfolio, which I will show in a moment, and compare the outcome with our NPL ratios, which apply either to short term or long term, regardless of the analysis you want to make. You will see that both in stage two and three are virtually double our actual NPL.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

This shows how rigorously we measure these stages. If it was only by NPL and therefore the figures observed here were identical to the NPL figures, it wouldn't make much sense to have the stages. In much simpler terms, we have the short term NPLs in stage two and the long term NPLs in stage three. In addition, we also include in stage three any credit deterioration, renegotiations, problematic assets and restructured assets, which are those renegotiated after becoming thirty days overdue or those renegotiated twice even if not overdue. When we acknowledge a change in a client's credit risk, even if it refers to performing loans and there are no overdue payments, which is particularly the case for companies, we classify it in stage two and depending on how steep the movement is, it goes to stage three.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Stage indicators are very important and I think it is going to greatly improve comparability to see that we have provisioned for expected loss, which is why our stages are higher than our current NPL ratios. Another key issue is what we are calling coverages, which ends up depending a lot on the mix. I will give you an example. If we have a mortgage loan payment overdue by more than ninety days, it goes automatically to stage three. But because the loan is guaranteed by the property, we do not need a 100% allowance balance just because it's in stage three.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

This is why it's very important to understand the underlying mix. A company whose rating is downgraded is automatically classified in stage two before going to stage three because it did not become a problem asset. I may have collaterals, so my allowance may be lower than the balance classified in this stage. In individuals, we have 26.1% coverage in stage two, while for companies, the coverage is 22.9% and in Latin America, it's 16.6%. In stage three, we have 5.8% of the portfolio of individuals, 3.5% of the portfolio companies, and 4.3% of the portfolio of Latin America.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

That is 4.4% of the total portfolio is classified in stage three. And when we look at the coverages, we see that they are already higher coverages because they refer to problematic assets, which underwent more renegotiations or restructured assets that automatically end up in this stage. And bear in mind the comments I have made about coverage, mix, and type of product. Another important point is that despite the change in the standard, we have not changed the way we manage the bank using the expected loss model. So deep down, this is a consequence of everything we have already been doing over the years.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

In other words, if we had to reprocess that traditional coverage ratio, which took into account the allowance balance for payments past due more than ninety days, you would see stability because nothing has changed. This is a consequence of the changes and not because we have to change the way we manage the bank's allowances and loan portfolio. This strengthens our suitable risk management criteria, rigor and discipline in particular when compared to the rest of the market. You can see this in our figures, whether in the change of the stop accrual approach with a BRL100 million positive impact on our margin or in the reclassification of portfolios as I have commented previously. In the end, all this is a reflection of better risk management.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

As regards the non interest expenses, we have also changed the disclosure to be more in line with the way we manage the bank. This is an interesting chart and I would like to give you some insights from First, we classify in the personnel expenses line all expenses in the commercial and administrative areas. Next, we have the transactional expenses related to the entire bank infrastructure and operation, that is the entire portion of expenses on fixed assets, branches, and infrastructure to run the bank. In the technology expenses line, we are including all expenses on IT personnel and infrastructure. In other words, this line includes all those technology employees allocated to the community.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Finally, we have the other expenses line. Year over year, non interest expenses grew 8.2% in Brazil and 9.8% considering also the Latin American operations. In other words, everything is absolutely within what we had already expected and this line will converge within the guidance range throughout the year. But the most interesting thing is to observe the time series that we have included in this presentation despite the baseline comparison effect. When we look at personnel expenses from the commercial and administrative areas, we see that the actual growth of these expenses has been only 0.6% per year over the last ten years.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

In a deflated series, that is very much in line with what we have been doing with regard to the management of the bank's teams. As for transactional expenses, we also have an interesting fact. We have posted a drop of 12% per year over the last ten years. This translates into a deflated development equivalent to 68.5% decrease in the period with the exponential effect of a negative change over time. This shows that we are managing to obtain an important reduction in transactional and infrastructure expenses while we have invested in technology and good team management, therefore, increasing the bank's operating leverage.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

And this is reflected in that efficiency ratio of 36% in Brazil, which you have seen just now. And when we look at technology expenses, is very clear that we have been posting growth of 5.3 per year in expenses over the last ten years. This considers all the systems modernization, all the investments in our platform and all the investment in product and digital actions among others. In other words, we are perfectly consistent with our strategy of having a completely modernized and much more agile bank with incredible experience and with a much better operating scale and leverage. This is why I think this chart perfectly summarizes our strategy.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Let's move on to the efficiency ratio that I was commenting on. We have reached a consolidated efficiency ratio of 38.1 and an efficiency ratio of 36% in Brazil, which is the best ratio in the time series. And in a series not as long from the first quarter of twenty nineteen to today, we can see exactly how we have been able to make progress in terms of efficiency ratio, whether through a more efficient operating leverage management with more investments in technology or through our ability to generate revenues. Our figures are very good and we are very pleased, but we still have a lot of work to do. The good news is that we still have a lot of opportunities to chase and we will continue to be very disciplined in the bank's cost management.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

In closing, let's talk about capital. Here, show that we came out of a CET1 of 13.7% in the fourth quarter of twenty twenty four. We had the payment of additional dividends with an impact of 110 basis points and as a result, we reached a CET1 of 12.6%. We had a contribution of 60 basis points to net income for the quarter, showing that our ability to generate capital with profitability remains very strong. And this made it possible to neutralize the impact of risk weighted assets such as market operational and credit risk and to absorb all regulatory impacts with this increased capital generation capacity.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

We have dedicated teams in house that are always looking for opportunities to increase capital efficiency. Therefore, all the operational risk capital and all the credit risk capital and structured operations that increased in this quarter were absorbed with the capital generation for the quarter itself. Thus, we reached a CET1 of 12.6%, which is a very sound threshold. With everything remaining constant, we will work hard to be able to pay more additional dividends. As we always say, our goal is to pay recurring additional dividends and that is what we have been working on.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

All the planning we do is carried out with a lot of discipline while monitoring the existing scenario, our growth capacity, regulatory impacts, etcetera. All these factors are taken into consideration while the bank continues to have a very sound capacity for generating capital. With that said, I end my presentation here. I'd like to end with two takeaways for you. First, as you have seen, this quarter we posted very sound results of a high quality.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

I think it is important to look not only at our bottom line, but also to understand the entire mix and the effects that have led to it. We have posted significantly higher revenue, a major growth in EBIT and efficiency ratio at its best levels and a reduction in the cost of credit. In short, a quarter with very well behaved indicators. As I have always said, we have never been so well prepared to face whatever challenges lie ahead, whether for the quality of our portfolio, the level of provisions in our balance sheet, and a huge level of compliance with the new standards, which shows that at the end of the day, managing lending using the expected loss approach as we have been doing for many years has generated consistent results. There were no transfers among line items.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

There was no discontinuity in the financial margin, and all the other effects I have already mentioned were taken into consideration, which is very positive. As you can see, I am in the auditorium and I am going to need a minute to join Renato, who is waiting for me in our studio for our q and a session. In the meantime, we will show you our new campaign that we are launching, which basically reflects everything you have seen in this presentation, especially regarding the investments we have made so far. Over the years, we have invested a lot in the bank. We always talk about institutional marketing and large institutional campaigns, but we have made an important change.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

We are increasingly talking more about our products and our business lines, while naturally being very careful in what we say and backing all the investments made by our brand, which is the most valuable brand in Latin America. This new campaign has some very important attributes. The first is to communicate to the public what our activity and our daily life is. That is working to simplify people's lives, provide good product experience and good business experience, and solve client problems. This new campaign shows this, and you will be able to see the number of products that we have been launching as a result of our capacity for innovation and modernization achieved over the years.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Also, we reclaim a word that has been very important to us for many years, which is done. We used to talk about made for you, then we evolved to made with you, and then we launched made a future. And now we think that to make it simpler and make this delivery tangible, the time has come to use. It's done. And this is what you will see in this campaign.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

I hope you like it because here at Itau, when we deliver a product, we deliver a solution. It is done. Thank you, everyone. Now I'm going to join Renato, and we will talk in a little while. See you later.

[Moderator]

Thank you, Milton. Well, I think that it was very nice, the format of the presentation. And for those of you that have watched it, it's a very nice video of the new campaign. So as we continue with the Q and A, we have Milton Gabriel, our CFO. Welcome, Gabriel.

[Moderator]

And this session is bilingual. So we answer the question in the language that is asked. If you should you need any translation, you can always choose the audio in English or Portuguese. As always, you can submit the questions via WhatsApp number 11932198835. So we have a lot of questions.

[Moderator]

People have raised their hands. Without further ado, let's start. First question, we have on the screen Daniel Vaz from SafraBank. Good morning. Welcome to our earnings call.

[Moderator]

Good morning, everyone. Congratulations on the results. I have two questions on my side. I wanted to ask about growth. I mean, it's easy to say that a bank your size should have more defensive market share, and then you have discussions with investors.

[Moderator]

But we can hear the argument that it's difficult that you can compete in the massified segments against the new events. But in another point, the bank does want to be attacker in some fronts. I mean, you referenced that. And given the great level of quality of assets and capital generation, should we expect a more bold position in 2025? And how can we expect the workings of Itau in niches where you have less market share looking up ahead?

[Moderator]

Thank you. Thank you, Daniel. Thank you for the question. So it's two questions. I'm going to start first by credit.

[Moderator]

We cannot forget that we are in the highest interest rates of the last nineteen years, fourteen seventy five. It's not just an issue of offering, but demand that reduces as we see the different businesses. We have had great opportunities. We've grown the portfolio in many of the segments very, diligently, and we have personnel that is focused in our risk management and portfolio management. Of course, this is a dynamic process, but the public, the clients that we want to grow, we've managed to grow two digits, and we gained the market share.

[Moderator]

So the boldness comes from that. We have a lot of strength in growing in those publics that we understand are resilient in longer cycles. From the standpoint of opportunities, we are optimistic but cautious. Optimistic because, as I told you, we are maybe at the best moment for the balance sheet of the bank for any scenario that we should face, whether if it's a scenario for opportunities, we are ready to rapidly grow for adjustments. We are also prepared with a very resilient portfolio.

[Moderator]

This capital allocation portfolio with a long term vision is very important regardless of the fact that we have indicators that are well behaved because these are decisions that we made today that will sustain the balance on the medium to long term. So we are very disciplined. The capital structure is key with a quality of balance sheet that is very strong, seizing the opportunities and growing in the segments that we believe that we should continue to grow, growing two digits. But what you see in the aggregate is the effect of the growth and the derisking, which we closed basically last year in the portfolio. But in those publics that are not target publics, well, we chose to lose the market share.

[Moderator]

So when we look at address market, we've gained or maintained the market share in the businesses and where we've maintained and gained the share. And in the publics that we consider that they're not part of a strategy, losing the share is the best decision that we can take. So we're gonna see the market moving. It's a lot of businesses. The bank has a very complex portfolio of businesses.

[Moderator]

So that philosophy has worked for all the business lines. We are we're we have the guidance with the best expectation. We are comfortable, and we are focused on the adequate returns with with the capital allocation, not only looking at the credits, but also the completeness of the relationship with our clients. So we're optimistic. We're happy with what we've done and cautious because the scenario which is global or local inspires cautious because of the interest rates that I just mentioned.

[Moderator]

About the network, the decision to integrate this network, which is not simple. I've been there when the company was listed. I was closing the capital. This is an integration that has been done in an impeccable matter. I don't like to self compliment, but in the end, this was a well conducted process for the teams in the bank, and this integration was so soft, so seamless that today, we can see this as another service for receivables we have in our offering of flows and our packages.

[Moderator]

So this integration of the network in the bank, the way that the managers of the bank of all the segments discuss the issue acquirers within the package of flows and receivables and payments, we have unbelievable synergies. And we leave the mono product mono liner discussion to have a holistic overview of the client, which is correct. But I'm never gonna talk about the acquirers client. I'm gonna talk about the client in the discussion that they wanna have about the credit, the receivable that is important and whether if it's a discussion on the service that the network is the best discussion, it starts there. So this integration of the commercial teams along with the network and the unification has brought important results.

[Moderator]

We're very happy with the evolution, and naturally, we will advance in the different segments. This is our opinion. And the MPEZ, which is a platform that we have digital of the company to talk to the digital smaller company, smaller client, has an embedded solution already embarked. So we cannot so we have looked not only at more clients, but we've deepened the relationship with the existing clients and with the competitiveness of our offering. Thank you, Milton.

[Moderator]

Let's go to the second question with Thiago Batista from UBS. Well, it's another result that is constant, and we've grown in a you've grown in a quarter. My question is about the private consignado. So two topics on this. But you had the list of the six biggest players.

[Moderator]

And we have two states, three or four niche, and the six would be 80% of the private market share. And we don't see any of the incumbent, the traditional amongst the players. So how do you position this product? Why you and the other big players, how do you position yourself in this business? Why do you imagine there would be a cannibalization maybe the exchange for the more expensive income for the other one, so they can pile up the debt.

[Moderator]

So I wanted to understand how do you see this small market, I understand, but how do you see it? Well, thank you. Thank you for this initial consideration. Well, talking about well, two minutes on this Poncinador payroll loan. And so our product, it unlocks a value.

[Moderator]

There was always an operational limitation on how to do the agreements with the companies on a large scale. We have the solutions via CTPS that is unified via the e social, and this is a change that is relevant, and it makes the market to have a relevant growth. Let me give you a few numbers that can help you in your analysis. First information, this is a market of BRL 40,000,000,000. I'm not talking about the BRL 10,000,000,000 that were disbursed over the last weeks.

[Moderator]

No. Out of the BRL 40,000,000,000, Itau Unibanco has 12,000,000,000. So about 30% of that market, we have it today because we have a strong penetration in the segment and big agreements. So we have used that strategy of the private payroll loan for a long time. So this consignado, we if you've seen with the incumbent banks, it has been since the inception, Banco do Brasil, Caixa.

[Moderator]

But we've been in the private since the since the inception of the concept concession because we've and we've learned. This is very important. We've learned all throughout these weeks. And why do I think it's important that we do this counterpoint? The private payroll loan is completely different from any other that exists.

[Moderator]

We leave from an anticipation of the withdrawal on the birth at the birthday, which has less risk, then you drop down in the chain on the risk. And then you have INSS, and then you have public companies. It depends whether if you're working with a municipality or a company. And the private payroll loan is no different. You have a company and the risk of the pay of the payer, you have to, of course, take take a look at the risk, but you have to work with a combination of the company that do not improve the the combination of the risk does not improve on the performance that is expected for other portfolio.

[Moderator]

So the massive salaryman in Brazil, it's a hundred and 20,000,000,000. So in the private consignado, it's 40. So the other 80,000,000,000 is private credit that exists for this basis of salaryman. So what I'm saying is that if you do the same analysis for the consignado of the INSS and the public companies, the leveraging of the of the jump in credit divided by the salary amount monthly is 46 times, four to six times. So that 120,000,000,000 can become 300,000,000,000 can be become 400,000,000,000 in ultra optimistic, but it has a portfolio that has portfolio.

[Moderator]

It has a you know, they might be this portfolio might even have a share in the GDP. It can grow a lot very if you are optimistic. So we have to migrate the clients so we don't lose the risk of that client becoming over in the in with too much debt, and the program allows that. And number two, you're not subordinate to somebody. Once you provided that payroll loan, you are under somebody that will have until 35% of their salary being used.

[Moderator]

You're you're gonna be tied down to that. So so when you look at the risks and you do the testing with all the production that we've done, I would say that 70% of what was produced are are people that clients that do not have a bank account with our bank. Either we don't have a a relationship or we don't have an an appetite. For the other 30%, we have our funnel. And remember that one of the the the rules is to check the ICRC to see if they have a personal loan because then you cannot provide the loan because of the risk of over indebtedness.

[Moderator]

So it's a big drop in the funnel when you do that. And then the third funnel, which is risk, which is a matrix that combines the risk of the company with the risk of those that take the payroll loan. And we define clearly what is the public that we want to operate and we do not want to operate. So by our decision of risk, we decided not to subscribe a lot of the credits that were taken in the market. I'm not saying that this is right or wrong.

[Moderator]

Our appetite of our risk management is like that. And remember that many of the players that are getting in with a lot of appetite, they know less of the risk of the of the companies, which is our core business for a long time for many years. Since we know a lot of about the companies and the good risk management of the companies, if you take a look at our risk management through the cycles, I think that this is the the the competitive differential because we're gonna lose operations, of course, but by a decision, our decision, because we do not think that the risk compensates because of the risks that are being practiced. So this discipline will be very important. Our comparative advantage is the know how that we've developed all throughout time on the management of risk of companies That provides you a capacity for decision making process that is different.

[Moderator]

I think that there is operational challenges that are important that we have to observe in the next months with the when the first payments are gonna be done. I think that there is natural evolutions of the platform that will occur. There is the risk of the credit itself. We think that losses will be materialized and the delays, delinquencies will be the same one as the private but with lower rates practice. So there is the government, you know, the two biggest public banks.

[Moderator]

So to highlight the program, and I understand that this is an agenda of growth, everybody has their own policy, everybody has their own appetite. And I think that the fintechs that have been working, you have to subdivide them into two publics. Those are those are subscribing and taking the more risk because of a lack of knowledge, clearly. But, you know, time is to tell. We're gonna see.

[Moderator]

And there is regulatory aspects because one of the rules is for you to check the SCR, the central risk management of the central bank before providing credits. And we've seen a lot of people taking credits, and they were in that database. But that's a regulatory base, and that's up to Dataprep and the government to take a look at that and see how they're going to treat that because they are operating outside of the rule. So I think that there is a mix of everything. And I think that the final message is that we've done portfolios.

[Moderator]

You're gonna see We have a great expectation about that. We think that the 40,000,000,000 are gonna grow a lot, and we are gonna have a fair share, possibly less than 30% that we have today, probably larger than the 12,000,000,000 of portfolio that we have today, but with a leg with a net financial margin that is sustainable throughout time. So we see that this is a great opportunity. We're good at it, and we're expanding, and we're generating credit with good economic conditions for the takers of these payroll loans, and this has to do with our lifetime value strategy and reducing delinquency on the long term. Thank you, Milton.

[Moderator]

Complete result, complete quest complete answer to this recurring question. Third question, now also with us, Eduardo Rosman from BTG Pactual. Rosman, thank you. Hello. Hello, everyone.

[Moderator]

Congratulations on the numbers, strong quality. You have a digital transformation that has been paying out. My question is what is now? What about now? I think that the threshold is getting ever higher.

[Moderator]

They're very relevant in a sector that is well penetrated in an economy and an economy that does not grow a lot, unfortunately. So how do you generate value? Or, you know, where is it gonna come from? Juanita Wu, closing old banks. It's gonna come from abroad.

[Moderator]

Help us to with your 2¢ on that. Well, thank you, Rosman. Always great to see you. Congratulations on the report. And this has to do all the reports as they're published.

[Moderator]

We read all of them. Thank you for the feedback. I would like to say the following. Rosman, You mentioned many of the points. When we look ahead, we still see a lot of opportunities.

[Moderator]

This opportunity, we have a breakdown in the several segments that we work with. Since the bank in the end of the day is a big holding of capital allocation with a portfolio that is very diverse with businesses that are non correlated, some correlated, we can have a portfolio that is very well balanced, and we can find opportunities in all fronts. So when we talk about the the business unit the you mentioned Guanitau, the natural presence. We are very excited. In the next quarter, I'm gonna show you some early indicators of what we've managed to do through Juanitao.

[Moderator]

It's very exciting to see the results, the initial results. First, the migration of the 15,000,000 clients that we can manage that we migrated until the end of the year. We've migrated already 8,000,000. So until the end of the year, we should finish the total migration. 99.1% migration, that's the rate precise.

[Moderator]

So zero attrition and the NPS of those that migrated above 85. So you changed, you migrated, no attrition and the customer experience is 85. That's very encouraging. And then you get into a stage of offering a full bank for the client that had a modern liner experience, and that full bank experience has had great value in the penetration of products, accounts payable, opening new relations. And now we start to advance in the breadth of the portfolio of the bank.

[Moderator]

We segmented all the bases. We have clients in all the segments. And in the next quarter, me and Renato, we already discussed of bringing some indicators so you can have an idea of what we are discussing. A great deal of the growth in the natural persons comes from that and gaining market share. We are more competitive.

[Moderator]

We this is a we have all the conditions of continuing to grow. Of course, the GDP is important, growth of activities, but we continue with opportunities of occupying the market and gaining market share in the segments that we really understand that we can have a differential, a value proposition that is different. And for that, we are moving. We are in constant movement. Just to give you an overview on the digital transformation, we mobilized 300 journeys in the bank, experiences and in the business unit for natural person and the companies.

[Moderator]

We launched over 18 products, new products. These are inserted in the journeys of our clients, and all of them with a great output. Level of engagement, increasing level of adoption, very high. So we are very excited with our new capacity to develop solutions and solving the pains of the clients with a speed that we never had. We are surprised every day with our capacity of generating impacts.

[Moderator]

300 journeys modernized, 18 products launched. If you get into our super app, you're going to see the campaign that we've just seen that. And in the companies, BU, we've gained the market share. In also the wholesale, we've had great opportunities. We had a great penetration.

[Moderator]

We our business of agribusiness has grown very solidly. We've opened new fronts at Itau BBA, all of them performing very well. So I think that there's still opportunities. And the central point here and now welcoming Gabriel here as the CFO official in all the calls present from now on. Gabriel, besides his great CV, he's going to be the leader of our agenda of cost efficiencies, also looking up ahead.

[Moderator]

And we see here that there is an opportunity that is very big to continue to advance. I think that we needed to go through this modernization process. I discussed this. What we have to turn off at mainframe, the discussion that the big bank operates in the mainframe. We see that being closed in the future, but we are in this process of closing cycle and so that we can have a modernized bank, % online, running on the cloud or, you know, a few things, something that doesn't make sense to take it to the to the cloud, of course, continuing with the mainframe.

[Moderator]

And with efficiencies, which is the last stage that is very relevant, especially on the natural persons clients. And this is the next stage. So we can service the clients in the different segments with a value proposition that is adequate, but with the cost of service that is correct. And with that, we can service our current clients. The super app is not not even on pilot anymore.

[Moderator]

I mean, it's a lot of clients of those that migrated and those other clients of the of the banks, this is going to be a new lever of growth with an efficiency level that is lower. Part of the evolution of the bank, it has to do with that. So we are optimistic with everything that we've achieved, of course, correlated with the activities. And the we have the nominal GDP growing, but still with a lot of opportunities to be captured. Thank you, Milton.

[Renato Lulia, Group Head of Investor Relations & Market Intelligence at Itaú Unibanco]

And the next question, we're going to switch English as we always do because that comes from Tito Labatt of Goldman Sachs. Tito, great to see you. Thank you so much for joining the call today.

[Tito Labarta, Vice President at Goldman Sachs]

Great. Thanks, Renato. Thanks, Milton. Gabriel, good to see you guys. Thank you for the call and taking my question.

[Tito Labarta, Vice President at Goldman Sachs]

My question is on the financial margin with the clients. I think very good performance, particularly in a seasonally tough quarter and also given the high base you already have there. Just looking at the year over year rates running a bit above the guidance, I mean, sounded a bit constructive, Milton, a bit before on the potential growth outlook. So could there be potential upside? Or just help us think about the continued growth of the financial margin with clients?

[Tito Labarta, Vice President at Goldman Sachs]

And also maybe beginning to think about, well, maybe we saw the last rate hike earlier this week and maybe the market is beginning to price in potentially lower rates later in the year. So just help us how do you think about that financial margin with the clients given sort of the current environment and potentially the rest of the year? Thank you.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Yes. Thank you, Chito. Good to see you too. Always a pleasure to have you here with us. Let me start saying that we are very positive of the with the financial margin with client.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Of course, when we do our budget, we take in consideration the level of interest rate. We have planned or budget those hikes that we've seen so far. Let's see what happens in the next meeting. But at the end of the day, all of them somehow are incorporated in our guidance that we released in the beginning of the year. So we are positive.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

I still believe that the guidance is the best information that we have today. But if I had to choose a geography, I would say that we would be much more close to the top of the guidance with the financial margin with the clients than in the average or the midpoint of the average, so of guidance. So my view is that the range still absorbs our best expectation, but we are positive that we can deliver near to the top of the range. This is our best estimative expectation, I would say, today. A lot of opportunities.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

As you saw, the average balance of our portfolio has been very positive in this quarter. We had those seasonal effects of less calendar days, business days and also current days. But in general, all the operations performing very, very well. Of course, the interest rate has an impact as well, being on the spread of the investments and the deposits that we have in the bank, but also on the working capital of the bank that has been increasing quarter over quarter. So overall, positive, and I believe we can deliver the top of the range by the year end.

[Moderator]

Now going back to Portuguese. We have Marcelo. Ms. Rai, good luck, you're MBBI. Welcome to the call.

[Moderator]

Well, it's an honor to be here after so many twenty years as an investor analyzing the bank on the other side. So my question, a lot of them were answered. But when we think that's Qunital opportunity. The margin of opportunities that Qunital can bring, we think about the segments where Itau can have an increase of market share. So credit card is a big market share.

[Moderator]

We have an opportunity for growth, but maybe the question or it would be thinking about the platform of investment. How do you think the platform of investment were in a sense that if Guanitau, the type of client that Guanitau will bring will be opening an opportunity for growing in the retail, what would be possible to develop so that Itau can bring a client for the platform of investment that already exists? Already was that discussion of what was the lessons learned during the development of ION. So how do you think about this business segment? One, that the bank is not a shareholder of XP, and I think that there is an issue that can be identified that is very different.

[Moderator]

Well, thank you, Marcelo. Congratulations on the challenges. Thank you for the questions. Well, first of all, it's very important to say since we have it being born from the origin of credit cards and each which are the two big publics that are being migrated, we don't think that is necessarily in the credit card. There's always gonna be an opportunity because it's always the same client operating with us.

[Moderator]

And sometimes, they come through a specific product, and we have the capacity of broadening the offering of credit cards for this client. Number two, when you segment this space of 50,000,000 clients, you can see that there is clients from all the segments. We have a low income, it's our agent says we have the average income class, and we have the affluent of the personalite. Of course, evident one or the other clients from private, but I would say that this is concentrated in the in the the natural person segment. So the opportunity not only goes through the evolution of the credit relationship of that client, but products and solutions.

[Moderator]

So you can evolve in the transactions, accounts payable. You can bring a flow to the bank. All the features that we launched for the clients to seize our resources, anticipation of the fixed credit, you start to lever within the platform itself and investments and the model of attention of with Nicolas and Personalities. It's also something that we can offer for these clients, all the programs and advantages for the clients. So we see an opportunity for cross sell now solving the pains of the clients and increasing operations with this client.

[Moderator]

And investment is one of them. And here, a link with ION. We are very satisfied with the evolution of ION throughout the year. It has an extraordinary result. So when we see in the natural persons, it's very strong.

[Moderator]

And EION has always worked with managers, which is a specialized sales force, specifically in personal identity class. And they also talk about investments and other products, banking credit, real estate credit, and all the other clients. That composition and that logic of the specialist has brought really results that are very strong. We're very excited with all the evolution when we compare to the market and our capacity for generating value. We are very satisfied when we measure the flow.

[Moderator]

It's very positive. ION has a scalability that is is limited because that model where you have the human attention, it works for a specific public of clients. But for a more scalable public, which is a great deal of what is being migrated to Juanita Wu, we need to have a solution that is more intelligent for servicing this scalable client. And I was at a web summit last week, and I was discussing that we are launching where with a pilot with a wealth specialist of investment powered by artificial intelligence. So this is something that we've been working for a long time.

[Moderator]

We've turned the year with pilots and testing. We scale up we've done the scalability of the test. And this is the question, well, what about the models of LLM and all the artificial intelligence that is available for everything? What is your edge? I think that there is a combination that is far from the bank, which is the combination of all the know how that we've acquired because we are a platform that is very strong in investments in Brazil.

[Moderator]

The main platform investment in Brazil when you look at the know how and the management of investment and all the learnings that we have of the open platform combined with the artificial intelligence, you can train our agents in artificial intelligence with data that sometimes you're not going to have in the market. Somebody that can have a great technology but doesn't have the behavior or the expertise of allocating and curatorship of the clients. This combination is very powerful, and it will allow us to scale our relationship with the clients in the world of investment. So we are in an early stage. We are have to learn.

[Moderator]

The pilots are important when you discuss investment. You have to create a at the guardrails so you can be careful, but the results have been very encouraging. And we hope to scale this solution all throughout time, and it's connected all throughout It's not a chatbot. You know, it's an artificial intelligence experience that will give you creatorship and consultancy and will help you with the management of your investments with all the training and the that we've acquired all throughout the year.

[Moderator]

And this will help us scale the platform of Juanitao and other relationships that we've had with the clients that are at the bank that need a more specialized service. Now the next question, Mario Pierre from Bank of America. Mario, good morning. Good morning, everyone. Thank you for the opportunity.

[Moderator]

Congratulations on the results. Very predictable. We see an improvement quarter on quarter, and the market appreciates that. So Milton, a question for you. What about expenses?

[Moderator]

You've shown that the bank has done a great job, and we have the lower threshold. But when we look, well, you closed almost 0% of your of your branches all throughout the year. And your number of employees, excluding technology, dropped just 2%. So today when we see the number of employees per branch is 32 a year, later was 29. So I wanted to understand.

[Moderator]

How do you see that metric evolving and if there is still space for building branches? Because every call we hear, investment in technology, why not? I wanted to understand from you, how do you see the function of the physical branches from now on? We have a survey. We see that the people still have a value of going to the branch.

[Moderator]

So what would be the ideal number of branches and number of employees per branches? Thank you. Thank you, Mario. Always great to see you in our calls as well. I think that the question is very good, Mario.

[Moderator]

And let me give you a few data that can help you in your train of thought. Well, first of all, we don't have an objective before we don't think about we're gonna close so many branches. Of course, we do the forecasts. We do the analysis, and it's a very complex algorithm. It's not simple.

[Moderator]

We wanna close. We wanna close. We look at a lot of variables, the geography, clients, penetration of that branch in the region, the result of that branch, capacity of doing the scalability of that agency or not the distance between the branches. Can we service that client in a central branch and have a business branch as more satellite? So this is an analysis that we've done daily by our teams.

[Moderator]

And this is an important point. Well, there is a point that there are a great deal of these branches we are migrating to digital branches. It's a completely different model of servicing. The cost of service is much lower and with the scalability and the capacity of adjusting the account loads in a very important way. Second aspect, when we close the agencies that we close, we always look at the distance, how many kilometers we are from the next agency.

[Moderator]

Will that generate attrition with the clients that will service us or not? So in the end, depending with the distance, we have a reduction when we close an agency because a great deal of the managers of relationship, given that the account loads are finite, we can transfer the commercial teams that service these clients. We decrease the work of those teams, maintaining quality, measuring NPS, and we adjust as necessary. So in fact, this quarter, if you take a look, there was a reduction of 100 branches. We know that the model FIGITAL has an important it's important for the medium high income.

[Moderator]

Low income is less efficient to service, and all the work that we've done to make our journey digital and making the super app digital makes us have a more competitive value proposition. Because once again, our objective is to service the client in a way that they want to be serviced. So we don't close the branch on by brute force simply because we wanna adjust the cost and we reduce the structure. Because when you do that, you're taking away top line as well, relevant top line, and you're leaving the clients without service. Well, we need to service the clients with the right price so that these models of attention are sustainable in the long term, and this is the work that we've been doing all throughout time.

[Moderator]

The digitalization will allow us to adjust the business model so we can be competitive with an efficiency level that is adequate so we can service the different public. And should be, in fact, take on more credit losses in the more vulnerable public. It's not the very low income. This is not a public that we have a target objective, but the low income clients that are resilient in a long credit cycle. So there is a shuffling that we've been doing.

[Moderator]

And then the important is to see the evolution, the direction of the evolution and the work that has been been built from the base upwards. So now you're gonna see in the future evolutions in these indicators that will give you more clarity naturally of what is our strategy. But it's one step at a time. We are aware of the challenges, but we want to do things well done. We want to take care of the clients, the people in the bank, and all the transition have to be done in the best way possible.

[Moderator]

We are in the process. This is a process that will be picking up speed all throughout the next years. Thank you, Mario. And now Renato Belloni from Autonomous. Welcome to the call.

[Moderator]

Good morning, everyone. Thank you for the opportunity. Congratulations on the consistency of the results. First of all, let's go back to your answer on the financial margin of clients. If we well, you're running well above the guidance now.

[Moderator]

So the issue of the deceleration of growth has been clear. But if we take that margin within the guidance, okay, you're still running above what you already mentioned. So I wanted to understand within that implicit compression, where do you see the biggest risks and among the segments that were decelerating? How will that influence the mix? Or will that come from the increase of the cost of funding?

[Moderator]

And secondly, can you mention the evolution of this sector of credit where is the biggest risk and how is the bank positioning itself for that? Thank you, Renato. Thank you. And what I wanted to tell you is that when we look at the margin, well, first of all, portfolio. This is a central point.

[Moderator]

We've seen the portfolios perform within what we expected. Average income coming up, we have a volatility in because of the exchange, but the exchange, Gabriel, is always there monitoring the effect. So this is an outlook that we have a constant outlook. So we have to look at the average numbers that I just presented to you. Second aspect that I wanted to mention to you, the interest rate itself.

[Moderator]

It's a pass through for margin that is slower. And why is it slower? Because we do hedging of those positions. So with the interest rates, it's a low cycle and the interest rate drops very a lot. We take longer to perceive this drop because the portfolio works in a very ruled way.

[Moderator]

So that increase in the interest rate, there is a pass through. We predicted it. So we can observe in the working capital that effect of the CDI. Generalized, I can see an annualized margin that is relatively stable with small oscillations. The adjusted margin to the risk is relevant to the capital because at the end of the day, we we published and you've seen that our margin adjusted to the risk is the best one of the series since the fourth quarter of twenty nineteen.

[Moderator]

So when we look at the projections of the margin adjusted for the risk in the in the payroll loan, it can have in the consolidated, sorry, these are small effects with a very solid effect. This is the important thing. The risks. I think that we understand that the portfolio will continue to perform as we expected. We don't see a risk in spread in our portfolios.

[Moderator]

The increase in the interest rate somehow reprices capital markets less competitive even though we had a quarter with good activity less than last year. So we have more operations for the balance sheet and the demand that naturally with this level of interest rates tends to have be less. The companies and the people do less consumption and less decisions on purchasing, and we feel that. But we are constructive in regards to the financial margin with the clients, positive that we will have a solid year in the value delivery. And and you did a compliment on the first question.

[Moderator]

It was just about the margin oh, it was about the credit cycle. Yeah. How do I see the credit cycle? This credit cycle is the following. We can see good indicators that are favorable.

[Moderator]

We wanted to open the short delays because since we are in an expected loss and we are been working with expected loss for a long time, we have to look at the dynamics of the short delays because it gives you the tips of what's up to what's up ahead. And it's a short term those short delays that will bring the provisions in a model that is very sensible with the expected loss. When you see delinquency in natural persons growing in 26 basis points, and what we wanted to show with two decimal points is that we follow this factor with the average rate. And that's about thirty, forty, I would say more than 40 than 30 because there were a few years that that logic was discontinued. Post pandemic in the past was very low.

[Moderator]

But we see a process of derisking that was very high in the portfolio. So this is a quarter that is more typical with the quality of portfolio that is very good. So that's why we're running in those thresholds. That's a big indicator. So that's why we when we look about the provisions about the formation that ends up being higher than 100%.

[Moderator]

It has to do with the double effect. The formation is very good because the portfolio is performing very well. All the work of credit that we've been doing all throughout the years, but with an expected loss that is since the short term with the natural presence that happened in this quarter, it brings more provisions. So that's why we provision 120% of the provision in this quarter. And now throughout the time, we imagine that there's going to be a reduction that is natural.

[Moderator]

That's why you pay attention to the short terms. When you see the segments and then you see the natural persons, PMEs, the the SMEs, the big effects of denominator with the big companies and any change that you do in the methodology of write off can lead you to have distorted indicators. So since we didn't change the criteria, the indicators are comparable, and that's for all the products. So this cycle is benign, but we are cautious because we see indicators of utilization of, you know, a little bit of consumption of liquidity, you know, using the working capital of the companies. This is a quarter that is pressured.

[Moderator]

When we project our indicators of credit up ahead, we have a comfortable stability except with the SMEs that we imagine that there's gonna be a normalization of the last two quarters that they were below what we expect that is reasonable. So we had an I don't foresee about but the market is more nervous. We see more clients that wants to discuss. But as I told you, you know, our portfolio has never been so resilient for a a challenging scenario. If it's up up to see we don't see a credit crunch.

[Moderator]

The liquidity in the capital markets is still strong, and we're gonna see the evolution. Our portfolio is very healthy. The delinquencies are well behaved, and we are very excited with the perspectives. Next question, Matteo Guimaraes from XP. Welcome to our earnings call.

[Moderator]

Good morning, Renato, Milton, Gabriel. Thank you for the opportunity of asking a question, and congratulations on the results. I wanted to ask a question about the cost of funding. I think that the financial margin is still very strong, and we see a few competitors with strategies of cost of funding. I wanted to understand if you foresee that there is a space for some improvement in that indicator or if eventually some changes that the competitors are doing and they're going to be opening opportunities for you, that would be more you would be more aggressive in that point.

[Moderator]

That would be the first. And if you allow me to follow-up on a question early on about the private payroll loan. And it's clear the subordination issue, whether if it's credit loan with our guarantees or the payroll loan that already existed. But my question is about the subordination in the credit card because with the launching of the private payroll loan with the app, Cartere de Trabalho, the client could take a debt in a bank that maybe they didn't even have a relationship with the day before. So can it affect in the appetite in the segment of the credit card?

[Moderator]

Well, thank you, Matteo. It's great to see you. Thank you for the question. Now starting about the cost of funding, depends on how you see the cost of funding and a strong statement. In the end, of course, we have a cost of funding that is optimized in the bank because of all the business lines that we operate.

[Moderator]

I mean, these are products of treasury, etcetera. So our cost of funding, all the flow of clients that we have in the bank, the cash management, how well, the we are the the the centered in the relationship with our natural persons clients. And so the cost of funding is optimized. So if you see the deposits in the portfolio of natural persons, we have the best relationship in the market. So it shows that we are a solid franchise for investment and a solid alternative for our clients.

[Moderator]

But the most important thing to see is that there is a client on the other side. So here is where we do the statement of franchise. We won and we will continue to be a strong franchise of investment for our clients. So our objective is not to optimize the cost of funding. So the cost of having a client that will not engage on the other hand with the bank, and you'll lose the vision of lifetime value.

[Moderator]

When we launch Coperino, the piggy bank, where the client has the alternative of taking the money and do a savings account or doing a value reserve and then we pay a % of the CDI, it shows that our vision is of client. It's not the optimization of the cost of funding. This is a part of the story. So I see this as an opportunity, an opportunity because naturally reducing in a relevant way, of course, you can have volatility and the cost of capturing. That's part.

[Moderator]

We have LCR close to 200. We had it higher. We had the payments of extraordinary dividends. We don't we didn't follow-up on that because if it was for that, we had to reduce in a very relevant way the cost of capturing deposits in the end. We will lose deposits by design, but we will lose a client as well.

[Moderator]

So in the end, what we want to do is service the clients in the best way possible with a franchise of investment that is very robust. So to answer that question, it it depends on the opportunity of serving our clients better and showing that regardless of the cycle, Italy Bank is a great place to invest. It's a great place so that the clients can service within the platform and opportunities and alternatives for investment. We're not gonna do changes in our in the structure of force capture. I'm not going to say that we're not going to fiddle with it or that we're never going to change the the rates of of well, it depends on the transfer price, the management of liabilities as far as the market the business dynamic.

[Moderator]

But the important thing is to strengthen the franchise of investment and the relationship with our clients. That's our main strategy. About the private payroll loan and the subordination, My vision is that the credit card, it was never in the way that it was conceived. I've discussed that before, a good platform for financing the consumption. It's great for transactions.

[Moderator]

It helps with the experience of decline day to day because of the loyalty program or the simplicity of the transaction. But when the client needs to finance that consumption, today, 86% of our portfolio of BRL 140,000,000,000 do not have interest rates. That's the phenomena of the Barcelados Unjuro. So at the end of the day, what we have for finance portfolio, we've tried to the the PIX in in the credit card, the other products is a smaller part. Even though that portfolio has grown, the finance portfolio grew in the in the quarter, and it helped with the margin.

[Moderator]

The the feeling is that when you give the private payroll loan for that client, you'll have a better product for financing, limited to the 35% of the salary, of course, but probably it will be the best alternative. Up to us to offer to the client the best alternative and the cheapest one and complement their needs with other products. So we need to leave from the the more competitive to the less competitive because the delinquency in credit card, specifically in the rotation products are very high. So this is going to be a natural way, whether if it's by the credit PIX or private payroll loan, etcetera, of the finance that was done in the in the credit card and the rates that are practiced, they tend to converge for a healthier dynamic. But let's remember that the base of settlement in the public of credit cards, it has a size, but it's not so relevant when you look at the total public.

[Moderator]

So when you look at the capacity of offering, it's not exclusively in the salaryman. You can service other publics as well. So I think it's constructive. Certainly, the market will be accommodated, but it's a step at a time. But we are going in the right direction.

[Moderator]

More adequate rates with adequate risk, less delinquency, and we can defend the net financial margin. And taking the product declines to the right product of consumption that clearly is not the credit card where that usually happens. You. Next question also with us, Guilherme Grispan from JPMorgan. Thank you for the presentation.

[Moderator]

So great quality on the results. I think that they asked the big debate of the case. I wanted to clarify two doubts that are more specific on this quarter that we are in doubt in the results. First of all, it's working capital you mentioned on your presentation, but we noticed a strong performance of that line in this quarter. It's a longer duration.

[Moderator]

It's not a spot. And then you have the vertices of the investment. When you see the yield of that line, it was very representative. We had gradual increases. And the implicit yield went from 8.7 to 11.2%.

[Moderator]

So since this is a line of working capital and others, I just wanted to understand if it's working capital or if there is another others that is influencing. If it's sustainable, more so important that level of yield that we've seen from this quarter up ahead. And the second question, just to the taxes were higher in this quarter. Should we expect the taxes conversion for the guidance? I don't think it's if it's an explain what led to the increase of the taxes in this quarter.

[Moderator]

Thank you, Vignerome. Thank you for the questions. Working capital of the bank and others, as you've seen, what are the others? Just to give you some more visibility. Well, investments that we have in companies that we do not necessarily consolidate and we do by half in the patrimony consolidation.

[Moderator]

Well, the investment is within the working capital. So if we have an activation, a purchasing of a payroll and we have to do the activation of that payroll, that's in the working capital. So there are some effects that are there that can have some seasonalities. So the part of the effect is the result itself of the rate pre in the capital that comes in the quarter and a part are effects that are relative to the previous quarter. So these are deltas of effects that are happening or of the variation of half or intangibles of payrolls that we had in the previous quarters that were higher or we didn't have negative effects in this quarter.

[Moderator]

So it's a bit of a combination of both that leads you to bring this effect in the working capital. So I think that now, Gabriel, this well, our expectation is more normalized. Of course, this volatility can happen by the effects that I mentioned. But these are adjustments that are done in between quarters that show a bit of a discontinuity. And this is the level of working capital, and the rhythm, it seems adequate.

[Moderator]

Right? Yes. I think that the yield that you mentioned is a yield that makes sense. With all the disclaimers that Milton mentioned on the volatility that we have quarter on quarter, whether if it's a basic effect, things that happened in the previous quarter or by the yield of the portfolio that of what we are investing looking up ahead. And about the rate of taxes, very simple explanation.

[Moderator]

In fact, we have two effects that will explain this aliquot. Well, first, because the bank is a conglomerate with several vehicles, have financial and nonfinancial vehicles. And we have three types of aliquots in the conglomerate. We have companies that pay 34, corporate aliquot. There are companies that pay 40, and there are companies that pay 45.

[Moderator]

Depending on where the result was generated, you change the mix. In this quarter, we had more generation of results in companies with higher aliquots. So naturally, you have an you know, the aliquot is growing effectively effectively. The second aspect is more like you generate, less is the benefit of the interest rate on the working on our own capital. So the higher the profitability of the bank, the JCP is lower because it's limited to PL and TGLP.

[Moderator]

You have benefit that is defined for a higher net income. So the benefit of the interest of our capital is divided at the higher your result is. So the result is higher diluted the interest of our capital, JCP. And the second one is the mix of the businesses that we have where the businesses with the higher aliquot had a bigger result. So we had pulled up the higher aliquot.

[Moderator]

The expectation is to try to converge to the guidance and maybe more close to the roof of the guidance than below. We would be different. So I think that's it. When we look at the bank, I mean, is the effect portfolio that Mendelso mentioned. A 20 companies that we have in the conglomerate, have different profitabilities, different incomes, different sizes.

[Moderator]

Depending on the seasonality of all this, generate fluctuations in that tax rate, and that should converge with the guidance that we've seen in the beginning of the year. That's information of the guidance. Any difference in the next quarters, we will do the adjustments. But it's good cholesterol in the end of the day. Good cholesterol and diluting the effect of JCP, interest of our capital.

[Moderator]

Thank you. And now also Gustavo from Citibank. Welcome. Good morning, Milton, Gabriel, Renato. Thank you for the opportunity.

[Moderator]

Congratulations on the strong result. Switch watch, high quality. Question is about the mass. We see the ROI per segment that you see the retail 25%, wholesale 25%, thirty %, that order of magnitude. But in the previous quarters, you shared with us that the mass side still had a challenge of profitability.

[Moderator]

The bank has been doing investments. We've seen the efficiency level improving. Of course, there is the cost. But I wanted to know how do you see the profitability of demassified? Is it improving to the point that you're getting to a stage that you can be higher in demassified?

[Moderator]

Have you got to a level of profitability? Or there's still some space just so we can understand when the bank or what is the stage that the bank is demassified? And does the bank believe that we can get to a profitability rate level that is higher in the segment. Great to see you. Congratulations, Gustavo.

[Moderator]

Thank you for the initial words. Remember the third quarter of 'twenty two, and I was discussing that we reached 16.4% of profitability in the retail, and we were not happy. This is a process cycle of credit that is tougher, but we had a relevant work for this portfolio. And today, I'm happy to look that some quarters later, we are running at 25% of profitability in the retail, but whether if it's natural persons or work companies. So we need to break down this vision.

[Moderator]

The two businesses are running above cost of capital. So we don't have that sensation that there is a compensation. Profitability in companies is even higher than the clients, natural persons, but we still with the monolineers, which is where we had a cycle of credit that was tougher with the credit card and vehicles, we did a strategy for a revision that is relevant in the way that we work and the appetite of risk. And that process was very solitary for the portfolio. There was a de risking combined with a better management penetration and increase engagement of the target clients that would make the bring more profitability for this threshold.

[Moderator]

So when we look back to the profitabilities that we had many years ago, several circumstances. First, the regulatory caps did not exist at that time. You didn't have the cap of the credit card. You didn't have the cap of you know, of many things. So the regulatory changes generated impact.

[Moderator]

And this is a market that is more penetrated in credit than it was at that time. So you have a cost of credit that is more preponderant and a profitability of credit that pulls the profitability of everything lower. Bottom line has to fight. I think that we are still very far away from what we wanted to have in terms of profitability. So we have a great opportunity.

[Moderator]

When I see the segments of high, medium income, Uniqlasp and Personalite running with profitabilities that are very solid and very good and with critical mass, So you have to have volume for the generation of revenue, basis of clients. So the segments have been performing very well, and they're growing. When I look at the low income, the opportunity is enormous because we have a model of service so we can have a more adequate profitability for our appetite. Of course, the basis, there is a series of elements. The clients that are migrated from one segment to the other, so the attention to the client penetration and the increase of engagement, but there is also a model where that has to be optimized and should be optimized all throughout time.

[Moderator]

Answering your question, if what we are not optimizing in the attention of Massified, we have a homework, all the digital evolution of the bank and the evolution of the app and the migration will service that. My expectation is short term. So in the next quarter, I will ask you a question. Well, I don't think that this is an evolution that happens in a quarter, but it's an evolution three to four years that is relevant. So the expectation is that we have an opportunity that is enormous, and we are ready to execute this path in the correct way, taking care of our clients, improving the experience and servicing the clients in their segments with a model of attention correct at the right cost so we can absorb and accept more losses in the portfolio.

[Moderator]

So there is a change in the appetite, a lot of work of improving the experience and evolution of the platform. Thank you.

[Renato Lulia, Group Head of Investor Relations & Market Intelligence at Itaú Unibanco]

Next question for Morgastelli, Jorge Curie. Jorge, good to see you. Thank you so much for joining us today.

[Jorge Kuri, Analyst at Morgan Stanley]

Thank you. Thanks, everyone, Mito, Renato, Gabriel. Congrats on the results. Let me go back to rates, and this is a bit of a longer time frame question be beyond your your guidance for the year. Evidently, rates are at a, you know, ten year high roughly.

[Jorge Kuri, Analyst at Morgan Stanley]

And so I I wanted to ask you, what do you think the windfall that that you had benefited from rates in your record ROE today is? And and, look, you know, if we go back to when rates were below 10%, you know, the ROE of the bank was around 18%, nineteen %. Today is at 22, 20 three. And and there are so many moving parts. So I I I'm not I'm in no way suggesting that, you know, there's there's a regression analysis for rates and ROE.

[Jorge Kuri, Analyst at Morgan Stanley]

But I guess that's the question I'm I'm asking you, which is how do you how do we quantify how much of the very high level of profitability that you have today is due to this very excessive level of rates. And then as we hopefully normalize rates in Brazil to hopefully sub 10 or around 10 within the next two to three years, What does that do to your ROE? And what are the things that you can still do over the next two to three years to make sure that, you know, that level of ROE that we're seeing today doesn't dilute over time. Or or or maybe maybe it will, and it's it's it's fine as well. So, yeah, that that's where I'm trying to get to.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Okay. Thank thank you, Jorge. Thank you for your question, your words. Long time no see, you in our call. So thank you for joining us today.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

And I would say that we have a slide done for you, Jorge. And sometimes we bring this slide in our presentations here where we try to show how sensitive is the margin of the bank and the profitability due to interest rate in Brazil. I think it's not a simple question because, as you said, there are many moving parts when you look to that impact. What I can tell you is that in the short term, the benefits are working capital and also deposits. Those are the two more relevant impacts that we have.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

But at the end of the day, we hedge those effects. So it doesn't come in the same speed as we see the hike or the reduction on the interest rate. So it's less sensitive due to the level of hedge we do to maintain more stability in our figures. This is one point. The second one, I think when the interest rate starts to go down, we see more activity, more activities, more portfolio growth.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

More portfolio growth is more business with our clients, more engagement, more penetration of product services, derivatives, cash management, FX, all the products that we serve our clients. And so we have some compensations in the portfolio in different lines due to different reasons. We have impacts in the financial margin with the market. We have impacts in the financial margin with the client. We have more portfolio growth, less delinquency, especially on the individual side.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

So it's difficult to give you a number. So the good thing to see is in the long term, when we see all the volatility of the interest rate and we see our NIM, you will see it much more stable than your expectation. And this is due to the broad portfolio that we have, very well balanced in all lines of businesses. This brings us a good portfolio sensitivity and gives us a lot of natural heads inside the portfolio of the bank. So those are the short term impacts, and they are positives.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

You are right. But in the other hand, we have costs under control, and we have to deepen the agenda on that. If we believe there is no revenues coming for any reason, we have to go deeper in cost, so on and so forth. So that's why we look to the efficiency ratio all the time. We are looking to revenues, but we are looking over cost as well.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

So this is a general answer. I don't have a key point to tell you this is what happens because the portfolio is very broad. But this dynamic is very positive and the balance sheet of the bank is very less sensitive to the interest rate than people usually expect. In general speaking, I prefer to work in an environment where the interest rates are lower than the interest rates that we are seeing today. And why is that?

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Because you might see a hike that could be beneficial in the short term for the banks. But if it stays for long, the delinquency will go up very strongly and you lose the capability to grow the portfolio. And of course, the activity, DCM, investment banking, everything is impacted. So our view is that for the long term, we prefer to work with a structural interest, much lower single digits, if possible. It's much better for us in the long term that two digit interest rate that we are seeing today. Any comments here, Gabriel, additional comments?

[Gabriel Amado de Moura, CFO & Member of Executive Committee at Itaú Unibanco]

No. I think as Milton told you, Jorge, there is a portfolio effect on the bank, right? So with the different cycles of interest rates, when you take a look at the short term, you're going to have more of the liability income from us, from capital and everything. But the flip side to that is asset growth, right? And we see that in other countries that we operate, right?

[Gabriel Amado de Moura, CFO & Member of Executive Committee at Itaú Unibanco]

So the experience in Chile, for example, with much lower interest rates, you see the penetration of credit to GDP much higher than we have in Brazil. So yes, of course, some of the lines of business that we have on lower interest rates will be a little bit lower than we have nowadays. On the flip side, if you take a look at fees, transactions, investments and asset growth, will be much different. So I think that the portfolio effect at the end of the day is positive for us.

[Renato Lulia, Group Head of Investor Relations & Market Intelligence at Itaú Unibanco]

And if I could

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

just also the cost of the hedge of the capital index as well, Jorge, sorry, Renaud, has an impact as well. And this is why we believe that the financial margin with the market for the next quarter might have more impact because as higher is in the interest rate and it's bigger is the difference between the interest rate that we have here compared to the countries where we operate, higher the cost to have the capital index. So this is one of the reasons why we are seeing, we expect to have our guidance more aligned to our expectation than to have four consecutive quarters in line with this quarter that we had. This is the reason why because the cost of hedge, we pay BRL500 million this quarter. We expect this to grow in the coming quarters.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

And also, you will see some effect on the banking book. Even though we do a very dynamic hedge on the book, we might see some impacts with the expected results coming from the banking book to be lower in the coming quarter. So this is also the flip side of working with a high interest rate in Brazil.

[Moderator]

Were going to

[Renato Lulia, Group Head of Investor Relations & Market Intelligence at Itaú Unibanco]

say And then, other comment I was going to make is that since there are Brazil specific topics as well, so we have products that have caps, right? So payroll loans and contract guarantee that were overdrafts. Overdrafts. And then every time that the cost of funding goes up, cost of legal is up, your spread is compressed. So whenever actually goes down, you might see also your spreads

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

as 100%. We said on the retail operations, as I was saying, you have caps on our credit card, you have caps on consignado, the payroll loans, you have caps on overdraft. So it puts pressure as well on the profitability of the retail whenever the rates are high. So as I said, many effects, we have to take all of them in consideration. But that's why I always say and we try to show, as I said, Jorge, we are less sensitive to interest rate than it seems like.

[Jorge Kuri, Analyst at Morgan Stanley]

So if we bring it all together

[Renato Lulia, Group Head of Investor Relations & Market Intelligence at Itaú Unibanco]

Thank Neuton. Thank you, Jorge. And we are we warm up in English, so let's keep that language because now we have Carlos Gomez with us from HSBC. Carlos, great to see you. Thanks so much for joining.

[Carlos Gomez-Lopez, Head of LatAm Financial Institutions at HSBC]

Thank you for taking my question. Congratulations, like everybody else, for the results. And thank you for the reference to taxes as good cholesterol. We will use that. That's very good.

[Carlos Gomez-Lopez, Head of LatAm Financial Institutions at HSBC]

My questions. First, you have made a big effort showing us the new classification of loans by stages and new provisioning. I think that gives a new insight about how the profitability is for each type of lending. Do you think that we will see a change in the market going forward when the other banks, when everybody starts to look at things in this way? Do you expect perhaps some products to become more, you know, to become bigger, some products to become smaller in the future?

[Carlos Gomez-Lopez, Head of LatAm Financial Institutions at HSBC]

And completely unrelated to that, we haven't heard about any possible changes in taxation on IOC or of your subsidiaries abroad. Do you feel anything like that is in the works for the coming months? Thank you.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

No. Thank you, Carlos. Thank you for coming. Thank you for the initial words. It's a good cholesterol whenever you have the same corporate tax, right?

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

When it goes up for legal decisions or regulatory decisions, this is not necessarily the good cholesterol because at the end of the day, we know that if you have a hike in interest rate, in tax rates, what happens is that the cost of credit in Brazil increases. And of course, the payers, the ones that are depending in lending and needs to finance their needs, have to pay more whenever it happens. So it's always important to remember this is how we see whenever we have a hike on the corporate tax rate. So my view is that these stages, the way we are showing now, reflects the way we manage the bank. So we don't expect any change because now we have the local or the BRE GAAP IFRS local.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

So we don't expect to change the way we operate inside the bank because of that. This will give us, in our view, will be more transparent, more comparable, will be easier to show, reflects better what we do inside the organization. So I don't expect any change in the way we operate the products and the businesses, especially because, as I said in the very beginning, we haven't changed any method, any criteria compared to the BR GAAP when linked to the write offs, for instance. So as we keep exactly the same way, it shouldn't change the way we manage the organization. Your second question on IOC, we don't see any discussions coming from there.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

I know there is a discussion now in the Congress. There is a proposal coming from the government that have to be analyzed by the Congress that is increase the corporate rate withholding tax with for dividends. They take out some exempted products above a specific income that the people has. So that's what we could see in terms of change. But this is a discussion that it's still very open.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

Let's see how the Congress will react to that. We don't have any discussion related to increasing tax. We don't have any discussion regards the IOC. And I think this is what we have now. Of course, things can change.

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

And if it change, we're going to give you more color on that. But still waiting to see how the Congress will deal with this tax exemption for people that has up to 5,000 in monthly income. So let's see what happens. Let's keep very follow very close.

[Moderator]

Next question is from Enrique Navarro, Santander. To see you. Milton, everyone. Congratulations on that result. I think that the performance is solid.

[Moderator]

And my question is, well, talking to some of the participants in the market, not that there is a concern, but there is a care with delinquency in the second quarter. The increase in Selic, you can have the lagging. So there is carefulness when we discuss the second quarter. Since you have several segments, I wanted to hear from the horse's mouth. Is there something that we should really monitor for the second quarter for delinquency?

[Moderator]

How do you see this evolution? And anything that you can share would be great. Thank you for the initial comments. You know that I don't look at the price of the share during the call. So you updated me.

[Moderator]

I only see it after the call is done because we're looking at the long term, and we are less sensitive to the spot price, but it's always a great feedback. So thank you for the initial words. Well, delinquency. So let's separate the discussion. For our portfolio, we have stability in the delays.

[Moderator]

There is a big concern, and I was discussing small companies. There should be normalization throughout the second quarter. So I think that this is the best expectation. I don't see something a lot different. But I look at some market indicators, credit cards, vehicles, national financial system.

[Moderator]

We've seen movements that are bigger in the portfolio in the market than what we've seen in ours. So an example, credit card. We have been for seven, eight quarters with relevant reductions. And we have 25 or almost 30% depending on division with Carrefour that we have in the portfolio. So in the end, ex Itau, we've seen a performance in some products that is much worse than what we've seen in our own portfolio.

[Moderator]

This is for vehicles as well. So it's important to see that our vision is constructive regardless of a very challenging scenario. So to believe that the interest rates are going to be dropping, there is not going to be an impact in delinquency, it's not reasonable. But the portfolio of the bank is very resilient. So that's why we don't see a lot of changes in delinquency, everything being constant.

[Moderator]

So there is a lot of dynamic of portfolio, but this is a portfolio that is very challenging. So the indicators of the market are sovereign. It's not what I think. So it's important to look at these delays, the short term delays, the breakdown per segments, the CFN indicators, you're gonna have a challenging scenario for the semester. I don't think it's a scenario that we observed.

[Moderator]

It's a scenario that we've looked for many years. So we have to follow that closer. And the portfolios in the several banks, companies in the system, they will perform according to their appetites and their risk profile that they have in their portfolio. We have a base that is very solid of clients. We did the derisking that is very relevant in the business of companies.

[Moderator]

We have a solid portfolio with a credit performance that is good. And in big companies, a portfolio that is distributed, less concentrated in sectors with adequate volatility. So it's very well established. So I tell you, again, we don't foresee. I'm not saying that it doesn't happen.

[Moderator]

Wholesale is events. We are subjected to events the whole time. So we work with affected loss in other segments. We don't do the cross subsidy of the segments. We are always looking at the right level of provisioning.

[Moderator]

So our balance is the portfolio is very well protected. So we have to follow this to the prospector. The last question, last but not least, Eduardo Nicchio from JNEL. Welcome. Good afternoon.

[Moderator]

Congratulations on the results. Milton, Gabriel and Renato. Quick question about the hedge of your capital index, which you've been good managers of capital of the cycle. The hedge has been a comparative advantage in this interest cycle. And my question is what the other banks are not going be able to replicate if you have a competitive advantage in this segment with a hedge, is there a difficulty to do this or not?

[Moderator]

And your vision, the hedge of the capital index versus the NII, what is the advantage and disadvantage? Because there's a cost. And that cost, we see it in the NII market. And if you can tell us about that, thank you. Well, thank you for the initial words. Well, first of

[Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco]

all, there

[Moderator]

are a few answers, a few idiosyncrasies for Itau and Ibarra. First, the relevance of the operations outside of Brazil. When we compare it to other players, we are the bank, the other Brazilian players that have a bigger exposure of activities outside of Brazil. Now when you get a portfolio of Chile and Colombia, it's very relevant in our assets. So we have a portfolio in foreign, well, dollar, Chilean peso, but we have the banks in Uruguay and Paraguay.

[Moderator]

And we don't you have to take care of the portfolio that is sensitive to euro and dollars, and these are Brazilian clients that are taking resources and other currencies. In the past, we were very sensitive to the exchange because of the overhead. Remember that we had a positive result with the strategy, but depending on the level of the you would have to manage the liabilities of the strategies of how you did the hedge, but it generated a dangerous tax effect. So when we don't have the overhead, our sensitivity to the stock exchange, to the exchange it drops big in the capital. But because whether if it's CTPF or CTTT, it consumed the capital in a different way.

[Moderator]

Afterwards, the big effect that we had is the variation of the portfolio. The hedge is dynamic. We're always looking at the cost of opportunity. So we have clearly a policy that has been approved giving visibility to the regulator on how we do this, but we are always looking to try and optimize this hedge. So it's dynamic up until a certain point because these are long term strategies, and we try to bring a stability to the capital index in the end because that gives you surety to grow, to pay dividends, it gives you surety to advance.

[Moderator]

When you have a capital index that is so important for our volatile activity, you have to be conservative by definition. So a bit of the risk appetite that we had way back where is higher than what we had today. It was because the buffer was higher to absorb the movements in the exchange rate. When our capital mix is less sensitive to the exchange rate, we have lower buffers and more levers. And with a dividend policy, distributing more dividends because you define a lower appetite for risk.

[Moderator]

So we see this cost. It's lower than what we we talked about the quarters with BRL 300,000,000. So the cost of opportunities is some what we've left the capital looser with a currency with the growth of these portfolios. And also, it's a natural hedge. The counterpart of that is that you do not bring this capital and then you apply it to the coupon or the interest rates in the countries that you are.

[Moderator]

So it's you can you can replicate this. We were less sensitive than we are still more sensitive to the exchange rate because of the participation that we have in operations in Brazil, but we are less sensitive now. And we're always looking at the cost benefit. What is the level of volatility that we are ready to accept vis a vis the cost of carrying over these hedges? Thank you, Milton.

[Moderator]

Thank you, Nishio. That was the last question. With that, we finish our Q and A session. And just to remind you that the questions, had a lot of questions via WhatsApp by the investors, the IR team will answer. Thank you, Gabriel.

[Moderator]

Thank you, Milton. I'm going give you the floor so you can close the call. Thank you, Renato. Thank you, Gabriel. We will be together with all the publications, all the calls up ahead.

[Moderator]

So thank you to by the support, the feedbacks and the recognition and the positive and constructive feedbacks that we receive. We're very satisfied with the evolution of what we managed to deliver in values, and these are values for the clients, collaborators, the investors, and value to the society in the end of the day. Thank you for taking part. Active part. The questions are always good, so we can understand what you're looking at, what are your concerns, to see if there is a blind spot or some additional homework on our culture.

[Moderator]

We don't know everything, and we're very excited. I think that we're we're very excited structurally with the evolution of the bank and all the transformation that we've experienced with the amount of solutions that we've gotten and with more strength and excited with the perspective, the macro challenges for everyone. The micro, it depends on how you do your homework and delivering more value for our stakeholders. So we are very humble. Everybody with two feet in the ground, working hard, knowing that the past performance is not gonna guarantee a future performance.

[Moderator]

So we need to continue to be consistent consistent because this is an infinite work, infinite game. I hope to be here in the next quarter. See you next time. And for those of us that are in the conference in New York, it will be the best conference of all the series, over 130 CEOs confirmed, incredible lineup. It will be a great opportunity for you investors that are here to take part and have high quality discussions.

[Moderator]

We will see you in New York. See you next time.

Participants

Analysts

• Renato Lulia, Group Head of Investor Relations & Market Intelligence at Itaú Unibanco
• Milton Maluhy Filho, CEO & Member of Executive Board at Itaú Unibanco
• Moderator
• Tito Labarta, Vice President at Goldman Sachs
• Jorge Kuri, Analyst at Morgan Stanley
• Gabriel Amado de Moura, CFO & Member of Executive Committee at Itaú Unibanco
• Carlos Gomez-Lopez, Head of LatAm Financial Institutions at HSBC