伊塔烏聯合銀行 (ITUB) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. This is Itau Unibanco Holding conference call. At this time, all lines are in a listen only mode. Later, there will be a question and answer session, and instructions to participate will be given at that time. (Operator instructions) As a reminder, this conference is being recorded.

At this time, I would like to turn the conference over to Miss Daniela Ueda, Financial Investor Relations Brazil. Please go ahead.

Good morning, and welcome to Itau Unibanco Holding conference call about the first quarter of 2010 earnings. This conference call is being broadcast live on www.itau-unibanco.com.br/ir. A slide presentation is also available on that site.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from those anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks, and other factors.

With us today in this conference call in San Paulo are Alfredo Egydio Setubal, Investor Relations Officer, Sergio Ribeiro da Costa Werlang, Executive Vice President of Risk Control & Finance, Silvio de Carvalho, Chief Financial Officer, Jean-Marc Etlin, Itau BBA's Executive Vice President, Caio Ibrahim David, Executive Officer, and Marco Antunes, Accounting Director.

First, Mr. Alfredo Setubal will comment on the first quarter of 2010 earnings. Afterwards, management will be available for a question and answer session.

It is now my pleasure to turn the call over to Mr. Alfredo Setubal.

Good morning. It's a pleasure to be with you again, to talk about our results for the first quarter of 2010. In our view, the quarter results that we released were very good, very strong, showing already some synergies of the merger, and also, the number that we are taking advantage of the good environment that we have here in Brazil in terms of the growth of GDP in the quarter.

For those who are following through the Internet, I will start on the highlights on slide number 2. The first one is the earnings, the net -- the recurring net income of BRL3.168 billion. This number means an increase, and when we compare it to the previous quarter of 12.6%, an ROE of 24.4%.

If we look at the number that we released, considering the extraordinary items, BRL3.2 billion means an ROE of 25%.

The second point is [the example], these extraordinary items. We show BRL66 million. That's mainly related because we used the program for installment payment of the federal taxes that we could use, and this gave us a gain of BRL145 million.

The third highlight is that we didn't use, for the second quarter, the additional provisions for loan losses that we made, and we have, at the end of the quarter, the same amount of the end of the year, of BRL6.1 billion, because the conditions of the economy, as I said at the beginning, is much better, and we are seeing numbers for loan losses lower than expensed in the previous quarter.

Related to that is the fourth highlight, is the NPL ratio over 90 days, and the NPL ratio over 60 days. That achieves 4.9% and 5.9%. That's in line with what we have been saying in the last quarters, that we expected these numbers to reduce when we compare it to 2009, remembering that the peak was in the third quarter, 5.6%. So for NPL over 90 days. We continue to expect the numbers to be a little bit better during the year as the economy continues to show good support.

And the final highlight is our BIS ratio. That finished at 17.3%.

On slide number 3, we can see, on the bottom of the slide, total assets of BRL634 billion, with an increase of 1.6% over 12 months, and 4.3% when we compare it to the second -- to the end of the year of 2009. Stockholders' equity of BRL52.9 billion, also an increase of 4.5% when we compare it to the last year.

On slide number 4, [recurrent] effects net of taxes. As I said, we have a gain using this loss for the program for installment payments of BRL145 million, and also, we made provisions of BRL79 million related to economic plans claims by individual investors that entered into the Justice, and we made the provision to face these claims. So then, that is BRL66 million, in terms of non-recurrent gains.

On slide number 5, we can see on the managerial financial margin, BRL16.1 billion. It's a growth of 2.7% when we compare to the first quarter of 2009, and negative 2.6% compared to the end of the year, the fourth quarter.

That financial margin with customers increased 2.1% in 12 months, and 0.5% in this quarter. And the big difference is the financial margin related with the market. When we had big gains last year in Treasury due to the better environment, we have decreased both when we compare with the first quarter of 2009. This year, reduction of 23%, and when we compare it to the fourth quarter of 2009, 31.5%.

Loan losses reduced also due to the better environment. We made provisions of BRL3.8 billion in this quarter, and much lower when we compare to the last quarter of 2009, a 4% reduction. And also, 12% reduction when we compare it to the first quarter of 2009.

As I said, we didn't use any provision from -- that the -- additional provision that we have, due to the better environment. We are going to go more into details some slides ahead.

Another point that is very important is related to our operation expenses, which showed a very good number in this quarter, related to our synergies that are starting to -- really starting to show. We finished with total expenses of BRL9.2 billion, which was a reduction of 6.4% when we compare it to the last quarter of 2009, and only an increase of 4.1% when we compare it to 12 months. That's below inflation, and also, we are going to show you more details ahead.

Going to slide number 6, we can see our credit portfolio. As I said at the beginning, finish of [2008], BRL284 billion. From that, BRL183 billion related to retail operations. We continue to focus in individuals -- individual markets, middle markets. Individuals first increased 2.3% in the quarter, pushed by personal loans and vehicles that increased 5.3% and 3.7%.

In terms of companies, corporate was almost flat, but we had a huge and strong demand for credit, (inaudible) coming from the small and middle market companies, 5.5% increase only in this quarter. This is due, just to remember, that we are focusing in these segments for many years, and also, because we are investing in these segments, as we have been saying in other conference calls and meetings. And we are increasing these segments and opening new platforms. We are hiring -- [following up] new managers, to increase our market share and to serve better our clients in this middle market segment.

In terms of direct loans, I think the most important is that mortgage -- that is, still is a small part of our credit portfolio, but continues to grow in a very important pace, 42% in 12 months, and 10% in this quarter.

Going to slide 7, non-performing loans and coverage ratios, we finished with 4.9%, as we said, better than in the previous quarter. We have been saying that we expected this number to be below 5%, or between 4.5% and 5% during the year, and we still expect these numbers to be achieved. We didn't use our additional provisions which remains at BRL6.1 billion, and our coverage ratios for 90 days increased a little during this quarter to an achieved 188%.

On slide 8, provision for loan losses, just to show you that we have a very comfortable position, considering all the provisions and additional and generic, and all provisions that we have, when we compare to our credit portfolio.

On slide 9, [source of] funding, it's BRL701 billion, an increase of almost 3% in the quarter, and 13.8% in the 12 months. Here, considering only the deposits, but also the mutual funds and technical reserves of our companies, insurance companies.

We can see also on slide number 10 that our ratio between loan portfolio and funding increased to 96.1%, compared to 90.8% in the last quarter. That is mainly because of the increase of the compulsory deposits that the Central Bank announced in the first quarter, and we already made deposits of BRL13 billion in the Central Bank to face the new regulations. That's why the level of liquidity decreased a little bit, but it's still comfortable for the situation that we are in the market.

In terms of banking fees and banking charge, on slide number 11, we can see an increase, and we finished the quarter at BRL4.1 billion, an increase of almost 17% in the 12 months, and a decrease of 2.6% in the [year]. I would like you to pay attention to the line of Current Account Services, that show our big increase in 12 months, and a little decrease in the quarter, compared to the fourth quarter of 2009, because in the first quarter of 2009, we reversed BRL95 million of income related to the credit information renewal charges that we, because of the regulation, we were obliged to reverse this number. That's why we show so big increase.

Credit cards, it's seasonal, and first quarter compared to the fourth quarter, fourth quarter is, in general, the most active in terms of use of credit card, because of Christmas and year-end.

On page 12, it's a very important one, non-interest expenses. We had a good number to show you again here, the same way that we showed in the last quarter of 2009. We finished with BRL6.7 billion. That's a decrease of 9.1% when we compare it to the fourth quarter, and a decrease of 2.8% when we compare to March of 2009.

PIS is important. We announced to the market last week, before the release of the results, that we changed the way that we included, from this quarter, and we made the reconciliation of the other quarters, that we included in this line of Personnel Expenses all the participations of the employees in this line that was not included before. And also, this number in this quarter gets the benefit from the provisions that we made for vacation, for important number of employees that were in vacations during January, February. Here in Brazil, you know, it's summer period.

On slide 13, a little bit more detail of the non-interest expenses, showing that if we exclude the Redecard expenses, the Porto Seguro expenses, expansion costs and the branch network migration expenses, the number is much better than -- we show a very good control, and here, you can see better the synergies that are appeared, especially because of the merge, and that we are starting to make the branch network configuration and so on.

Here, it's is important to see that we have BRL347 million in expansion costs. Here, we include the costs that we have, that we are opening new branches, we are expanding our middle market platforms, that our new business that we know that takes some time to break even, and more time to contribute to our earnings.

So, I think we are in a very good position, and a very good direction, in terms of cost of expense, controlling our expenses, and more synergies will appear as we go on with the integration of branches of Unibanco that we expect to finish by the end of this year. And then, we can have more efficiency in terms of systems and integration (inaudible), [Cofins] and so on.

On slide 14, efficiency ratio adjusted to risk. We have the two numbers, the traditional number that we achieved 44% in the quarter, and the number that we started to release, that here, that the efficiency adjusted to risk that also show important improvement, achieving 69% against 73.4% in the last quarter of 2009. So we are working hard in expenses, and also taking an advantage of the good environment in terms of new business, and business and the growth of the revenues through credit and other business. That also helped this number.

BIS ratio, on page 15, a strong position. We issued some subordinated time deposits here in Brazil, and also, we issued a bond, subordinated bond, to increase our Tier II capital basis, to face the new regulation of the Central Bank, and also to keep the bank in a good position in terms of capital, to face the growth of credit and opportunities that we have here in Brazil.

On slide 16, the four traditional segments that we use to release -- Commercial Bank, Itau BBA, Consumer Credit, and Corporation & Treasury. And if you go to slide 17, we can see the split among all these areas, these four areas. When we see our recurring net income, BRL3.1 billion, we see in this slide that Commercial Bank was responsible for BRL1.5 billion, Itau BBA BRL69 million, Consumer Credit BRL703 million, and Corporation & [Credit] -- Corporation here meaning the excess of capital that we have, plus the gains of -- structural gains and market gains in terms of Treasury, at BRL384 million. That was the (inaudible) managerial pro forma results from our four big segments that we use to release.

And to finish, the earnings per share, that continues to grow, and we expect the strength to continue because of the good environment and the good position that the banks have in the local market.

That finished the presentation, and we are open for questions that you probably have about our numbers.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator instructions) Our first question comes from Mr. Daniel Abut from Citi.

Good morning. I've got a couple of questions. On the NPL ratio side, you are indicating your remark that you see room for further declines throughout the year. Do you venture to give us a guidance of how low can it go by the end of the year? You mentioned either on a 90 day basis or 60 day basis, whatever you feel more comfortable.

And second question is on the expense side. You show this slide 13, that shows that even considering the expansion costs, and the Porto Seguro expenses that make the number not entirely comparable with a year ago, you are showing a decline in expenses compared to a year ago.

If I'm not mistaken, in the prior conference call, you indicated that you see expenses growing this year somewhere in the low single digits, 3% to 5%. Even what we see in the first quarter, do you see room for better performance in expenses that you were seeing a quarter ago, given the synergies from the merger that, as you said, are starting to begin?

Daniel, it's Alfredo. We expect NPLs to remain along the year with some variations quarter to quarter. Of course, something between 4.5% and 5%. That's the number that we expected this year, for the whole year. It's difficult to be more precise than that, but due to the conditions of the economy, we continue to give this guidance, in terms of NPL.

In terms of expenses, as I said, we had a very good quarter. We show very good numbers, some synergies [do not] appear. But also, first quarter, it's traditionally lower expenses, and lower expenses in terms of marketing, lower expenses in terms of personnel, many people in vacation and so on. So, I prefer to be more conservative and remain with the guidance that we gave you, to the market before.

There is some increase, lower increase, when we compare it to the total expenses for the year, and if we exclude expansion, even lower. Maybe between -- excluding expansion and all these Redecard and Porto Seguro and so on, something between 0% and 3%, in terms of growth of expenses, and total expenses, something between 3% and 5%.

That's -- I prefer to be conservative. I don't want to give you an increased expectation. I think it's more -- it's better to be more conservative at this moment. But let's see quarter by quarter.

Thank you, (inaudible).

Excuse me, our next question comes from Mr. Fabio Zagatti from Barclays Bank.

I wonder if you could provide us with some further color on the competitive environment in Brazil for loan growth throughout 2010. We have seen from Central Bank there for March that for the first time, domestic private banks surpassed public institutions, and by a wide margin, foreign banks, too. How do you see this trend for the rest of the year?

And, looking at how you are positioned to compete, in terms of your branch network, loan origination capabilities, who are you seeing as the most active competitor in the field? Thanks.

I think competition is tough. We have not much -- not a big number of banks competing in terms of retail in Brazil. But all the banks have a strong, a good brand, and good technology, and so on.

So we -- but we are in a very good position. We are leaders among the private banks. We have very strong positions in most of the business that we are. So we are very comfortable to face all these competitions.

We are also expanding our business, in terms of opening new branches -- as I said, 150 new branches this year. We are hiring managers to serve better and increase our share in terms of [asset needs]. And we are seeing in the numbers released by the Central Bank that the private sector are regaining part of the market share that was lost to the public banks during the most -- the worst part of the crisis, especially in the beginning, in the first semester of that year.

So we continue to increase. We believe that we, and all the private sector, will gain market share. I think this sector is more active. And as I said, the numbers released by the Central Bank shows that the local banks, the private local banks, are gaining market share, and the foreigners are still losing. And the public banks also are losing this year.

So, we feel our position is very, very strong to continue to keep our leadership in most of the sectors, and we see some room to increase share in some segments like (inaudible).

Okay, that's great. Thanks a lot.

Excuse me, your next question comes from Mr. Jason Mollin from Goldman Sachs.

Hello, everyone. My first question is digging more into the cost side, specifically on personnel expenses. You showed a substantial 11% decline quarter on quarter, and you mentioned the impact on -- of vacation, of making provisions previously for vacations. Can you quantify that, and give us a sense that this was a BRL350 million decline quarter on quarter to see if -- it looks like this was much below our expectations, and if you can sustain that, that would be quite positive.

And my second question is on fees. You disclose that the 20% plus year on year growth in current account fees was distorted by a reversal in the first quarter of 2009, and if we adjust for that, the fees were basically seen to be flat. How should we think about banking fees going forward? I presume the issue on pricing is done, so it -- should it be in terms of number of accounts?

And secondly, if you can comment, in terms of fees, on the credit card segment, which were up 15% quarter on quarter. Do you anticipate changes in the pricing environment, given regulation, and what's your expectation for the growth there?

Hi, Jason. (inaudible) speaking. The first part of -- your first question, actually, was regarding expenses. Yes, the production during this quarter was mainly to the seasonality and other consequences of the vacations during the first quarter in the country. There are some other movements -- I don't have the precise breakdown right now with me, but it's mainly due to the seasonality on vacations.

Regarding fees, yes, again, you are right. If we reduce that impact during the first quarter last year, it should be quite flat. And looking forward, what we see is some room for increasing fees, mainly due to increasing volumes in our operations, and also due to increasing operations regarding our [CIB] and our -- all the fixed income and equities distribution. Also, credit cards should be one of the boosts for these increasing fees in near future.

Maybe just a follow up on costs. If we look at personnel expenses, maybe if we look year on year to kind of get rid of the seasonal impact, then they were down 3.5% year on year first quarter 2010 versus 2009. Is this kind of the run rate that we should expect throughout the rest of the year?

Well, as Alfredo said, we are, you know, opening new branches, and that's why we don't think that this saving that we booked during the first quarter is one thing that we could keep along the year. So that's why we are not changing any guidance on expenses, increased during the year. But you're right. The surprise was very positive during the first quarter. But we don't think that we have reasons to believe right now that this could be kept throughout the year.

I also think that you mentioned the first -- you mentioned competition scenario, competitive scenario, regarding credit cards, right?

Yes, I was just asking, because we -- you know, as usual, we hear some discussion of regulating credit card fees, and we've seen some regulation come through and adjustment on other banking fees. So, I was wondering if that would impact your view for credit cards.

You know, I think we had lots of comments, and typically negative agenda, regarding credit cards. But we keep saying that this is a very, very good market. It's in an immense expansion in the country. We are still -- and there are standards quite behind what is acceptable worldwide. So we think that even under any regulatory different environment, it's going to be a fair, good competition scenario, and with lots of room for us to take our room and take advantage of that.

Just to give you one figure on that, I think it's around 15% or 20% of the total expenses of a family in Brazil is paid using credit cards. And the international standard comes from 40% to 50% in countries like France, UK, and US. So there's -- there is room for going better than market as a whole, and we'll be keeping our share on this.

Thank you very much.

Excuse me, our next question comes from Mr. Saul Martinez from JPMorgan.

Hi, good morning, everybody. Two questions as well. First I wanted to ask about your net interest income and your net interest margin outlook. If you look at your net interest income to customers, it grew only 0.5% quarter on quarter. Year on year, which normalizes for the fewer trading days, for the fewer business days, it only grew 2%, and I suspect much of that had to do with the fact that we've had a low interest rate environment up until the Central Bank began to raise rates this month.

Can you talk a little bit about what your outlook is for -- not only in net interest margin this year to customers, but also, how quickly do you think that your net interest income will start to grow, and what do you -- if you can share what your thoughts are for net interest income growth to customers this year, that would be helpful.

Secondly, on asset quality, I think, Alfredo, you mentioned -- and correct me if I'm wrong, in response to Daniel's question, that the NPL 90 days would be -- you guys are being -- expecting something like 4.5% to 5%. I believe you're at 4.9% already, and if I look at the asset quality indicators, the formation of new non-performing loans before chargeoffs that are declining very quickly, it seems like that's a very conservative estimate, and there's room for that to even perhaps fall further than that.

If you can just comment on your -- if you think that number is conservative, and whether there's the potential for asset quality to continue to improve a little bit more than what your expectation -- what your guidance implies, that would be helpful as well.

Hi, Saul, it's Sergio. So, regarding the margin, what we are seeing so far during the year is slightly changed in the spread scenario. Actually, spreads went a little bit up during the first quarter, but when -- taking the picture of our performance, we are still a little bit behind the previous quarter in terms of the spread, but compensating that with higher volume. So, that's why the net interest margin -- the margin, before any bad debts, was quite similar when looking at the clients.

And looking forward, covering the year, we do think that we are not going to repeat the same performance on margin, on the market -- with the market. But we'll do -- be able to compensate this lack with more results with the clients, because of this decreasing in the credit expansion.

If we look at the margin, after the bad debt, then definitely we should see some -- you know, some increase when comparing to previous years. And what -- drives to your second question, yes, again, you are right. Actually, we are very -- you know, it was a very good surprise during the first quarter. We saw this reduction in non-performing loans faster than we had expected.

But it is a little bit early to change any guidance on that. So, let's wait for the behavior during the second quarter, and maybe we will be in a position of changed guidance. But at the first glance, you know, the way you are seeing is the same way that we are seeing. If this confirms them, maybe we'll have room for better benefits from that.

And just a follow up, to make sure I understood the answer to the question on net interest income. You expect margins to contract during the course of the year, but that volumes would overwhelm that, and that net interest income will show some growth during the course of the year? Is that correct?

Looking at the figure, we think that should be similar to last year, maybe with some change from spreads to volumes. But closer to a flat figure.

And also (multiple speakers) --

(multiple speakers).

I'm referring to margin with clients. I'm sorry, I'm referring to margin as a whole, because we should be compensating some of this lack in the margin with the markets with some more margin with the clients, mostly because of volumes. That's what I said.

Okay, so your total net interest margin you think would be flat, but your net interest margin with clients might actually increase.

Absolutely.

Okay. Okay, great. Thank you.

Excuse me, our next question comes from Mr. Marcelo Telles from Credit Suisse.

Hi, good morning, everyone. My first question, you know, I'd like to go back to the discussion on credit cards. Sorry for insisting on that point, but I just want to segregate the discussion in (inaudible), and focus more on the issuer's perspective, not the acquirer's perspective. From what I've seen is that on the part of the regulation, of the regulatory changes and this provision of the Central Bank, would also encompass the -- you know, to supervise the credit cards from the issuers' standpoint. So my question is, if you anticipate any potential changes in the fee structure on the issuer side.

And my second question, now going back to the expense side, purely, you know, it had a very good quarter, a little bit beyond what the seasonal factors which were favorable would explain. But if you take more like a medium term view, and we think of 2011, do you think you'd be able to extract more synergies next year as well? Or you think that by the end of this year, you would already be running at a sustainable rate in terms of what we would expect, in terms of expenses? Thank you.

Regarding your first question, we don't see much changes in the fee structure of the credit card business. We continue -- of course, there is many talks, many discussions inside the government and so on. But at the end, we believe this will not affect much, the total business, because also, the business is growing. I think it is important to remember that the use of credit cards are growing, the number of people that are having access to this instrument is growing. So I think, even if we have some reduction, we'd be compensated by more volumes of cards, and more transactions.

On the second question, in terms of synergies, we will still have synergies next year, yes. Because we are just going to finish the integration of the branch network of Unibanco by the end of November. So until there, we have to keep all the systems and people and everything related to this working.

And we had to just do this work, and most of this work will be done only next year, in terms of systems, and turnoff of systems, and so on. And also, the (inaudible) and all the gains of the transaction -- of this integration, partly will be captured during the year, and next year we are going to have the whole year under the integration of the branches. So part of the gains will remain to 2011.

Excellent. And just one follow up question, on my last one. The -- so, if you were to estimate how much -- what was the rate of achievement of your total expected synergies, where do you think that rate would be this year? Do you think you achieved like 60% of your synergies, 70%, you know, and have 30% more next year? Just to give us a sense where you are.

We are not giving numbers in terms of synergies, because all these numbers are mixed with the expansion of the bank in terms of that work, in terms of the needs. It is very complex to really separate totally these gains of synergies.

What I can give you is that we expected by the fourth quarter the efficiency ratio to be around 42%. I think that is a better way to see the gains and costs and revenues, to see the bank as a whole, not only looking at the synergies.

Perfect. Thank you very much.

Excuse me, our next question comes from Mr. Tito Labarta from Deutsche Bank.

Hi, good morning. I just have a couple of questions. Just a follow up in terms of asset quality, and you mentioned -- kind of what you expect for NPLs. But I just wanted to get a sense in terms of the provisioning levels, which also fell in the quarter. Do you expect that to remain pretty stable throughout the year? Do you think that could decline further? As you say, your coverage ratio also increased (inaudible). Would you feel comfortable lowering your coverage ratio? Just wanted to get some more color on that.

And then my second question -- sorry, another follow up on that credit card business. Two of your largest competitors announced the creation of a new brand. So I just wanted to get your thoughts as to how that new brand could impact your strategy in terms of credit cards, in terms of pricing, growth, etc. So I just wanted to get your thoughts on the impact on the credit card issue because of that. Thank you.

Hi, Tito, Sergio. So regarding bad debt provisions, and NPL movement, it was actually a good surprise, if I may say. Actually, you know, the improvement with NPL was a little bit faster than we expected. And this is -- you know, it reduces, I think, 60 or 70 bps during the first quarter, and our guidance was from 50 to 100 bps during the year.

Although it is a little bit early to get any conclusion on that, what we see is that environments is getting much better, and maybe -- if this is confirmed, maybe we'll see a better scenario, even better than we included in our guidance. So far, we do think that it's too early to change any strategy on this. You know the bank has showing a conservative approach on this, and we are keeping our provisions. The additional provision was not touched during the quarter. And what we are doing, as time goes by, models are getting better and better, and then maybe what is expected, a portion of these additional or generic provisions both could be impacting basically [50] portfolios.

And again, as quarters goes by, the impact in the results with the better scenarios should be back to the same levels that we had pre-crisis. You remember that the total bad debt provisions, or expenses, as a function of the total portfolio, used to be [1.2, 1.3] per quarter pre-crisis. And during last year, it's reached [1.7, 1.8]. So, we believe that we should be at this lower level, [1.2], if this scenario -- this better scenario in terms of delinquency is proved to be permanent.

Your second question, on (inaudible) brands, I cannot comment on competitors' strategy. But we have our own strategy on this segment. We had a very strong brand on the CD classes credit card markets, you know, EPPIcards. EPPICards, is the leader in Northeast region, that is the fast track region, fast growth region in the country.

So, we think that's -- you know, with this very attractive markets, all the competitors should be moving and trying to build up a good strategy to compete in this very competitive scenario. We have our own, and we are quite happy with the increases in the credit card business.

Okay, great. Thank you.

Excuse me, our next question comes from Mr. Victor Galliano from HSBC.

Hi, good morning. Yes, just a couple of follow ups here. Focusing again on operating expenses, you've given us that very useful break up there, of the non-interest expense costs, on slide 13. If we focus on the expansion costs, which is the number BRL347 for 1Q, what do you expect as a run rate for this going forward, during the quarters to come? Do you think it should stay at this sort of level, or increase? I mean, you're talking about adding 150 branches this year. So far this year, you don't seem to have added any new branches, at least to the end of Q1. Can we expect this number to increase going forward on a quarterly basis?

And the second question I had for you is on funding. We've seen the first phase of the increase of the compulsorio. Can we expect those reserve requirements to increase quite a bit further in the second Q, or is other's reserve requirements now the new level? Thank you.

Victor, your first question, we expected a number, in terms of expansion, to be around the same level for the other quarters along the year, because we are opening and expanding the business through the year. It's not easy to open all these branches and hire all these people at once. So I think it's better to consider it -- this kind of level for the coming quarters in your model and your [calculations].

Sergio Werlang will answer you the second part.

So Victor, (inaudible), the increasing reserve requirements that happened right now, basically it's almost put us back -- almost at the previous into where -- where previously to the September 2008 events.

So, we -- there is still room, a little bit of room, for the Central Bank to increase reserve requirements. But it won't have a huge impact on demands, so we don't expect -- because, you know, it's very close to that level in '08. And what we expected, that the Central Bank would just use the usual instrument, which is the interest rate. It's much more effective right now. It doesn't mean that they want to increase a bit the reserve requirements if they feel they should, but it's a very small number, and not really important.

Okay, but that BRL37 billion number now reflects the new level? Because I thought there was some more compulsorio to come through in April.

You are right. We made the deposit of BRL30 billion -- BRL13 billion in the quarter. I think if I'm not wrong, we have to go up to BRL25 billion.

Okay.

But I can give you a more precise number, but I think the number is around BRL25 billion, the total that we have to deposit.

Okay, thanks very much.

Excuse me, our next question comes from Mr. Paul Tucker from Egerton.

Yes, hello, everybody. Most of my questions have been touched upon, but I just wonder whether you could give us a little more clarity on your exposure to some of the peripheral European economies. Now, you give some disclosure in Note 7 about your government securities abroad, and you detail [less] Spain, and you give a helpful breakdown of maturities, and then over the page, the amount of which relates to pledges and to your own portfolio.

But can you just kind of take us through what are those guarantees, what are you doing, if anything, to change your approach to risk, so in terms of haircuts on your repo book or things like that, whether you still own those bonds as a principal? And more generally, then, how do we think about your total aggregate exposure to Portugal, Spain, Greece, including what may be buried in the corporate securities piece as well? Thank you.

We don't have exposure -- relevant exposure in these countries, so -- I mean, the major part of our portfolio is all Brazil or Brazil-linked. And it's just some not relevant parts.

Well, can I just follow up on that? You say it's not relevant, but if I look at Spain, you've got -- what, BRL3.7 billion out of a total of BRL136 billion. So if that were to go to zero, it kind of becomes somewhat relevant for your equity, right? It's not going to take your Tier I ratio to 2%, but I think it's little easy to say it's not relevant.

The major part of it, it's short-term. So, it's in Spain, specifically. Okay? So, it's actually not of a relevant impact.

Okay, but then it's relevant if it's not paid back, so how are you thinking about, just generally, your -- could you just help us understand how those exposures come about, and then how you're thinking about, if anything, any changes that you're making in terms of managing risk?

I don't quite get your question. You want to know if Spain went to zero immediately in terms of value, I think that's then -- you know, what, a much bigger problem than anything else. But definitely, our exposure is very short-term, and that's what it is.

And those exposures come about because they are speculative bond positions that you own? Or, they are collateral that you take in repo transactions? Just help us understand why they're there. Because I -- and I'm sure, sitting in Brazil with GDP growth growing from 6% to 7%, this all feels somewhat distant, and I'm glad it does. But in Europe, it kind of sounds like a much more relevant question.

Those are direct bonds linked to the government of Spain, the majority of them. And as I said, an enormous portion of it will come due until the end of May.

Okay, thanks.

Excuse me, our next question comes from Mr. Jorg Friedemann from Merrill Lynch.

Yes, thank you for the opportunity. Just an instructive question, if I may. I understand you consolidated credit card, and I also have credit card fees coming from interchange (inaudible). Could you provide a rough approximation of which portion, out of these BRL1.5 billion reported as credit card fees comes from individuals?

We don't have here this information, Jorg. But we can provide you later, if you need. You call here, (inaudible), he will give you.

Okay, perfect. Thank you.

Excuse me, our next question comes from Mr. Paulo [Avedo] from HSBC.

Good morning. I just wanted to drill down a little further on the EPPICard question that -- you know, you talk about your reaction to (inaudible), that you already have EPPICard that targets C and D classes. Would you consider opening it up to be an open loop association with other issuers and other acquirers, or could you also just give Redecard the acquiring portion and still keep just the issuing card with Itau? Can you tell me what do you think and what you think you could do, given the regulatory framework? Thank you.

We are analyzing all the movements that we have in the market. Of course, this announcement of the joint -- JV between (inaudible) and Banco de Brasil, and make us think about what we can do, and what we should do in this business.

So we are analyzing -- you know, that if EPPICard is a strong brand, that we have 13 million cards, and we have a very good presence in this -- no banking clients of ours, we have a very good market share, and so on.

So we already are in this position. We already are in this business. But we have to analyze all the movements, and also the regulatory changes that are under discussion. But anything that is happening in these credit card markets, and we have a very good position, and of course, we want to keep our pace and our market share.

We have to analyze carefully all the movements that we can do, intend to do, or plan to do. We have not decided anything yet, but of course, all the transactions has to be very transparent, and we will announce if any, the time -- it's okay. But of course, it is a market that has many changes in competition, regulatory, and so on. So we have to be careful in the movement that we have, because of the share that we already have in all these segments.

And that is -- well, would Redecard be your vehicle for acquiring, like Banco de Brasil, and (inaudible) have defined (inaudible) as their acquiring vehicle?

Everything is under discussion. We have not yet a decision what will -- that what are we going to do. As I said, we have a new movement, a new competitor, a potential new competitor, this JV between these two banks. And we'll have to know, it's carefully -- the movement that we are going to do from now on, considering the companies, the shareholders, and so on. It's not -- it's premature to say what are we going to do? But it is, we are in discussions inside. We were already, before, not only because of this movement. Of course, it's a very important part of our business.

So we are careful, and we are not going to take decisions under the pressure. So we are confident we have a good position, and we are going to keep it as a strategic business (inaudible).

Thank you very much.

Thank you. This concludes today's question and answer session. Mr. Setubal, at this time, you may proceed with your closing statements, sir.

Thank you all for being with us. I'd just like you to know that Silvio de Carvalho, that worked at Itau for almost 40 years, is leaving the Company, because he achieved the bylaws -- by our bylaws, the limit of the age. And Silvio has done a tremendous job here with us all this time, and especially in the last 16 years in these Investor Relations road shows, and attending all the analysts and so on, and I want thank you, Silvio, for all this work.

And thank you all for the presence here with us through this conference call. I think that we had a very good result. We are very confident about our position, our share, and we expect to continue to provide good numbers in the coming quarters, and we believe the Brazilian economy will continue to be strong.

Just to finalize this issue about Spain that Paul Tucker asked us, the number is BRL1.5 billion -- it's not BRL2.2 billion. The correct number is BRL1.5 billion is our exposure in the short-term securities that matures month of May.

Thank you all, and we are here, open to questions in the coming days, if you have more details and so on. Thank you.

That does conclude our Itau Unibanco Holding earnings conference call for today. Thank you very much for your participation, and have a good day. Thank you.