伊塔烏聯合銀行 (ITUB) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. This is Itau Unibanco Holding conference call about the first-quarter of 2011 earnings. 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 and broadcast live on www.itau-unibanco.com/ir. Our slide presentation is also available on this site.

Before I proceed I want to mention that forward-looking statements will be 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 Sao Paulo are Alfredo Egydio Setubal, Investor Relations Officer; Sergio Ribeiro da Costa Werlang, Executive Vice President of Risk Control and Finance; Caio Ibrahim David, Chief Financial Officer; Rogerio Calderon, Corporate Controller and Head of Investor Relations; Marco Antunes, Accounting Director; and Rodolfo Henrique Fischer, Itau BBA Vice President.

First, Mr. Alfredo Setubal will comment on the first-quarter 2011 earnings. Afterwards management will be available for a question-and-answer session.

It is now my pleasure to turn the call over to Mr. Setubal. Please go ahead, sir.

Good morning for those (inaudible) in the US. Good afternoon for those in Europe. It is a pleasure for us to be back and telling you about our first-quarter results.

For those who are following through the presentation, we are on slide number 2. We are talking the highlights for the quarter. The first one is the results. Recurring net income reached BRL3.6 billion in this quarter, what means ROE annualized of 23.4%. That means an increase of 7% when we compare to the fourth quarter of 2010. And a net income of BRL3.5 billion in the first quarter.

The second highlight is the growth of our loan portfolio. The portfolio finished with BRL345 billion in this quarter. That means a growth of 3.2 -- 22% -- 3.2% when we compare it with the end of 2010, and almost 22% when we compare with the first quarter of 2010. It was a strong and solid growth. The growth was higher than the market. And we continue to focus more on the middle companies and individuals.

The third is the financial margin. The financial margin was BRL10.8 billion with our clients. A solid number four the quarter. And when we compare throughout (inaudible) was 17.2%. In the quarter the margin we [planned] was almost flat. Banking fees totaled BRL4.5 billion, with an increase of '11% in 12 months.

More highlight with the NPL and results of loan losses. The NPLs [of] 90 days remain in the same level for the third quarter in a row at 4.2%.

(inaudible) related to the mix of the portfolio that we have we have seen some deterioration, especially in very small and small companies. We have (inaudible) in the last months, in the last conference call, in the guidance that we provided that we have seen and expecting some deterioration in delinquency because of the increase of the interest rate and macro prevention measures taken by the Central Bank.

So maybe it was under our expectations from the deterioration in the numbers. The total number is okay, 4.2%, when we have seen, as I said, some deterioration especially in small -- existing in very small companies.

For this we made this quarter BRL270 million in provisions above the minimum required by the Central Bank, related to the methodology that we adopt when we consider the potential losses of the revolving credits that we have.

So we continue to expect some deterioration in the next quarter. We expect to make some additional complementary provision in the next quarter. But we expect that the total number of the bank to stabilize around 4.5% during the year. So it is not a huge deterioration, but it is a deterioration that we expected due to the conditions that we are seeing now in the economy in Brazil.

This complementary provision achieved BRL5.1 billion, considering the new provisions that we made in these quarters.

The fifth highlight is the low interest expense. In the quarter when we compare to the fourth quarter of 2010 we saw a decrease of 8.1% due also to the seasonal issues related to the first quarter.

When we saw 2010 we saw an increase of 19%, what is higher than the guidance that we provided for this year around it 12% [to] 13%.

The fourth slide you can see stable managerial financial margin and service fees. In the quarter this number remained almost flat, a 1.2% decrease. But that grow from 12% when we compare to the 12 months.

Loan losses, BRL3.2 billion, an increase of 21.7% due to the [real] additional provision that we made in this quarter that I already said in the previous slide. Noninterest expense at BRL7.7 billion, a decrease of 8.1% in the quarter.

On slide number 5, you can see net interest margin with our clients, a decrease in the quarter from 12.2% to 11.7%. That is too a very good number, and it is related especially to credit card, that we had a very strong position in the market of credit card in the first quarter. You can see that it happened in the first quarter of 2010 that we saw a decrease especially related to the credit card debt.

But it is our expectation that the [net interest] will be back to the previous levels in the coming quarters.

Banking fees, stable in the quarter. Also related to [IFRS] accounting services and credit cards. ROE, 23.4% in the quarter -- the first quarter. This number is along our expectations for the future.

On slide number 6 you can see the growth of the total assets, 3.7% in the quarter, 23.5% in 12 months. Also related to securities and also related to the growth of the credit portfolio that was very strong in this period.

Stockholders equity, BRL63.7 billion, strong growth of 4.7 due to some gains that were accounted directly in the portfolio's equity in this period.

The loan portfolio, 3.4% in the quarter. As I said, our growth was higher than the total market released by the Central Bank. And almost ready 22% when we compare it to 12 months.

In spending, a growth of 3.3%. The bulk of any client money under management that (inaudible) in this quarter.

On slide number 7 we can see more numbers, more details about our results. I think it is important to see the financial margin with clients. As we said, a slight small decrease in this quarter, but strong number when we compare to the fourth quarter 2010 was almost stable. And this is important because first quarter was very strong even though business declined. It is the strongest in terms of economic numbers and for the bank. So I think we have, again, strong numbers related to the business that we do with our clients.

What was [down], it was margin with the market. The treasury structure and (inaudible) that showed a decrease in the quarter when we compare to the fourth quarter, and also when we compare to the first quarter of 2010.

So, I think, in terms of financial margin the numbers are good. The numbers showed some decrease, but the number with clients, I think, in our view, is the most important. We saw a very strong and solid number.

Also, I think it is important to see the results from the insurance business. That includes pension plans and capitalization and (inaudible) insurance, traditional with a number of 10.6% in the quarter, which we thought very good.

Loan losses. As I said, we made some additional provisions in this quarter related to the losses that we expected for the coming months. And also, I think recover where this is written off was good when we see the numbers for 12 months, 34.9%, achieving BRL[12.2] billion in the quarter.

(inaudible) expenses reduction of 8.1, in line with the target that we have that will reduce it to have more efficiency in the coming years. Just remember that our target that we announced in the first -- when we released the 2010 numbers is to achieve 41% in efficiency ratio by the end of 2013. So we continue to work hard to achieve this efficiency ratio.

The recurring net income, BRL3.6 billion. Some small nonrecurring events for the net income that we (inaudible) BRL3.5 billion for the quarter. In our view is a very strong number related to -- especially related to clients business.

On slide 8 we can see the loans by type of client. We continued to focus on personal loans, on credit cards. As I said, first quarter usually not strong because of the very strong use of credit cards in the Christmas period and the end of the year. So we continue to focus on individuals, very close with the macro prevention measures taken by the Central Bank. At the end of the year we had some reserve (inaudible) payments and in terms of credit, even though the number -- the sales of new cars a record in Brazil, but the level of financing reduced due to the measures that the Central Bank announced in [December].

Mortgage continues to be strong. We expect that this will be the trend again this year. The 15% (inaudible) and 62% when we saw the numbers compared to March of 2010.

In terms of companies, the [yield] this quarter is strong corporate business, that was the growth 4.2%. Also we've (inaudible) with the mortgage for developers that we include in these numbers. But, anyway, the corporate business is very strong. And also the capital market is not so strong for companies, but anyway, we continued to focus in both segments.

Small and very small companies, the middle-market, continued to be our target, especially the middle-market, very small and small. We reduced (inaudible) the base of concessions of credits in this quarter. Related also to some expectations in the deterioration of the delinquency, especially in very small companies. So we reduced [their take], but we continued to focus our growth, especially to middle companies.

On slide number 9, you can see the trend of the NPL for 90 days. The third quarter in a row with the same average number of 4.2%. And we can see that for individuals that number continues to get better, especially related to the mix that we have. And, also, related to new car financing and markets that usually show last delinquency.

It is not the case when we saw the numbers for companies. Companies increased some 2.9 to 3.1 when we compare the last quarter, especially related to the small and very small companies. In the middle-market and large companies the numbers continue to be very good.

Coverage ratio for 90 days, 173%, which seems to be a strong number, even though we reduced when we compare to the September of 2010 (inaudible) of September when the number was 196%. But, anyway, it is a very comfortable number in terms of coverage.

BRL22.2 billion in provisions for loan losses out there, BRL5 billion additional, both the minimal requirement of the Central Bank regulation. And write-offs of BRL4.1 billion in the first quarter of 2011.

On slide number 10 we can see that we have very comfortable allowance for loan losses. Remember that we have in terms of total provisions are very comfortable. Of course, when we compare to the total portfolio this number is 7.3. But we have good caution to continue to grow the portfolio.

We can see also the result of loan losses compared to the financial markets, 26.9, very -- it is a good reduction when we compare to the peak as well in the second quarter of 2009. The peak number achieved almost 41%. That was the peak of the financial crisis that was started in 2008.

On slide 11 you can see the funding. Funding continued to be not an issue for the growth of the credit portfolio. We continue to find enough funding from clients, especially retail, whereas our basis for deposit, and also then the growth from our (inaudible).

The total funding that were deposit and assets under management and technical provisions, BRL810 billion at 3.3%. And when we compare to the last quarter it is a good (inaudible). When we consider all the instruments and also our free cash flow the total number is BRL1.057 trillion.

On slide 12 banking fees, in line with expectations for the first quarter. We continue to believe that due to the economy growth for this year that we expect to see something between 3.5% to 4%. This number we will see in line and continue to grow at the same pace that we can see, even though a little bit higher that we can see in the 12 months -- compare the 2010 -- March 2010 as well as 2011.

Noninterest expense is on slide 13, 8.1% in terms of reduction. I think it is important to notice that we increased our personnel in 1,800 new employees, especially related to the middle-market operation and the expansion of branches that we opened. And we think that with this we continue to have a good number in terms of personnel expenses in this quarter.

Administrative expenses also we reduced -- an important reduction when we compare to December 2010. So we continued to work hard to achieve this level of 41% in terms of efficiency ratio.

You can see on slide 14 our efficiency ratio in the quarter, 47.8%. And in 12 months (inaudible) 49.5%, above the number that we would like to have. But we continue to believe that we are going to reduce the efficiency ratio to something around a little bit below 47% for the year.

Evolution of our BIS ratio. The BIS ratio, 16.1, very strong, both in terms of [Tier] tangible and Tier 1, very strong numbers. And we have a pending approval of the BRL2.6 billion of Tier 2 in the Central Bank.

If we consider these numbers, the BIS ratio would be 16.6%. So in terms of capital I think it is that not a limitation for Itau Unibanco to continue the growth of the business, especially related to credit to our clients.

On slide 16, you can see the managerial numbers, the pro forma numbers for the first segment that we usually release.

We can see in the first quarter of 2011 that BRL3.6 billion in recurring net income; BRL2.3 billion came from our commercial bank; BRL665 billion from Itau BBA, which is our corporate and investment banking operation; consumer credit, BRL425 million, and treasury in excess of capital, BRL218 million.

So you can see the RAROC, and all the numbers are very good, especially going into the numbers related to client fees.

To summarize, the market capitalization, as demostrated, continued to have a very good liquidity, both in York and Sao Paulo. And our market capitalization by the end of three quarters, BRL175 billion.

Just remember that we would like to show you, and also we are open now to questions that we will probably have for us.

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Daniel Abut, Citi.

Alfredo, good morning. One question on the (inaudible) margin. You explained that to a large extent this was seasonal, and you were expecting it because related to the strength of your credit card business and it happens almost every year. But my question is, did you have in your budget and your expectation for the year this type of decline?

Because you guided for a [250] point improvement in the gross income ratio for the year as a whole, and it is difficult to imagine that happening if the NIM doesn't rebound in a quite meaningful way in the remainder of the year.

You did say in your remarks that you expect the NIM to recover, but I want to get a sense if the decline of 50 basis points quarter-on-quarter surprised you, and was a bit more than you were expecting, or it was pretty much factored in the way you thought about the year as a whole when you gave that guidance for the cost income ratio improvement.

Rogerio Calderson. Good morning. Yes, it is very much in line what we had in our business plan for the year. It didn't surprise.

If you also take a look in the last two years, one of them showed in the shot here just presented by Alfredo, the last two years we had a drop of 30 basis points from 2009 -- 2008 to 2009, and 40 basis points from 2010 -- from 2009 to 2010. Now it is 50 bips. It is very much in line with what the normal seasonality of our NIM behavior.

It is also very much linked to the credit card business. You know, the credit card business is very impacted in the first quarter, since we came from the most important quarter to the less important quarter.

It is also a consequence of the (inaudible) activity process that the bank has been doing. And, also, is a consequence of the vintage maturity. Of course, when we take a look in the total portfolio, the very old portfolios of vintage that are now running off are those with the highest level of NIM.

As we have anticipated, this is a trend that should be compensated in volumes, and this was exactly what happened in the quarter. If you look at the total margin [climb], it is flat. So NIM was compensated by that. It was not a surprise, very much in line with the budget. Totally aligned with the other guidances we made.

So you do expect to have a meaningful rebound in the rest of the year that would likely make the first-quarter NIM the low point [as] has been the case in prior years?

Yes.

My second question is a bit more on the spike on the delinquency, earlier delinquencies. The delinquencies that are up to 90 days, which caused you to conservatively increase your excess reserves, that I assume you expect to consume later in the year as those early delinquencies become real delinquencies.

Could you elaborate more on what's behind it? Part of that is seasonal, I imagine. But not all of that is seasonal. So it was a bit more of what happened in prior years in terms of spike in the early delinquency, in ratio in the first quarter of every year.

So what is behind it? And because the guidance that Alfredo gave that the NPL rate of the whole may get to 5.4%, so only an addition of 30 basis points, seems a little too optimistic in light of what we saw in the early delinquency bucket in the first quarter.

Well, it is -- there is a seasonal impact in this number as well, as you mentioned. But in 2011 it was a bit more than the other years. So more than seasonal, but considered and anticipated when we made the presentation on the last-year figures. So it is again -- it was part of the overall picture we had just now is being captured by our model. We have adopted the model based on our expected losses as from December 2010. It is now capturing now in our models.

One of indicators that shows that is the 31 to 90 days overdue. Not only this one, but this is a much clearer one to show. And it was there. So it is really a little bit more than seasonality, but it was captured in this movement.

Of course, when we talk about deterioration in the portfolio, what we do believe is that this is not actually a strong deterioration. What we see is a slight increase in delinquency during the years, so maybe 20, 30 basis on what we have now. But we cannot anticipate precisely the size of this movement.

What is important is that the expected loss model captured this. And captured not only for the provisioning method, it is also driving our selectivity, our pricing. And it is the business of the bank. It is not only provisioning, it is just a consequence of this.

What I think is important to make an a [session] is that we move based on the market we anticipate we see. So we take all the decisions to protect the results of the bank based on the scenario we are foreseeing.

Would you say that given your models and what you have seen, despite the fact that the early delinquency is up to 90 days have increased more than just what seasonality would indicate, you feel comfortable that the NPL ratio over 90 days should not increase more than an additional 30 basis points or so?

At this point in time it is possibly 23rd bips. We are not sure about this figure, of course. But what we do know is that business is being monetorized and capturing the model. So it is quite a comfortable position right now.

Considering also the mix of the portfolio, don't forget that we are changing -- we have been all selective considering small and very small companies. We are too growing in mortgage, new cars that continue to have low level of delinquency. So I think this expectation is more related to the credit that we provided before, not to the credit and the spreads that we are doing this last month, especially in this quarter.

Jason Mollin, Goldman Sachs.

My question is also a little bit on asset quality. You mentioned that you are seeing this deterioration a bit on the small side of the SME segment. If you can talk about what you're seeing, is there any segment that you are seeing more of industry or what kind of companies are you seeing this slight deterioration in asset quality?

My second question is also on the side of -- you talked about this previously on the other call, but just in terms of expenses and synergies after the merger, if you can give us an update on where you might be seeing some of the synergies coming through? In some of your discussions, in your MD&A you talked about data processing. If you can give us a bit of an update on that front. Thank you.

So, maybe it is better if we make any split between individuals and corporations. In individuals we have some signs of increasing delinquency. However, you know, we are moving from a risk type of credit to a safer type of credit, particularly with important increases in auto loans, particularly on brand-new auto loans, and also in the real estate mortgage business.

So what gives actually a source of a mitigation of this impact when you look at individuals. But we also identified some movements in individual's portfolio, not impacting too much our Itau Unibanco's portfolio, but we do see in the data from the market -- and actually you also could see when based on Central Bank figures just posted.

If you look at corporate, the last corporations are not suffering anything out of this macroeconomic scenario right now, at least. And if you look at the smaller companies, particularly on those very small companies, yes, they suffer more than the other segments. Once again, what drives our selectivity process, what drives our target to further penetrate the markets.

I'm sorry, you have a second question on synergies, right?

Second question on synergies, if you can just give us an update on where we stand and what kind of progress you might be seeing or you could have seen in the first quarter?

Okay, so, I think the affirmative here is so far so good. We have a normal decrease because of seasonality in the first quarter. This normal decrease is 4% or 5%. We had a dropoff 8% -- it starts to show some improvement. And if you look at the segments, as you mentioned, you can see insurance, for instance, we showed some improvement in (inaudible), some improvement in order process, also credit card as a consequence of the integration of the seven platforms into just one. So it is starting to be seen, of course. And it is fair to say most of the movement in expenses in the first quarter was due to seasonality.

On the other side, on the planning side, I think it is worth to be mentioned that we have developed the plans with each one of the managers of this bank. So it is now engaging all the levels of the management. And the targets are there -- parts of the renumeration schemes and parts of the targets for everyone over the next months. So we are quite confident that we're going to deliver on the guidance.

Jorge Kuri, Morgan Stanley.

I do have a question on your margins. There something that is not clear to me. You mentioned that the decline this quarter was due to the credit card seasonality. However, if I look at your spreads, your rate on spread-sensitive products declined 80 basis points first quarter versus fourth quarter. This is in the context of overall industry spreads that increased 390 basis points, and your credit card loans fell 1%.

Now go back to last year. Last year the spread reduction was only 40 basis points, so half of what we saw this year. However, last year spreads in the industry were growing -- sorry, were declining a lot. Spreads actually fell 190 basis points in March of 2010. And your credit card loans fell 2%.

I would have expected, given all of these numbers, that the impact on the credit card would have been significantly lower than last year. It doesn't seem to be the case; it actually seems to be the opposite. So there is something still that I don't understand on what is happening to your margins, especially because spreads have increased a lot in the industry.

So I'm wondering if this has to do, rather than what the credit card seasonality, more with the fact that consumer lending is growing much slower than overall lending, particularly corporate and commercial, which have lower spreads, and therefore, we may continue to see these below expectations margin going forward.

I don't know, I'm really trying to understand what is happening, but certainly there is something else here than the credit card. So I just wanted to get your color on that. That is the first question. I will ask another one later.

Well, I'm not absolutely sure that I understood your first question. But I think you are --.

I can repeat it. No problem. You want me to repeat?

No, no, no. Let me make it and you just confirm if my understanding is correct. I think you are looking at the portion of our net interest margin explanation that addresses the spread sensitive and not interest rate sensitive portion, am I right?

Yes. I am. Yes. But if you look at net interest margins it is the same thing, right?

Okay, so, I think it is much better if we look at the net interest margin, because whenever we look at one of these portions we have some impacts due to the way we showed this figure. Because in the interest rate portion we show what we could name the floating spread we do.

And the spread is on the treasury price, the terms are (inaudible) price. So if you look at the aggregate, that is what I was saying that the drop was 50 bips. Quite similar to the 4 bips showed last year and third bips shows in the previous year.

This was -- it is very much in line with last year, but was a little bit bigger, because we have been moving up in the credit card penetration. So the credit card is increasing this impact in the mix of the portfolio.

All right. So your margins fell 50 basis points this quarter. This is in the context of interest rates that when up in the economy, of spreads that went up 390 basis points, and your credit card portfolios that are still 1%.

But if you look at last year, last year your spreads fell -- your net interest margin fell 40 basis points. However, interest rates were flat, and spreads in the economy fell 190 basis points. I'm not understanding how this has to do with credit cards. It doesn't seem to be related to the credit card, otherwise we would have seen a different impact.

So I am trying to understand what else is impacting your margins beyond this credit card issue. And then what the expectation is for the rest of the year. My concern, and this is what I wanted an answer is, does this have to do more with the fact that consumer credit is growing much slower now, and it is expected to grow much slower during the rest of the year than your corporate credit, which has a significantly lower spread, and therefore, we may see subdued margins for the rest of the year?

I was mentioning credit card when giving additional colors on seasonality. It is not -- you are right, it is not only seasonality. It is also a production of the sales activity process we have been doing the portfolio. It is also a process of the vintage maturity process.

We had some very old vintage that are now running off. They were contributing to a higher level of spreads than the very less one. And the very last ones since the last quarter, they have been growing in terms of spreads in the origination.

So I should add not only seasonality, but also the selectivity process and the vintage. So at the end of the day we never -- we always said that if you look long-term this compression in net interest margin, it is possibly to come. It is not a short-term or maybe not even a medium-term issue, but it is going to be noticed over time.

What we have always said is that any movement in net interest margin should be compensated through higher volumes. This was actually by coincidence, or not, it was exactly what happened in the first quarter.

So if you look at the net interest margin, it was compressed at 50 tips. But once compensated, if you look at the total margin with clients this line was actually flat.

All right. So, let me move on. My second question is on your effective tax rates. It was 28% in the first quarter of 2011, 29% in 2010. What is the expectation for full-year 2011 and full-year 2012?

It is 27%, 28% for this year. In the first quarter it was a little bit lower than this. And if you are looking in comparison with fourth-quarter it was actually -- is a stronger difference, because in fourth quarter was a bit bigger than this average. So it is 27%, 28% is the right number to be using in any model for this year.

And from next year a portion of our social contribution that you know, the tax credit itself, is going to be -- most likely is not going to be sufficient to aggregate the full year. So we should see some increase in the effective tax rate as from 2012. Hard to precise right now the figure, but I am almost sure that it's not going to be below 30%.

Well, 30% is a good number for now, or --?

No, 30% is a good number for 2012. 27%, 28% is a good number for this year.

Saul Martinez, JPMorgan.

I'm going to ask very similar questions, so sorry if I keep beating a dead horse. First, on your NIM progression, it is a follow-up to Jorge's question. I will try to make it a little bit more simplified. But how quickly should we see the impact of higher lending spreads in the system filter their way through your net interest margin?

Obviously, we started to see higher lending spreads show up in the Central Bank data, but that is obviously just for new loans, not for your entire portfolio. And as you mentioned in the past, the durations on those loans have lengthened, so it takes a while for that of to filter through.

Should we be seeing higher lending spreads starting to benefit your net interest margins in the next quarter or is it still a couple of quarters away before we see the NIM progression really benefit from the higher lending spreads you are seeing in the system?

Secondly, on your asset quality, I'm a little confused here, because you guys are just given 30 basis points increase. Your competitors are saying delinquencies aren't going to go up this year. If I look historically NPLs -- across different cycles, you have never had an NPL cycle where NPLs only have increased 30 basis points. They have historically increased substantially more than that.

So I'm a little confused, because you are a more conservative than your peers, but you are arguing that the cycle is going to be historically -- from a historical standpoint a very, very shallow cycle. So I am just curious how confident you are in terms of your own projections about the increase in the delinquency rate?

Okay, so, net interest margin. We should see from now some improvement. It is not going to be a very strong recovery because the portfolio is very big. So the impacts of the recent vintage with a higher level of spreads is going to be noticed over time.

It should impact marginally. It should be more noticed -- to the right side of the driver, and should be more observed in the second half of the year, and then increasingly.

In the terms of the quality of the credits, this increase of 20, 30 bips in the NPL is not precise actually. Based on the data we have now what is important to reaffirm is that based on the expected loss model, we have priced -- we have changed -- we have applied all the impacts of the models, not only in the provisioning, but also in the pricing and in the selective policies by the bank.

So we should also see some consequences of these changes in our behavior towards or in favor of this NPL movement. It is also worth to notice that we have been changing the quality of the portfolio differently from other periods you should be observing. Because what we see now is slight deterioration in the NPL, but on the contrary, we have a movement changing the next mix of the portfolio what could reduce a little bit impact of these movements.

If you're wrong, do you think you're more likely to be wrong and that delinquency rates will be higher or delinquency rates will be lower than your guidance?

What we see now is that this is very much linked with the market economic conditions in Brazil. So what we see is most likely during the next quarter because of this spike in inflation, we can see some increasing in this trend.

However in the second half of this year we should see the other way around movement. So it does start to -- delinquents should start to improve in the second half.

So to better address your question, I think we can be -- we can need additional provisions eventually in the second quarter, and most likely in the second half of the year should be in the other way around.

So what you're pointing to here is that net interest margins are going to benefit more from higher lending spreads likely in the second half, and your asset quality is going to get better in the second half.

So it sounds like you're very optimistic about earnings progression. Those two comments suggest you are pretty optimistic about how earnings will progress in the second half. Is that a fair assessment?

I think I should say optimist, not pretty optimist, because I am referring to small movements in all the directions, so it is not that it is going to be seen when it jumps up or down come. It is a slight movement in the second quarter and a slight movement on the other way around in the second half.

It is normal behavior of the Brazilian economy. It is very much aligned with what we are observing in inflation. So inflation is now hitting its peak probably in the year. Then in the second half should be backwards to the range of the targets inflation by the government.

Okay, great. Thank you very much.

Jonathan Prigoff, Equinox.

You talked a bit about the progression in expenses quarter-on-quarter. I was wondering if you could help me understand the year-on-year change in expenses, and also, I guess, fee income? Because the expense growth was pretty significantly above the annual target you guys gave at the end of last quarter, and the fee income growth was a bit below. I think it was 11% instead of 14 percentage points.

So I'm wondering if that is also something that -- I mean, it is going to have to improve later in the year in order for you to meet that guidance. So I was wondering if you could tell me maybe what didn't work this quarter and what is going to change throughout the year to help you get in line with those targets?

Expenses are now -- when we take quarter-on-quarter is now higher, 19%. Our guidance is up to 13%. It should be back in line to the guidance by the second or most likely the third quarter. And the reason for that is that we had in the second and third quarters last year very strong expenses figures due to the migration, and those are not going to be repeated this year. So we will be back to the guidance by the second, or most likely the third quarter. It was, actually, part of the calculations when we announced the guidance.

The same when referring to fee income. Fee income is now actually (inaudible) 11% quarter-on-quarter. Our guidance was 14% to 16%. Normally fee income accelerates on the second quarter, so we should be soon inside the guidance.

Okay, okay. Thank you.

Mario Pierry, Deutsche Bank.

So most of my questions have been answered, but in terms -- I didn't see you provide your guidance again, so I am assuming the guidance you provided as of the end of the year still remains.

My question then becomes with your loan growth, I think you guided back then loan growth of 16% to 20%. Since then I think your economists have reduced their GDP forecast for Brazil, and also have seen the introduction of more macro prudential measures. So I was just wondering, do you have any reason to be reducing your outlook for loan growth this year?

I would also like to ask, so far from the macro prudential measures implemented by the Central Bank, judging by the data from the Central Bank, we have seen very little impact. Do you work off a base case where more measures could be implemented? Thank you.

The guidance -- you're right, the guidance announced was 16% to 20%. This guidance was built up based on the overall picture of 15% growth in the markets. Although it is right we have a different view in terms of the GDP growth, it is not going to be different in terms of credit growth. It is going to be close to 15% if the measures put in place are effective to that, and so far they are being effective to that.

So we are maintaining keeping our 16% to 20%. What is actually big enough to accommodate is small movements and those are not different from the scenario we had when we announced the guidance.

We disagree with the point that the measures were not strong or not effective in terms of demand. The impact in our overall origination for our auto loans was important, if you consider first quarter this year on first quarter last year we had a reduced 15%. That is not only because of the macro prudentials, it is a very mature portfolio. So we had 5% to 10% growth in auto loans. It is going to be more or less like this. But the impact due to the macro prudentials, they are noticed.

Okay, so then you are assuming that no more macro prudential measures are implemented?

Well, this is not exactly known. We don't know what is going to be done. But it seems based on the minutes of the meetings, etc., it seems that there going to be much more interest rate raisings instead of use of macro prudential. You read, I read, everyone reading this, this is the picture.

But it is the way I mentioned before. So I think the final chapter of this book is the 15% or close to 15%. So more or less market credentials, more or less interest rates should be towards this target anyway. But we, based on the history we see, we believe it is going to be increases in interest rates and not use of macro prudentials in the near future.

All right, thank you very much.

Marcelo Telles, Credit Suisse.

Thanks for the opportunity. Most of my questions have been answered, but I have one question regarding your -- the profitability of your consumer credit business. Look at slide number 16, there was a significant reduction in the RAROC for that segment.

I know it seems like the allocated capital has increased, but I was wondering if you could explain what is driving that profitability down. (inaudible) here, you are probably reflecting the higher capital requirements for vehicle finances, so if you can elaborate on that.

Are you seeing any pressure in any specific subsegment within consumer credit, or maybe it is just provisions? I would appreciate your feedback on that. Thank you.

Well, the main reason you just mentioned. The main reason was the capital allocation process, that was changed during this quarter. But it was also impacted by this seasonality movement that I mentioned in the net interest margin aggregate for the bank. It impacts much more this column to any other one, because this consumer credit is very much credit card business.

That is very clear. Thank you.

Jorge Kuri, Morgan Stanley.

Sorry to take more of your time. I just wanted a bit more granularity on your guidance for loan growth. Is there anything you can say in the different components of your book -- individuals, SME, corporate -- how do you think that is going to play out in terms of growth rates for 2011? Thank you.

Well, the same range for individuals and corporations, so 16% to 20%. I mentioned during this call that auto loans is something between 5% and 10%. I can add another one. SMBs we have 20% to 25%. I also [remember] the mortgage should be at the same pace of less years, so around 40%, 50% year-on-year.

Thank you.

(Operator Instructions). This concludes today's question and answer session. Mr. Setubal, at this time you may proceed with your closing statements.

Thank you all for the your participation. I think we had a good quarter related to our client business, and with strong numbers related to the repayment of clients. And I think we are expecting a slight deterioration in (inaudible). But it has been under control. I think we have been more cautious since we announced that we were detecting the deterioration when the Central Bank started to increase insurance rates some months ago, so we have been more selective. We have improved our pricing models. We have improved our provisions models. So we think everything is under control.

We continue to believe that the economy will grow 3.5%. And [it] will provide a good environment for banking in Brazil. So we continue to be confident that we are going to deliver good numbers for our shareholders in terms of results, and in terms of the efficiency rating in the coming quarters.

So we continue to be very confident in the operations and the solid numbers that we have been releasing quarter by quarter, and we will for sure continue to release in the coming quarters.

Thank you all. And we expect to [see] you again for the second-quarter results that we will release in (inaudible). Thank you.

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