伊塔烏聯合銀行 (ITUB) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holdings Conference Call to discuss 2014 second quarter results.

(Operator instructions)

As a reminder, this conference is being recorded and broadcasted live on the Investor Relations website, at www.itau.com.br/investor-relations.

A slide presentation is also available on the site. The replay of this conference will be available until August 12th by phone on 5511-3193-1012, or 5511-2820-4012, access code 7861233#.

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 that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks, and other factors.

With us today in this conference call on Sao Paulo are Mr. Alfredo Egydio Setubal, Executive Vice President and Investor Relations Officer, Mr. Caio Ibrahim David, Chief Financial Officer, and Mr. Marcelo Kopel, Corporate Controller Director and Head of Investor Relations.

First, Mr. Alfredo Setubal will comment on the 2014 second quarter results. 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 is a pleasure for us to be here, to talk about our second quarter results.

For those who are following through the slides, on slide number two, the highlights for the quarter. The first one is the recurrent net income, almost BLR5 billion. There was a growth of 9.8 when we compared to the first quarter, and 33.2 compared to last year.

Recurrent ROE, also a very solid number, at 23.2% in the quarter, an increase of 110 basis points, compared to the first quarter of the year, and 380 basis points compared to last year. The better quality of credit also is very important.

We achieved the lowest level ever in the history of the bank, 3.4% due to the better mix in terms of credit, with lower risk lines growing more than others. That's the main reason for that improvement of 10 basis points in 2Q when we compare to the first quarter of this year, and 80 basis points when we compare to last year.

Financial margin was declined, [and] 7.1% this quarter. The total number in BRL was 12.7 billion, an increase of 10.6 % when we compare to the first half of 2013. This is an important line, showing that we are growing revenues here with our clients, due to more business and also, of course, of - also with more spreads due to the reality of the economy in Brazil right now.

Financial margin with market, also a good quarter, with a total result of BRL881 million, which is an important increase when we compare to the first quarter of this year, up 43.6%, and also when we compare to the first half of last year, 73% over.

Loan/loss provision expenses BRL4.5 billion in this quarter, an increase of 5% due to some product lines that are increasing in terms of delinquency, but the total mix of the portfolio, the [NPL] was 3.4, as I said before.

Commissions and fees continue to grow, BRL6.3 billion in the quarter. It was a good improvement in the second quarter when we compare to the first quarter, and also to - when we compare to last year, with an increase of 17.8%.

Non-interest expenses, a total of BRL9.6 billion in the quarter, an increase of 10.1% when we compare to last year, but this we do not consider the acquisition of Credicard of last year, and by the end of last year the total improvement, the total growth of non-interest expenses, would be almost in line, a little bit above inflation, 7.1%.

All this compounded together, we saw an improvement in our efficiency ratio of 60 basis points. We achieved 47.1% in this quarter, and the risk adjusted efficiency ratio with the [NPLs] and claims from insurance also improved a lot, and reached 64.8.

And the loan portfolio, the total risk considering the private portfolio of the bank in terms of securities - the total was 10.9 when we compared to the last year, and an improvement of 2% this quarter.

On page three, we see the results more open. I think it is important to note here that we improved the recovery of credit [with enough] to BLR1.2 billion this quarter, and also the income from insurance, almost BLR2.2 billion in the quarter with a little increase, 3.3%, when we compare to the first quarter. This resulted in recurrent net income of BLR4.9 billion in the quarter.

We see on page four the financial market [bit] market. We had a much better quarter this period, and we also increased our average to BLR628 million when we saw 12 months behind.

The ROE, on page five, 22.7, was a very good one, since we are in a good trend in terms of results. And the average for the last 12 months, 22.8.

The loan portfolio continued to increase slowly because of the restrictions, more restrictions in terms of selecting the clients, and also due to the pace of the economy that is very low at this moment. But at the end we see an issue with BLR518 billion, including here the corporate private securities that we held in our books, of almost BLR31 billion.

So considering these numbers, our growth in 12 months, 10.9%, and 2% in the quarter, we continue the trend to reduce the risk of the loan portfolio. We continue to increase our payroll loans that achieved BLR30 billion, an increase of 21% in this quarter. This growth was impacted by the acquisition of almost BLR3.8 billion in this quarter, our portfolio from the BMG bank. We bought that in the JV of Itau and BMG. This BLR3.8 billion, two-thirds of that was bought by the end of June, and BLR1 billion during the quarter.

So this growth with acquisition, and most of that didn't have an impact in terms of margin, in terms of revenues, in this quarter. Of course, this was important in terms of growing this portfolio, as we mentioned, and now a material fact when we announced the JV, that that was a possibility that the JV buying portfolio from BMG.

So this put the payroll loans in a very good size of portfolio in line with the strategy of the bank to continue to reduce the risk of [default fraud]. Vehicles continued to reduce. We have a reduction of 8% this quarter, and 24, almost 25% compared to last year. The portfolio achieved BLR34 billion.

And mortgage continued to grow BLR26 billion, with a growth of 26% in these 12 months, and 4% in this quarter.

Credicard continued to grow. Of course, here we have the influence - when we compare to last year, because of the acquisition of the credit card business company in December of last year.

In terms of companies, we continue to grow our corporate business. The total growth on the quarter was 2.3%. The total portfolio finished with BLR196 billion, in line also with the strategy of reduce the total risk of the portfolio. We consider the corporate loans a low delinquency business, so this is in line.

And we continue to reduce the base, the portfolio of this very small and medium-market companies. We finished with almost BLR83 billion, with a reduction in the quarter of 1.1% and 4% when we compare to last year, so the strategy continues to be the same, with reduction in some credit lines, and increasing the - more of the credit lines with lower risks to our books, especially in this moment when the economy continues to show very low growth in terms of GDP.

On page seven, we see the financial margin breakdown. We see where did the growth come from in this quarter. So we started - we finished the first quarter of 2014 with BLR11.8 billion, and finished with BLR 12.7 billion. In terms of financial margin, we declined. And this difference came from BLR427 million, because of the mix of the products and the spread that continues to increase a little bit. And we had, of course, the influence in the revolving lines of credit portfolio that we renewed this quarter.

The calendar days, we have more days, one more day, in this quarter so we have more revenues. BLR132 million SELIC rate operations, BLR105 million positive. Volume of loans operations, BLR46 million, and 128 from several small lines that have influenced it, but also showed some growth. So we finished this quarter with BLR12.7 billion in terms of margin with - financial margin risk [clined]. What is a good sign in terms for the future, that we continue in recovering the growth of business with decline.

On page 8, we see the net interest margin reaching 11.4% in the quarter, the same level that we were one year ago, two behind, and this quarter achieved the - much higher levels. This was influenced by the SELIC rate. Of course, that increased during this period of 12 months. And the increase of the spread in the period, as I said, because of the growth of the SELIC and the increase of risk in the overall economy because of the reduction of the pace of the growth.

On page nine, we can see the credit quality, 90 days in duration. We continue to show improvement in this line. We finished the total consolidated number is 3.4%, both individuals and companies showed improvement. And we see some room yet, due to the mix of our portfolio in the coming quarters. We see some room for these numbers to have some improvement yet in the coming period.

Coverage ratio finished in the same level as last quarter, 176 (inaudible).

On page 10, we see the loan/loss provision expenses, 4.5% this quarter, and considering the recovers, 3.2%. As I said, recover improved this quarter.

We finished with BLR24 billion in terms of total provisions. Of these, BLR5.2 is complementary, that we maintain the same level in the - for many, many quarters already.

On page 11, we see the trend of the NPL as between 15 and 90 days. We can see here that the trend continued to be very positive. We improved 30 basis points in this quarter, in the overall portfolio, both improvement in terms of individuals and companies, what gives us confidence to believe that we will continue to have no problems in the coming quarters, in terms of delinquencies above 90 days. So that's a good sign, and these numbers confirm this trend.

On page 12, we can see commissions and fees, and also the results of some insurance business. We continue to grow the fees and commissions in this period, in terms of business, an increase of clients - number of clients, and of course, some impact here from the acquisition of Credicard in the end of 2013.

The results from insurance also contribute a lot in terms of business, and the overall numbers for fees continuing to be a little bit above our estimate, and in line with the strategy of growing the fees, also to reduce the impact of independence of revenues coming from - exclusively from credit operations.

On page 15, we can see our results of BLR4.9 billion in the quarter, recurrent net income. And we split here between the banking operations and insurance operations and excess of capital. When we see the banking operation, we can see here that - from the BLR4.9 billion end results, BLR4.1 billion came from the banking operations, with the ROE - with the [relocated] capital of BLR 23.8, deficiency ratio of 49.4, and risk adjusted deficiency ratio was 67.5.

We see the insurance operations, the result was BLR736 million. And here we can see how good is the operation in terms of ROE, [say] 69.1%, almost 70% of ROE for this insurance business. Efficiency ratio of 33.2, and risk adjusted efficiency ratio, considering the claims, at 63.6. So we can see that the insurance operation has solid numbers, and very good contribution in terms of ROE and efficiency ratio.

On page 14, we have more details. As you know, the strategy of the bank here in this business is to concentrate in bancassurance. And that's the reason we announced last - in March, that we sold the corporate - the big risks, the corporate big risks. We were leaders, but in line with the strategy of concentration of the insurance business in our channels, where we can directly sell products to our clients, especially in terms of pension and capitalization, and all the related bancassurance products, we announced this selling.

61% of the revenue of our business came from traditional insurance products, 28% from pension plans, and 11% from capitalization. We have BLR3.3 billion, in terms of revenues, considering these numbers the 30% participation that we have in the Porto Seguro group, so the total revenue of BLR3.3 billion, retained claims 979, selling expenses 425 million. And so this results in a net operation revenue of BLR1.9 billion.

So the final number, 733, considering the expenses of the company and of the business in terms of Porto Seguro, and expense that we allocated to this insurance business. So as we can see, we have a very good business and contribute a lot to our bottom line.

Non-interest expenses, not considering the credit card expenses in this year, so we can see that there is, in non-interest expenses, the growth of 7.1%, a little bit above the inflation level. Not excluding the Credicard business that we acquired, the growth was 10.1%, in line with the perspective that we have for this year.

Here we can see also the efficiency ratio, and that we continue to show improvement. And when we saw the efficiency ratio risk-adjusted, to the claims and to the NPL, we see improvement. And it is the best number that we achieved in these two years, and also an improvement in the traditional efficiency ratio, achieving 47.[1].

Capital rates, on page 16, we finished with 11%, a little bit lower than in the beginning of the quarter. And we show here how this number was compounded to achieve this 11% of Basel III, considering Basel III calculations to the - so we believe that we are in a very good position in terms of capital requirements for the coming quarter, as long as we continue to have a good result in capitalizing most of the results in our capital.

On page 17, you see the market capitalization for the bank by the end of the quarter, BLR170 [point], and a daily liquidity of our shares of BLR725 million, mostly they were divided between New York and Sao Paulo exchanges.

On page 18, we are keeping our expectations for this year total (inaudible) portfolio. Probably the growth will be around 10%, maybe a little bit lower depending on the pace of the economy for this coming month. And the loan loss provisions, net of recoveries, BLR13 billion to BLR15 billion, commissions and fees growth of 12 to 14. We are a little bit above these levels up to now, but we are not moving and changing the expectation at this moment.

Non-interest expense is 10.5. We are [debt] to 12.5. This is not considering Credicard, 52 - 0.527.5. It probably will be in line to these numbers as we saw in the - by the end of this quarter, we are 10.1 and 7%. So probably we will be close to that numbers by the end of the year also.

And efficiency ratio improvement of [58] points to 175. I think this also will continue to improve the numbers and achieve this level.

And to finalize, page 19, large risks and insurance business we sold, and we announced by [being] off last month, we sold [the rate] to - by BLR1.5 billion. And what we are transferring to them is the stockholders' equity of BLR[364] million, assets of BLR5.6 billion, [technical] provisions of [26], and BLR323 [billion].

The effect when these (inaudible) is approved by the authorities, the impact, pretext, and now our net income will be BLR1.1 billion of this transaction.

This finishes the presentation and we now can open for questions that we [totally] have to answer.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions)

Our first question comes from Mr. Carlos Macedo with Goldman Sachs.

Thank you. Good morning, gentlemen, and congrats on the strong results. I have a couple of questions.

First, on your margins we did see a big increase in the quarter, probably more in line with the fourth quarter than the first. We do know there's some seasonality there. But given that rates have, for the time being, stopped going up, and the change in mix in your portfolio, what's the outlook here? Should we expect that we're going to continue see these - the credit spreads going up, or is it something that we will probably - you're probably going start leveling off now, towards the end of the year?

The second question is on expenses. You reported expense growth of 10% so far, and your guidance is - at the low of your guidance. And the difference from Credicard is only three percentage points. Now that the big hump in expenses for the year, the non-recurring hump, which was the World Cup, is behind you, is there room for expenses to grow less than 10%, particularly given that Credicard has had a much smaller impact on your expenses than I think you originally imagined, or at least is expected in your guidance? Thanks.

Good morning, Carlos. In terms of the margins, the way we see our NIMs we believe it will level off or be a slight variation to what the levels we are now. And the outlook for credit spread is, it should stay where it is now when you look at - on a product-by-product. So, at the end of the day, what could actually generate variations against our numbers is truly the speed of growth between the different portfolios we have, which will obviously have its own impact on the NII and the NIM as well.

In terms of expense growth, you mentioned, you know, the events we had with the World Cup, and so on, and so forth. But our guidance already took into account the calendarization of such expenses. So, basically, you know, what we have is upcoming in front of us, we have the bank employees annual adjustment salaries. So our guidance already takes into account the different factors that could influence the run rate of our expenses.

So we are comfortable with the level of guidance we gave, and we are, you know - so for the time being, we should not revise that.

But are you - would you be more comfortable with the top end or the bottom end of the guidance, given you are at the bottom . . . .

No, we will probably - we will probably stay within the middle of that for the time being. But if we see need - you know, if the third quarter comes with, let's say, better news, we will address that in our next conference.

So, I mean, just reading through the numbers here, you would expect an acceleration in the pace of growth of expenses in the second half of the year?

Yes, if the business gets - goes faster. But remember, our payroll is a meaningful expense in our numbers. So around 40% to 45% of our expense base is payroll-related. And we have the upcoming increase. So you would see the acceleration, just by the fact that we're going to have that adjustment, you will see an acceleration in the upcoming quarters.

OK. Thank you.

Our next question comes from Mr. Tito Labarta with Deutsche Bank.

Hi. Good morning, and thanks for the call. My question is on asset quality.

I think you mentioned - maybe you could see a little bit more improvement. But I just want to get a sense, because we did see some deterioration at your peers in the quarter. You know, if you do think you can see some improvements, maybe, from the change in mix, how much more could it improve?

And then - but also, like, when do you think that the cycle will start to change? At what point - I mean, while I understand asset quality should be under control, but at what point do you think NPLs could start picking up for your portfolio? Thank you.

Tito, the improvements - you know, those will be really slight improvements. You're talking about, let's say, 10 to 15 or maybe 20 [bips]. And it's truly a function of how we have less risky portfolios outgrowing the riskier ones. So it's truly a small, a much smaller - if that happens, a much more - smaller improvement.

In terms of further looking out toward 2015, the outlook is very dependent on the macroeconomic conditions. So we continue with our risk appetite, and we will continue, let's say, fostering the growth of the secured portfolios. So you could expect corporate loans and payroll and mortgages outgrowing the other products.

And if we have, let's say, better news from the economic front, you could see other portfolios accelerating, but not necessarily meaning, or actually not meaning that we're going to change our risk appetite for those products.

Great. Thank you. Maybe just one quick follow-up then. In terms of provisions, would you feel comfortable saying that you should be at the low end of the [BLR]14 to [BLR]15 billion guidance in provisions?

And any chance you think it could be even below that?

No. As of what we see now, we are seeing ourselves at the low end of the guidance. Should we have, let's say, additional positive news in terms of the NPLs, this could translate into, let's say, better news on that. But as of now, we are seeing ourselves at the low end of the guidance.

All right. Perfect. Thank you very much.

Our next question comes from Mr. Saul Martinez with JPMorgan.

Hi, guys. Congratulations on the very, very strong results.

I have two questions. First, it's more, I guess, of a big picture question on earnings and ROE and profitability, sustainability. You grew earnings 10%, recurring earnings 10% sequentially, off of a good first quarter. And 37%, I believe, year on year. Your ROE, on a recurring basis, is 24%, so even if you factor in high rates in Brazil, it's a very, very strong result.

And when you talk about trends, it seems like, you know, NIMs are stabilizing, asset quality's fine, fee growth is good, you have costs under control. It doesn't seem like they're - that you're seeing too many headwinds in terms of earnings dynamics going forward.

So how do you think about, you know, in the next, not necessarily medium-term, but in the next two, three, four quarters, are these levels of ROEs, in the 23%, 24% range - should they continue to be - are they sustainable? Because it doesn't seem like there are too many headwinds that won't allow you to sustain the profitability you generated this quarter, which was exceptionally strong.

For the short-term, as you asked, Saul, it's something that one could expect, you know, in the neighborhood of where we are. Because, let's say the portfolio is already [reprising], and given the outlook we have for the rest of the year, one could expect that level to be sustained.

When you look at longer-term, then it's a different picture because there are too many moving parts, and the major moving part is truly for how long, you know, we can - as you said, we can continue to grow as we are growing, and with the economy at a slow pace. Remember, we've been improving, you know, our cost base. You know, for two consecutive years we grew below inflation. We collected a lot of benefits out of our reduction in terms of the risk exposure.

So short-term, it's doable. Longer-term, we really need to reassess it against the macroeconomic backdrop.

OK. That's fair.

Second question is on your cost of risk. And I guess it's a follow-up to some of the previous questions. We did see a 5% q-on-q increase in gross loan/loss provisions. The provisions to loans went up a bit. And that even includes some reclassifications, some benefit of reclassifying to A to AA. I think BRL80 million, so it would have grown a little bit faster than that. I mean, taking into consideration, obviously, the headline NPLs improved, but your provisioning level is growing.

Where do you see the cost of risk or provisions to loans going to in the next two to four quarters?

We think - so, in terms of numbers, the way we see our cost of credit for the coming quarter, we see the - you know, it's a slight increase, which is aligned with what we guided for the year.

When you look at what we guided for the year, we said, you know, cost of credit net of recoveries would be between BLR13 billion and BLR15 billion. Even with that increase, which we already forecasted, due to the portfolio dynamics, we believe we're going to be in the bottom end of the guidance. So that is basically how we see it. So if we were forecasting that, and we expect to be in line with that.

In terms of NPL creation, we had an increase in the first quarter when you compared that with the fourth quarter. But now we should see that, again, with a relatively stable, or a slight improvement, on that as well. So we are comfortable with the scenario that we guided earlier in the year.

OK. That's very helpful. Thank you, Marcelo.

Thank you.

Our next question comes from Mr. Morris Molina, with [Centendad].

Yes, I have a - one question with your call, tier one [back for] free, fully loaded, capital ratio. When you talk about the mitigation impact on your insurance business, is this exclusively related to the sale of your large insurance business, or do you plan additional divestitures or restructuring of that to improve your capital ratios? And I would have a follow-up question.

Morris, it's not truly related, only related to the sale of our large risk. It's basically the optimization of the capital structure. We have excess capital in our insurance company, so by reviewing the amount of capital that we need to have in our insurance company, and flowing it back to the parent company, that will by itself optimize our capital structure, help optimize our capital structure.

Does this involve moving the leasing subsidiaries on those units that you have hanging from your insurance companies, that are not properly insurance, or does it involve talking to your insurance regulator and telling him, "Look, we have too much capital. Can we take some back?"

Because there seems to be an impression that there is a pressure from the regulatory front to have, or keep, the capital - the current levels of capital, so it's a bit pertinent to see how this is achieved.

Well, it's a combination of both. Actually, talking to regulators where it makes sense, where we have a case where we have excess capital. And regulators are very sensitive to that. So, you know, you could have - one could argue that you can have some excess capital but, you know, we have the case where we can demonstrate that there is room for us to reduce the capital base. And some of that actually was a boost.

So when we see mitigating actions in progress, a part of this point A is already being implemented as we speak. So - and part of the investment as well. So a combination of restructuring the legal entities and reducing capital is what we are talking about in those two items.

OK, wonderful. Thank you.

And my second question is related to the process of your acquisition or your joint venture with CorpBanca in Chile. Do you have any progress update of how the completion of the deal is going ahead, and the issues with the lawsuits?

And I would also like to see if you have any comments regarding the motivation for the IFC to address and make an investment, and I don't know how much it costs them to hire an investment bank to evaluate the deal. We believe that they do have veto power over this transaction, and where you would be willing to renegotiate if they find something that they don't like in terms of the structure of the deal?

Yes, what is real constant about the approval process of this transaction, you know, we are following up with all the regulators. As you know, there are multiple regulators involved on that. So we are following up with them and approvals are on track. We expect that to be closing by the end of this year, or early next year, so we are confident on that.

In terms of the lawsuits, you know, we - you know, we are following the legal steps on that, but it's against CorpGroup, so we are, you know - but again, as I said, it shouldn't affect the approval timetable that we have.

In terms of what you asked about IFC, IFC is a large shareholder. They have their duties and they know what they've got to do. So if they ask for, let's say, an independent opinion, it's to give them further comfort, on top of all the opinions we already provided them. So, you know, we continue confident on the transaction and the benefits of this transaction to all shareholders.

Wonderful. Thank you.

Our next question comes from Mr. [Mario Pierre] with Merrill Lynch,

Hi. Good morning, everybody. Let me ask you two questions as well.

The first question is related to your risk appetite. Clearly [right] your NPLs now are at historical lows. The competitive environment in Brazil seems to be much better with some spreads going up.

So I'm more interested in knowing what would make you more excited about growing your loan portfolio? And clearly, I think that the message from the Central Bank recently means reducing reserves and requirements was that they would like to see more credit in the economy. So what would make you more interested and start lending more aggressively again?

And the second question is related to that, I guess. When we think about asset quality going forward, what is your biggest concern? Is it unemployment? Is it inflation? Is it the high interest rate environment? Or is it just like overall weak economic growth? Thank you.

Mario, if we think about the economy in three large groups of clients, think about the clients we do business. And we like the credit risk we have, the profile of this group of clients. And the spreads - we munerate adequately the risks we are underwriting. And these are the clients we currently do business.

In the other extreme, think about a group of clients that they are too risky for our standards, and despite you can charge very large spreads, we are not interested because they - it gives a lot of volatility to our balance sheet. And we - even the returns could be very high, we don't do business with them.

And in the middle, there is a group of clients that - we like the credit risk, but the spreads were not adequate prior to the re-pricing that happened in the market. As the market adjusted the prices and the spreads, and - out of that, we became interested again in doing business with these clients without necessarily changing our risk appetite.

So the message here is truly we don't have - we will not change our risk appetite, but given that you have less, let's say, distortion on the prices on the market. So there is less distortion on market prices. We could be doing business with that group of clients that we like the credit risk, but we weren't doing. So net-net, risk appetite remains the same for the time being without, you know - but we could be addressing this client.

In terms of asset quality going forward, it's really the macroeconomic backdrop that talks to all the other components that you mentioned about the level of indebtedness, the unemployment, and so on and so forth. It's - one comment that I would like to add is, you know, the portfolio that we are growing the most, which is the payroll deducted loans, you know, 80% of that is linked to federal - government employees and pensioners from the government. And 20% is to the private sector.

So even if we have, let's say, continued to have a slow economy, the growth - let's say, the fact that we are having this portfolio outgrowing the market doesn't become a very big concern given the profile of its borrowers.

I don't know if that addresses your question.

Yes. Just going back in to what you said about, you know, some groups are too risky for you and you're not really willing to go there, even if their spreads were higher. I also wanted to understand, then, from the other perspective, from the demand perspective. Do you believe that there will be demand today for you to be more aggressive?

So, it seems to me, from what you said, it's much more a distinction that the bank is making, rather than the demand seen there.

I think, you know, what you said, it could be applicable to certain products. So, for example, in [Vecu]. It's an industry - it's not something that is happening to us, but it's happening the industry. There is no consumer demand for borrowing. So it doesn't - you know, even if we were willing to lend more, or we are willing to lend more given the credit appetite we have, the demand is very soft on that particular case.

So on a case by case basis, you know, we believe there could be something related to risk appetite, but a lot related to, let's say, borrowing appetite as well.

OK. Thank you.

Our next question comes from Mr. Marcelo Telles, with Credit Suisse.

Hi. Good morning, gentlemen. Congratulations on a very, very good result. I have two questions.

The first quarter [means], I look at your credit margin, extended credit (inaudible) in the quarter. And it seems that the, you know, the purchase of the payroll portfolio had a very small contribution, you know, to that. So about BLR130 million. So it seems that those results are real and genuine, you know, increase in the spreads in the quarter.

So my question is, which segments drove that? I mean, is it fair to say that revolving credit lines, you know, were the main reason behind? And [I believe] that is still, you know, even though maybe the spreads of the margin are not a good (inaudible) to increase from current levels, we still have the re-pricing of the (inaudible) longer [tenure longs], you still, you know, upset your P&L in the coming quarters. I mean, is this a correct assessment?

And the second question is regarding the - 2015, particularly with regards to the asset quality cycle. I know you addressed, to some extent, that already in previous questions. But if you think about, you know, a very low economic growth environment next year, how do you think the asset quality cycle will play out? What could make that asset quality cycle different, let's say, next year in our low growth economy, versus, let's say, the deterioration cycle we saw, you know, from the - into 2011 and 2012?

What is different today that really - if you can be specific [even though] the action has been taken, and the sort of risk you are taking, that would be great.

OK. Let's start with the last question, and then we'll go back to the first one, Telles.

I think the main difference is the feed where we are getting. You know, we're coming from a slow economy already. And we are getting to, let's say, another year. Our GDP focus for next year is 1.5%, and for this year it's 0.7%. So we're already getting into a year with a slow growth in our loan portfolio, which is probably different than what we saw in the past. In the past we were coming at a much faster pace, with a much different credit profile.

I'm not trying to say we're not going to have any issues, we're not going to have any problems. But I'm saying that the behavior on certain products could repeat themselves, of what happened in the past. But given the fact that we are now being more selective on the clients we select and the clients we do business, and also the type of products we do business with, this time it should be different.

So if we had, let's say, a much higher increase in the past, now we could have an increase in the NPL, but this should be, let's say, offset or partially offset by the - both the type of clients we are doing business, and the product types we are doing business. So I am not discarding, let's say, something of a deterioration on NPL, but, again, we have to really look to the speed we are getting into the next year, in terms of loan growth, and the mix of clients and products.

Back to your first question, about credit margin expansion, the revolving spreads also - you know, the short-term product is actually re-priced, and it's a fact. The longer-term loans, they are - they will start re-pricing as we go through quarter by quarter. But remember, we are still looking to foster lower-risk products.

So even though you are - we are re-pricing the portfolios as they mature, let's say, booking new loans, as we have large corporates outgrowing, you know, products that have higher spreads, this means that, you know, if one would expect NIM expansions, that would be kind of hard to see.

But at least we could see, at least, like credit margins stable, whereas you probably have a - you know, the negative [links] effect, but on the other hand it has some re-pricing. So is it possible for - to keep your credit margin stable over the next, let's say, two to three quarters?

I would say, for the next two to three quarters, you could see a fluctuation. You could see it going down because of the mixed pressure we have. But not materially down, the NIM. OK. The NII should follow the portfolio.

Perfect. Thank you.

Our next question comes from [Nana O'Leary] with [Morningsales].

Hi. Good morning. Thank you very much for the presentation, and congratulations on the very strong result.

One of my questions has already been answered, and I have a couple additional ones, if I may. The first one is related to the impact of the relaxation of the macro-prudential measures, the recent one - the recent relaxation of these measures by the Central Bank, in particular in terms of your loan growth and in terms of the - your core or common equity tier one ratio.

And the second question is related to how you see the evolution, basically, of that ratio. Currently, your fully-loaded common equity tier one ratio, without these measures, is at 11%. So, where should we expect that ratio going forward? Thank you.

Thank you, Nana.

If you follow me onto the presentation, on page 16, that will probably help in the answer. When you talk about the relaxation of the measures, you're really talking about 10 basis points improvement in our [BIF] ratio. So when you look at that chart, from the left bar to the far right bar, basically we put all the components here, and how we see this thing growing.

You asked about the loan growth impact of the relaxation of the measures. We have the range of 10% to 13% loan growth, and we believe this could help us achieving the low-end of the loan growth, because when we provided that loan growth guidance, we basically were operating under a much higher GDP growth scenario.

So, the GDP has changed and we are, let's say, working toward reaching the low end of the guidance. So that doesn't change our view in terms of how we're going to be seeing our portfolio grow for the year.

In terms of the evolution, if you look at all the measures, all the actions we listed here in the chart on page 16, basically at the end of - if we were to implement Basel III fully loaded today, with all the measures that we are already working, that means that we would have a fully loaded [CET] of 11%. So it makes us, let's say, comfortable that we are working the right direction, with the actions we are taking to manage our capital base.

Thank you. So, you're - so, the recent relaxation of the - or the reduction of risk-weighted assets in certain segments would not have - would have a 10 basis point impact on the common equity tier one ratio? In addition to . . .

Yes.

. . . well, all the measures that you have laid out on slide 16?

No, it's listed here. It's the third - actually, when you start with the 11.5% of the current . . .

Oh, I see.

. . . the third bar, impact of the new rules of July '14, it's basically what it just mentioned.

Thank you very much. That's clear.

Thank you.

Our next question comes from Carlos Gomes Lopes, with HSBC.

Hi. Hello.

Hi. Go ahead.

Hi. Two questions. First, on the CorpBanca transaction, can you give some update about its estimated effect on your tier one capital ratio? Originally, I believe you said - I heard 100 basis points, and it was [30]. So I would like to know, in your latest calculations, how much of an input - impact?

And second, I noticed that your investment portfolio, as you show in your report, has recently [flat] since December, 2012, at about the same level. Is that part of, shall we say, limited risk appetite on the investment side? Or should we interpret it in any other way? Thank you.

Carlos, regarding CorpBanca, the estimated impact on this transaction starts with something around 15 basis points, going all - going up to 50 basis point on our capital base. So that's when it's fully in effect, and fully implemented, we expect to be with 50 basis points impact on our capital base.

In terms of the investment portfolio, I mean, we don't have anything special to comment about that. It's primarily being managed as we were managing it during the previous quarter.

OK. And if I may add, in the past you have had - you used to have a policy of having some forex exposure. Several years ago you moved to a fully hedged balance sheet. Have you considered reviewing that policy and perhaps having some part of your capital in U.S. dollars, or you continue to be 100% reais?

We will - our policy continues to be the same. And execution of the policy typically follows the policy, unless there are not - let's say there's not enough liquidity of deepness in the market to be executing the hedge. But we continue to do that as our policy.

Thank you very much.

Thank you.

Our next question comes from Veronica Armas with [Lorraine Vile].

Hello. Thank you for the call. Just a quick question. I was wondering if you could talk about the outlook you have for the second half of this year, maybe deferred [semester] of the new one, about a whole banking system for Brazil, regarding loan origination growth. And if you could break it down by type of loan. Thanks.

Well, the expectation that you could have more activity in the second half of the year than we had in the year - earlier part of the year. And that is related to - typically, the second part of the year is more active than the first part of the year. And this year in particular, because of the World Cup in Brazil, we had more holidays than the normal which basically, let's say, postponed - could have postponed decisions from companies.

So the outlook is to have, let's say, more activity than in the first quarter. But nothing that will dramatically change the pace of the economy.

OK, great. Thank you.

Thank you.

(Operator Instructions)

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

Thank you, everybody, for participating in this conference call. I think we had a very good quarter. We are in a very good position to continue the trend of growing and keeping the numbers in a very good rate. So I expect to be again with you to the conference call related to the third quarter results.

Thank you.

This concludes Itau Unibanco Holdings Earnings Conference Call for today. Thank you very much for your participation. You may now disconnect.