伊塔烏聯合銀行 (ITUB) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holding conference call to discuss 2014 third 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 this site. The replay of this conference call will be available until November 11th by phone on 5511-3193-1012 or 2820-4012, access code 1599139#.

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 in Sao Paulo are Mr. Alfredo Egydio Setubal, Executive Vice President and Investor Relations Officer; Mr. Caio Ibrahim David; Executive Vice President and CFO; and Mr. Marcelo Kopel, Corporate Controller Director and Head of Investor Relations.

First, Mr. Alfredo Setubal will comment on 2014 third quarter results. Afterwards, management will be available for a question-and-answer session.

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

Thank you. Good morning for those who are in the US, good afternoon for those who are in Europe, and a pleasure for us to be here to comment about our third quarter results. For those who are following through the Internet, we are starting on slide number 2, the highlights for the quarter.

First one of course is the result, the net income; the recurring net income of BRL5.5 billion with a solid growth from the second quarter of almost 10% and 34% when we compare to nine months of last year.

These solid results provide a recurring ROE of 24.7%; that is the biggest, the highest ROE in the last years when we compare the quarters, with an increase of 100 basis points from the second quarter and 380 basis points when we compare to last year.

The better credit quality of our credit portfolio, we are also in the lowest level in the history of the Bank, 3.2% when we consider the NPL over 90 days. We were able to improve 20 basis points this quarter and 70 basis points when we compare to last year.

And margin with clients was also again a solid quarter in terms of revenues from the operations from our clients, both in terms of credit, in terms of services, BRL13.3 billion in the quarter.

Financial margin with the market was the best quarter when we compare to the last two years. The conditions of the market and the positions that we're taking and the hedge and everything worked very well this quarter even though the volatility of the local market and international market -- but anyway, was a quarter above the average -- historical average, was a very good performance for us.

Loan loss provisions at BRL4.7 billion which is an increase of 6.2% when we compare to the second quarter. This increase in provisions were more related to the reclassification that were made in some large companies related to some sectors that are not performing very well in the economy -- was more related to these points in these companies. It's not a trend in our view. It was more a point that in our analysis required a little bit more provisions due to the reduction of our internal rating.

Fees and results from insurance also was a good quarter. We continued to focus a lot in terms of fees and insurance products. The growth in the last 12 months was almost 15%; this quarter 4%. If we do not consider the Credicard acquisition that was made last December, the growth in line, just to make things more comparable, would be 11.5%. So I think the strategy of growing fees is correct and we are delivering a good growth in this line.

In terms of expenses, BRL9.8 billion in the quarter. We increased 1.8% and 10.8% in the year in line with the guidance that we provided to the market at the beginning of the year. Because of the acquisition of the Credicard Bank from Citibank in December last year, we are having more expenses especially in technology.

As we announced, we built a huge and very modern new datacenter and we are running the Bank with three datacenters at this point because we are just starting to transfer the systems slowly to the new datacenter in a process that will take more than one year.

So in terms of expenses related to technology and to these datacenters, we are going to have the next year yet with some extra expenses. And probably we are going to shut down one of these three datacenters only in 2016-2017. So we are going to carry some extra expenses in the coming quarters related to this.

If we do not consider the Credicard to make things comparable again, we can see that the growth of expenses were 7.6% in nine months. But it's a little bit above the inflation index, 1%. But it's a good number when we consider all these extra expenses related to technology that we are incurring.

In terms of efficiency, we reached 45.5%. I think we continue to improve in line with the guidance.

The loan portfolio, due to the lower pace of the economy this year in Brazil and last quarter, the growth of the portfolio is not so good. We have 3.2% in the quarter and 10.2% in 12 months. If we include the private securities that we carry, this growth would be 11.5% in 12 months. But the economy is not performing very well, so the credit portfolio and our policies to reduce the risk appetite of the Bank in terms of credit expansion I think is in line with this strategy, the results, the growth of the credit portfolio.

On slide number 3, the results are more open. I think we had a very solid operation (sic - "operating") revenues, BRL23.3 billion in this quarter with a growth of 5.4%. As I said, margin with clients was very good. The growth what it means is that our core business, that is the business of the client, is very solid and growing in a good pace.

Margin with market was, as I said, a very good quarter. It's difficult to forecast new quarters -- coming quarters in terms of results from our heads and our operations with the market and proprietary desk and so on. But anyway, this quarter was very good. The second quarter was a good one also, but this was much better. It's difficult to forecast, as I said, the coming quarters. But the volatility of the market and our position provided these results this quarter.

Commissions and fees, as I said, was a very good quarter. I think the strategy of the Bank in the last years to increase fees and in terms of the acquisitions that we made in terms of Redecard, in terms of Credicard I think is paying off in terms of revenues, and it is also helping to reduce the dependence of our revenues from credit exclusively. So I think the strategy is good.

The result from insurance also was a good one; before claims BRL2.4 billion, also in line with the strategy of growing in terms of bancassurance with products that we can sell through our branches, through our managers and through the Internet. So I think we are concentrating more and more in this for the clients and I think also the result has appeared.

In terms of provisions, as I said, we have an increase in provisions from loan losses, more related to the reclassification of some clients from large companies in some specific sectors. So this is not a trend in our view in terms of increasing the loan loss provisions, but more related to these companies.

Recovery of credits also was high in this quarter also because we recovered especially one client -- one large company also made influence in these numbers. But the trend is quite stable for the coming quarters in terms of recovery of credit in the average that we had in the last quarters.

Expenses, non-interest expenses BRL9.7 billion, as I said, a little in line with the expectations of the guidance that we provided at the beginning of the year. And we will continue to be very focused in the coming years in terms of controlling and getting more efficiency, especially with the huge investments that we are taking in terms of technology, new systems, new datacenters. I think this will help to get more efficiency and reduce and control more the level of expenses that we have.

At the end, we have this recurrent result of BRL5.4 billion. It was a very good quarter with a very good ROE. We can see the ROE trend in the next page. Two years ago before we changed the strategy of the Bank to reduce the risk of the credit portfolio and increase our revenues strategy in terms of services, in terms of fees, 19.3%, and this quarter getting the benefit from this strategy we achieved 24.7%.

In terms of loan portfolio, on slide number 5, we continue to grow payroll loans and mortgage in line of this strategy of reducing the risk. In terms of payroll loans, we bought this quarter again BRL4 billion from Banco BMG that was included in our JV with them. So part of the growth of this portfolio that achieved BRL36 billion with a growth of 21.9% in this quarter was related to this BRL4 billion in terms of acquisition.

We continue to reduce the vehicle financing, 8% this quarter. At the end, it was BRL31 billion, the portfolio. Just to remember that two years ago or a little bit more, this portfolio was BRL61 billion. So we reduced by half the car financing for individuals in this last years in line with the strategy of reducing the credit risk.

In terms of companies, corporate continued to be our main driver in terms of growth. BRL203 billion is our credit portfolio for large companies. At the end of the quarter, we saw a growth of 3.7%. Even though the spreads are not so good here, but we continue to believe that in this environment of low growth of the economy it's better to provide credit to large companies than to small and very small. This segment of small and very small companies are much more leveraged, and they suffer much more in terms of delinquency with a very low pace of the economy.

Latin America, we continue to grow. Here has also influence of the dollar, the real devaluation. But anyway, we continue to increase especially in Chile our presence in the large companies segment.

Private securities, BRL33 billion. So at the end, we have a total credit exposure BRL536 billion with a growth of 11.5% when we compare to last year.

On page 6, we can see in a more visual way the change in the credit portfolio that we made in the last years. Here at the bottom of this page we can see what made the influence in terms of financial margin with the clients that jumped from BRL12.7 billion to BRL13.3 billion.

We can see here that the more calendar days provided more revenues accrued. SELIC rate product operations also is BRL228 billion -- helped to improve this margin with the clients -- and the increase of the loan operations of BRL144 billion. So this is a breakdown of how we and why we increased the margin with the clients.

On page 7, we can see the net interest margin. We see that the SELIC rate has been growing in the last quarters and we had an increase last week also. But in terms of gross credit spread, we are quite stable. The spread is stable. What is changing is that we are renewing our credit portfolio in higher rates than in the past. So that's why we believe that the net interest margin will remain in these levels for the coming quarters.

On page 8, financial margin with the market, we can see here the volatility of this result. It's difficult or impossible to forecast what will come in the coming quarters. But anyway, this quarter specifically was the highest in the last two years, was a very good performance from our structural and from our proprietary desk in terms of market.

On page 9, we can see the trend of our NPL over 90 days. When we compare two years ago, the number was 5.2%. We reduced 200 basis points in this period with this policy of reducing the risk of the credit portfolio in both individuals and companies. We were able to reduce to the lowest level ever in the history of the Bank and maintaining a very good coverage ratio of 181%.

On page 10, also in terms of credit quality, we can see the loan loss provision expenses is 4.5% when we annualize to our total loan portfolio; a little bit above the last quarter in relation to this reclassification of credits in the large segments -- large company segment.

In terms of allowance for loan losses, we continue with a very solid level of provisions and we maintain BRL5.2 billion in terms of extraordinary provisions.

On page 11, a good sign also in terms of credit quality, that the index of 15 to 90 days NPL ratio, continuing reducing the level. We finished with 2.6%, a 10 basis points improvement when we compare to last quarter, what is a good trend for our next quarters in terms of provisions. We are not expecting provisions to increase much in the coming quarters.

On page 12, we can see here the commissions and fees in more detail. We continue to be very focused on products and services and insurance products to grow our revenues in this segment to reduce the dependency on credit revenue. So we continue to -- we can see here that the improvement was in the last 12 months at 14.7%. If you will not consider the Credicard acquisition that was made last December, this growth will be 11.5%, what is continuing to be a very good number. So I think the strategy continued to be correct.

On slide 13, we can see the breakdown between banking results and insurance results. We had BRL5.4 billion in results of the Bank. From these, BRL4.3 billion came from the banking operations and BRL880 million came from the insurance business. And related to the allocation of capital, we can see the ROE of the banking operation was 25% and the ROE to insurance business 78%.

On page 14, insurance operations in more detail. I think we continue to increase the results for the four quarters in a row. I think the strategy here also is to concentrate more and more in bancassurance, in products that we can sell through our branches, through the Internet to our clients.

In terms of slide 15, on non-interest expenses, as I said, we continue to be very focused. This year we have more expenses. But anyway, if we exclude Credicard to make things more comparable, the growth was 7.6%, [visibly] above the inflation, but in line with the extra costs that we are having especially in terms of technology investment.

On page 16, we can see here the capital ratios. We are generating capital. And here was an exercise to see how we would be in terms of capital if we -- before the application of Basal III. I think here it's not an issue. We are generating capital enough in this moment, of course more than we need because the credit portfolio is not growing much. But anyway, we have to keep on this generation of capital to face in the future when the credit portfolio will have a better performance and also to be open to new investment opportunities that can appear for us.

On page 17, we can see the liquidity of our shares, BRL830 billion per day, half and half between New York Exchange and Bovespa. And our market cap close to BRL200 billion.

So in terms of outlook, here on page 18, we can see the outlook that we provided at the beginning of the year. We changed the growth of the loan portfolio that was then 10% to 13% at the beginning of the year as the economy didn't perform very well. We will not reach these levels. And we announced to the market 15 days ago that our expectation now is below 10%, something around 8% in terms of the total growth of the portfolio for the full year of 2014.

The other one we didn't change. Loan loss provision net of recovery of credit, between BRL13 billion and BRL15 billion, we've maintained this. Service fees and result for insurance 12% to 14%, we also maintain this range. Non-interest expenses 10.5% to 12.5%, also we maintain this level of expenses. And efficiency ratio, improvement from 50 to 175 basis points and also we keep this for the full year of this 2014.

On slide 19, we can see the strategic agenda. Bancassurance concentration, as I said, in terms of insurance. And we sold the large risk business to ACE and was approved last month by the regulators and this was finalized by the end of last month.

And also, we announced the termination of the agreement that we had with Via Varejo to offer extended warranty in the retail network of Ponto Frio and Casas Bahia and we recovered part of the investment that we made upfront with them.

In terms of Corpbanca business in Chile, the merger between Itau Chile and CorpBanca, we had the approval of the Central Bank of Brazil and now we are waiting for the next steps in terms of approval from Banco Central de Chile and Columbia. And we expect this to be finished in the first quarter of next year.

In terms of mortgage and payroll business, we keep our leadership among the private banks. One for us is important because at these two lines of credit that we are growing more in this strategy of reducing the risk of the credit portfolio.

And to finalize; for those who will be in Brazil in the coming weeks. We have a program presentation of Itau Unibanco in Brasilia on November 12th and also our main event with investors and shareholders that is our public presentation of Sao Paulo on December 16th. And everybody who can be here in Brazil, it will be a pleasure to receive you there in both of these presentations.

This finalizes our first part of the conference call, and now we are open to the questions.

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

Philip Finch, UBS.

Thank you for the presentation and the opportunity to ask some questions. First of all, can we just start macro-wise, what are your forecasts internally for GDP growth next year and the SELIC? And related to that, what should we assume in terms of loan growth for you next year? Clearly, it's slowing down. Should we assume that trend continues next year?

And secondly, just in terms of the cost expenses, which you very helpfully explained. There were some distortions from the Credicard acquisition. But given the IT expenses and the datacenters, you are still going to have three for the next year also and it won't come down to two. Should we assume that cost growth should remain above inflation next year? Thank you very much.

Regarding our view on the macro, what we have for GDP next year is 1.3% real growth. SELIC we envision finishing this year at 11.5% and next year at 12%. In terms of loan growth, we are still wrapping up our budget process. But as of now it should be close to nominal GDP -- nominal GDP plus something. So that's where we are at the moment. We are going to be finalizing that and give you more transparency over the fourth quarter earnings call.

Regarding IT expenses, you mentioned the datacenter which was mentioned by Alfredo. Our aim is to grow at inflation or inflation plus. So you may consider a small plus over inflation given the datacenter investments. But that shouldn't be a meaningful number, that plus that I mentioned to you.

Thank you very much, Marcelo. That was helpful.

Tito Labarta, Deutsche Bank.

A couple of questions, first in terms of your net interest margin. You mentioned you expect it to remain low and simply stable as you have been able to increase the spreads on some of your loans. About the recent increase in rates and you just mentioned you expect it to reach -- to continue rising to next year. Do you think there could be any outside to that or what will be the sensitivity to the rising SELIC?

And then the second question in terms of the asset quality, you continue to deliver pretty good results there with asset quality still improving. At what point do you think that could start to shift and you could see some deterioration? I mean is that maybe end of 2015 or do you think you could still see some further improvement? I just want to get a little more color on how you see asset quality continuing to evolve. Thank you.

Thank you, Tito. On NIM, our view is that it should remain relatively stable given the different moving parts we have on that by renewals coming at a higher rate than the previous rates, but the mix shift still playing a very important role given the growth differential that you have within the different portfolios. So that's something that should keep it relatively stable.

You mentioned the SELIC rate. The market now is very competitive. The price dispersion that you see between banks has reduced. So I don't see much room for having -- you could see increase in rates, but not in very increasing spreads given the competitiveness of the market. So that's where we are regarding the SELIC rates unless we see a meaningful deterioration where basically we are going to be risk-adjusting the price to reflect that.

But that doesn't change our risk appetite. So for that end, we should -- don't see much change on the rates other than our own cash, which obviously benefits for the SELIC rates.

Regarding asset quality, you ask at what point we could see a shift. I mean the shift on the economy -- we are less correlated to the economic environment now because of the mix shift. That should probably continue towards the next year unless you see a major disruption, which is not our best case scenario. But you could see that changing towards the end of 2015 and starting in 2016, meaning that we are going to be more pegged -- our credit performance will be more pegged to the economy than it is now because of the mix shift that we have.

Okay, great. Thank you. That's very helpful.

Carlos Macedo, Goldman Sachs.

I have a couple -- one question actually. I mean looking at your ROE, almost 25% -- it is about as high as it has been in the last several years. And the outlook that you laid out with a weak GDP growth, higher rates, your margin is looking as they were going to be flat throughout the year. Maybe you don't get the tailwinds from provision expenses that you had in the last few -- in the last several quarters.

When you put all that together, it does look like earnings growth is going to be weaker next year than it was this year, maybe 10% to 15%, something like that, which probably leads your margins to -- or your ROE to contract from where it is now given it is at a very high level.

Is there anything the Bank can do on the expense side, on the fee side or generally to sustain the kind of growth that we see from earnings? Potentially if you do get some pressure on NPLs, it could be even lower than that. But is there anything the Bank -- any leverage the Bank can pull outside of the -- of what's pushed by the economy to sustain the level of growth in earnings?

Hi, Carlos. Thank you for your question. I mean if you think that the -- if we say that ROE, let's say just for argument sake, is 24%, okay, and we pay a third of that as dividend, so we are left with -- we pay 8% out of the 24% ROE, so we are left with 16%.

So anything on earnings growth below 16% will be a reduction in our ROE, just to work the math. So basically, we are focusing on all the levers that you mentioned -- on costs. We are focusing on increasing services to our clients. The quality of the asset portfolio is helping us; the credit portfolio is helping us.

But net-net, what we could see -- another avenue that we can see of growth is insurance. We are under-penetrated on insurance. But given the participation of insurance in the overall results, it's hard just to say that we are going to sustain the entire ROE or even grow the ROE based on that.

And you correctly mentioned about the tailwinds we had on credit this year, which is something that is unusual for you to grow the portfolio, increase revenues, take less risk and reduce your credit cost. So it's something that we would focus to do on the different levers, but it's hard to expect the ROE to be kept at nearly 25% next year.

So it would be reasonable to say that we are at the peak of the cycle here. And I'm not talking specifically about Itau necessarily because some of your peers have had the same kind of behavior in terms of NPLs -- and you are probably better, but NPLs and margins.

Yes, you could say that that's a high point of our historical path. I hope I'm wrong. But that's the alignment of several positive factors that we have in this quarter. But net-net, we still are confident we are going to be delivering ROEs over the course of the next quarters over 20%, 20% plus.

Perfect. Thank you. A follow-up to that is, the scenario that you outlined is generally aligned with the market consensus for next year. You were talking about being a little bit more -- less pro-cyclical than in the past. How does that relationship evolve over time? Are you really -- what is -- if GDP growth slows to less than 1%, say 0.5% next year, if we do see unemployment climbing up from 4.5%-5% to 6.5%, is Itau really that protected from a negative environment or a more negative environment than is currently expected?

Carlos, all the preparations, everything we started 2-1/2 years ago in terms of the de-risking, the less dependency on credit revenue by means of increasing fees, everything was done to make the Bank more resilient to a downturn scenario. You could see upticks on certain credit lines like credit cards or overdrafts line, which is basically what we spoke I think in the second question.

But the overall portfolio to some extent -- and I'll give you the auto financing portfolio as an example, our NPLs in this portfolio are going down even though the portfolio is reducing. So it's hard for you to reduce the NPL when you are reducing a portfolio and now NPLs are going down there.

So we -- to some point or to some extent, we believe we can shelter the pressure, but we will only know when we get there. Unfortunately, that's as much as we can give you in terms of clarity. So there are lots of moving parts and to some extent we believe we are sheltered. But we will see.

Okay, thank you, Marcelo. Thank you for your answer.

Mario Pierry, Merrill Lynch.

Congratulations on a very strong quarter. Let me ask you two questions. The first one is related to fee income growth. Excluding the acquisitions that you made, when we look at current account fees and loan operations, they are still growing close to double-digits. So I wanted to understand from you is your ability to increase prices to sustain fee income growing at a double-digit pace in the future?

And if you could also comment on Redecard. It seems like Rede finally was able to gain market share from competitors for the first time in almost two years. If you could tell us more about your strategy in Redecard going forward? And then I'll ask a second question later.

Sure. Thank you, Mario. In terms of fee income growth, the big growth this year hasn't really come from increasing prices, but basically the increase of services offered to clients and a large number of the clients buying into the new services that we are providing. We have differentiated services on Uniclass. We have MaxiConta with cellular -- with credit on your prepaid cell phones. We have a number of new packages and offers that clients did sign up for that. So basically that's where the increases are coming in current accounts.

Insurance also is an avenue of growth for the following year. We mentioned bancassurance and that's a very promising area for us. So part of the strategy is to continue to focus on that.

Obviously, the credit card market is something that is probably going to be growing mid-teens next year and a third of our fee line comes from credit cards and that doesn't include the interest on credit cards, but only includes the [MGR] from the acquire and the interchange that we -- and the fee -- and the annual fees we have on the issuing side. So payment is an avenue that we will continue to grow and the economy is still going to be moving and we are benefiting from that end.

So if the fee growth next year is not something at mid double-digits, it could be at least very low double-digits or high single-digits, okay.

Regarding your question on Rede that we might have gained share, the strategy has been since the de-listing of the company to have the Bank working closer to Rede. Now, we can see this crystallizing by the Bank being closer -- the new segmentation that we have on small companies, where these companies are being serviced in our branch network. So that brings the Bank closer to the acquirer. The number of affiliations of the Bank nearly doubled in the last 18 to 12 months. So Rede has been gaining ground and traction with the Bank and that is reflecting in more activation and more volume.

So this is something that should continue and that was the primary objective of having Rede as part of the Group or fully-owned by the Group, which is to be able to have a holistic approach to the clients.

Okay, that was very thorough. Let me ask you then my second question is with regards to costs. But here my concern is more like we continue to see a very weak economic environment. We are seeing your loan growth decelerating and it seems like you are not too excited about loan growth next year either. So I just wanted to get from you how comfortable are you with your current headcounts or is there room for you to be reducing headcount in the coming years if the economy doesn't improve?

Mario, we manage -- we don't have like targets for headcounts. I mean we manage the Bank based on being able to produce more and gain efficiency. So based on the churn we naturally have out of the Bank, we are able to manage the headcount. And if we have to manage the headcount down, it's not going to be by a major restructuring -- by proactively managing the turnover.

And the people who can be retrained, we retrain them. We have a high rate of people who are retrained and relocated within the Bank. But that gives us a buffer to manage the Bank in more difficult times if we have to manage down the headcount. But there is no restructuring program in place that we will need to do it.

Okay, thank you very much.

Marcelo Telles, Credit Suisse.

Thanks for your time and congrats on the results. I have two questions. The first one, was there any impact in your results resulting from the depreciation of the real or you were like pretty much hedged and there was no impact at all?

And the other question is regarding your provision expenses for the quarter. We saw there was quite a bit of an increase in provisions in the wholesale division of the Bank, which would indicate something in line with what you just -- what you said about some specific, corporate loans that had to be provisioned for. So do you think we can see an improvement in provision in the wholesale division in the coming quarters or do you expect those provisions to remain more or less at the same level? Thank you.

Telles, thank you for your questions. We have no impact of the real depreciation. I mean we were fully hedged on that. So it's no material changes in our number regarding that.

Regarding the loan loss increase in wholesale, as Alfredo mentioned, we did change the rating of certain corporate names, no concentration on any specific economic sectors. And I mean given the circumstances and what we see in the economy, this could happen in some names but nothing that you could see as a trend.

So net-net, we will be managing the portfolio and keeping an eye on. If there's specific loan loss increases that we need to do punctually or specifically, we will do. But in our radar screen that was something that was done specifically in this quarter. But we are vigilant regarding any specific change that needs to be done.

Perfect. Thanks a lot, Kopel.

Saul Martinez, JPMorgan.

I just have a couple of -- one follow-up question and one other question. First, Marcelo, you mentioned in your earlier remarks that your asset quality has became less correlated to the economic environment due to mix shift and obviously that's -- it's obvious that that seems to have occurred, but that it could change at the end of 2015 or 2016 and start to become more pegged to the economic cycle. Can you elaborate on that? It's not clear to me why that would be the case especially since the mix shift process should continue as we head into next year. If you can just give us a little bit more color there.

And secondly, the payroll loan book is growing tremendously. It's bigger than your mortgage book. It's bigger than your auto book now. Obviously, the BMG partnership has helped. But is there any difference at all in terms of the economics, the profitability of acquired loans from that partnership relative to payroll loans, for example, that you may originate yourself?

Can you just give us a sense of whether the economics are also attractive especially considering this is a product with very high risk adjusted margins?

Okay, Thank you, Saul. Let's start -- let's answer it backwards in terms of the payroll. Payroll is -- as you mentioned, is key to our strategy. The difference in economics is basically if you consider that we have two types of originating channels; one through our branch network and the other one through the joint venture.

And throughout our branch network, basically we have the branch costs and basically we dilute the cost by originating the credit there. So the profitability of a loan, even if you do the proper cost allocation, which we do, for our own origination is better than originating through third parties. The risk is quite similar because the credit approval process is the same, okay. So on a net basis when you originate through our own network, you are better off. Okay? So that's the comment regarding payroll growth.

Regarding the asset quality and being less correlated, the fact that I mentioned that is because when we are outgrowing on a portfolio like payroll and let's use that as an example and even mortgages, payroll now is -- around 85% of that is related to the public sector, be it with (inaudible) or be it public servants. So that is where I say it's less correlated because those segments are not affected by unemployment.

And when you look at the mix shift and you see that portfolios that are more prone to be affected by the economy like unsecured lending and SMEs and so on and so forth, the difference between the speed of growth between those two portfolios end up being less correlated to the economy. That's where my comment came from.

So as we go deeper on that, eventually we will become more correlated to the GDP. But obviously, our best case scenario is there is no disruption in the economy. If we were to have a disruption, then the correlation obviously will come into play. But we don't have a disruption scenario for next year.

In other words, it becomes more pegged if we see a disruption or if we see a real sort of stress scenario for economic conditions?

Yes.

Okay. And just -- okay, then fair enough. And then the -- so just to elaborate on the first answer I should say, on the own origination versus the BRL4 billion, the BRL4 billion that you acquired, can you give us a sense of how different the economics are between those -- the acquired portfolio and other -- these still very profitable types of loans that you are acquiring because you are obviously growing that book very, very quickly?

So what I can give in terms of color is the average commission that you probably see over the term of a loan acquired through a third party is around 15%, okay. So to the extent I find a way of doing this acquisition through our network, under that number we are becoming more -- we are more efficient. So this is just to put you in perspective.

And remember the branches there as our window to be distributing and offering services to our clients, multiple services to our clients. So it's really the more efficient we get in terms of targeting our clients, the less we are going to spend on this theoretical 15% that we have to spend to make economics equal.

Okay, great. Thanks. That's helpful.

Thank you.

Boris Molina, Santander.

I have a few questions; the first one regarding the progress in your acquisition of CorpBanca. Could you confirm if you are currently in negotiations with the IFC to amend the shareholders' agreement or if the only authorizations for you to close the merger are related to Central Bank and regulatory approvals?

Boris, IFC is doing its homework now. I mean they have an agreement on the existing shareholders' agreement with the current shareholder and they are doing their homework in terms of doing valuations. And we are basically -- if there are -- if there is information that they asked us, we provided that.

So they are following their own course there. And we are confident that the deal provides benefits to all shareholders including obviously themselves. So I think we are going to get to closure on that.

Our scenario in terms of approvals, we just got the approval from the Brazilian Central Bank for the -- to be participating on the merger, have a stake in the merger, a controlling stake in the merger. And we are seeing -- we still need to go through the approvals of the Chilean regulator and Columbian and Panama, and now that we come to the shareholders meeting, where the shareholders of both entities need to approve that. So our estimated closure for the transaction is first-quarter 2015.

Okay, wonderful. Thank you. And I had a second question regarding the slide on your presentation about the evolution of your capital ratios under Basel III. You show a 100 basis point improvement from the use of tax loss carryforwards. Is there any change in the regulation of taxation that would allow you to avoid having tax loss carryforwards in the future?

I mean over the last years your tax loss carryforwards have been around between 6% and 7% of your shareholders' equity and this is a -- it's like a nature of life. So are these going to disappear completely?

No, it's not that it's going to disappear completely. The assumption there is if we are to consume everything we have -- and just keep in mind that at the same time we are consuming that, we are also having the benefits of some goodwill amortization for tax purposes.

So over time as we don't have all the goodwill amortization tax benefits to be consumed, the ability to consume the tax loss carryforwards becomes easier than having to eat into the tax loss -- the tax shelter we have for goodwill and the tax loss carryforwards.

Okay, wonderful. Thank you.

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

Thank you everybody for participating with us -- with a very good and solid results. Marcelo answered all the questions that you had. Actually, we were able to attend to everybody. So thank you for your participation and wait to be again in the fourth quarter results at the beginning of next year. Thank you.

This concludes Itau Unibanco Holding earnings conference call for today. Thank you very much for your participation. You may now disconnect.