伊塔烏聯合銀行 (ITUB) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome Itau Unibanco Holding conference call to discuss fourth quarter 2014 earnings results. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (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 February 10 by phone on 55-11-3193-1012 or 55-11-2820-4012, access code 2225864#.

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 comment as a result of macroeconomic conditions, market risks and other factors.

With us today in this conference call in Sao Paulo are Mr. Roberto Egydio Setubal, Executive President and Chief Executive Officer; Mr. Alfredo Egydio Setubal, Executive Vice President and Investor Relations Officer; Mr. Caio Ibrahim David, Executive Vice President and Chief Financial Officer; and Mr. Marcelo Kopel, Corporate Controller Director and Head of Investor Relations. First, Mr. Roberto Setubal will comment on fourth quarter 2014 earnings results. Afterwards, management will be available for a question-and-answer session.

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

Good morning and good afternoon for all of you. It's my pleasure to be here with you to comment on our results for the fourth quarter and the year of 2014. On this presentation, I would take the opportunity also to comment on our business model and the implications of the current macroeconomic situation of Brazil.

Let me start commenting on the fourth quarter results. I think it was a great quarter closing a great year. We had a R$5.7 billion recurrent profits and the return -- recurring ROE of 24.7%. I think that the result was very good, but not only the results were good, but the quality of the results were very strong.

Financial margins are increasing; provisions are declining; fees, services and insurance revenue increasing. Every -- all the revenues are developing and growing above the level of non-interest expenses. So all of these together brings these results. It is important to note that, even though we have a difficult macroeconomic situation in Brazil, our credit quality has been improving recently, and I will comment more on that during the presentation.

ROE has stabilized in a very high level during the first year -- during the second half of 2014. And I think that the results -- the quality of the results make me believe that we have a good moment for the bank and a good scannability for the results we are enjoying at this moment.

Commentary on our P&L on screen 4, I think that again here, we have a commentary on the year. I think we had a very strong year. Revenues in general grew 14.5%, comparing to expenses growing to 10.4%. This was very positive for the results probably. And on the top of that, our loan losses and claims declined during the year. So this combination allowed our results to grow more than 30%. It's important to notice also that all the lines have been moving in the right direction. So all the lines of margins with clients is growing, so recovering from two years ago very strongly. Commission and fees services in general are growing, so this was very positive.

The quarter itself was pretty much compared to the third quarter, which was very positive quarter. So we kept basically the same trend of the previous quarter with good growth in margins and very much control on loan losses and expenses. So all of these allowed us to have also a strong quarter for next year.

As non-recurring events on screen 5, we can see that we have a gain at the amount of previously on the sale of our large risk insurance operation. And also we are looking on the current macroeconomic situation and what we envisioned for the future, we thought that would be some policy for the bank to increase our provisions, our allowance for loan losses, which we did during this quarter above the regulatory level in more than R$1.1 billion on provisions and the net effect is here as you can see on page 5. Those are the main events -- non-recurring events for the quarter.

Let me talk a little bit about our business model as we move to page 6. We are a bank obviously, but -- we are a bank that has much more business than long itself. Loans part of our business is an important part obviously, but we have a strong presence in services -- financial services and insurance. And as we show here in the screen 6, we have more net income coming from insurance and service than we have coming from credit itself.

When you look the credit business, we can see here that our return on regulatory capital is getting to the level of 15% in 2015 compared to 12.4% the previous year. So it was an important improvement and basically this improvement was due to our current risk adjusted policy that is pretty much aligned with return of both cost of capital, which we believe that is at the level of 16% for the bank. Our insurance business has also been developing strongly and we have looking on the right side of this page, 16% growth in our revenues -- in our insurance and the services business. Since this is outgrowing the expenses, we end up having a 25% growth in our net income for that business.

That business as I mentioned is bigger than our credit business, which had an important improvement in terms of quality, delivering growth in terms of net income of 35%. This was due mainly through the improvement in the losses that we had in that business. So, the business is moving today into a very strong situation performing above cost of capital and with a very strong and good quality of assets. So this is the current situation that we have.

In our mind as the business model, we target to have a return of the credit business of cost of capital at least hence the insurance and services that we cross sell for our clients basically comes on the top of that giving us strong ROE and pretty much sustainable as we're able to deliver this cost of capital return on loans, because the service business is a business that does not taken to that much lower capital driven business, so we can deliver the final and a sustainable strong ROE at the end of the day.

And this current level of return on credit is something that we believe is pretty much sustainable and this is what we have been targeting since we change our risk appetite two years ago and we have been having our loan portfolio moving into this direction more recently. So on page 7, we can see this loan business here that we have in the bank. There is a strong improvement.

As I mentioned, we've much better returns than we had last year and much better than the ones we had in 2012 where we were below 10% at that year. So the improvement is really very important to observe. This was the result. One of the reasons for that, we can see on page eight was the change in our business and our loan portfolio.

We've a much more safe and lower risk kind of portfolio. So we grilled this last year a lot in payroll loans and mortgages, much stronger than areas that were more risker in our view like vehicles where we've been declining. Also, the small Company portfolio had declining during the year. But since we have already cleaned that book, we started to grow in the last quarter and we believe that during the year of 2014, we probably will have a small growth in that segment even though we know that the current microeconomic situation is not one that's favorable for that business. But even though, we believe that we can grow the book, although in more speed, but we can grow that book under the current level of risk appetite.

On page nine, you can see the change of mix of portfolio, which was really very important coming from 2012. On screen 10, we can check the margins, how our margin has improved, and how it has been especially sustainable when we look the net credit spread, which is the gross margin -- the gross spread after credit cost. So, we have been having a stable net spread, which has been very positive in terms of results.

Our financial margin with our market revenue has come back to high levels, and this has been a very stable in the last quarter. The credit quality as a result of that change in the risk appetite is still improving, as we can check in the page 12. In terms of consumers, our decline is very impressive year-to-year and quarter-to-quarter, we still keep on growing these trends. We believe that we might observe additional improvements in the consumer portfolio during the year of 2015, even though we have this challenging macroeconomic environment.

And I've already mentioned to you that we are very positive on that trend, given the quality of the origination that we have today. The weightage that we are originating today is much better quality than we were in the past; they're very consistent, and they have a lower level of risk than we used to have. And we don't have in the numbers of the NPLs over 90 days; it does not reflect the current quality of origination that we are booking in the bank.

So, probably we'll see additional, although in the lower speed, but additional improvements in the quality of the consumer portfolio. Companies in general are more stable situation today. As I mentioned to you the small company portfolio has already been cleaned, so we have today a more stable credit quality at the levels that we are seeing today.

So at the end, the total NPL might that have some additional improvements in the year of 2015. This is combined as we can check below at the end of page 12 with a bigger coverage that we have today. So, we have increased the level of provisions in this last quarter as I mentioned before. So, today we are more comfortable and better covered this scenario. Obviously today, what the major concern is the corporate portfolio, but we believe that we have strong positions for that scenario. Hence even though we know clearly the problems that will result from the problems at Petrobras and Lava Jato case, but we believe that the level of provisions are very good enough -- more than enough for the moment and we are facing very confident targets for next year.

As we know, we gave you a guidance for next year of R$13 billion to R$15 billion of net provisions. We believe that this number is pretty much achievable, giving everything that I have been describing to you at this moment. Both the improvements in the consumer portfolio, the level of provisions, the quality of the originations that we have today for both small companies, consumers and also the available Corporates. Corporates might have problems here and there, but overall our exposure to the Petrobras change as well and we are very comfortable with all the provisions and the situation and the quality of credit that we have today.

Having said that, we move on to page 13. The level of provisions compared to our book has been stable, (inaudible)this last quarter. The levels arouse that we have in our balance sheet has grown. So as I mentioned, we are quite comfortable with the position that the bank has today.

In the page 14 -- in the screen 14, we can check the short-term delinquency, which is still improving and consumers. We know that for the next quarter probably we will see some increase in the short-term delinquency as we have had in all the years before in this period here since 2009. This is the seasonality that we have in Brazil. So, we expect this to improve a little bit -- to increase it little bit, but we believe that the overall trend over the year is a positive one in terms of improvements. Small companies as I mentioned, it felt a little bit more giving sometimes you have companies specific data that goes in delinquency, so it floats a little bit. But overall we believe that the level of delinquency will stay stable.

Okay. This is what I had for the loan business. Let me talk now about the insurance and service fees that we have, which is an important part of our franchise. As I mentioned to you, the biggest part of our profit comes from that business. And I'd like to share with you the way we see that business and how much, how strong is that business, which by the way and it's important to note, is a business that is not related to the economic cycle in terms of -- it's much more sustainable over time. It might grow more or less depending on GDP, but it's a sustainable business with growing net income over time. (inaudible)are very high given the fact that we have the clients already in the bank, a strong franchise who attract a lot of clients.

We break down this column here on page 16, showing you all the major service business that we have today. Starting with the insurance business then we have [Hegy], which is the old credit cards business, cash management, asset management, deposits and asset management liability -- asset liability management. We can see improvements in all these lines compared to the previous year. [Hegy] particularly had a great year and great improvement since we acquired [Hegy] two years ago.

We have been improving the quality of services -- the efficiency, the expenses, which were stable by the way during this year, though we kept flat expenses and this resulted in a huge improvement in our recurring results.

Cash management is also an important business for us and also growing asset management as well. Deposits is an important part of our banking franchise, a strong source of revenue for our commercial bank. It's important not only from the perspective of a stable funding source, but also in terms of revenue, which also helps to pay those high costs of the distribution on branches.

So in page 17, we have all these revenues (inaudible)revenues split by business lines, but I'd like to move on to page 18 where we have our insurance business, which is improving. Gross revenues has grown 10.6%, but we have to be careful here given the fact that we're selling some of business, like I mentioned we sold the big risk business, so we lost revenue in the last quarter.

We're deactivating some business lines and concentrating in the more profitable business. The correct risk of our insurance business is very particular in many ways, especially when you look at the level of claims that we have, it's a very low claim business, 27%, 28% claim level. It's very strong because it's lace business basically. We have more here and the low risk levels of insurance, so this is quite sustainable.

It appears that this is quite profitable and the level of profitability has been growing above the level of revenues specifically because we're restructuring the business, concentrating more profitable business and more low risk kind of insurance business. And we believe that over time, these will be the trends, high growth year in terms of profitability and with end profits in general, didn't had a good year as we can see in the screen 19.

The volume of transactions grew 11% and revenues grew 12%. So we had a good MDR, basically stable MDR compared to last year. Expenses were pretty much under control, although we had a great increase in our presence in clients and point of sale in general. So it was a good improvement, so the level of revenue coming from equipments had important role for you, and also the financial revenues has 60% almost increase, very strong increase, so altogether we're able to increase the growth here in net income by 27% from the year, very good year. We are very happy about the position, the improvement that we have made in this business and the perspective that we're looking ahead we have in that business.

Other services in page 20, a very strong business for us. We look them as a long term business. We have a strong business in asset management. We manage almost BRL 669 billion out of our balance sheet, the important business for us. We like that business and they give us a strong revenue of BRL 2.1 billion. So it's important source of revenue for the bank as a business. (inaudible)basically deposits we have BRL 447 billion of deposits, which brings us margins giving -- and it's a good business for our retail operation and also as a source of funding for the bank itself.

Consortium is also another important and fast growing business that we have, if the revenues growing very rapidly. Other business we like has no risk associated with those business, so this is an important source of revenue and very stable and sustainable over time.

Cash management, which accounts basically for current accounts revenue together with payments in general and receivables that we service that we do for clients is also growing an important source of the present revenues for us.

So altogether, the business of services and insurance, it's an important business and is important source of revenue, very stable, very sustainable over time. So this is part of the business model that we have to be positive facts of the business what we have.

On the other sides of our balance sheet -- of our P&L, we have expenses, which we have been kept under strict control this year as you can see on screen (inaudible)we had a 7% growth, just a little bit above inflation in comparable basis, not including credit card here. So the expenses are growing in a much lower speed than revenues in general, which is something that we have in mind to keep this way for the years ahead. Efficiency ratio has been improving as a result of that, and particularly the efficiency ratio adjusted to reach also is improving reaching number of levels that we have never have had in the past will remain. We are very comfortable with the capital position of the bank stage. As we can see on page 22, we've our edge under the current rules of Basel III, fully applied today. So phasing right now, we'd have above 10% almost 11% level for equity Tier 1. So it's a very comfortable position and (inaudible)have improvements as we offset the FX loss that we're carrying to be in our balance sheet and we optimize some investments we might reach 12%, so the bank would reach in a very strong of capital. We do not see any need for capital in the future (inaudible)to Basel III.

In terms of guidance for 2014, I think we had a great year. In terms of loan portfolio, we were not there, but we were close, 10% was low range guidance. We had 9.8% especially giving the situation -- the macroeconomic situation that deteriorated during the year, I think was a good number to achieve.

Our loan loss provisions were in the low ends of our expectation and revenues coming from services and insurance was in the higher ends of our guidance, expenses also in the lower end. Efficiency ratio was even above the best guess that we had at that moment. For 2015, we expect that it will be lower growth in general in terms of margins and services and loan portfolio as we can observe on screen 24 compared to 2014.

Growth on revenues will be lower, but still growing -- out growing expenses and we believe that we can keep provisions pretty much under control between BRL 13 billion and BRL 15 billion, which by the way was the same range that we gave you for 2014. So we believe that provisions even though the scenario is more difficult, even though we have perspectives of much lower growth this year than last year even though we've (inaudible)arise from that, even though all those scenes we expect to be in that range. Thank you. And now we are open to answer questions.

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

Jorge Kuri, Morgan Stanley

Good morning, everyone. Thanks for the call. Couple of questions. You're obviously very positive on the outlook for delinquency in 2015. I guess it would help to understand what sort of macro and industry backdrop are you basing those assumptions, meaning how much do you expect unemployment to go up and are you expecting electricity rationing, what sort of the GDP growth assumptions you have, to what extent you are assuming or not that there is a bigger problem with oil and gas companies.

So just a little bit of that background, so we can understand at what point you would change that view, say, if you think delinquency is going to be flat, because you know the unemployment is going to go up. And if you see unemployment go up, then we can think about another scenario. So -- that will be my first question.

And then the second question is regarding credit cards. I think you have correctly pointed out that you've changed the structure of your loan book moving out of car loans and more into payroll loans and mortgages, which do have lower risk, but we do see the portion that is on credit cards has actually increased a lot. I think in fact 32% of your total loans -- consumer loans, and it's actually the biggest portion of your consumer loans. That number compares to 10% to 15% at your peers, so you're significantly more exposed to that.

So thinking about a difficult year, thinking about a year with recession, a year in which unemployment may go up for the first time in a long time, which we are already seeing now and knowing by looking at every single credit cycle in emerging markets and developed markets over the last 50 years, credit cards are normally the product that post the worse in a scenario where unemployment goes up as first in people still paying. So just curious to understand what is it that gives you confidence -- start even though you are by far the largest exports to credit cards and if credit cards to the worst in a difficult employment macro scenario. What gives you comfort that, that's going to play out against you? And obviously in the understanding that you have like around 40% to 50% market share of credit cards in Brazil, so they cannot all be to AMB clients you probably have a lot of exposure to lower tier clients. Those are my two questions. Thank you.

Thank you, Jorge for the questions. I think they are very important points (inaudible)are very important especially giving the macro scenario that everybody, including us seen for Brazil this year or for 2016. Starting with the scenario, we believe in those numbers are based on the scenario that growth will be close to zero may be negative, maybe a very small portion of positive, but very low growth.

We do not expect this year unemployment rate to go up more than 1%. It might go up. Somehow, we consider see that might probably and the year maybe 1% above the current level, but not more than that. And I have to mention that today we have a good portion of our consumer business is not related to people that -- employed persons. We have a business also make loans to people that are self-employed, which is important portion of the Brazilian macroeconomic design in Brazil.

We have 20 million people that are officially employed and more than 40 million people that are part of the population economically achieved. So this is one portion of the problem. I think that -- so we believe that there will be some additional impact, but what makes us to feel much more confident is the quality of the origination that we have today and the amount of data that we have today.

Today, we have access to the level of indebtedness of any client in Brazil through the Central Bank data base. We have a lot of data giving our presence in the market about the clients, payments, , level of income. So, we have a lot of data to figure out the quality and the level of indebtedness of -- the level of income of all the clients. And the quality of the origination that we have today in our portfolio. It's a very good run. So this makes me feel very, very comfortable about the outlook for the quality of delinquency. It's clear that as the macroeconomic situation, if it deteriorates, probably we might have some deterioration also in delinquency, but we really do not see these having a major impact this year. We believe that if we have any impact might be down the road, because this year probably it won't have the time to have the effect in P&L given the quality that we have today in our books, given the quality of origination that we are doing, and given all the monitoring that we have been doing in our portfolio. So we have been -- every month, we look very carefully through all the leading indicators, the quality of the portfolio that has been originated and we have been correcting any kind of deviation that we see.

portfolio. It's a very good run. So this makes me feel very, very comfortable about the outlook for the quality of delinquency. It's clear that as the macroeconomic situation, if it deteriorates, probably we might have some deterioration also in delinquency, but we really do not see these having a major impact this year. We believe that if we have any impact might be down the road, because this year probably it won't have the time to have the effect in P&L given the quality that we have today in our books, given the quality of origination that we are doing, and given all the monitoring that we have been doing in our portfolio. So we have been -- every month, we look very carefully through all the leading indicators, the quality of the portfolio that has been originated and we have been correcting any kind of deviation that we see.

So far, we don't see again any kind of deterioration there and we have been keeping a very strong control on that portfolio. We have a portfolio as you mentioned that are in segments, A and B. Clearly, we have a huge concentration there, because the bank is very strong in those markets. But as you've mentioned, we also have some exposure to the clients, although much smaller in terms of portfolio compared to what we have in A and B.

Did I answer all of your questions, I think so. If you have anything else, please ask me.

No. Thanks for the detailed explanations and congrats in 2014.

Thank you.

Philip Finch, UBS.

(inaudible)Ms. Setubal. Thank you very much for the comprehensive presentation. I've got a couple questions as well, please. First is to do with your capital position, which clearly has improved dramatically and impressively in recent quarters. My question is twofold here. One is going forward given that your balance sheet growth is going to be (inaudible)limited given the macroenvironment and giving you very high levels of ROEs and retained earnings.

This capital position is going to clearly rise quite dramatically going forward. So the question here is twofold. One is what sort of optimal level of capital are you targeting. And secondly, with excess capital how do you -- how are you considering deploying that going forward in terms of paying more interest on capital or just part of build out some sort of (inaudible)to make acquisitions.

And secondly, my question is to do with your ROE, which again has impressed in terms of the improvement we've seen in recent quarters. Again, what is the sustainable level here, are we at the optimal level. And again, working gains is your capital position, the equity is getting large and large and that's obviously putting pressure on that ROE? Thank you.

Okay. Starting with the capital position, I think that we -- recently, we have all those changes in the regulatory capital requirements. So we have been having to accumulate more capital in order to comply with Basel III specifically. It's not totally clear, all the requirements that might come ahead, I think we probably have gone 80% of the regulatory requirements, but there are still some questions, some things open that might made us need some additional regulatory capital looking from to be, but assuming that we achieved those levels and we are comfortable.

Basically today, we believe that being at the level of 11.5 or something like that in terms of core Tier 1 for the current level of capital requirement, we believe that we would be in a good position. So assuming that we at some point in time in the short future, we achieved that position, which we are not there today. We opted the (inaudible) at this level of ROE and distributing basically one-third of our profit as we have been doing. We will be accumulating capital because of growth. We will not be like 15% at risk this year and next year. So we will be generating more capital than we probably will need. I think that there will be two ways of using that, we today would consider to do -- to use the capital. One is future acquisitions, which we don't see today, they might happen. We don't see anything in Brazil and not anything in Latin America, which are the areas that we could be looking for additional opportunities. We don't envision anything today in US or Europe or Africa or Asia. We don't see anything that we might be interested. We are focusing basically in Latin America, so those are the markets that we would be seeing.

I think that in Latin America in general, assets are too expensive compared to Brazil, I think of the economic cycles takes place in the fall of pricing commodities. I think all of these will probably affect more positively relatively Brazil to other markets in Latin America making maybe things more attractive in the future. For the time being, we don't see anything to use the capital. So -- and additional alternative -- the alternative use for capital would be the acquisition of .

I think that as we feel comfortable with the level of capital the bank has, as we have done in the past and given the current level of price of our share, we believe that we might have an opportunity to acquire buyback shares to the bank.

Great. Thank you very much.

Carlos Macedo, Goldman Sachs.

Hi. Good afternoon, Roberto. Congratulations on the strong results in the fourth quarter. Couple of questions. Really, the first one -- it's two questions on the same theme and it's your guidance for margins. It's fairly robust, even though you did expand quite significantly in 2014 in the back of it. Just trying to give set up the stage a bit, the average (inaudible)in 2014 was up to 160 basis points from the average (inaudible)in 2013. We're looking at 2015 being a path of that 130. We know from prior calls that you're exposed around BRL 600 million financial margin for every 100 basis points. So all those people that's what we expect, we know that there is still the repricing of the back book even though over 30% of your books originated in the current quarter. So a part of that's already done, and we also know that there is a very significant shift in your loan mix. Also on top of that from what we could see here the big impact of the change in financial margin 2014 was in insurance and the services as opposed to credit. Could you give us some color on what's behind that guidance what you see for Selic at the end of the year? What exactly will drive the margins to essentially increase year-on-year since you're guiding for stronger growth in NII than you're guiding for loan growth. And then, I'll follow up with another question.

The guidance for Selic, we are not having a different view from the market something between 12.5 and maybe on the top, may be 13, but I'm more towards 12.5 and this was basically the number that we base the guidance. We are supposing up 12.5 Selic rate during this year. In terms of margins, one of the reasons is the Selic, why the gross margins that we are guiding from -- we are announcing the guidance for financial margin between 10 and 14. One of the reasons for this -- that has been growing -- outgrowing the loan portfolio is Selic rate, which has on the average in 2015 (inaudible)2014 will be higher.

Second portion is the fact that we have been declining delinquency this also adds to the margin additional revenue compared to the level of assets, also the fact that we are reducing growth. But when you take the average revenue that we have on loans compared to the previous year giving the deceleration of growth, these adds -- these brings more revenue to the loan growth. So there's a lot of small things that you adopt and at the end you come back to this level. Another thing which is important is the fact that we repricing the stock of loans in higher spreads. We are not expecting any growth in spreads compared to what we have today. We based our views and our guidance on the current level of spreads. With the current level that we are practicing today on spreads is a little bit higher, especially in some segments than it was one to two years ago. So the re-pricing of the portfolio is favorable and that's why all together, all of these we have margins outgrowing the loan book.

I mean surely there is the mix effect that will work against that a bit. But also you probably had that in 2014 as well right over 2013. My question is, most of the increase in 2014 came from insurance and other services. Is that something that we can expect to happen again in 2015?

Well, insurance is not an important sector in the financial margin, I'm not sure it's -- what you were talking about.

Is just the breakdown that you provided us this quarter within -- it went from 10 bid into 14 bid and so 35% growth there?

Let me check what you are referring to.

Page 16 on your presentation.

Okay, I'm there.

And just most of the increase came from there. I'm just wondering if we're going to see in the asset liability line is where it went from 1.3 to 3.2, which was the biggest in case in that specific segment. I'm just wondering if we're going to see the similar thing in 2015?

Some fees in 2015 and this also in spite of these process that I described to you of re-pricing and things, but this is also already taken into account in the financial margin, yes.

Just a follow-up question on that. Over the last couple of quarters you're trading business, treasury business has done much better than in prior quarters and we also saw (inaudible)at least under the new methodology they are using to calculate increase, should we expect both things to stay higher going forward? Is that a new strategy for the bank or is it just something to happen as you were taking opportunities in the last couple of quarters?

If you're referring to page 11, page 11 we have the financial margins with markets that we mentioned here. It has been stronger than the last year and is sustainable, but this is not really a trading business. Good portion of this OEM revenue is in here. So these -- the portion of trading revenue coming here, it's very small, it's a smallest part of the year. So what we have -- it really is much more ALM kind of revenue. So the trading, we do not expect any major difference of trading compared to what we have this year, the year of 2014 or even, the year of 2014 as a matter of fact it was not a great year in terms of trading, it was below 2013 and we do not expect that to really increase. The [banking book] is the one who is really making more difference.

Okay, thank you. I am very grateful.

Welcome.

Tito Labarta, Deutsche Bank.

Hi, good morning -- good afternoon for you. Thanks for the call. Couple of questions, one, just following up on the asset quality a little bit, you did book some additional provisions in the quarter. I just want to understand a little bit more the rationale behind that, was it specifically related to the Petrobras or just looking to what kind of drove that and could drive that in the future like what are you concerned about being ahead to those additional provisions? And then the second question, I saw some headlines, talking about succession plans could be starting on April, maybe you can give some more color on that in terms of the timing, potential candidates for CEOs, if you could give any color on that or just how you see that evolving? Thank you.

Okay, starting with succession plans, I still have two years to go. So it's something that this on the road. Its not something that we really discuss today. What will be announcing this -- the head of wholesale and head of retail business as an additional step to that. This will take place to April this year. So it's not something surprises going on, it will be a natural process inside the bank. I've been more recently delegating more and more, so this will be a natural process that we'll go ahead this year.

In terms of visions that we have made last quarter, additions or provisions, I think that we had -- looking ahead we see a year that will be a tough year (inaudible)all those issues on Petrobras (inaudible)on the corporate side, how this we win back the constructors. So we are observing these and the level of growth that we foresee. We thought that it would be a good idea to make additional positions for all this expectation.

So were you just taking advantage say about the gain you had from the large risk insurance operations maybe offset that with the additional provisions moving more just kind of cautionary more than anything?

No, I think that we would say that this was much more giving the recent deterioration of the scenario.

All right, thank you very much.

Mario Pierry, Merrill Lynch.

Good morning and congratulations on very strong results. I have two questions. So, the first one is related to your guidance for provisions of BRL13 billion to BRL15 billion. If you could help us understand or give us a breakdown on how do you see these provisions between corporates and consumer. And also related to this, as you showed in your presentation, your coverage ratio now is at 193%. Where do you think that this ratio is going to get to by the end of the year.

And then my second question is related to Redecard or Rede. We appreciate the improved disclosure that you are giving to us. And we notice right that Rede has gained market share now for two consecutive quarters after losing market share for about a year and a half; however, your market share still is well below historic levels. So if you can give us more color, specifically on Rede, what kind of growth rate do you think we could see out of the business, and where do you think your market share can evolve to?

Okay. Starting with the coverage ratio on those guidance of provisions, 2013 to 2015, we do not foresee any reduction in the coverage ratio. We are keeping the level of coverage ratio to reach this level of guidance. In terms of how much provisions, we think that we will have of this 2013 to 2015 on consumers and how much to companies and corporates, the only thing that I can tell you is the fact that compared to this year, we will have less provisions in consumer and more provisions on companies. I think this is what I can tell you.

In terms of Rede, you're right. Rede has been a recovery in market share. I think that at the beginning when we started operating Rede after the acquisition, we put a lot of efforts in terms of integrating it with the bank, reducing costs and expenses in general, improving the level of quality for clients. And this effort is now paying off. I think that -- and also the alignment of the interests of Rede with the interest of bank -- of the bank itself for the small business segment has been very strong. So I think we are in a good moment. I think we implemented the right strategies and we definitely have in doing a good job in terms of recovering market share during these last two quarters.

Saul Martinez, JP Morgan.

I know this question is going to come across as a little bit repetitive, so I apologize in light of all the questions, and the discussion on the Portuguese call in your prepared remarks earlier questions on this call. But, I think there is a bit of a disconnect between investors involved and the market participants and what we're hearing about Lava Jato rationing the economy, very, very negative headlines and views on Brazil, and your guidance (inaudible)guidance on loan loss provisions where you're expressing confidence that things will be -- things are fine. So, my question is more on corporate credit specifically, and if you can elaborate more specifically on why you feel okay, in light of Lava Jato in light of rationing risk? And is there anything you can share with us in terms of perhaps structured loan type of borrowers, collateral cash flows of borrowers, anything that can make us feel more comfortable and help us bridge the gap as to why you feel comfortable with corporate credit in light of what seems like a pretty difficult environment?

And secondly, I believe on the Portuguese call you actually said that the economics plan issue is something that worries you or that is a bigger risk factor for you and for the banking system and then Lava Jato; is there anything new there, anything you would be willing to share in terms of what your expectations are with the economics plan issue, and what your thoughts are on the potential for that to come before the Supreme court?

Starting with the economic plan and going into Lava Jato. I was asked, what would be my voice looking ahead in a moment (inaudible)that was even to me was mentioned the (inaudible)economic. So, I think that (inaudible)economically is that something that is worrying me. As a matter of fact, I'm much less worried today on (inaudible)economy than I was one year ago. I think things have been moving into the right direction, and I think the understanding of the issue itself is much more clear today.

The fact that the banks have not gained anything on the economic plans and they basically have implemented what the law required us to do. It's becoming much more clear to everybody, so I think the outcome will be positive. For sure, I worry about that issue because we don't have a final outcome and the numbers might be big. But I'm very optimistic about good outcome on that section. But given the fact that the number is a big number, I worry about it. I do not worry about that much on Lava Jato in terms of direct exposure that we have. That's why I see -- the exposure that we have, the confidence that I involved in Lava Jato are relatively small, assuming that Petrobras, I'm not including Petrobras on that. I don't have a big exposure on Petrobras. I'm really confident Petrobras is not under (inaudible)and the companies that we have exposure in terms of that has been involved within the Lava Jato, first of all the exposure relatively is small.

Second, most on the companies that we are talking about in terms of our exposure are groups and not companies exactly, but groups that have much more assets out of that kind of activity. So -- and we believe that if they have problems in some -- in the construction business, they have all the business and assets that they might sell in the strategy that makes us to feel very comfortable about the numbers that we have exposure. It's important also to understand that there is a number rolling out the press about $130 billion exposure of the Brazilian banking system to companies that are involved in Lava Jato. In reality, this is a misleading number, because when we talk about $130 billion, this includes all companies of those groups. So if you look at some of the groups that we mentioned in Lava Jato, many of them have -- the biggest ones have a lot of other business and these that have nothing to do with the construction company. And the number of $130 billion includes all of the exposure of all other companies that has nothing to do with Lava Jato.

It's basically companies that have partially the same shareholder, but unnecessarily all the shareholders because many of those companies are even listed companies. So all the exposure that we have that are included in that number of $130 billion. When you take the number of companies itself that are really involved in Lava Jato is a much, much smaller number. And a good portion of this number has collapsed if there was anything. In our case, we feel very comfortable with the level of exposure that we've. It's really not meaningful for us. Even if something goes wrong directly there, we do not expect that these BRL13 billion to BRL15 billion will be affected. We are very profitable with the exposure in Lava Jato and all those things.

That's great. So just a follow-up, I know you say you don't see any risk at all with Petrobras going into the fall, so with Petrobras having had the ratings downgraded by the rating agencies, is there any risk, and I know your exposure is small. Is there any risk that you have to downward to classify them into a higher risk bucket and that it get back a trigger an additional amount of provisioning back into bottom line?

Assuming that we keep in line with the international raters, the classification that we have in our balance sheet, this will not affect at all the level provisions that we'll have to do for Petrobras. Even this downgrade, we had already downgraded before. We are a little bit even more conservative. We have more granularity in terms of ratings than the agencies. But we are pretty much comfortable with the level of rating that the agencies are giving the Petrobras. We're even more conservative than they are.

Right. Thank you very much and congratulations on a very strong 2014.

Thank you.

Boris Molina, Santander.

I have a question regarding your presentation (inaudible)and the breakdown between credit and services. You mentioned that this is a business model. And this is what we want to review at this point, but I have impression that the old business model was still valid meaning in retail bank and insurance, car, consumer credit, and wholesale banking.

So my question is, do you entail it, changing the way you measure and manage the business or is this just an interesting set of life so that we can see that will -- does have like other banks fee-based businesses, like (inaudible)and Bank of Brazil. However, that doesn't mean that you try to expect analyst to apply a higher valuation given this breakdown that you've presented. And the question comes because we know the Bank of Brazil has been doing this asset revenue stripping in order to realize capital gains and support the capital ratios and help the treasury under constrained fiscal position. But this breakdown of businesses doesn't make sense on the point of view that is, some of these businesses cannot exist without the other. So you can really realistically expect us to assume a separation because in the instances where these assets have been strip, there is a huge degree of cross optimization that depressed the (inaudible)of one segment versus the other. And to a larger degree, it's kind of like (inaudible)some gain. So what is your thinking regarding this? Is this a real change in the way you see or expect us to see the business? Are you going to continue to present the results under this format and not on the other format? What could you expect on this?

I think this is an excellent question and give us more opportunity to discuss the business. I think one very important change that we have made since two years ago and now we're showing more results, what it deal that was the risk appetite. The risk appetite that we are implementing in our loan portfolio and the kind of pricing and everything is totally in according with the capital requirements for that activity.

So what we're trying to -- which we do not really did before as strictly as we're doing now is the fact that we're pricing risk much more according to risk itself in the capital needs that business have, that clients have, that loan have. So the big reason is that we're putting more, much more emphasis internally since 2012 to the fact that loans have to be -- the use of capital has to be paid by itself.

So the loan pricing, the loan activity today is much better price than if you use it to be. This is a very important change because probably looking back, if you go back many years, probably we were operating loans below worth of GAAP and where it should look only loans. Now we are going the direction of having loans, much better price that in terms of loans, especially in the loan segments. And you can see in the corporate segment, is more complex, but we do consider risk (inaudible)services for our mid and long-term loss. These have to be price according to the capital that it uses. We do some calculation on risk strategy as in the short-term loan but in the long-term loan. So, this is an important thing to see. Another important fact that a good portion, very important portion of that business of services and loans of services and insurance is not related to clients that has loans in the bank.

So I'm not saying that our independent business, but there are many, many clients, the good portion as I mentioned of that segment does not take loan from the bank. And this is important to understand that the bank is a bank is one Company, we have not considering to split it or to float any of those businesses, but not necessary the client of loans is the client of services.

We have many -- probably we have more clients in number that do not take loan and have services with us as compared to clients that has loans and services. Because also in the loan business we have clients and we are reducing it, but we have, we do have clients that only take loans. So the way we're looking at that is okay. We have to adapt the bank to this situation but loans have to pay for itself, that's the first idea.

Second is not necessarily this is important to you to understand. Clients that bring me having you on the services and insurance, not necessarily they have loans in the bank. Okay, so, this is very important also to understand.

So when we look the business internally this way, and we have all the internal targets and things and we have been increasing as we have announced that two years ago the importance of services in our business and all the investment and technology and everything. This results also consistent this idea of increasing the level and the level of service and number of clients on services and also revenue on service.

So we are really trying to give more weight internally in our business to non-loan business. Even though we believe that the bank will be always a bank, even though we'd like the loan business. Hence, but we today the vision is to manage the loan book in a much lower level of volatility with much lower risk and we can do that without supervising the service business -- the insurance business, as you can see we've reduced it in many segments or our loan presence and we reduced it, especially the higher risk segment without suffering on the revenue of services and without reducing our presence in service in general. So that's a very important point. The fact that clients are clients of the bank and we have supermarket of service to offer, not necessarily clients that have credits with the banks have loans on the bank, the ones who really service from our service business.

Is that okay?

Yes, it's wonderful. And I had an additional question regarding the prior question of capital and the outlook going forward. Do you expect that when you expand across Latin America that local regulators will demand from Itau subsidiaries and capital levels consistent with what will eventually be a domestically significant financial institution per Brazilian regulation meaning that you will probably see 100 basis points to 200 basis points capital surcharge. In the Financial Stability Board recommendations, the risk is caveat, I mean blind up potentially in Chile that (inaudible)I'm going to say CorpBanca, which after the merger is going to be better capitalized but still short of the levels that we think the bank should have, would potentially face an additional capital surcharge. Is it something that you foresee either in Chile or in Mexico going forward?

That's a very important question, especially given the fact that we plan to increase our presence in other markets. Yes, there are differences between the capital requirements of Brazil where we have our balance sheet consolidated and capital requirements in other jurisdictions.

In Brazil, we have higher capital requirements than compared to any other jurisdiction in Latin America, much higher. So when we do an acquisition, we plan to do something -- any kind of M&A transaction in Latin America, we basically consider the current level and the future levels of capital requirements that Brazil require. So this is -- makes me feel -- makes me less competitive compared to local investors, because I need more capital than local investors who have only to comply with their own jurisdictions.

So, as other countries like Chile, Columbia, they come closer to Basel III. I'll be more competitive, because the gap between the capital requirements in their view, we will reduce. Is that, okay?

Yes. Thank you so much.

Victor Galliano, Barclays.

Hello, yes, most of my questions have been answered, but due to the (inaudible)that holds here. But if we can go back to the credit quality question and one of the things that you did mention was about how much better your credit quality assessment was now and using in part the central banks database. Is there anything that has changed in terms of your sourcing of credit and how you assess credit risk in particular with regard to consumers that is independent of the data base, in other words, internally. And can you give us any color on how that's changed over the last year, year and a half, two years since you made the strategic decision to move away from revolving credit, ex-credit cards of course. Thank you.

Yes, there are many changes. The way we manage the risk of our consumer loan portfolio. In addition to check for all the clients the level of investments, we also are much more conservative today on the collateral portion that we want for our loans, especially in the vehicle loans we're requiring today much more collateral, so the client basically has to have an equity in that loan so that we feel comfortable. That's one of the reasons why we've been reducing our prices in that segment.

The level of collateral that we're requiring is much higher. The level of income also is higher than we used to ask and so we basically move it out, but it will (inaudible)the subprime segments, we're today much more concentrated in A&B segments compared to what we were two years ago. There are many other specifically the , but basically the whole policy for credit has changed. It's much more detailed and carefully monitored. So that we monitor region by region. We're monitoring a lot of things that we do not used to do. But basically a lot of small things like those that I mentioned have changed.

Congratulations again on very -- yet another solid set of results. I had a couple of questions if wish I'd really be grateful if you could clarify. The first one is, and again, sorry, to go back to the question that kept -- been asked throughout the call, but could we please go back to slide 24 and your 2015 outlook for the provisions. Could you please provide a bit more clarifications on your key assumptions for wider provisions, forecasts would be in line with last year's, especially that this year would be clearly a more challenging year from a macroeconomic perspective and also we have the overhang of the car wash exposure? That's my first question.

My second question is related to CorpBanca. Could you please provide a bit more color on when you expect the transaction to be completed and also do you have any other expansion plans in Latin America for next year -- for this year or next?

First, we do not envision any transaction in Latin America for this year, anything relevant. We envision that probably before end of this first semester of beginning of second semester, we should have all the approvals and we should start consolidating CorpBanca in our balance sheet. Things are moving little bit slower than we would expect, but that certainly I think happened with regulator benefits.

On the guidance on loan loss provision, I can understand that you guys feel surprise at the level provisions giving the fact that the macroeconomic situation is getting worse. And basically why I do feel comfortable with the guidance that we gave you. Basically, because we started two years ago moving into a more conservative -- more than three years ago, it was in 2012, moving to a more conservative kind of risk appetite. So all of the loans that we have been origin making, things then have been under different level of risk, much lower risk. That's why things then, if you look our numbers on credit quality and delinquency, we have been improving, basically because we -- at the beginning, very first moment, when we started to [cut] off this kind of policy, we had a mix of much more loans that we're underwritten in the old (inaudible)in the old previous risk appetite and a small portion of the ones that we are underwritten in this new risk appetite.

Since then, we are moving out of the loans that were underwritten in the old risk appetite and moving in into this new quality of loans, much better quality of loans under the new risk appetite. So that's why we have been improving the risk quality of our both (inaudible)volumes.

We have not gone through all these processes still have in our books, loans that we have underwritten under the old risk appetite. And that's why we are still -- even this year, which was a very bad year in terms of economic development, the growth was close to zero. And by the way, we have been -- in last two years, we have had a very low level of growth in Brazil. So the next year growth won't be that much different from what we have had these last two years.

So even though we have been improving our risk -- our delinquency ratio, exactly because of this mix of new risk appetite underwritten loans and old ones. So we are more and more moving towards to get to a point, probably along this year, of having probably 95% of our loans under the new risk appetite model.

So that's why we believe that we are still in a mood of improving things. I'm not saying, if we had stable risk appetite, even the new one, probably we would see a situation that we would show some deterioration. But the situation that we expect today is much smaller than the benefit that are still coming from cleaning up the books and improving the mix that we are still underway.

Sure. So essential the BRL13 billion to BRL15 billion incorporate both the benefits from this de-risking, which has taken place a few years back.

Yes.

Plus the cost from the (inaudible)exposures.

Yes, you're right. And by the way, one important comment is that if we had a more -- I mean, if you look only at the consumer portfolio, probably 2015 compared 2014, we'll have a lower level [for this]. And on the company sites, we would see an increase in provisions year-to-year. So at the end, that's why at the end more or less they balance the chart, they offset the chart.

Thank you very much.

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

Okay. Thank you very much for having the opportunity to talk to you and showing why we are positive about 2015 year. And I was very glad also to share the views about our business model, which we'll get in more details in future presentations. Thank you all for being with us and for the questions. Thank you. Bye-bye.

That does conclude our Itau Unibanco Holding earnings conference for today. Thank you very much for your participation. You may now disconnect.