伊塔烏聯合銀行 (ITUB) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holding conference call to discuss 2015 first quarter results. At this time, all participants are in a listen-only mode. Later, we will 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 May 12 by phone on (55-11) 3193-1012 or 280-4012, access code 8187089#.

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. Eduardo Vassimon, Executive Vice President, CFO and CRO and Mr. Marcelo Kopel, Corporate Controller and IRO. First, Mr. Eduardo Vassimon, will comment on 2015 first quarter results. Afterwards, management will be available for a question-and-answer session. It is now my pleasure to turn the call over to Mr. Eduardo Vassimon.

Thank you. [Be welcome]. Good morning, good afternoon. It's a pleasure to be here with you today to talk about first quarter results. For those that are following our presentation, please go to page 2. I will start with highlights of the period.

The first highlight itself is the recurring net income BRL5.8 billion, 3% above last quarter, that was a rather strong quarter and 20% growth in 12 months. Recurring ROE, close to 25% and credit quality measured by NPL 90 days is stable, in relation to last quarter, 60 basis points below the same quarter of last year. When we look the shorter turnover NPL 15-90 days, we see an increase of 40 basis points. There is here seasonal elements that we're going to see more during the presentation. I'd like to highlight the stronger financial margin growth, financial margin with clients 3% in the quarter. We had exceptionally high margin with market BRL1.9 billion in this quarter. We consider this as unusual event. The same applies in our opinion to the level of loan loss provisions made in this first quarter BRL5.5 billion, 20% growth over last quarter. We also consider this as a unusual effect number, we are going to talk more about that during the presentation. And finally in this page of the quarter attention to the reduction in non-interest expenses 2.3% in this quarter. This is partially affected by seasonal effect.

Moving to page 3, we show that we have been able to deliver consistent recurring ROE above 20%. On slide number 4, we see the main lines of our P&L. I would call here your attention to the variations observed between the last quarter of last year and this first quarter. The main figure here is the increase in managerial financial margin BRL1.3 billion due to increase both in margin with clients and margin with markets. Margin with clients went up 3% in this quarter, despite the lower number of calendar days. And margin with markets as already mentioned was exceptionally high, around BRL850 million growth. Another line that deserves highlight here is the increase in commissions and fees 0.6% in the quarter. Normally first quarter is slightly below the last quarter of the previous year. And then we have again here loan loss provision expenses with substantial increase of BRL900 million, 20% over last year. We are going to talk more about that. We see here also substantial decrease in recovery of credits 20% in this quarter. This is due to two basic factors, one is seasonal element here and the second element is the more challenging credit environment. Another line here I'd like to comment is retained claims substantial reduction of 26%, but this is positively affected by the fact that we have sold the larger risk operation last year. Altogether, we produced recurring net income, again [3%] above last quarter and 20% in 12 months.

Moving to page 5, where we have our loan portfolio, I'd like to highlight here that main growth come from two lines, payroll loans and mortgage loans. This is pretty much in line with our strategy development already for a couple of years, moving to less risk portfolios. So, payroll loans growth was strong 10% in this quarter. This is partially affected by acquisitions of portfolios that we made in the amount of BRL1.8 billion. Vehicle financing showed a reduction of 9% in this quarter and 20% in 12 months. We don't see this portfolio growing at least until the second half of next year.

Another line I'd like to call your attention to credit card loans, this BRL56 billion in the first quarter show the reduction of 5%. This is very much due to seasonal effects. Typically, the last quarter of each year is particularly strong. And I'd like to mention that this BRL56 billion of credit card receivables is substantially composed of non-interest receivables. This is a characteristic of Brazilian market. In our particular case, three quarters of this number roughly speaking relates to sales at sites on in installments, but in any case, non-interest receivables and this 75% figure is above market average. The remaining that is interest bearing receivables. We have a smaller part represented by revolving credit. Revolving is the part of this portfolio that bears the higher risk and higher rates and here again, this represents only 8% of this BRL56 billion and we are below market average. So, altogether, we showed an increase in the quarter of 3.4% in our credit portfolio, 14% in 12 months. When we exclude foreign exchange rate variation, that's the last line here or you would have actually read a small contraction of 0.6% in this quarter and a modest growth of 6% in 12 months.

Moving to page number 6, we show this for the first time in our first quarter, is the segregation of results in basically two blocks credit and trading on one side, and insurance and services on the other side. And here, we try to segregate the part of our P&L that is riskier and more sensitive to economic cycles as is the case for credit and trading and less risky part and much less sensitive to economic environment, that's the case for insurance and services. And here we can see that most of our BRL5.8 billion of recurring net income was made in the insurance and service part that delivered a substantial return on equity 47%, while the credit and trading showed a return close to our cost of capital.

Moving to slide number 7, where we see the mix of our loan portfolio. I would like to call your attention to the right side of the this chart, the upper part of this page, where we see the growth of mortgage and payrolls that basically almost doubled in three years. Here again, consistent with our strategy of moving to a less risk portfolios. On the lower part of this slide, we see that we were able to grow our financial margin with clients despite a smaller number of calendar dates that had in this first quarter relevant effect of minus BRL262 million and the positive element was basically due to reprising of our portfolio. The competitive environment and the more risk environment made us reprice several products increasing their spreads.

On next slide, number 8, we see some stability in the gross credit spreads around 11%. If we exclude the foreign exchange effects, this would have been 11.3%. When we take into consideration the risk element, so adjusting this figure to provisions for a loan losses, we see a sharp reduction and this is due, of course, to the high level of provisions made in this first quarter and the same applies when we look at the non-interest margins with clients. On next page, page 9, we see financial margins with markets. So, very strong figure of BRL1.9 billion. We labeled this as one-time event, probably would be better to call it an unusual event, because we don't expect this to be repeated in the next quarters. The more let's say consistent figure would be around BRL1 billion as we can observe in the previous three quarters.

Slide number 10, starting to talk about credit quality. The 90-day NPL ratio, we see a reduction in individuals, a continuing reduction in individuals, a process that has started a couple of years ago and certain stability when we see the total portfolio. Actually, this 3% total would be 3.1% if we exclude FX variations, so basically stable in relation to the last quarter of 2014. On the lower page of this slide, we see a substantial increase in the 90-day coverage ratio, basically meaning that for each Real that we have in arrears 90 day, we have two Reals of provision and this increase from 193% to 200% was basically due to increase in the generic allowance coverage. That's the middle part of those bars. This was voluntary and preemptive move that we decided to make basically downgrading of the corporate portfolio.

So, given the more challenged environment and in line with our more conservative policy, we somehow anticipated some effect by building up those provisions and that's the main reason for the high figure of BRL5.5 billion that we saw in the previous slide. This means that if you are right in anticipating problems that we might see in the future, we could expect these coverage ratio to go down a little bit in the next quarters and conversely we would see some increase in the NPL ratios, but the expense itself now we feel wouldn't grow. Actually, we are going to talk about that in the future, later in the call. We expect the expenses to go down during the next quarters.

Going to slide 11, we see here that the increase in provisions was followed also by a reduction in recovery. This reduction is partially due to seasonal effects, but also related to the more challenging economic environment. Actually, we expect now for 2015 to have this figure to be around BRL4.2 billion in the whole year, down from BRL5 billion that was our previous expectation. In the lower part, we see the total level of allowance for loan losses reaching BRL28.4 billion. The slide number 12, we see here credit quality measure by 15 to 90-day NPL ratio and we can see very clearly here a seasonal element in this increase from 3.8% to 4.1% individuals. This phenomenon was very similar to what we have seen in the previous four years. When we take the total figure including companies, we see an increase of 0.4%.

Moving to slide 13, here we show the breakdown by segment of our loan loss provision. On the gray area, the gray part of the bars, we show the retail banking loan loss expenses of each quarter. We see some stability around BRL3.5 billion. And what explains this substantial increase of expenses in this quarter is clearly related to the wholesale banking operations. And here we labeled this one-time event again here probably non-usual to be a better form of labeling it. And we believe that this is, will be the worst point in terms of nominal expenses [BRL5.5 billion]. We expect this figure to go down quarter-by-quarter and the accumulated figure growth for the year in our best judgment would be close to the midpoint of our new expectations that we're going to show a little bit later. So, this again was preemptive and a voluntary measure downgrading some particular corporate credit.

Moving to slide number 14, I'd like to highlight again here the increasing banking service fees and income from banking charge 0.6% in the quarter, a quarter that normally is slightly weaker than for the last quarter of the previous year. We see reduction in credit cards 3.7% and this has a seasonal element. When we look the 12-month growth, we have 12.5% and if we exclude the non-core insurance activity, we reach the 13.4%. [What is] considered to be non-core is extended warranty. This is a business we are getting out of, large risks that we have sold last year, health insurance and others.

Moving to slide 15, we see robust growth of revenues of our core activities, insurance core activities 14%. On the right side, we see good evolution both in terms of claims ratio and combined ratio and relevant market share of 18%. On next slide, number 16, we show non-interest expenses reduction of 2.3%. Here again, there is a seasonal element and we show also here what would be this figure without offshore operations because here of course there is an element of currency devaluation, so would have had 4.2% contraction and in 12 months, a growth of 7.6%, that below the inflation of the same period towards 8.1%. In the lower part of this slide, we see continuation of the positive trend of improving our efficiency ratio in 12 months. When we take just this quarter, again an improvement in the efficiency ratio to 43.2% but a worse figure adjusted to risk because again of the high level of provisions that we made in this quarter.

Moving to slide number 17, talking about core capital ratio, so we had 12.5% in December. Despite the income that contributes positively to 0.8%, we reached 11.6%. This was due to payment of interest on capital that we typically do in the first quarter, payment of dividends, the additional impact of Basel III schedule, additional 20% Basel schedule and a relevant effect 0.4% of increasing tax loss carryforwards. This is related to our structure of investments abroad. When we have relevant depreciation of the Real as we had in this first quarter, close to 20%, our investments abroad -- the increase in our investments abroad is non-taxable while the hedge that we make is tax deductible. So, this produce a substantial increase in our tax loss carryforwards. When we see full Basel III rules, we have this element in a stronger way. So, start from 11.6% of common equity, we reach 9.6% fully loaded, and we just broke down here the effects in deductions schedule anticipation and risk-weighted assets rules anticipation because I believe not all banks take into account all those effects. This 9.6% fully loaded Basel III ratio, given the present FX ratio around 3.10%, would already been above 10%. So, we are comfortable with this level of capital, particularly given our ability to generate profits. Moving to slide 18, just quickly highlighting good liquidity of our shares, reaching close to BRL1 billion daily trading volume with a good balance between local and external market.

Slide 19, we decided to change our outlook for this year, given the relevant change that we observed in the economical situation and the relevant change that we observed in the expectations of economic agents. We had relevant changes in FX rates, in interest rates and particularly in the forecast for economic growth. So, this led us to change all the line of our outlook. Our total portfolio in this revealed outlook would grow between 3% and 7% only given the low economic growth environment that means lower demand for credit on one side and a more conservative approach from ourselves. In terms of managerial financial margin, our reviewed outlook [is to be] substantially higher than the previous one, given the re-pricing process of portfolios that we have already mentioned, given also the fact that we had rather a very strong first quarter and finally, given the higher level of interest rates. The loan loss provisions outlook went also up [on 13% to 15%] to BRL15 billion to BRL18 billion. So, this is partially due to the already mentioned lower level of recoveries that I mentioned would be in our expectations around BRL4.2 billion. It's related of course to the more challenging economic environment and finally to the fact that we had already made a substantial increase in expenses in this first quarter. Services fees and results from insurance, we made a small adjustments here. And finally, non-interest expenses, given the new level of FX rate and given the higher inflation, we are forecasting 8.3% inflation for the year, we have adjusted this to 7% to 10%.

Finally on slide 20, just to briefly mention the strategic alliance with MasterCard that we had already announced to operate a new electronic payments network and also to highlight the fact that we have opened our new technology center that is aligned with our strategy to move in the direction for more digital bank and to provide more agility and security for our clients. So, with that, I finalize here and now Marcelo Kopel and myself would be available for questions. Thank you.

(Operator Instructions). Jorge Kuri, Morgan Stanley.

Let me ask two questions please. First on asset quality, if we go back to the last couple of earnings calls, you were very confident on delinquency and provisions would remain steady even though the economy was already in recession and the labor market was [offering]. And you mentioned you've de-risked the balance sheet and in general prepared the bank for the tougher times. And to be fair you did get some pushback from the analysts at least in the fourth quarter call that some of your views were probably a bit too optimistic. So here we are three months later and provisions surprise for the upside, renegotiated loans had a pretty big jump, bad debt formation went up a lot and you've just materially increased the guidance for provisions this year. So, obviously, something did not play it out as you expected. Now I hear that you're saying that the deterioration in delinquency and increase in provisions is now behind and the worst is behind and that we're going to see actually improvement going forward. So, given that three months ago, you did not see the deterioration that was around the corner, how do we get confidence that this time around, you're going to get it right? And maybe the right question to ask is, what did you miss, what did you learn through the process and more importantly, what have you changed in order to make sure this doesn't happen again? And, I'll ask my second questions later.

First, we have knowledge that the new economic environment is worse than we anticipated. So, what we did is to adjust the provisions given the deterioration that I believe is substantially worse than we and part of the market expected. Just to qualify about the worst is behind us, the worst is behind us in our opinion in terms of provision. In terms of economic environment, we believe that worst is still to come. Probably, in terms of economic growth, the second quarter will be the worst one and we are sure that unemployment will go up and so, we expect that even in the retail portfolio to have some slightly increase in provisions in the next quarters. But in terms of the level of expenses, our judgment is that we saw the worst point and all of those elements are incorporated in our new guidance. So, again, it's a very challenging environment. We don't deny this. We expect the retail portfolio to (inaudible). We are going to see NPL ratios going up, probably because we made this preemptive move in building up provisions, but we are confident that the final number for the year will be close to the center point of our new outlook.

All right, thanks. My second question is on your guidance for NII growth. How much of the change is mark-to-market as a result of the high trading gains this quarter and how much is due to things that you think will be different over the next 12 months versus what you told us three months ago? Maybe you can share the detailed math behind it in terms of the key drivers of this line?

Let's strip out the why we reviewed it. First, obviously the, let's say the additional let's call BRL900 million of let's say treasury gains that we had this quarter already had an influence on the revised number, but we are not let's say, putting that as part of our run rate where we typically expect like a BRL1 billion a quarter. So, that influenced the number. The second thing is, when we did initial outlook of 10% to 14%, there was a high component of using the NIM level of the fourth quarter and just by annualizing that would give us a lift on the NII, okay. So, part of that comes from that. But over and above that, we got the market rates going up and spreads going up as well. So those things also influenced. And the third element, which is important is, our free cash flow which is subject to the influence of the SELIC rate. In our base scenario, when we provided the outlook, we had a lower SELIC. So, the SELIC by itself also had an influence on why we're expanding that. So, to summarize, we trued up the outlook including the performance of the first quarter plus higher interest rates and higher spread over the course of the year.

Carlos Macedo, Goldman Sachs.

I have one question that will have a second part I believe and I am going back to Kuri's question on asset quality. If we take your numbers for the guidance, the new guidance, it implies, compared to the old guidance, increase in around BRL500 million per quarter in provision expenses outside [whereas] discounting will happen in the first quarter. Do you think that's enough to offset all the headwinds that you talked about in the economy? We're talking about an unemployment rate that is going up and will continue to go up. We're talking about a potential hit in SMEs that hasn't really come through yet, at least not in the numbers that you've provided us. Do you think that, that is enough for us to see to basically last through the end of the year or do you think there is more risk to the upside than the downside here?

The view is that the range that we provided, BRL15 billion to BRL18 billion, should be enough to walk us through what you just described, okay. We commented that in the other call but embedded in this BRL15 billion to BRL18 billion, there is some deterioration in the blended rate of the individual's portfolio. Obviously, this is a consequence of a higher or growing unemployment rate. And in the rest of the, let's say, increase of the loan loss reserve, it comes from the large names. We've been trying to be as much preemptive as we can in terms of anticipating those provisions. Vassimon described the potential impact of certain names going in over 90 days, which will increase the numbers in terms of the index and reduce coverage, but nevertheless, will not impact the -- or a spike -- produce any additional spike in the level of the provisions. Therefore, the current view is that we should be lending the year in the midpoint of the new outlook but having some room to maneuver in case things get worse than we expected.

Now, just of complement, Carlos, here, you mentioned a very small and middle market segment. This is, of course, a segment that suffers in this new and more challenging environment. But, in our case, if we look, our growth in this segment has been very modest. In 12 months, we've grown less than 2%. So, we have been particularly careful in this segment.

Okay, thank you. Just going back to then the provision you made on the corporate side this quarter, would you call it more of a specific provision for companies that might have been involved in the Car Wash investigation and companies in the oil sector or would you call it more of a provision for a cyclical factor that involve with the downturn of the economy?

I won't call it cyclical. I'll call it specific names where we have what we've been focusing more but nothing that you would say sector A or sector B has been hit hard. So, I won't call it cyclical.

Okay. I did see that a lot of the names moved to the D category and that's when you start getting 90 days past due. You could have more provisions if they move past 90 days past due to 120, right?

No. Actually, E will reflect over 90, D is before 90-days. But that is just a result of how we're seeing things and trying to pre-empt the provisioning as Vassimon described before.

Okay, final question on this topic. Your guidance does reflect -- for NII, does reflect a strong increase as you said. Your non-accrual loans are growing for the first time in I think five or six quarters. And presumably, that growth was accelerate going forward. What kind of growth do you factor for your non-accrual loans over the year? I know that your loan growth is 3% to 7%, but presumably, your non-accrual loans are increasing. How much of an impact that will have in the expansion of your margin, of your NII?

Well, it's embedded in the growth that we provided, the revised outlook already embeds a higher, let's say, non-accrual portfolio, but given that a bigger piece of this non-accrual is coming for our larger tickets, the foregone revenue of that is lower than one could think.

Okay, but would it be fair to say that even though your portfolio grows at 3% to 7%, your accrual loans will probably grow at a fraction of that?

Yes, it's fair to say, because it's just how the math would play. But one thing that is important, Carlos, is, this year in particular, the average portfolio growth will be higher than the end-of-period growth. So, that also helps, especially, obviously I'm talking about the current portfolio, that helps increase the NII.

For sure, but so will the non-accrual loans?

Yes, absolutely. I'm just adding to the point that you made about the non-accrual.

Mario Pierry, Bank of America Merrill Lynch.

Let me ask you two questions as well. Let me stay with the topic on asset quality. As you mentioned, you do expect NPLs to go up from current levels. If you could share with us what type of increases are you expecting, especially on the corporate and in the individual segments? And how should we think about -- if we go back and look at your historical NPLs, the peaks are much higher than what you are at right now. Would you think that we could return to an environments where we see the peak NPLs that you showed, especially in 2012 as you show on your slide 10 but even if we go back historically, the peaks used to be much higher. So, can you give us some guidance on what type of increase in NPLs you expect? Also, on asset quality, coverage ratio of 200% now is the highest it has been I think in at least five, six years. How should we think about your coverage ratio going forward? Is this a ratio that should be returning to 170% in the next few years or given the uncertainties in the market right now, would you expect the ratio to stay at 200%? And then, I'll ask you another question on expenses, but if you could answer these two questions, that will be great.

Let's start with the coverage ratio. Coverage ratio is really is not an objective, but as a consequence of everything that we are foreseeing the portfolio. So, as Vassimon mentioned before, if the actions we took preemptively to build provisions -- let's say, the judgment that we had materializes, you could see some consumption of the coverage as a result of that, as well as the NPLs going up. Talking about the NPL going up, you would probably see it at a higher point in the second quarter and going down throughout the third and the fourth quarter. The end of the year, the end of 2015 should be slightly higher than we actually saw for the end of last year, but lower than we actually going to see in the second quarter. So, we cannot provide you with the number. I can give you the trend is basically up in the second quarter and slowly returning throughout the end of the year. That is the view regarding this. And obviously, when you do see that, you would see impacts on the coverage because as credits flow from the early bucket into the later bucket, the longer bucket, coverage will be consumed on that.

So, when you mentioned that the NPLs should be moving up to second quarter, are you more concerned about the corporates or the consumer portfolio?

Primary corporate. There will be something in the consumer but this is more related to the typical behavior that we have every year when you see a spike in the short term in the early buckets and some of that goes to the longer bucket. On the corporate side, is more on a case-by-case basis.

From what you've mentioned then, clearly, you don't see your NPL ratios going back anywhere near the peak levels that we saw in 2012?

No, I don't. That's the current view of the house.

Okay. My second question then is related to your expenses. You increased your guidance more in line with inflation or even above inflation. For the last couple of years, you were able to keep your growth below inflation. Also, when I look at your efficiency ratio, it has been improving, but it still is substantially above your main peer here in Brazil. So, I was wondering, what else can you do on the expense front in order to grow below inflation?

Sure. Let me strip out the growth on expenses in two major components. The domestic operations and international operations. International operations, given the behavior of the Brazilian currency not only against the dollar but against the other Latin currencies, in relative terms, the Real got weaker, which means that, when we do the translation of those currencies into our own local currency, we are getting benefits on the topline but also we are getting a higher component on the expense line. The net of that is positive since we are generating profits abroad, but on a line-by-line basis, you get some distortion out of that. When we look at the domestic piece of that, we are working in terms of streamlining our processes and continuing to make sure that the other lines non-related to personal become more efficient. Part of the restructure we did earlier in the year created a new function, which is basically you can call it a Chief Operating Officer, which now has not only the technology part of the bank, but also all the operations area. We expect synergies to come out of the rationalization of processes and the way we run those operations area, we should be able to come up with an estimate by -- when we talk about the second quarter numbers, but this should be something that will provide long-term gain by becoming more efficient in this particular area. And the third element is the behavior of our client is migrating to becoming more digital. So, by becoming more digital, it asks us for less of a physical presence and which is more labor intensive and requires larger IT investments. Having the ability to foresee that, five years ago, we launched that big BRL11 billion program of IT investments and this is materializing now. So, over the course of the years, the physical presence will be less important than the digital and this should also help us bring more efficient.

Okay. So, just to give us, are you willing to commit to some type of efficiency target over the next year or two?

The commitment comes from our own goals. Every senior executive here has a goal in terms of its expenses and the target is to at least on the domestic side growth at inflation, which means that you have a challenge by itself. When you isolate the component of the facts and let the inflation abroad, this is less under our control, not that we don't act on that but the local executives are tracked and measure about growing at inflation.

Saul Martinez, JP Morgan.

I have two questions on credit. One, a little bit of a follow-up on the previous question. There has been a pretty substantial structural decline in asset quality metrics across all measures, you look at 15 to 90-day delinquency. Yes, we see the seasonality in 1Q. But individual 15 to 90-days were 11%, I think in 2009, it's [7% to 11%]. Now, (inaudible) change. We see this across a lot of metrics, longer term, and the reasons are, you've discussed a million times; mix, risk aversion, what not. But, are we at an inflection point even with these structural changes, especially considering not just the current economic environment, but in an environment where Brazil doesn't grow much over two, three plus years, four years, I know this isn't necessarily the house view, but how do you think about the risk on credit of a prolonged and gradual worsening in terms of credit? How do you think about the sort of the structural dynamics over two, three year period considering in environment where Brazil doesn't really grow much and stagnates over a multi-year period?

Second question is on provisioning policy. It's a more specific question. And how closely does the Central Bank force banks to harmonize the classifications. You took a generic reserves in the wholesale bank. But, I guess, what I want to understand better is if there is a -- if this is a conservative risk classification, do other banks need to upgrade and revise their classifications? Conversely, if your risk classification is not as high, how proactive will the Central Bank be enforcing you and other banks to harmonize this or is it more on a loan-by-loan basis with the specifics of the loans being the driver? So, those are my two general themes of question.

(technical difficulty) of course, given [this environment], we have to price our credit accordingly. And so, in a riskier environment, we expect to reprice our portfolio as we started to do in this first quarter.

Vassimon, sorry to interrupt. I apologize for asking you to start over again, but I think for me and for some others, the line went quiet up until about 10 seconds ago. So, I think we all missed, if I'm not mistaken, your response. I apologize for that.

Okay, sorry about that. I'm going to repeat everything. Maybe you have already heard, but we expect the Brazilian economy to have its worst point in this cycle in this second quarter in terms of economic activity. Of course, the effects of this will be felt still for several months. In terms of unemployment, for instance, the peak would probably be seen between the end of this year, beginning next year. So, this is slight improvement that we shall see next year. We don't expect any fantastic growth, but some growth already next year with marginally improved credit conditions in general. Having said that, all together are riskier environment and we have already been adapting our credit policies since the second half of last year. And also we are repricing our credits in a fashion that's compatible with this riskier environment.

In terms of the Central Bank of Brazil approach, yes, they follow and monitor this very closely and when they do identify a substantial divergence between banks for the same specific client, they question both banks. But, when you are more conservative, much more conservative than the rest of the market, Central Bank typically wouldn't ask you to reduce your provisions, particularly because there is no tax effect as you'll know in the provisions. But when they see the majority of the market with a specific name and one outlier with a much better classification, then they probably would ask this outlier to adequate its rating.

I know you can't talk for others, but do you feel like your provisioning on the corporate side tends to be on the conservative and of the provisioning levels in the banking system?

I can't comment on our other participants in the market. I see our policies as adequate to the present environment. We historically have had a conservative approach I think is adequate and particularly has been preemptive particularly in this quarter, anticipating possible problems that we might see in the future.

Okay, thank you. And, sorry for asking you to repeat your answer again but thanks again.

No problem.

Philip Finch, UBS.

Just one question and it's regarding HSBC. If they were to sell their Brazilian and/or their Mexican business, is this something Itau would be interested in exploring and if so, in terms of the sort of synergies that you think you could get from such an acquisition, could you outline what you think these could be?

Philip, the only thing I can say is that we always analyze opportunities that could add value to our franchise, to our shareholders, and that would be compatible with our strategy. So, that's all I can comment.

Amit Mehta, PIMCO.

I guess, I just wanted to follow up on the asset quality question that has been posed by the various analysts already. You made the point that you've taken more specific provisions for corporate. And I'm just trying to get my head round what the kind of GDP -- I know you've revised your GDP estimates for Brazil, minus 1.5% for this year, and unemployment higher. Can you give us some sensitivity if we were to stretch those economic scenarios for more deterioration, how much more your credit quality or preemptive provisioning would need to go up from the levels that you're guiding currently? So, can you just give us more color on maybe another 0.5 percentage point deterioration in the economic outlook for Brazil and if you had one more percentage point of deterioration in the unemployment rate, how much further that would stretch your preemptive provisioning?

In terms of the sensitivity to GDP fluctuation, on the magnitude that you're talking about and within that calendar year, we will probably fall within the interval that we provided, the BRL15 billion to BRL18 billion. And which doesn't mean that will not affect subsequent years because with the, as you pointed, the minus 1.5% GDP growth for this year talks to probably 0.7% growth on the next year. So, this will have a chain effect on the following year. So, with the sensitivity we've ran when we did -- with the exercise we've done for the new outlook and given what we're foreseeing in the economy, the BRL15 billion to BRL18 billion could be okay on a lower fluctuation of that. What could change the view is larger cases that we did not contemplate on the preemptive provisioning that could spike the provision level, but it's less related to a specific slowdown and more related to large cases that were not contemplated in the exercise.

And, just on that basis, where would you see potential risk, large risk candidates come from? You made the point in your commentary today that it was much more broad-based rather than any sector or segment-specific. So, can you just give us more color on where the hotspots are for you and your portfolio?

There are some companies that are let's say more related to some of the slowdown that we saw as a consequence of the initial events we had in the year, some of them related to the Petrobras discussion. Now that the financials are released, this becomes less of an issue and life should continue there. But it's not really a one specific name or another one or one specific sector or another one, but the overall let's say focus is on large names that could potentially change the overall interval, not that the smaller names will make a meaningful change on the new BRL15 billion to BRL18 billion range.

And just to take a clear message from what you're saying, majority of the risk, as you see it, sits on the corporate segment rather than the individual segment. Is that fair to say?

Yes. It's a fair statement and we did mention before that you could see some upticks on the individuals portfolio. And that's something that comes together with a slower economy. But, let's say, the majority of the increase is related to the corporate segment.

Victor Galliano, Barclays.

Just a quick follow up again on the provisioning side and taking the midpoint of your guidance that you've taken for net provisions of BRL16.5 billion and the fact that you've down BRL4.5 billion net in the first quarter, that doesn't seem to me like it's going to be coming down a whole lot in the next three quarters. If you average that, that should be around BRL4 billion a quarter. And obviously, with the fact that you're also saying recoveries should be lower, given the economic situation, it doesn't make it look like a sort of one-time big event if you see what I mean, the first quarter, net provisioning. So, I'm trying to get my head around that unless obviously the remainder of this BRL16.5 billion is not distributed evenly over the quarters which is also very possible. But that could also imply that you see another big quarter of provisioning ahead of us?

And my second question. So, I just wanted to understand that a little better. And my second question really is about capital. Could you just repeat what you said in terms of where we are -- in terms of where we are now in the exchange rate, where would you be on a fully loaded Basel III? Would that be at above 10%? And also, if you could remind us of what the impact of CorpBanca will be in terms of the impact on capital, and that should I believe come through in the second half the year?

Let's answer your questions starting with the end. The CorpBanca fully loaded impact would be 50 bps on our capital base. The level, if we recalculate our Basel of 9.6% with the dollar exchange rate at 3.10%, this would bring us about 10% of CET I fully loaded, okay. And the third one, talking about the provisions, let's split the answer in two parts. One is recoveries and the other one is on the gross provisions. On the recoveries, Vassimon mentioned that we did have BRL1 billion in this quarter. Typically, the first quarter is a slower quarter in terms of recoveries and you can test that against the historical data and this is just a function of more commitments that people have in the first quarter and companies as well. So, our number for the year talks to a BRL4.2 billion recovery level. For the following quarters, the gross provisions should either level off and then starts slightly reducing from the third quarter onwards. If you do the math, using our first quarter of BRL5.5 billion, you will get to a gross number of BRL22 billion of gross provisions, okay. If you look at our new outlook, the BRL18 billion which is net of recoveries, assuming a BRL4.2 billion recovery brings you to BRL22.2 billion gross provisions. So, that's how we laid out our outlook and that's why we say if our current view materializes, that will brings us more in the mid-point of this new BRL15 billion to BRL18 billion range than to the top part of that.

Boris Molina, Santander.

Yes. I had a question regarding CorpBanca transaction. I don't recall but at some point, I think I read your transaction agreement. But what are the conditions in the transaction agreement under which the controlling shareholder of CorpBanca could walk away from the transaction without paying the $400 million break-up fee? Is it contemplated whether that the controlling shareholder votes personally in favor of the deal but then minorities vote against them. I think the KPMG have reported a rumor to propose the renegotiation of the exchange ratio or if representative minorities try to block the deal because the combined company is above the two-thirds and minority shareholder rights have basically [gone to zero] under Chilean regulation. So, what are the circumstances because we have been hearing from Chile -- we went to Chile a couple of weeks ago and the market down there is basically saying that Mr. Saieh believes that his (inaudible) are over and he wants to renegotiate the deal and he's looking for ways to undermine the deal here and there. So, is there any circumstances where the Board can [legislatively] reject the transaction and Corp Group not pay the $400 million fee? And would this rejection by the Board or a proposal to renegotiate trigger some acceleration of the credit lines that are granted with the CorpBanca shares that would force them to seek alternative financing for [$400 million] that you have advanced to them?

We will not comment on rumors. We keep work to close this transaction in the second half of this year. Obviously, it's subject to still many steps, foremost steps, that's the approval by shareholders. Of course, it's up to the shareholders to decide whether they believe it's a good business for CorpBanca, and if they approve, then there is a final step, final main step, that's the approval from regulators. The whole transaction is taking a little bit longer than we expected, but it's moving forward. We had recently the release of the opinion of the accounting experts. So things are moving and we believe again that you'll be able to close it in the second half of this year.

Does the opinion from the accounting recommend a updated exchange ratio?

I cannot comment on that. It's not yet a public document.

Eduardo Rosman, BTG.

I have a question about your cost of capital. In an event, at the end of last year, management mentioned that Itau's cost of equity was at 16%. So, I wanted to understand if the bank fees, it's cost of equity today at higher, lower, or the same level when compared to last year? And how should we think about Itau's cost of capital evolution, once the bank starts generating more and more of its results outside Brazil?

The view -- obviously, the cost of capital view is a long-term view, we updated that. So, we are probably more closer to 17% and 16% that we mentioned and this is obviously a function of changes that we saw in the economy and for how long this will be. When we look at investments abroad, we need to look at and balance that against the benefits that this franchise will bring us and how are we going to make it compensate for the money that is being deployed. So, there are several factors that get into this analysis, but the base scenario takes into account the 17%. There could obviously be adjustments to that depending on the particularity of the investments, but that's how we start the whole analysis.

Okay. But, since -- let's say if we argue that you're going to have a bigger diversification, lower risks, eventually we could be working with a venture with a lower cost of capital going forward. It makes sense?

To some extent, yes. This could be, let's say, not a key decision factor, but something that could influence if we are looking to accelerate on earnings diversification.

Natalia Corfield, JPMorgan.

It's actually on CorpBanca again. I know you cannot comment on rumors, but is it possible to tell us exactly where you are in the process? What exactly is missing to get it approved? And also, if the transaction closes, is there any possibility that Itau does not get the control?

The next step would be the call of the family of shareholders to discuss and hopefully approve the deal. And your second question was?

If we are not have control on the transaction.

No, the structure of the transaction guarantees control for Itau.

Right. And the accent of shareholders, when is that expected to take place?

Expect to be in the near future, but I cannot be more precise than that.

Carlos Gomez, HSBC.

Two questions. One is, can you tell us what do you expect effect of a higher long-term interest rate TJLP to be in both on your [onlending/BNDES] and on the tax deductibility of interest on capital. So it's a long-term effect of long-term interest rate and the second refers to the Consignado business and the payroll lending. They are growing very fast 81% year-on-year, is becoming a significant part of your portfolio. What is the potential for growth in that segment, which seems already fairly well exploited? Actually, it is only concentrated in the public employees and where there is, how much can that business grow for you and when would you see any risk in that business?

Starting with the payroll, growth on that, for us and for the market, should slow down. Probably the view we have is that to grow somewhere low double digits, okay. And, if you look at last year, there was a lot of inorganic activity in our growth because of the acquisitions we've done. So, that is a factor that will not happen this year. Back to your original question on TJLP going up, affecting the onlending, yes, it could affect the onlending, but still is a privilege rate that borrowers can access into the market. So, I would say it has more to do with the amount of the BNDES fund that will be available then the appetite for that in the market, okay. And for us, since we underwrite that credit risk and we basically borrow from the BNDES and lend by underwriting the credit risk, to the extent the borrowers again on that will show up, given that it's still a preferred rate compared to the market rates. The second point on the impact on interest on capital, it has a positive impact on the -- given the fact it increases the interest you pay and consequently, since this is a tax deductible expense, it also benefits from that. So, during that period, to the extent this rate is going up, it means that you could have a lower effective tax rate.

But that has not been under discussion. The government has not proposed to modify that?

There are more rumors in the market than the government talking about itself, but again, it could be on the table for them. It really depends on how they control the agenda and how fast it can approve the other economic measures that were already identified and can produce the additional revenues they need.

And if we could also [expand] on the BNDES availability of funding. What's your expectation for that? Obviously, you are a big agent for the BNDES? Do you expect the BNDES to be able to grow its portfolio this year or you're not counting on additional resources for the bank?

In line with this fiscal effort of the government, we should see a lower growth rate for BNDES in terms of new disbursements.

But there is still growth. There is still an increase relative to the end of last year?

Yes, probably but not a relevant one.

(inaudible).

I have again a question about the CorpBanca merge. So, what will be the economic implicants for Itau in case that the merger doesn't works?

The merge brings us the opportunity to build a larger franchise in Chile together with CorpBanca and this will -- in case, entities put together, this will produce certain synergies that can only be obtained by the combined entity and not by the two entities alone. So, that could be, let's say, will postponed the acceleration of our growth in Chile. This would probably the implication.

Okay, and I have another question. On the financial statement, you have, on page 1 and 152, the table provides the analysis of the market risk by showing where the largest concentration of market risks are, right? So, the table shows that Chile has BRL9.4 million on average. What explains that number and what does it mean?

Yes, bear with me for a second. What footnote specifically you're looking at?

On page 152, the table, it says that provides an analysis of the market risk by showing where the largest concentration of the market risk are, right? So, it shows that Chile has BRL9.4 million, which is three times bigger than Argentina. So, I'm wondering what does that mean? Is Chile market more exposure to risk than Argentina and other countries?

Chile is a much bigger operation than Argentina. So, basically, to assist our clients and be competitive in pricing, we inevitably run some type of market risk, if this is your question.

Eduardo Nishio, Brasil Plural.

I have a follow-up question from the Portuguese call. Recalling, you said that you're comfortable with your level of provisioning coverage today, current situation, all others constant, you would be able to deliver or the plan is deliver ROEs above 20% for the next couple of years. So, my question is, in terms of EPS growth, do you think you can deliver double-digit EPS growth for the next couple of years, given the current economic environment?

I can talk about the ROE, and it's for us, we can foresee us providing the 20% plus return year-after-year but the EPS is a longer conversation in the sense that if you take into account that we distribute a third of our earnings, let's say -- let's make the math simple. Let's use the 24% example of our current ROE, okay. So, say we distribute eight out of the 24, so it means that if we don't grow earnings at least 16%, ROE will go down. So, I would say we will fluctuate in the range between 20% and 24% plus at the current levels. Some expansion is possible, yes, maybe not likely but that's the backdrop we are working on. And in a slower -- if the economy starts recovering it's possible to grow double-digits, the earnings per share. If not, then it becomes a harder exercise.

Okay, but your current guidance points to probably to mid-digit growth for this year?

Yes. If you do the math, you'll probably arrive to some EPS around 15%.

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

Thank you everybody for following and participating in this call. As a final note, I would like just to reaffirm our belief that we'll be able to continue to deliver good results for our shareholders with returns above 20% although in this particular year of 2015 with a different composition among P&L lines with higher margins and higher provisions this year. Thank you again.

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