伊塔烏聯合銀行 (ITUB) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holding conference call to discuss 2015 third 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 broadcast live on the Investor Relations website at www.itua.com.br/investor-relation. A slide presentation is also available on this site. The replay of this conference call will be available until November 10 by phone on 55-113-193-1012 or 28204012, access code 9067132#.

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. Eduardo Vassimon, Executive Vice President, CFO- Chief Financial Officer, and CRO-Chief Risk Officer; and Mr. Marcelo Kopel, IRO-Investor Relations Officer. First, Mr. Eduardo Vassimon will comment on 2015 third quarter results. Afterward, management will be available for a question-and-answer session.

It's now my pleasure to turn the call over to Mr. Eduardo Vassimon.

Good morning, good afternoon, welcome again. For those that are following us at Internet, we are at slide number 2. I start highlighting the recurring net income of the third quarter, BRL6.1 billion. We consider it to be a robust result particularly considering the environment in Brazil, the economic conditions prevailing in the country. This result is stable considering what we saw last quarter and is roughly 21% higher than the same result in the first nine months of last year. Recurring return on equity was 24%. Credit quality stable both for NPL 90 days and 15 days to 90 days. We are going to talk a lot about credit quality in the next slides because we consider this to be one of the main points of interest of the market.

Moving to slide number 3. Given the particular relevance of non-recurring events, this quarter we produced this slide where I would like to highlight two main events. As a positive non-recurring event, the social contribution rate increase that was basically BRL4 billion impact in bottom line and as a negative impact, the main event was a complementary provision for loan losses BRL2.8 billion after taxes; before tax, this figure is around BRL4.7 billion. We're going to talk more about this in the next slide. Going to slide number 4. Here again 24% return on equity. On a trailing 12 months we have 24.5%, very similar to the figures we saw in the previous quarters. And recurring return on average assets is stable in the several former quarters at 1.9%.

Moving to slide number 5, we have the P&L. I'd like to highlight here the positive increase in financial margin with clients, 4.4% in this quarter and 16.4% in 12 months. This increase is related to the re-pricing process of risk that we have been conducting in the several previous quarters and we continued this quarter, higher funding efficiency, and a higher selic rate also contributed to this positive growth. Another point that I'd like to highlight is the financial margin with the market BRL2.3 billion that's an unusual result, higher than what we consider to be an usual result. We're going to talk more about that in the next slide. Commissions and fees showed 10% growth so slightly above inflation.

Result from insurance 1.5% drop. This is related to the fact that the Bank is no longer operating in some segments of insurance that we do not consider to be core like large risks and extended warranty. And I'd like to call your attention to the fact that retained claims dropped 22% in 12 months so that the net between results from insurance and retained claims showed a nominal increase in nine months. Operating expenses in 12 months grew 8.5%, below inflation. Here again, we are going to give you additional details a little bit ahead. And the bottom line in terms of recurring net income around 21% growth when compared to the first nine months of last year. Going to slide number 6, we have the credit portfolio. The total credit portfolio showed 10.1% growth in 12 months.

If we exclude FX rate variation effect, we reach a flattish number in 12 months and in the quarter a reduction of 1.1%. This of course is related to the challenging economic environment where we see lower credit demand and also reflects tighter underwriting credit standards that we have been adopting now for several quarters. When we look at specific business here, we see that payroll loans have grown 25% in 12 months; but when we see the growth in this particular quarter was a modest 0.4%. This is basically because the process of buying portfolios has ended and so now we are going to see a more organic growth. Another line that shows good growth in 12 months is mortgage loans, close to 22% in 12 months and a robust 5.5% this quarter.

Vehicle loans continue to go down 9% in this quarter. Corporate loans 9%, slightly below inflation; but if we take out FX rate variation effect, this would be a negative growth. So, this shows very clear the challenging economic environment we are [living]. Moving to slide number 7, we have here the breakdown of our P&L into two pieces. On one side, the credit and trading that's more related to the economic cycle and on the other side, insurance and services that's more resilient to economic cycle. The first piece shows return on equity 15%, little bit below cost of capital while insurance and services shows a very strong return on capital. Moving to slide number 8, we have the financial margin with clients breakdown.

We see on the right side of the upper table the three lines of business that have been showing more robust growth in the past few years. Latin America consistent with our regional expansion strategy and mortgage loans and payroll loans consistent with our strategy of moving to lower risk lines of business. The corporate segment also shows an increase and this is to a large extent related to FX effect. On the lower part of this page, we see a positive evolution of financial margins with clients basically related to the re-pricing process and the increase of the selic rate. Moving to page 9, we see the financial margin average rate in annual terms. Spread-sensitive operations shows stability at 10.8%. If we consider the FX effect, this would be 10.9% so a slight increase. Adjusted by risk, we see a reduction in the green line from 7.1% to 6.9%. This 6.9% would be 7.0% considering the FX effect.

Moving to slide number 10 and talking about financial margin with market. As I mentioned this, we do not consider this BRL2.3 billion as usual results. This was due to the very high volatility we observed in this third quarter. Just to give an example, FX rate showed a 28% devaluation in the period. So, the ability to take advantage of higher volatility and some directional positions in FX and interest rate allowed us to produce this very robust result. But again, we do not consider this as usual result. A more usual result would probably be around in annual terms BRL5 billion that would be more in line with historical standards for this line considering of course that this is increasingly a volatile line of the P&L.

Moving to slide 11 and starting to talk about credit quality on the upper part of this slide. We see the 15 day to 90 day NPL ratio, we see stability at 3% for the total portfolio. Excluding the effect of FX rate variation, the total portfolio NPL would have increased 10 bps. For individuals, we see a small reduction here that we believe to be consistent with the process of adjusting our credit policies that is starting to show consistent results for this 15 day to 90 day NPL rate. Companies showed an increase of 10 bps in this period. Going to the lower part of the slide, the 90-day NPL ratio is stable in the total at 3.3%. That would have been 3.4% excluding FX rate variation. When we look at the individuals, we see a relevant increase of 50 basis points from 4.6% to 5.1%, that's above what we expected in this particular line of business.

Looking ahead, we expect to see additional increases in NPL of individuals for 90 days although at a slower pace, a more moderate pace.

The companies' NPL ratio for 90-days showed a reduction of 20 basis points. Here also we expect to see in the future increases of this indicator particularly because we have some particular cases of relevant corporate loans that will roll over to 90-days past due situation and those loans are already to a large extent provisioned. Moving to slide number 12, we see here the 90-days coverage ratio. Very relevant increase from 187% to 214% of the coverage ratio basically due to the complementary provision we made in this quarter of BRL4.7 billion. Just to remind that this BRL4.7 billion is above the minimum required by local regulators.

As we mentioned already in the past, we don't manage the Bank in looking too much to this coverage ratio. We follow it of course, but this is not something where we have a specific target and we possibly are going to see a reduction in this figure looking ahead as some transactions may become past due or roll over to 90-day past due. Looking at the lower part of this page, we see the coverage ratio by segment. In the Retail Banking segment, we see a figure this quarter that's similar to the one we observed in June. And in the Wholesale Banking portfolio, we saw an increase given the more anticipatory aspect of this provision. Moving to slide number 13, we compare here the individuals 90-day NPL ratio with the same indicator excluding fully provisioned credit.

In the second concept, we see a much more modest increase of 20 basis points for individuals. For companies, we see a stability around 0.5%, 0.6% of 90-day NPL when we exclude fully provisioned credits. And finally in this page below we have a breakdown between very small, small, and middle market companies on one side and corporate on the other side and we see a reduction in corporate indicator and a slight increase in the very small, small, and middle market companies. That's naturally a segment that's more sensitive to the economic cycle. Moving to slide number 14, we are showing this for the first time given the present challenging credit scenario. We are showing here renegotiated loan operations.

We see a nominal increase of BRL1 billion in this portfolio from BRL12.5 billion to BRL13.5 billion. Roughly speaking, one-third of this increase is related to FX effect. When we consider this as a percentage of the total loan portfolio we see 2.8%, that's historically low and basically stable when we look back the several quarters before this one. On the lower part, delinquency on loan loss coverage, we see a consistent increase in this indicator reaching 233%. The 90-day NPL balance shows a nominal reduction from BRL2.7 billion in June to BRL2.5 billion in September bringing the 90-day NPL ratio down from 21.5% to 18%. Moving to slide number 15. Loan loss provision expense as a percentage of total loan portfolio basically stable around 4.8%, 4.9% in the past few quarters.

In the lower part, we see a reduction in NPL creation from BRL5.6 billion to BRL5.2 billion and also a reduction in write-offs from BRL4.7 billion to BRL4.3 billion. So NPL creation as a percentage of loan portfolio basically stable around 1%, 1.1% in the past few quarters. The last slide on credit, slide number 16, we see the evolution of loan loss provision expenses by segment. As expected, we see here a decrease in the wholesale portfolio from BRL1.8 billion to BRL1.4 billion and an increase of the retail portfolio expenses from BRL3.7 billion to BRL4.3 billion. Moving to slide number 17. Going quickly here just to highlight that we've been growing commissions & fees and results from insurance slightly above inflation, 10.2%.

On slide number 18, non-interest expenses. In 12 months we show 8.5% increase, that's below inflation. If we do not consider operations abroad that are of course affected by FX, this would have been 6% growth only in 12 months. If we take the particular quarter, the third quarter, there is a substantial increase of 9.3% basically due to the 15.2% increase in the personnel expenses. Here it's important to explain that when we booked this in September, we banks were still negotiating with the union and what we booked in September was the proposal we had on the table that time that was a combination of a percentage increase with a lump sum payment. So, this lump sum payment was booked at the end of the negotiations stand to be only a percentage increase with no lump sum so that we are going to see in the fourth quarter a reversal of this lump sum payment provision and all considered, we are going to see a small reduction in the fourth quarter of personal expenses.

In the lower part of this page, we see the trailing 12 months efficiency ratio continued going down although in the particular quarter, in the third quarter, we saw some increase. Moving to page 19 talking about capital. We had a 90 basis point reduction on common equity Tier 1 from 13.2% to 12.3%. The net income of the period was basically offset by an increase in tax credit and a combination of dividend distribution mainly. And the growth in RWA and in this case related to FX reduced this reduction. When we look at the CET 1 fully loaded, we see a reduction here coming from the common equity Tier 1 12.3% and anticipating the schedule of Basel rules to reach 9.8%. This is influenced by the FX devaluation in the period given the structure of our investment abroad and the hedge of this investment.

Considering the FX rates prevailing in the past two days, this 9.8% would be today something between 10% and 10.5% so we are very confident that we are well capitalized. Given the ability to generate profit and a perspective of low growth in our credit portfolio, we expect to see this figure increasing in the next quarters. Going to page 20. Just to quickly highlight here that in this historical series, we are seeing the high in terms of net dividend yield and the low in terms of price to earnings, we consider to be attractive the stock price of our Bank today. Moving to page 21 just to briefly mention the shares buyback program. This year have been particularly active in buy back in shares for capital management or for compliance with our long-term compensation programs.

We have bought close to 87 million shares so far this year. We have an open program of 50 million shares, of which we have already used 13.3 million shares. And finally moving to slide 22, the 2015 outlook, our expectations for this year. For the total loan portfolio growth given the FX devaluation, we expect to be above this 7% that's the top of this interval here. In terms of managerial financial margin given the good result with markets and the re-pricing risk process, here again we expect to be slightly above the top of this interval. For provision for loan losses net of recovery of loans, we expect at the end of the year to be around BRL18 billion, that's the top of this interval. For services fees and result from insurance operations are probably going to be closer to the low end of this range. And finally non-interest expenses, we are probably going to be closer to the high end because of FX effects.

We are here very committed to working hard to deliver not only this year, but the years ahead below inflation expenses growth. So with that, I finish my presentation. My fellow corporate and myself are available for possible questions that you may have. Thank you.

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

First in terms of credit quality, you talk about how delinquencies will likely go up in the coming quarters on the one hand and then you've also been adding to your complementary provisions and boosting your coverage ratio. So going forward, what sort of costs of risk or provisions to loans can we assume going forward? You mentioned that you've been running at around 4.8%, 4.9% in recent quarters, is that the run rate that we can still assume or should we assume higher costs of risk going forward? Second question is regarding your loan growth. Stripping out FX, the loan growth was flattish year-on-year. Looking into 2016 can we assume this remains the case or are we going to see negative loan growth, in which segments, and when can we anticipate any form of recovery in credit demand? And lastly in terms of geographical revenue diversification, what are you planning to do outside Brazil? Obviously you got CorpBanca with Chile and Colombia, but are you looking beyond that to Mexico or Peru? Thank you.

We are still in the process of working on our 2016 budget and given the level of concern that we still have in the Brazilian economic and political scenario, we don't have any specific expectations regarding the ratio you mentioned. What we can say is that given the economic scenario, yes, we expect to see NPL ratios to continue to go up on a moderate pace. But it's premature to have any more precise assessment on the ratio mentioned and also the same is true for credit growth. We do not see by all means any relevant credit growth next year. The Brazilian economy most probably are going to contract further next year although possibly in a lower pace than what we are seeing this year. In terms of geographical diversification, we have the strategy of over time reducing a little bit the dependence on Brazilian business. Of course we will always be a very Brazilian based bank, but with the merger with CorpBanca, we are probably going to be close to 20% of credit assets outside Brazil. Yes, Mexico and Peru are countries that we would be interested to be in the future, but we don't see this frankly in the near future. Our focus now is to consolidate CorpBanca operation.

Okay. Thank you very much, Eduardo.

Carlos Macedo, Goldman Sachs.

First question regarding the excess provisions you made in the quarter, you now have a very large balance of excess provisions. You haven't used those excess provisions, if I'm not mistaken, for six years or seven years. Under what conditions would you use these excess provisions? What would be the situation in which you're prompted to use them? Second question regarding the securities in your book, I mean we saw on the held to maturity book there was a fairly substantial decline in the market value, there were securities also available for sale to some degree. Is that something that concerns you regarding capital for the near future? What's the maturity once those securities continue to mature? Is that something that we should be concerned about? We saw the impact that had on Bradesco's capital not as much for Itau, is that something that should be something that we worry about over the next few quarters? Thank you.

To your first question, we have built this additional provision cushion precisely to face possible more challenging environment in the future. I think that we would possibly use this if conditions continue to deteriorate further in the next quarter. So, it's not something that we cannot exclude using this in the future again if conditions continue to deteriorate. We don't have any particular trigger for that to be to some extent a judgment call, but this was just precisely to use in a more stressful scenario. In terms of reduction of our bonds held for sale and are held to maturity, given the volatility in the third quarter, yes, we had some reduction. But as I briefly mentioned during the call, we by all means are not worried about our capital bases. Again our full CET 1 ratio given present market conditions would be already above 10%. The ability to generate profits combined with the lower credit demand, I think will put us in a very comfortable position in terms of capital both in absolute and relative terms.

Okay. One question regarding the first answer. You said that you don't manage the Bank looking at the coverage ratio and obviously you have a lot of rules that you need to follow and there are no specific triggers that will lead you to use that excess provision. But just conceptually thinking because of the chunkiness of the wholesale book, would you think that it would be something that would be driven by say a one-time event in wholesale as opposed to a more structural event in retail or is there really no rule that you will follow for that?

There is really no rule, but both the events you mention are theoretically covered by this increase in provisions. We could use this if conditions in general deteriorate and affect the retail portfolio, could be used if there is a specific large case in the quarter. As we mentioned, we don't have a target for coverage ratio. But as you can see in the charts is we are probably at the high point ever in terms of coverage ratio. So looking ahead, I think it's reasonable to expect some reduction, some conversions to the historical levels.

Okay, perfect. Thank you, Eduardo.

Tito Labarta, Deutsche Bank.

Just following up a little bit more in terms of asset quality. I know it's hard to see into next year just given the environment, but maybe if you can maybe quantify a little bit when you say some moderate deterioration next year, would you say that what we saw in the consumer portfolio about 50 basis points like that type of deterioration per quarter or even maybe a little bit less as you mentioned? Is that what you would consider to be moderate? Also in terms of the corporate NPLs that can pick up, if you can maybe just give some color on how you see moderate, is that a couple of basis points per quarter or anything significant that worries you particularly with the additional provisions that you're booking, is there anything that could kind of surprise you or be worse than expected? As much color as you can give on that, would appreciate it.

And then also in terms of your margins, you continue to see some margin expansion. How do you see your margin evolving into next year? Do you think you can see further margin expansion? Has that now peaked in terms of your ability to increase spreads? And then just finally in terms of the trading gains. I know this quarter was very high, but do you think that could reverse a bit in the fourth quarter at least what you've seen up until now? Do you think you could get back some of those gains this quarter? Thank you.

It's Kopel speaking. Let's start from backwards on your questions. Talking about the trading gains. When we talk about unusual level of gains and this is an example, this quarter in particular is an unusual level for the gains, what we've been saying to the market is that the usual level we could expect is around BRL5 billion for the year which will mean BRL1.2 billion, BRL1.25 billion a quarter. So, that's something that you can keep in mind for that. Then your question about margin expansion in 2016. When you look at our NIM for this year, it's been slowly growing throughout the year as we've been increasing prices on our spreads, on the new originations, and on the renewals of the Bank book we've been re-pricing those as well. This is an ongoing process. Part of the book has been re-priced and the new originations are coming day-after-day.

But for next year even if things stay at where they are, the average NIM for next year should be higher than the average NIM for this year. So, that's something that you could work with. And the third part or the beginning of your question, which is asset quality and to your point about this level of increase. The 50 bps that we saw in individuals to be fair, they were above our expectation. When we mentioned that we were expecting a moderate increase in the second quarter, we were not referring to a 50 bps increase. So, it's somewhere lower than that that we consider moderate and we don't see that happening quarter-over-quarter. And just to finish and wrap up to that point, when you talk about and you may ask about the peak of the delinquency which you could; in our base case now, we are talking about more towards the end of 2016 and beginning of 2017. So, these are the things that we can consider and we don't consider 50 bps as a moderate increase.

How about on the corporate portfolio also when you kind of say moderate there and given that probably there could be some chunkiness there or something major? How you see that evolving because you are already at pretty high levels compared to over the last year-and-a-half? So, if you could maybe give some color on the corporate side as well?

Corporate is more discrete behavior so it's not that you model and use the statistics. We had a meaningful step up on our comps base for this year. There could be additional cases next year, but we are departing from a meaningful base for this year. So as Vassimon mentioned during his presentation, we are seeing some cases that we have been providing already to preempt the provisioning for those, which will probably show up in the NPLs of the fourth quarter, but those are basically being to a large extent already provisioned. So, we depart from a high cost base for next year. There could be some increase, but departing from a very high level so therefore, that increase should be something lower than the increase you could see on the individuals.

Okay, fair enough. Just one follow-up on the trading. I understand on average about BRL1.2 billion per quarter makes sense. I was just trying to get a sense given you had such a huge gain in the third quarter, do you think you can give some of that back in the fourth quarter, could it be lower than it or does it continue to be high? Just can I get some more color on the fourth quarter given we're already more than a month into it?

I mean you could use that number as a proxy for the fourth quarter as well.

The BRL1.2 billion.

Yes, something in that neighborhood.

Great, fair enough, all right. Thank you very much.

Marcelo Telles, Credit Suisse.

The first one is still regarding the trading. Looking at how much you've been hedging of your investment in foreign subsidiaries, it seems that you remained underhedged versus your dollar exposure which would mean in theory you would be let's say long dollars at that stage at least at the end of the third quarter. So, there will be probably the second quarter in a row that you'd be with that position. Is that something that you could expect that to be more structural and be there for some time given the high market volatility, which of course in fact has helped you [shore] your balance sheet to some extent compared to some of your peers. So would you expect that to change at some point or do you think we should see that to last a little bit longer? And the second point regarding asset quality, what is the scenario that you are working in terms of GDP growth next year? What are the downside risks that you see and in your view, how would the loss of investment grade by Moody's would impact the quality of your loan book? Thank you.

Marcelo, this is Vassimon. On your first question on trading, as we mentioned, the figure you see is a picture of the position at the last day of the third quarter so it does not necessarily reflect a position that's much more dynamic. Having said that, we have a small part of our investment abroad where the hedge is more difficult because of liquidity aspects of markets for instance in Argentina and Paraguay. So, this is one of the factors that explains why in a certain point in time you may not see a fully hedged figure. And of course, the other aspect is FX positions that we may have from time to time that are dynamic and in these particular cases cannot be considered a structural position. So coming back to the previous question, I think this trading results are by nature volatile, but our best guess as a more quote-unquote usual result would be around BRL1.2 billion, BRL1.3 billion per quarter.

Your second question about asset quality and GDP growth. The call of our economic department today is a drop of 1.5% GDP next year. What starts to seem a little bit optimistic from now so we're probably going to see a reduction in GDP that's higher than that, of course this impacts the whole credit environment. And in terms of the possible loss of investment grade, I believe that to a large extent is already priced in. I know you'll see the prices of Brazilian [AMB] or CDS, it's already price of a non-investment grade country. Of course this makes the refinancing abroad more expensive, but a relevant part of this could be refinanced domestically either through institutional investors or banks. Of course, we are following this process very cautiously and analyzing companies on a case-by-case basis.

Excellent. Thanks for your time.

Saul Martinez, JPMorgan.

First, I'm going to follow-up on the question of cost of risk that was asked earlier and understanding that you can't give specific guidance or specific numbers, I'll ask in a little bit more of a conceptual way how would you think about it and how we should think about it. This credit cycle is obviously challenging to analyze because on the one hand you have derisked as you've explained many times before pretty aggressively. There is a mix shift, you are not growing into the cycle, but at the same time Brazil is going to have a contraction in GDP that over a two-year, three-year period that it hasn't seen probably since the 1930s at least, which obviously is going to hit asset quality. But looking at your cost of risk metrics, net cost of risk is up about 100 basis points this year versus last year.

In the last couple of cycles, you've seen I think in 2011 and 2012 about 120 basis points, 130 basis points increase; in 2008, 2009 you saw I think a little bit more than that; previous cycles, you may have seen more than that. How should we think about the increase in cost of risk from trough to peak? Given the moving parts and the trends that I mentioned, do you think this is a cycle that because you have been derisking that wins out and you don't see as much of an increase or do you think that we should be working with an increase in the cost of risk from trough to peak whether it's 2016 or 2017, it sounds like you think it's 2016 that is worse than in past cycles? So, conceptually how do you think about it and how do you think the market should think about it?

The second question is somewhat related so on corporate credit, clearly this is a product where a relatively small number of cases can impact provisions quickly, your expected losses are generally lower, I realize that you were starting from a high level as you mentioned; but unexpected losses can be much bigger given your concentration risk. How are you seeing the tail risks today associated with corporate credit? Do you think the economic backdrop, a further downgrade that limits Company's ability to fund themselves externally? How do you see the probability or the likelihood of that producing a stress scenario? But again, I realize it's not the base case scenario but how relevant a risk do you see with corporate credit and provision spiking much more than what the base case suggests?

Saul, it's Kopel. Let's start with your first point regarding how we go between the low end of the NPLs into the high end of that and to give you like a short answer. From what we have seen internally and we are still working on that and finishing if you take the 2009 number where we peaked there given all the different components you said about derisking, about GDP contraction, and I'm adding to that the slow growth we've been having in the portfolio; all that combined at this point makes us understand that we would not reach the peak that we had in 2009. That's the view we have at the moment. Moving into your corporate lending question about they are more binary or they are more like big one-time events in each of the cases given that they are big credits. The market has been working on some cases and we are part of that work with the market so if that happens and these credits are not necessarily fully provided for, which we've been downgrading quite a bit of them in advance, there is this additional provision that could help us shelter at least part of this pressure.

Okay. I guess my first question though, Marcelo, wasn't more related to do you reach the peak of the NPLs because your mix is dramatically different. It's more the delta that you've seen in 2009, the delta that you've seen in 2012 versus 2010, and how that compares to the delta on whether it's NPL or really it was more cost of risk, provisions for loan. And the question is more along the lines of if my numbers are right, 100 basis points to 150 basis points from trough to peak in the last two cycles, you've had 100 basis points already; do you think that they could get worse than what you've seen in the past cycles or is it too early to tell?

Saul, this is Vassimon. I think it's too early to tell because we are still in the mid of the process. I think you could not discard the possibility of being higher than what we saw in terms of difference between what's on top and what you saw in 2009, but it's really difficult to call it at this point. We are definitely in a very severe economic situation so again we are going to see NPLs going up. Seeing from now it's difficult to say, but you cannot exclude the possibility of having a delta that's higher than we observed historically. Having said that, as Kopel mentioned, you've seen from today we do not expect to reach the levels we saw in the last cycle.

Okay. That's great. Thank you very much.

Anibal Valdes, Barclays.

So I'm more interested in the underlying dynamics of the loan portfolios so the first question is related to the indicators. So we saw the increase in the individuals portfolio NPLs, but the early delinquency rates which is between 15 days to 90 days didn't show a pickup so it clearly comes as a surprise. So how can you explain that the early delinquency rate doesn't show such a dramatic increase in the previous quarters while you have the increase of 50 basis points over 90 days? So, that's one of the things that I would like to further understand.

And the other one regarding the individuals portfolio, what things are you seeing in that portfolio? Is it deterioration across the board; in credit cards, consumer loans, and vehicle financing; or is it specific product in a specific region or is it abroad probably in the loan portfolio? Thank you.

Let's start with where we're seeing the increase in NPLs is coming from credit cards and personal installment loans, which [aren't] secured lines and these are more sensitive to an environment where we are. But just to make a point on the credit cards, as you probably have seen three-quarters of our portfolio are comprised of transactions and where we are seeing the increase in NPLs is not coming from transactors that are becoming revolvers and getting delinquent, but we are seeing that the increase in NPLs within the revolvers portfolio. So it's not that people are changing their behavior and where typically people who use the credit card as a means of payment and are transactors and becoming revolvers.

So, that's one element that I would like to make on the credit cards and I mentioned also decrease in NPLs for personal installment loans. Then regarding the NPLs and talk to the short-term and the long term. As we've been in our dynamically managing our credit qualities, the fact that we have a reduction in this quarter shows that certain vintages were that we did raise the bar and increase the underwriting standards have a better behavior and therefore rolled over to a lesser extent than the vintages that rolled over this quarter. But that doesn't mean that we expect that the next quarter you would have a similar behavior. Therefore we are still expecting an increase in the NPLs for individuals in the following quarters actually.

Thank you, Marcelo.

Victor Galliano, Barclays.

In terms of capital and you showed us that you're fully loaded Tier 1 for 3Q, does that also include the impact of CorpBanca? That's my first question and my second one on renegotiated. You give us broad picture of the amended portfolio and then you give us the renegotiated loans, which are BRL13.5 billion out of the I think BRL21.9 billion portfolio you have there. Those BRL13.5 billion, are those all loans that are overdue or how do you separate the BRL13.5 billion from the BRL21.9 billion if you see where I'm coming from?

Victor, it's Marcelo. Talking about the renegotiated loans and as you correctly pointed out that there is a larger portfolio of BRL20 billion, which is comprised by two pieces and the renegotiated loans are inserted into that portfolio, which is the BRL13.5 billion that we have. And in this portfolio what you have is on page 14 of our presentation the breakdown of how much of that are overdue credits, which is BRL2.5 billion out of the BRL13.5 billion renegotiated loans. So, that's how you should read our numbers.

So, there is BRL2.5 billion overdue for more than 90-days or starting from one day overdue, how do we --?

Yes, it's 90-days overdue. And then your second question about the capital, CorpBanca is not included in that 9.8% that we show on the capital projections and neither are the future profitability. So, CorpBanca will be an impact of approximately 80 basis points in our numbers. Therefore you should do the math and also take into consideration that since FX has an important influence in our number, the sensitivity now is looking at current FX rates, we are more like between 10% and 10.5% at the moment.

So an 80% on 10%, 10.5% is what you are saying?

I'm saying that the 9.8% today that we show in page 19 talks to 10% to 10.5% given the FX movement, which we do see the DTAs and so on and so forth.

Alright. Thank you very much.

Carlos Gomez-Lopez, HSBC.

Just to give you a break on asset quality, questions on different matters. First in the use of the DTAs that you make, you mentioned BRL540 million provision for contingencies and in notes you mentioned it at least largely refers to economic plans. That's a large amount, that's almost BRL1 billion pre-tax. Is this something that you expect to be a one-off, is it recurrent, and would it include provisions for collective claims? And the second question is what do you expect your tax rate to be in 2016 given the past changes?

Carlos, it's Kopel speaking. The BRL540 million that we had as a non-recurring is comprised by a number of things including the economic plans. We did have a corporate restructuring or legal entity restructuring, which accounted for approximately more than half of this BRL540 million. So, this is not something that will be repeating itself and that's why it was classified as a one-time or as a non-recurring item.

Could you give more details about legal entity restructuring?

We reorganized our legal entities aboard outside Brazil and by doing that, certain taxes were triggered and this is the reflection of those taxes related to this reorganization.

This is Vassimon, Carlos. On your question about the tax rate, with increases we expect to see this close to 37% next year.

That includes already the reduction of interest on capital to 5% presumably?

Yes.

Thank you very much.

Boris Molina, Santander.

I had a question regarding the outlook for pricing and corporate spreads. If you look at the spreads over selic of non-earmarked loans in Brazil, it's probably the largest driver of your corporate spreads and continue to expand on a pre-provision or pre-NPL level throughout the last year-and-a-half even in the last month in spite of the headlines spreads decline, the relevant spread continued to expand. However, when you [look at] the non-performing loans or non-earmarked loans for the private sector basically the risk adjusted spread on that measure have been flat for almost a year-and-a-half, almost two years. And so the behavior of the banking industry seems to be that they are increasing spreads along with cost of risk.

Now my question has to do with what is the behavior going to be like if you have pre-provision cost of risk ahead of time? Is there any room for the spread for companies to continue to expand because when we look at it on a cyclical adjusted basis for secured personal loans like credit cards we see the spreads going back to record highs and peak levels we've seen in past cycles, but this is not the case for corporate lending. So if we think that over becoming fairly dysfunctional in terms of the way the fiscal accounts are being managed and very ineffective management, is there room for the industry to price higher the current cost of risk going forward related to the levels we have right now? Do you think that corporate spreads can continue to expand in 2016? What is your outlook for further spread expansion in 2016?

Let me just put things into context. As you pointed out, banks have been pricing the increasing risk. Depending on how you look at the series, the fact that spreads after cost of risk have been relatively stable, it confirms that banks have been pricing that accordingly. In the scenario described where risks tend to increase, two things can happen in our case. To the extent the credit is the credit that we would like to underwrite, we will price it accordingly. But there would be cases where we may forgo credits in the sense of making new credits given the fact that it's not a matter of price, but it becomes that it's the fact that they became riskier than we would like to underwrite and therefore you would have a volume impact because we will forgo those particular credits to the market. So in another words, we would probably not put ourselves in an adverse selection situation just because we can price it more.

Okay. So basically you could price it right and the operation could take place at the right price, but because of the risk you will just basically decline to take the volume?

There are situations where certain clients, it doesn't become a matter of price, but it becomes they don't feed our credit appetite.

So if you think about it in this context, then the buildup of excess provisions of that we've seen in the last year-and-a-half is truly alarming because it gives an idea of the level of expected losses you expect on your corporate loan book where the provision coverage has been higher. So seen in this light, it's not that the spreads to good borrowers subsidize weak borrowers, it's that the weak borrowers are pretty large and that is reflected in your wholesale corporate coverage ratio?

I don't think the word should be alarming because as we recall, at the end of last year we expected a softer economy and we built BRL1.1 billion of additional complementary provision and this is another buildup we've been doing for a softer economy. And as Vassimon mentioned before, there could be instances that we may possibly use this coverage. But again the visibility is low at the moment therefore where we are now, we will continue to proactively provision credits to the extent we feel then they are weaker, I'm talking about the corporate loans specifically, and we'll continue to do that on the rollovers of the individual portfolio as well. So, I wouldn't use the word alarming as per the situation, but it's a delicate situation in the sense that we are very careful of the underwriting standards.

Okay, wonderful. Thank you so much.

Eduardo Nishio, Bank of Plural.

First one is regarding your Wholesale Banking. If you look into the performance of the Wholesale Banking unit, you see that they are underperforming for quite a while the other units and it has been widely commented in the press that the Wholesale Banking is under reorganization. I was wondering if you can comment a little bit more, give us a little more color what's going on there and if you can give us the broader plan and if we can expect some improvements in the near term or when it's going to happen? I'll appreciate it. That's the first question. Then I will do my second later. Thank you.

Eduardo, this is Vassimon, Yes, it's true that the results of the Wholesale Bank division were not brilliant recently, but it's basically related to the economic situation in terms of increasing cost of credit risk. So, this is the main driver of the underperforming of this division. And the adjustments that have been made in the structure of the Bank are a reflex our major restructure of the executive committee of the Bank in beginning of this year and are not related to the recent performance of the division. Historically, Wholesale Bank have been performing very well. In this particular year again given the economic situation, it was a poor performance and the changes are adjustment in the structure without changing by all means the focus and the relevance and the importance of the division.

Okay. My second question is a follow-up on a comment that the peak in delinquency would be in the first half of 2016. I was wondering if you can develop up a little bit more. If we look into the past environment, the economic downturn has been worse than I think most expected, we're probably going through the worst economic environment since the 1930s and the unemployment is expected to peak in the second half of 2016. Just wondering how comfortable or confident you are with the delinquency peaking in the first half instead of a more prolonged difficult scenario? Thank you.

I think it was some type of misunderstanding. What we mentioned is that we believe seeing from today and given all the uncertainties of the environment that we expect the delinquency to peak between the end of next year and the beginning of 2017. So, not in the first half of next year because again we are expecting 2016 to show another GDP drop so we don't see the situation improving in the first half of next year. We are expecting again to have it peaking by the end of next year, beginning 2017.

Perfect. Thank you so much.

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

Thank you again for participating in our conference call. Just to reiterate our message that we believe that the third quarter results were quite positive given the very challenging environment of the Brazilian economy. We believe that we have reinforced and protected substantially our balance sheet with additional provisions that were built in this quarter. We believe that we are well capitalized and prepared to take advantage of the improvement of the environment that we may see within one year or two years in the future. Thank you again.

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