伊塔烏聯合銀行 (ITUB) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holding Conference Call to discuss 2015 Fourth Quarter result. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference is being recorded and broadcast live on the Investor Relations website at www.itau.com.br/investor-relations. A slide presentation is also available on this site. The replay of this conference call will be available until February 9 by phone on 55-11-3193-1012 or 2820-4012, access code 1628627#.

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 condition, market risks and other factors.

With us today in this conference call in Sao Paulo are Mr. Roberto Egydio Setubal, Executive Vice President, Executive President and CEO, Chief Executive Officer; 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. Roberto Setubal will comment on 2015 fourth quarter result. Afterwards, management will be available for a question-and-answer session. It's now my pleasure to turn the call over to Mr. Roberto Setubal.

Good morning and good afternoon for all of you. Thank you for being with us and giving us the opportunity to clarify some doubts and things about our results and especially about the guidance we gave you yesterday. I will start talking about the quarter and then we would -- I'll go quite fast on that, so that we have more time to discuss the coming year.

Our results in the quarter was BRL5.8 billion, down from last quarter 5% and 15% above last year's -- 2014 last quarter. The ROE was down, giving the (inaudible) high level of 22% in the quarter, closing the year at almost 24% of ROE for the year. Credit quality was down as we have seen some deterioration on NPLs over 90 days and some improvement in the short term NPLs as we will discuss down the road.

Second page, you can see the trends over the past years of ROEs. We have been very strong in terms of our ROE and coming down in the last two quarters. And the main reason for coming down in the last quarter, as we can see on page four, was the financial margin with market that we had very high level margin in the third quarter, BRL2.2 billion, which is much above the traditional level that we have, down to BRL1.2 billion, so a reduction of BRL1 billion in revenue in the quarter.

I would say that you should have expected this reduction given the fact that we have already announced that -- this number can fluctuate during the quarters, but for one year, we expect it to be close to BRL5 billion, so the level that we had in the fourth quarter was pretty much in line with what would be an average, kind of an average as we could expect coming from kind of revenue.

In the quarter, we also had fees and commission going up, and this seasonality giving the card expansion in the Christmas time. And some other revenue that increased in the last quarter of the year giving the more intense activity. But everything else in terms of revenue was pretty much in line with the expectation that we have coming from the third quarter.

Provisions and recoveries net were pretty much in line and if you look, provisions and recoveries in the quarter was in line, but we had one specific case of above BRL300 million that was written off that we recovered, so we had a negotiation, a renegotiation on that credit, but we have full provision for -- we have made full provision on the same recovery. So net-net was very close to what we had last quarter. Claims were pretty much in line. Expenses, also a small increase, especially given the fact that we had salary increase dues in September, which affect much more the fourth quarter.

So basically these were the main differences. So results, not putting more seasonality effect, were pretty much in line with the third quarter. We have opened in the fifth page a new chart that opens our consolidated P&L in Brazil P&L and Latin America P&L. This is something that will be important in the future given the fact that we will be consolidating along with the CorpBanca in Chile, CorpBanca will be a number that will affect the Latin America column, but you might be able to keep track of what's going on in Brazil given the fact that we will be opening these numbers, which I think will be more and more important in the future.

Our two main groups of activity, Credit and Trading and Services and Insurance, we opened the results here in 2015. Results in services went up 22%. This was good news. This is a very strong source of revenue for the bank. This keeps our business very stable. And in 2015, which I believe was one of the most difficult years in our credit business, we do have a stable recurring net income and this gave below what would be cost of capital for us today, but the return is still 15%, although like I mentioned, below the cost of capital, still giving this very bad year in terms of delinquency, still good result.

Going ahead, and this scenario that we are living in Brazil with this (inaudible) GDP reduction, our credit portfolio basically stayed stable during the year. Few lines have increases and many others have declined. Automobiles for instance, have declined, payroll loans have increased, mortgage has increased, but overall small reduction and some stability overall.

We have put here down the chart the CorpBanca number, which I think is interesting to you to give an idea of how CorpBanca will impact our numbers. But very clear that going up to something around BRL250 billion of loans. Latin America will represent very close to the available 20% of that exposure in our balance sheet. The change here, the evolution of CorpBanca 30% is pretty much due to exchange rate fluctuation, which was very close to what we had overall in Latin America including all the expenses of Latin America of 34% just above the last year.

Moving ahead, financial margins were pretty much stable. We have some stabilization in margins with a small trend of spreads, but the fact that we are more risk averse today, our mix is coming to our low -- ending with resulting in margin that was quite stable. Even when we consider the level of reserves that we are putting on against the margin, still we have come up from last quarter from 7.4% to 7.5%, so it's pretty much stable. We've been able to keep margins in line with provisions, so in this kind of environment we did a good job.

Financial margins with the market have come down as you can see in page nine. I have already commented on that. And the number of the last quarter was pretty much in line of what we can expect for coming quarters, it can go up and down around this number, but the number was quite okay in this fourth quarter. When we look into the year, we see that the number for the year was strong. We have many quarters above that level and specifically last quarter was a record gain in margins with market, which is something that made our results stronger in that quarter.

Credit quality in the page 10 is good moment for the short-term NPLs of 15 days to 90 days came down this last quarter. For the NPL 15 days to 90 days for consumers in general have come down. We have some seasonality here. We have additional salary at the end of the year in Brazil. So this gave some more revenue for people so they can pay those more in line with what is expected. And also the fact that credit card number in the last quarter is always a little bit higher given the higher use of credit card in the last quarter. So all of this combined made the number come down. But if we do not consider the seasonality effect, it will be pretty much stable with the previous quarters. Next quarter we expect it to go up like we've seen already in 2016, 2014, 2013, all the years we have this first quarter impact and over the year it come down a little bit.

Small companies fluctuating pretty much in line with previous quarters and corporations have come down. It's good news looking ahead for corporations as we can see in NPLs of over 90 days. Corporations are coming down in NPLs, which is good news. It has been affected by the assets that we have sold and we will talk more about that in this presentation. Consumers and small companies with trend of deterioration, which we believe will be going a lot along the year. We expect the economy, the GDP to reduce again in 2016. So we expect that in line with that we have some deterioration in NPLs. So the scenario that we see ahead will be definitely what will mainly impact NPLs in the year.

Our coverage ratio is strong, we have not touched the coverage ratio in this last quarter, we have BRL11 billion in coverage. And when we see the kind of NPL that we have, considering only those credits that are not fully provisioned, it has been pretty much stable which is also good indication that we have provisions in good shape with -- in line with deterioration.

In the next page, we have more information about renegotiated loan operation. This is something new. We have never shown the way we are opening here. We have opened the days overdue at the moment of the renegotiation. So it's more clear what has been done in the bank. Book is growing because delinquency has been growing. So this comes pretty much in line with delinquency, which is the consequence of the GDP reduction. Below here, the good news is that NPLs of that book is pretty much low at this moment compared to other moments in the past. So the book is becoming reasonably well.

Here is a more detailed information about the asset that we have sold. We have three main portions that we have sold and I will start on the right side. We have sold middle market segment loans, which were written off, so was zero on our balance sheet. This was a sale of BRL2 billion that we made BRL44 million of revenue, but it did not impact NPL because it was already written off. In Chile, we have this -- every year we have a sale of student loan portfolio. This is, every year we do this in Chile. Also it's not impacting the NPL ratios because it was pretty much in -- we did not have any major past due loans in this book. In Chile, it was sold pretty much for the value that we have making profit in Chile on that sale because it was a good portfolio. Here in Brazil, we also transferred loans with very low probability of recovery in the short term. We made this sale to to keep our books clean. We had already a lot of provisions on that, 75% of the asset was already with provisions. We had at that moment that we sold that more provisions in our book than those that would be required by Central Bank rules. So we were selling credit that was overdue. Few on our assets -- assets of companies, loans of companies that have other loans in the market. So we had a negative impact giving provisions that we -- some of those were already fully provisioned, 100% provisioned. So we made revenue on that, but we made additional provision on this revenue of BRL17 million in order to keep these with very low effect in terms of profits. This has -- the impact that we show were in the NPL.

Provisions, the next page, we can see how much provisions we have been making every quarter in the retail baking and the wholesale banking. Retail banking has delinquency in consumers has been increasing. They've been going up as well. Delinquency in the wholesale bank, as I mentioned to you has been coming down, so the provisions has also been coming down. In this last quarter, as I mentioned before, we have loan recover of write-off of BRL300 million that impacted because we recovered, but we've made 100% provisioning against these renegotiation, and this BRL300 million, each year, so we did not have this recovery. We will have a number pretty much close to BRL1.2 billion compared to BRL1.4 billion before, the quarter before BRL1.7 billion and BRL2 billion in previous other quarters.

So this is pretty much in line with what we have done. Before we mentioned to you that we were making provisions, anticipating provisions in previous quarters. We made this communication that we were anticipating loss (inaudible) we would have in provisions now, given the fact that we have not seen any major additional big number coming up in coming quarters, we expect that we won't have that much provisions on the wholesale asset.

On page 15, we open the insurance and services P&L of each one of the lines that we have. I think this is an important source of revenue for the bank. It is pretty much stable. It is a very strong business for us. It gives us a lot of stability in our earnings. We have good returns on this business. It's very diversified, it's not something that complement quite well our loan business because it has no volatility in terms of -- in bad moments of the economy, it does not suffer. As we can see this year, we still have some growth here, although lower growth than other years, but still growth and good revenues, sound results. So this balance quite well with the loan business. It represents more than 60% of -- almost 60% of our results in the year.

In the next page, we open details, the fee and commission revenue that we have. Overall, we have grown the business in the year 10%, which is pretty much in line with inflation, although we had this GDP reduction in the year. In terms of expenses, on the screen 17, we have grown expenses -- non-interest expenses below inflation, inflation was even though around 10% in Brazil, 10.5%. So we were focused on below inflation in terms of expenses expansion, which is quite good. We believe that we will keep a very strong focus on reducing expenses going forward. So for the next year and the years ahead, we expect non-interest expenses to grow below inflation.

On our capital position, as we can see in the page 18, quite strong, quite profitable. We have at this moment 18.8% of the core equity (inaudible) fully loaded by the rules. So it's very comfortable and we have ahead of us, just to make the point, the fact that we will reduce our (inaudible) by almost 1% at the moment that we made the consolidation of CorpBanca especially because we will make a capital increase in CorpBanca of $600 million more or less, probably in this first semester this year. So we will reduce a little bit this position at that moment.

In 2017, we have our guidance and we believe that we have made a good job, especially because we started the year at the end of 2014, everybody was expecting GDP to be positive in 2016. So a more stable exchange rate, so and so forth. So at the beginning of the year with the new perspectives for the year, we have changed the guidance, but even though the result at the end of the year was much worse, much more difficult GDP, reduction was much worse than the one expected at the beginning of the year. We basically could follow the guidance pretty much well. Only the provisions for loan losses net of recoveries were a little bit above the guidance that we gave. But we believe that is given the scenario was a very good number.

For 2016, we see again a scenario more negative. We believe that GDP will be negative this year of 2016 all the economies putting out their numbers, the IMF, negative number for 3.5%, negative for Brazil, all the houses in Brazil are putting numbers as negative at 4%. So those numbers here that we see in our guidance are based in something between 2.5% in the best case and the worst case, which we don't believe that would be the case, but we gave some space for that of 5% negative GDP, especially provision number which is high and I believe that it has surprised some of you. Based on this very negative scenario (inaudible) 2.5% negative of GDP to 5% also negative. So we are trying to be very realistic about the economic scenario in Brazil. We believe that given in this scenario, delinquency will be increasing, consumers especially given the higher level unemployment delinquency and consumers will be higher and also especially in small and medium market we believe that as the economy keeps on this same pace of deterioration, reduction of GDP, we believe that we will need more provisions for the year.

On the same lines we believe that we won't be able to reprice margins and grow margins for clients the same pace that we did this year. So we are more conservative here in terms of margins compared to what we have in 2015 and the same applies to commissions and fees. I think we are frank with numbers that we believe are more realistic with this kind of scenario. Obviously if we have a better scenario than this one, numbers might be better, but we are trying to be more realistic and based on numbers in the scenario that we are considering.

In terms of expenses, we are working hard, like I mentioned before to have expenses below inflation, so this is what we (inaudible) for the year. We have opened here, what would be the consolidated balance sheet guidance and the Brazil guidance. This is important because we don't know exactly what could happen with the exchange rate. Last year exchange rate quarter-to-quarter fluctuated a lot and this may be much more complex to understand where we were, but now we'll be opening this very clearly so that you can have a more clear observation of how the Brazilian business is doing. And we gave the guidance for the Brazilian group of business as well.

Okay, you should consider also effective tax rate 33%, this is what we have in our projections for the year of 2016. Thank you. Now we open for questions.

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

Mr. Tito Labarta, Deutsche Bank.

Hi, good morning. Thanks for the call. Couple of questions, I guess obvious question, in terms of asset quality and your provisioning guidance, you hint to be a bit more conservative than some of your peers. So just wanted to get just maybe some more color on that, is it just being more conservative than your peers, are you seeing some more asset quality issues? I mean obviously we expect some deterioration this year, but I guess how much deterioration do you think you could see, I know it's early in the year, maybe hard to tell, but would it be similar to what we saw in 2015, around 60 basis points, 70 basis points deterioration for the year? Do you think it can be worse than that? If you can maybe give some more color on that.

And then the second question, I guess in terms of profitability. Clearly, you had very strong ROE last year, probably not sustainable this year, but do you think it's -- in terms of longer-term, what would be a sustainable level of ROE? Is it something that kind of drops this year, maybe to 18%, 19% and then can recover back to the 20% level or so? If you can maybe just give some thoughts in terms of what you think for bottom line profitability given the guidance that you've given?

Okay. Very good points. First question about the expectations for provisions. We based basically, our provisions with models that are showing correlation to year looking back with GDP and especially the retail business, we have a good correlation, we have modeled (inaudible) good correlation of what can you expect in terms of delinquency and what kind of provisions we will need as a result of that with the GDP scene. So basically our members are working with the scenario. We have no specific issue that we are specifically condition other than the scenario macro in Brazil. Like I mentioned, we are in those numbers being very open in terms of the possibility of having something much better than what the last number that houses show Brazil between 3.5% and 4% negative number. We have -- I mean our positive numbers are closer to 2.5% reduction in GDP and our worst-case scenarios show in terms of provisions and delinquency go as high as negative 5%.

So we believe that we are covering what would be something that we can see today with good margin in both sides compared to what market expects today. Delinquency will go up, like I mentioned. In the worst case it can go even upper than the number you gave. I mean if you have a 5% GDP fall, which we do not believe, but we are putting a scenario, we could see higher numbers than 60 basis points to 70 basis points increase in delinquency.

And the ROE for the coming years, it could depend on a lot on the scenario that we see for Brazil. If you see some recovery, some, at least improvement in GDP conditions, I think ROE will improve because we are keeping the books very clean. We are doing all the provisions that we can do. Ad especially it's a good opportunity to mention the fact that we have -- we believe that if the economy improves, ROE will improve and cost of capital will reduce. But just give me an opportunity to mention something about the additional provisions that we have in our balance sheet. Provisions above the Central Bank level that we have -- today we have BRL11 billion of allowance for loan losses, which are above the Central Bank level, which is almost a one-third of the full provision we have.

This number, I mean how do we work with provisions, those provisions, we are basically trying to keep the expected loss fully provisioned. So in retail this is quite easy because we have model that shows the expected loss at each moment for our books, so we apply the model in our portfolio, we came out with a big number of provision and then we reduced what is required by the Central Bank and it's part of what we call additional provisions.

For the corporate side, it's more complex because they don't have models that can really apply to corporate at present, very specific things and a very big numbers. But we also do in a more -- especially given the economy and especially looking at specific segments and specific situations, we try to make provisions ahead of Central Bank requirements, as we have assets that we believe that will not perform. So we do provisions to put additional -- trying to mark the market what would be the asset value for -- that we believe would be the case at each moment.

So we keep doing provisions as we increase expected losses for retail and corporations. But looking to the future, the moment that economy starts to recover, we will see a scenario that probably the new expected losses will not come up and the old ones that our -- might be in our book at that moment, we'll be already covering the losses that will come up. So we see a much better scenario in terms of provisioning quite fast as we (inaudible) the scenario overall. We believe that 2017 should be a better year than 2016, although it's not clear, but we believe that 2017 can be a better year than 2016.

If I could, just a quick follow-up question, then. In terms of -- maybe trying to get a more specific number on ROE, I mean, just given the range that you've given on the provisioning levels, would you think this year would be closer to the 17% to 18% level or can you stay closer to 19% to 20%. And I guess, following up on the excess reserves that you have, I mean could you use some of that to keep the profitability maybe at the higher end, just what -- in terms of like what you're thinking in terms of what the ROE could be this year, I know it's difficult to say, but just want to get in what you are thinking about that in terms of what you're comfortable with given the excess reserves that you do have?

Tito, I believe that the guidance that we're giving to you, including the 33% tax rate, make it very easy for you to make up the numbers and come up with that kind of ROE that you can work in that range. With the guidance, you find, I mean the mid range, the positive range, the negative range. I think we believe that ROE will be pretty much in that range. So you can just make up the numbers you come up with these result.

Jorge Kuri, Morgan Stanley.

I have two questions. The first one and bear with me, I'm really not trying to be difficult, but I do want to understand what gives you confidence that your current more negative guidance is fair? You were rather optimistic about delinquency over the last 12 months, particularly 12 months ago despite a good level of skepticism from the market. I think you talked about de-risking and how you've changed the balance sheet and how you thought that was going to be enough to contain any asset quality problems. On the consumer side, you seem not very worried and obviously things didn't play out that well. Your bad debt formation was up 40% last year, your consumer NPLs went up 100 basis points only in the last six months. So look, I get it that the macro environment was tough and it's easy to say that asset quality was worse because the macro was worse, but in reality the risks were clearly that -- that was going to be the case, so prudence in the expectations was probably called for. So now you've come with a much more negative message. So the question is, look, what gives you and also I guess confidence that the current guidance is not again too optimistic, that you're not underestimating the macro and banking risks? You're expecting 2.5% contraction in GDP, but consensus is already above 3%. So how do we get confidence on what you're saying? And I'll ask my second question later.

I think that you're absolutely right. We passed the year with much lower level of expectations on delinquency. As we started the year, also the beginning of 2016, the kind of macro environment was much better expected at that moment than the one that played down the -- so I think that we should have made more clear the kind of expectations that we had for the year, in terms of macro growth or recession at that point, that we did not make it that much clear. Now, we are making it very clear, like I mentioned to you this provisions were made based around the positive number, the most -- the smaller number would be something that would be pretty much in line with 2.5% negative growth for the year in Brazil. The top number would be more in line with 5% negative, okay. So the mid-range that we're talking about here in this case is something around 3.75%. So we believe that this number will be, as we expect, if Brazil's development for the year -- the economy stay in that range, provisions will stay in that range as well.

And my second question is, what's happening on your credit card book? You obviously have more credit cards than anyone else, I think it's roughly 30% of your consumer loans, that's two times more than the average of your peers. Given the unemployment and consumer recession, because it's exactly that that we're seeing in Brazil, how is that book performing? What is the NPL ratio on credit cards today? What was it a year ago? How much do you think it's going to be increased? And to what extent the provisions that you've included in your guidance are specifically directed to credit cards?

Okay, fair questions, Jorge. I think that credit cards is a kind of -- is a higher risk than all the consumer risks like mortgage and payroll loans. We have been very careful in that book. We have been declining the book the last two years. So we have been doing controlled risk management in that book. I don't have the numbers of NPL this year. We do not release that number, but definitely it is included in the NPLs of individuals that we show here, okay? It's higher, a little bit higher than the average for sure because payroll loans and mortgage are much lower than credit cards. But in our case, at least we can compare with the market according to the Central Bank numbers and we are below market delinquency in credit card.

Carlos Macedo, Goldman Sachs.

Couple of questions, one is on margin. We saw margin -- the margin with clients kind of basically hold serve this quarter and now looking into next year, the guidance doesn't really say much of an expansion in margins, basically saying that margins will stay flat. Could you give us a little bit of a view on what you expect for the SELIC and you've always talked in the past about how the repricing of the book would still provide some support to margins going forward and whether we think that's still the case or we're at a point now where that's not really going to happen given the outlook for SELIC? And then I have a second question.

Okay. Our guidance was based on the fact that we expect SELIC to stable for the year, but in fact in terms of financial margin (inaudible). Because of that and because of the overall situation, we are not expecting spreads increase along the -- so this is based on spread that we will purchase at the end of the year. So repricing will take place because few, at the end of the year, was a moment that spreads were higher than those moments before. So some repricing will take place and this is the reason why margins with clients are going ahead of -- growing more than the credit portfolio because of the ways do you repricing. But we are not considering here that additional increases in spreads will take place in the market.

Along the year of 2016, we had a lot of price increases, spreads increases, as SELIC was increasing, spreads were increasing, but it seems we're not expecting SELIC increase. We do not expect major movements in the spreads, so we expect spreads to be fairly -- pretty much stable (inaudible) end of the year.

So no increase is SELIC, but no cuts in SELIC either. Is that the assumptions you're using for this forecast?

Yes. And we are basically using spreads that we are doing -- we're purchasing at the end of the year of 2016, stable in 2016.

Second question, capital, your capital levels are strong, common equity Tier 1 above 13%. We know that CorpBanca will dilute that a little bit, but still, loan growth in Brazil, which for the purposes of capital ratios is important, you could be in negative territory and you still, based on your guidance, middle of the range, you'll do 18% ROE or so with a 30% payout and you will accumulate a significant amount of capital, assuming that things don't completely unravel. When do you start thinking about increasing the dividend payout? I mean it is 13.5% going to 12%, but soon coming back to the 13%, I mean, when do you start considering that kind of possibility?

We have a long tradition of keeping our dividend payout between 30% and 35%, maybe 20 years or maybe even more than that, our payout was in that range. In many years we have used surplus of capital we were generating to buy things (inaudible) in other years that we did not have that much of [synergy] we bought back shares and we kept the dividend pretty much in that range. Buying back shares is something that we do often. If you look back over the years, we buy back over the years a lot of shares and just last year, for instance, we bought almost 2% of the capital of the bank stock.

So at the end of the day, the earnings per share are increasing in addition to the 15%, 16% number, nominal number, the earnings of the bank with additional 2%, which may give a total of 18%. So we might buy back shares as long as we see that this is a good investment for the bank. And I believe that at this moment shares are in a very low price, for all the reasons that we know, but in the long-term, we believe that our ROE will come -- will go up in 2017, 2018, especially given the Central Bank Brazil will improve a little bit, not that much, but this will be -- just some small improvement in Brazil will be enough to make it possible to the bank to increase ROE, especially because we are keeping very close track on delinquency and doing all the provisions that are needed.

We are, like I tried to explain on the expected loss, we believe that we are ahead of the curve and so our books are very clean, so by the time that the economy starts to improve, we won't have things coming from the past that would be necessary to pay. So we'll be open to have them -- to enjoy the full new scenario in the future.

So just following up, you mentioned that the levels now are attractive for buybacks. The program you have now is roughly half of what you -- a little bit less than half of what you did in 2015. Is it easy to increase the size of this program? Is there something that depending on the situation, the generation of capital that you were able to put together, something you consider? Could we have another year like 2015 in buybacks if the opportunity presents itself?

We can have -- I do not -- I'm not giving you a guidance, but this is a possibility. We have been announcing numbers of buyback and once we reach the level that we have been authorized by the Board, we go to another -- and this depends on the situation, the condition, the perspectives, so these numbers I'm seeing that we believe is a small number, for the bank we can cope quite well with this kind of acquisition, buybacks giving the scenario that we are seeing. So for the moment we believe that this is a good start and along the year we can see how it develops.

Just one final question then wrapping this up. Is there a maximum number for core Tier 1 that you consider that you wouldn't want to go above and you would have to reconsider maybe the historical dividend policy?

We believe that between core Tier 1 fully loaded, we'll not go above 12% on a stable base.

Mario Pierry, Bank of America.

Let me ask you two questions, one question is more specific and then one general question. Let me start with the specific one, your guidance for provisions is net of recoveries. However, we've seen the recoveries have total close to BRL5 billion in 2014 and 2015. You are making significant investments right now with the acquisition of recovery. I was wondering what kind of recoveries -- what is the nominal amount - nominal level that you expect in terms of recoveries in 2016? Could we see a number much higher than the BRL5 billion that you have been delivering?

And then the more general question is, you're guiding, basically you're guiding for negative real loan growth in 2016. Your peer is also guiding for negative real growth. My question then is related, if there are any concerns that we could see, the government trying to interfere in the system again, if we could see the public sector banks becoming more aggressive in landing spreads. Also how do you think is the relationship with the government? Now, clearly last year, the system was targeted by the Central -- by the government. Your tax rates increased by 5 percentage points, right, you still grew your earnings 15% in 2015, your ROE was still 22% to 23%. So are there any concerns that the government could try interfere in the system again 2016?

Well, talking about recoveries, we are not putting any influence on the recovery acquisition (inaudible) number. So there is no impact in the guidance given the fact that we are in this process of acquiring recovery. Although we plan to use recovery, which probably might increase our performance in recoveries in general. But we believe that in this scenario, recoveries are much more difficult. Recovery is something that improves a lot when the economy improves. So we do not -- we're not putting numbers in the improvement. So we're basically keeping recoveries in low levels between BRL4 billion and BRL5 billion more (inaudible) for in this guidance. We do not believe that in the year of 2016, we will have a major improvement in recoveries. It's possible that down the road, when the economy is much better, a lot of things that has been written off currently we will recover. So I expect recoveries to improve at the end of the cycle, not now.

Okay. And then the question --?

Yes, the second question about the -- we do not -- okay, look we have never been influenced by the government. I think that the interference of the government in the system has been always gone through the public banks, which accounts for more than 50% of the market share. But they have never influenced our action. So this has never happened in Brazil, so I do not believe that will happen in the future.

No, no, exactly, so that's my question, do you think that the government could use the public sector banks again in order to try to stimulate the economy and how do you think that the government looks at your profitability right now, if you could be -- if they could come up with new taxes in the banking system?

I think they -- look, the good thing about having federal banks in Brazil is the fact that government understands the dynamic of banks. They know the problems, they know about the delinquency, they know about the capital needs. So it makes the conversation much more rational, because they have (inaudible) also people that will be influenced and (inaudible) that. So I don't think -- and obviously, tax increases and additional burdens in the system will make credit even more difficult, which I don't think at the moment is the interest of the government. I think they would like to see banks to be more easy and to increase more the credit offer than try to collect some more taxes. So do not expect this to have any influence in our business.

The banking, the public banks, I have to say I think they have announced -- I know what's in the newspaper, they have announced some lines, additional lines, which are much smaller than lines that we -- the amount of lines that they put in the market in previous years. So for the year they announced this BRL83 billion of additional loans and programs with no subsidy. It's -- I am not sure about the demand for those lines without subsidies, maybe some of them like agricultural loans, which have very strong demand in Brazil given the exchange rate, you might have additional demand, but not necessarily for all of that number. So I don't think that this will be a major impact in the banking market.

Jason Mollin, Scotiabank.

Roberto, can you provide an update on the strategy for the Latin American region, specifically where do you see the greatest opportunities outside of Chile, where Itau will have a 12% market share post-merger? You mentioned Argentina in the Portuguese call is a small investment for Itau currently, but they're good prospects with President Macri. And also, what is your view on Mexico and the opportunities there?

We see Latin America as a good opportunity for Itau. Our experience is that we can perform quite well in this market. So we believe that we should increase our presence in all the countries in Latin America. Currently, we have presence in Argentina, Chile, Uruguay, Paraguay and Columbia. We believe that we can increase our presence in Chile, Colombia and Argentina. We have good position in Paraguay and Uruguay. Those are leading franchises in both countries with very good level of profitability. In Chile, we are acquiring CorpBanca. And in Colombia, basically we're entering we CorpBanca subsidiary. In those two markets, we will become fourth and fifth biggest bank in terms of assets in those markets. But we believe that we can go up and do additional acquisitions in those markets in the future.

In the moment in those two markets, we believe that we have to make the integration of the banks that we have acquired with our bank in Chile and in Colombia, CorpBanca had acquired two banks, which are already in the process of integration. So I think that for the next three years at least, we probably will not acquire anything in those countries or we'll not look forward to acquire anything because integration will take a lot of effort and this will be our strategies to put those banks integrated and to make out of them a good franchise.

Then comes up Argentina, which I mentioned to you that we have a small position, I think the market expectations are very high in Argentina. Let's see how it develops. It's a great opportunity for us with the presence that we have today already. There we can grow a lot in the region if the conditions shows -- the right ones in the future. Then we have Mexico, I think a market that we are not in. Mexico and Peru will be the next two markets for us as we would see as a potential for Itau to be present through an acquisition. But today we are not seeing anything in those markets that would be of our interest.

Saul Martinez, JP Morgan.

I have two questions. I hope you can hear me, I'm actually outside of the office. But first a very specific question and I have a broad question. On NII, I'm still a little bit perplexed by the guidance. And if I take your fourth quarter run rate for NII from client activity and I carry that through just the fourth quarter level through 2016, I get to the high end of your guidance range. I get to something around 4% to 4% plus. So effectively your guidance implies that at the midpoint and below that, the run rate in 2016 for NII is actually going to be lower than what it is currently.

So -- and I understand directionally the guidance in terms of your mix shift and less pressure from spreads, maybe FX. But can you give a little bit more granularity around and quantify a little bit the impact of these effects? In the fourth quarter alone you had a repricing benefit net of mix shift of BRL400 million. So it's hard for me to see that that essentially goes away from one quarter to next that quickly. So you can just give a little bit more color and especially in light of your competitors being a bit more optimistic about NII?

Secondly, and this is a broad question, forgive me -- it's not meant -- the spirit of it is not meant to be confrontational, but the question is, why should anybody buy your stock right now? And if you can make the equity case for Itau, because I think a lot of the investment story, or part of the investment story has been that the competitive backdrops gotten better. You have some benefit for repricing, that buffers the negative impact on asset quality and it allows you to maintain high profitability and you've certainly done that. Your profitability has been impressive in tough environment.

But your ROE, according to your guidance is around 18%. Long-term rates are not much lower than that. So clearly right now you're not generating that. The outlook for 2017, 2018 and 2019 is highly uncertain. Any cost of that equity reduction is really outside of your control. You are buying back stocks, so you certainly feel like there's value. But I'd like to hear in a little bit more detail how management, how the Company views the investment in Itau? And what you think the investment story is for Itau for investors?

Let me start with the margin. I think we have a lot of seasonality in the fourth quarter. So I don't think the reference for fourth quarter (inaudible) precise one. We have some seasonality in terms of use of products that changes over the years. So there is no full compliance with the idea that the fourth quarter you can reply every quarter because of this seasonality effect, this is one thing.

Second thing is the fact that from third to fourth quarter, part of the increase was due to the exchange rate, the average exchange rate between the two quarters. Although the final exchange rate was stable, the average one was -- we have some evaluation along the third quarter that was fully -- became fully revenue in the fourth quarter as the loan book in other currencies was bigger throughout the quarter. So this had some impact in the fourth quarter increase in terms of margins.

And like I mentioned before, we are not putting in our guidance spread increases along the year; it is only repricing, okay. So if we had additional spread increases, we would be able maybe to increase more spreads, but we are not seeing spread increases, basically for two reasons; one is because we expect SELIC rate to be stable. Second, because we believe that the current market positions, we do not believe that we could be able to increase rates at present. We have increased it along the 2015 year. So in that sense, we might -- we will -- assuming those conditions as true, we believe that this number reflects what we would expect. If you believe that we can have a higher level of spread, which could be the case, then margins could be higher than that.

Okay. And on the business case of Itau, I think that Itau has most of its business in Brazil. So Brazil is going through the -- maybe the worse moments ever in terms of economic growth. But I believe that Brazil, at some point, will be better than yesterday, we will improve our GDP, at least might improve somehow, not that much in the short-term, but we believe that it will be better than it is today. So as Brazil improves, we believe that capital ratios in Brazil -- capital -- cost of capital in Brazil will reduce and the performance of the bank will improve, ROEs will be higher in the future, we believe. We always have kept difference between cost of capital and our level of ROE, which we believe will be the case in the future. Maybe today we have not had this opportunity given the fact that the year was much worse than we expect by the end of 2014.

Just to remember, at the end of 2014, everybody was (inaudible) growth for 2015 and we end up having a negative GDP of almost 4% in the year. So we were not really foreseeing this. Looking this year, we believe also, like I mentioned in our guidance, our guidance update based on negative growth of 2.5% to 5%. So it's something in between that range. So this is something that we do not believe that this -- you can expect that this will be going on and on. I believe that we probably are in the bottom moments and things tend to improve in Brazil. I believe that one source of improvement will be the external accounts, which are improving quite fast here in Brazil. I'm not sure if you have followed, but Brazil, in terms of current accounts, that's probably given the current projections, somehow there are already projections, neutral, so zero (inaudible) so we're closing fully the gap this year and next year.

So these things change a lot the perspective for the country. And I believe that -- and the better conditions, Itau will perform with ROEs much above cost of capital and above my peers. Another important point is that we are really making the effort to keep the books very clean, provisions very updated so that by the time that the economy starts to recover, we will not be carrying over things from in the past. So we believe that as we keep books very clean, we will be able to very quickly to improve ROE.

We also have a business model that is very resilient, especially in a condition like the one we're living given the very strong amount of revenue that comes from services. And this makes us more than almost 60% of our -- more than 50% of our profit last year, Saul. And this is not affected by this GDP issue and higher risk in our loan book. So it complements quite well our loan book and makes our profitability very resilient.

So if we keep the books clean like I'm trying to explain, I believe that once Brazil recovers, we'll be able to grow our book quite fast as well and profitability will improve quite fast. And in addition to that, I believe that we are working very hard in terms of improving the efficiency of the bank and the quality of the bank. Since we do not have space for growth, we are investing a lot in improving the bank, investing especially in technology in order to make the bank more efficient and also preparing the bank for digital world, which we believe will be coming very soon and we have to be well prepared for that.

So I think that the franchise of Itau overall, in terms of business model, in terms of diversity of business, it's quite good, it's a great franchise. Clearly, I think we have conditions to outperform the peers, the average market at least. So in assuming over the years that Brazil will have some kind of improvement, I think that the current prices of Itau, somehow low, I would say.

Lucas Lopes, Credit Suisse.

It's my understanding that the large corporate segment has driven the material increase in cost of risk in the past year. How does the bank expect the composition of loan loss provision expenses to be in 2016? For instance, it is expected to be (inaudible) the most of the time. Any color on that would be very helpful.

Also if I may ask a second question follow-up on NII loans. Has Itau taking into account any repercussion from high NPL or margins in the guidance? I'm asking this because the provisioning guidance (inaudible) a sharp increase in NPL and after six days due, the bank cannot accrue interest in a loan, which (inaudible) negatively on NII. That's it.

We believe that the -- I mean, talking about the delinquency for next year, we have a clear -- that the retail segment will have increases in NPLs. Most of the provision increase is related to retail, but smaller increase in middle market and corporations. Most of the provisions increase comes from the retail segment. This is what we expect for the coming year.

And Lucas for the impact of --.

Marcelo is answering the other part of your question.

And for the NII growth and the impact of non-accruing loans, yes, it's embedded in the equation that as well, as one of the components there is as part of the equation on how we project NII going forward.

Victor Galliano, Barclays.

Just a couple of quick questions from me. On CorpBanca, in the past you said that this would absorb -- I think I heard in the past, more like 80 basis points on the acquisition. Are you now saying more 100 basis points, has there been any material change there? Is it an exchange rate thing? Can you give us some clarity on when that's moved?

The second question is about the RWAs came down in the fourth quarter. Is that a recalibration of credit risk along the book on the back of the new regulation of Central Bank came out? And lastly, sorry, third question on insurance, I just want to get a sense of why you think that there was or why you can tell us there was no earnings growth year-on-year in the insurance segment?

Okay. Let me start with insurance earnings. Basically, we are moving out of some lines, as (inaudible) announced and concentrating on the other few lines. So at this moment we have some adjustments in the business, which has made more difficult to grow revenues and profitability. We also -- at the moment the crisis is taking place today, we don't have that much space to grow the insurance business. So we expect the insurance business to grow pretty much in line with service for the coming years. In this year specifically, we have this adjustment coming from the sales of some business lines and some reduction in some lines that we are moving out, closing down the business. Above the 80 basis points that you mentioned of CorpBanca impacting our capital ratio and now we are moving up to something more closer to 100 basis points. Basically, one reason is the exchange rate, it became a much bigger book given the current exchange rate and I think this is the major influence. And second one is the more fine adjustment that now we know -- we have more information on the balance sheet, so we can have a much better calibration on that. And Marcelo, you answer about the about the RWA.

Yes. On your specific point on RWAs, the change from the Central Bank affected the sureties, the risk weighting for sureties, okay, and then I also mentioned the dollar movement and also the consumption of tax assets.

Just a quick follow-up on the CorpBanca, if I could. So there is no -- as you said the FX rate, is there any sort of hedge in place with regard to this because I know that it's a dollar-based deal for any of the price and obviously you know that the agreement has been in place for a long time.

About the hedge for the commitment of capital increase you're talking about?

Yes. Well just the price of the deal because I know it was struck in dollars back in 2014.

Yes. And the 80 basis points relates much more to the size of the asset that was impacted by the size of the asset. When we translate it into reais, it became bigger than it was previously. That's why we have this additional around 20 bps impacting the capital ratio.

Ali Rehan, MM Investments

Just a quick question on your guidance for provisions. If -- and did you mention that the range of GDP that you're working with is between minus 2.5% and minus 5% and the range of provisions is BRL22 million to BRL25 billion, but for 2.5% change in GDP you expect provisions to increase by BRL3 billion and sounds it a little bit too optimistic. Would you agree with that?

Yes, pretty much given the level that we are already, this is what we expect, because this would mean an acceleration, I mean, 5% this year, the impact in 2016 would be basically on the margin of what we're seeing today, okay. This would give more impact in 2016 -- 2017 if we have this kind of environment. We have additional impact in 2016 -- in 2017, I mean. Do you understand?

Yes. Also just to understand in terms of how you -- sorry, go ahead, please.

I think we are -- basically what we assume -- we have a base case and as this deteriorate or improve, the impact was not going to be in the full year. The full year impact of that would be down the road in the year ahead. So we have our best (inaudible) case.

In 2017?

Yes. In 2017. We have a better environment for 2016, we have better in 2017 or the worst case in 2017, if we have a 5% negative in 2016.

And just also trying to understand about how you factor in corporate delinquencies in your guidance. Because for retail, you can use your models to project what the sort of provision of requirement you would require, but for corporates they can be pretty lumpy, right, and it's hard to kind of project which corporates are going to go bankrupt and how much provisioning you will require. So how do you work on the corporate provisioning?

It's much harder, as you mentioned. We have to keep a very close track on corporations in order to understand that. But mainly we keep a good track on factors that are suffering more. We keep a much closer track than other factors that are doing fine. So we can basically look through factors and see how this would affect our book, our exposure is to that factor on how this could impact the provisions. But you're right, it is much more (inaudible) size, the kind of the expectation that we can have in the provisions for wholesale book.

Just quickly, finally, do you think there is also -- in what circumstances would provision guidance -- provisions would be higher than the BRL25 billion that you're guiding for?

Basically from today, I just could say that only if GDP would be even more negative than the range I gave you from -- so it would be worse than 5% or some major impact coming from something that we don't see. But today we do not see that.

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

Okay. I just want to thank you for being with us during this call. I think it was an important opportunity to us to clarify how we are basing our guidance for 2016 and ahead and I think -- I believe that we have answered all of your questions and please feel free to look for Marcelo if you have additional points if we were not clear enough during the call.

And thank you very much for being with us at this time. See you next time.

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