伊塔烏聯合銀行 (ITUB) 2016 Q3 法說會逐字稿

Good morning ladies and gentlemen, welcome to Itau Unibanco Holding Conference Call to discuss 2016 third quarter results. (Operator Instructions)

As a reminder, this conference is being recorded and broadcasted live on the Investor Relations website at www.itau.com.pr/investor-relations. The audio webcast works with Internet Explorer 9 or above and Chrome, Firefox and mobile devices, IOS8 or above and Android 3.0 or above. A slide presentation is also available on this site. The replay of this conference call will be available until November 7 by phone on 55-11-3193-1012 or 28204012, access code 5591183#.

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 2016 third 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. Eduardo Vassimon.

Good morning, good afternoon. We will start our presentation at page 3, with the highlights of the period; we had BRL5.6 billion recurring net income. We consider these results to be robust, particularly taking into consideration there is still challenging economic environment. We are seeing more positive perspective for NPLs. Talking about the credit quality, we had the 3.9% NPL-90 day. This is higher than what we presented in the previous quarter, but it was affected by one specific economic group that is [already] for some time 100% provision for, and it's a private company of the oil sector. If we rediscount this [specific effect], we would have had a stable NPL 90-day at 3.6%. In Brazil, NPL-90 day was 4.8% and here again excluding these specific economic group, we would have had 4.4%, slightly lower than the number we had in the second quarter.

Moving to page 4. We have here recurring return on equity/recurring return on asset, return on equity close to 20%, recurring return on asset at 1.6%, of same level of the previous quarter. Moving to page 5. We will have the P&L here, I'd like to highlight some specific point. We had a positive growth of financial margin with clients 6.9%. This is positively impacted by the fact that in the previous quarter, we had an impairment of around BRL540 million, which we disclosed extensively in the previous quarter, but even discounting these would have had above 2% growth in this line.

Financial margin with the market, we had a strong BRL1.7 billion this quarter, 16% higher than what we had in the second quarter. Commissions and fees in 12 months, 7.3%. And I'd like to call your attention to the results from loan losses, a reduction of 2.5% in this quarter, although in 12 months, we had over 20% growth, 24.5%.

Non-interest expenses showed substantial increase at 8.4%, but here we had some extraordinary events. When we exclude those events, we would have had basically a flat number in terms of expenses when compared to the previous quarter. Those extraordinary events are basically two elements. The first is methodology enhancements for calculating labor claims, these amounts to BRL687 million. And the other element is our lump-sum bonus paid to employees totaling BRL275 million. This is part of the agreement reached with the union, so part of the agreement was an increase of 8% and lump-sum of BRL3,500 per employee.

So, both these lump-sum bonus and this adjustment in the labor claim are events that although accounted as recurrent results, are extraordinary in the sense that we do not expect them to be repeated in the next quarter. So, for projecting next quarter, in our view should exclude those two elements.

Moving to page 7. We have the breakdown of our P&L between credits and trading on one side and insurances and services on the other side. We have the results in the third quarter similar to the ones we filed in the second quarter. And Insurance and Service, that is a more stable part of our P&L -- accounts for approximately 6% of our bottom line.

Moving to page 8, where we have the credit portfolio. I'd like to call your attention to the growth, a few lines. First one is credit card loans. We had 2.4% growth in this quarter, recovering partially the contraction that we saw in the past in the particular segment. And the other one is mortgage loans, keeping basically the same behavior of previous quarter in line with our strategy of moving to less risky (inaudible) with strong 2.9% growth in this quarter.

Altogether given the economic environment, we had a small reduction of 0.6% during this quarter compared to the second quarter. In the lower part of page 8, we have more information here on our Latin America portfolio. On the left side, we see growth of 2.8% for individuals and 0.6% for companies. And on the right side, we see the breakdown by country, where you can verify a clear concentration of our LatAm portfolio in Chile and Colombia together represents approximately 85% of our LatAm portfolio.

Moving to page 9, we have the loan portfolio mix. When we see here, Brazil only, we continue to see a contraction in the vehicle finance portfolio, even among other teams, the reduction in market itself of car sales. Credit cards, as I mentioned, are showing some recovery and both mortgage loan and payroll loans keeping the same trend of previous quarter in line again with our strategy of moving to less risky portfolio. In the upper part of this page 9, we see the consolidated loan portfolio, including Latin American which represents already 20%, close to 27% of our loan portfolio, but considering that we have in the biggest part of the portfolio Chile, only 33% economic interest. This figure would be 12.5% as indicated here in yellow.

Moving to page 10, talking about financial margins, good evolution in financial margin, both the regular, let's say, financial margin and also the risk-adjusted financial margins both presenting a good evolution.

Moving to page 11. We had a strong market result, financial margin market at BRL1.7 billion, basically flat in Latin America and improvement in Brazil. And when we look ahead, we both expect for the next quarter an amount that is compatible with the average of the previous 12-months, considering that this is naturally a line that has more volatility.

Moving to page 12 and starting to talk about credit quality, we have here the 90-day NPL ratio. When we excluded this particular case, (technical difficulty) in the beginning of the presentation of the economic growth, that's already 100% provision would have had a flat number at 3.6% for the total. In Brazil, a small reduction considering the same [deduction] of this particular group, from 4.5% to 4.4% and a slight increase in Latin America up to 1.2% from 1.1%.

The lower part of this page 12, we have Brazil with the breakdown by the main segments and here I think, we have quite positive information with the reduction of NPL for individuals. So for the second quarter, in a row, we had a reduction now at 5.7%. So, we believe that this shows that this segment is performing quite well and most probably we had seen the peak of NPL for individual in the first quarter of this year.

For large companies or corporates, when we exclude this oil company, we will have had a reduction from 1.6% to 1.4% and as to SMEs, we still have more challenging [performance], still going up the NPL, although at a lower rating.

When you move to page 13 to so see the [full term] 15 to 90-day NPL ratio, we see good behavior of SMEs, so going down 50 basis points from 4.3 to 3.8, what encourages us to say that we believe that this segment should also show more complete signs of stabilization in the next few quarters. We will give you those flat at 4.2%, Latin America also flat at 2.1% and for corporate Brazil, this reduction reflects that this particular oil company moved from 15 to 90-day over 90-day NPL. So, it's more reasonable to see in our opinion this is a flat around 1.5 in the last three quarters.

Moving to page 14, and showing the NPL ratio. Excluding fully provisioned credits, we have in Brazil, and give you those with a stable (inaudible) a small reduction from 2.3% to 2.2% and also a reduction in companies, again excluding the fully provisioned credit from 1.1% to 0.9%. So more compatible with recent standard. In the lower part of the page 14 is the NPL creation, and we have here, when we did this particular oil company case, our reduction both in companies, in wholesale and retail for the third consecutive quarter, we have normal reduction of NPL creation. So, again compatible scenario of improvement for this particular line of business and for wholesale, we also see a reduction, when we excluded the oil company. When we see the ratio between the NPL creation and loan portfolio for wholesale, only 0.5% reduction from previous quarter, always considering the exclusion of this oil company, and a stable ratio for NPL creation to loan portfolio for retail at 1.9%, very stable than several previous quarters.

Moving to page 15, I'm talking about renegotiated loan portfolio. We had some increase from BRL24.1 billion to BRL25.3 billion, this increase is compatible with the economic environment where we see still challenging credit conditions, but most of the increase is related to operations, transactions that are not (technical difficulty) in the bottom of this figure from BRL5.6 billion to BRL6.2 billion in September, so showing what believed to be a more preemptive approach for renegotiation.

In the lower part of the page 15, we see the NPL, 90-day NPL coverage, here excluding this oil company case, would be at 188%, so a solid figure compatible with historical standards. For 90-day NPL, the range in the previous three quarters, the range of between 20% and 22%. Again here excluding this oil company, when you see the nominal figures we had in June BRL5 billion, we have a huge increase of 1.7 and this is almost 100% related to this oil company. If we exclude this oil company, this figure as indicated here in the page would have been BRL5.1 billion, so a small increase.

Moving to page 16, we have provision for loan losses by segment. We had a good reduction in Retail Banking segment. Here by the way, we believe that in this cycle, the peak of retail in terms of provisions was in the last quarter of last year at BRL4.6 billion. And for the bank as a whole, we are confident that in this cycle, the peak was in the first quarter at BRL7.8 billion.

Moving to page 17, we have here the coverage ratio for 90-day NPL. In this total, the yellow figure, we have 204%, that's a very robust number in our view and we have also recalculated this [fees] excluding this particular oil company case, this is the dotted orange line. We would beat them at 214%, the highest figure in three years. So, we consider that we have quite comfortable level of coverage for NPLs.

Moving to page 18, we have the breakdown of our allowance for loan losses by type of risk. In the bottom what you call Overdue is the minimum required by Brazilian Central Bank. The intermediate block, (inaudible) is related to transactions that are overdue where we had more provisions than the minimum required by Central Bank and also provisions related to renegotiation.

And finally, the upper part is what you call Potential, where we do not have anything overdue or renegotiated, but according to our models and our judgment, we have provisions related to expected losses. So altogether, we had a small increase from BRL38.5 billion to BRL39.1 billion for loan losses.

Moving to page 19, we have here permission for provisions and NPL creation by segments. The upper part for retail continue to be around 100%. So, some quarters are slightly above and some quarters, as in the case for the third, is likely below, but in a choice perspective, around 100%, for wholesale banking in Brazil, we are at 79% including everything, if you exclude this particular oil case, that is again 100% provision, would have been at 256%, and excluding this very same case in the total would be at [120%].

Moving to page 20, and talking about commissions, fees and insurance results, we had a flat figure for this quarter when compared to the second one at BRL7.8 billion and 7.3% growth in 12 months. This figure is negatively affected by the Credit Operation and Guarantees Provided line, that of course is very much related to the economic environment and our credit policy and in this particular line, we show the nominal reduction of 0.7% in 12 months.

Moving to page 21, and talking about the non-interest expenses. Again here we show huge increase of 8.4%, but excluding extraordinary events that again, we don't expect to be repeated. They would have had the flat figures and nominal expenses in the third quarter, very similar to the second quarter. We have again excluded this because we believe that to forecast to project the expenses in the next quarter, this is something that we should not see in the future.

In the lower part of this statement, one on the right side, just to highlight the fact that in line we saw out strategy of getting more and more digital, we are expanding our digital branch network.

Moving to page 22, here very quickly just to highlight the fact that efficiency ratio without considering extraordinary items that I referred to would have been 44.9%, so below the 46.7% that we observe in a single cycle.

Moving to page 23, talking about Capital. We have highlighted here in the bottom part of this page, the CET1 fully loaded according to Basel rules, so anticipating the [schedule], we're today at 14.1%, and discounting both the Citibank and the Itau BMG transactions that were announced, you would have been at 13.6%. Both those transactions are still dependent on regulatory approval. So, 13.6% after those transactions is still very comfortable level and putting us in a very comfortable position for taking advantage of potential new credit cycle.

On page 24, talking about our forecast, we have reaffirmed all the lines of this forecast, so I believe that all lines will be within the range indicated in this page. For credit portfolio, we believe that it will be close to the bottom of this range. For financial margins with clients, we believe that the final figure will be between the midpoints in the lower point of the range. Provision for loan losses net of recovery will be, in our view, very close to the bottom point of this range. Commissions and fees results will be close to the bottom. And non-interest expenses, despite the extraordinary items, would be still within the range of the close to the top of this range.

On page 25, we give some information on Citibank's and Itau BMG's transactions that were announced, most alignment of strategy of reinforcing our activity within the case of Citi and in the Itau finance (inaudible) BMG, both again subject to some closing completion approvals from regulators particularly, Brazilian Central Bank and the Brazilian Antitrust Authority.

And finally on page 26, we invite you all to participate in our Annual Meeting, APIMEC Meeting that will take place on November 17 in Sao Paulo. To conclude, again we believe that this was a robust quarter with positive perspectives for NPLs, expenses under control and resilient margins.

So, thank you and now Marcelo Kopel and myself would be available for possible questions that you may have. Thank you.

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

Hi, good morning Vassimon and Kopel and everyone on the team. First congratulations on the strong set of figures. I have two questions, the first one regards provisions. We noticed a significant improvement in new NPL formation, I think you mentioned in fact three consecutive quarters of decrease, and if we repeat the last quarter or second Q, we would mostly I think going to be below the guidance. So my question is, do you have room or do you have baked-in in the forecast, any increase in additional provisions or the BRL23 billion to BRL26 billion does not incorporate any kind of rebuilding of additional provision? And then I'll move to the second question.

Thank you Domingos. As to the provisions, on (inaudible) given the -- what you have seen in the previous months, we are, I'd say more confident in relation to provisions related to individuals. While for companies, I think we are still in the process of stabilizing the latter, but it's less clear than for individuals. So, we still might see some volatility in the provisions, particularly for companies. And as I mentioned during the call, seeing from today, our best expectation is to be very, very close to the bottom of the guidelines of forecast that we mentioned. We do not describe to be slightly below, this could be slightly above, slightly below it, but again, we are more confident for individuals.

Okay, perfect. The second question is more on the NII, on SELIC, Itau hedges its loan book and some peers don't and it seems like a very anticipated reference rate decrease in Brazil and it feels a little counter logical to me, that one bank could benefit while the other wouldn't. From this aspect, my question is, how can you benefit from an anticipated (inaudible) decrease on the NII. Can't you capture that through trading gains or potentially some other line that we are not seeing?

We naturally in the management of our total book (inaudible) and we do consider scenarios, economic scenarios and we tend to anticipate movements when we consider appropriate in the interest rate and we have done so to some extent recently so that we can move the effect of reduction of interest rate and also reduction interest rates, of course, normally occurs and we believe this is the case now, in a scenario where we see an improvement in the economic environment as a whole, so in a scenario where we would see more demands for credit and reduction in NPLs. So, there is one positive sign -- one positive aspect that there is improvement in the whole environment in the economic conditions.

Perfect. Thank you very much. Congratulations again.

Carlos Macedo, Goldman Sachs.

Thanks, good morning Vassimon and Kopel. Hi guys, thanks for taking questions. Main question here, goes back to capita. I mean I've been asking this question, I think I'm pretty myself for three or four straight conference calls. You are accumulating 30 basis points to 40 basis points a quarter and you're fully loaded, fully mitigated Tier 1 ratio. I mean now 14.6%, now it's include in the tax credits, that's in the year-and-a-half, if you keep the same trend in the asset growth, you're going to be well over 16%, and that's not efficient, right? What's the plan here? I mean you're talking about growth coming back and at least seen some growth, but at the same time, we are talking about maybe mid-single digits loan growth in 2017, maybe a little bit starting, that's not really going to make a dent.

You haven't really bought back any shares this year, you don't talk about increasing the payout. The acquisitions that you made were strategically important for your presence in Brazil, don't really -- haven't really made a dent into that big capital level that you have. So, is it going to be acquisitions or is it going to be more buybacks? Is it going to be higher payout? How are you going to turn this around, because 16.5%, I don't think many banks in the world can say that they have. I don't think you feel comfortable with it. I remember Roberto talking at the beginning of the year that they (inaudible) -- you guys want to run the bank at 12% to 12.5%. Could you give us some light into to what the current thinking is? And more importantly the timetable for implementing that thinking?

Good morning, Carlos. Yes, we -- as Roberto mentioned previously we believe that 12% to 12.5% would be a reasonable level of capital in normal and more stable condition. I think we're getting there, but still in a not so stable economic environment, and we don't see us reaching 16.5% with no action. We expect some growth starting next year and some pick-up in correct growth in 2018.

We have made those two transactions, small but we already consumed 0.5% and we'll be following a possible (technical difficulty) for acquisition particularly outside of Brazil. Of course, we are in the short term more focused on consolidating the CorpBanca deal, but if there is good opportunity in the right timing, we would consider expanding our presence in Latin America.

If all this is not enough, we would definitely consider be more aggressively buy back shares. So, any of those (inaudible), I'd say during the next year we will probably have a more clear picture on in terms of demand for credit, in terms of the whole economic environment. And we are not going to be sitting and just seeing the capital accumulating to 16% or 17% level.

Okay, thanks Vassimon. I mean just, I think the most you've bought back in any given quarter, has been BRL1.2 billion, and again, you're accumulating BRL4 billion of capital every quarter, it doesn't again. Buybacks are only part of the answer, right? Is there no chance that you raise the dividend payout even if temporarily?

Carlos, its Kopel. I think what you should -- the answer is, would be a combination of things, because just a one thing will not address the accumulation at all. So, it'll be a combination of things and if special dividend or a temporary increase in payout is needed to address that, it could be used. So, but don't see one option excluding the other one, they should be probably used or they will be happening at the same time.

Okay. Just as a follow-up to that, because it's just capital sitting on the other side of the balance sheet. The excess reserves are now at BRL10.4 billion. You're talking about NPLs improving, the cycle turning, growth coming back. Is there a plan to make use of that or again is it just going to sit there for any day in case the cycle doesn't turn out the way it expected to?

Hi, Carlos, this is Vassimon. These excess provisions should not be seen as a reserve for rainy days. When we built it, most of it, we had a very low level of ability in [a crisis] that was approaching in our judgment at that time. But I think we have to see this more as a regular process of having provisions according to our expectations for losses according to our models.

So, in the second quarter, we saw some reduction in this complementary provisions. In this quarter, we have increased a little bit. So, we are going to see these fluctuate according to our judgment and our model. So, and what we can say from now is that for the next year we expect to have a lower level of provision expenses. (multiple speakers). These complementary provisions, now you should be seen as part of the management of our expected loss model.

So, it would be reasonable to say, I mean, a lower level of provisions that you could eventually use these excess provisions. If your, or in other words, that level of excess provisions come down if you started seeing the risk for what you provisioned them for decrease?

Yes, the level provisions should reflect our assessment of the risk. If the environment improves, we will have a lower level provision.

Okay, perfect. Thank you Vassimon and thank you Kopel.

Tito Labarta, Deutsche Bank.

Hi, good morning thanks for the call and taking my questions. Couple questions, also following up, just a little bit more on provisions. Just want to get a sense, looking through the cycle as things improve over time. If we look from 2013 to 2015, you're provisioning around 3% to 3.5% of loans this year and above 4%.

Just like over time once you get through the asset quality cycle, what's kind of sustainable cost of risk in a normal environment. I am not saying you're going to get there next year or 2018, just given your loan book where it is today, just think in a normal environment you'd be provisioning around that 3% to 3.5% or I don't know how long you will take to get -- just want to get a sense --once you get through the asset quality cycle, what you would expect things look in terms of the cost of risk? And my second question, just following up in terms of loan growth, which segments do you think you could grow in as the economy improves? You mentioned growing in mortgages, we saw payroll loans have been kind of flat over the last year, you saw a pickup in credit cards this quarter. As the economy improves, what segments do you think there could be some demand, will it be [more so] into one? Thank you.

Hi Tito, its Kopel speaking. I think fortunately or unfortunately, Brazil is (technical difficulty) have comparable periods here in Brazil, but you mentioned something around 3.5% in your number, which looking at the history for the net provisions that was the number that we achieve. So, on average the several quarters during 2015 and that could be a number. If you want to pencil your number that could be a number that you can pencil, okay. But again, we're still going through a cycle, we have many things ahead of us like elections in 2018, structural reforms that need to take place. So, in lack of a better number, you could use that pencil that number for the time being. But, it's more like a temporary thing until we can get something more longer term view, which we don't have it now.

In terms of growth, we are getting out of a cycle, but not throughout -- out of the cycle, GDP growth to be in the positive territory next year, or somewhere between 1.5% and 2%. So that could provide an opportunity for the market to grow at a modest single-digit number and throughout 2018 with things progressing in the political and economic agenda, you can get some acceleration to that. But as of now, seen from where we are, trying to compare that with the past growth where penetration of credit through GDP was at a much lower level with only vision that being the case.

Tito, this is Vassimon, just to complement, what we are seeing is that inventories are going down rather quickly, so demand is higher than production today, so industry should show some recovery. For individual, demand for credit is probably take a little bit more time because there's still going to see increase in employment, although at lower pace, we expect employment to peak in the first half of next year, but the level that we should reach by the end of this year will be already close to the peak. So, we are, I think, in the process of approaching the peak and then in the second half of next year, we should have starting the reduction of unemployment level. So, it will be in our view, a slow and gradual process.

Jorge Kuri, Morgan Stanley.

Hi, good morning, Jorge Kuri from Morgan Stanley. Two questions if I may, the first one is on the macro environment. Can you give us a sense of what you guys are sensing being close to the economy on how things have progressed over the last three months? We've seen some macro indicators coming weaker than expected and consensus numbers for GDP growth next year have come down around 10 basis points now. The market expects 1.2% GDP growth versus 1.3% before. What is it that you're seeing, are you seeing signs of improvement duration, what -- you're very close to the economy, so wondering what is it that you're seeing, and especially in the context of your 2% GDP growth for next year, which is obviously much higher than what the consensus is today?

Good morning, Jorge. We expect the growth to be between 1.5% and 2% next year. We are seeing mixed signals here. What I believe is rather normal when you are leaving economic cycle, confidence has clearly improved both for consumers industry and entrepreneurs commerce industry. But the signs are not yet robust. As I mentioned previously, we believe that this will be a rather slow process of recovery, but we are confident that we are starting, we're going to see more positive figures in the next few months. Again, it will be slow, but the signs that we have, the indicators that we follow including some indicator that we dealt for a credit purpose internally are showing clearly that things started getting worse and are starting to get slowly better.

And the interactions we have with the main companies also show that the mood has improved. There is still some reluctance in investing, because there is, ideal capacity is high. And of course, the whole environment is still dependent on the consolidation of the fiscal measures. As you (technical difficulty) the Lower House approved very important measure, the ceiling for expansion, this still has to go through the Senate, and we have Social Security Reform, you have other relevant reforms. So, the mood is positive, I think the political scenario is more stable. We see, I think a good environment for a more liberal approach to economic issues, but it will take time. It will be a slow process, but we believe consistently in the right direction.

Thanks and I have a second question, if I may. Just to clarify, I saw in your institutional presentation that your GDP growth estimate is 2, is that sort of like that's your economies number, but the bank is working with a different 1.5 to 2, or just to clarify what is that you are expecting?

That's a good question, thank you Jorge. Yes, our economic area is forecasting 2%. We in our budget, in our models, we're slightly more conservative, we're working for 1.5%.

Got it, perfect. So, my second question, if I may is on sensitivity to lower rates. I also saw in your institutional presentation that your economy is expecting rates to go down to 10% by the end of next year, which is a bit more aggressive than consensus, that's also in line with what we expect, a 10%, so that's a pretty (inaudible) reduction in rates and I know that these things do not work in isolation and you made it very clear. Variables move all around and lower rates, means other parts of the business will change, but most banks globally provide very good visibility on an all else equal -- all else equal obviously being the key word here and assumption, what is the impact that every 100 basis point reduction in SELIC rates has in your bottom line. We get those numbers from banks in Mexico, banks in Peru, banks in Chile, banks in Colombia. I'm sure it's not a very difficult number to put together. So, one thing if given that 2017 is going to be a very characteristic year because of the sharp reduction in rates in an environment of relatively modest growth. I think it's important for the market to understand again on an all else equal, what does this mean for your business?

Hi Kuri, Marcelo here. I understand the context of the market providing that, but the concept of all else equal for Brazil is really something harder to say. So, we will not disclose a number for that, but I'll make a few considerations adding to what you already preempted in your question, which is things don't work in isolation and most of the spread is not driven by the funding cost, but it's driven by the credit perception.

So, therefore we do envision a reduction in NIM and it's a fact we envision that this will happen gradually for a couple of reasons. One, the portfolio duration, second because perceived credit spreads will go down to the extent actual credit is perceived with less risk. Third, competition is being rational. Okay, so that helps as well and the point here is really in the part that we are more, let's say, sensitive to that which is in, for example, in the funding costs. This will have an impact this year making efficiency out of your volume rate. But at the same time, we tend to increase the duration of our placements that protect those liabilities in the sense that this should help smooth the impact.

So, if you look at our [ALN] and the value at risk at this particular quarter, you see an increase in our value at risk, which talks to having longer duration positions to smoothen the impact of that. Needless to say that, it's impossible in a situation like that to keep postponing forever the impact of a reduction in interest rates, the only thing that we have here is how we transition in a scenario where you are having the pressure on interest rates going down and we are still not ready to make growth make up for all this reduction.

So, you should see the combination of reduction in rates bringing them down gradually, a pick-up on the credit cost, which should help a shelter part of that, and to some extent a modest growth in credit and in 2018, credit should accelerate further and the bulk of the reduction should be already baked in on the numbers. But that's not a perfect scenario, apart from being perfect on economy, that is still in a slow mode.

Alright. So, in essence of you providing, what I think is basic disclosure for most banks globally. So, what's your best guess Marcelo, single-digit loan growth that probably means average-on-average in, I guess, low single-digit plus NIM compression, what does that means for revenues? Can you see financial revenues grow next year or you think that the working scenario should be (inaudible).

I think Jorge, if we say modest growth on the portfolio, NII should be added (technical difficulty) than the portfolio, okay. And that just talks to what we just spoke about, NIM trending down in a gradual way. But that would be the indication we will provide in the absence of having a formal guidance to give it to you.

Mario Pierry, Bank of America Merrill Lynch.

Yes, good morning everybody, congratulations on the solid results. Just one question related to the competitive environment that you're seeing, as we have seen a lot of consolidation in Brazil recently, [write-off] Bradesco in HSBC. You've been buying Citibank and now also doing a transaction with BMG to buy the entire stake there. At the same time, we've seen the public sector banks with some capital problems.

So, I just want to get from you, what is your desire then to or your willingness to regain some of the market share that you were willing to lose in the last few years when you didn't feel comfortable with the economic environment, especially given your high capital ratios. So, can we see Itau over the next few years regaining back some of the market share that you lost and also -- what does this mean for credit spreads if the competitive environment is improving?

The environment we see is a very competitive one, but rational competitiveness. I mean we see both private and public banks showing a good level of discipline in pricing, in capital deployments. So, I think we have a good environment for competition.

In the past, this was not necessarily the case and although, of course, market share is important, we always try to price adequately the risk and we are not going to get into irrational competition. So, this caused us in the past to lose in some specific segments a little bit of market share. I think in this new environment of rational competition, given our capital position, that's quite strong. I think we are well placed to possibly regain a little bit of market share.

And then in terms of -- in regards to the credit spreads given, okay, it's a rational competitive environment. It seems like no one wants to be the first lender here, especially as no one seems completely comfortable with the economic environment yet. Does that mean then the credit spreads remain elevated for a few more months?

Yes, I agree with that. I believe that credit spreads, of course, will follow the risk perception, but I have the impression that they will go down in a lower pace than the risk itself, given this is a more rational environment. So, I don't see spreads getting compressed in the short-term and so, I think it's a favorable environment where we start to see less risk and still (technical difficulty) of the spread, but of course over time, they will convert and reflect a lower level of risk.

Perfect, thank you.

Nicolas Riva, Citi.

Hi, thanks a lot Marcelo for taking my questions. My first question is on the fourth quarter. Typically, the fourth quarter is the strongest quarter of the year. And if I look at the third quarter, you had some one-time expenses about BRL900 million in provisions for labor claims and bonus payments for the labor agreement. The guidance for loan loss provisions for the full year implies loan loss provisions about flat quarter-on-quarter in the fourth quarter. So my question is, in the fourth quarter, if it would be realistic to assume net income of about BRL6 billion net income for the fourth quarter? And my second question is on loan growth. So, you already said that for next year we should expect to see loan growth in mid-single digits more or less for next year. Now, if I look at your corporate and SME loan books, we saw a decline on a quarter on quarter basis, we saw declines of 3% quarter on quarter from corporates and 2% quarter on quarter for SMEs. So my question is, when are you seeing really the inflection and growth to resume really in the corporate and SME books? Thanks.

Hi, Nicolas. Regarding the credit growth, it should be something that to materialize strongly our stronger action in the second half of next year, okay. We are still seeing Company is adjusting especially on the corporate segment, we're still seeing Company is adjusting. Vassimon mentioned before that, there is a lot of idle capacity in the economy. So that typically postpones the decision for companies to be coming back to the market, and when they come back, it's going to be mostly driven by working capital than to longer-term financing, given the installed capacity that they have. So, this is one thing. And needless to say that, growth will be [uneven] throughout the different segments. So, you'll see segments or different pockets of the economy growing at different paces.

Regarding our fourth quarter estimates, we can't really comment on numbers for the fourth quarter, but Vassimon mentioned a couple of -- gave some color in terms of the intervals. So, you may well get through the number you provided or something around that, but it's more up on you to put numbers. But one thing that we need to remember is, the fourth quarter typically brings additional volumes on certain portfolios that when you look at on a prospective basis, regardless if they're delinquent or not, you tend to build provisions for them just because on expected losses.

So, the trend on some of the segments is the one we've been seeing, but you may get some fluctuation as Vassimon mentioned in terms of quarter on a quarter, but we are confident with the intervals we provided.

Marcelo Telles, Credit Suisse.

Hello, Vassimon, Kopel, everyone. Thanks for the time. Congratulations on the results. I have two questions, the first one, you mentioned earlier that you would expect some level of decrease in provision expenses next year. And my question to you is, what is the level of, let's say, GDP growth expected for next year that you think would prevent you from reducing provisions. I know you are expecting 2%, but what sort of level of GDP growth you think could lead -- your provisions not to improve next year and I ask that because we all know that the level of corporate leverage is very high, almost three times EBITDA, pretty much all-time high levels. And there is a big like operational leverage component there, so I was wondering to have it done any work in terms of sensitivity to GDP and cost of risk in your case.

And my second question is regarding operating expenses. You've been doing a good job on costs. But when you look in terms of what you're going to achieve this year, I think your guidance 2% to 5% growth, but you have a big decline in your loan portfolio -- 10% decline more or less and how should we think about your operating expense evolution next year and on, let's say, if your volume is declining, so you have maybe some modest growth from next year. Do you think you could see a pickup in OpEx or you think you can still deliver operating expenses growth below inflation? Thank you.

Good morning Marcelo, as to the relation between provisions and GDP -- I don't have the answer. You will have to make some simulations, but we expect in our base case that 1.5% to have a decrease in provisions, if it turns out to be substantially different from that then we should revise this expectation, but should be something relevant to change this assumption. As to operating expenses, yes, we believe that we will be able to deliver the loans ratio on a gross next year.

Okay. Great. Thank you.

Carlos Gomez, HSBC.

Hi, good morning and again, congratulations. I have another question on the capital, but I want to focus on the denominator of the capital ratio. If you look at page 41 of your MD&A, and you look at the composition of your risk with these assets, you see a very, very sharp decline in the category of 85%, it was from BRL150 billion to BRL94 billion. So I wanted to know, if there was anything specific that brought such a big decline. And on a wider basis, if our numbers are correct, your loan portfolio, given that you purchased CorpBanca, quarterly CorpBanca has grown 4% and yet your risk-weighted assets have declined 8% year-on-year. Could you tell us how much of that is mix and how much is changing the capitalization rules of Central Bank? Thank you.

Carlos, for your first question, there was a migration from what we call STR 85% which is the percentage that is [weight the assets] from 85% to 100%. And that's the change in classification given a clarification provided by the Central Bank. So, this is basically a migration from one line to the other one.

Regarding CorpBanca, as you mentioned, I need to conform, but those got to have to have something regarding effects, but we will take that offline with you.

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

Thank you all for participating in our call. To reaffirm that we believe this third quarter to be a solid one in terms of results in both perspective in terms of NPLs and expenses under control and resilient margins. So, thank you all.

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