伊塔烏聯合銀行 (ITUB) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Itaú Unibanco Holding Conference Call to discuss 2017 first quarter results. (Operator Instructions)

As a reminder, this conference is being recorded and broadcast 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; iOS 8 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 May 10 by phone on (55-11) 3193-1012 or 2820-4012, access code 1775156#.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors.

With us today in this conference call in São Paulo are Mr. Candido Bracher, Executive President and CEO, Chief Executive Officer; Mr. Caio Ibrahim David, Executive Vice President, CFO, Chief Financial Officer and CRO, Chief Risk Officer; and Mr. Marcelo Kopel, Investor Relations Officer.

First, Mr. Candido Bracher will comment on 2017 first quarter results. Afterwards, management will be available for a question-and-answer session.

It is now my pleasure to turn the call over to Mr. Candido Bracher.

Good morning, everybody. It's a pleasure to be with you to talk about our first quarter results. I would like to begin in Page 3.

Before going into the results, actually to talk about an important evolution in our governance. It relates to our risk appetite. This is a framework we've been using since 2009, and which had an important evolution now, one which is being prepared -- has been prepared for more than 1 year. It's approved by the Board of Directors. It's based upon our statement which includes being an ethical institution, aiming at having high and growing results with low volatility by means of a long-lasting relationship with clients and with a well-distributed funding.

From this statement, we derive our principles of risk management, which are based on sustainability of results and customer satisfaction, on broad risk culture internally, pricing adequately our risks and adequate diversification of our risks, looking to have operational excellence and an ethic behavior in all parts of our operations.

From there, we come to 5 dimensions of risk which we measure: capitalization risk, liquidity risk, composition of reserves, operational risk and reputation. These risks are distributed in 43 metrics, which we follow permanently. All of these metrics have limits or warning levels, which are followed monthly by the board of management of the bank and daily by the executives of the bank.

Going now to page 4. Our results in the recurring net income reached BRL 6.2 billion in the first quarter, increasing 6.2% when compared to the last quarter and 19.6% when compared to the same period of the previous year.

Recurring net income from Brazil operations was BRL 6 billion in the quarter, 7.3% higher than the previous quarter and the same 19.6% higher than the previous year. So the annualized return on equity was 22% in the first quarter, and for the consolidated figures, and 23.5% for Brazil alone. Regarding credit quality, we observed stability under 90-day NPL ratio for both consolidated and Brazil operations when compared with the previous quarters. And both indicators improved when compared to the same period of the previous year.

On Page 5, we demonstrate the evolution of our returns on shareholder's equity and return on assets. We can observe relative stability in the last quarters, consolidated ROE, increasing from 20.7% to 22% in the first quarter in the consolidated and Brazil from 21.7% to 23.5% ROE.

On Page 6, we see our results in more detail. And we highlight here on a quarter-on-quarter variation. First, a 5.8% reduction in operating revenues which is mainly explained by an 8% reduction in the financial margin with clients. I will get into detail in this reduction later.

The favorable variation in the results for loan losses and impairment, down 17.9% in the quarter. You can see a significant increase in noninterest expenses, mainly explained by the difficulties acknowledged after period. So if we compare now with the first quarter of 2016, we have a 2.7% decrease in the financial margin with clients, a solid growth of 7% in commissions and fees, plus results from insurance, a significant reduction of 28.5% in the results for loan losses and impairment, and an increase of 0.8% in noninterest expenses. This 0.8%, if we adjust the exchange rate impact would be 4% -- would have been 4%, still below the inflation in Brazil for the period. As a result of all these, recurring net income grew almost 20%, 19.6% year-over-year.

On Page 7, we separate our results in Brazil and Latin America. So as you may notice, our results composition is still heavily concentrated in the Brazilian operation. The Latin America net income was approximately 3% to 4% of our total net income in the first quarter [2016].

Page 8. In Page 8, we show our business model. Here is a note we divide our results in those deriving from credit and from trading, from insurance and services and the last -- fourth column, the results of our excess capital.

Here, some important points to observe. First, that a large portion of our results are related to insurance and service. We have 53% of our total net income in the first quarter '17 from this total activities. In credit results, we have stated our goal of delivering a return equal or higher than our cost of capital. In 2000 -- in the fourth quarter of '16, this figure was -- the ROE was 8.2% for credit. Now it has evolved to 13.2%. So we're already getting closer to our goal of having this figure equal or higher to the cost of capital.

It's worth mentioning that we have observed the first, on this first quarter, a reduction in the financial margin, in the insurance and services products when compared to the fourth quarter of '16. This reduction mainly related to lower activity in the acquiring business which is seasoned very strong in the fourth quarter and the lowest Selic rate that impacted mainly our margins and liabilities.

Going to Page 9, our credit portfolio. We see that we are not yet observing growth in our credit portfolio, but we can mention that we have observed an acceleration in origination concentrated in our retail operation in these months of March and April, for individuals and for SMEs, not for the wholesale part.

Page 10, here we see our financial margin with clients. We see on the gray line on the top the Selic rate and then the green line is our financial margin, which decreased from 10.8% to 10.3%. And in the blue line, we have our expanded financial margin to include the effects of loan losses which have -- it has improved from 6.6% to 6.7%. The compression in the margin was mainly related to the reduction of the Selic rate in the period. This Selic reduction impacted mainly our liabilities margin, but also impacted the remuneration of our working cap. We were also impacted here by a seasonal effect related to our lower number of calendar days. This impact was approximately BRL 311 million. Then there was an increase in our risk-adjusted financial market risk clients from 6.7% to 6.6%, mainly explained by the provision of our loan losses which improved in this quarter. We expect this trend of improvement in the risk-adjusted financial margin to continue in the following quarters.

Page 11. We show our financial margin with the market. This was another good quarter in the financial margin with markets. And as you can notice, the 1-year moving average has been quite stable in the past few quarters, improving slightly.

Moving now to credit quality in Page 12. We see that the 90-day nonperforming loan ratios were stable for both consolidated and Brazil figures. For Latin America, there was a 10 bps increase in the quarter. Regarding our Brazilian operations. We observed again reductions in the 90 days nonperforming loan ratios for individuals and SMEs. We expect individual NPLs to slowly improve until the end of the year. For SMEs, we expect to finish 2017 in a similar level as that of the fourth quarter last year, but with some volatility during the year.

Regarding large corporate 90-day NPLs, we expect to continue to observe volatility here related to economic groups that could get overdue for more than 90 days.

On Page 13, moving to the 15- to 90-day NPL Ratio. This one increased to 3.2% from 2.5% in the quarter with increases in both Brazil and Latin America operations. Here we must separate the corporate side from SMEs and individuals. In SMEs and individuals, as you can see in the lower chart, this is a seasonal move. I mean, always in the first quarter, we have witnessed this increase in the 15- to 90-day NPL ratio, which is due to the accumulation of taxes and the credit card bills of the purchases of the last quarter of the year.

In the Corporate segment, we had an increase of 1.3% in the quarter, mainly due to 2 corporate clients from the construction sector. Both these cases were already met and adequately provisioned. In the scenario of this current [craze] , this migrating to 90-day nonperforming loans, we should plan for provision for potential losses through our provisions for overdue loans, which will render a reduction of our coverage ratio.

Page 14. NPL creation, we see on this figure continues to reduce. It has reduced to BRL 4.9 billion from BRL 5.3 billion in the quarter, reaching the lowest levels since the first quarter of '15. This was really driven by a consistent improvement in Retail Banking NPL bridge.

On Page 15, we see the amount of our provision for loan losses. This provision for loan losses reached BRL 5.4 billion in the quarter. It's important to tell that we don't think this figure should be annualized and compared with our guidance because it has a known linear distribution among quarters.

We expect this figure to remain more or less in the same magnitude in the next quarter but to reduce significantly in the second half of the year.

So we reiterate our guidance for provision expenses which implies that we expect reductions in our provision expenses for the following quarters. And regarding cost of credit, which is in the lower shot of the slide, we expect the improving trend to continue in the following quarters.

Page 16, total provisions by type of risks. Consolidated, we see that we had a slight increase in total allowance to BRL 37.6 billion from BRL 37.4 billion. And this includes BRL 1.9 billion of provisions related to financial guarantees provided, which are allocated in provisions for potential loss.

This provision for potential losses has as its main component, provisions in the wholesale segment, as you will see -- as you can see in the breakdown which is provided.

On Page 17, this appears again. When you see that the coverage ratio for this large corporate is at 553%; for retail, 165%; the combined coverage ratio at 231%. This the highest coverage ratio since the mergers in Unibanco. And when analyzing the expanded coverage, we have enough allowance to cover all nonperforming loans and all of the negotiated portfolio.

It's important to point once again, that this very high coverage level is due to the anticipation of provisioning we have been doing recently, especially in the wholesale segment. And when this credits -- when these credits become overdue, the consumption of this coverage is expected to help.

On Page 18, we see our commissions and fees and result from insurance. We observe the reduction compared to the fourth quarter '16 which is due to typical seasonality, related to credit cards and when compared to the first quarter '16, we see a significant increase of 6.3%.

Page 19. We see the noninterest expenses. We see, as I mentioned, an increase of 0.8% when compared to first quarter of '16, which, excluding the effect of foreign exchange of our operations abroad, the increase would have been around 4% which is a level still below the Brazilian (inaudible). We see that the number of employees increased this quarter but this was mainly due to a larger number of replacements of available positions. And in terms of branches, we had a net reduction of 100 branches in Brazil as part of the closed permanent process of reviewing our branch network. We expect this reduction to reach approximately 180 branches this year. So we have concentrated disclosures in the first quarter. In Paulo, we have opened in the quarter 9 digital branches and we expect to open 20 -- a little over 20 digital branches in the whole year.

Going now to our core capital ratio on Page 20. We had a reduction in our Basel ratio in the quarter, mainly due to higher deductions related to the phase-in schedule of the Basel III. And also, by the additional payment of interest around capital, each of this phenomena impacted our capital in 0.7%.

If we consider fortification of Basel III rules and the impact of the consolidation of the operations of Citibank in Brazil and the payout which we have increased from 25% to 40%, our common equity Tier 1 would have reached 13.8% in the quarter as is highlighted in the slide.

So coming to our guidance now to Page 21. We reiterate the guidance for the year. But going item by item. Total credit portfolio, we expect to end the year around the middle of the guidance we have provided. Financial margin with clients’ ex-impairment. Here, we think that we will be within the guidance but in the lower part of the range. Result from loan losses and impairment will reaffirm the guidance and our expectation is to be in the middle of the range. In commission and fees and result from insurance operation, we also reaffirm the guidance and expect to be in the upper side of the range. And noninterest expenses, we also reaffirm the guidance and our expectation is to be in the middle of the range by the end of the year.

Here in Page 22, it was just to present the new model, which we announced last week regarding changes in the disclosures of discounts granted. Which was -- the changes were previously classified as a component of our financial margin with clients and will now be now classified as a component of the cost of credit in the managerial income statement. These changes in line with our management information regarding discounts granted.

Page 23, just to show performance of our stock -- stock market performance and to highlight the increase in the dividend yield observed in 2016 and 2017.

This does close the presentation and we open now for your questions.

(Operator Instructions) Our first question comes from Philip Finch, UBS.

Given that biggest sets come down further, is there a risk that your current guidance for financial margin or NII growth is too optimistic? My second question is regarding your capital efficiency, where we're seeing continued improvement of your common equity Tier 1 ratio at around 15.4%, as you just mentioned, your Basel III fully loaded core Tier 1 at 13.8%. Do you think you have too much capital? And if so, what do you plan to do with the excess capital, especially as you showed just now on your presentation on Slide 8 that the ROE on excess capital is only 9.4%?

Thank you, Philip. I'm not sure I heard all your first question. But if I understood well, you ask whether we are not being too optimistic in our forecast of the financial margin with clients given that the Selic rate is down to 2.1 in the year. Was that it?

Yes, exactly it.

Okay. Here, no, we don't think we are being too optimistic here. It is a fact that we expect the Selic rate to fall more, but there are other effects which will also happen and especially, I mean, the question of the working day -- of the number of days in the quarter, which is not going to be repeated. So I mean looking at our, in the [deal] at our forecast and we came to this figure in the lower part of our expectation. What changed mainly in relation to when we made our forecast? When we provided the guidance were 2 aspects. One was the Selic rate as you've mentioned and which is -- the average rate will be significantly lower than what we had anticipated. And the second one are the changes in credit cards operations in Brazil, regarding the new resolution, the installments and the revolving credit. So these 2 effects bring our expectation from the head of the range to the bottom of the range. But I think, I mean, this is a reasonable expectation now. On your question concerning capital. Yes, I mean, 13% -- 13.8% is probably more capital than would be needed should the situation remain as it is. But there are some changes which are possible and we will expect. I mean, we expect the Brazilian economy to recover at some point in time and this will -- we will use more capital in this. And there is still somewhat of a (inaudible) uncertainty, Basel IV. I mean, it has been postponed but it has not been forgotten. And so we don't know yet what will come from this over year. I think it's prudent to have capital to cover -- for these two potential events. I should also mention, I mean, that to deal with excess capital and we have also taken 2 measures. We have elevated a good payout ratio and we continued to buy back shares in the market.

Just a follow-up on that, please, are you considering at all to do a special dividend going forward?

No. We are not considering into do a special dividend going forward. I mean, what we consider is to continue our buyback activity.

The next question comes from Carlos Macedo, Goldman Sachs.

I have a couple of questions. First question, we talked about margins, but one of the things that was a little bit higher than, say, the straight-line guidance for the quarter was your market-related income at BRL 1.8 billion. Your guidance for the year is BRL 6 billion, annualizing this, you'll be ahead of that. How should we think about that? Are you positioned with your ALM so that you will benefit from the decline in rates? And as a result, that kind of set part of the pressure that you're getting on your book otherwise? Should we think that maybe your results on the trading line and over the market related income line will be higher than the guidance that you gave in the fourth quarter? Second question. So when you look at your auto loan book, right? It used to be a very significant part of your overall book and now it's a small flivver. Is something like this has happened in some of your competitors but there are a few competitors, I think Santander here stands out, has been expanding this book at a meaningful pace and finding demand and being able to lend. Is there something they're seeing you're not? I mean, can you talk a little about the dynamics in the auto segment, I think that's the best way to put it?

Carlos, thanks for your questions. Your first question regarding market-related income. As you know, I mean, this is possibly the line most difficult to forecast, I mean, the one with the highest volatility. We have been able to keep reasonable stability in the results there, but this is not guaranteed. So the fact that we are slightly above the average expected for the year, which would be BRL 1.5 billion, is a reason for comfort, but does not authorize us yet, I mean, to forecast a higher margin than the BRL 6 billion which we have -- guidance we have provided. As to being positioned in our ALM for the reduction of interest rates. Yes, we are. We are adequately positioned there. But it's already included in this forecast. On the auto loan book, yes, I mean, your observation is correct. This -- we have been reducing our auto loan book. This reduction stopped the dependent to have been -- we have been making less loans but we have also been financing a smaller of portion of the acquisitions and so this explains the -- also the reduction of this book. Another explanation why we're not growing here, especially if we compare with other banks. It's related to the fact that we have our operational agreement here in Brazil with Fiat. And so the growth, the behavior of our portfolio have a close connection with the performance of Fiat sales, which has not been outstanding recently.

Okay. But you're not seeing just a follow-up in the second question. You're not -- are you seeing increased demand? Is the quality of the applications you receive improving, approval rates are going up or going down, has there been any change recently?

I think there have been no change. It stopped worsening, but it has not started to improve yet.

Okay. Just one follow-up question and then on the first question, Candido, sorry. You mentioned that you are positioned in ALM, and that your guidance for the market-related income considers that. Would that mean that once rates are stabilized at a much lower level, we should think about a lower market-related income because you won't be able to benefit from the declining rates or would that be looking forward too much?

I think this will be looking forward too much. It's possible, as I told you, I mean this is a -- one of the most volatile lines that we have to forecast but I wouldn't risk making any further forecast there.

The next question comes from Jorge Kuri, Morgan Stanley.

Candido, could you expand a little bit on the comment you mentioned about origination in the retail segment starting to pick up. Given that unemployment continues to go up and overall, the job situation isn't great and the consumer leverage is still pretty high. What type of demand are you seeing from what client segment? What type of products? Just some more color on that would be great. And then the second question, just a simple one. What interest rates is embedded in your guidance for financial margin with clients? What Selic rates are you forecasting for the year?

Thanks, Jorge, for the questions. In the -- considering the demand I mean that -- the origination of credit that we have witnessed an increase in individuals and in SMEs margin in April. We were surprised by that, positively surprised. We were not expecting it. Among the first signs of recovery that we're seeing. They are mainly the lines of products but concentrated in the higher segments of income in individuals and in the higher segment of companies also. But we have not changed our models. We have not changed our risk appetite yet to do this. We are keeping the same sense with the same policy we had before. And what interest rate do we -- your second question, I mean, we are in line with the market expectations, the fall of the Selic rate. I think our average rate considered for the year is 10.2%, 10.4%.

The next question comes from Jason Mollin, Scotiabank.

Mine is related to the profitability analysis that Itaú discloses by businesses presented in your business model slide, Page #8. Can you talk about this breakdown specifically? How is the credit business segment defined? How are incoming costs related to credit defined or calculated here? For instance, our fees related to credit included in the credit business or in the services segment? What about distribution channel costs like the branch network or another way of asking this could be, what about transfer pricing in this analysis? And then as a corollary, you show the value creation or disruption based on the capital and the earnings, I guess, in this segment. Can you talk about your cost? I'm imagining you have an implicit cost of capital estimate in that calculation. You've talked about that in the past but maybe you can update on your thoughts of the cost of capital given that the 10-year Brazilian sovereign bond in reais is down. Not at historical lows but pretty close.

Okay. Thanks, Jason for the question. I will start by the cost of capital by saying that, I mean, this is a figure we did not disclose even because -- I mean, we have different costs of capital for different activities, according to their work. But what I can tell you is that our average cost of capital is slightly above the cost of capital we have been seeing in buy-side and sell-side houses in general. So how is this structured?

We have a full product approach here in this chart. So the commissions, the credit fees, every fee related to credit comes under the credit column here. You can see here, we have commissions and fees, BRL 2.4 billion in this quarter in the credit book. These are the credit -- the fees related [this way]. We try to separate completely each of this activity. In the trading column, we have -- in the trading column we have -- excuse me, the trading activity with market risk. For instance, in the credit column the interchange we -- change in credit cards comes also under this column. And, I mean, so insurance and services are the fees we receive which we think are unrelated, that have no direct relation with credit. Everything from asset management, for instance, comes here, fees, seasonal funding activity or liability funding comes here, cash management, private banking, investment banking, this is what comes all our advisory fees from here.

And in terms of cost and in terms of transfer pricing, it must be difficult to allocate. We've seen at all banks, it's always difficult to allocate cost. But how do you allocate the costs for the branch network? I mean, is it -- I mean, this is -- is this -- I'm imagining this is somewhat of an art rather than just the science. This is an analysis to the best of your ability, I guess. Is that an accurate statement? Or this analysis is very clear cut?

No, this is a very accurate statement in the sense that -- 2 things. First, transfer risk. Transfer risk is made at market rates. We use market rates for everything. There are no spreads charged, for instance, by our funding activity from the business areas. It all goes and comes at market rates. And the cost allocation, I mean, we have extensively invested in having precise cost of location. But as you know, there are always many different ways to allocate cost. What we can see is that we have had stable criteria for this for a few years already now. And so this is perfectly comparable quarter after quarter.

The next question comes from Tito Labarta, Deutsche Bank.

A couple of questions also. Sorry to follow up on your margins, but when we compare to some of your peers, they didn't face as much as margin pressure as you did. I mean, you mentioned there was lower interest rates and some seasonality as well. So given the seasonality, does that mean that your margin can maybe pick up a little bit as that sort of subsides in the next quarters? And are you seeing some more pressure on spreads on loans? I just want to understand kind of the difference between you and your peers. Is it -- they are still maybe repricing some of their loans and you don't have loans enough to reprice? Just want to get a little bit more color on that and know, I guess, why you suffered a bit more in the margins than your peers. And then the second question, also following up on loan growth. I mean, you talk about origination picking up, but loans are still falling. So where do you think the inflection point is? When do you start to see loan growth picking up? Could that be in the second quarter or is it still more the third quarter? Just want to get a sense of when you see that pickup in origination actually increase your loan book.

Thanks for your question, Tito. Before, I would just like to complement on Jason's question regarding our criteria for capital location. The criteria using this column is the same criteria which we use for our internal evaluation of all the areas of business remuneration and everything. So it's consistent across the board. Now coming to your question, Tito, on our margins. We have not yet started to feel a pressure on spreads. The reduction of margins because of the Selic reduction, especially in our funding activity in the margin of liabilities and not in the margin of assets. As I've said, I mean, we have seen some recovery in the activity of credits in March and April. This is still in the very beginning. We are not expecting anything vibrant for the next quarters. But I think we may start to see some more intense recovery in the second half of the year. Our guidance here is from 0 to minus 5%. So as I said that we are looking at being closer to the minus 5% figure. We had in this first quarter a minus 2.7% compared to the first quarter but we still see margins going down a little bit in the year. But this is exactly what our guidance reflects.

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

I would just like to thank everybody for your presence and for your questions. This was the first time I presented the results of the bank. I expect to come back in the next quarters also with positive results as, I think, has been this one. Thank you very much.

That does conclude our Itaú Unibanco Holding Earnings Conference for today. Thank you very much for your participation. You may now disconnect.