伊塔烏聯合銀行 (ITUB) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Itaú Unibanco Holding conference call to discuss 2017 second 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 August 7 by phone on (55-11) 3193-1012 or 2820-4012, access code 398-7548#.

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; Mr. Caio Ibrahim David, Executive Vice President, CFO and CRO; and Mr. Marcelo Kopel, Investor Relations Officer.

First, Mr. Candido Bracher will comment on 2017 second 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. It's a pleasure to talk to you about our second quarter '17 results. Talking first on Slide 3. We present you the main themes we see as our challenges looking ahead. There are 6 topics, which I will briefly describe.

In this quarter, we will explore the main evolution points in the digital front, from the front side. First, focus on clients. First and foremost, we will strive to offer our clients a significant enhancement of products and services. We want to reach a new level of customer satisfaction. We know this is not done overnight, but it should be a permanent objective of the bank. In order to improve client satisfaction, we must keep in touch with digital transformation. Financial systems worldwide are undergoing a deep digital change, and we strive to be at the forefront of this movement. We seek to implement the best practices available, not limited to the ones available to the financial system. In order to continue improving clients' experience and our efficiency. This digital transformation and client-centricity require an adjustment of our HR practices. In order to foster even more, the cooperative work in communities and agile sales, while promoting a fair and meritocratic environment. And we already talked at length here about risk management in previous presentations, but we shall keep perfecting our risk management tools.

And we continue to move forward with our internationalization process. At the moment, we strive to reach in the countries where we already have presence the same management quality, which we accomplished in Brazil, rather than expanding our business abroad. This all should allow us to keep a consistent level of profitability and value creation to our shareholders.

On Slide 4. We go into more detail about our investments in the digitalization of our services and product, and also present the innovations that we have recently implemented. Today, Internet and mobile transactions already represent 77% of our clients' transactions. Digital clients amount to BRL 13.6 million and mobile users amount of BRL 10 million, an increase of 15% over the last 6 months. The speed at which the world is becoming increasingly digital is unprecedented and financial services are no exception. In particular, mobile services have enjoyed exponential growth. Our mobile apps already represent the #1 channel to reach our clients access to bank.

Innovation in this environment requires a very strong customer focus, a deep understanding of customer experience, multifunctional teams working in agile methods and competent investment in data and analytics. Our initiatives in digital platforms, digital branches, mobile and Internet channels have seen relevant developments. We highlight here the launch of our Itaú Light App, targeted at less digitally literate clients. It offers a simple interface and runs on entry-level smartphones and has been a new force in digitizing previously nondigital clients.

A second development to point out is a new Internet banking channel for our SMEs clients and credit card holders with a new and improved customer interface. Finally, this quarter, we reach the milestone of 100,000 bank accounts opened to our mobile app in a fully digital process.

Turning now to Page 5 and our results, but still before talking about our financial results, I'd like to make a few general comments about this quarter. This quarter, as you all know was impacted by a significant change in mood which was triggered by events that caused great instability. Because of those events, the likelihood of having reforms approved reduced, negatively affecting confidence levels in Brazil. These events postponed the recovery of credit demand which was beginning to happen and will probably resume in a more modest base in the second half of the year. It's important to note that we observed a relatively calm period in the market following a short high-volatility span. This can probably be attributed to the good perception the market has from the economic team and the expectation that this team will remain in its functions. As a result of that, demand for credit and financial services was affected but not as seriously as one would have feared given the intensity of the events.

Well, now on Slide 5, we highlight the key performance figures from our second quarter results. Bank posted a BRL 6.2 billion of recurring net income in the quarter and BRL 12.3 billion in the first half of 2017. This latter represents the 15% increase when compared to the same period in 2016. The recurring ROE in the first half of 2017 was 21.8%.

Focusing on the first half of the year figures compared to the same period of last year, the highlight was the decline of our cost of credit. We will comment on the operational trends of our result in the following slide.

On Slide 6. We show a brief history of quarterly recurring ROE, which highlights the stability of our performance even in an adverse environment. In the second quarter of 2017, the recurring consolidated return on equity was 21.5% and the consolidated recurring return on assets was 1.7%. When we segregate the Brazilian operations, the ROE was 22.7%.

On Slide 7 now. If we look on the right side, with the first half of the year figures, we can notice a small contraction in operating revenues of 0.2%. It was due mainly to a decrease on the credit portfolio in the period, which affected our financial margins slightly. But this effect was more than compensated by a substantial decline in cost of credit, an increase in commission and fees and strict cost control. The combination of these results led to a recurring net income increase of 15% in the period when compared to the same period of the previous year.

Slide 18 -- on Slide 8. We disclose the breakdown of our profit and loss between Brazilian and Latin American operations. We note that Latin American operations are in the building process. Notably, Itaú CorpBanca, which was merged 1 year ago and still has significant room for growth.

Slide 9 is where we present our business model chart. In this chart, we break down the income stated -- statement between credit operations, trading, insurance and services and assess that. Throughout the first 5 years, we placed special focus on our services business, and the results presented in this chart, I think they are a reflection of this strategy. You can see that insurance and services business accounts today for more than 50% of our recurring net income. This is one of the reasons why we've been able to keep our profitability at current levels in such an adverse scenario for credit operations, but an important point to mention here is that we see now in this quarter that the credit business is recovering and showing returns in lines of -- with our cost of equity. The narrow effect you'd see, 14.9% recurring ROE on our credit operations which is above our cost of credit breadth, which is 14.5%.

On Slide 10. Talking about credit portfolio, we -- what we observed here is the impact of a low credit demand environment, which translate into originations, yet enable throughout base amortizations, even if they are growing. Nevertheless, the reduction pace of our loan book has been slowing down as the year-over-year contraction in this quarter is 30 bps lower than what was presented last quarter. Here our expectation is for the loan portfolio to stabilize in the second semester, and we are prepared to resume credit growths whenever credit demands are low.

Slide 11, financial margin with clients. We see that despite this more difficult economic scenario and Selic rate reduction, our net interest margin remains stable at 10.3% in the quarter. The risk-adjusted net interest margin improved significantly due to better cost of the risk -- cost of risk in the quarter. The lower part of the chart represent the evolution of our financial margin with clients. Despite the effect of the new credit card regulation and the lower Selic rate, which affects our liability margin, there was some compensating factors in the quarter that allowed our financial margin with clients to increase like higher number of calendar days, some structural operations of the Wholesale segment and higher gains in commercial derivatives in our Latin American operations.

Going forward, here one could expect that the drop in the Selic rate will cause pressure over our liabilities margin.

Slide 12. Financial margin with the market. We had another positive quarter here, which given the unexpected events of May 17, we considered to be especially good results. Looking ahead now, we believe that for the full year of 2017, the financial margin with the market will reach a level around BRL 6 billion. Because the financial margin with the market has some correlation with the Selic rate. Therefore, macroeconomic scenario, where average Selic rate will be single digit from 2018 are -- proves to be correct, it is very likely that this margin trend is to reduce in the future.

Slide 13 now. Commented our credit quality. Here there are good news. As you can see there was a 20 bps improvement in our total 90-day NPL ratio in the quarter. There were improvements in individuals, in SMEs and corporate, so improvements across the board here. Regarding the 15 to 90 day NPL ratio, there were also improvements in all segments in Brazil. For the corporate segment, we've mentioned in the last conference call that the 130 bps increase observed in the first quarter was related to the construction companies' exposures. This quarter, there was 100 bps improvement as these exposures were renegotiated and, therefore, included in our renegotiated portfolio.

Slide 14. We see the NPL creation. There was an improvement in the overall level of the NPL creation in the quarter mainly led by a significant improvement in the Wholesale segment. The small increase in retail segment here is due to typical seasonality, it's not a trend.

Page 15 now. Provision for loan losses and cost of credit. We see there were improvements in the overall provision expenses due mainly to the Wholesale segment. Retail provision expenses increased a little bit in the period, but as I said this is normal behavior for second quarter, as you can see in the historical data here. There was also a small increase in Latin America operations. The same trend, we can see for cost of credit but with an even bigger improvement in cost of credit since there were less impairment expenses in this quarter.

Page 16, represent our total allowance by type of risk. The bank's overall level of allowance reduced marginally in the quarter from BRL 37.6 million to BRL 37.4 billion. Considering that some of allowances were aggravated and overdue loans, there was a reduction from BRL 20.5 billion to BRL 20.2 billion in the quarter, which is in line with the improvement observed in the 90-day NPL ratio. Therefore, there was a slight increase in the potential provisions from BRL 17.1 billion to BRL 17.2 billion.

Now Page 17 represent our coverage ratio. And here you see the coverage ratio reached 243% increasing from 231% last quarter. Such high coverage level is not only due to the NPL improvement, but also due to some credit exposures from the Wholesale segment for which we have made anticipatory provisions, but that are neither defaulting nor improving sufficiently for the provisions to be reversed. This effect can be seen as the Wholesale segment coverage ratio reached 715% in this quarter.

Page 18. Commissions and fees and result from insurance. Here we see that insurance provisions have increased 4.9% when compared with first half of 2017 with the same period in the previous year. We can highlight here the good performance of our asset management fees in line with the solid growth of our assets and the management in the period. We see also decline in the results from insurance. And this is explained mainly by the sale of our group life insurance to prudential that became effective in April this year, the discontinuing of our extended guarantee activity and to the fact that lower inflation and lower Selic rate negatively affected the remuneration of insurance assets. That all said, we're seeing performance in the segment is still below optimal, and we are working on improvements, which should bear results going forward.

Page 19. See our noninterest expenses. Expense evolution is in line with our plan, comparing the first half of 2017 with the first half of 2016, noninterest expenses growth was only 1%.

Well, now on Page 20. Moving to our core capital ratio. As of June 30, our Common Equity Tier 1 considering the core application of Basel III rules, the impact of Citibank retail business acquisition and the investments in XP, now this capital ratio reached 13.5%. As you may notice, we continue to observe organic capital generation. Even continuing with of our buyback program during this year, where we bought back 37.9 million shares in total July 17, we are still accumulating capital.

On Slide 21. Here there are 2 important observations to make. The first one is purely technical and relates to the fact that we are reclassifying discounts granted from margins to cost of credit line. This amount should be added to the results from loan losses plus impairment line that should now be named cost of credit. Then in this quarter that the guidance then, which was 14.5% to 17%, goes up to 15.5% to 18% increasing in the forecast of 2017.

Now talking about our forecast. We reiterate here all our arranges for the year. Having said that, the events of last May led us to believe that we will deliver a credit portfolio growth around the bottom of the forecast range. Regarding financial margins with clients, we believe that we will end the year between the bottom and midpoint of the range. Forecast of credit, we believe we will end the year around the top point of the range.

For commission and fees and results from insurance operations, we now estimate that we will end the year around the middle of the range. And to finalize for noninterest expenses, we believe we will end the year between the middle and the best point of the range.

Just to finish on Slide 22. You may see the invitation details of our annual APIMEC meeting, which will be held on September 26. We would like to bring forth the invitation for you all and remember that the event will also be webcast with simultaneous English translation.

That finishes our presentation and now I'd like to open for questions and answers.

(Operator Instructions) Our first question comes from Mario Pierry, Bank of America Merrill Lynch.

Let me ask you 2 questions, please. The first one is related to your ROE of your credit operations that you showed on Page 9. You're showing the ROE of 14.5%, significant improvement from a year ago. Your ROE now is in line with real cost of capital. I was wondering, as far as I remember, the target has always been to reach the cost of capital, but also wondering if you do think you could go above your cost of capital, at least this year, given the expected improvements in provisions? So that's question #1. Question #2 has to do with the big spike up in your Wholesale coverage ratio to 715% as you mentioned. It seems like you made some provisions in anticipation. But if you could give us a little bit more color, what sectors are of concern and that led you to boost such coverage ratio?

Thank you, Mario, for your questions. The first question you ask, whether the ROE on credit operations could go above cost of capital, 14.5% as a result of the expected improvement in credit quality. And my answer is, yes, it could. I think modestly, because we expect this improvement in credit quality to be slow over time and not to be in a jump. And also cost of credit could see some reduction may be further due to that the lower yield of the bonds in which we base our evaluation of cost of credit. So here, yes, I think it's possible that ROE and credit will be above cost of credit.

Now as to our coverage ratio. Maybe it's good here that, I mean, at a risk of going a bit too much into detail, that I explain the dynamics of this provisions of this complementary allowance, which we make and which we have made. Surprises hit the companies. I mean we looked at many companies and here, I think, especially companies in some way related to the Lava Jato scandal but not exclusively. Many companies, I mean, that would face difficulties. I mean, the EBITDAs were dropping, at the same time interest rates were going up, exchange rate was devaluing, so the relation net debt to EBITDA was increasing much more than what had been forecasted when we extended these credits. As a result of that, we make anticipatory provisions for the potential allowances for these companies based on the expected loss method which we use. And these provisions, they tend to accumulate. How is the way that this coverage level decreases? I even said in the last conference that I expected it to decrease. And I was wrong there. The lower it is for provisions decrease. They decrease in 1 of 2 ways, either these companies for which we made anticipatory provisions, they effectively default. And when they do default, the provision is transferred from the potential provision to the regulatory provision. Or they improved to a point where the expected loss is reduced. They can be upgraded and the provisions can be reversed. What happens in this quarter is that neither of these 2 things happen with the bulk of the companies. They have neither defaulted nor improved to a point where the provisions could be reversed. And I think when given our scenario now of a slow improvement in the economy in Brazil that this trend may -- could continue for some time. That the companies are in this twilight zone, let's say. So it's not impossible that the coverage ratio could even increase from the point where it is. Because NPL may reduce, not because the provisions will increase but because NPL 90-day reduce, and so the coverage ratio could be a bit reduced. I hope this answers your question.

Yes, so just to be clear though, so this increase is primarily because you had more companies having problems or you're seeing more company having problems than before? And that led for you to reduce the risk rating of some of these companies? Or the expected losses are now higher than you expected?

No, the main reason for the coverage ratio increase is the decrease in NPL 90.

So it's just primarily is that the NPL has come down, not necessarily the provisions went up?

Provisions, they went from BRL 17.1 billion to BRL 17.2 billion, the potential provisions. Although this is not in (inaudible) okay?

The next question comes from Eduardo Rosman, Banco BTG Pactual.

I have 2 questions. The first one is kind of a follow-up on Mario's question. It's on your cost of equity. I remember the last year when Mr. Setubal presented fourth quarter '16 results, he mentioned the cost of equity above 18% for Itaú which is very high, right? Of course that given all the improvements, seems since then the cost of equity has been improving the last quarter if I'm not wrong. You mentioned the cost of equity of 14.5%, I think. But this was before May, right? So I wanted to know if cost of equity increased since then or not? And what are the drivers that could bring this cost of equity down in the next 12 months? So this would be question #1. Question #2 would be on trying to understand a little bit how do you see your results next year, right? Because we still have very weak lending activity. It seems that given all the political uncertainty, we're not going to see any big acceleration until presidential elections are held, and beside at the Selic rate will also be a lot lower next year. It seems the NII will barely grow if it grows at all. And so -- when I look to your other P&L lines, you're already delivering very good figures in most of them. Expenses are growing only 1% in nominal terms. Cost of credit coming down, that's why your pretax is going to go up probably more than 20% this year. So of course, that this is very good but it also creates a tough base of comparison for next year. So my question is, what to expect for the next year if you guys think that it's possible to grow above inflation earnings next year?

The first one concerning cost of equity. Yes, I mean, last year our cost of equity was 14.5% and it remains in this level. The events of May have not altered this. I mean there was a brief spike in the formulas which we follow, which are basically based on risk premium. But they already improved back and we did -- our present cost of capital did not escape the range in which we position it, and we don't like to change the cost of equity very often. So we expect for it to get of out of the bend, it did not, and the bend has reduced again so it remains at 14.5%.

As to 2018 results, we are not making any forecast or any guidance on the 2018 results. What can be said is that I mean, we will keep our focus on cost control, on improving efficiency, and of course, we are ready to grow assets as soon as the demand picks up. I think it's a fair assumption that if the assets do not increase -- I mean if loans do not increase, it will be difficult to grow results next year. But let's see, I mean, how the demand for loans behaves going forward this year and in the beginning of the next.

Perfect. Just a follow-up on the cost of equity question. Do you think it's possible to forecast that could come down before presidential elections next year? Or no, until then given all the uncertainty, probably we are not going to see any changes?

I don't see cost of equity coming down very significantly in Brazil. But when we compare the cost of equity, we use in Brazil with the cost of equity that the European and American banks use for them around 9% or 10%. It appears to us that this difference of 4 to 5 points, at least fairly represents differences of risks in the different markets. Having said that, I mean, it could go down marginally. Yes, I think it could go down marginally in the next quarters.

The next question comes from Jorg Friedemann, Citi.

So I'm also having 2 questions today. Just the first point on the NPL progression. I'd like to understand how do you see the prospect for NPLs going forward? I am -- I know particularly, referring here to the NPL creation in the retail book that iterated a bit, and also, I know the increase in renegotiations. So just wondering, if putting all together, these trends together, what -- with what you just commented on the corporate book, you believe that really the worst is already behind of us? And my second question is related to the prospects for NII, net interest margin. You mentioned during your presentation that you had at least 3 potential impacts that are affecting NII. Of course, I know the most important one is credit growth, but also you, I think, referred to structured operations that helped the NII this quarter, plus I know the mix shift. So I'm just wondering if you could comment on your prospects for NII with normalization of those conditions and your guidance implies as light pickup of credits volumes. So if you also believe that the worst is behind in terms of NII? Or is this pressure of lower rate will not be compensated by pickup in credit volumes?

Thank you, Jorg. First on NPL, how do we see it. The NPL creation in the retail book, in this quarter, we attributed to seasonality. It was second quarter seasonality. Here we think that the trend is stable to a small reduction in the NPL 90 in this book. The question of -- you're asking whether for the corporate side, if I think the worst is already behind us? Yes, I mean, this is my impression. And as to the renegotiations you mentioned, I think they are a natural consequence of that dynamics I have explained before. So when these companies, I mean, which have had that, that augmented, the EBITDA reduced, when they have difficulties in meeting their commitments in the agreed dates, it's natural that we give them some room for bracing and to recuperate, and this is done through renegotiation of credits. Following the renegotiation, as I said before, I mean, one of 2 things may happen. Either they default because they cannot recuperate, or they improve their conditions and then we are able to reverse the provisions. In both cases, the provision flows out of the complementary allowance of the potential allowance.

Concerning NII. I think here is very much -- what I said on the slide, of course, I mean, going forward, I think that one could expect here that a drop in the Selic rate will cause some pressure on our liabilities margin, which are an important part of NII. Of course, I mean, if you manage to have credit growth, we can compensate further. So I mean, I think this is all reflected in the guidance that I have just given you concerning NII.

The next question comes from Philip Finch, UBS.

Couple of questions for my side, please. First of all, regarding loan growth. Can you check some color in terms of what you're seeing in terms of loan origination and which segments do you think will most likely rebalance a service 1 to 2Q numbers? I think on Slide 10, sequentially credit card growth was slightly positive while all the other segments are negative? Going forward, which segment should we assume to recover first and then maybe an explanation, why? And link to this first question, do you have visibility in terms of the sensitivity to economic recovery in terms of credit demand, so if GDP growth will recover sharply next year to 2% or more, what does that mean for credit demand? Is there a lag? Will it come back quicker? So any color on that front would be very helpful. Second question is regarding asset quality and specifically Slide 15 in your presentation. So whether it's a top chart or the bottom chart you're seeing the levels of provisions for loans and cost of credit in Q2 approaching or at historical low levels or trough levels? So the question is, going forward, I mean, how much more scope is it to come down given that you could argue that the loan composition of your book is so much more defensive than it had been previously?

Well, Philip, I will give you a very generic answer on your first question because I mean, it's not very clear towards yet which segments could first respond to an economic recovery and increased demand in loans. But what we see is that working capital needs would come before investment needs. So, I mean, generally, this could mean the reaction coming first in individuals then in corporate. In corporate, more specifically for working capital. Although, I mean, if we really experience a more robust recovery in the economy, I think corporate loans have more potential to grow going forward not in the first moment but going forward. Then your question on asset quality on our Slide 15, I mean, how much more room for improvement there is? I think there is still room for improvement. We have a relatively small loan book now, which was built conservatively, and which has a high level of provisions. So when we look forward and in the corporate segment, we have this (inaudible) on the quarter mark basis and a name by name basis, and not only statistical. We have impression that there is still some room for improvement. Not too much but still some room for improvement.

The next question comes from Tito Labarta, Deutsche Bank.

Couple of questions also, I guess, first on your financial margin with clients looking at the Slide 11. You could say, this probably held up pretty well given the reduction in interest rates, the lower rates on credit cards. I know the lack of competition has kept spread somewhat high. But we think once the rates have finished coming down, maybe by year-end, and maybe as growth starts to come back, how much do you think that this financial margin with clients can come down from this 10.3%? I know you don't have a long history given bank operation of CorpBanca, but just trying to get maybe a little sensitivity of that line to the lowers to leak in a more normalized environment with better growth? Do you see it falling below 10%? If any color you can give on that would be very helpful. And my second question, you started the call talking a lot about your digital strategy, lot of Internet and mobile transactions have picked up quite a bit. What does that mean for expense growth over the next few years? Do you think they will continue grow in line with inflation? Is there maybe some additional investments that could push it above that? Or maybe some benefits and improvements in efficiency because of that? So you can maybe give us some color on how you see that's going to impact the expense growth for the next couple of years would be helpful.

Thank you, Tito. So on your first question, I mean, the trend in financial margin is quiet. As I mentioned, I mean, Selic rate will put some pressure -- the reduction in the Selic rate will put some pressure on this margin, and for it to grow we will need a growth in the loan portfolio. Having said that, what we look more here is the financial margin with clients adjusted by risk, which has been growing. And here, I mean, we believe that we'll be able to keep this margin stable over time. Your second question on how much our investments in technology development may affect our total level of cost investment in the bank. And here, I don't have a precise answer to you. But we must remember that technology has a double effect when it pertains to cost. I mean, it increases cost because it requires a lot of investment and we are making investment because we have -- we want to increase, I mean, the rate at which we are able to produce our apps, and it seems like this we are investing a lot in adapting ROE of production here and having the community sales, the agile sales, working, so this all represents investments. On the other hand, technology presents great possibilities of cost reduction, like cloud computing, for instance, is a great example of that. So I think that all things added, one should at least compensate the other and we shall be able to keep a very strong hand on cost growth. I was just going to compliment that a low inflation environment of cost also helps.

Maybe just the 1 follow-up on the first answer, you mentioned looking at financial margin adjusted for risk, which is 7.3%, has come up from 5.4% in the first quarter of 2016. So when you say it can remain stable, you mean around this 7.3% more or less? Is that kind of what you're thinking in terms of the stability?

I think that on average you can have this margin around but on average. I mean of course it will float around.

Our next question comes from Domingos Falavina, JPMorgan.

Actually, I have 2 questions. My first one is regarding the asset quality trend, which at least to us here, was surprisingly good on the early delinquencies, specifically on the 15 to 90 on the SMEs, which is supposed to be a bit less over last year, I guess, than the large corporates and still it came down substantially. For my question, I guess on this part of asset quality, like, if you could explain a little bit more what happened on the SMEs, if it is just you being more cautious with the market getting better? And what kind of coverage ratio do you feel comfortable working? Because I understand that you explain that your coverage went up because new NPL formation came down but you could have provision left too and kept the coverage flat. So I guess, my question is like what is kind of a reasonable for the year-end coverage ratio? And my second question has to do a little bit with the NII. A little bit more concerned about the NII, we're looking at their own book, shrinking 3% this year, which we use your guidance, in basically, in 2018 starting with loan book at the same leverage it started '17. And then we have all the additional headwinds, right? Selic coming down, spreads coming down and so on. So just on the top line and then we look at rumor estimates and it bakes in, like, the market is baking and either flat or slightly growing NII. My question is more directionally, if you believe it's reasonable to assume top line growing in '18?

Thanks for your questions. So first on asset quality trend concerning 15 to 90 days SMEs. Here, what I can tell you is that our experience is that the most recent waves of credit we have made, the vintages, the most recent vintages of credits are showing better results. So I think that we still can enjoy this trend for some time in the SMEs. Then you asked me about what my guidance would be for the year-end coverage ratio? And I don't know. Here really it depends on so many variables, I thought last quarter that the general trend was for it to decrease because of course, BRL 231 million was already a very high level and you think that things tend to normalcy in this coverage ratio. I mean, it should reduce. But since there is the possibility, given a very slow growth of the economy here. That this credit, for which we have the complementary allowance, that they neither default, nor improve to a point of being able to reverse, and at same time NPL may reduce. So I mean, it could -- really, it could go up or down here in this short period of time. If you ask me about what would my forecast be to the end of 2018, then I would say that surely, I mean, it should be lower, significantly lower than it is today. But for the end of this year, I'm not comfortable in making any forecast right now. Your question about NII. I think you're right. I mean, there are some headwinds on NII. I mean, the Selic rate is -- especially remain headwind, I mean, we also had the credit card, the change in credit card rules and things like this. My impression here is that in order for NII to grow next year, it will be necessary growth in assets, which right now is higher than we can foresee.

The next question comes from Rafael Frade, Bradesco.

Just want to go back to NII, you were highlighting in your release there were such operation with your corporate client. I would like to have an idea of how relevant it was for the NII given that you highlight this? And then second, in spite the lower interest rate in sector, the results of working capital grew q-on-q, mostly since it's because of our larger base. I would like to understand a little bit this base. I saw that there were some changes, for example, in the capital that are allocated in the insurance company. It seems that maybe some of it goes to this line because the result of all of this is that when you restate your guidance for the NII for the year, we are getting a little hard to reach it, because basically the NII need to be almost flat for the second half and given the lower interest rate seems a little harder. So we would like to understand this a little better.

Thanks, Rafael. Not quite sure I got your second question slightly, but I'll try to answer it. Concerning the NII, I mean, this structural operation is our corporate client, it was around BRL 100 million. So it's a good result. Being banked on NII. And yes, I mean, you're right, I mean, we expect our NII to be relatively stable throughout the year now. I mean, balancing positive and negative effects, which we see ahead. I think that it's -- the most probable scenario for us is for it to remain on this level.

Just a follow-up on this is, just that I'm seeing more negatives than the positives that are basically the lower interest rates and the impacts on credit card. Which ones would be the positives that you think that could compensate for that?

It's important. In credit cards, the main impact was already in this quarter. We expect this situation now to stabilize, it could even improve a bit as the installment credits -- as the installment portfolio should grow a bit more.

Our next question comes from Carlos Macedo, Goldman Sachs.

Actually, I have a couple of questions. First question is related to loan growth as you said you are going to lend when the demand comes looking to the second half of the year. Your guidance implies an annualized growth rate of between 5% and 12%, which is something that the market hasn't done for a while, and then you haven't done for a while. Where do you think the growth will come in the second half of the year? And to get to the bottom end of your guidance, which would imply 5% annualized? Second question, going back to capital 14.5% that doesn't even consider BRL 8 billion you have in excess of reserves that essentially is capital on the other side of the book. Obviously, what you've been doing even with XP, you haven't really made a dent into that capital, and that's just continue to -- going to continue to build as long as risk-weighted assets don't grow. Buybacks aren't making a dent, I mean, is there a time where you were considered -- to make a payment of a complementary dividend, something large in order to get capital back to more manageable lower position?

Concerning loan growth, we are already seeing originations growing. Not yet, I mean, even in this quarter, we are already enough to offset the amortizations. We expect this trend to continue and to allow us to reach the bottom part of our guidance. I think we see this -- the sector is more or less widespread and we think we have a good chance of getting there. Concerning our capital, I mean, you are right. We keep on accumulating capital. Of course, our preferred way to deploy this capital would be through a growth in RWA, but it's not coming significantly and possibly not coming in the near future. And then, we will have to consider alternatives as the one you mentioned of making a dividend increase.

But it is, I'm sorry, just a follow-up. I mean, you already raised the payout, that helps. But that just basically extends the flow. It doesn't lower it from the current level. Is -- would that be -- is there a deadline or a time table for you to think about that, given where risk-weighted assets are -- the way risk-weighted assets are growing? Or is there -- or is it something that will be decided when the conditions present themselves?

Well, we are permanently thinking about it. The aspect, I mean, we are evaluating this cautiously. And I think if we come to the conclusion that it's a stressful situation that we cannot alter, with the natural evolution of our business even with acquisitions, I mean we will have to decide something based on dividends, the format which it will take it's too soon to tell.

The next question comes from Eduardo Nishio, Banco Plural.

I have 2 questions as well. First one is regarding REDE, your acquiring unit. The volumes have been running below market average, I was wondering, with the full acquiring coming up, what strategy on REDE, if you planning to grow a bit more faster than what you haven't done so far? And my second question is bit more on the -- in the long term. Looking to your forecast in your macro forecast here. You're seeing interest rates going to 7%, GDP is roughly 3% on a normalized environment. How do you see in that environment, your normalized growth in loans? And how do you see that recovering over time? If you see the spike before and then it come down later or it will be a gradual growth in loan growth over time? I'm sorry, and perhaps if you can also elaborate a little bit on cost and the entire, how the banks moving towards that direction. Cost, technology and perhaps cost of risk and how you see this play around in a more normalized environment?

Well, thanks, Eduardo, for your questions. They basically cover everything of the balance sheet. So let me start by hedging. The situation here in hedging is not yet one where we can speak about growing the numbers in hedging. In hedging, we are still facing an adverse competitive scenario which started a couple of years ago with the opening of the market. And since then, what we have seen is new comers, also is new technologies, gaining market share in this market and we, consequently, losing some market share. We are presently here intensely revealing our commercial structure and our commercial practices in hedging in this acquiring business. Aiming at first stabilizing this negative trend, and I think this is what our goal is right now and where most of our efforts are placed. The second question concerning macroeconomic forecast, I mean, if the -- this is really having some improvement in economic growth for next year and which our economists puts at 2.8, when we protect our business, we do not quite use such an intense -- such a large figure. But I think the economic growth, I mean, could be gradual. And here this is just a guessing exercise. Could be gradual until the result of the elections. And then when we have the result of the elections depending on how the markets sees the new president, we could have a spike in growth. Finally, you're asking about cost, technology and cost of risk. Cost of risk, as I mentioned, we see improving. It's still improving in the second half of this year and next year, as I mean, credit quality has basically improved and if the economy is recovery, it is to be expected that this positive trend we are seeing in credit will endure. On technology, I believe I already have answered it. We are investing sizably on technology aiming at giving our client a much better digital customer experience and regarding investments we must also say that we have a very high demand for -- regulatory demand for our technology services as every other bank -- as every bank in this market has. And in terms of costs, I mean, there is nothing much new. We keep a tight grip on cost in the bank and expect to administer them close or below inflation levels.

The next question comes from Natalia Corfield, JPMorgan.

So my question is a little bit going back to your regulatory capital and also involving your subordinated debt. As was mentioned, you're (inaudible) capital right now and your subordinated debt is losing capital treatments due to Basel III rules. Specifically, the days out rank is, I believe, probably it's counting very little now for capital. So my question is, do you have any strategy in this regard to the subordinated debt? I know more -- like all of them are trading above par right now. Would it make sense to replace some of this debt, that's basically my question?

Thanks, Natalia, for the question. Listen Natalia, I think that if we had a lower level of capitalization then we could consider replacing and issuing some new subordinated debt. At 13.5% of -- for Equity Tier 1, it really makes no sense for us right now to consider this hypothesis.

For sure, that's clear. But for instance, you

have a portion of your subordinated debt is moving capital treatment right now? So would it make sense for you to keep this, to have this debt, few -- even like you -- they have a higher coupon? And they're not helping you in terms of capital as much as they used to do like few years ago?

Yes, I mean, you're right to mention that this subordinated debt is entering in the phase when it loses its capital effect. But so far it still has some capital effect and so, I mean, we are not seeing in the short term of doing anything with it.

The next question comes from Olavo Arthuzo, Santander.

I just want to go back and clarify some points related to the excess of capital of the bank that in this quarter it increased once again. Talking about the expansion in Latin America, we used to hear from you that the focus was the integration of the operations Itaú CorpBanca. But today looking to the all the adjustments that were made throughout 2016, and the expectation is that those operations report higher and more normal returns going forward. So do you see some room from more M&As or investments, but outside of Brazil?

Thanks, Olavo, for your question. So concerning Itaú CorpBanca, we have merged a year ago, a bit more than a year and 2 months ago. We still see a lot of work ahead of us in the integration of this operation, especially if we move to Colombia now. So we are not in this moment, I mean, contemplating the possibility of making other acquisitions. Of course, I mean, as always should that something very interesting appear in the market which gives us a significant market share and so on, we will consider. But nothing of this type has appeal so far.

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

Thanks very much. Thank you all for participating in the call. Thanks for your very good questions, I hope my answers were adequate. I would like now to pass over to Marcelo Kopel, if he wants to make some remarks.

Just to say a few words. We have Marcelo Barreto here with us today, and he is transitioning from the IR role into a treasury, a very important function at treasury as part of his career development, and I would like to take the opportunity to thank him for all the work he has been doing for IRR. It's been a pleasure to work with him, and I'm sure you guys share the same view. So thanks for him being here, and we would be making some changes and announcing them shortly in the IRR team. So thanks everyone, and look forward to see you.

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