Itau Unibanco Holding SA

BOVESPA:ITUB4

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Itaú Unibanco Holding Conference Call to discuss 2019 first quarter results. [Operator Instructions] As a reminder, this conference is being recorded and broadcasted live on the Investor Relations website at www.itau.com.br/investor-relations. A slide presentation is also available on this site.

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, President and CEO; Mr. Milton Maluhy Filho, Executive Vice President, CFO and CRO; Mr. Alexsandro Broedel, Group Executive, Finance Director and Head of Investor Relations; and Mr. Marcos Magalhães, CFO of REDE.

First, Mr. Candido Bracher will comment on 2019 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.

[Cândido Bracher, executive]

Good morning, everybody. Welcome to our first quarter 2019 earnings conference call. We'll start the presentation on Slide 2 where we showed the main highlights of our performance for the quarter.

You see that our recurring net income was BRL 6.9 billion, which represented a 7.1% growth when compared to the same period in 2018, resulting in a ROE of 23.6%. This performance was mainly related to an improvement in our financial margin with clients, which was partially offset by a lower financial margin with the market. Our cost of credits remained relatively stable, and noninterest expenses were up by 4.1% below the inflation for the period.

In the next slides, we will provide further details on these figures.

On Slide 3, we show the value created by the bank, which amounted to BRL 2.9 billion in the quarter in line with our focus on creating value for our more than 1.2 million individual shareholders. Actually, let me say that, that BRL 2.9 billion is a record figure in our history.

Page 4. We show that our total credit portfolio grew 7.7% over the last 12 months driven by individuals and SMEs, which have grown 12.7% and 17.6%, respectively. Origination continued strong in both portfolios, resulting on richer credit mix, which will be shown in the next slide. In addition, we observed in this quarter an upsurge on the corporate origination at 18% growth, while corporate bonds issuance remains solid.

On Slide 5, the BRL 1.1 billion increase in NII was mainly due to the change in the mix of our credit portfolio as shown in the previous slide and superior average balances. This NII performance resulted on a N-I-M, NIM, of 10% for the quarter.

On Slide 6, we show our financial margin with the market, which amounted to BRL 1.2 billion, well in line with our expectations and guidance.

Turning to Slide 7 now, we show our credit quality information. Short-term delinquency increased 13 basis points in the quarter due to seasonal effects on individuals portfolio related to a higher concentration of expenses of households such as cars and housing taxes, among others. It is important to mention that despite this increase and the change of the credit mix towards higher interest-bearing loans, short-term delinquency ratio is below the levels seen in the same period in 2018. The 90 days delinquency ratio increased 11 basis points in the quarter but is also below the level seen on the same period in 2018. The increase in the quarter is due to a couple of cases on the wholesale portfolio that were already fully provisioned. This event led to the decrease of our NPL 90-day coverage ratio that we have been anticipating. It is important to highlight that the coverage ratio for the retail NPL 90 days continue to show stability despite the change in mix towards higher risk and interest-bearing loans. Lastly, the cost of credit ratio increased 30 basis points in the quarter as would be expected given the credit portfolio growth and the acceleration of the change in credit mix in the period.

Slide 8 shows our revenues from services and insurance, which grew 1% when compared to the same period in 2018. This small growth is a direct result of the competitive environment, especially related to the acquiring business. Also of note is the impact of the regulatory cap on the interchange fees from debit transactions, which started to impact our operations on the fourth quarter last year.

Turning now to Slide 9. We show that our noninterest expenses grew 4.1% when compared to the first quarter 2018. Our cost to income ratio improved 240 basis points in the quarter but is still above the same period of last year. We intend to continue to work tirelessly to keep costs under control and improve operational efficiency.

Slide 10 now, illustrates the strong organic capital generation of the bank as we finish this quarter with a Tier 1 ratio of 14.6 coming from 13.5 in the end of 2018. The main driver of this growth was our profitability in the quarter as well as the lower density of our risk-weighted assets. Also of note was the approval by the Central Bank of Brazil of the additional Tier 1 instrument we issued under local market in the beginning of the year, which added 30 bps to our capital ratio.

Slide 11 will talk about our new initiative on the acquiring business. Hedging, we will no longer charge interest on the prepayment of credit card transactions, which were repaid in [ 3 plus 2 ]. This is valid for credit card purchases with no installments and to clients with an Itaú domicile and annual revenue up to BRL 30 million, which covers about 90% -- 98% of the market. We see this as a way to better serve our clients and harmonize practices with international standards.

Now on Slide 12, we present our revised guidance for the year. We revised the guidance as a consequence of 2 management initiatives. First, the new acquiring payment arrangement with hedging previously mentioned, and second, a more rigorous revision of our cost structure motivated by our perception of a more modest macroeconomic growth for 2019. As a matter of the fact, in the beginning of the year, we estimated GDP growth of 2.5% when we gave the original guidance and now our economic team estimates GDP growth of 1.3%. Therefore, we revised downwardly our expectations for financial margin with clients and also fees and insurance. Additionally, we reduced our expectation for noninterest expenses growth for the year.

When seen in aggregate, these changes do not have a significant impact in the guidance implied net income. With this, we conclude this presentation and are now open to any questions you may have. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Jorg Friedemann, Citibank.

[Jorg Friedemann, analyst]

I have 2 questions. The first, it became evident in this quarter and according to what Candido just mentioned that the environment is tougher for revenue growth and the bank is trying to curb costs to defend profitability. However, I was surprised by the significant cut in the OpEx guidance. So I was just wondering if you could provide a bit more color on the reasons behind lower cost growth for this year. Are you reducing investments in any specific areas? Or are you trying to simply optimize cost through enhancement of profits? And this is the first question.

The second question, I know that you have that methodology that takes into consideration profitability and the expansion of risk-weighted assets, to come up with your payout. In this quarter in particular, we saw an optimization of risk-weighted assets. I believe that this is related to a stronger growth in the retail portfolio that demands a lower RWA. And at the same time, your profitability continues to be very solid. You added 8 basis points in terms of your Common Equity Tier 1 and just with internal capital generation. And in addition, you also had a bit more a Q1. So taking into consideration all of the dynamics and where you are in terms of Common Equity Tier 1, you believe that you could have how much of payout this year?

[Cândido Bracher, executive]

Thank you, Jorg. So let me take your 2 questions. First, on our cost, I mean changing of the guidance in cost and then all the actions we've taken since the beginning of the year in order to control and reduce cost expansion in the bank. Actually, I mean, they were not caused by the perception of higher competition in the market and more competitive environment. The main reason was the perception of slower economic growth, as I mentioned when we began the year, estimating GDP growth of 2.5% and now we're estimating it at 1.3%. So I mean when we had, early on the game, the perception that the economic growth that we would not accommodate a cost growth as we had anticipated. And the measures we've taken, they involved virtually every sector of the bank. I mean we have gone in detail through the costs in every executive director area and the work costs reductions across-the-board in the bank, it didn't affect of factors specifically, nor did it affect investments specifically.

Second, the payout. The payout is not a target in itself. The payout is a consequence of the level of level 1 capital that we want to have. The board establishes that by the beginning of the year, we should have a level 1 capital of 13.5%, taking into consideration we expect that portfolio growth for the year and expected RWA growth for the year, and possible investments and possible changes by the regulator, which may require more or less capital. So taking all this in the year in consideration, I mean, that tells us we might begin the year at 13.5%, level 1. This is what we will continue to do and we are, in terms of date, we are still following this date, it will be the year that we made these calculations and see some, from today, date points to a significant payout again by the year of 2019.

[Jorg Friedemann, analyst]

Yes, that's perfect. I really appreciate, Candido. Just following up very quickly on the first point. If I understood it correct, you are not curbing any investments in technology and the plans that you had in terms of restructuring some business areas such as insurance, for instance. So everything continues as before. Is the result of the lower cost guidance is more related to enhancement of process? Is that correct?

[Cândido Bracher, executive]

We are certainly not cutting any investments in technology. And to be very transparent with you, in insurance, we are not cutting any investment as well, but we are lengthening the profile of the investment not because we wanted to save money with that, but because we found out that it takes a little longer to train the workforces that we hired. So the rhythm of hiring is going to be a little slower than we had originally anticipated, Jorg.

[Operator]

The next question comes from Mario Pierry, Bank of America Merrill Lynch.

[Mario Pierry, analyst]

Let me ask you 2 questions as well. First question, Candido, you mentioned that you now expect weaker economic recovery in Brazil this year. You reduced your GDP forecast. But at the same time, you're maintaining your loan growth guidance unchanged. So I was wondering, how do you expect loan growth to be throughout the year, especially if the economy is to be decelerating. If you can talk about how you see demand from large corporates, right, the large corporate segment continues to contract, while consumer lending have been growing at a double-digit pace. So if you can just give us some color here with your appetite for lending, what kind of trends you're seeing, and why you maintain your guidance for loan growth unchanged even though you expect a weaker economy.

The second question is related to the strategy at hedging. It seems like some of these change in your guidance is self-inflicted, right, your lower fee income generation, somehow your margin as well. It's because of the actions you're taking at hedging. However, you started to be more aggressive in prices in the third -- second quarter last year, so it seems to me that even though you are reducing prices, you're not seeing the benefits either in volumes or revenues. When do you expect that to change, and if you can give us some color as well with regards to the profitability of hedging on a standalone basis. If you are already operating of a return on invested capital below your cost of capital or if you're still being profitable in the business?

[Cândido Bracher, executive]

Mario, thank you very much for 2 good questions. First, the guidance for loan growth despite the fact that we see economic growth, I mean, by half of what we saw in the beginning of the year. There's one factor, which is that despite expecting the economy to grow less this year, we expect the potential reform to be approved in the second half of the year. And the loan growth is measured by the figure at year end. So this plays a role there. A main factor I would say is that we are feeling encouraged by the loan growth we are experiencing, not only in individuals and SMEs but mainly in March, we saw -- and more recently, saw an upsurge in the demand for our corporate loans at prices which are compatible with our cost of capital. So we remain confident that, I mean, given these expectations, we will finish the year within the limits of our guidance for loan growth.

Now in relation to hedge, it's difficult to make the size forecast in a market which is changing so fast, as the acquiring market in Brazil, to be honest with you. Last year, as a matter of fact, we have started to lower our base in the second quarter and as a consequence, we leveled our market share, and we stopped losing market share. But I must say that I think that in last year movements, we were mainly followers. I mean, we reduced our margins following the market. With this recent movement, we anticipated what we saw as an unavoidable trend in the market. To play in [ 3 plus 2 ] is what markets in the whole world do, didn't do in Brazil because of our historic, very high interest rate, volatile inflation and so on. And I mean the recent stability in interest rates and inflation under control, I think, we will drive the market inevitably to the T2 standard. So here, we basically anticipated this move. And you are correct in saying that the change in guidance was mainly provoked by self-inflected measures, be it the measures in -- related to hedging and [ 3 plus 2 ] the additional cost controls and cost savings that we have implemented in the year.

[Mario Pierry, analyst]

Just a follow-up. It seems like your competitors now have been following you in reducing prices in the acquiring business as well. So where do you think this stops, right, because it seems like, let's say, last year, you were, like you mentioned, being a follower, now you're being a leader, but then someone else might want to be a follower. How do you see the profitability of this business then over the long term?

[Cândido Bracher, executive]

I think the profitability of this business will suffer if we don't take into consideration increases in volume and if you don't take into consideration innovations, which I think -- innovation, which, I think, is inevitable in this market. But certainly, it's not a market where you can give yourself the luxury of protecting our margins and seeing your market share be washed away very fast. So you have to play along, I mean, that's competition. Mario, wait, I will ask Marcos Magalhães, CEO from REDE to complement.

[Marcos Antônio de Magalhães, executive]

Just something to think as important is to stress that despite competition's been very fierce on pricing, it's not being irrational competition. So we're going towards maybe, like Candido said, in terms of what is standard international practices. I think that the margins of this business in Brazil will also convert to international standards and as of now, it is still a couple of inches notches above international benchmark. So that's the way that will go and again, it's not at this point as we don't see it as irrational competition.

[Mario Pierry, analyst]

Okay. I think -- just to take the opportunity. When you mentioned that the profitability of margins in line with international standards, international standards don't have prepayment. Are you talking about -- what kind of margins are you talking about?

[Milton Maluhy Filho, executive]

I'm just talking about overall margins. So if you get the ratios for tax profit for the revenues, that's a good figure of where the market should go to.

[Operator]

The next question comes from Eduardo Rosman, Banco BTG.

[Eduardo Rosman, analyst]

I have 2 questions. The first one is on the fee income because even if we exclude hedge and the credit card business, I feel that performance overall is too weak. I know that we're seeing kind of a pressure across-the-board in our asset management business, investment banking, credit cards, et cetera. So I just wanted to get your thoughts about to know how should we think about growth in the fee income business going forward. Should we expect growing in line with inflation now the new normal or not? So that's the first question.

Second question is on the value creation. When we look to your Slide #3, we can see that your value creation story reaching record high levels, right. So I wanted to ask how you think about this metric, if you believe if it's still possible to improve the gap of the ROE to the cost of the equity ratio. If you think this is -- it's going to be more like the ROE going up or cost of equity needs to move down, how much can you move down. So if you can talk about that as well it should be interesting.

[Cândido Bracher, executive]

Thank you, Eduardo. In your first question, how do we see the growth in fee income if we see it going along with inflation, if this is the new normal. I don't. I think, I mean, we are living a special situation this year with the pressures from -- this year and next year, with the pressures from the acquiring business and it's important to add the interchange tax, which was established by the regulator and started to -- the effect started to be felt in the last quarter of last year. And -- but I see them more combined between inflation and GDP growth. I think that as GDP starts to grow again, we will have an increasing demand for -- of this business, which generate fee income. So I expect, I mean, for this year, we have provided the guidance, 2% to 5%, but I expect these figures to improve and to be better as the economy starts to grow.

On your second question on value creation, I don't see this gap widening, the gap between the ROE and cost of capital. I think it is at a historically high level. I see the cost of capital reducing as the pension reform gets approved and so on. So yet, despite not seeing this gap widening, I think value creation improved through volumes. So the value creation is not only the result of the gap, that is also the result of how much capital you apply to the business, how much results you generate. And I think that a more healthy way of growing value creation will be to grow portfolio and to grow business in general, which we expect to have as the economy starts growing again.

[Operator]

Our next question comes from Jason Mollin, Scotiabank.

[Jason Mollin, analyst]

Candido, my first question is on a follow-up on cost, we've seen Itaú's focus on cost efficiency in the past, of course, obviously in accelerated fashion after the merger with Unibanco, but it seems as if that's always been a focus for the group. What drove the timing for this renewed focus now in the first quarter versus the end of last year in what I guess you referred to as self-inflicted pain and this changing guidance? And could we see this again? Is there more room to really tighten down more? I guess, if you look at Brazil globally, cost to assets for the banks are on the high side. So how low can we go?

And of course, you just mentioned -- and this was related to my first question I was going to ask. But in terms of value creation, it really is, I think, important to talk about revenues and not just cutting costs. So it's really you're thinking that where we are now at record value creation, very high earnings and it's not going to come. When can we expect this volume? Is it really next year, the year after? Where can we go to in terms of that volume growth, loan growth. Can we get back to 15% loan growth in Brazil? Is that -- where is the long-term kind of recovery in loan growth rate for you guys?

[Cândido Bracher, executive]

Thank you, Jason. So your first question on cost, I mean, what drove the timing of this measures of cost controls. What drove it was the perception that the economy would not grow as expected this year. So when we looked at the difficulties we would have in growing fees and investments this year, we wouldn't get a tailwind from economic growth, we decided to be much more austere in cost management in the bank. Is there are more room to control costs, yes, there is, I think there always is, but especially with the investments we are making technology. So we expect it over the next years. I mean we will have a significant improvement in cost to the bank. You may say also that maybe, I mean, all these innovations we will also bring a reduction in fees in general, in margins in general. We have our efficiency ratio now at [26.3] but again I believe there is room to improve more. But taking your observation and view. I mean, as to what concerns the timing. We are now working on costs way beyond the end of this year. I mean so we are projecting austerity for the periods ahead.

The second question concerning, I mean, volumes and when can we expect them to come back. I don't have the precise figure with me now, Jason, but I have seen recently. I'm sure that -- I mean, in corporates, we are still below the level at the end of 2014 or 2015. In individuals, we are more or less about the same level of those, but taking inflation into consideration. So I believe, I mean, there must be room for growth, a significant room for growth in the assets and in income in the years to come. I think what we depend on is on economic growth and economic growth depends on fiscal stability and fiscal stability depends on pension reform. This is more or less how we see it so the perspective of upholding a good pension reform in the second half of this year, I think, opens a very constructive perspectives for 2020 and beyond.

[Operator]

The next question comes from Nicolas Riva, Bank of America.

[Nicolas Riva, analyst]

Just 2 questions. The first one on capital. We did see the decline in the CET1 because you paid the additional dividends and the interest on capital. Right now, it's at 13.3%. I think you said earlier on the call, you gave a target of 13.5%. Was that 13.5% the target for the CET1 or actually for the Tier 1? So just to get an idea if you are done basically with this process of optimizing the capital structure.

And then the second question on the guidance. So you've changed the guidance for net interest income, but again changed the guidance for loan growth. Was the reason for this basically more competition from our banks in terms of pricing or a different assumption for the Selic rate?

[Cândido Bracher, executive]

Thank you, Nicolas. On the first question, you are right. I mean it's for Tier 1 capital. 13.5% is the level we want to have at the beginning of the year for Tier 1 capital. Our Core Equity Tier 1 now is at 14.6% at the end of this -- sorry, our Tier 1 is now at 14.6% at the end of this quarter. The Core Equity Tier 1 is 13.3%, you are right. The second question, I mean, why did we adjust the guidance for financial marketing clients and for fee income and not for total credit portfolio. One reason is because we looked mainly at self-inflicted -- I mentioned the self-inflicted factors, I mean, which were the measures we had in hedging when adjusting the guidance. But the main factor is that we feel encouraged by the growth we are witnessing in credit demand. We are seeing a healthy demand from individuals and SMEs and starting at the end of last quarter, we are seeing an upsurge also in the demand for corporate loans so we feel encouraged that we'll be able to meet this goal established in our guidance for loan growth. Also, because we do expect the approval of the pension reform in the second half of the year and I see this will drive demand for loan, especially in the corporate sector even further.

[Nicolas Riva, analyst]

Okay. I mean one follow-up there. The revenue from the prepayment business from REDE, they're all booked in the fee income line or also in the NII line? Because you mentioned REDE as a driver also of what happened in the change of guidance for net interest income, but I wasn't sure if it's booked in NII or just in fee income, the prepayment business of REDE.

[Operator]

Our next question comes Otávio Tanganelli, Crédit Suisse.

[Marcelo Telles, analyst]

Marcelo Telles from Crédit Suisse. I have a couple of questions. The first one, regarding your NII guidance for the year, I mean particularly the decline in NII. We haven't -- even though you brought it down to 9% to 12%, it seems somewhat challenged, somewhat like a challenging target. Then considering that you are like 7% up year-on-year, so you probably have to grow to 4.5% per quarter over the next 3 quarters in order to reach that target. So which to me sounds better...

[Cândido Bracher, executive]

Sorry.

[Marcelo Telles, analyst]

Too optimistic -- hello?

[Cândido Bracher, executive]

Otávio, sorry. You were cut, so could you please start your question again since I didn't hear it from the beginning? Sorry.

[Marcelo Telles, analyst]

Of course, Candido. Marcelo Telles here from Crédit Suisse. So I have 2 questions. The first one regarding your client's NII growth target of 9% to 12%. Even though you changed versus your previous guidance for a little bit, it does seem somewhat optimistic, right, considering that you grow a little over 7% year-on-year. And it seems you'd have to grow 4.5% per quarter over the next 3 quarters in order to reach that target. So my question to you is what makes you comfortable that you can achieve this target, especially considering that you mentioned the economy is a little bit lower than you expected and perhaps probably the growth could be more skewed towards the second part of the year? So if you could elaborate on that, I would appreciate.

And my second question is you did mention that these ongoing cost effort that now Itaú is making is something that is probably not just a 1 year, I think, but it's an ongoing effort. Maybe you can see that going forward. So considering that the fee growth hasn't gone down, but that you're being able to really control your cost very well and you mentioned that you do not expect your ROE gap to your cost of equity to widen, is it fair to say that on the positive side, you can continue to keep your excess return as it is today because you still see room to offset, let's say, some potential pressure, revenue pressure particularly on the fee side with more cost cutting down the road? And I'm look - I'm trying to look for a little bit beyond 2019 in that question.

[Cândido Bracher, executive]

Okay. First, concerning NII growth, which -- I mean we are guiding this between 9% and 12% for the year. I mean, we are confident that we can -- we'll be able to deliver this growth in NII, and the reasons are the following: one is that we expect some economic, more economic activity now. We expect the pension reform approval in the second half. The main reason though is that average portfolio growth, I mean average portfolio growth between 2019 and 2018 is much higher than we have between 2018 and 2017. And as you know, the NII is made on the average portfolio, not at the portfolio on the end of the period. So this gives us also confidence in the year to reach this NII target.

And the other very important point is the change in mix that we are experiencing. We are really experiencing much more intensive growth in individuals and SMEs portfolios, which have a better higher margin than corporates and so on. So this change in mix -- as you can see by the way in the presentation, I mean this change includes the main explanation for the growth in NII. And what concerns cost? Yes, I mean I see our cost control going beyond 2019. In 2020, I think that really we are keeping this more and more under control. I think that the technology will enable structural cost confirmation in the bank going forward. Also, something that we will always require investments. And I think that there is a limit to get ability to incur profitability based on cost reduction. So we expect profits it's in the future, to come mainly from growth in assets and growth in income and economic growth in general, although I mean we intend to keep costs strictly under control going forward.

[Marcelo Telles, analyst]

Just one follow-up on your -- on the second answer. So is it fair to say that even though you may have like some competitive pressure in some of your revenue lines that you can actually -- because you could continue to control cost and you probably have like a very positive credit cycle ahead, that you can maintain your excess return similar to the levels that we have today at least over the -- in like the short to medium term? Is it a fair assessment?

[Cândido Bracher, executive]

It's certainly in this direction that all our efforts here go, Marcelo. But as the example in hedging has shown you all, competition must be taken into consideration when building the scenarios ahead.

[Operator]

The next question comes from Domingos Falavina, JPMorgan.

[Domingos Falavina, analyst]

I offer 2 quick questions. The first one is just again on REDE's position. So when we look at kind of like the medium-term history, REDE was one of the market share losers, I think, given the growth of CapEx in Santander all the way by growing 0% to 1% with the industry growing 10% year-on-year all the way up to the fourth Q, first of '17, first Q of '18. And what we hear on the ground is basically that there is strategy change and sort of even management future self changes, which feature drastically up for us the profitability pool of this industry and decided to change the attitude, I should say, in pricing as well. And we start seeing volume growing basically 5% year-on-year, 8%, 14%, 18% in the 4Q, which is above industry growth. Industry was growing 15%. In this first Q, we saw basically growth decelerating to 14%, which implies maybe in line, maybe a little bit below industry growth potential market share losses. And then we noticed the second round of aggressive measures as far as the push too.

And my question is at what level of growth, assuming the industry grows 15%, will you be okay with the [ account printing ] growth? And is it like market growth? Or is it plus 1% or 2%? Do you want to be a gainer? And at what point you're going to revisit price and say we have to go on a second round? So that's the first question. The second question is on Tokpag. You have a very good app, Venmo-like, for transferring. It's been removed from the Apple store. We can no longer download it. And some of the rumors we hear is that you may be launching some kind of digital initiatives, digital banking around that software. I'm just curious to see why exactly was it removed. Is it just rumor? Or do you have actually something in mind for more the low-income portion of the population on the digital side?

[Cândido Bracher, executive]

Thank you for the questions. I will ask Marcos Magalhães to help me with the first answer. But just to the first part for your first question, how -- why have we changed our stance in hedge in regards to competition. So I think it changed its price. First, during 2017 and so on, we try to protect margins and this evidently didn't work. So there was a moment in beginning of 2018 when we decided we would play along with the market and protect our market share. And this worked in the sense of protecting the market share at the expense of compressing margins, which is what happens in highly competitive markets. And now we have, so to say, taken a leap and leading the industry towards this [ people-still ] initiative. We are exercising and we are in constant discussion here on how to cope with this much more competitive environment, and there is a learning process. And we feel that we are doing better now. But I will pass to Marcos to complete the answer.

[Marcos Antônio de Magalhães, executive]

So 2 points to add to that. The first is the different results between the first quarter of this year and the fourth of last year, there is seasonality involved in terms of client portfolio mix. So that pretty much explains the variance of growth from the fourth to the first quarter.

[Domingos Falavina, analyst]

Magalhães, I'm comparing year-on-year growth. If you could explain, the seasonality shouldn't impact the year-on-year, right?

[Marcos Antônio de Magalhães, executive]

No. It does impact it because the portfolio mix changed in that period. So when you look in the fourth quarter year-over-year and the first quarter year-over-year, the reason in the change in growth rate is related to that. Second point is our long-term pursuit here is to level market share. So we intend to -- we don't have a goal to be the largest acquirer in the market in terms of market share. We do have a goal to keep the -- our operations relevant in market share in the market, and that means for us to sustain our share on the long term.

[Domingos Falavina, analyst]

So for here, the goal is to grow in line with the market actually?

[Marcos Antônio de Magalhães, executive]

Yes.

[Domingos Falavina, analyst]

Clear. And on the Tokpag?

[Cândido Bracher, executive]

I'm sorry. On your second question on the Tokpag. Well, the Tokpag I think was a [national] product. I agree with you. I got some criticism at home because we had discontinued it. But the fact that the market did not seem to think it was such a great product and adoption was not to the standards that we demand from our new products and so this was the simple reason why it has been discontinued. And in what concerns I mean new initiatives, I mean we are always thinking about them. We are always working on new products to satisfy our customers, but there is nothing to be advanced right now in this field.

[Operator]

The next question comes from Jorge Kuri, Morgan Stanley.

[Jorge Kuri, analyst]

I have 2 questions, if I may. One on the bank and another one on acquiring. Can you walk us through what happened with delinquency in the first quarter? We did see an meaningful uptick in most of the metrics whether NPLs, bad debt formation, renegotiated loans, cost of risk. All of them moved in the wrong direction, I guess. Is this mostly seasonal? Is this mostly because the economy has been weaker than expected? Are you seeing similar trends so far in the second quarter? What's your expectation of how this is going to shake out?

And my second question, just I guess taking advantage of Mr. Marcos Magalhães is on the call, is about rather overall from our strategic perspectives. So I'm guessing some people would disagree that the main disadvantage was pricing at REDE. Some people would argue that -- and certain of your competitors argue that the difference between themselves and the incumbents is they provide much better product services, customer experience and that's what merchants really value. So are you only going the pricing routes? And how sustainable is that strategy? Everyone moves to free [ B2 ] tomorrow? And then you're still the same company with the same disadvantage on prices, product -- sorry, products, service, quality, merchant simplicity, et cetera? Or is there, in addition to prices, a targeted effort at the company to try to provide a much better customer experience and hence, more sustainable competitive advantages?

And if I just may ask a third question, sorry. You did mention that you thought that profitability had to converge to international standards because there's no reason why Brazil should have higher profitability in the payment space. I'm not sure I understand that. I mean, the bank generates 23% return on equity. I don't see banks globally generating 23% return on equity. So does that mean that we should also expect the bank to have single-digit ROEs like every other bank in the world? Or how do we reconcile this comment?

[Cândido Bracher, executive]

Jorge, thanks for your very provocative questions as usual. So let me start by the first one here on credit. First, I mean what's happening on credit is totally within our expectations. We are not surprised by anything that's said. It's the result of 3 movements, and just remind me if I forget. The first is what we show in our product mix. We are moving credit mix towards where there is margins are higher but also where delinquency is higher in individuals and SMEs. So this change in mix coming and the portfolio growth in itself commands higher provisions. The second effect is the seasonal effect in the first quarter of the year.

That always happens in the first quarter of the year. Last year, it had been weaker. It had been only 20 basis points. This year, it came to 40 basis points again as it has been in the previous years. So no surprise here. And the third aspect of what we do with the corporate world, which is the decline in the coverage ratio. In this decline in the coverage ratio, you will remember, I have been announcing for over a year now. And it's the results -- and I always say we make provisional -- make provisions, which are precautionary. We have made quite a few of them during the years of crisis and after because there were companies, which had not defaulted yet but which [indiscernible] default as you know. I mean we [indiscernible] the probability of default, with probability of default we saw increasing in the period. With these companies, 2 things may happen. One is that they actually do default. We had this case in this semester where 2 companies did default -- did pass the 15 to 90 days to get to the over 90 days from here. And these 2 companies were already 100% provisioned for a long time. I mean the second was just what we expected.

And the other thing that may happen is that companies may improve simply, and their probability of default may improve and then making the provisions no longer necessary for these companies. This also happened in this quarter. We have a couple or 3 companies, I mean, which keep this business going. So when you combine all these easily are the expected losses, in general, are exactly according to what we have forecasted. And I mean you can see that this is perfectly in line with the guidance we have provided for cost of credit. So I mean it's -- here, everything we have has absolutely no surprises in the credit front. I will answer the third question and then pass to Marcos to answer the second question. When I mentioned that the -- in the payment arena, profitability I mean could go to international levels. I am just recognizing a de facto situation, which is...

[Operator]

Ladies and gentlemen, please hold.

[Technical Difficulty]

Ladies and gentlemen, please hold. Speakers, you may proceed.

[Cândido Bracher, executive]

Hello? Jorge, sorry. We got cut. I don't know when you stopped hearing me.

[Jorge Kuri, analyst]

You were actually starting explaining the question I asked about profitability converging for payments. You were just starting the answer to that.

[Cândido Bracher, executive]

Okay. So let me continue. So in this comment I made is direct -- it derives from witnessing the very strong competition in this sector and the enormous margin compression that we have been experiencing there, I mean, for 3 years now probably. And the market is changing here. I mean this is a market where innovation and technology are making a big difference as well as the normalization of the interest rates in Brazil. So all this is leading to this conversion, which I see in this market. And measures as the one we have taken this week, they are designed to grant us a lead in the industry and enabling us to keep on serving these clients as broadly as we can in the bank. I mean we certainly do intend to maintain the differentiated returns on equity that we have. And we think that we will be able to make it not by avoiding competition. On the contrary, it is by facing competition directly. I pass now to Marcos.

[Marcos Antônio de Magalhães, executive]

Okay. Just adding 2 points to what can be said there. When we talk about conversions, remember that also the products, the way it works in Brazil is conversion also to international practice. For example, rent, something that is very typical of our market. It's an existence in our marketing that is going down towards the sale of the POS, for example. We talked about segment period, which is also shortening by stronger competition and by also strength of regulation. So this conversion is making the product converge to international practice that were -- we infer it will convert to profitability on that segment as well. Talking about better, so to say, user experience, that's a very good question, Jorge. Thanks for bringing that up. Certainly, we are focusing on that. We have many accounts working on improving our customer service or the user experience. We have goals to increase our NPS. All of our employees have goals on that respect. But linking to what we did in terms of pricing change is that by of our measure, half of the gap in the NPS towards our competitors is by virtue of pricing. So NPS measures subsection, but a further subsections comes also from pricing. So half of the difference, half of the gap is for pricing. That's why we decided to level that.

[Operator]

The next question comes from [ Owa Vuatuzu ], Santander.

[Unknown Analyst]

It is just one and it's related to the guidance for the year. There were too many revisions, one on the revenue side and the other on expenses. So sorry for my insistence on this topic, but my point here is that given that the competitive scenario in the car industry is becoming day by day more challenging, we do understand there was some change already this strategy that change the guidance of the year. But on the other side, since the management of operating expenses rely basically on in-house initiatives, why this change in so short period of time?

So would I be wrong to assume the bank is perceiving a more like a little of this scenario for top line growth? It will balance or offset this weaker-than-expected performance on revenues and deliver a high profitability. They are shifting their minds and starting to pick cost. But more important than this, are you seeing this movement in your competitor too? Or only Itaú shifting the strategy from products and growth to cost management after this 4 months of the year?

[Cândido Bracher, executive]

Thanks for your question. Yes, it's true. I mean we started to be much more aggressive in dealing with costs once we realized that the economy would not grow as we had expected when we supplied the guidance. I mean as I mentioned already, our expectation for GDP growth was cut by half, virtually moving from 2.5% to 1.3%. And this is what led us to be much more active on cost control than initially. When you -- I mean, we don't really talk about competitors, yes, so even for your competition. But I should just observe and I mean that our competitors, our main competitors guidance for costs is already very low. Ours was the highest guidance for cost.

[Operator]

The next question comes from Jason Mollin, Scotiabank.

[Jason Mollin, analyst]

Just a quick follow-up on the comment that the economy, the outlook for the economy is positive getting a pension reform in the second half of the year. What is the downside risk if we don't get this pension reform? What is the outlook? How is Itaú Unibanco preparing for this? What could that scenario look like?

[Cândido Bracher, executive]

Thanks, Jason. The scenario is not good. So if the pension reform does not get approved, we will have the relation public data with GDP, it will keep on increasing. This will cast doubts on the stability of inflation. Probably, interest rates will have to rise. We may see some pressure on the exchange rate also due to that. I mean the level of confidence as a whole in the economy is going to drop. And fortunately, this is not a scenario we are unaccustomed to. We have lived with this scenario very frequently in the past. And I mean we know what to do in this situation. So I just hope and expect that we will not have to use this tool kit at this time.

[Operator]

Next question, Carlos Gomez, HSBC.

[Carlos Gomez-Lopez, analyst]

I'm not going to ask about the current business for a change. My 2 questions are [ referring ]. Number one, on the tax rate, your tax rate is now up 32%. In our calculation of your peers are at 30%, 29%. Part of it obviously has to do with your international operations. But is there anything more structural or is there something temporary and do we expect to convert with your peers at some point? And the second refers to the guidance. But in a different way, I'm actually surprised that you have reduced your NII guidance by only 4.5% and when I look at your economic forecast 6 months ago, you were expecting Selic [ key ] at 80% for this year. 3 months ago, you were expecting 6.5%. Now you expect 5.75% and it seems to us that what you expect your NII to do has not really moved a lot in line with interest rates. We know that you are already being sensitive. But still, the impact seems quite minor. Could you comment on that?

[Cândido Bracher, executive]

Thanks, Carlos. I will comment on your second question, and then I will ask Alexsandro Broedel to comment on the tax rate issue. You are right when you observed that we had a Selic rate extra, and I must just point out that it's end of the year Selic rate. But we had an end of the year Selic rate at 8.5% at our first forecast. And then right now, we have 5.75%. And in the middle, we had a 6.5%. What changed is I am not in the economic team making the economic forecast. But as I understand from the economic team, what changes the perception of when the pension reform would be approved. We started the year -- at the end of last year, we believe the pension reform could be approved early this year. If it were the case, then we expect that economic pick up derived from that, from the levels we had, and this will drive the need for higher interest rates in order to keep inflation under control. As we've seen, inflation is well behaved. Now in recent months, it has shown a couple of higher indices but our economic team believes it's well under control. And the expectations for the pension reform have moved to the second half of the year. And it's widely expected in the market now that if it were not for the fiscal weakness, the structural weakness of Brazil, interest rates could be lower. And this scenario has been building, this consensus has been building in the economy.

So now the expectation is that immediately after the approval of the reform, there could or there should be a drop in the Selic rate. Afterwards, as the plan unfolds and the economy starts growing and so on, the question of raising interest rates may come again into place. But the important -- I mean, why does is the effect in our NII with being really limited? It's because in both cases, be it when it was 8.5%, be it now when it's 5.75%, we are only referring maybe to the last couple of months in the year. So the effect of this is rather limited. I pass to Broedel now.

[Alexsandro Broedel Lopes, executive]

Carlos, too many reasons to reconcile our effective tax rate with the one, the different competitor of us that you mentioned. The first one is goodwill amortization. We -- our level of goodwill amortization at the moment is much lower than this case that I mentioned, so that affects our effective tax rate. The second reason is ROE. So higher ROE, higher effective tax rate because the benefit of interest on capital is pretty much fixed over the year because that depends on the amount of the book value of equity and the amount of the [indiscernible] so the rate [indiscernible] of the book value of equity. So these are the 2 main reasons that reconcile our number with theirs.

[Carlos Gomez-Lopez, analyst]

And my second follow-up on the interest rates. You now expect rates to be lower than in the past [indiscernible] with respect to higher pricing [indiscernible] focused during the last amortization of your NII for 2020?

[Cândido Bracher, executive]

A lower interest rate in 2000. Yes, I mean a lower interest rate has -- I mean, yes, I mean if you look at the chart we show in page -- let's see if I'm here -- on Page 5. In Page 5, we show our NII, how it has evolved, how the Selic rate dropped from 10.9% to here, it's 6.4% because it's the interbank rate. But so it has dropped 4.5 points and as you see from our NII level, it has kept well to the amount 12% or a high 11%. So the -- we are -- I mean it's not that the interest rate does not affect our NII, but it affects in different manners and somehow, quite often in compensating manners. Volumes tend to grow. There are many compensating factors and this is what explains that our NII was virtually unchanged as the interest rates suffered this drop, which we have seen here. I expect this to remain the same way should rates drop for the next year.

[Operator]

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

[Cândido Bracher, executive]

Well, just to thank everybody for your attention and your interest in our results and the very good questions. Thank you.

[Operator]

That does conclude our Itaú Unibanco Holding Earnings Conference for today. Thank you very much for your participation. We would like to invite you to join the conference report to be at 11:30, you may now disconnect.