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Itau Unibanco Holding SA
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Hello, good morning, everyone. My name is Renato Lulia, Group Head of Investor Relations and Market Intelligence at Itaú Unibanco. Thank you for participating in our video conference to talk about our earnings for the first quarter of 2023, which we are broadcasting live from our office at Faria Lima Avenue, in São Paulo.
Today's event will be divided in two parts. In the first, Milton will explain our performance and earnings for the first quarter of 2023. Next, we'll have a Q&A session, during which analysts and investors will be able to interact directly with us.
Now, I'd like to give some instructions to make the most of this meeting today. For those of you watching via our Web site, there are three audio options on the screen, the entire content in Portuguese, the entire content in English, or the original audio. In the first two options, we will have simultaneous translation. To choose your options just click on the flag on the top-left corner of your screen. Questions can also be sent via WhatsApp. To do so, for those of you watching on the Web site, just click on the button on the screen or simply send a message to the number +55-11-98993-1132. The presentation we'll be making today is available for download on the hot side screen, and, as usual, on our Investor Relations Web site.
I now hand over to Milton, who will begin the earnings presentation. Then, I'll be back to moderate the Q&A session.
Milton, the floor is yours.
Thank you, Renato. Good morning, everyone. It's a pleasure to have you here for our first quarter of 2023 earnings presentation. Our goal is to make an objective presentation focusing on earnings, since on June 15 we will host Itaú Day 2023, which will be the right occasion to share with you a lot more about our strategy and our business developments. We will talk about planned centricity and digital and cultural transformation, we'll go deeper on several topics that we've been talking a lot about with you.
The recurring managerial result of BRL 8.4 billion this quarter, a quarter-on-quarter increase of 10%, and which pushed us to a consolidated ROE of 20.7%, representing an increase of 1.4 percentage point, and ROE of 21.1% in Brazil. Financial margin with clients was BRL 24 billion, down 0.7 percentage point quarter-over-quarter, but it's worth mentioning the seasonality of the first quarter, as we can see in the historical series, since it has fewer calendar days. The cost of credit was BRL 9.1 billion, down 7% quarter-over-quarter. And one of the positives is that our non-performing loans over 90 days remain stable at 2.9%, which is consistent with what I've been talking about for the last few quarters. I'll provide more details on this topic in the next slides.
Finally, the efficiency ratio on a consolidated basis was 39.8%, a drop of 1.7 percentage points, remaining below 40% for the first time in history. This clearly shows that our journey has been consistent. This shows sustainable performance and topnotch results in all indicators. The credit portfolio showed signs of a slowdown, also in line with what I've been saying. The individuals loan portfolio grew 0.9% in the quarter, below what we had been growing in previous quarters, but still posts a year-on-year growth of 16%. The SMEs loan portfolio grew 9.2% in the first quarter of '23 versus the first quarter of '22, and was down slightly by 2.2% on a quarter-on-quarter basis, in line with the bank's risk management measures.
The total portfolio in Brazil grew 11.2% in the first quarter of 2023 versus the first quarter of 2022, and 0.6% on a quarter-on-quarter basis. The corporate loan portfolio grew 1.8% in the quarter. In Latin America, the portfolio grew 11.7% or 10.4% excluding the FX effect. It's still a solid growth, but at a slower pace than we had been posting in previous quarters since we have been more cautious in light of the current macro scenario. In the last quarters, we've talked a lot about the individuals and retail portfolios. But I know that the market concern now is the corporate loan portfolio.
There are concerns about the prolonged interest rate cycle and its effects on the bank's portfolio, and how prepared the bank is to face a more adverse macro scenario when we look into the future. So, we brought some figures that we felt would be important to share with you. We classify our loan portfolio into industries according to their volatility. In 2014, which was a snapshot taken just before the credit crunch event of 2015 and 2016, during which we faced a very complex time in the market, especially for large corporate clients, 36% of our portfolio was concentrated in higher volatility segments, which are shorter cycle segments, such as commodities, and therefore generate higher risk in adverse scenarios.
Today, only 17% of our portfolio is concentrated in higher volatility industries, and we've achieved this by rebalancing the portfolio over the past years. The wholesale portfolio has grown by more than BRL 100 billion in recent years, but this growth has been focused on clients with higher risk quality and industry diversification, which has produced important results in portfolio management. The second indicator shows the concentration ratio of the 10 largest debtors to the stockholders' equity. In 2014, the 10 largest debtors accounted for 46% of stockholders' equity. And today, the ratio is down to 25%.
We've also achieved a major reduction by diversifying the portfolio, which is quite healthy, especially in times that may bring some additional volatility. Finally, in 2014, 68% of our portfolio was made up of investment-grade clients. While today, the share of investment-grade clients in the portfolio is 75%, which also shows all the work we've done to adjust the portfolio mix to improve its quality and, therefore, lower its risk. In terms of financial margin with clients, in the first quarter we posted a drop of BRL 200 million or 0.7%. The first quarter of the year is impacted by seasonality, basically explained by the lower number of calendar days, and there's a seasonality factor impacting Latin America, which we should continue to observe over the next quarters.
We present the product mix effect to zero to show that we had no mix impact. In working capital, we gained BRL 100 million, since it grew from BRL 2.7 billion in the last quarter to BRL 2.8 billion in this quarter. As a result, the big effect on the margin with clients was on the core margin, which is in line with our historic performance as this is a quarter where typically this happens, so we have no specific concern to this regard. The NIM, in both consolidated figures and in Brazil, remains flat compared to last quarter, 8.7% on a consolidated basis and 9.4% in Brazil. In risk-adjusted figures, the NIM increases on a quarter-on-quarter basis.
I remind you that in the fourth quarter last year, we had that big retailer event, and we recognized a provision for 100% of the exposure. The part was already recovered this quarter, which is the main effect. Looking at the financial margin with the market, again the highlight is consistency. As difficult and volatile as the environment is, our risk and balance sheet capabilities have proven to be successful. If you look historical series, you can see that we continue to deliver a positive financial margin with the market quarter-after-quarter. Moreover, in this quarter, financial margin with the market was stronger for Brazil, reaching BRL 1 billion, while Latin America had a weaker quarter, especially in Chile, due to inflation effects.
The capital ratio hedging cost was BRL 500 million, so the financial margin with the market is very much in line with what we had been posting in previous quarters, once again proving to be solid and consistent. In general, I would use the word consistent in all the tables of our presentation.
Moving over to commissions, fees, and insurance results, we posted a slight quarter-on-quarter drop in credit card business, but is still up 16.9% year-over-year in which acquiring services stands out by posting a year-on-year growth of 30.7%. Revenue from advisory services and brokerage dropped 8.1% in the quarter, but still posting revenue of BRL 0.7 billion. This has been a rough year with less investment banking activity even for a diverse bank. We offer DCM, ECM, and M&A services. There are uncertainties on how they are affecting these operations. But, we cannot deny that it was a more challenging quarter.
In Latin America ex-Brazil, revenue was coming as expected growing 10.9% year-over-year and 5.5% quarter-on-quarter. Another business that I draw attention to, insurance operations which revenues are down 1.5% on quarter-on-quarter basis, but up by 10.9% year-over-year, and highlight is the core insurance result. Earned premiums were up 16.9% year-on-year. And the core insurance earnings grew 30.9% over earnings that had already been growing strong.
We continue to be very pleased with our insurance business strategy and results. In acquiring activities since I was saying earlier, the transaction volume went up 21% while revenue went up 30%. This shows our ability to manage clients, re-price the portfolio, increase the penetration of financial products, and promote the growth of the acquiring business. Thus, we continue to extract a lot of value from the operation. And earnings have been keeping up with our development as well.
In card issuance business, the transaction volume was up 10%, a much lower growth than in previous years. But the main message here is that client portfolio mix is quite favorable, especially from a risk standpoint. Card issuance revenues continue to grow in the internal channels which consist of clients with whom we have a longer term relationship. They are checking account holders. And they are key for our cross-sell strategy where credit cards are just one product in the relationship with these clients.
We foresee a lower growth in revenues and a reduction in the client base in the channels with lower income client profile. Both, in the external channel and the consumer finance credit channel. This is very much in line with the adjustment to the portfolio that I have been commenting on as part of the risk management strategy that we have been doing.
The number of active cards of account holders grew 14% which shows that the risk diversification strategy has been very successful. Speaking about credit quality, we can see a totally expected growth in the short-term delinquency rate, NPL 15-90. I always remind you that in the first quarter of every year if you look at a longer historic NPL series, the first quarter is always seasonally more pressured. This is due to people's higher yearend spending and bills which explains why default increases in the first quarter historically.
The short-term delinquency rate for individuals rose 30 bps in the first quarter of 2023. The growth of this rate in the first quarter over the last five years has been between 30 bps and 42 bps. So, 30 bps is the lowest growth rate in recent years. What happened in the last two years is that this rate went up in the first quarter. And it did not go back down in the second quarter because we were in the process of gradually normalizing the cost of credit.
And, we expected NPL to continue to go up which we do not expect to happen in the next quarter anymore. The key point is that we normalized NPL rate for individuals. The delinquency rate for SMEs was up 20 bps. And the good news is that the NPL 90 days has stabilized as I have been telling you for several quarters now. And it's precisely into our expectations for this quarter.
With these results, we deliver risk management capacity, predictability, and consistency as we have been signaling to you. The NPL 90 days rate for SMEs in Brazil fell from 2.4% to 2.3%. It's clear that there are challenges that the scenario may change over time. But, we have been able to deliver and demonstrate a very efficient management capacity.
It's hard to track the NPL rate for large corporates because usually in this portfolio when delinquency occurs, the client already has an issue. So, coverage ratio may be more adequate. And I'll talk about it in the next slide.
The portfolio cost of credit reached 3.2%. And if it weren't for the subsequent event, last quarter's ratio would have been 3%. So, there was a slight increase. I have been saying for several quarters now that we should normalize the cost of credit at a pre-pandemic level. And that is what is in fact happening. The current cost of credit is at 3.2% and pre-pandemic it was 3.3%.
Last quarter due to the subsequent event, it was 3.5%. The cost of credit was BRL 9.1 billion, which would be more comparable to the cost of credit of BRL 8.5 billion in the fourth quarter of 2022. The difference to the BRL 9.8 billion posted in the fourth quarter of 2022 is explained by the subsequent event involving the retailer for which we provisioned 100% of the exposure in the fourth quarter of 2022. The total coverage ratio was flat and there was a slight increase of one percentage point in retail.
The average retail coverage for the last four years pre-pandemic from December 2015 to December 2019 was 167%, and we are running at 182%. We continue to provision our formation and maintain our expected credit loss management, which is key to have a sound balance sheet with adequate provisions and prepared for the challenges that lie ahead.
I think that in terms of credit, despite the challenges in the current scenario, we have good news to share with you. Non-interest expenses in Brazil dropped 3.5% but we have the seasonal effect in this line since the first quarter is typically weaker in terms of costs, which explains the drop in the quarter and the 9% growth year-over-year.
For the first time in history, we achieved an efficiency ratio below 40%. On a consolidated basis, it was 39.8% in a quarter where non-interest expenses grew 7.7% year-over-year and fell 3.5% quarter-over-quarter. The efficiency ratio in Brazil was 37.9%, which is also down from the last quarter, which had already been a good quarter. So, these are the lowest efficiency ratios in the industry when we consider all expenses without any reclassification and calculated in a manner we believe to be the most correct.
They are the lowest efficiency ratios in the history of the bank. About the cost base, our quarter-on-quarter core costs fell by BRL 700 million, a drop that is mostly explained by our efficiency program, which fostered cost discipline and focus on cost. And it has a volumetric effect, which is the good cost, the cost that we would like to have more of as the business generates more activity.
And more importantly, we continue investing in our businesses and in technology, delivering sound and consistent earnings, taking care of the bank of today while investing in the bank of the future. It's worth noting that we are not delivering these efficiency ratios by cutting off investments. We are at full speed with our digital transformation. We are expanding businesses, focusing on capital discipline and in value creation, and continuing to invest in the bank.
Moving on to capital, we were practically 10 basis points above common equity Tier-1 we presented in the previous quarter. We increased earnings already, adjusted for the distribution of interest on capital. There were also the effects from risk weighted assets and prudential adjustments. We ended the fourth quarter of 2022 with common Equity Tier-1 at 11.9%, and it reached 12% in the first quarter of 2023.
Considering 81, we reached 13.5% Tier-1 capital. In other words, our CET-1 of 12% is 50 Bps above our 11.5% appetite which was approved by the Board of Directors. As we can see, the bank is well capitalized and points to a very positive trend.
And finally, I'd like to extend to you an invitation to attend Itaú Day 2023, which will take place on June 15. During this event, we'll have the opportunity to have a very open, transparent chat to share with you a clear view of what our strategy has been, how we are taking care of our clients, of our culture, how we've been carrying out the digital transformation process, and how we have expanded and been able to deliver these sound consistent earnings.
I'm counting a lot on your participation. It'll be a pleasure to have you with us in this event, and with this I wrap up the presentation. I hope that you've been able to understand the main drivers to deliver our earnings. In fact, I think that during challenging times, soundness and consistency should be of great value, and our earnings show it.
I'll now join Renato for the Q&A session, where we can share more details. I'll fly tonight to attend our conference in New York, and I will surely meet with many investors. Thanks, and see you soon. I wish you all the best.
Hello, everyone. I'm back. Milton is right here with us. Thank you for your wonderful presentation. Now, we would like to start the Q&A session. It will be in two languages. If you ask the question in English we're going to answer in English. If you ask in Portuguese we will answer in Portuguese. We have both options therefore available for you, audio in English or Portuguese. Now you can also submit your questions via WhatsApp, 1198-993-1132.
Time for your questions.
Without further ado, I would like to call to the screen, Thiago Batista. Hello, welcome to our call of the first quarter.
Good morning, Milton. Good morning, Lulia. Congratulations on the result, very strong. It seems like the bank is operating in a different country even. Well, the question is not about that, it's about profitability of the business areas. When we follow-on on the wholesale and resale post-pandemic, maybe it's a coincidence or not, but it really changed the, well, the portfolio. We are talking the retail 30%, wholesale 17%, now it's [subverted] (ph). The last -- the aforementioned, well, retail -- Well, 30% is wholesale, 17% retail. How do imagine the returns? Is there a structural change in the business? Is it competition from the fintechs, what justifies that change and how can we imagine the profitability, so I should say, looking at the future.
Well, thank you for the question, Thiago. Thank you for the compliment; it's always a pleasure to have you here. I believe that the question, it's legitimate, it's excellent. Let's separate. When we see at a longer series, when we take a look at that, there are some relevant effects taking over the last few years. You mentioned the pandemic had an important effect as the bank did -- renounced a lot of revenue to service well and help our clients to, well, that credit program at Travessia crossovers, well, with the small companies and medium-sized companies should go to weather the storm. So, we had a few regulatory effects, the cap of some loans remove the profitability, and also we have the delinquency has returned.
We've had two great years, and delinquency had climbed over the last few years, specifically credit cards, where our operation is very large. We have an enormous portfolio. We have a significant share of the market. It had made the profitability of Retail to drop. Now, even though we've had a few improvements over the last few quarters, we've had a benefit and the seasonal cost, that's why profitability increases a bit. In Retail what we've done is it depends more on credit than it depended in the past, so it was very relevant for credit, but we had a capacity to generation of fees and revenues which is very aligned with credit.
And it's an operation we thought has grown more than the capacity to expand the business and fees, which is a profitability, therefore, that tends to the return of credit more than credit fees, and that's how the bank captures the value. When we do a deep dive, a zoom in Retail as a whole we can very good with the company is doing very well, delinquency very controlled as you have seen in the credit indicators. In the natural persons, they are more dependent on credit, but they're more resilient in a cost of credit. And when we talk about the market -- the open market where we operate credit cards or some other segments, we operate with vehicles and other loans and vehicles, we see profitability pressured.
We have the work of repositioning our portfolio, we also changed the level of profitability of portfolio, bringing our migration to a more insured portfolio, and therefore we have a lower profitability, but much more resilient in a scenario that is showing adversity. So, the repositioning of the portfolio clients that are were working with the incomes of the clients, a third of the portfolio in low income, we reduced in 10 percentage points that number, while our management capacity has made us weather this storm better. So, looking at Retail as a whole, our expectation is to continue to work strongly to improve the profitability.
I do not believe that they are going to return to the aforementioned thresholds, we have to improve. And there is an efficiency agenda that is very strong. So, this is where we control and this is where we had to highlight the efficiency, specifically the natural persons in the direct lines. We are looking at them as an integrated business units. And also in Wholesale, we've had great incomes. We have the investment bank, the commercial area, asset management, the Latin American operations, they're all within this umbrella of Wholesale. We had a bit of a drop in the previous quarter because of that [PDD] (ph) that was very specific.
We have a normalization of the cost of credit, which is normal. It should bring profitability lower. Then we have less activity in the investment banking and asset in performance fee, and therefore we should get some pressures in profitability, but the numbers in what we expect and the expectation of guidance, we are going to deliver the guidance.
Thank you, Milton. We have the second question, Gustavo Schroden, Bradesco. Welcome.
Welcome, Lulia. Welcome, Milton. Thank you for the opportunity. Congratulations on the results, very strong across the board. Now, I would like to use -- well, to take Milton's words and expanding on that efficiency, it's below 40% specifically if we consider the size of the bank. It's a bank that has 4,100 branches, and the point of sales, 100,000 employees. I've asked that question before to Milton, I am going to ask it again. According to my reading, it would be a game-changer in profitability if all of that infrastructure, which is heavy, the bank can work with an ROI of 20%-21% and the efficiency level below 40%.
Milton, well, talking into consideration the Internet, now says we've gone through the pandemic period which we had a reading that everybody needed to do how it would be the post-pandemic behavior of people, we have a great scenario, we have a great visibility of how people are behaving. Therefore, is there any space to reduce, significantly speaking, the number of branches and the points of sale -- points of service, and even the structured staff needed to support, and maybe I'm talking about optimization here, and that can bring us to a different threshold of profitability, which is already high. So, I wanted to hear this from you once again. I think that there is a space so you can have a change in ROI, but maybe it's already high, but maybe changing the threshold of that ROI that is already high.
Hi, Gustavo, thank you; pleasure to see you once again. It's always good to receive this question because, remember that there is a lot of employees watching the call, besides the investors. And this gives a great opportunity to communicate everyone. This agenda of efficiency is fundamental. We've managed, in fact, to reach the efficiency levels increasing the operational leverage of the bank. Of course there was a space for that in reducing if you are talking about the branches over the last few years, since 2015, when we start to do a few movements for reducing, we've reduced 1,500 branches all through that time.
Maybe this is not an isolated objective. Well, we want to service our clients in the right way. We believe in the digital model, we are trying to evolve understanding the channel, the digitalization of the [cliency] (ph), demands of the clients, and the products. Well, in this quarter, we've closed, if you've seen, 55 branches. We reached the volume of 415 digital branches, which is a different model, lower cost where we have extended hours for servicing our clients. This is very important. And we've been working with the business space where these lighter branches we have the hubs and satellites. We concentrate the operations in one branch and a few branches, we leave these business areas lighter to service, to bring, to provide consultancy, to talk about more sophisticated products.
The care and equilibrium that we have here, when we reduce structurally the land base, we reduce the top line because the digital model is working and it's integrated. Therefore the care that we have to have is as our clients still demand and still go to the branch, there's still a flow of payments that is very important. Even though the flow of payment drops, it grows nominally, even though it reduced the share in our branch networks in regards to payment as a whole. So, we continue to work strongly on efficiencies, specifically at the moment where there is more adversity. The more uncertain the future is, the more intense our efficiency agenda is here at the bank and this is the rhythm that we're going to implement in 2023 and 2024.
And if we have to do additional adjustments, we will do so as that is necessary to service our clients correctly. And since we have the digital integrated model, this is our central challenge. There is space for us to evolve. We will continue to dedicate ourselves over the efficiency agenda. You've talked about a few of the levers and these are very important levers for us to continue to grow and deliver this level of efficiency, top line is very strong and helps in the index but we need to have a look forward for the future. The balance needs to be given. If the top line is uncertain, the cost is certain and we will do a deep dive on that.
Thank you, Milton. The third question is here, Rafael Frade, Citi. Welcome, Rafael.
Thank you, Milton. Thank you, Renato. Thank you for the opportunity. Well, one question about credit cards, Milton. As you commented, we've seen and it's a stabilization of the quality of credit of the portfolio as a whole. But if you look at the credit cards specifically, it's worsening. We have a worsening of the marginal, well of the margins. If you can tell us more about credit cards, regardless of all the measures that were implemented, there is still some lagging, some stuff that we get from the previous origination. And another question, I thought that it was different from the other players. You had an increase in spend and how much is that of the demand of the client, the proposal of funding that's coming from other companies, if you can discuss funding?
Thank you, Rafael.
Well, I'm going to start talking about credit cards. Credit cards, remember, our portfolio is very large, we have practically 30% of the market share. When we continue, when we take into consideration the card for a bank, look at the portfolio as a whole. Now, these segments have had different performances. There was a great performance from the natural person's bank accounts. This is a portfolio we continue to grow. And this is the high income profile.
Of course, we have an allocation, but this is more balanced. And then there is two portfolios, the finance and the open ocean where we work with the brands without going through the regular channels, and this has been reducing the concessions. Specifically, in these two portfolios in the finance, you have the value proposition of the partner. So, not necessarily, you have the same quality of credit. You can see through that, and you can have better quality in the open ocean, the client that comes through the digital channel and looks for credit, you have more difficulty.
So, you have an adjustment in the portfolio. We've reduced the concessions and we've done the general review of the limits and the exposure of the riskier groups. They were reduced in a more relevant way. So, I can tell you that the short delays, not only in this year has improved the performance, but there is a portfolio that has a lagging to it. When we compare the numbers to the SFM numbers that were published, there was a delay, there was an opening in the delays, there is a lower threshold, and we do the correction at the end quicker than the system as a whole.
So, I believe that capacity and how dynamic it is, it's what makes the difference. So, we are very comfortable. We've done the necessary interventions at the limits and these we can see a reduction in the higher threshold and if we remove the account holder, there is lower capital cost and we have a different performance in regards to the cross sale and the records that we have of the clients itself.
So, this is the central point on the credit cards. About the funding, your second question. I believe that the bank has managed to perform very strongly in capture and deposits, not only for what we call the traditional deposits. We have an open platform, multi-products, an asset management that is very competitive and a distribution channel that is very solid. So, we've managed to work with either the investment and the credit analyzers and the capacity that our private bank has been growing. We are gaining market share in the private, 29% market share. According to the BIMA data, this is the largest one in terms of share and it's growing. So, our funding has captured value. Of course, when we see more adversity moments, we see the flight to quality and the bank is always seen as a safe harbor in terms of investments, given the solidity results capitalization of the bank and with the movement of the interest rates and the reduction in the funds and assets.
So, what we talk about the open platform, the multi-market, the industry as a whole, performance of the industry was very poor in the first quarter across the board and with the level of interest rates, the treasury products they tend to grow. That's why we've seen that inflow that is very important. Of course some volatility of course when funding comes from great corporations and great clients, it's more institutional funding and we've lost a few deposits over the last quarter more than we observed specifically concentrated in great corporations and this is distributing the result and consuming more cash flow due to the reducing in cash flow.
So, we've seen the volatility and the funding of big corporations but the account holders, natural persons is very resilient and this is outstanding and outperforming the market. So, the bank has managed to work with the liabilities with a lot of solidity. Our indicators are stable, much higher than the regulatory limits and if you look at our deposits from the account holders over the portfolio of account holders, natural persons you can see that we have the better ratio in the market, the funding one to one. So, we can see the capacity of attracting deposits with quality and servicing our clients always with a vision of consultant best investment for the client and it's not the best product for the bank. So, we have the quality with adequate spreads for the adequate client that really needs and it makes sense to invest in the product.
Okay, thank you. Thank you, Milton. Now the next question we have is from Eduardo Rosman from BTG. Hello, welcome.
Thank you for the opportunity. Congratulations on the numbers. I wanted to change the theme here. I think that the result was very clear. I think that Milton mentioned that you are going to be in New York Conference, I've returned from a visit to foreign investors and the general reading is that the shares are very cheap. But they are very worried about the risks, we have the IVA change, the change in the rotary credit, many others. So, when did you get your reading? How do you see the risks? Are they real, exaggerated? And how do you work with the day-to-day of the bank of course, take into consideration these risks.
Thank you, Rosman, always great to have you here. Thank you for the questions. In fact, something that we do not do here in the bank is to ignore the risk. So, we really face head on all the challenges that appear. In fact, there are some uncertainties, you've mentioned a few.
The credit card is something that is recurrent for many, many years. And the work that we've had is to manage, to educate and show in a very deductive way all the stakeholders how their credit card market works in Brazil, I remember when I was working in credit cards, I had an opinion, and when I was sitting there at the Chair, I discovered a different world. And many people do not know it, because it is a very complex environment, it consists of credit card risks, complex risks, issuance, and all the equation in between, how it's closed? So, in the credit card in Brazil, it's 40% of the usage; 21% of GDP BRL 10 trillion, the credit cards they moved to BRL 1 trillion per year, but we have our own idiosyncrasies. If you see the payment in installments, it's large percentage. So, if you pay interest rates in rotator, it's very small 3.8%-4% rotatory. So, when you look the threshold that pays the interest rates, it's substantially higher than the part that doesn't pay. And you know that the bank carries over other risks. So, it's important to repeat it's going to be an educational and also cultural issue to the market.
So, when we compare to emerging economies, we can see clearly and other countries we realized that our imbalance of the interest and payment installment is very high in Brazil. So, I say that with a lot of tranquility. We have the acquirer and we have the issuer. We own 100% of both. So, there is no conflict in defending model A or B. I defend the technique and the understanding of the whole. So, this is clear for the market. For the stakeholder whether it's central bank, you know them very well. The ministry of economics has worked with few debates and we are discussing alternatives and have to make the market evolve. Of course, this doesn't depend on isolated or play area has to be multi-disciplinary. And it would be ideal to have through the self-regulation that it would be a model that will be self-sustainable attacking structurally and transit and may be root cause of the problem.
I am not alone in this agenda. There are several people sitting down in work group and we are advancing. And we should see how it's evolving, but always taking a look at sustainability of the business. Now the JCP, it's really -- there is still no clear proposal. Our reading actually we are seeing recently. But, while we are seeing a few comments about the infraction notice that was done in a relevant value and incorporating our defenses. If somebody operated in a wrong way and I don't know what the case is, I am not going to judge the cause. I believe that you need to attack it in a -- where there was an exaggerating and excess of creativity. You have to remember that the interest over the own capital is to substitute the loss from that effect, and this is to keep an inflationary country such as ours, you can keep the parity power of value -- economic value of your patrimony of your asset. So, it has a value. But you have to remember that our sector is a sector that has the highest taxes in the country. We pay 45%. The contribution -- structure contribution, we have the ISS taxes. We have the taxes over purchases. State taxes, we have the short-term agendas. We have to careful with them because they compromise their growth of the credit portfolios. And it increases the spread in Brazil and we need to attack on the other hand.
The same way that we attack the cost of spread in Brazil, which is a great work here. So, the IVA that you commented has its nuances. The finance intermediation is taxed at 4.65%. And no other country of the world -- there might be an exception in the IVA or the VAT tax. Well, if you just apply this VAT to the incomes of intermediation and services, we are increasing the load on the sector in a material way, specifically making the credit more expensive for the natural person, the account holders. And we want to work to reduce it, the taxation to reduce the spread and not increase the spread. So, I believe the government is conscientious of this. We have seen some official publications and some things that have been worked. But we don't know what the definitive actions will be on the asymmetries. And the third element, we still have a lot of tax asymmetries in the sector. The companies in other sector, they pay less taxes.
Some, they do not pay a social contribution tax. And there is a social security. So, there is an adjustment for the same level playing field. The risks are there. You mentioned a few. We are working in the best way, in a constructive way to gain visibility and to explain the impact, so we can avoid an agenda that at the short term might make sense. But, you generate structural problems for the economy of the society and for the population as a whole that wants to pay and wants to have access to credit that is more competitive. So, I believe that these levers that we are working with them. And having any news, we will communicate to you.
Thank you, Milton.
The next question will come from Tito Labarta from Goldman Sachs. Hello, Tito, good to see you and hope to see you soon in New York.
Yes, sure. Yes, hi, Milton. Hi, Renato. Thank you for the call and taking my call. My question in English, my question is on the financial margin. A little bit weak in the quarter, but still overall pretty strong particularly financial margin with clients, so, growing above the top end of your guidance for the full year, and volumes doing okay, spreads up a little bit in the quarter while the financial margin with the market a bit weaker in the quarter. So, just to help us think about the rest of the year, how that should evolve also in the context of when you expect the rates to come down and what the impact could be on both of those lines from you? Thank you.
Hi, Tito. Good to see you again. Thank you very much for your question. So, I start talking about the clients, the financial margin with clients. While we have been seeing as you know there is this seasonal effect on the first quarter, we last current days in the first quarter. So, this is expected. We still believe the guidance is feasible although we believe there is more challenges now than it was in the very beginning of the year when we released for you to the market the guidance. So, our view is that the challenges are bigger now. We still believe that the guidance the way it is sat. It can accommodate our performance in 2023, but with a downward trend. So, this is my first view over here. On the re-pricing on the working capital of the bank, we still have room to do so. So, the way we release on the MD&A you will see that we are still running 400 basis points below the rate.
So, this re-pricing that is done throughout the time on the interest rate should be done throughout the year. So, we still have some benefits to get from there, okay? We have been working with more guarantee lines although we had some increase in the clean lines in the first quarter due to the seasonal reasons as well. And also we have been seeing, of course, some products that are kept due to the regulation. That's true for overdraft, that's true payroll loans, ISS. So, we have to keep an eye on that. So, this can put a little pressure on the spreads as well. So, this is our view. We still believe we can do that on financial market with client. But, if I could choose a line to say the geography even though we believe it's too early to say though, I believe that the financial margin with the client we have are challenged ahead, but we are still confident with the guidance, okay?
And talking about the financial market where with the market, we have been able to deliver good and decent quarters. I know are challenging as you know, we had a very good quarter for trading, especially good for banking. That shows the way we have been dynamic in hedging our positions, our AUM, and our mismatch in the balance sheet. So, we have been able to do so guarantying good level of margins quarter by quarter, and financing the cost of hedge of the capital index as well.
So, we still believe that it's difficult to predict this line as you know. But still believe that the guidance is reasonable. And we should be able to deliver the margin with the market within the guidance that we released at the very beginning. While we are seeing more challenges coming from the Latin America operation especially from Chile, as you know Itaú Chile just released and had the conference call as well. So, what they have shown there is that the financial margin with the market in the first quarter was very challenging especially due to the low inflation environment that we have been seeing there. That shows that as the bank are launched in U.S., local inflation whenever you have lowering inflation, you have other benefit but in the financial with the market, you suffer a little bit more. So, Chile and that region should be more volatile. And in Brazil, we still believe we can post decent quarters for the coming quarters.
Thanks, Milton. [Foreign Language]
Thank you very much. Now, we have Bank of America, Flavio Yoshida, welcome.
Hello. Hello, Milton. Hello, everyone. My question has to do with the risk appetite here that we have. We noticed the NPL is stable after period of time. But, the growth, the portfolio for individuals and companies in Brazil is dropping. So, we see that some of the lines for individuals have been more resilient, which is the case of real estate, for instance. So, I wanted to understand and for consigned credit as well. So, we wanted to understand what the future scenario is. In your opinion, how do you think we can maybe accelerate that growth? Thank you.
Thank you, Flavio, so, good to see you. Thank you for that question. It is true. We've been working with the portfolio. We've been working with changes in the concessions for a couple of quarters already, because it's going to be challenging. We believe that we are data-driven, and we have the ability to manage these risks whenever things get more volatile. So, that's the good news. We've been able to have stable trends for individuals. I think our levels are very good right now, and we expect things to be more normal, I would say more neutral over the next few quarters. So, I think naturally, that shows the quality of the portfolio. Also, we have the mathematical effect here, the denominator effect, as you were saying, there is a realization in the portfolios that makes the growth go down in terms of the curve.
So, the indicators will have more of a pressure. As for the appetite, we're still very focused. We're looking at engagement, we're looking at our medium and high-income clients, and we have a very good scaffold think. We know which channels, which clients, which ones have a higher risk, appetite risk. So, we won't stop growing. We might grow in a decelerated fashion, but we will still grow. I think that is what we're looking for over the next few quarters. We will continue with the same share in the target clients in terms of risk of appetite. And we are losing share in, I would say clients that we understand are not in the curve that we want to or in the trend that we want to follow, but we know that demand has changed over the next few quarters, so that drop is more relevant.
From a demand standpoint, we see that there is a lower demand. So, in middle market, we have a lower portfolio and that's because of a lower demand, they're usually working with capital flow and there's also an exchange rate change. So, when we think about the exchange rate for last year and for this quarter, there was a change. The demand is going down around 25% on average. And for individuals, we've also had to adjust a few things. So, there was a cap in the consigned credit lines and we've had to adjust because with 197, some of the targets that we had were not sustainable, we had to adjust that. And we're reducing the lines for vehicles and real estate as well.
It is still growing, but it's at a lower pace. And we think that, of course, with this level of pricing, there is a lower demand, so there is lower growth curve, but that's our expectation for 2023 to continue to grow and invest in our main clients. We have a very large portfolio at the bank, so naturally there is going to be an effect on whenever we are working with that transition, but again, we are still growing and with the right appetite in the middle market and also high income lines.
Excellent. Thank you.
Thank you, Milton. Now we have Daniel Vaz from Credit Suisse. Hello, Daniel. Welcome.
Hello, everyone. Thank you for the conference. Well, Milton, I think last time I asked you a question, you told me that you usually have a range of collateral credit of 53%, and you are actually looking at the higher part of this range. So, now, thinking about the current scenario, thinking about the strategies that you're working with, what do you have in terms of trends for the next semester and unsecured lending? I mean, where do you see there is a possibility for higher spread and about balance thinking about the organic growth that you have right now? So, what's your opinion on that collateral, credit, your portfolio, any opinions on that?
Thank you for that question, Daniel. I think in practical terms that is happening. We see a deceleration, the guaranteed credit, especially against the past few years, that is going to decelerate. We also see a reduction in general, but that's balanced somehow. If you think about the first quarter, we've been able to grow overdraft for instance, has been better. There is usually a reduction in that because we have people receiving bonuses at the end of the year, et cetera. Also we've been earning more share and the best ratings and we've been able to also look at the target clients in a better way. So, we are growing in terms of share with those clients, but there is a lower demand as I was saying before.
So, nowadays with these interest rates and these levels, there is a lower demand. That's natural and that's why we have this monetary strategies whenever there is a deceleration. So, even the middle or high income clients, they don't need as much credit at these times because the interest rates are higher and then they just wait a little bit longer to spend, to spend important amounts. So, yes, there is a lower demand, but we believe that it's going to be okay to continue to focus on these clients and still adjust the balance sheet of the bank, we are going to continue with the lower rating clients and also focus on the middle and high income clients, which is what brings really sustainability for our company. So, if we have the opportunity, we will continue to grow. What we need is really more demand. And we have to see what the right mix is.
We now have with us Jorge Kuri from Morgan Stanley. Hey, Jorge, welcome and good to see you and hope to see you tomorrow in New York.
Thank you. Thanks, everyone. Congrats on the numbers and hope to see you too as well. I wanted to ask about the details on Slide 16 of your presentation where you have the return on equity by the different business lines and you're showing for the first quarter on the credit business, 10.4% return on equity. And I wanted to get your perspective on how do you feel this number is relative to the potential, evidently when risk free rate is 13.75, I'm guessing this is not a result that you want to see. And so what are the different levers that are affecting this number and how do you see them going forward? And in general, longer term, what do you think would be the fair, attractive return on equity for your credit business?
Jorge, thank you for your question; good to see you again, hope to see New York in the coming days. So, my sense is the following. So, if we go to a historic series, you will see that the return on equity on the credit was always very close to the cost of capital. So, the sense is that we saw a huge growth in the cost of equity of the bank in the last quarters. So, that put a little bit more pressure in the level of return on equity. And also we saw the level of delinquency growing, especially under the credit card portfolio. And I think this is the big impact when we look credit in terms of returns. So, if we separate the credit card portfolio and look to the other portfolios, we are generating our return on equity above the cost of capital. That means that we create value in credit and also the cross-sell doesn't exist without credit.
So, the reason why we deliver the most relevant part of our value creation has to do with the credit and the cross-sell and the relationship with our clients in all segments. And that means I'm talking about retail, I mean about retail, I mean about corporate clients in general. So, this is what we've been seeing. So, my sense is that coming close to the cost of equity would be reasonable because the major amount of value creation of the bank comes from services and also in trading we are able to deliver a little bit more than cost of capital historically.
So, this is my view. We have to work towards the cost of capital and I think there is room to do so, especially when we have the delinquency normalized, so we expect to have a better returns, especially under the credit card and auto loans portfolio, those are the two portfolios that suffer a little bit more and brought the level of return a little bit down. So with all the measures that we took, the adjustments, it's not in one quarter that you will see that. But looking forward, I think it's reasonable to expect cost of equity and return on credit coming in the same direction. This is my best expectation. This would be my appetite in terms of to be good expectation and having something that is reasonable for us.
Thank you, Milton.
Perfect. We have our next question here from Eduardo Nishio from Genial.
Hello. Good morning. Hello, Milton. Hello, Julia, thank you for the conference, and congrats on the results. Going back to what Thiago was saying about the return for retail, I see you're making adjustments in your businesses. You have this new perspective on clients and products. And considering you've done the rollout in wholesale and as a consequence, we see that wholesale has seen that effect, has noticed that change in return and profitability. So considering all that, I would like to know what your perspective is for the future rollout for retail. I know you're working on that now, and I understand retail is probably more complicated. I mean different departments will have some special incentives. I think it's probably difficult to change that perspective completely. So I would like to know more about this initiative. What do you expect in terms of outcomes? Do you think you can improve the top line, the profitability and also when do you think you're going to see that ROI going up basically, that curve getting better.
Thank you for that question, Eduardo. While we have a project here that's probably one of the main challenges that we have. We started this year with this new structure, with new leadership, and we're using this as a new operational model. It's the NMO, as we call it now. So we do have very important challenges in terms of reorganizing and revisiting the expectations of our clients.
We understand that usually banks are based on the product view. Usually, you focus on the product, on the system, on the structure. What we're trying to do now has to do with two effects. First, we have more of a modern platform right now, which is very important. You're not a victim of the old systems anymore. And also we have the agile way of working where you have communities that are designed to understand the needs of our clients. It's easy to talk about it, but in practical terms, it is very challenging. I'm not saying this is a simple thing. We have dedicated teams. We have a very high governance level for follow-up, for execution. So the whole concept has been defined already. We have started to implement all this already. We're looking at a very important execution phase right now, and we're thinking about the different business units as well. So we talk about different business units for individuals, for companies, for retail, et cetera, et cetera.
So, we do have a very good P&L, very structured view on that. We are reorganizing our teams right now and we want to continue to work with these opportunities. As I was saying, structurally speaking, we're no longer going to have those return levels that we had in the past, because the market has completely changed in terms of regulations or competitors as well. And we also have changes in credit levels, so the return levels are going to be lower, but we are focusing on the different units to have more profitability, again for individuals and also for companies. So we've had a very good catch up. I would say, we've seen a good profitability rise. So again, we started with better results with individuals, but with the right leadership and with the right education, we believe that we're going to see good results. It's not going to happen overnight, not in this first quarter. But our expectation is for that change to really have good effects over time and that's going to change profitability, NPS, it's going to change the opinion or the experience of clients as well.
So, we are going to have more engagement and that's going to be way more relevant because people will see that their needs are, we're looking at their needs and we're adapting to that. So I am sure that again, we've done a few reviews on that process and we want to continue to do so. So we want to focus on clients and the sum of all these factors is going to maximize everything, not just on our side, but also for clients. We have a long way ahead, but so far so good. And we have very high expectations and we've started to see some good results.
Thereafter we have Henrique Navarro from Santander. Welcome.
Hi everyone. Thank you for the opportunity to ask this question. Congratulations on the results. Now, in the issue of provisions, you already start the year, if we annualize the bottom of the guidance and this is a dynamic that we can consider for the rest of the year, maybe working from the standpoint of the guidance for provisions.
Thank you, thank you for the question. Thank you for your participation. Still early to talk about geographies, our opinion is that we still have important challenges in the next quarter. If you analyze the first quarter, it takes you naturally to a higher threshold than bottom floor. But when we normalize the wholesale, that is contained in the guidance, there might be seasonality in the cost of credit. So the expectation is that it will grow over the last few next quarters without any big events, nothing too unexpected. But since wholesale is events, we still are cautious because events might happen all throughout the year and they might bring volatility to the cost of credit, which is something that we haven't observed over the last few quarters. This is not the bottom of the guidance. We're so comfortable with the guidance. We had no problems delivering the guidance, but the cost of credit depends on scenario perspective. So cautiousness is welcome. And if we have more news, we will update you.
Thank you, Milton.
Going to ask in Portuguese or English, but what, welcome, good to see you here in our meeting. Please feel free to ask a question in whatever language you prefer. Thank you.
[Foreign Language]
Well, good morning. Thank you for the result. Thank you for this great opportunity. My question is on the business of M&A, the transactional acquiring business is growing year-on-year, much higher than the industry. So I would like to know what would be the drivers for growth and what type of clients are driving this growth?
It's a hybrid question, right? It's a hybrid question, but thanks for the acquiring business acquisition. Well, the business acquisition, we have been for many years adjusting the operation. This is a clear change in the service. The value proposition and the results are following suit. So from the standpoint of market share, we've been growing in these segments that we really have the target segment and remember that the dynamic of market share and profitability and the business acquisition is inversely proportionate. So on the same hand, from the standpoint we have the market share. The big clients are driving the two-thirds of the market share, the small ones are driving two-thirds of the profitability.
So, looking at the share in a broad way is not a good metric. I've been saying that for many years. So we've been growing the market share in those target segments where we believe that we have more opportunities and we have profitability impact. We've been ultra disciplined in the big companies and big corporations. So we do not operate the contribution margin that is negative because in the end of the day, if you do that, you don't have any big challenge to operationally lever this. Well, there are some, but if the contribution margin is negative, as we see some players operating, in some cases you cannot have operational leverage and what you're doing is renting market share and there is a cost. And this is not the play that we believe, we've managed to re-price in a very important way this increase in interest rate has brought re-pricing challenges for the industry as a whole, closer proximity to the challenges, to the channels of the year.
So, having an acquiring that is closer, that is ours, that we don't have to ask for, excuse me. And we can create more cooperation. Well, all the operations are politically connected, so we can bring more value so that the acquiring is more of a product in the value proposition and not just a part of the business. And we've managed to have greater penetration in the business finance products, helping the clients. This is the cheaper receivable that they have to discount. So our clients, when they have a situation, they demand that. And we've had a great capillarity in all these segments. So the re-pricing and the capillarity of the pricing of the financial products and the changes in the package has made our profitability grow.
In global, our market share is stable. And in the segments where we in fact have more of an emphasis, we've managed to gain market share once again. We're not going to get into the dispute of the REIT of renting the market share. We are competitive in pricing the NPS of the client is fundamental. The operation has been evolving in that sense, very good in that sense. And this year, this is the result of the acquiring is substantially larger than the last year; having a contribution that is good for the balance sheet of the bank as a whole.
Well, thank you. Next question?
Bank of America, hi Nicolas. Good to see you. And thanks for your question.
Hi, Renato. Hi, Milton. Thanks very much for the chance of questions. I have one question about your bonds, your hybrid bonds. Of course, you didn't call the perps, the old 6.18s and 6.5s in December and March. And at the time you clearly emphasized the economics as the criteria for making the call. I wanted to ask if with the Tier-2s, with the 29s and with the 31s, given that the structure is a bit different from the 81s, you can only call once. If you don't call the bonds, they start losing capital treatment, given all of that, if the criteria to decide whether or not to call the Tier-2s is going to be a bit different from the 81, whatever you can say is going to be helpful. Thanks.
Yes, thank you very much, Nicolas, good to see you again. So, very clear, so when you look to the yield or the coupon that we reset in the 81s, we set something around 7.5% and 8% ballpark, if we had to go and access the market for a new 81 although we know that the market is different now after what we saw of the Credit Suisse event, we might see more challenging annuitions premium, but what we see now and the price that we are that we could reset the bonds at 250 basis points below what would be a new issuance.
So, this is pretty relevant for us. So this is basically why we made the decision not to exercise the call. And this will be the case always. We're going to be not only taking a look on the price, we have to take a look in other situations, the level of capital of the bank, alternatives that we have locally or offshore. But this was the case. The Tier-2 that we have, the Tier-2 is the old Tier-2. So we don't have any benefits in capital anymore, but they still have a cost of a Tier-2. So we are always discussing our liability management and the capability to refinance bonds with senior bond or even in the local market, depending on the yield. And we have the capability to issue locally or issue offshore, depending on the yield. So this will be a price discussion, considering that we don't have the benefit doing that they are old Tier-2, we don't have the capital benefit anymore and we are fulfilled with our 81 as well. We have 1.5 which is the regulatory space that we have to issue 81s. So this will be basically the reasons and how we're going to be deciding and accessing the market moving forward. And we have a very good liquidity situation nowadays, so we might decide to repay or not, depending on the yield and the possibilities that we see in the market in the moment of making this decision.
Very clear. Thanks again.
So the next question now we have Renato Meloni from Autonomous, welcome. You're muted.
Good morning, everyone. Now I can hear you. Thank you for the opportunity. Can you talk about the dynamic, corporate lending for the rest of the year, so NPLs, they've increased, but they are at a level that is very reduced. Do you have the expectation that that's going to increase, also growth? Is it still going to be difficult to grow or continue to drop?
Thank you, Renato, for the question. Starting with the NPL, in this specific segment of wholesale, we don't look at the NPL because it's misleading in terms of the quality of the portfolio. We're looking at the coverage level because since we have an access to the client, client-to-client, we define the level of rating provisions, NIM, so 99% of the times we are provisioned before the event. So the coverage index speaks better of the level of protection that we have in the portfolio. And the delay really comes at a moment that you couldn't find a solution for the client and then there is delinquency and it consumes on that coverage.
So, the cost of credit and that segment is very low. We've gone through a scenario of normalization in the other sense, we've came from a very strong crisis in 2015, '16, several clients had recovered all throughout the years. And you have the cost of credit. Yes, but also some reversals. We got to a very low threshold. In general what we've seen the portfolio is very healthy in terms of quality. The process of management of portfolio that we've grown all throughout the years has grown.
I gave you a few highlights even on how we de-concentrated a portfolio, how we adjust it for the more sensitive sectors, reduce exposure, diversifying the portfolio and it's a segment that has a strong performance over the last few years. Our expectation is to have lower demand. This is what we've observed, that is taking place. On the other hand, important to show that on the side of capital markets, the origination drop was brutal when we compare this year to the previous year, so the capital market is very closed. We see a good liquidity volume in the credit funds, over a BRL 1 trillion and these funds but with price dynamic and the opening of interest rates, they make us have more cash then appetite. So that means that the capital market is closed. There's a lot of refinancing, a lot of companies that will access the market all throughout the year. They have their bonds, their debentries, you name it. They don't have the capacity to rolling this out.
So, the balance of the bank is the most important right now in that sense. So, on the other hand, you have a drop in the money, but there is opportunity of refinancing and the absorbance of these capital operations with good levels of return. We will have great opportunities in the segments that access less capital markets. Yet on those we have less demand and we are growing on those and improving the quality of the portfolio all throughout the years. This is a challenge but once again I'm talking about the gradual normalization. We hope that the cost of credit will grow and the previous thresholds were unsustainable. We know that and that will happen in the next few years but we are not foreseeing a credit crunch that will be as relevant as we've seen in '15, '16. There are some Chapter 11s here and there but all the cases were published. We don't have exposure or either we don't have exposure or we're well provisioned. The portfolio is well defined and our provisions are very solid, so how tempestuous we are in our work, we are doing well and we are not waiting for the delay. We work on the expected loss. So any deterioration scenario, we will call those provisions, as we've always worked with the balance sheet here.
Thank you, Milton.
Back to English, because we have with us, Gilberto Garcia from Barclays. Hi, Gilberto, good to see you. Thanks for joining our call.
Hi, good morning, and thank you for the opportunity. I had a question on credit cards. You have mentioned that your clients, given the rates are high, are reducing their demand for credit. And some of your peers have also said that they are going to try to refocus on this higher income segment, which presumably means more competition for you. And ultimately, there's also the matter of seasonality. Most years, the first quarter has a bit of a sequential decline in credit cards and so I was wondering if you could give us some color on what the main driver is in your view, are you seeing more competition or is it just back to normal in terms of seasonality? Thank you.
Yes, thank you very much, Gilberto for your question. I think the first quarter is pure seasonality due to the high amount of transactions in the last quarter, as you know. But yes, we've been making relevant adjustments in our portfolio. I was showing, a little before, that we were growing much more in the clients, not only in [indiscernible], but in credit card products that we have in the more affluent clients. And we've been reducing in the other segments. So, this is an important information. With all of that, we've been able to maintain a good level of revenues. We still have some annuities fees paid, so they are less volatile due to the TPV of our portfolio.
And yes, we've been able to grow the portfolio with the more affluent clients. We don't see a different level of competition, we see the same. But in the other hand, as a whole, I feel that the credit card was the selected product for many newcomers in the market, so that's where we saw an overwhelming offer of credit card. And somehow many clients are overleveraged nowadays with their income very compromised due to the quantity of credit cards they have. Now, this is very easy to have three, four, five, 10 credit cards because you don't pay fees for that, so it's on a free option to have you that, to have a credit card. And there is a lot of lack of education.
And this is something that we are working a lot to help our clients to understand the challenges when he has or she has or the client has many credit cards in their wallet. So, this is the phenomenon that we saw. So, there is a huge adjustment being done in the market. We've been seeing different levels of returns in these operations. You know the balance sheets are public, you can have the assessment. But I can tell you right now, there is no one making or creating value in a portfolio like that due to the cost of equity. So, we will see an important reduction, yes. But as I said, we are growing the affluent portfolio, where we believe there is still a lot of opportunity to do so, a lot of cross-sell to be done. And we've been able to grow our portfolio, our client base, and to enhance the penetration of credit card with a good product, good UX, very focused on NPS. This has been our main goal, and we've been achieving that. And we don't see a different competition that what we saw. But yes, we might see more competition, but we are ready to do so, it's part of the game.
Thanks, Milton. Next question comes from Natalia Corfield from J.P. Morgan.
Thank you for accepting my question. Now, I'm going to go back to the Tier 2 that Nicholas has mentioned. I believe that he is talking about the Brasília 3 Tier 2 that we have a call next year, the 2029, if I am not wrong, in November of '24. So, just so I can understand how you are thinking about the call of that bond giving that it loses the capital treatment after the call gradually, but it will lose, lose, lose, and there is just one call, which is the next year's call.
Thank you, Natalia. About that specific one, it gets into the regressive period of capital utilization after the exercise or not of the call. It's a long time before -- it's difficult to talk about today if we are going to do a call next year, in November. We're going to wait for the market conditions. The markets might change. We're going to look at local alternatives, external alternatives, we're going to look at price, what is the return, vis-à-vis, a new operation for the bank is very active in the capital management and liquidity, and if we understand it that the economics are there, and we can finance ourselves in a more efficient way, the exercise of the call can be done.
If we think that the runoff and we have the capital level and losing efficiency, the price is adequate, this bond is becoming senior; it would depend on the market condition. So, it's very, very difficult with one year-and-a-half of anticipation, 18 months to have any assessments. So, as we get closer to the call up ahead, as we did with the 81, we're going to very transparent, and we're going to anticipate what is the following direction.
And Milton, we're now going to go to the last question from Carlos Gomez, HSBC. Hi, Carlos, good to see that you managed to connect, I had your question here via WhatsApp as well, just in case something happened last minute. But great to see you again and please go ahead.
Thank you very much for taking the question. And since it is the last one, let's try to be a bit more optimistic. We are in the middle of the first year of this administration, and we've been talking about what happens in 2023, evolution of credit, lending less. What do you expect for the next three-and-a-half years? What rate of growth do you think it is realistic for the bank and for the Brazilian credit industry for the rest of the current administration? Thank you.
Thank you, Carlos. It's a good question to be the last question. So, my view is that we still, as you know, we're going to making 100 years next year. So, we run the bank in respect of the scenario and the challenge that we see in Brazil. You might have longer or shorter cycles. So, our view is that we still have challenges ahead. There is a lot of things going on in the Congress right now. There is all these discussions of the tax, the fiscal frame, which is very important to understand how it's going to be approved in the Congress. This is very, very relevant for the future of the country, sustainability of the debt. There is a lot of discussions to be done in Congress.
The fiscal, the tax reform which needs to be -- could be very disruptive for Brazil because, at the end of the day, the companies in Brazil, you need to simplify the fiscal frame. You need to get more productive. And we have to talk about growth, and long-term growth. So, I think we still have some structural agenda. We have to pay attention in all the discussions about how the tax reform will success in Congress and what will be the key indicators looking forward. We believe there is still room to work in expenses and also in revenues. We have to take care not to increase the level of taxation in Brazil, because one-third of the GDPs already taxed.
So you need to be very efficient in understanding where to do so, to guarantee that we create the environment for companies and individuals in Brazil to succeed, to prosper. So, this is what we really expect. So, we don't talk about noise or political noise. I think this is part of the journey, but we do believe that the Congress and the government, and we've been having lots of conversations with the finance minister, and we are very positive of the way they want to listen, they way they are trying before the political challenge that they have, trying to move forward with the relevant agenda.
So, we'll be here for the long-term. It's difficult to say what will be the next three-years-and-a-half, but we are positive that we have the best conditions to succeed. Brazil is in a unique position due to the geopolitical discussions. We have a huge opportunity. Agro in Brazil is doing very well. The energy segment has a lot of opportunity. So, we have all the assets we need, including the geography situation that we are to succeed. We cannot take and lose this opportunity. So, we have a lot of homework to do. It's not going to come easy, and I think we have believers to do so. But it depends a lot on our capability to coordinate and to work as a country to succeed. So, this is our hope. And if -- what depends from Itaú Unibanco, we will do our part to help the country and the government to succeed.
Thank you so much.
Excellent, Milton. Thank you so much. Thank you to everyone who participated and sent their questions. I think, well, this is the wrap-up of our Q&A session. This is the end of our conference call for the first quarter of 2023. I would like to thank you, everyone. Thank you to all of the participants. And I reinforce the invitation, Itaú Day, on June 15, in the morning. You will see a QR code here on the screen. You can register already. You can start sending your question actually. So, that's what we have in terms of a change against last year. This year, you can already send your questions before our meeting. So, I'll see you all on June 15.
Milton, you have the floor now for the final message.
Thank you, Renato. Thank you for being the mediator on this Q&A session.
I would like to thank everyone once again for participating, for being here. And I am very happy with the result. I think we all know there are challenges ahead, but our management capacity, our risk management, our value proposition, all the transformation, digital transformation, cultural transformation, and so many other elements that we have in place right now guarantee that we'll have good outcomes. So, again, on June 15, as Renato was saying, we'll be here talking about digital transformation, culture, businesses, business processes, without talking about the nitty-gritty of the figures really, it's going to be more of a P&L perspective, it's going to be a more broad perspective.
So, I would like to invite all of you to connect on June 15. And again, Itaú is here for all of you. This is for investors, for clients, for stakeholders. We appreciate, we value your feedback. We want to be cautious, and we want to continue working hard to have the best outcomes possible. Thank you once again. And I'll see you at the conference over the next few days probably, some of you. Otherwise, I'll see you on June 15. Thank you.