Itau Unibanco Holding SA

BOVESPA:ITUB4

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to Itaú Unibanco Holding conference call to discuss 2019's second 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; and Mr. Alexsandro Broedel, Group Executive, Finance Director and Head of Investor Relations. First, Mr. Candido Bracher will comment on 2019 second quarter results. Afterwards, management will be available for a question-and-answer session.

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

[Cândido Bracher, executive]

Good morning, everybody. Welcome to our second quarter 2019 earnings conference call. I will start the presentation on Slide 2, where we show the main highlights of our performance for the quarter.

Recurring net income was BRL 7 billion, which represented a 2.3% growth when compared with the previous quarter and resulted in a 23.5% ROE. The key drivers of this performance were the acceleration of our financial margin, both with clients and with the market as well as a stronger fee revenue generation. These effects were partially offset by 2 expected events, seasonally higher noninterest expenses, and a higher cost of credit. The latter is the result of a continuous growth of the origination of credit to individuals.

Lastly, our effective tax rate increased 70 basis points as a result of the lower TJLP, long-term interest rate in the period, which is used to calculate the tax shield from our interest on cap. In the next slides, we will provide a more in depth view of these figures.

On Slide 3, we show that our value creation increased 9% in the second quarter and reached BRL 3.2 billion, a record figure. This was a result of our performance in the quarter as well as due to a lower cost effect.

Moving now to Slide 4. We show that our Brazilian credit portfolio grew 7.9% over the last 12 months driven by individuals and SMEs, which have grown 14% and 19%, respectively. Origination continues to accelerate in both portfolios, resulting on a richer credit mix, as will be shown in the next slide.

On the other hand, our credit portfolio in Latin America remained practically stable compared to the previous year. This is a consequence of the appreciation of the real against other currencies in the region. If we discount this effect, the portfolio would have grown 7% when compared to the same period in 2018 and the portfolio -- and the portfolio as a whole, which has grown 7.7%.

Now I want to draw your attention to Slide 5, which would create a crucial element of our results dynamics. It's in the bottom of Slide 5. Financial margin with clients is composed by 2 distinct elements. One is related to working capital, which is mainly affected by its own volume and the Selic rate. And the other, which is the core element of NII and emanates from spread-sensitive operations.

This percentage of NII grew around BRL 800 million as a result of the [ growth from ] expansion and continuous change of mix towards higher spread-bearing products. This amount was partially offset by a lower working capital NII, which was a result of 2 effects: one, lower average balance after dividends payments; and two, lower interest rates. Consequently, we are observing a robust increase in the spread-sensitive NII.

On Slide 6, we show that our financial margin with the market increased 26.4% this quarter. This performance was largely attributed to higher accruals in the foreign investment overhead strategy and in our insurance reserves management. We consider those gains to be structural as they are an integral part of our core banking activities.

Turning to Slide 7 now, we show our credit quality. Short-term delinquency remained stable in the quarter, while the NPL 90-day ratio decreased 10 basis points. The latter was a result of loans written off from specific large corporate clients and a further improvement in the SME NPL ratio, which reached 2.5%, the lowest level since the merger between Itaú and Unibanco. The NPL 90 days coverage ratio remained stable at 208%, and the cost of credit ratio increased 10 basis points, as would be expected, given the acceleration of the change in credit mix in the period.

Slide 8 shows that our revenues from services and insurance grew 5% in the quarter. This performance was mainly driven by asset management and investment banking fees. It is worth to highlight the growth of almost 50% in the year after funds from our open platform initiative, which reached BRL 155 billion. Also of note is our credit and debit card issuer fees, which continue to grow consistently.

Lastly, the acquiring BDC revenues declined 12.8% in the quarter mainly as a result of the new commercial initiative, which consists and is no longer charging interest rates and the prepayment of credit card transactions, which are now paid in [ 3 plus 2 ]. In the next page, we examine in more detail the initial results of these initiatives.

[indiscernible], this show that after the [ 3 plus 2 ] initiatives, our acquiring operations had enough [indiscernible]. New client acquisition increased 73%, while new clients choosing Itaú Unibanco said [indiscernible] more than doubled in the same period. More importantly, Net Promoter Score increased 8 points in the year. These KPIs reinforce our perception that this was the right move.

Now turning to Slide 10. We show that our noninterest expenses grew 4.3% in the quarter. This growth was largely expected as expenses in the first quarter are seasonally lower than the rest of the year. And it is important to highlight that the growth was mostly due this year than in 2018 when our expenses grew 5% in the same period.

It is worth pointing out that the quarter concentrated the closure of almost 200 branches just in Brazil, which added further pressure in our immediate OpEx, but will positively impact our efficiency from now on. Finally, our first half expenses grew 3.7% when compared to the same period in 2018, roughly in line with the inflation for the period.

Another important message. Yesterday, we announced a voluntary severance growth. This program affects the potential population of 6,900 employees potentially. They will have from 1st to 31st of August to decide whether they will join or not the program. As we have more information about this, more confirmed information about this, we will inform the market.

Now Slide 11 illustrates the organic capital generation of the bank as we finished this quarter with a Tier 1 ratio of 14.9%, an increase of 30 basis points compared to March '19. It's worth mentioning that we announced the distribution of BRL 7.7 billion of the complementary dividend to be paid in August 23, 2019.

Finally now, I want to discuss our expectations for the remaining of the year. On Slide 12, we show that the eco performance of the economy so far makes it clear that the original forecast for economic growth was too optimistic, with the interest rates forecasted in a higher level than the one we foresee now.

Lastly, it is worth mentioning the appreciation of the Brazilian real against the Chilean and Colombian pesos. So bearing these effects in mind, I now want to comment on our guidance. Go item by item here. So we still abide by our guidance for the year, but it's continuing to situate our base scenario for each line.

Total credit is well within the interval in Brazil, but the changes in exchange rates for LatAm places our base scenario around the lower end of the range for the consolidated portfolio. The forecast of our lower Selic rate and a narrower future yield curve have a negative impact in the expectations for our liabilities margin and for our working capital NII. Therefore, we anticipate our financial margin with clients to finish the year close to the lower end of the guidance. We expect our financial margin mid-term market and our cost of credit to be around the midpoint of their respective ranges.

As for the commissions and fees, we anticipate to finish the year between the mid and lower point of the guidance. And finally, we expect our noninterest expenses to finish the year around the lower end of the guidance.

With this, we conclude this presentation and are now open to any questions you may have.

[Operator]

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

[Jorg Friedemann, analyst]

I have 2 questions. The first question -- thank you very much for sharing your impression, Candido, on where we should be in terms of the guidance by each line. But here, I just want to understand a bit better why you are so conservative in terms of the financial margin in the market? Because if you look into the run rate so far, you are already above the upper industry range. So just wondering if there is anything that might negatively impact the results for the coming quarters that you are already aware? Or this just a matter of being really conservative there?

And the second question, I understand that you are still looking for additional clarity about the early dismissal program, but just a couple of points here. First, I understand that the 6,900 employees that are eligible for this program are all based in Brazil. So it's approximately 7,000 out of the 85,000 that you have, is that correct? Or this could be also extrapolated to other regions?

And the second point, just wondering if you had already contemplated such an early dismissal program when you put together the OpEx guidance and how the potential effect of such a program will be contemplated in the guidance. You mentioned that you believe that you're going to be in the midpoint of the OpEx guidance here. This is already contemplating or not the potential effects of the layoffs for this year.

[Cândido Bracher, executive]

[indiscernible] Thank you very much for your questions. First on guidance. On guidance, I must say I think you're right. The financial margin is -- the market is probably, I mean there is the line, more difficult to process, and I mean we had a positive semester, 2 positive quarters in the beginning of the year above our initial guidance. So we were relatively conservative when forecasting the end of the year. Actually, it can be better, but I cannot be certain about it.

Now concerning the early dismissal programs. Firstly, you're right, and it only concerns Brazil. So 6.9 -- the eligible population is 6,900 employees in Brazil. And the cost of this program, we of course referring to the nonrecurring costs, so do not affect our guidance.

As to the benefits, we will wait until we have a clearer figure of the -- I mean, how much adherence to the program base. So far, we have not included any of these impacts when we guide the noninterest expenses to the lowest point of the guidance.

[Jorg Friedemann, analyst]

Okay. That's perfect. And by the way, could you just give us some kind of initial ideas about what could be the impact if you have like, I don't know, 20% or 50% adherence? Or are you still working on the numbers?

[Cândido Bracher, executive]

[indiscernible] last time we made a program like this was already 10 years ago. So we really have no statistic evidence to make any kind of forecast here. It depends very much on the adherence, the niche level. This adherence will happen. So we -- it's too soon to tell of our expectations.

[Operator]

The next question comes from Otávio Tanganelli, Credit Suisse.

[Otávio Tanganelli, analyst]

I have only one question, if I may. I wanted to ask about the asset management fees. We saw an acceleration from previous quarter. It was growing at about 5% year-on-year, and this quarter has accelerated up until almost 15%. I wanted to get a little more color on what's driving this because the assets under management continue to grow at a similar pace than what we saw in the previous quarter, but the average rate, if you divide the revenues by the assets under management, they increase as a percentage of the AUM. So I wanted to understand a little better.

[Cândido Bracher, executive]

Thank you, Otávio, for your question. I have a very direct answer. I mean once we grow this improvement in the margin or the performances, I mean we had a good quarter in terms of performance of the more sophisticated funds, and this improved this line on our balance sheet.

[Operator]

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

[Mario Pierry, analyst]

Let me ask you 2 questions as well. The first one is related -- contributed to the 6,900 employees that you think are eligible for dismissal. Can you give us some color, what kind of functions are you targeting? And what kind of jobs these people have? And related to your costs also, [ I mean ] this quarter you closed close to 200 branches and laid off 1,000 people. Can you disclose to us the costs that you had related to these branch closings and layoff of people? And then I'll ask a second question related to something else.

[Cândido Bracher, executive]

Thank you, Mario. Thanks for your question. So this 6,900 employees, they are above 55 years of age until -- you must become 55 before the end of this year, and there are people who enjoy [indiscernible] people who enjoy some kind of stability, which according to Brazilian legislation happens when we have a health license or a member of a syndicate or a director of a syndicate, same practice. So they are not divided by functions, specifically. So they cover all the spectrum of functions in the bank.

As to the 200 branches we closed, I do not have a figure for the cost involved. But of course, there is some costs involved as there always is when you have to lay off people. And we could expect the benefits to come along that time. You said you had another question?

[Mario Pierry, analyst]

Yes. So just one follow-up then on these 6,900 people. So it's fair to assume then these are people that have an above-average salary in the bank? It's just that we're trying to understand here what could be the potential benefits of this plan. So if you look at average salary, but like it seems to me that this will be people earning well above the average salary.

[Cândido Bracher, executive]

Yes. I think this is a reasonable assumption, Mario.

[Mario Pierry, analyst]

Okay. And then second question is related to your net interest margins, right? You show on Page 5 the ability of the bank to maintain net interest margins relatively stable over the last few years, even though the Selic has contracted quite a bit. Can you discuss -- I understand where the big chunk of this is related to improved mix, but can you discuss a little bit the type of pressure these credit spreads, especially in these specific segments, if you're already seeing rent spreads coming down? Looking at Central Bank data, we see mortgage rates are down, pretty much every interest rate that you're charging on your loans have been coming down. So the question then becomes about your ability to maintain new financial margins with clients stable for the foreseeable future.

[Cândido Bracher, executive]

Well, Mario, the Central Bank calculate -- divulges an item, an index called ICC, [indiscernible], which is a compound weighted average of all the finances in the bank.

During the past year, our ICC dropped 0.1%. It would have dropped, but the mix made it to increase 0.6%. So spreads alone had a negative impact of 0.7%. And I see this as a continuous trend, especially with the improvements in the economy that we expect from the pension reform and so on, I think that competition will increase and that there will be pressure on spreads. This may still be somehow offset by a weaker mix in terms of portfolio [indiscernible] to what you -- to where you can go in terms of [indiscernible]. So I think that the general trend is for more pressure on spreads.

[Operator]

The next question comes from [ Andrew Broski ], Goldman Sachs.

[Daer Labarta, analyst]

Is that for Tito? I'm not sure if that was for Tito Labarta at Goldman? Or if there's somebody else from Goldman, I don't know.

[Cândido Bracher, executive]

[ Andrew Broski ]. Yes, I hear you.

[Daer Labarta, analyst]

Sorry, I'm not sure where they got Andrew, but this is Tito Labarta from Goldman Sachs. Sorry for that.

A couple of questions also. I guess first, just a little bit color on REDE. We saw the volumes only grew about 0.9% in the quarter despite the price reductions and the free prepayment and receivables. It just seems curious why it looks like you're still losing market share in REDE, despite the price. Reductions? And then I have a follow-up question on expenses after that.

[Cândido Bracher, executive]

Okay. Tito, thank you for a very good question. If you pay attention, our [ 3 plus 2 ] offer targeted the market with net revenues up to BRL 30 million a year. We think that this is the richest segment of the market, where there's more profit to be made. But this is not the segments that make the most of the market share. Most of the market share is made by the large corporations, well above BRL 30 million a year. And in this segment, we have been losing market share for quite some time already. And so this is why, despite our offer and despite our improvements in this segment up to BRL 30 million in the overall figure, we grow very little in our total volume.

[Daer Labarta, analyst]

Okay. That's helpful. So do you think you'll continue to lose share overall, given these trends that you're seeing?

[Cândido Bracher, executive]

Well, it depends on the willingness of our competitors to grow below cost on the larger corporations' segments because that's something we're not in.

[Daer Labarta, analyst]

Okay. Got it. Makes sense. Great. And then a follow-up question on expenses. I know you've given some color there. But maybe if you think a bit longer term, do you think expense growth can remain around the 3% to 5% guidance that you're giving for this year, particularly with some of the initiatives that you're announcing? So is it around inflation? Is that a good level of cost growth for the next few years? And are these sort of initiatives, is it because of the pressure you're seeing on spreads and competition to -- sort of forcing you to reduce costs? Or is it something else?

[Cândido Bracher, executive]

Okay. So I -- as I said in the -- our seasonal interest and expenses in the bottom of the range this year, and we'll certainly keep a strong hand on that in the [indiscernible] coming ahead. I don't see this as a result of pressure, I see this as an opportunity. I mean you know -- I mean we -- as you remember, we started the year with a much higher guidance, 5% to 8%. Then when we saw that the economy would have a weaker performance, we decided to make a big corporate effort around efficiency and cost. And we are happy with what we are discovering, with the opportunities we are seeing and we certainly think they did not -- they did not finish this year. I mean that we will -- that this will be a trend.

[Operator]

The next question comes from Eduardo Nishio, Banco Plural.

[Eduardo Nishio, analyst]

Candido, two questions as well. First on the guidance, if you go back again. I think there's 2 items that are either niche or you didn't talk about. Cost of credit, if you can give us your views on that. And also effective taxes. I appreciate it. Then I have my second question.

[Cândido Bracher, executive]

Okay. Thank you, Nishio. Cost of credit will be in the middle of the range. It's going very well along the lines we had forecasted. Effective tax rate will also be in the middle of the range this year.

[Eduardo Nishio, analyst]

So for cost of credit, BRL 4 billion posted this quarter, a little bit more than that. And then last quarter was BRL 3.8 billion. So more or less the same level? No changes probably to reach the BRL 16 billion, right?

Then my second question is concerning your digitalization, your digital transformation, if I will. You've been reducing staff this quarter. It's about -- quite a lot, it's 1,200 people, reducing branches, and we cross that here across all regions. What will be the ideal size? Or what are your ideal bank size in this digital transformation? And by when do you expect it to reach -- and by the way, you'll be hiring IT folks as well. So what will be the ideal mix of people? And if you can give us some color on the future of your digital transformation, I appreciate it.

[Cândido Bracher, executive]

Okay. Thanks, Nishio. Here, we have 2 conflicting forces. In one hand, we expect the growth in the economy. I mean coming after the pension reform approval to put some pressure in growth, in terms of absolute growth, and this also implies people. On the other hand, digital transformation has been enabling us to reduce people [ effectively ]. When you combine those movements, I would think that the reduction will still more than compensate the economic growth factor, but not quite sure about it.

In terms of digital transformation, I mean we are increasing -- I mean the opening of accounts, total deeds that we now are using, facial recognition [ and then ] new assets, including vehicle financing. So there are many progresses being made and that will be made in the future.

In the closing of branches, it's not only the digital -- I mean it's -- of course, it's an effect of the digital transformation, but the digital transformation is driving less people to our branches. But we are not closing branches, which are automated directly. We are only closing branches so far that are very close to one another. So when 2 branches are very close, less than 500 meters distance, and one of them is capable of absorbing the population of both the branches, these are the cases when we are closing. We still have something to assume for that in our portfolio.

[Operator]

The next question comes from Domingos Falavina, JPMorgan.

[Domingos Falavina, analyst]

Candido, my question is a bit more structural. When we look at the [ sequent ] position this quarter, it looks very good to us like the evolution, it's the investment bank and broker growing 40-plus-percent. And above all, it seemed to us that the bank is not really pushing hard current account fees, which in our view here at least, it seems like a smart decision given the competitive threats. And my question is, when we look at this fee, is this kind of really correct? So basically, do you also share the view that current account fees are unlikely going to grow substantially, and it makes sense to hold back on some of these adjustments or not? Is that something we are reading in a wrong way? And then I'll ask a second question.

[Cândido Bracher, executive]

We take the decisions on a decentralized [indiscernible]. But I think your reading is right. I mean we are preferring to grow the areas where we can grow volumes more significantly as new investment banking and asset management. And we are not pressing on the fee level. We are more -- we are very more in growing volumes than the level of fees, which we tend to keep a slow growth as we can.

[Domingos Falavina, analyst]

Understood. Second question is on REDE. I'm sorry if I missed any specific comments there. But I mean volumes came in, at first it seems some additional deceleration. But when we look at the industry in general, [ I mean net-net ] deteriorated massively at the 6% [indiscernible]. So versus the big players, Itaú still did well. But it kind of left us with the question here, like what's happening to volumes? Like are we not seeing one big player, I'm not sure if that's [ up to me ] or someone else going and taking away volumes? Did you guys notice an overall industry deceleration maybe in credit and debit volumes? And what kind of effect [indiscernible] have in NII in fee that you could comment a little bit? Like even the quarter has passed.

[Cândido Bracher, executive]

So in relation to the [ 3 plus 2 ], the effects are those -- I mean I have described to you so a 73% increase in new accounts, more than double the increase in companies choosing us to be the bank that they receive the acquisitions and so on. And I'm not sure I understood your doubts about the total volume. This has been what I explained in the last question. I mean it's really linked to the large corporations. I mean this is where they are losing market share. [indiscernible] There are some competitors, which are very aggressive in this segment, I mean looking specifically for market share. But at prices, which I mean in our experience, leave a negative margin. So this is why we're not going there. [ And I mean ] not too worried about it.

[Domingos Falavina, analyst]

[indiscernible] was more like if you believe you're losing share? Because when I look at [ net-net ], it grew 6%. We look at [ sale ], it grew 9%. So you grew more than those 2. So my question was more like do you believe you're losing share? Or do you believe the industry in general is growing below 14%?

[Cândido Bracher, executive]

I'm not sure about the answer here. Sorry, Domingos. I'll have to go back [indiscernible].

[Operator]

The next question comes from Olavo Arthuzo, Santander.

[Olavo Arthuzo, analyst]

Actually, I wanted to shift a little bit, pursuit to other topic that has been calling attention to market. I would like to understand the bank's digital strategy. So in other words, I just wanted to have a clear view on Dow's approach as a digital bank because Bradesco has their own feature called Next that has fuel service free of charges, and other then client must pay a fee. And Banco de Brazil has another digital solution that is free of charges for some services, but different from Bradesco. It is within the bank, and we know it as [indiscernible]. So my 2 questions are, first, what exactly the Itaú perception on these approaches from your main competitors in light of a lot of other initiatives and digital banks that target Itaú customer base?

And the second question is, in few words, what is the main focus of Itaú digital strategy?

[Cândido Bracher, executive]

Thank you, Olavo [indiscernible] question. So answering your first question. I think we can -- that is something I've been saying for some time, which is there is a basic decision to be made in terms of digital strategy, which is do you separate a new bank from an old bank, and you concentrate your digital efforts in a new venture? Or do you work -- I mean to transform the existing bank, the legacy systems and so on and to modernize the incumbent bank offices? And here, our strategy is [indiscernible]. So we are working hard in order to digitalize Itaú as a whole and not a new bank. We have new initiatives, like [indiscernible], for instance, which is quite a new product. It's a platform, but it's integrated into Itaú. We have, as you know, Cubo, which is a hub of [indiscernible] working in joint companies. I mean it's the largest in Latin America, and we learn a lot from them there.

We have real leaders in digital wallets in Brazil, Apple Pay, Samsung Pay and all the others. We have now just launched an app for people to buy foreign exchange in the app. We are opening more than 200,000 accounts this quarter, exclusively by us. So we are digitizing the bank as a whole and not in some separate initiative.

Our digital strategy this year, I mentioned this in my interview recently, is I like that phrase that incumbents will find innovation before innovators find distribution. And that's said as an incumbent. I used to see it as an incremental funding innovation while basically being first in replicating the initiatives of fintech and so on. I have changed my view in this point. I think it's not simply replicating what they do, but it's learning to do it differently. It's producing technology in an integrated way between the technology area and the business area which, by the way, I think that in a few years from now, we will not be talking anymore about technology and business area. This will be one anomaly thing. And I mean this is the path we are trading, and I think we are making consistent progress there.

[Operator]

[Operator Instructions] Our next question comes from Marcelo Telles, Credit Suisse.

[Marcelo Telles, analyst]

I have 2 questions. My first one is a follow-up on your comment about credit spreads. I think you mentioned earlier, right, that you would expect some pressure in credit spreads down the road. And my question to you is, in which segments you think that this should happen? Because when you look at the credit spreads evolution, at least as per the Brazilian Central Bank data, we actually see spreads very resilient, particularly on the retail side. So if you could elaborate what would be the timing? Which segments? What would be driving that? Maybe that it's more the fee tax or the competition come from some -- among the big banks, just to understand what would cause that spread compressions to take place.

And my other question is with regarding costs. I think it's very good to see the banks so much focus on reducing costs through the severance program. And my question to you is, going forward, and if you think about 2020 and on, does the bank have some sort of goal of not growing operating expenses at all and try to become more competitive -- allow for some fee decline or use OpEx as an operated leverage to leverage earnings growth down the road? Because with this program, it could be that maybe your OpEx next year could be -- could not grow at all or even decline. Is that a reasonable assumption, you think, in the -- considering the efforts that you've been undertaking?

[Cândido Bracher, executive]

Thank you, Marcelo. First, on the spreads, I am expecting the competition to come more from traditional competitors and maybe from -- as is easily the case. I mean when the economy starts to perform well, you have more appetite also from foreign banks dealing in the local markets and in the corporate sector cases, quite significant pressure in this situation. So I am not seeing the pressure on spreads coming in any specific segment. I'm just thinking that with a better economic environment, there will be more people willing to take credit risk, and this will possibly, I mean generate some extra pressure on spreads. I mean spreads have been away under pressure for quite some time. Not too much pressure, but some pressure, and I think this may increase.

In what relates to cost, I mean we certainly intend to keep a very strong focus on debt. I think that cost reduction is fundamental to -- in order to enable the bank to be more competitive in pricing. And I think we will need to be more competitive in pricing -- everybody will need to be more competitive in pricing going forward. Therefore, I mean a strong active cost is fundamental there.

[Marcelo Telles, analyst]

And Candido, just one follow-up on your answer. The -- being very competitive on cost and being able to have better pricing, does that mean that you think you could sustain your current ROE levels where they are today? Do you think that they are sustainable, let's say in the short to medium term, at least? With all these efforts you're undertaking?

[Cândido Bracher, executive]

As you know, we guide very much our efforts in the bank on value creation. And so I look at the ROE always in relation to the average cost of capital. I see a clear trend of decline in the cost of capital in Brazil. So I think that there may be some pressure also on ROE.

[Operator]

Our next question comes from Neha Agarwala, HSBC.

[Neha Agarwala, analyst]

I wanted to understand that for your REDE business, the acquiring business, you made recent cuts in prices. But apart from competing in pricing, any other changes that you are making? Structural changes that you are making in REDE, which should improve its competition just given the evolving dynamic of the sector?

And my second question is, can we have any update on [ AP ]? Is the platform operational? How has the update been? How do you see the rating with the bank? Any update there would be very helpful.

[Cândido Bracher, executive]

Thank you, Neha. So on the acquiring business, I think you're right. I mean it's not only pricing that we are looking. I mean we have been investing a lot in improving the quality of our services in this and in the quality of our machines, of our support service to the clients and so on. And we are seeing improvement in the levels of satisfaction, which are not only derived from the pricing activity, as I have mentioned.

Another question in relation to competitors, I think we have really good examples here, looking at the competition and the -- it keeps us under pressure to improve even more the quality of our services. In relation to [indiscernible], I will tell -- I mean it's too soon to say more about this product. I mean it's just been open to some groups of clients, the smaller groups of clients. I think we will know more next quarter and the quarter after that.

[Neha Agarwala, analyst]

If I can follow up on your credit business. Have you adopted any other distribution model apart from the bank's channels, especially for the micro merchant segment? I believe you've been spending a little bit more on the marketing and advertising, but any other specific changes in your model or the way you reach clients that has been made for REDE?

[Cândido Bracher, executive]

Yes, we have been focusing also in more the segment of noncurrent account holders, and we are investing a lot in the support for these -- for those clients.

[Operator]

[Operator Instructions] The next question comes from Luis Fernando Azevedo, Banco Safra.

[Luis Azevedo, analyst]

My question is a follow-up on the ROE dynamics. Looking ahead, if you look in the appendix page breakdown following the segment, which is a very good chart, and we can see a big improvement to the ROE of the credit operations.

On the other hand, the [indiscernible] how do you see the ROE per segment moving ahead? And of course, the idea is do you think that the ROE, the consolidated ROE is already [indiscernible] this 23.6%? [indiscernible] could be open, how is the assumption of the cost of capital that you're assuming now?

[Cândido Bracher, executive]

Thank you, Luis Fernando. Yes. I think this chart, that you refer to the business model. I mean it shows the convenient advantages of having a wide portfolio of products and in services and end credit. And over time, we have seen services performing better. Now we are seeing credit improving in the past 1 year and so on. And there's no specific forecast here for these areas. As even within the groups of insurance and services [ inside ], you have products which improve the time and models, which face more competition.

As to the general -- but I just say that -- I mean I feel comfortable in having such a wide portfolio of products where one tends to compensate the other.

In terms of the ROE, what I can tell is that the distance now between ROE and cost of credit is I think probably the widest in our historical [ series ]. So let's see if we can keep these present levels.

I want -- seriously what's my take on how cost of capital is going to evolve? Here, I am a bit appalled, let's say, because we -- I see our cost of capital in [ '13 ], and we are reducing trend. On the other hand, I see the cost of capital used in developed economies remain around them, way above the interest rate in this market. So I would expect at some moment in time, there would be a convergence. I mean not only do they go through the same level, but that this wide margin would reduce in the developed economies. That's not what we are seeing so far.

And while we don't see a reduction in the cost of credit of 10% in the developed economies, it's difficult to imagine that Brazil will have a cost of capital which is only 2% above what you have in developed economies. So I see this as a resistance for a drop in the cost of credit in Brazil -- cost of capital in Brazil, sorry.

[Luis Azevedo, analyst]

So you think that we are going to -- we are already stabilizing the cost of capital?

[Cândido Bracher, executive]

Unless we see a drop in cost of capital in developed economies, I think yes. That we are already around the bottom -- around the narrowest margin, reasonable margin between cost of capital in developed economies and in Brazil.

[Operator]

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

[Cândido Bracher, executive]

[indiscernible] and investors, thank you all for the very good questions and for the interest in our results.

Thank you. Have a good day.

[Operator]

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

You may now disconnect.