Itau Unibanco Holding SA

BOVESPA:ITUB4

Earnings Call Transcript 2022-Q2

[Renato Lulia, executive]

Good morning, everyone. I'm Renato Lulia, the IR officer for Itau Unibanco. Thank you for taking part in our video conference to talk about the earnings for 2Q '22. This event is being held here from our studio at headquarters in [indiscernible] avenue. So I'd like to give you some instructions so you can enjoy the event. For those who are on the website, you have 3 options to hear; all content in Portuguese, all content in English or in original audience.

For the first option 2 options, we have simultaneous translation. So click on the flag on the top left hand corner of your screen. You can also submit your questions by WhatsApp. Just click on the icon on your screen if you're watching on the website or send a message to the phone number 5511-9452-9674. So the information is also available for download on the hot site screen and on our website.

So now I'm going to hand over to Milton, who will give his presentation and I'll be back to moderate the Q&A session. Milton, over to you.

[Milton Maluhy Filho, executive]

Good morning, everyone. Welcome once again to our video conference for the earnings of 2Q '22. I'll give you information during some slides and then we'll go into our traditional chat during the Q&A with our investors. Thank you. So to begin, we have disclosed the results of BRL 7.7 billion. That's the recurring managerial result increase of 4.3% quarter over quarter. We have a consolidated ROE of 28.8, but in Brazil, we're considering 21.6, which is strong return. In the credit portfolio, I'd like to highlight BRL 1 trillion, 84 billion , a growth of 5% in consolidated 5 and a half in Brazil. I'll give you more flavor to that briefly.

The annualized average margined achieved 8.4%, a growth of 0.5 percentage points in the quarter and 9.2 in Brazil, growth of 0.3 percentage points. Our [ NPL ], considering over 90 days, 2.7 consolidated a growth of 0.1 percentage points, and in Brazil, 3% as well with a growth of 0.1 percentage points. And important figures are efficiency index and the consolidated was 40.8% in Brazil. Another quarter where we've achieved the best index of the series, 38.7%. These are just some of the highlights. I'll give you more flavor about that in the next slides.

About the credit portfolio for individuals, we have a growth of 7.2%, mainly driven by credit cards that has an effect of consumption, actual increase in demand, and that has really driven the revenues for credit cards, which naturally impacts the portfolio personal credit growing 6.8%. The highlight in this case in personal credit portfolio, we have consumer credit overdraft and a composition, but as it grows, the overdraft 8% growth and consumer credit 7.3.

So the main element that I'd like to highlight is that 80% of this growth in the quarter came from the Personnalite and Uniclass segments. I'd like to remind you that we went through a trough in those portfolios and we've been recovering. Payroll loans had an increase of 5 percentage points in the quarter, a strong effect in that quarter, and it should continue to grow in the next quarters, but at a different rate, I'd like to call your intention to large companies, the growth of 4.1% in Brazil, the portfolio grew 5.5% in the quarter, 25% year over year. When we consider Latin America, it's portfolio, that grew 3.2%. But if we take away the exchange rate variation, we grew 4.5&. Here in payroll loans, we were strong for public agencies. You might remember that I've been saying that in that business, in payroll loan, where we have the smallest share, we repositioned ourselves. We've been giving more emphasis on that and that's why we've been going into more payroll loans with the public agency, a growth of 12% in the quarter and 90% year over year.

The growth of very small, small and medium size companies, we have 9.4% in the quarter, 72% of the origination in the quarter were companies with higher revenues. So the profile where we've been growing the portfolio are the companies that have higher revenues in that segment, very small and SMEs. We announced an objective to the market to achieve 2025 with BRL 400 billion, structuring the capital's market, originating credit for industries that have a positive impact in the ESG. We've already achieved 76% of our target, so over 224 billion operations that were structured and we will comply or meet our objective by 2025.

We had a strong quarter in financial margin with customers, as you can see. So in the top line, BRL 1.9 billion, 9.7% quarter over quarter. That's very strong, but in the core, this where we have volume spreads, Latin American operations and others and funding, we grew BRL 1.6 billion, a growth of 8.8%. That's mainly driven by the average volume, as you can see, but impacting all lines of the product lines or product makes more consecutive days in the quarter and spreads with the liabilities, lines with the increase of interest rates in Latin American and others has other items that are in that line. Our working capital, which is allocated into financial margin with customers, because it's the capital used for the credit portfolios with customers, you can see that it grew BRL 400 million, therefore solid growth. As I mentioned before, our medium annualized managed margin achieved 4.8% in the consolidated. In Brazil, we achieved 9.2% with the growth that I already mentioned.

Margin with the market. The news is good given the scenario. Since the beginning of the year, when we gave you our guidance, we said it would be one of the hardest years in this case because of the volatility, the scenario overseas, the interest rates, but still we have good results. As you can see, BRL 600 million . And overall, we have the cost of hedging of the capital ratio. That's been approximately 500 million per quarter. The guidance said it would be approximately 2 billion. So that means that the margin alone was 1.1 billion in the quarter. And that's a good result given the challenges, obviously at lower levels, but still closer to what we were seeing in these series. Last year, we had some exceptional quarters in the market margin.

Services and insurance. I'd like to call your attention to credit and debit card growing 6.6%, very strong. Here, we can see an effect in issuing more revenues, but also in the acquirers, not only more volume, but also more share in financial products. Here, in managing resource -- or funds, we had an exceptional quarter, not only in regular use, but also the performance of our funds that had an important effect in this quarter.

Economical and financial advisory and brokerage. So the variable market is weaker and we've found a great opportunity in the fixed income market, therefore, we have solid results. And here, the last line that I'd like to call your attention to on this slide is insurance and it's results. We achieved 1.8 billion margin, but I'd like to call your attention to that.

On these lines, we have some entries, we have core insurance operations. We also have the actuarial result that we have of a mismatch between assets and liability and inflation aspects. We also have the results. Adding on the result of Porto Seguru, so we've grown expressively in insurance, and we have consecutive quarters with great growth.

As you can see here, gain premium increased 23.6% in the quarter. And when we see the managerial recurring result, you have an increase of 88.7%, different rate, different level, great expectations for the insurance operations. Credit -- or cards. As I mentioned before, growth of 33.1% when you see the flow year over year and in acquire 22.1.

Here, I'd like to highlight the acquisition of Avenue. Still not full control, but structured to acquire control as time goes by. And that will increase our investment ecosystem offering a new value proposition for our customers who want to invest in the international market. Credit quality. Here, we have some good news. So [ 50 ] and [ 90 ] -- or stable, as you can see in Brazil, Latin America, and the consolidated view. In Brazil, here individuals, [ listen ] corporates, they're very well behaved and that's good news given the scenarios and challenges that we've been facing.

In the longer tail, we have a slight growth of 0.1, not only in Brazil, but also in Latin America. And when we look at portfolios, you can see a small growth in individuals as I've been talking about since 3Q '21. And on the other hand, when you look at SMEs, you see a small drop of 0.1 and 0.4 in very small companies. So they're well behaved in this case, we have some challenges moving forward, but we've been able to perform well despite the challenges. When I look at the relative indicators, there's 2 information that's very important. So everything that we've seen in the previous slide aren't affected by portfolio sales, we haven't sold any in the quarter. And that's very important information because obviously when you sell an active portfolio, that impacts those indicators.

In credit, we didn't have a relevant increment in negotiations, and that's another lever that makes the delayed indicators at lower levels. So here, we have a small growth, 3.2% of the portfolio as we call it a renegotiated portfolio. And that's great news, growth of just 2%, but solid coverage, 195% of coverage on the 90 day pass due. Cost of credit was 2.8% on the portfolio, still lower than what we saw before the pandemic achieving BRL 7.5 billion and [indiscernible] should grow with much more portfolio. So in the relative indicators, it's very important to have that relative measure. When we go to a [ fleximilized ] portfolio, good news, we achieved BRL 24.1 billion, that's portfolio been dropping across time. We were amortizing 4 billion to 5 billion per quarter. Speed is still good. We'll continue to disclose that portfolio. And the good news is that 65% of that portfolio has an actual guarantee, and that's great. And we have coverage of 267% of the pass due over 90. And this portfolio is performing well without any renegotiation. So it's the normal flow and how it's been behaving.

The coverage ratio. We had a small drop in Brazil in retail, but I'd like to remind you that from 2015 to 2019, the coverage was 167% in retail portfolio. We're at 195, even higher than what we have done before. And we provisioned the 70% of the end of PL creation. So the balance sheet is well protected and provisioned for.

Noninterest interest expenses. So in the quarter, 6% growth in the quarter 5.6. And when we see the inflationary pressure measured by salary increases, IPCA and IGPM, we see solid delivery in terms of cost and efficiency, bringing the bank costs to an adequate level, solid efficiency levels as I mentioned before. We've reached the lowest level, 38.7% in Brazil, 40.8 consolidated with a declining path and that's great news, but still investing in the bank's core business. So our cost agenda is about tactic strategy and long term. So when you look at the core alone, we're growing 0.9% in the quarter, if you consider 1Q '21 compared to 1Q '22, but we've had over 1 billion going through the expenses line and all the expenses are in this line. We don't have any others. So they're all in these lines in the balance sheet, that's how we've been able to perform. That shows our discipline, our focus and how we're concerned about the future.

Capital, good news as well. We have stable capital in [ dates ]. Here we started from 11.1 to 12.1. So we achieved 12.6% and net income, 0.5% adjustment and the risk weighted items, 0.3%. Here, we have the purchase of our share in XP, and the exchange rate has an significant change deviation from the first quarter to the second in our hedging has been very efficient. There's the cost that I already mentioned in the market margin, but when you take a look at this, we are not sensitive to the exchange rate, which was not what happened in the past. So we've been hedging that index.

Lastly, I'd like to call your attention to our guidance. So what's the story that we're telling. It's the best expectations that management has about what we see in terms of challenges and the earnings we expect during the year. So whenever we have new information, we always want to be proactive and adjust the guidance. We deemed it was important to adjust 4 lines of the guidance and I'll explain them now.

We changed the guidance for the credit portfolio. We expected growth from 9% to 12%, and we're reviewing that to 15.5 to 17.5. In Brazil, we expected growth of 11.5 to 14.5. And now we're considering 19 to 21. The financial margin with customers from 20.5 to 23.5 now at 25 to 2.7 in Brazil in consolidated, 22 to 25, we're reviewing that to 26.5 to 28.5. Cost of credit, portfolio growing, top line growing, therefore we need to adjust the cost of credit and the relative performance of the net financial margin has been very positive. So when we go from 20 to 29, we go from 20 to 31 in consolidated Brazil, 23 to 27; to 26 to 29. And lastly, grow portfolio, to more business and being closer to our customers that leads to more cross selling. So we deemed it was important to review the line of revenues from services insurance. The performance was better than what we imagined from 3.5 to 6.5 in the consolidated to 7 and 9, and then Brazil, from 4 to 7; to 7.5 to 9.5.

In the other line, not only the financial margin with the market and the non-interest expenses and the tax rates are maintained. That's what I wanted to share with you. So I'd like to invite you and say that on September 1st, we'll have our Itau day. We started this last year and the theme as should be every year, it's all about our customers. So we want to give you more elements about what we've been doing, our strategy, telling you about the results. So for us, these events can show what we have built.

We want to show what we talked about last year, what we've been -- how we've been delivering, what we said, what we think about the future and how we imagine to execute the future. It's not just about telling the story, but you also have to execute. And we've been very good at doing that. 67% of our clients are engaged and they are engaged with our portfolio. 2.1 million new engaged clients, customers. The growth of engaged customers has been more than are already customers. Engaged clients are much more satisfied and faithful, so thank you very much.

I hope that you guys can help me with this. I want you to be there on Itau day and we'll have all sorts of interesting information for you then. So that's the invitation for you. Questions and answers, popping over to Renato, and I'll be back shortly. Thank you so much, and see you soon.

[Operator]

[Operator Instructions] We have some questions coming in already, Thiago from UBS.

[Thiago Bovolenta Batista, analyst]

Congratulations on those results, they were wonderful. Question about the portfolio quality. Itau is performing better when we look at the quality indicators and we see that it's portfolios growing strongly, especially this quarter. Can you talk a little about expectations about EPLs? What would the cycle -- the cycle you expect? And if future growth and guidance is going to continue with Personnalite or what type of customer are you focusing on?

[Milton Maluhy Filho, executive]

Thank you for this question, Thiago. Just to give you a bit of background on credit quality or loan qualities, you could see that our overdue indicators are quite consistent. There's always - we didn't sell any active portfolios. We've been very disciplined in managing and renegotiation. You can see actually the numbers for these renegotiated portfolios, it was just 600 million reels and the index -- the ratios dropped from 3.3 to 3.2. So you can see that the numbers are quite strong. Looking again at portfolios, we have to make a few comments. It's quite important to look at this first. We have made some significant adjustments in production. We've been doing this since the third or fourth quarter last year when we noticed that were some variations and we acted quickly in response, I think actually 2 portfolios required some adjustments. The first was credit cards.

So we saw that there were some necessary adjustments made. We cut production by 50%, just to give you an idea. And there were also cuts in vehicle production. We found that there were some variations there especially with rating. So that was important to, and we've been very proactive, and we made some very important adjustments. We talked about GDP, but for credit, we have to look at nominal. We started the year off with higher inflation rates. So GDP nominals were much higher, and this has affected our portfolio growth in general. When we look at retail, a few things, the first credit card that was most affected by inflation and consumption increase. So consumption was obviously a high impact and inflation obviously impacted. So 120 million and 1 billion is credit cards without interest rates. So that's a very significant amount. The rest can be paid in installments - paid installments without investments. And so there was a lot of growth in that area over the quarter.

When we see our payroll loans that also grew, we had new client, new customers in that area. It was a much more active portfolio. And also the public sector grew. That was actually a gap that we had before we recognized before. So we're now working with miniaturized state payroll. So we have a much larger segment working with the public sector now. So these have been very exciting, very positive numbers, but feel very comfortable.

And we've had a lot of growth focused on higher income, Uniclass, Personnalite specifically because of their ability to pay the inflationary effect is quite high, but because of the central bank, we're getting the message that we need to be cautious. We have been very active, but very cautious. We're looking every time -- any other delays, any overdue payments. We act very quickly. We use all of our leverages and everything -- when we look at everything, I think we need to be cautious.

There are macro risks, not just in Brazil, but in the world. There are intrinsic risks, higher inflation, higher interest rates, and some portfolios we've seen lower demand, including real estate. And there have been some adjustments in production as well to avoid problems. So some, their credit cards are doing well, others that aren't. But when we look from 2021, we see a slight drop. There was high amortization of clean, including personal loans, checks, overdraft, but we made some adjustments.

We've been able to recover that, we've been able to recover our market share, with the annual effects year on year, these are very important. So we have to look at and normalize quarter compared to a more depressed quarter. Moving forward, we've got an active management. We're going to be very cautious. We're well positioned and that's going to be our approach moving forward.

[Operator]

Next question from Flavio Yoshida from Merrill Lynch.

[Flavio Yoshida, analyst]

Congratulations on the results. Very strong results. Good job. Here's my question. Actually, it's a follow up question. Individual Portfolio with Personnalite the only class has been growing significantly. So this is individual customers and these are the lower risk customers, right? So that's okay. But if a high income customer is taking out a loan, the situation in terms of default is not as good or in terms or in terms of delinquency is not as good. So I'd like to actually know how you feel about this dynamic?

[Milton Maluhy Filho, executive]

Thank you so much for this question, Flavio. Our outlook is one of caution and we have to look at portfolio performance overall. If we break it down by segment, not just individuals, but Personnalite versus Uniclass, things have gone quite well, but in 2020, 2021, there was a very drastic shift. And these customers amortized our debt. They stopped spending as much. They ended up amortizing and we also lost a bit of our fair share in that time. Now we're recovering our fair share. We're starting to penetrate in customers who have been with the bank for over 2 years now. So they're well known customers as well as customers who had lower debt rates because of the amortization and they're now recovering, returning to some of the lines. So Uniclass is a segment, our customers who make more than BRL 4,000 per month. So they're a little more upscale.

So this, again, we're talking about individuals who make more than BRL 4,000 per month. So this is no way to say, oh, the situation is worsening. We're monitoring it. We actually don't see any severe alterations in terms of customer behavior. It was very similar to what we thought prior to the pandemic. But overdraft and credit cards are something we have to pay attention. Now, if you look at the volumes, we're quite online with where we were pre pandemic.

[Operator]

Next question, [ Rafael Faraby ] from Citibank. You're on mute.

[Unknown Analyst]

Sorry about that. Milton, you said that last year, it was a lot more critical in this journey and now we're coming back to normal. So this is very clear in your NIM, I think was 10 before, prior to 2020, we're now at 8.4-ish percent. So we're expecting, do you expect it to be around 10% or do you see some sort of mix with income? The, question is default or delinquency. Even though NPL was much more significant in the past and as the mix changes, this may increase. So the first question is, is that 10% credible or not? And for NPL creation, do expect those to follow the same trends.

[Milton Maluhy Filho, executive]

Thank you for the question. When we look at NIM in the past, we have to look at how the mix was in the past. There were a lot cleaner than they were in terms of -- we had a higher retail than we had wholesale in the mix. Now, it's more guaranteed than it is before, which clearly affects our NIM and wholesale has grown a significantly.

So there's more wholesale to retail in this period. So this naturally is going to impact us. And the second big thing you mentioned is that there was a cap of overdraft for retail. I think it was 8% before. So this is very important in terms of our returns and our numbers. Interest rate has helped us with the liabilities margin and this affects the entire portfolio. So this is a much more negative impact on the NIM. Other portfolios, including a payroll loans, you've got more caps.

So the interest rate has increased -- funding has increased in these caps. So this has also affected -- pushed against the margin. I don't expect us to go back down to the 10% NIM because of what I just mentioned. We do expect this to expand slightly, but just because I said, there is the working capital effect, which has been positive.

Again, those 400 million reels with the effect that I mentioned earlier. When I look at this performance, I think our levels are quite good, quite stable for at least the next 2 quarters. When we look at the portfolio mix, the overdue rates are okay. But again, we work with expected losses and not actual losses. So there's a certain effect from 2021, from 2022. But since we're working with expected loss, we look at the lifetime loss or lifetime overdue loans for that client.

So when we look at growth of our portfolio like we've seen, this will naturally affect our balance sheet. So we've really seen this dynamic play out. When we look at coverage, our losses are covered. In this quarter -- specifically in this quarter, we have a complimentary inclusion, which means that we really haven't significantly touched upon this. And then this is established to be consumed over time.

So our coverage rates are adequate. With retail. we've got about 18% coverage. That's just retail. Last year, we were at 167 when we were looking at 15% to 19%. So I think it's very good. With NPL creation, you talked about NPL creation. We include it 100% percent. So it's already provided for vis a vis the credit costs. And we expect that to be around 105% moving forward. So we do expect to normalize these overdue loans over time. We expect this to happen over the third and fourth quarter.

Our best expectations is that they will start to reach those pre pandemic levels. That's what we do expect in the next few quarters. Again, that's another positive effect. Again, we have to be very cautious. We have to -- we know that we've got solid growth ahead and we're very proactive. And I do expect to cover this coverage over time. And I expect that we'll reach levels that we saw pre pandemic. So we'll be able to reach those levels. We'll normalize to those levels shortly. Thank you so much.

[Operator]

Gustavo Schroden from Bradesco.

[Gustavo Schroden, analyst]

I want to talk about credit cards. You talked about transactions. We know that credit cards have been used increasingly more for payments, bills. Credit cards have been growing in Brazil, but we look at loans, actual loans or payments in installments. We see changes in turnover went from 6% to about 10% now, one-time payment, upfront payments has jumped to 80%, 81% or dropped 81%. When we look at credit cards and we look at all sorts of indicators, we see that Brazilians have been using their credit cards more, but when you look at the breakdown of how they use those credit cards, I think there's higher amortization. What do we expect in terms of turnover and for NPL for individuals when you break it down, I know we have break it down -- we break down by individuals versus company, but if you could perhaps break it down even a little bit more, we talk about the use of credit, the use of loans, the use of installment payments for credit cards, if you could talk a little bit about that, I'd appreciate it.

[Milton Maluhy Filho, executive]

Gustavo, thank you for that question. When we look further down the road, this transactional credit card portfolios, we're quite high in 2020, 2021, there was a lower revenue because spending was lower and amortization was higher. This was a very -- this sent a very significant decrease in the portfolio. When we look at the profitability for retail, you see a very significant drop in the ability to take out loans, get credits or use credit cards. We don't think -- we don't think that this was sustainable over the long term.

So what we've seen now is an increase in propension, much higher than what we saw prior to the pandemic. Consumption is increasing. Expenses are up. There is the inflationary effect. So again, higher bills, higher payment -- higher bills, lower payments. When we look at the entire portfolio under BRL 26 billion, 80% is noninterest, 20% interest. 10% is rotational and the rest is in installments. Regulatory has changed, so you can no longer have it paid. You have to -- payment starts to in incur interest after 30 days.

So this is a dynamic that we started to see last year. This is nothing atypical. And again, our levels were quite low before. So what we're trying to do is bring this up to normal levels, but this portfolio is a very important, very big portfolio. You can see retail, it's about a third of our portfolio -- of our credit card portfolio. And this is a multichannel distribution portfolio.

We've got bank. This is a very strong channel. Performance has been wonderful. And we have a great relationship with the individuals. And retail store owners, this has been a little difficult channel because loans are higher, but you also have the advantage of working with the agencies of these stores and they're helping to charge and get the payments back. So they're working with the proposal -- they've been able to react to the portfolio. So we've been able to -- and obviously we've seen volatility in the larger portfolios.

So we had a significant worsening in those portfolios. So what we see in delinquency individuals basically comes from credit cards or from cards. So the other lines are well behaved. The other credit, the other products are well behaved, so to speak. But when you have like open water and less of a connection to the bank, and more than one product, that's where we see deviations where we saw that in cards and we saw that in auto as well. The 2 portfolios that suffered a little more, but they pretty much explain that in individuals, we don't break that down per product, but just to give you an idea. So looking forward, we've seen a change in the portfolio. In production, we're still actively managing the portfolio. And it's a scenario that does require caution, and we have good models of provisioning. When we see worsening in delinquency or macro scenario, we have provision, so balance sheet is well protected, but without a doubt, that portfolio does suffer a little more. In the mid and long term, it should become more stable and the yield of the business should get better.

[Operator]

Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

Renato and Milton, if I could follow up a little bit more on the financial margin. First on the financial margin with clients, you I think benefited from 2 aspects, one higher interest rates and the shift in loan makes rates potentially close to peaking, maybe another small increase but probably close to the peak, maybe start to come down next year. Help us think a little bit how that could potentially impact that financial margin with clients. Can that still go up because of mix and how dependent it is on the movement and rates? And then the other part of that is on the market and AI, that's been fairly weak, I think because of the higher rates. If rates begin to stabilize, how do you see that market and AI can evolve from here?

[Milton Maluhy Filho, executive]

Sure. Tito, thank you very much for your question. Well, talking about the financial margin with clients, I was saying in a previous question that we believe that we should stabilize this 8.4 around this in the next 2 quarters. We may be see 10, 15 basis points in the coming quarter. So we believe, of course we do have the impact of the interest rate as we can see in the charge above but in the other hand, as you can see the most relevant impact comes from the core business of the bank.

So you can see the volumes very strong. You have impact in the spreads, but much more on the interest rate on the liability side, on investment from our clients, and we don't see in the short term movement in the interest rate. You're right, we believe we're very close to the peak 1375. We may have 25 basis points, it's not our base case but we believe and will depend in many issues, especially the fiscal discussions that we should have by the coming year.

So to understand where should the interest rate start to reduce. Whenever it happens, of course, we may see an impact the same way around as we're seeing here and the same way when we saw that huge reduction, massive reduction on the interest rate in the previous quarter. So it's difficult to say now, where should it stabilized by this year? I still believe that around 8/4, 8/5 on a consolidated basis sounds reasonable. Let's see for next year, what level of interest rate, what will be our mix, our capability of growing in some specific portfolio? So this is the way we are approaching that.

Talking on the financial margin with the market, the most important thing is that our guidance had embedded an estimation of not very relevant profitability in financial margin with the market for a few reasons. First of all, as you know, we still had the overhead strategy for the coming years, the past years. They were very relevant. Just to give you a number.

Last year, we had around 800 million [indiscernible], especially on this strategy. We don't have this anymore. We didn't have the cost of the hedge, the capital index. We implemented the hedge policy by the year end. So we've been investing or expanding around 500 million [indiscernible] per quarter, as you can see in the chart, but we had of course with the opening and the interest rates widening, the way we are seeing and all the macroeconomic challenges that we see fast raising interest rates, Europe and all the impact that this has been having in Brazil, we expected to have lower financial margin with the market as the guidance was posted. I think we did a decent quarter as you see excluding the 500 million [indiscernible] that we had for the cost of the capital index.

We posted 1.1 billion [indiscernible] in financial market margin with the market, which is relevant. If you go back to other quarters, you will see that's not so very below that, but I think we posted a decent quarter. My view is that we're going to have challenges for the next 2 especially due to the interest rate effect, but we have a lot of results coming from trading. Trading this quarter was not so good as it was in the first quarter. We have the financial market margin in the treasuries abroad in Latin America. They are doing a good job as well in Chile. We had a very good profitability in treasury. So it's difficult to project, but I think we are doing fine due to the scenario we are facing now.

[Operator]

Next question came from WhatsApp from Natalia Corfield from JPMorgan. I'll read it to you. It's about AT1, about our bond, and considering the close to 626, the AT1, the perpetual, if executed would not be economic considering the market scenario. So how do you see the possibility of calling if it's not feasible?

[Milton Maluhy Filho, executive]

Natalia, that's a really important question. We've been talking a lot about that. We've had a lot of market demand. So the vision is in fact that call comes due at the end of the year and another one in the beginning of next year, 2 very relevant operations, almost $3 million in the total issuance.

We believe that when we do a simple update of the reset for the coupon of those bonds, with the new issuance, we're talking about a difference of over 250 BPs and that's very material. So first of all, there's a fiduciary duty and economic duties. So calling, paying over 250 base points in a new call doesn't seem reasonable.

When the time comes, we'll make the decision and we'll disclose that to the market. But in fact, the takeaway is if it was -- if it were a small award, that made sense, even though the liability management would be a bit more expensive, we would consider it. But under these conditions, when the time comes, we will look at the exclusively economic perspective if the premium is that big. If it's higher than that, we'll consider the macro scenario.

But looking at the market today, it's difficult to say that we would call under those conditions. And it's not about capital at a second time, but the Brazilian Central Bank also has to approve, and one of the requirements for Brazilian Central Bank approval is in addition to show that you have sufficient capital and we do, you have to prove that a new issuance is more economically feasible than the current operation. Obviously the central bank will work with ranges, reasonability that's valid, but the differences are very significant. So even before submitting that to the regulator, we would probably not call if the conditions were similar to what we see right now.

[Operator]

Let's go back to the screen. Now we have a question from [indiscernible].

[Unknown Analyst]

Milton, Renato, I have a question about your ROE sustainability. Given that you said it's not hard to get an ROE of 20, but maintain it at 20. And if it's higher, you can run at a higher profitability. So looking at 2023, do you see a small increase or even an improvement to your ROE for the upcoming years, given that this rate will be higher.

[Milton Maluhy Filho, executive]

[indiscernible]. Thank you for your question. First part of the answer is when we look at the data, even the guidance that we just reviewed, there's an ROE of approximately 20%. So we still believe, and we've been able to run at that level of profitability. We had a recovery across last year, so it would be reasonable to believe for the next quarters, even though we don't give guidance of ROE, it's implicit and that's how we did it, showing what the ROE would be close to. In the interest rates, we have good results.

Well, actually there were 3 major effects from interest rates. There were bank's working capital, the liabilities and the overhead strategy, given the arbitration of the local coupon with the external coupon. So overhead, we don't have that anymore. And the liabilities we're capturing now. And when you look at the compensation of working capital vis a vis, the interest rates, you see that the [ investive ] rate of the working capital to the select rate is there because we hedge working capital and the liabilities, and we do that in points across the curb.

When you have a sudden increase of the rate, you can't capture that at once. It comes in quarter by quarter, and we went through a very important reduction in the interest rate where the working capital rate goes down slower, not so sudden.

So the effective rate of working capital should go up in the upcoming quarters as you roll over the hedging and you capture the increase in the interest rates, the bad side of interest rates, and we don't advocate for a high interest rate scenario. We want something stable because you're driving delinquency. We talk a lot about individuals in a world where the spreads to the margin aren't repriced because as a general rule, the individual's portfolio is prefixed. So for SMEs and larger companies, that interest rate has a large pressure to service their debt. So that also leads to pressure in default. So on one side, you have growing revenues, but that also gives you a pressure in growing credit. So on one side interest rate -- higher interest rates help you on one side, but affect you on the other. So we prefer it lower and credit, which is one of the most important levers in our P&L should be relevant and remain sustainable in the long term.

It's not good to have too much volatility in the cost of credit. You have to look at the whole and not each aspect alone. So moving forward, we don't see anything that would make us believe that the bank's profitability would be materially affected, but then again, forecasting 2023 and 2024 is a reasonable exercise in futurology, given the scenario of all the information available. So I'm not going to give you guidance of profitability. We have been able to advocate that for the bank, the results of the quarter speak for themselves.

The guidance that was given also includes a reasonable rate of profitability. 2023 has challenges, competition in the credit scenario and the more mature economies, what's going to happen with the slowdown in the US and in Europe, and China may even perform better than it will in 2022. The Fed increasing the interest rate to 4%, opening up the rates.

So there are many variables we're going to have to monitor that and look at that, and all the migration of the portfolios, where we have revenues from services, we're going to a more longer term sustainable relationship lowering the churn. So there's pressure from the competition, pressure coming from all sides. I'm not going to give you guidance in the long term for ROE, but we've been able to deliver good profitability in this short term. We will continue to perform well in my opinion.

[Operator]

We have with us Jorge Kuri.

[Jorge Kuri, analyst]

Congrats on the quarter results. I wanted to ask Milton, you've said along your presentation that you feel that is prudent to be cautious, and you talked about cautious environment, and I'm just trying to understand what that means in the context of the balance sheet growth that you're seeing and the guidance that you have. I mean, you're guiding for growth that could be up to close to 18% year on year. Your consumer book grew 7% quarter on quarter, that analyzes high double digit rates, particularly riskier products like credit cards are growing at almost 40% annualized right this quarter. And trying to understand that cautious commentary versus the velocity at which you plan to continue to grow the business.

And I'm just wondering if evidently there's risks out there and the world is not a great place today, and then those risks have to be calibrated, but it just doesn't feel that you are particularly cautious with the level of growth that you're seeing. And so, again, just want to understand what does that mean? I mean, does that mean that we're going to see a big deceleration going forward and sort of like we've seen the best or you maybe think, hey, there's some risk out there, but we feel comfortable and the environment is supportive for us to continue to grow out this space.

[Milton Maluhy Filho, executive]

Okay. Thank you, Jorge. Well, first of all, of course, whatever we produced and all the growth we had in the portfolio that we posted in this quarter, of course we are comfortable with that. Otherwise, we wouldn't be growing the portfolio the way we did. And as I was saying before we are doing that in the most affluent segment. So they are performing very well in terms of credit. And we still have good perspective looking ahead. When I say cautious is because we are always cautious. We are always looking, understanding this scenario, understanding what are the challenges we may see ahead. And when we look 2 quarters ahead and 12 months ahead, we don't have all the answers. No one has. So we are cautious because on the short term, we've been seeing, as we are posting here, the delinquency measured by the NPL over 90 days has been growing every single quarter since the third quarter of last year.

This is completely the way we expect it to be. You might remember in the third quarter of last year, I was saying to the market, when we hit it the low, I was saying that we would see gradual normalization of our delinquency ratios and it's exactly what's happening. So when I say cautious, it's because we are seeing the delinquency going up and we have been acting our portfolio the way we should. So we've been reducing strongly the production in the credit card portfolio. We are reducing strongly the production in the auto loan. So we've been being very effective and very fast, moving fast to make the adjustments that we need. So my point is, whenever you see a gradual normalization of the delinquency ratios, we still believe that we should stabilize very close to what we saw in the pre-pandemic scenario.

We have to follow through, and we have to guarantee that we will execute this the way we would like to. So this is our best case scenario. The other thing I was saying before, we lost in 2020 our fair market share in many credit lines. We've been recovering that. So there is a base level comparison that should be taking and understand that we are comparing to a base level of 2021. I know the quarter on quarter, but we have to look to the nominal GDP to understand why the portfolios are growing. And especially on those portfolios, like credit card, as you said, we've been seeing a behavior coming from our clients, but we've been reducing credit limits for many clients that we believe that have an important deterioration or that when we look forward, we understand that might have some issues in terms of the capability of paying the bank.

So we are comfortable with the growth we had. On a margin basis, we are decelerating, but understand that the portfolio is not only retail. We have wholesale here that has been growing a lot, as you can see here with a very healthy portfolio, and we cut a lot of productions, as I said. So there is the event of putting together many productions on the retail, you see that the impact in the portfolio growth is coming in those quarters, but we are confident with what we did, but we are cautious with the future. So this is the way we are approaching it.

[Jorge Kuri, analyst]

Thank you. That's very clear. If you don't mind, I think one of the points in your results that have been underappreciated and no one has asked this on the expense side, you've done a great job at managing expenses, well below inflation and well over revenue growth. And I'm just wondering how much of -- and this is not easier. You've bonded this for the last few years. How much more is there for you to continue to minimize expenses, maximize efficiency over the next few years? Have we seen the best years? Could potentially start to see an uptick in growth or 3 years out, we should continue to see you improving on a year on year basis?

[Milton Maluhy Filho, executive]

No, thank you very much. In fact, we are very focused on that. Of course, when we see 38.7 efficiency ratio for Brazil, it's the best quarter ever the best, the best index that we had if you look to a long series, whatever you look at but we have the 2 effects here. We are having a very strong top line growth that benefits the ratio. And we are also having a very strong efficiency program as you can see, showing that we grew only 0.9% year on year looking this semester. It's relevant when you compare to the level of inflation we are facing in the market. So we are confident. I'm sure many of our guys of the bank are watching here our conversation. Also, I can tell you, that we still have a lot of room to reduce costs, to be very disciplined and to keep on this agenda.

There is a lot of opportunities here. We are not there yet. You depend on the dynamic on the top line, of course, to see where we can stabilize the ratio, but I can tell you from the cost perspective, we still have a room to improve. This is the method for everyone. And also on the investment side, we are investing a lot in technology and investing in new business. So all the growth we had in terms of costs has to do with investing in the future of the bank. So this is very relevant. We are not doing a short term agenda, guaranteeing the profitability of the bank for the coming quarters, and not looking for the whole period, we are looking for a long term agenda. This is the way we manage the bank. We have a very strong shareholder view. This is the way we are doing our investments here.

[Operator]

Back to Portuguese, we've got [indiscernible] from Credit Suisse.

[Unknown Analyst]

Congratulations for the results. I'm looking at liabilities. Last half of the year, we've seen the little bit of growth on top of liabilities. When we look at the ratio, you said that this drops a little bit. What I wanted to understand is how you've grown fundings for bonds and other instruments? And what about strategic investment for funding?

[Milton Maluhy Filho, executive]

Thank you. First, we have gained market share in investments, both in terms of private and in terms of retail. And we've been working in our ecosystem's significant investment in E.ON, 110 offices working. We hope to hit 120 branches by the end of the year, nearly BRL 500 billion under custody management which is dedicated consulting. So we've been operating very strongly in investments. We're no longer working with net resources. We're working -- net-net banking has been really expanding quarter on quarter.

Our strategy is very clear, and I think your question is very significant. When we say we've been working in consultancy, that's the best thing for many years now, that's the best thing. We can take them out of a multi-market account with its -- at higher administrative rates and bring them over to bonds or other instruments. It's much better. It's better instruments for them. It's better for their suitability.

We understand what their risk profile is. So with this high interest rates, there was a migration from higher risk to lower risk products. So there were some funds that were multi-market and they have moved over to fixed market. So we've got a great - we've got LCAI, [indiscernible], we've got all sorts of different instruments and products available. They're very consistent, consistent returns, specifically for retail.

For financial instruments, we also use this institutionally for funding. Sometimes we're the first asset and we have great liquidity management. [ LC ] is quite high because of fly to call during the crisis and there's high demand for credit and loans. So the request for loans and credit has increased. So we've been using cash, but again, we're working within margins above regulations and we're very comfortable.

Our investment strategy and our model has been stable so early it's heavy investment because you can't just do this. You can't just have a ton of people working, if you don't have the model, the products, the offers, the digital side, if you don't have all of the elements that you need, and if you don't have human capital, quality human capital to be able to make this work. So we've been strengthening and investing in this model for some time now.

We've seen that results have stabilized as a result of this very significant investment. So we're heading in the right direction. The model is very functional and we've had very good results. So we've got some -- when we look at our breakdown and we see the coverage, we're doing fine. We've got different products, we've got new products. Every channel, private bank, we all have different products.

We've also been working strongly to overcome some of the investment product gaps. So in addition to treasury, the traditional products that we had, but how can we meet some of the other demands, contracts, mini contracts, limits, home brokers, and we've been growing and we've been doing this -- we've been focusing on this, but we've also seen in the market is that we've got great strategy in terms of the market. We understand that this is -- and our spreads are fully compatible with the operations. So it's important to have this overview.

We're looking at the sustainability of our customer relations over the long term. Sometimes we need to accept a lower margin in order to offer better products to the customers.

But these are all consistent with our strategy, with the moment that we're facing right now. And the spreads are absolutely adequate for what we're offering. There's another element that I have to mention as well, which is the secondary market, which is purchase and sale of assets. And we have been doing more of this to offer more liquidity for our customers.

These are either lower liquidity instruments, but it's important if you can, when you look at these analysis, look at the spread and transparency with our customers and how we have been consistent and sustainable when doing this. I think there's a great opportunity and we've been growing -- our investments have been growing. I'm very optimistic about what we should expect moving forward.

[Operator]

Next question comes from Jason [indiscernible]. [Operator Instructions]

[Unknown Analyst]

Congrats on the strong results in particular, in Brazil's current economic context. Economists as per consensus for the central bank focus poll expect real GDP to grow 0.4% now in 2023 down from, I don't know, 0.5, just a few weeks ago. Interest rates are expected to remain high, now staying in about the 11% range at the end of 2023. And we have a presidential election. I mean, you've addressed a lot of my issues, but I thought maybe you could give us your views on where Itau Unibanco is in the current economic and banking sector cycle.

You've talked a bit about where you see loan growth going and caution, et cetera. Maybe you could share where you see similarities and differences versus historical cycles with high rates and low economic growth and Brazil's fiscal challenges that might be helpful.

And as a secondary part of that question in the current cycle, it is interesting and I appreciate the disclosure of Itau's hedging strategy on the capital index. You show that you spent 500 million [indiscernible] on the second quarter after 400 million in the first. Maybe if you can give us your views on how you see that working currently and going forward. Thank you.

[Milton Maluhy Filho, executive]

Okay, Jason. Nice to see you again. Thank you for your question. So talking about this scenario, I think it's difficult to compare when we look back. I think we still have a few challenges looking forward. First of all is you are right when you see the focus, you are seeing this growth coming from 0.4, our macroeconomics has a 0.2 figure for 2023. So it's not that different even though it's half of the focus, it's still on a very low ratio. So that's a challenge for 2023. And especially due to the level of interest rate, we don't believe that we've been facing all the effects of the interest rate hike that we've been observing in the past month. So looking forward, we believe that it's going to have a slowdown, the impact on the economy side. We might see commodities coming to a lower level due to the war, Russia-Ukraine war, but also we expect that the GDP in US coming from 2 this year, maybe one next year. In Europe coming from 2.5% coming to 0.7% next year.

So [ Mario ] has this mathematics that says that when the global GDP falls around 1% with you, about 1% in our GDP as well. The good side of that is that on China, we might see a recovery coming from this year to next year. So you won't see on the economic -- the world index, you won't see that major impact, but you are seeing this in US, in Europe, and South America, you still have huge challenges in many of the countries. We are going through inflationary process worldwide. This is not a phenomenal of Brazil. So our view is that the interest rate, depending on the fiscal policy that we will understand, and everybody will know that in the coming years, we are going to an election process. So no one will be discussing here, what will be the new or same fiscal policy, depending on who wins.

But we understand that by the beginning of next year, and this will be a very relevant pillar to define where the interest rate may accommodate. So it may stay at 1375 for a longest period. It may go down. Our base case scenario that it will go down to 975 by the year end, but it can happen different. We might see even a hike in interest rate depending on the fiscal side. We have benefits of this year. The inflation helps the level of [ indebtness ] of the country. We have the GDP growing. We have a few impacts that are positive. So we might have the yearend, 80% of gross debt through GDP. But for next year, our base case is going to 84. So the question is where it will stabilize. We are doing a few investments now, some more of fiscal stimulus, are there going to be permanent are there going to be only for this period or next year it won't happen.

So there is a lot of questions that we don't have the answer. So this is what we are seeing in terms of macroeconomic challenge, I think will be a challenging year. There are risks here interest rate going up in US as you know. It might go more than 4%. So you have the BC in Europe will increase interest rate as well. So we are seeing this phenomenal worldwide. So that's why I'm saying that we have risks. We have to be cautious. We have to understand where we are, and I, I think when we go back for many crisis in Brazil, we have almost 100 years old. So we have capabilities. We've been learning from our mistakes and we've been learning from the macroeconomic environment. So we have the capability and we have a very relevant risk appetite to manage this scenario.

So we are doing the measures that we need to do and linking to your second question. It has to do with the hedge on the capital index. When we decided to do that is because we had a volatility in our capital that we didn't control, and this has nothing to do with the overhead strategy. It has more to do with the banks we have abroad. So when you look to Chile, Columbia, Argentina, Uruguay, Paraguay, they have their capital in the local currencies. So when you do the hedge, you have the benefit of the arbitrage. You get the - you don't have these 500 million hedge cost, but in the other hand, you have your capital very volatile, and this is not good to manage a bank the way we do. We want to understand what's our risk appetite, what are the levers that we can leverage that we can work to keep the level of capital that we have, but the effects we don't control.

So the only way of doing that was hedging it. This is something that other banks doing on international basis when they have subsidiaries abroad. We think it's relevant, but we are going through a phenomenal in Brazil of hiking interest rate. It will happen in the US and in the other countries as well. So what really costs to us is they spread over our local interest rate with this local interest rate of those countries.

In a more, I would say sustainable scenario, this spread should be much lower than what we are observing now. This cost might be lower than what we are seeing, but we are confident. You can see from our capital basis, the effects came from 470 to 525, and we had at the end of the day a stable capital. If you take out the credit, and if you take out some [indiscernible] effect and the consumption by the XP acquisition, you will see that the hedge was very effective.

So we are happy with this strategy, happy with the hedge, and we have a much more controlled scenario when we can predict, and we can estimate our capital. So our view is that by the year end, our best guess now, we're going to recover to our risk appetite capital index. I'm talking about 11.5 core capital common equity.

[Operator]

Moving back to Portuguese, we've got [ Dominguez ] from JPMorgan.

[Unknown Analyst]

Milton, I liked [indiscernible] question. I'm looking at Bloomberg's saying the CEO is a little more cautious with inflationary increase, but we're looking at the portfolio. it grew 8% quarter on quarter for credit cards. For revolving credit, that grew 86% year on year, and sorry, the revolving part grew 1 over 120% year on year and now 20% this past quarter. So I've got lots of questions. What are ways to ask this? For these interest earning assets, or perhaps if you could talk about these a little bit more? Do you think it makes sense to be so cautious with the 8% growth quarter on quarter? And these are customers who didn't pay on bill date - they didn't pay when it was due. So they're already overdue. They're already paying in installments. So I'm just trying to tie this into growth. What makes sense in terms of caution and then in terms of wholesale? I don't remember the number. It was 30 plus percent, but wholesale beat out retail in your portfolio. So I'd just like you to talk a little bit about wholesale over overtaking retail in your portfolio.

[Milton Maluhy Filho, executive]

Thank you so much for that question. I'm going to go back to Portuguese now. Very good questions. Our credit card portfolio is highly related to consumption and transactions. So quarter on quarter, this grew 11%, that was a growth, 11%. This shows that consumption is now up, and we've got different types of consumption according to our different customer basis. What's our basic consumption, what's excessive consumption, so we basically understood what low income, middle income, high income customers look like.

So everyone across the board has been spending more. We've been working with low propension. If you look back at 2020, 2021, there was high amortization, especially in 2021 for revolving credit. So there was high amortization because of the dynamics of lower expending, higher liquidity in the system, all of the support, all of the help because of COVID. So there was a real important decrease in propension, but it's risk to return when we talk about credit cards.

So again, the rates are higher, so we can work with a little bit higher risk for this type of product. There's no cap. There's margin, there's manipulation, but we also have a certain point where we don't want to accept risk, because if you hit it too higher risk, obviously it doesn't matter what percentage you get, because we're going to have to cut the customer off. They're going to be completely overdue or default.

If you look at the portfolio volume, over 120 billion reels, and we're talking about 6%, 7% of funding for revolving, we would expect this propension to increase now, but the levels are still very adequate. They're just right. They're very similar to what we saw in previous quarters, but it is a more volatile portfolio and it is going to be affected by what we see. So credit costs and overdue rates are also accounting for this, are already accounting for this effect. This is something we've already felt. That's why we made the cuts that we made.

They're very important. In some areas, we reduced production in 50% and we expect to make more cuts. But the brokerage credit is much better engagement, which we talked about that is stronger. And for the retail cards, you've got higher risk, but you can collect much easier. We have with the nucleus or the course where we're able to provide customer service. Those are a little bit stronger too. So we're able to collect better from our customers.

We've also had very similar market shares, because where we're seeing market excess, we're not going after it. We see if there's too many cards on the market, there's a flood of cards on the market, there's very little cost for experimenting. So very easily, any customer could pick up 4 or 5, 6 cards. So we have seen higher leverage than what we've seen in the past.

We don't want to defend market share at whatever cost we want to do something that makes sense, according to our risk appetite, but it is focused on transactions, and we have to look at inflation, consumption. We're going to see portfolio growth, and this is going to -- how you operate with the portfolio is on the limit.

So we've been very active. We've been actively working on the limits for those patients that would improve or worsen. So you've got the installed portfolio, you've got a higher ability to charge or collect from the customer, focus on customer service, but we also have significant limits in certain sectors, specifically in low income groups where we've seen a lot of overdue or complete delinquency -- overdue payments and complete delinquencies.

So there is a balance of risk and return, and the portfolio effect since we've got a lot of Uniclass and Personnalite customers where it's very healthy, so we're able to offset. But if we look at profitability of retail and we're going to talk about this, retail wholesale, this is the same thing we're seeing. There's the portfolio effect, but there's also the gradual normalization of overdue payments or complete delinquency.

And the portfolio of individuals brings profitability down. So you can work on that with products that may or may not create value. You look at the relationship of the customer overall, and you can't look at it individually. So you consider that in the portfolio. That's why I talk about caution and in our practices, from the third quarter until now has been all about that, adjusting production where we have to, and we have growth because we have comfort, caution looking forward and the because that we're having marginal production. About the return of the wholesale bank, it's not actually a wholesale bank, it's the entire wholesale business. So it's not only Itau BBA, but we have WMS here. So asset and all the result that comes from our wealth business has returned. So we're in the best years of the wholesale bank.

So Itau BBA has very strong revenues out of all the business lines, coming from credit, coming from investment banks, fixed income, variable income is a little bit slower this year, weaker as you know, M&A, okay, good results and commercial portfolio as well. All the niches where we operate in are performing well. Cross-selling in FX, liabilities, funding. So we've seen in the wholesale world, lower levels of bad debt.

So they're at the lowest levels for the wholesale division. And in our opinion, at some point, things will get back to normal. I don't think it's going to going to be what we've seen in previous crisis. We don't expect that, but we are at a very low level and that's valid for everyone that operates in that market.

In our specific case, in the corporates business, we changed the mix, going into the better ratings, very active portfolio management that started off with BBA in the beginning of 2015, 2016, which changed how we managed the portfolio, and now we're reaping the results of very healthy portfolio, great ratings, very strong results in all the lines that you can generate from your customers and at the same rate, low cost of credit and low bad debt.

So timing is perfect for the profitability snapshot, but I don't think it's going to be 30 some for too long, but wholesale with WMS will have very strong profitability rates.

[Operator]

We have Henrique Navarro from Santander.

[Henrique Navarro, analyst]

Congratulations on your results about the acquirer. [indiscernible] have very strong results. I remember that 3 years ago, even inside Itau that in the future acquirers would be a cost center, a very profitable cost center. The results are very good. So my question is, did you change the dynamics with the acquirers? So we saw [indiscernible] as well with good results. Is that linked to a scenario where acquirers connected to big banks have a competitive edge or because of new entrance? Could you give us some more flavor of the quality of the results of [indiscernible]? How should we look at that going forward?

[Milton Maluhy Filho, executive]

Great Henrique. Thank you once again for your question, it's great to see you here. So the [ Redde ] business and for people who sat in this chair for a while in the past, when you look at long series, I was actually looking at this couple of days ago. In the past, we had 3 billion in profit with [ Redde ]. That was the order of magnitude. When you look at what happened from then, until now, the market changed. There's a lot of competitors out there. The prices dropped materially, the MDRs as well, and the take rates as well.

So there was a huge change in the competitive environment. Things really changed in the world of acquirers. So the market in the past, the external channel was highly relevant, not the bank channel, and now customers want an integrated offer. They want to talk about receivables and payments. They don't want to talk just about MDR, just about the terminal, even though they still discuss that. They want quality service, they want price. We know that MDR has significant impact to retailer's costs and the companies that take credit cards. So the market really changed. So what we did was first of all, to focus on the more profitable segments. And I remember this in the past, there was a huge fight about market share that was synonymous to results, but it's not because 2/3 of the market share in the acquirers market comes from the big customers where prices are tight and negative contribution margins sometimes.

So we gave up on that negative contribution margin, unless that relationship with the customer makes sense. So we look at the customer with an integrated view, different than we looked at them in the past. It's not an acquirer and a bank separate. The customer is the same. You have to look at both. When we make a decision at [ Redde ], one of the bank managers are involved to be it in the whole sale segment or in the corporate segment. So it's fully integrated.

The second element is that when you compare the results of [ Redde ], when you look at the top line, you won't see that much, but the bottom line, internally in the managerial model, we take working capital out of the company and we allocate that to the corporation, acquirers are independent. So they have the working capital in favor of them. That's the equity of the company. And it costs zero at the end of the day in the P&L. And you have the benefit of the increase of the interest rates.

So your funding cost is also lower as that capital does not pay interest rates to shareholders. They pay dividends, they pay -- they have different types of profitability measures. So at [ Redde ], we isolate that effect. So the marginal cost of that is the funding opportunity. They don't benefit from a lower funding cost for the financial products. And we've been focused -- by focusing on more profitable segments, we've gained market share, but we also lose from design in the series, even though in the quarter, we can defend that market share.

In some, we did not have market share -- we lowered the market share because of the negative contribution margin. And we've been leveraging the financial services, be it advances or even the flags. And that's in the MDR. When you look at the revenues from services and insurance, that's the result of MDR and the flags where we advance, that's the financial margin for the customer, because it's pretty much a credit product.

The funding cost is also in the financial margin for customers it's not here. So the interest rate really affected all acquires because of the mismatch. They're very active in advancing and prefix and post-fix funding. And that affected many acquirers. There is normalization as you change the pricing of the assets of the liabilities and assets, be it the advanced payments or the sales, the payment methods. So if you don't increase the net MDR, but you clearly improve the spread of the financial products that were highly pressured from the increase in interest rates. That's what's being done. We're still very satisfied with the evolution that we see in the bank. It's a cost center based on the point of view of the business. It's not. When we were saying that it's that because we didn't look at an acquirer as a business as it was in the past. It's just another branch of servicing customers. So now it's a complete view. That's how we've been operating.

[Operator]

We have Nicolas Riva from Bank of America.

[Nicolas Riva, analyst]

Renato and Milton, I have a follow up on the prior question about the perpetual bonds. So you said clearly under current market conditions, it doesn't make sense for you to issue a new perpetual bond in international market. My question is if you would consider calling the perpetual bond in December losing temporarily that capital, the $1.25 billion and waiting for market conditions to improve to issue a new PERB or also potentially if you would consider issuing a new PERB in the domestic market and refinancing some of that international PERB in the domestic market.

[Milton Maluhy Filho, executive]

Yes. Thank you, Nicolas, for your question. To be very clear here, we don't have a capital constraint, so the decision has nothing - it's not relevant, the discussion on capital here. So we still have room. We have the additional tier one of the bank consuming 1.5. So we are on the regulatory cap. So we don't imagine to take this risk and mismatch because at the end of the day, if I exercise the call, not being effective economic-wise to the bank and then waiting for a new window of opportunity, we're taking a market risk if we do that, and it doesn't make sense on the economic perspective, again, to exercise a call, if the reset will give you a premium, a new issuing, we'll give you 250 basis points spread over of what we have nowadays.

So the answer is no. We would make the decision whenever it's possible, but taking in consideration that if in economic view, we should exercise the call, this is our fiduciary obligation. We will exercise the call. If we don't have to exercise the call due to economic perspective, we won't exercise the call. So due to the current market level that we are seeing now and if we had to make this decision today, we wouldn't exercise the call. I think this is the best way to give you this answer. Talking about the local market, we've been active.

We have an important amount of local debt in the local market and we are always analyzing. So when I say there is a huge spread, I'm not looking only on the international market, because we may be able to access local pockets at decent conditions but we do the same calculation. If this new liability doing locally, if it's better than the perpetual, of course, we would exercise the call and issue a local.

So we don't have a preference if it's either offshore or onshore. Our preference is to make the most relevant economic decision. We take other things in consideration, but this is the core element on the decision we make. So we will look to the local market as we always done, but it's not so deep as we see the offshore market for this type of instrument, but we are looking to the local market as well.

[Operator]

Last question, Milton. We have Marcelo Telles from Credit Suisse.

[Marcelo Telles, analyst]

Milton and Renato, it's the last question. Actually, I have 2 questions. They're pretty much related to each other, and it's not actually about the bottom line. We talked a lot about that, but I'd like to hear your opinion, Milton, about the Brazilian Central Bank initiative of the digital BRL. Is there a concern in the bank where that would increase the risk of financial intermediation, so upfront deposits? I'd like to hear your opinion on that. And the second point at Itau Digital and the tokenization area, could you talk about that objective there if there's some opportunity in cost reduction there? How are you getting ready for Web 3.0 D5? I'd like to hear about that.

[Milton Maluhy Filho, executive]

Okay, great Marcelo. Great question to end this day. 2 different questions than what we've heard so far. So first about the CBDC, obviously we've been following that closely. The Brazilian Central Bank has been talking to the market and talking about their objectives. I think it's still early to say, but in our opinion, we don't believe that the regulator would like to generate a systemic risk. I don't think that they want to capture the deposits and take the banks out of it. That's a huge systemic risk. That's not their agenda. Their agenda is about trying out new technologies and understanding what kind of movement that would lead to even actual money, even the Pix system that has decreased money in circulation, actual money. So it's about understanding what they're talking about and the solution for that type of thing. It's still in the initial stages and pilot program, but I don't ever -- I don't believe that that was the regulator's idea to take the banks out of the equation. So that's not a concern, but we do have to monitor, understand how that will be done, how it would be operated, what bank -- what role will the banks play? Is that collateral? Will we have each one of us -- each of the banks have their own coin? Will it be stable or not, or currency? Excuse me. But I'd like to say again that we don't see a systemic risk in that at least as far as everything that we've heard from the regulator, that's not what they want, what the Brazilian Central Bank wants. They don't want to generate a systemic risk. So we're very comfortable in that.. The size of the opportunity to be determined and how we are going to operate, TBD. So it's hard to say right now. We created an area of digital assets. In fact, that was something that we were already doing step by step basis. And we decided to centralize that under one single department with a person that's fully dedicated to that. We're open. We're not closing our eyes to the revolution, be it in the currencies market, be it in the stablecoin market, be it in tokenization market.

And the block chain technology has a lot of applications besides crypto and other things. So we're looking at how the bank will position itself in the metaverse. We've already had some initiatives in that. We went - we joined the gamers world strongly, and that's good to understand the bank's opportunity in web 3.0, metaverse and so on. So we're very open. We do spend time talking about that and understanding that. So we're already moving. We already have pilot projects of digital tokens here at the bank. I myself was part of that. I bought a credit token to see how it works and the type of experience that the customers will have. So it's something we've embraced. We believe that there will be a cost reduction agenda that's very significant, more digital processes and efficient processes where you can have digital authentication and certification and you can break down the products and create secondary liquidity and individuals.

You can democratize and allow people to buy a part of credit where they don't have access to that today because through the tokens, we can do that. So there are a number of opportunities. That was a great question. But the main takeaway is that we are looking at that and we're also moving on those fronts.

[Renato Lulia, executive]

Milton, we have a number of questions from WhatsApp asking about delinquency costs and the Avenue's acquisition. Since we have no further time, our team will answer everyone directly. So this is the end of the Q&A session. Before you leave, once again, we'd like to invite you to Itau Day 2022, that will be held on September 1st, 9:00 to noon BRT time. We'll have the co-chairs of the board of directors, and also all the members of the executive committee.

As Milton mentioned this year, we will talk about customer centricity and looking at that at many different angles. So we hope you can join us on September 1st. See you then. Thank you, Milton. Thank you, everyone.

[Milton Maluhy Filho, executive]

Thank you. I'd like to thank everyone for participating. Once again, it's always a pleasure to talk to you all and share this information about all the different themes and consistency, always with transparency in our disclosures and the quality that we offer the market. We always answer the questions. You might not like the answer, but we always answer whenever you ask us your questions. So once again, I'd like to invite you once again, to be with us on Itau Day, to talk about the bank, it's path. It would not be what it is today without all its shareholders and the trust that we receive from all of you. So we'd really like to share with you our agenda. And it's also a way to give the visibility of the rest of us, of our executive committee, because nobody does anything alone. We always work towards our customer's interests, and you'll see a lot of that on Itau Day. Thank you once again for participating, we'll see you in specific meetings and the next call. Thank you.