Itau Unibanco Holding SA
BOVESPA:ITUB4

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Itau Unibanco Holding SA
BOVESPA:ITUB4
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Price: 34.52 BRL -0.52% Market Closed
Market Cap: 337.4B BRL
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Earnings Call Analysis

Q2-2024 Analysis
Itau Unibanco Holding SA

Positive Results Driven by Loan Portfolio Growth and Risk Management

In Q2 2024, Itaú Unibanco reported BRL 10.1 billion in managerial recurring results, a 3.1% increase from Q1. The consolidated return on equity improved to 24% when adjusted for the Tier 1 capital ratio of 11.5%. The loan portfolio grew 8.9% year-over-year and 7.1% excluding foreign exchange impacts. Key segments included SME, with a 12.5% year-over-year growth, and large corporate loans at 16.3%. Delinquency rates declined to below pre-pandemic levels, showcasing successful risk management. Commission fees and insurance grew by 5%, and noninterest expenses increased by 4.7% quarter-over-quarter in Brazil, maintaining cost management discipline.

Strong Financial Performance

In the second quarter of 2024, we saw robust financial results with a managerial recurring profit of BRL 10.1 billion, marking a 3.1% growth from the first quarter. The bank’s consolidated return on equity (ROE) stood at 22.4%, an increase of 50 basis points from the previous quarter, while in Brazil, ROE reached 23.6%, showing growth of 100 basis points quarter-over-quarter.

Loan Portfolio and Delinquency Rates

The loan portfolio demonstrated consistent growth, achieving a value of BRL 1.3 trillion. Key segments such as the individual loan sector grew by 1.2% this quarter. Notably, the personal loans portfolio rose by 2.3% and the mortgage portfolio by 1.6%. The delinquency indicators are promising, being lower than their pre-pandemic levels, which indicates high-quality control over loan repayments and a decline in delinquency rates.

Improving Margins and Capital Base

Despite the heightened interest rates, the bank efficiently managed its margins, showcasing a risk-adjusted Net Interest Margin (NIM) of 5.7% in Q2 2024, down slightly from the previous quarter but reflecting good risk handling. Furthermore, the bank's capital base continued to grow organically, ending the quarter with a Common Equity Tier 1 (CET1) ratio of 13.1%, up by 10 basis points.

Revenue Growth in Commissions and Insurance

Commission and insurance fees recorded satisfactory results with a growth rate of 5%. Specifically, credit and debit card revenues increased modestly by 0.8% in the quarter. The asset management sector also performed well, bolstered by a strong quarter in advisory services and brokerage, demonstrating a 83.5% year-over-year growth. Insurance operations maintained a positive trajectory despite some challenges posed by regional natural disasters.

Guidance and Market Outlook

The bank reaffirmed its annual guidance and remains confident in the resilience and quality of its operations. The results in the second quarter validate the growth and strength in essential business areas, promising sustainable performance in the coming quarters. Additionally, the bank emphasizes a comprehensive approach to managing capital prudently and making strategic investments in technology and digital channels for long-term growth.

Focus on Operational Efficiency

Operating expenses increased by 4.7% as expected, considering the typical accounting effects, but the core costs continued to grow below inflation levels. This efficient cost management resulted in achieving the best efficiency ratio for any second quarter, underscoring the bank’s dedication to controlling operational expenses while making significant investments in its business expansion.

Strategic Expansion and Market Adjustments

Loan growth was significant across all client segments, especially in medium to high-income sectors, marking a crucial shift towards improving portfolio quality. Derisking processes neared completion, promising more stability and growth potential. The bank also highlighted its strength in the corporate segment, with substantial loans granted to large corporate entities and SMEs, reflecting dynamic economic contributions and prospective growth.

Regional and Sectoral Strategies

The bank’s operations in Latin America provided mixed results due to currency fluctuations. However, dynamic lending strategies and a solid NPL ratio across regions reinforce a positive outlook. The bank's segments such as investment banking, asset management, and insurance are positioned to exploit market opportunities effectively, continuing their growth trajectories and yielding substantial revenues.

Earnings Call Transcript

Earnings Call Transcript
2024-Q2

from 0
R
Renato Lulia
executive

Hello. Good morning, everyone, and thank you for joining this video conference to talk about our earnings for the second quarter of 2024. As usual, we are broadcasting directly from our office in Avenida Faria Lima in Sao Paulo. Today's event will be divided into 2 parts. First, Milton will take you through our performance and earnings for the second quarter of 2024, and then we will have a Q&A session, during which investors and analysts can ask us questions and get into the details with us. Before we get started, I'd like to give you a few pointers to help you make the most of today's meeting. For those of you who access this via our website, there are 3 audio options on screen, the entire content in Portuguese, the entire content in English, or just the original audio. For the first 2 options, we will have simultaneous translation. [Operator Instructions]. The presentation we will be making today is available for download on the website screen and as usual, on our Investor Relations website. I will now hand over the floor to Milton, who will begin the earnings presentation, and then I'll be back to moderate the Q&A session. Milton, the floor is yours.

M
Milton Maluhy Filho
executive

Good morning, everyone. Welcome to our meeting to talk about the 2024 second quarter earnings. In this presentation, we have primarily tried to provide executive information in order to make more time for a conversation during the Q&A session. Let me go straight into the figures to share our results. We reached the double-digit mark in quarterly managerial recurring results of BRL 10.1 billion in the second quarter and posted growth of 3.1% over the first quarter of 2024. Now, moving on to the bank's profitability. Our consolidated return on equity was 22.4%, a quarter-on-quarter growth of 50 basis points. And in Brazil, our ROE was 23.6%, a quarter-on-quarter growth of 100 basis points. I'd like to draw your attention to the fact that we are running with the common equity TRI ratio of 13.1%. If we were to adjust the bank's profitability by the risk appetite levels set by our Board, which today is not permitted to operate with capital below 11.5%, we would have posted a consolidated ROE of 24%, taking into account all adjustments and ROE of 25.7% in the operation in Brazil.



So, the profitability adjusted by common equity Tier 1 of 11.5% is 25.7% in Brazil, which is the profitability for the quarter. We have good news regarding the loan portfolio with sound growth that I will comment on later. We've been finding opportunities to grow with quality and a long-term vision by looking at longer-term cycles. We reached the BRL 1.3 trillion mark during this quarter. Delinquency ratios are within acceptable thresholds. And I think that the delinquency indicators level that we've been working on is just as important as the steep fall that we're posting. Delinquency indicators are lower than pre-pandemic levels, and I'll talk about that later. Commission fees and insurance recorded a good quarter and posted high-quality growth of 5%. We continue to organically grow our capital base and ended the quarter at common equity Tier 1 of 13.1%, a growth of 10 basis points in the quarter. I'll give you more details on capital in a little while.



Going into a little more depth, let's talk about the loan portfolio. I'll focus on some key messages. The individual loan segment grew 1.2% in the quarter. And last quarter, I had commented to you that there would still be a derisking effect going on in the portfolio in the coming quarters. The credit card portfolio was one of the portfolios in which we had to make the biggest credit adjustment. This portfolio remains stable, which is good news because it needs to stop dropping, so it can start growing again, and we're already seeing an inflection point for this portfolio this quarter. The personal loans portfolio grew 2.3% in the quarter. We also grew 0.8% in payroll loans and vehicle loans. Growth within the mortgage portfolio was 1.6%. The portfolio of individuals grew 3.2% in the year, with some more detracting effects such as the card portfolio and the payroll loan portfolio holding back this growth. But as I said last quarter, we are at the end of the derisking process. So, all the origination effects are already starting to be positive for the portfolio. We'll be able to notice that in the coming quarters.



The SME portfolio also posted healthy growth in the quarter of 2.7% and has been growing above double digits year-over-year, posting growth of 12.5%. The large corporate portfolio posted very strong growth of 8.6% in the quarter, and 16.3% year-over-year. I'll remind you that this includes the FX impact. I'd say that 1/3 of this growth was due to exchange rate volatility, but 2/3 of the growth happened organically, which shows this portfolio's great momentum, and the results for Latin America, which posted growth of 13.3% are basically explained by the FX effect. Thus, this does not necessarily represent a portfolio growth but rather reflects fact fluctuations. As a result, we can see the loan portfolio growth of 8.9% year-over-year, and excluding FX, growth was 7.1% for the period. I had told you last quarter that we'd reaffirm the growth set in 2024 guidance and that we'd be able to post high quality growth in the quarters ahead. The market doubted it, but I believe that 2Q'24 figures prove this dynamic.



By looking at the credit card portfolio, for example, we note that it was flat in the quarter but grew 2% year-over-year. In this context, I'd like to highlight 2 segments that are key for the bank in terms of both the quality and the number of customers, which are Personnalité and Uniclass segments. The credit card portfolio in both these 2 segments grew 3.5% quarter-over-quarter and 17.3% year-over-year. These are middle and high-income segments where we've been focusing a good portion of our growth. We have good news regarding credit origination in all products. We posted quarter-on-quarter growth of 6% in the individual segment, 7% in SMEs and 23% in large corporate segment. Year-on-year growth was up 19%, 11%, 21% and 17%, respectively. This shows our ability to grow and originate credit very strongly with high quality and a long-term vision. This is what we're managing to do. And deep diving at the personal loans portfolio, which includes products such as installment loans and overdrafts, 71% of the growth in 2Q '24 came from the middle and high-income segments named Uniclass and Personnalité segments. Again, this shows the strength of Itaú Unibanco's middle- and high-income segment. It's very important to show our ability to grow in segments that still have a lot of room to continue growing despite our very strong leadership position.



With respect to the clients NII, I'd like to make an observation regarding the adjustment in Argentina, which I'll continue to make during the next 2 quarters. Our last year's earnings included 7 months of Argentina's results, so we're trying to normalize this effect by excluding Argentina from the analysis. Taking this and the working capital effect into account, we posted a 7.4% growth in our clients' NII year-over-year. As you can see, if we consider the core clients NII in the second quarter of 2024 over the first quarter of 2024 by firstly, disregarding the working capital effect. This NII growth would have been even greater since we would also have a drop in working capital in these deltas. The core clients NII grew 2.7% in the quarter or BRL 600 million. The product mix was slightly negative for the NII because, as I showed you in the loans portfolio slide, we grew more in the corporate segment than in the individual segment. And within the corporate segment, we grew more in the large corporate segment than in SMEs. This is the slightly negative mix impact on the NII. On the other hand, volumes more than offset this effect with a contribution of BRL 400 million in the period.



We also have the positive effect of spreads and liabilities margins in which liabilities margins is the more representative of the 2 as it continues to expand as a result of a very strong growth of the bank's liability. Finally, the structured wholesale operations are also having a positive contribution in the other and Latin America line. Even though we see a slight decrease in the consolidated annualized NIM for the quarter, it is practically sidelined when adjusting for risk. The consolidated risk-adjusted annualized NIM was 5.8% for the fourth quarter of 2023 in the first quarter of 2024, and 5.7% for 2Q '24. The provision recognized in Latin America generated this 10-basis points impact on the consolidated NIM. The annualized NIM in Brazil dropped slightly, but as I always say, the most important indicator is the risk-adjusted NIM, therefore, increasing our NIM and expanding our top line and our portfolio must be done with high quality. Otherwise, there will be a negative impact on risk-adjusted NIM. We continue to consistently improve the risk-adjusted NIM. Thus, I would say that this is yet another quarter of good news in terms of our NIM.



I'd like to pause for a moment to bring back this chart and tell you the reason why I'm bringing it up again. In the second quarter of last year, we showed this data because some analysts asked us how sensitive our NIM was to interest rates. We've always said that we were less sensitive than some analysts were saying. But since this issue keeps coming back, we thought it would be important to show this data again. In this graph, we add the client's NII and the market NII, which is how we manage everything sensitive to interest rates on the balance sheet, whether it is the loan portfolio or market positions. So, the first piece of information is that we set the 100 baseline in the fourth quarter of 2019, which was the last quarter before the COVID pandemic. The second piece of information is the interest rate, which is this black line. It shows how the interest rate has behaved over time. By doing this analysis, we note that the NIM is highly stable, while interest rate behavior is very volatile. We note the interest rate rose from its lowest levels in history to the levels we have experienced recently. While both our gross margin and risk-adjusted NIM have been expanding and proving to be much less sensitive to interest rate fluctuation.



I think this graph is very intuitive, and it shows our ability to manage all the risk factors of the conglomerate and be able to navigate through greater interest rate volatility cycles with a much lower impact of CDI fluctuation than many imagine. This is why we think it's important to show you this information one more time. And what would this drop be? These are the first quarters of the pandemic during which we recognize very high provisions in the balance sheet. And that's why, in fact, we had a drop in NIM. But then we posted a very strong recovery over time. This is the message I'd like to share with you. Itaú had a very positive quarter posting the best quarter in this historic series, both on a consolidated basis and in Brazil. In Latin America, we had a slightly weaker quarter as you can see, and the capital hedging cost was flat compared with the previous quarters. This quarter's earnings, therefore, stand out because they were strong as a result of the operation and better risk management seizing some market opportunities that we found allowing us to post quality results.



Moving on to commission fees and insurance revenue. I'll start with credit and debit cards, which grew 0.8% in the quarter. In current accounts, some might ask why there is a drop in what's happening. And I'd like to highlight that we disclosed to the market the support for Rio Grande do Sul and our clients impacted by the floods in the region. And now we can see how it affected some balance sheet lines. We exempted those clients from individual and business current account fees, which explains about 2/3 of this drop in the current account fees. We had a very good quarter in the asset management business. It is important to mention that both the second and fourth quarters usually include a performance fee, which generates some volatility, but we've been able to deliver performance fees both quarter-over-quarter and year-over-year. We remind you that last year was a very difficult year for performance fees. And although this year has not been easy, we have been able to deliver better results for some products.



We posted major growth for advisory services and brokerage in the quarter, especially in DCM, which posted very strong results. In addition to continuing to expand our individual's brokerage business. Therefore, this business also helps to explain part of this growth in earnings. Year-over-year, we grew 83.5%. And I remind you that in the second quarter of last year, we were facing a very difficult time with no capital market activities, which means that this is not the best comparison. In terms of results from insurance operations, we continue to expand the top line. We also had the effects of the floods in Rio Grande do Sul in the quarter for the insurance business since it affects the retained claims. But the quality of the operation and the insurance penetration continues to grow organically at the same pace that we had been growing over the past years. This gives us a very sound picture of commissions and fees and results from insurance operations.



Funding through the asset management business was strong and posted an increase of 22% year-over-year and up 34% comparing the first half of 2024 against the first half of 2023. This is the advantage of having a portfolio with very diverse products and being able to understand what our clients' needs are. Client centricity, which has enabled our funding volumes to grow and net new money has been higher and higher quarter after quarter. The pension funds operation reflects the same levers with revenue growth of 22% in the quarter and net inflows growing 61%. So, we have more volume, good advisory service for our clients and higher profitability as we can also deliver performance fees and pension products. And in investment banking, I already mentioned the strong DCM results. We indeed had a very sound quarter with 27% market share, and once again, delivering consistent results.



I'll now present the credit quality indicators, starting with short-term delinquency indicator, the NPL 15-90. In Latin America, we had a slight increase in the short-term delinquency indicator explained by 1 or 2 corporate groups in the region, which is not worrying us when we analyze the total delinquency ratio and the delinquency ratio in Brazil, we see a slight drop in the quarter. 90 days NPL is running at 3% in Brazil, a slight drop compared to the last quarter and a 2.7% in total. Further down, we have the Latin America indicator at 1.4%. As important as it is to analyze the trend, we must also analyze these indicator levels. When comparing the current level with the pre-pandemic one, we can see that we now operate at lower levels. So, I believe that this is the most important message to convey. We have been running for some time at levels lower than pre-pandemic. We can see this dynamic in the NPL 15-90 for Brazil, which fell 10 basis points quarter-over-quarter, while the NPL 15-90 for SMEs also fell 20 basis points in the period, which projects a very positive trend.



For large corporates, the indicator is at historic lows. 90 days NPL in Brazil remained stable despite the typical rollover of short-term delinquency that happens in the first quarter. 90 days NPL for individuals was 4.2% in the quarter, remaining flat compared to 1Q '24 and is lower than the pre-pandemic level, which was at 4.8% in 4Q '19. As I've said earlier, these indicator levels are as important as their trend. We've shown that quarter-after-quarter, we are operating with high-quality credit indicators. And obviously, this is where we always have to be careful with the type 1 and type 2 mistakes. The type 1 mistake is a credit mistake, which is the kind we don't want to make, and the type 2 mistake is a risk appetite mistake, which is the kind that we have been careful not to make so that we can grow with quality. In terms of credit quality, the cost of credit was flat with a growing loan portfolio in the period, as I showed earlier. This leads to another decrease in the cost of credit ratio over the loan portfolio, once again, reinforcing the high quality of our portfolio. The renegotiated portfolio also fell nominally and percentage-wise with the loan portfolio growing.



Its ratio to total credit portfolio is at 3%, which is good news. The coverage indexes are all very stable with very little volatility within a very acceptable margin when compared to the time series. There are no points for our attention in these credit indicators. Noninterest expenses grew 4.7% quarter-over-quarter in Brazil, noting that the second quarter is typically stronger than the first quarter because of the accounting effect of vacations in the first quarter and some higher investments made in the second quarter. Excluding Argentina, growth was 7.1% year-to-date over year and consolidated OpEx grew 5.0% in the same period. The most important thing is that the efficiency ratio continues to fall consistently because managing the top line is as important as managing the cost, and it is this dynamic that has been translated into efficiency rates. This efficiency ratio that we are now disclosing is for the 6-month period. But it is important to highlight that the efficiency ratio for the second quarter is the best efficiency ratio of our second quarter in the historic time series. So, this was another quarter in which we achieved the best efficiency ratio comparable to the second quarter.



At the beginning of the year, when we presented the 2024 guidance, I pointed out that core costs would grow below inflation. In effect, inflation for the last 12 months, measured by the IPCA is at 4.2% and core costs grew 3.8%. This shows that we have been able to keep core cost growth below inflation, but without ever leaving aside investments in our organization, in business expansion, in technology, in our digital channels and in a better experience for our clients. This is what we've been trying to do quarter after quarter. So, the main reasons for the increase in the expenses line are the investments we make. All this investment generates results and benefits over time, which is why it is important to analyze the efficiency ratio.



The last slide of the presentation covers capital. Here, the most important thing to show is that we continue to grow organically, and we expanded our capital base by 0.5%, already adjusted for the dividends. Prudential adjustments, which consider effects of the mark-to-market of securities booked in the shareholders' equity, have consumed 0.2% of capital with all the interest rate volatility in recent months. And the loan portfolio expansion that I was talking about just now consumes 0.2% as well. It's important to remember that the capital appetite of the Board of Directors for the business is 11.5%, and the capital appetite for dividends is 12%. I'm sure that we'll cover this topic during the Q&A session. The most important message is that we are working with a very strong capital base, which allows the bank to continue pursuing growth opportunities as long as capital is not a constraint. We manage capital allocation focusing on high quality and profitability to ensure value creation. We have a very sound capital base, which has been expanding and financing the bank's growth. So, I understand that this is a very healthy dynamic for the balance sheet, which shows that we ended up with a very robust CET1 and Tier 1 indicators.



This is the end of our 2Q '24 results presentation. I'd like to thank you all once again for participating in another earnings presentation. In this presentation, we did not bring up the guidance, which is naturally reaffirmed. The guidance is not quarterly, it is annual, and we want to be able to share any developments with you. And we are absolutely in line with everything we have committed to since the beginning of the year. You will certainly be the first to know if there's any change of scenario or vision. Now, I'm going to join Renato for our Q&A so we can discuss our results further. Thank you very much once again for your participation, Cheers.

R
Renato Lulia
executive

[Interpreted] Thank you, Milton, for your presentation. It was very quick because we just had Itaú 's 3 hours of initiatives and content about our business, focused on results, and we have 13 questions waiting for you here on today's call. Well, let's start the second part of our meeting today, which is a Q&A session. Now I remind you that we have 2 languages. Milton will answer the questions and language later asked either English or Portuguese. If you need support for translation, you can choose the entirety of the content in Portuguese or English. Besides, you can submit your questions via WhatsApp. Let's start, Milton, with the first question. We have a long list of analysts. We have Renato Meloni from Autonomous. Thank you, Renato, for taking part in our call.

R
Renato Meloni
analyst

[Interpreted] Good morning, everyone. Thank you for the questions. Actually, I wanted to understand what is the perspective for acceleration of the portfolio of natural persons for this quarter. But if you can give us some context regarding the derisking that you just mentioned, but also with the comfort that you have to accelerating the origination in all the segments of income. Thank you for the question.

M
Milton Maluhy Filho
executive

[Interpreted] Okay. To give you a bit more context, let me just find the camera right there. All right. So, to give you a bit of context, derisking it's at the end of the process, as I mentioned on the previous quarter. The 0.35 year-on-year on the drop in the second quarter, I would like to just say that we're very close to that end. The end of this. Well, we are at the inflection point until the third quarter, we should be close to that. So, in the end, we have to clarify something very important. We didn't stop growing. We continue to grow in the portfolio of medium high income, several quarters in a row. But when you look at a few portfolios in the aggregate, for example, credit cards, you have a nurture of the portfolios that continue to drop nominally. So, you have a strength -- a gravitational strength that pulls you down when you have the origination and the portfolio growing in other segments. We're going to lose the negative effect, and we're going to see the positive effect.



We should observe the year-on-year growth on the portfolios in regards growing, in regards to what we observed in this quarter. This is the central message. We had the opportunity of growing in several businesses, several products and several segments of income. So, you have to be very careful when we say high income, low income. Well, actually, we've seen opportunities in all segments in growing in a correct channel with the correct client, and we have less resilient clients in all segments, whether if it's low, medium, high income, we have to interpret well the data. That's the important thing, understanding the model, the depth of the relationship and engage the more and more these clients. So, we're looking at the future and we can see in a positive way capacity of growth, especially after the growth derisking in the portfolio, but always having -- well, understanding that the level of leverage is still high. The commitment of the income of population is so high. So, you have to grow with care. Growing the portfolio and accelerating, bringing more margin and then returning that. It's not what we do. We do a very disciplined net margin and net financial margin.



So, it's the margin of the products minus the cost of credit, the expenses, and we've defended our net margin -- and we are going to continue to expand on the adjusted line for the risk in -- within this discipline. So, we see it in a very positive way we naturally continue with the appetite for growth, quality and the long cycles and removing the volatility of the portfolio so we can continue to deliver the consistent growing results. That's the main message.

R
Renato Lulia
executive

I switch to English because I know the next question comes from Tito Labarta from Goldman Sachs. I was preempting your interest Tito. Thanks for joining us for the call.

D
Daer Labarta
analyst

Actually, a follow-up on loan growth. But more on the corporate side. We saw very good loan growth, both on the large corporates. I know part of that was FX, but even without the FX, origination grew up quite a bit, SME loans also growing at a healthy pace. Just to understand, how do you think about sort of the health of corporate -- the health of the economy overall and in terms of your ability to continue to lend at this pace? And how could that maybe even like trickle down into the economy, right? Because you hear a lot of concern fiscal concerns about Brazil, but I mean, that you're growing corporate loans is strong, right? There seems to be some demand there. So just help us think about that in the context of the Brazil macro as well?

M
Milton Maluhy Filho
executive

Yes, sure. Thank you, Tito. Thank you for coming. Thank you for your question. I would say that the growth that we had in this portfolio, especially on the big companies, has been very, very healthy. And we've been able to find opportunities. We have a very well-capitalized bank, which brings us opportunities to grow the portfolio whenever we find there is an opportunity. The DCM market in Brazil, as you know, is very active. We've been seeing the AUM growing strongly quarter-on-quarter. And we've been seeing opportunity to deliver more credit to our clients and also to take the advantage to being leading in the DCM market and selling this portfolio throughout the market. So, this is kind of a revolving process, where we grow the portfolio, we sell to the market, and we, of course, open the balance sheet to finance clients that don't have access to the DCM market. So, in general, speaking, although we have all those macro discussions on interest rate, inflation, the FX, we've been working since 2015 and '16. We changed completely the way we managed our portfolio. We have a very, very portfolio approach, risk approach for the portfolio.



And if you take -- just to give an example, if you take the 10 largest clients or the 10 biggest clients in terms of credit within the bank, we have less than 3.5% of our capital allocated to those clients. So, we reduced strongly the allocation, the concentration of those portfolios, and we have a very healthy balance when you look all the segments where we are inserted in. And if you look at the clients, we're always hearing this client to that client that may -- or might be having an issue with credit. We've been having good surprises. We never know, so knock on wood, 3x, but we've been doing quite good in terms of credit origination and credit management and risk approach. So, we are very comfortable. We do believe there is opportunity. I don't believe that we'll keep the same pace of growth in the big companies, large companies here as we saw in this quarter. We believe that this space might reduce in the coming quarters, but even though very healthy, generating a lot of business to the bank cross-sell and a very close relationship to our clients.



In the SME, we are doing the same. We are seeing opportunity to grow, grow with quality. If you see the delinquency ratio of our portfolio, we've been reducing the short-term delinquency, 20 basis points this quarter. So very sustainable, very good quality and very good profitability. So, this is key. We're going to keep very focused on the capital value creation at the end of the day, capital allocation and managing risk. So, we are not and we will never be trying to do artificial pricing or trying to gain market share artificially. We are very focused. So, all this production and these credits that you see in our balance sheet, they have a very good profitability and return on capital, looking, of course, the relationship we have with those clients where we have a relevant position in investment banking, talking about ECM, M&A, DCM, and also all the other products that we can do with those clients. So, we are very comfortable with the health of the portfolio and cautious, of course, always looking to the forecast and the expectations on the economy. And if there is any need to adjust the appetite, we will do so, but very comfortable we know need so far to worry with any of this growth, very quality and a good healthy portfolio.

R
Renato Lulia
executive

[Interpreted] Now going back to Portuguese. We have Rosman from BTG Pactual.

E
Eduardo Rosman
analyst

[Interpreted] I wanted to steer away from the quarter, and I wanted to get an update from Itaú. I wanted -- Milton, how relevant is one for the strategy on the medium term for the bank. Do you expect -- well, are you going to be disappointed if you don't have success as you want? Or this is just an option for your case study.

M
Milton Maluhy Filho
executive

[Interpreted] Okay. Thank you, Rosman. Thank you for the question. I'm going to start with the second one because the entirety of the team is watching us. We will be disappointed if we, in fact, cannot advance in a relevant way in what we call the Itaú platform. We started this process. It was a very strong work on the infrastructure with the platform, with the unification of management. And I look for the client holistically for the whole of the relations, and there is a complexity and there is a great opportunity as well, as well as complexity. What do we do? We started with a process that I say that is family and friends. It's a pilot that was very carefully implemented. We have a volume of clients that have been working with this pilot, and all the indicators are very healthy thus far. Just so you know, out of all the clients that we stimulated the migration of the apps of cars for the super app, 98% migration, 98% is much higher than the expectations and much more than any migration because we've done this in a very light way, in a very soft way.



And the client is understanding that there is value being offered. We are very satisfied with the advances, and we will anticipate all the migration. We had predicted about 15 million clients that we're going to migrate for this platform. We are working at a very healthy pace. We don't like to give numbers, but we are probably going to migrate in 2.5 million clients still this year. Maybe we're going to double that this year, depending on the rhythm because there is a lot of quality on what we've done. It's a commitment. It's also an expectation, an estimate given the results that we achieved in the short-term period. It's a very long journey. There's still a lot to do. There is relevant evolutions in our super app. We've benefited because these mono apps, they have their own quality, specific qualities. The fact that you're specialized in a journey it gives you more advanced features regarding that journey. But we have the best of both worlds. We are improving the Super App with what we had that was the best in the mono-product journeys also bringing to the mono-product or the credit card. There is a full bank experience with a delivery that is broader and more complete.



We are at a very accelerated pace. Following up day-to-day, the way that we do the log in with our apps, we don't have just the number of credit card and the agency. We're looking at the CPF number. These are changes that we could only do with the modernization that we implemented in the bank. Without that, we couldn't have done so. And all the investments in IT have given us benefits on the core platform of the bank because there are several components or legacy that we're utilizing as well. This is transformational as a journey. I'm raising the bar of the expectation. The in-house expectation is very high, but we are at the inception. And P&L, there is no impact from the standpoint of migration, the amount of clients, we have the expectation of impact is going to be high. And throughout the next quarters, we are going to measure with more efficacy, more quality, more data, how our cross-sell capacity will improve the relationship with these clients as well. So high expectations, but still at a ramp-up phase. Thank you, Rosman.

R
Renato Lulia
executive

[Interpreted] Now with us, next question, Gustavo BBI.



_

G
Gustavo Schroden
analyst

[Interpreted] Good morning, Milton, Renato. Congratulations on the record income of BRL 10 billion in the quarter. I would like to explore the results of treasury. I think you really called it stands out. We've seen the volatility, but there is BRL 900 million, BRL 1 billion, BRL 1.4 billion. So, I wanted to understand if you can share with us, Milton. The composition of that data. I wanted to understand if there is a gross up of fiscal benefit you might have, how much do you get from trading? Just so we can understand this better. And is this going to be a trend in the next quarters, 900 million, EUR 1 billion, considering the information available. This is a very volatile line.

M
Milton Maluhy Filho
executive

[Interpreted] Thank you, Gustavo. It's important to -- well, thank you for the question and congratulations. Let me start by the more objective answer. There is no way. There is no artifact. There is no realization of plus value, trying to take the results to the margin. No, none. What we have in that result in this quarter is that it was a stronger quarter, atypical, certainly. If we look at the record, we were running with BRL 1 billion, some and results in Brazil in this quarter was a stronger quarter. I think there are many risk factors in play. We had the higher effect with trading, more with the banking. The trading had a relevant impact. It was a stronger quarter, but once again, as you said, there are 2 predictions that we have to do. First, if we naturally can deliver this quarter up ahead, it's going to be a new outlier. That's not the expectation. We are trying to find the opportunities nonetheless, but that's not really our expectation looking at the quarters up ahead.



I think it's more reasonable to think about our margin with the market going to the threshold of EUR 1.1 billion. Remember that the cost of the hedge of the index has gone to lower thresholds. We published with a decimal. But if you open it, it's going to reduce given the interest rate differential, that we've seen, this has been positive for the cost of hedge. So, the expectation is going back to normalcy with all the difficulty of trying to project the line for the market, but this was a quarter that was outlier. And if you look at the DF's, you're not going to see the effects of grass up or plus values being added that are not recurring to our balance. And it's more of a risk management and opportunities that came up because of different risk factors in the different tables. It was a quarter that was exceptional, and there was no increase in the limit or the risk appetite. But it was within the framework of the risk of the bank for the market. There was no change in the appetite in the sense of limits that are available. There might have had more consumption of the limits within the framework that is exactly the same as the previous quarter. So, these are quarters that I would say that are comparable.

R
Renato Lulia
executive

[Interpreted] Thank you, Gustavo. Next question. Now on the call, Daniel Vaz from Safra. Welcome.

D
Daniel Vaz
analyst

[Interpreted] Congratulations on the results. I wanted to explore the acquirance. You grew 10% year-on-year in the quarter, it seems to be a maintenance of market share. You're thinking about the growth of the industry. So, if and when do you expect to grow above the industry? Are you well aligned with the strategy of Itaú? And second, I can ask later.

M
Milton Maluhy Filho
executive

[Interpreted] Great. Thank you for the question because I wanted to clarify something and actually give you feedback on some changes. The line of acquirements is in the service -- in the line of service and insurance, but you can only see a part of the result of the business of acquirements through that line because there is another part of the result that stays in the margin -- financial margin with the clients. So, remember that there is the invoice of brand, MDR, anticipation, there is the flags. There is a cost of funding of that advance and those lines are distributed. So, if you try to simplify and get to our take rate, looking at that line isolatedly, you're not going to get to the result of the acquiring. I don't see the benefit in publishing it this way because it's a partial information that doesn't give you the completeness of the whole thing. So, we're discussing internally how we're going to publish the acquiring business. Maybe we should -- we should get the issuance and the acquirements in the same line to avoid any assumption or any inadequate conclusion.



Second point about market share. It's very important in your question in regards to the fact that we don't have an objective, a goal of market share. Market share is a consequence of work, a consequence of getting close to the client, a consequence of our value proposition, of an offering, of a business that is done with a client. Regardless of the fact that we are growing along with the market, and we have a market share of leadership, we don't guide ourselves through market share. That's not what moves our decision-making process in the bank. What we've tried to do is the integration that was done completely, very well done with incredible quality, and we can see the level of penetration and proximity with the clients, that is different. The advantage of having 100% of the bank and having an integrated operation is that you start to talk about the acquiring part of the business as a part of the business.



So, in the past, we looked at acquirements separate business. All the companies fighting for business that was a mono-liner. That's not our vision anymore. Our vision is client, companies, value proposition, offering. And we don't guide ourselves. Not even if you look at the end of digital balance sheet and you try to find an assumption of the result, you're not going to do it because a great deal is with the company's results that is accounted in the balance sheet of the of the bank. So, from now on, we are focusing on the client. We're trying to look at our business in an accelerated way as a mono-liner. Well, that is wrong. So, we really believe in the integration. It's working very well with the connection of the business, with the teams, and about the proposition for the client is what matters. We migrated from that vision of product for a long time. That's an old way of looking at our bank, we have to look at the client now. And that's the need. There is a client that is going to be -- that is going to open the relationship through acquiring, but then they won the full bank, and back and forth, there is working capital. They might need cash management; they might need an exchange or a derivative. They need to do the capture of credit cards in their business, whether if it's online or physical. So that's how we've been working with the acquirers in the bank.

D
Daniel Vaz
analyst

[Interpreted] Can I ask the second question? You hired 700 employees of technology. It's a number that really, really stands out. Is there any specific direction that you can give us? I know that you're doing a lot of projects simultaneously, but can you give us some color on that?

M
Milton Maluhy Filho
executive

[Interpreted] Daniel, great question. I think that, first of all, we have to look at the mix. If you look at the amount of technology employees and the amount of employees in the bank that doubled in the mix. So, simplifying very well -- very much is we are running at 17%, 18%. That shows that the bank is changing the way that they're delivering products and services for the clients, the way that we are using the platforms. The importance and the relevance of technology having within the organization. Not as a support area but as a business area. So, the way that we organize ourselves, the method of working, and how much we've done and we've delivered at the end with all the services and technology that we've been doing for many, many years have given us important results. We got to the point that we need to be careful because it's not by getting more people that you're going to deliver more results. If you need to take into consideration the interconnection of the platforms. It doesn't matter sometimes you just get 100 more employees. You have still mono-lines that are not changed for a component structure.



So, without the modernization of the platform, we realized that there is an opportunity of accelerating the value delivery very strongly in the natural persons. We've seen that there is the acceleration of digital projects that changed the experience of the client and the NPS in the loyalty. So, Itaú has been accelerating, and we understood that we need to open different fronts. Now we did the study, and we concluded that we can add more people, more team, and technology to accelerate a few processes and a few projects or changes and features, changes in journeys of the client quickly. And this is the -- what we call the throughput at the end. And we decided to, yes, increase more people, more staff. It's not 100% for a natural person, but 90% or so in that increase is focusing in our clients and a person, so we can accelerate several of the projects for the value delivery for our clients. The value is there and the results are there to see, very encouraging. If you start to test our solutions and our -- now and we'll see this in 6 months, you're going to see changes in products and context and product solutions experience, value delivery for the client ever more complete than what we have now. More quality within a design language that is very within our own standards and happening very quickly.

R
Renato Lulia
executive

[Interpreted] Next question from Bernardo Guttmann from XP.

B
Bernardo Guttmann
analyst

[Interpreted] Thank you for the space and congratulations on the results. I wanted to understand the growth of levers in the bank, but also the payroll loan. It's very important for the retail. You reduced that payroll because of the cap of the INSS. So, it's very interesting to understand the strategy of this segment. The appetite of this bank to grow the portfolio, and we've seen ever more aggressiveness with the digital competitors, more aggressive rates that they're practicing. So, it would be interesting if you can comment on how you would retain these clients because of the competitiveness of the market?

M
Milton Maluhy Filho
executive

[Interpreted] Thank you for the question. Thank you for the Congratulations. Now payroll loans, they have several angles that we can explore. First, our portfolio is very much -- very well distributed. We have the biggest INSS portfolio. We have a very important position with the business. There is a private portfolio that we have a market share that is very relevant, but a very small market. Regardless of the share being big is a smaller portfolio and a portfolio that is similar, which is the public that we've been growing. It was a relevant gap that we had, and we have been growing over the last few years. I think that the payroll for Minas Geraes is key, where we've been growing in this segment. It's not just Minas, we've done this with several others. INSS has a change of strategy for the bank. I think that the cap of the INSS brought for everyone, first offering reduction for the market is not specific. And we've seen that at the end, we've reduced the impact -- we've impacted the consumption of this line, which is cheaper for the retirees because of the cap.



If you look at the market, historically, was always regulated by price. Competition always existed and competition happens at the bank, but also through the correspondent, the distribution channels. So, it was a very competitive market from start. The cap forced dynamic in the market that you left outside the retirees lost access to the credit because given the interest rates, a few specific public, especially the older folks that have a specific demand, they lose the offer of credit. That impacted the system. And since we are very relevant in that market, we had an impact. The second comment that I do, we migrated a lot of the production. It's not that we changed the whole production, but this was a channel that in the past, the external channel represented 60% of the production for us. Now, it's more than the inverse. Now we grew in the banking channel. Our agency are internal and not the external because this price dynamic with the cap is more competitive. And you can produce the payroll with a loan with profitability and with the minimum adequate return.



When you go to the correspondent, you have the commission. So, besides the natural challenges of the channel that reduces the correspondent channel, and that's a big impact on the cap. Now, in the answer of Daniel, if you remember, the modernization of the platform and the futures. We believe that one of the deliveries and the offerings that we really need to advance is the payroll loan in the digital channel that has been prioritized. The additional investment that we're doing in technology and the increase in staff goes through more products and services, and payroll loans is one of those services that will be attacked with this change of experience for the client. Our vision is that with that, we can be more competitive. Funding, always an issue for everyone. We are looking at a funding that is very competitive, maybe the cheapest cost of funding in relation to the market, but we always work with transfer price. To ensure they are not subsidizing the business given the cost of opportunity of that cash. That could be the limit, for example, in public bonds.



So, we do a transfer price that is competitive. And we can see space for growth. We've been growing in the different portfolios. Year-on-year, INSS, in fact, has been reducing. But we believe that with this digital offer and with this change of mix and channel and production, we can continue to be more competitive in the product and all the derivatives and variations.

R
Renato Lulia
executive

[Interpreted] Next question. Brian Flores from Citibank.

B
Brian Flores
analyst

[Interpreted] Question about the revenues and services, that line. Well, there is the specific line that I know that DCM was very strong, as Milton has said, but also, Renato, you've done a few structural changes facing the clients specifically. So, thinking up ahead, how should we think close to the EUR 2.5 billion that you delivered in the quarter or a line that is normalized on a downward path?

M
Milton Maluhy Filho
executive

[Interpreted] Thank you, Brian. Look, this is difficult. This is a line that depends on the market conditions. Demand, capital markets depends on naturally of the appetite of our clients to finance themselves and invest the micro conditions, several variables that impact the performance of this line. We continue to believe, and we think that we should continue to work with the market share. Well, I don't see it as enough section for the share. But from the standpoint of the capacities that are being installed in our bank and the capacity for the distribution of the reading of the bank, that the bank takes. We have a participation of the market above the fair share in other businesses. Well, historically, we've always had a leadership position in DCM, and we believe that there is a lot of opportunities for business. And when the capital markets they're open, we observed this quarter. This is a line that generates a lot of business because the clients use the windows. There is a close of rates in CDIs. So, the market is very attractive if you want a self-finance and competitive rates. And the market has been absorbing the papers and with CDI with higher volumes and rates closing.



So, it's a very healthy dynamic. How sustainable it's going to be, only time will tell. But I can say that it was a record quarter, I would say, for DCM. But we are waiting for a certain normalization over the next few quarters. I don't know if we're going to see quarters that are so good for results and dynamics as we've seen for this quarter, but the dynamic is very healthy. It's difficult to project the results of this side. Equity markets, we don't see in the short-term any chance there is always going to be a deal or a follow-up, we are looking at pinpoint after operations, M&A, some activity and the investment banking, it's a DCM market per se. I'm waiting for a normalization. I don't think that it's going to continue with the rhythm of the second quarter, but given our fair share, if the market continues to be heated up, we will continue to seize those opportunities.

R
Renato Lulia
executive

[Interpreted] Now the next question. Thiago Batista, UBS.

T
Thiago Bovolenta Batista
analyst

[Interpreted] Good morning, everyone. Congratulations on the results. Now Milton, you commented at the beginning of the call about the utilization of capital. And that would take the ROI of the bank, about 24% consolidated and 25 in Brazil. If I'm not wrong, that should be the highest level since 2015 or something close to that. And every member some years ago that we've discussed the ROI, was going to go middle teens given the competition of newcomers. So that's not happening. But my question to you, that level of ROI, '24, '25, is it sustainable in the medium-term? And do you have a plan for increasing the frequency of the capital allocation. Today, if I'm not wrong, you are optimizing the capital once a year, at the end of the year and then you'll pay the dividend. Would that be more recurrent, maybe twice a year, something like that? So, we can see -- in fact, that ROI migrating to '24.

M
Milton Maluhy Filho
executive

[Interpreted] Thank you, Thiago. I think that in the end, since we do not do guidance of ROI, we are not projecting the ROI in the long-term, we are projecting the value creation. As a relationship with the cost of capital, direct relationship, we've been delivering this level of profitability because of a series of reasons. We have a benign cycle of credit operation of the wholesale with a threshold that is very high. When we looked in the past, the operation of retail had a higher ROI than the wholesale, but we never worked and operated with this level of profitability in the wholesale as we've operated in these years. Maybe that's the twist of what changed what you mentioned from the previous years and what we observed now. We, in fact, can raise the profitability of the wholesale in the broad sense of the word. It's not just Itaú BBA with medium and large companies, it's not just investment banking. It's the whole cross-sell and also our asset that has a relevant role in the value creation of the wholesale and the Latin American operation that has been evolving all throughout many years.



So, what wasn't in the equation at that time is that we could take the operation of wholesale for the profitability level that we've observed and that has been sustainable nonetheless. It wasn't just a jump that came that went down. We can see quarter-on-quarter, we've defended the profitability of wholesale in all the businesses. Including this last quarter, there was an additional increment in the profitability of wholesale. Optimization of capital, there is risk management. There is an increase in penetration. There is creation of new businesses. There is an increase in penetration and products in services that generate cross-sell fee business. I mean, there's a completeness here. And we've been able to lead most of these businesses, and we've been in the first positions in the rankings, and that brings strength for our wholesale operation. When you look at the future, I think that it depends on circumstantial macro and micro issues, we continue to operate with 20-plus when we look at the guidance, the ROI, not less than 20%. But this year, adjusted by the appetite, we have been running with an ROI level historically very high.



And we have important catch-up with the wholesale bank. We went through an adjustment. We had the anemic regulatory issues, profitabilities of retail going down. And then we can go quarter-on-quarter increasing the profitability of the retail business. In the natural persons and the companies, you remember that in the past, we ran 16% profitability in the business of retail and now we are running at 23.5% in this quarter. So, there was an important catch-up quarter-on-quarter. And that instead blend, that mix that makes us be able to grow profitability. And at the same time, in the corporation, everything that is a margin by the market that is not wholesale and retail, as you've observed, we've been managing to deliver results and generate alpha with the risk of the market. So, all of those factors that allow us to operate with that level of ROI. So, it's a perfect alignment maybe of the stars obviously, but also, we are subject to changes in scenario and perspectives.



Well, looking at the horizon relatively short-term for long in what we can observe, the bank will continue to deliver good profitability, and we are sure of that, and the quality of the results. If you look at the different lines of this balance sheet, it's a high-quality result and highly recurrent, which is very important. There are no events that are going up and down in our results now. In the end, we have a lot of discipline and consistency in the management of our deliveries in the capital ratio. Well, in practice, since we are declaring the dividend, we are doing an adjustment. Now in August, the dividends JCP that have been declared over the last quarters, the interest on capital, and that has been done the adjustment. The first payment, I would like to say has been done. But I think that once a year with the information available and with the uncertainties that we still have up ahead, there is regulatory changes. There is operational risk, there is a financial review of the trading book. There is the sole basis. There is a discussion of the DTAs, and IFRS 9. There is a risk of credit for the operation, increase of the risk of Basileia, Basileia III risk operational.



Well, when you pile up those uncertainties and plus all the perspective of growth and opportunities that we've seen, we think that doing that capital management of the optimization of capital once a year is very adequate. And we also used the hybrid tools, AT1, AT2, and we're going to continue to do that, always thinking about optimizing the capital base of the company. But now distributing the dividend, we can maybe change the opinion, have some extraordinary dividend distributed maybe in the future, yes, that might happen. That's not what we imagine that's going to happen at least in 2024. Our expectation is to end the year with a good vision, prospective for opportunities of regulatory issues, good operation of capital capacity of generating organic capital so we can do a good calibration and do another payment of extraordinary dividends. With the information that I have today, the payment will be done, there will be an extraordinary dividend. But we also see as an advantage that we have a capital base that is very solid because the opportunities will come up. If you see that we grew the portfolio, we grew strongly in the quarter, and still, we expand the capital base of the bank.



I mean, there is no healthier dynamic than having a strong balance, seizing opportunities, organic, inorganic. What we know, what we do not know yet. And be ready to do movements that are necessary. So here, you have to be very careful because the grade is the enemy of the good, as we say in Portuguese. Well, we have to be objective in the value creation. If we understand that we have an adequate allocation of capital, creation of value, giving good profitability for the shareholder, that's the central driver for all of us. But it's not our objective to retain excess capital. So, in fact, in the end of the year, we do our work. And at the beginning of the year, we will communicate to the market what is that extraordinary dividend. But once a year seems to be okay.

R
Renato Lulia
executive

[Interpreted] You said that there was going to be a question on dividends. And yes, that was certain. Next question. We have Mario Pierry from BofA.

M
Mario Pierry
analyst

[Interpreted] Hi, everyone. Congratulations on the results. Another quarter, very predictable, good trends. We need to focus still on the capital. with the implementation of IFRS 9 next year. What is going to be the impact? Did you manage to calculate the impact on capital? And another question that I have is about Americanas. It seems that the negotiations have improved. Do you have a potential for the revision of those provisions that you had for Americanas, the company?

M
Milton Maluhy Filho
executive

[Interpreted] Thank you, Mario. Thank you for the question. Okay. To give you some context. In the end, with the change of IFRS 9, it has an accounting change, the way that we publish our results, BR GAAP, our IFRS more adapted to what is Basileia III, but also there is a tax issue. In the sense that you cannot -- you can no longer choose how much you're going to waste tax the expense of bad debt, you have to pay that PDD, that bad debt throughout the year. There is an optimization of tax and capital. And the main impact is the stock that the norm has to say that you have to award, do the amortization in 3 years at the time that it starts to work. So, let me start from the end. Even if we had to do the amortization in 3 years, so there would be no material impact for Itaú Bank. That's the first message. The bank has the capacity and result and stock that is adequate to absorb those provisions and those expenses are in 3 years from 2025 onward if the norm prevails. Of course, when that happens, that generates another impact. It generates impact for the optimization of capital less impacts in the index because you stop to optimize the capital PDD that optimize 100 and then you have to withhold other tax credits that have a ponderation that is higher.



You have the consumption of CDF the capacity to absorb is less. So, there are impacts, it's not 0 impact, but they are immaterial for Itaú Unibanco. But it's not necessarily the same thing for the industry what is for us. What do we believe? We believe that there is a debate that is taking place with a central bank with the finance ministry, so that everyone has awareness of the impact. It doesn't matter that you look -- it's not going to work if you just look at bank A or B, you have to look at the whole system. We are inside of that debate. We are inserted that. And we believe that there is a way to work with this norm this law to create the condition so that there is no capital impact on the system so that the banks continue to work and giving credit, and with their activities without any relevant impact. In the end, every bank has a different condition. The data is public, the stock, the tax, the absorption data are there for the public, and there is a premise. It depends on your analysis and ours for the projection of the results throughout the future.



There is a tax reform that might happen this next year, may not. If there is a credit tax reevaluation of the Alaqua for the corporation drop, what is the impact of -- there are many nuances here. Febraban is leading the discussion, CNF is involved with the finance ministry or the Central Bank. I think that the banks are going to have to be in the table. So, to see if there is an alternative to the norm that is on site. We can work with some longer deadlines for the amortization of the stock maybe. That's what's on the table. We believe that the new norm is important. Certainly, it will be implemented, but the question is the timing when effectively it will start, and specifically for the tax issue, when it's going to be implemented. But there is goodwill from everyone because there is a common problem for everyone and for the government because if all the banks start to anticipate the tax consumption, that's going to impact how much the government will get in terms of amount of money. So, there is goodwill. So that's within the discussion, but it's still at the beginning of the debate. Good debates, good conversations, but we don't have any other information on how that issue will be conducted. As soon as the government will have a decision that information will be public. But there is a goodwill to mitigate and decrease some of that impact in the system.

R
Renato Lulia
executive

[Interpreted] Next question. Nicio from Ingenia.

U
Unknown Analyst

[Interpreted] Congratulations on the consistent results for the quarter. I want to go to go back to the app. It's very interesting that you are taking the risk again and the implementation of the 2 apps. The first part would be an update of Atlas that wasn't mentioned yet. How do you see the ramp-up of that product? It's a product that the other incumbent banks, they still don't have that. And how do you think it's going to impact the industry with this new product. And if you can share with us the level of cross-sell, the pilot line of one, the cross-sell is the main objective for this product, how was it in the pilot plant, the cross-selling of this product? And do you expect a reversion of 98% when you do a broad rollout of that product. Second question is in regards to your sensitivity to the margins. The analysis is very interesting. The margin besides the margin, you also do the hedge of the capital. And I wanted to understand on the dynamics of those 2 hedges that you do that protect from the volatilities of CDI. And how should we think about that in the medium- to long-term? According to the numbers that you presented; I believe that we can conclude that. Regardless of an interest rate that is lower, we could expect a margin -- annualized margin at least that is adjusted for a higher risk. So, is that correct? How do you think about the dynamic of margin and CDI?

M
Milton Maluhy Filho
executive

[Interpreted] Thank you, Nicio, for the question. Let me start by Itaú One. Our focus -- central focus in the pilots and the discussion that was in the experience of the migration. So, we do not have, let's just say, we're not running after a cross-sell without completing -- without having the complete migration to the platform. It has to be a soft welcome. I migrate and the client has to feel welcome. It has to improve the features, the quality, the experience, they have to feel welcome. The way that we can communicate with the client changes, and this has been the central focus of our pilots. That to us is priority 1, 2, 3, to ensure that the migration is done with quality, with care and that the client doesn't feel that, oh, I migrated for the platform, and I am receiving a push of products and offers and solutions, because in the end, that's not pro-client. It's an old and wrong way of trying to preclude businesses with our clients.



The way that we work is to work within the context of the journey of the client. First, we migrate, then we create the context. The clients start to have an app with many solutions and features. They have access to more frequency to the different solutions. And we get into the context. They hire -- they register a PIX key, if they have the journey of the PIX. They have access to the credit of the payment with the PIX. Well, that's going to be -- that's coming up in the future. So, the pilots that we've done, the cross-sell, they are encouraging, but there's still baby steps. There is not enough to show that this is a relevant pilot that is worth to get into any assessment or conclusion. We're still at the beginning of these pilots. Priority #1, 2 and 3 is to ensure that these clients are on board on this new app, this new platform, this new journey. The cross-sell has to be within this context with quality and care so we can naturally show to the clients that there is a relevant value of understanding their migration and their needs. Well, this is Itaú, it's work in progress. Over the next quarter, we're going to have data to share for you with pilots and migration that has been done.



About Atlas, it's important to give you some context. Atlas, we don't see it today in the same way that we see One Itaú as something that we have to ramp-up, grow, and there is 15 million clients that we actually service overnight. No. Atlas in the end complements a part of our value proposition and offering that was lacking. So, we invested a lot of time understanding the needs of the entrepreneurs, talking to the clients, understanding their demands throughout these years. And we did a relevant revision of all of our model for service, for the proximity of where the products all with -- it was a complete review. And the campaign that we've just done for the repositioning, you only do the campaign when you really have an important change in the value proposition and offering for the client. So, the campaign for repositioning is based on that because we've been growing with quality in our business, in our company's business, and we think that this is a good moment for growth for acquiring new clients, increasing the basis. And with the campaign of repositioning, we are ready to ramp-up our operations in the company. How Atlas is inserted in that.



It's another value proposition. You have within the pyramid of the company's the different segments. For each of them a value proposition that is very niche, understanding the needs of the client, the entrepreneur. And Atlas gets in for the companies. For those companies that want to sell service, much to be fully digital, simple products with inner context, with artificial intelligence and that we can, in fact, understand with data, the needs of the client. We can deliver the context within this journey. Atlas is also at the inception phase. It's a pilot. It's a few thousand clients that are operating in Atlas. Our expectation is that as those clients are becoming more digital and they have digital needs, Atlas is within our value proposition, providing that. So, it cannot be seen as a business that is separated from the bank. In the end, is part of the offer of the business unit companies. They service the complex means and services the simple digital needs of the clients. So, I don't see it in the same way that I see One Itaú. That's why we're not providing any details because it's part once again, of the value proposition of this segment.



Now, the other question about margin, it's natural that the business has some sensitivity to the interest rates. And I would like to say from what is visible with the interest rates dropping, we have 2 effects. First, the working capital of the bank that suffers naturally, as you roll out that operation there is lower rates and the liabilities of the bank that impacts also in the interest rates. There are benefits with the reduction of the interest rate, the differential of the interest rate drops to cost of hedge also has an impact. But the 2 big impacts here are those 2. On the other hand, when that happens, you have more opportunity for growth in the portfolio where the interest rates lower and the delinquency tends to be lower given the interest rate level. Now, our portfolio today, whether if it's on the liability or assets, we can -- it's very balanced. So, whether if it's navigating with the margin of the market, the way that we do the hedge of the risk factors with the 50 margins will decline. And the way that we operate with these different businesses, that has brought balance your margin. So, you have negative as the interest rates, but you have several positives. And you have several positives and negatives in the other scenario.



Besides that, our portfolio for business is very balanced. So, you have business on the wholesale and the retail that will compensate themselves all throughout the cycle. That's why the risk adjustment is important to be taking into consideration in the series. That's a central point. The cost of the hedge of the index, it's important that you mentioned that. It's almost like a satisfaction of a decision that we took 2 years ago. When we made the decision of doing the cost of the hedge of the index, the first vision is there is a cost. And we said that it could cost 500 million per quarter when the decision was done. And when we did the guidance for the year, we removed BRL 2 billion where the market, which was the exercise of the cost of the hedge of the index. What happened is that the differential of the interest rate. Besides the management has brought lower impacts. But I mentioned what happened with our capital index had we not done the hedge of the index all through all these years.



With this volatility, you see that the portfolios of the wholesale grew 1/3 through exchange rate. And all the Latin American operations, if we had not done the hedge of the index, what would be the capital index right now? But we have that excess -- would we be able to grow with the same strength that we've been growing. Would we be able to have that -- to bring you that predictability to do great big projections on the long-term. So today, when we look in the rear-view mirror, that was a great decision. Of course, there is a cost. We invested in the other currencies and not BRL, but it brought a great stability for our capital index. And the more stability you have, the more safety you have, the bigger is your capacity to project growth, making decision-making process inorganic, organic without worrying if it's -- if we're going to have capital or not in the next quarter.



So, that's the central core point. And of course, in the scenario of changing interest rates, treasury operations and especially the banking book has a sensitivity that is natural to the levels of interest rates, but we are always working to leave a framework of limits and spaces so we can manage our assets and liabilities, and do a good hedge of the bank when we think that is appropriate. So that balance with the margin with the market and the margin with the clients, we've done a level of sensitivity with interest rates much lower. So that's why we have that record, that history.

U
Unknown Analyst

[Interpreted] Well, guys, I'm just going to ask you 2 minutes. Going back to the second question of Mario of BofA. It was so complex and we forgot about the question about Americanas. Can you comment that second part, I was just reminded?

M
Milton Maluhy Filho
executive

[Interpreted] Well, good yes. And you see that the objective was not to steer away from the question Mario, let's go back. Americanas. In fact, we adopted a strategy of leaving in a relevant way. And the bid, the data is there. We did a management with the information that we had of reducing relatively the exposure and the risk. Naturally, we continue. The version that we have in the company is very small, very, very irrelevant. And there is still some credit lines without getting into a lot of detail because of the -- we cannot comment, but the data -- with the data that is public, that's the information that I can give you. And I would like to say that at this moment, we're discussing what are going to be the impact. Remember that when we did the provision for Americanas in the balance sheet in the fourth quarter, of '22, the subsequent event, what did we do? Half is well rounding up. About half of those provisions were done in the complementary, the complementary provisions. So, we attributed a complementary provision for Americanas. And the other part, about half went through invoice, the P&L of the bank.



So, when you have a reversal of receivable, there has an impact in several lines from lines of P&L and the complementary ones. What are we going to discuss is taking into consideration the quarter that will be closed in the next months. And we always review the portfolio case by case, where there is a provision, where do we need it? What's the scenario they change? Then we're going to have a clear vision. Since this is not an effect that will be repeated in the next quarter, this is an isolated effect. My opinion is not giving that information precisely now, does not impact the model and the flow that you have to look at the future, given the isolated effect and the one-off that it has in this business. Possibly in the next quarter, when I talk about this result, you will get the details on how we work the Americanas case. But the fact is from the standpoint of complementary or the P&L, we're going to have a relevant receivable of a provision that was 100% done in the balance sheet. That's a positive news, a recovery that is relevant given the provisions.



But how are we going to work it and allocate it. We haven't made that decision, and that's for the future. But Mario, it's an important question because I read all the reports that were published yesterday, you have to have precisely the coverage of the wholesale. It has a high -- it's very high because we do the provisions before we have any delays. Those clients are -- they don't have voided credits. So, it gives you a false sensation of access in regards to delay, but any delay that it has the degree of the sensitivity for the wholesale is big. So, any changes in the P&L, you have volatility. So that's where you have to look at the total coverage level and not guide yourself through the index of the wholesale because it doesn't tell you a lot. Americanas has a provision done in the balance sheet, but the delay is not there. So, in the end, we are going to have some impact looking up ahead in Americanas. And depending on the decision-making process that we do, it will have an impact in the coverage index.



But to give you some numbers, 10, 15 points in a coverage level total is reasonable to take into consideration depending on how we treat Americans in the next quarter. But this is to give you a sensitivity, it's more material in the index of overage for the wholesale than the whole. So, it's important that you take this care and you don't -- when you don't do the evaluation of the index of the coverage of the wholesale, it's high volatility because of immaterial effects.

R
Renato Lulia
executive

[Interpreted] Thank you, Milton. Now continuing. Thank you, Yuri, for waiting. Welcome to the call.

Y
Yuri Fernandes
analyst

[Interpreted] Congratulations on your results. It's no surprise that they are good. Wanted to ask about wholesale, I wanted to explore the margin. We see that the portfolio is growing year-on-year. Of course, there is exchange rate of our derisk and LatAm, we're thinking about those points, but the NII grew 0. The portfolio grew 11%. The ROE capped at 28 invoice growth. So, the bigger portfolio, higher leverage, thinking about assets on PL. So, what are the drivers that are behind this? So, it might be LatAm or fees that we're not making so much money in NII, but we are monetizing the clients through FIIs. So just those economic issues on wholesale.

M
Milton Maluhy Filho
executive

[Interpreted] Thank you. Good question. Good to clarify. It's important to understand how we work those results, and we provide the results in the business model. The wholesale has LatAm in their asset. So, leave it on the side for a bit and look at Itaú BBA per se, those activities and businesses of credit. What happens here? We are working with 12 of capital, which is what we use. Minimum of the dividend also allocated in the business. And they made a -- we made a decision of allocating in this quarter a capital of 11.5% and leaving the excess of capital of 11% and how much we have, in this case, 13.1% in the corporation of the bank. So, when you look at the business model, we publish wholesale, we publish retail, and we publish corporation pus margin for the market. So, what happens when we do that? First, an automatic impact. I am allocating less capital in the business, because I left from 12 and I went to 11.5%, first. So secondly, we believe in the business, the Selic rate. Even though I do the hedge of the working capital of the bank in several vertices and the business model, we have the daily Selic in the business.



So, any reduction in Selic at the time has immediate sensitivity in the business and not in the corporation because corporation is working with longer vertices. Since I located less capital in the business, and I went from 12 to 11.5%, the allocated capital of the business being lower provides you less interest because it has less capital and Selic dropped. And that's directly in the margin in the NII. So, when you look at the NII, it has an important component for the effect of the working capital, whether it is the change for the 12 to 11.5% were the structural drop of the interest rates in the period. Those are the 2 main effects. And the other effect that you just captured that is very important is that when we do the management of the business, we look at NII and we look at the revenue of FIs and services, because a great deal across all the credit that is done and the NII, it gets into the line of services and insurance. So, there you have all the other businesses, whether if it's exchange rate and a fee of investment bank, which is a very strong franchise.



So when you look at our growth that is important in this quarter, there is a third effect that you have to take into consideration. A great deal of the portfolio was produced off over the last few months. So, it has an effect in the income that generates the NII that is lower. So, the growth is at the end. You cannot capture fully those effects. There is the 2 effects of the capital that I mentioned, whether if it's 11.5%. So allocated last capital give less remuneration of capital for the business and the interest rate that drops. And there is the other effect that a great deal of the result is in the service, in the line of service and fees that balance that vision of profitability from the standpoint of the client. So, looking at that whole, you see the effect and that's why the ROI regardless of that, the ROI of the business growth goes up. And why does it go up? Because I have last capital allocated, so you can say more leverage in the relationship of 12% to 11.5%. But I take that access to the corporation. And I keep the excess of the capital, 11.5% until the 13.1%, with the effect of pre against the Selic is in the corporation and with the effect of the margin with the market. So, that's how we publish the business model, and that's why you see that effect that is very specific in the wholesale.

R
Renato Lulia
executive

[Interpreted] Next question. Arnon, Santander.

A
Arnon Shirazi
analyst

[Interpreted] Congratulations on the results. Revenue of 10 billion. Good number. The question is the portfolio of credit. The share of the interest rate has dropped that is working with the derisking that you mentioned, but maybe at this moment, you're going to go back to the appetite -- the appetite for risk for the lower income? And how should that work with the Parcelada and Rotativo?

M
Milton Maluhy Filho
executive

[Interpreted] Well, thank you Anand. Okay. So, you went to the point. The effect of derisking has a lot of benefits for margin, delinquency body has a perverse effect because it decreases given the profile of the clients, the propension of finance on the credit card, whether if it's the interest rate on the credit card or the interest rates on the credit card, which is Parcelada. So, we have the profile of the interest rates that is different from the market. If you look, we got to 14% of the finance pay portfolio with the interest rates. And I always talk about the Parcelada with the interest of the BRL 130 billion of credit cards that we have, 86% of that type portfolio doesn't pay interest rates, but we have risk of credit, we only receive the exchange that is in the service line. So that's the anomaly that exists. Only 14% of that portfolio pays interest rates in the credit card. So, what is our vision? First, we have to be very careful because we are always looking at the clients, their needs, and we're trying to offer the best product in the best rate possible.



So, the credit card product, it's not a product for financing consumption. It's a product for payment that is very -- it's a way of payment that is very efficient. And on the other hand, as the client needs to finance themselves through the products, is not the best product for financing. The client has to look at the other alternatives. The interest rate on credit card Rotativo is not -- should not be used for financing. It corrects the delay for the client for not paying the credit card and direct the client to home equity, whatever the credit line that the client has access. Another credit line, therefore, our vision is that as the portfolio is stabilizing, we might see an increase in the progression in increase in time, but it's a portfolio with the risk profile that is different from what we had in the past. The biggest impact in the P&L of the credit card is the delinquency, the delay. But this is a client that is not paying and you charge high rates. So, from the standpoint of financial health of the result and the quality of the results is not a good quality. So, in the end, yes, we've been working with a pre-pension level that is lower. It depends on the cycle, depends on the evolution of the product that we've been working to offer conditions that are more competitive and solutions of finance within the credit card chassis, this is an evolution and also a time there might be an evolution with that. But it's the profile that dictates the rhythm because it's a portfolio of high median income rate, it has lower propension.

R
Renato Lulia
executive

Nicolas Riva From Bank of America. Welcome back to the call.

N
Nicolas Riva
analyst

Nice to see you guys. So, Milton, I have a few questions on your bonds on your Tier 2s and your AT1s, given that the call option approaches on the 2019 in November and also on the AT1s in February. So far, you haven't been calling the AT1s, but you can call in each coupon payment date. And also looking at prices, it's interesting because it seems that the market is kind of assuming that you're not going to call the 4 and 5 in February, it's trading well below the coal price par. But the two AT1s that you didn't call in the past are trading just above the call price, and you can still call them every 6 months in each coupon payment date. And then on the Tier 2s, I think in the past, you have highlighted that even though you cannot say beforehand what you plan to do regarding the call option, the Tier 2 start losing capital treatment, if not called, which I think gives an incentive really to call the 2019 in November, and looking at market prices, we are trading at the call price, it seems that the market is assuming you are going to call that 2019 November. So, any thoughts you can give us regarding the call options on the Tier 2s and the AT1s would be welcome.

M
Milton Maluhy Filho
executive

Thank you, Nicolas Riva. It's always good to see you. Thank you for your question. Let me go through. So, on the AT1, we keep doing the same thing with -- in the past decision. So, we are looking also all the economics around what would be the new price of new issue, if we do and what will be the reset premium. So, we believe that today, we would pay at least 100 basis points more if we exercise the call and try to tap the market with a new AT1. So, at least, okay? So, that means that whenever on an economic way, we don't feel comfortable to exercise the call due to the impact on the new issue, we won't exercise the call the same logic that we adopted all the other calls. So, we know that we have every 6 months, the decision to be made, and we're going to follow through. And if we believe there is any change in the market or any situation that allows us to do in a different way, we'll be more than glad to exercise the call if it's decades. But looking with the information we have today on the AT1, we don't believe it's the case now due to the repricing and the reset that we have to do in those transactions.



Now going on the Tier 2, we have some calls to be exercised in November. And we haven't made the decision yet. So, it's very important to tell you that we are always analyzing what would be a new issue if we can issue locally or abroad. What is the size of the opportunity? What will be the new issue premium, what would be the new price if we have to tap the market. But it's very important to make it clear. We haven't made the decision on the Tier 2 yet. We are discussing that. There is a lot of discussions going on at this moment. Whenever we have this decision made, of course, the market will be the first one to know. And you are right, you have and you lose the capability to use that for capital on the remaining tenor of those bonds. So, at the end of the day, we're going to take this in consideration in the decision to be made. So again, we haven't made the decision. We are having at this moment this discussion. Whenever we have this very clear inside the bank, we're going to release and let all of you know what will be our decision on the Tier 2.

R
Renato Lulia
executive

And for our last question, we remain in English, because we have with us here, Carlos Gomez from HSBC. Hello, Carlos, good to see you.

C
Carlos Gomez-Lopez
analyst

Thank you very much. Thank you for 2 things, one, for your generosity with your time. This is a very long call. And second, for showing us the costs, including Argentina, not only on the revenues, but also the cost so that we can see the true picture. A very simple question. You mentioned earlier the uncertainties -- regulatory uncertainty that you have. You are always negotiating with the government different aspects of your activity. What is the focus now. Last year, we were talking on credit cards. What is the main thing that the banks today are discussing? Is it this DTA treatment? Is it still the card? Or is it IOC? What is in your mind right now?

M
Milton Maluhy Filho
executive

Yes. Thank you. Good to see you, Carlos. Thank you for your words. And to know that for me, it's always a pleasure to have the most quality time with you here to go through all the details about the bank. So, thank you for your comments. So, I would say that the DTA that we were having in the discussion right now is the discussions that we had more, I would say, in the past or previous months. It's always discussions on CSLL. If it's going to increase or not. I think it's very clear, and Adaj made it very clear recently that the idea is not to hike the social contribution of the banks because you have to take into consideration that we have the highest amount or highest rate when compared to other countries and other banks around the world. So, this is important to highlight. The DTA has been part of the discussions. Credit card is always going to be an ongoing discussion, always going to be an ongoing discussion. So, I don't think we solved the problem that structurally we have. But this is, I would say, an ongoing discussion. This topic will come back. I will be a little bit quiet. We have more discussions. But the main topic, I would say, it's the DTA right now. There is no discussion. So, on IOC, there is no discussions, on the new reform on capital and gains. There's no discussions coming from that side. And there's the regular discussions that we have about general topics, the economy, the market, interest rate that we talk about, the fiscal side. So, I would say, regular discussions, but nothing that needs to be highlighted here. So very regular discussions and the common course of business, I would say.

R
Renato Lulia
executive

[Interpreted] Now we finish the Q&A session. We answered to all the analysts that connected today with the call, the questions. And the questions that might come up through as -- are going to go directly to the Investor Relations team, are going to be answered there. I give you the floor, therefore, to close our earnings call.

M
Milton Maluhy Filho
executive

[Interpreted] Thank you, Renato. Thank you for working with us. Thank you, everyone, that took part. Always a pleasure to be here with you. We try to do a presentation that is very executive. So, we have time to talk and discuss the issues, get into the details with the most transparency as possible. You're never going to leave this call without answers. We are always going to take care of the quality and the transparency of the information. I want to seize this moment to thank you, to thank something that is very serious. We are very honored with the recognition that we've had from II, and we were recognized by you in the sell side and the buy side in all the categories of AI. And we were very honored third year in a row that we -- second year in a row that we are recognized in all categories. This doesn't make us rest in our laurels. Now, responsibility continues. It increases. We want to do more, to deliver more and to be ever closer to you with the maximum transparency, delivering the data, information quality on the books, quality on our calls and publications, quality on the Itaú Day, which is so important.



And we try to open there as most that we can. We always try to give strategy telling you more. But since we have that relationship with the investors in the market, if we are in doubt, we make them as -- we have trust on the long-term. Thank you for your recognition. And everyone that is watching our commitment to the bank is top with the organization, with the country, and we are going to diligently work to deliver solid results, consistent results, and especially quality results, always thinking on the long-term. Never sacrifice in the short-term to deliver results, whether if it's by the growth in revenue, the reduction on expenses. We are always investing in the franchise and working with a 100-year anniversary for the next 100 years. Thank you for your patience and time and dedication to the call and the questions. Have a nice day. We will see each other in the one-on-one meetings, and see you on the next call.



[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]