Itau Unibanco Holding SA

BOVESPA:ITUB4

Earnings Call Transcript 2022-Q3

[Renato Lulia, executive]

[Interpreted] Good morning, everyone. I'm Renato Lulia, Group Head of Investor Relations and Market Intelligence at Itaú Unibanco. Thank you for participating in our video conference to talk about our earnings for the third quarter of 2022, which are broadcasting directly from our office here on Faria Lima Avenue in Sao Paulo. This event will be divided into 2 parts. In the first part, Mr. Milton Filho will explain our performance and earnings for the third quarter of 2022. Next, we'll have the Q&A session where analysts and investors will be able to interact with us directly.

Now I'd like to give some instructions for good participation in this meeting today. For those of you who are accessing this via our website, there are 3 options of audio on the screen, the whole content in Portuguese, the whole content in English or the original audio. And the first 2 options will have simultaneous translation. To choose your option, all you have to do is click on the flag on the top left of your screen. Questions can also be forwarded via WhatsApp. To do so, all you have to do is click on the button on the screen on the website or send a message to the number plus 5511-99-148-4308. The presentation we'll make today is available for download on the hot side screen and also as usual, on our Investor Relations website.

I now give the floor to Mr. Milton Filho. We'll begin the presentation on the earnings, and then I'll come back to you to moderate the Q&A session. Milton, go ahead.

[Milton Maluhy Filho, executive]

[Interpreted] Good morning, everyone. Thank you for participating in our conference on the earnings for the third quarter of 2022. I'll go straight to the figures. And then during the presentation, I'll bring in some information that I consider relevant. So the first good news is that we posted a very robust recurring managerial result of BRL 8.1 billion in the quarter, up 5.2% from the previous quarter. And in Brazil, we posted a growth of 4.8%, reaching BRL 7.4 billion. Consolidated ROE of 21%, an increase of 0.2 percentage points.

And in Brazil, we've been able to maintain a very high and stable profitability level of 21.6%. The consolidated loan portfolio grew 2.5%, reaching BRL 1.1 trillion. And in Brazil, it reached BRL 900.3 billion, up 2.7% from the previous quarter. The margin with clients also posted a very positive increase in the quarter, growing 6.4% to BRL 23.4 billion. I'll provide more details later on. When we look at Brazil alone, it grew 5.5%, reaching BRL 20.6 billion. Speaking of delinquency, there was a very small increase in the NPL ratio of 0.1 percentage point in the consolidated figure. And when we look at Brazil alone, it grew 0.2 percentage point. I'll provide more details later on.

On the capital ratio, we have good news. We were able to increase our capital base, which grew 0.6 percentage points, reaching 11.7% of core equity in the quarter above our risk appetite. There's no good financial performance without our clients. So I decided to include a slide here to show very briefly what is behind the figures we deliver. There's a lot of work and dedication. There are a lot of tools. But the central message here is that we've been for some years now working with the Net Promoter Score concept. So we have the measurements for all products, channels, global NPS, transaction, NPS, and competitiveness.

We received more than 4 million pieces of feedback every year. Everyone is read and interpreted. And we incorporate them into our model to understand from our client standpoint, where the levers and opportunities are. We've been receiving this high volume of feedbacks and the process already incorporates them into the interpretation of the information. So we made a commitment back in 2018 to grow 20 points by the end of 2022. In our global NPS, we consider all main segments of the bank on a straight-line basis to understand how the client has been assessing us. The good news is that we've already grown 18 points in this period.

Therefore, there are 2 more points to go, and I'm confident we'll achieve our goal for 2022 by the end of the year. Therefore, we have another 7 points to grow by the end of next year, which I believe is very possible. And the expectation is to reach 25 points of increase. Therefore, we have another 7 points to grow by the end of the year, which I believe is very possible. 2 more pieces of news here. 60% of our businesses are at record high levels. So this is excellent, and we've been monitoring this every month. And more than 25% of our businesses are above what we believe is the level of excellence that is above 75 NPS points.

Speaking of the loan portfolio, we can see a growth of 3.4% in the quarter for individuals and 4.5% for SMEs. In Brazil, we see a quarter-over-quarter growth of 2.7% and a year-over-year growth of 20.8%. Obviously, we have an explanation for each of these lines. Personal loans grew 6.8% in the quarter. I'd like to say that part of the personal loan portfolio consists of consumer credit paid and installments and the overdraft accounts themselves, but 90% of this growth took place in higher income segments, therefore, with lower default rates, both in the personal [ A ] segment and in the [ Uniclass ] segment. Another highlight regarding the loan portfolio is that we had a huge gap in payroll loans with public sector, and I've been telling you this for some time now. We always had an important share in the INSS pensioners in the private company sector.

So we set the goal of increasing our share in the public sector as well. So the good news, we grew 8% in the quarter and 77% year-on-year. Regarding SMEs based on the profile of our portfolio and where we've been focusing over the years, we can see that there was an increase in origination, which grew 15.4% in the period. But 70% of this origination was in larger clients with higher revenue and therefore, with lower default levels. So the portfolio grew in a very healthy way.

And although we can already see a slowdown from the previous quarter, we've decided -- and I've already told you this, to make adjustments throughout the cycle. Trying to understand where the opportunities are, where there's room for growth and where necessarily we need to make origination adjustments. Very good news for financial margin with clients in the quarter. The core margin grew BRL 1 billion, and the working capital, another BRL 400 million. So it grew BRL 1.4 billion, up 6.4% from the previous quarter. Another important message is that we've been increasing our average margin quarter-on-quarter. In the consolidated graph here, it started at 7.4% in the third quarter of 2021 and reached 8.6% in the third quarter of 2022. And in Brazil, it went up from 8.5% to 9.4%.

This growth was not only seen in the annualized margin but also in the annualized risk-adjusted margin. So it's good news. We've been managing to grow with quality. I think that this is a very positive highlight. The next item I want to highlight is the margin with the market. There is currently a very challenging market, as you've seen with the higher interest rates and more volatility. And even so, we've been able to consistently maintain the results over the quarters.

We remind you that this year, we established a capital ratio hedge in a cost around BRL 500 million per quarter, as we mentioned in the beginning of the year when we released the 2022 guidance. The cost is very susceptible to an increase in the interest rate and to the difference between the interest rate in Brazil and international interest rates. Despite that, we performed well this quarter in Brazil with a margin with a market of BRL 900 million, and we've been able to meet our expectations. We should keep in mind that we no longer have the effects of the overhead strategy. This means that the 2022 numbers compared to last year's number that included the overhead result. So we've been able to keep a good margin.

Draw your attention now to the growth we had in a number of lines under commissions and fees and results from insurance operations. So we recorded a fair growth in the period. Credit and debit cards increased by nearly 8%. In the asset management business, we have a drop of 11.8%, but it's crucial to draw your attention to a very important accounting criteria. We recognize on a cash basis, the performance fee of the asset management business. Typically, this effect is felt in the second and fourth quarters. Therefore, it was accounted in the last quarter and it will happen again in the fourth quarter of the year.

Therefore, comparing the third quarter with the second quarter is not ideal. In the fourth quarter, if we managed to perform well in our funds, we should also recognize the performance fee. Another highlight is that the insurance business continues to grow. Here, we have positive impacts on insurance operations and less positive impacts on pension plans due to portfolio hedge and deflation in the period. What we call core insurance is growing 53% year-on-year I've been telling you over and over that there was a gap in our insurance business and that we would focus on. The fact that we've been improving our performance, I'm just delighted with this evolution.

Moving forward to financial advisory and brokerage services. Despite a drop in this line, we keep on trying hard. This is a harder year for equities, but the bank has a very solid performance in both fixed income and M&A. There was a slight drop due to a little less activity in the quarter. Equities have not been so good, but we've been leading all the fixed-income rankings. And as you can see, we have a fair share here of 27% in origination, 33% in distribution and 31% in ESG bond issuances. Let's just say that the DCM performance is really strong. Last but not least, let's talk about asset management.

In addition to the effect of the performance fee, which I've mentioned before, it's essential to show that we keep on growing. As you can see, we have an open platform and have been working a lot on incentive models with complete independence, which allows us to grow more in open platforms than in our own products. But it all depends on the cycle, whether it's a higher or lower interest rate scenario and our clients' investment profile and on what investment products they are looking for. We have a lot of flexibility when it comes to meeting our clients' needs.

Speaking of delinquency, I'll get started with the NPL 90 days overdue because we have some important messages. There was a slight rise in NPL 90 days overdue in Brazil, as I told you in the beginning of the presentation, I also told you that when we were to make any sale in an active portfolio, we would make it with transparency. If you compare 3.25% to 3.29%, the difference is basically the effect we had from the active portfolio sale in the period. It was a positive economic result, and it also decreased the NPL ratio.

So again, for the sake of transparency, we thought it was important to share this piece of information with you. The total 90 days overdue NPL was impacted by only 3 basis points. If it weren't for the sale of active portfolio, our NPL would have been 2.85%. Once again, the sale of active portfolio was made at a positive economic value, which is something good and healthy for the bank's balance sheet. When we talk about NPL 90 days overdue in Brazil, individuals NPL posted a slight rise by 30 basis points as the active portfolio sold was mostly made by individuals. The impact would be an increase of 7 basis points. And here, I'll pause for a moment to talk about something that will surely come up here in the Q&A session because I'd like to address a critical point. You must remember that in the third quarter of last year, I told you that there would be a gradual normalization of the NPL ratio.

This was the bank's expectation for 2022. As you can see, the normalization has been happening in a very healthy way while still operating in lower levels than pre-crisis. We expect the NPL for individuals to get a little worse, perhaps for one more quarter. We expect the impact for next quarter to be of a similar scale to what we have this quarter. This is our best expectation for the information we have today. But of course, there's a lot of uncertainty. Things may change. We expect NPL normalization to levels similar to those we had pre-COVID in the first quarter of 2023. This is an important message.

We see a slight rise of 10 basis points in NPL for SMEs. Moving to the short-term delinquency, individual's NPL ratio for 15 to 90 days overdue rose 10 basis points, whereas for SMEs, there was a drop of 10 basis points. So we expect well-behaved short-term delinquency rates and 90 days overdue NPL to gradually normalize to levels similar to those we had pre-COVID which is super consistent with what I've been telling you for the last 4 quarters. NPL for the large corporate segment is at really comfortable levels, 0.1% and although NPL is not exactly the best measure for monitoring delinquency in the segment.

Moving to credit quality and cost of credit. The ratio renegotiated portfolio to total portfolio was flat at 3.2%. But there's an increase of BRL 1.7 billion in the quarter, of which only BRL 900 million correspond to NPL 90 days overdue. So we keep highly focused, renegotiating what makes sense to renegotiate. There's no purpose other than providing good service and some support to clients who really need it. However, for those clients who are regrettably far in the red, we follow our collection rules with all due care. Another important piece of information is that the coverage for NPL 90 days overdue in this portfolio is over 220%. This is a very sound coverage, which is also very positive news. The reprofile portfolio is the one that we segregated in the beginning of the pandemic the Travessia program, which was the program implemented to help our clients who were not overdue at that time to make it through the crisis.

This reprofiled portfolio started at BRL 53.5 billion, and it's now at BRL 21.5 billion. So more than half of the portfolio has been amortized to this 2-year period, down 39% year-on-year 10.8% quarter-on-quarter. 60% of this portfolio is collateralized, and duration tends to increase once the remaining unsecured amount is paid. Therefore, the amortization volume tends to drop, but with more collateralized mix and good credit quality. The cost of credit to portfolio ratio also posted a slight increase. The nominal value is up due to the portfolio growth, but we are still running at levels lower than those of the pre-pandemic periods. So there's not much worth mentioning regarding this item. We reached a coverage ratio of 215% flat or a little drop compared to the previous quarter. With fairly adequate coverage in all segments. We reached 188% coverage for individuals, and we must keep in mind that the average coverage from 2015 to 2019 was 167%. That is -- we've been operating at nearly 20 percentage points above the historical average.

Going forward to OpEx, I'd say this is a more challenging quarter due to the effects of the collective bargaining. The negotiated bonus was a major effect in the quarter. The 2021 salary adjustment of 10.97%, which impacted until September 2022 was based on inflation measured by INPC plus 0.5%. The broad consumer price index, so-called IPCA, was up 7.2%, general market price index, or IGPM rose 8.2%, and we recorded a bonus effect of BRL 80 million since September 2022. So OpEx increased 3.8% quarter-over-quarter and 6.9% year-over-year.

Just to remember that last year, there was no bonus since it was a different negotiation of collective bargaining negotiated every 2 years. This means that we managed to run OpEx below inflation even with the bonus impact in 2022. I'd like to show our OpEx agenda as follows. First, we compare core expenses between 9 M21 and 9M 22, there was a 0.9% rise way below inflation. As a reminder, the bank's inflation is much higher because of the salary adjustment. We have in place our efficiency program, which started some time ago with positive results. Moreover, the bank keeps on growing, doing more business.

And I would like to say that transaction costs may be a burden in OpEx, but this is a counterparty in increasing revenues. Our investments grew by BRL 1.9 billion. There are investments in technology, in new business and in business expansion, seeking higher efficiency, productivity, revenue generation and cost reduction. So these investments are focused on the long term. In the end, we excluded Latin America operations. The bank has had a great performance with financial discipline and good cost management. It's true that we do not manage cost for the sake of cost. We manage the efficiency ratio. And we have the lowest ratio in the banking industry when calculated in the complete methodology. Our efficiency ratio reached 38.9% in Brazil and 41.1% in the consolidated. Last but not least, the news regarding capital is great. We managed to increase capital by 60 basis points in this quarter with CET1 going to 11.1% from 11.7% and 81% to 1.6%.

You only have to keep in mind that the regulatory limit is 1.5%. The message here is that we still have a buffer of 10 basis points, just in case the Brazilian real appreciated and we have to optimize our capital ratio. CET1 reached 13.2%, basically due to higher earnings, including the recognition of a provision for dividends and increase in loan portfolio. This way, we were able to finance our growth and also accumulate capital for shareholders, which is very good news, too. And here I finish my presentation, these were the main messages. We feel very positive about the results of this quarter. Of course, we're aware of the challenges we face at all times and highly aware that we'll face major challenges in the future. I'll be joining Renato now for the Q&A session.

Once more, thank you very much for your attendance and participation. See you in a while. Take care.

[Renato Lulia, executive]

[Interpreted] Milton has just arrived, so we can start with our Q&A session. And it will be bilingual. So we will answer the question in the language of the question. And if you want translation, we have the option for English and Portuguese can select it. Please remember that you can submit your questions via WhatsApp. And for that, the number will be plus 5511-99-148-4308.

[Flavio Yoshida, analyst]

[Interpreted] I would like to congratulate you for the excellent work and the very good results of the bank in a scenario that is very challenging. And I would like to understand, in your opinion, profitability for the future, at least for the next year 2023. The scenario is challenging, the visibility is low. However, most of what you've done all throughout this year will be, let's just say, you're planting so you can harvest next year. So from that dynamic, are we expecting a good result next year? And also I wanted to understand the dynamic of the credit portfolio, what we've seen was an acceleration in the second quarter. Now there was a bit of a deceleration year-on-year. And I wanted to understand what can we expect. I know that you're still going to publish the guidance for next year. But what can you give us as a feeling for the growth of the portfolio for next year?

[Milton Maluhy Filho, executive]

[Interpreted] Yoshida, thank you for the question. I think you've concluded very well. Well, since it's the first question, I don’t want to provide any information that is not correct, but we are still working with the scenario of 2023. We have a lot of uncertainties and a lot of points that we need to refine. We are in the final points for the issuance of the budget. In the first call of the next year with the results of the fourth quarter, we're going to talk about these points. But the message here is sustainable growth. That's the central core point. And that's what we've been working for over the last few quarters.

There is a review of the guidance of 2022. Well, we haven't really reviewed it. Of course, there are ranges for the lines. But we understand that within this geography, we can deliver the results of the bank and reaffirm, therefore, the guidance for 2022. The expectation, therefore, is that we will see a growth that is healthy. Well, there is a small -- there is a decrease in the portfolio, there is [ inertia ] for the portfolio next year. There is a way that the interest rates still impact our business. And the way that the bank does the hedge of the working capital, the deposits. So there is always an integral that we have to see observed. Well, there are challenges such as the investment bank, how the activities will unfold, and we have to keep an eye on this. There is challenges in the cost of credit.

We're still careful in the follow-up of the risk of the bank and very cautious. The scenario inspires cautious -- and linking to your first question -- well, second question actually, there was a decrease in the third quarter, and we are growing nonetheless, the portfolio is bringing healthily. We are getting a penetration in the lower-risk clients. We are deleveraging some clients that have higher risks. We've been able to have a capillarity in clients that we have our history. Well, we are increasing the share of wallet in these groups that we have a relationship with, and we are very careful with the external challenges, especially mono-product. If we have to mention 2 cases, the credit cards and the mono-product. And here, the credit card for the shareholders well for the clients of the bank, we have the open ocean segment where we acquired the digital clients and also the clients where the only leverage credit. And typically, you have a lower income than the average.

Here, we've been also conservative, and we reduced the concession in a material way over 90% reduction in the period and in the finance that has a value proposition with our partners, we've done adjustments in the concession of credit nonetheless. This is a quality of risk that is much – well, the open and you use the physical — Well, you do the charging. And this is the -- what we've been following up there, there was a decrease. And I can see that for the next year. If we anticipate the guidance, we're going to see a portfolio that is going to grow less than it's been growing 2022. We just have to see that this is a portfolio that has been added over the last quarter.

And since there is a reduction in a base effect, we're going to see a reduction in the portfolio as a whole. And the central point here is to look at our business. When we look at the cost of credit. We are a universal robust bank where we are very relevant in all these segments. And we are working in this balance of the portfolio allows us to be able to navigate in a very consistent way throughout the very difficult period. There are some important compensations in the portfolio of [ Selic ] and also an upscale affluent profile that allows us to have results of credit that are very adequate. And now we go back to what we observed in the pre-pandemic.

[Renato Lulia, executive]

[Interpreted] Thank you, Milton. We have now the next question from Tiago Batista from UBS.

[Thiago Bovolenta Batista, analyst]

[Interpreted] Congratulations for the results, very strong quality good portfolio. My question is about margin for your customers. And here, I'm focusing in sensitive operations to spread. If we look at the rate of spread of this spread, we are seeing a growth quarter-on-quarter, but still much lower than what was pre-COVID. Pre-COVID was -- now it's 8%. It was higher. Now can we imagine that market will converge because it was pre-COVID or not, the change in mix was so large a mix of customers, clients, and products were so changed? Why do we come back to those levels then? And the other alternative is the margin post-revision. That is 200 bps below to the pre-COVID so it's 5.6%. It's close to 7%. Can we imagine that the margin is destripping or the pre-provision will go back to the levels of the pre-COVID? That’s the point.

[Milton Maluhy Filho, executive]

[Interpreted] Okay. Thiago, thank you very much for your question and for analyzing the results. Well, first of all, things are much more different than the pre-COVID. A few of the information that is key that we have to pay attention to the evolution of the margin. The first thing, the -- our guaranteed portfolio has grown 5 percentage point increase the capillarity of 5 percentage points. And of course, that brings a mix to an accounting less risky, but with giving less margin, of course. And there is an effect at the beginning of COVID, which was a cap of the regulatory cap that had an impact in the profitability of the profits – of the product. We had the risk line, so with a drop in the portfolio that was growing and that had an effect on the margin. Well, there is a mix between guaranteed and non-guaranteed, it changed. That's an important information, for example, bank over trusts.

So look, our wholesale portfolio, if we just go back 3 years, it's something that grew 55%. If you go back 3 years down in the past, it's a portfolio that has -- that is very horizontal. So if you have more wholesale less, well, we have more guarantee and less clean. That's the second phenomenon that has an impact on the margin. And the third aspect and this is very relevant for the period that we've seen an interest rate increase until the 13.75%. The speed has been very, very high. And there are some products that are impacted. And in the flow, we've really increased the rates. But in the portfolio, there is more impact when you compare retailing wholesale. You have the overdraft, the [ cap ], the real estate and [ mat 4 ], we have a dynamic of spread postpaid.

So on one side, you are benefiting from the benefit of the savings account and on the other hand, you have an impact in the credit, and you have the 2 effects that you leave the spread in the credit and the liabilities in the front line. So there are several other effects. My vision is that we should not go back to what we had in margins and pre-pandemic. We are still seeing our margin stabilizing with maybe a bit of an expansion, but stabilizing above the levels that we are seeing here. This is our best estimation thus far.

[Renato Lulia, executive]

[Interpreted] Thank you, Milton. Third question online, Gustavo Schroden from Bradesco BBI.

[Gustavo Schroden, analyst]

[Interpreted] Congratulations on the results, very strong. I want to ask a few questions. The first one is asset quality. Part of the correct wording is appetite for risk. I'm going to use that phrase for a lack of a better one. We see delinquency and the individuals it's growing. There are some different dynamics between the players. In fact, it has been growing for everyone. My question, Milton is regarding -- well, not trying to predict the future if the NPL will stabilize in the next quarter or in the first quarter of '23. But up until what do you believe that we can maintain, let's just say, that appetite for risk in those riskier lines, how much do you accept of deterioration in the NPL that we can continue still going along with this rhythm?

We see a deceleration in the growth, specifically credit cards is growing, but there is a deceleration also vehicles or cars financing. Well, what is your limit really looking at detail-rich I'm not even thinking about if we stop this quarter, next year, we're going to start -- you're going to stop. It's very difficult to estimate, but I wanted to understand your risk appetite in those lines. And the second question is quicker. It's about dividends. I think that the capital is replenishing itself. There is a level of ROE 2021 with a dividend of 25%. The trend really is to exclude FX -- extraordinary effects, the trend is the capital to go back. So do you think that the dividends are going to go back to 40% next year?

[Milton Maluhy Filho, executive]

[Interpreted] Gustavo, thank you. It's a pleasure to see you once again. Thank you for the comments about our results. Let me address delinquency and individuals, natural persons. First of all, [ let me speak in ]Portuguese. Well, we actually understand the complete portfolio. Well, our operation for individuals is very diverse. We have the account holder and all the segments that we have, the unit class personnel all the products, we have our operations, monolinear, credit, real estate, we have vehicles and we have the operation of credit cards. The 2 portfolios that feel like you say, the cycles that we're observing with the increase of inflation is a portfolio of credit cards or open ocean as we've talked. And our appetite is to create value. So our appetite hasn't changed. It's dynamic and it depends on the conditions of what we see in the prospective scenario, what we are observing. -- the reality, the result of these crops, you say. So we've had very relevant adjustment in concession. We reduced rigorously.

The concession in certain products, credit cards, open ocean is one of them vehicles. We've done -- as you commented, the portfolio of vehicles at the margin, the total portfolio is reducing, and that shows that we've been able to adjust to the necessary adjustments. And now the important is that we are always expose, the X before and then we react feed this model. These -- this is within our epitope. You have the vehicles, it's already fitted. So the credit card is more volatile. We are doing a very active management of the portfolio, very entrance. The portfolio is very relevant, as you know, and it is subject to more volatility, but we've been able to absorb this in this period.

All the account holders given the profile of our client therapy in our relationship. 2/3 are clients that are engaged. So we have a credit performance that are very solid during this period. Therefore, since the portfolio of a computer is very diverse individual is very [ diverse ]. We have compensation. Some are more pressured, some are less pressured. If we look at the future, there will not be a review of the appetite in terms of expanding with more lines of risk unless we have clients that we have records that we have a good relationship where we have a good capillarity of credit.

So what we've been able to do is increase the share of wallet in those clients increase the value proposition, improving the relationship and that allows us to grow with quality. That's the central message. Well, the harvest crops are fitted. The adjustments have been done in a relevant way. And when we look at companies, we have to do the breakdown in 2 worlds. We have wholesales and retails. We have the middle market, above BRL 50 million. And then we have the ultra-large biggest corporations of Brazil, their clients. So when we look at the wholesale, the performance is extraordinary. We've really, really would -- grown with control costs. We had a popularity with our clients. We have a very solid value proposition. And the cost of credit is changed.

Well, we have the middle-year companies, but this is for the wholesale because we operate with a profile of the retail, where we have the small companies, but our mix is a bit more upscale from the invoicing and they have a better quality for the retail. When we go to middle, this is not different. The story is not if we've been growing with a lot of quality with a cost of credit that is very well behaved and margin -- net margin that is very healthy. As we see how we're managing the bank, we're not just looking at top line. We refeed our models as we bring new observations and new elements, and we are always looking at profitability, always looking at that. Our mantra for the creation of value, the return on allocated assets, this is the main driver for the decision-making process.

Even though we have appetite policies for credit that are very well defined. In margin, we are always pricing, well, and we are making the operations run aspect as we can in the best way possible, not only being able to look at the past but also estimation doing an estimation of the future performance of our banks. And that's how we manage. We've done a relevant decreases, and we are growing with [ Poladian ] expanding as possible, our financial margin with our clients as a portfolio growth – dividends, sorry. Question number 2.

Before we give the floor to Rafael. About dividends. The question is for your objective. Our policy for dividends, you know the table that was published. When we said there is, on the one hand, that matrix the APR assets that are underrated by risk. On the other hand, the profitability. Our appetite for risk for the SAT1 has reduced 311.5 it was 12%, and we had a reduced at the board. And we were talking about 13 percentage points on CapitalOne. So this is our event. Before the table of dividends, we're still observing at 13.5%. The second point, when we go to an excess of capital, we are always observing, respectively, and not looking to the best, our real capacity to be able to grow and invest.

We not only growing the portfolio, we are doing new investments acquisitions. We have opportunities that are coming up so in the past, we used to operate with a payout -- with a quarter with a payout that was very high because there was an excess of capital in the bank that was very high. And we didn't see the perspective of the use of that capital. That's why we created the policy for the proctoring and the payout was very high. Now we don't see the increasing. We're still working at 25% for 2 reasons. We are doing a catching up in the capital. If you look at the last 2 years, we've really replenished the main capital of the bank we are about the episode. We have challenges for the future positive and challenges, nonetheless, in the same way that we have a change in [ Basel ] that can risk of credit or benefits or operational risk. There are some public days.

There are some transactions that we are working with the regulator that consume the capital, their intangibles that go against the capital, and we are still investing in the bank. So really, looking at the reasonable horizon, at least in the next 12 months, we do not see any sense in increasing the payout. What we are doing, yes. And we've been able to do with predictability of consistency has increased the profit. And the pay the information is that we are working with 25 any changes, looking at the future for any scenario. If we do not understand that the bank has the capacity to have an adequate profitability, the capital of the shareholders, and we're going to increase the distribution certainly.

[Renato Lulia, executive]

[Interpreted] Now Milton, we are going to go Rafael Yes. Sorry for the full start. Now it's your turn.

[Rafael Berger Frade, analyst]

[Interpreted] I think that I was going to have us answer about your dividends, your policy of dividends. Congratulations on the results. There are 2 questions here. I think that Milton has commented on that – on the previous event even on the over-offering, maybe there is an over offering of credit cards in the open hand. You've commented really on that issuance. Could you give us a readout on what you understand that happened in the market, specifically in that segment that there was an excess of offering?

And the second question, still were not trying to get a guidance, but just to understand your dynamic of delinquency. Milton already mentioned, if everything else is constant, maybe delinquency will be stabilized in the first quarter. Well, what are your expenses with provision? I mentioned that the expenses were provision are going to go to the fourth quarter. Would it be reasonable that it is a percentage -- as a percentage of the portfolio would be maintained in the same levels from the fourth quarter, so there is a stability and then the provision for the percentage of the portfolio, we have a trend in the evolution in the same [ Bridon ], let's just say, or there would be any variations. How do you see this?

[Milton Maluhy Filho, executive]

[Interpreted] Rafael, thank you for the question. Thank you for your initial comments. Now let's talk about the operation and the credit cards. Now we always talk about the benefits, the benefits of competition, more players, more digital players, more competition. Certainly, that brings benefit. The client is benefited the experience changes and then makes the bank having to reinvent ourselves every day, so we can deliver a better value proposition and experience for our clients. Now if you add a series of effects, and I'm talking about regulatory effects, and I'm talking about the whole scenario issues.

Well, we have the lower interest rates are negative in some places, the phenomena of the abundant capital for fintechs and new companies that are growing. And the greatest driver, it was growth. We've always heard about the growth, the base. Those were the drivers. And now we happen a lot of these players started their operations based on credit cards that was their main product, we're maybe the only product at that time. So at that time, the investors had grown robust increase your base of clients and reduce your acquisition cost. Many of them had journeys that were incredible for the clients, but they are growing with a lot of effort. The second I expect is that the growth was given in an unbalanced way – unbalance.

What do I want to say about that their products, they don't have any fees. They're free with a digital experience that is very good. And detonates an unbalanced economic imbalance between the client and the organization. So first point -- today is very easy, and it was very easy. Any client would acquire a product of credit cards. So whether it would be through the digital channels and the fact that they didn't have to pay any annuity – any fee. So they can have some credit cards issued in one day, and that was very easy. Second element since there is no cost, you get a credit card in your pocket and you leave it there until you need it. Third, that we observed in the open action. The behavior of the client is a client -- a customer that generates the sudden death.

Well, it has a mono-product with new relationship only use with the credit card until they have the difficulty of pay for the free what they do, they get it in the drawer and then they go to the next. So the main engagement is key in that relationship to be the main engager. That's the core issue. The third element is that when you create it, something that are artificial in the tariff for the interchange of the prepaid, several businesses had a revenue that was artificial. There was asymmetric. It was artificial and that made the profits and liabilities of the business model. Now we have more interest rates, so the main vaccine for that excess interest rate and it's coming up all throughout the world, the investors.

They have less appetite. So the correction for the market value of the -- many of these companies happens now and the value of these companies drops. And the investors are expecting profitability for them to get profitability, you have to get levels of monetization. And you have to have a risk and credit that is adequate. When you operate in a very low-income public domain leather is credit. They don't have pockets. These clients don't have the markets you have other relationships with you. So it's very difficult in those scenarios such as the one that we are observing increasing inflation, interest rates and all the effects that we've been seeing. It's very difficult for this client should be able.

Well, their bargaining price has been corroded. They don't have purchasing power. They have difficulty sometimes pay their obligations. So yes, there was an over-offering. There was a capital asymmetry that was relevant, the bank's consider the capital levels to operate with this public, it's much higher than the fintechs. I am -- I believe in proportionality. I think that we need to classify by size. And the Central Bank has done that recently met, but it's still not implemented. There's still a phase-in of that change. The rate of the interchange all the exchange many of the clients -- well, the business model was based just on main mainly on that tariff that was more than the double than the regulatory capital of the central bank of line by the central [ byte by the MDR ].

So we generated that effect that was very relevant, very important effect. So part of what we are seeing of delinquency has to do with the over offering. The client is levered. They have last financial education, maybe less capacity to for the decision-making process until when they can go with their intents and the intents of the families has increased. And when we stratify the space, we can see that the growth of low-income was 2 products. Credit card and personal credit and personal credit, it becomes a lever for you to remove the client from the credit card and given deadline. So they get base.

So it's a renegotiation that is for us so you can remove the client from one product and then getting them to the personal credit portfolio. So this is a portfolio that grew on the market, but part of the delinquency will be up there with the time in the future because you have to look at the dynamic as a whole. But I think that there was a very, very low -- there was too much access here. So the corrections happen and it takes time. It takes time to digest and it takes time to do the adjustment in the [ parent ] in such a way that will affect the growth of the portfolio on time. And about the cost of credit. If you look up ahead, we still think that there was a small expansion in the indicator.

I'm not anticipating any guidance. Look, we still believe that they're going to stabilize in levels that was lower than the pre-pandemic? When we look at the fourth quarter of '19, around that we were running 3.2% of the credit index. We believe that it will be the relationship should be going slowly towards this threshold. But once again, there is a lot of uncertainties. There is a lot of things that were not defined, and we're going to follow up. And at the beginning of the year, we're going to have more unity to give a guidance that is more robust online per line of the bank.

[Renato Lulia, executive]

[Interpreted] Very good. Let's go to the next question. We have a long list of questions today. Next one, [ Renato Melone ]. He is on screen.

[Unknown Analyst]

[Interpreted] And congratulations on your results. Can you expand a little bit more on the adjustments that you're doing with the credit concession? For example how much was digital the cutoff on the limits? Well, how much of the drop in approvals? Also, well, with these reductions, do you -- are you going to continue next year? Or are you at the correct level for the scenario nowadays?

[Milton Maluhy Filho, executive]

[Interpreted] Renato, first of all, I say that the adjustments that were necessary was already done. Of course, there is always a space on the margin, and this is a dynamic agenda. If we are in a commerce scenario, then we can do adjustments, we can look at the history, how the model is performing, and there is always a prospective vision. Remember, we've been working with our models not only that look at the expectation of the bad rate of this client with time but also what is the macro perspective. So there is some macro variable. And the cutoffs well, on open ocean was very relevant, but not only per channel. We did really adjustments that are relevant in lower income. These are the incomes that are impacted the people that are impacted more in this process. So there was a decision that was made for many -- for a long time, we've been managing this sharing.

There was a reduction in 10 percentage points in the period, our share with this public just to give you the relevance of the adjustment that we've done. And we grew in public that have a risk level that is better given the income that are suffering less in the cycle. So there is the guaranteed products. So we have the guaranteed products. And we've increased them 5 percentage points in the capillarity of these products in the portfolio as a whole. For the things that we're analyzing.

And based on the information that is available, the adjustments that were done. If we look at the future, there can always be an adjustment, additional adjustment. But the big -- the sharing already happened. If you look at vehicles and the cuts in production very relevant in credit card, we cut 90% of what – 90% of open ocean 80% gives you a dimension of the size of the adjustment, whatever the volume, 90% of adjustment shows how much we're seeing these harvest with more volatility, and they are not connected to our [ elepilty ]. And the central point is that we're quick and dynamic. We interpret the data. We have the deviation, we work surgically and our models allow for this.

[Renato Lulia, executive]

Next question comes from Tito Labarta from Goldman Sachs.

[Tito Labarta;Goldman Sachs;Analyst, analyst]

Great. My question, a little bit on the capital, but more specifically, given the macro and political environments. You mentioned, I think, core Tier 1, 11.5%, 12%. You're right around there, good improvements this quarter. Just given the scenario that we're going into, do you feel that you would need to hold maybe more capital. Asset quality is deteriorating some uncertainty on the fiscal situation in Brazil. I don't know what you've heard on potential movements from the government. Just what we heard is like increased use of public sector banks, potentially renegotiating some debts. So any color you can provide on what you're hearing from government potential programs? And would that make you more cautious to want to hold more capital?

[Milton Maluhy Filho, executive]

Okay, Tito. Thank you very much. So I'll answer in English to respect the language of your question. So the topic is just going back when we define our risk appetite and the levels of Tier 1 that we were expecting for the bank, we were seeing about 13.5%, and this is what we use for the dividend policy of the bank. At that time, if you remember, the largest or the biggest impact that we could have in our capital base was related to the FX, the valuation, held the valuation. And why was that? That was because we have a huge portfolio, not only in Brazil, in other currencies, but also the banks that we have abroad, especially in Latin America.

So you have to take this in consideration. From that time, when we look today, there is a second huge impact that was due to the FX devaluation. It was the overhead strategy of the bank that whenever we had a real depreciation, it will generate tax credit, and this would have a huge impact in our capital base. So there is no more overhead. So there is no revenues, but there is no risk for capital. And second, I think, successfully we implemented by December of last year when we announced that we were implementing the hedge of our Capital Index. That means that there is a cost, this BRL 400 million, BRL 500 million per quarter. But when we look at full year, there is no volatility due to the FX.

So even though we had some appreciation at the beginning of the year, we are seeing some devaluation and our effectiveness of the hedge has been perfect. So that is very good news. That means that the buffers that we had for this type of volatility, now we can replace with further uncertainties that we might have in the future. So we are very comfortable and we do a stress test in our balance sheet all the time and we have these discussions. And we see that we have a very comfortable capital base and that our appetite is pretty well defined with 11.5% of CET1 and also 1.5 Tier 1. So we are confident with that. I think we have a comfortable buffer. We don't have the FX risk anymore. We should be increasing our capital. There are some positives and negatives, as I was saying just a few minutes ago, we have for credit basal changes, maybe have some positive impact in our capital. We have the operational risk that will impact the bank, but this won't be in 2023 should be in 2024.

We have some approvals that are still pending investing or buying some companies. So at the end of the day, we're still comfortable. We feel that we have the capability to keep growing capital, but still with a good buffer from far away from the regulatory requirement that can lead us to uncertainties and changes in macro policies. We think it's still early to say what's going to happen. And although we see the market very volatile, yes, there was a good example of that, but it's still in the mood of expecting new flows to understand what are the risks that we are seeing looking forward. But we have a very comfortable capital base, and we are very fine with that.

[Renato Lulia, executive]

Thanks. And the next question comes from Jason Mollin, never sure which language you're going to ask your question, but I'll leave that up to you.

[Jason Mollin, analyst]

I'll ask my one question is for question, and I'll do it in English since you have all -- everything set up to do that. Well, first, I'd like to repeat the congratulations on the solid results. Itaú Unibanco is living up to the very high standards in a challenging environment, in my opinion. Most of my questions and operational performance have been addressed. So let me ask this. In the management commentary report, you started with the statement that Itaú Unibanco's digital and cultural transformation agenda continues to evolve. And you have provided strong digital metrics and customer satisfaction through MPS. But if you can provide a recap and update on how the cultural transformation is evolving, have there been challenges? And how have you been facing them, I think it really differentiates the...

[Milton Maluhy Filho, executive]

Great. Good to see you, Jason. Thank you for the compliment. It's a pleasure to have you here with us. So I think someone the other day was asking me how many of my time I spent with the cultural transformation. And I answered 120%. And why is that? Because culture transformation is something that come top down, and we have to do that every single day. Every single decision every single promotion, every single discussion every single moment you need to walk the talk the new culture. So the thing is that last year, we worked very deep in defining the territories of this new culture. And we had discussions internally with many people from the bank.

And I would say that 90% of our employees, more than 4,000 people in this survey said that they would expect a relevant digital -- relevant cultural transformation. And this was just to like to know that we still have a very fertile ground to invest. So then we started to discuss in the executive committee with the Board of Directors saying what are the possible movements that we can do, and we were bought at the end of the day. We really think that we have a lot of good things of our culture that never change the ethical thing, client thing, profitability, performance, sustainable performance are things that won't change in the coming years, but we still have to modify relevant things in our culture. So we did that.

We've been working a lot of workshops, internal workshops. We've been discussing with all the managers since the executive committee just to let you know, I was part of 4 workshops with the Executive Committee, where we had very, very deep discussions about the new culture because we have to keep in mind that the change begins in ourselves before saying that people should do this way or that way, we have to be sure that we are doing the right way. And this is the discussions we've been having in the executive committee to guarantee that we are the role model, the partners of the bank of the role model, the directors of the bank of the role model. But they have to be trained.

We have to be trained. We have to be very open mind to understand that things are changing, and we have to do things in a different way. So this is basically the way we've been working. We've been having many, many workshops. We have teams dedicated to the cultural transformation. And I think if you ask me, how can I measure culture? It's not only by the workshops or the reaction or the capability of doing things. We had a major change in the bank. So there is no title anymore. I always say that it's not a irrelevant information. It's very relevant. We only have directors. We don't have direct Executive Director, Executive Vice President. We are all directors.

Now this gives us a lot of flexibility when we have to move people because we give them a mandate, we give them an objective. We give him a goal. And that's how, and there is a compensation discussion. There is nothing else. We increased our partnership program. We used to have 2 levels, the holding partner and also we have the associate. We don't have those names anymore. We have partners. And all of them are partners. We have 450 positions of partners inside the bank coming from 195. So more than twice the size we had a year ago. We don't have one layer, the active layer that we used to have. We don't have anymore.

So there is much more autonomy, much more accountability, much more speed, agility is something that we take a lot in consideration. But never forgetting what brought us here, the ethical, the risk capability of managing the bank, the performance and sustainable performance in the long term and the client. It's something that we're always upgrading. So this is the agent that we upgraded. And also, the way we are working, the method is relevant for the new culture. So if you have the digital transformation where we are very advanced, if you have the way of working changes in a more agility way.

And if you have the right culture, where are the results, the NPS. So at the end of the day, the client should be more satisfied. So the way I measure cultural transformation, it's in the ENPS, the Employee Net Promoter Score. Just to give you a number, we reached 83 points in the ENPS. We won in Brazil, the first company in the great place to work, not only on financial system, but also looking at companies all over, so #1 in great place to work. This is a very good feedback that we receive from our team. But the most relevant one at the end of the day, if you have had people, you should have had clients if you are working in the right direction. And the ENPS of the bank, ENPS has been achieving its maximum when we look at the historical range. So we are very positive that we are in the right way, right base moving forward, but still challenges. You don't change -- you don't ship involves in 2 or 3 months.

We have to do that as time come by, we are moving forward. And also we are bringing new culture to the bank all the time. So we have to work and be very open mind that we don't know everything. We have to take the competition very serious that we have to look to the market, understand what they are doing, what you can do better, and you need to bring good people to the bank. So this is the process that we are going towards. And we are very happy with the evolution so far. But on the other hand, I would say that we are 15% or 20% of the journey. So we still have a lot of work to do in that front.

[Renato Lulia, executive]

[Interpreted] And now the next question, we have Rosman from BTG Pactual.

[Eduardo Rosman, analyst]

[Interpreted ]I have a very quick question for you. I think that a lot of investors are surprised with the difference of the results of Itaú for their private partner -- well, the other ones, Santander and Bradesco. Well, you talked about the [ Poltor ]transformation. You -- since you took on in CEO, well, how -- if we had to look at the difference in performance to your peers, how much do you think can be explained by more cyclical issues. It depends on the cycle of the client that the bank operates the high crop, the more – the companies and the individuals are to have more money. How much can that explain the transformation? Maybe that would be the structural thing. I'm not trying to get a number, but I wanted you to give us a guidance how much can we see. And if thing that you're seeing will continue and that will mean a gap in the return for Itaú and to its peers.

[Milton Maluhy Filho, executive]

[Interpreted] Rosman, thank you for the question. I want to do a statement before -- before I answer first, I have an enormous respect for our competition, enormous. So as I've always said, Itaú is what it is because Bradesco exists because Santander exists because Banco do Brasil exists all of our competition has an enormous value. They've done incredible things all throughout the years, and these are long-term journeys. We cannot just look at 1 quarter, 1 year. We have to look at the long term. That's the first statement.

Second statement that I want to give you. Maybe I should talk more about the bank itself I don't want to do comparison, relative comparisons. I believe that you have data information capabilities to get your own conclusions I want to talk about why I believe that we are having a performance that is sustainable, predictable, and quality based. There is no single answer. I did not attribute all this exclusively to one element or the other. There's a series of factors. There are said the factors from the long term, from the external factors, internal factors, I'm going to try and talk about the strength of the bank. First of all, the fact that we are in a universal bank, strong that plays a role in the quality of our results. What do I mean by that? If you look at all the businesses, we're investing that we have a competition.

We have had highlighted performance. We have really wholesale participation that is relevant in Latin America. We've done a great catch-up. That is great. When we look at wholesale, and I apologize before it was retail. Well, wholesale, we have credit. We have in the every business in the cash, services product, the distribution sales. We've had performances that are on the investment bank. If you just look at the ranking and you follow up that closely, we can fight for the leadership in all the rankings, whether if it's fixed income, variable income, M&A. These are not decisions that were taken just now. We've been working with these franchises for many, many years.

Since Itaú's exception in 2013, and we really focused there our wholesale, we see an evolution that is consistent, that is constant with our operation. Back in 2005, we did an investment in the investment bank. And now we're getting the fruits of that investment. It's evident that it has to do with the human capital, it has to do with the culture, it has to do with the -- our vision of the client. But we're getting the fruits of long-term structural decision-making process. The bank is an evolution, 88 years of story and the bank has always evolved and has been able to be reinvest itself in times of need and shorter cycles as well.

So there is a structural issue here at hand. Second point. When we look at the profitability, we see that our -- well, our wholesale bank, we have to really mention that. I'm talking about the Latin American operation. Treasury has a very important role in that. When I talk about treasury global markets, I'm not talking exclusively on the trading table that also is important, of course. The bank has been navigating very well in the face of adverse scenarios. So talk of the interest rate. We're still delivering results that are healthy in March, whether if it's the dynamic, banking, hedge, positions to choosing the time of badge, you can be more directionally more positioned on the other. Trading is doing very well. Banking is very well regardless of the challenges of the increase in the interest rates, the rare of those positions is more pressure. We had levers last year that we don't have this year, for example, the overhead. So when you look at our asset base, we've had a fantastic year performance fees that were very strong.

And I just mentioned the accounting effect of the second fourth quarter, we talk about the quality and the capacity to manage that we've had our private. It's the market leader, and we are still growing with quality. ENPS at the record high. We had happier customers, more satisfied customers. And this is a virtuous cycle that we can increase our profitability of the bank as a whole. So I would say that there isn't just one answer. The cultural transformation is evident that it helps digital transformation is a necessary condition. It's not sufficient. It's not enough to tide the digital transformation, if you don't have the right culture. If you don't understand the client in the correct way, if you don't have the agility and the capacity to react to the needs.

When we look at the wholesale world and we look at all the businesses, we had historical mats. And retail is also an operation that is very complete. So we look at all the businesses. The really retail bank is doing very well with the quality of the team that has to do with the quality of the decision-making process with the transformation that the bank has done, anticipating to movement. We're talking about the digitalization as well that we've done. So really, in retail that is doing very well. individuals doing well. Retail the insurance business, there for us was a theme. It was a gap.

Now we are still focusing. The insurance business is growing in a very relevant way, our expectation is to double this business in a very -- in a reasonable horizon of time, level from what we observed last year. And we are going at the adequate rhythm for those. Monoliners are growing, growing with policy adjustments. Recent adjustments have been done where we're talking about vehicle or other portfolios. Retail is growing. The real estate is growing. And credit card business is important for the bank. And this is a volatile portfolio. We can across the portfolio because we are seeing the acute cycles in the past and that happens. So if I have to give you an answer, it's a set of factors. And I believe that the fact that we are a universal robust bank with competitiveness and leadership that we've achieved and that brings a great responsibility and that vision of the client that is very strong, has allowed us to navigate very well the challenging scenarios.

[Renato Lulia, executive]

[Interpreted] [ Jorge Kuri is here with us ].

[Jorge Kuri, analyst]

And congrats also on the great results. My question is on operating efficiency. I think you've said little about it, and I think you've done a lot on it. And I think that's a big part of what has driven your results to be so resilient. So you've gone from 3.7% expenses to assets 5 years ago to 2.7% today, and I'm looking at expenses to assets just to clean out the volatility of the net interest margin with the volatility in rates. If you want to think about it on a cost-income ratio, you're at 40%, how much more can you do? When you think about the next 3 years and next 5 years, could we see another 4 percentage point come out of expenses to assets over the next 5 years, can you run the bank with 1.7% cost to assets? Can you run the bank with 30% cost-to-income ratio? And what is needed to get you there?

[Milton Maluhy Filho, executive]

Okay, Jorge, thank you very much for your comments. As we say, we like to underpromise, overdeliver. So I think in efficiency, we've been doing that for a while now. My view is that as the name say or the definition say, it’s an efficiency ratio. So we look for cost, but we look to revenues as well. So it depends a lot on the scenario. We are in a very favorite moment now. If you see we're in the lowest level when we look this year, finding the lower level of efficiency ratio. So there is a lot of operational leverage that we can do, as you can see, when you look and compare to our assets. We can grow the bank and we can keep the costs under control.

The other point that I would like to highlight is that we are not -- we are investing a lot in the future of the bank. So for cost, it's very easy if you want to take a cost-only cost approach that you make wrong decisions and you decide not to invest in your franchise, not to grow the businesses, not to sell product. And you can do that, you have a much better cost ratio by the next quarter, but you won't have a strong franchise in the long term. So our decisions here are long-term based. Even if we have to invest, we're going to do it because this is the way we keep growing the bank, keep expanding the business that we do that we have.

So my view is that we still have room to keep doing the efficiency agenda. We are always discussing that cost, you have to do every single day. This is part of our strategic agenda, and we are focused on that. We are very focused on that. So my view is that still have room to increase. We are doing investments, as you know. But the most relevant thing is that the level of efficiency ratio that we have nowadays, I think it's international benchmark for global banks like ourselves. So we are very happy but not satisfied. So I think we did good up to now, but we still have room to do more.

And it will depend in many decisions that will be taken in the coming quarters. It depends on the scenario. It depends on the capability and the revenues that we are able to generate more pressure, less pressure. So there's a lot of things to do. I cannot give you one number saying that we can go 1 point more or a full 100 basis point, but I can tell you that's still room to do more. And I think the core cost that we say that we grew 0.9% in the quarter is the sense that we are doing good, and we are doing much below inflation. We will keep investing -- keep investing in the bank, and we will keep delivering low cost on the core costs. This is the mantra. This is the agenda.

[Renato Lulia, executive]

[Interpreted] Now, we go back to Portuguese, and we have [ Mato from Banco Inter ].

[Unknown Analyst]

[Interpreted] Congratulations on the results. The question is regarding credit cards. You have demonstrated an increase in the overdraft fees, and I wanted to understand what is the level that is healthy for this rate. Is there any action plan for reducing the delinquency?

[Milton Maluhy Filho, executive]

[Interpreted] Thank you for being with us once again. In fact, during the pandemic period, if you -- we cannot just look at a snapshot. We have to look at the picture, the whole picture. What is the lockdown less expenses, less people purchasing stuff and we have more payment and less expenses in the credit card fees. So our portfolio dropped in the credit card predominantly. And remember that JPY 126 billion of portfolio, we have EUR 12 billion is the -- without the interest rate. So EUR 26 billion is the interest rate portfolio. So yes, we saw a reduction during the period of dynamics and where people were spending less. And of course, with more delinquency in some portfolios, we see the empire in the open ocean. Before the decline goes delinquent, they go through the interest rate. They go for paying the installment – paying by installments and maybe they do the agreement. So part of delinquency goes through that previous step. Yes, we've done a series of actions reduction in the margin.

There is a portfolio that is installed, but the bank has the capacity to be very active in the management of the limits of our clients, whether they are -- they have the benefits of the capital. And those clients also that are given signs for difficulty. -- is part of the active management of the bank to communicating with quality and to do the necessary adjustments. There are several initiatives. -- adjustment in the crops, the concession, the structural limits adjustment and to try and understand up until when these portfolios. So when I'm talking about the projections in the individuals, natural persons. The increase, the big sensor was to bid the credit card business. So when I say that we are expecting a stabilization with the information [ nowadays ], that portfolio will be -- has a tendency to stabilize, and we're working strongly for this. This is contained within the individuals, the universe -- natural person, university.

[Renato Lulia, executive]

[Interpreted] Next question, we have Henrique Navarro from Santander.

[Henrique Navarro, analyst]

[Interpreted] Congratulations on the result. My question is regarding the coverage index. If we imagine that you have 250 something like that. Imagine 2023, the risk of the portfolio should be lower corporate portfolio. So if you think about your records, that is something closer to 200%? Imagine that also we consider the way that you provision. The provision criteria, you do it a bit before and then you can revert that provision down the line. And then you mentioned 2023, the regulatory risk, the taxes over dividends, and even the increase in taxes where the bank is more interested in the income. So considering these profits, these hypotheses can we work with 200 to reduction in the coverage index for the year '23? And those assumptions that I mentioned. Some of them do not make sense. If that make sense, can you comment?

[Milton Maluhy Filho, executive]

[Interpreted] Yes. Henrique, thank you for this opportunity. Thank you for the compliments. Well, I think it's reasonable to think about a certain stabilization throughout time 200% ballpark, we don't have a goal. We don't have an objective. We do not manage the bank through a coverage level. Since we are operating with an expected loss, we are always anticipating through the modest coverage index is a consequence of the decision-making process. But this is a great indicator. So I think that, yes, the bank should remain with the coverage index that is reasonable throughout this period.

When I look at -- when I look at retail, yes, we are confirming coverage, but is still above the threshold of 15% to 19%. We're still operating 20 percentage basis points above what we are operating in a period of 15%, 19%, which is great news. So we are keeping a portfolio that is well covered. And there is an element in that portfolio that has to be taken into consideration with a lot of care, which is really the wholesale portfolio. This is an advanced portfolio. What do I mean by advance? The coverage index not necessarily -- it's not an excellent metric for the wholesale portfolio. I like the coverage of provisions over the total portfolio.

There are different outlooks that we can take. So any event of anything that is already provisioned by expected loss that we already had expected liability that is anticipated. It takes on the coverage. So that's why we need to separate. We have to look at wholesale, isolatedly, there's going to be volatility in retail. So before you have a delinquency before that, you have restructuring where we have the legacy it's because of a stress situation that is much stronger, and then the client will take the provision with them. So it's reasonable to expect that we have good coverage levels. There are some challenges for the future. So I would say to the bank as well perfected.

We've been able to navigate with some buffer in our relationship with coverage against provisions, regulatory provisions, we'll give you -- if you look at that, we'll give you a good idea on the protection of the balance sheet, and it's reflected on how we mark those coverages for segment, and this is reflected in the coverage [ index ], I’m not going to give you a number because we do not project it that way, but I think it's reasonable to expect a certain stabilization above all, in the total coverage. In retail, there's probably going to be some usage because as I commented, we've observed an increase in the NPLs. And remember, even though we provision above the NPL formation, you're still fighting against an indicator of 200. So any time that you in the margin you do that, you take your indicator to a lower level or lower threshold.

[Renato Lulia, executive]

[Interpreted] We’ve got 3 more questions down the line. And now we have Marcelo Telles from Crédit Suisse.

[Marcelo Telles, analyst]

[Interpreted] Sorry, I had an issue here with my microphone. First of all, congratulations Milton on the great result. Clearly, it gets It’s different threshold, a different level in regards to the other banks. This is really impressive. And now I wanted to -- well, most of my questions were, of course, answered, but I wanted to ask you more about given the fact that you are super important in the credit card market, how do you see the growth of PIX picks the transfer? How do you think that PIX can substitute? Do you see it as a threat to the credit card business, our business, we see an increase in the use of [ Picor ] PIX here in Brazil, in the B2B and the transfers. And Milton, what is your opinion on that type of transaction, the PIX transaction to be able to capture part of this value chain?

[Milton Maluhy Filho, executive]

[Interpreted] Thank you, Marcelo. Thank you for the question. Thank you for the comments. I, first of all, would like to say the following. We were all in on PIX. As soon as we got the discussion of PIX, if we said it, this is good for the experience. If it brings a great experience, 24/7. We already didn't charge the tariff for the internal transfer inside of the bank. So the client to transfer from one come to another, they always and the freedom and it was on cost. -- it was 24/7 for the account holder EBITDA when they did a transfer for another account holder of it will remember that PIX universalized that. So our footage process was to get PIX in front of any product.

There was an impact in the revenue. But of course, since our agenda, our culture is on the client, it's the best product. The best product is the one that is focused on the clients. So that was the first decision to really focus on PIX from then on, we've been working diligently, and we've been working with the evolution of PIX a receivables at payment. How is it doing what type of payment method is dislocated. We're keeping a great market share and volume transactional that we have at the 2 ends in the receivable and the payment, the orders of magnitude of 20% of market share. So I think that these are very relevant numbers given our size.

So we're still looking at the packages of the accounts of the -- and thinking about the suitability of the clients, they have a package of services at a certain level of offers. But they're not using it. They're not – they're not using what they hired. We're doing the adjustments. So we are getting the PIX so that the client is getting the great experience, the long-term vision that is centered on the client at the right price, I know that the Central Bank has a role -- Central [ road map ] that the Ian potential products PIX, P2B as when they grew more, the B2B still going at a different speed, still time for a solution that can be captured and there is evolution. We ourselves at the sandbox of the Central Bank, we have a tens of new initiatives, the PIX credit that somehow would substitute a 4-point model, if well done, this can be a complement for the payment method here in Brazil.

So our opinion well, it's difficult to say here today what will be the PIX and its evolution down the line. But the fact is any evolution for any path trailed, the bank, Itaú bank will have PIX very relevant. We never had from Itaú or any other bank and you have a retaliation in regards to PIX. No, we've always wanted PIX to work since the inception. And PIX only work and [ success ] it is because of the engagement of all the banks in the system because the level of investment in the platforms is enormous. The assessment and the checking the saving accounts. So that interoperability only works because of that. So we are very satisfied with the advances. And if the PIX comes to certainly disrupt other business model, other methods of payment, we're going to be at the concert of that. This is -- if it's good for the client. It's good for the bank, it's good for the long term.

[Renato Lulia, executive]

[Interpreted] We have with us, Nicolas Riva from Bank of America.

[Nicolas Riva, analyst]

So I'm going to ask on your AT1 capital on the purpose. So a few weeks ago, you said you're not going to be calling the 6 and 18 in December. You said it was basically based on the economics. And I guess on the difference between the coupon reset, which should be right now about 8% on the refinancing cost. But you can call every 6 months, and you said you're going to continue monitoring market. So my question is, if there is a certain premium in terms of coupon research versus refinancing cost that you would be willing to pay in order to extract that call option where it's, for example, 50 basis points, 100 basis points? Or any color on that?

And then second, we have seen some Brazilian banks access the domestic market in recent years. Banco Brasil in the third quarter raised BRL 2.3 billion in a private placement in AT1 in the domestic market. So there, my question would be, how much do you think you could raise in the domestic market with AT1s to refinance some of the global purpose? And then finally, on capital, just going back to the question that Tito Labarta asked about capital. I just want to make sure I understood correctly. If your internal targets remain 13.5% Tier 1, 12% CET1, and if you're going to be making decisions on dividends based on those targets.

[Milton Maluhy Filho, executive]

Okay, Nicolas. Good to see you again. Thank you for your questions. Let me start talking about the AT1. As you said, we said to the market on a formal basis that we wouldn't be exercising the call the difference of the repricing and the recap looking to the prices that we should tap on market were very relevant. It's more than 200 basis points. So it didn't make any economic sense to exercise that call. That was the decision we made. And I think we were very transparently, not only communicating before the exercise date, but also much before that, I was saying this in conferences, we were saying to investors that this would be the definition that we should move.

The second thing is that there is no price that we define before saying that this level of premium we'll be exercising the 6 months call. But I would say that 50 basis points, we would discuss, but it's not automatic that we will say that if there is 50 basis points of whatever premium there is, we won't be exercising or we will be exercising. We will evaluate the alternatives that we have, not only offshore, but also local. And just to go back to your second comment, we raised Capital One locally as well, the same way Banco do Brasil, we did the same. But there is no dip. There is no -- it's not a very deep market in where you can change or you can refinance the size of AT1s we have issued offshore in the local market. So we can do up to a certain level, and it's very competitive. It was very competitive in terms of price, even swapping to U.S. dollars.

But we don't have the same size that we have to our portfolio issued abroad. So the thing is we need to understand the size. You need to understand the price. But I would say that 50 basis points, we will discuss what are the benefits of exercising. But above that, it's very difficult that we will be exercising and for the reasonable future that we can see from now -- it doesn't seem the case is that in the short term, we should be exercising the calls. We still have some costs to be exercised by March of next year.

And the same way around, we'll pursue the same strategy. And on the capital, the second comment question that you made, let me be very clear on that. Our risk appetite defined on the Board of Directors of the bank is that for CET1, we should have 11.5%. That's why we are 20 basis points above and will be 13% in the level 1. This is the risk appetite that we have defined. For dividend purpose, we are still observing the same policy that we approved and released to the market. So 13.5%, Below that, we shouldn't be discussing any extra payout even though the risk appetite of the bank is 11.5% and 1.5%, 13% of Level 1.

[Nicolas Riva, analyst]

If I can ask a follow-up. So your comment about the 50 basis points. Basically, what you're saying is that right now with current rates, if you think you wouldn't be able to issue a par below 8.5% then you would then call your global purpose and issue, at least in the global market. And then of course, the question would be precise.

[Milton Maluhy Filho, executive]

Yes. The thing is we're going to be looking to the price for the yield that we have at that time. If there is 50% -- 50 basis points more expensive, we will have the discussions. But again, the decision will be on an economic base. I'm not saying that there is 50 days we exercise the call. I'm much more safe. I have to make the decision today, I wouldn't exercise the call because we discuss on an economic basis. But below that or above that, we won't be even discussing. So just to give you a good idea of you have to compare the level of price, the repricing of the Tier 1 that we have and compare that to a new issue premium and understand what are the premium that we have embedded. So this is the 50 basis range that I'm mentioning here.

[Renato Lulia, executive]

[Interpreted] We're getting towards the end. And for the last question, I'm going to ask you because it's [indiscernible] from Rafael [indiscernible], I'm going to read. Well, we perceive a deceleration in the business of issuance of the credit cards through the back presentation. In [ parallel ] the whole industry has seen a raise in delinquency in credit cards. And do you plan to have a more harsh measure to decelerate credit in these segments? Reviews of anything?

[Milton Maluhy Filho, executive]

[Interpreted] Well, first of all, thank you for the question. It's a shame that you can't join us through day. I think that we go back to the previous question. I think that we've done relevant adjustments. The market as a whole is suffering the readjustments happen across the board. This is not specific for Itaú Unibanco call. But of course, what is necessary is -- has been done, and we've taken the necessary measures not only in the review of the limits but also in the adjustment of the concession and this is what we still have opportunities.

So it's important to mention that every time that you face a situation such as this, we need to separate where do we want to do the derisking of the portfolio -- and where we have the opportunity to actually continue to grow and invest in the franchise. And the credit card product is very transactional of the day-to-day of decline with the bank. So I mentioned a long-lasting relationship with other products doesn't make any sense. So there are opportunities that we are still taking. But wherever necessary, the adjustments will be done. So we've seen the deceleration in the market, the feeling from the market is that they are all doing relevant adjustment in the concession.

[Renato Lulia, executive]

[Interpreted] And with that, we will finish the Q&A session. And also, we will finish our results for the third quarter earnings in '22, Milton, you can do the closing of our earnings.

Well, thank you, Renato, for conducting this. I would like to thank you all for your participation and presence here in our event. For us, it's a great pleasure to be able to share with the level of maximum transparency, our agenda. We've shared the information quality quantitative. It's always a pleasure to receive your questions. Your [ propecations ] are also welcome. And I would like to say that we are facing scenarios that are challenging, I have to -- well, you're in the market, you know it.

And the challenges of ahead, the bank will continue to operate with the cautious with the care that is necessary, making the necessary adjustments because our objective is to create long-term value, predictability and sustainability. This is our agenda, and this is why we prepare ourselves and we work every day. Once again, thank you very much for your presence. Thank you all for the comments. And to say on our side, we are very humble. We are very respectful. We are down to earth, not only with our competition, but also the market as a whole, and we will continue to play our role working hard with a lot of passion from what we do. Thank you very much. and we will see each other soon. Thank you.

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