Itaú Unibanco Holding S.A.
Q4 2017 Earnings Call Transcript

Published: 6 Feb 2018

[Operator:]

Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holding Conference Call to discuss 2017 Fourth Quarter Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded and broadcasted live on the Investor Relations website at www.itau.com.br/investor-relations. The audio webcast works with Internet Explorer 9 or above and Chrome, Firefox, and Mobile devices iOS 8 or above and Android 3.0 or above. A slide presentation is also available on the site. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks, and other factors. With us today in this conference call in Sao Paulo are Mr. Candido Bracher, Executive President and CEO; Mr. Caio Ibrahim David, Executive Vice President, CFO and CRO; and Mr. Alexsandro Broedel Lopes, Group Finance Director and Investor Relations Officer. First, Mr. Candido Bracher will comment on 2017 fourth quarter results. Afterwards, management will be available for a question-and-answer session. It is now my pleasure to turn the call over to Mr. Candido Bracher.

[Candido Botelho Bracher:]

Good morning and thank you for listening to our 2017 earnings conference call. Before we go into our key financial figures and performance, I would like to spend a few minutes on Slide 3 to talk about our medium- and long-term strategic agenda. As you may remember, in previous quarters we outlined six objectives in order to increase the value creation to stakeholders. In this quarter, we have segregated those objectives into two groups

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tito Labarta, Deutsche Bank.

[Tito Labarta:]

Hi, good morning. Thank you for the call. A couple of questions, I guess, typically under your guidance, first on your margins, it does indicate slight margin compression this year. But trying to just to understand, when you think the margin compression will be - or when will you realize the impact of lower interest rates completely, in other words, like when you think the margin stops declining? Then, second question in the - your guidance for provisions, as further improvements this year, does it indicate the cost of risk could likely fall below 3%? How sustainable do you think that level is? I mean, does that include or does that factor in maybe some - working on some of the vehicles [loans so] [ph], which you mentioned which could improve the coverage? [Does this then now] [ph] factor that in, so just trying to get a sense of this sustainability of the cost of risk at these levels beyond this year. Thank you.

[Candido Botelho Bracher:]

Thank you for the question, Tito. So, of course, on margins, so we believe we may still have one or two reductions in the Selic rates this year, one this week from other 0.25% and maybe one next month. I'm not so sure about the second one. Though the one this week looks a bit more probably of happening. So when this process is over, I think it will still be maybe a quarter until the full impact of the interest rate reduction is felt on the margin. Of course, I mean, as I said in the guidance, we expect this effect, which is mainly on our liabilities margin than in the credit margins to the effect of the lower Selic. We expect this to be compensated by our growth in assets, which will increase the margins. Now, your second question on provisions and how sustainable this is. I mean, the reduction and the cost of credits, I mean, below 3%. I think it is sustainable. Of course, I mean, this year we may have some help in a moment or order of clients for which we have already provisions and which companies may recuperate. But we also have still negative effects this year from the large renegotiated portfolio during the crisis. I mean, when I remember the normal years, I mean, before the quarters of 2015, 2016, I think, I mean, we had cost of credit around this level which we are forecasting. So I expect this to be a sustainable trend in normal years.

[Tito Labarta:]

Thank you. [Selic rate higher] [ph]. Thank you.

[Candido Botelho Bracher:]

Thank you.

[Operator:]

The next question comes from Jorge Kuri, Morgan Stanley. Mr. Jorge Kuri?

[Jorge Kuri:]

Yes, hi, good morning, everyone. Let me do a follow-up on the question on provisions. The range on the guidance is quite wide. It is like a 33% gap between the low and high end, which is almost 2x the range that you had in 2017. So I'm trying to understand what is it that you're thinking on both sides? What macro-provisions and operating conditions will lead you to that R$12 billion and the same goes for the R$16 billion? That's my first question.

[Candido Botelho Bracher:]

Okay, thanks for your question, Jorge. I mean, as a matter of fact, I mean, it appears a bit more difficult forecast the provisions this year than it was last year. Of course, it's obviously easier to speak, I mean, after the fact. This year, I mean, the main facts which - for volatility in the provisions beyond the normal effects of economic activity and how this may affect the individuals portfolio it's still related to the corporate portfolio. We have a large renegotiated portfolio on the corporates. And I mean there are companies, which can improve and provoke a reversion in their provisions. And there are others which have renegotiated credits in last year in a difficult situation that may become in every years and so on, and thus even requiring more provisions. So I mean, this is what of course is the volatility and have indicated towards this interval which you correctly pointed out that is larger than it was last year. There is another effect also, which is just as important as this large [ph] portfolio, which is how much our portfolio will grow. I mean, between 4% and 7% growth it will mean a very different need to make new provisions for the growing portfolio. This also impacts our forecast.

[Jorge Kuri:]

Okay. Thank you, Candido. And then my second question is on spreads. There was a relatively good ability of the banking system to different spreads last year in the phase of falling Selic rates and that probably have to do with the lack of competition, and then just your desire to try to offset some of the negative pressure on your securities portfolio rates came down. As we move now a year into - have a low rates and then you start to get a little bit more competition in the credit markets start to pick up, customers start to ask for lower spreads given them rates are now low for long. What is your expectation on the credit spreads throughout this year?

[Candido Botelho Bracher:]

Okay. Thanks, Jorge. As you see in our chart on Page - business model on Page 6. We have last year - I mean, fairly made our cost of equity in the credit activity. So I mean, despite the effects that we are depending our cost spreads only now the credit activity has been able to generate to create that. So I think, this is a natural factor in resisting to a pressure to lower spreads. I think, what's true for us is to also for our competitors, I don't think no is making a return much above cost of capital in credit. And what we have seen is relative stability in credit spreads, we believe that there will be some increasing demand and this will also help to support the spreads around the level they are today.

[Jorge Kuri:]

Sorry, Candido. The connection is not great. So use that your expect spreads to be - credit spreads to be flat this year?

[Candido Botelho Bracher:]

Yes. I expect them to be flat this year.

[Jorge Kuri:]

All right. Great. Thank you.

[Candido Botelho Bracher:]

Thank you.

[Operator:]

The next question comes from Philip Finch, UBS.

[Philip Finch:]

Good morning, everyone, and thank you for the presentation. Two questions, if I may, please. The first is regarding the competitive landscape, if you could just give us an update on that, would you say the outlook still looks benign? Or are you seeing signs of raising competitive pressures and then necessarily what segments? And possibly linked to this, are you seeing any signs of disruption with increasing technological advancement in Brazil at the moment? And the second question is slightly related to this, can you give us an update of your digital offerings, what percentage of your customer base are now using digital mobile banking and does it pave the way for more branch closures? Thank you.

[Candido Botelho Bracher:]

Thanks for your questions, Philip. Let me first talk about competitive landscape. I mean, we have never seen much ease on the competitive landscape, I think we have always lived in an intense competition in Brazil with the banking system. In some areas more competition than in others, but in general, I think it's quite a competitive market, we expect it to remain this way in 2018, and we are not seeing is becoming neither tougher nor easier for these. Any signs of disruption you asked me. I mean, there are always news here and there, and we see a new companies appearing with new products every day in many part of the market. I mean, this is the case of XP in discount broker, and which we - where we acquired - we are in the process of acquiring 49% stake. This is the question, and this is also the case with some companies in the acquiring business. Just see the - it's in the IPO of Fagisigoru [ph] in this segment. But I don't think this disruptive competition. I mean this is more competition in markets where we already operate with different strategies. But of course, I mean, we are seeing here in the market every day, I mean, news of new products and more use of digital products. In our case, I mean, there are many numbers, you can use to talk about digital, even if you refer to our own bank, a number which is simple to memorize and we always say that, I mean, 80% of the transactions that customers do with the bank are through mobile or internet. Of course, when I - when we look at this figure, it indicates a better picture them to when we actually have, because not all of the transactions, which the clients do digitally with the bank, they go digitally end-to-end, and in order processing. And so our efforts now are very much geared towards digitizing more and more our operations area, our back-office [ph]. If I can report to you some other important figures here. We have over 2 million clients in our digital branches. And this digital - over 2 million account holders in a total of 18 million account holders. And these branches have 20 to 30 percentage points, they are more efficient, than the normal, the regular Brick and Mortar branches. And there are many other figures I could quote you here, I mean, 9.5 million users using mobile bank-line and SMS, and seems like this, but I mean, the picture doesn't - the picture is the same with all the result figures I give you. So I mean, in terms of effort to digitize in the first page of the presentation I mentioned our strategic goals, and the transformational ones. And one of the transformational one is exactly, I mean, our digital strategy, which has been I mean the object of intense attention of the executive committee.

[Philip Finch:]

Great. Thank you, Mr. Bracher. So with the impressive improvements in digital, do you expect to see more branch closures going forward?

[Candido Botelho Bracher:]

Not immediately. We have close 280 branches in the past two years. When we analyze now looking forward, didn't find many branches below the line in which we consider a branch economy and this is because - mainly because branches are still very important in opening new accounts. So what we are studying very intensively here is the new uses of branches, is how to transform our branches to adapt them to the new types. This is taking more our attention then the push to closedown branches.

[Philip Finch:]

Okay. Thank you very much indeed, Mr. Bracher.

[Candido Botelho Bracher:]

Thank you.

[Operator:]

The next question comes from Jason Mollin, Scotiabank.

[Jason Mollin:]

Hi. Thank you for the opportunity to ask the question. My first question is on your business model breakdown and the - looking at the returns by business segment. And yes, it is - this as you mentioned the first time to see value creation in the credit portion of the business. Looking at how you analyze that in this line, again it looks like you're calculating cost of equity very close to that return, because the value creation is slightly positive, for my calculation about 14.1%. And then overall in the consolidated basis for the year, which is the regulatory capital to value creation it looks like you're calculating cost of equity close to 14.9%, 15%. And that is a little higher, it's interesting if I take the nine months that you gave us after the last quarter that's up a little bit from 14.6%. I'm just wondering, what that reflects a higher cost, if it looks like it's coming from higher cost of equity in the trading side to the end of the year. So I'm just trying to understand that I would have thought with lower rates that might not be the case might actually be lower. That's my first question.

[Candido Botelho Bracher:]

Jason, your question is correct. You're very observing. I mean, as a matter of fact, we have internally three costs of capital. We have a main cost of capital, which is everything, and is the one we use for credit. Then, we have a cost of credit, which we used specifically for operations varying market risks for trading, which is higher than the cost of credit. And we have a cost of credit, we use for service operations. For operations we have in our credit, in our market risks. And this is a cost of credit slightly below the average, which is now 14%.

[Jason Mollin:]

And would you consider the cost of credit, the current environment given where the Selic is and given where the 10-year government bond, is this where - if you think this is on the low end, is this how we reach and looking out for the next year. So this kind of are you think it will remain?

[Candido Botelho Bracher:]

Jason, the 14% I refer is the cost of credit at the end of the - today is already 13.5%, we have reduced it in our last board meeting last week. We think it is coming close to the best point in the curve, I mean, when we compare the cost of credit in Brazil to the cost of credit we see - you analyst using in developed markets. We think, it's not likely that the spread will narrow much further than it's already is.

[Jason Mollin:]

That's helpful. And my second question could be on the regulatory outlook on substantial changes. We saw a shift from credit card loans, revolving credit cards, a push to move those into installment credit. Are you anticipating any other changes that could material impact your results?

[Candido Botelho Bracher:]

Listen Jason, these changes on credit cards, we effectively impacted our results. And the effect on 2018, we will be a bit bigger than in 2017, because they were not therefore the full year of 2017. Some of them have started in April, some of them have started in August 2017. So in 2018, we will have them for the full year. There are some discussions ongoing with the central bank concerning overdraft limit. And there is a self-regulation in this by the bank, and this self-regulation, I mean, it may lead to some reduced usage of overdraft. But it's too soon to tell.

[Jason Mollin:]

Thank you very much, Candido.

[Candido Botelho Bracher:]

You're welcome.

[Operator:]

Our next question comes from Rafael Frade, Bradesco.

[Rafael Frade:]

Hi, good morning, everyone. I have kind of follow-up questions on the provisions for guidance. So just to be more clear, so it's - really would you expect even all that you mentioned that eventually we will have provision expenses below the NPL [ph] creation for the year given that you have already some cases that we're provisioning even 2017 or even 2016. So how we should expect this evolving throughout the year? On the others, another question would be related to fees. I was a little surprised with - it seems a little strong to me. If you could give a little more visibility about here, if there any specific line that maybe will lead for this group would be very helpful.

[Candido Botelho Bracher:]

Okay. Thanks for your questions, Rafael. If I understood, where your first question regarding provisions you asked me, I mean, is it possible that your total provision will be below NPL creation. This year, because some credits are already provision for.

[Rafael Frade:]

That's right.

[Candido Botelho Bracher:]

I think, yes, it is possible. I don't think it's certain, if I counter - if the reflection on that will be our coverage ratio. What I can tell is that, we do not expect significant changes in our coverage ratio this year. So this - it will go down a little bit of coverage ratio, of course, as I said in the slide. But it is not a significant change. So I think, yes, you're right, I mean, it's possible that we have the provisions this year below NPL creation. Your second question on fees, as we just go here to our fees forecast here, so we are forecasting a growth from 5.5% to 8.5% in 2018, after having shown 5.2% in 2017. I don't think this is such a difficult increase since during the year 2017, we saw a constant improvement in this trend, which we expect to continue during 2018. Of course, 2018 is an election year, so specifically for the investment banking fees, I think the second semester may lack a bit, but as far all geographies, I mean, asset management, cash management, and so. We are seeing, I mean, increase in demand which are consistent with this forecast.

[Rafael Frade:]

Okay. That's perfect. Thank you, Candido.

[Candido Botelho Bracher:]

Thank you, Rafael.

[Operator:]

The next question comes from Eduardo Nishio, Banco Plural.

[Eduardo Nishio:]

Hi, thank you. Thanks for the presentation. My first question, I have to - it's related to your financial margins with clients. If you can give more color on how do you want to achieve, basically have a positive range and we see some peers with negative guidance for 2018, obviously, your credit growth will help, but looking to your peers also they have the same range, positive range for the year. So if you can breakdown a little bit - give me a little bit more color on how you can achieve that positive range, I appreciate. Then I have my question. Thank you.

[Candido Botelho Bracher:]

Okay. Eduardo. I think - I don't have much to add to what we already mentioned, I mean, our - to the improvement in financial margin, is clients is a direct consequence of the improvements in total credit portfolio. Being that, I mean, we expect credit portfolio to grow more in individuals and SMEs, then in large preparations, and there is no individuals and SMEs carry a better spread than large corporations.

[Eduardo Nishio:]

Okay. The Citibank also helps that, I mean, the growth?

[Candido Botelho Bracher:]

Yes. The Citibank also helps the growth, but it's very small.

[Eduardo Nishio:]

Okay. Then my second question relates, and sorry to go back to the cost of credit and your provisions outlook. Reaching a historical low now, provisions over your loan portfolio of 3.7% historical low, also cost of credit also historical low. Just give a ballpark number, how much you think it can normalize. Is it far beyond this 2.9 or it's around that number? A more color here, I think it will be greatly appreciated. Thank you.

[Candido Botelho Bracher:]

Okay, Eduardo. I don't have the full series of our NPL here with me. But I don't think it is a historical low. If I come back to the years before the crisis of 2008, I think we had much lower, way lower figures than 2003, 2004, 2005. But I can't affirm this, because I don't have the figures here with me. Having said that, I think, I mean, it's a different environment today. It's a different bank. We see this level of 2009, 2008, a level of one which we can stabilize the cost of credit.

[Eduardo Nishio:]

Okay. Thank you.

[Candido Botelho Bracher:]

Thank you.

[Operator:]

Our next question comes from Carlos Macedo, Goldman Sachs.

[Carlos Macedo:]

Good morning, Candido. Thanks for taking questions. First question, I just wanted to get an idea. You said that that you expect spreads to remain steady through the year. If you could talk a little bit about qualitatively about the spreads on your front-book and your back-book, so the spreads at which you're originating loans now compared to the spreads that were in your books, say, a year or two years ago. How does that relates, are they lower now? I mean, it helps us to get an idea of what could happen going forward as you originate more loans in an environment with a lower benchmark rates. The second thing, again, I think - and I'm sorry, much like actually before to back to this question. I'm looking at the historical loan loss provision to average loans here, the cost of credit, and then never did the low-3 going back to 2004. So the question is, is this - again, how sustainable this is? Is this a factor of you using part of your excess reserves to offset some of the - some of your clients requesting - demanding more of the coverage? How should we - and you talked about the coverage ratio not going down. So does that really just mean that your asset quality is going to stay very solid the whole year, improve throughout the year as expected? I mean, how should we think about this overall, given the big picture of Itau and the mix of the portfolio now?

[Candido Botelho Bracher:]

Thanks for the questions, Carlos. Let me first go to spreads. If I compare this - the spreads we are using today with the spreads of two years ago which were during the crisis, for the same types of credits, the spreads are possibly a bit lower today than they were two years ago. Having said that, we must see that we have - we are changing the mix of our portfolio, we have been changing the mix of our portfolio. And in this sense, I mean, we have been reducing the portfolio in the large operations where the spreads are lower and increasing in individuals in asset mix where they are higher. I mean, this movement in the mix, I think that may more than compensate the reduction in the same line of spreads. When we talk about loan loss, we will also come back to the mix a little bit to explain what - how this can be different now. And, I mean, since - [the answer is] [ph] many years, when we have - I think we had a very consistent evolution in our risk appetite and in our risk tools and in our credit models, more recently now, especially for retail. So I would - I mean, I think this allows us to expect a lower cost of credit than the average before.

[Carlos Macedo:]

But just - sorry, to follow up, I want to make sense, if you're shifting the mix to improve you margins that they will have an impact on your cost of risk as well?

[Candido Botelho Bracher:]

Yes, that's true. But I think that the - the move in the - that improvement in the quality of the credit instruments more than compensates for that.

[Carlos Macedo:]

Okay, okay, thank you, Candido.

[Candido Botelho Bracher:]

Thank you.

[Operator:]

The next question comes from Carlos Gomez, HSBC.

[Carlos Gomez-Lopez:]

Hello and good morning. Three very quick questions. The first one is what is your appetite for auto-loans? And I look at your portfolio to really have R$14 billion, you used to have as much as R$16 billion seven years ago. How large [even this lineup, which makes mainly how to auto deal] [ph] your portfolio going forward. Also coming to what you really intend to do, any changes at credit cards due to any increased competition. And the third, I would like to get your views on Argentina. Thank you.

[Candido Botelho Bracher:]

Sorry, Carlos. Could I ask you, please, to repeat your second question, I didn't understand it.

[Carlos Gomez-Lopez:]

Yes, at credit card, I mean, the Unibanco [ph] over the last few years, whether you guys have lost market share versus its competitors? We have an environment in which we have new offers in the market. If you start to be going through the same, change, will you have a low cost offer? Are you going to be doing anything this time credit card compared to Gotfructum [ph]?

[Candido Botelho Bracher:]

Okay. Thank you. So first, on auto-loans, as I mentioned in auto-loans, I mean, after 21 quarters of a decreasing portfolio, we have reverted this. We expect this portfolio to grow now strongly. I don't think we will come back to the levels of car portfolio we had in the best. But I think it will be significantly higher than it is today. On credit card, yes, you're right, I mean, on credit card, I mean, there was - there has been this pressure, competitive pressure in the market, which has caused us to lose market share and also there was - there were some margin compressions in this market. We are reacting to these trends in various ways. I mean, by making a more combined offer of products for our accountholders, the companies that are our accountholders is improving a lot. We have hired new people was one of the few exceptions here in the bank that we have 500 new people to deal more with the smaller companies in this portfolio which pay the higher margins. We still expect to lose some return in credit card this year, but we expect to it to level and to grow from there.

[Carlos Gomez-Lopez:]

Thank you, and Argentina?

[Candido Botelho Bracher:]

On Argentina, I mean, Argentina the strategy is the same as we had. I mean, we had a good year in Argentina, but we have a bank which makes money in the wholesale activity. And this year even made money on the retail activity, but this was the first time in many years and it was a very small amount. So we think we are sub-scale in the retail in Argentina. We do not see many possibilities of increasing this participation in the market in Argentina by acquisitions now. This is not what we are looking at. What we are looking at is at using more digital tools in Argentina in order to increase our participation.

[Carlos Gomez-Lopez:]

Thank you, very clear.

[Operator:]

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

[Candido Botelho Bracher:]

Just to thank you all for having participated in the call and thanking those who made questions. I mean, these questions have always helped us to try to make more clear statements, the presentations in the future.

[Operator:]

That does conclude our Itau Unibanco Holding earnings conference call for today. Thank you very much for your participation. You may now disconnect.