Itaú Unibanco Holding S.A.
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Good morning, ladies and gentlemen. Welcome to Itaú Unibanco Holding conference call to discuss 2015 first quarter results. [Operator Instructions] As a reminder, this conference is being recorded and broadcasted live on the Investor Relations website at www.itau.com.br/investor-relations. A slide presentation is also available on this site. The replay of this conference call will be available until May 12 by phone on (55-11) 3193-1012 or 2820-4012, access code 8187089#. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward looking comments as a result of macroeconomic conditions, market risks and other factors. With us today in this conference call in São Paulo are Mr. Eduardo Vassimon, Executive Vice President, CFO and CRO; and Mr. Marcelo Kopel, Corporate Controller and IRO. First, Mr. Eduardo Vassimon will comment on 2015 first 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. Eduardo Vassimon.

[Eduardo Mazzilli de Vassimon:]

Thank you. Welcome. Good morning, good afternoon. It's a pleasure to be here with you today to talk about our first quarter results. For those that are following our presentation, please go to Page 2. We start with highlights of the period. The first highlight itself is the recurring net income, BRL 5.8 billion, 3% above last quarter that was already a strong quarter, and 20% growth in 12 months. Recurring ROE close to 25%. And credit quality measured by NPL 90 days is stable in relation to last quarter, 50 basis points below the same quarter of last year. When we look at the shorter tenure NPL 15 to 90 days, we see an increase of 40 basis points. There is here a seasonal element that we are going to see more during the presentation. I would like to highlight the stronger financial margin growth, financial margin with clients, 3% in the quarter. We had exceptionally high margin with market, BRL 1.9 billion in this quarter. We consider this as an unusual event. The same applies, in our opinion, to the level of loan loss provisions made in this first quarter, BRL 5.5 billion, 20% growth over the last quarter. We also consider this as an unusual effect number. We are going to talk more about that during the presentation. And finally in this page, I would call your attention to the reduction in noninterest expenses, 2.3% in this quarter. This is partially affected by seasonal effect. Moving to Page 3. We show that we have been able to deliver consistent recurring ROE above 20%. On Slide #4. We see the main lines of our P&L. I will call here your attention to the variations observed between the last quarter of last year and this first quarter. The main figure here is the increase in managerial financial margin, BRL 1.3 billion, due to increase both in margin with clients and margin with market. Margin with the clients went up 3% in this quarter despite the lower number of calendar days. And margin with market, as already mentioned, was exceptionally high, close to around BRL 850 million growth. Another line that deserves highlight here is the increase in commissions and fees, 0.6% in the quarter. Normally, first quarter is slightly below the last quarter of the previous year. And then, we have again here loan loss provision expenses with a substantial increase of BRL 900 million, 20% over last year. We are going to talk more about that. We see here also decreased -- substantial decrease in recovery of credits, 20% in this quarter. This is due to 2 basic factors

[Operator:]

[Operator Instructions] Our first question comes from Jorge Kuri, Morgan Stanley.

[Jorge Kuri:]

Let me ask 2 questions please. First on asset quality. If we go back to the last couple of earnings calls, you were very confident on delinquency and provisions would remain steady, even though the economy was already in recession and the labor market was suffering. And you mentioned you have de-risked the balance sheet and in general, prepared the bank for the tougher times. And to be fair, you did get some pushback from the analysts, at least in the fourth quarter call, that some of your views were probably a bit too optimistic. So here we are 3 months later, and provisions surprise to the upside, renegotiated loans had a pretty big jump, bad debt formation went up a lot. And you just materially increased the guidance for provisions this year. So obviously, something did not play out as you expected. Now I hear that you're saying that the deterioration in delinquency and increasing provisions is now behind, and the worst is behind, and that we're going to see actually improvement going forward. So given that 3 months ago, you did not see the deterioration that was around the corner, how do we get confidence that this time around, you're going to get it right? And maybe the right question to ask is, what did you miss? What did you learn through the process? And more importantly, what have you changed in order to make sure this doesn't happen again? I'll ask my second question later.

[Eduardo Mazzilli de Vassimon:]

Jorge, this is Vassimon. First, we acknowledged that the new economic environment is worse than we anticipated. So what we did is to adjust the provisions given the deterioration that I believe is substantially worse than we and part of the market expected. Just to clarify about the worst is behind us, the worst is behind us in our opinion in terms of provision. In terms of economic environment, we believe that the worst is still to come. Probably, in terms of economic growth, the second quarter would be the worst one, and we are sure that unemployment will go up. And so we expect that even in the retail portfolio to have some slightly increase in provisions in the next quarters. But in terms of the level of expenses, our judgment is that we saw the worst point. And all of those elements are incorporated in our new guidance. So again, it's a very challenging environment. We don't deny this. We expect the portfolio, the retail portfolio to suffer still a little bit. We are going to see NPL ratios going up, probably because we made this preemptive move in building up provisions. But we are confident that the final number for the year will be close to the center point of our new outlook.

[Jorge Kuri:]

All right. My second question is your guidance for NII growth. How much of the change is mark-to-market as a result of the high trading gains this quarter? And how much is due to things that you think will be different over the next 12 months versus what you told us 3 months ago? Maybe you can share the detailed math behind it in terms of the key drivers of this line.

[Marcelo Kopel:]

Sure, Jorge. It's Marcelo. Let's strip out the -- why we reviewed it. First, obviously, the -- let's say, the additional, let's call, BRL 900 million of, let's say, treasury gains that we had this quarter already had an influence on the revised number. But we are not, let's say, putting that as part of our run rate where we typically expect like BRL 1 billion a quarter. So that influenced the number. The second thing is when we did the initial outlook of 10% to 14%, there was a high component of using the NIM level of the fourth quarter. And just by annualizing that, would give us a lift on the NII, okay? So part of that comes from that. But over and above that, we got the market rates going up and spreads going up as well. So those things also influenced. And the third element which is important is our free cash flow, which is subject to the influence of the Selic rate. In our base scenario, when we provided the outlook, we had a lower Selic. So the Selic by itself also had an influence on why we are expanding that. So to summarize, we trued up the outlook, including the performance of the first quarter plus higher interest rates and higher spread over the course of the year.

[Operator:]

Our next question comes from Carlos Macedo, Goldman Sachs.

[Carlos G. Macedo:]

I have one question and then I will have a second part, I believe, and I'm going back to Jorge's question on asset quality. If we took -- if we take your numbers for the guidance, the new guidance, it implies, compared to the old guidance, increasing around BRL 500 million per quarter in provision expenses outside, and already discounting what happened in the first quarter, do you think that's enough to offset all the headwinds that you talked about in the economy? I mean, we're talking about an unemployment rate that is going up and will continue to go up. We're talking about a potential [indiscernible] in needs that hasn't really come through yet, at least in the numbers that you provided. If you think that, that is enough for us to see -- to basically last through the end of the year? Or do you think there's more risk to the upside than the downside here?

[Marcelo Kopel:]

Carlos, it's Marcelo. The view is that the range that we provided, BRL 15 billion to BRL 18 billion, should be enough to walk us through what you just described, okay? We previously commented -- I actually -- I'm sorry, we commented that in the other call, but embedded in this BRL 15 billion to BRL 18 billion, there is some deterioration in the blended rate of the individuals portfolio. Obviously, this is a consequence of a higher or a growing unemployment rate. And in the rest of the, let's say, increase of the loan loss reserve, it comes from the large names. We've been trying to be as much preemptive as we can in terms of anticipating those provisions. Vassimon described the potential impact of certain names going over 90 days, which will increase the numbers in terms of the index and reduce coverage, but nevertheless, will not impact the -- or spike -- produce any additional spike in the level of the provisions. Therefore, the current view is that we should be blending the year through -- in the midpoint of the new outlook, but having some room to maneuver in case things get worse than we expected. But Vassimon will just add to that.

[Eduardo Mazzilli de Vassimon:]

Yes. Not just to complement. Carlos, here, you mentioned a small very small and middle market segment. This is of course, a segment that suffers in this new and more challenging environment. But in our case, if you look, our growth in this segment has been very modest. In 12 months, we've grown less than 2%, so we have been particularly careful in this segment.

[Carlos G. Macedo:]

Okay. Just going back to the provision you made on the corporate side of this quarter. Would you call it more of a specific provision for companies that might have been involved in the car wash investigation and companies in the oil sector, and -- or would you call it more of a cyclical -- provision for cyclical factors that involve with the downplay in the economy -- the downturn of the economy?

[Marcelo Kopel:]

Carlos, I won't call it cyclical. I'll call it specific names where we have more -- we've been focusing more, but nothing that you would say sector A or sector B is being hit hard. So I won't call it cyclical.

[Carlos G. Macedo:]

Okay. I did see that a lot of the names moved to the D category, and that's when you start getting 90 days past due. You could have more provisions if they moved past 90 days past due to 120, right?

[Marcelo Kopel:]

No, the D -- actually, E will reflect the over 90. D is before 90 days. But -- yes.

[Carlos G. Macedo:]

Okay. I'm sorry. So...

[Marcelo Kopel:]

Yes, but that is just a result of how we are seeing things and trying to preempt the provisioning, as Vassimon described before.

[Carlos G. Macedo:]

Okay, final question, sorry, just on this topic. Your guidance does reflect -- for NII, does reflect a strong increase as you said. Your nonaccrual loans are growing for the first time in, I think, 6 -- 5 or 6 quarters. And presumably, they will -- that growth will accelerate going forward, what kind of growth do you factor for your nonaccrual loans over the year? I know that your loan growth is 6 -- 3% to 7%. But presumably your nonaccrual loans will increase, and how much of an impact that will have in your -- the expansion of your margin of your NII?

[Marcelo Kopel:]

Well, it's embedded in the growth that we provided. The revised outlook already embeds a higher, let's say, nonaccrual portfolio. But given that, let's say, a bigger piece of the nonaccrual was coming for larger tickets. The forgone revenue of that is lower than one could think.

[Carlos G. Macedo:]

Okay. But would it be fair to say that even though your portfolio grows at 3% to 7%, your accrual loans will probably grow at a fraction of that?

[Marcelo Kopel:]

Yes, it's fair to say because it's just how we -- the math will play. But one thing that is important, Carlos, is, this year in particular, the average portfolio growth will be higher than the end-of-period growth. So that also helps, especially -- obviously, I'm talking about the current portfolio, that helps increase the NII.

[Carlos G. Macedo:]

For sure. So -- but so will the nonaccrual loans?

[Marcelo Kopel:]

Yes, absolutely, absolutely. I'm just adding to the point that you made about the nonaccrual.

[Operator:]

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

[Mario Pierry:]

Let me ask you 2 questions as well. Let me stay with the topic on asset quality. As you mentioned, you do expect NPLs to go up from current levels. If you could share with us, what type of increases are you expecting, especially on the corporate and in the individual segments? And how should we think about -- if we go back and look at your historical NPLs, the peaks are much higher than what you are at right now. Would you think that we could return to an environment where we see the peak NPLs that you showed, especially in 2012, as you show on your Slide 10. But even if you go back historically, the peak used to be much higher. So if you can give us some guidance on what type of increase in NPLs you expect? Also on asset quality, coverage ratio of 200% now is the highest it has been in, I think, at least 5, 6 years. How should we think about your coverage ratio going forward? Is this a ratio that should be returning to 170% in the next few years? Or given the uncertainties in the market right now, would you expect them to -- would you expect the ratio to stay at 200%? And then I'll ask you another question on expenses, but if you could answer these 2 questions, that'll be great.

[Marcelo Kopel:]

Thank you for your wonderful questions. Let's start with the coverage ratio. Coverage ratio is really -- is not an objective, but has a consequence of everything that we are foreseeing in the portfolio. So as Vassimon mentioned before, this -- the actions we took preemptively to provision -- to build provisions -- let's say, the judgment that we had materializes. You could see some consumption of the coverage as a result of that as well as the NPL going up. Talking about the NPL going up, you will probably see it as a higher point in the second quarter and going down throughout the third and the fourth quarter. The end of the year, the end of 2015 should be slightly higher than we actually saw for the end of last year, but lower than we're actually going to see in the second quarter. So we cannot provide you with a number. I can give you -- the trend is basically up in the second quarter and slowly returning throughout the end of the year. That is the view regarding this. And obviously, when you do see that, you would see impacts on the coverage because as credits flow from the early bucket into the later bucket, the longer bucket, coverage will be consumed on that.

[Mario Pierry:]

Okay. So when you mentioned that NPLs should be moving up in second quarter, are you more concerned about the corporates or the consumer portfolio?

[Marcelo Kopel:]

Primarily corporate. There will be something in the consumer, but this is more related to the typical behavior that we have every year. When you see a spike in the short term in the first -- in the early bucket, and some of that goes into the longer bucket. On the corporate side, it's more on a case-by-case basis.

[Mario Pierry:]

Okay. And couple -- and from what you mentioned then, clearly, you don't see your NPL ratios going back anywhere near the peak levels that we saw in 2012?

[Marcelo Kopel:]

No, I don't. That's the current view of the house.

[Mario Pierry:]

Okay. My second question then is related to your expenses. You increased your guidance more in line with the inflation rate or even above inflation. For the last couple of years, you were able to keep your growth below inflation. Also when I look at your efficiency ratio, it has been improving. But it still is substantially above your peer, your main peer here in Brazil. So I was wondering, what else can you do on the expense front in order to grow below inflation?

[Marcelo Kopel:]

Sure. Let me strip out the growth on expenses in 2 major components

[Mario Pierry:]

Okay, so -- just to give us, are you willing to commit to some type of efficiency targets over the next year or 2?

[Marcelo Kopel:]

I mean the commitment comes from our own goals. Every senior executive here has a goal in terms of its expenses. And the target is to, at least on the domestic side, grow at inflation, which means that you have a challenge by itself. When you isolate the components of FX and, let's say, inflation abroad, this is less under our control. Not that we don't act on that, but the local executives are tracked and measured by our growing at inflation.

[Operator:]

The next question comes from Saul Martinez, JPMorgan.

[Saul Martinez:]

I have 2 questions on credit. One, a little bit of a follow-up on the previous question. There has been a pretty substantial structural decline in asset quality metrics across all measures. You look at 15- to 90-day delinquencies. Yes, we see the seasonality in 1Q. But individual 15 to 90 days were 11%, I think in '09, a 7% in '11. Now they're 3 and change. Do you see this across a lot metrics longer term? And the reasons are, you've discussed a million times, mix, risk aversion, whatnot. But are we at an inflection point, even with these structural changes? Especially considering not just the current economic environment. But in an environment where Brazil didn't grow much over 2, 3-plus years, 4 years. I know this isn't necessarily the house view. But how do you think about the risk on credit of a prolonged and gradual worsening in terms of credit? How do you think about the sort of the structural dynamics over a 2-, 3-year period considering an environment where Brazil doesn't really grow much and stagnates over a multiyear period? Second question is on provisioning policy. It's a more specific question. And it's -- how closely does the central bank force banks to harmonize the classification? You took a generic reserve in wholesale -- generic reserves in wholesale bank. But I guess what I want understand better is if there is an -- if this is a conservative risk classification, do other banks need to upgrade and revise their classification? Conversely, if your risk classification is not as high, how proactive will the central bank be enforcing you and other banks to harmonize?

[Eduardo Mazzilli de Vassimon:]

Saul, this is Vassimon. In terms of asset quality looking ahead, we expect Brazilian economy starting to recover next year. We do not expect a substantial growth in 2016 and probably not in 2017 either. But this should improve marginally the credit conditions. Having said that, we have been, in our case, adopting a more conservative approach in terms of reducing risk appetite and calibrating the ratings we operate since the mid of last year. So if you're prepared to face this new economic environment, that will require, of course, a very close monitoring. But we expect the things to start to improve next year. Actually, as I think I briefly mentioned, in terms of economic activity, I think the worst will be seen in this second quarter. Of course, we'll see effects of this during several months yet. Unemployment should go up until the end of this year, beginning next year. But we believe that we have adequately adopted our credit policy to this new environment. Of course, given that these environment, we'll have to price our credit accordingly. And so in a riskier environment, we expect to reprice our portfolio as we started to do in the first quarter.

[Saul Martinez:]

Vassimon, sorry, sorry to interrupt. I think you guys -- I apologize for asking you to start over again. But I think for me and for some others, the line went quiet up until about 10 seconds ago. So I missed -- I think we all missed, if I'm not mistaken, your response. I apologize for that.

[Eduardo Mazzilli de Vassimon:]

Okay, sorry about that. So I'm going to repeat everything, maybe you have already heard. But we expect the Brazilian economy to have its worst point in this cycle in the second quarter, in terms of economic activity. Of course the effects of this will be felt still for several months. In terms of unemployment, for instance, the peak would probably be seen between the end of this year beginning next year. So this is slight improvement that we shall see next year. We don't expect any fantastic growth, but some growth already next year with marginally improved credit conditions in general. Having said that, it altogether is a riskier environment. And we have already been adapting our credit policies since the second half of last year. And also we are repricing of our credits in a fashion that's compatible with those riskier environment. In terms of the Central Bank of Brazil approach, yes, they follow and monitor this very closely. And whenever they do identify substantial divergence between banks for the same specific client, they question both banks. But if -- when you are more conservative -- much more conservative than the rest of the markets, central bank typically wouldn't ask you to reduce your provisions, particularly because there is no tax effect, as you know, in the provisions. But when they see the majority of the market, with specifically in one outlier with a much broader classification, then they probably would ask this outlier to adequate its weighting.

[Saul Martinez:]

Do you feel -- I know you can't talk for others. But do you feel that your provisioning on the corporate sides tends to be on the conservative end of the provisioning levels in the banking system?

[Eduardo Mazzilli de Vassimon:]

I can't comment on our other participants in the market. I see our policies as adequate to the present environment. We historically have had a conservative approach. I think it's adequate. And in particular, it has been preemptive, particularly in this quarter, anticipating possible problems that we might see in the future.

[Operator:]

The next question comes from Philip Finch, UBS.

[Philip Finch:]

And it's regarding HSBC. If they were to sell the Brazilian and/or the Mexican business, is this something Itaú would be interested in exploring? And if so, in terms of the sort of synergies that you think you could get from such an acquisition, could you outline what do you think these could be?

[Eduardo Mazzilli de Vassimon:]

Philip, this is Vassimon. The only thing I can say is we always analyze opportunities that could add value to our franchise, to our shareholders, and that would be compatible with our strategies. So that's all I can comment.

[Operator:]

The next question comes from Amit Mehta, PIMCO.

[Amit Mehta:]

I guess I just wanted to follow up on the asset quality question that's been posed by the various analysts already. You make the point that you've taken more specific provisions for corporate. And I'm just trying to get my head around what's the kind of GDP. I know you revised your GDP estimates for Brazil, minus 1.5% for this year, and unemployment higher. Can you give us some sensitivity if we were stretch those economic scenarios for more deterioration? How much more of your credit quality or preemptive provisioning would need to go up from the levels that you're guiding currently? So can you just give us more color on maybe another 0.5 percentage point deterioration in the economic outlook for Brazil? And if you had one more percentage point of deterioration in the unemployment rate, how much further that would stretch your preemptive provisioning?

[Marcelo Kopel:]

Amit, it's Marcelo. In terms of the sensitivity to a GDP fluctuation and the magnitude that you're talking about, and within that calendar year, we will probably fall within the interval that we provided, the BRL 15 billion to BRL 18 billion, which doesn't mean that will not affect subsequent years. Because with the -- as you pointed, the minus 1.5% GDP growth for this year talks to probably 0.7% growth on the next year. So this will have a chain effect on the following year. So with the sensitivity we ran when we did -- with the hedges that we've done for the new outlook, we -- and given what we are foreseeing in the economy, the BRL 15 billion to BRL 18 billion could be okay on a lower fluctuation of that. What could change the view is larger cases that we did not contemplate on, the preemptive provisioning that could spike the provision level. It's less related to a specific slow down and more related to large cases that were not contemplated in the exercise.

[Amit Mehta:]

And just on that basis, I mean where would you see potential risks -- large risks candidates come from? I mean you made the point in your commentary today, that it was much more broad-based rather than any sector or segment specific. So can you just give us more color of where the hotspots are for you in your portfolio?

[Marcelo Kopel:]

It -- there are some companies that, let's say, more related to some of the slowdown that we saw as a consequence of the initial events we had in the year. Some of them related to the Petrobras discussion. Now that the financials are released, this becomes less of an issue, and life should continue there. So -- but it's not really one specific name or another one or one specific sector or another one. But the overall, let's say, focus is on large names that could potentially change the overall interval. Not that the smaller names will make a meaningful change on the new BRL 15 billion to BRL 18 billion range.

[Amit Mehta:]

And just to take a clear message from what you're saying, majority of the risk, as you see it, sits on the corporate segment rather than the individual segment? Is that fair to say?

[Marcelo Kopel:]

Yes, it's a fair statement. And we did mention before that you could see some upticks on the individual portfolio. And that's something that comes together with a slower economy. But let's say, the majority of the increase is related to the corporate segment.

[Operator:]

The next question comes from Victor Galliano, Barclays.

[Victor Galliano:]

Just a quick follow-up again on the provisioning side. And taking the midpoint of your guidance that you've taken from net provisions of BRL 16.5 billion and the fact that you've done BRL 4.5 billion net in the first quarter, that doesn't seem to me like it's going to be coming down a whole lot in the next 3 quarters. If you average that, that should be around BRL 4 billion a quarter. And obviously, with the fact that you're also saying recoveries should be lower given the economic situation, it doesn't make it look like a sort of onetime big event, if you see what I mean, the first quarter net provisioning. So I'm trying to get my head around that. Unless obviously, this -- the remainder of this BRL 16.5 billion is not distributed evenly over the quarters, which is also very possible. But that could also imply you see another big quarter of provisioning ahead of us. And my second question -- so I just wanted to understand that a little better. And my second question really is about capital. The -- could you just repeat what you said in terms of where we are now in the exchange rate? Where would you be on a fully loaded Basel III? Would that be at above 10%? And also if you could remind us of what the impact of CorpBanca will be in terms of the impact on capital. And that should, I believe, come through in the second half of the year.

[Marcelo Kopel:]

Okay, let's -- this is Marcelo to answer your questions here, starting with end. The CorpBanca fully loaded impact would be 50 bps on our capital base. The level, if you recalculate our Basel, of 9.6% with the dollar exchange rate at BRL 3.10, this would bring us above 10% of CET 1 fully loaded, okay? And the third one talking about the provisions, let's split the answer in 2 parts, one is recoveries and the other one is on the gross provisions. On the recoveries, Vassimon mentioned that we did have BRL 1 billion in this quarter. Typically, the first quarter is a slower quarter in terms of recoveries, and you can pass against the historical data. And this is just a function of more commitments that people have in the first quarter and companies as well. So our number for the year talks to a BRL 4.2 billion recovery level. For the following quarters, the gross provisions should then be a level off, and then starts slightly reducing from the third quarter onwards. If you do the math, using our first quarter of BRL 5.5 billion, it would -- you will get to the gross number of BRL 22 billion of gross provisions, okay? If you look at our new outlook, the BRL 18 billion, which is net of recoveries, assuming a BRL 4.2 billion recovery, brings you to BRL 22.2 billion of gross provisions. So that's how we laid out our outlook, and that's why we say if our current view is if it materializes, that will bring us more in the midpoint of the new BRL 15 billion to BRL 18 billion range than to the top part of that. Okay?

[Operator:]

The next question comes from Boris Molina, Santander.

[Boris Molina:]

Yes, I had a question regarding the CorpBanca transaction. I don't recall -- at some point I think I read a transaction agreement. But what are the conditions in the transaction agreement under which the controlling shareholder of CorpBanca could walk away from the transaction without paying the $400 million breakup fee? Is it contemplated whether the controlling shareholder votes personally in the favor of the deal but then minorities votes against them, citing the KPMG report that has been rumored to propose a renegotiation of the exchange ratio? Or if minorities are represented, the minorities tried to block the deal because the combined company is above the 2/3, and minority shareholder rights have basically gone to 0 under the Chilean regulations. So what are the circumstances? Because here, we'll be here from Chile. We went to Chile a couple weeks ago, and the market down there is basically saying that Mr. Saieh believes that problems his problems at SMU are over, and he wants to renegotiate the deal and he's looking for ways to undermine the deal here and there. So is there any circumstance where the board can legitimately reject the transaction and Corp group not pay the $400 million fee? And would this rejection by the board or a proposal to renegotiate trigger some acceleration of the credit lines that are granted with the CorpBanca shares, that would force them to seek alternative financing for those 900 million [ph] that you advanced them?

[Eduardo Mazzilli de Vassimon:]

Boris, this is Vassimon. We will not comment on rumors. We keep working to close this transaction in the second half of this year. Obviously, it's subject to -- there's still 2 main steps, formal steps, that's the approval by shareholders. Of course, it is up to the shareholders to decide whether they believe it's a good business for CorpBanca. And if they approve them, there is a final step -- a final main step. That's the approval from regulators. The whole transaction is taking a little bit longer than we expected, but it's moving forward. We had recently the release of the opinion of the accounting experts. So things are moving, and we believe again that we'd be able to close it in the second half of this year.

[Boris Molina:]

Does the opinion from accounting recommend an updated exchange ratio?

[Eduardo Mazzilli de Vassimon:]

I cannot comment on that. It's not yet a public document.

[Operator:]

Our next question comes from Eduardo Rosman, BTG.

[Eduardo Rosman:]

I have a question about your cost of capital. In the event at the end of last year, management mentioned that Itaú's cost of equity was at 16%. So I wanted to understand if the bank sees its cost of equity today at a higher or lower or same level when compared to last year? And how should we think about Itaú's cost of capital evolution once the bank start generating more and more of its results outside Brazil?

[Marcelo Kopel:]

The view, other than the cost of capital view, is a long-term view. We updated that, so we're probably more closer to 17% than 16% that we mentioned. This is obviously a function of the changes that we saw in the economy and for how long this will be. When we look at the investments abroad, we need to look at -- and balance that against the benefits that this franchise will bring us and how we're going to make it compensate for the money that is being deployed. So there are several factors that get into this analysis. But the base scenario takes into account the 17%. There could obviously be the adjustments to that, depending on the particularity of the investments, but that's how we start the whole analysis.

[Eduardo Rosman:]

Okay. But since, let's say, if we argue that you're going to have a bigger diversification, lower risks, we could eventually be -- we could be working with eventually with a lower cost of capital going forward. It makes sense?

[Marcelo Kopel:]

To some extent, yes. This could be, let's say, not a key decision factor, but something that could influence if we're looking to accelerate on earning diversification.

[Operator:]

Our next question comes from Natalia Corfield, JPMorgan.

[Natalia Corfield:]

It's actually on CorpBanca again. I know you cannot comment on rumors, but is it possible to tell us exactly where you are in the process? What's exactly missing to get it approved? And also if it -- if the transaction closes, is there any possibility that Itaú does not keep the control?

[Eduardo Mazzilli de Vassimon:]

Natalia, this is Vassimon. The next step would be the call of the assembly of shareholders to discuss and hopefully approve the deal. And your second question was?

[Marcelo Kopel:]

If we are to -- not have control in the transaction.

[Eduardo Mazzilli de Vassimon:]

Sorry. No, no. The structure of the transaction guarantees control for our Itaú.

[Natalia Corfield:]

Right. And in assembly of shareholders, when is that expected to take place?

[Eduardo Mazzilli de Vassimon:]

We expect to be in the near future, but I cannot be more precise on that.

[Operator:]

The next question comes from Carlos Gomez, HSBC.

[Carlos Gomez-Lopez:]

Two questions. One is can you tell us what you expect the effect of a higher interest -- sorry, long-term interest rate detailed the -- to be in both of your own lending from the BNDES and on the tax rate availability of interest on capital. So what is the long-term effect of long-term interest rate? And the second refers to the Consignado business, the payroll lending. They are growing very fast, 81% year-on-year. It's becoming a significant part of your portfolio. What is the potential for growth in that segment, which seems already fairly well exploited? Actually it is only concentrated in the public employees and retirees. How much can that business grow for you and when would you see any risk in that business?

[Marcelo Kopel:]

Carlos, starting with the payroll. Growth on that should, for us and the market, should slow down. Probably the view we have is that to grow somewhere low double-digits, okay? And if you look at last year, there was a lot inorganic activity in growth because of the acquisitions we've done. So that has affected that, will not happen this year. Back to your original question on growing up affecting the lending. Yes, it will -- it could affect the lending but, it still is a privilege rate that borrowers can access into the market. So I would say it has more to do with the amount of the BNDES funds that will be available than the appetite for that in the market, okay? And for us, since we underwrite the credit risk and we basically borrowed from the BMGS and loaned by the underwriting credit risk, to the extent -- the borrowers again on that will show up, given that it's still a preferred rate compared to the market rates. The second point on the impact on interest on capital, it has a positive impact on -- given the fact that it increases the interest you pay, and consequently, since this is the tax deductible expense, it also benefits from that. So in -- during that period, to the extent this rate is going up, it means that you would -- could have a lower effective tax rate.

[Carlos Gomez-Lopez:]

And that -- sorry. But that has not been under discussions? The government has not proposed to modify that?

[Eduardo Mazzilli de Vassimon:]

I mean there are more rumors in the market than the government talking about it. So -- but again, it could be on the table for them. It all depends. It all depends on their -- how they control the agenda and how fast it can approve the other economic measures that we already identified and can produce the additional revenues they need.

[Carlos Gomez-Lopez:]

And if you could also expand on the BNDES issue, the availability funding, what's your expectation for that? And obviously, you are a big agent for the BNDES, do you expect the BNDES to be able grow with your portfolio this year or you're not counting on additional resources for the bank?

[Eduardo Mazzilli de Vassimon:]

In line with this effort -- the fiscal effort of the government, we should see lower growth rates for BNDES in terms of near disbursements.

[Carlos Gomez-Lopez:]

But there's still growth? There's still an increase relative to the end of last year?

[Eduardo Mazzilli de Vassimon:]

Probably, but not a relevant one.

[Operator:]

The next question comes from Paulina Baski [ph], Puso [ph].

[Unknown Analyst:]

I have again a question about the CorpBanca merge. So what will be the economic implications for Itaú in case that the merge doesn't work?

[Marcelo Kopel:]

Paulina [ph], the merge brings us the opportunity to build a larger franchise in Chile together with CorpBanca. And this will -- in case these entities go together, this will produce certain synergies that can only be obtained by the combined entity and not by the 2 entities alone. So that could be -- let's say, we'll postpone the acceleration of our growth in Chile. This will probably be implication.

[Unknown Analyst:]

Okay. And I have another question. On the financial statement, you have it Page 1 and 152. The table provides on the analysis of the market risk by showing where the largest concentration of market risks are, right? So the table shows that Chile has BRL 9.4 million on average. What explains that number? And what does it mean?

[Marcelo Kopel:]

Yes, bear with me for a second, Paulina [ph]. What footnote specifically you're looking at?

[Unknown Analyst:]

On Page 152.

[Marcelo Kopel:]

Yes, the....

[Unknown Analyst:]

Yes, the table. It's says that provides an analysis of the market risk by showing where the largest concentration of the market risks are right? So if you look at Chile, has BRL 9.4 million, which is 3x bigger than Argentina. So I'm wondering what does that mean. Is Chile market more exposed to risk than Argentina and other country?

[Eduardo Mazzilli de Vassimon:]

Paulina [ph], Chile is a much bigger operation than Argentina. So basically, to assist our clients and be competitive in pricing, we naturally ran some type of market risk, if this is your question.

[Operator:]

The next question comes from Eduardo Nishio, Brasil Plural.

[Eduardo Nishio:]

I have a follow-up question from the Portuguese call, regarding -- you said that you're comfortable with your level of provisioning coverage today in our current situation, all else constant. You would be able to deliver our -- the plan is to deliver always above 20% for the next couple of years. So my question is in terms of EPS growth, do you think you can deliver double-digit EPS growth for the next couple of years, given the current economic environment?

[Marcelo Kopel:]

Nishio, I can talk about the ROE. And it's -- for us, we can foresee us providing the 20%-plus return year after year. But the EPS is a longer conversation in the sense that if you take into account that we distribute the 1/3 of our earnings. And let's say -- let's make the math simple. Let's use the 24% example of our current ROE, okay? So let's say we distribute 8% out of the 24%, so it means that if we don't grow our earnings at least 16%, ROE will go down. So I would say that will fluctuate in the range between 20% and 20-plus are the current levels. Some expansion is possible, yes, maybe not likely. But it's -- that's the backdrop we are working on. And in a slower -- if the economy starts recovering, it's possible to grow double digits the earning per share. If not, then it becomes a harder exercise.

[Eduardo Nishio:]

Okay, but your current guidance points to -- probably to mid-digit growth for this year?

[Marcelo Kopel:]

Yes, yes. If you do the math, you will probably arrive to some EPS around 15%.

[Operator:]

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

[Eduardo Mazzilli de Vassimon:]

Okay. Thank you, everyone, for following and participating in this call. As a final note, I'd like just to reaffirm our beliefs that we'll be able to continue to deliver good results to our shareholders with returns above 20%. Although in this particular year of 2015, it's a different composition among P&L lines, with the higher margins and higher provisions this year. Thank you, again.

[Operator:]

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