(Updates with comment on XP deal and payout ratio.)
By Carolina Mandl
SAO PAULO, Sept 12 (Reuters) - The chief executive officer of Itaú Unibanco Holding SA said on Wednesday he does not think the central bank will block the bank from adding to its stake in financial services firm XP Investimentos if it does not seek to take a controlling position.
CEO Candido Bracher said he thought the Central Bank was too strict last month when it blocked Itau from acquiring a controlling stake in XP, seeking to safeguard competition in the financial sector. The Central Bank said then that Itau could expand its 40 percent holding in 2022.
Itaú's move with XP underscores competition challenges that banks are facing with financial start-ups, known as fintechs.
In a conference with investors in Sao Paulo, Bracher said due to competition with fintechs, banks' profitability margins are likely to go down.
"Fintechs are choosing niches where banks are less efficient," he said. "They are exposing banks' weaknesses in terms of quality of services."
He also said that banks face a more challenging regulatory environment than in the past, particularly in areas where financial start-ups are focusing business.
Bracher said fintechs are exposing banks' problems in areas such as credit cards by being able to charge lower rates and offer higher-quality services.
In the same presentation, Itau's Co-Chairman Roberto Setubal told investors and analysts that the bank was taking some measures to keep its payout ratio above 25 percent in 2018.
He mentioned that even considering an exchange rate of 5 reais per dollar, the bank could still maintain its tier 1 capital ratio at 14.5 percent, above its minimum target of 13.5 percent, which it set last year. (Reporting by Carolina MandlEditing by Leslie Adler, Brad Brooks and Cynthia Osterman)