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Edited Transcript of ITUB4.SA earnings conference call or presentation 30-Oct-18 1:00pm GMT

Q3 2018 Itau Unibanco Holding SA Earnings Call

Sao Paulo Oct 31, 2018 (Thomson StreetEvents) -- Edited Transcript of Itau Unibanco Holding SA earnings conference call or presentation Tuesday, October 30, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Candido Botelho Bracher

Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers

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Conference Call Participants

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* Carlos Gomez-Lopez

HSBC, Research Division - Senior Analyst, Latin America Financials

* Carlos Grein Macedo

Goldman Sachs Group Inc., Research Division - VP

* Domingos De Toledo Piza Falavina

JP Morgan Chase & Co, Research Division - Head of Latin America Financials

* Eduardo Rosman

Banco BTG Pactual S.A., Research Division - Analyst

* Jason Barrett Mollin

Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services

* Jorg Friedemann

Citigroup Inc, Research Division - Director

* Marcelo Fedato A. Telles

Crédit Suisse AG, Research Division - MD of the Latin American Equity Research and Head of the Latin American Financials Sector

* Nicolas Alejandro Riva

BofA Merrill Lynch, Research Division - Research Analyst

* Philip Finch

UBS Investment Bank, Research Division - MD, Global Banks Strategist, and Latam Banks Analyst

* Rafael Frade

Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Itaú Unibanco Holding conference call to discuss 2018 3rd quarter results. (Operator Instructions) As a reminder, this conference is being recorded and will be kept alive on the Investor Relations website at www.itau.com.br/investor-relations. A slide presentation is also available on this site. This opportunity, we would like to mention that forward-looking statements are to be made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in our 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. Candido Bracher, President and CEO; Mr. Caio Ibrahim David, Executive Vice President, CFO and COO; Mr. Alexsandro Broedel, Group Executive, Finance Director and Head of Investor Relations; and Mr. Milton Maluhy Filho, Itaú CorpBanca CEO. Mr. Milton is participating in this conference call as the future CEO and CRO of Itaú Unibanco. First, Mr. Candido Bracher will comment on 2018 3rd 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.

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [2]

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Thank you. Good morning, and welcome to our third quarter 2018 earnings conference call.

Turn to presentation on slide 3. We had another solid quarter with our recurring net income reaching BRL 6.5 billion and the consolidated ROE of 21.3% and of 22.4% in our Brazilian operations. You can see that the growth of 1.2% of our financial margin with clients and the reduction of 9.4% of the cost of credit were the main drivers of the third quarter results. This quarterly performance was partially offset by the 2.1% decrease of our fees and reserve from insurance and by the 3.1% increase in our noninterest expense. Our higher expenses were mainly influenced by ForEx variations and by the collective agreement with the bank employees union. Nevertheless, our expenses from Brazil operations excluding the impact from Citibank with their business, grew 0.9% over the past 12 months, well below inflation for the period. Additionally, the credit portfolio grew 10.6% over the last year while the nonperforming loans over 90 days improved 30 basis points at the same time. It's important to note that the 10 basis points deterioration of the NPL ratio in the quarter was mainly due to a few corporate cases that were already profitable positions.

Lastly, our capital ratios continue to improve despite the credit growth in 2018. The Tier 1 capital ratio reached 14.8%, which already considers the full result of the Basel III capital requirement and also the impact of XP Investimentos' minority increase of position.

On Slide 3, we present our income statement. You can see that our accumulated performance over the first 9 months of 2018 generated a 10.1% growth in income before tax and minority interest. This performance was partially offset by a temporary higher effective tax rate in the period. The high FX burden is caused by the accounting of our tax credit at a 40% rate while we pay current taxes at a 45% rate in accordance with current regulations which should expire at the end of the period.

Now on Slide 4, the financial performance reported on Slide 3 is an essential element of our value creation process. Here on Slide 4, we show that our value creation reached reach BRL 7.2 billion in 2018, and increased up to 36% on the last 4 years, which confirms our focus on capital discipline. Also essential to our value creation process is our investment in technology which, as shown on page 5, has increased 67% since 2014. This investment is of far more importance to generate both profit efficiencies and product quality. The investment has promoted the constant evolution of our digital platform, improving the user experience of our clients. This led to a constant growth with the adoption of our digital channels by our clients, as they already amount to almost 11 million individuals by the end of September. Through our app, we opened more than 160,000 new current accounts in the third quarter, a 30% growth compared to the previous quarter. Our digital branches represent more than 30% of recurring revenues in the retail business. It's an efficiency ratio that is more than 4,000 basis points better than the brick-and-mortar branch.

These are some of the important KPIs stressed during our digital transformation journey.

Now on Slide 6, you see our business model, with the breakdown of our income statements between credit, trading, insurance, services and capital. We evaluate our business allocating capital from each and every transaction in the bank, creating a more critical capital management approach. This process allows us to enforce our value creation in each area of the bank, linking mix to each manager and station. As previously shown in this presentation, our value creation increased BRL 1 billion during the first nine months of the year, as currently in the case in recent years, our insurance and service operations continue to account for the bulk of the value created. But it is important to point out that credit transactions have consistently created value throughout 2018.

Turning to Slide 7. Our credit origination remains strong, mainly in our individuals and SMEs credit portfolio.

As mentioned in the past quarter, this growth is driven by credit demand from our clients and much by the loosening of our risk capital and credit spent. And the corporate portfolio, the origination remains subdued due to lower demand from our clients and our minimum value creation requirements. However, this does not implicate in our reduced relationship is our large corporate clients. As we continue to advise and help them to access the debt capital markets, in each we play a leading role, both in the distribution and in the origination of corporate debt.

Now turning to our credit portfolio on Slide 8. You can observe our growth rate of 2.1% in the quarter and of 10.6% over the last 12 months. This performance is concentrated in our individuals and SMEs portfolios, which in aggregate gained 11.9% over the last 12 months. Our portfolio in Latin America continues to be affected by ForEx variation, especially when compared to last year. If we strip out its effect, the portfolio would have grown by 5.2% in the last 12 months instead of the 27.4% as the table shows.

That brings us to Slide 9, where we show our financial margin with clients growing by 1.2%, primarily because of the continuing change in the credit portfolio mix towards products with higher spreads, as shown on the previous slide. Our risk-adjusted NIM increased 10 basis points in the quarter, also in line with the improvement of the credit quality of core portfolio. Also note, it's a fact that before the easing cycle of Selic rate, we were constantly questioned about the negative impacts that a lower Selic will have in our financial margin. Now 2 quarters after the stabilization of the Selic, activities shown here indicate that our NIM is less sensitive to market volatility than people originally thought.

Slide 10 shows our incremental margin with the mark. Interaction, as you know, includes not only our trading gains but also our asset and liability management, and it remains relatively stable this quarter despite the market volatility in the period.

Turning now to slide 11, we will take a look at our credit quality indicators. All our non-performing loans over 90 days improved 30 basis points over the year, consistent with our risk at the time and strategy. In this quarter, the 10 basis points increase is caused by the corporate book and refers to delinquency of a few companies that were properly provisioned and did not cause any negative effect in our P&L. The NPL over 90 days of our SMEs portfolio reached 3.4% this quarter, which represents 150 basis points improvement over the past year.

In addition, the delinquency of the individuals portfolio, which remained stable in this quarter, shrinked 60 basis points over the last 12 months. Those portfolios are at their lowest delinquency ratios since the Itaú Unibanco merger.

Moving onto slide 12, we can see that our cost of capital has reached 2.1%, once again the lowest point since the merger between Itaú and Unibanco.

Now on slide 13, we show our coverage ratio, which has declined 1,300 basis points over the quarter. As mentioned previously, this indicator was likely to decline either due to the result of exposures for each provisions already existed or due to the upgrade of the credit rating from clients whose financial health improved. During this quarter, both factors contributed to the decline.

Slide 14 gives a breakdown of our revenue from services and insurance, and as you can see, these revenues were down by 2.1% in the quarter. Commissions and fees declined 1.1% in the quarter mainly due to the advisory services and brokerage. This line was naturally impacted by the pre-elections in [Sabille]. Despite the higher competition in our season services business, its revenues still show a good performance, growing 6.8% in 2018.

It is fair to say that without the effects from the Citibank retail business, revenues grew 5.2% in the same period.

As for the lower results on our insurance operations in the quarter, it is related to the liability of deficit test revenue recognized in the second quarter. Since this test is held once every 6 months, we have no impact this quarter.

Now turning to our noninterest expenses on slide 15, we have an increase of 3.1% in the quarter. This growth was mainly related to the effects of ForEx variation in our expected in Latin America, as well as the impacts of the collective agreement with the bank employees union. We note that our expenses from the Brazilian operation, excluding the impacts of the Citibank retail operations, grew 0.9% over the past 12 months, well below inflation for the period.

On Slide 16 now, we show our Basel III Tier 1 capital ratios, which increased 60 basis points in the quarter, reaching 14.8%, already accounting the 19 bps impact from acquisition of [XP debts units]. This evolution was due to our net income in the period as well as with the effect of Resolution 4680, which changed the treatment of deferred tax assets originating from hedging strategies of international index.

Now on slide 17, we are glad to announce that we have received the final approval from the Brazilian legislature to acquire the minority interest of 49.9% in XP debts units . The total transaction value was BRL 6.7 billion and the financial settlement took place at the end of August. This acquisition reflect our strategy to diversify our net income towards less volatile revenues. With this now, we conclude this presentation and I'll open for the questions which you may have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Eduardo Rosman, BTG Pactual.

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Eduardo Rosman, Banco BTG Pactual S.A., Research Division - Analyst [2]

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I have a couple of questions on the acquiring segment. The first one is regarding the competitive environment in the industry, right. We can see that your prices declined a lot in a quarter when compared to the previous ones. We did some calculation here, and we can see here that a huge, calculated as revenues divided by the card volumes declined 30 basis points "to 1.08." So I wanted to understand what drove, let's say, the lower prices this quarter. Is it was something more proactive from you? Also, what do you think we can expect if these prices should continue moving downward, if you believe that, from now on, this should be a more stable level, so if you can elaborate a little bit, we would be grateful. And the second question is also, let's say, it's also on the industry, right. We saw Cielo announcing recently it is leaving the banking lock agreement, so I wanted to know if it makes sense for [the H] to remain in the agreement or not, right, or if it make sense to have the agreement at all from now on? I think clearly, some of the new entrants, they have been able to be very aggressive on the prices because they do a lot more prepayments than incumbents, so I wanted to understand here the view of the bank. For the bank, I understand that the end of these agreement is bad because it increases the risk of the loans that have call ratios as collateral, but on the other hand, this could help [H] to become more competitive when compared to the other ones. So if you can talk a little bit about these as well, I would be thankful as well.

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [3]

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Eduardo, thank you for your questions. So first, on the acquiring business and the competitive environment in (inaudible), I think it's no secret to everybody is witnessing in how competitive this business has become in the past 2 years, and it's become seasonally more competitive. In this scenario, we have first lost some market share due to competition, but we have restructured our activity in many ways with investments and we have been able now to stop this loss in market share. As for the prices, we don't make the prices, the competition makes the prices, the market makes the prices. So I can't tell you if they will keep on falling or not. But I could say that I see now, seeing the market that indicates that the competition will ease in the near future. So when we -- as you know, we have created a (inaudible) credit card regard in order to compete in another segment. We have increased significantly our direct sales force. And we'll then keep on competing in this market, expecting to bring also a better service to our clients and to be a strong competitor in the area -- sector.

About the [SEG], I mean the agreement, Cielo has announced that it will leave the SEG . We have announced as well that we are leaving the SEG . Yet, I expect this should not happen, either for Cielo or for us. I believe that the end of this agreement is first and foremost a loss to the system, not to the banks, especially a loss to the clients. And the clients today have access to this type of credit that in Portuguese we call fumaca, smoke, which is the ability to discount revenues which are still to be made -- or sales which are still to be made. And the SEG enables, so this credit to be made. It's safer credit and thus it has a lower interest rate, which is very beneficial to clients. Without this agreement, without the SEG, search credits dealt to fumaca cannot be made. There is an effort led by the Central Bank to establish a way in which this could continue being made. An agreement has already been reached on how this market should function in the future, but it take some time. It takes about 2 years for all the technical evolution to be made and the -- then when this is done and ready, all the participants will have access to discounting receivables in the market, this improving the rates for the companies. And what is being worked upon now is a solution for the in-line, between now and 2 years from now. I trust that the efforts of the Central Bank and of the banks that we will be succeed and we'll be able to find some way or function that will enable this credit to fumaca to keep on being made. So we won't have to be the (inaudible).

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Eduardo Rosman, Banco BTG Pactual S.A., Research Division - Analyst [4]

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Now it's very curious, just a small follow-up on the fumaca question. Do you expect any increase in provisions because of the, lets say, deterioration of these collaterals? Or you don't think that this is going to happen?

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [5]

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I don't think nothing significant can happen there on any grounds.

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Operator [6]

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The next question comes from Carlos Macedo, Goldman Sachs.

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Carlos Grein Macedo, Goldman Sachs Group Inc., Research Division - VP [7]

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Couple of questions on more of the banking side. First, you mentioned during your presentation that much of the growth that you have been seeing so far, the acceleration at least, has been driven by demand and not by appetite. I think I asked this question on the last couple of quarters. Now that the elections in Brazil are done, we have an outcome, of course, we still need to see the new president come to power and govern, but what will it take for the risk appetite of the bank to improve? On the asset quality side, NPLs are at the lowest level they have been, as you said, since the merger. And cost of risk hasn't -- is been pretty much flat. What does it take for you with your risk appetite to increase it, and what would that mean for loan growth, if it did? And I have a second question that's an asset quality specifically on the consumer side and the volatility on the corporate, but the consumer side has been pretty steady. Do you see any room for further improvement there given where you are? Cost of risk there hasn't really declined that much. It's actually been going -- trending a little bit upwards, at least on the retail side. How do we think about that going forward in terms of the cost of risk of that specific segment?

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [8]

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We've been making these questions for the past 2 quarters and making the same question. This time I may give you a different answer. So as to risk appetite, so first just to be precise on what is risk appetite and what is not risk appetite. Risk appetite for us means that we don't lend to companies or individual with risk of probability of default above a certain level, which is there reaching different levels for different -- for different sites. So how have we then been able to increase our portfolio and to increase our credit activity? Because companies get better, when the economy gets better, and their probabilty of default decreases. So companies which were out of the risk appetite, they get in the risk appetite as the economy improves and as they improve. So change in the risk appetite would lead accepting lending to companies -- with companies lending to people with a higher probability of default. We think that the steadiness we have seen in the improvement of company and the perspectives we have had may encourage us to review those levels of probability of default below which we do not lend. We are starting this as we speak and we may submit to our board some measure in this direction over the course of this next quarter, so this is your first question.

On the second question, if I understood well was something about the perspectives of cost of risk in consumer side. It has been improved very significantly. Should at some moment, it should stabilize. We do not see the signs of it yet. It continues to -- so far it continues to improve of the -- at a lower pace but it continues to improve.

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Carlos Grein Macedo, Goldman Sachs Group Inc., Research Division - VP [9]

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Okay. Just follow-up on the first question, I don't want to front run your guidance for next year but stronger risk appetite, you're already growing at 13% per year. Would that mean loan grow potentially stay in the mid-teens next year if the risk appetite doesn't really go up? Or was that a little bit too aggressive for the size of the market as it is now in the process that we have for GDP growth?

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [10]

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Kind of early. I cannot estimate what will loan growth look like for next year. But what seems safe to say is that the growth for next year will lean more upon credit than it has leaned this year.

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Operator [11]

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The next question comes from Jason Mollin, Scotiabank.

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Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [12]

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My first question is again on loan loss provisions and the declines we've seen, and I would call normalization, I guess, so the cost of credit as well as loan loss provisions to loans. We've seen in the charts, you show for all the history there, where we are at the lowest levels. Should we expect levels to increase as loan growth accelerates? Or can they continue to decline, would be my first question.

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [13]

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As loan growth accelerates, you have a natural tendency for these levels to increase because you have to make provision for the new loans. However, given the very high level of the coverage ratio that we present, as I have been saying over the past quarter, this level tends to decrease over time. It will decrease because some companies will default and they will add to the denominator or it will increase because some companies will improve and the provision will be reversed. I think this is fewer trends that -- of normalization, as you named it, which we should see still for 1 or 2 years ahead and -- in this trend of cost tends to reduce the cost of credit. What will be the better between both trends, one of the increase because this is the total portfolio, and one of decreasing because of the decrease of the coverage ratio? I don't know.

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Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [14]

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Let me ask the second question on the credit card business. So cards now represent of about 35% of the loan book at close to -- around BRL 69 billion, only less than 9% of revolving credit. We know -- we have, I think you reported, about 83% are transactional charges including installments without interest. So I just wanted to understand how you see this potential changes in this market, specifically, the use of interest-free installments, and if we've seen some push to reduce the use of interest installments and move to installment payments but -- and charging interest rates. How do you think about this issue and what are the implications for Itaú and the credit card market in general.

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [15]

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Well, as you know, interest free installments is embedded in the culture of Brazil. It's something -- every retailer sells on interest free installments. Just recently, one year ago, the retailers have been allowed to have a discount when the sale is not made in interest-free installments. As this habit becomes more widespread, then there tends to be a tendency to increase the interest-bearing credit, which is where we place our efforts. So our main efforts in the credit card there is to increase the interest-bearing portfolio. I think we are being successful there. I think this is a trend which should increase as we go forward, but it's a long -- I don't think interest-free installments will ever be excluded or will ever be finished. They are too much of a tradition embedded in the heart, and a lot of the retail market depends upon it. But as we create alternatives for it and the alternatives, I mean, with a discounted value and then bearing interest in the financing, I think we'll be able to grow our credit card portfolio that bears interest.

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Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [16]

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Can you share a little bit of this 83% that you call -- I would call transactional charges. What portion of that is the interest fee installment versus just the usage that the -- when the car payment is due by the client, paying it off in full? What percentage of that is actually due to this interest free installment product?

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [17]

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Jason, I don't have this figure right now with me. I'll have to ask Gustavo to call you back with specifics.

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Operator [18]

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The next question comes from Jorg Friedmann, Citibank.

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Jorg Friedemann, Citigroup Inc, Research Division - Director [19]

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I have also two questions. The first is related to your fee income business. I was particularly intrigued by the performance of the asset management fees. So just wondering if you could describe a bit what drove the performance in this quarter, if you could attribute that only to competition or it could also be the initial signs of the effect of Itaú opening its platform and migrating a bit, I know from the pure asset management fees to distribution fees something that will be accommodated over time. And then my second question is related to costs. Of course, it became very clear to us in your presentation that the bulk of the increase has been related to the LatAm by unit given the depreciation of the real during the quarter as well, but you also had this impact of the labor agreement. So just wondering, if we strip it out, the FX impact, what we could think about structural growth. The question is more related if the LatAm units will continue pushing the costs above the inflation for the foreseeable future?

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [20]

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First, your question on the asset management. No, it has -- the decrease in seasonal asset management is not related to -- for a change in expenses of distributing more third-party products or so. It's very specific in this quarter. It's due to smaller performance fees. And we had most of our accounts between the first quarter after years in the industry, so performance fees were very strong, and -- in the first semester, and was a bit less so in the third quarter. So this was the reason for the impact in the asset management fees.

As to costs, I mean, as relates the American cost, if they will be above or below our inflation in Brazil, it's related essentially to the exchange rate variation that you cannot forget that. Locally, their costs tend to increase below inflation, as is the case in Brazil and as we intend to continue to do so.

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Jorg Friedemann, Citigroup Inc, Research Division - Director [21]

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Yes, perfect. Just a brief on that part of Latin America. Some of the units, particularly Chile and hopefully Colombia soon are recovering, and the question is now related to if these growth of reserves abroad could continue pressuring expenses in the quarters ahead? Or if you believe that at some point, it will converge to the guidance this year, and the lower levels for next year? That was a bit more my point. Sorry if I was not clear.

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [22]

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I think that the improvement in performance, especially in Chile and Argentina, they have more to do with the way management is evolving and with the way new managing guidelines are being implemented in this bank than with investments in itself. So I think we'll be able to keep on improving the performance there, keeping expenses below inflation in these countries.

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Operator [23]

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The next question comes from Rafael Frade from Bradesco.

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Rafael Frade, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [24]

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My question is really to the guidance. You reaffirm -- in the press release, you reaffirm the guidance but you don't mention anything on the -- on -- during your initial presentation. I would like just to get a sense of how are you seeing the guidance for the year. I feel like now seems to be looking for credit, it seems that probably, you'll be above your guidance. In fees, maybe we can be more in the low end of the guidance, so I would like to hear your talking about it.

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [25]

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As you know, we provide guidance for this various lines, and we know that you make your calculations and you end up with your guidance for final results. We do the same thing here. And when we look at this calculation, we're seeing that we'll be well within the guidance, the results that you have calculated for final results. As today in the lines you are right, there are some cases where we'll be around the extremes of the guidance, either positive or negative.

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Operator [26]

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Next question comes from Domingos Falavina, JPMorgan.

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Domingos De Toledo Piza Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [27]

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I have 2 quick questions. One is on headcount. We know this, about 1,000 employee increases Q-on-Q, and I believe in addition to the FX and also the salaries, one of the reason for the price increase, according to the release, was the efforts or the focus on the commercial efforts on the acquirer as well as on the insurance. So if you could provide a little bit of detail of this headcount increase, what percent would you want to acquire, or how many people or actually did you increase your acquired sales effort by, and as well as your insurance? And then I'll hold for the second question.

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [28]

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Yes. You're right, there has been a headcount increase, and there will be continue to be investment in people in these 2 areas and in insurance and the acquiring business. It seems that this third quarter, rough figures, that we were around 300 for the acquiring business and 400 for insurance. We expect to have, of course, efficiency gains in any other areas of the bank, which will offset the impacts on costs created by these investments in these areas.

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Domingos De Toledo Piza Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [29]

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And one additional one on the acquired. It seems the POS rental is sort of the most commonly used negotiation tool to retain clients, and it seems that Itaú is really focusing on keeping these client relationships as seen by the number of real clients as well as by the volume growth. My question is, when you look at these POS rental revenue streams, do you see that decreasing or becoming irrelevant in how long? Is that something that you believe will continue to be a relevant stream? Or will it cease to be important in the short term?

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [30]

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Yes, you are right. We are trying to adapt our products and our offer to customer needs, to client needs. And one of the main victims a bit is the POS rental, and apparently it will continue to be, so POS rental tends to continue to decrease.

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Operator [31]

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Your next question comes from Marcelo Telles, Crédit Suisse.

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Marcelo Fedato A. Telles, Crédit Suisse AG, Research Division - MD of the Latin American Equity Research and Head of the Latin American Financials Sector [32]

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I have 2 questions, the first one, and it's more of a broad question, regarding fintechs. I mean, how do you see the threat of fintechs to your business, particularly in -- considering your expectation of probably like working or accelerating your loan portfolio down the road? So where you see the biggest threats from fintechs for you? That's something that could perhaps change the dynamics a little bit in terms of this loan growth acceleration into the future?

And my second question is regarding costs, kind of a follow-up of Falavina's question, considering that you expect to accelerate your loan growth going forward. How should we think about your operating cost base down the road? Can you still continue to deliver the strong cost control you've delivered in recent years, or you think because of higher lending growth, we might start to see an acceleration on your operating expense base?

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [33]

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Thank you, Marcelo. So first, your question on fintechs. I must say that I see the fintech activity much more challenging for us in the service side than on the credit side, at least for the near future. Most of the activity we've seen in fintechs and the new competition, they come on the investments, they come on the acquiring business, they come -- mainly they come on services. In credit, we do not see yet such an intense activity by fintechs. And we see the quality of our credit operations improving very consistently with the use of artificial intelligence, with use of technology, the way our current models are improving. So here we have the intention that we can compete on a more even basis using technology to compete against fintechs, so my expectation is that the credit portfolio, we will experience good growth ahead of us.

And going to your second question, I don't see a huge impact in the costs in the growth of the portfolio. I think we have an established structure, and within the structure, we will be able to grow the portfolio without adding much cost to it. And these are part of the scale gains. It's a completely different scenario than in the acquiring business or in the insurance business where we need more people to increase sales, and we don't need more people to increase our credit facility.

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Marcelo Fedato A. Telles, Crédit Suisse AG, Research Division - MD of the Latin American Equity Research and Head of the Latin American Financials Sector [34]

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Very clear. Just one more additional question, if I may. Regarding REDE, where do you think you are from a technology standpoint and from a service standpoint, compared now to newcomers in that business. Do you think we still have to deal a lot of like legacy issues that have been potential impact to your business. Or if you could just elaborate a little bit on the service and on the technological strategy of REDE, that will be great.

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [35]

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Okay. Marcelo, I think we have a few -- quite a way to go in our acquiring businesses. I think we can improve much more there. It's not the case of our credit card. Our credit card is already born and it is a new scheme, it is a new platform. But in the traditional hedges, I see a lot of room for improvement in our -- in the quality of our offer to our clients. And then we have the following up all of the aspect of this -- of this offer and we are following closely the improvement in each of them, and we simply -- we will be able to improve much more and offer much more competition to the market.

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Operator [36]

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Our next question comes from Philip Finch, UBS.

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Philip Finch, UBS Investment Bank, Research Division - MD, Global Banks Strategist, and Latam Banks Analyst [37]

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First, a follow-up to Marcelo's question on disruption risk. We've seen a few new digital players coming to the market in last year or so, offering free banking, free checking accounts transfers. Is that putting pressure on you, or are you seeing any customers switching to these new startups or digital players? And are you planning to also reduce your fees as well related to this. So I guess, ultimately, you're benefiting from cost reduction as a result of technology, digital banking. Is there a risk factor of these cost benefits are going to be passed through to your customers partially or fully via lower fees.

And the second question is regarding your digital -- sorry -- your dividend payment or payout outlook. In previous calls you've mentioned the potential for a high dividend payment, given that what at not least you've issued some additional Tier 1 capital. Now loan growth clearly has picked up much faster than anticipated. Does this in any way reduce the potential for dividend payment going forward?

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [38]

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First question deserves a little longer answer, I think. Of course, that is fintech and all this new competition is a threat to the business. I have no illusion that which will not somehow affect our margins, to think that our margins will suffer, but they always suffer when there's new competition and there's increased competition. As to the way we compete, I've seen this phrase written somewhere which made sense for me, which is that "Incumbents must find innovation before innovators find distribution." I think this is more or less the race that is there, so we as incumbents must find innovation, must be able to compete with the products offered by this new competition. And this is what we are doing, and this is why I have shown here our interest in technology, and we could go on much longer about investments in technology, that we could mention that we have traveled the number of scientists in the data sciences in the bank, and many other progresses which we are seeing in order to have -- keep improving our efforts as new competitors appear in the market. So I think that in this game we can compete very well, but margin will be compressed. I think it will be more so in services than in credit. I think in credit, there is -- our condition to compete and our feelings of scale, and really, I mean, the accumulated knowledge on credit evaluation that we have, and it presents and enables us to compete even more strongly in credit than in service. But I think this is the name of the game going forward, is to face this competition in every, every market that we mentioned with the client and the insurance business. We have the cash management business. There are many businesses like this. We have -- I believe we all took the benefit of a complex offer of structured financial products. It's the ability of being a one-stop shop and so on. And we think that if we -- I were to constantly improve the quality of our products, to constantly improve the user experience of our products, which is our main focus now, we will succeed in this competition and we will keep the high levels of returns that we have been offering to our investors.

Second question, on dividend payout. Yes, I mean, in this, our recapitized state that we should have by the beginning of the year, 13.5% Basel III Capital One Tier 1 ratio. And what's above it and will not be consumed by acquisitions or by expected changes in regulation, will be distributed as dividend. So our guidance to next year,seems to me that we'll have a very fair level of dividend distribution. If portfolio grows much faster than we expect, then of course, we will distribute a little less dividend because more capital will be required to keep the 13.5% level.

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Operator [39]

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The next question comes from [Felipe Salamal], Citibank.

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Unidentified Analyst, [40]

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I have a few questions about credit card bot. Is it possible to share more details about the recent performance of this business, for instance, what is the current POS date of credit card bot? How many clients are -- credit card bot has been able to add to its portfolio on a monthly basis?

And if you could also, if possible of course, share with us some numbers about estimated market share in the micro motion segment. Both the current market share and the market share of net additions, that would be great.

And the last question that I have is why Itaú decided to use the system of First Data to do the processing of credit card bot transactions instead of using REDE?

These are my questions.

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [41]

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For credit card bot, we're not disclosing any information on this bot. I think the information I can give you is that we are on track to reaching our goal of 120,000 clients by the end of the year. Why did we decide to use First Data and not REDE as the supplier for our credit card bot, because we are experimenting with different authorities, and we think when this is part -- this is just part of our striving to offer our customers a better user experience, and we are challenging our own internal platform for like we can easily expect to have both improving.

There is also -- I could have answered this another way too and it will also be a bit for Philip, this question about First Data. You know that in every company and in every bank, there is a competition for IT resources. We have a high competition for IT resources in the bank, we have a very clear and established methods of measuring the net present value of each investment that we propose to technology. So when a new product comes which has a longer run but it's easier for them and it's easier to calculate the results and the prospects of this investment, if you do not rely on our internal IT, but if you can hire it externally.

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Operator [42]

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The next question comes from Nicolas Riva, Bank of America.

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Nicolas Alejandro Riva, BofA Merrill Lynch, Research Division - Research Analyst [43]

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I have two questions. The first one on the level of NPL creation. So we did see an increase in this level in the quarter of about BRL 5 billion. You do mention the rollover of some overdue loans which were 15 to 90 days overdue, and now they are more than 90 days overdue. But if you can comment on this, on this increase of your declarations, if it's something that concerns you for coming quarters?

And then my second question, on your guidance for loan growth. So in the call you seem to be more positive on credit going forward. But if I look at the guidance for loan growth, you didn't change it for this year, the 4% to 7%, and if I look at what it implies for the fourth quarter, it seems to imply basically 0 growth quarter-on-quarter for the fourth quarter. And my question there is if the acceleration that you're seeing in loan growth would be more of a 2019 story rather than fourth quarter story?

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [44]

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Concerning the NPL creation, these companies that went in arrears over 90 days in this quarter, these actually date back to '15, '16. In '15 and '16, we identified companies which were much weaker due to the huge crisis that we went through, and we have made precautionary provisions for these clients and we follow up these clients very closely in a different area of the bank that we created especially to follow up clients like these and have since. So that when these clients may eventually default, as was the case with this company, now the level of provisioning is very high, and in this case it was above 80% in the case of both. And we expect we will not lose 80% of this credit eventually going forward. So this does not represent any special concern to me going forward. And as I look into our book of senior situations, which is some companies are improving and others still deserving a closer attention, expect that if the economy of all improves, we may have more positive than negative surprises in this portfolio going forward.

And we have not seen new companies been added to this portfolio, so we have not been doing this year, it has not been significant, the number of new cases added to these cases of bigger concern.

Guidance for loan growth? We are reaffirming the guidance in general. With this CAGR disclaimer that I mentioned in previous question, in some lines, we may be around the top or the bottom of the guidance.

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Operator [45]

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The next question comes from Carlos Gomez, HSBC.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [46]

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I have a question about 2 products. If I look at page 69 on the presentation, I wanted to ask you about retail financing and mortgages. In autos, certainly it matters more than you were before, but you are regaining ground. What would be your aspiration? Do you want to cover on portfolio (inaudible) you have had in the past. Do you think it would be a particular percentage of a total on your individual performance, or do you have a market share target as an expectation. And now mortgages, which are now 21% of your [legal] loans, at what point is something going to become an issue, and would you make different instruments than the savings accounts?

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [47]

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So about -- thank you, Carlos, for your questions, about vehicles and picking a market which we think will grow and where our presence will grow, as you know, we have restructured completely our activity in this market. We were once market leaders there and now we are a much smaller participant in the market. And we want to regain the reign here, and we have invested a lot in the quality of our products in the processing, in the technology, in order to give better user experience and to have a quicker turn time to customers, and we think we will be growing this portfolio consistently above inflation going forward. And sorry, your second question, Carlos?

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [48]

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About the funding for the mortgage portfolio.

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [49]

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Funding for the mortgage portfolio does not present a special concern right now. As you know, the mortgage portfolio is funded fundamentally by what we talk (inaudible) and regardless of the bank, and we have a very comfortable margin to fund the expected growth of the mortgage portfolio.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [50]

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So you don't expect any to occur, in the next, say, 2 or 3 years? Not enough...

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [51]

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I expect the portfolio to grow, but I do not expect problems in funding.

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Operator [52]

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

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Candido Botelho Bracher, Itaú Unibanco Holding S.A. - CEO, Executive President & Member of Board of Executive Officers [53]

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Well, just to thank you very much for the interest in our results. Excellent questions you've made. And there's that we are confident that we'll -- we are confident that we'll continue to show strong results going forward. Thank you very much.

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Operator [54]

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