Itau Unibanco Banco Holding SA American Depositary Shares (Each repstg 500 Preferred shares) (NYSE:ITUB) Q4 2022 Earnings Call Transcript February 9, 2023
Renato Lulia: Hello. Good morning, everyone. I'm Renato Lulia, Group Head of Investor Relations and Market Intelligence at ItaÃº Unibanco. Thank you for participating in our video conference to talk about our earnings for the fourth quarter of 2022, which we're broadcasting directly from our office here in Avenida Faria Lima in SÃ£o Paulo. This event will be divided into two parts. In the first part, Mr. Milton Maluhy Filho will explain our performance and earnings for the fourth quarter of 2022. Next, we'll have a Q&A session where analysts and investors will be able to interact with us directly. Now I'd like to give some instructions to make the most of this meeting today. For those of you who are accessing this via our website, there are three options for audio on the screen all content in Portuguese, all content in English, or the original audio.
In the first two options, we have simultaneous translation. To choose your option, all you have to do is click on the flag on the top left of your screen. Questions can also be forwarded via WhatsApp. To do so, just click on the button on the screen on the website or simply send a message to the number 55-11-94552-0694. The presentation we'll make today is available for download on the hot side screen and also, as usual, on our Investor Relations website. I now give the floor to Mr. Maluhy, who will begin the presentation on the earnings. And then I'll come back with you to moderate the Q&A session. Milton, go ahead.
Milton Maluhy Filho: Well, thank you, Renato. Welcome to our fourth quarter of 2022 earnings presentation. I'll also talk about the 2023 guidance. I'll go straight to the figures, so that I can bring you some more information. Firstly, our earnings in the quarter totaled BRL 7.7 billion, a drop of 5.1% from the previous quarter, and BRL 7 billion in Brazil, which also dropped 5.7% from the previous quarter. A very important topic I'd like to raise at the very beginning, so that it can be very clear to you, is the subsequent event the credit case that was announced after December. In our balance sheet for 2022, there was an increase in provision for loan losses to cover 100% of this exposure. Therefore, there won't be any negative impact in 2023, only positive impact from a possible credit recovery.
I wanted to make this clear at the very beginning. I'll comment during the presentation on some adjustments to make it clear how our performance would have been without this credit event. But it's very important to highlight that the exposure in our balance sheet is 100% covered. If it weren't for this effect, our consolidated earnings would have been BRL 8.4 billion and BRL 7.7 billion in Brazil. Speaking of profitability, already considering the provision for loan losses to cover 100% of the credit exposure caused by the subsequent event, we posted a consolidated return on equity of 19.3%, a drop of 1.7 percentage points and of 19.7% in Brazil. If it weren't for the subsequent event, our consolidated ROE for the fourth quarter would have been 21% and 21.7% in Brazil.
Another very robust quarter and very significant from the performance standpoint. To continue on the subject of the subsequent event, I'll jump to the cost of credit. At the end of the quarter, our cost of credit was BRL 9.8 billion. And if it weren't for the subsequent event, it would have been BRL 8.5 billion. Therefore, you may note a difference of BRL 1.3 billion, which was recorded in our P&L. And the difference for the total exposure was recorded in our balance sheet. For the subsequent event, it was recorded as additional provision for loan losses. We always carry out regular reviews of the bank's additional provision for loan losses and we used a portion of this balance to complement the provision for the subsequent event. Therefore, the provision for loan losses covers 100% of the exposure.
Part of it has already been recorded in the P&L in the amount of BRL 1.3 billion and part of it is recorded in the additional provision for loan losses. And if there is a deterioration of this case, naturally, it would consume the additional provision for loan losses that is associated with the event. In the financial market with clients, there was a growth of 3.6% in the consolidated figure, reaching BRL 24.2 billion and, in Brazil, it totaled BRL 21.2 billion, which represents an increase quarter-over-quarter of 2.6%. Speaking of the NPL for over 90 days, once again, we are very consistent with what we've been telling you for many quarters now. We can see a slight increase of 0.1 percentage points in the consolidated figure and 0.2 percentage points in Brazil.
We posted another positive result for the efficiency ratio, reaching 41.2% in the consolidated figure and 39.1% in Brazil, a drop in both ratios from the previous quarter. Now I'll talk a little about the credit portfolio. We've been reducing the pace of growth of the portfolio throughout the second semester of 2022. And you'll see that in the numbers. Our credit portfolio for individuals grew 3.7% in the quarter and 20% in the year. The SME portfolio grew 2.4% in the quarter and 10% in the year. We reached BRL 918 billion in the portfolio in Brazil and BRL 1.1 trillion in the consolidated portfolio, an annual growth of 11% and a 14% if adjusted by the foreign exchange variation. In the next slides, I'll present the results compared to the 2022 guidance disclosed.
For the loan portfolio, the growth expectation was between 15.5% and 17.5%, but the result was below the low range of the guidance. We've already been telling you that the bank has been very carefully making adjustments to the risk appetite in view of the current macro scenario. I'm very comfortable with having delivered a figure that is below the guidance because of this. Now deep diving into the portfolios. The collateralized product share in the individual portfolio grew from 47.7% in 2019 to 52.8% in 2022, so that we have a more guaranteed mix. Finance credit card portfolio and overdrafts, two lines that have a significant impact on the margin, dropped in the quarter as the result of an active risk management. On the other hand, this naturally had an impact on the margin of the product mix.
The margin with clients posted growth of 3.6% in the quarter, up BRL 800 million, of which BRL 600 million was the core increase and BRL 200 million was related to the working capital impact allocated to the margin with clients. As I previously mentioned, the product mix had a slight negative impact of BRL 100 million. On the other hand, the average volume, the spreads and the effects of the operations in Latin America had positive impacts, raising our margin to BRL 21.5 billion. We reached a consolidated annualized average margin of 8.7% and a risk adjusted annualized average margin of 5.6%, excluding the subsequent event. If we include the subsequent event, it was 5.1%. In Brazil, we were able to maintain the annualized average margin at 9.4% and a risk adjusted annualized average margin at 5.9%, excluding the subsequent event.
But if we take the event into account, it reached 5.3%. We expected consolidated financial margin with clients to grow between 25% and 27%. And we delivered it very close to the top range of the guidance, which is good news. Now we'll talk about the financial margin with the market. We should remember that 2022 was a very challenging year for this line, mainly due to the interest rate rises, volatility and the fact that we no longer have the positive effects of the overhead strategy that we had until 2021. But nevertheless, we managed to deliver a positive margin again as margin with the market reached BRL 700 million, slightly outperforming the last two quarters, already considering the capital hedge cost of roughly BRL 500 million per quarter.
So we recorded another robust quarter as we performed well in both Latin America and Brazil. We expected a major reduction in margin with the markets as our 2022 guidance for this line was between BRL 1 billion and BRL 3 billion. The good news was that we reached the top of the guidance, although we can clearly see a negative impact compared to 2021 results for all the reasons I've mentioned, notably due to the overhead strategy and to the impact of the capital hedge implemented in 2022, which added approximately BRL 2 billion in costs this year. Capital hedge was the major responsible for the drop of the margin with the market in 2022. Moving to commissions and fees and results for insurance operations. We performed well in credit cards, both in issuing and acquiring activities, and recorded a 4.2% increase.
We also performed well in asset management, and we recognized our funds performance fee in the second and fourth quarters. That is accounted for on a cash basis as required by the central bank. We recorded the performance fee in the fourth quarter, and this is why we posted increased earnings quarter-on-quarter. We also posted dramatic increases in insurance operations, both in quarter-on-quarter and year-on-year comparisons. We expected growth between 7% and 9% in 2022 commissions and insurance results guidance and we ended up with 7.8%, which means we were very close to the guidance midpoint. Regarding asset management, our funding balance, whether through our own or third party products through the open platform, was up 8.7% year-on-year.
The most important thing is that we can provide better products for our clients because of our complete portfolio. Please bear in mind, focus on client centricity. We have performed really well in our own products due to a greater demand for fixed income products, which are deemed safer and less volatile. For this reason, the open platform output ended up falling in the period. Acquiring transaction volume recorded a significant increase of 17.9% from 2021, with revenues growing more than two times then the volume of transactions, which means we've been performing really well due to the right mix of products and services, delivering real value and growth, with NPS of acquiring activities improving dramatically. I've been emphasizing the growth of the insurance business in the previous quarters and the premiums earned were up 19.9% year-on-year.
Really noteworthy is that the core of the insurance operations result has grown nearly 50%. We believe this segment is due to keep on growing. Now let's move to credit quality. First, we noted that delinquency was at an acceptable rate as measured by the ratio of 15 to 90 days overdue NPL. This is a very important piece of information. Last quarter, I mentioned that this rise in the Latin America ratio has been due to a specific corporate case that will be regularized and will not be transferred to NPL 90 days. As you can see, this was rightly done. In Brazil, and in total, we recorded a slight increase of 20 and 10 basis points respectively, as I commented back at the first slide. Focusing on transparency, we recorded the impact of BRL 100 million from the sale of the active portfolio of 0.02 percentage points at the NPL rate.
That represents a very small amount, but underlines the way how we value the transparency of any sales of our portfolio to the market. In Brazil, delinquency, as measured by ratio of 15 to 90 days overdue NPL, is extremely acceptable for individuals and was flat compared to the previous quarter. The NPL ratio for SMEs recorded a slight rise. The ratio for the corporate segment is not a good indicator, since it usually concerns events rather than delayed payments. You must remember that, last quarter, I mentioned that I expected NPL to go up in the fourth quarter for the individuals portfolio as we had noted in the third quarter, in line with the normalization process for this indicator, We recorded 30 basis points increase in the third and 20 basis points increase in the fourth quarter.
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I had also told you that this normalization process would go until the first quarter of 2023. This expectation is reaffirmed which underlines our strength, risk management and ability to manage the cost of credit in more troubled times. Challenges surely lie ahead, but I believe the bank has been successful so far in walking through such tough scenarios. NPL for SMEs in Brazil recorded a slight increase of 10 basis points and it poses no specific concern for us. The cost of credit to portfolio ratio closed the quarter at 3.5%. If it were adjusted by the subsequent event concerning this specific credit, it would be 3%, very close to previous periods and even below pre-pandemic results. Cost of credit increased to BRL 8.5 billion in the fourth quarter from BRL 8 billion in the third quarter.
And considering the subsequent event, it reached BRL 9.8 billion. Loan coverage ratio in the wholesale segment reached 1,857%, precisely due to the provision for loan losses done in the fourth quarter to cover 100% of the exposure on the specific corporate case that entered into judicial reorganization. Thus, if the event occurs to the extent of the recognized provision, the coverage ratio will surely suffer. Cost of credit would have closed the year at BRL 31 billion if we excluded that subsequent event. That is at the top of the 2022 guidance. To wrap it up, the amount we exceeded the 2022 guidance of BRL 1.3 billion is related to the specific case of this retailer. That is the subsequent event occurred in January 2023. Moving now to OpEx. The non-interest expenses were up 6.7% year-on-year and 4.5% in the quarter, the latter due to its seasonality.
We came close to the top of the guidance Brazil and within the consolidated guidance. The efficiency ratio reached 39.1% in Brazil and 41.2% in the consolidated figures. Year-on-year, the investments we made in platforms and new business to improve the client experience were the main driver of non-interest expenses increase. Our core cost was up 0.7% or BRL 300 million. The inflation in the period was almost certainly above 6% for banks, impacted by the effects of the collective bargaining from previous years at much higher levels. We've been able to make huge investments to build the future of the bank, while growing slightly above IPCA inflation index, but below inflation for banks. Good news for the capital ratio, we made headway in the capital base for one more quarter by reaching 11.9%.
If we disregarded the subsequent event, our capital ratio would be at 12%. Our Tier 1 closed at 13.5%. That is 50 basis points above our risk appetite. As a reminder, our risk appetite is 11.5% at CET1 and 1.5% at AT1. So, here we are again accumulating capital in the quarter. We've been successful in increasing earnings, generating enough capital to invest and grow our business and portfolios and also evolving the bank's capital base. So this is good news and one more positive quarter. I've been talking about earnings all the time, but the pillars underlying our earnings, the ones I want to highlight here are, one, how our culture is engaging our employees whom we call ItaÃºbers and, two, how digital transformation is happening and the impact on what is most important for us, the reason for our existence, our client centricity agenda.
I'll start talking about culture. First, we reached an employer Net Promoter Score of 88 points. And this is the bank's record high eNPS. And I always say that engaged and happy employees deliver a higher client satisfaction. We reached almost 19,000 people who are already working in a community or tribe model. There are 2,030 squads in the bank's operations. I'd like to share with you very carefully and humbly some awards and recognition we got in 2022. People ask me how we measure cultural transformation and employees engagement. And I think that these recognitions are the answer. We are the first bank to top the Great Place to Work ranking with over 10,000 employees. So this is the first time a bank achieves this position of the best company in Brazil according to the Great Place to Work ranking.
We were ranked first in the banks category of the Valor award. This was the first time Valor Magazine introduced the bank's category. We were ranked first in the Valor award career, the best in management. We also ranked first in the top companies of LinkedIn for the third consecutive year. We were elected the most innovative bank in Brazil by Valor Innovation. We were ranked first in the international category of the best workplaces for innovators award and eighth in the global ranking. So I always look at these recognitions and feel delighted. I think we've been making important progress, but also in a humble way because things are still difficult and we need to keep on performing on a very sustainable basis. Focusing on the coming quarters, the second pillar that is very important to our journey is digital transformation.
The system modernization and focus on quick problem solving brings higher value creation to our clients and competitiveness in our business. I told you that 2022 was a key milestone for the bank's digital transformation. We managed to reach our goal of 50% of our platforms modernized with state-of-the-art technology and totally decomponentized. As regards the competitiveness of our platforms, we reached the modernization of 70% of what we understand is relevant to the client journey. So rather than looking at the absolute figure of 50%, I prefer to look at this evolution because it's what impacts the UX user experience. Speed is increased and our ability to bring in an agile methodology, renewed digital platforms, a new culture and client centricity to production has allowed us to quickly increase our ability to deliver products, correct mistakes and deliver new features to production.
We increased the speed by 756%. Also very important is reducing incidents because incidents become issues for our clients. So when we look back at the period beginning back in 2018, the numbers of incidents in our platforms fell over 70%, especially driven by all the work done and the journey we've undertaken. Moving to client centricity. I'll share some figures we usually don't disclose, but I think it's a good moment for accountability since we are wrapping up 2022 and beginning 2023. Client centricity, as measured by Net Promoter Score, is very important for our day to day activities. The bank's global NPS has increased 20 percentage points since 2018. We significantly cut back the gap we used to have compared to our peers that were operating with higher NPS levels.
That was our goal and we are succeeding in delivering. We can see that most of our business is at record high levels, which evidences the engagement, the focus, the client centricity, and the digitalization actually happening. Almost 60% of our business reached what we call an excellence zone, with NPS over 70 points, such as the personality test segment, top business and business, which are two retail corporate segments. ItaÃº BBA Uniclass segment, private segment, credit card business, vehicle financing business. Rather than showcasing the evolution of this business and of the products portfolio, it's better to set the goal of closing 2023 in the excellence zone. That is, reaching an NPS over 70 points. This is our goal for 2023 on a global scale.
All our weighted business must reach an NPS of around 70 points by the end of the year. This is the goal and we really believe we'll be able to get there based on everything we discussed today. Let's strive to go after it and reach all these ratios. This is the great evolution for the client agenda. Moving forward to 2023, I'll start with the expectations for the macro scenario. The main highlights are GDP is expected to grow by 0.9%, but I believe we have a positive bias. This forecast will likely be reviewed in the short term with an upward trend. Regarding the Selic rate, the best expectation today is a fall towards 12.5% by the end of 2023. It naturally depends on decisions about the fiscal framework and inflation itself, which will have to be closely monitored.
Inflation will be well in line with the rate of 5.8% in 2022. We expect employment rates to slightly rise to 8.5% from 8.2%. Foreign exchange will post a slight devaluation of the Brazilian real to BRL 5.5 to $1. So moving to 2023 guidance, we expect the credit portfolio will increase between 6% and 9%, a more modest growth compared to what we've delivered in previous years. This is fully associated with the challenging scenario we are experiencing. That's why we choose to be more cautious in granting credit, a strategy we've been applying in the last quarters. The financial margin with clients is expected to grow between 13.5% and 16.5%. Margin with the market is expected to range between BRL 2 billion and BRL 4 billion. We believe we'll manage to deliver positive margins for another year despite the challenging scenario.
With the capital hedge cost already included in these figures, there is a significant impact of approximately BRL 2 billion depending on the interest rate differential. Cost of credit is expected to range between BRL 36.5 billion and BRL 40.5 billion. Commissions, fees and revenues from insurance operations are expected to increase between 7.5% and 10.5%. Non-interest expenses are expected to rise between 5% and 9%. It's crucial to say that we expect the core cost not to rise over 2%. We must remember that inflation measured by IPCA has been around 5.8%. And I always say that inflation for banks is usually higher due to the collective bargaining that brings in the inflation inertia from previous years. So we've set the goal of not letting the core costs rise over 2%.
The whole difference between 5% and 9% lies in the investments in the bank's digital transformation, in modernization, in business and client centricity and in customer experience. And last, but not least, the effective tax rate is expected to range between 28.5% to 31.5%. That's all I wanted to share on 2022 earnings and 2023 guidance. I'll be joining Renato for the Q&A session to address your questions. Thank you very much for joining us, and I'll see you in a while. Take care.
A - Renato Lulia: Well, hello, everyone. I'm back. Milton is already here with me. So let's start with the Q&A session. . Now, let's start. The first question is from Domingos Falavina from J.P. Morgan.
Domingos Falavina: I have two questions. Very quick two questions. In terms of provisions, the first is to understand a bit how that additional provision works. The additional one. Well, it seems the balance is BRL 17 billion. I wanted to understand how much is already destined for the segment for credit cards or specific sector of the economy and how much of that is completely free, let's just say, with the use looking at the subsequent fines of approximately BRL 2 billion, BRL 1.3 billion, the exposure . So, I wanted to know how much leeway do you have, let's just say? And the second one, how do you reconcile the guidance for the growth, the 20% growth year-on-year with a portfolio that is growing also in 6% to 9%. So it's growing two times the portfolio when the bank is working with a derisk, you're increasing the risk.
And this is a provision that is anticipated with the expected loss. And so, how do you reconcile if it's an increase of risk? Or are you going to be more conservative in the guidance? These are the two points.
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