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Itau Unibanco Holding S.A. (ITUB) Q2 2019 Earnings Call Transcript

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Itau Unibanco Holding S.A. (NYSE: ITUB)
Q2 2019 Earnings Call
July 30, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning ladies and gentlemen. Welcome to the Itau Unibanco Holding conference call to discuss 2019 second-quarter results. At this time, all participants are in a listen-only mode. Later, they will conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call, please press * followed by 0.

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. 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 microeconomic conditions, market risks, and other factors.

With us today on this conference calling from Paulo Mr. Candido Bracher, President, and CEO. Mr. Milton Maluhy Filho, Executive Vice President, CFO, and CRO. And Mr. Alexsandro Broedel, Group Executive Finance, Finance Director, and Head of Investor Relations. First, Mr. Candido Bracher will comment on 2019 second-quarter results. Afterwards, management will be available for a question and answer session. It is now my pleasure to send the call over to Mr. Candido Bracher.

Candido Bracher -- President and Chief Executive Officer

Good morning, everybody. Welcome to our second quarter 2019 earnings conference call. I will start the presentation on slide two where we show the main highlights of our performance for the quarter.

Recurring net income of 7 billion real, which will present to the 2.3% gross when compared with the previous quarter and resulted in 23.5% ROE. The key drivers of this performance was the duration of our financial margin boost requiring hundreds of markets as well as a stronger fee revenue generation.

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These effects were partially offset by two expected events -- significantly higher non-interest expenses and the higher cost of credit. The latter is a result of a continuous growth of origination of credit to individuals. Lastly, our effective tax rate increased 70 basis points as a result of the lower long-term interest rate in the period, which is used to calculate the tax shield from our interest on capital. In the next slides, we will provide a more in-depth view of these figures.

On slide three, we showed that our value creation increased 9% in the second quarter, 3.2 billion real, a record figure, which is a result of our performance in the quarter as well as due to our lower-cost effect.

Moving on to slide four, we showed that our Brazilian client portfolio grew 7.9% over the last 12 months, driven by individuals and SMEs which have grown 14% and 19%, respectively. Origination continues to accelerate in both portfolios, resulting in a looser credit mix, as will be shown in the next slide.

On the other hand, our portfolio in Latin America remained relatively stable compared to the previous year. This is a consequence of the depreciation of the real against over currencies in the region. If you discount this effect, the portfolio would have grown 7% when compared to the same period in 2018 and the portfolio as a whole would have grown 7.7%.

Now, I want to draw your attention to slide five, which portrays a crucial element of our result dynamics in the bottom of slide five. Financial margin with clients is composed by two distinct elements. One is related to working capital, which is mainly affected by its own volume and the [inaudible] rate and the other, which is the core element of NII and [inaudible] from spread-sensitive operations.

The spread sensitive NII grew around 800 million real as a result of the credit portfolio expansion and continuous change of mix [inaudible] higher spread bearing products. This amount was partially offset by a lower working capital NII, which was the result of two effects -- one, lower average balance after dividend spend, and two, lower interest rate. Consequentially, we are observing a reverse increase in the spread sensitive NII.

On slide six, we show what our financial margin is, the market increased 26.4% this quarter. This performance was largely attributed to higher accruals and deferment investments as our head strategy and in our insurance results management. We can see that those things could be structural, but they are an integral part of our core banking activities.

Turning to slide seven now, we show our credit quality. Short-term delinquency remained stable in the quarter while the NPL 90-day ratio decreased 10 basis points. The latter was a result of loans written off from specific large corporate clients and a further improvement in the SME's NPL ratio, which reached 2.5%, the lowest level since the merger between Itau and Unibanco. The NPL 90-day coverage ratio remained stable of 208% and the cost of credit ratio includes 10 basis points as would be expected given the acceleration of the change in credit mix in the period.

Slide eight shows that our revenues from servicing insurance grew 5% in the quarter. This performance was mainly driven by asset management and investment banking fees. It is worth to highlight the growth of almost 50% in the year after funds from our open platform initiative, which reached 155 billion reals. Also of note is our credit and debit card issuer fees, which continue to grow consistently.

Lastly, the acquiring business fee revenues declined 12.8% in the quarter, mainly as a result of the new commercial initiative, which consists [inaudible] charge in interest rates and the pre-payment of credit card transactions, which are now paid in [inaudible]. The next page, we examine the initial results of these initiatives.

On slide nine now, we show that often when people show that [inaudible] initiative are acquiring operations had an upsurge of demand. New client acquisition increased 73%, while new clients choosing to only bank domicile more than doubled in the same period. More importantly, [inaudible] increased 8 points in the year. These KPIs reinforce our perception that this was the right move.

Now, turning to slide ten, we show that our non-interest expenses grew 4.3% in the quarter. This growth was largely expected as expenses in the first quarter are seasonally lower than the rest of the year. But it is important to highlight that the growth was more subdued this year than in 2018 when our expenses grew 5% year from the same period. It is worth pointing out that the quarter concentrated the closure of almost 200 branches just in Brazil, which added further pressure in our needed opex but we will positively expect our efficiency from now on.

Finally, our first half expenses grew 3.7% when compared to the same period in 2018, roughly in line with inflation for the period. Another important message -- yesterday, we announced our voluntary severance program. This program affects the potential population of 6,900 employees potentially. They will have from 1st to 31st of August to decide whether to join or not join the program. As we have more information about this, more confirmed information about this, we will inform the market.

Now, slide 11 illustrates the organic cash flow generation of the bank as we finish this quarter with a Tier 1 ratio of 14.9%, an increase of 30 basis points compared to March '19. The first mention of what we announced a distribution of $7.7 billion reals as a complementary dividend to be paid on August 23rd, 2019.

Finally, now I want to discuss our expectations for the remainder of the year. On slide 12, we show that the actual performance of the economy so far makes it clear that the original target for economic growth was too optimistic with the interest rates forecasted on a higher level than the one we foresee now. Lastly, it is worth mentioning that the depreciation of the Brazilian real against the Chilean and Colombian pesos.

So, bearing these effects in mind, I now want to commence on our guidance and go item by item here. So, we still abide by our guidance for the year. But it's continuing to situate our base scenario for each line. Total credit is well within the interval in Brazil but the changes in exchange rate for that time places our base scenario around the lower end of the range for the consolidated portfolio.

The forecast of a lower rate and a narrow future yield curve have a negative impact on expectations for our liabilities margin and for our working capital NII. Therefore, we anticipate our financial margin with clients to finish the year close to the lower end of the guidance.

We expect our financial margin with the market and our cost of credit to be around the midpoint of their respective ranges. As for the commissions and fees, we anticipate to finish the year between the mid and lower point of the guidance. And finally, we expect our non-interest expenses to finish the year around the lower end of the guidance.

We conclude this presentation and are now open to any questions you may have.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question and answer session. The questions will be limited to two per participant. Our first question comes from Jorg Friedemann, Citibank.

Jorg Friedemann -- Citibank -- Analyst

Thank you for the opportunity. I have two questions. The first question -- thank you very much for sharing your impression on where you should be in terms of the guidance page line. But here I just want to understand this better. Why you are so conservative in terms of the financial margin with the market because if you look into the run rate so far, you are already above the upper end of the range. So just wondering if there's anything that might relatively impact the results for the coming quarter that are you aware, or it's just a matter of being really conservative there?

And the second question. I understand that you're still looking for additional clarity about the early dismissal program. But just a couple of points there. First, I understand that you'll be 6,900 employees that are eligible for the program are all based in Brazil so it's approximately 7,000 out of the 85,000 that you have. Is that correct where this could be extrapolated to other regions?

The second point, just wondering if you had already contemplated such an early dismissal program when you put together the opex guidance and how the potential effects of such a program will be contemplated in the guidance. You mention that you believe that in order to be in the midpoint of the opex guidance here, this is already contemplating or not the potential effects of the layoffs for this year. Thank you very much.

Candido Bracher -- President and Chief Executive Officer

Thank you very much for your questions. First, on guidance. On guidance, I think you're right. The financial margin is for market is probably among the more difficult to forecast. We had a positive semester, two positive quarters in the beginning of the year above our initial guidance. So we were relatively conservative when forecasting the run of the year. I think it can be better. But I cannot be certain about it.

Now, concerning early dismissal program -- first, you are right. It only concerns Brazil. So, the eligible population is 6,900 employees in Brazil. The costs of this program will of course go into the non-recurrent costs. So, it will not affect our guidance. As to the benefits, we will wait until we have a clearer picture of how much a difference the program does. So far, we have not included any of these impacts when we guide the non-interest expenses to the lowest point of the guidance.

Jorg Friedemann -- Citibank -- Analyst

Okay, that's perfect. By the way, could you just give us some kind of ideas about what could be the impact, if you have like, I don't know, 20% to 50% of [inaudible] or are you still working on the numbers? Thank you very much.

Candido Bracher -- President and Chief Executive Officer

You know, last time we made a program was over ten years ago. So we really have no statistical evidence to make any kind of forecast here. It depends much on the adherence and which level it's given to happen. So, it's too soon to tell about our expectations.

Jorg Friedemann -- Citibank -- Analyst

Okay. Thank you for the answers and congratulations on the results. Thank you very much.

Operator

The next question comes from Otávio Tanganelli, Credit Suisse.

Otávio Tanganelli -- Credit Suisse -- Analyst

Hi, good morning. Thanks for taking my question. I have only one question, if I may. I wanted to ask about the asset management fees. We found acceleration from the previous quarter, it was growing at about 5% year-on-year and this quarter is accelerated up until almost 15%. I wanted to get a little more color on what's driving this because the assets under management continue to grow at a similar pace than what we saw in the previous quarter. But the average rate -- they say it was 35, the revenue was 5 by the assets under management. They increased as a percentage of the AUN. So I wanted to understand a little better. Thanks.

Candido Bracher -- President and Chief Executive Officer

Thank you, Otávio, for your question and I have a very biased answer. What's growth is improvement in the margin were the performance is. We had a good quarter in terms of performance of the most sophisticated funds and with this improved design.

Operator

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

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Good morning everybody. Let me ask you two questions as well. The first one is related tangent to these 6,900 employees that you think are eligible for dismissal. Can you give us some color -- what kind of functions are you targeting? What kind of jobs these people have? And related to your costs also, this quarter you closed close to 200 branches. You laid off 1,000 people. Can you disclose to us the costs that you had related to this branch-closing and lay-off of people? And then I'll ask second question related to something else.

Candido Bracher -- President and Chief Executive Officer

Okay, Mario, thanks for the question. So these 6,900 employees, they are about 55 years of age until -- they must become 55 before the end of this year. And they are people who enjoy [inaudible] or people who enjoy some kind of stability, which according to the [inaudible] happens when you have a healthy life and whether you are a member of a syndicate or things like this. They are not divided by functions, specifically. So they cover all the spectrum of functions in the bank.

As to the 200 branches we closed. I do not have a figure of the cost involved, but of course, there is some cost involved as there always is when you have to lay off people. We can expect the benefits to come along the time. You said you had another question?

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Yeah so just let me follow up on these 6,900 people. So it's fair that some then these are people they have an above-average salary at the bank. It's just that we're trying to understand here what could the official benefits could be of this plan. So, if you look at the average salary, but it seems to me that this will be people earning well above the average salary.

Candido Bracher -- President and Chief Executive Officer

I think this is a reasonable assumption, Mario.

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Okay. Then the second question is related to your net interest margins. Before on page five, the ability of banks to maintain net interest margins is relatively stable over the last few years even though we submitted this contracted quite a bit. Can you discuss -- I understand why the big chunk of it is related to improved mix but can you discuss a little bit the type of pressure that you see more credit spreads, especially in these specific segments.

If you're already seeing rate spreads coming down, looking at central bank, we see mortgage rates are down -- pretty much every interest rate that you're charging on your loans have been coming down. So, the question then becomes about your ability to maintain your financial margins of clients stable for the foreseeable future.

Candido Bracher -- President and Chief Executive Officer

The central bank divulges an index called ICC, [inaudible], which is a compound weighted average of all of the finances in the bank. In the past year, our ICC dropped 0.1%. So it might have dropped but the mix made it increase 0.6%. So spread alone had a negative impact of 0.7%. And I see this as a continuous strength.

Especially with the improvement in the economy that we expect from the pension reform and so on, I think that the competition will increase and that there will be pressure on spreads. It may still be somehow offset by a richer mix in terms of the portfolio of the Brazil mix to where you can go in terms of mix. So, I think that the general trend is more pressure on spreads.

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Okay. That's really clear, Candido. Thank you very much.

Candido Bracher -- President and Chief Executive Officer

Thank you, Mario.

Operator

The next question comes from Andrew Brodsky, Goldman Sachs.

Tito Labarta -- Goldman Sachs -- Analyst

Hi, not sure if that was for Tito Labarta at Goldman, or is there somebody else from Goldman on the line? Can you hear me?

Candido Bracher -- President and Chief Executive Officer

Yes, I hear you.

Tito Labarta -- Goldman Sachs -- Analyst

Sorry. I'm not sure whether you got Andrew, so this is Tito Labarta from Goldman Sachs. Sorry for that. A couple of questions also. I guess first, just a little bit of color on REDE. We saw the volumes only grew about 0.9% in the quarter despite the price reductions and the free pre-paid into receivables. Just curious why it looks like you're still losing market share in REDE despite the price reductions? And then I have a follow-up question on expenses after that.

Candido Bracher -- President and Chief Executive Officer

Okay, thank you for a very good question. If you pay attention to our [inaudible] [00:30:19] offer targeted the market with net revenues up to 30 million reals a year. We think that this is the richer segment of the market where there's more profit to be made. But this is but the segment that makes the most of the market share.

Most of the market share is made by the large corporations, well above 30 million reals a year. In this segment, we have been losing market share for quite some time already. And so this is why, despite our offer and despite our improvement in the segment up to 30 million reals, the overall figure will grow very little in our total volume.

Tito Labarta -- Goldman Sachs -- Analyst

Okay, that's helpful. So do you think you'll continue to lose share overall given these trends that you're seeing?

Candido Bracher -- President and Chief Executive Officer

It depends on the willingness of our competitors to go below cost on the larger corporation segments because that's something we're not doing.

Tito Labarta -- Goldman Sachs -- Analyst

Okay, got it. Makes sense. Great. And then a follow-up question on expenses. I know you've given some color there. But maybe you're thinking about longer-term. Do you think the expense growth can remain around the 3-5% that you're giving for this year, particularly with some of the initiatives that you're announcing? A lot of inflation, is that a good level of cross-go for the next years? And are these sort of initiatives -- is it because of the pressure you're seeing on spreads and competitions that's sort of forcing you to reduce costs or is it something else?

Candido Bracher -- President and Chief Executive Officer

As I said, I see non-interest expenses the bottom of the range this year. And we'll certainly keep a strong hand on that in the time coming ahead. I just see this as a result of pressure. I see this as an opportunity. As you remember, we started a year with a much higher guidance, 5% to 8%. Then when we saw that the economy would have a weaker performance, we decided to make a big recorded effort around efficiency and costs. And we are happy it was working out, discovering the opportunities we have seen. And we certainly see they did not finish prior this year. And we weren't aware that this would be a trend.

Tito Labarta -- Goldman Sachs -- Analyst

Okay, great. Thank you, Candido.

Operator

The next question comes from Eduardo Nishio, Banco Plural.

Eduardo Nishio -- Banco Plural -- Analyst

Thank you for the opportunity. Good morning, Candido. Two questions as well. First, on the guidance sheet, can you go back again? I think there's two items that I either missed or you didn't talk about. Cost of credit, if you can give us your views on that. And also effective taxes, I'd appreciate it. Then I have my second question. Thank you.

Candido Bracher -- President and Chief Executive Officer

Thank you, Nishio. Cost of credit would be in the middle of the range. It's doing better along the lines we had forecasted. Effective tax rate will also be in the middle of the range this year.

Eduardo Nishio -- Banco Plural -- Analyst

For tax cost of credit, 4 billion reals close to this quarter, a little bit more than that. And then last quarter was 3.8 billion reals. So more or less the same level, no changes probably to reach the 16 billion, right? Then my second question is concerning your digitalization, your digital transformation, if I will. You've been reducing staff this quarter quite a lot. It's 1,200 people. Reducing branches. And we crossed that here across all regions.

What would be the ideal size, what are your ideal bank size in this digital transformation? And by when do you expect it to reach? And by the way, you'll be hiring IT folks as well. So what would be the mix of people? And if you could give us some color on the future of your digital transformation, I'd appreciate it. Thank you.

Candido Bracher -- President and Chief Executive Officer

Okay, thanks, Nishio. So, we have two complete conflicting forces. On one hand, we expect growth in the economy coming after the pension reform approval to put some pressure in gross in terms of absolute gross and this also applies to people.

On the other hand, our digital transformation has been moving us to reduce people effectively. So, when you combine those movements, I would think that the reduction will still more than compensate the economic growth structure but not quite sure about it. In terms of digital transformation, we are increasing the opening of accounts totally digitally. We now are using facial recognition in many aspects, including vehicle finances. So, there are many dollars being made and that will be made in the future.

In the closing of branches, it's not only the digital -- of course, it's an effect of the digital transformation that the digital transformation is driving less people to our branches. But we are not closing branches which are automated geographically. We are always closing branches so far that are very close to one another. So, when two branches are very close, less than 500 meters distance, then one of them is capable of absorbing the population of both the branches if that's the case as one we are closing. We do have some room for that in our portfolio.

Eduardo Nishio -- Banco Plural -- Analyst

Thank you.

Candido Bracher -- President and Chief Executive Officer

You are welcome.

Operator

The next question comes from Domingos Falavina at JP Morgan.

Domingos Falavina -- JP Morgan -- Analyst

Good morning, Candido and everyone. Thanks also for taking the question. My question is a bit more structural. When we're looking at the fee composition this quarter, it looks very good to [inaudible] the evolution is the investment banking and broker growing 40%+. And above all, it seems to us that the bank is not really pushing hard current account fees, which we now view, it seems like a smart decision given the competitive threats.

My question is when we look at these fees, is this kind of reading correct? Basically, do you also share this view that current account fees are unlikely going to grow substantially and it makes sense to hold back on some of these adjustments or not? Is that something we are reading in a wrong way? And then I'll ask the second question.

Candido Bracher -- President and Chief Executive Officer

We take these decisions on a decentralized manner. But I think your reading is right. And we are preferring to grow where we can grow volumes more significantly as investment banking and also to management. And we are not pressing on the fee level. We are growing volumes than the level of fees. We tend to keep as slow gross as we can.

Domingos Falavina -- JP Morgan -- Analyst

Understood. My second question is on REDE and I'm sorry if I missed any of the specific comments there. I mean, volumes came in at first, at first it seemed some additional deceleration, but when we look at the industry in general, that decelerated massively at 6% [inaudible]. So versus the big players, that still did well, but it's kind of left us as a question here like what's happening to volumes. Like, we're not seeing one big player, [inaudible] growing and taking away volumes. Did you guys notice an overall industry deceleration maybe in credit and debit volumes? What kind of effect did your [inaudible] have in NII and fees if you could comment a little bit, given the quarter has past?

Candido Bracher -- President and Chief Executive Officer

So, in relation to [inaudible], the effect of those I have described to you -- so, 73% increase in new accounts, more than double the increase in companies choosing us to be the bank where they received their contributions and so on.

I'm not sure I understood your doubt about the total volume because [inaudible]. It's really linked to the last operations. This is where we are losing market share. There are some competitors which are very aggressive in this segment and looking specifically for market share at prices, which are -- in our experience, we have a negative margin. This is all I have to -- we are not going there. I'm not worried about it.

Domingos Falavina -- JP Morgan -- Analyst

Do you believe you're losing share? Because when I look at [inaudible], you grew more than those two. So my question was more like, do you believe you're losing share, or do you believe the industry in general is growing below 14%?

Candido Bracher -- President and Chief Executive Officer

I am not sure about the answer here, sorry.

Domingos Falavina -- JP Morgan -- Analyst

Okay, thank you.

Candido Bracher -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from [inaudible] with Santander.

Unknown -- Banco Santander -- Analyst

Hi, everybody. Good morning. And thank you for taking my question. Actually, I wanted to shift a little bit it's because -- should to other topic that has been calling attention with markets. I would like to understand the banks digital strategies. So in other words, I just wanted to have a clear view on Itau's approach as a digital bank because [inaudible] has their own feature called "Next" that has a few services free of charges and then the client must pay a fee.

And Banco do Brasil has another digital solution that is free of charge. It's for some services. But different from [inaudible]. It is within the bank and we know it as [inaudible]. So my two questions are first, what is exactly the Itau perception of these approaches for our main competitors. In light of a lot of other initiatives and digital banks that target Itau customer base. And the second question is, in a few words, what is the main focus of Itau digital strategy? Thank you.

Candido Bracher -- President and Chief Executive Officer

Very good questions. So, for your first question, I think we can come back to something I've been saying for some time, which is there's a basic diffusion to be made in terms of digital strategy. Which is, when you separate a new bank from an old bank and concentrate your digital efforts, a new venture or when you work -- I mean, to transform the existing bank's legacy systems and so on, and to modernize the incumbent bank, so to say. And here, our strategy is [inaudible] the second one. So, we are working hard in order to digitalize or Itau as a whole and not a new bank.

We have new initiatives, like [inaudible] for instance, which is not a new product. It's a platform, but it's integrated into Itau. We have, as you know, Google, which is a hub of people co-working in giant companies and it's the largest in Latin America and we learn a lot from them there. We have digital wallets in Brazil, [inaudible], and all the others.

We have now just launched an app for people to buy foreign exchange in the app. We are opening more than 200,000 accounts a quarter exclusivity by the app. So, we are digitizing the bank as a whole and not in some separate initiative.

Our digital strategy -- here I mentioned it in an interview recently -- I like that phrase that incumbents must find innovation before innovators find distribution. And I thought as an incumbent, it's finding innovation and basically being first in replicating the initiatives of fintechs and so on.

I have changed my view at this point. It's not simply replicating what they do. But it's knowing to do it differently. It's producing technology in an integrated way between the technology area and the business area, which, by the way, I think that in a few years from now, we will not be talking anymore about technology. This will be the one and only thing. This is the path we are creating and I think we are making consistent progress there.

Unknown -- Banco Santander -- Analyst

Okay, that's very interesting. Thank you, Candido.

Operator

Excuse me, as a reminder, if you would like to place a question, please press * followed by 1 on your touchtone phone now. Our next question comes from Marcelo Telles, Credit Suisse.

Marcelo Telles -- Credit Suisse -- Analyst

Hello, good morning, Candido. Thanks for your time. I have two questions. My first one is a follow-up on your comment about credit spreads. I think you mentioned earlier, right, that you would expect some pressure in credit spreads down the road. And my question to you is, in which segments do you think this should happen? Because when you look at the credit spreads, the [inaudible] as per the Brazilian Central Bank data, we actually see spreads fairly resilient and particularly on the retail side.

So, if you could elaborate a little bit on the timing, which segments, what would be driving that, maybe it's more the fintechs or the competition could come from among the big banks. Just to understand what would cause that spread to take place.

And my other question is regarding costs. I think it's very good to see the banks with so much focus on reducing cost through this severance program. And my question to you is, going forward if you think about 2020 and on, does the bank have some sort of goal of not going operating expenses at all, and try to become more competitive, allow for some [inaudible] plan or use opex to leverage earnings growth down the road? With this program, it could be that maybe your opex next year could not grow at all or even decline. Is that a reasonable assumption, you think, considering the efforts that you've been undertaking? Thank you.

Candido Bracher -- President and Chief Executive Officer

Thank you, Marcelo. First, on the spreads, I am expecting the competition to come more from traditional competitors and maybe from -- it's usually the case when the economy starts to perform well, you have more appetite also from foreign banks in the local markets and in the corporate sector facing quite significant pressure in this situation. So, I am not seeing the pressure on spreads coming in any specific segment. I'm just thinking that with a better economic environment, there would be more people willing to take credit risk and this will possibly generate some extra pressure on spreads.

Spreads have been under pressure for quite some time, not too much pressure but some pressure and I think it may increase. In what relates to costs, we certainly intend to keep a very strong focus on that. I think that cost reduction is from the mental pool in order to enable the bank to be more competitive in pricing. And I think we need to be more competitive in pricing. Everybody will need to be more competitive in pricing going forward, therefore a strong active cost is fundamental there.

Marcelo Telles -- Credit Suisse -- Analyst

And Candido, just to follow up on your answer. The very competitive cost and being able to have better pricing, does that means that you think you could stay in your current ROE levels, where they are today? Do you think they are sustainable in the short-term at least with all these efforts are in the taking?

Candido Bracher -- President and Chief Executive Officer

As you know, we guide very much our efforts in the bank and better creation. So I look at the ROE always in relation to the average cost of capital. I see a clear trend of decline in the cost of capital in Brazil. So, I think there may be some pressure also on [inaudible].

Marcelo Telles -- Credit Suisse -- Analyst

Okay, that's very clear. Thank you, Candido.

Operator

Our next question comes from Neha Agarwala, HSBC.

Neha Agarwala -- HSBC -- Analyst

Hi, thank you, Candido, for taking my questions. I wanted to understand that starting from your ready business, the acquiring business, you made recent cuts in prices. But apart from competing in pricing, any other changes that you are making, structural changes that you are making in REDE, which could improve its competition nets given the evolving dynamic of the sector?

And my second question is, can we have any update on ET. Is that platform operational? How has the uptake been? How do you see it integrating with the bank? Any update there would be really helpful. Thank you so much.

Candido Bracher -- President and Chief Executive Officer

So, on the acquiring business, you're right. It's not only pricing that we are looking. We have been investing a lot in improving the quality of our services, researching the quality of our machines, of our support service to the clients and so on and we have seen improvement in the levels of satisfaction, which are not only derived from the pricing activity.

As I have mentioned in another question in relation to competitors, I think we have good examples here looking at the competition and it keeps us under pressure to improve the model, the quality of our services. In relation to ET, it's too soon to say about this product. It's just been open to the several groups of clients, smaller groups of clients. I think we will know more next quarter and the quarter after that.

Neha Agarwala -- HSBC -- Analyst

If I can follow-up on the acquiring business, have you adopted any other distribution model apart from the bank channels? Especially for the banking marketing segment? I believe you've been spending a little bit more on the marketing and advertising. But any other specific changes in your model or the way you reach clients that have been made already? Thank you.

Candido Bracher -- President and Chief Executive Officer

We have been focusing also on having a moderate segment of non-current account holders and we are investing a lot in the support for these clients.

Neha Agarwala -- HSBC -- Analyst

Thank you so much.

Operator

As a reminder, if you want to pose a question, please press *1. The next question comes from Luis Fernando Oliveira, Banco Safra.

Luis Fernando Oliveiro -- Banco Safra -- Analyst

Good morning everybody. My question is a follow-up on the ROE dynamics. Looking ahead, if you look in the appendix studies that break down ROE per segment, it's a very good track and we can see a big improvement where you have the credit operation. On the other hand, the [inaudible] has been under pressure. How do you see the ROE per segment moving ahead and of course? Do you think that the ROE is already [inaudible] at 23.6%? And if you could look, how is it the effects of the cost of capital [inaudible] now? Thank you.

Candido Bracher -- President and Chief Executive Officer

Thank you, Luis. I think this chart that you refer to, the business model, it shows the convenience advantages of having a wide portfolio of products, services, and credit. Over time, we have seen services performing better and now we are seeing credit improving in the past one year and so on. I make no specific forecast here for these [inaudible]. But even within the groups of services, you have products which improve the time and others which face more competition. As to the general, I'll just say that I feel comfortable in having such a wide portfolio of products, where one tends to compensate the other.

In terms of the ROE, what I can tell you is that the distance now between ROE and cost of credit is, I think, probably the widest in our historical series. So, let's see if we can keep these present models. You asked me what's my take on how the cost of capital is going to evolve. Here, I am a bit appalled, let's say. I see our cost of capital [inaudible] reducing trend. On the other hand, I see the cost of capital used in developed economies, remaining long-term way above the interest rate in this market.

I would expect at some moment in time there would be a convergence, not that they would go to the same level, but that this wide margin would reduce in the developed economy. That's not what we are seeing so far. While we don't see a reduction in the cost of credit of 10% in the developed economy -- it's difficult to imagine that Brazil would have a cost of [inaudible] which is only 2% above what you have in developed economies. So, I see this as a resistance for a drop in the cost of capital in Brazil.

Luis Fernando Oliveiro -- Banco Safra -- Analyst

So, you think that we are already stabilizing the cost of capital?

Candido Bracher -- President and Chief Executive Officer

Unless we see a drop in the cost of capital in developed economies, I think yes, that we are already around the bottom. Around the narrowest margin between the cost of capital in developed economies and in Brazil.

Luis Fernando Oliveiro -- Banco Safra -- Analyst

Okay, great. Thank you, Candido.

Operator

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

Candido Bracher -- President and Chief Executive Officer

Just to thank you all for the very good questions and for the interest in our results. Thank you. Have a good day.

Operator

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

Duration: 55 minutes

Call participants:

Candido Bracher -- President and Chief Executive Officer

Jorg Friedemann -- Citibank -- Analyst

Otávio Tanganelli -- Credit Suisse -- Analyst

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Tito Labarta -- Goldman Sachs -- Analyst

Unknown -- Banco Santander -- Analyst

Eduardo Nishio -- Banco Plural -- Analyst

Neha Agarwala -- HSBC -- Analyst

Luis Fernando Oliveiro -- Banco Safra -- Analyst

Domingos Falavina -- JP Morgan -- Analyst

Marcelo Telles -- Credit Suisse -- Analyst

Otávio Tanganelli -- Credit Suisse -- Analyst

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