Itaú Unibanco Holding S.A. (ITUB) on Q3 2023 Results - Earnings Call Transcript
Renato Lulia: Hello and good morning, everyone, my name is Renato Lulia, and I'm the Head of Investor Relations and Market Intelligence at Itaú Unibanco. Thank you very much for participating in our conference to discuss our earnings for the third quarter of 2023, which as always, we are broadcasting directly from our office at Faria Lima. Today's event, as usual, will be divided into two parts. In the first part, Milton will go through our performance and our earnings for the third quarter of 2023. Right after that, there will be a Q&A session during which analysts and investors can interact directly with us. I'd also like to give you some instructions on how to get the most out of today's meeting. For those who are accessing our website, there are three audio options on screen, the entire content in Portuguese, the entire content in English and the original audio. The first two options there is simultaneous translation. To select your option, just click on the flag in the top left corner of your screen. Your questions can also be sent via WhatsApp. To do this, just click on the button on the screen for those who are watching on the website or send a message to 11-97-825-5707. Our presentation today is available for download on the website screen, as well as on our IR website. I'll now hand over to Milton who will start the earnings presentation. And then I'll come back to moderate the Q&A session. Milton, the floor is yours. Milton Filho : Good morning, everyone. Welcome to our earnings call supported by a very objective presentation. I'm going to run through the figures for the quarter and emphasize the Argentina effect which as you saw on Friday, we settle the sale of this operation. I'm going to show you how this affects our earnings and how the guidance is kept unchanged, except for just an adjustment that removes the effects of Argentina from the seven months that this operation was part of our earnings and how we've disregarded the remaining five months and the guidance that's been published in the second quarter. So let's get started. We've delivered a recurring managerial result of BRL9 billion results, which points to very strong earnings that has grown 3.4% quarter-over-quarter. We've reached a consolidated ROE of 21.1%. Brazil's ROE which is the most comparable with market was 22% up half a percentage point. It's key to highlight that if we were working with our capital within the risk appetite threshold approved by our board this ROE would be around 24%. I'm telling you this just to give you an idea of the effect that capital has and how it dilutes ROE by 2 percentage points. In commission and fees and result with insurance operations, the growth was 3.6% quarter-over-quarter reaching BRL12.9 billion results at a cost of credit of BRL9.3 billion riyals This is the first nominal drop we've seen with a 1.9% decrease quarter-over-quarter. This is very good news from lending. The NPL rate is absolutely stable with no news, which is in-line with the message I've been sending you for a few consecutive calls now. The Level one capital ratio, which I mentioned just now reached 14.6%, an increase of one percentage point in the quarter. I'll show you in a moment our set one running at 13.1%. But there was also a significant increase in the bank's capital. Speaking about the loan portfolio, the individuals portfolio grew by 6% year-over-year. As for the quarter the credit card portfolio is still decelerating. But I'll emphasize this in a moment. Personal loans portfolio grew by 4.2% in the quarter, payroll loans portfolio reduced and vehicles portfolio increased slightly in the quarter. So the portfolios in general except for personal loans as mentioned grew 6% year-over-year. The SMEs portfolio grew 3.2% year-over-year, but we're already seeing a significant pickup this quarter growing 3.3% which means that the quarterly effect is already above the trend we had seen for this portfolio. And then the credit portfolio as a whole after adjusting the Latin America effects we see a growth of 4.7% year-over-year and 1% increase this quarter. The message I want to leave you with which for me is the most important one is that in the portfolios where we decided to not stop growing, they continue to expand significantly. Thus, if we take the two middle and high income segments, Uniclass and Personnalité, the portfolio grew 3.7% in the quarter and the individual loans portfolio grew 0.6% on a consolidated basis. Year-over-year this portfolio grew 17.5%, while the individual loans portfolio grew 6%. The portfolio of the middle and high income cards grew 3.6% in the quarter against a drop of 0.5% on a consolidated basis, and by 15% year-over-year against a drop of 0.8% on a consolidated basis. And in middle and high income personal loans, we grew 6% in the quarter and 24% year-over-year. This shows that we've been increasing our engagement in the middle and high income segments where we've delivered and performed very strongly over the quarters. And we've made a portfolio adjustment. We've made a significant derisking in our portfolio. This saved the banks almost 200 NPL points throughout the period. The portfolios where this derisking was more significant, were in the credit card portfolio, which already had a significant nominal drop in the period, and also in the vehicle portfolio to which we had to make very significant adjustments. In the other portfolios, we continue to grow, and especially among those clients that are in fact resilient throughout the cycle, as we say, through the cycle. That's how we've managed our portfolio. When we look at the payroll loans portfolio, for example, we have two key messages. The first is a drop in the INSS public pension portfolio, which is in line with the information we've been disclosing as FEBRABAN itself has done due to the limits that have been set. When this happens, the access to a cheaper financing facility cannot be made available to pensioners who end up electing more expensive facilities due to these limits now in place. We can see these portfolios dropping. On the other hand, we've managed to expand government and private companies payroll portfolios, where we've grown by over 12% year-over-year in both cases. As for credit origination for SMEs, we see that it's continued to grow since the first quarter of this year. For large companies, there was a slight increase up to the second quarter. And since then, we've seen a growing demand already reaching 118 year-over-year on a 100 baseline, which shows that we've managed to grow with quality by always focusing on the net interest margin. To focus on generating operating revenue is not enough, we have to look at the generation of operating revenue, the related cost of credit and the return they're on by analyzing the net interest margin, therefore already adjusted for the service cost which may conclude whether these transactions are adding value to the shareholder in the long term or whether they are simply showing a growth in earnings that does not bring a return on the shareholders' capital. This is the type of management and work that we've done consistently each quarter. This is our daily work. As for the financial margin with clients, we have good news. The line expanded by BRL700 million in the quarter a 3.2% growth. It was a well distributed and balanced growth with the effects of volume, the volume of liabilities, number of working days some effects in Latin America and others. These are very sound results and for the first time to increase transparency, we've broken down the Argentina effect. Argentina and the working capital had an impact of BRL3.2 billion last quarter with BRL2.9 billion from working capital itself and BRL0.3 billion from the Argentina effect, which contributed with approximately BRL100 million to our monthly earnings. When we look at the end of the graph, we get BRL3.1 billion with BRL3 billion from working capital, which compares to BRL2.9 billion. It shows that we've managed to adequately hedge our investments and growing equity. And this quarter, we only have one month from Argentina. So we show this result considering July, as the earnings of the other two months were not affected. Because we stopped to account for this asset as a consolidated bank, as the Argentina operation was recorded as an unavailable for sale asset due to the sale process that was underway. When we look at the consolidated margin, it expanded quarter-over-quarter from 5.1% and we reached 5.6% in the consolidated margin this quarter. And when we look at Brazil, we also see this expansion taking place reaching 5.9% 30 basis points in the quarter, which is a very strong result. As for the financial margin with the market, the quarter was in line with the previous quarters, reaching around BRL700 million results after the effect of the cost of the capital index hedge. The effect in Brazil is in line with these figures. We see BRL1 billion in margin with the market and in Latin America, a slightly lower figure. Remember that here we only have one month of Argentina, and two months where we've already recognized this investment as available for sale, thus it doesn't impact earnings. This was the effect of the margin with the market, with no particular news, I'd like to detail some information and commission and fees and result from insurance operations. First, the strong quarter-on-quarter income from credit and debit cards as we've managed to expand issuance, which grew 4.5%, the acquiring business grew 2.8%. It's worth noting that in light of all the integration work, better management in proximity to the clients, the acquiring business is going through in short, a process of engaging our clients that has helped us to reprice and adjust our operation as a whole. Year-on-year growth was 18.9% a very sound result. Transaction volumes are also sound, growing 5.3% in the quarter while posting good profitability, which is the most important. And in issuance, we grew 2.9% year-over-year with a volume expansion of 2.7% in the quarter. We remind you that this was the portfolio where we've actually made the most adjustments, we've reduced substantially our exposure to the open seat and this adjustment, of course, not only affects revenue, but also the portfolio growth. When we look at the advisory services and brokerage line, we see a very strong growth of 22% in the quarter, and 21% year-over-year. In further details, we came first in the investment banking ranking and ECM M&A, and DCM achieving 18% market share in ECM 15% in M&A, and 29% in DCM, which shows that we've been consistent and delivered very solid earnings in this slide. When we talk about asset management, there was actually a slightly lower year-over-year growth with an expansion in the quarter. But the most important thing is to show that the open platform grew this quarter. As a result, we are already seeing a certain migration trend to this platform. And the line of own products has been growing a lot throughout this cycle of monetary tightening. So the pickup is lower quarter-over-quarter with an increase of 2.2%. Finally, in insurance, we grew 19% year-over-year with a growth of 5.4% in the quarter, which shows that we are consistently expanding our insurance operation, increasing the value of this operation within the bank's balance sheet. In terms of credit quality, our first message is from a global standpoint. When we look at Brazil at the total and add Latin America short term delinquency reduced in all three cases, and coincidentally in all of them fell from 2.5% to 2.3%. This shows that short term delinquency is well behaved. When we look at the NPL 90 days on a consolidated basis, the total is fully in line just like in Brazil and Latin America. And when we look at the short term delinquency in Brazil for the second quarter in a row, we have a reduction in the individual loan portfolio from 3.5% to 3.4% and now 3.2%. In fact, the first quarter is usually more pressured by the previous quarter spending and we've seen that in two periods we are already returned to the levels we have before the start of the year. In very small, small and middle market companies, the indicator fell by 10 BPS while in corporate segment, the indicator went sideways without any news. When we look at the 90 day NPL in Brazil, in line with what I said last quarter, we have an absolutely stable rate. And our best expectation for the fourth quarter is a drop in the NPL for individuals. Bearing in mind that this is a portfolio that is decelerated a lot. So there's a much more controlled overdue effect and a denominator effect. Both show that we have a very healthy portfolio and no worries. In SMEs, we are in line with what I said in the last call that we expected an expansion of around 10 BPS, and that's what happened, but our expectation is a drop in the fourth quarter. So we see that the short term delinquency is reducing thus, we don't have any specific concerns. Our very small, small and middle market companies operation is posting very strong returns both in the middle market and in retail. So no specific concerns here, we have a very controlled cost of credit. When we look at the nominal cost of credit, in this series, we have the first quarter with a nominal reduction. It's important to remember that in the fourth quarter, we have the effect of one retail company which ended up changing this figure. If it hadn't been for that we'd have seen a gradual growth over all the quarters. So this is the first quarter that we've actually seen a nominal decrease and in relative terms, it's fallen to 3.2%, which is a very comfortable figure and with a portfolio that is growing. In the renegotiated loan operations we have two news. The first is that it appears nominally stable at BRL40.9 billion results and 3.5% compared to the portfolio which shows a very controlled and well behaved portfolio. As far as coverage ratios there's not much to say. You'll see a certain stability, only small effects but absolutely stable. In other words, the bank's balance sheet continues to be very well covered and protected with very adequate provisions. As for non-interest expenses, this quarter is typically subject to stronger effects, such as the collective wage agreement. As a result, personal expenses accelerated from the second to the third quarter, while other expenses are very much in line. Thus, non-interest expenses grew 8.4% In Brazil, and with the effect of Latin America, they grew 6.9%. And what are the key messages? The efficiency ratios are quite good, clearly much better than what we've seen in the market as a whole both in Brazil and on a consolidated basis. And these are international benchmarks. We've managed to deliver a very appropriate efficiency ratio with two main messages. The first is about the bank's core cost or run the bank, which is in line. In the nine-month period compared to the same period in 2022, we grew only 1.1%. On the other hand, what has actually been expanding this figure is not just cost itself, but the investment that we continue to make [Indiscernible] our goal is not to manage costs for the quarter. Basically, what we have to do is to make our operation more productive, more efficient, thinking about how we invest in our operation by investing much more in technology data and business expansion. So we're always looking at the franchise over the long run, always with a longer time horizon. So that's the reason for all these investments, which is still being absorbed by the P&L resulting in the level of profitability I've just mentioned. I believe these are the key messages regarding costs, the bank's efficiency program continues to make a very positive contribution. And in terms of transactional volumes, if the unit cost is the same as lower or rising less than inflation, if we actually increase volumes to do more business, this is a benign cost, so we've still been able to finance all this benign cost expansion with all the efficiency program at the bank. One of the most talked about topics lately is data. We've talked a lot about machine learning models, generative artificial intelligence, among others. This is a topic that comes up all the time. So what we wanted to do here was to provide a summary of our various initiatives. This isn't just a topic for a specific department, it's a topic for the whole bank. And we have some data that shows and reinforces how strong our investment and belief in this data agenda has been. Starting with our data structure, which has 100% of all the bank's data in the cloud, in a very modern data mesh architecture, which makes the data much more democratized within the institution not being used by just one department as all departments start consuming that data. And not just consume, but adding their own data much more efficiently to the bank as a whole. And so we brought you some information that I think is relevant. We have more than 350 data scientists in the organization, more than 200 initiatives using generative artificial intelligence, more than 50 machine learning engineers, more than 150 professionals working with a generative artificial intelligence, and more than 570 models currently being used within the organization. One of the cases that I think is relevant in terms of outcomes rather than output is service. For example, we've increased by 45 percentage points, the volume of client service that is automatically retained through our models using artificial intelligence. 72% of all calls made already handled by artificial intelligence with much greater efficiency, accuracy and speed, and with improved NPS. And this is in line with all the investment in technology and efficiency that I've just mentioned. This shows a much more scalable and efficient bank in the long run. And we have a series of other initiatives with greater security for our clients. Since we are able to interact and identify the voice of a fraudster thus allowing us to protect our clients. With regard to productivity and the corporate client experience, we already have a lot of information for every documentation analysis so that it can be done as accurately as possible. We currently have a 97% accuracy. We've also been using chatbots to interact with our clients, providers. We've used our artificial intelligence models in different businesses, and we have no doubt this will be an agenda that has come to stay and will grow exponentially over the coming years. We want to be at the forefront, we have no choice but to migrate our systems to the cloud and upgrade them. As for the artificial intelligence agenda, we have everything it takes to lead this process, we want to be at the forefront of this agenda. I'd also like to comment on a few topics about culture and people which are very important to us. We've recently announced two objectives, black representation in the institution, and women in leadership. When we set this objective, we said that by 2025, we wanted to have 27 to 30% black representation in the organization, we've already reached 27.3% in July. 40% of our hires today are black people, which naturally means that we can evolve in these indicators. We really believe that it's not just the diversity agenda, it has to be an agenda of diversity and inclusion in order to keep this flow sustainable over time and to ensure that these indicators evolve consistently. We are very proud of the work we've been doing. And as I always say, it's not a job that has a day and a time to end. This is the new normal. And that's the agenda we've been working on. We also had a goal of achieving between 35% and 40% of women in leadership by 2025. We've already reached 35% in September 2023. So we are already at the lower end of our 2025 target, and will naturally keep moving upward. Regarding the hiring flow, our goal was to hire 50% of women in the flow. We've already hired 53.8%. And here we are talking about an indicator of women in leadership. When we look at women and the bank's total workforce, we now have 54.3% women. We brought this indicator just to give you an idea of the importance of this agenda, and we have to constantly talk about this ESG agenda. Of course, the narrative is important, but the results you can deliver are much more important than the narrative. And every quarter we present some output. Some focus to show how this agenda is part of our DNA, and how it is one of the pillars of our culture. Regarding some acknowledgments for the second consecutive year, we were named the best company to work for buy Great Place to Work. And not just as the best bank, we won the Best Financial Institution and also the best company with over 10,000 employees. What I always say here is that if we have happy and engaged employees, a strong culture client centricity, naturally, we will have satisfied clients. These are fully connected. We won The Most Amazing Place to Build Your Career. And we also won this award for the second year running. That's very goodness. And last but not least, also for the second consecutive year, we won the Valor 1000 award as the top company among banks. This shows a little of the recognition we've achieved. We talk about these acknowledgments with our feet on the ground and with a lot of humility. This is very important for us to keep moving in the right direction. But with great care and humility, because we still have a lot to do. And we believe that this is a longer term agenda. We're not going to be complacent with these results. The bank has a lot to evolve, and this is the agenda we will continue to pursue. Now radically changing the subject, I've talked about culture, I've talked about diversity, I've talked about inclusion, I talked about awards and now I'm going to talk about capital. As I've said a moment ago, we came out from a set one of 12.2% last quarter, and we've already done a pro forma last quarter showing the positive effects of the regulatory changes which have in fact materialized now with plus 0.9%. As a result, we've reached 13.1% of the set one capital ratio and our appetite is 11.5% as defined by the board. So there's been an expansion in all consecutive quarters since the first quarter of March 2020, during the pandemic when we made those material provisions. Since then, we've been expanding and growing our capital ratio. We have plus 0.4% growth in earnings already adjusted for dividends. We have the minus 0.3% of RWAs with the consumption we've had formed credit market and operational and the plus 0.9% I mentioned is basically the evolution of our models and all the regulatory changes which leaves the bank at a very adequate capital level. Regarding Itau Argentina Bank, I'll try to be very objective, but it's important to emphasize this for you. Considering the earnings that we see on our balance sheet the seven-month result of BRL578 million also poses an opposite effect in equity that doesn't go through P&L which is the effect of inflation and the foreign exchange variation of the equity in Argentina. So if you look at earnings isolated, you get the feeling that it's an accurate of investment but deep down when you consider the economic effect from the stockholder standpoint, we saw a seven month loss in Argentina of BRL113 million. As a result, we made the decision to divest especially in the retail business in Argentina, an operation that we had in this country for many years. We'll keep a very small operation, in this case, a representative office focused on a few corporate groups, we have a very close relationship through capital market transactions, investment banking, some lending transactions. We felt it was important to carry out this sale. The sale was completed satisfactorily with the regulator's approval and its financial settlement last Friday. From the earning standpoint, in the material fact, where we announced the sale, we said that we post non-recurring result of approximately BRL1.2 billion. And this is the result that is actually materializing in this quarter's earnings. So this settlement have this impact on equity that has been accumulating over the years, which is the CTA that we disclosed on the balance sheet. And the balance sheet as of September 30 does not include any more of the effects of Argentina, because from July onwards, we have the effect of only one month in the quarter, which is July. We started treating this asset as available for sale and no longer as a bank consolidated on our balance sheet. The result excluded was a credit portfolio of BRL4 billion and operating revenues of BRL1.9 billion a non-interest expenses of approximately BRL650 million and earnings of BRL578 million is reported in P&L, which is the figure I've showed you just now. Thus, we no longer include Argentina in our earnings. As a result, we simply took the guidance that had been released to you last quarter, and we made the adjustment by excluding the impact of Argentina. How did we make this adjustment, we went back to the guidance and looked at what we had projected line by line for Argentina over 12 months, and we simply excluded them from the projection. And now we are restating the guidance without any changes. Basically, what we're doing is excluding the effect of Argentina from the last five months, two months of which are from the last quarter and three months from the coming fourth quarter 2023. Thus, here you can see the figures adjusted across the board. The basic message is that our guidance is being reaffirmed, we continue to believe in the projections and we are delivering earnings within these lines. Needless to say geography can always change from one side to the other side. But all ranges described here absorb our best expectation of how we should and 2023 This concludes the presentation. And I will now join Renato, so that we can answer your questions during the Q&A. I'd like to thank you once again for your trust. And say that we remain very confident in our agenda. We've been working tirelessly on this cultural transformation that I've talked about so much. This obsession with the client with expanding all NPSs, ensuring that our business keeps evolving and growing. We still have a lot of opportunity for growth. And we're going to continue evolving at the bank, but always with that focus and that long term view, creating shareholder value is a mantra for us. And it's something we have very strong in our DNA. Then we're not going to fight for growth that leads to one or two quarters with better earnings that is not sustainable in the long term. We are going to keep this long term view as we've always done here at Itaú Unibanco. Thanks everyone once again for your time. I'll join Renato and we'll continue our talk. Thank you very much. See you in two minutes all the best to everyone. A - Renato Lulia : Milton is back with us. Thank you very much for being here and for your presentation. And now we will start the second part of our meeting, which is the Q&A session. Remember that this is a two-language session. We are going to answer the question in either English or Portuguese. If you need support, with the translation, you can choose the audio that you need. You can submit your questions via WhatsApp the number is 11-97-825-5707. The list of participants is long. We have the first question without further ado, let's start. We have my friend, Renato from Autonomous here with us in video. Thank you for taking part of our call. Renato Meloni : Good morning, everyone. Thank you for the opportunity. Would you please comment on the improvement on the ROA with the business on retail, regardless of the revenue didn't grow so much. I want you to understand the drivers behind that improvement. And maybe under certain scenarios for the next quarters if there is a trend. And if you can comment on your expectation regarding the meeting with the Central Bank that is scheduled on the credit cards. Thank you. Renato Lulia : Thank you, Renato, for the questions. Welcome, everyone. I would like to start with profitability. In fact, when we look on the quarter-on-quarter, the result on the retail is stable, but with competition that is different. With a turn of the quarter, we have had a revision of the capital allocation with a regulatory changes, and the demand of capital in the retail operation was reduced. Therefore, the capital that was economically allocated on the operation is dropping, but the operation is stable. Why? Because all the remuneration of capital is one side of the business, you'll have less capital allocated with the business, you'll have less remuneration of the capital allocated in the business. That's why you remove the effect of the margin of the operation, but the core the operation was improving, it is improving a lot. When you remove that working capital, you'll have the constant and then you demand less capital. And then you have two levers, the operation of the company that is expanding, and growing with greater profitability with more efficient capital allocation. And the inflection point that I said, where the business of individuals already happened. And we are improving quarter-on-quarter the profitability. So yes, there is a return, but there is an evolution with every return even though it's flat quarter-on-quarter, year-on-year, though it's an important growth. And we can see a recovery and the individuals with all the drivers more client engagement, less cost of credit, more efficient, less cost, less costly operation. And we can work with all the levers. And the companies have been growing with great profitability. And the competition of both. Lastly insurance has allowed us to improve the profitability of retail and we can believe on an improvement, looking up ahead. This is one point. Second question, which is the credit card discussion, our expectation as well, this is an agenda with a lot of associations. There will be a debate as your job, the regulator has a capacity under conditions to understand the different opinions, it's important that they hear all of the market all of the players and the most important here, thing here is that we want to resolve. What are the starting points for the debate of the credit card and the starting point the intersection is so that their rate, the installments are lower than what we were nowadays. Because today there is a delinquency level that is very high with the credit card, because there is -- well those of you when you hired a credit card, when you requested the product you had the comparison of the rates, you see the programs, and you'll see the experience of the product. And you'll see if the limit is adequate. So when you get into the credit card product, the client doesn't expect you sell finance, because this is not the product, that this is not the way that the product was designed. And our defense is based on that, how do we transform the credit card that has a penetration of 40% with a platform, turning it into a platform that our finances, they use, expanding the offering and making the most vulnerable products that get into the -- into the higher rates to actually pay their credit cards. This is the regulator, they're going to make the decision and the commitment here is when FX is with the consumer. And they might -- they might have finance with less competitive conditions. And we are making this credit card platform with more efficiency. This is why just Brazil -- Brazil is the only country that is different. This is an anomaly where the revolving credit and we have to deal with it. So we have to -- we have the understanding the diagnosis, and we hear once again FX is non-negotiable, so we're not -- we would like a technical correct discussion that is well done. And this is what we are supporting. Federal Bank is the leader of this debate for the institutions as a whole, financial institutions, of course. Renato Lulia: Thank you, Renato. Second question, we have Bernando Goodman [ph] from XP. Good morning. Thank you. The floor is yours. Unidentified Analyst: Good morning, everyone. Thank you for the opportunity. I wanted to understand more on the retail segment. The bank has de-risking very objective derisking. And now you have the result with the delinquency that stabilized. You talked about the high income and bank is very well positioned in that segment. However, on the other hand, some competitors already have results, pointing out with more appetite, releasing the strains on the retail. And while, you didn't get hurt out of the cycle, would it be -- would it make sense to expand the composition of the portfolio? Looking at the segments that are the base of the pyramid that are focused by mainly by the FinTechs? Thank you for the question, Renato. But thank you for your time. Milton Filho: Okay, let me give you an opinion over here, we are very much convinced about the decision. Well looking back, the derisking decision of portfolio was a very correct decision not only derisking, but we often all these orders, we have grown in our target segments. Since our portfolio is very large, you'll have the credit card portfolio 120-127 very and whereas big numbers within that portfolio, we have the high engagement clients. With the profitability and risk levels that are adequate, you have a big portfolio that we call it, the open ocean, not only the clients that we acquire digitally, but the finance and the association that we have. This is a very big portfolio. And we've done, well credit card is one of the products vehicles, we've also had to do adjustments. And just to give you a few numbers that really stand out to me. This is the first quarter consecutive that we have the reduction of the NPL of credit cards. So the market, there is the first inflection, the system as a whole, we are in the second quarter with a relevant reduction in vehicles. We're in the third quarter consecutively doing the inflection of the long delinquency, with expressive drops in delinquency and the equation of risk and return. If we look at all the production to return all of our models, and while we expect to have profitability through the cycle. And we've been playing implemented the portfolio management that was very efficient on the wholesale, we implemented that on retail. So we balanced the portfolios. We have worked with all the publics. It's not that we don't work with lower income, we've worked with a lower income with the correct product with the correct client in a correct way, with an adequate rate. So we can through the cycle, have more recently entered products. We doubled down the high medium income. And we have grown expressively year-on-year that has strengthened our position our leadership in that segment, we believe in the importance, and we invest in that. But there is a segment which has a lower income that is still very relevant in our portfolio, regardless of the derisking that it was 35% of the portfolio is still 20 very relevant. But again, with the right product with the adequate profitability with a resilient product client, so we can work with the public. In my opinion, the big drivers of ahead so we can grow with more efficiency and quality in those publics are. First the platform, the Itaú platform. The capacity to deliver a bank that is a full bank. One Itaú, for all the clients of the organization doesn't matter if they come through real estate, or the payroll loans, we want to deliver a full bank experience for the client. And here in the bank, just if we just look at the amount of clients that we have on the suite of notion [phon], we have the millions of clients that have a record with us we have a relationship with, that we do not have we could not deliver because of the technology issue of their bank offer. And this is what we're going to work on in the future. And we can accelerate through that through growth in those -- in those clients. So we have a few Uniclass outside of the full bank, some personality. We have a lot of clients that fit into our target and that we can we could grow with quality. The last point is play of course we try to be more efficient. We try to have an offer that is lean, the simplest possible. One Itaú will allow us to do this on the lower income clients where we have an adequate cost and an adequate appetite. So for all these clients, they don't go through the threshold of credit, it's not the cost of the loss, the cost of credit over a loss is so high. There are no efficiency that justifies working with this client. And you end up with a portfolio that seems to be growing because of the dynamic and the accounts receivable, but the loss is on the long term. So we are focusing on the net margin through the cycle profitability, it has to be the adequate profitability. And we have the capacity to rebalance this portfolio and continue to grow with quality improving the profitability of the business as a whole. So we have an efficiency agenda for the public. There is an integration that we can grow more and more in these clients that we do not service with our full bank offer. And we are going to continue to do what we've always done, which is reworking the segments [indiscernible] and Uniclass, where we're growing double digits with great quality and generating more engagement and loyalty with these clients. So these clients that are more engaged with the bank, they have lower delinquency. And this is our agenda for the future. And we believe that there is a big space yet to be worked with. Unidentified Analyst: Thank you, Milton. Renato Lulia : We have [indiscernible], UBS. The floor is yours. Unidentified Analyst: Good morning, everyone. My question, well, still working with the second -- with the previous questions, credit card and low income. Credit card, it was an impressive improvement. You talked about the two quarters of the HR, the BPS. But you shown that there was a change in the mix that was very big, the growth, strong growth of Uniclass and Personnalité, big drop in the lower income, you don't have the numbers. Credit card, my doubt is if the mix is constant, would we have a better outcome? This is the first point. Second, in the low income, you mentioned that some of the company's competitors, Santander, they said they have a deficit in the lower income. So we need a solution for that business. Well, based on your explanation is the solution is Itaú One or something along that line. How are the -- well on site, well, would it be viable to have the -- well, the question is what the bank agency -- this is Itaú One - I'm sorry for the question it's very complicated. But yes, will the Itaú One would be a solution? Well, if we maintain the same mix, the results wouldn't have improved as what we've observed. Milton Filho: We estimate that derisking of the portfolio would be 200 points of NPL in our -- the other way. So just so you can see the dimension of derisking that we've done and the moment that we've done it. And these are portfolios that can regenerate the bank product, we talk about the top-line if you don't see the backbone through the adjusted cost of credit, and that margin induces you to take a decision that with the inadequate appetite. Of course there was it was an over offering of that product in the market, every new competitor got in with a credit card offer. So client that today could have had two credit cards, the experience of having a credit card more -- it's more difficult to do digitally in one day they can open and get five-six-seven Credit cards. And then there is a phenomena of not charging the fee. It seems like it's three in the pocket of the client. So they use the credit cards whenever they need. And if they are not a client that is engaged in the organization and the first credit cycle, they get the credit card away and then they go to the next product. And then they try to keep the last credit card with the bank that they have the best relationship there is a natural trend that the engagement leads to lower delinquency but the credit models for as better as they might be. They don't they do not improve the income of the clients. So that's the first point. We are very, very much convinced de risking is fundamental, just so you can understand. Our delinquency on credit cards. Quarter-on-quarter we show the bank balance sheet, the delinquency dropped in 6%. The vehicle loans also dropped in a quarter. These are numbers that we don't talk about, but all the derisking in the portfolio has a result in the delinquency the NPLs has dropped. And we've improved the profitability but the credit card operation monoline or standalone, it's an operation that is not positive, it destroys value, as it is. It runs below the cost of capital. So in some businesses, you can have a positive result. But it's diluted on ROE and on the other businesses, which are the most risky, you have a negative sometimes result. So you're diluted for the income and diluted for the ROE and still would have we given the size of our portfolio we could have -- we could absorb this. Importantly, what would it -- what would have been the ROE that we would have had, if we don't have to mix the compensation of the credit card and the size that we have. I mean, this is the numbers would have been higher, if we had the size of the industry as a whole. And the lower income issue, I think it really depends on the channel and the product and the client, they are working with. Generally yes, it is deficit operation. The cost of service is very high for clients, I do not have the pocket capacity there. So the clients that you can operate with the credit, whether delinquency rate that is very high, sometimes through credit itself, they do not contribute for the operation for the operation of the bank. So what we believe is that the network of branches will continue to have an important role, but their remote service many clients, for the high medium income, they still like to be service to talk to the human to have the onsite service. And we believe that the branch network the way that we reworked with our motto, the satellites and all the branches, and with the adequate footprint, very well coverage in the geography, we work in places that we still have played an important role. But just the One Itaú, the platform that we're developing, it will certainly give us the firepower that is unprecedented. Because this is a kind of dedicated service where there is a death, there's a deficit in the on site, I can make them digital and bring them in on the digital. This is the only way that we can make this client profitable. And the capacity of cross sell direct mentioned that we can do, because we have a full bank offering for these clients. This is our bet, this is a plenty of cost of play of efficiency, the agency has a very important role. It has a compensation that is very relevant for our business model, then we believe in the physical model, and we believe adjustments in the branches are necessary. We've done an adjustment this year. And we are trying to maximize the efficiency. And in the end, the branch network will be the size of how our clients want. As long as we can add value with the branches, there will be an important an important place for the interaction with our clients, specifically, quite some products. We believe that we like in our model, and this is an adequate model. Renato Lulia: Thank you, Milton. Fourth question from Rafael Frade from Citibank. Rafael, the floor is yours. Rafael Frade : Good morning, everyone. Two questions. One, well, you commented on the issue of derisking of the retail portfolio, but it's very surprising that in fact, when we look at it the last 12 months, the consolidated goes up regardless of all of the derisking. So the question is at which stage are we in looking up ahead, that is a last let's just say when against us, and we have a more a better growth in the portfolio, we can have a marginal improvement on the portfolio. The second question is regarding the financial module with the clients that have had an expressive growth in the quarter, but what we subdivided between the retail and wholesale, actually more than half of that improvement on the current market comes from assets of corporations. So can you just understand what was the factor? How do you -- how is this reflected on the others? Milton Filho: Well, thank you Rafael. Let me start by the second question. And then I can answer your [Indiscernible] issue. Second question very simple. If you look at the financial margin in a way that we publish, we separate the working capital effect. So you can see that in the margin, there is no working capital associated to the market. But 95% is where the capital recommendation by the client because it's credit risk and operational risk associated to the credit operations. So when you see that we exclude BRL2.9 billion in the last quarter in and it was BRL3 billion, you can see that in the consolidated the remuneration of the working capital is stable off, there is an increased NPL in a period, it's already there, it's a patrimony growth, and our rate continues to be positive, and the way that we do the hedge of the working capital. So what we still have benefits, that is important information. How do we unfold this to the business? And this is why you see the difference. So if we look at quarter-on-quarter, there is a change in the regulatory working of the capital, how do we work with our models business models? I have the necessary capital that has to be allocated in the operations, since there was a reduction in the risk -- for the credit risks, or the -- for the risk of credit, for example for Basel layer three, for retail and wholesale, there was a reduction. What do we do with our business model, is we exclude that excess of capital that was still larger. And we like -- we put it on a corporation, so I don't leave it in business, the remuneration of the access of capital, it stays in a corporation. So when I isolate 2.9, and a 3 in that slide, it's already contained inside in there. Why? Because it's the whole, that breakdown is just how I allocated between business. When you look at the financial margin, the BRL700 million, which is a core is the core growth. The other one is just a recalibration between the businesses of the working capital, the excess of the capital that I take to the corporation. So it's just a way to represent the distribution of allocated capital. I hope that it make sense, because it's the way that we work with our business models. So all of the access, clean access, I leave it in the corporation, that's what you see the delta in a quarter of BRL100 million to BRL550 million in that line of the corporation in the margin with the client. So it's just a redistribution of the working capital within the businesses. Going back to your first point, on an NIM, we believe that the the core of the derisking are already happened. The negotiated portfolio is very well provision very well negotiated, we've seen an expansion in the line. We've managed and we've improved our mix. And the mix is not just the retail, wholesale is the mix. And we've improved the profitability and more so. Here is the engagement issue. The other relationships, other products, all the crossover is here. So liabilities is here. So we've managed to deepen the relationship with our clients, and improve the set of products that we serve as our clients. So the line adjusted to the risk is has two effects. So it's the top-line effect, and then there is the derisk. And therefore there is a lower cost of credit, which can help us along through the time with the NIM that is better. On the other hand, we did with the derisking better clients' lower risk and lower profitability. So even though it's generating value adjusted to the risk we've had margins that were lower, because we've worked with profiles of companies and individuals with more affluent and a better level of risk. So with contribution margins are lower, but we are still positive in regards to the NIM. And maybe keep what we are operating or maybe this is something that will happen, but it depends on the macro scenario, and the future risk factors. Rafael Frade : Thank you. Renato Lulia : We have with us Tito Labarta from Goldman Sachs. Hi, Tito. Good morning. Thanks for joining us. Tito Labarta: Hi, good morning, Milton and Renato. Thank you for the call and taking my question. A couple of questions also shifting a little bit more to capital. Now you showed some nice increase in your core Tier 1 above your minimum. And you're doing good ROE. How do you think about potentially increasing dividends? Also yeah, just thinking about loan growth, right. 6% to 9% of guidance for this year. How do you see loan growth evolving from here into next year is asset quality seems to be getting better interest rates potentially coming down? Could you accelerate the loan growth into next year? And how will that influence potential dividend payouts just to kind of to give capital and loan growth time to next year? Renato Lulia : Okay, Tito Nice to see you. Again. Thank you for your question. I start to say that we are taking the full benefit on the interest on capital on a running basis. So we expect this year a minimum dividend payment of around 30% this is where we are when we consider the interest on capital. On top of that, we are still expecting the regulation on operational risk Basel III. We should have information about that in the coming weeks. I would suppose that this month, we would have the view of the new regulation and with that we can do our planning of the capital need to run the business because the operational risk will be implemented in 2025. And we still don't know how the phasing we work out. The good thing is that our capital generation has been improving, as you know, but we want to approve by the end of this month in November in our board of directors, what direction we're going to go, and what are the alternatives we have. And we have a few, we should or we can increment the dividend, we can repurchase shares. So there is a mix of things that can be done. And these discussions will have by the end of this month, if the regulation on the operational risk comes up, and this is our best guess now. With that in mind, our view is that we could, and we should have an increase in our dividend and/or repurchase of shares will depend on the alternatives that the board will take in consideration. We will have and make a proposal by the end of this month. So we believe that in the coming weeks, we should release new information to the market with that respect. And talking about growth, portfolio growth, I would say that we are right now planning 2024 we should have the guidance, then releasing the numbers of next quarter by the beginning of next year. We're still working on that the same way we did looking to the portfolio's that we want to have in the long-term, understanding how to manage the portfolio to balance that in the long-term to be more resilient through the cycle. And this is the discussions we're having now. I cannot anticipate that because we didn't finalize, we still have some work to be there. So far, whenever we have this information available, we will share with you Thanks, Tito. Renato Lulia : Going back to [Indiscernible] English. So now we have Rosman from BTG Pactual. Eduardo Rosman : Good morning, everyone. I'd like to talk about valuation and your opportunity for M&A. So I want you to get the opinion, Milton, on the valuation of the bank in the world the ROEs are positive, most of the geographies, nonetheless, the valuations are very cheap because in the past, it was very low. And we didn't know what was the real book and what was the ROI? I think that Jamie Dimon had complained about the deficiency of capital in the United States. In Santander, it talks about the unfair competition with players or a non-banking players. So what is the challenge for the sector not only in Brazil? Have you discussed with other CEOs all throughout the world about this? And maybe to understand from you do you see this as an opportunity to have capitals, excess capital as your question? You have a sub optimal operation in Colombia, Chile, there is a space so you can be more relevant. So would it make sense to use some of that capital to eventually maybe purchase banks in the region? I think therefore, the bank is always challenging to pay above the booking because of the intangible. I wanted to get your opinion. Milton Filho: Thank you, Rosman. Thank you for the question. So I agree with your initial affirmation. Our vision is that the prices are cheap. We do not manage the business on the price of the share on the short term, there is volatility. There is always the effect of the bankers the effect of the competition, there is the effect of Brazil itself on the activities of the bank. So our share ends up having multiple effects. You can have the multiple bank, but then you have to look at a competition where we can have more upside, or a less upside. So that's what we look at here as on the long-term. That's how we deliver the value on the price of the share and the price of the dividend the value creation we believe because of the level of results that we are generating. Up ahead, the prices are low, not only ours, but our other banks outside of Brazil, we've seen that. This is a bank dynamic of the shares. The issue of the M&A, we've always had our history of records the bank is because of relevant fusion that happened in 2008. But we are always looking at opportunities outside of Brazil. The asymmetries are still very relevant. And regardless of the price of the assets, whether it's fiscal asymmetry, which is I have to pay a tax in different times the tax. You have an effective rate in Chile, lower in Chile and Colombia, and I have to bring it and recognize it in the books of the bank and capital above all. When they consolidate the assets in Brazil, we work with the appetite level of the board that is set 1.5 of 81 with 3% of level one, those operations run with the -- working with the local capital below that. So when I bring the operation of Chile, that is 9% and they consolidated here in Brazil, that delta capital, I do not need to reserve it temporarily, because this is a level of capital that my shareholder expect me to retain in the operation. When I allocate that cost of capital to 14, and 15, whatever the cost of capital it is, it's very difficult for the profitability of that operation to generate value for the shareholders. So the logic of the value equation, you can see the Chile that works with the best profitability is when we do their consolidation, we have all the costs the cost of hedge, the capital index, capital allocation, per se. And the tax asymmetry that makes the profitability and division of the shareholder before is lower. So it's positive for the income, but it's alluded on the ROE. So when we look here, we don't have big opportunities outside of Brazil that can change that trend, or even in Colombia, or Chile. So our objective has been to improve and simplify and gain efficiency in Colombia, which is subscale operation in Chile, the operation is running in good thresholds of profitability of client centricity, the improvement, the investment that was only paying off after a few years, and we continue to be very comfortable with what we have. There is nothing, Argentina is, is something outside of the curve. And in Brazil, I mean, there's always a regulatory competitive issue. What are the businesses that we can advance? And, of course, we have businesses that complement our offer. We found smaller businesses that had complement our ecosystem, but we haven't seen the opportunities that are relevant. And we've seen other opportunities, and we declined, because there wasn't added value of the price wasn't adequate. And we still look at the market in that sense. Well, I understand an opportunity to generate value we are open for that. We have M&A on M&A area that -- the team that is highly qualified that is ever looking at the market, the mapping the opportunities. But our opinion is the opportunities, there's more technological platforms, such as avenues that was approved recently by the central bank, and we can and they can complement our offers. And that's why the ADL brokerage full digital that complements, also the partnership with Protus [ph], we are still active. Whenever there is a good opportunity, we continue to advance. Eduardo Rosman : Thank you, Milton. Renato Lulia : Next question, Daniel Vaz. Welcome, I hope you have a great time in your new house. The floor is yours. Daniel Vaz : Good morning. My question is also on capital. I know that it was commented in the question of Tito. But I wanted to understand in your capital overview that variation of the origination of SME that we've just seen SMEs, that represents the additional capital that you have, in your opinion, will it be -- what is behind in more originations for the small and medium sized companies? Do you have any real movement seeing an improvement in the perception of the risk? Or actually these movements aren't the adjustment of the origination? If you consider, that's the first question. And last but not least in the renegotiation, we saw the stability in the quarter. I don't know if there is an effect of the [Indiscernible]. But maybe this will be a good indicator looking at the head. Do you agree with that information of the renegotiations? How do you see this from the standpoint of the bank? Milton Filho: Thank you, Daniel. First and foremost, capital is not an active restriction of the bank for growth. This is the main message that I wanted to leave through. When we do a capital plan, looking at the long horizon, we take into consideration the capacity of growing the portfolio within our appetite and ready to generate capital with our profitability level that we've managed to bring to the operation. Today we have the organic capacity for generating capital that is strong more than enough for growing the portfolios. So wouldn't say that your capital is a restriction in itself. And the only restriction will always be at this moment always appetite until we well -- how do we want to roll in which public the -- which product with which deadline which product portfolio is the optimal one so we can at least get volatility through the cycle. And this is the way that we working. Look at the volatility of the portfolio, wholesale and the more of a volatile moment. This is what we've tried to do with the retail portfolio. So we rather have less cycles of ups and downs and having a positive EPS with less volatility. This is what we try to do within a management at the bank. Capital is not an active restriction, but we the vision is to have that excess capital. We don't want to retain more of that excess and what we niche for growing investment. We've talked about the capital allocation at the beginning. If we were working with a defined capital by the board of 11.5, have said one ROE would have been 24% number. So we have an ROE of 22 and with a capital level one of 13. And we've managed to act to remunerate and allocate the capital adequately. We don't want to retain the capital more than necessary. This is what we want to do from November onwards. And our expectation is that there is an increase of the payout and the repurchasing of sales, something will be done. And we're going to go beyond what was done, which is the optimization of KCP, which has brought our payout to closer to 30. So we should improve that payout plus the payout, again via repurchasing our dividends, recommendation of both, we're going to give you more disclosure in the next call. Not a next call, the next month, possibly after the discussion that we're going to have the board -- at the board of directors, this is the first point. The second point on the renegotiation of the portfolio, the impact of -- there is a rollout is very small. We are very engaged, the market was mobilized very good program. But the impact on the second stage very small. There is still work to be done the experience of the client and eligible clients how the bits are going to work. For the impacts, they do not really move our numbers. This is a very strong work we have renegotiated what is necessary. If you look at the records of renegotiations with the bank, you're not going to see ups and downs. We never used a renegotiation to administer delinquency, we renegotiate with an economic vision, when it makes sense to renegotiate at a great price for the client needs. And for the client that does not have the conditions to renegotiate, we rather continue with the process of charging if the renegotiation doesn't make sense for the bank or the client at several points. So we've been very disciplined in the management of renegotiation. This is our agenda. And well, Charles -- and we, as we can recover cash from operations, this is important. So we continue with the collection billing. And while this is a question that we should explore, is understanding that the renegotiated, so it would be provision well. We do the stress test in the renegotiation. They are -- on the deadline there are renegotiations that are being done, they're paid. Of course, there is some long and short delays, we always look at it in a portfolio. We do the threshold of stress, always looking at the worse rollout, if it was the full portfolio, what is the rhythm, how that portfolio is going to work? Is there individual at their companies, we always run this test stress test. So I can go into your data, generic and specific provisions that are enough to deal with the portfolio in the cycle of what we expect even in the cycle of stress looking up ahead. So very well protected. Portfolio has been very well provisioned once. Our access of provision today, when you look at the generic, a great deal of that or a great deal of that access is allocated to those portfolios. So the bank is really well positioned, provisioned, and we don't see relevant effects looking up ahead in the P&L in the sense of deterioration of the portfolio, the balance sheets very well protect protected. So we can go through that cycle. This is not the base case. But we have a great provision but of course with a deadline that is longer than what we expected with our portfolios. Daniel Vaz : Thank you. Renato Lulia : Next question. We have Gustavo Schroden from BDI. Gustavo Schroden: Good morning, everyone. I wanted to ask two questions. I wanted to be more specific on the payroll loan. I know that you talked about the retail but this is a very important product. And while you have that reduction in the INSS portfolio. Looking at your material, you have -- you said that it was intentional the reduction because of profitability that was lower. I wanted to understand from you, I mentioned that this experience lead a [indiscernible] to happen. And if we look at the recent records, as this liquid is dropping, and while there will be another drop in the cap of the INSS. So if you can tell us what is the strategy, because this is a product that when we see that derisking happening across the board, all the banks are going through the rhythm, they decrease the appetite in more risky lines and credit card? So, the payrolls are a product that the banks use as a counterpart against the reductions on the retail. So can you explain what is the strategy on the payroll loan? I think it would be very interesting. And the second question would be on the ROE. You mentioned twice that if we had had adjusted as an equity one to 11.5, we will be talking about 24% of our ROE in Brazil. If your [indiscernible] is a perspective for profit, dividend sharing, dividend distribution, sorry, of course, according to the decision of the regulator, there is a possibility I mentioned that the bank has maybe a gain in efficiency, the PDD is dropping next year. So can we look at 2024 and it may be dreaming of an ROE 24%-25% next year? Thanks. Milton Filho: Well, I like to dream, I always dream big. And this is a bad set, we will continue to trail. Looking at the ROE. Well, clearly speaking, we still see quarters that are very solid, very consistent. You have determined of the year, another quarter, right. So how do we -- since we affirm in the guidance the guidance has predicted the result of ROE above 20 of course, we are reviewing the numbers for next year. There are elements well known, and those that we use, because of the budgeting looking up ahead. And there are the elements that are unknown. There may I always have changed regulatory change that is positive we are considering that. We believe I'm not going to anticipate that the profitability level that we are operating seems to seems sustainable looking at the horizon '24. Of course, there are levers on both sides, but ballpark, we can imagine I would say 20%, close to 20% seems reasonable, we would have to naturally look we are tracking the numbers here. So we can have more long termITUB Ratings Summary
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Itaú Unibanco Holding S.A. (NYSE:ITUB) - A Comprehensive Analysis
- The consensus price target for NYSE:ITUB has decreased from $7.4 to $6.8, indicating a cautious outlook from analysts.
- Itaú Unibanco showcased a strong operational performance in the third quarter, with significant credit growth and a decrease in delinquency rates.
- Despite challenges, Itaú Unibanco's financial stability is bolstered by substantial capital reserves and strategic dividend distributions, making it an attractive option for dividend investors.
Itaú Unibanco Holding S.A. (NYSE:ITUB) is a leading financial institution in Brazil, headquartered in São Paulo. It offers a wide array of financial services through its Retail Banking, Wholesale Banking, and Activities with the Market and Corporation segments. The bank serves a diverse range of clients, from individual customers to large corporations, both domestically and internationally.
The consensus price target for ITUB has seen a decline over the past year, dropping from $7.4 to $6.8. This shift suggests a more cautious outlook from analysts, possibly due to economic challenges or company-specific factors. Despite this, Itaú Unibanco's third-quarter results showed strong operational performance, with robust credit growth and a decline in delinquency rates, as highlighted by Zacks.
Itaú Unibanco's financial stability is further supported by its substantial capital reserves and strategic dividend distributions. These factors contribute to an attractive dividend yield and improved return on equity (ROE). However, Barclays analyst Gilberto Garcia has set a lower price target of $4.5 for ITUB, reflecting a more conservative view on the stock's future performance.
The bank's recent earnings reports indicate an increase in both earnings and revenues, driven by a rise in operating revenues and managerial financial margin. However, the company faces challenges due to rising expenses, which could impact its short-term financial outlook. Investors should monitor upcoming earnings releases and macroeconomic indicators in Brazil for further insights.
Itaú Unibanco's strong financial performance, including a net income of R$10 billion in the second quarter, positions it as a reliable choice for dividends. This performance surpasses competitors like Banco do Brasil and Nu Holdings, underscoring Itaú's solid track record and focus on security and predictability within the banking sector.
