Earnings Call Transcript - ITUB Q1 2021

Operator, Operator

Good morning, ladies and gentlemen. Welcome to Itaú Unibanco Holding Conference Call to discuss 2021 First Quarter Results. As a reminder, this conference is being recorded and broadcast live on the Investor Relations website. 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 macroeconomic conditions, market risks and other factors. With us today in this conference call in São Paulo are Mr. Milton Maluhy Filho, President; Alexsandro Broedel, Chief Financial Officer; and Renato Lulia Jacob, Group Head of Investor Relations and Marketing Intelligence. First, Mr. Milton Maluhy will comment on 2021 first quarter results. Afterwards, management will be available for a question-and-answer session. It is now my pleasure to turn the call over to Mr. Milton Maluhy.

Milton Maluhy Filho, President

Hello. Good morning, everyone, and thank you for attending our first quarter 2021 earnings conference call. I will start with Slide 2. We can jump straight into our highlights for the quarter. The recurring net income grew 18.7% and reached BRL 6.4 billion, and this significant growth was supported by a sound overall performance of our business despite the volatile macroeconomic environment. When we look at the loan book, we had solid growth of 4.2% in the quarter. Three of the most important contributors to this performance were mortgage and auto loans, growing respectively 12.1% and 4.5% in the quarter, as well as our renewed focus on the agribusiness sector. The increasing demand for this product is directly correlated with a new approach towards this segment with the introduction of new and specific products. Looking at our P&L, the financial margins with clients maintained their positive trend for the second quarter in a row despite the negative seasonal effects of the first quarter. Cost of credit contracted by 31.9% in the period, reflecting positive credit quality trends in the portfolio. Noninterest expenses decreased by 6.6% in the period, resulting from constant investment in technology, boosting our operational efficiency. Lastly, we effectively navigated this highly volatile environment, generating a 51.7% growth in the financial margin with the market. I would also like to update you on our digitalization efforts as they continue to generate positive results. We opened more than 3.7 million relationships with new clients through our digital channels in this first quarter alone. Finally, I would like to highlight the significant changes in our strategy, which was originally conceived as a digital wallet, and has evolved into a full-fledged, 100% digital banking operation. Through it, we opened more than 2 million new relationships this quarter. We will delve deeper into all those topics as we move along this presentation. When we proceed to Slide 3, I'd like to share a few statements before we go into the next slide. I would like to discuss what it means to be a digital company. For us, being digital is essentially about having a substantial focus on the needs, demands, and genuine pain points of our clients. The path to achieving this is through the use of technology, but this does not mean interacting with your customers entirely remotely or merely viewing a super app. Being digital, in our view, goes far beyond that. Truly digital companies possess cultural and operational characteristics that distinguish them. For us, being digital means we should be able to serve our clients where, when, and how they wish to be served. For some clients, this will mean addressing additional banking needs via our super app on their mobiles. For others, it will involve having face-to-face discussions with a financial adviser who will assist them in making the best data-supported decisions. With this goal in mind, several aspects are essential for the company's digital transformation. First, the intensive use of technology in all areas of operations, from new ways to interact with customers to process automation, is critical. The application of technological solutions enhances our capacity to create new products and truly differentiated experiences for our customers. Second, innovation must become part of everyone's daily routine, not just a task assigned to a team. Third, we need to be quick in developing and implementing new solutions, reducing time to market and adjusting whenever necessary. Fourth, we must organize ourselves into multidisciplinary teams utilizing new modes of operation. We must cultivate a passion for efficiency, leveraging technology to enhance our commercial potential and increase our ability to offer more competitive products and solutions. Finally, our ability to utilize the vast amount of data we have accumulated over the years will enable us to provide products that more intelligently and intuitively fit our clients' needs. Throughout this presentation, we will address several points I have just mentioned in order to shed light on the important advances we are making in our operations. Moving to Slide 3, we present some KPIs from the migration of our customers to our digital platform. As we previously showed, we opened new relationships with more than 3.7 million customers entirely through our digital channels. This trend is continuing to accelerate. We opened 1.5 million new relationships on our digital platform in April alone. Beyond merely opening new accounts, we observed growing engagement with our clients through digital channels, with 54% of products acquired completely digitally. More significantly has been our customers' feedback, achieving excellent levels of satisfaction, with NPS figures reaching close to 80 points for the first time. This is just a glimpse of what we are developing and delivering to our customers, but it already underscores some results of our strategy. On Slide 4, we present the evolution of iti. As I previously mentioned, it was initiated in 2019 as a digital wallet, but has gradually evolved to become a fully digital banking operation for clients seeking a simple, free-of-charge, and entirely digital banking platform. Over the last year, we diligently improved upon the initial business model and enhanced the initial MVP. We expanded product availability to include debit and credit cards, personal loans, and the capability to withdraw cash from our ATM network. Additionally, clients now have access to a continually expanding list of benefits tailored to their geographic locations and profiles. These changes indicate that we are moving in the right direction. We reached 6 million clients, half of whom were acquired in 2021 alone, highlighting this strong performance and the continuous improvement of this platform. Our target is to reach 15 million clients by year-end. We believe that iti is a platform with great appeal for attracting younger clients, as 84% of clients do not have an active bank account, and roughly 70% of them are between 18 and 35 years old. We recognize the potential this platform has to reach this critical demographic. Last but not least, iti, beyond being a standalone business, serves as a relevant technology platform to support our other businesses, for both monoline products like credit cards and additional banking services. Overall, this operation exemplifies our capacity to listen to our clients' demands and learn from our experiences as we pivot and evolve. Now, addressing the mortgage and financing aspects, we will discuss some dynamics behind two significant portfolios within the retail bank: mortgages and auto loans. As you know, mortgages are extremely vital products for our clients, representing one of the most relevant financial decisions families will make. It's one of the key products to increase the lifetime value of the banking relationship. However, due to historical reasons, it's still underpenetrated in Brazil at just 10% of GDP. When we combine these factors, it's easy to understand why the segment is so competitive. In 2020, we positioned ourselves and introduced significant innovation to the Brazilian mortgage market when we launched a product with interest rates tied to savings deposits, which, at the time, were among the lowest rates available in the market. We were able to implement this through a unique funding structure allowing us to be more competitive in pricing without eroding product profitability. Our operation responded strongly to this initiative, with origination more than tripling in the first quarter compared to the same period in 2020, reaching a record BRL 10.3 billion, resulting in a 12.1% portfolio growth in this quarter alone. Unfortunately, this rapid expansion brought a negative side effect in terms of below-ideal customer service, which negatively impacted our transactional NPS score for the operation. Throughout the first quarter, we worked tirelessly to refine our production line and expand our teams, and we anticipate marked improvement in client satisfaction with the product in the coming quarters, as evidenced by the new vintages showing an NPS score improvement from 30 points to 50 points, as illustrated on this slide. Regarding auto loans, the pandemic significantly altered customer perspectives on the benefits of ownership, which subsequently increased demand for auto loans, leading to a year-over-year growth of 25.6% in our retail operation. Additionally, the demand for heavy-duty vehicles and trucks has remained strong, and with tailored financing options, we grew more than 30% over the last 12 months, becoming a leader in this segment. Moving to Slide 6, regarding agribusiness, I would like to highlight our progress in serving this crucial industry. Although we have been catering to this sector, we lacked an integrated strategy to address all different actors with specifically developed products and teams. This began to change when we established an agribusiness division within our corporate banking operation. We developed a completely new platform and hired specialists to expand the commercial team's geographic coverage, offering products tailored to each client's needs. We are already seeing positive results, with client satisfaction among the highest in the bank. Additionally, this credit portfolio grew 11.2% over the last quarter and 20.5% over the last 12 months, reaching BRL 46.5 billion at the end of this period. This growth was achieved through a strong environmental analysis as we work closely with meat producers to ensure traceability along the production chain and proactively address legal deforestation concerns. I am confident that this segment will continue to drive our growth in the upcoming quarters, as we aim to finish 2021 with approximately 2,400 clients, which is a fivefold increase compared to 2019. Moving to Slide 7, the credit portfolio increased by 4.2% during the quarter, driven not only by the mortgage and vehicle loans previously mentioned but also by the large corporate and LatAm credit portfolio, the latter primarily due to the devaluation of the Brazilian real. Regarding the large corporate portfolio, we had hoped that the debt capital markets would return to normalized levels in the first quarter; unfortunately, this did not happen. However, the good news is that we successfully placed solid debt operations on our balance sheet that can be managed over time, which contributed to our credit growth during this period. The credit card portfolio decreased by 4% in the quarter, mainly due to seasonal effects and, to a lesser extent, a deceleration in economic activity in the country. Lastly, the personal loans book exhibited a modest growth of 1.6%. Although this seemingly uninspiring growth could be seen as a concern, there was a significant mix change in its composition. As you can see in the table at the bottom right corner of this slide, both the overdraft portfolio and traditional unsecured personal loans grew in the mid-teens, while the reprofiled loans declined almost 10% during the same period. This trend mostly materialized toward the end of the quarter, so it did not have a substantial impact on our NII this quarter, but it paints a positive picture for the upcoming quarters nevertheless. Moving on to Slide 8, we highlight the financial margin with clients. Our financial margins grew approximately 1% in the quarter, despite the seasonal effect of having fewer calendar days. This growth was primarily driven by the larger average credit portfolio, as well as capital remuneration, which resulted in a stable NIM during the quarter. Looking ahead, we anticipate an acceleration in our NII, not only from credit growth but also from higher utilization of revolving loans and consumer loans, as previously illustrated. On Slide 9, we present the evolution of our asset management platform. Over the past few years, as interest rates in Brazil have gradually decreased, we have seen significant demand from customers for more sophisticated and unique products to invest their money. This demand prompted us to undertake profound changes in our asset management area, seeking to offer the most comprehensive portfolio of investment products in the country and implementing the concept of an open platform within the bank. Consequently, we started providing third-party products and services in addition to our core offerings. This strategy has been a resounding success, as we currently have nearly BRL 330 billion in assets under custody on this platform. Furthermore, we have worked to diversify our own asset management products to bring additional value in line with our clients' demands and expectations. A notable example lies with our alpha-focused asset management products, which have seen growth from BRL 9 billion in assets under management to over BRL 60 billion, reflecting the type of product our customers have been demanding most. To support this shift, we revamped our asset management division, creating autonomous teams within the bank that attracted over 40 of the country’s most talented portfolio managers. In efforts to broaden our product reach, we also began offering these products through third-party platforms and are already distributing them on 16 different platforms and banks, in addition to Itaú itself. We invested heavily to transform our clients' investment journey by launching our new investment platform, called ion, which offers a completely new user experience. We are also making significant investments in our new investment advisory model, which brings transparency regarding our advisers' incentives. Most importantly, we are hiring more than 1,200 new investment advisers to assist our clients in better understanding our product offerings and making the best choices in alignment with their profiles, of course. I believe these changes will further enhance our customers' perception of value. Moving to Slide 10, I will now discuss fees and insurance revenues. We observed a decline of 1.9% in the quarter, which was largely anticipated due to two key factors. First, revenues related to credit and debit card transactions typically decrease in the first quarter every year due to lower economic activity during this period. It’s worth noting that this effect was aggravated by the deterioration of the pandemic in Brazil and its negative effects on economic activity. Second, there was a 3.5% drop in our current account fees during the first quarter. As mentioned in the previous quarterly earnings call, following the implementation of the new Fast Payment solution, we took the opportunity to exempt our clients from paying any wire transfer fees, regardless of their preferred method. This quarter marks the full effect of this change. It’s also essential to note that asset management fees decreased by 7.2% this period despite the continuous growth in assets under management. This decline was primarily driven by lower performance fees, although we anticipate better performance in the following quarter. Our investment banking operations remain a key source of revenue, maintaining a leadership position in the market. Despite macroeconomic volatility, the capital markets continue to display resilience, and the pipeline of transactions for the next quarter is as strong, if not stronger than what we observed last year. Lastly, regarding insurance revenues, these grew by 5.5% during the quarter due to improved financial margins in our private pension plans business. Now moving to Slide 11, let’s switch gears and review the credit quality KPIs. As you're aware, we typically see a rise in short-term delinquency in the first quarter driven especially by the individuals' portfolio. This pattern results from a higher concentration of expenses during this period, ranging from holiday season expenses to annual property taxes. In line with previous years, this quarter, we observed a similar trend as the NPL 15 to 90 days ratio increased by 35 basis points. However, more importantly, the NPL 90 days ratio decreased by 3 basis points and reached the lowest level in our recent history. For the SME portfolio, we witnessed an increase of 80 basis points in the NPL 90 days ratio, a movement that was anticipated and relates to the end of the grace period for the reprofiled loans portfolio. Despite this increase, the NPL ratio remains in line with pre-COVID levels. Excluding the reprofiled loans from this ratio, we can confirm that the remaining portfolio continues to show improvements in credit quality. Also important to highlight is the fact that short-term delinquency in this portfolio declined by 20 basis points, reinforcing our assessment that the worst may be behind us. Thanks to the positive credit quality trends, the cost of credit in retail was 31.9% lower during the quarter. Lastly, our coverage ratio decreased by 22 percentage points during the period, mainly due to the wholesale segment, both in Brazil and in LatAm. These positive KPIs, despite the challenging macroeconomic context we are facing, are a direct result of the strategy we implemented last year, when we launched a program offering a wide range of customized solutions. These solutions include grace periods, extended loan terms, and additional credit offers designed to provide individuals and micro-small enterprises with more flexibility during these tough times. On Slide 12, let's discuss IT. A crucial aspect of our digital transformation is what occurs behind the scenes or inside the bank, which isn't easily captured by analyzing KPIs from our digital channels and customer acquisition. Here at Itaú, technology is not an isolated internal service but a key component of the teams dedicated to serving our clients while developing products and business within the institution. In this segment, we aim to provide insight into significant advancements made by our technology teams and how they translate into superior KPIs with direct impacts on our business. Firstly, we managed to more than double investments in new solutions while reducing infrastructure spending by 28%. This represents a significantly more efficient allocation of resources, a trend we expect to continue. However, it is crucial to emphasize that people and culture drive real transformation. In that regard, we have been reorganizing our teams around community and squads, implementing Agile methodology. We have made substantial progress in that area, with some of our most crucial business teams, such as credit card management, cash management, and mortgages already operating under this new framework, as well as roughly 50% of eligible tech operation, business, and product teams. The benefits of these changes are already evident, as you can see on this slide. Our goal is to achieve 100% by the end of 2022. Now, looking at the next slide, Slide 13, we continue to showcase other aspects of our digital transformation that are crucial. We are focusing on our cloud migration efforts, aiming for 50% of our services to be in the public cloud by 2022. This is not simply about transferring current systems to a new data center; we are rewriting code and updating solutions, dismantling monolithic systems, and adopting microservices architectures to maximize the benefits of this transition. This allows us to operate with greater autonomy, speed, productivity, and efficiency. Alongside this, we are significantly expanding the deployment of codes, which reduces the time allocated to managing business complexities. In terms of quality, we position ourselves as benchmarks as our digital platforms showcase the highest availability rates in the market. Behind our digital transformation is an unwavering focus on improving the customer experience and satisfaction. Moving to Slide 14, we detail our efficiency program. The bank has always maintained a strong emphasis on cost management and efficiency; however, we recognize the need to exceed our prior achievements. This is fundamental to reinforcing our efficiency culture at all levels of the organization. We need to constantly scrutinize our activities and processes for potential optimization opportunities. Additionally, we have implemented a transversal efficiency program encompassing the entire bank. As of now, we have 16 efficiency fronts, each supported by a member of senior management, with biweekly meetings to assess progress. Moreover, we have standardized work methodologies with detailed KPIs and planning structures in place. Following a meticulous approach, we are already seeing results from 1,200 initiatives in planning, of which over 400 are currently in the implementation phase. These span a range of types, from minor initiatives aimed at reducing waste to significant restructuring projects. Two major initiatives that I wish to highlight are nonrecurring provisions related to a restructure of our operations within the retail bank, which we plan to implement over the next two years. This is expected to yield considerable benefits in service quality and efficiency. I am confident that, based on the changes and transformations we have instituted thus far, we are on track to fulfill our objective of sequentially reducing our core expectations over the next three years. Discussing noninterest expenses, you will see on Slide 15 that the results from the actions I've just outlined over the last three slides are evident, with our noninterest expenses declining by 6.6% in the quarter while we continue to invest in our business and IT. These investments generate additional space within our expenses, creating the opportunity for further self-funding future investments. Finally, moving to Slide 16, we note that our Tier 1 capital ratios decreased by 20 basis points during the quarter. This reduction was primarily due to FX impacts on our credit portfolio and overhead strategy. However, these adverse effects were partially mitigated by our financial performance, marked by a higher net income and profitability in the quarter. On Slide 17, regarding guidance, despite the ongoing deterioration of the sanitary crisis in Brazil and its negative impact on economic activity, we still believe that our guidance for 2021 reflects our best expectations for the year. To conclude this presentation on Slide 18, I invite you all to join our public meeting on June 2, where we will introduce the members of our new executive committee and present our vision for the bank's future. This will be a fully digital event with more details to follow in the coming days. With that, I conclude the presentation, and we can now start the Q&A session. Thank you.

Operator, Operator

Our first question comes from Mario Pierry with Banco da America.

Mario Pierry, Analyst

Thank you for a very detailed presentation; it really helps us understand the bank's strategy better. Milton, I have two questions. The first is on iti, right? You mentioned that you're growing your iti client base quite quickly and able to attract new clients who are not currently bank customers. So, I would like to understand how you think about monetizing these clients. You mentioned some products there, but compared to your standard bank customers, how do you see the ability to monetize these new clients? And then, related to that, how do you perceive the threat from fintechs? How do you assess that as a risk to Itaú's profitability? My second question is about operating expenses; you spoke about another one-time provision charge for restructuring. We notice that your employee count in Brazil is decreasing, excluding all the new IT hiring. How do you see your branch network evolving over the next few years? Is there room for aggressive branch closures?

Milton Maluhy Filho, President

Thank you, Mario. Thank you very much for your questions. I will start with the first one regarding the iti platform. The primary thing is that we had to undergo a significant shift in how we approached the market and our clients. Initially, it was designed as a payment platform but has transitioned into a full digital banking service. This change is our strategy to attract clients. As shown in the numbers we presented, we are indeed bringing new clients to the bank; 84% of them are new clients. Moreover, we have a substantial focus on younger and non-banking clients who constitute a significant demographic using this platform. The approach is different from traditional business planning where you know with certainty what will happen in the second, third, fourth, and fifth years. Here, we are shifting the dynamics. We attract clients and provide them with unique experiences, collecting insights over the coming quarters to determine how to monetize the platform effectively. Credit, particularly in the mid to long term, is essential for monetizing this platform, and this forms part of our strategy, although we do not have a set products roadmap; our focus lies on understanding our clients' needs and responding accordingly. It is challenging to provide a specific number now, but we believe that through offering an excellent user experience backed by unique technology, we will discover ways to monetize these clients effectively in the future. That said, regarding fintech competition, we recognize that some companies have evolved from being startups into larger entities. They are, of course, competing in the market. However, we believe that our balance sheet, along with our credit management capabilities and data models, will be our long-term differentiation against these fintech platforms. It is part of our mandate to compete effectively and provide excellent client experiences. Now, as for the provisions you mentioned, we consider them nonrecurring because they were made as part of a new structural project we defined in the past three months. They do not relate to our regular operating expenses. We don't expect to see such provisions in forthcoming quarters as they are tied to our service delivery simplification strategy through our branches. So, we are quite comfortable in this regard, and these are separate lines. Concerning future branch operations, I would like to convey a few constructive insights. Over the past ten years, we observed a significant increase in new banking clients in Brazil, roughly 16%. While the market share of digital transactions has surged to 45-50%, the total volume of transactions processed through branches has remained higher than in previous years. Brazil still has a relatively low density of bank branches when compared to markets that have undergone extensive digitalization of banking services. Even though there has been a shift toward digital channels—accelerated by the pandemic—we still have a solid operational core within our branches. During the past five years, we have closed around 1,000 branches, due to recognizing redundancy. Now, we feel much more confident about the existing branches we have. Although it is likely that branch numbers may further decline post-pandemic, we are altering how they are structured. We have implemented full-service branches alongside smaller satellite branches tailored for specific clientele demands. This restructured approach allows us to provide both remote service and physical presence as needed, particularly for more complex products that clients generally prefer to discuss face-to-face, either in person or through virtual means. Therefore, we do believe that physical branches continue to play an important role in our strategy.

Mario Pierry, Analyst

That's very clear, Milton. I appreciate your answers. Just a quick follow-up on iti: With the proliferation of digital banks in Brazil, it seems like we see a new player entering the market almost weekly. What do you think differentiates it from other digital banks, and could you talk about your customer acquisition cost?

Milton Maluhy Filho, President

Absolutely. Firstly, it's important to note that clients generally seek simple payment accounts. They prefer not to deal with the complexities of conventional current accounts. They want a free-of-charge experience that’s effortlessly accessible. The platform's appeal also lies in its youthfulness and the sense of new opportunities it provides clients. When you join iti, you can open an account in just four minutes, which is extremely impressive. Feedback from surveys shows that iti consistently ranks highly in customer service and account opening experiences. The core offerings are free, aligning perfectly with what clients desire. They want a payment account for bills, cash deposits, and a prepaid card. Subsequently, we can analyze client behavior to offer them credit options. Many of these clients do not possess credit scores or experience in the market, which gives us an opportunity to provide them with financial education, gamification elements, and attractive discounts and cash back offers tailored to their economic needs. Regarding acquisition costs, we worked to ensure that our costs of acquisition are highly competitive because if we cannot monetize these clients in the long term, it results in significant expenses for the bank. Currently, we see customer acquisition costs at approximately BRL 24 to BRL 25 per account, which is a more attractive figure compared to traditional methods of acquiring clients through physical branches or other channels. This is why we are successfully attracting a growing number of clients.

Operator, Operator

Our next question comes from Tito Labarta with Goldman Sachs.

Tito Labarta, Analyst

I have a couple of questions, if I may. First, regarding your revenue growth outlook: I know financial margin with clients was somewhat affected by seasonality, but on a year-over-year basis, it was down despite good loan growth. Additionally, with respect to fee income, we noticed that both cards and asset management fees have declined even when faced with growing assets under management. Could you help us think about the longer-term revenue growth outlook considering the competitive environment and the rise of fintechs? Although you have provided guidance for the year, what kind of revenue growth pressure do you foresee? Should we expect that the worst is behind us and that revenue growth can start to improve? For my second question, the cost of credit has shown good performance, now falling below historical levels, and given your excess reserves, is this the new normal, or should we expect it to rise again as things stabilize?

Milton Maluhy Filho, President

Thank you for the questions, Tito. Starting with the financial margin with clients, I would like to reiterate that last year, we faced two significant effects affecting our revenue. Firstly, we had discussions around the pricing of revolving credit from the Central Bank regulations, which had substantial implications for our financial margin with clients. Additionally, the pandemic strongly influenced our operational activities. Furthermore, there were self-inflicted decisions that we undertook, which, in the short term, we classified as investments in relationships and the lifetime value of clients. However, these decisions also had a considerable impact on our revenues when we transitioned clients from revolving credit to cleaner portfolios with superior spreads, opting for long-term credit lines with grace periods and lower interest rates. We've encountered the repercussions of this for three consecutive quarters. The good news is that we are now observing an acceleration in the current quarter. The credit line balances show signs of improvement, suggesting a positive trend that we expect will continue into the coming quarters. As such, we are still confident about reaching our guidance, subject to the credit environment and our ability to extend credit lines to clients currently facing challenges due to the pandemic. We remain optimistic about this potential, and I believe we can effectively catch up. In terms of NII, we have been growing the portfolios of large companies and engaging new issuances in the capital market, resulting in a balance sheet that includes profitable credits. Although these corporate credits may compress margins when compared to retail credit lines, they still offer positive profit contributions. Regarding future revenue growth, we should keep in mind these self-inflicted decisions previously made, and our focus should not solely be on short-term outcomes; we must look further into the lifetime value of our customers, which remains integral to our strategy. While it is challenging to predict the exact timeline for achieving that, we've noted positive indicators in our NPS scores correlating strongly with long-term customer value. Regarding the cost of credit, yes, we've achieved favorable performance this quarter with our cost of credit. I would characterize this level as not our target level. We anticipate a gradual increase in the coming quarters. Our expectation puts us near the bottom of our previously estimated ranges. We believe this quarter's performance reflects temporary advantages, and we expect more steady conditions as we move forward.

Tito Labarta, Analyst

That's very helpful, Milton. One follow-up if I can. You discussed the importance of lifetime value concerning your customer acquisition efforts earlier. Do you have any initial data on what your lifetime value to customer acquisition cost ratio is, or what target you aim for?

Milton Maluhy Filho, President

Unfortunately, we cannot provide specific metrics for LTV to CAC since these are calculated in various ways for different segments. However, we recognize it as an important metric and are focused on its implications across all our businesses. What we are observing indicates that with our proactive approach to assisting clients in navigating the crisis, we are seeing tangible benefits, particularly with client NPS, which correlates positively with their lifetime value.

Operator, Operator

Our next question comes from Henrique Navarro with Santander.

Henrique Navarro, Analyst

I have two questions. First is about the restructuring provisions. I understand that typically, more substantial provisions reflect a long-term vision where expected benefits exceed the initial outlay. In your presentation, you mentioned plans to reduce core costs over the next two years. Could you help us understand the connection between this restructuring and the anticipated savings? My second question pertains to iti. You noted that of the six million clients, 84% are coming from outside the bank, indicating that only 16% have existing accounts with Itaú. How do you envision the future of this cannibalization—will it increase or decrease, and how many clients from Itaú might you anticipate reaching your 15 million target? Lastly, what is your expectation for iti to break even?

Milton Maluhy Filho, President

Thank you, Henrique. To address your first question, we have clarified to the market that we pursue a nominal reduction in costs for the second consecutive year, related to the efficiency program implemented over two years ago. This initiative aims to differentiate core costs from investments, allowing us to focus on reducing core bank costs while creating room for new investments. The provisions made do not target specific three-year objectives but rather represent an ongoing integral part of our efficiency program. While this provision contributes positively to our restructuring efforts, it is only one element among many initiatives we are pursuing. Regarding your second question about cannibalization, we recognize this as an opportunity rather than a risk. If we do not cater to these clients, the likelihood is that they will migrate to competitors. In many cases, these are clients who previously failed to maintain profitability for our branches. By shifting them to a digital platform with lower acquisition and maintenance costs, we expand our services while improving profitability over the long run. We view this transition positively. As regarding the breakeven of iti, we refrain from disclosing any specific metrics at this time, given our focus on iterative learning regarding client demand and preferences—assessing our performance on a quarterly basis rather than in five-year business plans.

Operator, Operator

Our next question comes from Jorge Kuri with Morgan Stanley.

Jorge Kuri, Analyst

I would like to revisit the topic of net interest margins to understand the interplay between SELIC rates and your margins. Last year, your annualized margin averaged 11% with average SELIC rates at 4%. This year, it was 8.5% with SELIC averaging around 2.5%. If rates are projected to rise to 5% or 6% over the next year, do you think your margin could exceed what we observed in the first quarter of last year? Or do you expect your margins to remain below that level due to pricing pressures? This brings me to my next question concerning your asset management business. Although the volumes have performed well, your margins appear pressured, primarily from lower rates, especially considering that fixed income constitutes a significant portion of what you manage. How do you envision this segment performing as rates increase?

Milton Maluhy Filho, President

Thank you, Jorge. To begin with the financial margin with clients, it’s important to note that several factors influenced large corporate portfolios and their growth, as opposed to what was recorded last year, which means we cannot directly compare the margin metrics to prior periods. I do not expect a return to the 9.2% seen between the first quarter of 2020; however, we can improve upon our current margin metrics moving forward. The increase in interest rates does influence our financial margins with clients, particularly for working capital. With SELIC rates projected to rise, this could contribute positively to our financial margins. What you need to keep in mind is that while our NII will grow, the changes in the credit mix will play a crucial role in influencing this margin. The competitive landscape is also an important consideration when evaluating potential improvements. To summarize, although I believe we can witness an improvement in margins, I don't foresee a return to the previously high levels easily. Regarding your question on asset management, it’s crucial to understand what transpired recently. We saw clients shift towards simple products like deposit accounts due to lower rates, which impacted our traditional asset management revenues. The significant transition toward fixed-income products has resulted in decreased performance fees this quarter compared to prior periods. As we forecast a return to higher interest rates, it is likely that we may experience positive momentum with these asset management fees. We expect clients to increasingly gravitate back to traditional investment products, spurred by higher interest rates. Our focus remains on enhancing our product offerings by increasing the transparency and performance of our asset management division.

Operator, Operator

Our next question comes from Carlos Gomez with HSBC.

Carlos Gomez, Analyst

Two brief questions from me. Firstly, can you provide any update on the XP transaction? Anything new we should know? And are there any target dates for closing? Secondly, we've noted an increase in labor claims provisions, which have almost doubled from last year. Can you explain any particular reasons for this surge and what we might expect going forward?

Milton Maluhy Filho, President

Thank you, Carlos. Regarding the XP transaction, we anticipated approval from the Fed by the end of January for our spinoff, but it has not occurred yet. We expect this in the short term, but I cannot control this process entirely. Let’s hope for progress by the end of this month. All necessary information has already been submitted. Concerning labor provisions, the increase relates directly to our restructuring provisions applied to our balance sheet as we work on simplifying our service delivery, particularly in retail. This is where we can expect an uptick in labor provisions, but it’s closely tied to the one-time restructuring focus.

Operator, Operator

Our next question comes from Geoffrey Elliot with Autonomous.

Geoffrey Elliot, Analyst

I wanted to address the iti strategy, which seems similar to what some competitors, like Bradesco’s Next, have pursued. Can you help clarify how you differentiate your approach within this competitive space?

Milton Maluhy Filho, President

Thank you for your question, Geoffrey. As we noted from the beginning, our strategy involved offering a payment account platform that has since evolved into a full-fledged digital banking experience. It operates within the Itaú ecosystem rather than as a separate entity. Our model seeks to create a specific value proposition for young and non-banking clients. While we may develop additional digital platforms in the future, our current focus is on integrating this experience within our banking services to deliver tailored solutions. Regarding your second question on account package changes, our focus is on continually adjusting our customer tiering to better suit clients’ needs. We are proactively developing new features to encourage clients to remain with higher-tier accounts, although we do recognize that some may choose to downgrade or shift their account types as we widen our service offerings. Our emphasis on suitability will guide our approach to this, prioritizing alignment between clients’ needs and the requested services, which may lead to some revenue adjustments temporarily but should enhance long-term customer engagement.

Operator, Operator

Our next question comes from Thiago Batista with UBS.

Thiago Batista, Analyst

I have two questions. First, in the earlier Portuguese call, you mentioned that achieving an ROE on par with 2019 levels around 24% is very challenging or perhaps not feasible. Considering your first-quarter ROE is around 18.5%, do you think this type of profitability can be maintained moving forward? Secondly, could you please provide more context around your restructuring plan? Is this related to branch operations, back-office simplification, or both?

Milton Maluhy Filho, President

Thanks, Thiago. To address your first question, I won't specify a guide on the return on equity because our guidance implies a return on equity of around 17.6%, which reflects our best available information for the year. Thus far, we've exceeded that in the current quarter, but we don't provide quarterly guidance on what returns we will achieve. Therefore, I will maintain guidance while knowing it remains distinct from our 2019 figures. Regarding your second question on our restructuring efforts, this involves integrating our operational and commercial branches into a single management team, allowing for better service delivery and experience for our clients. We believe assigning ownership over branch performance to one manager will yield beneficial outcomes, and this necessitated the restructuring efforts alluded to in our provisions.

Operator, Operator

Our next question comes from Natalia Corfield with JPMorgan.

Natalia Corfield, Analyst

I have two questions. Firstly, can you share your dividend distribution plan for the year? Also, last year you were hindered from distributing more than the minimum statutory dividends; could you provide a status on this situation in Brazil? Secondly, regarding international capital markets issuance, do you have plans for 2021, given that you've one of your AT1 callable next year?

Milton Maluhy Filho, President

Thank you, Natalia. Regarding our dividend policy, it remains unchanged, and we are not experiencing restrictions from the Central Bank in distributing dividends beyond the minimum statutory requirements. In the first quarter, we distributed dividends at 25%, which corresponds to the minimum regulatory and statutory payment. Future distributions will depend on our Tier 1 capital level; we aim to reach 13.5% pre-tax, and then we can pay out excess dividends once we achieve that. For your second question about the international market, we currently do not have a clear plan for issuance, as it depends on favorable market conditions. Our debt capital markets team is always in dialogue with market players to understand potential opportunities, either in the domestic or international setting. I appreciate everyone's participation in this conference and the insightful questions posed today. As you witness, our ongoing transformations and advancements are aimed at enhancing our operations and our capacity to serve clients better. We look forward to catching up with you soon. Take care and stay safe. Thank you very much. Goodbye.

Operator, Operator

This concludes our Itaú Unibanco Holding Earnings Conference for today. Thank you very much for your participation. You may now disconnect.