Earnings Call Transcript
Itau Unibanco Holding S.A. (ITUB)
Earnings Call Transcript - ITUB Q4 2023
Operator, Operator
Hello. Good morning, everyone. I am Renato Lulia, Group Head of Investor Relations and Market Intelligence at Itaú Unibanco. Thank you very much for joining our video conference to talk about our earnings for the fourth quarter of 2023, which we are broadcasting directly from our office at Avenida Faria Lima in Sao Paulo. This event will be divided into two parts. In the first part, Mr. Milton Maluhy will explain our performance and earnings for the fourth quarter of 2023 and present the 2024 guidance. Right after, we will have a Q&A session, during which analysts and investors can interact directly with us. I'd like to give you some instructions to make the most out of today's meeting. For those who are accessing this via our website, there are three options for audio on the screen: the entire content in Portuguese, the entire content in English, or in the original audio. The first two options will have simultaneous translation. To choose your option, all you have to do is click on the flag on the top left corner of your screen. Questions can also be forwarded via WhatsApp. To do so, just click on the button on the screen on the website or simply send a message to the number +55-11-939-591877. The presentation we will make today is available for download on the website screen, and also, as usual, on our Investor Relations website. I'll now give the floor to Mr. Maluhy, who will begin the presentation on earnings. Then I'll come back to you to moderate the Q&A session. Milton, go ahead.
Milton Filho, CEO
Good morning, welcome to our fourth quarter of 2023 earnings and the 2024 guidance presentation. I'll go straight to the figures so that I can bring you some more information, and then we'll have enough time for the Q&A. Firstly, our earnings in the quarter totaled R$ 9.4 billion, a growth of 4% from the previous quarter. As a result, we delivered a consolidated ROE of 21.2%, with a 10 basis points growth in the quarter. In Brazil, ROE reached 22.2%. Moving on to revenue generation, our NII grew 3.3% in the quarter, reaching R$ 23.2 billion. Commissions in fees and results from insurance operations posted strong growth of 4.6%, reaching R$ 13.5 billion for the quarter. All this with sound credit quality indicators. The consolidated NPL over 90 days posted a drop of 20 basis points. The NPL for individuals dropped 50 basis points. These are major results that show an evolution in the credit cycle. We've ended the quarter with a Tier 1 capital ratio of 15.2%, an increase of 60 basis points. The individuals portfolio grew 1.9% in the quarter and 4.1% in the same year. The SME's portfolio grew 2.6% in the quarter and 3.5% in the year. The large corporate's portfolio grew 8.7% in the year. Thus, the total growth of the loan portfolio in Brazil was 5.7% in the year. In Latin America, the results were affected by FX. As a result, the total portfolio grew 3.1% in the year, and excluding FX variation, growth was 5.3%. It was a year in which we focused on derisking of the portfolio, and we've been working more intensively on target clients and reducing the portfolio's exposure to non-target clients. We posted sound growth in the segments on which we focus. The Personalite and Uniclass loan book grew 16% in the year and 5% in the quarter. In Payroll Loans, we continue to grow in the private and public sectors, both quarter-over-quarter and year-on-year. There was a decrease in the public pension segment as a result of the caps that were put in place on interest rates. Therefore, we stopped serving a population that increasingly demands a social security-based payday due to these adjustments. Another piece of news worth sharing with you is that we had a nominal reduction of R$ 1.9 billion in the renegotiated portfolio, a drop of 4.6% quarter-over-quarter. This shows that our portfolio is good quality with sound credit indicators. It was a great quarter for clients NII, up 3.3%, or R$ 700 million in the fourth quarter of ‘23. This growth was well-distributed across our product mix, volume, spreads, and liabilities margin, and Latin America. We've isolated the effect of working capital, which starts the quarter at R$ 3 billion and ends at R$ 3.1 billion. The one month earnings of the operation in Argentina, which was recorded in the third quarter earnings, was also isolated. Thus, core growth was 3.3% quarter-over-quarter. Another piece of positive news was the expansion of the consolidated NIM from 8.9% in the third quarter to 9% in the fourth quarter. The risk-adjusted NIM also increased from 5.6% to 5.8% in this period. The risk-adjusted NIM of the Brazilian operation increased from 5.9% to 6.2% in the quarter, and the total NIM for Brazil reached 9.8%. I believe these are very positive messages for the financial margin with clients. In the financial margin with the market, the fourth quarter was similar to the previous one with a sound result of R$ 800 million, with similar dynamics both in Brazil and in Latin America. The slight expansion in the quarter was due to the lower impact of cost for capital hedge. This shows that we've been delivering good risk management, as demonstrated by our solid financial margin with market performances, despite the scenario of adversities and difficulties throughout the year. The financial margin with the market totaled R$ 3.3 billion in 2023 versus R$ 2.9 billion in 2022, which shows major growth in a year during which we faced material challenges. It is worth mentioning that we met the 2023 guidance in all the disclosed lines, with the exception of the estimated growth of our loan portfolio, which was below the disclosed expected range. This performance is explained by the difference between the projected FX rate for 2023 used in our budget and the actual FX rate for the period. Commissions, fees, and results from insurance operations were also within guidance, up 5.3% year-over-year and 4.6% quarter-over-quarter. The highlight in the fourth quarter was the strong growth in credit cards due to seasonality. We've posted major progress in advisory services and brokerage fees. Net inflows increased 70% quarter-over-quarter and 7.4% year-over-year. This result comes from all the work of the last few years and shows that we are moving in the right direction. The latest acceleration is very positive. The transaction volume in the acquiring business grew 17.5% year-over-year, while revenue was up 20.4%. This performance reflects an appropriate product mix, which has allowed us to increase revenue above the traded volume. In Insurance, earned premiums increased 11.2% in the year, with recurring income growing 19.6% in the period. It is worth emphasizing that we've seen significant growth over the last three years in this operation. This performance shows that both the course and strategy designed for this operation are being well executed. In terms of credit quality, we draw attention to our short-term delinquency rate, which is absolutely under control, as shown by its stability both in Brazil and in Latin America. The long-term delinquency rate measured by NPL 90 days decreased 20 basis points in Brazil, and in total, and in Latin America, there was a slight increase of 10 basis points in the quarter. This underscores that the short-term delinquency is under control. Short-term NPL in Brazil remained stable in the individuals portfolio, and had a slight growth of 10 basis points in the SMEs portfolio in the quarter. For the large corporates portfolio, this is not the most appropriate indicator to monitor. As I always say, non-performing loans are also well behaved. After four quarters of stability, the long-term delinquency rate of the individuals portfolio decreased by 50 basis points and ended the period at 4.4%, which we consider a sustainable level. The NPL 90 for SMEs and large corporates remain stable. Generally speaking, we posted very strong credit indicators, with good developments and stabilization throughout the year, which is very good news for credit quality. Cost of credit reached R$ 9.2 billion this quarter, a nominal amount below the prior quarter. The indicator that measures the cost of credit over the portfolio decreased in the quarter from 3.2% to 3.1%. This was the second consecutive quarter in which there was a drop in the individuals portfolio NPL formation, which shows that the portfolio has reacted favorably. The cost of credit rose from R$ 32.3 billion in 2022 to R$ 36.9 billion in 2023, slightly above the best scenario in the guidance range, which was between R$ 36.5 billion and R$ 40.5 billion. There was a nominal drop in the renegotiated portfolio, which now accounts for 3.3% of the portfolio. This performance shows another good development and trend for the portfolio. There was no major highlight in the coverage indexes, which showed a slight increase in total coverage from 209% to 216%. We have a very well-provisioned portfolio, with an adequate level of coverage and sound consistent results. OpEx, or noninterest expenses as we call them, are normally under greater pressure in the fourth quarter. In Brazil, this line grew 8.5% year-over-year, and in Latin America, excluding Brazil, it fell 4% in the period. On a consolidated basis, noninterest expenses increased 4.1% quarter-over-quarter and 6.5% year-over-year. In the fourth quarter, we also recorded one-off investments, such as the remodeling of Itaú’s brand, which put a little more pressure on this line in 2023. We've been keeping up with our financial discipline, which can be seen in the efficiency ratio trend, which has reached its best historical level. The efficiency ratio was 39.9% on a consolidated basis and 37.9% in Brazil, including all expenses. This shows a major development, and we've achieved this by reducing core costs, which grew by 1.6% in the year, well below inflation for the period. This is a trend we plan to continue working on. We continue to actively work and invest in the business and in the future of our operation. This includes key investments in new businesses and technology, which explains the increase in the year, disregarding Latin America in this analysis. The guidance range for noninterest expenses was between 4% and 8%, and we remained within it by recording growth of 6.5% in the year. We have good news on capital. We were able to expand our capital ratio for another quarter, ending December with 15.2% in Tier 1 capital ratio, of which 13.7% at Common Equity tier 1 and 1.5% at AT1. The last bar in this chart shows the pro forma capital for December 2023, considering the dividends that we just announced last night. We have two key messages on this. The first is that we are reporting a material extraordinary dividend, amounting to R$ 11 billion, which will be paid in March along with interest on capital of R$ 4.3 billion that had already been announced, meaning there's R$ 15.3 billion to be paid in March. This amount of interest on capital is already net of taxes. In 2023, we paid R$ 6.2 billion in interest on capital, also net of taxes. This totals the cash payment of R$ 21.5 billion in dividends and interest on capital in 2023. Thus, the payout for the year was 60.3%. Once this payment is made, the core capital ratio will be adjusted to 12.8%. There are some uncertainties ahead of us, and that is why capital management discipline is needed to conduct our business. Now let's move to the 2024 outlook. I'll start by sharing our macroeconomic projections. We expect Brazilian GDP to grow 1.8% in 2024; the interest rate, SELIC, to reach 9.0% at the end of the year; and inflation to be 3.6%. Employment should be slightly stable at 8% and the exchange rate of R$ 4.9 to US$1 also slightly stable. I now present to you our consolidated 2024 guidance, which is based on a growth expectation of between 6.5% and 9.5% for the loan portfolio and growth between 4.5% and 7.5% for the NII with clients. It's worth noting that we also present the expected growth on a comparable basis, excluding the effect of the sale of the operation in Argentina in 2023. With this adjustment, the expected growth for the NII with clients is between 5.5% and 8.5% on a comparable basis. The financial margin with the market should be between R$ 3 billion and R$ 5 billion. Our expectation for the cost of credit is between R$ 33.5 billion and R$ 36.5 billion in 2024, reflecting a major decrease when compared to the cost of credit in 2023, which was R$ 36.9 billion. Our worst-case estimate for the cost of credit in 2024 is already nominally below the cost of credit in 2023. We tend to look for an even better result. Commissions and fees and results from insurance operations are expected to grow between 5% and 8% and between 5.5% and 8.5% on a comparable basis, with a pro forma adjustment from the sale of Banco Itaú Argentina. Noninterest expense is expected to grow between 4% and 7%, adjusted for the same effect on a comparable basis. The goal is for core costs to grow below inflation so that we can continue to invest in our operations. The tax rate is expected to be between 29.5% and 31.5%. Our goal is to keep delivering ROE above 20%, and these figures reflect that goal. I'm very pleased with the earnings achieved in 2023, the course that the bank has followed, and the way we have mobilized, advanced, and invested in the business. Cultural transformation has had a very material impact. Digital transformation is materialized in several of the figures we presented today. There are challenges ahead. No one is being complacent. On the contrary, we are very focused on delivering even stronger earnings in 2024, as shown in our guidance. Now I'll be joining Renato for our traditional Q&A session. See you in a little while. And thank you very much.
Operator, Operator
Milton, thank you for the presentation. We will start now the Q&A session. And today we have, besides Milton, we have Broedel, our CFO. He's going to be here with us in the Q&A session. Remember that we have both languages. We will answer the questions in English and Portuguese. You can always choose your audio of preference, English or Portuguese. You can submit your questions via WhatsApp. Well, there is a long list of questions. Milton and Alexsandro Lopes, shall we start?
Renato Meloni, Analyst
Thank you. Good morning. Thank you for the opportunity. First, in regards to the guidance, when you look at the interval that you're mentioning, the growth in the portfolio of credit and a margin of clients, then that might imply a reduction. Is that a real thing? Because there is an expectation of the stabilization for 2024. And how should you or how are you looking at the dividends? And if the growth in the portfolio goes to 9.5%, can we have a similar payout? Any additional comments are great.
Milton Filho, CEO
Thank you, Renato. Good morning. Thank you for the question. Let's clarify the guidance of the portfolio. The first message is that the portfolio for the guidance is, let's just say, the tip of the portfolio and the margin is the one that we realized. That means that the average portfolio all throughout 2024, and the information is not in the guidance, will be lower than the financial margin with the client. So we have to look at the average of the portfolio because that's the margin that you can see in the guidance. That's the first aspect. The second aspect—when we look at the records, we've been growing with a lot of quality in the margin. And it's important to look at the margin not only associated with the Argentina effect, which explains another percentage point of growth. So isolating it, we would grow seven percentage points on average. It's important to consider the cost of credit, which has a nominal reduction. That means that our financial margin net cost of credit will have an expansion. Portfolio growing, cost of credit shopping. And you asked about the NIN. We are expecting, yes, stability throughout the year and adjusted to the risk. We understand that there is an opportunity for some adjustments through the credit cycle, depending on the mix of the growth of the portfolio that you can see here. That is growing above the average payout of the portfolio in the period. The cost of credit is higher and adjusted by the Argentina effect, growing by 7%. It's very important to clarify the dividends. That is of interest to everyone. What was our decision? Let's turn back time. Way back when we reduced our appetite in the risk management of the bank, we always talked about 11.5% that's the capital set approved at the board. That's the appetite for the management of the bank. We said that 12% would be the norm for the policy of dividends. Looking ahead, there are some uncertainties or certainties that are calculated. The cost of credit, Basel, operational credit, Basel III, 2025. That might have an impact of 42 basis points. The second aspect is the tax reform of Brazil. If we look at it as it is in Congress, as if it was approved as written, we will have to do an impairment in the credit, because when we look at the corporate threshold, we will have to reevaluate them in the balance sheet of the bank. That reevaluation will reduce an asset, and thus you have a capital effect. Looking ahead, the uncertainties regarding our capacity for growth, we are entering a year that we expect to be benign, and any opportunity that makes sense through the cycle we will grow. Therefore, considering the growth of the portfolio, along with the Basel operational risk, credit risk, and considering the tax reform and uncertainties, our decision is to do the payout that is additional to what was already paid, or R$ 4.3, which is the interest on capital in March plus the extraordinary dividends. A payout of 60% is adequate; we are distributing R$ 21.5 billion between what was already paid and what will be paid in March. It's a very relevant distribution, three times the dividends of 2022. Our policy from now on is clear: not to retain the excess. We will look at the uses throughout and the sources of 2023. How we are generating capital, the result, and how we are applying it, whether in organic or inorganic opportunities, portfolio growth, and regulatory changes ahead with the tax reform. Looking from that standpoint, we will look at next year; we will do the projections, and if there is an excess, our expectation or decision is to distribute the capital excess. Don't view that extraordinary dividend as an isolated event. It's an important dividend. Looking ahead, we need to understand the excess that we have. We will continue to distribute an extraordinary dividend with more information and the results and effects therein.
Gustavo Schroden, Analyst
Congratulations on the results not only of the quarter but the year. I wanted to talk about the guidance since Milton already gave us a soft guidance of an ROE above the minimum of 20%. That seems conservative to me on your side. I wanted to discuss with you, can you go over the guidance, the main lines? Where can we work more on the higher threshold, the medium threshold? Should we assume, on my side, we see the upside rather than downside in PDD taking the NPL trajectory that we've seen? But if you can just give us your true sense on those two lines and can we work above or below the guidance? Can we assume the 20% ROE that you indicated as conservative? I want to check with you.
Milton Filho, CEO
Thank you, Gustavo. I hope that you're right. We're going to work so that you're correct. Well, the guidance is, in the end, our best estimate. We are coming from a budgetary procedure. We always have a temporary guidance. We have the average point of these lines. The medium is always a good reference. If you look at the last quarter, we were running Brazil with ROE of 22.2%. Very strong. Had we unloaded the dividends in the way that you're seeing it right now, the results would be 23.4% ROE of Brazil. The effect of the dividend generates a basis effect that improves the ROE and reduces the net result of the bank because of the working capital, but it improves the relationship and makes the ROE better. So I believe that we have to look at the year for the opportunities for growth of the portfolio. The average is reasonable. There is the exchange rate in Latin America, which is uncertain. So taking that away, there might be some opportunities for the growth of strong portfolio growth, depending on scenarios and perspectives regarding the credit cycle. I believe that working above 20% is a great reference. We didn't give guidance on ROE. We are working above 20%. Can it be more than 20%? Of course, we're going to work to deliver adequate profitability given the scenario and the opportunities. Because of credit, we've been very successful throughout the cycle. You've followed the bank for many years. We had a difficult cycle. Some portfolios suffered more. In our case, credit card is a very relevant portfolio, R$ 135 billion. Vehicles are very important, R$ 33 billion. Those two portfolios naturally, they suffer more. The good news corroborates your vision with the cost of credit. The vehicle portfolio, for the fourth consecutive quarter, has a reduction in the overdue fees of 90 days, credit cards have the third. In the natural persons, there is a 50 basis point reduction in credit cards. It shows that the cost of credit is behaving. What does the guidance have? It has a level of uncertainty because we have the wholesale portfolio that is very relevant in Brazil and Latin America. You can imagine a normalization of the delays of wholesale. I've talked about that; we expect that by 2023, we had a benign effect except for the American event in January. We had a portfolio with the cost of credit that was very well behaved below the minimum thresholds on record. Over the long-term, our expectation is that we can have a normalization. If that doesn't happen and there are any cases that concern us or that we do not have the adequate provision, we don't have that, but we might consume some thresholds of the guidance, but the cost of credit is positive. The other lines are well calibrated and the costs depend on us. We think we need to follow up the portfolio of the margin and the cost of credit depending on the events that I commented. We're going to update you throughout the next quarters. I'm hopeful that you're right; we will work to deliver an ROE better than 20%.
Mario Pierry, Analyst
Hi. Good morning, everyone. Congratulations on the result. Thank you for taking my question. Milton, I wanted to understand your guidance for the growth of credit. Can you provide us a breakdown? What are the lines that you expect higher costs? When you look at the macroeconomic scenario, it is positive, the bank has great capital and the growth nonetheless seems timid. You're talking about a nominal growth of the GDP, 5.5%, 6%. A portfolio growing 8% seems a bit shy. I wanted to understand how you see the product itself.
Milton Filho, CEO
Thank you, Mario. Beforehand, thank you for the question. Thank you for being with us today. I wanted to tell you, when we look at the portfolio, I'm going to do a deep dive. We hope that the companies, whether it's retail or the big companies, will grow above the average point that you observe. So they carry over that. The natural persons grow less in that relationship compared to the average of the GDP. We will expand on the products that make sense in the target segments that we are growing above two digits. Here, there is a double effect. First effect, the natural persons portfolio has a renegotiation drop, which is good for the overall balance of the cost of credit. But it's a natural offensive of the balance sheet. The second aspect, when we look at the portfolios, we have the decision to reduce nominally some portfolios, important reductions that saved about 200 points of delays in the over 90 days. So if we kept the same mix of growth that we had in the pandemic, we would be running in the natural persons around 6.4, 6.5 with the late 200 points above. So you have the opportunities for growth. The portfolio of real estate has grown a lot in the pandemic with low interest rates and high demand. With higher interest rates, we see that there is less demand, even though we are keeping a good market share of production; the nominal dropped. We see INSS, and there is pressure, and we have the caps that we already mentioned. There are some effects that play against, like payroll loans, but some that are positive. In credit cards, we have derisking of the portfolio, and we are growing strongly in the target segments. In real estate, we can see a deceleration. In the last quarter, we can see a deceleration of personal credit that is very specific, the reduction of the 13th salary. That happens, and there is the effect of the renegotiation portfolio, which tends to continue to drop. That is the overall mix. There is a capital markets effect. We expect good growth. We are depending on the capital markets that are more active; if they are more active, we will give preference to the capital markets. This is the cheapest financing for the great corporations, and we lead this market, so we have the cross-sell, and it generates engagement with the clients. Then there is an effect which is difficult to predict, which is Latin America, which is the exchange rate devaluation in these numbers, implicit, and the numbers can change all throughout the cycle. Thus, breaking down the portfolios, we are very comfortable with the mix that we are going to grow; if there's an opportunity to grow more, we will seize those opportunities.
Rafael Frade, Analyst
Good morning. Thank you for taking my question. I'd like to follow up on two points. First, regarding the NIN, making it very clear that we expect stability in the NIN, but all throughout the last few years you always said that the liabilities margin has been an important contributor to the improvement of the NIN. Is that thinking more of a detractor for the end of ‘24 and for ’25? And second question, which is a follow-up on the issue of cost of risk. I think it's very clear the guidance accommodates fluctuations, but we wanted to understand more on the retail when we see the fourth quarter. The aforementioned level is at the level of 2019-18, but you commented at the beginning that you have an important shift in the portfolio that seems like this is a safer portfolio than ’18-‘19, so specifically in retail can we see an NPL formation for ‘24, maybe below what the official records? Thank you.
Milton Filho, CEO
Thank you, Rafael. Pleasure to see you again. Let me start with the NIN. Liabilities are growing for us, and we managed to grow in an important way. You can see the net cap grew 70% over the last quarter. We do not talk about the absolute numbers, but these are strong numbers, and I can assure you. Therefore, there is always the interest rate effect and the volume as well. A combination of both generates an effect on the NIN. When you look at the margin of this quarter, the volumes are very relevant. The second aspect regarding the financial margin for the clients: we do the hedge, whether it's working capital or liabilities. We do the hedges with longer vertices, so it shows that in a longer cycle, for better or worse, we have better stability in remuneration. There is a reduction in the margin; we can see the margin of working capital reducing, but there is an increase in pay for the pays, and the liabilities have been growing importantly. There is demand for the bank's products, which increase this effect. We believe that in 2024, we're going to have a great year for volumes. The rates from the application and the hedge of the bank tend to be less sensitive to the effects of the select rate, which highlights what I mentioned. We've seen some reports that said that our line is very sensitive to interest rates. This is another proof, seeing the cycle as it is, that our NIN is very stable regardless because we can work with both sides of the equation. The interest rates they tend to drop, but they will stabilize at a threshold of nine. We're never going to see a drop of interest rates as we've seen way back when, and that is sustainable and it opens up the growth of the portfolio that compensates at the other end with volumes and growth of assets. We consider that NIN is stable regardless of the pressure of these liabilities, and the volume compensates the effects of the interest rates. This shows that our investment strategy and the review of the offerings and platforms are very successful. We have an NPS that is measured by an external auditing company that does all the measuring, and it's where the best when we compare with the main competition, and we continue to advance. The positive news is that in investments, this was our best year with the relationship with the platform. We had some months of positive capture regarding some of these players, and we ended up delivering a nominal net cap above what was published by the competition. This indicates that we're doing our homework. This is very important. The second aspect of the delay, the delinquency—well, there are better portfolios produced throughout the cycle. We see a nominal delay above 90 days below what we saw in the pre-pandemic. We remain optimistic; we expect the NPL creation to tend to have, well, stability looking ahead. We see in the natural presence there is a reduction in the two consecutive quarters, with a drop in the formation in the natural presence, and we believe that this is a great trend. Of course, more exits for write-off within the regulatory rules that deal with the portfolio formed in the previous periods with the renegotiations we have a balance, and with the renegotiation with the quarters, we see effects in the write-off. So yes, we see very positive formation, and the cost of credit that is nominally for the retail is reducing step by step. This is great news where the portfolio is growing and the margin expanding. Overall, we can deliver an NIN that is very positive with an expansion in the risk-adjusted line, which is what we are doing consecutively over the last quarters.
Thiago Batista, Analyst
Good morning to everyone. My question is about efficiency. When we look at the bank's efficiency, Milton commented that you are at the 40% historical minimum, good number when you compare it to the bank itself or other banks, but it's still above some digital banks or traditional banks. Is it possible to draw from 40% and get you to 35% or not? Or 40% is the absolute bottom? If you allow me a second question, the credit card. We see that the level of the payments of Itau increased in 2023. We had 81%, 85% of one lump-sum payments. When we look at the Central Bank, that trend didn't happen with the data of the Central Bank. What is the difference? Why is it happening? Does higher income make a product? Can you tell us more?
Milton Filho, CEO
Okay, let me start with the second point. Thank you, Thiago, for your presence. Credit cards. The explanation is mixed. In the end, when you look at our non-financed portfolio, it is higher than the market average. In the last quarter, we had 34% of our non-financed portfolio. This is a very relevant number. I always say the effects of interest rates on our R$ 135 billion credit card portfolio; R$ 115 billion are non-interest. So R$ 20 billion is the financed portfolio. In the last quarter, the last month, there is a seasonal effect with more purchasing and more volume. So there's a trend of an increase in one lump sum and in installments that are non-interest, depending on the purchasing profile of the population. The main explanation is mixed, and there is derisking in the portfolio, of course. Since we reduced relevantly the segments of high risk that were destroying the value for the shareholders, then we rebalanced the portfolio with more focus and the mixes that are more sustainable in the long term. We do not look at credit card as an isolated product; we look at it in a global relationship with a client. We've been growing relevantly. The fact that our portfolio is more affluent than the average of the market takes our non-interest in regards to the interest to a higher threshold. We should see a normalization. There is a reduction in the propensity, of course, depending on the profile. Once the propensity comes back, the finance portfolio will grow more in relation to non-interest because of the seasonality of the last quarter. Efficiency, I'm going to give the floor to Broedel, but I just wanted to make some relevant comments. First, we have to look at the bank's mix. Looking at the efficiency level of the bank, we are looking at the consolidated. We have a lot of businesses here and different efficiency levels. We are running at 37.9%. It shows that inverse, so we are reducing. Relevant, well, directionally, the path has to be efficient. There is no doubt about that. We've done a series of movements in that direction. This has happened for some years, and this has to do with our DNA and culture, but there is space for a deeper dive and a cost of efficiency level. We can get you to 30%, 35%, whatever threshold is. It's important to say that when you reduce and become more efficient, part of the efficiency goes to the price. Imagine that the efficiency level just drops. It's not true because it becomes more efficient, and then you become more competitive. That equation of revenue and cost is what we work on. Our efficiency level is benchmarking as a bank of our size, it's a global benchmark. We have a series of initiatives that we're working on to separate. What are the events of wholesale? What is retail? The investment in technology that we've done in digitalization naturally goes through all that. The core costs are dropping and are growing less than inflation, and that's the trend. However, it will grow less than inflation while knowing that we have an inertia that is very strong, which is a payroll. Regarding the collective bargaining agreements, we have higher costs than inflation measured by the IPCA. Just looking at IPCA doesn't translate the banking inflation, which is a higher threshold. Broedel, would you like to highlight some of the points we've been working on? That would be nice.
Alexsandro Lopes, CFO
Thank you, Milton. Yes, we have a concern here, as Milton mentioned, of looking at an efficiency program that generates effects in the long term, and these are consistent results. We don't want those efficiency levels to be a volatile indicator. We have periods of gains in some periods, losses in some periods, and that's the up-and-down effect, as we say. We have a variation, but we don't want that. We want gains that are consistent, gains that are recurrent. That point Milton mentioned, efficiency, doesn't depend just on an index; it depends on the mix of business that the bank works with. Structurally, the bank has efficiency indices that are different. We have a program that involves over 1,000 initiatives. We have automation, cost reduction, digital processing, migration to the cloud, amongst other initiatives. The important thing is that this is a program from all the organizations. There is no silver bullet. All the initiatives are implemented and followed up. We have an important control of the budget as well, so that the initiatives we implement are not, the economies are not eventually used. More importantly, which I believe is the relationship between good management of cost and efficiency. You can see that the guidance, we are not doing the investments that we consider are important to reach a certain level of cost or efficiency. Why am I saying that? Because sometimes the important investment, because of an accounting issue, carries costs that come earlier. You have the amortization of the investments and technology as well. Our discipline here is that this program is to be consistent all the time. We don't give a specific guidance on efficiency, but we want to have efficiency levels that are sustainable, reachable, and continue over time. Keeping the modernization of our platforms and a higher focus on the client, client centricity, all these initiatives and the efficiency level, Thiago, are inserted in the context of management of the bank as a whole. It's not an objective that is independent. Having said that, we believe and imagine that there are important opportunities for improvement all over time.
Unidentified Analyst, Analyst
Good morning, Alexsandro, Milton. Thank you for the opportunity. I want to understand better the strategy for the composition of the funding of the bank over the last quarters. You've had an improvement in the participation of exempt instruments. With a new regulation, these instruments should be more restricted for issuance. What is the reading of Itau about the impacts for the system? Looking at the businesses of wholesale and retail, what is the market stock that you estimate in these instruments post the changes? Thanks.
Milton Filho, CEO
Thank you, Bernardo. This is a new issue. Of course, naturally, the resolution was published last week, we are naturally going over the details. What I can anticipate is that, without a doubt, the exempt instruments have a participation in the funding of the system as a whole. They are growing throughout time. There is a creation of LIG which brought, you had the double backing of the LIG and LCI, which you could use, but the exempt in the interest are 15% of our capture. They are important, but they are limited to 15% of all the capturing volume that we have. In that change, the recent change, basically two-thirds of our capture were not affected, so we are talking about a reduced impact. Thus, we are talking about 4.5% of the total funding of the bank in terms of materiality. It doesn't mean the resources are leaving. There is a natural migration of resources. When you do not have the exempt from income tax, you do not offer new products. This is a systemic overview. The system as a whole goes through that. Given our level of relationship with our clients and the capacity for generation of backing, we don't see the impact in the cost of capture of the bank; this is immaterial. We will substitute with instruments of CDB and banking letters as other instruments that make more sense for the investor and that are going to have some impact on our cost of capture, but it's immaterial. I believe that for the system, it's difficult to assess the impacts because it depends on the generation of coverage, the profile of business of each institution, relevance in the events of the capturing of each institution. Fifty percent in our case, we can see in other cases, less or more. It's difficult to assess the market. It's very difficult. Every bank will start to talk about the impacts in their activities. We are in a phase of deepening in the norm, doing a deep dive and analysis, but there will be an impact; it's not relevant; it is immaterial for the size of our operations. We continue with a very broad portfolio, the investments are 360, focusing on offering the best investment for the client in that cycle. As we always say, our executives of investment are measured by the profitability of the portfolio of the clients and not the selling of products. So we don't see an impact in the relationship with our clients because we expect to have the capacity to replenish those alternatives efficiently.
Tito Labarta, Analyst
Hi, good morning. Thank you, Renato. Good morning, Milton, Alexsandro. Thank you for the call and taking my question. A bit of a follow-up, I think, to Thiago's questions earlier on efficiency, but slightly different perspective. When you look at the guidance on expenses, like core expenses as you mentioned, below inflation, but you are growing above inflation this year. You had about R$ 3 billion, I think, in business and technology investments. For how long do you think you'll need to continue to do these types of investments? I'm asking in the context of the competitive environment just with increasingly more digital players becoming more relevant, just to think about how you're positioned. And somewhat related, but on the credit card, very strong quarter for credit cards, both on the issuance and acquiring. There's been a lot of competition on both sides. How much of the growth in the quarter was seasonal, and how much are you, maybe given the credit cycle, looking a little bit better? Are you able to be a little bit more aggressive there? A couple of your peers announced that they're trying to privatize their acquiring business, so if you can just comment on the competitive dynamics in cards, both on the issuance and acquiring side, given where we are today.
Milton Filho, CEO
Sure. Good to see you, Tito. Thank you for coming. So just follow up here. First of all, on the efficiency ratio. We're always going to be investing in the long-term of the bank, so this is our long-term view. We're not looking for one or two quarters efficiency ratio. This is the trend, especially on the technology investment. We doubled the force. We had 8,000 FDs; nowadays, we're running with 15,000 FDs when you look forward. We stabilized now for two years in a row. We believe that we achieved the level of FDs that we need for all the digitalization and modernization of our platform. Our idea here is to keep doing this project. This is very relevant because we have to finalize what we need to modernize. We are two-thirds of the journey, so we still need investments to be done throughout 2024 and further. The most important is that whenever we make investments, we amortize those investments in the coming years. You see a strong pressure coming from the investments we made in the last period; those amortizations come in the following years, and we are able to absorb all this in our P&L. We still believe that there should be another level of increase in the amortization. But it should stabilize when we look at a long-term period. This is very positive because in that cycle, the level of investment will be more similar in the coming years. Previously, we came from a very low amount of investment, and our investments in technology increased significantly. Part of the investment in technology is done to gain more efficiency and productivity in our operation. You will see the cost of the amortization of the investments, but on the other hand, you will take pressure from the run-the-bank costs that we are seeing at these times. We believe that this level of FD is there. We should see a stabilization in the level of investment as well. Technology is much more than modernizing the platform. In this sense, it will reduce. We have to keep running the business and modernizing our platform to achieve the best customer experience. This will continue to be the trend, and we are very focused on that. Talking about the credit cards, the quarter is very seasonal. You saw relevant growth in the credit card portfolio, especially when you see the site payments. So it's not buy now pay later. That means that there is a seasonality. We are not here trying to increase the level of risk appetite. We will not be running more risk than we should. The opposite is true; we've been derisking the portfolio, especially in some segments, but we've been growing a lot in segments like Uniclass, Personalite, and other clients where we believe they are very resilient through the cycle. This is our main focus. On the acquiring side, we've been very successful in the hedges integration, and we are getting benefits from doing that. I should mention that you cannot look at the P&L of hedges in a standalone company balance sheet; you have to look at it in the retail business operation, not only the P&L on a separate basis because this won't give you the full vision of how we manage and view the business. For us, it's a new product to have in the relationship with the clients. So the relationship is key, and we have ways to take the best proposition to that client. In our view, acquiring has produced excellent results this year; we had a strong recovery in the P&L the way we see and measure that. Just to give you an idea, when you look at the hedges' P&L, we take the working capital out of it and we take the working capital to the corporation. So in the business model, all the working capital benefiting from the interest rate is not in the business model. This won't align us with other standalone companies that have a huge working capital. You have to discount that to compare their business with ours because we don't live in our business model, using working capital on the hedge balance sheet. So this is one example. We do a lot of anticipation and business cross-sell in the bank's balance sheet, not just in the hedge's balance sheet. For us, it's a business of integration. Two-thirds of the P&L came from the open market clients that didn't have the domicile or relationship with Itaú Unibanco, but today it's completely the opposite. The relationship has to do with engagement, with principality, with cross-sell. We had a strong year in 2023. Hedge had a strong recovery in the P&L. This business model is entirely integrated, and we are in a position to deliver a unique value proposition to our clients in the coming quarters.
Unidentified Analyst, Analyst
Thank you for taking my call. I have a question on ROE per segment, it calls for attention retail improving, going back to levels above 20% of ROE. When we do the decomposition of that result, it seems that it comes from the cost of credit. I wanted to hear from you, Milton. Is the correct evaluation of that improvement of ROE an issue of mix? You've talked about growing in segments Personalite, Uniclass because the balance of that segment is higher in the ponderation of the ROE. Is it fair to say that in the process of the improvement of an MPL that lower income should improve more in the cost of credit? If you can comment on how you're using these sub-segments, do you think it's sustainable for ROEs above 20%?
Milton Filho, CEO
Thank you for your inquiry. The level of profitability we needed to work strongly to recover profitability. There are issues of structural changes in the market. There's a little bit of everything, and we have to understand what is happening with the big variables. The payroll loans, the cap of retail, and then there are structural changes to credit cards, rotation. When you have the offering, you have the fee business pressure, with competition in margins and an expansion of the period. The credit service relationship has changed, meaning the business has a higher dependency on credit than they had before—overdrafts. We've grown an insurance offering—a service that has growing profitability. In three years, we have seen a 93% profit in the operation. This year, we will double the results over the last four years. This business has an increasing focus on cross-sell, which also helps profitability. To explain here, I told you that when we were questioned a few quarters back, we saw that it was the bottom, and then we saw the inflection point. What generates that inflection? Several aspects. There is the play of generation of the top line. So we have to work with the correct mix, the correct client in a relevant way. We've done that with quality. The play of cost of credit; you are right, with all derisks we apply throughout the portfolio and all the credit crises observed with a higher concentration in some portfolios where we overperform relative to our peers. Credit card is an excellent example. Our portfolios, on average, have more relevance in credit cards. This brings a higher cost of credit in more difficult cycles. We are capable of turnover—regardless of the size—absorbing those losses in the balance sheet of the bank, producing crops with positive quality. So it's a mix of margin, cost of credit, net margin that helped profitability. All of our mono-liners are below or above the waterline. So all of them are positive. The challenge is isolating the cost of capital for specific businesses, and we are working to improve them. We understand that it's sustainable to maintain profitability levels; we can expand it every year with balanced portfolio profit and adjustment considering retail and wholesale.
Rosamund, Unidentified Analyst
Congratulations. Well, Rosamund asks the credit spread. It ended up at a higher level than average, and the working capital is 9.5%. The bank always guided that we should confer it for... Given the vertices that we use. In that sense, can we say that the guidance is conservative for the NII, as the credit portfolio looks strong?
Milton Filho, CEO
Rosamund, thank you very much for your question. Certainly, you will see the recording later. The main message for you is that regarding the portfolio, we have to look at the mix of the growth. We have to examine the average balance of growth, and that impacts our line. Our view is that the NIN will continue to be stable. The portfolio of companies tends to pull the NIN for a lower threshold. On the other hand, we have managed working capital and liabilities very well. The volumes are strong. Overall, we have an NIN that is stable with a small expansion and the adjusted line to credit. So the portfolio and the average should grow as 8%. So if we have a clear opportunity in the long run, we will certainly do it without adventures. We have appetite and capital funding to remain very close to our clients. We aim to grow in the segments we truly focus on, and we do not want to lose opportunities to grow above two digits. When you improve your portfolio profile, you shift to a mix that is less risky, resulting in a lower NIN, but a risk-adjusted NIN improvement. That's what we observed in the market—our dynamics highlight that our objective is to expand the NIN adjusted to risk while we continue to manage our clients well.
Daniel Vaz, Analyst
Thank you, Renato. Good morning, everyone. Congratulations on the results. I wanted to go back to the credit card. In the release, we saw a reduction of 3 million plastics to 38 million of credit. It seems clear that the preference is for the more engaged clients in Personalite and Uniclass. I wanted to explore more the strategy for ‘24 in the mass channel and the retail partnerships. The bank understands that the client is stressed. Is there just a transfer of risk to the other players or has the system reduced the credit for this client, and is there space, in your perception, to increase the exposure in these clients and increase the consumption of the product?
Milton Filho, CEO
Thank you for the question. First, our expectation is that the credit card portfolio will grow this year. It's inevitable; the TPV and invoicing are growing. The business is naturally subdivided into three major groups. The first group has the bank, where we have big penetration in all segments, especially in the higher-income and checking segments. Most of our business involves acquiring new clients and increasing principality and engagement. The second point is that with the super-app, we will have an offering that is easier, more integrated, and simpler for our clients that do not have a full bank offering. They will have access to a decent growth of clients that can be relevant. Mono-liners may offer a product, but we excel in our relationship with clients; we know them well, they have a solid credit record, enabling better modeling for offering. We have significantly reduced the offerings for open oceans, where we engage clients without any credit records. Our partnerships continue to carry the right appetite for the cycle. We are looking at the value proposition, and we want to ensure it remains good.
Jorge Kuri, Analyst
Can you hear me now? Oh, sorry. Thanks for that. Congrats on the results... I wanted to shift gears. I think you've explained in detail the results for the guidance. Maybe shift a bit to the credit card regulation. Apparently, the 100% cap on interest rates kicked in January. It doesn't seem that prices for revolving interest rates from cards are going to change at all in response. I wanted to get your view on the impact of this bill. Also, what is the risk that the sponsors of the bill, six months from today, will think that nothing happened, and the prices are exactly the same? And what is the risk that happens, and we can see more aggressive caps enforced? What is the industry doing to try to avoid that?
Milton Filho, CEO
Yes, well, thank you, Jorge. Good to see you, and thanks for your kind words. To start, we want to update you about the changing law seen at the end of last year. We spent, and I’ve been highlighting, nearly a dedicated effort together with industry stakeholders, including the Central Bank, retailers, and all the associations, working with Congress and discussing this topic with several senators and deputies. We have consistently reported that the market’s primary issues leading to anomalies and asymmetries in credit cards were not accurately reflected. The credit card portfolio totals R$ 135 billion, out of which R$ 115 billion is interest-free. So our position is that rates being reported extremely high are misleading. Our stance has always been that the rates should not exceed 100% on the acquisition. The Central Bank regularly publishes monthly figures, often inflating these percentages to an unrealistic level, thus misguiding the public perception. As a result, we believe the impact will be marginal regarding the costs of credit cards if and when law enforcement takes place. We will comply with the law; it's our obligation to follow what is dictated, and this is the operation process we will maintain in 2024. Beyond that, I believe there will be an ongoing debate regarding the financial dynamics affecting rates. Unless a holistic understanding develops regarding real impacts and effective long-term viable solutions, the dialogue must persist.
Arden Shirazi, Analyst
Good morning, Milton, Broedel, Renato. Thank you for the opportunity. My question is regarding the vehicle portfolio. We've noticed an increase quarterly and year-on-year; talking to investors and clients, it seems that the market is more excited about that credit line. I wanted to hear your perspective. What mindset do you have for quality growth? What kind of markets are you working with? Thank you and congratulations on the results.
Milton Filho, CEO
Thank you, Arden, and for your kind words. The vehicles business is an area where we have had significant participation for years, and through all this movement, we've learned a lot from new mistakes. We have a portfolio that is appropriately sized. We're focusing on servicing our clients regardless of the channel they enter when acquiring vehicles and financing. We expect moderate growth in that portfolio for ‘24 based on what we see. We must mitigate risks; we have been reducing our 90+ days delays for four consecutive quarters. While this has been good, the market is sensitive, and we always allow more conservative growth. Our portfolio grows steadily as we digitize our services for competitiveness while defining risk appetite levels. Thus, we foresee slight growth at a level aligned to what we've seen. This is still largely dependent on the market while leveraging strong service teams, in line with our goals.
Nicolas Riva, Analyst
Hi, Renato. Thanks, guys, thanks Milton, and Alexsandro for the chance. I have two questions. The first one on the dividend: just to confirm, the R$ 11 billion you announced as extraordinary dividend, that should come out of equity in the first quarter. Should I expect that by the end of March, this will take out about 90 basis points of capital from your ratios? And then in general, on your dividend policy, I remember that in the past you used to target a Common Equity Tier Fund of roughly 12% and 1.5% AT1 bucket, and you said you would pay dividends with the excess above 12% or 81. Is that still the way you look at the policy?
Milton Filho, CEO
Yes, sure. Thank you, Nicolas. Thank you for coming. I can start by discussing the dividend policy. You are right; the calculation is precise. Regarding the R$ 11 billion and its impact on Tier 1 capital, we expect it to be around 100 basis points; there may be some volatility. The first quarter could show a hit of roughly 20 basis points from the available-for-sale securities in our balance sheet, so we might see more fluctuation throughout quarterly earnings. Regarding long-term targets of 12% for the Common Equity Tier I and 1.5% for the 81 being our standard, we are getting better at understanding the distribution levels we need to maintain. Looking ahead to 12 months or even 18 months, we can enhance our distribution decisions smoothly. We aim to reach that 12% as a consistent level, taking a careful posturatment perspective on future distributions and possibly recognizing excesses.
Carlos Gomez, Analyst
Thank you for having us. Congratulations on the results and the dividend, and thank you for extending the call to allow ample time for analyst questions. I have two questions: First, you mentioned the estimated impact of Pac-03, which is 42 basis points based on your current calculations. Can you also share the impact of the tax reform as described today, and how the impairment of DTA would affect your capital? Secondly, in previous discussions, you provided an estimate of your cost of equity, which I believe was around 15%. Could you update us on where you think it stands today? Thank you.
Milton Filho, CEO
Okay, Carlos, thank you for your insights. The first question is about the DTA impact. When we query 42 basis points, it’s essential to point out; there are two elements. The first regarding operational risk, which we assess at around 100 basis points, phased over four years (25 basis points per year). When combined with credit changes, this could push the total by 42 basis points. On the other side, if we implement a reform reflecting the proposal indicated, we could see up to 60 basis points implemented on capital. Your question concerning cost of equity: currently, we are aligned at 13.75% real cost. Last month, the average was nearer 14%, but now for the first quarter, we expect about 13.80% to 13.85%.
Operator, Operator
Thank you, Alexsandro. Thank you, Milton. With that, we will close the Q&A. Remember that we received several questions from you via WhatsApp. We will respond to them all through the IR team. I wanted to give you the floor for the final message for the investors and analysts.
Milton Filho, CEO
Thank you, Renato. Thank you, Alexsandro for the partnership and discussions. Once again, we conclude this year, which started with notable difficulties; January 8th, 11th, January 11th, then there is the event that passed through other issues. Imagine with all the changes happening in the country at the start of ‘23, it was challenging to visualize how ‘23 would turn out. I'm very pleased to discuss these solid results, consistent results with good quality, and importantly, looking at what's inside the result. Result is a function of everything we are doing in the bank. All digital transformation, cultural transformation, proximity to client centricity has driven consistent results over long periods. We continue to be committed to this agenda. Cultural and digital transformation takes place every day. We aim to deliver solid results with encouraging indicators of engagement, principles, and client centricity ahead. Our growth is driven by engaged employees who are driven to deliver the best experiences, creating trust. Trust as clients or investors; we will work exceedingly every day to surprise you and to provide the best banking services for all our stakeholders. Thank you very much, and I look forward to our conversations in the future.