Earnings Call Transcript - ITUB Q2 2021

Operator, Operator

Good morning, ladies and gentlemen. Welcome to Itaú Unibanco Holding Conference Call to discuss 2021 Second Quarter Results. As a reminder, this conference is being recorded and broadcasted live on the Investor Relations website at www.itau.com.br/investor-relations. A slide presentation is also available on this site. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors.

Milton Maluhy Filho, CEO

Good morning, everyone, thank you for joining us in our second quarter 2021 earnings conference call. Well, first of all, I would like to emphasize here, the recurring managerial net income, we reached at 6.5 billion reals, which represent an increase of 2.3% versus the previous quarter. The recurring ROE increased 40 basis points in the quarter, and we finished with 18.9% this quarter. I would say and highlight first of all the growth of 4.6% of our Brazilian real portfolio. The credit card book rebounded after a weak first quarter that was affected by the new wave of the pandemic, which translated into lower economic activity and consumption in the period. The payroll linked loans accelerated and grew 5.5% in the quarter. Now, we believe that this portfolio has a big growth potential and I will talk about that a little bit further. Mortgage had another very strong performance in origination which translated into 12.8 as you can see rose. The strong credit portfolio translated into a more vigorous growth in the financial margin with clients as it increased 3.9% in the quarter. Credit quality metrics continued to show very positive trends. The highlight was the NPL 90 days in Brazil, which ended the quarter at 3.6%. It's a decrease of 30 basis points. We also saw an important recovery of our fees and insurance revenues mainly driven by credit card issuance and capital markets activities. We will present more details throughout the presentation. Revenue growth coupled with our cost control brought our efficiency ratio in Brazil to 42.2%. It was a drop of 100 basis points and is the lowest level in years. We added 4.7 million customers through our digital channels just this quarter. It's an important figure. And it's an important growth when we compared to the last quarter of this year with a growth of 27%. When we talk about it, client acquisition continued to come at a strong pace as we anticipated. We reached 7.8 million customers at the end of the quarter. And the good news is that out of the 2.6 million customers we added in the quarter, 90% didn't have a current account in the bank. We are attracting a young client base and customers that we were not successfully engaging lately.

Operator, Operator

Ladies and gentlemen, we will now begin the question and answer session. First question comes from Mario Pierry with Banco da America. Please go ahead.

Mario Pierry, Analyst

Good morning, everybody. Congratulations on your results. Milton, I have two questions and both of them are related to your guidance. And as you mentioned, right, you're now more comfortable with margin with clients growing closer to 6.5% for the year. But doing the math, it implies that your net interest income with clients has to average about 18 billion reals in the second half of the year. This means growth of almost 15% year-on-year. So can you give us why you feel so comfortable that you can grow at a much faster pace going forward? Is it because the mix of your loan book is improving? Is it because of a high rate environment or is it a combination? And is there any reason why you wouldn't be able to sustain such elevated growth going into next year? So that's the first question related to margins and why you're so comfortable with growth accelerating so much. And then the second question is on your expenses. You show the slide where your expenses are going 3.5% year-on-year in the first half of the year, and your guidance is for minus 2 to plus 2. So when you're already above your range and in the second half of the year you have salary negotiations with the Union in Brazil. And normally, we see increases of inflation plus 1% or inflation plus 2%. So that would imply personnel expenses in the second half of the year should be growing almost 10%. So I would like to get more color on why do you think that you can still meet your guidance for expenses? Thank you.

Milton Maluhy Filho, CEO

Thank you, Mario. Thank you, good questions. Well, first of all, in terms of margin with clients, as we had a period in the past of mainly, I would say, four to five quarters declining the margin with client, in this last quarter, we had an evolution in the margin with client and the previous quarter, we were much more in line with the previous one. So that's where we stopped decreasing the margin with client. I think you went through part of the answer, which is the mix, which is relevant for this margin growth. As you see, last year, we had a huge growth in the large corporate client segment. And we had, I would say, a depressed growth on the retail portfolio. And this was somewhat self-inflicted, with the risk appetite throughout the pandemic. Also, we had a migration of our portfolio to what we call the traverse here, which was the program that we made for our clients to go through the crisis. This meant that we made important reliefs in terms of the rates we were charging from the client, and also we gave much more time and terms for those clients to repay their debt. This had a huge impact on our margin as well. The two main effects here are one, it's the base of comparison, because we had a depressed year last year in terms of margin with clients. This year, we see a better growth in retail and SMEs, even though we are still growing faster in the guaranteed products such as auto loans and also mortgage. However, we have been seeing a good recovery of the clean credit. Since this quarter, we have a good expectation, and we believe we can deliver decent growth in the coming quarters. So I'm positive about the margin. That's why we didn't change the range, but this is why I’m positioning in terms of geographic that we should be closer to the top of the range, better than what we expected when we released the guidance. It's very important to keep that in mind, this is our best expectation. We've been very active in the commercial areas, we've been very active on the retail side. We have a good expectation that we are capable of delivering good growth with good margins and good credit quality. This is the assumption that we have today. Hope we can deliver that, of course. But don't forget that we still have a range from 3 to 7, and we hope to be much closer to the top of the range, but the range is there to accommodate if somehow we are not able to deliver that. So, that's why we still have a range for this figure, okay, for this line. Talking about the guidance of costs. It's important to say that the most relevant impact here that we had on the non-interest expenses was the devaluation. That's why we delivered the 3.5%. When you look at only Brazil, it’s 0.8%. You're right, that we have decidual issues that we have to recognize the inflation and, even more, on the negotiations we have with the Union. But it's important to note that we are keeping very focused on our efficiency program, so we do believe that we are able to deliver the guidance the way we are presenting. Of course, the effects may change or may bring some impact. But don't forget that when we look at our P&L of the bank, even if we have any negative effect from the devaluation in our cost, we have a good positive impact in our revenues. So the bank's balance sheet net-net is positive in terms of FX. This is considering somewhat the FX planning that the core cost of the bank will reduce in the coming quarters. We will maintain the efficiency agenda very strong considering that we have some bad winds coming. This is our goal here to overcome those bad winds, I would say. We remain positive that we can deliver on the guidance for costs as well.

Mario Pierry, Analyst

Milton, very clear. Just see if I can follow up then on your loan mix. Why do you expect SaaS growth in retail and SMEs? Can you just give us the color of what you are expecting? If you breakdown your loan book between SMEs, retail, and large corporate, what is the implied growth in each segment you are forecasting?

Milton Maluhy Filho, CEO

Mario, we usually don't provide guidance and the breakdown of our credit portfolio expectation. I think the figures you have you can see on a consolidated basis, I believe that we should see still an acceleration in the retail business, this is what we are seeing. On the corporate, it will depend on market conditions, especially in the capital market. We may be able to book a few good credits, in terms of credit quality, and also in terms of return on capital. But we may also be able to deliver and sell to the market if there is a window of opportunity. So it’s hard to give a solid guidance on that. Let's see how the market and the volatility we will face in the coming months. I would say we expect good pace on retail and the pace on wholesale will depend on market conditions.

Operator, Operator

The next question comes from Jorge Kuri with Morgan Stanley. Please go ahead.

Jorge Kuri, Analyst

Hi, good morning, everyone, and congrats on the great quarter. I have two questions, please. The first one is, again, going back to the guidance on growth versus NII. And I guess I'll ask the question a different way. Your new guidance on loan growth is 8.5% to 11.5%, and you said you left guidance for NII to sustain as you thought that the range encompasses the numbers that you think are reasonable. So I'm assuming you're thinking maybe 6.5%, which is the high end of the guidance. The part that's a bit odd, and I guess that's what I'm asking is why would NII grow below credit growth in a year in which grades are going up, which is going to help your asset-sensitive balance sheet and your margins historically have been roughly in line and have moved in the direction of SELIC, and we're actually going to see a pretty significant increase in SELIC, which is not a modest one. Secondly, you are growing your loan book quite rapidly. So your loan to asset ratio should improve year-on-year. Within loans, you are growing in the high-margin loans or you're growing credit cards very rapidly, auto loans, SME loans. It would seem that this is a year in which your NII should grow faster than credit growth because of the things that I said. So I wanted to understand what drives your existing guidance to be below that. And then my second question is your effective tax rate; your guidance is 34.5 to 36.5. I wanted to see if you have a preliminary view on what the effective tax rate would look like after the ongoing fiscal reform, tax reform is approved based on what's on the paper now? Thank you.

Milton Maluhy Filho, CEO

Jorge, thank you for your compliments. And thank you for your question. First of all, talking about NIM. I’ll give you some information that I’m pretty sure of, but just to ensure that I’m giving you the whole spectrum of the answer. First of all, we’re looking here for the end of period growth. We know that the average balance is what really impacts the financial margin with clients. Separating the two effects here, talking about interest rates: yes, it's true that we should have an increase in SELIC. Actually, our forecast for year-end is to have 7.5% SELIC, but it doesn't benefit our P&L in the same way that you will see a benefit from increasing the interest rates, and this is due to the reason that we hedge those interest rates over a reasonable period of time, I would say four to five months with monthly installments, there is a shape of this curve. That means that we will benefit over time. So in the short-term, we won't see a huge impact. But yes, for 2022, we might have a much higher impact than we will see in 2021 from the hedge that we have. This is for the working capital, this is for the liabilities we have from clients, and the overhead is run-off. So we won't see major impacts here in interest rates for this reason. So this is part of the answer. The second one is that yes, we are growing here in a mix that is better than what we were looking at last year, more retail than wholesale somehow. But on retail, we still are growing the business in some portfolios that don't have the same margin as the credit loans, for instance. If we do a breakdown in our portfolio, you will see the SMEs bringing us a very good financial margin, then you have credit cards with a very strong financial margin, personal loans as well. However, vehicles and payroll loans, even though they are having important growth in terms of moving the needle in terms of margin, they bring a lower impact, which is relevant for this information. So the mix is positive. I see a very positive trend; we don't believe we will be able to go through the range that we are seeing here. However, we believe we should have decent growth or increase in the financial margin with clients due to the growth that we will see in those portfolios, especially coming from the retail side.

Jorge Kuri, Analyst

And then my second question on the taxes.

Milton Maluhy Filho, CEO

Yes. The effective tax is as follows. We see, to simplify the math, we see that the interest on capital should have a negative impact, let's say around 6 to 7 points in the tax. You also have the benefits, let's say of 12.5 in the regime of the interest rate, the income tax on the own profits. This means that we should benefit in the long-term, 5 to 6 points reduction in our effective rate. I would say if we take both effects into consideration, that 5 to 6 points are our main guess here. Now, that depends on the only income that will have, of course, as the higher the income the different the impact because you reduce the benefits that you have from the interest on capital.

Operator, Operator

Our next question comes from Tito Labarta with Goldman Sachs. Please go ahead.

Tito Labarta, Analyst

Hi, good morning. And thank you for the call and for taking my question. My question is on your fee income, your very strong performance there, your guidance stays the same. I imagine mostly insurance continues to be weak. Just to try to break that out a little bit. If we were just to look at just the fee income excluding insurance which is doing well. Any color you can give on how you think that will grow? And not just for this year, but given the competitive environment, which is this sort of a sustainable growth for fee income, and then the expected recovery in insurance in the second half. Then my second question is somewhat related, but thinking about your digital strategy. You mentioned earlier on the call that your branch network is still a competitive advantage, but now EP has close to 8 million clients and if you look at the valuation on some of the FinTechs out there, based on client you could get a pretty high multiple there. So I just want to think about the strategy: is the intention or could we keep sort of EP inside, any intention to spin it off, or do you want to leverage the branch network and at the same time have a digital strategy combined? Just to think about that strategy, given the competitive environment? Thank you.

Milton Maluhy Filho, CEO

Well, Tito, thank you for your question. Coming from the FinTech perspective, I think I may address part of the answer to Jorge Kuri as well. He mentioned the credit card portfolio. It's worth mentioning that when we see the growth in the transaction of the credit card portfolio, we currently have around 15% of the portfolio of the full credit card portfolio paying interest; the other 85% does not pay interest. This means that even though we are growing the portfolio, the portion that pays interest will grow in the coming months, but it's not automatic. So this, of course, doesn't help in the short-term to NIM, but it helps a lot the commission and insurance because it’s here where we report the interchange, the annuity that we charge the clients, and also we have the cost of our loyalty program. Those are the three main factors that we see here in the commission and insurance. The recovery on the credit card portfolio will be reflected in the portfolio that pays interest in the future; it may not be in the short-term, and this is what really impacts the margin. Just to clarify the topic for equity as well. So talking about commission and insurance, where I see that we should have good deliveries into the credit card for the reasons I mentioned, we believe there's what I would call hidden consumption, and whenever the pandemic is in a better shape, we may see a boom in consumption. This will have an important impact on our credit card business. Furthermore, we are growing the business; we are delivering and issuing an important number of credit cards every month, and this will help a lot with this commission line. In asset management, we expect a good semester. It will depend on market volatility and our capability of delivering good results. So there's a lot of market risk implied. However, we are growing what we call the portfolio that really generates performance fees. This has been a movement that we've been doing for the last few years. We have more than 60 billion reals of products that generate alpha, and we can charge for performance fees, and we are having a decent quarter and expect to continue delivering on performance fees as well. We've been very active in investment banking activity. The main topic here is how will be the volatility in the second semester. If things continue as we’ve seen in the first one, we hope to see a good window of opportunity and should keep delivering good results in the investment banking area, remembering that we have a very strong pipeline and we are well-positioned in this segment. So, those are the lines that I believe. So it's not different from what we see this quarter. This is the expectation I have for the coming quarters as well. This is where we should see good activity and good performance.

Tito Labarta, Analyst

Thanks, Milton, I guess maybe just to clarify that. So when you say similar to this quarter fees can remain stable or this is like a base and you can grow off of this base from here?

Milton Maluhy Filho, CEO

So it's difficult to see if we can grow. In credit cards, I think we still have room to grow. In investment banking, I think we had a very fantastic quarter. If we are able to deliver another quarter like this, it would be good news due to the great performance that we had. In asset management, we may be able to deliver a little bit better than what we had. But as you'll see, we are still growing year-on-year and quarter-on-quarter. I think we should be delivering something around the numbers you’re seeing here, a little bit more, a little bit less. But the performance will be very similar to what we saw this quarter. This is where the expectations are related to market risk. It's difficult to make any estimation but it's my best guess looking at the figures now and trying to project the future. On the insurance side, we hope the losses we had during COVID will decrease in the coming quarters. This is our best expectation, but we have to see if there is really this reduction. We're still working on higher levels of losses due to COVID. This is something we have to keep focusing on to ensure that we'll be able to deliver a better result. Structurally speaking, we are making important changes, including the management of the insurance business, and we have higher expectations that we can grow the business in the coming years. I'm not sure that we're going to deliver these in the coming quarters. However, we may see in the coming quarters a positive trend.

Operator, Operator

Your next question comes from Geoffrey Elliott with Autonomous. Please go ahead.

Geoffrey Elliott, Analyst

Thank you very much for taking the question. When we contrast you with some of the competitors, something that really stands out is your headcount has been pretty stable, maybe slightly higher over the last few quarters, whereas some of the others have chosen to make pretty significant headcount reductions, which I guess may realize expenses in the near-term as a result. What's behind your strategy there? What would it take for you to rethink that and get more aggressive about bringing headcount down?

Milton Maluhy Filho, CEO

Geoffrey, thank you for your question. It's a simple answer. We have separated here what we call the bank's headcount and also the technology headcount. When you look back two years from now, we almost doubled the size of the technology team. We have 13,000 employees nowadays and we grew 83% in this period. What we have been doing is investing heavily in technology. We have 13,000 people working in technology, and this is due to the modernization we are implementing in our platform; all the investments and enhancements of the way we approach technology. This is a huge investment. We acquired ZUP, the technology company last year, we had the central bank's approval, and we have more than doubled ZUP since it arrived at the bank. Thus, we are making major investments here, which is very important to deliver a much more digital company in the future. This is the way we are approaching it. When you look at the headcount X technology, you will see a reduction in the last years and also a more stable situation this year. This is due to the crisis and our capability to accommodate everybody working in home office, and so on and so forth. You are right; we do not see when we go to June 2020. Just to give you a figure, only in Brazil, we had 74,000 employees. Two years later, we have 72.6 thousand employees. We've reduced 2,000 employees. However, on the other hand, we grew technology from 10,000 to 13,000 looking only at a single year. What is happening is that we are investing in technology, growing teams, but reducing the headcount of the bank overall. The investment in technology brings the opportunity to enhance productivity by reducing some processes that are completely manual. Therefore, this is the situation at present; headcount is important information, of course, but the mix of the headcount reflects where we are investing and how it's affecting our investments as well because we are growing some commercial teams. Thus, we are reducing core area headcount but investing in and enhancing commercial teams such as investors, assessors, retail, insurance task force, and commercial force. We are enhancing headcount where necessary. So we are confident that we are progressing in the right way.

Geoffrey Elliott, Analyst

And that growth in technology headcount clearly has been very rapid over the last few years. My guess is you're always going to need tech people. But are we reaching a point where that growth can start to slow down a bit now?

Milton Maluhy Filho, CEO

Sure, for sure. I completely agree with you, Geoffrey. I think we are getting to a point that we should expect a slowdown. We have to manage all these people. We have to have projects. We need to modernize platforms where they can have more flexibility to work, with fewer dependencies in the journeys. So you are right; I don't expect to keep growing the headcount in technology. We are getting to a point that we should see some flat movement. For 2022, I don't want to give you information that needs to change in the coming months. However, my expectation is that the acceleration will be much, much lower than what we have seen in the past years.

Operator, Operator

Your next question comes from Thiago Batista with Banco UBS. Please go ahead.

Thiago Batista, Analyst

My question is about the cost of risk of the bank in coming years. When we look at the kind of risk now, I would say it is much lower than the past. I do believe that this reduction in the cost of risk is structural and we probably will see a cost of risk below these historical figures in coming years or no? After the normalization of the economy, the end of the aid in Brazil, do we tend to see cost of risk increasing going forward?

Milton Maluhy Filho, CEO

Thiago, thank you. Good question. We should see an increase in cost of credit in the coming quarters; this is our best expectation. This is due to many reasons. First of all, it's the growth of the portfolio. As you know, we work with expected losses provisions. This means that we are always anticipating provisioning when we are growing the portfolios strongly. Also, there's some uncertainty that we have regarding the 40 billion reals, as I'm saying, related to the reprofiled portfolio. We have to follow very closely to understand what the behavior of this portfolio will be in the coming quarters when you should have fewer benefits coming from the government. So this should bring an important impact. The key message here is that even though we believe that the cost of credit should increase on both a nominal basis and a relative basis with the growing portfolio, it will stabilize as we are seeing levels behind pre-crisis levels. This is our main view here. I believe that the second and third quarters of last year should create an inflection, and we should stabilize in levels behind the pre-COVID crisis, which is good news and very healthy. We should be delivering more margin with a very well-managed credit cost.

Operator, Operator

Your next question comes from Natalia Corfield with JPMorgan. Please go ahead.

Natalia Corfield, Analyst

Hi, everybody, and thank you for taking my question. My question is related to your 81; you have a call date at the end of next year. I am wondering how you're thinking about those calls and also you have an instrument in the local market, which I'm not 100% sure of when the call is going to be, but I would like to know as well how you're thinking about this call? It is my first question.

Milton Maluhy Filho, CEO

Natalia Corfield, thank you for your question. Good to talk to you. In Treasury, we are making our capital planning. We are always looking at those calls. You have the call date, but you also have the opportunity to exercise this call later. We are always assessing the cost and the opportunity we have to exercise the call versus the capital needs we have to grow the business. This applies to both local and international markets. I cannot anticipate our decision now, but we are doing our capital planning and making some calculations to understand what the best instrument is in terms of capital; whether it is needed or if it makes sense to exercise the call. I don’t have the answer for you right now; this is something our Treasury team is working on.

Natalia Corfield, Analyst

Sounds good. And perhaps on issuance. Do you have an update on insurance in the international market, any plans?

Milton Maluhy Filho, CEO

It really depends on market conditions, Natalia. We are always looking; we saw some opportunity in the past to issue locally and we did a pretty decent amount locally whenever we saw an opportunity. We did a very good issuance last year, right before the crisis jumped in. So we aimed to have a robust opportunity to price a deal. We are always looking at market conditions. In the 81, we are fully loaded. We don't have a lot of room; in fact, we are a little bit above what would be the limits set by the regulator. I don’t expect that what we might do in the coming months would involve some liability management, some discussions on that, some senior notes, or maybe Tier 2, but then we will decide if it's better to do it locally or if it depends on market conditions. Of course, we want to have an external curve; we want to be active in the external market as well to have a presence next to the investors. But it will depend on market conditions pretty much.

Operator, Operator

Your next question comes from Carlos Gomez with HSBC. Please go ahead.

Carlos Gomez, Analyst

Thank you for taking the questions. Two brief ones: one on the tax rate. You paid a 1.3 billion extraordinary uptake for the income tax credit that is different only to the coming six months. Therefore, we should notice a big reversal in the next two quarters from now. And the second one refers to your dividends; I calculate you have paid about 26% of earnings so far. What do you expect for the rest of the year? Thank you.

Milton Maluhy Filho, CEO

Carlos, good to talk to you. Thank you for your question. First of all, in terms of the 1.3 billion reals, what we did was based on our expectations of tax payment this semester because this increase in contributions, social contributions of 5%, would impact only six months. Thus, we had this recognition in a non-recurrent event of 1.3 billion reals. Yes, we do expect to consume and pay a higher effective rate in the coming months. So we could say net-net it may be a little bit negative, but it's not relevant at the end of the day. That's why we recognized this effect or this event. We are very focused on this. And in terms of dividends, we are provisioning; we are still below or very close to our capital appetite level of 13.5. Maybe I can answer in two ways here: we are delivering and we expect to deliver a better profit. This will enhance naturally the payment of dividends, as we are seeing with the guidance predicting a better second semester; this will increase naturally the payments, the dividend payments. But in terms of payout ratio, we are still working with 25% because we have to recover capital. We will keep the matrix that we provided to the market in the past years, where we will see the risk-weighted assets and our profitability ratio. The result will be based on the excess of capital of 13.5 we will be distributing, which means that we didn't change the policy. The idea of distributing the excess of 13.5 or the excess of our capital appetite will remain. But more importantly, with better profitability from the bank, we should see nominally better payout in the coming dividend payments. Thank you, Carlos. Nice talking to you. Thank you very much.

Operator, Operator

This concludes today's question and answer session. Mr. Milton Maluhy Filho, at this time, you may proceed with your closing statements.

Milton Maluhy Filho, CEO

Well, thank you, everyone, for joining us in our second quarter results. It’s a pleasure to be here with you. Hope to see you during this period or we will meet again in the next quarter results. We are very positive about all the evolution we had, especially the cultural change that we are doing inside the bank. This is the most, I would say, positive outcome that we are seeing here. So we are very positive about the numbers we have and very confident about the future, of course, depending on macroeconomic conditions. Be safe, take care. Hopefully, we will see each other next time in a much better environment. Thank you very much. Good to talk to you all. Bye-bye.

Operator, Operator

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