Earnings Call Transcript - ITUB Q1 2025

Operator, Operator

Hello. Good morning, everyone. I am Renato Lulia, and it is a pleasure to have you joining us at another Itaú Unibanco Quarter Earnings Conference. Milton will explain our performance and earnings for the First Quarter of 2025 in a new format from Itaú BBA's auditorium at Faria Lima headquarters in São Paulo. Then we will host a Q&A session, in which analysts and investors will be able to interact directly with us from the studio, which is right next door to the auditorium. I would like to give you some instructions to make the most of today's meeting. For those of you 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, and we will have simultaneous translation in the first 2 alternatives. To choose your option, all you have to do is click the flag at the top left corner of your screen. Today's presentation is available for download on the hot side screen and also, as usual, on our Investor Relations website. That is it for now from me. Now I will hand over to Milton, and we will meet later next door in the studio for the Q&A session. Milton, over to you.

Milton Maluhy Filho, CEO

Good morning. Welcome to our earnings presentation. Today, we will discuss the earnings for the First Quarter of 2025, highlighting two key changes. First, we have revised the presentation format to enhance understanding and analysis. I will also address some changes in disclosures related to the credit portfolio chart and the breakdown of service and insurance revenue. Furthermore, I will outline the effects of implementing Resolution 4966 in Brazilian GAAP accounting practices, which I believe brings positive news. Let's jump right into the results highlights. This chart illustrates our managerial recurring earnings, return on equity, both in Brazil and on a consolidated basis, pretax earnings, net interest income with clients, as well as efficiency and capital ratios. This quarter, we achieved a recurring managerial result of BRL 11.1 billion, marking a 2.2% growth from the previous quarter and an almost 14% increase year-over-year in terms of profitability. In Q1 2025, our return on equity stood at 22.5% on a consolidated basis and 23.7% in Brazil, both of which improved on a quarterly and annual basis. When we adjust ROE based on our risk appetite capital of 11.5% for the Brazilian operation, we arrive at a 25.9% ROE. This figure is more comparable to our peers, considering our capital ratio is slightly above our risk appetite. On a consolidated level, our ROE is 24.4%. Thus, we continue to showcase strong profitability and high returns, yielding positive earnings for the quarter. It's crucial to examine the quality and composition of our results. EBIT rose by 6.5% from the previous quarter and by 16% year-over-year, reaching BRL 16.7 billion, which translates to over BRL 1 billion of growth quarter-over-quarter. Our margin with clients was BRL 29.4 billion, also impressive, with a 3% growth compared to the last quarter and nearly 14% year-over-year. Additionally, we achieved the lowest efficiency ratio in the bank's history at 36%, accounting for first-quarter seasonality. This marks our best first quarter ever in terms of efficiency ratio, closing at 38.1% on a consolidated basis, a notable improvement over the previous quarter and a slight year-over-year increase. For our operation in Brazil, we witnessed a 240 basis point improvement and almost 100 basis points improvement year-over-year, all while sustaining a robust capital base. We ended the quarter with a CET1 of 12.6%, factoring in regulatory impacts and additional dividends paid during the quarter which accounted for 110 basis points of capital. Thus, on a pro forma basis, accounting for these additional dividends in the fourth quarter, we saw a 30 basis point increase since December 2024. However, our CET1 was lower compared to March 2024. Now, let me walk you through the credit portfolio performance. The individual loan book grew by 8.6%, the SME credit portfolio expanded by 17.7%, and the large corporate loan book increased by 13%. I will clarify some adjustments we made to the credit portfolio chart for better understanding. The individual loan book has not changed; it grew 8.6% due to increases in credit cards, personal loans, vehicle financing, and mortgages, although payroll loans are still under pressure from the interest cap for INSS beneficiaries. Consequently, the payroll loan origination for INSS beneficiaries has decreased due to elevated funding costs. Additionally, the finance credit card portfolio grew by 8% this quarter due to an uptick in end-of-year shopping. At the start of the year, a portion of this portfolio begins to incur financing costs, which significantly impacts our margins. We've also revised past figures for better comparability. We previously considered an essential agribusiness portfolio as large corporates since that segment managed this business. Over time, as this portfolio was divided into different companies, we have reclassified them into the SMEs portfolio based on their annual revenue. All the details have been outlined in the footnote of the credit portfolio chart.

Operator, Operator

Thank you, Milton. I think the presentation format was excellent. For those who watched it, the new campaign demonstrates great value. As we move into the Q&A session, we have Milton and Gabriel, our CFO. Welcome, Gabriel. This session is bilingual, so we will respond to questions in the language they are asked. If you need translation, you can select the audio in English or Portuguese. We have a lot of questions, and many people have raised their hands. So, let’s begin. The first question is from Daniel Vaz from Safra Bank. Good morning and welcome to our earnings call.

Daniel Vaz, Analyst

Congratulations on the results. I have two questions on my side. I wanted to ask about growth. I mean, it's easy to say that a bank of your size should have more defense of market share and then you have discussions with investors. And we can hear the argument that it's difficult that you can compete in the massified segments against new events. But in another point, the bank does want to be an attacker in some fronts. Given the great level of quality of assets and capital generation, should we expect a bolder position in 2025? How can we expect the workings of Itaú and niches where you have less market share, looking up ahead?

Milton Maluhy Filho, CEO

Thank you, Daniel. Thank you for the question. So it's two questions, I'm going to start first by credit. We cannot forget that we are in the highest interest rates of the last 19 years, 14.75%. It's not just an issue of offering, but demand that reduces as we see the different businesses. As we have had great opportunities, we've grown the portfolio in many of the segments, very diligently and we have personnel that is focused in our risk management and portfolio management. Of course, this is a dynamic process. But the public, the clients that we want to grow, we've managed to grow two digits, and we gained market share. So the boldness comes from that. We have a lot of strength in growing in those publics that we understand are resilient in longer cycles. From the standpoint of opportunities, we are optimistic but cautious. Optimistic because, as I told you, we are maybe at the best moment for the balance sheet of the bank for any scenario that we should face, whether if it's a scenario for opportunities, we are ready to rapidly grow our adjustments. We are also prepared with a very resilient portfolio. This capital allocation portfolio with a long-term vision is very important regardless of the fact that we have indicators that are well behaved because these are decisions that we made today that will sustain the balance for the medium to long term. So we are very disciplined. The capital structure is key with the quality of balance sheet that is very strong, seizing the opportunities, and growing in the segments that we believe that we should continue to grow, growing two digits. But what you see in the aggregate is the effect of the growth and the derisking, which we closed basically last year in the portfolio, but in those publics that are not target publics, we chose to lose some market share. So when we look at the addressed market, we've gained or maintained the market share in the businesses and where we've maintained and gained the share within the publics that we consider that are not part of a strategy, losing the share is the best decision that we can take.

Operator, Operator

Thank you, Milton. Let's go to the second question with Thiago Batista from UBS.

Thiago Batista, Analyst

It's another consistent result, and you have shown growth this quarter. My question is about the private consignado. I have two topics regarding this. You mentioned the six largest players, and we have two states, three or four niche competitors, and these six account for 80% of the private market share. We don't see any of the traditional incumbents among these players. How do you position this product? What distinguishes you and the other major players in this market? Do you foresee any potential cannibalization, perhaps an exchange of more expensive income for another, leading to increased debt? I want to understand your perspective on this small market; I recognize it is limited, but I’m curious how you view it.

Milton Maluhy Filho, CEO

Thank you for this initial consideration. I want to spend a couple of minutes discussing the consignado payroll loan. Our product creates value, overcoming the operational limitations previously faced when forming agreements with companies on a large scale. We now have solutions through CTPS, unified with eSocial, which represent a significant change and drive relevant market growth. To provide some context, the total market is valued at BRL 40 billion, separate from the EUR 10 billion disbursed recently. Itaú Unibanco currently holds BRL 12 billion of that, which is about 30% of the market, thanks to our strong presence in this segment and substantial agreements. We've been implementing the strategy of private payroll loans for quite some time. The consignado has traditionally been dominated by incumbent banks like Banco do Brasil and Caixa, but we have been active in the private sector since these loans were first introduced, learning valuable lessons along the way. It's crucial to emphasize that the private payroll loan is fundamentally different from other types of consignado loans. It starts with an anticipation based on birthdays, which carries less risk, before moving down the risk chain. In the private payroll loan context, companies and the risk associated with them must be carefully evaluated. The extensive Brazilian salary market is valued at BRL 120 billion, while the private consignado amounts to BRL 40 billion. The remaining BRL 80 billion reflects private credit available for salaried workers. If we analyze the consignado loans available for INSS and public companies, the potential for credit growth could increase the BRL 120 billion to between BRL 300 billion and BRL 400 billion in highly optimistic scenarios. However, there are inherent risks involved in that growth. Additionally, once a payroll loan is issued, the borrower must allocate up to 35% of their salary to repayments, which is an important aspect of our risk management approach. Many new entrants eager for market share may not fully understand the risks associated with the companies involved, which has been our area of expertise for many years. Our risk management practices differentiate us in the market. While we may lose some operations, it is a decision based on our belief that the projected risks do not justify certain practices. Maintaining this discipline is essential. Our key advantage lies in the extensive know-how we've accumulated over time in managing company risk, which informs our decision-making process.

Operator, Operator

Thank you, Milton. I will provide a complete answer to this recurring question. We now have another question from Eduardo Rosman at BTG Pactual. Rosman?

Eduardo Rosman, Analyst

Congratulations on the impressive results, strong quality. Your digital transformation is yielding positive outcomes. My question is, what are the next steps? I believe the benchmark is continually rising. Your relevance in a well-established sector within a stagnant economy poses challenges. So, how will you create value? Where will that originate? With Itaú closing its banks, it seems like the solutions will need to come from international markets. Please share your insights on this.

Milton Maluhy Filho, CEO

Thank you, Rosman. It's always a pleasure to see you, and congratulations on the report. We carefully review all published reports and appreciate the feedback. I want to address a few points you mentioned. Looking ahead, we see numerous opportunities across various segments. Our bank, being a significant holder of capital allocation, has a diverse portfolio with non-correlated and some correlated businesses, allowing for a well-balanced approach to identifying opportunities. Regarding our PF business unit and One Itaú, we are thrilled about our progress. In the upcoming quarter, I'll share early indicators of our achievements with One Itaú, which are quite promising. We’ve successfully migrated 8 million of the 15 million clients planned by year-end, achieving a migration rate of 99.1% with no attrition, resulting in a positive customer experience of 85%. This migration enables us to offer a full banking experience to clients who previously had a limited service, enhancing product penetration and creating new relationships. We're expanding our banking portfolio, having segmented our client base across all segments, which is driving growth and increasing our market share. While GDP and activity growth are important, we continue to see opportunities to capture market share in segments where we have a unique value proposition. We are actively pursuing these opportunities. In terms of digital transformation, we've implemented 300 journeys in the bank for both natural persons and businesses, launching over 18 new products integrated into our client journeys, all of which have seen high engagement and adoption rates. We are excited about our enhanced ability to develop solutions that address client needs quickly, and we are consistently impressed by our capacity to generate impact with these digital advancements. If you check our Superapp, you'll see our latest campaign reflecting these developments.

Operator, Operator

Thank you, Milton. For the next question, we're going to switch to English as we always do because that comes from Tito Labarta from Goldman Sachs. Tito great to see you. Thanks so much for joining the call today.

Tito Labarta, Analyst

Great. My question is on the financial margin with the clients. I think very good performance, particularly in a seasonally tough quarter and also given the high base you already have there. Just looking at the year-over-year rates running a bit above the guidance. I mean, you sounded a bit constructive, Milton a bit before on the potential growth outlook. So could there be potential upside? Or just help us think about the continued growth of the financial margin with clients and also maybe beginning to think about, well, maybe we saw the last rate hike earlier this week and maybe the market is beginning to price in potentially lower rates later in the year. So just help us how do you think about that financial margin with the clients, given sort of the current environment and potentially the rest of the year?

Milton Maluhy Filho, CEO

Thank you, Tito, good to see you, too. Always a pleasure to have you here with us. Let me start by saying that we are very positive with the financial margin with clients, of course. When we do our budget, we take into consideration the level of interest rates; we had planned or budget those hikes that we've seen so far. Let's see what happens in the next meeting. But at the end of the day, all of them somehow are incorporated in our guidance that we released in the beginning of the year. So we are positive. I still believe that the guidance is the best information that we have today. But if I had to choose a geography, I would say that we would be much closer to the top of the guidance with the financial margin with the clients than the average or the midpoint of the guidance. So my view is that the range still absorbs our best expectation, but we are positive that we can deliver near the top of the range. This is our best estimated expectation, I would say, today. There are a lot of opportunities. As you saw, the average balance of our portfolio has been very positive in this quarter. We had those seasonal effects of last calendar days, business days, and also current days. But in general, all the operations are performing very, very well. Of course, the interest rate has an impact as well, being on the spread of the investments and the deposits that we have in the bank, but also on the working capital of the bank that has been increasing quarter-over-quarter. So overall, positive, and I believe we can deliver near the top of the range by the year-end.

Operator, Operator

Thank you, Milton. Now going back to Portuguese. We have Marcelo Mizrahi. Good luck, you're in BBI. Welcome to the call.

Marcelo Mizrahi, Analyst

It's a privilege to be here after 20 years as an investor analyzing the bank from the outside. Many of my questions have been answered, but as we consider the opportunities presented by One Itaú, I want to focus on the segments where Itaú can gain market share. The credit card market represents a significant opportunity for growth. However, I'm particularly interested in the investment platform. How do you envision the investment platform evolving given the type of clients One Itaú will attract and the potential for growth in retail? What can be developed to integrate clients into the existing investment platform, especially in light of the insights gained during the development of One? I'm curious about this segment since the bank does not hold a stake in XP, and I believe there are notable differences to address.

Milton Maluhy Filho, CEO

Thank you, Marcelo. Congratulations on the challenges, and thank you for the questions. First of all, it's important to note that One Itaú is rooted in the origin of credit cards as we migrate two major customer segments. We believe there will always be opportunities in the credit card space because the same clients continue to engage with us, often through specific products. We have the ability to expand our credit card offerings for this segment. When we look at the 50 million clients we serve, we see a diverse range, from low-income customers to those in the middle-class and affluent sectors through our Personnalité services. While we do cater to private clients as well, the focus is primarily on the retail segment. The opportunities also extend beyond evolving credit relationships to include new products and solutions. We aim to enhance transaction capabilities and accounts payable, attract more banking flow with the features we’ve introduced, and offer benefits like credit anticipation and investment options on our platform. This also ties into how we support our clients with our Personnalité program, providing various advantages and programs. We see substantial cross-selling opportunities by addressing client needs, particularly in investment services. We’re pleased with how One has developed over the year, achieving impressive results among retail clients. One has relied on a specialized sales force to cater to Personnalité and Uniclass clientele, also discussing investments in various banking products. This specialist approach has yielded strong outcomes, and we're encouraged by our performance compared to the market. Our ability to generate value has been satisfying, with a positive flow. However, the scalability of One's model, which relies on human interaction, is limited to certain client groups. To serve the broader clientele being transitioned to One Itaú, we need a more intelligent solution for servicing scalable clients. We are piloting a wealth management service utilizing artificial intelligence, a project we've been developing for some time. We've already conducted pilot tests and scaled them effectively. The expertise we've gained is significant and should enable us to enhance our client relationships in investment areas. We are in the early stages of this venture, learning what is essential in investment discussions and establishing the necessary guidelines for safety. So far, the results have been promising. We plan to expand this solution continuously. This initiative is integrated within the Superapp, designed as an intelligent experience rather than a chatbot, aimed at assisting clients with investment management, tapping into our acquired training and expertise. This will facilitate the scaling of the One Itaú platform.

Operator, Operator

Now the next question. Mario Pierry from Bank of America.

Mario Pierry, Analyst

Congratulations on the results, very predictable. We see an improvement quarter-on-quarter, and the market appreciates that. So Milton, a question for you, more about expenses. You've shown that the bank has done a great job, and we have the lower threshold, but when we look you closed almost 0% of your branches all throughout the year. And your number of employees, excluding technology, dropped just 2%. So today, where we see the number of employees per branch is 32; a year later it was 29. So I wanted to understand how you see that metric evolving and if there is still space for building branches because every call we hear, investment in technology, why that? I wanted to understand from you how you see the function of the physical branches from now on. We have a survey we see that the people still have a value of going to the branch. So what would be the ideal number of branches and number of employees per branches?

Milton Maluhy Filho, CEO

Thank you, Mario. It's always a pleasure to have you on our calls. Your question is insightful, and I’d like to share some data that might help your thought process. Firstly, we don't set a target for the number of branches we plan to close; rather, we conduct forecasts and analyses using a complex algorithm. We examine various factors such as client geography, a branch's penetration in the region, its financial performance, scalability potential, and the distance between branches to determine if we can serve clients effectively from a central branch while having satellite branches. Our team conducts this analysis on a daily basis, which is crucial. Additionally, a significant number of branches are transitioning to digital models, which fundamentally changes our service approach. Digital branches have much lower servicing costs and offer greater scalability along with the ability to adjust account loads effectively. When we decide to close branches, we assess the proximity to the nearest agency and evaluate the potential impact on client attrition. Depending on distance, we may see a reduction when closing an agency since many relationship managers can be reassigned, as account loads are finite. This means we can reduce the workload of these teams while maintaining service quality and measuring client satisfaction through NPS. In this quarter, there was a reduction of 100 branches. We recognize that the digital model is particularly beneficial for mid to high-income clients, as servicing low-income clients through digital means can be less efficient. Our efforts to enhance our digital journey, especially with the Superapp, strengthen our competitive value proposition because our goal is to provide service in the manner that our clients prefer.

Operator, Operator

Thank you, Mario. And now Renato Meloni from Autonomous. Welcome to the call.

Renato Meloni, Analyst

Good morning, everyone. Thank you for the opportunity and congratulations on the consistency of the results. First, I’d like to revisit your response regarding the financial margin of clients. Currently, you are exceeding the guidance, which highlights the issue of decelerating growth. However, if we consider that margin alongside the guidance, you are still performing above your previous expectations. I would like to understand where you see the biggest risk within that implicit compression, particularly among the segments that are experiencing deceleration, and how that might influence the mix. Will that be affected by the rising cost of funding? Secondly, can you discuss the evolution of the credit sector? What do you identify as the greatest risk, and how is the bank preparing for it?

Milton Maluhy Filho, CEO

Thank you, Renato. I want to address the margin, particularly regarding our portfolio, which is a key focus for us. The portfolios are performing as we anticipated, with average income on the rise. There is some volatility due to exchange rates, but Gabriel is consistently monitoring this impact. We maintain a constant overview, so we should consider the average numbers I've just shared with you. Another point to mention is the interest rate, which impacts margin more slowly because we hedge those positions. In a low interest rate environment, significant drops take time to reflect because the portfolio operates in a regulated manner. While we anticipated the pass-through effect of interest rate increases, the impact on working capital is observable, particularly the generalized CDI effect. The annualized margin remains relatively stable with minor fluctuations. Our adjusted margin concerning risk is crucial as we have reported the best margin adjusted for risk since the fourth quarter of 2019. When assessing the projections for the risk-adjusted margin in payroll loans, we note minor effects but also a solid basis. We believe our portfolio will continue to perform as expected without spread risks. The rise in interest rates may make capital markets less competitive, and while we had a strong quarter, it's less active compared to last year. Consequently, operations for the balance sheet have increased, but demand tends to decline with higher interest rates, leading to reduced consumption and purchasing decisions. Despite this, we remain optimistic about delivering solid financial margins to our clients and anticipate a strong year ahead. Regarding the credit cycle, we observe favorable indicators. We want to focus on short delays, as we’ve been working with expected loss for some time. Monitoring short delays provides insight into future trends. Delinquency rates among individuals have risen by 26 basis points, and we track this alongside average rates. However, we have witnessed significant derisking within our portfolio, and this quarter reflects typical quality, with well-managed delinquencies. We are excited about our outlook.

Operator, Operator

Thank you, Milton. For the next question, Matheus Guimarães from XP.

Matheus Guimarães, Analyst

Congratulations on the results. I want to ask a question about the cost of funding. I think that the financial margin is still very strong, and we see a few competitors with strategies of cost of funding. I wanted to understand if you foresee that there is a space for some improvement in that indicator or if eventually, some changes that the competitors are doing, and they're going to be opening opportunities for you, would be more aggressive in that point. That would be the first. And if you allow me, follow-up on the question early on about the private payroll loan, and it's clear the subordination issue, whether if it's a credit loan with our guarantees or the payroll loan that already existed. So my question is about the subordination in the credit card because with the launching of the private payroll loan with the app, the virtual card, the client could take a debt in the bank, maybe they didn't even have a relationship the day before. So can it affect the appetite in the segment of the credit card?

Milton Maluhy Filho, CEO

Thank you, Matheus. It's good to see you and I appreciate the question. When discussing the cost of funding, it's important to recognize that it's an optimized cost across all products. This demonstrates that we are a strong player in the investment space and a solid alternative for our clients. However, the key aspect is the presence of a client on the other side; this is where we define our franchise. Our aim is to maintain a robust investment franchise for our clients. Thus, our priority isn't just to optimize funding costs. If we focus too much on cost without engaging clients, we may lose sight of their lifetime value. We view this as an opportunity, understanding that while we can reduce costs in significant ways, it might introduce some volatility in client acquisition costs. We have a liquidity coverage ratio close to 200, which was previously higher, impacted by extraordinary dividends that we chose not to follow up on. In managing deposit acquisition costs, we may intentionally reduce deposits, but this could also result in losing clients. Ultimately, we want to provide excellent service to our clients through a strong investment franchise, ensuring they access the right consumption products, which often isn't a credit card.

Operator, Operator

Next question also with us Guilherme Grespan from JPMorgan.

Guilherme Grespan, Analyst

Thank you for the presentation. So great quality of the results. I think that they asked a big debate of the case. I wanted to clarify 2 dots that are more specific on this quarter that we are in now in the results. First of all, it's working capital; you mentioned in your presentation, but we noticed a strong performance of that line in this quarter. It's longer duration; it's not a spot and then you have the vertices of the investment when you see the yield of that line, it was very representative. We had gradual increases; the implicit yield went from 8.7% to 11.2%. So since this is a line of working capital and others, I just wanted to understand if it's working capital or there are other influencing factors. Is it sustainable? More importantly, that level of yield that we've seen from this quarter ahead. And the second question, just to the taxes were higher in this quarter; should we expect the tax conversion for credit? If you can explain what led to the increase of the taxes in this quarter.

Milton Maluhy Filho, CEO

Thank you, Guilherme. Regarding the bank's working capital and other factors, I want to clarify what those others are. We have investments in companies that we don't necessarily consolidate, but these are included in our patrimonial consolidation. The investment is part of the working capital. For example, if we activate a payroll purchase, that activation falls within the working capital. There are factors here that can show some seasonal variations. Part of the effect is related to the rate in capital for this quarter, while other effects stem from the previous quarter. It's a mix of both influences that impact the working capital. Currently, our expectations are more stable, although some volatility can still occur due to the factors I mentioned. These adjustments between quarters can reveal some discontinuities, but the levels of working capital seem appropriate. Now, regarding the tax rate, there are two factors to consider. First, since the bank is a conglomerate with various financial and non-financial entities, we have three different tax rates across the group: 34%, 40%, and 45%. The applicable rate depends on where the results are generated, and this quarter, we saw more results from higher tax rate companies, leading to an increase in the overall tax rate. The second factor is that as profitability increases, the benefit from interest on our own capital decreases. The higher profitability leads to a lower JCP benefit because it’s restricted by our equity and TGLP, which means the benefit is capped at a higher net income. We aim to align closer to our guidance, potentially near the upper limit. Would there be a difference from previous expectations? I don't believe so; that's the overview.

Operator, Operator

And now also Gustavo Schroden from Citibank.

Gustavo Schroden, Analyst

Congratulations on the strong results. Swiss watch, high quality. Question is about the mass. We see the ROI per segment is that you see the retail 25%, wholesale 25%, 30%, that order of magnitude. But in the previous quarters, you shared with us that the massified still had a challenge of profitability. The bank has been doing investments; we've seen the efficiency level improving. Of course, there is the cost. But I wanted to know how do you see the profitability of the massified? Is it improving to the point that you're getting to a stage that you can be higher in the massified? Have you got to a level of profitability or is there still some space just so we can understand when the bank or what is the stage that the bank is diversified? And does the bank believe that we can get to a profitability rate level that is higher in this segment?

Milton Maluhy Filho, CEO

It's great to see you. Congratulations, Gustavo, and thank you for your initial comments. In the third quarter of 2022, we discussed achieving 16.4% profitability in retail, which we felt was insufficient. The credit cycle has been challenging, but we've made significant progress with our portfolio. I'm pleased to report that, several quarters later, our profitability in retail has risen to 25%, for both individuals and businesses. Both sectors are performing above the cost of capital, and we are continuing to see positive trends. Profitability is even stronger in the business sector compared to individual clients, but we still face challenges with monoliners, particularly in the tougher credit card and vehicle credit cycles. We have implemented a strategy that has improved our risk appetite and overall portfolio management, leading to a healthier portfolio. Our derisking efforts, combined with better client engagement, have contributed to increased profitability. When we reflect on past profitability, it's important to note that several factors have changed. Regulatory caps were not a concern then, and various changes have impacted the market due to tighter credit conditions. The cost of credit has increased significantly, affecting overall profitability. I believe we still have a long way to go before achieving our desired profitability levels. However, there are promising opportunities in segments like high and medium income, especially with our Uniclass and Personnalité offerings, which are showing strong profitability and critical mass. Volume is essential for generating revenue from clients, and these segments are performing well. On the other hand, the low-income segment presents a vast opportunity because we have a service model in place that allows us to achieve suitable profitability levels. The bank's digital transformation and app evolution will support this, and I expect to see progress in the short term. While this won't transform in just one quarter, I see this as a valuable evolution over the next 3 to 4 years. We are prepared to pursue this path effectively, ensuring we care for our clients and enhance their service experience while managing costs, allowing us to absorb and accept potential losses in the portfolio.

Operator, Operator

Next question from Morgan Stanley, Jorge Kuri. Jorge, Good to see you. Thank you so much for joining us today.

Jorge Kuri, Analyst

Congratulations on the results. Let me go back to rates. And this is a bit of a longer time frame question beyond your guidance for the year. Evidently, rates are at a 10-year high roughly. And so I wanted to ask you what do you think the windfall that you had benefited from rate in your record ROE today is? And look, if we go back to when rates were below 10%, the ROE of the bank was around 18%, 19%. Today, it's at 22%, 23%, and there are so many moving parts. So I'm not suggesting that there's a regression analysis for rates and ROE. But I guess that's the question I'm asking you, which is how do we quantify how much of the very high level of profitability that you have today is due to this very excessive level of rates? And then as we hopefully normalize rates in Brazil to hopefully stop around 10% within the next 2 to 3 years, what does that do to your ROE? What are the things that you can still do over the next 2 to 3 years to make sure that, that level of ROE that we're seeing today doesn't dilute over time? Or maybe it will, and it's fine as well. So yes, that's what I'm trying to get to.

Milton Maluhy Filho, CEO

Okay. Thank you, Jorge. Thank you for your question, your words. Low time, no see you in our call. Thank you for joining us today. I would say that we have a slide for you, Jorge. Sometimes we bring this slide in our presentations here, where we try to show how sensitive is the margin of the bank and the profitability due to interest rate in Brazil. I think it's not a simple question because, as you said, there are many moving parts when you look to that impact. What I can tell you is that in the short-term, the benefits are working capital and also deposits. Those are the two more relevant impacts we have. But at the end of the day, we hedge those effects. So it doesn't come in the same speed as we see the hike or the reduction of the interest rate. So it's less sensitive due to the level of hedge we do to maintain more stability in our figures; this is one point. The second one, I think when the interest rate starts to go down, we see more activity, more activities, more portfolio growth. More portfolio growth means more business with our clients, more engagement, more penetration of product, services, derivatives, cash management, effects, all the products that we serve our clients. So we have some compensations in the portfolio in different lines due to different reasons. We have an impact in the financial margin with the market. We have an impact in the financial margin with the client. We have more portfolio growth, less delinquents, especially on the individual side. It's difficult to give you one number. So the good thing to see is in the long-term, when we see all the volatility of the interest rate, and we see our NIM, you will see it much more stable than your expectation. This brings us a good portfolio sensitivity, and gives us a lot of natural heads inside the portfolio of the bank. So those are the short-term impacts and they are positives, you are right. But on the other hand, we have costs under control, and we have to deepen the agenda on that. If we believe there are no revenues coming for any reason, we have to go deeper into costs. This is why we look to the efficiency ratio all the time. We're looking to revenues, but we are looking over cost as well. This is a general answer; I don't have a key point to tell you this is what happens because the portfolio is very broad. But this dynamic is very positive.

Operator, Operator

Thank you, Jorge. And also great to see you. We are warming up in English. So let's keep that language because now we have Carlos Gomez from HSBC. Carlos, great to see you. Thanks so much for joining.

Carlos Gomez, Analyst

Congratulations everybody else for the results. And thank you for the reference to taxes as good cholesterol, we will use that. That's very good. First, you have made a push for showing us the new classification of loans by stages and new provisioning. I think that gives a new insight about how the profitabilities for each type of lending. Do you think that we will see a change in the market going forward when the data points when everybody starts to look at things this way? Do you expect perhaps some products to become bigger, some products to become smaller in the future? And completely and related to that, we haven't heard about any possible changes in taxation on IOC or your subsidiaries abroad. Do you think anything like that is in the works for the coming months?

Milton Maluhy Filho, CEO

No. Thank you, Carlos. Thank you for coming. Thank you for the initial words. It's good cholesterol whenever you have the same corporate tax, right? When it goes up for legal decisions or regulatory decisions, this is not necessarily it's the good cholesterol because, at the end of the day, we know that if you have a hike in interest rates, in tax rates, what happens is that the cost of credit in Brazil increases. And of course, the payers, the ones that are depending on lending and need to finance their needs have to pay more whenever it happens. We see whenever we have a hike on the corporate tax rate. My view is that these stages, the way we are showing now reflects the way we manage the bank. So we don't expect any change because now we have the local or the BR GAAP IFRS local. We don't expect to change the way we operate inside the bank because of that. This will give us, in our view, will be more transparent, more comparable. It will be easier to show, reflect better what we do inside the organization. I don't expect any change in the way we operate the products and the businesses especially, because as I said in the very beginning, we haven't changed any method, any criteria compared to the BR GAAP when linked to the write-offs, for instance. We keep exactly the same way. We shouldn't change the way we manage the organization. Your second question on IOC. No, we don't see any discussions coming from there. I know there is a discussion now in Congress. There is a proposal coming from the government that has to be analyzed by Congress to increase the corporate rate withholding tax for dividends. So that's what we could see in terms of change. This is a discussion that is still very open. Let's see how the Congress will react to that.

Operator, Operator

If I can follow up on your assessment...

Henrique Navarro, Analyst

Congratulations on that result. I think that the performance is solid. And my question is, well, talking to some of the participants in the market, not that there is a concern, but there is care with delinquency in the second quarter. The increase in Selic, you can have the lagging. So there is carefulness when we discuss the second quarter. Since we have several segments, I wanted to hear from the horse's mouth. Is there something that we should really monitor for the second quarter for delinquency? How do you see this evolution? And anything that you can share would be great.

Milton Maluhy Filho, CEO

Thank you for the initial comments. You know that I don't look at the share price during the call. So you updated me, I only see it after the call is done because we're looking at the long-term and we are less sensitive to the spot price. But it's always a great feedback. So thank you for the initial words. About delinquency. So let's separate the discussion. For our portfolio, we have stability in the delays or it's a big concern, and I was discussing small companies there should be normalization throughout the second quarter. But I look at some market indicators, credit cards, vehicles; we've seen movements that are bigger in the portfolio in the market than what we've seen in ours. So in the end ex Itaú, we've seen a performance in some products that are much worse than what we've seen in our own portfolio. This is for vehicles as well. It's important to see that our vision is constructive regardless of a very challenging scenario. To believe that the interest rates are going to be dropping is not going to be an impact in delinquency; it's not reasonable. The portfolio of the bank is very resilient. So that's why we don't see a lot of changes in delinquency, everything being constant. So there is a lot of dynamic of portfolio, but this is a portfolio that is very challenging. The indicators of the market are sovereign; it's not what I think. It's important to look at these delays, the short-term delays, the breakdown per segment, the CFN indicators; you're going to have a challenging scenario for the semester. I don't think it's a scenario that we observe; it's a scenario that we've looked for many years. We have to follow that closely.

Operator, Operator

Thank you, Milton. That was the last question. With that, we finish our Q&A session. I want to remind you that we received many questions via WhatsApp from the investors, and the IR team will address them. Thank you, Gabriel. Thank you, Milton. I will now hand it over to you to conclude the call.

Milton Maluhy Filho, CEO

Thank you, Renato. Thank you, Gabriel. We will be together with all the publications, all the calls up ahead. Thank you for the support, the feedback, and the recognition of the positive and constructive feedbacks that we received. We're very satisfied with the evolution of what we managed to deliver in values; these are values for the clients, the collaborators, the investors, and value to society in the end of the day. Thank you for taking part, and active part; the questions are always good, so we can understand what you're looking at. We are very humble; everybody with two feet on the ground, working hard, knowing that past performance does not guarantee future performance. We need to continue to be consistent because this is an infinite work, an infinite game. I hope to be here in the next quarter. See you next time.