Earnings Call Transcript - ITUB Q1 2023

Renato Lulia, Group Head of Investor Relations

Hello, good morning, everyone. My name is Renato Lulia, Group Head of Investor Relations and Market Intelligence at Itaú Unibanco. Thank you for participating in our video conference to talk about our earnings for the first quarter of 2023, which we are broadcasting live from our office at Faria Lima Avenue, in São Paulo. Today's event will be divided into two parts. In the first, Milton will explain our performance and earnings for the first quarter of 2023. Next, we'll have a Q&A session, during which analysts and investors will be able to interact directly with us. Now, I'd like to give some instructions to make the most of this meeting today. For those of you watching via our website, there are three audio options on the screen: the entire content in Portuguese, the entire content in English, or the original audio. In the first two options, we will have simultaneous translation. To choose your options just click on the flag on the top-left corner of your screen. Questions can also be sent via WhatsApp. To do so, for those of you watching on the website, just click on the button on the screen or simply send a message to the number +55-11-98993-1132. The presentation we'll be making today is available for download on the side screen and, as usual, on our Investor Relations website. I now hand over to Milton, who will begin the earnings presentation. Then, I'll be back to moderate the Q&A session. Milton, the floor is yours.

Milton Maluhy Filho, CEO

Thank you, Renato. Good morning, everyone. It's a pleasure to have you here for our first quarter of 2023 earnings presentation. Our goal is to make an objective presentation focusing on earnings, since on June 15 we will host Itaú Day 2023, which will be the right occasion to share with you a lot more about our strategy and our business developments. We will talk about planned centricity and digital and cultural transformation, we'll go deeper on several topics that we've been talking a lot about with you. The recurring managerial result of BRL 8.4 billion this quarter, a quarter-on-quarter increase of 10%, and which pushed us to a consolidated ROE of 20.7%, representing an increase of 1.4 percentage points, and ROE of 21.1% in Brazil. Financial margin with clients was BRL 24 billion, down 0.7 percentage points quarter-over-quarter, but it's worth mentioning the seasonality of the first quarter, as we can see in the historical series, since it has fewer calendar days. The cost of credit was BRL 9.1 billion, down 7% quarter-over-quarter. One of the positives is that our non-performing loans over 90 days remain stable at 2.9%, which is consistent with what I've been talking about for the last few quarters. I'll provide more details on this topic in the next slides. Finally, the efficiency ratio on a consolidated basis was 39.8%, a drop of 1.7 percentage points, remaining below 40% for the first time in history. This clearly shows that our journey has been consistent. This shows sustainable performance and top-notch results in all indicators. The credit portfolio showed signs of a slowdown, also in line with what I've been saying. The individual's loan portfolio grew 0.9% in the quarter, below what we had been growing in previous quarters, but still posts a year-on-year growth of 16%. The SMEs loan portfolio grew 9.2% in the first quarter of '23 versus the first quarter of '22, and was down slightly by 2.2% on a quarter-on-quarter basis, in line with the bank's risk management measures. The total portfolio in Brazil grew 11.2% in the first quarter of 2023 versus the first quarter of 2022, and 0.6% on a quarter-on-quarter basis. The corporate loan portfolio grew 1.8% in the quarter. In Latin America, the portfolio grew 11.7% or 10.4% excluding the FX effect. It's still solid growth, but at a slower pace than we had been posting in previous quarters since we have been more cautious in light of the current macro scenario. In the last quarters, we've talked a lot about the individual's and retail portfolios. But I know that the market concern now is the corporate loan portfolio. There are concerns about the prolonged interest rate cycle and its effects on the bank's portfolio, and how prepared the bank is to face a more adverse macro scenario when we look into the future. So, we brought some figures that we felt would be important to share with you. We classify our loan portfolio into industries according to their volatility. In 2014, which was a snapshot taken just before the credit crunch event of 2015 and 2016, during which we faced a very complex time in the market, especially for large corporate clients, 36% of our portfolio was concentrated in higher volatility segments, which are shorter cycle segments, such as commodities, and therefore generate higher risk in adverse scenarios. Today, only 17% of our portfolio is concentrated in higher volatility industries, and we've achieved this by rebalancing the portfolio over the past years. The wholesale portfolio has grown by more than BRL 100 billion in recent years, but this growth has been focused on clients with higher risk quality and industry diversification, which has produced important results in portfolio management. The second indicator shows the concentration ratio of the 10 largest debtors to the stockholders' equity. In 2014, the 10 largest debtors accounted for 46% of stockholders' equity. And today, the ratio is down to 25%. We've also achieved a major reduction by diversifying the portfolio, which is quite healthy, especially in times that may bring some additional volatility. Finally, in 2014, 68% of our portfolio was made up of investment-grade clients. While today, the share of investment-grade clients in the portfolio is 75%, which also shows all the work we've done to adjust the portfolio mix to improve its quality and, therefore, lower its risk. In terms of financial margin with clients, in the first quarter we posted a drop of BRL 200 million or 0.7%. The first quarter of the year is impacted by seasonality, basically explained by the lower number of calendar days, and there's a seasonality factor impacting Latin America, which we should continue to observe over the next quarters. We present the product mix effect to zero to show that we had no mix impact. In working capital, we gained BRL 100 million, since it grew from BRL 2.7 billion in the last quarter to BRL 2.8 billion in this quarter. As a result, the big effect on the margin with clients was on the core margin, which is in line with our historic performance as this is a quarter where typically this happens, so we have no specific concern to this regard. The NIM, in both consolidated figures and in Brazil, remains flat compared to last quarter, 8.7% on a consolidated basis and 9.4% in Brazil. In risk-adjusted figures, the NIM increases on a quarter-on-quarter basis. I remind you that in the fourth quarter last year, we had that big retailer event, and we recognized a provision for 100% of the exposure. The part was already recovered this quarter, which is the main effect. Looking at the financial margin with the market, again the highlight is consistency. As difficult and volatile as the environment is, our risk and balance sheet capabilities have proven to be successful. If you look at historical series, you can see that we continue to deliver a positive financial margin with the market quarter-after-quarter. Moreover, in this quarter, the financial margin with the market was stronger for Brazil, reaching BRL 1 billion, while Latin America had a weaker quarter, especially in Chile, due to inflation effects. The capital ratio hedging cost was BRL 500 million, so the financial margin with the market is very much in line with what we had been posting in previous quarters, once again proving to be solid and consistent. In general, I would use the word consistent in all the tables of our presentation. Moving over to commissions, fees, and insurance results, we posted a slight quarter-on-quarter drop in credit card business, but is still up 16.9% year-over-year in which acquiring services stands out by posting a year-on-year growth of 30.7%. Revenue from advisory services and brokerage dropped 8.1% in the quarter, but still posting revenue of BRL 0.7 billion. This has been a rough year with less investment banking activity even for a diverse bank. We offer DCM, ECM, and M&A services. There are uncertainties on how they are affecting these operations. But, we cannot deny that it was a more challenging quarter. In Latin America ex-Brazil, revenue was coming as expected growing 10.9% year-over-year and 5.5% quarter-on-quarter. Another business that I draw attention to, insurance operations which revenues are down 1.5% on a quarter-on-quarter basis, but up by 10.9% year-over-year, and highlight is the core insurance result. Earned premiums were up 16.9% year-on-year. And the core insurance earnings grew 30.9% over earnings that had already been growing strong. We continue to be very pleased with our insurance business strategy and results. In acquiring activities since I was saying earlier, the transaction volume went up 21% while revenue went up 30%. This shows our ability to manage clients, re-price the portfolio, increase the penetration of financial products, and promote the growth of the acquiring business. Thus, we continue to extract a lot of value from the operation. And earnings have been keeping up with our development as well. In the card issuance business, the transaction volume was up 10%, a much lower growth than in previous years. But the main message here is that client portfolio mix is quite favorable, especially from a risk standpoint. Card issuance revenues continue to grow in the internal channels which consist of clients with whom we have a longer term relationship. They are checking account holders. And they are key for our cross-sell strategy where credit cards are just one product in the relationship with these clients. We foresee a lower growth in revenues and a reduction in the client base in the channels with a lower income client profile. Both, in the external channel and the consumer finance credit channel. This is very much in line with the adjustment to the portfolio that I have been commenting on as part of the risk management strategy that we have been doing. The number of active cards of account holders grew 14% which shows that the risk diversification strategy has been very successful. Speaking about credit quality, we can see a totally expected growth in the short-term delinquency rate, NPL 15-90. I always remind you that in the first quarter of every year if you look at a longer historic NPL series, the first quarter is always seasonally more pressured. This is due to people's higher year-end spending and bills which explains why default increases in the first quarter historically. The short-term delinquency rate for individuals rose 30 bps in the first quarter of 2023. The growth of this rate in the first quarter over the last five years has been between 30 bps and 42 bps. So, 30 bps is the lowest growth rate in recent years. What happened in the last two years is that this rate went up in the first quarter. And it did not go back down in the second quarter because we were in the process of gradually normalizing the cost of credit. And, we expected NPL to continue to go up which we do not expect to happen in the next quarter anymore. The key point is that we normalized the NPL rate for individuals. The delinquency rate for SMEs was up 20 bps. The good news is that the NPL 90 days has stabilized as I have been telling you for several quarters now. And it is precisely into our expectations for this quarter. With these results, we deliver risk management capacity, predictability, and consistency as we have been signaling to you. The NPL 90 days rate for SMEs in Brazil fell from 2.4% to 2.3%. It's clear that there are challenges that the scenario may change over time. But, we have been able to deliver and demonstrate a very efficient management capacity. It's hard to track the NPL rate for large corporates because usually in this portfolio when delinquency occurs, the client already has an issue. So, coverage ratio may be more adequate. And I'll talk about it in the next slide. The portfolio cost of credit reached 3.2%. And if it weren't for the subsequent events, last quarter's ratio would have been 3%. So, there was a slight increase. I have been saying for several quarters now that we should normalize the cost of credit at a pre-pandemic level. And that is what is in fact happening. The current cost of credit is at 3.2% and pre-pandemic it was 3.3%. Last quarter due to the subsequent events, it was 3.5%. The cost of credit was BRL 9.1 billion, which would be more comparable to the cost of credit of BRL 8.5 billion in the fourth quarter of 2022. The difference to the BRL 9.8 billion posted in the fourth quarter of 2022 is explained by the subsequent event involving the retailer for which we provisioned 100% of the exposure in the fourth quarter of 2022. The total coverage ratio was flat and there was a slight increase of one percentage point in retail. The average retail coverage for the last four years pre-pandemic from December 2015 to December 2019 was 167%, and we are running at 182%. We continue to provision our formation and maintain our expected credit loss management, which is key to have a sound balance sheet with adequate provisions and prepared for the challenges that lie ahead. I think that in terms of credit, despite the challenges in the current scenario, we have good news to share with you. Non-interest expenses in Brazil dropped 3.5% but we have the seasonal effect in this line since the first quarter is typically weaker in terms of costs, which explains the drop in the quarter and the 9% growth year-over-year. For the first time in history, we achieved an efficiency ratio below 40%. On a consolidated basis, it was 39.8% in a quarter where non-interest expenses grew 7.7% year-over-year and fell 3.5% quarter-over-quarter. The efficiency ratio in Brazil was 37.9%, which is also down from the last quarter, which had already been a good quarter. So, these are the lowest efficiency ratios in the industry when we consider all expenses without any reclassification and calculated in a manner we believe to be the most correct. They are the lowest efficiency ratios in the history of the bank. About the cost base, our quarter-on-quarter core costs fell by BRL 700 million, a drop that is mostly explained by our efficiency program, which fostered cost discipline and focus on cost. It has a volumetric effect, which is the good cost, the cost that we would like to have more of as the business generates more activity. And more importantly, we continue investing in our businesses and in technology, delivering sound and consistent earnings, taking care of the bank of today while investing in the bank of the future. It's worth noting that we are not delivering these efficiency ratios by cutting off investments. We are at full speed with our digital transformation. We are expanding businesses, focusing on capital discipline and in value creation, and continuing to invest in the bank.

Renato Lulia, Group Head of Investor Relations

Hello, everyone. I'm back. Milton is right here with us. Thank you for your wonderful presentation. Now, we would like to start the Q&A session. It will be in two languages. If you ask the question in English we're going to answer in English. If you ask in Portuguese, we will answer in Portuguese. We have both options therefore available for you, audio in English or Portuguese. Now you can also submit your questions via WhatsApp, 1198-993-1132. Time for your questions.

Thiago Batista, Analyst

Good morning, Milton. Good morning, Lulia. Congratulations on the strong results. It seems like the bank is operating in a different environment. My question is about the profitability of the business areas. In examining the wholesale and resale sectors post-pandemic, there's a noticeable shift in the portfolio. Retail now accounts for 30% and wholesale for 17%, which is reversed from before. How do you envision the returns? Is there a structural change in the business or competition from fintechs that explains this shift, and how do you see profitability looking ahead?

Milton Maluhy Filho, CEO

Thank you for your question, Thiago, and for the kind words; it's always great to have you here. Your question is valid and insightful. Let's break it down. If we look at a longer timeframe, there have been notable effects in recent years. As you mentioned, the pandemic significantly impacted us, leading the bank to forgo some revenue to better serve our clients, particularly through the credit program at Travessia, which supported small and medium-sized businesses during tough times. We've also encountered some regulatory challenges, such as loan caps that affected profitability, and delinquency rates have increased again. After two strong years, delinquency has risen, especially in credit cards where our presence is substantial, and this has contributed to a decline in Retail profitability. However, we have seen some improvements in recent quarters, aided by seasonal cost benefits, which have slightly buoyed profitability. Retail is now more reliant on credit than it was previously, making credit generation and fees crucial to our revenue model. Our operations have expanded beyond just fee generation, capturing value through credit returns. When we closely analyze Retail as a whole, the company is performing well, with delinquency rates under control, as reflected in our credit indicators. Although individual clients are more credit-dependent, they are also more resilient in a challenging credit environment. In the open market where we deal in credit cards and other loans, we are seeing profitability pressures. We are actively repositioning our portfolio, enhancing its strength by shifting towards a more secured structure, which may reduce profitability but increases resilience in tougher times. Our management has effectively navigated these challenges, having reduced the portion of our portfolio tied to low-income clients by 10 percentage points. Overall, while we expect Retail to continue improving profitability, we do not anticipate returning to previous levels, and we are focusing on a very strong efficiency agenda. This is where we have control, particularly regarding efficiency, especially in servicing individual clients directly. In Wholesale, we've seen significant income, with our investment banking, commercial area, asset management, and Latin American operations all contributing. We did experience a slight dip last quarter due to specific provisioning costs, and we anticipate a normalization of credit costs, which may lower profitability. Additionally, reduced activity in investment banking and fewer asset performance fees will exert some pressure on profitability, but we remain confident in meeting our guidance expectations.

Renato Lulia, Group Head of Investor Relations

Thank you, Milton. We have the second question, Gustavo Schroden, Bradesco. Welcome.

Gustavo Schroden, Analyst

Welcome, Lulia. Welcome, Milton. Thank you for the opportunity. Congratulations on the strong results across the board. I would like to expand on Milton's comments regarding efficiency, specifically noting that it's below 40%, particularly when we consider the size of the bank, which has 4,100 branches and 100,000 employees. I've asked Milton this before and will ask again. Based on my understanding, it would significantly enhance profitability if the bank could achieve a return on investment of 20% to 21% with such a heavy infrastructure while maintaining an efficiency level below 40%. Milton mentioned considering the internet and the pandemic period which has shaped our understanding of post-pandemic consumer behavior. We have a clear view of this behavior now. Therefore, is there an opportunity to substantially reduce the number of branches and points of service, as well as the structured staff required to support them? I'm referring to optimization that could lead us to a different, potentially higher, threshold of profitability. I wanted to hear your thoughts on this again. I believe there is potential for a shift in ROI, which is already favorable, but perhaps we can elevate that threshold further.

Milton Maluhy Filho, CEO

Hi, Gustavo, thank you; pleasure to see you once again. It's always good to receive this question because, remember that there are a lot of employees watching the call, besides the investors. And this gives a great opportunity to communicate with everyone. This agenda of efficiency is fundamental. We've managed, in fact, to reach the efficiency levels increasing the operational leverage of the bank. Of course, there was a space for that in reducing if you are talking about the branches. Over the last few years, since 2015, when we start to do a few movements for reducing, we've reduced 1,500 branches all through that time. Maybe this is not an isolated objective. Well, we want to service our clients in the right way. We believe in the digital model, we are trying to evolve understanding the channel, the digitalization of the client demands, and the products. Well, in this quarter, we've closed, if you've seen, 55 branches. We reached the volume of 415 digital branches, which is a different model, lower cost where we have extended hours for servicing our clients. This is very important. And we've been working with the business space where these lighter branches we have the hubs and satellites. We concentrate the operations in one branch and a few branches, we leave these business areas lighter to service, to bring, to provide consultancy, to talk about more sophisticated products. The care and equilibrium that we have here, when we reduce structurally the land base, we reduce the top line because the digital model is working and it's integrated. Therefore, the care that we have to have is as our clients still demand and still go to the branch, there's still a flow of payments that is very important. Even though the flow of payment drops, it grows nominally, even though it reduced the share of our branch networks in regards to payment as a whole. So, we continue to work strongly on efficiencies, specifically at the moment where there is more adversity. The more uncertain the future is, the more intense our efficiency agenda is here at the bank, and this is the rhythm that we're going to implement in 2023 and 2024. And if we have to do additional adjustments, we will do so as that is necessary to service our clients correctly. And since we have the digital integrated model, this is our central challenge. There is space for us to evolve. We will continue to dedicate ourselves over the efficiency agenda. You've talked about a few of the levers and these are very important levers for us to continue to grow and deliver this level of efficiency, top line is very strong and helps in the index but we need to have a look forward for the future. The balance needs to be given. If the top line is uncertain, the cost is certain and we will do a deep dive on that.

Renato Lulia, Group Head of Investor Relations

Thank you, Milton. The third question is here, Rafael Frade, Citi. Welcome, Rafael.

Rafael Frade, Analyst

Thank you, Milton. Thank you, Renato. Thank you for the opportunity. Well, one question about credit cards, Milton. As you commented, we've seen and it's a stabilization of the quality of credit of the portfolio as a whole. But if you look at the credit cards specifically, it's worsening. We have a worsening of the marginal, well of the margins. If you can tell us more about credit cards, regardless of all the measures that were implemented, there is still some lagging, some stuff that we get from the previous origination. And another question, I thought that it was different from the other players. You had an increase in spend and how much is that of the demand of the client, the proposal of funding that's coming from other companies, if you can discuss funding?

Milton Maluhy Filho, CEO

Well, I'm going to start talking about credit cards. Credit cards, remember, our portfolio is very large, we have practically 30% of the market share. When we continue, when we take into consideration the card for a bank, look at the portfolio as a whole. Now, these segments have had different performances. There was a great performance from the natural person's bank accounts. This is a portfolio we continue to grow. And this is the high-income profile. Of course, we have an allocation, but this is more balanced. And then there is two portfolios, the finance and the open ocean where we work with the brands without going through the regular channels, and this has been reducing the concessions. Specifically, in these two portfolios in the finance, you have the value proposition of the partner. So, not necessarily, you have the same quality of credit. You can see through that, and you can have better quality in the open ocean, the client that comes through the digital channel and looks for credit, you have more difficulty. So, you have an adjustment in the portfolio. We've reduced the concessions and we've done the general review of the limits and the exposure of the riskier groups. They were reduced in a more relevant way. So, I can tell you that the short delays, not only in this year has improved the performance, but there is a portfolio that has a lagging to it. When we compare the numbers to the SFM numbers that were published, there was a delay, there was an opening in the delays, there is a lower threshold, and we do the correction at the end quicker than the system as a whole. So, I believe that capacity and how dynamic it is, it's what makes the difference. So, we are very comfortable. We've done the necessary interventions at the limits and these we can see a reduction in the higher threshold, and if we remove the account holder, there is lower capital cost and we have a different performance in regards to the cross-sell and the records that we have of the clients itself. So, this is the central point on the credit cards. About the funding, your second question. I believe that the bank has managed to perform very strongly in capturing deposits, not only for what we call the traditional deposits. We have an open platform, multi-products, an asset management that is very competitive and a distribution channel that is very solid. So, we've managed to work with either the investment and the credit analyzers and the capacity that our private bank has been growing. We are gaining market share in the private, 29% market share. According to the BIMA data, this is the largest one in terms of share and it's growing. So, our funding has captured value. Of course, when we see more adversity moments, we see the flight to quality and the bank is always seen as a safe harbor in terms of investments, given the solidity results capitalization of the bank and with the movement of the interest rates and the reduction in the funds and assets. So, what we talk about the open platform, the multi-market, the industry as a whole, performance of the industry was very poor in the first quarter across the board and with the level of interest rates, the treasury products they tend to grow. That's why we've seen that inflow that is very important. Of course, some volatility of course when funding comes from great corporations and great clients, it's more institutional funding and we've lost a few deposits over the last quarter more than we observed specifically concentrated in great corporations and this is distributing the result and consuming more cash flow due to the reducing in cash flow. So, we've seen the volatility and the funding of big corporations but the account holders, natural persons is very resilient and this is outstanding and outperforming the market. So, the bank has managed to work with the liabilities with a lot of solidity. Our indicators are stable, much higher than the regulatory limits and if you look at our deposits from the account holders over the portfolio of account holders, natural persons you can see that we have the better ratio in the market, the funding one to one. So, we can see the capacity of attracting deposits with quality and servicing our clients always with a vision of consultant best investment for the client and it's not the best product for the bank. So, we have the quality with adequate spreads for the adequate client that really needs and it makes sense to invest in the product.

Renato Lulia, Group Head of Investor Relations

Okay, thank you. Thank you, Milton. Now the next question we have is from Eduardo Rosman from BTG. Hello, welcome.

Eduardo Rosman, Analyst

Thank you for the opportunity. Congratulations on the numbers. I wanted to change the theme here. I think that the result was very clear. I think that Milton mentioned that you are going to be in New York Conference, I've returned from a visit to foreign investors and the general reading is that the shares are very cheap. But they are very worried about the risks, we have the IVA change, the change in the rotary credit, many others. So, when did you get your reading? How do you see the risks? Are they real, exaggerated? And how do you work with the day-to-day of the bank of course, taking into consideration these risks.

Milton Maluhy Filho, CEO

Thank you, Rosman, it's always a pleasure to have you here. I appreciate your questions. We do not ignore risk at the bank; we confront the challenges head-on. There are uncertainties, as you noted. The credit card market is a persistent issue, and our effort has been to manage, educate, and clearly explain to stakeholders how it operates in Brazil. I recall my own experience in credit cards, where I had a certain perspective until I took on my current role and realized the complexities involved. Many people are unaware of this complex environment, which includes various risks associated with credit cards, issuance, and everything in between. In Brazil, the credit card market reflects 40% of usage and accounts for 21% of the BRL 10 trillion GDP, with transactions reaching BRL 1 trillion annually. We have unique characteristics, such as a significant portion of payments being made in installments. Interest rates are quite low at around 3.8%-4%, but the threshold for those who do pay interest rates is considerably higher than for those who don't. The bank also manages additional risks, making it crucial to emphasize the need for both educational and cultural shifts in the market. When we compare ourselves to other emerging economies, it’s evident that Brazil has a significant imbalance between interest rates and installment payments. I say this confidently. We operate both as the acquirer and the issuer, which eliminates any conflict in advocating for either model. My focus is on the techniques and understanding the big picture. This should be clear to all stakeholders, including the central bank and the ministry of economics, with whom we've engaged in various discussions aimed at market evolution. It’s essential to take a multidisciplinary approach to foster sustainable models that address the root causes of these issues. I’m not alone in this effort; many individuals are collaborating in working groups and we are making progress, always keeping an eye on the sustainability of the business. Regarding JCP, there is currently no clear proposal. We are monitoring a few recent comments related to an infraction notice of significant value, including our defenses. If someone acted improperly, it's not my place to make judgments. We need to address any instances of exaggeration or excessive creativity. Remember, the interest on our own capital is intended to offset losses and maintain value in an inflationary environment like ours. Our sector faces the highest tax rates in the country at 45%, including various contributions and taxes that can hinder the growth of credit portfolios and increase spreads in Brazil. We need to tackle these factors just as we work to reduce the cost of spreads. The VAT you mentioned has its complexities; the financial intermediation is taxed at 4.65%, which is unique compared to other countries. Increasing this tax burden on service income would substantially raise costs for individuals seeking credit. Our goal is to reduce taxes to lower spreads, not increase them. I believe the government is aware of these concerns, as seen in some recent official communications, but we await definitive actions addressing these asymmetries. We continue to confront significant tax disparities in our sector, where companies in other industries often pay less. We need adjustments to create a level playing field. We recognize the risks you've outlined, and we’re committed to working constructively to enhance transparency and clarify impacts, avoiding short-term solutions that could generate long-term structural problems for the economy and society at large. Our aim is to ensure that people who wish to access competitive credit can do so. We are actively pursuing these initiatives and will update you as developments unfold.

Renato Lulia, Group Head of Investor Relations

Thank you, Milton.

Tito Labarta, Analyst

Yes, sure. Yes, hi, Milton. Hi, Renato. Thank you for the call and taking my call. My question in English, my question is on the financial margin. A little bit weak in the quarter, but still overall pretty strong particularly financial margin with clients, so, growing above the top end of your guidance for the full year, and volumes doing okay, spreads up a little bit in the quarter while the financial margin with the market a bit weaker in the quarter. So, just to help us think about the rest of the year, how that should evolve also in the context of when you expect the rates to come down and what the impact could be on both of those lines from you? Thank you.

Milton Maluhy Filho, CEO

Hi, Tito. Good to see you again. Thank you very much for your question. So, I start talking about the clients, the financial margin with clients. While we have been seeing as you know there is this seasonal effect on the first quarter, we last current days in the first quarter. So, this is expected. We still believe the guidance is feasible although we believe there are more challenges now than it was in the very beginning of the year when we released for you to the market the guidance. So, our view is that the challenges are bigger now. We still believe that the guidance the way it is set. It can accommodate our performance in 2023, but with a downward trend. So, this is my first view over here. On the re-pricing on the working capital of the bank, we still have room to do so. So, the way we release on the MD&A you will see that we are still running 400 basis points below the rate. So, this re-pricing that is done throughout the time on the interest rate should be done throughout the year. So, we still have some benefits to get from there, okay? We have been working with more guarantee lines although we had some increase in the clean lines in the first quarter due to the seasonal reasons as well. And also we have been seeing, of course, some products that are kept due to the regulation. That's true for overdraft, that's true payroll loans, ISS. So, we have to keep an eye on that. So, this can put a little pressure on the spreads as well. So, this is our view. We still believe we can do that on financial market with client. But, if I could choose a line to say the geography even though we believe it's too early to say though, I believe that the financial margin with the client we have are challenged ahead, but we are still confident with the guidance, okay? And talking about the financial market where with the market, we have been able to deliver good and decent quarters. I know are challenging as you know, we had a very good quarter for trading, especially good for banking. That shows the way we have been dynamic in hedging our positions, our AUM, and our mismatch in the balance sheet. So, we have been able to do so guaranteeing good level of margins quarter by quarter, and financing the cost of hedge of the capital index as well. So, we still believe that it's difficult to predict this line as you know. But still believe that the guidance is reasonable. And we should be able to deliver the margin with the market within the guidance that we released at the very beginning. While we are seeing more challenges coming from the Latin America operation especially from Chile, as you know Itaú Chile just released and had the conference call as well. So, what they have shown there is that the financial margin with the market in the first quarter was very challenging especially due to the low inflation environment that we have been seeing there. That shows that as the bank are launched in U.S., local inflation whenever you have lowering inflation, you have other benefits but in the financial with the market, you suffer a little bit more. So, Chile and that region should be more volatile. And in Brazil, we still believe we can post decent quarters for the coming quarters.

Renato Lulia, Group Head of Investor Relations

Thanks, Milton.

Unidentified Company Representative, Analyst

Thank you very much. Now, we have Bank of America, Flavio Yoshida, welcome.

Flavio Yoshida, Analyst

Hello. Hello, Milton. Hello, everyone. My question has to do with the risk appetite here that we have. We noticed the NPL is stable after a period of time. But, the growth, the portfolio for individuals and companies in Brazil is dropping. So, we see that some of the lines for individuals have been more resilient, which is the case of real estate, for instance. So I wanted to understand and for consigned credit as well. So we wanted to understand what the future scenario is. In your opinion, how do you think we can maybe accelerate that growth? Thank you.

Unidentified Company Representative, CEO

Thank you, Flavio, so, good to see you. Thank you for that question. It is true. We've been working with the portfolio. We've been working with changes in the concessions for a couple of quarters already, because it's going to be challenging. We believe that we are data-driven, and we have the ability to manage these risks whenever things get more volatile. So, that's the good news. We've been able to have stable trends for individuals. I think our levels are very good right now, and we expect things to be more normal, I would say more neutral over the next few quarters. So, I think naturally, that shows the quality of the portfolio. Also, we have the mathematical effect here, the denominator effect, as you were saying, there is a realization in the portfolios that makes the growth go down in terms of the curve. So, the indicators will have more of a pressure. As for the appetite, we're still very focused. We're looking at engagement, we're looking at our medium and high-income clients, and we have a very good scaffold think. We know which channels, which clients, which ones have a higher risk, appetite risk. So, we won't stop growing. We might grow in a decelerated fashion, but we will still grow. I think that is what we're looking for over the next few quarters. We will continue with the same share in the target clients in terms of risk appetite. And we are losing share in, I would say clients that we understand are not in the curve that we want to or in the trend that we want to follow, but we know that demand has changed over the next few quarters, so that drop is more relevant. From a demand standpoint, we see that there is lower demand. So, in the middle market, we have a lower portfolio and that's because of a lower demand, they're usually working with capital flow and there's also an exchange rate change. So, when we think about the exchange rate for last year and for this quarter, there was a change. The demand is going down around 25% on average. And for individuals, we've also had to adjust a few things. So, there was a cap in the consigned credit lines and we've had to adjust because with 197, some of the targets that we had were not sustainable, we had to adjust that. And we're reducing the lines for vehicles and real estate as well. It is still growing, but it's at a lower pace. And we think that, of course, with this level of pricing, there is a lower demand, so there is lower growth curve, but that's our expectation for 2023 to continue to grow and invest in our main clients. We have a very large portfolio at the bank, so naturally there is going to be an effect on whenever we are working with that transition, but again, we are still growing and with the right appetite in the middle market and also high-income lines. We now have with us Jorge Kuri from Morgan Stanley. Hey, Jorge, welcome and good to see you and hope to see you tomorrow in New York.

Jorge Kuri, Analyst

Thank you. Thanks, everyone. Congrats on the numbers and hope to see you too as well. I wanted to ask about the details on Slide 16 of your presentation where you have the return on equity by the different business lines and you're showing for the first quarter on the credit business, 10.4% return on equity. And I wanted to get your perspective on how do you feel this number is relative to the potential, evidently when risk-free rate is 13.75, I'm guessing this is not a result that you want to see. And so what are the different levers that are affecting this number and how do you see them going forward? And in general, longer term, what do you think would be the fair, attractive return on equity for your credit business?

Milton Maluhy Filho, CEO

Jorge, thank you for your question; good to see you again, hope to see New York in the coming days. So, my sense is the following. So, if we go to a historic series, you will see that the return on equity on the credit was always very close to the cost of capital. So, the sense is that we saw a huge growth in the cost of equity of the bank in the last quarters. So, that put a little bit more pressure in the level of return on equity. And also we saw the level of delinquency growing, especially under the credit card portfolio. And I think this is the big impact when we look at credit in terms of returns. So, if we separate the credit card portfolio and look to the other portfolios, we are generating our return on equity above the cost of capital. That means that we create value in credit and also the cross-sell doesn't exist without credit. So, the reason why we deliver the most relevant part of our value creation has to do with the credit and the cross-sell and the relationship with our clients in all segments. And that means I'm talking about retail, I mean about retail, I mean about corporate clients in general. So, this is what we've been seeing. So, my sense is that coming close to the cost of equity would be reasonable because the major amount of value creation of the bank comes from services and also in trading we are able to deliver a little bit more than cost of capital historically. So, this is my view. We have to work towards the cost of capital and I think there is room to do so, especially when we have the delinquency normalized, so we expect to have better returns, especially under the credit card and auto loans portfolio, those are the two portfolios that suffer a little bit more and brought the level of return a little bit down. So with all the measures that we took, the adjustments, it's not in one quarter that you will see that. But looking forward, I think it's reasonable to expect cost of equity and return on credit coming in the same direction. This is my best expectation. This would be my appetite in terms of to be good expectation and having something that is reasonable for us.

Renato Lulia, Group Head of Investor Relations

Perfect. We have our next question here from Eduardo Nishio from Genial.

Eduardo Nishio, Analyst

Hello. Good morning. Hello, Milton. Hello, Julia, thank you for the conference, and congrats on the results. Going back to what Thiago was saying about the return for retail, I see you're making adjustments in your businesses. You have this new perspective on clients and products. And considering you've done the rollout in wholesale and as a consequence, we see that wholesale has seen that effect, has noticed that change in return and profitability. So considering all that, I would like to know what your perspective is for the future rollout for retail. I know you're working on that now, and I understand retail is probably more complicated. I mean different departments will have some special incentives. I think it's probably difficult to change that perspective completely. So I would like to know more about this initiative. What do you expect in terms of outcomes? Do you think you can improve the top line, the profitability and also when do you think you're going to see that ROI going up basically, that curve getting better.

Milton Maluhy Filho, CEO

Thank you for that question, Eduardo. While we have a project here that's probably one of the main challenges that we have. We started this year with this new structure, with new leadership, and we're using this as a new operational model. It's the NMO, as we call it now. So we do have very important challenges in terms of reorganizing and revisiting the expectations of our clients. We understand that usually banks are based on the product view. Usually, you focus on the product, on the system, on the structure. What we're trying to do now has to do with two effects. First, we have more of a modern platform right now, which is very important. You're not a victim of the old systems anymore. And also we have the agile way of working where you have communities that are designed to understand the needs of our clients. It's easy to talk about it, but in practical terms, it is very challenging. I'm not saying this is a simple thing. We have dedicated teams. We have a very high governance level for follow-up, for execution. So the whole concept has been defined already. We have started to implement all this already. We're looking at a very important execution phase right now, and we're thinking about the different business units as well. So we talk about different business units for individuals, for companies, for retail, et cetera, et cetera. So, we do have a very good P&L, very structured view on that. We are reorganizing our teams right now and we want to continue to work with these opportunities. As I was saying, structurally speaking, we're no longer going to have those return levels that we had in the past, because the market has completely changed in terms of regulations or competitors as well. And we also have changes in credit levels, so the return levels are going to be lower, but we are focusing on the different units to have more profitability, again for individuals and also for companies. So we've had a very good catch up. I would say, we've seen a good profitability rise. So again, we started with better results with individuals, but with the right leadership and with the right education, we believe that we're going to see good results. It's not going to happen overnight, not in this first quarter. But our expectation is for that change to really have good effects over time and that's going to change profitability, NPS, it's going to change the opinion or the experience of clients as well. So we are going to have more engagement and that's going to be way more relevant because people will see that their needs are, we're looking at their needs and we're adapting to that. So I am sure that again, we've done a few reviews on that process and we want to continue to do so. So we want to focus on clients and the sum of all these factors is going to maximize everything, not just on our side, but also for clients. We have a long way ahead, but so far so good. And we have very high expectations and we've started to see some good results.

Renato Lulia, Group Head of Investor Relations

Thereafter we have Henrique Navarro from Santander. Welcome.

Henrique Navarro, Analyst

Hi everyone. Thank you for the opportunity to ask this question. Congratulations on the results. Now, in the issue of provisions, you already start the year, if we annualize the bottom of the guidance and this is a dynamic that we can consider for the rest of the year, maybe working from the standpoint of the guidance for provisions.

Milton Maluhy Filho, CEO

Thank you, thank you for the question. Thank you for your participation. Still early to talk about geographies, our opinion is that we still have important challenges in the next quarter. If you analyze the first quarter, it takes you naturally to a higher threshold than bottom floor. But when we normalize the wholesale, that is contained in the guidance, there might be seasonality in the cost of credit. So the expectation is that it will grow over the last few next quarters without any big events, nothing too unexpected. But since wholesale is events, we still are cautious because events might happen all throughout the year and they might bring volatility to the cost of credit, which is something that we haven't observed over the last few quarters. This is not the bottom of the guidance. We're so comfortable with the guidance. We had no problems delivering the guidance, but the cost of credit depends on scenario perspective. So cautiousness is welcome. And if we have more news, we will update you.

Renato Lulia, Group Head of Investor Relations

Thank you, Milton.

Unidentified Analyst, Analyst

Well, good morning. Thank you for the result. Thank you for this great opportunity. My question is on the business of M&A, the transactional acquiring business is growing year-on-year, much higher than the industry. So I would like to know what would be the drivers for growth and what type of clients are driving this growth?

Milton Maluhy Filho, CEO

It's a hybrid question right? It's a hybrid question, but thanks for the acquiring business acquisition. Well, the business acquisition, we have been for many years adjusting the operation. This is a clear change in the service. The value proposition and the results are following suit. So from the standpoint of market share, we've been growing in these segments that we really have the target segment and remember that the dynamic of market share and profitability and the business acquisition is inversely proportionate. So on the same hand, from the standpoint we have the market share. The big clients are driving two-thirds of the market share, the small ones are driving two-thirds of the profitability. So, looking at the share in a broad way is not a good metric. I've been saying that for many years. So we've been growing the market share in those target segments where we believe that we have more opportunities and we have profitability impact. We've been ultra disciplined in the big companies and big corporations. So we do not operate the contribution margin that is negative because in the end of the day, if you do that, you don't have any big challenge to operationally leverage this. Well, there are some, but if the contribution margin is negative, as we see some players operating, in some cases you cannot have operational leverage and what you're doing is renting market share and there is a cost. And this is not the play that we believe, we've managed to re-price in a very important way this increase in interest rate has brought re-pricing challenges for the industry as a whole, closer proximity to the challenges, to the channels of the year. So, having an acquiring that is closer, that is ours, that we don't have to ask for, excuse me. And we can create more cooperation. Well, all the operations are politically connected so we can bring more value so that the acquiring is more of a product in the value proposition and not just a part of the business. And we've managed to have greater penetration in the business finance products, helping the clients. This is the cheaper receivables that they have to discount. So our clients, when they have a situation, they demand that. And we've had a great capillarity in all these segments. So the re-pricing and the capillarity of the pricing of the financial products and the changes in the package has made our profitability grow. In global, our market share is stable. And in the segments where we in fact have more of an emphasis, we've managed to gain market share once again. We're not going to get into the dispute of the REIT of renting the market share. We are competitive in pricing the NPS of the client is fundamental. The operation has been evolving in that sense, very good in that sense. And this year, this is the result of the acquiring is substantially larger than the last year; having a contribution that is good for the balance sheet of the bank as a whole.

Renato Lulia, Group Head of Investor Relations

Well, thank you. Next question?

Carlos Gomez, Analyst

Thank you very much for taking the question. And since it is the last one, let's try to be a bit more optimistic. We are in the middle of the first year of this administration, and we've been talking about what happens in 2023, evolution of credit, lending less. What do you expect for the next three-and-a-half years? What rate of growth do you think it is realistic for the bank and for the Brazilian credit industry for the rest of the current administration? Thank you.

Milton Maluhy Filho, CEO

Thank you, Carlos. It's fitting to have this as the last question. As you're aware, we are approaching our 100th anniversary next year. We are managing the bank with an understanding of the scenarios and challenges we face in Brazil. There may be longer or shorter cycles ahead. We recognize that challenges remain. Currently, there are numerous discussions happening in Congress regarding tax policies and the fiscal framework, which are crucial in determining their approval and will significantly impact the country's future and debt sustainability. It’s important that we address these discussions. The proposed tax reform could be quite disruptive for Brazil since companies need a simplified fiscal framework to enhance productivity. We must focus on growth and long-term development. There is still a structural agenda that requires our attention, particularly regarding the success of the tax reform in Congress and identifying key indicators for the future. We see potential for improvements in both expenses and revenues, while being cautious not to increase the taxation levels in Brazil, as a third of the GDP is already taxed. It's crucial to operate efficiently to create a nurturing environment for both companies and individuals to thrive in Brazil. This is our expectation. We choose not to engage in political noise; we consider it a part of the journey. However, we are optimistic about Congress and the government's willingness to listen. We've had multiple discussions with the finance minister and are encouraged by their efforts to address their political challenges while advancing the important agenda. We are committed for the long term. It's hard to predict the next three and a half years, but we remain confident about the favorable conditions for success. Brazil is uniquely positioned due to current geopolitical discussions and has significant opportunities, especially in agriculture and energy sectors. We possess the necessary assets and geographic advantages to capitalize on these opportunities. It's essential we seize this moment. There is much to be done, and success will require collective coordination and effort as a nation. This is our hope, and from Itaú Unibanco's perspective, we will contribute to helping the country and the government achieve their goals.

Renato Lulia, Group Head of Investor Relations

Excellent, Milton. Thank you so much. Thank you to everyone who participated and sent their questions. I think, well, this is the wrap-up of our Q&A session. This is the end of our conference call for the first quarter of 2023. I would like to thank you, everyone. Thank you to all of the participants. And I reinforce the invitation, Itaú Day, on June 15, in the morning. You will see a QR code here on the screen. You can register already. You can start sending your question actually. So, that's what we have in terms of a change against last year. This year, you can already send your questions before our meeting. So, I'll see you all on June 15. Milton, you have the floor now for the final message.

Milton Maluhy Filho, CEO

Thank you, Renato. Thank you for being the mediator on this Q&A session. I would like to thank everyone once again for participating, for being here. And I am very happy with the result. I think we all know there are challenges ahead, but our management capacity, our risk management, our value proposition, all the transformation, digital transformation, cultural transformation, and so many other elements that we have in place right now guarantee that we'll have good outcomes. So, again, on June 15, as Renato was saying, we'll be here talking about digital transformation, culture, businesses, business processes, without talking about the nitty-gritty of the figures really, it's going to be more of a P&L perspective, it's going to be a more broad perspective. So, I would like to invite all of you to connect on June 15. And again, Itaú is here for all of you. This is for investors, for clients, for stakeholders. We appreciate, we value your feedback. We want to be cautious, and we want to continue working hard to have the best outcomes possible. Thank you once again. And I'll see you at the conference over the next few days probably, some of you. Otherwise, I'll see you on June 15. Thank you.