Earnings Call Transcript
Itau Unibanco Holding S.A. (ITUB)
Earnings Call Transcript - ITUB Q1 2022
Renato Lulia-Jacob, Investor Relations Director
Hello. Good morning, everyone. I’m Renato Lulia. I’m the Investor Relations Director and Market Intelligence of Itaú Unibanco. Thank you for taking part in our video conference to talk about the earnings call, the earnings results of the first quarter of 2022. This event is being transmitted directly from our first Investment Center Itau Personnalité, just launched at Faria Lima, the financial center of São Paulo. Here we offer a personalized experience for all of our clients that desire onsite service to make these financial decisions. We also have rooms for meetings and video conferences in the studio to see and transmit our results. I’ll give you more instructions to better use this session. For those of you accessing the website, you have three options of audio: the content in Portuguese, the content in English, and the original audio. In the first two alternatives, we will have simultaneous translation. To choose your option, just select the flag in the left-hand corner. You can submit your questions via WhatsApp by pressing the button on the screen or by sending a message to the number 1199-145-458. The presentation today will be available for download on the website and our Investor Relations page. Now let’s start the presentation of the results of the first quarter of 2022. Milton, the floor is yours.
Milton Maluhy Filho, CEO
Good morning, everyone. Welcome to our earnings call, Earnings Results of the First Quarter of 2022. First of all, I’m going to give you some quality and quantity information, qualifying the results of the first quarter. If we compare it to the fourth quarter of 2021, we achieved a result of R$7.4 billion. When we look exclusively at Brazil, we have a result of R$6.7 billion. So I would like to highlight that in a consolidated manner, we’ve been working with a return on equity (ROE) of 20.4%, which is very robust. Looking specifically at Brazil, we achieved a ROE of 21%, reflecting a strong return on investment. Now, regarding our credit portfolio, the consolidated portfolio experienced growth of 0.5%, reaching R$1032 billion, and the credit portfolio in Brazil reached R$830 billion. Another important piece of information to highlight this quarter is the efficiency index. When we look at the consolidated index, it stands at 41.8%, marking the lowest point in the bank's series, while the Brazilian index is at 39.6%, remaining below 40%, showcasing our strength. Historically, we are operating at the lowest level we have recorded. Now, let’s talk about client acquisition. In this quarter of 2022, we acquired digitally 5.5 million clients. We have various products and channels, including Itaú channels, ITI channels, credit cards, and all our businesses and products. This highlights our ongoing efforts and dedication towards client engagement. We have a strong focus on our ecosystem, improving our value proposition, and creating more value for our clients. The corporate venture capital fund we are managing is active, and the objective of this fund is to invest not just to capture value through equity but to make sure we are investing in companies that will support and improve our ecosystem. Additionally, these companies will integrate with the bank at some level in the business. Notably, we have partnerships with PayPal, aimed at boosting e-commerce, alongside collaborations with companies like Reddit, Samsung, and Apple. Our partnerships have been instrumental in building our client portfolio. Most recently, in corporate venture capital, we have invested in several startups. We aim to focus on improving our main business and capturing value through M&As and joint ventures with a keen eye on integration. For instance, ZUP, Pravaler, Ideal, and our recent marketplace venture in agribusiness showcase our focus on that sector. Moving onto results, I’ll summarize how we are structuring ourselves to focus more on clients by segmenting our database and defining engagement. We’ve identified behaviors, allowing us to provide relevant offers dynamically. For instance, we have seen engaged clients generating 1.5 times higher Net Promoter Scores and experiencing more than a 6.3-fold increase in conversion rates. Now looking at our credit portfolio, we have seen significant growth: a 4.4% increase in our natural person portfolio and a small decrease for micro to medium-sized companies, while large companies saw a 4.4% growth. Year-on-year, the robust growth rates were 32.9% for natural persons and 21% for micro, small, and medium enterprises. This quarter's portfolio growth was slightly lower at 0.5% but shows an annual increase of 13.9%. The variations in exchange rates have notably influenced our portfolio as well. For instance, the natural person portfolio with guarantees has risen from 47.7% in December 2019 to 53.7% in March 2022. This is significant as it indicates a migration towards a more secure credit portfolio. We have reduced the unguaranteed portfolio from 52.3% to 46.7%, showcasing a healthier risk profile. Our efforts to support clients during the pandemic saw our portfolio's frozen state reduced from R$53.5 billion to R$27.1 billion, highlighting the effective amortization of this credit. It’s worth mentioning that we are not renegotiating these debts; they are genuinely being amortized, which is critical to maintaining a healthy balance sheet. Regarding provisions, we maintain a solid coverage ratio at 230%. Non-performing loans above 90 days are low at 3.3%, and while we do see some decline in portfolios due to exchange rate fluctuations, it's noteworthy that we are focused on quality credit outcomes. It's important to highlight our strong growth margin of 23.9% compared to the first quarter of 2021, exceeding our expectations despite lower business days. This growth was supported by solid results in both our Brazilian and Latin American operations, demonstrating resilience. We anticipate some challenges ahead due to rising interest rates and ongoing market volatility. Our guidance remains consistent with previous expectations, focusing on quality financial performance amidst fluctuating market conditions. In terms of insurance, we are witnessing a robust year-on-year growth rate of 24%. The insurance premiums, driven by careful management, have led to a strong portfolio with lower liabilities. Our focus has also been on acquiring robust clients while rationalizing our service offerings. We're seeing solid growth in our card issuing and acquisitions, growing at 22.7%. Regarding our complete banking product portfolio, we are ensuring clients have the best products suited for their needs. Now, reflecting on volatility in interest rates and our growth strategies, our investment professionals operate without conflict between spreads and their compensation, aligning their goals with optimal client outcomes. As such, we maintain a healthy credit quality outlook, despite an expected increase in delinquency rates which we see as a normalization process. In closing this segment, I'd like to emphasize our confidence in our current trajectory and future guidance, as we strive to maintain a solid balance sheet while continuously building a more efficient and effective organization.
Renato Lulia-Jacob, Investor Relations Director
Send us your questions, your comments. If you want, you can send them on WhatsApp or using the button on the platform. All this material is going to be available as I said before, and our IR page. I have Milton over here. Hello, Milton. Let me turn it over to you now so we can start with the debate in our earnings call. We have the first question already from Flavio Yoshida from Bank of America Merrill Lynch.
Milton Maluhy Filho, CEO
Flavio, Hello. Good morning.
Renato Lulia-Jacob, Investor Relations Director
I think he’s still connecting. There it is.
Milton Maluhy Filho, CEO
Hello, Flavio. Good morning. Can you hear us?
Renato Lulia-Jacob, Investor Relations Director
Not sure. Flavio, can you hear us? Maybe you’re on mute Flavio, I’m not sure.
Milton Maluhy Filho, CEO
I’m not sure Flavio can hear me. Okay. I think we can try maybe the second question and then we’ll go back to Flavio.
Renato Lulia-Jacob, Investor Relations Director
I’ll try again. So I have a question from Tiago Batista. Tiago, Can you hear us? There is probably a connectivity issue. Let’s double check. In the meantime, it’s interesting to see all those results that you mentioned. So I wanted to know what are the main highlights, if you want to repeat some of the highlights in terms of the consistency of our results this quarter.
Milton Maluhy Filho, CEO
Well, as you were saying, this is live. We’re probably having a connectivity issue. This was a very consistent quarter. I think the results were well aligned with what we were expecting. Again, the main term here is consistency, and there might be a few questions. We expect to hear from all of you, but still, it makes us very satisfied and happy in terms of this quarter and the future as well. We really trust the guidance for the entire year, which is why we didn’t make any changes in that.
Renato Lulia-Jacob, Investor Relations Director
Okay. I think Flavio is with us now. Hello, Flavio. I’m not sure if you’re on mute Flavio. We cannot hear you. Can you hear me now?
Flavio Yoshida, Analyst
I was on mute before.
Renato Lulia-Jacob, Investor Relations Director
There it is. Okay, Flavio, we can hear you now.
Flavio Yoshida, Analyst
Great. How are you today?
Milton Maluhy Filho, CEO
Great, Flavio. Nice to hear from you.
Flavio Yoshida, Analyst
Well, it’s great to have this opportunity to ask you a question. You were talking about the guidance before. What we have seen here in terms of the figures of the first quarter is that they’re not higher than the guidance. So what I wanted to ask you about was the margins. When you look at the growth, you can see that it is usually for credit cards that have had very good growth. And when it comes to corporates, that’s a bit stronger than before. So I wanted to know why you haven’t changed the guidance, especially regarding margins. Do you think the margins are going to suffer more pressure as time goes by throughout the year, etc?
Milton Maluhy Filho, CEO
Thank you very much for the question, Flavio. We’re truly sorry for the inconvenience with the connectivity issue. In terms of the margin, I can reinforce that we had a very solid quarter—above the guidance. However, since we’re looking at annual figures, when we’re making projections for the future, we believe that this will align with our guidance year-on-year. Moreover, we’ve seen some advancements across various lines. There are many reasons for that, including seasonality and fluctuations in activity. For instance, we’ve seen impacts on card growth—especially in the fourth quarter, driven by seasonal bonuses and amortization. From a credit quality and margins perspective, we aim to recover margins and started the year off very strongly. Our projections for growth have factored in aspects like inflation and interest rates, which can impact our expected margins. Last year, we experienced significant acceleration in margins, and we believe our current trajectory will continue.
Renato Lulia-Jacob, Investor Relations Director
Thank you, Milton. Thank you, Flavio for the question. We have another question here from Tiago but I see Tito on screen. So Tito, let me turn it over to you.
Tito Labarta, Analyst
Yes. I can hear you. Can you hear me?
Renato Lulia-Jacob, Investor Relations Director
Yes. Brilliantly. Thank you.
Tito Labarta, Analyst
Okay. Great. Thanks for the call and taking my question. My question is just in terms of your growth in NII and provisions. You had good growth in client NII as you mentioned, but provisions are also growing quite a bit. There are concerns about asset quality deterioration in the current market environment. So just how do you think about that growth? Are you concerned about asset quality deterioration? I mean, you have seen that growth in unsecured lending. Do you see potential risk from that at some point later in the year? How do you view those two lines in tandem?
Milton Maluhy Filho, CEO
Okay, Tito. Thank you very much for your question. Let me provide some insights on cost of credit and our future outlook. We maintain a positive guidance outlook and believe we will deliver figures consistent with what we announced at the beginning of this year. We saw a deterioration in certain specific vintages last year, and we adjusted quickly to mitigate these risks, which positively impacts us this year. However, looking back, 2020 and 2021 were exceptional years with unusually low delinquency ratios, so a gradual normalization was anticipated. We expect a slight increase in delinquency rates as a routine correction throughout the year. Additionally, while we noticed some growth in our clean portfolio this quarter, we were mindful to exercise caution with credit origination during this period. Our relationships with our clients drive percentage credit quality metrics, and we remain cautiously optimistic about our margins and overall balance sheet health moving forward.
Renato Lulia-Jacob, Investor Relations Director
Thank you so much, Milton. Now we have a question from Tiago Batista.
Unidentified Analyst, Analyst
Hello and good morning.
Milton Maluhy Filho, CEO
Good morning.
Unidentified Analyst, Analyst
You can hear me okay?
Milton Maluhy Filho, CEO
Yes.
Unidentified Analyst, Analyst
So I have a question about bank capital. You were discussing 12.5%, around R$100 million below the target you had. Without considering the consumption you’re going to have from XP, is that something that concerns you? Also, is there a plan to reconsider all that? I mean, Milton, you mentioned that you’re creating about 50% to replenish this. But it’s still at 100% below that level. So how long do you think it might take to reconstitute all that? And will we see a reduction in that goal for the next few months, given the new hedge approach?
Milton Maluhy Filho, CEO
Thank you, Tiago, for your question. There are several points to cover here. We are working with a CET1 placeholder at around 12% and believe it to be comfortable, maintaining a buffer of 1.5%. Our dividend structure will not be impacted, and as I mentioned earlier, we are aiming for a solid return on equity. We consider our dividend payout along with our financial growth and risk-weighted assets demand. As such, if we have lower profitability, there might be an increase in payout. While we've adjusted our portfolio management strategies for maintaining competitive capital ratios, we remain committed to ensuring a stable outlook that reassures our stakeholders and adheres to our risk appetite. We will continuously look to optimize returns against regulatory requirements to ensure we stay above necessary thresholds.
Renato Lulia-Jacob, Investor Relations Director
Well, thank you, Milton. Thank you, Tiago. We have another question now from... No, we inverted the screen. We are adjusting. I think we can go with...
Unidentified Analyst, Analyst
Good morning, everyone. Milton, congratulations on the results. My question is very simple.
Renato Lulia-Jacob, Investor Relations Director
We lost audio. No, I think we can hear it. Can you repeat the question?
Unidentified Analyst, Analyst
Sure. Well, the question is treasury and guidance. The result Milton already specified is what we expected. And if we think about the guidance that you passed, R$1 billion to R$3 billion, we had R$1 billion now. But with the guidance, does that mean that the next quarters will be weak, and how are you anticipating this match? Will there be any possibility for a review of the guidance for the second quarter?
Milton Maluhy Filho, CEO
Thank you, Gustavo, for your questions. We understand the quarter performed better than expected, navigating a volatile moment both in Mexico and internationally. The ongoing geopolitical tensions and their effects on inflation have created uncertainty. We expect a more challenging second quarter, and our projections should remain consistent with our guidance unless significant opportunities arise. Hence, we should stay within our previous figures.
Renato Lulia-Jacob, Investor Relations Director
Thank you, Milton. Now I think everyone knows who’s next. Here is Rodman. Thank you very much.
Unidentified Analyst, Analyst
Good morning, everyone. Can you hear me?
Renato Lulia-Jacob, Investor Relations Director
Great. I wanted to ask about the other blocks of the results you have opened, and for example, we can see that the ROE for the bank is strong. I wanted to understand the trends here.
Milton Maluhy Filho, CEO
Thank you, Rodman, for the ROE question. We’ve observed portfolio growth slightly exceeding our expectations, with service and insurance dependencies being crucial in this growth. Credit results continue to be a primary driver. It’s important to analyze credit as an integrated component of our operations, where we aim to enhance performance and efficiency. While we see solid results in our investment banking and wholesale space, we remain cautious about the impact of inflation on credit quality.
Renato Lulia-Jacob, Investor Relations Director
Great. Thank you, Milton. We now have Eric Friedman from Citi.
Unidentified Analyst, Analyst
Hello, everyone. Thank you for accepting my call. I wanted to ask about the growth of clients. You mentioned earlier that you are very client-centered. What other business units do you think have opportunities for improvement within the bank? Also, regarding regulatory flexibility for M&As, do you foresee any consolidation opportunities given the current context?
Milton Maluhy Filho, CEO
Thank you, Eric, for your question. We've been focusing on client-centric strategies driven by cultural and digital transformation. The majority of our employees now share objectives that prioritize the client. We’ve also modernized significant portions of our legacy systems, migrating toward a more efficient cloud infrastructure—expected to reach 50% modernization by year-end. Opportunities exist in various segments, including wholesale and insurance, that have shown promising growth trajectories. Regarding regulatory considerations for mergers and acquisitions, we remain cautiously observant. We expect a more competitive landscape which we are equipped to navigate with our existing strategies.
Henrique Navarro, Analyst
Hello. Good morning. I wanted to ask about delinquency rates, specifically concerning the 90-day and 15-day metrics. It seems the latter may pose a real concern as it could signal trouble ahead. What's your assessment of this situation?
Milton Maluhy Filho, CEO
Hi, Henrique. Thank you for your question. The 15-day delinquency ratio is normalizing, consistent with historical patterns we observe, especially during the first quarter. I wouldn’t categorize our current levels as problematic. However, we do monitor portfolio performance closely and make adjustments as necessary, aiming to navigate seasonal difficulties. While some deterioration is expected in the coming quarters, particularly for delinquent loans, we believe our approach will maintain a strong overall portfolio quality.
Geoff Elliott, Analyst
Hi. Thanks for your comments Milton. My question pertains to how increasing interest rates impact your credit quality, especially given most of your retail clients are not protected by floating rates. What thresholds do you see that might stress your customers?
Milton Maluhy Filho, CEO
Thank you for that question, Geoff. We need to view the distinctions between corporate and retail clients. Our corporate clients experience direct impacts from rising interest costs, whereas retail clients face marginal implications depending on credit origination policies. We have observed some decline in demand for mortgages as a result of economic pressures, which leads us to proactively adjust our credit issuance strategies—we need to safeguard against adverse selections while remaining responsive to these shifts.
Renato Lulia-Jacob, Investor Relations Director
We have a question now from JP Morgan.
Unidentified Analyst, Analyst
Good morning, Milton. I have two quick questions. Firstly, for your credit cards, it seems that the balance in the portfolio has seen a 40% growth while card issuance has also increased. Can you share your thoughts on how this might affect profitability, especially due to the revolving credit nature?
Milton Maluhy Filho, CEO
Excellent question. The growth in our card portfolio can be misleading without considering the context of previous limitations due to COVID-19. We've worked to capture segment growth while being cautious. Our share remains strong, but with an intent to safeguard against volatility related to consumer spending, especially as economic recovery leads to more credit demand. We reflect upon this while monitoring market share to protect our positions amidst aggressive competition.
Unidentified Analyst, Analyst
Excellent. Thank you, Milton. That’s very insightful.
Renato Lulia-Jacob, Investor Relations Director
We now have a question from Marcelo Telles from Credit Suisse. Hello Marcelo.
Milton Maluhy Filho, CEO
Good to have you here, Marcelo.
Marcelo Telles, Analyst
Thank you, Milton and thank you Renato. Most of my questions already have been answered, but regarding funding—especially when it comes to FIIs or real estate funds—was there a 40% quarter-over-quarter increase? I think you’ve been competitive, but considering independent platforms as well, what’s your strategy around funding? Do you think rates will need to be reconsidered, and how will this impact margins?
Milton Maluhy Filho, CEO
Thank you, Marcelo. We recently discussed the significance of our open platform strategy with strong results. Our liquidity indicators show better performance, and our team structure is designed without product-related conflicts of interest. As such, we are continuously evolving to meet client needs effectively while also remaining competitive. We believe that our approach will not only maximize our opportunities but also maintain strong results across the board even in fluctuating economic conditions.
Renato Lulia-Jacob, Investor Relations Director
We have another question and then space for WhatsApp. The next one is from Goldman Sachs.
Unidentified Analyst, Analyst
Hello Renato. Hello, everyone. Just a follow-up on XP participation from your recent acquisition. If you are below 10%, can you sell a larger relevance? How much impact does it cause in terms of capital gains?
Milton Maluhy Filho, CEO
The acquisition of R$8 billion previously was above the threshold of 10%, which ultimately requires our cautious management toward maximizing both our returns and capital adequacy. We have structured our approach around market dynamics and are committed to maximizing recovery while being opportunistic about exit strategies. We’ll make economically prudent decisions moving forward, ensuring favorable conditions before proceeding with any divestitures.
Renato Lulia-Jacob, Investor Relations Director
Thank you, Milton. Can we do another two? There are many questions via WhatsApp. I’m trying to gather all of them.
Unidentified Analyst, Analyst
The themes that are appearing include capital funds and dividends for individuals, so how do you see dividend payments for 2022?
Milton Maluhy Filho, CEO
We anticipate an increase in dividend payout due to growing profits. Our target payout ratio remains at 25%, and while we can consider that a higher dividend payout might be feasible, it depends on projected profitability and risk-weighted asset demands. We aim to replenish our capital positions diligently as we continue to invest in our franchise while providing value for shareholders.
Renato Lulia-Jacob, Investor Relations Director
Thank you, Milton. To wrap up, how do changes in inflation and interest rates impact the cost of the bank? How can we reach these ambitious efficiency goals that stabilize core costs?
Milton Maluhy Filho, CEO
During inflationary periods, payroll constitutes a significant expense. We focus on structural efficiency improvements rather than short-term cost cutting. Our efficiency program comprises over 4,000 initiatives, targeting sustainable savings rather than superficial reductions. This comprehensive approach fosters discipline within management while positioning us for long-term results.
Renato Lulia-Jacob, Investor Relations Director
Thank you, Milton. We have come to the end of the Q&A session. Before we conclude, I invite you to navigate through our manager published last year on our website, promoting transparency and providing insights into market strategy. We'll offer this session via WhatsApp for your convenience, so please feel free to reach out. Thank you all for participating, and we can’t wait to convene again next quarter.