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Itaú Unibanco Holding S.A. (ITUB)

Q2 2010 Earnings Call· Fri, Aug 6, 2010

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Transcript

Operator

Operator

This is Itaú Unibanco Holding Conference Call. (Operator Instructions). As a reminder this conference is being recorded. At this time, I would like turn the conference over to Ms. Francisca Istella, of Financial Investor Relations, Brazil. Please go ahead.

Francisca Istella

Management

Good morning and welcome to Itaú Unibanco Holding Conference Call regarding 2010 second quarter earnings. This conference call is being broadcast live on www.itau-unibanco.com/ir. A slide presentation is also available on this site. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from those anticipated in any forward-looking comments as a result of macro economic conditions, market risks and other factors. With us today in this conference call in Sao Paolo are Alfredo Egydio Setubal, Investor Relations Officer; Sérgio Ribeiro da Costa Werlang, Executive Vice President of Risk Control and Finance; Caio Ibrahim David, Chief Financial Officer; Rogerio Calderon, Corporate Controller and Head of Investor Relations; Marco Antunes, Accounting Director; Gustavo Henrique Penha Tavares, Itau BBA Director. First, Mr. Alfredo Egydio Setubal will comment on the second quarter 2010 earnings, afterwards management will be available for a question and answer session. It is now my pleasure to turn the call over to Mr. Alfredo Egydio Setubal.

Alfredo Egydio Setubal

Management

Good morning. We are sorry for the delay we had some technical problem in the previous conference. In Portuguese we had to interrupt for almost a minute the main sector that we started later this English conference call. For those who is following through the slide, turn to slide number 2, to highlight net income is the first income. The recurrent net income for the quarter at 3.3 billion R$ is increased 4.1 from the first quarter and that means ROE analyze it was 24.4. The first semester if you consider the first semester, the recurrent net income achieved a 6.5 billion and with a growth of 29.6 when we compare to the first semester of 2009. The second highlight is financial margin, with clients and the credit expansion that we showed. The growth of the margin was 6.7 and total 10 billion R$ in the second quarter. Especially because of the credit expansion 4.4% in the period this quarter and 11.4% when we compare to the first semester of 2009. If we consider only the retail credit growth, this number is 18.8. So we showed a very good margin with the clients and a very solid operation of the bank with the clients that I think is the most important thing. This is what gives us strength and ability to our to results. The third highlight is banking season and banking charts, a 4.4% growth when we compare to the first quarter, R$4.3 billion in the period, mainly because of the credit card operations increase in terms of volumes. Current account services also shows growth and investment banking also was a very active semester, active quarter for our Itau BBA investment banking operations. This far I like the delinquency rate and the results from loan losses. 90 days delinquency…

Operator

Operator

Thank you. (Operator Instructions). Daniel Abut from Citi.

Daniel Abut - Citi

Management

Good morning, gentlemen. Alfredo, a couple of questions related to expenses. You mentioned that about R$294 million in the first half relates to the migration of the Unibanco branches to the Itau platform. I do recall that at the time the merger was first announced and implemented, you did create a provision to cover merger-related expenses. So, the question is why wasn't this captured by that provision in an additional expense that could have been foreseen at the time of the merger's initial implementation. And second, related to that, is there any additional merger-related charges that are not covered by that one-time provision that are coming in the next few quarters that we should be aware of? And the second question is related to this provision for contingencies economic plan and granted this is not just Itau. Every single bank in Brazil does the same thing. They all call this non recurring but we've been seeing this every single quarter for the past god knows how many years. So it's probably time that we start to consider this more recurring than non recurring. But the question is when is it going to end? How much more do you think in terms of quarters of additional provisions for economic plans in neighborhood of R$100 million even paid per quarter, are we likely to see.

Alfredo Egydio Setubal

Management

Daniel, related to the branch migration, we are not able to include these expenses in the provision that we made at the time of the merge is not allowing us. So our auditors didn't allow us to include this in the provision that we made at that time. I think the rules are not, don't permit, doesn't permit to include this expense. What I can say is that we are accelerating this migration since March. So when we compare the first quarter to the second quarter, the numbers are much higher in this quarter because we are in a pace of 100 and 150 branches per month in terms of migration. And it's not only a migration systems. It's not only that. We are reforming all the branches. We are changing the equipment. We are changing the chairs and desks and the layout is totally new, is the new standard for Itau Unibanco. Then also after finishing this 1,000 branches of migration of Unibanco and we will start also the reforms in the former Itau's branches also. That of course would be in a different pace, not so fast but in a way we are going to do the same layout and the same things that we are doing now. For our numbers, for your perspective, you should consider in this second quarter and third and fourth quarter almost the same level that with these -- that we have in the same, in the second quarter. It's very realistic to consider this level of expenses in the third and fourth quarter because our intention and everything is going well in this direction is to finish the integration from the branches by the end of November. So we do have almost 500 branches to do in this four months. So the level of expenses will remain almost at this levels. In terms of economic plans, these provisions are more related to the caller plan of 1990. We still have one plan more in the color two but it is very small. We don't expect much provision for that. But the period that the people can complain it finished its 20 years. So we are almost in the end of these level five provisions against these economic plans. So, probably in the coming quarters this numbers will be lower. We don't know how much lower but it will; we will see some reduction because of the time of this claims finish.

Daniel Abut - Citi

Management

Thank you, Alfredo.

Operator

Operator

Excuse me. Our next question comes from Mr. Mario Pierry from Deutsche Bank.

Mario Pierry - Deutsche Bank

Management

All right. Good morning, everybody. Let me ask you two questions also. On asset quality, if I understood you, you said you do not expect any further improvements in non-performing loans in the second half of the year. If you can just give us more color as to why you don't seem to expect anymore improvements. Talking to your peers, it seems like they feel confident the asset quality should continue to improve, given how strong the economy is in Brazil. And then the second question is related to your trading gains. I know it's a very difficult number forecast, but you have been running close to R$1.5 billion a quarter, last year. This year we're running closer to 1 billion. Do you still think a 1 billion is a sustainable level or should we eventually see trading gains normalizing back to the R$500 million per quarter level? Thank you.

Rogerio Calderon

Management

Thank you Mario, Rogerio speaking, in terms of assets quality what Alfredo just said is that most of the improvement in the credit quality is our undertaking in our ratio. This is because of the maturity of the interest so we do think that we can have a further benefits or announcements, it should be very small. So, any slightly movement is possible but most of the benefits is the rent taking. So, you are not running the bank at 4.6% which is a 100 bps lower than by the end of the year and we should also highlight that the mix is changing a little bit so we are increasing much more towards SMEs. So, there is actually change in the risk mix in our portfolio. So, we believe it should be flat to the rest of the year. Regarding trading gains you are right and we always said it's alluding feasible to repeat the same results as last year because the consensus quite different this year but we are posting 800 to 900 it's we never give any forecasts on the direction of this but it's should be not far from this maybe it is still a little bit high than the sustainable level but it is should not be too far from this from now on.

Alfredo Egydio Setubal

Management

Just to compliment what Rogerio said about the delinquency, in our models we as long as the potential rate is increasing the interest rate we should expect some reaction in terms of economic growth and delinquency. So why don't we analyze our models and report the forecast of the interest rate that probably you go a little more higher. We can expect at least the delinquencies to remain stable, increase a little bit but it is not realistic to suppose that the Central Bank increased the interest rate and nothing happened.

Mario Pierry - Deutsche Bank

Management

Our view always was, unemployment continues to improve, disposable incomes are rising. I do understand that the high interest rates should slow down the economy. But we're still talking of an economy that's growing at a 4.5% annual pace probably in the second half of the year. So that's why I was a bit surprised.

Rogerio Calderon

Management

And Mario, we agree. So unemployment is really one of the most important indicator for us. This is absolutely under control. So we don't expect any trouble in terms of delinquency. What we are just saying is that in a way, looking not at the macro economics but looking at our portfolio, a movement up or down should be eventually noticed but not big. We included -- if you consider from 5.6 to 4.6, it represents more than 15%. So it should not be at the same level anymore. Most of the benefit is already captured.

Alfredo Egydio Setubal

Management

And we have to remember also Mario that we have mixed with more components of credit related to SMEs and individuals. When we compare with the numbers of 2008 the mix was different. The rates of corporate was much bigger than today. So also it is another factor that give us the models that we are almost there in terms of reduction in terms of delinquency ratio. We hope we are wrong. But we are very conservative.

Rogerio Calderon

Management

At the end of the day, if you are right Mario, we will be very glad actually.

Mario Pierry - Deutsche Bank

Management

All right, guys, thank you.

Operator

Operator

Excuse me. Our next question comes from Mr. Jon Prigoff from Equinox.

Jon Prigoff - Equinox

Management

Hi, just a follow-up question on the expense side. You mentioned that you added 2,000 employees roughly in the quarter and I was wondering if you could talk about where -- what areas you are adding people in and what your thoughts are in terms of headcount going forward. Thanks.

Rogerio Calderon

Management

Well, thank you for the question. So it's really attracting lots of attention. Our expansion -- expenses this quarter, so let me spend a little bit more time on it. What we should observe is that from the -- when we compare the second quarter to the first quarter, first of all we should consider that first quarter is normally benefitted by the seasonality. So its normal then, second quarter is bigger than the first quarter. It just happened differently last year but it was abnormal. Normally second quarter is higher than the first quarter. If you consider on page 14, if you consider that our total low interest expenses divested by this Redecard, Porto Seguro and new points of sale end brand is 600 million more than first quarter. I just want to draw your attention that around 200 million is due to the seasonality we had another 82 to 100 million more in advertising because of the World Cup, single event that is not going to repeat and the difference is indeed what increases in our total expenses and this was mainly due to a personal expenses where we added 200 people this quarter. So, this was included in our budget, the guidance on expenses already considered it and the efficiency is considered so everything is aligned with budgets. There is just to finalize you asked about the 2,000 people, they are mainly driven to SMEs platforms that is increasing you say the figure is increasing 27% this year is going to remain being one of the boasts of our growth. So, we need to people to serve those new clients.

Jon Prigoff - Equinox

Management

Okay, thank you very much. That's helpful.

Operator

Operator

Excuse me. Our next question comes from Mr. Boris Molina from Santander.

Boris Molina - Santander

Management

Yes. Just one final question regarding the cost. In your first quarter presentation you showed expansion cost of the network, R$347 million. But in your slide in this quarter, you are showing R$54 million. So, I would like to know what is the nature of the change and how could we think about these costs. And secondly, what is the number of a point of sale that you have, like working progress that you are planning to add. And what is the rate of points of sale that are driving these costs and how much you would expect the point of sale to grow towards the end of the year, in terms of new points of sale?

Rogerio Calderon

Management

Boris you are first question actually you are right we changed that a little bit of criteria to show the figures the current figure is 54 regarding the first quarter. I can explain further but I need some details that I don't have on my hands right now. But the correct figure is 64. Could you repeat the second part of your question?

Boris Molina - Santander

Management

Yes, if you're showing 54 million in the first quarter and 68 million in the second quarter. So, then my question is how many points of sale are you in plans of opening -- driving these costs and how many points of sale do you plan to add towards the end of the year so that we can have an idea of more or less how this line is going to -- performance is going to remain at this level on a foreseeable basis. Given your expansion plan on your branches for this year and next year, how could we think about this?

Rogerio Calderon

Management

Okay it should be more or less at the same pace and we are planning to open up a 150 new branch this year. We have reaffirmed the targets and most of the new branches are ongoing, right now are going to be opened within the next month if not all of them to the end of the year should be buy the beginning next year but you should use around a 150 branch this year.

Boris Molina - Santander

Management

Okay. Wonderful.

Operator

Operator

Excuse me. Our next question comes from Mr. Saul Martinez from JPMorgan.

Saul Martinez - JPMorgan

Management

Hi, good morning. A couple of questions. I'm going to continue on the cost side unfortunately for you guys but can you talk about the viability for guidance on expenses, 3 to 5% of total and then zero to 3%; I think excluding expansion costs in Porto Seguro and Redecard, because if I look at these numbers, unless -- and forgive me if I'm missing something obvious -- unless your expenses actually decline in the third quarter and in the fourth quarter relative to what they were in the second quarter, I don't see how you get to those guidance metrics. So can you talk a little bit about why you're sticking to that guidance range on expenses? And secondly, can you talk about why your effective tax rate was less than 24% in the quarter I think in the past; you guys have had a tax rate of 26 or 28 pretty consistently. What drove that lower tax rate and what should we be expecting going forward? Should be expect that tax rate to trend back upwards in the coming quarters? Thanks.

Rogerio Calderon

Management

Okay. So we reaffirm the guidance on expenses. This peak in terms of, the spike in terms of expenses in the second quarter was already included in our budgets. When we gauged the guidance from 3 to 5% total cost increasing, it was already considering including this peak on World Cup things and all the migration et cetera. So that's what make us very strong to reaffirm that it should be by the end of the year within the three to five range, yes. And I don't know exactly the calculations you made more or less we should keep stable during the second semester levels of expenses with some compensations of this peak in the quarter and this already what we believe -- is actually what we believe is going to happen. We are quite confident on this, okay? So quite confident.

Saul Martinez - JPMorgan

Management

How -- you're confident. But how viable is that? You're still growing. Your headcount is increasing. You have a wage hike happening in September and commercial activity is very high in the fourth quarter. You're confident that in spite of all that, the expense levels will remain roughly flat versus what they were in the second quarter?

Rogerio Calderon

Management

It's viable because we have - your right. We have these expenses going up. But we have synergies being captured month by month. So when you add and deduct, it's going to be stable during the rest of the year more or less. What's viable is actually the synergy that we are capturing. Can I go to the second question?

Saul Martinez - JPMorgan

Management

Sure.

Rogerio Calderon

Management

So, effective tax rate. Yes, we had some movements from the first quarter to the second quarter, some small adjustments. But if you consider the first semester, your going to find this level you were mentioning of 26 - 27% and looking forward this is the level that you should consider in your models if -- and you know in summary we are talking here on the total 34% income tax deducted by the benefits of interest on net equity. What drives us to the 26 - 27, that is our normal level.

Saul Martinez - JPMorgan

Management

Why was it so low in the second quarter?

Rogerio Calderon

Management

Well second, when we consider first and second quarter, it appears in which we file the income tax, all the papers. So we have some more adjustments, ups and downs but 26 is the correct figure for the future.

Saul Martinez - JPMorgan

Management

Great, thank you very much.

Rogerio Calderon

Management

We didn't have any major items to highlight. Its several things that shows this figure down this quarter.

Saul Martinez - JPMorgan

Management

Okay, thank you very much.

Operator

Operator

Excuse me and ladies and gentlemen, our next question comes from Mr. Marcelo Telles from Credit Suisse.

Marcelo Telles - Credit Suisse

Management

Hi, good morning gentlemen. Most of my questions have been answered. But I might introduce two others. The first one, you mentioned that you do not expect much improvement in your NPL ratio going forward and one of the explanations is that the higher participation of the SME portfolio. I was wondering if you could quantify what your delinquency rate in your SME portfolio is right now, and just to have an idea, compared to the whole commercial portfolio that you have today. And also on the branch expansion side we saw that in the first half of the year, actually your number of branches have actually declined by five branches, if I'm not mistaken. So that means that all the branch expansion would be concentrated in the second half. We see some of your competitors kind of like reducing the overall expectation in terms of branches. There seems to be some difficulties in the process. I know you reiterated that but in your case you're not facing all the same issues that some of your competitors are. What is the reason for that? Thank you.

Rogerio Calderon

Management

Well we don't give any specific information on delinquency in current portfolio but what I can anticipate to you Marcelo is that we, the NPL ration for SMEs is higher than the average. So every time we have an increase higher than the average of the portfolio, we have marginally an increase in this ratio. In number of branches, if I am not making a mistake we have one branch less than in the previous quarter. However it does not mean anything in terms of the total branches we are going to reach by the end of the year. We've reaffirmed that we should be opening around 150 branches during this year. Most of them, if not all of them are ongoing and should be open till the end of the year, if not by December, January or February. So its 150 branches within the next month.

Marcelo Telles - Credit Suisse

Management

Thank you. One last question if I may. I mean, we saw an improvement in credit recoveries in the quarter. Given that you have problem at bigger level of charge-offs, given the delinquency you had in the past year. So, would you expect that line to continue to increase in the coming quarters, or do you think that will be no more or less stable level going forward? Thank you.

Rogerio Calderon

Management

Well this high level in recovery is due to of course due to the higher level of charge offs and interest from last year. But we also made some additional efforts on this direction since we have more assets recorded of course we had more attention on this. We are very close to the if not have reached it yet, we are very close to what we believe is going to be flat for the next month. So, you should not consider any further increase on this figure.

Marcelo Telles - Credit Suisse

Management

Excellent. Thanks very much.

Operator

Operator

Excuse me. Our next question comes from Jason Mollin from Goldman Sachs.

Jason Mollin - Goldman Sachs

Management

Hello everyone. My question is on loan growth. Itau Unibanco's quarter-on-quarter reported loan growth has trailed the bank's two largest private sector peers. However, these peers have each purchased between 3 billion and R$5 billion in loans in the second quarter alone. Excluding the purchases by your peers of those, loan growth looks better, ahead of one and in line with the other. Do you -- does Itau view loan purchases in the current environment as an attractive use of capital, and should we expect to see loan purchases by Itau in the future. And just as a follow-up, are Itau's loan-growth expectations -- I believe at 18% to 23%, ex-large corporates for only organic growth, or do they include purchases or acquisitions, own acquisitions?

Rogerio Calderon

Management

Jason we are more concentrated in organic growth, we are not considering any acquisition of the portfolio and although we see some reduction in the portfolio that we already bought in the past. So, our growth will come from organic, our own efforts in terms of growing with our clients.

Jason Mollin - Goldman Sachs

Management

But given excess capital, is this -- could this be an interesting use of funds for Itau? Or it's not attractive in the current environment is what you're saying if you're -- indirectly, implicitly, I guess you're saying that because you're letting the portfolio run off.

Rogerio Calderon

Management

Our business ratio is comfortable we think this level is good. Of course if you rebuy a portfolio is should be better than carry on our securities and treasuries and if you want to buy through this point but it is not our intention to use this capital to buy a portfolio and we are not seeing much opportunities in terms of buying these portfolios. Maybe it should have some in terms of favorable business and things like that and we are not considering or not studying anything. We will be continuing our trend of growing organic.

Jason Mollin - Goldman Sachs

Management

Great. And my second question is related to Itau's insurance operations. Can you give us an update on the outlook for the Life and Pension businesses for the second half of this year, maybe some comments on the competitive environment? Are we seeing any -- is there pressure on pricing, or actually with higher rates there is less -- prices are actually improving for the bank?

Rogerio Calderon

Management

So if you look at insurance and pension plans in capitalization we've reached 356 million during the second quarter, what is around 7% higher than the first quarter and the return, the way we calculate the return on allocations kept actually, also raised it from 38 to 35. Also Porto Seguro is going fairly well, the association and increasing. So where I could, I don't have more specific data with me regarding the future of this insurance business but what we see is the very firm trends, positive trends. So we have now a solid position in terms of technical provisions and the return is quite adequate to the level of capital we have there. If you want we can go further and discuss specifically insurance. We can organize sort of a call on this if you want. I don't have more specific data with me here right now.

Jason Mollin - Goldman Sachs

Management

No problem, thank you very much.

Rogerio Calderon

Management

Thank you.

Operator

Operator

Excuse me; our next question comes from Mr. Federico Rey from Raymond James.

Federico Rey - Raymond James

Management

Thank you. My questions have been already answered. Thanks.

Operator

Operator

Thank you. This concludes today's question and answer session. Mr. Setubal, at this time you may proceed with your closing statement, sir.

Alfredo Egydio Setubal

Management

Thank you for your time, for being with us. I think we showed good results. I think quality of the result of this quarter is better in our view from the quarter before because we had more gains and more revenues from time client business and not from treasury. We continue in a good trend in terms of growth of our credit portfolio. So we are very confident that we are going to achieve the guidance that we provide in terms of credit, in terms of expenses for the year and of course it will depend in the pace of the Brazilian economy that we also are confident the growth will continue for many quarters ahead. So the environment for the bank, business will continue to be good. Thank you again. Sorry for the delay at the beginning and hope to be with you in the conference call for the third quarter. Thank you.

Operator

Operator

That does conclude our Itau Unibanco Holding earnings conference call for today. Thank you very much for your participation and have all a good day.