Itaú Unibanco Holding S.A. (ITUB) Q4 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Itau Unibanco Holding Conference Call to discuss 2020 Fourth Quarter Results. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded and broadcasted live on the Investor Relations website at www.itau.com.br/investor-relations. A slide presentation is also available on this site [Operator Instructions]. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors. With us today in this conference call in Sao Paulo are Mr. Candido Bracher, current CEO and new Board member; Milton Maluhy Filho, current CFO and CRO and new Chief Executive Officer; Alexsandro Broedel, new CFO; and Renato Lulia Jacob, Group Head of Investor Relations and Marketing Intelligence. First, Mr. Candido Bracher will comment on 2020 fourth quarter results. Afterwards, management will be available for a question-and-answer session. It is now my pleasure to turn the call over to Mr. Candido Bracher.

Good morning, everyone, and thank you for attending our 2020 fourth quarter earnings call. Before we get into the financial performance, I'd like to talk about some of the recent commercial, digital and ESG highlights from our operations. So moving now to Slide 2, you can see the credit origination for individuals increased 15% in a single quarter. This stronger origination led to an important growth in the loan portfolio, which was driven not only by seasonally higher credit card loans, but also by the payroll, mortgage and car financing portfolios. It’s also worth mentioning that the digital engagement of clients continues to improve. The digital client’s base reached 24.2 million, out of which 23 million are individuals. This represented an increase of 2.9% in the fourth quarter alone. The higher digitalization of customers creates an opportunity to further optimize our retail footprint, and led to the closure of 95 branches and client service points this quarter. I'm also quite proud to report that our employees’ net promoter score reached the record mark of 89 points. In this criteria, in 2020, that’s a direct result of our efforts to promote the best possible working environment due to [indiscernible] during this challenging crisis. Last but not least, we improved our client net promoter score by 10 points over the course of the last two years, therefore, beating internal target for the period. Now on Slide 3, we will share some more light on some of our digitalization and technology KPIs. We continue to constantly increase our investment in technology and expect to invest in 2021 twice as much as we have invested in 2018. Not only that, but we have invested better. While our investments in developing solutions and features for our digital platforms more than doubled in this period, we managed to decrease the expenses on infrastructure maintenance by 28%. Also important to highlight that this resulted in a 25% reduction in the clients implementing solutions in the last 12 months. We also increased the number of features and services available for clients in the bank digital platforms by over 80% in the same period. The sanitary nature of this crisis has forced many of our customers to migrate their interactions through digital channels. However, the use of these channels continues to rise even after the end of more acute period of social distancing. This behavior can also be seen in the opening of new digital accounts, which grew more than 200% over the first two weeks. Another key part of our digital strategy is to strengthen our technology team. In this regard, we currently have 261 data scientists, which is possibly the largest contingent of these professionals in any company in the country. Moreover, throughout 2020, more than 3,700 employees through our technology team have been added, directly and through the acquisition of ZUP. On Slide 4, I’d like to update you on the recent developments regarding the stake in XP Investimentos. With our focus on creating shareholder value, last November, we announced our intention to sell a portion of that stake in the company, and later spin-off the remaining part. With this in mind, in December 2020, we sold 4.5% of the capital of XP Inc. and two days ago, the Extraordinary General Meeting approved the spin-off of the remaining stake into XPart, pending regulatory approval. I think it’s important to highlight a couple of points. First, after the favorable opinion of the regulatory authorities, there is up to 120 days for listing shares on B3 and for the distribution of new shares of XPart. The cut-off date will occur close to the listing of the company, which will be informed in due course. Lastly, when the new company finally list the business on stock exchange, the shareholders will receive an equity holding in XPart in the same amount, type and proportion as the shares they hold in Itau Unibanco. Slide 5, now moving to our ESG highlights on Slide 5, I'm happy to report, we intensified our sustainability commitment in 2020, reinforcing the firm's socio-environmental responsibility and its role in transforming society. As you’re well aware, Itau Unibanco and its controlling shareholders donated more than BRL1.2 billion to fight the pandemic in the country. The donation was invested in research, acquisition of medical and protective equipment and awareness campaigns. We also launched the Amazon Plan in partnership with Bradesco and Santander. And out of the 10 proposed initiatives four were prioritized. First, fighting against illegal deforestation in the meat production chain. Here, we expect the producer’s engagement for traceability of direct and indirect supply. Second is the stimulation of sustainable chains directing BRL100 million, which will be offered by the three banks to finance of the cultural industries and cooperatives that deal with sustainable cultures and branded finance for small businesses. Third, is the promotion of bio-economy, whereby we expect to fund research and projects that unlock the socio-economic potential at new production chains. And fourth, land regularization and recommendation of how the financial system can support regularization to stimulate economic activity in the region, legal, security and economic activity. We also held and promoted a conference focused on the Amazon, where we hosted more than 70 sessions, companies and financial market participants, 12,000 spectators and donations for the planting of 380,000 native trees. Lastly, I'd like to mention that since 2019, the bank has implemented the TCFD and SASB guidelines in its financial reports, and will further develop them in the coming year. Now on Slide 6, I'd like to highlight that we recently issued a $500 million Tier 2 sustainable bond. This issuance was the first of its kind in Latin America, and was another step in integrating ESG into our business. To this end, we launched the sustainability finance framework whereby we defined eligibility for the allocation of funds raised through debt securities with social and environmental criteria. The funds raised can be allocated into eight categories, which are in those lines. This operation is strongly connected to the Positive Impact Commitments agenda, in which we have financing targets related to sectors and business covered by framework. On the bottom of the page, we highlight how we are performing in some of the financial conditions. We have already disbursed BRL47.7 billion to Positive Impact sectors, of which BRL12.5 billion were directed to renewable energy generation and sales. In the entrepreneurship agenda, we originally set an origination target of BRL9 billion to finance more companies led by women by 2024. But we ended up surpassing that mark well ahead of our expectations. We launched a new BRL11 billion credit target for these efforts. Lastly, I'd like to invite you to check future updates of the Positive Impact Commitments in our Investor Relations website. On Slide 8, we move into our financial highlights. We entered the fourth quarter of 2020 with a recurring net income of BRL5.4 billion resulting in an ROE of 16.1%. The 7.1 net income growth in this period was a direct result of a 4.5% reduction in the cost of credit, in addition to the growth in fees and net interest income. These effects were partially offset by a seasonally higher non-interest expense. This seasonality will not affect the bank's structural expenses downward trend. Finally, the loan portfolio continues to show positive trends and grew 2.7% in the quarter. As usual, we’ll review each of these effects over the course of this presentation. Starting with the loan portfolio on Slide 9, I'd like to highlight some of the trends that can be seen on this page. The first is related to the individual’s credit portfolio, which continues to show an important recovery driven by clients’ demand for collateralized products with lower rates and lower risk, such as vehicle financing and mortgage. The latter had a record breaking credit origination in the fourth quarter, which resulted in a growth of more than 130% over the same period in 2019. After several quarters in a row of stability, payroll need loans posted an important growth in the fourth quarter. This was mainly due to regulatory changes which raised in debt [ph] exceeding 45 bps, therefore, allowing them to access more funding through these products. Credit card had a strong quarter, as a result of seasonally stronger demand due to the economic activity at the end of the year and holiday season. We also observed a decrease in the personal loans portfolio, which is frequently the case during the fourth quarter of every year, until the payment of the 13th salary. We also observed a reduction in the personalized credit portfolio. This product is linked to our reprofiling loans program, and this reduction trend highlights the better financial health of our clients. The SMEs portfolio slowed down its growth pace due to lower rejuvenation of government sponsored and guaranteed loan lines. As you may recall, those products were responsible for last quarter's impressive growth in this area. Finally, the large companies’ credit portfolio grew by 1.6% in the quarter, mainly due to the corporate securities portfolio. Moving now to slide 10, which shows the fourth quarter -- that the fourth quarter proved to be an inflection point for the financial margin with clients. The 3% increase was driven by the continuous growth of the loan portfolio, as well as by the higher average balance of the bank's own working capital and higher margins in our operations in Latin America. These effects were partially offset by the marginal reduction in spreads and by an additional change in the portfolio mix, even though this larger effect was in a much smaller scale than in previous quarters and linked to seasonal effects such as the payment of the 13th salary, which naturally amortizes the balance of revolving credit lines. You can also see this dynamic when looking at the mint [ph], which is 20 basis points lower than the third quarter. On slide 11 now, we updated the figures from our reprofiling loans book. This portfolio finished 2020 with a BRL15.8 billion, representing a reduction of 5% when compared to the third quarter. This reduction is due to lower demand from our customers, as well as by a higher incentive amortization. 96.1% of the portfolio is already outside the grace period. The NPL 15 to 90 day’s ratio reached 8.3%, an increase of a 190 basis points when compared to the previous quarter. This increase was driven by two factors, the first of which is related to the end of the grace period for almost the entirety of the reprofiled loans book. The second refers to the arithmetic effect of the reduction of these portfolios balance. The 90 day NPL ratio reached 5.2%, which is well below the short term delinquency ratio of the previous quarter. As we said on the previous quarter, the credit quality performance of this portfolio is better than we originally forecasted in the early days of the pandemic. It also seems that our strategy of offering clients more flexibility payment terms is paying off literally. On slide 12, now, we delve into the credit quality of KPIs from our portfolio. The cost of credit decreased by 4.5% in the quarter, driven by an 11% reduction in allowance for loan losses in the same period, in addition to the lower volume of discounts granted as a repayable. These effects were partially offset by the increase of the impairment of corporate activities, which was mainly driven by a well-known large corporate client. While the provisions’ balance continues to grow, the coverage ratio reached 320%, down 19 percentage points in this quarter. This reduction was a natural effect of the increase of the NPL balance that ended up consuming the coverage levels. The short term NPL ratio declined by 10 basis points, due to the good performance of the individual’s credit portfolio in Brazil. This performance was again, partially offset by the expected increase in the 15 to 90 days NPL ratio from the SME portfolio. Despite the intensity of this deterioration it is important to highlight that credit quality ratios were unnaturally lower than they should have been given the reprofiling loans program we lost in mid-March 2020. Now they basically returned to the pre-pandemic levels. Finally, it is important to mention, that when we exclude the efforts of the reprofiled loans from the individuals and SMEs portfolio, their credit quality ratios are at our best historical levels. Slide 13, we show that the financial margin with the market reached BRL1.6 billion, representing an increase of 14.1% in the quarter. This performance is a result of higher gains in our banking book. The financial margin with marketing our team [ph] operation was also noteworthy, which revenues boosted the sales of securities and more volatility in interest and inflation rates. Now, on Slide 14, we show that the fees revenues grew 4.1% in the quarter. This performance is mainly explained by the higher volume of transactions in card issuance and acquisition, which grew beyond what was seasonally expected as well was due to higher performance fees in our asset management business line. These effects were offset by the investment banking and brokerage operation, which had a strong quarter, but not at the same level as the third quarter. Also noteworthy was the impact of the new fast payment solutions PIX on current account fees, as we took this opportunity to exempt our clients to pay any fee via transfers, in spite of their preferred method. Insurance revenues fell by 14.5% in the quarter, basically due to the asymmetric effects of inflation rates, and the remuneration of assets liabilities in our guided pension plan operation. On Slide 15, we show a 5.1% growth in non-interest expenses in the quarter mainly due to seasonal effects related to a stronger economic activity, higher profit sharing, traditional year-end commercial campaigns, and also due to concentration of training and layoff expenses in the period. I'd like to highlight that the operational expense in 2020, contracted normally 3% in Brazil. This is even more impressive if we discount the effects of inflation in the period, which brings us to a real contraction of 7.6% in the period. Expenses from operations, Latin America grew by 13.6% in reais in the year, basically due to their unfavorable exchange rate variation of the reais. As we previously mentioned in the beginning of this presentation, that these restructuring [ph] efforts allowed us to close 95 brick and mortar branches, and Foreign Service points in the fourth quarter alone. This movement pressed our expense upwards in the field, but in turn it should reduce OpEx in 2021. Last but not least, our workforce showed an increase of approximately 1,700 people. This growth is mainly due to our investments in technology. We've hired 17,000 technology professionals -- 17 -- 1.700 sorry, technology professionals in addition to the roughly 2,000 engineers that were added to our teams as a result of the Zup acquisition. Now on Slide 16, we show that our tier one capital ratios had an increase of 80 basis points in the quarter finishing the full year at 13.2%. This effect was mainly due to the higher net income as well as due to the sale of part of the investments we held in XP Investimentos. Well with this, I finish my part in the presentation, and I officially complete my last test as CEO of the bank. This was a journey of four years that gives me satisfaction and pride. And I'd like to thank you all investors and market analysts for our interactions, and also for your support throughout this journey. I now pass the floor to Milton, our new CEO, so that he can set the expectations for 2021. Milton, good luck, success, and very happy to leave the bank in your hands in your able hands. You know that you can continue to count on my support now from the Board of Directors. All the best.

Thank you, Candido, thank you for the kind words. Our daily interactions and discussions will be sorely missed. It will be a great challenge to succeed you but it was with great pleasure that I receive this role and responsibilities. Before we discuss our expectations for 2021, I would like to spend a minute on Slide 18, talking about the recent changes that we were -- that were implemented in our executive team. With the intention of being even closer to the business areas, we start to simplify our structure and reduced hierarchical level within the bank. So we doubled the size of our Executive Committee, which is now comprised of 12 people. Those are very seasoned executives who were previously in charge of relevant business units, and other key areas of the firm, and we now have seven members of the Executive Committee focusing on commercial areas, including the IT Division, as I consider them an integral part of our business. New ways of working, such as through communities have brought us -- our business units and IT even closer. The objective of this new structure is to be more speed, to have more autonomy at the front desk, to better understand the specific needs of each business areas and our clients and thereby maintain our focus on the bank's role. To conclude, I think it's not worthwhile to detail every structure. But I would like to draw your attention to the creation of the payments area, which for us has enormous value. Moving to next slide, and before presenting our expectation for our operation, it's important to put the macroeconomic scenario in context. The past few months have shown an important recovery in Brazilian economy. Having said that, we are unfortunately still experiencing an increase in the infection, numbers and fatalities throughout the country. This brings a high level of uncertainty to our macroeconomic forecasts. Among other factors, vaccination will be a key element in normalizing our lives, and therefore restoring the country's economy. It's important to mention that the scenario presented herein assumes there will be no further delays in the immunization of the Brazilian population. We expect the GDP growth of 4% in 2021. It worth mentioning reinforces [ph] of this growth is basically statistical carried from the last quarter of 2020. We also expect an increase of the basic interest rates ending the year at 3.5% and that inflation will remain under control and within the range defined by the Central Bank. Finally, we expect a stable unemployment rate albeit still at a high level. Here, it's important to give more context as we believe that formal job creations will remain positive, as in throughout the second half of 2020. But these effects will be offset by a greater number of people looking for jobs due to the reduction of government aid programs. Going to Slide 20, talking about the perspective, we are presenting the perspectives for our operations that were the basis for this guidance for 2021. Therefore, we expect from capital and liquidity, we believe we are at appropriate levels considering our internal stress test scenarios. Here's it's worth mentioning that our target of 13.5 to tier one capital remains in force and although we ended 2020 slightly below this level we believe that over the first half of 2021 will again meet or even exceed this target. Expansion of the loan portfolio driven mainly by the individual's portfolio assuming now recovering the economy in line with our base scenario. At first, this growth should be supported by lower risk and lower interest rate products, such as stable loans, mortgage and auto loans, but we expect demand for consumer credit lines and revolving lines to resume in the second half of the year. Recovery of the average rate of financial margin declines, the NIM over the year due to the progressive change in the credit portfolio mix between segments and the expectation of a higher interest rate and its impact on the remuneration of our capital and liability margin. Now it's important growth -- the growth that we see in service insurance revenues in line with the trend of recovery in economic activity. Despite the negative impacts resulting from PIX rollout, the Brazilian Central Bank First Payment Solution and also the spin off and sale off with XP Investimentos. Here it's important to mention that last year, we had a full year of XP Investimentos. And this year, we only have one month in this guidance. So we are taking consideration 11 months without XP in our figures. Although we still need the Fed approval for this transaction. Then the performance would be driven mainly by the expectation of strong activity in the capital market and the launch of new channels, products and services. Progressive reduction in cost of credit anchored in the bank's expected loss model and Brazil's economy recovery. However, the model will react promptly to relevant changes in the Brazilian macroeconomic scenario and the financial conditions of our customers. Strategic cost management based on the structural efficiency projects will continue to bring benefits in the coming quarters, with a nominal reduction in the balance as usual operational expenses. This year, we expect an increase of approximately BRL1.5 billion in our investments in technology, new products and commercial platforms, which would positively impact the bank's operational efficiency in the medium and long-term. Now moving to Slide 21, we present our guidance here. Due to the few high uncertainty of the macroeconomic scenario and its potential impacts in the bank's operations, we decided to increase the range of projections for 3 to 4 percentage points. We now expect our gross for the loan portfolio between 5.5% and 9.5% in the consolidated figures and 8.5% and 12.5% in Brazil. For the financial margin with clients or NII, the expectation is for growth of 2.5% to 6.5% in the consolidated figures and 3% to 7% in Brazil. We expect the financial margin with the market to end the year between BRL4.5 billion and BRL6.4 billion in the consolidated figures and between BRL3.3 billion and BRL4.8 billion in Brazil. For the cost of credit, the expectation is that that our whole operation we end the year between BRL21.3 billion and BRL24.3 billion in the consolidated figures, and between BRL19 billion and BRL22 billion in Brazil. For fees, insurance revenues, our expectation is for growth between 2.5 and 6.5 in consolidated figures and in Brazil. It's important to highlight here that we did not taking into account any additional revenues coming from XP as I mentioned before, from January this year as a result of the spin-off disclosed in Slide 4. As for our non-interest expenses, the expectations is for a nominal contraction or growth of 2%, both in the consolidated figures and in Brazil. This range was a reduced considering the higher investments in technology and in our commercial platforms as we mentioned on the previous slide. Finally, the effective income tax and social contribution rates should end the year between 34.5% and 36.5% in the consolidated figures, and between 34% and 36% in Brazil. We emphasize here once more that this guidance is based on the macroeconomic scenario that we have just present, and any abrupt change in our expectations for the economy may lead to a complete revision of expectations present in the period. With this I conclude the presentation, and we may start the Q&A session.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mario Pierry with Bank of America. Please go ahead.

Good morning, everybody. First of all, I wanted to congratulate Candido for all the work that you've done in the last few years and all of the interaction that we had was very enriching for us. And I wanted to wish Milton here good luck on the new role. I have two questions, both to Milton. Milton, when you look ahead, when you look over the next five years, what do you think are the biggest threats to the bank especially for the profitability of the bank? Is it regulation of all of these -- with the creation of open banking or the instant payments, or is it the low rate environment? Or is the main source of concern related to the entrance of new players, especially the FinTechs and potentially the big techs? And then my second question is a little bit more specific, when we look at your loan portfolio growth guidance in Brazil of 8.5% to 12.5%, this implies very little real growth, considering that you’re forecasting nominal GDP growth of about 7.5%. So can you discuss why we wouldn’t be able to assess their growth next year, it could be because the SME portfolio this year was inflated given all of the government programs in place. So maybe if you can give us a breakdown of you loan growth expectations for 2021, broken down by individuals SMEs and large corporates, I think that’d be helpful. Thank you.

Thank you very much, Mario. Well thank you for your words at the very beginning.

Thank you, Mario. Thank you very much. First of all talking about challenge we see ahead, I think you reported [ph] a few points. We should be working in a different scenario with low rates. We’ve be seeing some movements in the market, coming from competition and different lines of business. And in regulation, yes, we don’t forecast what should be the implications of the opening banking. That is something that we should be very, very I wouldn’t say, cautious, but we should follow very close to understand what would be the impact. We do believe that in a scenario of low interest rates, a few revenues that we used to have that were major impact, last year, with those affects maintained, we should grow the bank, which would be our view this year, especially on the credit side. And also we should be open to touch or to create new lines of business for the bank as well. It's a different scenario. We do believe still in 2021 we still have challenges ahead when we talk about the pandemic and all the effects it should have in the macro environment. But looking five years ahead, we still believe there is very positive trends and we hope these new markets, I would say scenario keep for the long-term. Talking about specifically and I think we'll be seeing an important digital transformation, not only in the bank, but in the customers. We've been working hard on that and this is something that should accelerate in the coming years. And we have to be very, very, I would say, transforming ourselves and working and moving forward towards this direction. Talking about the loan portfolio. It's quite an easy answer, I would say, because in one hand we saw very, very important growth in the wholesale portfolio last year, above our budget, including details of the movements we saw from the big companies anticipating crediting the market to grow throughout the crisis. And the capital market was closed for many months during last year. So the bank had to use the balance sheet to fulfill or to underwrite those transactions. When we look for 2021 we still see an active dynamic from retail portfolio, different from what we saw last year. But on the other hand, we see that wholesale growing much less than what grew last year. And also we expect to see a capital markets opening throughout the year. And this will impact for sure, our capability to underwrite credit for the balance sheets. We don't see it as a problem, because we are a very active player in this market. And in terms of external capital, the way to be more dynamic in terms of capital, we've seen some important activity that we are very active on.

That's very clear, just a quick follow up then on the retail segment, in terms of growth this year, what specific products are you most excited about?

Look, we believe there are secured loans, seeing when I mean, secured loans, I'm talking about the mortgage, I’m talking about auto loans, and I’m talking about I would say, which is the payroll loans. So basically those three lines we believe should improve a lot this year. But we will see some recovery on the personal loan as well. And credit cards due to the activity and more transaction and more consumption, we should see a growth as well. But we have been growing the secured part of the portfolio, just to give you a figure, five points in one year for the other one. So we have grown to a more safe portfolio moving forward.

Great, thank you very much.

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

Hi, good morning, and also echo that thank you Candido for your time as CFO [ph] and best wishes on your new role on the Board. And also congratulations, Milton, and best of luck in your role as well. A couple questions also, first, just looking at the guidance overall, just kind of plugging in the midpoint on each of the numbers, getting to roughly a 17% ROE for the year. Just want to get your thoughts if you think that’s reasonable in terms of maybe sort of longer term ROE, do you think you can get back to the 20% level? Or what do you think is sustainable and how long it could take to get there? And then second question in terms of your expense growth guidance roughly flat to down to two plus two. Do you think you can continue to control expenses at around this level sort of beyond this year? You mentioned you call like 95 branches in the quarter? Just thinking, given some of the pressures on the revenue side, how deep can you go on the cost cutting and how that can help to offset some of these revenue pressures? Thank you.

Okay, Tito. Thank you very much for your question. First of all just to clarify, the midpoint of the guidance, if you want to take, the number it's precisely the number should be around 17.6-17.7. Looking forward, what we are seeing looking forward, we are seeing a challenge. We have profitability coming from the revenues, and a lot of pressure on the interest rate. When you work in an environment with a 2% of interest rates. We lose revenue, so the working capital and also we lose, also for the deposits and the site deposits that we have within the bank. Those are the two major impediment. So we do believe that as the cost of capital should be reduced in the coming years in an environment with a low interest rate, that our return on equity should be not in between this year -- for the coming year. So this is a challenge. We are still working a lot on the efficient side, we still have room to work on it. We are opening space or room for investment. This is our agenda. We still have opportunity here to keep reducing the business as usual cost of the bank. But depending on the interest rate and the cost of capital, we are more focused here on creating value, generating value for our stakeholders. So the difference between the cost of capital and the interest rate here and the return is what we are going to be very focused, not specifically on the nominal return on equity. Even though we don't guide, neither for 2021, neither for the future the return on equity of the bank.

Okay, thank you, Milton. That's helpful. Just one quick follow up then, in terms of the 17.6 or 17.7 you mentioned at the midpoint. In terms of your dividend payout, should we expect it to resume back to a normalized payout this year or what kind of payout should we expect?

Tito, can you repeat again, please, I couldn’t listen to that?

Sure, just on the midpoint of the ROE, you mentioned 17.6-17.7 just what kind of dividend payouts should we expect that you get back to normalized levels this year in terms of the payout or how should we think about the dividend and also you're getting back to that core Tier 1 of like 13.5%?

Okay, the way we -- our policy here is to distribute everything that exceeds the 13.5. This will keep we won't change, but we also think in consideration the coming 12 months, if we foresee any major investment or any needs of capital. So it’s difficult to anticipate now. We’re going to keep this same ratios and the table that we released to the market two years ago, where we’re going to be paying what exceeds in terms of 13.5 depending on the risk-weighted assets and the return on equity of the bank. So the policy didn’t change.

Okay, so you go back to that normalized policy. You don’t expect any more restrictions?

We don’t.

Okay, perfect. Thank you Milton.

Thank you.

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

Hello, thanks very much for taking the question and good luck to both of you with the next steps. There's been a lot of capital going into the digital banks in Brazil over the past few months. Nubank doing their Series G, clearly an example of that, plenty of others C6, Banco Inter have all been raising money. How does that capital going into the new banks change the competitive environment for you? Are you seeing any changes in their behavior that you need to respond to?

Okay, Geoffrey. Thank you very much for your question. Yes, as I've been saying -- we've been seeing a very dynamic and competitive environment. We've been seeing some FinTechs working some lines of business where we've been seeing a lot of competition. I think it's the normal way for them to raise money is to do these kind of investments -- those series of investments. So this is the normal course of their business until they access capital markets. We are a very active bank here. We have a very strong capital structure. And competition makes us better. This is the way we believe and this is the way we've been working here for many years. So yes, we see a more dynamic environment, but it's fine -- it's the way it is and we have to compete. And we are doing a lot of efforts internally to have -- I would say, the capability to compete the best way possible and to grow the bank in the coming years. This is our focus.

And any particular product, lines of business where you're seeing that competition changing?

Look, we have been seeing in the past year big competition for payments, especially in the acquiring business. We’ve released the figures, we saw very strong competition there. I would say that we had a lot to learn from what happened with Sage to avoid seeing movements like these in other lines of business. But it's a very dynamic market. We see a lot of competition on the investment side and we are moving forward here to increase and to put efforts in our commercial distribution, not only the distribution, but also the way we do the assessments of our clients, the way we provide products, the way we provide the apps that they will interact with the bank. So investments and payments are more focused on the acquiring, we’ve seen a lot of competition. On the credit card business, we see companies coming into this market, as you just mentioned. But we see two main topics here. They usually open market, so they bring new customers to the market as well. And also they have a very focused, they're very focused on a specific type of client. And we are more diverse in terms of our client that we have in our portfolio. So my view here that we still have a lot of work to do when we focused on young people and also to the base of the parameters. So this is where we should be focusing a lot for the coming quarters. We still have work to do here.

Got it. Thank you very much.

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

Thanks, everyone. I have two questions. The first one about the capital position of the bank. Milton, you had comment that the bank continues with the target of 11.5 -- sorry 13.5 of Tier 1 targets. With the end of overhead, why not reduce this target of cap? So why not work let say 12.5 or a different number, a lower number? If I'm not wrong, overhead used to be the main question, the banks, or used to be the main cause of the questions that the banks maintain their capital. That is the first one. The second one, during the Barclays Conference Call, you mentioned about the importance of the payment business for Itau. Can you talk a little bit more about these units? When you say payments business, are we talking about hedge only, or we're including let's say, EG and also the business that can be created with PIX. So if you can discuss these payment units that you mentioned in the conference call?

Thank you, Thiago. Thank you very much for your question. On the capital side, what I would like to tell you is that we don't foresee any change in the 13.5. And if you remember what happened in the first quarter of last year, you will see that yeah, we had the impact of the overhead. We had those tax impact, but the major impact we have was the risk-weighted assets and you have to remember they are different from many banks in Brazil. We do have a very important and relevant international operation. And whenever we have any devaluation of FX it impacts the risk-weighted asset not only for the U.S. or any other currencies portfolio that we have abroad, but also the portfolios that we have on balance sheets locally in other currencies. So these are -- brought an important impact. The other thing is that it's true that we won't be having more relevant impacts on the tech side from the overhead. But we feel working our scenario that we believe we should be cautious here. We don't know yet what would be the impact of this pandemic, where we land, what will be the recovery that will be seen. So we are comfortable in keeping a conservative level of capital being 12% as a common equity and 13.5% in level one. So we still believe that this is a good and comfortable level, okay? And talking about the payment area. What I would say, yes, you're right. Not only, we'll have the acquiring business, the issuer, all the credit card portfolio, that we have not only for bank, credit card business, but also the retailers that we have -- we are partners. We also have the mono lines here, where we sell to the open market, the credit card. We also have cash management for the whole bank, not only retail, but also for the wholesale business. We'll have the each platform inside this new business area, and also PIX. And we are discussing what parts of open banking should be there as well. So all business that we have inside the bank that tough payments somehow, even some business from the retail as well should be concentrated in this new business area. And we do believe there is a lot of synergy, internal synergy, client synergy, platform synergy, experience synergy for the clients and this is what we're going to be working for the coming years.

Very clear, Milton. Thank you.

Thank you very much.

[Operator Instructions] Our next question comes from Jason Mollin of Scotiabank. Please go ahead.

Hi, everyone. I would also like to thank Candido for his hard work, dedication and communication over many years, and congratulate Milton for his success in prior roles, which clearly underpin his selection as the new CEO. Best wishes as you start these new stages. My questions are related to the perspectives and guidance that you presented. You mentioned that the Bank's outlook for 2021 is dependent on the base case macro scenario that you provided. How would you frame the upside and downside risks for economic growth, maybe rates, inflation and employment, the metrics you gave? And in that context, how do they translate to upside and downside risks for the guidance, specifically for loan growth and loan loss provisions? Thanks.

Jason, thank you very much. Look, as I said at the very beginning, that this scenario that we have it’s a positive scenario, but we do believe there is still a lot of uncertainty in the market. I would say that the main window we have is the vaccination program. We still have to follow very close the evolution of this plan. Just to give you an idea, if we have a postpone of six months in this vaccination program, we should have at least, we should lose at least 300 basis points in terms of economic growth. This will impact on employment as well, and this will impact the FX. And the reason why is because the expectation of the government, still provide more support to the Brazilian population will increase and also the uncertainty about the capability to have a sustainable debt. So this is our main worry here. Of course if we see this scenario, we don’t believe that the credit will go more for the low side of the guidance. That's why we need a broader range coming from three to four points. So we see a downside risk here in terms of credit portfolio. On the other hand, we should have more concern on the cost of credit due to more delinquencies. And we are not foreseeing for this year any new program to help the clients. Of course, we'll be very close to the clients, but not very structured program as we had last year. Maybe if we see a very, very bad scenario, we should think about reopening a program like that, with the impacts that we should have. On the revenue side, it's very important as well that on services those lines are very correlated with the activity of the country. So if we see a lower activity, as we saw last year, a few lines of revenues will be majorly impact. So that's why we made a broader range. So I see a concern on the credit side, I see a concern on the revenue side, I see a concern on the cost of credit. It's true that only costs loan interest costs of the banks, part of that is efficiency that we have to be very deep in the analysis and keep moving in terms of opening zones for new investments. But on the other hand, we should benefit as well from a lower economic activity because we have a lot of variable costs that would impact the operation as well. So this will be the hedge somehow for the P&L, as we've seen last year, part of it.

Maybe just as a follow-up on the provision outlook, does the cost of credit guidance incorporate any release of reserves? And then secondly, on the cost side, in the perspectives, you mentioned, an increase of about BRL1.5 billion in investments for technology, new products and commercial platforms. What would that total amount be? Or in other words, what did you spend on an apples-to-apples basis in 2020?

Okay, your first question, can you repeat.

Was, does the guidance for cost of credit incorporate any release of reserves?

Sure. Well, the thing is, yes it does. We do believe that's how we work we expected lost model. We anticipated the cycle, the credit cycle last year. So we expect the delinquency coming from the NPL to grow throughout the year. We do believe it will make up by the year end and maybe in the first quarter of last year. And for sure, this will consume part of the provisions that we made throughout the year. So they will need exactly to absorb those delinquencies that will determining the following years. So the answer is yes, we do believe that. And on the second question.

With the investment in technology?

Investment in technology.

Yes.

We did one release in 2020, but it's important -- it's a relevant increase that we have this year in terms of hours that we deployed throughout operation. We'll be doing a lot, the number of hours that we used not only for transform the bank but also to deploy and to develop new businesses -- lines of business, inside new products, and new business inside the bank. So I would say that we almost doubled the quantity of hours that we're going to be investing in our operation from last year to this year.

So will that BRL1.5 billion be and expenses that will that be amortized very quickly or how should we think about that number in terms of the expense?

Yes, because we are seeing investment but a part of that will already go as OpEx throughout the year of 2021. So not necessarily all of them will be made an assets and we have to amortize throughout the years.

Thank you.

Mainly, this 1.5 we believe-- I would say that most part of that is OpEx. There is more part of CapEx [ph]. So at the end of the day, it is implied in the guidance that we gave.

That's helpful. Thank you.

Thank you very much.

Our next question comes from Carlos Gomez-Lopez with HSBC. Please go ahead.

Hello. Thank you for allowing questions. First of all, like everybody else, congratulations, and good luck to Milton. And thank you very much Candido for all these years. It's been a very long road from the time when some of us had met you at PPA [Indiscernible] that was [Indiscernible] about that. And just you've had a great career. So thank you very much.

Thank you.

In terms of questions, now that you have a road to exit from XP, what changes for you -- what have you learned from your investment there? And how will you establish your investment platform differently from perhaps how you did before? And the second refers to the dividend, you’ve been very clear saying that you want to rebuild your capital back to the 13.5% level. I mean, should we understand that you are going to maintain this minimum statutory median the 25% probably through the end of the year until you reach that level or if you get closer, you will start increasing. Thank you very much. Again thank you, Candido?

Thank you, Carlos, thank you very much for your question. Talking about the road, as we've been seen here, we made a few changes recently in the Executive Committee as I mentioned. The idea here is to have a more simplified structure and we have more agility and focus and be we have a different time to market. We're going to be focused a lot more we say, in clients simplicity. This is something that Candido has been deepening inside the bank. And I think the culture of the bank is pretty much aligned with that. We still have a lot of work to do, we know that. We achieved our goals for 2020, but we still have room to improve for the coming year. So a lot of focus on that. We're going to be focusing a lot on the efficiency agenda, as I mentioned before this merged. And we should open room for new investments. So we have to keep the mindset to roll the bank to grow revenues, to open new lines of business. And to be able to fund that we have to open in the business as usual, run the bank that we have here. So there's a lot of things to be done there. And also an agenda that we're going to be a lot of focused and this is something also that we invested a lot in the past few years with the ESG agenda, this is something very important and we're going to keep a lot of focus on that. Talking about diversity, talking about environment, talking about what we called here, the [Indiscernible] was a major donation to help the country throughout this pandemic. This is the agenda that will keep a lot of focus. And also we have a new executive committee now that it's organized and trying to elaborate what will be the strategy coming for the coming years. We have a lot of work to do on that front, and we're going to be sharing with you in the coming quarters, whatever whenever we have more information. When we talk about dividend, the main issue here is that we -- until we get to the 13.5% we’re going to be working with the 25%, which is the minimum regulatory. We do believe that by the end of this quarter we should be above the 13.5% or even close to 13.5%. And then we'll keep or go back to the policy that we released to the market. So this is our expectation. We believe by the end of this quarter we should be above the 13.5% and then we'll keep the same rules, the same table that we released to the market. We'll go back to the same policy that we always had.

When you are thinking about being up to 13.5% level at the end of this quarter, I imagine that includes the XP transaction and some positive impacts from there, because I mean, otherwise it 200 basis points jump. Is there anything else that we haven’t focusing that also changes the capital ratio?

No, the XP transaction that we are doing right now, there is minimal impact in capital ratios. The part of the bill that have more impact forced the selling of this force of these stocks that we made in the last quarter, it brought around 20, 25 basis points in terms of capital. This was the main gain that we had, and this was the reason why we sold part of the investment we had. But on this spin off that we are making right now, there is no impact, relevant impact in terms of capital. Because we lose map course [ph] and we lose wholesale revenues here.

Okay. And that was our understanding. So I guess -- so how do you get to 200 basis point?

I'm sorry.

Just how do we get to 200 basis points just in one quarter in terms of capital accumulation?

200 basis points?

From 11.5 at the end of this year, at the end of this quarter to 15.5.

20 basis points, right, Carlos? What are you saying about the 200 basis points? I don't follow you.

So I -- sorry, maybe I am focusing on different price. So you think you'll be at 15.5 by the end of the quarter. Satisfied. Thank you very much.

Thank you.

Our next question is a follow up from Geoffrey Elliott with Autonomous Research. Please go ahead.

Hello. Thanks for squeezing in the follow-up. Two very quick ones. Firstly, the XP sale. What is that need, the XP spin-off? What is that need Fed approval? What's the Fed involvement there, given the operations in Brazil? And then second on PIX, it sounds like there have been a couple of kind of operational IT type issues. I know the initial sign-ups, initial key registrations were slower than you'd hoped. And I think that was something on the IT site there. And then there's been some press in the last few days about transactions being duplicated and trying to get those funds back. So curious about the tech challenges that you might have encountered on the PIX side? Thank you.

Look, first of all, talking about XP. The reason why the Federal Reserve needs to approve is because the banks and also XP have underwriting activities in the U.S. So it's part of the approval. We do have an operation in the U.S. and XP as well. So there is a change in the structure that we have, Federal Reserve needs to approve it. This is the main reason. Okay?

Understood.

Okay. And second about PIX, as you ask at the very beginning. When the Central Bank first released the figures, the numbers. We were at the very beginning of the journey. We made an important catch-up in the next last months. As I can tell you, it's not a public member, but we are very comfortable with the market share we have. In the market share for us, is not only the quantity of keys that we have from the clients, but also but more importantly than that is the transactionality of the piece. So we have a very fair share on that. Also includes quantity of clients and also in quantity of the volumes transacted in terms of market share. So we are very comfortable with the catch up we made after the first announcement of the Central Bank.

Okay, and the tech issues?

And the what?

It sounded like there are some tech issues that made it hard for you to register keys at the beginning, and then some more…?

So at the very beginning it was -- some instability in our platform, but we fixed -- we sure will have it's -- the nature of the business to have issues. But we are very comfortable with the catch-up we made in the platform as well.

Understood. Thanks very much.

Thank you very much.

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

Thank you, gentlemen. Thank you very much for your participation in our call. It's a big pleasure to have you here. As I said, at the very beginning, it's time to say thank you to Candido as well for believing us for the last four years. It was a privilege and a pleasure to work with you, Candido. And I'm sure from the Board of Directors, you will be here cheering for us and following us. So big pleasure to have you on Board.

Thank you very much Milton and thank you very much for the analysts and investors who have been a support during this period. And just like to say that I wish you the best of luck and I am extremely confident on the way you run the bank and how the bank will perform under your leadership. Thank you very much.

Thank you very much.

That does conclude our Itau Unibanco Holding earnings conference for today. Please answer our event perception survey available through the QR code. Thank you very much for your participation. You may now disconnect.