Itaú Unibanco Holding S.A. (ITUB) Q2 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to Itaú Unibanco Holding Conference Call to discuss 2021 Second Quarter Results. 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. 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.

Good morning, everyone, thank you for joining us in our second quarter 2021 earnings conference call. Well, first of all, I would like to emphasize here, the recurring managerial net income, we reached at 6.5 billion reals, which represent an increase of 2.3% versus the previous quarter. The recurring ROE increased 40 basis points in the quarter, and we finished with 18.9% this quarter. I would say and highlight first of all the growth of 4.6 of our Brazilian real portfolio. The credit card book rebounded after weak first quarter that was affected by the new wave of the pandemic, which translated into lower economic activity and consumption in the period. The payroll linked loans accelerated and grew 5.5% in the quarter. Now, we believe that this portfolio has a big growth potential and I will talk about that a little bit further. Mortgage had another very strong performance in origination which translated into 12.8 as you can see roused. The strong credit portfolio translated into a more vigorous growth in the financial margin with clients as it increased 3.9% in the quarter. Credit quality metrics continued to boost very positive trends. The highlight was the NPL 90 days in Brazil, which ended the quarter at 3.6%. It's a decrease of 30 basis points. We also saw an important recovery of our fees and insurance revenues mainly driven by credit card issuance and capital markets activities. We will present more detail throughout the presentation. Revenue grow coupled with our cost control brought our efficiency ratio in Brazil to 42.2%. It was a drop of 100 basis point and is the lowest level in years. We added 4.7 million customers through our digital channels just this quarter. It's an important figure. And it's an important growth when we compared to the last quarter of this year was a growth of 27%. When we talk about it, the client acquisition continued to come at a strong pace as we anticipated. We reached 7.8 million customers at the end of the quarter. And the good news is that out of the 2.6 million customers, we added in the quarter 90% didn't have a current account in the bank. We are attracting a young client base and customer that we were not successfully engaging lately.

Ladies and gentlemen, we will now begin the question and answer session. First question comes from Mario Pierry with Banco da America. Please go ahead.

Good morning, everybody. Congratulations on your results. Milton, I have two questions in both of them are related then to your guidance. And as you mentioned, right, you're now more comfortable with margin with clients growing closer to 6.5% for the year. But doing the math right it implies that your net interest income with clients has to average about 18 billion reals the second half of the year. This means growth of almost 15%. Year-on-year. So can you give us why you feel so comfortable that you can grow at a much faster pace going forward? Is it because of the mix of your loan book is improving? Is it because of high rate environment or is it a combination? And is there any reason why you wouldn't be able to sustain such elevated growth going into next year? So that's the first question is related to margins. And why you're so comfortable with growth accelerating so much. And then the second question is on your expenses, right, you show the slide where your expenses are going 3.5% year-on-year in the first half of the year, and your guidance is for minus 2 to plus 2. So when you're already above your range and you have in the second half of the year, you have the salary negotiations right with the Union in Brazil. And normally, we see increases of inflation plus 1% or inflation plus 2%. So that would imply the personnel expenses in the second half of the year should be growing almost 10%. So I would like to get more color than why do you think that you can still meet your guidance for expenses? Thank you.

Thank you, Mario. Thank you, good questions. Well, first of all, in terms of margin with clients, as we had a period in the past of mainly, I would say, four to five quarters declining the margin with client, in this last quarter, we had an evolution in the margin with client and the previous quarter, we were much more in line with the previous one. So that's where we stopped decreasing the margin with client. So I think you went through part of the answer, which is the mix, which is relevant for this margin growth. As you see, last year, we had a huge growth in the large corporate client’s segment. And we had, I would say, a depressed growth on the retail portfolio. And this was a self-inflicted somehow, with the risk appetite throughout the pandemic. And also, we had a migration of our portfolio to what we call the traverse here, which was the program that we made for our clients to go through the crisis. And that meant that we made important reliefs in terms of the rates we were charging from the client. And also we gave much more time and terms for those clients to repay their debt. So this had a huge impact in our margin as well. So I think there are two main effects here. One, it's the base of comparison, because we had a depressed year, last year in terms of margin with clients. This year, we see a better growing the retail and the SMEs, even though we still growing faster in the guaranteed product as auto loans and also the mortgage. But we have been seen a good recovery of the clean credit, since this quarter, we have a good expectation. And we believe we can deliver a good a decent growth in the coming quarters. So I'm positive about the margin. That's why we didn't change here, the range, but this is why I'm positioning in terms of geographic, that we should be closer to the top of the range, better than what we expected when we released the guidance. So it's very important to have these in mind, this is our best expectation, we've been very active on the commercial areas, we've been very active on the retail side. And we have a good expectation that we are capable to deliver a good growth with good margins, and good credit quality. So this is the assumption that we have today. Hope we deliver that, of course. But don't forget that we still have a range from 3 to 7, we hope to be much closer to the top of the range, but the range is there to accommodate if somehow we are not able to deliver that. So that's why we still have a range for this figure, okay, for this line. And talking about the guidance of costs. It's important to say that the most relevant impact here that we had on the non-interest expenses, was the devaluation. That's why we deliver the 3.5% when you look at only Brazil 0.8%. So you're right, that we have decidual that we have to recognize the inflation and even more on the negotiations that we have with the Union. But it's important to say that we keep very straight here, very focused in our efficiency program. So we do believe that we are able to delivered the guidance the way we are presenting hereof course, that the effects may change or may bring some impact. But don't forget that when we look to our P&L of the bank, even if we have any negative effect of the devaluation in our cost, we have on the opposite side a good impact a positive impact in our revenues. So the balance sheet of the bank net-net is positive in FX. So, this considering somehow a little bit the FX planning that the core cost of the bank we reduce in the coming quarters, and we will keep the efficient agenda very, very strong considering that we have some bad wind coming and this is our goal here to overcome those bad winds I would say like that. So we still positive that we can deliver the guidance for costs as well.

Milton very clear. Just see if I can follow up then on your loan mix. Why do you expect SaaS growth in retail and SMEs? Can you just give us the color of what are you expecting them? If you breakdown your loan book between SMEs, retail in large corporate, what is the implied growth in each segment you are forecasting?

Mario, we usually don't deliver, I would say, guidance and the breakdown of our credit portfolio expectation. I think the figures you have you can see on a consolidated basis, I believe that we should see, is still an acceleration, the retail business, this is what we are seeing. And on the corporate will depend on market conditions, especially is on that capital market. So we may be able to put on book a few good credits, in terms of credit quality, and also in terms of return on capital. But we may be able to deliver and to sell to the market, if there is a window of opportunity. So it’s hard to give a good guidance on that. Let's see how we'll be the market and the volatility that we will face in the coming months. So I would say good pace on the retail and the pace on the wholesale will depend on market conditions.

The next question comes from Jorge Kuri with Morgan Stanley. Please go ahead.

Hi, good morning, everyone, and congrats on the great quarter. I have two questions, please. The first one is, again, going back to the guidance on growth versus NII. And I guess I'll ask the question a different way. Your new guidance on loan growth 8.5% to 11.5% and you said you left guidance for NII sustain as you thought that the range encompasses the numbers that you think are reasonable. So I'm assuming you're thinking maybe 6.5%, which is the high end of the guidance. The part that's a bit odd. And I guess that's what I'm asking is why would NII grow below credit growth in a year in which grades are going up, which is going to help your asset sensitive balance sheet and your margins historically have more roughly in line and have moved in line in direction of SELIC, and we're actually going to see a pretty significant in SELIC, where it is not a modest one. Second, you are growing your loan book quite rapidly. So your loan to asset-to-ratio should improve year-on-year. And within loans you are growing in the high margin loans or you're growing credit cards very rapidly auto loans SME loans. And so it would seem that this is a year in which your NII should grow maybe faster than credit growth because of the things that I said. So I wanted to understand what drives your existing guidance to be below that. And then my second question is your effective tax rate, your guidance 34.5 to 36.5. I wanted to see if you have a preliminary view on what would the effective tax rate look after the ongoing fiscal reform tax reform is approved based on what's on the paper now? Thank you.

Jorge, thank you for your compliments. And thank you for your question. First of all, talking about the NIM. I'll give you some information that I'm pretty sure that but just to make sure that I'm giving you the whole spectrum of the of the answer. First of all, we're looking here for the end of period growth. And we know that the average balance is the one that really makes the impact here for the financial margin with clients. So separating the two effect here talking about interest rate. Yes, it's true that we should have an increase in SELIC actually, our forecast for the year-end is to have a 7.5 SELIC, but it doesn't benefit our P&L in the same way you will see the enhance or the increasing the interest rate and this is due to the reason that we make hedge of those interest rates in a reasonable period of time, I would say 40 months with monthly installments, there is a shape of this curve. But well, having said that, that means that will get the benefiting in the time. So in the short-term, we won't see a huge impact. But yes, for 2022, we might have a much higher impact, then we'll see in 2021 of the hedge that we have. This is for the working capital, this is for the liability that we have investments from clients, and the overhead is run-off. So we won't see major impacts here in interest rate for this reason. So this is part of the answer. The second one is that yes, we are growing here in a mix, which is better than what we were seeing last year, more retail than wholesale somehow. But on the retail, we still are growing the business in some portfolios that don't have the same margin as the credit loans, for instance. So if we do a breakdown in our portfolio, you will see the SMEs bringing us a very good financial margin, then you have credit cards with a very strong financial market the personal loans as well. And then vehicles and payroll loans, even though they are having important growth in terms of moving the needle in terms of margin, they bring a lower impact, which is relevant for this information as well. So the mix is positive. So I see a very positive trend, we don't believe we will be able to go through the range that we are seeing here. But we believe we should have a decent growth or increase in the financial margin with client due to the growth that we will see in those portfolios, especially in the one coming from the retail side.

And then my second question on the taxes.

Yes.

Thank you.

The effective on the tax is the following. We see to simplify the math, we see that the interest on capital should have a negative impact, let's say around 6 to 7 points in the tax. And you have also the benefits, let's say of 12.5 in regime of the interest rate, the income tax on the own profits. So that means that we should benefit in the long-term, 5 to 6 reduction in our effective rate, I would say if we take both effects in consideration 5 to 6 points, is our main guess here. Now depends on the only income that will have of course, as higher the income it's different the impact because you reduce the benefits that you have from the interest on capital.

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

Hi, good morning. And thank you for the call and taking my question. My question is on your fee income, your very strong performance there, your guidance stay the same, I imagine mostly insurance continues to be weak. So just to try to break that out a little bit. If we were just to look at just the fee income excluding insurance which is doing well. Any color you can give and how you think that will grow? And not just for this year, but given the competitive environment, which is this sort of a sustainable growth for fee income, and then the expected recovery in insurance in the second half. And then my second question is somewhat related, but thinking about your digital strategy. You mentioned earlier on the call that your branch network is still of competitive advantage comp, but now EP has close to 8 million clients and if you look at the valuation on some of the FinTechs out there, based on client you get pretty, can get a high multiple there. So, just want to think about the strategy is the intention or we could keep sort of EP inside, any intention to spin it off, or do you want to kind of leverage the net branch network and at the same time having a digital strategy combined just to think about that strategy given the competitive environment? Thank you.

Well, Tito, thank you for your question. Coming from the Finchem, and I think I may address part of the answer to Jorge Kuri as well. Talking of, he mentioned the credit card portfolio, it's worth to mention that when we see here, the gross in the transaction of the credit card portfolio, we see that nowadays we have around 15% of the portfolio of the full portfolio of credit card paying first, the other 85 doesn't pay interest. That means that even though we are growing the portfolio, the part that pay interest grow in the coming months is not automatically. So this, of course, doesn't help in the short-term to NIM. But it helps a lot the commission and insurance because it’s here where we report the interchange, the annuity that we charge the clients, the fees that we charge the client. And also we have here the cost of our loyalty program. Those are the three main factors that we see here in commission and insurance. So the recovery on the credit card portfolio, we'll see in the portfolio that pays interest in the coming future, it's not in the short-term. And this is what really impacts the margin. So just to make to clarify the topic for equity as well. So talking about commission and insurance, where I see that we should have good delivers into the credit card for the reasons I mentioned, we do believe that there is, I would say hiding consumption, that whenever the pandemic is in a better shape, we may see a boom in consumption. And this will have an important impact in our credit card business. And also we are growing the business, right we are delivering and issuing an important amount of credit cards every month. And this will help a lot on this on this commission line. On the asset management, we expect a good semester, it will depend on volatility and our capability of delivering good results. So there's a lot of market risk implied. But we are growing what we call the portfolio that really generates performance fees. And this has been a movement that we've been doing for the last years. And we are having a good delivery. Nowadays we have more than 60 billion reals of products that generate alpha, and where we can charge for performance fees and we are having a very decent quarter. And we expect we should have for the coming ones delivering on performance fees as well. What has been very, very active for us is the investment banking activity. The main topic here is how will be the volatility in the second semester. If things continues the way we've seen in the first one, we hope that we should have still have a good window of opportunity and should keep delivering good results in the investment banking area, remembering that we have a very strong pipeline and we are very well positioned in this segment. So those are the lines that I believe. So it's not different from what we see this quarter. This is the expectation I have for the coming quarters as well. So this is from there that we should see a good activity and good performance.

Thanks, Milton, I guess maybe just to clarify that. So when you say similar to this quarter fees can remain stable, or this is like a base and you can grow off of this space from here?

So it's difficult to see if we can grow, in credit card, I think we still have room to grow. In investment banking, I think we had a very fantastic quarter. So if we are able to deliver another quarter like these would be good news due to the great performance that we had. In the asset management, we may be able to deliver a little bit better than what we had. But as you'll see we are still growing year-on-year and quarter-on-quarter. So I think we should be delivering something around the numbers you're seeing here. A little bit more a little bit less. But the performance very similar to what we saw this quarter. This is where the expectation is related to market risk. It's difficult to make any estimation but it's my best guess looking at the figures now and trying to project the future. On the insurance side as you ask, we hope the losses we head to the COVID we believe that it should decrease in the coming quarters a little bit. So the results on insurance you should be better than what we saw this quarter. This is our best expectation as well, but we have to see if there is really this reduction. But it’s still working on higher levels of losses due to the COVID. So this is something that we have to keep focusing and following to make sure that we'll be able to deliver a better result. Structurally speaking, we are doing important changing, including the management, the insurance business, we have higher expectations that we can grow the business in the coming years, I'm not sure that we're going to deliver this coming quarters. But you may see in the coming quarters a positive trend.

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

Thank you very much for taking the question. When we contrast you with some of the competitors, something that really stands out is your headcount has been pretty stable, maybe slightly higher over the last few quarters, whereas some of the others have chosen to make pretty significant headcount reductions, and I guess, realize expenses in the near-term as a result, what's behind your strategy there? And what would it take for you to rethink that and get more aggressive on bringing headcount down?

Geoffrey, thank you for your question. It's a very, I will say simple answer. We have separated here what we call the banks headcount, and also the technology headcount. When you look coming two years from now, we almost doubled the size of the team of technology, we have 13,000 employees nowadays, and we grew 83% in this period. So what we have been doing is we are investing in technology a lot. We have 13,000 people working in technology. And this is due to the modernization we are doing in the platform, all the investments and enhancement of the way we approach to technology. So this is a huge investment. We acquired ZUP the technology company last year, we had the central bank approval, we more than doubled ZUPsince it arrived in the bank. So we are making huge investments here. And this is very important to deliver a much more digital company in the future. This is the way we are approaching. When you look to the headcount X Technology, you will see a reduction in the last years, in the past years, and also you see some something more stable this year. And this is due to the crisis to the capability we have to accommodate everybody working in home office, so on and so forth. But you are right, we don't see when we go to June 2020. Just to give you a figure only in Brazil, we had 74,000 employees. Two years later, one year later, we have 2,000 less employees. We have 72.6 thousand employees in Brazil. So we reduced 2,000 employees. But in the other hand, we grew technology from 10,000 to 13,000 looking only one year. So exactly what is happening is we are investing in technology growing the teams, but reducing the headcount of the bank. And somehow the investment in technology brings the opportunity to enhance the productivity to reduce some processes that are completely manual. So this is the pace more important than headcount, which is an important quantity is how we are approaching cost as a whole. So the program is delivering very good result. As you can see, 800 million reals only this semester when compared to last semester of last year. And the efficiency ratio is improving. So headcount is an important information, of course, but the mix of the headcount where we are investing and how it's affecting our investments as well because we are growing some commercial teams. So we are reducing in the core areas, but we are investing and enhancing commercial teams, the investors, assessors or the investors, we are increasing the retail the insurance task force, commercial force. We are enhancing some the agri-business, we are enhancing headcount. So we have to understand internally the mix of these headcount. So we are confident that we are in the right way.

And that growth in technology headcount clearly very rapid over the last few years, my guess is you're always going to need tech people. But we're reaching a point where that growth can start to slow down a bit now?

Sure, for sure. I completely agree with you, Geoffrey. I think we are getting to a point that we should expect a slowdown. So we have to manage all these people. We have to have projects. We need to have a modernize platforms where they can have more flexibility to work, less dependencies into the journeys. So you're right, I don't expect to keep growing the headcount in technology, I think we are getting to a point where we should see some flattish movement. But are we still starting for 2022? I don't want to give you an information and then needs to change in the coming months. But my expectation is that the acceleration will be much, much lower than what we see in the past years.

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

My question is about the cost of risk of the bank in coming years. When we look at the kind of risk now is, I would say, much lower than the past, I do believe that this reduction in the cost of risk is a structural reduction. And we probably will see a cost of risk below these historical figures in coming years or no. After the normalization of the economy, the end of the ad in Brazil, we tend to see cost of risk increasing going forward?

Thiago, thank you. Good question. We should see an increase in cost of credit in the coming quarters. This is our best expectation. This is due to many reasons. First of all, it's the growth of the portfolio. And as you know, we work with expected losses provisions. So this means that we are always anticipating provisioning, when we are growing strongly the portfolio's we are. Also, there's some uncertainty that we have the 40 billion reals, as I'm saying the reprofiled portfolio, we have to follow very close to understand what would be the behavior of this portfolio in the coming quarters, when you should have less benefits coming from the government, let's see where it will be stabilized. So this should bring an important impact. But the key message here for you is that even though we believe that the cost of credit should increase on nominal basis, and also on a relative basis, growing the portfolio, it will, it should stabilize, as we are seeing in levels behind the pre-crisis levels. So this is our main view over here. So I believe that second and third quarter of last year should make an inflection. And we should be stabilized in levels behind the pre-COVID crisis, which is good news and very healthy. We should be delivering more margin with a very well-behaved credit risk, credit cost. Thank you, Thiago.

Your next question comes from Natalia Corfield with JPMorgan. Please go ahead.

Hi, everybody, and thank you for taking my question. My question is related to your 81 you have a one of them with a call date at the end of next year. And another one so called dates at the beginning of 2023. And I am wondering how you're thinking about those calls and also you have an instrument in the local market, which I'm not 100% sure of when the call is going to be but I would like to know as well how you're thinking about this call? It is my first question.

Natalia Corfield, thank you for your question. Good to talk to you. Natalia, just to give you in Treasury, we are making our capital planning. We are always looking for those calls. You have the call date but you also have the opportunity to exercise this call later. So we are always seeing the cost and the opportunity that we have to exercise the call vis-à-vis the capital needs that we have or we need to grow the business. This is for local and our for that. So I cannot anticipate what's our decision now. But we are doing our capital planning and making some math here to understand what is the best instrument in terms of capital, if it's need or if it makes sense to exercise the call, but I don't have the answer for you right now. This is something that our Treasury guys are working in. So if you want to talk to them as well feel free, we can give you more detail about that.

Sounds good. And perhaps on issuance. Do you have an update on insurance in the international market any plans?

So it really depends on market conditions, Natalia. We are always looking, we saw some opportunity in the past to issue locally and we did a pretty decent amount locally, whenever we saw an opportunity and we did last year, the very beginning first quarter, we did a very good issuance. So it was a very good moment to do that, right before the crisis jumped in. So I think we had a very good opportunity to price a deal. So we are always looking to market conditions. As you can see, in the 81, we are fully-loaded. So we don't have a lot of room. In fact, we are a little bit above, what would be the limits that we have from the regulator. So I don't expect what maybe we should do in the coming months is some liability management, some discussions on that some senior notes, or maybe Tier 2, but then we will decide if it's better to do locally, or it will depend on market conditions. Of course, we want to have an external curve. We want to have to be active in the external market as well to be next to the investors. But it will depend on market conditions pretty much.

Your next question comes from Carlos Gomez with HSBC. Please go ahead.

Thank you for taking the questions. Two brief one, one on the tax rate you pay 1.3 billion extraordinary uptake for the income tax credit that different only to the coming six months. And therefore we should notice big reversal in the next two quarters from now. And the second one refers to your dividends, I calculate you have paid about 26% of earnings so far, what you expect for the rest of the year? Thank you.

Carlos, good to talk to you. Thank you for your question. In terms of going, first of all, in terms of the 1.3 billion reals, what we did is what was the expectation, our expectation is in terms of tax payment in this semester, because this increase in contributions, social contribution, in 5%, would impact only six months. So we had this recognition in no recurrent event of 1.3 billion reals yes, we do expect to consume paying a higher effective rate in the coming months. So we'll say net-net, maybe a little bit negative, but it's not relevant at the end of the day. So that's why we recognize this effect or this event. Now, and this is only related to our best expectation, what would be our tax income or tax payment in this semester? Nothing more than that, so we're very focused on this. And the second talking about dividend, we are provisioning we still below or very close to our capital appetite level of capital appetite of 13.5. So, maybe I can answer in two ways here, we are delivering and we expect to deliver a better profit. So this will enhance naturally the payment of dividend as we are seeing as the guidance having played a better second semester, this will increase naturally the payments, the dividend payment. But in terms of payout ratio, we still working with the 25% because we have to recover capital. And we will keep the matrix that we provide it to the market in the past years where we will see the risk weighted assets and we will see our profitability ratio. And this will be the result of the excess of capital of 13.5 we will be distributing that means that we didn't change the policy. The idea of distributing the excess of 13.5 or the excess of our capital appetite. But more than that, more important is that increasing the profit of the bank we should have nominal basis better payout in the coming dividend payments.

Very clear. Thank you very much.

Thank you, Carlos. Nice talking to you. 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.

Well, thank you, everyone for joining us in our second quarter results. It’s a pleasure to be here with you. Hope to see you during this period or we will meet again in the next quarter results, we are very positive about all the evolution we had, especially the cultural change that we are doing inside the bank. This is the most, I would say positive outcome that we are seeing here. So very positive about the numbers we have and very confident about the future, of course, depending on macroeconomic conditions. So well be safe, take care. And hopefully we'll see next time you know, much better environment. Thank you very much. Good to talk to you all. Bye-bye.

That does conclude our Itaú Unibanco Holding earnings conference for today. Thank you very much for your participation. You may now disconnect.