Itaú Unibanco Holding S.A. (NYSE:ITUB) Q4 2023 Earnings Call Transcript

Itaú Unibanco Holding S.A. (NYSE:ITUB) Q4 2023 Earnings Call Transcript February 6, 2024

Itaú Unibanco Holding S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello. Good morning, everyone. I am Renato Lulia, Group Head of Investor Relations and Market Intelligence at Itaú Unibanco. Thank you very much for joining our video conference to talk about our earnings for the fourth quarter of 2023, which we are broadcasting directly from our office at Avenida Faria Lima at Sao Paulo. This event will be divided into two parts. In the first part, Mr. Milton Maluhy will explain our performance and earnings for the fourth quarter of 2023 and present the 2024 guidance. Right after we will have a Q&A session. During which analysts and investors can interact directly with us. I’d like to give you some instructions to make the most out of today’s meeting. For those who are accessing this via our website, there are three options for audio on the screen, the entire content in Portuguese, the entire content in English or in the original audio.

The first two options will have simultaneous translation. To choose your option, all you have to do is click on the flag on the top left corner of your screen. Questions can also be forward via WhatsApp. To do so, just click on the button on the screen on the website or simply send a message to the number, +55-11-939-591877. The presentation we will make today is available for download on the website screen, and also as usual on our Investor Relations website. I’ll now give the floor to Mr. Maluhy who will begin the presentation on earnings. Then I’ll come back to you to moderate the Q&A session. Milton, go ahead.

Milton Filho: Good morning, welcome to our fourth quarter of 2023 earnings and the 2024 guidance presentation. I’ll go straight to the figures so that I can bring you some more information and then we’ll have enough time for the Q&A. Firstly, our earnings in the quarter totaled R$ 9.4 billion, a growth of 4% from the previous quarter. As a result, we delivered a consolidated ROE of 21.2%, with the 10 basis points growth in the quarter. In Brazil, ROE reached 22.2%. Moving on to revenue generation, our NII grew 3.3% in the quarter, reaching R$ 23.2 billion. Commissions in fees and results from insurance operations posted strong growth of 4.6%, reaching R$ 13.5 billion for the quarter. All this with sound credit quality indicators.

The consolidated NPL over 90 days posted a drop of 20 basis points. The NPL for individuals dropped 50 basis points. These are major results that show an evolution in the credit cycle. We’ve ended the quarter with a Tier 1 capital ratio of 15.2%, an increase of 60 basis points. The individuals portfolio grew 1.9% in the quarter and 4.1% in the same year. The SME’s portfolio grew 2.6% in the quarter and 3.5% in the year. The large corporate’s portfolio grew 8.7% in the year. Thus, the total growth of the loan portfolio in Brazil was 5.7% in the year. In Latin America, the results were affected by FX. As a result, the total portfolio grew 3.1% in the year and excluding FX variation, growth was 5.3%. It was a year in which we focused on derisking of the portfolio and we’ve been working more intensively on target clients and reducing the portfolio’s exposure to non-target clients.

We posted sound growth in the segments on which we focus. The Personalite and Uniclass loan book grew 16% in the year and 5% in the quarter. In Payroll Loans, we continue to grow in the private and public sectors, both quarter-over-quarter and year-on-year. There was a decrease in the public pension segment as a result of the caps that were put in place on interest rates. Therefore, we stopped serving a population that increasingly demands a social security-based payday due to these adjustments. Another piece of news worth sharing with you is that we had a nominal reduction of R$ 1.9 billion in the renegotiated portfolio, a drop of 4.6% quarter-over-quarter. This shows that our portfolio is good quality with sound credit indicators. It was a great quarter for clients NII, up 3.3%, or R$ 700 million in the fourth quarter of ‘23.

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Q&A Session

This growth was well-distributed across our product mix, volume, spreads and liabilities margin, and Latin America. We’ve isolated the effect of working capital, which starts the quarter at R$ 3 billion and ends at R$ 3.1 billion. The one month earnings of the operation in Argentina, which was recorded in the third quarter earnings, was also isolated. Thus, core growth was 3.3% quarter-over-quarter. Another piece of positive news was the expansion of the consolidated NIM from 8.9% in the third quarter to 9% in the fourth quarter. The risk-adjusted NIM also increased from 5.6% to 5.8% in this period. The risk-adjusted NIM of the Brazilian operation increased from 5.9% to 6.2% in the quarter, and the total NIM for Brazil reached 9.8%. I believe these are very positive messages for the financial margin with clients.

In the financial margin with the market, the fourth quarter was similar to the previous one with a sound result of R$ 800 million, with similar dynamics both in Brazil and in Latin America. The slight expansion in the quarter was due to the lower impact of cost for capital hedge. This shows that we’ve been delivering good risk management as shown by our solid financial margin with the market performances, despite the scenario of adversities and difficulties throughout the year. The financial margin with the market totaled R$ 3.3 billion in 2023 versus R$ 2.9 billion in 2022, which shows major growth in a year during which we face material challenges. It is worth mentioning that we met the 2023 guidance in all the disclosed lines, with the exception of the estimated growth of our loan portfolio, which was below the disclosed expected range.

This performance is explained by the difference between the projected FX rate for 2023 used in our budget and the actual FX rate for the period. Commissions, fees and results from insurance operations were also within guidance, up 5 3% year-over-year and 4.6% quarter-over-quarter. The highlight in the fourth quarter was the strong growth in credit cards due to seasonality. We’ve posted major progress in advisory services and brokerage fees. Net inflows increased 70% quarter-over-quarter and 7.4% year-over-year. This results from all the work of the last few years and shows that we are moving in the right direction. The latest acceleration is very positive. The transaction volume in the acquiring business grew 17.5% year-over-year, while revenue was up 20.4%.

This performance reflects an appropriate product mix, which has allowed us to increase revenue above the traded volume. In Insurance, earned premiums increased 11.2% in the year, with recurring income growing 19.6% in the period. It is worth emphasizing that we’ve seen a significant growth over the last three years in this operation. This performance shows that both the course and strategy designed for this operation are being well executed. In terms of credit quality, we draw attention to our short-term delinquency rate, which is absolutely under control, and shown by its stability both in Brazil and in Latin America. The long-term delinquency rate measured by NPL 90 days, decreased 20 basis points in Brazil, and in total. And in Latin America there was a slight increase of 10 basis points in the quarter.

This underscores that the short-term delinquency is under control. Short-term NPL in Brazil remained stable in the individuals portfolio, and had a slight growth of 10 basis points in the SMEs portfolio in the quarter. For the large corporates portfolio, this is not the most appropriate indicator to monitor, as I always say, but nonperforming loans are also well behaved. After four quarters of stability, the long-term delinquency rate of the individuals portfolio decreased by 50 basis points, and ended the period at 4.4%, which we consider a sustainable level. The NPL 90 for SMEs and large corporates remain stable. Generally speaking, we posted very strong credit indicators, with good developments and stabilization throughout the year, which is very good news for credit quality.

Cost of credit reached R$ 9.2 billion this quarter, a nominal amount below the prior quarter. The indicator that measures the cost of credit over the portfolio decreased in the quarter, from 3.2% to 3.1%. This was the second consecutive quarter in which there was a drop in the individuals portfolio NPL formation, which shows that the portfolio has reacted favorably. Cost of credit rose from R$ 32.3 billion in 2022 to R$ 36.9 billion in 2023, slightly above the best scenario in the guidance range, which was between R$ 36.5 billion and R$ 40.5 billion. There was a nominal drop in the renegotiated portfolio, which now accounts for 3.3% of the portfolio. This performance shows another good development and trend for the portfolio. There was no major highlight in the coverage indexes, which showed a slight increase in total coverage from 209% to 216%.

We have a very well-provisioned portfolio, with an adequate level of coverage and sound consistent results. OpEx, or noninterest expenses as we call them, are normally under greater pressure in the fourth quarter. In Brazil, this line grew 8.5% year-over-year, and in Latin America, excluding Brazil, it fell 4% in the period. On a consolidated basis, noninterest expenses increased 4.1% quarter-over-quarter, and 6.5% year-over-year. In the fourth quarter, we also recorded one-off investments, such as the remodeling of Itaú’s brand which put a little more pressure on this line in 2023. We’ve been keeping up with our financial discipline, which can be seen in the efficiency ratio trend, which has reached its best historical level. The efficiency ratio was 39.9% on a consolidated basis and 37.9% in Brazil, including all expenses.

This shows a major development, and we’ve achieved this by reducing core costs, which grew by 1.6% in the year, well below inflation for the period. This is a trend we plan to continue working. We continue to actively work and invest in the business and in the future of our operation. This includes key investments in new businesses and technology, which explains the increase in the year, disregarding Latin America in this analysis. The guidance range for noninterest expenses was between 4% and 8%, and we remained within it by recording growth of 6.5% in the year. We have good news on capital. We were able to expand our capital ratio for another quarter, ending December with 15.2% in Tier 1 capital ratio, of which 13.7% at Common Equity tier 1 and 1.5% at AT1.

The last bar in this chart shows the pro forma capital for December 2023, considering the dividends that we just announced last night. We have two key messages on this. The first is that we are reporting material extraordinary dividend, amounting to R$ 11 billion, which will be paid in March along with interest on capital of R$ 4.3 billion that had already been announced, meaning there’s R$ 15.3 billion to be paid in March. This amount of interest on capital is already net of taxes. In 2023, we paid R$ 6.2 billion in interest on capital, also net of taxes. This totals the cash payment of R$ 21.5 billion in dividends and interest on capital in 2023. Thus, the payout for the year was 60.3%. Once this payment is made, the core capital ratio will be adjusted to 12.8%.

There are some uncertainties ahead of us, and that is why capital management discipline is needed to conduct our business. Now let’s move to the 2024 outlook. And I’ll start by sharing our macroeconomic projections. We expect Brazilian GDP to grow 1.8% in 2024, the interest rate, CELIC, to reach 9.0% at the end of the year and inflation 3.6%. And employment should be slightly stable at 8% and the exchange rate of R$ 4.9 to US$1 also slightly stable. I now present to you our consolidated 2024 guidance, which is based on a growth expectation between 6.5% and 9.5% for the loan portfolio and growth between 4.5% and 7.5% for the NII with clients. It’s worth noting that we also present the expected growth on a comparable basis, excluding the effect of the sale of the operation in Argentina in 2023.

With this adjustment, the expected growth for the NII with clients is between 5.5% and 8.5% on a comparable basis. The financial margin with a market should be between R$ 3 billion and R$ 5 billion. Our expectation for the cost of credit between R$ 33.5 billion and R$ 36.5 billion in 2024 reflects a major decrease when compared to the cost of credit in 2023, which was R$ 36.9 billion. Our worst case estimate for the cost of credit in 2024 is already nominally below the cost of credit in 2023. We tend to look for an even better result. Commissions and fees and results from insurance operations are expected to grow between 5% and 8% and between 5.5% and 8.5% on a comparable basis, with a pro forma adjustment from the sale of Banco Itaú Argentina.

Noninterest expense is expected to grow between 4% and 7% is adjusted for the same effect on a comparable basis. Growth is between 5% and 8%. The goal is core costs to grow below inflation so that we can continue to invest in our operations. The tax rate is expected to be between 29.5% and 31.5%. Our goal is to keep delivering ROE above 20%, and these figures reflect that goal. I’m very pleased with the earnings achieved in 2023, the course that the bank has followed and the way we have mobilized, advanced and invested in the business. Cultural transformation has had a very material impact. Digital transformation is materialized in several of the figures we presented today. There are challenges ahead. No one is being complacent. On the contrary, we are very focused on delivering even stronger earnings in 2024, as shown in our guidance.

Now I’ll be joining Renato for our traditional Q&A session. See you in a little while. And thank you very much.

Renato Lulia: Milton, thank you for the presentation. We will start now the Q&A session. And today we have besides Milton, we have Broedel, he’s, our CFO. He’s going to be here with us in the Q&A session. Remember that we have both languages. We will answer the question in English and Portuguese. You can always choose your audio of preference, English or Portuguese. You can submit your questions via WhatsApp. Well, there is a long list of questions. Milton and Alexsandro Lopes, shall we start?

Operator: [Operator Instructions]

Renato Lulia : Yes. Good morning. First question we have on screen, Renato Meloni, Autonomous.

Renato Meloni: Thank you. Good morning. Thank you for the opportunity. First, in regards to the guidance, when you look at the interval that you’re mentioning, the growth in the portfolio of credit and a margin of clients, then might be a reduction, might imply in reduction. Is that a real thing? Because the — there is an expectation of the stabilization for 2024. And how should you or how are you looking at the dividends? And as here, if the growth in the portfolio goes to 9.5% can we have a similar payout? Any additional comments are great.

Milton Filho: Thank you, Renato. Good morning. Thank you for the question. Let’s clarify the guidance of the portfolio. First message. Portfolio of the guidance is, let’s just say, the tip of the portfolio and the margin is the one that we realized. That means that the average portfolio all throughout 2024 and the information is not in the guidance, it will be lower than the financial margin with the client. So we have to look at the average of the portfolio because that’s the margin that you can see in the guidance. That’s the first aspect, second aspect. When we look at the records, we’ve been growing with a lot of quality, the margin. And it’s important to look at the margin, not only associated with the Argentina effect, which explains another percentage point of growth.

So isolating it, we would grow seven percentage point on average. It’s important to consider the cost of credit, which has a nominal reduction. That means that our financial margin net cost of credit will have an expansion. Portfolio growing, cost of credit shopping. And you asked about the NIN. We are expecting, yes, stability of throughout the year and adjusted to the risk. We understand that there is an opportunity for some adjustments through the credit cycle. That depends on the mix of the growth of the portfolio that you can see here. That is growing above the average payout of the portfolio in the period. The cost of credit is higher and adjusted by the Argentina effect growing by 7%. Very important to clarify the dividends. That is of interest of everyone.

What was our decision? Let’s turn back time. Way back when we reduced our appetite in the risk management of the bank, we always talked about 11.5 that’s the set of the capital, approved at the board. That’s the appetite for the management of the bank. And we said that 12 would be the observed for the policy of dividends. And we look up ahead. There are some uncertainties or certainties that are calculated. The cost of credit, Basel. Operational credit, Basel III, 2025. That might have an impact of 42 basis points. And there is a second aspect, the tax reform of Brazil. If we look at it as it is in Congress, as if it was approved as it was written, we will have to do an impairment in the credit because when we look at the corporate threshold, we will have to reevaluate them in the balance sheet of the bank.

That reevaluation, even the corporate threshold, is evaluated, you reduce an asset, and then you have a capital effect. When you look up ahead, the uncertainties, our capacity for growth, we are getting into a year that we expect to be benign and any opportunity that might make sense through the cycle we will grow. So considering the growth of the portfolio, considering what’s up ahead Basel operational risk, credit risk, and considering the tax reform and uncertainties, our decision is to do the payout that is added to what was already paid, or R$ 4.3, which is the interest on capital, in March plus the extraordinary dividends. So a payout of 60%, we understand that it’s adequate, we are distributing R$ 21.5 billion between what was already paid and what will be paid in March.

It’s a very relevant distribution, three times the dividends of 2022. What is our policy from now on? It’s not to retain the excess. That has to be very clear. We will look at the uses on throughout and the sources of 2023. How are we generating capital, the result, and how we are applying it, whether it’s in organic, organic opportunities, portfolio growth, and regulatory changes that are coming up ahead with the tax reform. Looking from that standpoint, we will look at the next year, we will do the projections, and if there is an excess, our expectation or our decision is to distribute the capital excess. Don’t look at that extraordinary dividend as an isolated event. It’s an important dividend. And looking up ahead, we have to understand the excess.

Well, nothing into consideration, the effects that were already aforementioned, we are going to continue to distribute an extraordinary dividend with more information and the results and the effects therein. Thank you, Milton. Well, I thought it was dividends, yes.

Renato Lulia: Second question, Gustavo Schroden, Bradesco.

Gustavo Schroden: Congratulations on the results not only of the quarter but the year. I wanted to talk about the guidance and since Milton already gave us a soft guidance of an ROE above minimum 20%. That would be the point that we have to start. It seems conservative to me on your side. So I wanted to discuss with you. Can you go over please on what should we expect of the guidance, the main lines? Where can we work more as the higher threshold, the medium threshold? Should we, well on my side we see the upside rather than upside in PDD taking on the NPL trajectory that we’ve seen but if you can just give us your true sense on those two lines and can we work above or below the guidance and can we assume the 20% that you indicated as the conservative ROE but I want to check you from you.

Milton Filho: Thank you, Gustavo. I hope that you’re right. We’re going to work so that you’re correct. Well, the guidance in the end it’s our best estimate. We are coming from a budgetary procedure. We always have a temporary guidance. Well, we have the average point of these lines. The medium is always a good reference. If you look at the last quarter, we were running Brazil with 22.2% of ROE. Very strong. Had we unloaded the dividends in the way that you’re seeing it right now, the results would be 23.4% ROE of Brazil. The effect of the dividend generates a basis effect that improves the ROE reduces the net result of the bank because of the working capital but it improves the relationship and it makes the ROE better. So I believe that we have to look at the year for the opportunities for growth of portfolio.

The average is reasonable. There is the exchange rate in Latin America, which is uncertain. So taking away that, there might be some opportunities for the growth of strong portfolio growth, depending on the scenario, the perspectives, the credit cycle. So I believe that working above 20% is a great reference. We didn’t give guidance of ROE. We are working above 20%. Can it be more than 20%? Of course, we’re going to work to deliver an adequate profitability given the scenario and the opportunities therein. Because of credit, we’ve been very successful all throughout the cycle. You’ve followed the bank for many, many years. We had a difficult cycle. Some portfolios suffer more. In our case, credit card, very relevant portfolio, R$ 135 billion.

The vehicles, very important, R$ 33 billion. Those two portfolios naturally, they suffer more. Now, the good news, it corroborates your vision with the cost of credit, is that the vehicle portfolio, fourth quarter consecutive, that we have a reduction in the overdue fees of 90 days, credit cards is the third. In the natural persons it is 50 basis point reduction in credit cards. It’s basically the double, double the reduction with the nominal of the portfolios growing less. So it shows that the cost of credit is behaving. What does the guidance have? It has a level of uncertainty because we have the portfolio of wholesale that is very relevant in Brazil and Latin America. And you can imagine a normalization of the delays of the wholesale. I’ve talked about that, we expect that by 2023, we had a benign effect except the American event in January.

We had a portfolio with the cost of credit that was very well behaved below the minimum thresholds on record when we look at the long-term cost of credit, our expectation is that we can always have a normalization if that doesn’t happen and there is in any case the really concerns us or that we do not have the adequate provision, we don’t have that, but we might consume some thresholds of the guidance, but the cost of credit is positive. The other lines, they are well calibrated and the costs depend on us. Where I think that we are going to have to follow up is the portfolio of the margin and the cost of credit depending on the events that I commented and we’re going to update you all throughout the next quarters and I am hopeful that you’re right, we will work to deliver an ROE better than 20%.

Renato Lulia: Well, let’s now we have Mario Pierry, Bank of America.

Mario Pierry: Hi. Good morning, everyone. Congratulations on the result. Thank you for taking my question. Milton, I wanted to understand your guidance of the growth of credit. Can you give us a breakdown? What are the lines that you expect higher cost? Because when you look, when you see, well, the macroeconomic scenario is positive, the bank has a great capital and the growth nonetheless seems timid. You’re talking about a nominal growth of the GDP, 5.5%, 6%. A portfolio growing 8% seems a bit shy. I wanted to understand how do you see the product itself?

Milton Filho: Thank you, Mario. Beforehand, thank you for the question. Thank you for being with us today. And I wanted to tell you, when we look at the portfolio, I’m going to do a deep dive. We hope that the companies, whether if it’s retail or the big companies, they will grow above the average point that you observe. So they carry over that. The natural persons, they grow less in that relationship in the average of the GDP. And there is a relationship there. We expand, we will expand on the products that make sense in the target segments that we are growing above two digits. But here there is a double effect. First effect, the natural persons portfolio, there is a renegotiation drop, which is good for the overall balance of the cost of credit.

But it’s a natural offensive of the balance sheet. And second aspect, when we look at the portfolios, we have the decision of reducing nominally some portfolios, important reductions that saved about 200 points of delays in the over 90 delays. So if we kept the same mix of growth that we had in the pandemic, we would be running in the natural persons, something about 6.4, 6.5 of the late 200 points above. So when you look, you have the opportunities of growth. The portfolio of real estate has grown a lot in the pandemic with low interest rates, high demand. With higher interest rates, we see that there is less demand, even though we are keeping good market share of production, the nominal dropped. So, we see INSS, and there is a pressure, and we have the caps that we already mentioned.

So, it seems that there are some effects that play against, like payroll loans, but some that are positive. In credit cards, we have derisking of the portfolio, and we are growing strongly in the target segments of the back. In real estate, we can see a deceleration. In the last quarter, we can see a deceleration of the personal credit that is very specific, the reduction of the 13th salary. Well, that happens, and there is the effect of the renegotiation portfolio, which tends to continue to drop. That is the overall of the mix. There is a capital markets effect. We expect a good growth. We are depending on the capital markets that are more active, if they are more active, we are going to give the preference for the capital markets. This is the cheapest financing of the great corporations, and we lead this market, so we have the cross-sell, and it generates engagement with the clients.

And there is an effect which is difficult to predict, which is Latin America, which is the exchange rate devaluation in these numbers, implicit, and the numbers can change all throughout the cycle. So, breaking down the portfolios, we are very comfortable with the mix that we are going to grow, and if there is an opportunity to grow, we are going to grow more. And you can see that the NIN has a stability, expanding, and the risk adjusted line above all. And it shows growth above the average, and it shows the cost of credit nominally dropping, which has a net financial margin that is improving all throughout the year. We are very comfortable with that level of growth and if we have an opportunity then we are going to seize those opportunities.

We are very focused to service our good clients and continue with the engagement and customer centricity and the NPSS that are the highest levels of the bank.

Renato Lulia: Next one we have here Rafael Frade from Citibank.

Rafael Frade : Good morning. Thank you for taking my question. Doing a follow-up of two points. First the NIN making it very clear that we expect a stability in the NIN but all throughout the last few years you always said that the liabilities margin has an important contributor for the improvement of the NIN and maybe last for ‘24 but the effect also throughout ‘24. Is that more of a detractor is thinking for the end of ‘24 and for ’25. And second question is a follow-up on the issue of cost of risk. I think it’s very clear the guidance accommodates fluctuations but we wanted to understand more on the retail when we see the fourth quarter, the aforementioned side at the level of 2019-18 but you commented at the beginning that you have an important shift in the portfolio seems like this is a safer portfolio than ’18-‘19 so specifically in retail can we see an NPL formation for ‘24 maybe below what was the official records. Thank you.

Milton Filho: Thank you, Rafael. Pleasure to see you again. Let me start by the NIN, liabilities are growing for us and we managed to grow in an important way you can see the net cap grew 70% of the last quarter we do not talk about the absolute numbers but these are strong numbers I can assure you, therefore there is always the interest rate effect but the volume as well combination of both generates an effect on the NIN, when you look at the margin of this quarter the volumes are very relevant. Second aspect, for the financial margin for the clients we do the hedge whether if it’s working capital or liabilities. We do the hedges with longer vertices so it shows that in a longer cycle for better for worse we have a long better stability in remuneration there is a reduction in the margin.

We can see the margin of the working capital reducing but there is the increase of the pay of the pays and the liabilities have been growing importantly. And there is the demand for the banks products which increase this effect. So we believe that 2024 we’re going to have a great year for volumes. The rates from the application and the hedge of the bank they tend to be less sensible to the effects of the select rate and that highlights what I’ve mentioned. We’ve seen some reports that said that our line is very sensitive to the interest rate. This is another proof, seeing the cycle as it is, that our NIN is very stable regardless because we can work with both sides of the equation. The interest rates they tend to drop, but they will stabilize at a threshold of nine.

We’re never going to see a drop of interest rates as we’ve seen way back when. And that is sustainable and it opens up the growth or portfolio that compensates at the other end with volumes and growth of assets. So we consider that NIN is stable regardless of the pressure of these liabilities and the volume compensate the effects of the interest rates. And this shows that our investment strategy and the review of the offerings and platforms are very well successful. We have an NPS that is measured by an external auditing company that does all the measuring, and it’s where the best when we compare with the main competition and we continue to advance. Naturally, you’ll have a better offering in regards to the platforms, the new platforms for the investment.

The positive news is that in investments, this was our best year with the relationship with the platform. We had some months of positive capture in regards to some of these players, and we ended up delivering a nominal net cap above what was published by the competition. And it shows that we’re doing our homework. This is very important. The second aspect of the delay, the delinquency, well, there is better portfolios that are being produced all throughout the cycle. We see a nominal delay above 90 that is below what we saw in the pre-pandemic. We continue to be positive; we expected the NPL creation will tend to have, well, stability really looking up ahead. We see in the natural presence there is a reduction in the two consecutive courses, there is a drop in the formation in the natural presence, and we believe that this is a great trend.

Of course, more exit for write-off within the regulatory rules that has to do with the portfolio that was made in the previous periods and with the renegotiations we have a balance and with the renegotiation with the quarters we see the effects in the write-off. So yes, we see the formation that is very positive and the cost of credit that are nominal for the retail are reducing step by step and this is great news where the portfolio growing and the margin expanding. So on overall, we can deliver an NIN that is very positive with an expansion in the risk adjuster line, which is what we are doing consecutively over the last quarters.

Renato Lulia: Next question from Thiago Batista, UBS.

Thiago Batista: Good morning to everyone. My question is about efficiency. When we look at the bank’s efficiency, Milton commented that you are the 40% historical minimum, good number when you compare to the bank itself or other banks, but it’s still above some digital banks or traditional banks. Well, [inaudible] is not the same one, but in Mexico, they operate with better efficiency. Is it possible to maybe draw from 40 % and get you 35% or not? Or 40% is the absolute bottom? And if you allow me a second question, the credit card. We see that the level of the payments of Itau increased in 2023. So we had 81%, 85%, one lump sum payments. When we look at the Central Bank, that trend didn’t happen while the data of the Central Bank. What is the difference? Why is it happening? Higher income makes a product. Can you tell us more?

Milton Filho: Okay, let me start by the second point. Thank you, Thiago, for your presence. Credit cards. The explanation is mixed. In the end, when you look at our non-financed portfolio is higher than the portfolio of the market. In the last quarter, we have 34% of non-financed portfolio. So this is a very relevant number. I always say the effects of the interest rates of our R$ 135 billion of credit card portfolio, R$ 115 billion are noninterest. So R$ 20 billion is the finance portfolio. In the last quarter, the last month, there is a seasonal effect with more purchasing and more volume. So there’s a trend of an increase in one lump sum and in the installments and noninterest, depending on the profile of purchasing of the population.

The main explanation is mixed and there is the derisking in the portfolio, of course. Since we reduced relevantly the segments of high risk that were destroying the value for the shareholders, then we rebalanced the portfolio with more focus and the mixes that are more sustainable in the long term. And we don’t look at credit card as a product isolated. We look at it in a global relationship with a client, taking away those products that you’re a mono liner, open ocean, but in the bank, we have a relationship with the clients and we’ve been growing relevantly. And the fact that our portfolio is more affluent than the average of the market. So it takes our noninterest in regards to the interest to a higher threshold. We should see a normalization.

There is a reduction in the propensity, of course, depending on the profile. And once propensity comes back, the finance portfolio will grow more in regards to the noninterest because of the seasonality of the last quarter. Efficiency, I’m going to give the floor to Broedel, but I just wanted to make some relevant comments, general. First, is that we have to look at the bank in the mix. So looking at the efficiency level of the bank, we are looking at the consolidated. We have a lot of businesses here and we have efficiency levels when we look at the operation. When you look at wholesale, you see some numbers. When you go to retails, you look at others and there is the consolidated LATAM, without LATAM. So we are running 37.9% in the picture.

It shows that inverse, so we are reducing. Relevant, well, directionally, the path has to be efficient. There is no doubt in regards to that, we’ve done a series of movements in that direction. This has happened for some years and this has to do with our DNA and culture, but there is a space for a deeper dive and a cost, the efficiency level. Well, we can get you 30%, 35%, whatever the threshold is. It’s important to say that when you reduce and you become more efficient, part of the efficiency goes to the price. So, imagine that the efficiency level just drops. It’s not true because it becomes more efficient and then you become more competitive and therefore that equation of revenue and cost is that what we work in a relevant way in the bank.

Our efficiency level is benchmarking global — of a bank of our size. It’s a benchmark, global benchmark, but we have a series of initiatives that we’re working to separate. What are the events of the wholesale? What is retail? And the investment in technology that we’ve done to digitalization naturally goes through all that. The core costs are dropping, growing less than the inflation, and that’s the trend. But it will grow less than the inflation knowing that we have an inertia that is very strong, which is a payroll. In regards to the collective bargaining agreements, higher than the inflation measured by the IPCA. Just looking at IPCA, it doesn’t translate the banking inflation that is a higher threshold. Broedel, would you like to highlight some of the points that we’ve been working?

That would be nice.

Alexsandro Lopes : Thank you, Milton. Yes, we have a concern here, as Milton has mentioned, of looking at an efficiency program that generates effects on the long term, and these are consistent results. We don’t want those efficiency levels to be a volatile indicator. We have periods, gains in some periods, losses in some periods, and that’s the up and down effect, as we say. We have a variation, but we don’t want that. We want gains that are consistent, gains that are recurrent. That point that Milton mentioned, the efficiency, it doesn’t depend just, it’s not an index, it depends on the mix of business that the bank works with. Structurally, the bank has efficiency indices that are different. Do we have a program that involves over 1, 000 initiatives?

We have automation, cost reduction, digital processing, migration to the cloud, amongst other initiatives. The important thing is that this is a program from all the organizations. There is no silver bullet. All the initiatives are implemented, followed up. We have an important control of the budget as well, so that the initiatives that we implemented, they are not, the economies are not eventually used. And more important, which I believe is the relationship between the good management of cost and efficiency. You can see that the guidance, we are not doing the investments that we consider that are important to reach a certain level of cost or efficiency. Why am I saying that? Because sometimes the important investment, because of an accounting issue, they have costs that come earlier.

You have the amortization of the investments and technology as well. So our discipline here is that this is a program is to be consistent all through all time. We don’t give a specific guidance of efficiency, but we want to have efficiency levels that are sustainable, that are reachable, and they continue through all time. Keeping the modernization of our platforms and a higher focus on the client, client centricity, all these initiatives and the efficiency level, Thiago, is inserted in the context of management of the bank as a whole. It’s not an objective that is independent. Having said that, we believe and imagine that there are important opportunities for improvement all through all time.

Renato Lulia: We have Bernardo [inaudible] from XP.

Unidentified Analyst: Well, good morning, Alexsandro, Milton. Thank you for the opportunity. I want to understand better the strategy for the composition of the funding of the bank over the last quarters. You’ve had an improvement in the participation of exempt instruments. And with a new regulation, these instruments should be more restricted for issuance. What is the reading of Itau about the impacts for the system? Looking at the businesses of wholesale and retail, what is the market stock that you estimate as well in these instruments post the changes? Thanks.

Milton Filho: Thank you, Bernardo. This is a new issue. Of course, naturally, the resolution was published last week, we are naturally going over the details. What I can anticipate is, without a doubt, the exempt instruments have a participation in the funding of the system as a whole. They are growing out throughout the time. There is a creation of LIG which brought, you had the double backing of the LIG and LCI, which you could use, but the exempt in the interest, they are 15% of our capture. They are important, but they are limited to 15% of all the capturing volume that we have. And in that change, recent change, basically two thirds of our capture were not affected. So we are talking about a reduced impact. So we are talking about 4.5% of the total funding of the bank.

These are the materiality. And it doesn’t mean that the resources are leaving. There is a natural migration of resources. When you do not have the exempt from the income tax, you do not offer new products. And this is a systemic overview. The system as a whole goes through that. We’re given a level of relationship with our clients and the capacity for generation of backing. We don’t see the impact and the cost of capture of the bank. This is immaterial. And we will substitute by instruments of CDB and banking letters, other instruments that make more sense for the investor and that are going to have some impact in our cost of capture, but it’s immaterial. So I believe that for the system, it’s difficult to do an assessment. There is the mapping being done.

There is a global level to see what is the level of impact because it depends on the generation of coverage, the profile of business of each institution, relevance in the events of the capturing of each institution. 50% in our case, we can see in other cases less or more. It’s very difficult to do an assessment of the market. It’s very difficult. Every bank will start to talk about the impacts in their activities. We are in a phase of deepening in the norm, doing a deep dive and analysis, but there will be an impact, but it’s not relevant or immaterial for the size of our operations. And we continue with a very broad portfolio, the investments, 360. Our focus is to offer the best investment for the client in that cycle. As we always say, our executives of investment all are measured by the profitability of the portfolio of the clients and not the selling of products.

So we’re going to have funds, titles of interest rate, income tax, and if there is any migration, then we can retain that asset under management or under custody within the bank. So we don’t see an impact in the relationship with our clients because we expect that we have the capacity to replenish these alternatives in a very efficient way.

Renato Lulia: Next question comes from Tito Labarta from Goldman Sachs.

Tito Labarta: Hi, good morning. Thank you, Renato. Good morning, Milton, Alexsandro. Thank you for the call and taking my question. A bit of a follow-up, I think, to Thiago’s questions earlier on efficiency, but slightly different perspective. When you look at the guidance on expenses, like core expenses, as you mentioned, below inflation, but you are growing above inflation this year, you had about R$ 3 billion, I think, in business and technology investments. For how long do you think you’ll need to continue to do these types of investments? And I’m asking in the context of the competitive environment, just with increasingly more digital players becoming more and more relevant, just to think about how you’re positioned. And somewhat related, but on the credit card, very strong quarter for credit cards, both on the issuance and acquiring.

There’s been a lot of competition there on both sides. How much of the growth in the quarter was just seasonally and how much are you maybe, given the credit cycle, looking a little bit better? Are you able to be a little bit more aggressive there? And also, a couple of your peers announced that they’re trying to privatize their acquiring business. So if you can just comment on the competitive dynamics in cards, both on the issuance and acquiring side, given where we are today.

Milton Filho: No, sure. Nice to see you. Thank you for coming, Tito. Good to see you again. So just follow up here, first of all, on the efficiency ratio. We’re always going to be investing in the long term of the bank. So this is our long-term view. We’re not looking for one or two quarters efficiency ratio. And this is the trend, especially on the technology investment. We doubled the force. So we had 8, 000 FDs nowadays we’re running with 15, 000 FDs when you look four years ahead. But we stabilized now two years in a row. We do believe that we achieved the level of FDs that we need to do all the digitalization and the modernization of our platform. So our idea here is to keep doing this project. So this is very relevant because we have to finalize what we really need to modernize.

We are two thirds of the journey so we still have investments to be done throughout 2024 and over. But the most important is that whenever we do the investments, we amortize the investment in the coming years. So you see a strong pressure coming from the investments we made in the last period coming those years and we are being able to absorb all this amortization in our P&L. We still believe that there should be another level of increase in the amortization. But then it should stabilize when we look a long term period. This is very positive because there we’re going to be in a cycle where the level of investment will be much more similar in the coming years as opposed to what we observed in the previous years where we came from a very slow amount of investment and we had this curve of increasing the investment in technology so.

And part of the investment in technology is done to get more efficiency and more productivity in our operation. So you will see the cost of the amortization of the investments, but in the other hand, you will take pressure from the run the bank costs that we are seeing in those periods. So we do believe that the level of FD is there. We should see a stabilization in the level of investment as well. But technology score is much more than modernizing the platform. In that sense, it will reduce. But then you have to keep running your business and modernizing the platform every single day to achieve the best level of experience for our clients. So this will keep being the trend and we are very focused on that. Talking about the credit cards, the quarter is very seasonal, okay.

So you saw relevant grow in the credit card portfolio, especially when you see the site payments. So it’s not buy now pay later. That means that there is a seasonality. And we are not here trying to increase the level of risk appetite. We will not be running more risk than we should. And I think it’s the opposite. We’ve been derisking the portfolio, especially in some segments, but we’ve been growing a lot in the segments like Uniclass, Personalite and other clients where we do believe that they are very resilient through the cycle. So this is our main focus. On the acquiring side, I think we’ve been very successful in the hedges integration and we are getting benefits of doing that. So a comment for you and for everyone is that you cannot look the P&L of hedges the way we have, they stand alone company balance sheet the way you have it published.

And why is that? Because hedge is completely integrated inside the Itaú Unibanco. So when you look to that business, you have to look that in the retail business operation and not only the P&L on a separate basis because this won’t give you the full vision in how we manage and view the business. For us, it’s a new product that we have in the relationship with the client. So the relationship is key and then you have ways to take the best conversation or the best product to that client. And hedge, the acquiring business is one of it. So I think we had a very strong year, 2023. Hedge had a very strong recovery in the P&L the way we see and the way we measure, okay. Just to give you an idea, when you look to the hedge’s P&L, we take the working capital out of it and we take the working capital and we take it to the corporation.

So in the business model, all the working capital that has been benefit from the interest rate, it’s not in the business model. So this is not the way you see the other companies that they are standalone balance sheet and they have a huge working capital. So you have to discount that to compare their business with our business because we don’t live in our business model, the working capital inside hedge balance sheet. So this we take to the corporation level. So this is just one example. The other one, we do a lot of anticipation and business cross sell in the bank’s balance sheet, not only in hedge’s balance sheet. So that means that if you look only the take rate considering hedge’s balance sheet, you won’t see the full picture. So the number we see is completely different from what the market sees.

And for us, it’s a business of integration in the past. I used to be CEO of hedging that time. Two thirds of the P&L came from the open market, clients that didn’t have the domicile or a relationship with Itaú Unibanco. But when we look today it’s completely the opposite. The relationship has to do with engagement, with principality, with cross-sell. So this is what we see. That means that the integration was done at the right moment, at the best way possible, and we are getting benefits of doing that. And when we look forward, we see a lot of benefits to reach. And the competition will always be there. So you might see some movements coming from one player or the other play. This is life. So we have to keep doing the integration we did. And I think we are in a key position, very advanced when compared to the market, to deliver a unique value proposition to our clients.

And this is what we’re going to pursue in the coming quarters.

Renato Lulia: We have from JP Morgan, Brisbane.

Unidentified Analyst: Thank you for taking my call. And my question. On ROE per segment, it calls for attention retail improving, going back to levels above 20% of ROE. And when we do the decomposition of that result, it seems that it comes from cost of credit. I wanted to hear from you, Milton. The correct evaluation of that improvement of ROE is that an issue of mixed. You’ve talked about growing in segments Personalite, Uniclass because of the balance of that segment is higher in the ponderation of the ROE. And a consolidated ROE is higher in that segment. Are we seeing the ROE of the lower income improving where you know that the MPL of lower income is three, four times the higher income. And it’s fair to say that in the process of the improvement of an MPL that lower income should improve more in the cost of credit.

If you can comment on, how are you using these sub segments, and do you think it’s sustainable that ROE above 20% we had a lot of debate in that period of how much is it structural or not that process how it’s cyclical, it is, there were some caps in along the road and the payroll loans. So how do you see the sustainability of these ROEs above 20%.

Milton Filho: Thank you, [inaudible]. Well, time is suffering. As I say, that was your doubt and we were not satisfied with it. The level of profitability we needed to work strongly to recover the profitability. There are issues of the market structural changes. There’s a little bit of everything and we have to understand what is happening with the big variables. You’re talking about the — what — you have the payroll loans. You have the cap of the retail and then there is the structural changes to credit card, the rotation. So there is a structural change. There is a dynamic of the fees changing. When you have the offering, you have the fee business pressure. There is a competition of the margin, and there is an expansion of the period.

So the credit service relationship change, that business has a higher dependency and credit than they had before, for example, overdraft. And we’ve grown an insurance that has an increasing growing of, well, insurance. If we look at the three year window, through 93%, the profit in our operation. And this year, we will double the results over the last four years. And insurance is cross sell, business that helps with the profitability. To explain here, I told you that when we were questioned a few quarters below, we saw that it was the bottom, and then we saw the inflection point. What generates that inflection? Several aspects. There is the play of the generation of top line, which is important, so we have to work with the correct, mixed way, the correct client in a relevant way.

We’ve done that with quality. There is the play of the cost of credit. You are right at the end of the day with all derisking that we are doing with the portfolio and all the credit crisis that we have observed with a higher concentration in some portfolios where we have over the double of the second place. Credit card is that example. Our portfolios, in average, have more relevance of credit card, and our proportion is more relevant at the market. So it brings a cost of credit that is higher in more difficult cycles. And we were capable of doing that turnover of the portfolio, regardless of the size and absorbing those losses and the balance sheet of the bank and we’ve produced crops with positive quality. So it’s a mix of margin, cost of credit, net margin has had a relevant role in that profitability.

All of our mono liners are below the or above the water line. So that thing of losses or operations are all positive, all of that positive — all of them positive. The challenge is always isolated the cost of capital for some specific business and we’re working to improve them relevantly. So we understand that it’s sustainable that level of profitability, we understand that we can expand it all through all the years. So we expect a lighter expansion of the profitability of retail along the lines of what we committed with the turnaround of the operation. All the review of the business model, the structuring of the business model is the new operational model that we assembled in the bank. It has a big impact on that and all of our journey of the super-app that is working this year will also help us strongly to have a full bank offering for all the clients that do not have an offer a full bank in the bank so they will help in the profitability.

And on the other hand, our companies business retail has grown with quality, and we are seeing an expansion in the profitability of our company’s business, whether if it’s the management or credit Basel pondering, the adjustments that are recent. But basically, a value proposition that is very well fitted with a value generation that is very consistent. And we can see all the businesses having an evolution in the performance in ‘23 and in ‘24. We expect to continue with a lower or higher level that expansion we are very optimistic so we can have a more balanced portfolio in the terms of profitability. And when we look at the wholesale, the view for ‘24 is to deliver a profitability level that is strong. We talked about 28% of our ROE, 27% in last quarter.

Well, with this margin of one percentage point of mistake, plus or minus, the idea is to deliver a strong result in wholesale. We have a natural rebalancing of profitability, which is healthy for the portfolio as a whole, so we are very positive with that expansion that is happening.

Renato Lulia: Next question is from Rosamund, BTG. He couldn’t connect but he submitted the question. Yes, WhatsApp. I’m going to ask you, Rosamund, your question. He submitted the WhatsApp and congratulations. Yes. Well, Rosamund asks the credit spread. It ended up at the end, higher than the average and the working capital is 9.5%. And the bank always guided that we should confer it for so they’ve given the vertices that we use. In that sense, can we say that the guidance is conservative for the NII, the credit portfolio is strong. So margin and guess.

Milton Filho: Rosamund, thank you very much for the question. Certainly, you will see the recording later. But the main message for you is the portfolio, as I told you, we have to look at the mix of the growth. We have to look at the average balance of the growth and that’s what has an impact in our line. Our vision is that the NIN will continue to be stable. The portfolio of companies tends to pull the NIN for a lower threshold. On the other hand, we have the working capital and the liabilities very well worked out. The volumes are strong. On the overall, we have an NIN that is stable with a small expansion and the adjusted line to credit. So portfolio and the average growing eight. So if we have an opportunity and we understand that it makes sense in a cycle of long-term, once again, without adventures, we will grow the portfolio so we will not lose the opportunities and we have certainly appetite and capital funding, human capital to continue very close to our clients.

And growing in those segments that we’ve really focused, we do not, but we want to grow above two digits. When you improve the profile of your portfolio, you go to a mix that is less risk, which has less NIN. But the NIN adjusted to risk is better. That’s what we observed to the market. That’s our dynamic, if we can expand the NIN, the NIA in regards to the portfolio growing more, we will work diligently for that. But as long as the opportunities are clear, with a clear vision of portfolio management, client, and focusing on the clients.

Renato Lulia: Next question. Going back, now Daniel Vaz.

Daniel Vaz: Well, thank you, Renato. Good morning, everyone. Congratulations on the results. I wanted to go back to the credit card. Well, in the release, we saw a reduction of 3 million of plastics to 38 of credit. So it seems clear the preference for the more engaged clients and Personalite, Uniclass. I wanted to explore more the strategy for ‘24 in the mass channel and the retail partnerships. The bank understands that the client is stressed. Is there just a transfer of risk to the other players or the system has reduced the credit for this client and is there space in your perception to increase exposure in these clients and increase the consumption in this product.

Milton Filho: Well, thank you for the question. First, our expectation is that credit card portfolio will grow in this year. It’s inevitable, there is the TPV, the invoicing growing, the growth of the market changing on the mix. That always happens when we look at the data, we see that the business is growing. Our business, we try to subdivide it in three big groups. There are the ones that have the bank, where we have a big penetration in all the segments, above all the higher income, the check-ins segments, not only in the existing clients, but in the acquisition of new checking accounts. So a big deal of our business is achieving new clients and increasing principality and engagement. Second point is that with the super-app, we will have an offering that is easier, more integrated, simpler for our clients that do not have an offering of full bank who have an access to the basis of clients that can be relevant.

Mono liners, maybe they have a product and they don’t have the credit card for the product. We have the capacity for offering with unique experience and the right clients, we know them, they have a credit record and they have a good modeling for the offering. But we always call the open ocean, we reduced in a very relevant way, because we still see the compromise, very big compromise of the income of the families, an over indebtment in the product. So in the end of the day, there is an over offering over the years, the number of plastics per CPF in Brazil is increasing and more than doubled in the short term. So with the credit card that today is a product that doesn’t have a cost to be in a portfolio or in the app, you end up having access to several products with a digital experience where you do the quick onboarding, you don’t pay [inaudible] fees and you leave from 2.2, 2.3 and you have three, four credit cards per CPF on average and there are some CPFs were more, with more products.

So we have to be careful There’s a metadata if the client has the degree of financial education as difficulties receives a lot of offering and they have problems. Our role is to help our basis of clients to go through this challenging cycle but we reduce over 90% of the offering for the open ocean where we get these clients without any records, any knowledge and the partnerships, we continue with the level of appetite that I would say adequate for the cycle, we always look at the value proposition for when it’s not good and the offering as a whole, the trend is a decline will only go after the product because of these and not the value proposition. And we want to get a better value proposition to increase the principality and the engagement and the super-app will help us in the integration.

These are the main components of our credit card offering and you’re talking about partnerships and you mentioned co-branded. An important information over the last few months, we did a review of our portfolio and we closed with our partners. We finished a lot of partnerships that did not have an adequate value proposition for our clients and they generated cost of management. It was a small portfolio that had to be followed with a point program that didn’t make any sense. So there was a relevant restructuring and we are focusing on what is relevant priority. We prioritize very well and these are high level talks with our home branding partners and we understand that the product lost its value proposition so it wouldn’t make sense to us and either the partner should keep those co-branded and we kept some co-branded that are very relevant to default brands of air companies and the other proposition is very robust and in these we renew some partnerships we renewed with Azul Airlines which is a product that works very well with co-branded and we are excited with the potential of the product.

Renato Lulia: From Jorge Kuri from Morgan Stanley.

Jorge Kuri: Can you hear me now? Oh, sorry. Thanks for that. Congrats on the [inaudible]. I wanted to maybe shift gears. I think you’ve explained in detail the results of the guidance. Maybe shift a little bit to the credit card regulation. Apparently, the 100% cap interest statement printed well kicked in January. And it doesn’t seem to me that prices for revolving interest rates from cards are going to change at all, as a respond to that. I wanted to get your view on what the impact is on the business of this major kicking in. Also, what is the risk that the sponsors of the bill, six months from today, a year from today, look at prices and say, well, nothing happened, and the prices are exactly the same. And we did this precisely to lower prices.

And what is the risk that happens, and then we go against the more round and potentially more aggressive caps for being implemented in order to really deal with that? And what is the industry doing to try to avoid that? Thanks.

Milton Filho: Yes, well, thank you, Jorge. Good to see you. Thank you for your compliments. So just to go through, first of all, to give you a little update about the changing law that we saw at the end of last year. We spend and I’ve been telling for a long period, I would say almost a very dedicated as an industry, having conversations with all the possible stakeholders in the market, so this active, the Central Bank, the retailers, all the associations. We’ve been to the Congress, talking to a lot of senators and deputies, so we had a lot of discussions about this topic, and we had a very clear and simple diagnostic about what we saw as the main forces that were producing this level of anomalies and asymmetries in the credit card market, so as I was standing a little bit before here in this conference call, I was saying that we have R$ 135 billion as in portfolio, in credit cards, out of R$ 115 that there’s no interest, so that is just to give you an idea how relevant it is buy now and pay later in Brazil, so it’s very relevant, so our view is the following.

There was a lot of headlines in the system saying that the banks are charging 450% per year in interest rate, and I was always saying to the press and to all the stakeholders that this is a futile rate, it doesn’t exist at the end of the day for two main reasons. First of all, no one can stay in the revolving credit for more than 30 days, this is the first reason. The second reason, because you have a price amortization profile in the credit card that shows you that at the end of the day, no one’s paid much more than 100% on the acquisition value of the credit card, so on principle, to say on capital to make it easier. So we were saying that the rates are much, much lower than the rates that were being released. The central banks, they released the interest rate on a monthly basis of 12, 13, 14, whatever is the rate, and they do on a compounding rate, 12 months and say that it’s 450% per year.

It’s not true. The rate on the mathematical way, it’s correct. There’s no doubt about it. But it doesn’t happen because no one stays at this level of interest rate throughout 12 months. So our view, and we said that many times to everyone, and I kept repeating that, is that the impact would be very marginal on the interest rate whenever you had this law approved. And why is that? Because at the end of the day, no one was paying much more than 100%. We were seeing 160, 120, 170, depending on the portfolio. So you have to do, yes, adjustments on the terms and also on the interest rate, but you will be with minor impact inside the limitation. We’re going to fulfill the law, so this is our obligation to follow what is approved, and this is the way we are working in 2024.

But in our view, this is an open discussion because unless someone tries to understand really what are the real impacts for interest rates in credit cards and when to do a long-term agenda, not a short-term agenda, but a long-term agenda, I think this will be an open dialogue that we have to keep. And so our view is that the executive, the central bank, and all the stakeholders will listen to everyone else in the industry as they should. They will do another analysis trying to understand causes and effects, and will try to create new discussions about that. So we are always open to that. We have proposals, everyone else has, so it’s part of the business to have those discussions in a democracy very open to the dialogue, and this is what we’ve been doing so far.

So we don’t see a cap again, a new cap coming. I don’t think it’s necessary to what we are seeing, but if we want to solve that on a structural basis, looking at the long-term, we have to do things in a different way. Those were not the decisions made so far, but that doesn’t mean that they are not open and willing to do that discussion in the mid to long term. So we are very open to do so as the leader in this market, and what’s going on right now, it’s exactly what we’ve been telling the market. So I think the good thing of that, that we needed to prove somehow that this is what was going to happen. So before that was just analysis. So I think the real life will show and confirm our thoughts, and this will help to reopen this discussion again.

We are very positive that this can happen, and we are very open to that.

Renato Lulia: Back to Portuguese, because now we have Arden Shirazi from Santander.

Unidentified Analyst: Good morning. Milton, Broedel, Renato. Thank you for the opportunity. My question is regarding the vehicle portfolio. We saw that there was an increase quarterly, year-on-year, talking to the investors and clients, we see that that market in general is more excited with that credit line. I wanted to hear from you. What is your mindset in terms of quality growth? What kind of markets are you working with? Thank you and congratulations on the results.

Milton Filho: Thank you, Arden, thank you for the kind words. Vehicles business is something that we for many, many years had a participation that is very relevant and with all of this movement that has happened all throughout the market, we’ve learned a lot. We made new mistakes and we learned with the mistakes of the past. That’s an evolution. We have a portfolio that is an adequate size. We’ve been working ever more focusing and servicing well our clients, regardless of the channel that they do the vehicle acquisition and the procurement of the financing, we expect a growth in that portfolio for ‘24, not very robust. I would say that is adequate to what we’ve seen. This is a portfolio that we are in the fourth quarter consecutive that we are reducing our delays above 90 days.

There was a loss there and then there was a reframing in the market and we’re reducing it relevantly that delays delinquency in this portfolio. This is a scalable business naturally to dilute the cost in this activity and we’ve been working strongly to digitize the journey so that regardless of the scale, we can operate more competitively. So within the defined appetite of risk, we can define the higher volumes depending on the cost of service that we’re working. And I think that this portfolio we’re going to see the needle movement throughout the years. We’re looking in detail the portfolios that make sense. We are present in the market. We do not see and we think that this is a euphoria business because the big growth comes from euphoria, the big losses as well.

So this is a very volatile portfolio that is not very resilient. There is a positive aspect I would like to recognize with the assurance that you can recover the vehicle through the de-trans or extra judicially recovered the vehicle. This is important, this is a victory for all, and this will improve naturally. But we always talk about that vehicle is an insurance with wheels, so when you recover, the asset is always difficult. We know that in Brazil, recovery of asset in assurance is a big challenge, will always be, and is very strong, and it’s a big challenge. So we see the evolution in the assurance, and that can help us to have a recovery, an LGD better in this portfolio, and that allows us to do the expansion and the profiles of risk, then that’s what’s limiting.

I don’t see a big explanation for our growth. I don’t think that the growth is going to be modest. R$ 33 billion, I don’t think that it’s going to be very relevant, it’s going to be in that order of magnitude, maybe a bit above.

Renato Lulia: We’re going to switch back to English again, because the next question comes from Nicolas Riva from Bank of America.

Nicolas Riva: Hi, Renato, thanks guys, thanks Milton, and Alexsandro for the chance to ask questions. I have two questions, the first one on dividend, first, just to confirm, I’m looking at this right, R$ 11 billion that you announced as extraordinary dividend payments, that should come out of equity in the first quarter. So at the end of March, I should take out about 90 basis points of capital from your ratios just to confirm. And then in general, on your dividend policy, I remember that in the past you used to target a common equity tier fund of roughly 12% and 1.5% 81 bucket, and you said that you would pay in dividends, the excess capital on top of that, 12%, 81. Is that still the way you look at your dividend policy and your target for your capital structure?

And then second question on the perps, so far you haven’t been calling the perps the old is 6.18 and the old 6.5 which we said to higher coupons in 10. But if I look at market prices, you’re basically trading at the call price at par, and you can call them every six months. It seems that the market is assuming that they are going to call them in the short term. Now, you’re paying a coupon below 8%. And last week, we saw a Chilean bank, PCI, with better ratings because of the sovereign in Chile than you, issue an 81 on callable five at 8.25, so quite above the below 8% coupon you are paying on your perps. Is it realistic to assume that you’re going to call the perps in the next call date, or at least if you can discuss a bit how you’re thinking about the call option on the perps?

Thanks.

Milton Filho: Yes, sure. Thank you, Nicolas. Thank you for coming. It’s a pleasure to see you here again. So let me start talking about the dividend policy. So in general, you are right in the direction. So your calculation is precise. So when you’re taking consideration the R$ 11 billion, the impact we’re going to have in the set one. It’s true. We might see something around 100 basis point. We see that some volatility in the available for sale, securities that we have in the balance sheet, so the way we measure and the way we make our positions, we might see some consumption in the beginning of the year. So when you look one quarter, we’re going to have the profits that we made in the next quarter. We might see, we will see the impact of this dividend and some volatility coming from available for sale that might consume a little bit, maybe 20 basis points in our capital ratio.

So this is what you should see. And when you look in the long term, 12% is a good level. 1.5 on the 81 is where we are and where we have the policies very well established inside the bank. And having and looking forward 12 month or 18 months, depending on the level of information or uncertainty that we have, we’re going to be calibrating to define where is the best level of distribution that we should do. So this is roughly 12% is where you have to keep your eyes on. The uses and the sources are something that you have to keep the eyes on, especially when you have some tax reform on capital, when you have discussions coming from the regulatory perspective, coming from Basel on the operational side or credit side. So we are always looking the certainty and also things that can happen.

That’s why we always keep above the unknown that we don’t know, of course. So that’s why we keep some buffer on that. So this is basically that. So you are correct to look the way you are. So we don’t want to retain the excess of capital having the opportunity. Next year, we’re going to deliver another extraordinary dividend. So this is how we’re going to be achieving. It’s very difficult to exact define a payout, but the concept behind it, it’s very clear. And this is how we’re going to be pursuing. So this is the first topic. On the perpetual side, you’re right, I saw the BCI 81 coming to the market, the level of prices, and the idea we have is that when you go to a new issue, as opposed as in considering the new issue premium that we might have for a perpetual bond, we believe that today if we have to assess the market, the level of prices would be much higher of the level of prices embedded in the coupon today that we have.

So that’s why we haven’t exercised the call, and why is that, because we’ve been telling the market in advance that we wouldn’t exercise the call, that we would have a very economic view and approach, and then we have to consider all the alternatives we have to assess market, international and locally, how to keep a curve in the international market, and what would be the new coupon and the new yield if we go to a new issuance, and it would be much, much higher than where we see, so we don’t plan, this is not in our radar now to exercise the call, and if there is any change in that sense, we’re going to, with anticipation, to provide clear information to the market, but as far as we see, and if the market keeps the way we are seeing today, it can change tomorrow or the day after, with the information we have today, we are not expecting to exercise this call, so this is something that we’re going to keep talking to the market, to all the investors, very close.

Renato Lulia: We’re getting towards the end of our call. We have one last question in our list, in English, again, and it comes from Carlos Gomez from HSBC.

Carlos Gomez: Thank you for having us. Congratulations, like everybody else, for the results and for the dividend, and thank you for making this a long call and allowing a lot of time for questions from the analysts. So, two things for one, you gave us the estimate about the impact of [Pac-03] which is 42 basis points, as you calculate today. Could you also give us the impact of the tax reform, as you said, as it is described today, what would the impairment of DTA’s do to your capital today? And secondly, in the past, you have told us what your estimate for your cost of equity would be. If I recall correctly, it was around 15%, I could be wrong. Would you tell us where do you think it is today? Thank you.

Milton Filho: Okay, Carlos, thank you for your words. And thank you for coming. It’s always a pleasure to see you here. And we will take always the time to talk to the investor, a very relevant stockholder for us, and we’ll take and invest a lot of time with you as always. So coming about your first question here. About impacts on the DTA, let me talk the DTA first, which is important. When we talk about 42 basis points, it’s important to say that this has two elements, okay. The first one is the operational risk. The operational risk for us, we expect 100 basis points, but we have a phase in four years. So 25 basis points per year in the coming years, this is what we expect. So when we add to that on the credit side, there is some changes in the weighted assets.

So this together may impact 42 basis points, but on the operational risk, we’re talking about 100 basis points, 25 basis points per year in the coming years. This is what we are seeing. And the second element, which is important is, as if the reform was approved exactly the way we see, so it’s seven plus [inaudible], corporate tax rate and social contribution, we would see something like 60 basis points in capital if we had to do an impairment. So this would be the size if we have a reform approved exactly the way the reform that is posted today in the Congress. So if there was this major reduction in the corporate tax and also the social contribution, we could see an impact on the DTA impairment around 60 basis points.

Carlos Gomez: And the second was the cost of equity?

Milton Filho: Just to follow up, there’s a second question about the cost of equity. Just to give you the number, we are running the bank, the last quarter. Last month, we were seeing something around 14%, but looking now at the number of costs of equity that we approved in the board and that we are managing the bank is R$ 13.75. And this will be the cost of equity that you will observe, especially from February on. So you will have, in this quarter, a month with 14% of cost of equity and two months at R$ 13.75. So on the average, you will see something around R$ 13.80, R$ 13.85 in terms of cost of equity for the first quarter. This is the cost of equity that we will observe. We look, of course, to our model. We look to the south side, we talk to the buy side, and we make our own discussions in the committees to get to this level, so this is where we are now, Carlos.

Renato Lulia: Thank you, Alexsandro. Thank you, Milton. Well, with that, we will close the Q&A. Remember that we received several questions, Milton and Alexsandro, via WhatsApp. We are going to answer them all through the IR team, and with that, I wanted to give you the floor for the last message for the investors and analysts.

Milton Filho: Thank you, Renato. Thank you, Alexsandro for the partnership in these discussions. Once again, we close this year that started with important difficulties, January 8th, 11th, January 11th, then there is the event of the other corporate that went through other issues. And we imagine that with all the changes that happened in the country at the beginning of ‘23, it was difficult to imagine how ‘23 would come up. I’m very happy to talk about these numbers and having this conversation with you with solid results, recurring results, consistent results, with good quality, and the important thing is what’s inside the result. The result is a consequence of everything that we do in the bank. All the digital transformation, cultural transformation, proximity, client centricity has allowed us to deliver consistent results through long periods.

I believe that we continue completely committed with this agenda, the digital transformation, cultural transformation, and all the client centricity has to happen every day. We discuss this every second, and we hope to deliver in ’24, a solid year with indicators of engagement and principality and client centricity and relationship that is very solid. But then we’ve managed to do so with a level of engagement with our collaborators that is very high, very high. The collaboration is high, clients are satisfied. So we have an engaged team, a great human capital that is focused in delivering the best bank for clients every day. This brings the results. Second aspect, we have our feet on the ground. We are very humble. We know that the past performance is not an insurance of future performance.

Everybody is focused, disciplined, so that we can continue to deliver with a lot of quality in a market that is profoundly changing. Doing more of the same is not going to take us where we want. What we need is to have the capacity to reinvent ourselves every day. And this is the year of 100 years, September 27th of ‘24. So this is a symbolically very relevant year for us where we hope to deliver strong results and be prepared for the next 100 years. This will be our journey with a long-term view, governance that is very well established between the board, administration and all the committees. And this level of alignment and engagement has produced relevant results. Thank you for your time, for your presence, of course, and more so, for your trust.

Trust as a client, investor, and we will work strongly every day to surprise you and continue to deliver the best bank possible for all of our stakeholders. Thank you very much. We will see you briefly and we will talk in the meetings and for those that I only see in the call. See you in the next call. Thank you very much. Have a nice day.