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Itaú Unibanco Holding S.A. (NYSE:ITUB)

Q2 2010 Earnings Call

August 04, 2010 9:00 a.m. ET

Executives

Francisca Istella - Financial IR

Alfredo Egydio Setubal - IRO

Rogerio Calderon - Corporate Controller & Head, IR

Analysts

Daniel Abut - Citi

Mario Pierry - Deutsche Bank

Jon Prigoff - Equinox

Boris Molina - Santander

Saul Martinez - JPMorgan

Marcelo Telles - Credit Suisse

Jason Mollin - Goldman Sachs

Federico Rey - Raymond James

Operator

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

Francisca Istella

Good morning and welcome to Itaú Unibanco Holding Conference Call regarding 2010 second quarter earnings. This conference call is being broadcast live on www.itau-unibanco.com/ir. A slide presentation is also available on this site.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from those anticipated in any forward-looking comments as a result of macro economic conditions, market risks and other factors.

With us today in this conference call in Sao Paolo are Alfredo Egydio Setubal, Investor Relations Officer; Sérgio Ribeiro da Costa Werlang, Executive Vice President of Risk Control and Finance; Caio Ibrahim David, Chief Financial Officer; Rogerio Calderon, Corporate Controller and Head of Investor Relations; Marco Antunes, Accounting Director; Gustavo Henrique Penha Tavares, Itau BBA Director.

First, Mr. Alfredo Egydio Setubal will comment on the second quarter 2010 earnings, afterwards management will be available for a question and answer session. It is now my pleasure to turn the call over to Mr. Alfredo Egydio Setubal.

Alfredo Egydio Setubal

Good morning. We are sorry for the delay we had some technical problem in the previous conference. In Portuguese we had to interrupt for almost a minute the main sector that we started later this English conference call.

For those who is following through the slide, turn to slide number 2, to highlight net income is the first income. The recurrent net income for the quarter at 3.3 billion R$ is increased 4.1 from the first quarter and that means ROE analyze it was 24.4.

The first semester if you consider the first semester, the recurrent net income achieved a 6.5 billion and with a growth of 29.6 when we compare to the first semester of 2009.

The second highlight is financial margin, with clients and the credit expansion that we showed. The growth of the margin was 6.7 and total 10 billion R$ in the second quarter. Especially because of the credit expansion 4.4% in the period this quarter and 11.4% when we compare to the first semester of 2009.

If we consider only the retail credit growth, this number is 18.8. So we showed a very good margin with the clients and a very solid operation of the bank with the clients that I think is the most important thing. This is what gives us strength and ability to our to results.

The third highlight is banking season and banking charts, a 4.4% growth when we compare to the first quarter, R$4.3 billion in the period, mainly because of the credit card operations increase in terms of volumes. Current account services also shows growth and investment banking also was a very active semester, active quarter for our Itau BBA investment banking operations.

This far I like the delinquency rate and the results from loan losses. 90 days delinquency rates reduced 30 basis points in this period and we finished with 4.6 in the quarter and we showed a reduction of 100 basis points during this year. We expect this number to remain relatively stable. We don't see much gains anymore in these delinquency rates and show some gains and most part of the gains already are reflected in these numbers.

This is because, mainly because we have a different mix. We increased our portfolio mainly with individuals and SMEs and it's a more risky business and we expect it, this delinquency ratio to remain around the same level that we are today.

Also in the first semester our provision for loan losses, net of recover of credit, that is more active this year was 16.8%, less than when we compared to the same period of first semester of last year. We remain with the same level of additional provision of R$6.1 billion in this quarter when we compared to the other quarters, were stable.

Non-interest expenses, the fifth highlight. We grew 4.4% in the quarter when we compare to the same, the semester sorry, when we compared to the same period of last year and this we exclude the expenses within Unibanco's branch immigration, new point of sale that we are opening special branches and a lot of forms to attend SMEs, Redecard and Porto Seguro expenses that we don't have control. We can see that when we compare to the first semester of 2009 nominal reduction of 0.6%.

So in the quarter the number is not so good, especially because we had a 2000 people in the period, we increase our marketing expenses especially because of the world cup of soccer and that's the main reason of the growth of our expansion in these quarter.

Going to the slide number 3, we had a recurrent net income of R$3.298 million in the period and we made provisions for contingencies related to the economic plans that happens in the past year in Brazil of 133 million that the reasons that our non-recurrent not our net income was R$3.165 billion that was released.

On page 4, highlight some of our numbers, 6.4 billion in the semester four net income, 3.3 billion in the quarter. On our geo financial margin and banking fees, 33 billion in the first semester of this year is a growth of 5% in the year-on-year and a growth of almost 5% when we compare the quarters of 2010.

Results from lower losses due to the better environment that we have here in Brazil in terms of economic growth. We should important decrease in provision as we reduced net of the recovery of the write-offs credit of a reduction in this year of 15.8% and as more increased in the quarter of one point.

Non-interest expenses like I said growth of 12.6% in the quarter and when compared to the first semester of this year 4.4 that includes all the expenses of the bank. And slide five, net interest margin with client for the initial 10.1% was a very good quarter for our relationship with our client especially related to credits and fees.

Efficient ratio for 46.7 was accumulated in 2009 and 47 at 0.3 in the quarter we too are confident that we are going to reduce the number to a lower levels in the coming quarters as the synergies of two years more and of course also with a growth of our business.

The current ROE at 24.4 and we see the first semester and the same level for the second quarter. On page six, assets we have seen issued 661 billion growth of 2.7 in the quarter, as stockholder equity R$65 billion grow for 4%. Low end portfolio the growth of 4% and funding with the clients include the year R$716 billion with a growth of 2.1.

On slide number 7 we can see better, the P&L and I think I would like to highlight the financial margin with customers decline. I mentioned a growth of 6.7, showing of solid operation with our clients who are very important and in a reduction in the margin with the market, the treasury gains, proprietary and structural, total of R$391 million, a decrease of 12.6. What is good, it shows that the growth in the margin came from the business, the recurring business of the bank with the client, specially related to the credit portfolio.

Also we can see the result from our operation in insurance is stable when we compare the second quarter to the first quarter. Another point I would like to point here is the provision for loan lease losses, R$4.90 billion in the quarter, a little bit above of the first quarter of 2010 and also a recover of credit written off that we showed an increase in the period, R$967 million.

Those are good numbers when we compare to the last year, 2009 helped us to increase our portfolio and increase the results. Retained claims also were better in this quarter showing a better operation also for our insurance business. In terms of expenses, we are going to explain this more in the coming slides but in this quarter we had some extra expenses in the period, a little bit above the expectations from most of the analysts and investors. So the net income of R$3.155 billion was the number.

On slide 8 we see we see loans by type of clients. We continue to focus more on individuals and SMEs. We can see that individuals, the total portfolio was in terms of credit R$296 billion, individuals, R$107 billion. The growth in the quarter came more from credit cards and personal loans.

Vehicles was a little bit lower than in the past because we are focusing more in new vehicles in this quarter after the fiscal incentives from the government was finished and the sales of new vehicles was a little bit lower. But we already saw some recovery in the month of July. So vehicles portfolio didn't increase much.

In terms of companies we saw a big increase in our SME business, 6.7 in the quarter and we finished at R$8 billion in the portfolio with a growth of 26.3% in 12 months in line was with our strategy to grow and to invest in this segment.

We continue to increase the number of managers and people related to this business and most of the 2000 employees that we hire in the quarter was to serve in these segments of business and we will continue these trend in the coming quarter.

When we saw the numbers for corporate company we see that the growth was much lower, 3.2% in the quarter and negative on when we analyze. In the 12 months we finished with R$92 billion. We had some, few had some impact when we analyzed 12 month is related to the evaluation of the real against the dollar. Corporate company's few are using more capital markets for debt and for equity. So, it's more disillusive growth for this portfolio.

It's really, see the last line of this table we can see corporate total risk in this line, we include this the securities that we carry in terms of debentures, commercial papers and other papers issued by companies that we have in our secure portfolio but we can see that considering these the number grows to a R$104 billion in total and credit and the securities and the growth in the period would be 4.0.

In terms of mortgage continues to be very active, we finished the quarter with R$10.5 billion it is growth of 12% in the quarter and 47.7 in 12 months. This continues to be very active, it is growing but its still is 33% of our credit portfolio. But it is one of the growing factors.

On page nine, non-performing loans we really 4.6 reduction of 3.4% in the quarter. As I mentioned we don't expect much gains in the ratio, in the coming quarters but both individual and companies show that ratios 6.4 in individuals and 3.2 for companies for 90 days.

Additional provisions we have remained for the fourth quarter in the same level that we had R$6.1 billion of additional provision. We don't intend even with these better environment significant economic growth to reduce these level these ratio you will reduce it by the growth of the credit portfolio is not our intention to reverse these level of provisions in the coming quarters.

So, with all these the provisions and the additional provision our coverage ratio for 90 days remained almost flat in 107%. On page 10, we can see that we have 8.7% for provisions which is very comfortable that we will be considering the three times that we would in terms of the growth of the economy.

On page 11, total funding a considering the deposits and also the AUMs of R$716 billion with a growth of 2.1% in the quarter and 12% when we compare to the first semester of 2009 will give us a very comfortable position in terms of funding to serve the growth of our credit portfolio.

On slide 12 we can see that our relation, our ratio in terms of loan portfolio and funding achieved 98.9% because of the new regulations related to a compulsory deposit issued by the central bank in the first semester of this year and we have to make huge amount of deposits at the central bank to face the new regulations. But we don't see any kind of problems to fund our credit operations to serve the growth of our credit portfolio.

On slide 13, banking fees, we can see what I said, the growth in terms of asset management, current account services and also in terms of credit cards and also in the line others we can confirm the investment banking revenues that was more active this quarter also helping our growth of 4.4% in the quarter.

In term of expenses, on page 14 we can see that the total growth increased 12.6. This number was above the estimates of most of the analysts and investors. As I said, we had some extra people and also extra marketing expenses in this period that explains most of the big roles.

If we reduced the expense that we don't have direct control like Redecard expenses and Porto Seguro expenses that we consolidated in our balance sheet and also reducing the investment in new point of sales and also the branch migration expenses that we are doing from the Unibanco network to Itau's network and the number of the growth would be 9.8. But when we compare to the first semester of 2009 we see a nominal reduction in terms of expense.

We continue with our guidance of growth, of total growth around 5% for the year, between 3 and 5% for the year and also when we don't consider the expenses and the expansion of the bank and the migration expenses, the growth should be something between zero and 3%.

The BIS ratio of 15.7 would give us conditions to continue to grow our credit portfolio investments without problem. On page 16, the segmentation, we had a quarter with a recurrent net income of R$3.3 billion with the four traditional segments that we present to the pro forma numbers, managerial numbers, Commercial Bank, Itau BBA, Consumer Credit and Corporation and Treasury. We have R$3.3 billion in net recurrent income, 1.5 coming from the commercial bank, we're located of the R$55 billion of our shareholders equity.

We are looking at 17.32 to these commercial operation and this quarter the RAROC for this commercial banking just 36.5 OBITDA in R$592 million in terms of recurring net income, 12 billion in terms of allocation of capital and RAROC of almost 20%. Consumer Credit R$679 million in recurring income, capital allocated 7.7 and RAROC 35.3.

And Corporation and Treasury 532, capital allocation 18.2, we have got a RAROC of 11.8 naturally because lower gains from treasury in the quarter. Our market capitalization in slide 17 and 150 billion at the end of the quarter and we expect this unit in our liquidity 1.1 billion daily trading especially in the New York stock exchange and this number increased in probably will continue to increase a little because the stay off the Bank of America position that means 8% of our preferred share that are now quoted in the market.

So, liquidity is increasing with our shares here in the Bovespa, and New York.

We have a meeting here in Brazil, with investors and analysts. It will be on the 17th of August 3 o'clock for those who want t join us and they are welcomed for those are here in Brazil. We will be here in Brazil.

With this we finish the presentation and we are hoping for your questions.

Question-and-Answer Session

Operator

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

Daniel Abut - Citi

Good morning, gentlemen. Alfredo, a couple of questions related to expenses. You mentioned that about R$294 million in the first half relates to the migration of the Unibanco branches to the Itau platform. I do recall that at the time the merger was first announced and implemented, you did create a provision to cover merger-related expenses.

So, the question is why wasn't this captured by that provision in an additional expense that could have been foreseen at the time of the merger's initial implementation.

And second, related to that, is there any additional merger-related charges that are not covered by that one-time provision that are coming in the next few quarters that we should be aware of? And the second question is related to this provision for contingencies economic plan and granted this is not just Itau. Every single bank in Brazil does the same thing.

They all call this non recurring but we've been seeing this every single quarter for the past god knows how many years. So it's probably time that we start to consider this more recurring than non recurring. But the question is when is it going to end? How much more do you think in terms of quarters of additional provisions for economic plans in neighborhood of R$100 million even paid per quarter, are we likely to see.

Alfredo Egydio Setubal

Daniel, related to the branch migration, we are not able to include these expenses in the provision that we made at the time of the merge is not allowing us. So our auditors didn't allow us to include this in the provision that we made at that time. I think the rules are not, don't permit, doesn't permit to include this expense. What I can say is that we are accelerating this migration since March. So when we compare the first quarter to the second quarter, the numbers are much higher in this quarter because we are in a pace of 100 and 150 branches per month in terms of migration.

And it's not only a migration systems. It's not only that. We are reforming all the branches. We are changing the equipment. We are changing the chairs and desks and the layout is totally new, is the new standard for Itau Unibanco. Then also after finishing this 1,000 branches of migration of Unibanco and we will start also the reforms in the former Itau's branches also.

That of course would be in a different pace, not so fast but in a way we are going to do the same layout and the same things that we are doing now. For our numbers, for your perspective, you should consider in this second quarter and third and fourth quarter almost the same level that with these -- that we have in the same, in the second quarter.

It's very realistic to consider this level of expenses in the third and fourth quarter because our intention and everything is going well in this direction is to finish the integration from the branches by the end of November. So we do have almost 500 branches to do in this four months. So the level of expenses will remain almost at this levels.

In terms of economic plans, these provisions are more related to the caller plan of 1990. We still have one plan more in the color two but it is very small. We don't expect much provision for that. But the period that the people can complain it finished its 20 years. So we are almost in the end of these level five provisions against these economic plans. So, probably in the coming quarters this numbers will be lower. We don't know how much lower but it will; we will see some reduction because of the time of this claims finish.

Daniel Abut - Citi

Thank you, Alfredo.

Operator

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

Mario Pierry - Deutsche Bank

All right. Good morning, everybody. Let me ask you two questions also. On asset quality, if I understood you, you said you do not expect any further improvements in non-performing loans in the second half of the year. If you can just give us more color as to why you don't seem to expect anymore improvements. Talking to your peers, it seems like they feel confident the asset quality should continue to improve, given how strong the economy is in Brazil.

And then the second question is related to your trading gains. I know it's a very difficult number forecast, but you have been running close to R$1.5 billion a quarter, last year. This year we're running closer to 1 billion. Do you still think a 1 billion is a sustainable level or should we eventually see trading gains normalizing back to the R$500 million per quarter level? Thank you.

Rogerio Calderon

Thank you Mario, Rogerio speaking, in terms of assets quality what Alfredo just said is that most of the improvement in the credit quality is our undertaking in our ratio. This is because of the maturity of the interest so we do think that we can have a further benefits or announcements, it should be very small. So, any slightly movement is possible but most of the benefits is the rent taking. So, you are not running the bank at 4.6% which is a 100 bps lower than by the end of the year and we should also highlight that the mix is changing a little bit so we are increasing much more towards SMEs. So, there is actually change in the risk mix in our portfolio.

So, we believe it should be flat to the rest of the year. Regarding trading gains you are right and we always said it's alluding feasible to repeat the same results as last year because the consensus quite different this year but we are posting 800 to 900 it's we never give any forecasts on the direction of this but it's should be not far from this maybe it is still a little bit high than the sustainable level but it is should not be too far from this from now on.

Alfredo Egydio Setubal

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

Mario Pierry - Deutsche Bank

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

Rogerio Calderon

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

Alfredo Egydio Setubal

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

Rogerio Calderon

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

Mario Pierry - Deutsche Bank

All right, guys, thank you.

Operator

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

Jon Prigoff - Equinox

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

Rogerio Calderon

Well, thank you for the question. So it's really attracting lots of attention. Our expansion -- expenses this quarter, so let me spend a little bit more time on it. What we should observe is that from the -- when we compare the second quarter to the first quarter, first of all we should consider that first quarter is normally benefitted by the seasonality.

So its normal then, second quarter is bigger than the first quarter. It just happened differently last year but it was abnormal. Normally second quarter is higher than the first quarter. If you consider on page 14, if you consider that our total low interest expenses divested by this Redecard, Porto Seguro and new points of sale end brand is 600 million more than first quarter.

I just want to draw your attention that around 200 million is due to the seasonality we had another 82 to 100 million more in advertising because of the World Cup, single event that is not going to repeat and the difference is indeed what increases in our total expenses and this was mainly due to a personal expenses where we added 200 people this quarter.

So, this was included in our budget, the guidance on expenses already considered it and the efficiency is considered so everything is aligned with budgets. There is just to finalize you asked about the 2,000 people, they are mainly driven to SMEs platforms that is increasing you say the figure is increasing 27% this year is going to remain being one of the boasts of our growth. So, we need to people to serve those new clients.

Jon Prigoff - Equinox

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

Operator

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

Boris Molina - Santander

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

Rogerio Calderon

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

Could you repeat the second part of your question?

Boris Molina - Santander

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

Rogerio Calderon

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

Boris Molina - Santander

Okay. Wonderful.

Operator

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

Saul Martinez - JPMorgan

Hi, good morning. A couple of questions. I'm going to continue on the cost side unfortunately for you guys but can you talk about the viability for guidance on expenses, 3 to 5% of total and then zero to 3%; I think excluding expansion costs in Porto Seguro and Redecard, because if I look at these numbers, unless -- and forgive me if I'm missing something obvious -- unless your expenses actually decline in the third quarter and in the fourth quarter relative to what they were in the second quarter, I don't see how you get to those guidance metrics. So can you talk a little bit about why you're sticking to that guidance range on expenses?

And secondly, can you talk about why your effective tax rate was less than 24% in the quarter I think in the past; you guys have had a tax rate of 26 or 28 pretty consistently. What drove that lower tax rate and what should we be expecting going forward? Should be expect that tax rate to trend back upwards in the coming quarters? Thanks.

Rogerio Calderon

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

Saul Martinez - JPMorgan

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

Rogerio Calderon

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

Saul Martinez - JPMorgan

Sure.

Rogerio Calderon

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

Saul Martinez - JPMorgan

Why was it so low in the second quarter?

Rogerio Calderon

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

Saul Martinez - JPMorgan

Great, thank you very much.

Rogerio Calderon

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

Saul Martinez - JPMorgan

Okay, thank you very much.

Operator

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

Marcelo Telles - Credit Suisse

Hi, good morning gentlemen. Most of my questions have been answered. But I might introduce two others. The first one, you mentioned that you do not expect much improvement in your NPL ratio going forward and one of the explanations is that the higher participation of the SME portfolio. I was wondering if you could quantify what your delinquency rate in your SME portfolio is right now, and just to have an idea, compared to the whole commercial portfolio that you have today.

And also on the branch expansion side we saw that in the first half of the year, actually your number of branches have actually declined by five branches, if I'm not mistaken. So that means that all the branch expansion would be concentrated in the second half. We see some of your competitors kind of like reducing the overall expectation in terms of branches. There seems to be some difficulties in the process. I know you reiterated that but in your case you're not facing all the same issues that some of your competitors are. What is the reason for that? Thank you.

Rogerio Calderon

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

Marcelo Telles - Credit Suisse

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

Rogerio Calderon

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

Marcelo Telles - Credit Suisse

Excellent. Thanks very much.

Operator

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

Jason Mollin - Goldman Sachs

Hello everyone. My question is on loan growth. Itau Unibanco's quarter-on-quarter reported loan growth has trailed the bank's two largest private sector peers. However, these peers have each purchased between 3 billion and R$5 billion in loans in the second quarter alone.

Excluding the purchases by your peers of those, loan growth looks better, ahead of one and in line with the other. Do you -- does Itau view loan purchases in the current environment as an attractive use of capital, and should we expect to see loan purchases by Itau in the future. And just as a follow-up, are Itau's loan-growth expectations -- I believe at 18% to 23%, ex-large corporates for only organic growth, or do they include purchases or acquisitions, own acquisitions?

Rogerio Calderon

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

Jason Mollin - Goldman Sachs

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

Rogerio Calderon

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

Jason Mollin - Goldman Sachs

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

Rogerio Calderon

So if you look at insurance and pension plans in capitalization we've reached 356 million during the second quarter, what is around 7% higher than the first quarter and the return, the way we calculate the return on allocations kept actually, also raised it from 38 to 35. Also Porto Seguro is going fairly well, the association and increasing.

So where I could, I don't have more specific data with me regarding the future of this insurance business but what we see is the very firm trends, positive trends. So we have now a solid position in terms of technical provisions and the return is quite adequate to the level of capital we have there. If you want we can go further and discuss specifically insurance. We can organize sort of a call on this if you want. I don't have more specific data with me here right now.

Jason Mollin - Goldman Sachs

No problem, thank you very much.

Rogerio Calderon

Thank you.

Operator

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

Federico Rey - Raymond James

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

Operator

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

Alfredo Egydio Setubal

Thank you for your time, for being with us. I think we showed good results. I think quality of the result of this quarter is better in our view from the quarter before because we had more gains and more revenues from time client business and not from treasury. We continue in a good trend in terms of growth of our credit portfolio.

So we are very confident that we are going to achieve the guidance that we provide in terms of credit, in terms of expenses for the year and of course it will depend in the pace of the Brazilian economy that we also are confident the growth will continue for many quarters ahead. So the environment for the bank, business will continue to be good.

Thank you again. Sorry for the delay at the beginning and hope to be with you in the conference call for the third quarter. Thank you.

Operator

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

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