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

Q3 2010 Earnings Call

November 04, 2010 09:30 pm ET

Executives

Francisca Stella Fagá - Financial IR, Brazil

Alfredo Egydio Setubal - Head, IR

Analyst

Daniel Abut - Citi

Saul Martinez - JPMorgan

Tito LaBarta - Deutsche Bank

Victor Galliano - HSBC

Marcelo Telles - Credit Suisse

Jason Mollin - Goldman Sachs

Larry Vitale - Moore Capital

Victor Galliano - HSBC

Operator

Ladies and gentlemen, thank you for standing by. This is Itaú Unibanco Holding Conference Call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session and instructions to participate will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

At this time, I would like to turn the conference over to Ms. Francisca Stella Fagá of Financial Investor Relations, Brazil. Please go ahead.

Francisca Stella Fagá

Good morning, and welcome to Itaú Unibanco Holding conference call on the third quarter 2010 earnings. This conference call is being broadcast live on www.itau-unibanco.com./ir. A slide presentation is also available on the 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 macroeconomic conditions, market risks, and other factors.

With us today in this conference call in São Paulo are Alfredo Egydio Setubal, Investor Relations Officer; Sérgio Ribeiro da Costa Werlang, Executive Vice President of Risk Control and Finance; Zacha Jorge, Executive Vice President of Insurance and Marketing; Caio Ibrahim David, Chief Financial Officer; Rogerio Calderon, Corporate Controller and Head of Investor Relations; Marco Antunes, Accounting Director; Rodolfo Henrique Fischer, Itaú BBA Vice President.

First, Mr. Alfredo Setubal will comment on the third quarter of 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 Setubal.

Alfredo Egydio Setubal

Good morning for those who are in the US Good afternoon for those who are in Europe. We are starting our conference call.

For those who are following through the Internet and through the slides, we are starting on slide number two with the highlight from the third quarter. I think the first highlight is important one, is that we finished the branch migration process in reality during this month of October, less than two years after the announcement of the merger between Itaú and Unibanco, one of the very important process.

During these two years, many things were done in terms of integration of ATM, integration of people, moving people from one building to another to stay together in different area. And we finished now the integration of the branch and we concluded in October 24 the process of integration of 1,200 Unibanco branches and customer site branches into the Itaú operational system and Itaú brand.

It was a huge effort from many areas inside the bank, many providers, and we were able to finish a little bit before schedule in this month of October. We still have some work to be done next year related to the systems and the deactivation of systems of Unibanco that we have to see what we have to keep for fiscal purposes, for customer needs and so on. So during the year of 2011, especially during the first semester of 2011, we’ll be finishing all these systems and then we can turn off all the systems of Unibanco related to the branch network and capture more synergies due to this integration.

The second highlight is the net income. We finished with R$3.2 billion, was a increase of 17.5%, the more recurrent numbers when we compare to nine months of last year, to 22.2 in terms of recurrent ROE. If we don’t consider the R$406 million in migration expenses that we had this third quarter, the net recurrent income would have reached 3.4 billion and ROE of 24.4. So in our view was a very strong result, a very strong numbers, especially when we analyze the numbers that we generate from the client, from the expansion of the credit portfolio and revenue from services and so on.

The third highlight is related to the growth of the credit portfolio. We reached R313 billion in the credit portfolio. It was a growth of 5.7% compared to June and 16.6 when we compare 12 months ago. So our growth was a little bit higher than the average of the financial system growth was 5.4.

The highlight continued to be companies, the growth was 6.7 last quarter. In this quarter, we had a growth in corporate companies that have been more stable in the last quarters. The growth for corporate loans was 5.8 and the highlight continued to be small and medium-sized companies, where the growth was almost 8% in the quarter. So we continue to focus on this segment, especially small and mid-market company.

In terms of individuals, the portfolio achieved R119 billion. The growth in the quarter was 4.1%. And we continue to grow the growth in terms of vehicles, financing and credit cards. Mortgage continues to grow at very strong pace. In the last 12 months, the growth was 53% and in this quarter almost 14%. So we achieved R$12 billion, a little bit more than 4% of our total credit portfolio. That is still small but growing very, very fast.

The fourth highlight is really the financial margin. We increased 3%, achieving 10.3 billion. We are going to talk a little bit more about this in the coming slide and also see that the growth was in 12 months 17%, higher than we expected. Our guidance was at 15% growth for the year and probably it will be higher than 15.

The fifth highlight is related to non-performing loans. This quarter also we show a positive number. The reduction from 4.6 to 4.3 in an average of our portfolio, better than we expected at the end of the second quarter and we still see some room to improve, especially related to individuals.

The sixth highlight is related to non-interest expenses. As I said, we had in this quarter R$406 million related to the branch migration. And if we exclude this number and also the expenses that we received from Redecard and Porto Seguro and also the one related to the expansion of the network to sort of decline. The growth would be 1.1% when we compare to 2009. So I think it’s a good number in terms of growth of expenses when we compare things comparable between 2009 and 2010.

Next slide, slide number five, we had a recurring net income of R$3.158 billion. And in this quarter also we had some provision for economic plan of R$124 million, a little bit lower than in the second quarter and probably we too have some provisions in the fourth quarter - first quarter of 2011. When you finish the time for claims related to the color plan number two. So the total non-recurrent in the total net income was $R3 billion.

On slide number six, some graphics of some numbers of the bank, growth of 25% in 12 months when we compare the R$9.6 billion in net income. If we exclude the migration expenses in the quarter and the year the number would be R$10 billion, a very strong growth when we compare to last year and zero financial margin and banking fees growth of 5.6% in 12 months.

Loan losses, important decrease in terms of net provision, reduction of 17.7%, actually R$9 billion this year and non-interest expenses, a growth of 8.2. And if we don’t consider the numbers that I showed before it would be 1%.

Highlight also on page seven, net interest margin, a growth of 60 basis points in the quarter in 12 months, sorry. And efficiency ratio also decreasing, showing some gains from the synergies of the merge. Recurrent ROE 23.8 and if you’re not considering the migration expense, almost 25%.

On page eight, the growth of assets. We finished off R$686 billion in assets, a growth of 5% in the quarter, especially related to credit portfolio. Stockholders’ equity R$57 billion, loan portfolio 13.3 billion, a growth of 5.7 in the quarter and funding a growth of 5% in terms of deposits, and assets under management of R$752 billion.

On page nine, some more results, more open. We can see the financial margin with clients, around 10,300 million, a growth of 3% showing that we are very focused in the client business and we are growing this client business for in the bank, what is good for long-term results and long-term relationships with the client.

Financial margin with the market that is a treasury operation now and proprietary debt, R$906 million, in line with the second quarter, with a growth of 1.7%. In terms of fees, the growth of 3.5% in the quarter, very strong and very solid, more related to volumes than that in terms of price increase. Results from the insurance, pension plans and capitalization, a little bit lower than the second quarter but when we compare year-over-year, we can see some growth of 1.5% in the consolidated result for these areas.

In terms of loan losses and claims, 3.6 billion, a little bit lower than in the second quarter. The level of provisions for credit losses was a little bit higher but the recover was higher also. So the net number is better than in the second quarter. And a reduction, very important when we compare to 2009, remembering that in the third quarter of 2009 was the peak in terms of delinquency in Itaú Unibanco Holding. So at the end, we finish with a net income of R$3.33 billion.

On slide 10, loan by client type, we see that we continue to grow individuals very strongly, especially related to credit cards and vehicles. And mortgage that is gain space growth of 10.8, R7 billion of mortgage related to individuals of the total of 12 that I said before, the difference is to the developers.

Companies, the growth was very important, 6.7 in the quarter. The total number is R180 billion. This quarter we saw some growth, important growth, in corporate loans, 104 billion with a growth of 5.8. And the small, very small and middle market companies a growth of almost 8% continues to be the focus and a very important part of the results of the bank.

On page 11, we can see the graphic of non-performing loans and coverage ratios. We saw the peak in September ‘09 and the number of individuals at that time was 8.1, now it’s 6. 6 is below the level that we were at the end of 2008. So we continue to see better results here. Also individuals, more related to a better environment and also for some growth in some portfolios that has less delinquencies, small credit portfolio, for example.

In terms of companies, the peak was 4.1. We are now 2.9 and December ‘08 at 1.3. We don’t believe due to the mix that we have today that we are going to the same level that we were before. Probably that is 2.9. We remain around that, a little better but not much better because today we have much more small and mid-sized companies than in the past. So, this especially these small companies presents delinquency ratios much higher than corporate and mid-market company.

The additional provisions remain flat, R$6.1 billion and we have a coverage ratio of 196%, very, very comfortable in the new environment that we are having in Brazil. Provision for loan losses, 8.3 of the total portfolio, considering out specific, generic and additional provisions, also very nice position.

On slide 13, we can see all the deposits and pension plans and funds and assets under management as a total number of 941 billion with a growth of 4.2% when we analyze the growth in the second quarter.

The ratio between loan portfolio and funding considering the compulsory reserves, 76%, not considering 96%, very comfortable as we don’t see funding deposits as an issue to continue to grow the credit portfolio.

On slide 15, banking fees, very important growth, as I said, 17% in 12 months. The guidance that we provided at the beginning of the year for 12 months was 15%, so we are a little bit above the guidance. And the main areas continue to be asset management, loans and credit cards.

Non-interest expenses on slide 16, the growth of total non-interest expenses was 8.2% in 12 months, 5.3 in the quarter. In the quarter, as I said, we had this R$406 million in migration expenses. So if we take off to be more comparable with 2009, Redecard expenses, Porto Seguro expenses, new points of sale expenses, and the branch migration, we will see that the growth in terms of non-interest expenses is 1.1%; that’s a very good number, showing much below the inflation and showing through these numbers from synergy gains that is up here.

On slide 17, the BIS ratio continues to be very comfortable, 15.3. On slide 18, the segmentation that we made traditionally for big blocks for the results of the bank, the Commercial Bank, Itaú BBA, Consumer Credit and Corporation and Treasury. Corporation here meaning the excess of capital, so we can see the split of net income, the allocation of capital for each of these segments and RAROC that these segments provide for the result of the bank showing that we have very solid operations in all these segments, especially the three related to clients relations, so we are in a very good operation, in the bank.

On slide 19, to Insurance, Pension Plans and Capitalization, we will see the consolidated numbers of R$400 million in the quarter. These numbers are growing continuously. In this chart, we don’t have the business that we sold to Porto Seguro, that was a car insurance and residential insurance. And here I have just the numbers related to the insurance that we still operate through our insurance company.

That means that 50% of our premiums are related to life insurance. We have almost 24% of extended warranty and we continue to have a very important presence in big risks with the corporation and property risk, with the big companies.

The pension plan technical provisions achieved R$48 billion and the total technical provisions for the insurance and capitalization business R$8.2 billion. And to finish the market capitalization of R$187 billion, just considering the non-holding shares, and the volume of our shares as in October, R$600 million and the trades continues to be more concentrated in the AGR in the New York Stock Exchange.

So now we are open for the questions that you probably have about our networks.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Mr. Daniel Abut from Citi.

Daniel Abut - Citi

Alfredo, on the brand migration costs, as you explained in slide 16, you were R$406 million this quarter, almost doubling the amount of the prior quarter. Given that you concluded the process already, but not until the end of October, they’re probably going to be some additional brand migration cost hitting the fourth quarter although they should be significantly lower than the 406 million of the third quarter. Can you give us an indication of how much should we expect in the fourth quarter just to put this expense line finally behind?

And second one, on fee income, you highlighted that or you had guided initially 15% type of growth in fee income for the Itaubanco. It’s big in the first nine months, you’re above that, 17%. How should we think about fee income going forward coming into 2011? I remember not so long ago, Brazilian Banks were low in fee income at the 15%, 20% annual base. Then came all these effort by the Central Bank to regulate better fees and tariff, and this line was brought down to single-digit. Is now the pace of growth coming from volumes and new clients and new products, strong enough to sustain growth in fee income going forward in 2011 and beyond, comfortably in double-digit, or is 2010 the exception to the rule given that there was going to be some kind of rebound factor after that new regulation was digested?

Alfredo Egydio Setubal

Hello, Daniel. Related to your first question, we had this 235 strongly in the second quarter, 406 million in the third quarter related to the migration. And this quarter, we don’t have a precise number, but you can consider something between R$118 million, R$200 million related to these 187 point of sales of Unibanco that we finished during the month of October.

We always remember that we have our recurrence expenses of remodeling branches every time. Next year, we are going to remodel 600 branches of Itaú into the new model that we did with Unibanco’s branches. We are going to change the layout, we change the furniture. Of course it’s much, much less expenses when we compare to the migration of Unibanco’s into Itaú’s operational branches, but you have to consider some expenses for next year related to the Itaú’s branches.

Fees income, the second question, fee income this year is much higher than we expected. The guidance that we provided 10 to 15, we are 17; this is much more related to volumes of than prices. The prices we’re not increasing, even the competition doesn’t allow, and so to what is growing is that people and companies are using more the bank. We’re expanding also our client bases in terms of in the business and companies and volumes. I think the correct answer is volumes are very high due to the economic growth and good environment. People are using more banks and using more services. I think that’s the most important thing.

Daniel Abut - Citi

So when we think about 2011 and beyond if we assume that the environment will remain benign and more clients and more product and more usage, it’s not unthinkable that the income growth could stay in the double-digit zone that you had guided for this year in the 10% to 15% range.

Alfredo Egydio Setubal

It’s difficult to forecast, but my guess is that next year, we don’t have yet the budgets done, but my guess is something between 10 and 15 to start with some number I think is totally feasible.

Operator

Excuse me; our next question comes from Mr. Saul Martinez from JPMorgan.

Saul Martinez - JPMorgan

My question is on your financial margin, your net interest income from clients only grew 6.7% year-on-year, I think, quarter-on-quarter, the growth was somewhere in the neighborhood of 3%, in spite of year-on-year growth in your loan book, of course 17%. And that’s fine, and I get that credit losses are declining, asset qualities getting better, you’re moving into lower risk segment, which have lower spreads. But you made the comment that you think NPLs will stabilize at a higher level than the historical average at 2.9%.

Does it give some cause for concern that as you move forward, competition and spread may continue to reduce. And I think you guys have mentioned that in the past, yet at the same time, there’s less room for continued reduction in credit losses. Doesn’t that suggest that your net interest income growth after provisions will be very light going forward?

Rogerio Calderon

Hi Saul, Rogerio speaking. Well, the way we see, the way we forecast is that we should see some additional compression in the net interest margin before the debt and this is going to be highly impacted by the much better credit quality environment in Brazil. So if we look at the risk-adjusted net interest margin spreads, we are not expecting any major change. Although we have a fierce competition, but the players are, the behavior is, tends to be very rational as they are proving to be so far. We are not expecting, and when you look at the total amounts, then definitely, we expect that the volumes growth should more than compensate this likely reduction in net interest margin spreads.

Saul Martinez - JPMorgan

Okay. I’m going to push you on this a little because I’m hearing two somewhat contradictory things from you guys, one is that, over time, credit losses and better risk will reduce your provisioning level, but at the same time, during the commentary, you mentioned that NPLs would kind of stabilize because of a mix shift towards SMEs within the corporate segment. So I guess my question is, which one is, are the two things contradictory because my sense is what you guys have been saying is that your NPL and your provision are going to start to stabilize. But at the same time, you’re saying that over time, it will go down, I’m not sure which one it is.

Alfredo Egydio Setubal

Now we may have some time effects, but we still see some room for a small adjustment down in NPL, particularly on the individuals portfolio because we are moving actually on the other direction, other direction of the safer portfolios or individuals I mean, I’m talking on mortgage, I’m talking on brand-new vehicles, I’m talking on payroll discounted type of credits. So all said, we should see some additional decrease in the net interest margins in terms of its spreads for individuals. But as I’ve said, Saul, we are not expecting any major change in the risk-adjusted line. So we may have some time effects in the behavior of the line, but it’s already there.

Saul Martinez - JPMorgan

Then just a quick follow-up, can you just give some updated thoughts on international expansion especially in light of what are pretty lofty multiples outside of Brazil and LatAm kind of how you are, any update in terms of kind of how you guys are thinking about growth outside of Brazil?

Alfredo Egydio Setubal

Saul, its Alfredo. We continue particularly, in the last two years, we have been able to do the migration and all the integration of Unibanco and changing culture. And we did a lot of things inside the bank, and at the same time, we are able to keep the pace of the bank here in Brazil, not losing market share, even gain some market share in some area and some products. And I think this is the trend. Our focus is to continue to focus in Brazil. Brazil is growing; probably it will grow 5% a year, and then in the coming years, if the international environment continues to be good in terms of commodity prices. This will bring new customers to the system because the income of individuals will continue to have real gains in the coming years. So we still believe that Brazil is the best opportunity that we have in terms of growth for the bank in many products, in banking, in credit cards, in insurance and many products because of this (inaudible) of individuals and also because we have seen also growth in terms of company’s number of clients, in terms of companies that we are gain. So the opportunity that we have here in Brazil with good spread and good growth I think is enough to us to really continue to focus here in Brazil.

On the other hand, we have presence in other countries. Unibanco has bank in Paraguay and we have bank in other countries as Itaú. And these banks, we continue to operate them; they are not so big. I think our natural growth, if we go internationally, someday you’ll be, Latin America and starting from, if possible, with a country that we already are and we don’t have a very important presence like Argentina and Chile.

We are not studying any bank acquisition. We see that the valuations of the Latin American banks are very high; so we are not considering any bank acquisition, and we are not studying anything. We can maybe grow some marginal things in the country that we are. We are not considering any big acquisition that will turn from Itaú Unibanco Holding into international bank. That’s not our target; I think the tradition of both banks, Itaú and Unibanco is to do deals when possible accretive to the shareholders and that’s what is behind.

At the same time, we are expending some operations like Itaú BBA. Being more active in Argentina and Chile, running the corporate business, investment banking, is considering to open in Peru. We have a private banking operation in international. We open our bank in Zurich; we have Latin clients, not only Brazilian clients. So, we’re expanding this operation, but it’s very, it’s not a intention of the bank to really increase outside Brazil especially in these years and probably for many years that Brazil will be a very important place for banking.

I think we are in the position. We are the leaders in terms of private banking, in private bank in the country that is growing, we have the position that many of our competitors and banks would like to have this position. So, we will continue to focus here, where are the opportunities. And if appears anything outside, we will consider. But this is not the focus, we are not knocking at any door to buy any bank, any place. I think that is what is happening. We are the bank, and we are very focused in grow and taking advantage of the Brazilian economy in the coming years.

Operator

Excuse me. Our next question comes from Mr. Tito LaBarta from Deutsche Bank.

Tito LaBarta - Deutsche Bank

Just there is some comments in the local presses saying that the new government could increase reserve requirements. Just wondered to get your thoughts on which reserve requirements they might increase or what would be the impact to you? Thanks.

Sérgio Ribeiro da Costa Werlang

Well yes, there has been some talks that if inflation gets out of the target, one of the instruments that the government may consider to use, additionally to interest rates is to increase reserve requirements. So they can raise again, reserve requirements in either time deposits or in demand deposits. They have been higher in demand deposit they have been much higher. So no, with some other instruments and as always when you do that, the result this is simple, yield curve demand saw an increase in the final in the credit spread. There is no other way because you have less to loan the system as a whole has left alone for the same amount of depositors.

Operator

Excuse me, our next question comes from Mr. Victor Galliano from HSBC.

Victor Galliano - HSBC

Just a follow-up on some of the cost issues that were raised there. So 600 branches of Itaú are going to be remolded in 2011, can you give us some idea of what the average cost of remodeling for branch is there? And also in terms of the segment contributions from the different divisions in Q3, what we saw was obviously that the RAROC came down in both consumer and consumer financing, commercial banking, this is made up by Itaú BBA really, which came through very strongly. Is this mainly really a one-off in the Itaú BBA side, because I saw clearly that there was some reversal of provisions going on there or can we expect a sustainably high ROE coming through from Itaú BBA going forward in the kind of mid 20s? Thank you.

Rogerio Calderon

So, if starting from the cost, you are right Victor where we are expecting to remodel 600 branch, if we take the total costs we had during 2010 regarding migration. We are talking on close to R$1 billion to migrate 1,200 branches and some other customer servicing branches. If we just use the average cost, it would represent something close to 800 and we think that should be maybe 50, 60% of this when we’re talking on remodeling branch at the maximum. So by calculating 600 branch remodeling should be maybe one-third parts of the total we have this year, or close to this is the figure that we don’t have accurately. But it should be close to maybe one-third the total cost we have in 2010, one-thirds, 40% close to that. And I am handing to Rodolfo Henrique in order to address the other questions on Itaú BBA.

Rodolfo Henrique Fischer

In tax, we had some positive numbers in provisions this quarter. That was a result of basically, of negotiations from transactions during the crisis during 2008-2009. We are still in this process. So we might expect another quarter with some reversals, but basically this is not a one off but maybe a two off or three off events. Not only because of renegotiations but also because of upgrades in ratings, we are in a part of the cycle in which we are recovering from the crisis. So we might expect some increases, some upgrades in ratings, going forward. I would say that next year we should go back to our normal level of provisions.

Victor Galliano - HSBC

Okay. So you can expect a sort of more normalized return coming through RAROC of around 20% maybe for Itaú BBA?

Rodolfo Henrique Fischer

Yes, yes. Obviously during the second semester of 2008 and 2009, we had large numbers of provisions that we do not expect unless we have a new crisis. But this quarter is an exception. We might expect some another quarter with good positive numbers in provisions and then we go back to our historical returns.

Operator

Excuse me. Our next question comes from Mr. Marcelo Telles from Credit Suisse.

Marcelo Telles - Credit Suisse

My question is to regarding costs. I mean you are finalizing on the integration of Unibanco and I was wondering if there are any additional cost cut initiatives that you could put in place this next year in order to pull a little bit further your operating expense line? Thank you.

Rogerio Calderon

Yes, we have some other initiatives. In cost cutting, we have efficient, what we call here, project efficiency, it’s a similar initiative we had in Unibanco some years ago, I remember had talked it to you on that. And our forecast is that we should reach 40-42% in terms of efficiency ratio within three years. So by the end of 2013, we should be close to 40%, that’s our target.

Marcelo Telles - Credit Suisse

And if you allow me one more question. You said earlier that you expect 15% equities in the loan portfolio in 2011. I know that the budget has not been finalized yet. Could we see that 15% as a floor in terms of loan growth, because one of your competitors mentioned that you are expecting around 15 to 20% loan growth in 2011? And which segments would be the main drivers for next year? Thank you.

Rogerio Calderon

Well, sectors similar to those of from this year with some highlights to mortgage that should be at the same path. I’m referring to 50% growth. SME should be also very high. And I agree with you that we could consider 15% as a floor, we have not finished, though, as for next year. And you know that traditionally, we make our guidance for the entire year by the end of the annual conference call. So at that time, we should come up with a more precise figure, but I agree with you, it tends to be 15% as a floor.

Operator

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

Jason Mollin - Goldman Sachs

Most of my general questions have been answered. But maybe some more detailed ones. Specifically, we saw your other operational revenue line come down by approximately R$260 million quarter-on-quarter to 94 million, a big decline. If you can give us some color on what was driving that, if there is anything specific that we should be aware of?

And secondly, in Itaú BBA, if you can talk us a little bit about the positive provisioning line. We had a positive contribution or reversal provisions in the quarter, if you can give us some details there? Thank you.

Rogerio Calderon

Jason, Rogerio speaking, other operational revenues, as you know we don’t have a recurring level for this line and I think it was maybe too high and too low. Now maybe that if you want to make any calculation and if you take a longer series you are going to end up with maybe 150 or 120 as the average behavior in this line. I should highlight there is really very erratic behavior because it’s a sundries type of line. So it’s quite difficult to make any modeling on that. But if you want to consider, I would suggest around the 100, 120 similar. Jorge could you address?

Jorge Luiz Viegas Ramalho

As I mentioned, this number comes from negotiations after the prices and the business cycles, it doesn’t come from one company or one transaction or few transactions, it comes from different transactions coming from 2008-2009. And we might expect from some another positive number maybe or close to zero number in next quarter, but it will finish eventually. We’ll continue to have some breaking increases, but we might go back to our usual returns.

Operator

(Operator Instructions). Excuse me, our next question comes from Mr. Larry Vitale from Moore Capital.

Larry Vitale - Moore Capital

I notice on page 18 of the slides, you’ve changed your capital allocations around by division and one that stands out to me is in the commercial bank. I’m wondering if you can tell us why you’ve allocated another what 2.8 - R$2.7 billion or so to the commercial bank? Thank you.

Rogerio Calderon

Larry, we actually made a change of criteria from the second to the third quarter. Expected loss was considered in the different way to allocate capital that may be the result of this major change.

Larry Vitale - Moore Capital

I look forward so that it’s probably too long out, but I look forward to sitting down with you guys, and understanding the reasoning behind that sort of better..

Rogerio Calderon

Absolutely. It’s a not big problem.

Operator

Excuse me. Our next question comes from Mr. Victor Galliano from HSBC.

Victor Galliano - HSBC

Yeah. Hi. Just kind of back to the credit quality questions. I mean you’ve shared that on page 11, and the very close to trend obviously in NPL ratio and also the new NPLs on performing. Do you think we’re kind of hitting a floor here in terms of the new NPL formation on a quarterly basis? And realistically, I mean overall what do you have any expectations, can you give us any guidance into 2011, looking at credit quality, why you expect that overall NPL ratio maybe to be at the year end or mid year 2011?

Rogerio Calderon

I think, we should address in two different ways. Macro economically saying, yes we think that this is the end of this cycle. But as we are changing our portfolios, the mix of our portfolios, we could have some additional changing this overall picture particularly when referring to individuals in the downside, in the better side, and if you look towards companies, then it should be on the contrary because we’re moving to high risk portfolios but macro economically saying that should be the end of this cycle.

Victor Galliano - HSBC

But you could get little bit more benefit from your change in mix in the consumer side.

Rogerio Calderon

In individuals, yes but should be marginally.

Operator

Excuse me. This concludes today’s question-and-answer session. Mr. Setubal, at this time you may proceed with your closing statement sir.

Alfredo Egydio Setubal, Investor Relations Officer

Well, thank you all for the participation in this conference call. I think we should be able to show you very strong results and very strong numbers especially coming from clients that would give us the confidence that we are in the correct way. And we continue to grow the bank especially here in Brazil as I already said very good opportunities due to the growth of the economy in the coming year.

Thank you and be together by the beginning of next year to the fourth quarter annual result. Thank you.

Operator

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

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