Itau Unibanco Holding's (ITUB) CEO Roberto Egydio Setubal on Q4 2015 Results - Earnings Call Transcript

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Itau Unibanco Holding S.A. (NYSE:ITUB) Q4 2015 Earnings Conference Call February 3, 2016 9:00 AM ET

Executives

Marcelo Kopel - Investor Relations

Roberto Egydio Setubal - Executive President and Chief Executive Officer

Eduardo Mazzilli de Vassimon - Executive Vice President, Chief Financial Officer and Chief Risk Officer

Analysts

Tito Labarta - Deutsche Bank

Jorge Kuri - Morgan Stanley

Carlos Macedo - Goldman Sachs

Mario Pierry - Bank of America Merrill Lynch

Jason Mollin - Scotiabank

Saul Martinez - JPMorgan

Lucas Lopes - Credit Suisse

Victor Galliano - Barclays Capital

Operator

Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holding Conference Call to discuss 2015 Fourth Quarter Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions]

As a reminder, this conference is being recorded and broadcast live on the Investor Relations website at www.itau.com.br/investor-relations. A slide presentation is also available on this site. The replay of this conference call will be available until February 9 by phone on 55-11-3193-1012 or 28204012, access code 1628627#.

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

With us today in this conference call in Sao Paulo are Mr. Roberto Egydio Setubal, Executive President and CEO, Chief Executive Officer; Mr. Eduardo Vassimon, Executive Vice President, CFO, Chief Financial Officer and CRO Chief Risk Officer; and Mr. Marcelo Kopel, IRO, Investor Relations Officer.

First, Mr. Roberto Setubal will comment on 2015 fourth quarter results. Afterwards, management will be available for a question-and-answer session. It’s now my pleasure to turn the call over to Mr. Roberto Setubal.

Roberto Egydio Setubal

Good morning and good afternoon for all of you. Thank you for being with us and giving us the opportunity to clarify some doubts and things about our results and especially about the guidance we gave you yesterday.

I will start talking about the quarter and then we would go quite fast on that, so that we have more time to discuss the coming year. Our result in the quarter was R$5.8 billion down from last quarter 5% and 15% above 2014 last quarter. The ROE was down, giving the two are very high level of 22% in the quarter, closing the year almost 24% of ROE for the year. Credit quality was down as we have seen some deterioration on NPLs over 90 days and some improvements in the short-term NPL as we will discuss down the road.

Second page you can see the trends over the past two years of ROEs. We have been very strong in terms of our ROE and coming down in the rest two quarters. And the main reason for coming down in the last quarter, as you can see on Page 4, the financial margin with markets that we have a very high level margin in the third quarter of R$2.2 billion, which is much above the traditional level that we have down to R$1.2 billion so reduction of R$1 billion revenue in the quarter.

I would say that you should have this - expected this reduction, given the fact that we have already announced that we already - this number can fluctuate during the quarters, but for one-year, we expect it to be close to R$5 billion, so the level that we had in this fourth quarter was pretty much in line with what would be an average kind of an average that we could expect coming from kind of revenue.

In the quarter, we also had season condition going up, as seasonality giving the card expansion in the Christmas time and some other revenues have increased in the last quarter of the year giving the more in depth activity, but everything else in terms of revenue was pretty much in line with the expectation that we have coming from the third quarter.

Provisions and recoveries net where pretty much in line and if you look provisions and recoveries in the quarter was in line, but we had one specific case of both R$300 million that was written off that we recovered. So we had a negotiation and renegotiation on that credit, but we have full provision - we have made full provision on the same recovery. So net-net was very close to what we have set forth.

Claims were pretty much in line expenses also have small increase especially giving the sectors we had - the salary increase periods in September which effects much more in the fourth quarter. So basically these were the main difference so results are not putting more seasonality effects were pretty in line with the third quarter.

We have opened in the fifth page and new chart that opens our consolidated P&L in Brazil P&L and Latin America P&L. This is something that would be important in the future giving the fact that we will be consolidating along the CorpBanca. In Chile, CorpBanca will be a number that will affect the Latin America column, but we might be able to keep track of what’s going on in Brazil, given that we are opening this numbers which I think would be more and more important in the future.

Our two main groups of activity, credit and trading and services and insurance we opened the results here in 2015, results in services went up 22% this was good news. This is a very strong source of revenue for the bank, this keeps our business very stable and in 2016 which I believe was one of the most difficult years in our credit business which we have nice stable recurring net income. And these gave us below what would be cost of capital for us today, but the returns to 15% although like I mentioned below, the cost of capital still giving this very bad year in terms of delinquency still good the results.

Going ahead and this scenario that we are leaving Brazil with this big GDP reduction, our credit portfolio basically stayed stable during the year. Few lines have increased and many others have declined, automobiles for instance have declined, favorable loans have increased, mortgage has increased, but overall for reduction some stability overall.

We have put here on the table around this chart, the CorpBanca number which I think is interesting to you to give an idea of what CorpBanca and how CorpBanca will impact our numbers. But it’s very clear that’s going back to something around R$650 billion of loans.

Latin America will represent very close to above 20% of that exposure in our balance sheet. The change here and evaluation of CorpBanca 30% is pretty much due to exchange rate fluctuation which was very close to what we are having overall in Latin America including all the expenses of Latin America of 35% just above the lines here.

Moving ahead financial margins were pretty much stable, we have some stabilization in margins with small trends of spreads, but the fact that we are more risk averse to the [indiscernible] coming to our low so ending with resulting in margin that is quite stable, even when we consider the level of reserves that we are putting on - I guess the margin still have - we have come up from last quarter from 7.4 to 7.5. So it’s pretty much stable we have been able to keep margins in line with provisions so in this kind of environment maybe we did a good job.

Financial margins with markets have come down and you can see in Page 9 I have already commented on that and the number of that quarter was pretty much in line with what we can expect for coming quarters can up and down along this number. But the number was quite okay in this fourth quarter. When we look into the year, we see that the number for the year was strong. We have many quarters above that level and specifically last quarter was a record gain in margins with markets, which is something that with our results stronger in that quarter.

Credit quality in the Page 10 is in good moment for the short-term NPLs of 15 to 90 days came down this last quarter. For the NPL 15 to 90 days for consumers in general have come down, we have some seasonality here; we have additional salary at the end of the year in Brazil. So there is some more revenue for people so they can pay those more in line with what we have expected.

And also the fact that credit number in the last quarter is always a little bit higher given the use - the higher use of credit in the last quarter. So all of this combined made the numbers come down, but if we do not consider the seasonality effects, it will be pretty much stable with the previous quarters.

Next quarter we expect to grow up like we have seen already in 2016, 2014, 2015 all the years we have this first quarter impact and over the year it come down - small companies stipulating pretty much in line with previous quarters and corporations have come down. This is good news looking ahead for corporations as we can see in NPLs of over 90 days; corporations are coming down the NPLs, which is good news. It has been affected by the assets that we have sold and we will talk more about that in this presentation.

Consumers and small companies with trend of deterioration, which we believe will be going along the year. We expect the economy - the GDP to reduce again in 2016 so we expect this in line with that we have some deterioration in NPLs. So the scenario that we see ahead will be definitely what will mainly impact NPLs in the year.

Our coverage ratio is strong. We have not touched the coverage ratio in this last quarter and we have [indiscernible] in coverage and when we see the kind of NPL that we have considering only those credits that are not fully provisioned. It has been pretty much stable, which is also a good indication that we have provisions in good shape in line with deterioration.

In the next page, we have some more information about renegotiated loan operation, with something new we have never shown the way we are opening here. We have opened the days overdue at the moment of the renegotiation. So it’s more clearly have been done in the bank.

Book is growing because delinquency has been growing, so this comes pretty much in line with delinquency, which is a consequence of the GDP reduction. Below here the good news that NPLs of that book is pretty much lower at this moment compared to other moments in the past. So the book is probably reasonably well.

Here is more detailed information about the assets that we have sold. We have three main portions that we have sold and I will start on the right side, we have sold middle market segments loans, which were written-off, so was on zero on our balance sheet, this was say R$2 billion that we made R$44 million of revenue, but given the impact on the NPL because was already written off.

In Chile we have the every year, say we have sale of student loan portfolio this is every year we do this in Chile and then also is not impacting the NPL ratios because it was pretty much in we do not have any major past due loans in this book, in Chile it was sold pretty much for the value that we have making profit in Chile on that sale because it was a good portfolio.

Here in Brazil, we also transferred loans with very low probability of recoveries in the short-term and we made the sale to keep our books clean. We had already a lot of provisions on that 75% of the asset was already with provisions, we have - at the moment that we sold that, more provisions in our book then those that would be required by Central Bank rules. So we were fairly in credits that was overdue still on our assets, assets of companies, loans of companies that have other loans in the markets.

So we had a negative impact giving provisions like we’ve - some of those were already fully provisioned, 100% provisioned. So we’ve made some revenue on that, but we made additional provision on this revenue of R$17 million in order to keep this lower - very lower expecting in terms of profits, this has impacted ratio here in NPL.

Provisions, the next page you can see how much provisions we have been making every quarter in the retail banking and the wholesale banking. Retail banking has delinquency and consumers has been increasing have been going up as well. The delinquency in the wholesale banking as I mentioned to you have been coming down, so the provisions has also been coming down.

In this last quarter as I mentioned before we had one recover of write-offs of R$300 million that impacted because we recovered that will meet 100% provisioning against this renegotiation and this R$300 million this year, so if we do not have this recovery we will have a number pretty much close to 1.2 billion compared to 1.4 billion before, a quarter before 1.7 billion and 2 billion in previous other quarters.

So this is too much in line with what we have done before that we mentioned to you that we are facing provisions, anticipating provisions in previous quarter. We made this communication for you anticipating loss that you’d have and provisions while given that affect that we are not seeing any major addition of big numbers coming up in coming quarters we expect that we won’t have that much provision from the wholesale assets.

On Page 15, we open insurance and services P&L each one of the lines that we have and this is an important source of revenue for demand, it is pretty much stable it gives us day some business for us a lot of stability in our earnings. We have good returns on this business, it’s very diversified, it’s not something that compliment quite well along the business because this has no volatility in terms of - in that movement of the economy it did not suffer.

As you can see this year if we had some growth here although lower growth for the year but still growth and good revenues and results so this balance quite well with the loan. This represents more than 50% of almost 50% of our results in the year.

And next page we open the sales fee and commission revenue that we have. Overall, we have grown the business in the year 10% is too much in line with inflation although we have this GDP reduction in the year. In terms of expenses in 2017, we have non-interest expenses below inflation rate around 10% in Brazil 10.5%. So we were 4% below inflation in terms of expansion which is quite good. We believe that we keep a very strong focus on reducing expenses going forward. So for the next few years and the years ahead we expect non-interest expense to grow below inflation.

And our capital position as we can see in the Page 18 is quite strong, quite profitable. We have at this moment 18.8 of core equity Tier 1. I fully loaded Basel rules so we are very comfortable and we have ahead of us to just to make the point affect that we reduce our Tier 1 by almost 1% at the moment that we made corporate the consolidation of CorpBanca in specialty cost, we will make an capital increase in CorpBanca $650 million more or less probably in this first semester so this we will reduce a little bit of disposition at that moment.

In 2017, we have our guidance and we believe that we have made a good job especially because we started the year at the end of 2014, everybody were expecting GDP to be positive in 2015 so more stable exchange rate going so far. So at the beginning of the year with new perspectives for the year we have changed the guidance, but even though the result at the end of the year were much worse, much more difficult GDP, reductions was much worse than the one expected at the beginning of the year.

We basically could follow the guidance pretty much well only the provision for loan losses net of recoveries were a little bit above the guidance that we gave, but we believe that we’ve given the scenario was a very good number.

For 2016, we again a scenario more negative. We believe that GDP will be negative this year 2016 as all these economies bringing out of their numbers, the IMF negative number for 3.5 negative for Brazil. In Brazil the number is negative 4%. So those numbers we had received in our guidance are basically something between R$2.5 billion in the best case and the worst case, which we don’t believe that will be the case, but we gave some space for this 5% negative of GDP. Especially provision number which is high and I believe that it required some new - our Basel in this very negative scenario of 2.5 negative, our GDP 2.5 also negative.

So we are trying to be very realistic about the economic scenario in Brazil. We believe that in this scenario the delinquencies will be increasing, consumers has really given the higher level unemployment, delinquencies in consumers would be higher and also especially in small and medium market we believe that has - keeps on this same phase of deterioration and reduction activity. We believe that there will be more provision for the year.

On the same line we believe that we won’t be able to reprice margins and grow margins for clients at the same pace that we did this year. So we are more conservative in the low margins and compared to what we have in 2015 and the same applies to commissions and fees. I think we are trying to put numbers that we believe are more realistic with this kind of scenario.

Obviously, we have a more better scenario than this one, numbers might be balanced, but we are trying to be more realistic with and based on numbers in the scenario that we are considering. In terms of expenses, we are working hard like I mentioned before, who have expenses below inflation so this is what we are doing for the year.

We have opened to you what would be the consolidated balance sheet guidance and the Brazil guidance, which is important because we don’t know exactly what could happen with exchange rates last year, exchange rate quarter-to-quarter fluctuated our loss and this may be much more complex to understand where we were, but now we will be opening this very clearly so that we can have a more clear observation of how the Brazilian business is doing and we gave the guidance for the Brazilian to do the business as well.

Okay. You should consider also as objective tax rate 33%; this is what we have now projections for the year of 2016.

Thank you. Now we open for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mr. Tito Labarta with Deutsche Bank.

Tito Labarta

Hi, good morning. Thanks for the call. Couple of questions, I guess obvious question in terms of asset quality and your provisioning guidance - you seemed to be a bit more conservative than some of your peers. So I just want to get just maybe some more color on that, is it just being more conservatives than your peers, are you seeing some more asset quality issues, I mean obviously we expect some deterioration this year.

But I guess how much deterioration do you think you could see I know it’s earlier in the year, maybe hard to tell, but would it be similar to what we saw in 2015, around 60, 70 basis points deterioration for the year? Do you think it can be worse than that? If you could maybe give some more color on that.

And then the second question, I guess in terms of profitability. Clearly, you had very strong ROE last year, probably not sustainable this year, but do you think it's - in terms of longer-term, what would be a sustainable level of ROE, is it something that kind of drops this year maybe to 18%, 19% and then can recover back to the 20% level or so, if you can maybe just give some thoughts in terms of what you think for bottom line profitability given the guidance that you've given. Thank you.

Roberto Egydio Setubal

Okay very good point. First question above the expectations for provisions, we basically our provision models that showing correlation clear looking back with GDP and especially the retail business we have a good correlation, we have modeled it’s for good correlation of what can you expect in terms of the delinquency and what kind of provisions we will meet as a result of that we strategically think. So basically our members working with the scenario, we have no specific issue that we are physically conditioned other than the scenario macro in Brazil.

Like I mentioned, we are in those numbers been very open in terms of the possibility of having something much better than what last numbers that because of the showing Brazil between 3.5% and 4% negative number we have I mean our positive numbers at closer to 2.56% reduction in GDP.

In our worst case scenarios show in terms of provisions and delinquency, so its higher negative price. So we believe that we are covering what would be something that we can see today with good margin in both sides compare to what market expects to date. The delinquency we roll up like we mentioned in the worst case it can go even upper than the number you gave, I mean if you have a 5% GDP for which we do not believe, we are putting scenario, we could see higher numbers than 60 to 70 basis points including advantage

And the ROE for the coming years it will depend on a lot on the scenario that we see for Brazil. If we see some recovery some at this improvement in GDP condition I think ROE will improve because we are keeping the book very clean we are doing all the provisions that we can do. And especially it’s a good opportunity to mention the fact that we are - we have how we believe that as the economy improves ROE will improve and cost of capital will reduce.

But this give me an opportunity to mention something about the additional provisions that we have in our balance sheet provisions above Central Bank level that we have - today we have R$11 billion of allowance for loan losses, which above the Central Bank level, which is mostly one-third of the full preview that we have. This number I mean how do we work with those provisions. We have been simply trying to keep the expected loss fully provisioning.

So in retail this is quite easy because we have modern the shows the expected loss at this moment for our books so we apply the models in our portfolio, we came out with big number of provisions and then we reduced what is required by Central Bank and this is part of what we call additional provisions.

For the corporate side it’s more complex because we don’t have model that can really apply the corporate and very specific themes and very big numbers. But we also doing a more especially giving the economy and especially looking at specific covenants and specific preparations, we try to make provisions ahead of Central Bank requirements as we have assets that we believe that we will not perform. So we do provisions to put additional time to mark-to-market what would be the FX value for that we believe would be the case at each moment.

So we keep doing provisions as we increase the expected losses for retail and corporations, but looking to the future at the moment that economy starts to recover, we will see a scenario that probably do expected losses in mark to market and the old once that might be in our books at that moment we’ll be well already covering the loss that will come up. So we see a much better scenario in terms of provisioning quite fast as we improve the scenario overall. We believe that 2017 should be a better year than 2016 although it’s not clear, but we believe that 2017 can be a better year than 2016.

Tito Labarta

It sounds great. Thank you very much. I can just a quick follow-up question and in terms of and maybe trying to get a more specific number on ROE I mean just given the range that you have given on the provisioning levels I mean would you think this year would be closer to the 17%, 18% level or can you stay closer to 19% to 20%.

And I guess on the following up on the excess reserves that you have. I mean could you use some of that to keep the profitable maybe at the higher end, yes just in terms of what you are thinking in terms of with ROE could be this year and I know it’s difficult to say because I want to get what you are thinking about that in terms of what you are comfortable with given the excess reserves that you do have?

Eduardo Mazzilli de Vassimon

Tito I believe that the guidance that we are giving including the 33% tax rate make it very easy for you to make up the numbers and come up with kind of ROE that we can work in that range with the guidance you find I mean the mid-range, the positive range, the negative range. I think we believe that ROE will be pretty much in that range. We have been just make up those numbers will come up with this results.

Tito Labarta

Okay. Fair enough. Thank you very much.

Operator

Our next question comes from Jorge Kuri with Morgan Stanley.

Jorge Kuri

Hi good morning everyone. I have two questions. The first one and bear with me I am really trying to be difficult, but I do want to understand what gives you confident that your current more negative guidance is fair, you were rather optimistic about the delinquency over the last 12 months particularly 12 months ago despite a good level of kept decision from the market.

I think you talked about the risking and how you change the balance sheet and how you thought that was going to be enough to contain any asset quality problems, the consumer side you seem not very worried and obviously things didn’t played out that well such your bad debt formation was up 40% last year, your consumer NPLs went up 100 basis points only in the last six months.

So I get it that the macro environment was soft and it’s easy to say that asset quality was worse because the macro was worse, but in reality the risks were clearly that was going to be the case so prudence in the expectations was probably called for.

So now you’ve come with a much more negative message. So the question is look what gives you and also I guess confident that the current guidance is not again too optimistic that you are not underestimating the macro and banking risks. You are expecting 2.5% contraction in GDP, but consensus is already above 3%. So how do we get confidence on what you are saying and I’ll ask my second question later. Thank you.

Roberto Egydio Setubal

I think that you are absolutely right. We started the year with much lower level of - expectations on delinquency as we started the year, also the beginning of 2015 the kind of macro environment was much better expected at that movement then the one that played down the - so I think that we should have made more clear the kind of expectation that we have for the year in terms of macro growth or reduction.

At that point that we’ll not give maybe that much clear. Now, we are making it very clear like I mentioned to you this provision were made based on the positive number, the smaller number would be something that would be pretty much in line with 2.5% negative growth for the year in Brazil.

The top number would be more in line with 5% negative. Okay, so the mid-range that we are talking about here in this phase is something around 3.75%. So we believe that this number would be as we expect if Brazil development for the year, the economy stay in that range, provisions will stay in that point of growth.

Jorge Kuri

All right. Thank you, Roberto. And my second question is what’s happening on your credit card book, you obviously have more credit cards than anyone else. I think it’s roughly 30% of your consumer loans that’s two times more than the average of your peers given the unemployment and consumer recession because it’s exactly that we are seeing in Brazil. How is that book performing? What is the NPL ratio on credit cards today? What was it a year ago? How much do you think it’s going to be increased and to what extent that provisions that you’ve included in your guidance are specifically directed to credit cards?

Roberto Egydio Setubal

Okay. The third question, I think that credit cards is the kind of - is a higher risk than all the consumer risks like mortgage and payroll loans. We have been very careful in that book; we have been declining the book value in the last two years. So we are having control with management in that book. I don’t have the numbers of NPLs here. We do not believe that number, but definitely it is included in the NPLs of individuals that we showed here today.

But it’s higher a little bit higher than the average for sure because payroll loans and margins are much lower than credit card. But it gave at least - we can compare with markets according to Central Bank numbers and we are below market delinquency in credit cards.

Jorge Kuri

All right. Thank you, Roberto.

Operator

Our next question comes from Carlos Macedo with Goldman Sachs.

Carlos Macedo

Good afternoon, Roberto. Good afternoon gentlemen. Thanks for taking questions. So a couple of questions, one is in margins, we saw margin, the margin with claims kind of basically holds this quarter. And now looking into next year, the guidance doesn’t really, stay much of an expansion in margin basically saying that margins will stay flat.

Could you give us a little bit of view on what you expect for the SELIC and you've always talked in the past about how the re-pricing of the book would still provide some support to margins going forward and whether you think that's still the case or we're at a point now where, that's not really going to happen given the outlook for SELIC? And then I have a second question.

Roberto Egydio Setubal

Okay. Our guidance was based on the fact that we expect SELIC to be stable for the year, but the fact in terms of financial margin [indiscernible]. Because of that and because of the overall equation, we are not expecting spreads increase along the year, so this space around [indiscernible] pressing at the end of the year.

So repricing will take place because at the end of the year was a moment that spreads were are higher than most moments before. So some repricing will take place and this is the reason why margins we plan are going ahead of - growing more than the credit portfolio. Because of re-pace to your repricing but we are not considering the year that additional spreads - additional increase in spreads will take place in the market.

Along this year 2016 we had a lot of price increases, spreads increases as SELIC was increasing, spreads were increasing but since we are not expecting SELIC to increase. We do not expect major movements in the spreads. So we expect spreads to be fairly pretty much stable. Compared to what we…

Carlos Macedo

Okay, thank you. So, no increase in SELIC, but no cuts in SELIC either. Is that the assumptions using for this forecast?

Roberto Egydio Setubal

Yes, and we are basically using spreads that we are doing - we’re pressing at the end of the year of 2016 stable in 2016.

Carlos Macedo

Okay. Thank you. Second question, your capital levels are strong, common equity Tier 1 above 13%. We know that CorpBanca will dilute that a little bit, but still, loan growth in Brazil, which for the purpose of capital ratios that is important, you could be a negative territory and you still based on your guidance, middle of the range, you'll do 18% ROE or so with a 30% payout - you will accumulate a significant amount of capital, assuming that things don't completely unravel. What's - when do you start thinking about increasing the dividend payout? I mean it is 13.5 going to 12, but soon coming back to the 13. I mean, when do you start considering that kind of possibility?

Roberto Egydio Setubal

We have a long tradition of keeping our dividend payout between 30% and 35%, maybe 20 years or maybe even more than that, our payout was in that range. In many years we have used surplus of capital that we were generating to five things that to invest and do. In other years that we don’t have that much opportunity, we bought back shares and we kept the dividend pretty much in that range.

Buying back shares is something that we do often if we look back over the years we buyback over the years a lot of shares and this last year for instance we bought almost 2% of the capital - so at the end of the day the earnings per share are increasing in addition to 15%, 16% number - nominal number the earnings of the bank with additional 2% which may give that total of 18%.

So we might buy back shares as long as we see that this is a good investment for the bank and I believe at this moment shares in a very low price for all the reason that we know. But in the long-term we believe that our ROE will go up in 2017, 2018 especially given the - the Brazil will improve a little bit not that much but this will be - just a small improvement in Brazil will be enough to make it possible to the bank to increase ROE, especially because we are keeping very close track on delinquency and doing all the provisions that are needed.

We are like I tried to explain on the expected last year, we can believe that we are ahead of the curve and [indiscernible] looks very clean, so by the time the economies start to improve, we won’t have seen semiconductor that would be necessary to be and so we would be open to have - to enjoy the full new scenario in the season.

Carlos Macedo

Thanks Roberto. So just following-up you mentioned that levels now are attractive for buybacks, the program you have now was roughly half of what you did - little bit less than half what you did in 2015 and how - is it easy to increase the size of this program, is it something that depending on the situation the generation of capital that you are able to put together is something you consider I mean could we have another year like 2015 and buyback if opportunity present itself?

Roberto Egydio Setubal

We are not giving our guidance for this possibility we have been announcing numbers of buyback and unless we reached the level that we have been authorized by the Board we go to another, so it depends on the situation, the condition, the perspective so these numbers are something that we believe it’s a small number for the bank we can CorpBanca of well with this kind of acquisition, buybacks giving the scenario that we are seeing. So for the moment we believe that this a good start and really along the year we can see how it develops.

Carlos Macedo

Okay. Just one final question and then wrapping this up. Is there a maximum number for core Tier 1 that you consider that it would be - that you wouldn’t want to go above and you would have to reconsider maybe the historical dividend policy?

Roberto Egydio Setubal

We believe that between core Tier 1 fully loaded. We would not go above 12% on the stable.

Carlos Macedo

Okay. Thank you, Roberto.

Roberto Egydio Setubal

Thank you.

Operator

Our next question comes from Mario Pierry with Bank of America.

Mario Pierry

Good morning everybody again. Let me ask you two questions. One question more specific and then one general question. Let me start on this specific one. Your guidance for provisions is net of recoveries, however, right we have seen the recoveries have totaled close to R$5 billion in 2014 and 2015, you are making a significant investments right now with the acquisition of recovery. I was wondering what kind of recoveries, what is the nominal amount or nominal level that you would expect in terms of recoveries in 2016, could we see a number much higher than the R$5 billion that you have been delivering.

And then the more general question is you’re guiding, basically you’re guiding for negative real loan growth in 2016, your peer is also guiding for negative real growth. My question then is related if there are any concerns that we could see now the government trying to interfere in the system again, if we could see public sector banks becoming more aggressive in landing spreads also how do you think is the relationship with the government now clearly last year the system was targeted by the governments that your tax rate increased by five percentage points.

Right, you still grew your earnings 15% in 2015, your ROEs was still 22%, 23%. So are there any concerns that the government could try interfering the system again in 2016? Thank you.

Roberto Egydio Setubal

Well, talking about recoveries we are not putting any influence on the recovery acquisition. So there is no impact because isn’t the fact that we are in this process of acquiring recovery. Although, we plan to use recovery which probably might increase our performance in recoveries in general, but we believe that in this scenario recoveries are much more difficult.

Recovery is something that improved a lot when the economy improves. So, we’re not putting numbers in this improvement. So we are basically keeping recoveries in low levels between R$4 billion and R$5 billion more towards R$4 billion in this guidance. We don’t believe that in the year of 2015, but in 2016 we’ll have a major improvement in recoveries.

It’s possible that down the roads, when the economy is much better a lot of things have been written off currently will recover. So, I expect recoveries will improve at the end of the cycle, but not now.

Mario Pierry

Okay. And the question…

Roberto Egydio Setubal

Yes, the second question about the - look we have never been influenced by the government. I think that the interference of the government in the future has been always done through the public bank which accounts for more than 50% of the market share, but they have never influenced our action. So this has never happened in Brazil, so I do not believe that this will happen in the future.

Mario Pierry

No, no, exactly. So that's my question, do you think that the government could use the public sector banks again in order to try to stimulate the economy and how do you think that the government looks at your profitability right now - if you could be - if they could come up with new taxes in the banking system.

Roberto Egydio Setubal

I think the good thing about having several banks in Brazil is the fact that government understands the dynamic of banks. They know the problems; they know about the delinquency, they know about the capital needs. So the conversation is much more rational, because they have certified also people that are being influenced and we will bet that.

So I don’t - and obviously tax increase and additional burdens in this system will make credits even more difficult, which I don’t think at the moment is the interest of the government. I think they would like to see banks to be more easy and to increase more the credit offers then try to collect some more tax, but do not expect this to have an influence in our business.

The banking - the public banks, I have to say I think they have announced, I know what’s in the newspaper. They have announced some lines, additional lines which are much smaller than lines that we - the amount of lines that we put in the market in previous years.

So for the year they announced this R$83 billion of additional loans in programs with subsidy. I am not sure about the demand for those lines without subsidies, maybe some of them like agricultural loans, which have very strong demand in Brazil given the exchange rates. You might have additional number, but not necessary for all that number. So I don’t think that this will be a major impact in the banking markets.

Mario Pierry

Okay. Thank you very much.

Operator

Our next question comes from Jason Mollin with Scotiabank.

Jason Mollin

Hello, everyone. As always, thank you for the detailed presentation and call. Roberto, can you provide an update on the strategy for the Latin American region, specifically where do you see the greatest opportunities outside of Chile where that will have a 12% low market share post-merger. You mentioned Argentina in the Portuguese call is a small investment for Itau currently, but they're good prospects with President, Macri. And also, what is your view on Mexico and the opportunities there? Thanks.

Roberto Egydio Setubal

Okay. We see Latin America as a good opportunity for Itau. Our experience is that we can perform quite well in this market. So we believe that should increase our presence in all the countries in Latin America. Currently, we have presence in Argentina, Chile, Uruguay, Paraguay and Colombia. We believe that we can increase our presence in Chile, Colombia and Argentina we have good position in Paraguay and Uruguay those are leading franchises in both countries with very good level of profitability.

In Chile, we are acquiring CorpBanca and in Colombia basically we are entering with CorpBanca subsidiaries. In those two markets we will become fourth and fifth biggest banks in terms of assets in those markets, but we believe that we can go out and do additional acquisitions in those markets in the future.

In the moment in those markets we believe that we have to make the integration of the bank that we have acquired with our bank in Chile and in Colombia CorpBanca had acquired two banks which are already in the process of integration. So I think that for the next three years at least we probably will not acquire anything in those countries or we will not look forward to acquire anything because integration will take a lot of efforts and this would be our strategies to put those banks integrated and to make out of them good franchise.

Then it comes up Argentina which I mentioned to you that we have a small position I think the market expectations are very high in Argentina. Let’s see how we develop, it’s a great opportunity for us with the presence that we have today already there. We can grow a lot in Argentina if the conditions shows the right ones in the future. Then we have Mexico, I think the market that we’re not in. Mexico and Peru would be the next two markets for us that we would see as the potential for Itau to be present through an acquisition, but today we don’t we are not seeing anything in those markets that would be of our interests.

Jason Mollin

Thank you very much.

Operator

Our next question comes from Saul Martinez with JPMorgan.

Saul Martinez

Hi. Good morning, everybody. I've two questions. I hope you can hear me. I'm actually outside the office. But, first very specific question and I've a broader question, on NII; I'm still a little bit perplexed by the guidance. And if I take your fourth quarter run rate for NII from client activity and I carry that through just the fourth quarter level through 2016, I get to the high end of your guidance range. I get to something around 4% to 4 plus percent.

So, effectively your guidance implies that at the midpoint and below that, the run rate in 2016 for NII is actually going to be lower than what it is currently. So, and I understand directionally the guidance in terms of your mix shift and less pressure from spreads maybe FX.

Can you give a little bit more granularity around and quantify a little bit so the impact of these effects? In the fourth quarter loan you had a repricing benefit net of mix shift to R$400 million. So it's hard for me to see that essentially goes away from one quarter the next that quickly. So you can just give a little bit more color and that's especially in light of your competitors being a bit more optimistic about NII.

Secondly, this is a broad question, forgive me it's not meant - the spirit of it is not meant to be confrontational, but the question is - Why should anybody buy your stock right now? And if you can make the equity case for Itau, because I think a lot of the investment story - or part of the investment story has been that - the competitive backdrops gotten better. You have some benefit for repricing, that buffers the negative impact on asset quality and it allows you to maintain high profitability and you've certainly done that. So you're profitability has been impressive in tough environment.

But your ROE, according to your guidance is around 18%. Long-term rates are not much lower than that. So, clearly right now you're not generating that. The outlook for 2017, 2018 and 2019 is highly uncertain. Any cost of that equity reduction is really outside your control. You're buying back stock, so you shouldn't feel like there is value. But, I'd like to hear a little bit more detail how management, how the company view the investment in Itau and what you think the investment story is for Itau for investors?

Eduardo Mazzilli de Vassimon

Okay. Let me start with the margin. I think we have a lot of seasonality in the fourth quarter so I don’t think that’s the reference for fourth quarter [indiscernible] we have some seasonality in terms of use of products that changes over the year so there is full complement with the idea that the first quarter you can reply every quarter because of this seasonality effects, this is one thing.

The second thing is the fact that from third to fourth quarter the part of the increase was due to the exchange rate, the average exchange rate between the two quarters. Although, the final exchange rate was stable so average when was we have some evaluation along the third quarter that became fully revenue in the fourth quarter as the loan bookings in other transits was bigger throughout the process. So this had some effect in the first quarter increase in terms of margins.

And like I mentioned before, we are not fully in our guidance, the spread increases along the year, it’s only repricing okay. So if we have additional spread increases it would be able maybe to increase more spreads. But we are not seeing spread increase basically for two reasons, one is because we expect the rates to be stable certainly because we believe that the current market positions, we do not believe that we could be able to increase rates as well as we have increased along the 2015 year.

So in that sense we might we were assuming those conditions is true, we believe that these numbers reflects what we would expect. We should really is that we can have higher level of spreads which could be the case then margins would be higher than that.

Okay and on the business case of Itau. Itau has most of its business in Brazil so Brazil is going through maybe a worst moment ever in terms of economic growth, but I believe that Brazil at some point we will be better than this today we will improve our GDP at least might improve somehow and not that much in this quarter, but we believe that it will be better than rest.

So as Brazil improves we believe that capital ratios in Brazil - cost of capital in Brazil will reduce and the performance of the bank will improve, ROEs we will be higher in the future we believe. We always have kept a distance between cost of capital in our level of ROE which we believe will be the case in the future. Maybe today we not have this opportunity giving the fact that the year was much worse than we expect by the end of 2014.

Just to remember at the end of 2014 everybody was should be growth for 2015 and we end up having a negative GDP of almost 4% in the year. So we are not really foreseeing this. Looking this year we believe also like I mentioned in our guidance, our guidance are made based on the negative growth of 2.5% to 5% so there is in something in between that range so this is something that we do not believe that this we can expect that this will be going on and on, we believe that we probably are in the most of the moments and since tend to improve in Brazil.

I believe that one source of improvement would be the external accounts which are improving quite fast here in Brazil. I’m not sure if you have followed. But Brazil in terms of current account that’s probably giving us current projections, somehow that are already projected neutral, so zero that we are closing fully the gap in this year and next year, so these things changed a lot the perspective for the country.

And I believe that under better conditions Itau will perform with ROEs much above cost of capital and above my peers. Another important point is that we are really making the effort to keep the book very clean, previsions very updated, so by the time that economy starts to recover. We will not be carrying over things from the past.

So we believe that as we keep books very clean, we will be able to very quickly improve ROE. We also have business models that’s very resilient especially in a condition like the one we are leaving, leaving the very strong amount of revenue that comes from services. And this makes up more than 50% of our profit last year. And this is not affected by this GDP issue and higher risk in our loan book.

So it complements right well our loan book and make our profit very resilient. So if we keep the books clean like, I’m trying to explain. I believe that once if you recover, we would be able to grow our books quite fast as well and profitability to improve quite fast.

And in addition to that, I believe that we are working very high, very hard in terms of improving the efficiency of the bank and the quality of the bank, since we don’t have space for growth. We are investing a lot in improving the bank, investing especially in technology in order to make the bank more efficient and also preparing the bank for the digital world, which we believe will be coming very soon and we have to be well prepared for that.

So I think that the franchise of Itau overall in terms of business models, in terms of diversity of business, it’s quite good, a great franchise. Clearly I think we have conditions to outperform the peers, and the average market at least. In assuming over the year that Brazil will have some kind of improvement I think that the current prices of Itau, somehow low.

Saul Martinez

Thank you very much for the thorough answer. Really appreciate it.

Operator

Our next question comes from Lucas Lopes with Credit Suisse.

Lucas Lopes

Hi, good afternoon. Thanks for you for taking my question. It's my understanding that the large corporate segment has driven the material increasing the cost of risk in the past year. How does the bank expect the composition of lawless provision expenses to be in 2016? For instance, it is expected to be [indiscernible] there is the most of the time. Any color on that would be very helpful.

Also if I may ask a second question follow-up, has Itau taken into account any of repercussion from high NPL or margins in the guidance? I'm asking you because the provisioning guidance in Basel sharp increase in NPL and after six days they do the bank non-accrual interest and allowance negatively on NII, that's it. Thank you.

Roberto Egydio Setubal

We believe that I mean talking about the delinquency for next year, we have cleared that retail segment will have increases in NPLs, most of the provisions increase is related to retail, but smaller increase in Middle market and Corporation. Most of the provisions increase comes from the retail segment. This is what we expect for the coming year?

Marcelo Kopel

And Lucas for the…

Roberto Egydio Setubal

Marcelo is answering the other part of your question.

Marcelo Kopel

And for the NII growth and the impact of non-accruing loans, yes, it’s embedded in the equation that as well, since one of the components that is as part of the equation and how we project NII going forward.

Lucas Lopes

Great thank you.

Operator

Our next question comes from Victor Galliano with Barclays.

Victor Galliano

Hi, thank you for the opportunity. Just a couple of quick questions from me. On CorpBanca in the past, you said that this would absorb - I think I have heard in the past, more like 80 basis points on the acquisition. And saying more 100 basis points, has there been any material change there? Is it an exchange rate thing? Can you give us some clarity on why that's moved?

The second question is about the RWA's came down in the fourth quarter. Is that a re-calibration of risk credit risk along the book on the back of the new regulation of Central Bank came out? And lastly, sorry, third question on insurance - I just want to get a sense of why you think that there was or why you can tell us there was no earnings growth year-on-year in the insurance segment? Thank you.

Roberto Egydio Setubal

Okay. Let me start with insurance earnings. Basically we are moving out of some lines as we already announced and concentrating on other few lines. So this moment we have some adjustments in the business that which has made [indiscernible] to grow revenues and profitability.

And we also - the moment that the crisis is taking place today. We don’t have that much space to grow the insurance business. So we expect that insurance business to grow pretty much in line for the coming years. And this year specifically, we have these adjustments coming from the sales of some business lines and some reduction and some lines that we are moving out closing down the business.

Above the 80 basis points that we’ve mentioned of CorpBanca impacting our capital ratio and now we are moving up to or something more closer to a 100. Basically, one reason is the exchange rate; it became a much bigger book giving the current exchange. And I think this is the major influence. And second one is some more fine adjustment that now we have more information on the balance sheet, so we can have a much better calibration on that. And Marcelo we will answer about the RWA.

Marcelo Kopel

On your specific point on RWA’s - the change from the Central Bank affected the sureties, the risk waiting for sureties, okay. And then I also mentioned the dollar movement and also the consumption of tax assets.

Victor Galliano

Okay thank you. And just a quick follow-up on the on the CorpBanca, if I could. So there is no - as you said it's the FX rate. Is there any sort of hedge in place with regard to this because I know that it's a dollar-based deal for any of the price and obviously you know that the agreement has been in place for a long-time?

Roberto Egydio Setubal

Above the hedge for the commitment of capital increase you are talking about?

Victor Galliano

Yes, well just the price of the deal because I know it was struck in dollars back in 2014.

Roberto Egydio Setubal

Yes, and on the 80 bps front, the 80 bps relates much more to the size of the assets that was impacted by the cash flow, the size of the assets and when we translate this into reias it seems bigger than it was presently that’s why we have this additional around 20 bps impacting the capital ratio is not because of the…

Victor Galliano

Okay, thank you.

Operator

Our next question comes from [indiscernible] with NN Investments.

Unidentified Analyst

Hi, hello. This is [indiscernible] just a quick question on your guidance provision and do you mentioned that the range of GDP that you are working with is between 2.5, minus 2.5 or minus 5 and the range of provision is 22 billion to 25 billion, but for 2.5% change in GDP, you just didn’t expect the provision to increase by 3 million and sound a little bit to prevent that would you agree with that?

Roberto Egydio Setubal

Yes, pretty much given the level that we are ready this is what we expect because this would mean an acceleration size this year, the impact in 2016 would be basically on the margin of what we are seeing today. Okay this would give more impact in 2016, 2017 if we have this kind of environment. We have additional impact in 2017 I mean. Do you understand?

Unidentified Analyst

Yes. Sorry.

Roberto Egydio Setubal

Basically what we are seeing, we have base case and as this deteriorate or improve we expect not going to be in the full-year, the full-year impact of that would be on the road in the year ahead. So we have a best needle case in 2017, we are seeing better environment in 2015 we are much better in 2017 or the worst case is 2017 I think we have negative in 2016.

Unidentified Analyst

Okay, that’s clear. And just also try to understand about how you factor in corporate delinquencies in your guidance because retail you can use your models and you project what this sort of original requirements you would require, but corporate that can be pretty be lumpy and it’s hard to kind of project which corporate are going to back drops and how much provisioning do you require. So how do you work on the corporate commission?

Roberto Egydio Setubal

It’s much harder as you mentioned, we have to keep very close track on corporations in order to understand that, but mainly we keep a good track on sectors that are expecting more, we keep a much closer track than other sectors that are putting signs so we can basically look sectors and see how this would affect our books, our exposure is the best factor and how this could impact the building. You are right, as much more input size the kind of expectation that we can have for business for wholesale.

Unidentified Analyst

Okay just quickly, finally do you think there is also and what is their consciences would provisions guidance - provision would higher be - would be higher than 25 billion that you got it for?

Roberto Egydio Setubal

Basically from today I just would say that only if GDP would be even more negative than the range I gave you from would be less than 5 or something that you currently but today we do not see that.

Unidentified Analyst

Okay, thanks.

Operator

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

Roberto Egydio Setubal

Again I just wanted to thank you for being with us during this call. I think it was an important opportunity to us. How we are placing our guidance for 2016 and I think I believe that we could have answered all your questions and please feel free to look for Marcelo, if you have additional points. We are not clear enough during the call. And thank you very much for being with us at this time. See you next time.

Operator

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

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