Itau CorpBanca

Good morning, ladies and gentlemen. Welcome to Itaú Unibanco Holding conference call to discuss the 2020 first 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. If you should require assistance during the call, please press the star key followed by zero. As a reminder, this conference is being recorded and broadcast live on the Investor Relations website at www.itao.com.br slash investor-relations. A slide presentation is also available on this site. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks, and other factors. With us today on this conference call in Sao Paulo are Mr. Candido Brasher, President and CEO, Mr. Nertone Malurifio, Executive Vice President, CFO and CRO, Mr. Alexandro Bruedo, Executive Director, Group Head of Finance and IR, and Renato Luia Iaco, head of IR and market intelligence. First, Mr. Candido Brasher will comment on 2020 first quarter results. Afterwards, management will be available for a question and answer session. It is now my pleasure to turn the call over to Mr. Candido Brasher.

Hi. Good morning, everyone. And thank you for taking the time to attend to our first call of . I hope you're all well and safe. To start our presentation, let's move straight to slide number two, please. Before discussing the financials, we cannot obviously avoid talking about the crisis we are all going through and its impacts on our lives. And consequently, its impacts in our results. By mid-March of this year, the crisis broke out. It's true that an extension are becoming more evident as days go by, but they are not yet completely clear. So I would like to use today's first three slides as a segue to the presentation we did on April 6th in order to discuss and update you on the different initiatives we have put in place to deal with the impacts of COVID-19. in our company and in our community. Since the very beginning, it became evident to us we needed to step up and act proportionately to the role we have in Brazil as the largest financial institutions in the country and in Latin America. So we first began by making sure we could operate normally under very exceptional circumstances. we were very fast in moving 95% of all our workers from central and digital branches to work-from-home remote. On the brick-and-mortar branches, we have taken every measure possible in order to make our employees and clients safe. This has included, among other things, supply of masks, of safety equipment, implementing social distancing measures, and reinforcing hygiene protocols. We also wanted to make sure our teams have the support and peace of mind to focus all their attention to serve clients. So we announced some additional measures, such as a firm-wide job security by suspending all terminations without cause, and we also advanced the payment of the 13th salary. And so our teams are now tirelessly working on developing the best solutions to help our clients. We reinforced and improved our digital channels, which are operating now at their highest historical availability level. And in the last weeks, account openings through digital channels more than doubled in absolute terms. We have increased our communication in an important way, both internal and external, and we are getting very strong satisfaction ratings in this front. For example, our employee net promoter score has reached 92 points over the last few weeks, which represents an increase of 22 points over the month of February. But while all those initiatives are absolutely key, they are just part of our response to the crisis. As I said before, we felt we need to act proportionally to our relevance in the Brazilian society. With this in mind, we launched an initiative called Todos pela Saúde, Everybody for Health program. We have donated a billion reais specifically to this initiative and another 300 million reais for scattered actions against the pandemic. And for Todos pela Saúde, we have formed a group of distinguished health specialists, which is responsible for directing the resources so that all strategic decisions regarding these funds are backed by technical and scientific fundaments. And we are inviting others to join us at this initiative. If we move now to slide three. So let's briefly go through some important initiatives we launched at our Retail Bank to support individual clients and SMEs to navigate through these hard times. We have started by providing a 60-day grace period on loans in general, and then we have doubled it for individuals who were on time with their payments, and we have tripled it for small companies with reduced interest rates. On top of this, we are offering to extend the terms of the contract so that the installments adequately fit the cash flow of the client after the grace period is over. This initiative aims to at enabling our clients to get their financials back on track after we are through with this crisis. Up until the end of last week, over 850,000 clients have refinanced their loans under these terms of the offer. We have also announced several other initiatives in the past 30 days or so to extend benefits and exemptions for our clients to support the liquidity of small and medium-sized companies and their transition to the Delivery Sales model during the social distancing phase, which we are going through. We move to page four now, slide four. You see the work we've been doing in our wholesale bank has not been any different, aiming at supporting our clients in the best possible way. Right after the crisis started, there was an increased demand for liquidity, especially from corporate clients. So we put our balance sheet to use and doubled our credit origination in diverse industries and used very good credit breaks. For middle market companies, we are now offering a 90-day grace period for amortizing credits, and we have proactively supported larger companies by postponing maturities of loans that expire in the coming months. We substantially intensified our communication with our clients through different channels. A very interesting fact that we are noticing is that a banker can now make many more virtual meetings with clients in a day instead of going there and visiting them physically. It's also worth mentioning the vast amount of specialized daily content we are bringing clients in order to help them in their investment decisions. That's the backdrop of what we are living today, a health crisis that we still do not know how long it will last and how deep its impacts will be, nor when and how quickly life will return to normal. With that in mind, and going back to what I said in the very beginning of this call in terms of making sure the bank was operating normally, we took decisive steps in order to make our balance sheet even more resilient as you will see in the next slides. So now moving to slide six and the proper financial highlights. So here we know that we've entered the first quarter of 2020 with a 3.9 billion reais recurring net income and a 12.8 ROG. Although we've had a good start of the year, especially in the first two months, This quarter's result already incorporates some effects of the crisis. This is most evident in the reinforcement of our balance sheet with the additional provisions indicated by our expected loss model, which will be discussed in further detail later in this presentation. During the quarter, our loan book grew 8.9%, reflecting basically the increase in credit origination, especially for corporate clients, as well as the effect of Brazilian health evaluation. Finally, we had another very strong quarter in terms of cost management, posting a nominal contraction of 0.8% when compared to the first quarter of 2019, and a 7.3% decrease vis-à-vis the last quarter. This is the result of our continued focus on technology and automation, and our discipline in making our processes and structures lighter and more efficient. Now moving to slide 7, credit portfolio, we look in more detail on how our loan portfolio expanded 18.9% in the last 12 months. The growth in the quarter was mainly led by our wholesale portfolio, especially corporate loans, as a reflex of our support for liquidity needs of our clients. Our credit origination in Brazil went up 36% when compared to the first quarter of last year. notably increasing 72% for corporates. This is origination. Even when considering only the first two months of the year, credit origination was already up 22.5% in Brazil, with a 30% increase for corporate clients. It's worth mentioning that we also saw an acceleration in our funding compliance, you see there in the bottom right of the page, as demand for more conservative investment products increased during this period. Moving to slide eight now, profile of our credit portfolio. The objective here is to show you that we have a high credit exposure by business line, client concentration, and especially industry. The highest industry concentration overall in our portfolio is real estate, and it represents only 3.7% of our group. Sectors most exposed to the impacts of the current crisis, such as oil and gas, different tools, and airlines, add up to only 2.4% of our total credit portfolio. Lastly, on currency diversification, it's important to mention that all credit operations are naturally hedged because they are funded in the same respective currency. Now we move to slide 9, where we explain the expected loss provisioning model. So here we describe our loan portfolio, our loan loss provisions, and how the bank's expected loss model works. This model has been in use since 2010 and has been constantly evolving. The model works differently for wholesale and for retail. While on the wholesale, the approach is much more bottoms-up, where the clients are individually assessed and discussed in credit committees, On the retail, we rely on statistic models that deal with an increasing number of variables and that already have a relevant share of artificial intelligence, considering the high number of clients and interactions involved. This is, as compared to very simplistic descriptions of engineering behind the models, is to provide some insight on how we incorporate all available information in order to estimate future credit losses, and so to anticipate provisioning needs. On the chart to the right, you will find a breakdown of our loan loss provisions. The total provisions rose from 39.7 billion to 47.1, therefore a 7.4 billion quarter increase, out of which 5.2 were due to absorb potential losses. Considering expected impacts from the crisis on our clients is no delinquency on their debts. In the financial statements, you see a different breakdown of those provisions, and the labels are a bit different. You see that our complementary provisions increased by $4.3 billion last quarter. Although the labels are different, the objective is the same, to prepare the balance sheets to absorb future losses. Moving now to slide 10, cost of credit, the result of what I just mentioned, an increase in our cost of credit during the quarter to 10.1 FIDA, corresponding to 5.5% of our total credit portfolio, and increasing our coverage ratio by 10% for 39%. On slide 11, still on credit quality, Here we have a longer time series of provisions and non-performing loans, so that you can see that in interdisciplines, there's a reasonably well-behaved level of NPLs, 3.1%, and a high level of provisions and college, 6.6%. We strongly believe that this is the most brilliant approach. Now, moving to slide 12, let's talk about the financial margin in this slide. The net interest margin decreased by 80 basis points in the quarter, as you can see on the chart at the bottom of this page. The main impact came from the new overdraft loan regulation that took effect at the beginning of the year, 600 million. The rest can be explained by the impact of the reduction in interest rates on our working capital and liabilities market. Here's what's mentioned. that we took a very intentional decision not to try to compensate the impact of the overdraft debt by increasing our exposure to higher portfolios, and therefore bring additional to our balance sheet. Actually, we went the other way. To take our exposure to credit cards and personal loans and aggregate, for example, it has decreased 3.4% this quarter, given the scenario that came with this crisis, and with the benefit of hindsight, we believe it was a good decision. Slide 13 now, financial margin in this market. The first quarter of the year has definitely not been a good quarter for our trading deficits. On top of it, the decrease in interest rates also impacted the remuneration of our hedge positions and investors abroad. On slide 14, commission fees and results from insurance operation. These revenues declined 8.2% quarter on quarter, basically because we had an exceptionally good quarter by the end of last year. The CDOs on a yearly basis, they increased 8.2%, the same 8.2%. When we look at the asset management and advisory services and brokerage lines, we see a decrease that is already partially explained by the effects of the current crisis, but that, on the other hand, still presents a strong performance on a 12-month basis. Actually, you see on a 12-month basis, asset management grows 40.2% and investment banking 148.1%. As you can see on the right side of the screen, from January 2019 to March of this year, we've held the top spot on the main rankings for investment banking, placing first on M&A and ECM, both in Brazil and Latin America, and on DCM on our domestic market. And when we compare to our field revenues on the first quarter of last year, this 8.2 decline becomes an 8.2 increase. And on the negative side, basically we are buying results. Here it's worth noting that the impact of the D plus 2 offer which we extended to all our clients by the end of the year, did not exist back in the first quarter of that year. Now on slide 15. Let's see the non-interest expense. Extensive decline by, sorry. Extensive decline by 0.8 year on year. well below the 3.3% inflation over the same period. A very solid performance. It's important to highlight that the personal and administrative expenses were reduced by more than 2% in the same period. As we discussed in the previous earning calls, this is the result in terms of strategic management of costs and focus on efficiency. You see this as an ongoing process, not a project, with more positive results in the coming quarter. Important to highlight, though, that we haven't stopped investing heavily on the things that are most relevant for the future of our bank. In the past 12 months, we've hired an additional 640 IT technicians and acquired ZOOP, a technology services provider that adds another 800 specialists. All in all, we managed to increase by 54% our technology development capacity between 2016 and 2019, and we are sticking in this curve. Finally, this crisis is bringing daily lessons on how we can operate even more efficiently. We are positive that this will turn into additional benefits in the near future. Now on slide 16, capital. We finished 2019 with a 14.4 to 1 capital ratio. We paid dividends on 19 results by the beginning of March this year, which caused the ratio to decrease 1.1 percentage points. Other effects that negatively affected this ratio were a mark-to-market of securities, tax credits, and RWA growths. These last two were impacted by foreign exchange variations. either through the tax effect of the overhead of our investments abroad or through the heightened interest-risk weighted assets. Finally, the first quarter results came in lower than initially forecasted. On the other hand, the same exchange rate variation has partially compensated its negative impacts in the valuation of our adult denomination additional Tier 1 capital. Lastly, We have announced that we've also issued $700,881 bond, which is a very good time, right before the crisis broke out, totaling a 12% to a one capital ratio at the end of March 2020. I'd like to mention that we run stress tests on a weekly basis, and even on scenarios with the dollar, U.S. dollar, running at higher levels, our capital base can still absorb them. Moving to slide 17, here we find a table with different estimates of 2020 GDP in Brazil. We devised this table to portray what the GDP should be according to when social distancing measures begin to unwind and how fast the economic activity resumes afterwards. Naturally, the longer it takes for the lockdown to start to ease, the greater the economic impact it has. We see the scenarios to the left of the table as more likely to happen when we build our loan loss provisions among many other variables. As you can see, we are facing a moment of extreme uncertainty on the microeconomic conditions, and so the range of estimates we get is quite wide. Moving to this last slide now on perspectives. Due to the low visibility and uncertainty about the extension and depth of the social and economic impacts of this current crisis, the 2020 forecast previously disclosed during our fourth quarter earnings release has been suspended. Nevertheless, I'd like to point out that the financial margin of these clients' non-interest expenses, credit portfolio, and fee income ended the first quarter at of this year in line or better than the guidance which we have provided previously. We understand, however, that it is prudent not to disclose new forecasts at this time until it is possible to estimate the impacts and the extent of the current situation in the company's operations more accurately. Nevertheless, I'd like to share with you the main perspectives for our business. Chapter and liquidity should remain at appropriate levels considering our internal stress test scenarios. Regarding the credit portfolio, the main factors that will drive its growth in the short and medium terms will be the greater participation of the corporate banking portfolio, lower demand from individuals, and relatively high volume of negotiations. We believe the financial margin with clients will grow around the credit portfolio growth. Commission fees and results from insurers will remain under pressure due to lower economic activity and absent capital markets. The cost of credit and balance of loan loss provision according to the expected loss provisioning model will be adjusted whenever there are substantial changes in the macroeconomic scenario and in the financial situation of the clients. And we maintain our commitments to nominally reduce non-interest expenses, reflecting a division and strategic cost management, the investments made in technology, the impact of lower economic activity in our variable costs, and the benefits of the new model of remote work and service. So with this, I conclude this presentation, and we may start the Q&A session.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star key followed by 1 on your touch-tone phone now. The questions will be limited to two per participant. If at any time you would like to remove yourself from the questioning queue, press star 2. Today's first question comes from Jason Mullen with Social Bank. Please go ahead. Thank you.