Itau Unibanco Holding S.A.

Hello and good morning, everyone. My name is Renato Lulia, and I'm the Head of Investor Relations and Market Intelligence at Itaú Unibanco. Thank you very much for participating in our conference to discuss our earnings for the third quarter of 2023, which, as always, we are broadcasting directly from our office at Faidia Lima. Today's event, as usual, will be divided into two parts. In the first part, Milton will go through our performance and our earnings for the third quarter of 2023. Right after that, there will be a Q&A session during which analysts and investors can interact directly with us. I'd also like to give you some instructions on how to get the most out of today's meeting. For those who are accessing our website, there are three audio options on screen. The entire content in Portuguese, the entire content in English, and the original audio. In the first two options, there is simultaneous translation. To select your option, just click on the flag in the top left corner of your screen. Questions can also be sent via WhatsApp. To do this, just click on the button on the screen for those who are watching on the website, or send a message to 11 97 825 5707. Our presentation today is available for download on the website screen, as well as on our IR website. I'll now hand over to Milton, who will start the earnings presentation, and then I'll come back to moderate the Q&A session. Milton, the floor is yours.

Good morning, everyone.

Welcome to our earnings call, supported by a very objective presentation. I'm going to run through the figures for the quarter and emphasize the Argentina effect, which, as you saw, on Friday we settled the sale of this operation. I'm going to show you how this affects our earnings and how the guidance is kept unchanged. except for just an adjustment that removes the effects of Argentina from the seven months that this operation was part of our earnings, and how we've disregarded the remaining five months in the guidance that's been published in the second quarter. So let's get started. We've delivered a recurring managerial result of R$ 9 billion, which points to very strong earnings that has grown 3.4% quarter over quarter. We've reached a consolidated ROE of 21.1%. Brazil's ROE, which is the most comparable with the market, was 22%, up half a percentage point. It's key to highlight that if we were working with our capital within the risk-appetite threshold approved by our board, this ROE would be around 24%. I'm telling you this just to give you an idea of the effect that capital has and how it dilutes ROE by two percentage points. In commission and fees and result with insurance operations, the growth was 3.6% quarter over quarter, reaching 12.9 billion rials, at a cost of credit of 9.3 billion rials. This is the first nominal drop we've seen with a 1.9% decrease quarter over quarter. This is very good news from lending. The NPL rate is absolutely stable, with no news, which is in line with the message I've been sending you for a few consecutive calls now. The level 1 capital ratio, which I mentioned just now, reached 14.6%, an increase of 1 percentage point in the quarter. I'll show you in a moment our set 1 running at 13.1%. But there was also a significant increase in the bank's capital. Speaking about the loan portfolio, the individual's portfolio grew by 6% year over year. As for the quarter, the credit card portfolio is still decelerating. But I'll emphasize this in a moment. Personal loans portfolio grew by 4.2% in the quarter, payroll loans portfolio reduced, and vehicles portfolio increased slightly in the quarter. So the portfolios in general, except for personal loans as mentioned, grew 6% year over year. The SMEs portfolio grew 3.2% year-over-year, but we're already seeing a significant pickup this quarter, growing 3.3%, which means that the quarterly effect is already above the trend we had seen for this portfolio. And in the credit portfolio as a whole, after adjusting the Latin America effects, we see a growth of 4.7% year-over-year and 1% increase this quarter. The message I want to leave you with, which for me is the most important one, is that in the portfolios where we decided to not stop growing, they continue to expand significantly. Thus, if we take the two middle and high income segments, uniclass and personal et, the portfolio grew 3.7% in the quarter and the individual loans portfolio grew 0.6% on a consolidated basis. Year over year, this portfolio grew 17.5%, while the individual loans portfolio grew 6%. The portfolio of the middle and high income cards grew 3.6% in the quarter against a drop of 0.5% on a consolidated basis. and by 15% year-over-year against a drop of 0.8% on a consolidated basis. And in middle and high-income personal loans, we grew 6% in the quarter and 24% year-over-year. This shows that we've been increasing our engagement in the middle and high-income segments, where we've delivered and performed very strongly over the quarters, and we've made a portfolio adjustment. We've made a significant de-risking in our portfolio. This saved the banks almost 200 NPL points throughout the period. The portfolios where this de-risking was more significant were in the credit card portfolio, which already had a significant nominal drop in the period, and also in the vehicle portfolio, to which we had to make very significant adjustments. In the other portfolios, we continue to grow, and especially among those clients that are in fact resilient throughout the cycle, as we say. Through the cycle. That's how we've managed our portfolio. When we look at the payroll loans portfolio, for example, we have two key messages. The first is a drop in the INSS public pension portfolio, which is in line with the information we've been disclosing, as Febraban itself has done, due to the limits that have been set. When this happens, the access to a cheaper financing facility cannot be made available to pensioners, who end up electing more expensive facilities due to these limits now in place. We can see these portfolios dropping. On the other hand, we've managed to expand government and private companies' payroll portfolios, where we've grown by over 12% year over year in both cases. As for credit origination for SMEs, we see that it's continued to grow since the first quarter of this year. For large companies, there was a slight increase up to the second quarter. And since then, we've seen a growing demand, already reaching 118 year-over-year on a 100 baseline, which shows that we've managed to grow with quality by always focusing on the net interest margin. To focus on generating operating revenue is not enough. We have to look at the generation of operating revenue, the related cost of credit, and the return thereon, by analyzing the net interest margin, therefore already adjusted for the service cost, which may conclude whether these transactions are adding value to the shareholder in the long term, or whether they are simply showing a growth in earnings that does not bring a return on the shareholders' capital. This is the type of management and work that we've done consistently each quarter. This is our daily work. As for the financial margin with clients, we have good news. The line expanded by 700 million in the quarter, a 3.2% growth. It was a well-distributed and balanced growth, with the effects of volume, the volume of liabilities, number of working days, some effects in Latin America and others. These are very sound results, and for the first time, to increase transparency, we've broken down the Argentina effect. Argentina and the working capital had an impact of 3.2 billion last quarter, with 2.9 billion from working capital itself and 0.3 billion from the Argentina effect, which contributed with approximately 100 million to our monthly earnings. When we look at the end of the graph, we get 3.1 billion, with 3 billion from working capital, which compares to 2.9 billion. It shows that we've managed to adequately hedge our investments and grow in equity. In this quarter, we only have one month from Argentina, so we show this result considering July, as the earnings of the other two months were not affected, because we stopped to account for this asset as a consolidated bank, as the Argentina operation was recorded as an unavailable for sale asset, due to the sale process that was underway. When we look at the consolidated margin, it expanded quarter over quarter from 5.1%, and we reached 5.6% in the consolidated margin this quarter. And when we look at Brazil, we also see this expansion taking place, reaching 5.9%, 30 basis points in the quarter, which is a very strong result. As for the financial margin with the market, the quarter was in line with the previous quarters, reaching around 700 million reals, after the effect of the cost of the capital index hedge. The effect in Brazil is in line with these figures. We see 1 billion reals in margin with the market, and in Latin America a slightly lower figure. Remember that here we only have one month of Argentina and two months where we've already recognized this investment as available for sale, thus it doesn't impact earnings. This was the effect of the margin with the market, with no particular news. I'd like to detail some information in commission and fees and result from insurance operations. First, the strong quarter-on-quarter income from credit and debit cards as we've managed to expand issuance, which grew 4.5%. The acquiring business grew 2.8%. It's worth noting that, in light of all the integration work, better management and proximity to the clients, the acquiring business is going through, in short, a process of engaging our clients that has helped us to reprice and adjust our operation as a whole. Year-on-year growth was 18.9%, a very sound result. Transaction volumes are also sound, growing 5.3% in the quarter, while posting good profitability, which is the most important. and in issuance, we grew 2.9% year-over-year, with a volume expansion of 2.7% in the quarter. We remind you that this was the portfolio where we've actually made the most adjustments. We've reduced substantially our exposure to the open sea, and this adjustment, of course, not only affects revenue, but also the portfolio growth. When we look at the advisory services and brokerage line, we see a very strong growth of 22% in the quarter and 21% year-over-year. In further details, we came first in the investment banking ranking in ECM, M&A, and DCM, achieving 18% market share in ECM, 15% in M&A, and 29% in DCM, which shows that we've been consistent and delivered very solid earnings in this line. When we talk about asset management, there was actually a slightly lower year-on-year growth, with an expansion in the quarter, but the most important thing is to show that the open platform grew this quarter. As a result, we are already seeing a certain migration trend to this platform, and the line of owned products has been growing a lot throughout this cycle of monetary tightening, so the pickup is lower quarter over quarter with an increase of 2.2%. Finally, in insurance, we grew 19% year over year, with a growth of 5.4% in the quarter, which shows that we are consistently expanding our insurance operation and increasing the value of this operation within the bank's balance sheet. In terms of credit quality, our first message is from a global standpoint. When we look at Brazil, at the total, and at Latin America, short-term delinquency reduced in all three cases, and coincidentally, in all of them fell from 2.5% to 2.3%. This shows that short-term delinquency is well-behaved. When we look at the NPL 90 days on a consolidated basis, the total is fully in line, just like in Brazil and Latin America. And when we look at the short-term delinquency in Brazil, for the second quarter in a row, we have a reduction in the individual loan portfolio, from 3.5% to 3.4%, and now 3.2%. In fact, the first quarter is usually more pressured by the previous quarter's spending, and we've seen that in two periods we are already returned to the levels we had before the start of the year. In very small, small and middle-market companies, the indicator fell by 10 BPS, while in corporate segment, the indicator went sideways, without any news. When we look at the 90-day NPL in Brazil, in line with what I said last quarter, we have an absolutely stable rate, and our best expectation for the fourth quarter is a drop in the NPL for individuals. Bearing in mind that this is a portfolio that has decelerated a lot, so there is a much more controlled overdue effect and a denominator effect, both show that we have a very healthy portfolio and no worries. In SMEs, we are in line with what I said in the last call, that we expected an expansion of around 10 BPS, and that's what happened. But our expectation is a drop in the fourth quarter, so we see that the short-term delinquency is reducing. Thus, we don't have any specific concerns. Our very small, small and middle-market company's operation is posting very strong returns, both in a middle market and in retail. So, no specific concerns here. We have a very controlled cost of credit. When we look at the nominal cost of credit, in this series we have the first quarter with a nominal reduction. It's important to remember that in the fourth quarter we had the effect of one retail company which ended up changing this figure. If it hadn't been for that, we'd have seen a gradual growth over all the quarters. So this is the first quarter that we've actually seen a nominal decrease, and in relative terms it's fallen to 3.2%, which is a very comfortable figure, and with a portfolio that is growing. In the renegotiated loan operations, we have two news. The first is that it appears nominally stable at 40.9 billion rials and 3.5% compared to the portfolio, which shows a very controlled and well-behaved portfolio. As far as coverage ratios, there's not much to say. You'll see a certain stability, only small effects, but absolutely stable. In other words, the bank's balance sheet continues to be very well covered and protected, with very adequate provisions. As for non-interest expenses, this quarter is typically subject to stronger effects, such as the collective wage agreement. As a result, personal expenses accelerated from the second to the third quarter, while other expenses are very much in line. Thus, non-interest expenses grew 8.4% in Brazil, and with the effect of Latin America, they grew 6.9%. And what are the key messages? The efficiency ratios are quite good, clearly much better than what we've seen in the market as a whole, both in Brazil and on a consolidated basis. And these are international benchmarks. We've managed to deliver a very appropriate efficiency ratio with two main messages. The first is about the bank's core cost, or run the bank, which is in line. In the nine-month period compared to the same period in 2022, we grew only 1.1%. On the other hand, what has actually been expanding this figure is not just cost itself, but the investment that we continue to make. Our goal is not to manage costs for the quarter. Basically, what we have to do is to make our operation more productive, more efficient, thinking about how we invest in our operation by investing much more in technology, data, and business expansion. So we're always looking at the franchise over the long run, always with a longer time horizon. So that's the reason for all these investments, which is still being absorbed by the P&L, resulting in the level of profitability I've just mentioned. I believe these are the key messages regarding costs. The bank's efficiency program continues to make a very positive contribution. And in terms of transactional volumes, if the unit cost is the same as lower or rising less than inflation, if we actually increase volumes and do more business, this is a benign cost. So we've still been able to finance all this benign cost expansion with all the efficiency program at the bank. One of the most talked about topics lately is data. We've talked a lot about machine learning, models, generative artificial intelligence, among others. This is a topic that comes up all the time. So what we wanted to do here was to provide a summary of our various initiatives. This isn't just a topic for a specific department, it's a topic for the whole bank. And we have some data that shows and reinforces how strong our investment and belief in this data agenda has been. Starting with our data structure, which has 100% of all the bank's data in the cloud, and a very modern data mesh architecture, which makes the data much more democratized within the institution, not being used by just one department, as all departments start consuming that data. And not just consume, but adding their own data much more efficiently to the bank as a whole. So we brought you some information that I think is relevant. We have more than 350 data scientists in the organization, more than 200 initiatives using generative artificial intelligence, more than 50 machine learning engineers, more than 150 professionals working with generative artificial intelligence, and more than 570 models currently being used within the organization. One of the cases that I think is relevant in terms of outcomes rather than output is service. For example, we've increased by 45 percentage points the volume of client service that is automatically retained through our models using artificial intelligence. 72% of all calls made are already handled by artificial intelligence, with much greater efficiency, accuracy and speed, and with improved NPS. And this is in line with all the investment in technology and efficiency that I've just mentioned. This shows a much more scalable and efficient bank in the long run. And we have a series of other initiatives, with greater security for our clients, since we are able to interact and identify the voice of a fraudster, thus allowing us to protect our clients. With regard to productivity and the corporate client experience, we already have a lot of information for every documentation analysis, so that it can be done as accurately as possible. We currently have a 97% accuracy. We've also been using chatbots to interact with our clients. We've used our artificial intelligence models in different businesses, and we have no doubt this will be an agenda that has come to stay and will grow exponentially over the coming years. We want to be at the forefront. We had no choice but to migrate our systems to the cloud and upgrade them. As for the artificial intelligence agenda, we have everything it takes to lead this process. We want to be at the forefront of this agenda. I'd also like to comment on a few topics about culture and people, which are very important to us. We've recently announced two objectives, black representation in the institution and women in leadership. When we set this objective, we said that by 2025, we wanted to have 27 to 30% black representation in the organization. We've already reached 27.3% in July. 40% of our hires today are black people, which naturally means that we can evolve in these indicators. We really believe that it's not just a diversity agenda. It has to be an agenda of diversity and inclusion in order to keep this flow sustainable over time and to ensure that these indicators evolve consistently. We are very proud of the work we've been doing, and as I always say, it's not a job that has a day and a time to end. This is the new normal, and that's the agenda we've been working on. We also had a goal of achieving between 35% and 40% of women in leadership by 2025. We've already reached 35% in September 2023. So we are already at the lower end of our 2025 target and will naturally keep moving upward. Regarding the hiring flow, our goal was to hire 50% of women in the flow. We've already hired 53.8%. And here we are talking about an indicator of women in leadership. When we look at women in the bank's total workforce, we now have 54.3% women. We brought this indicator just to give you an idea of the importance of this agenda, and we have to constantly talk about this ESG agenda. Of course, the narrative is important, but the results you can deliver are much more important than the narrative. And every quarter we present some output, some focus to show how this agenda is part of our DNA and how it is one of the pillars of our culture. Regarding some acknowledgements, for the second consecutive year we were named the best company to work for by Great Place to Work. And not just as the best bank, we won the best financial institution and also the best company with over 10,000 employees. What I always say here is that if we have happy and engaged employees, a strong culture, client centricity, naturally we will have satisfied clients. These are fully connected. We won the Most Amazing Place to Build Your Career, and we also won this award for the second year running. That's very good news. And last but not least, also for the second consecutive year, we won the Valor 1000 award as the top company among banks. This shows a little of the recognition we've achieved. We talk about these acknowledgements with our feet on the ground and with a lot of humility. This is very important for us to keep moving in the right direction. but with great care and humility, because we still have a lot to do and we believe that this is a longer-term agenda. We're not going to be complacent with these results. The bank has a lot to evolve, and this is the agenda we will continue to pursue. Now, radically changing the subject, I've talked about culture, I've talked about diversity, I've talked about inclusion, I've talked about awards, and now I'm going to talk about capital. As I've said a moment ago, we came out from a set one of 12.2% last quarter, and we've already done a pro forma last quarter, showing the positive effects of the regulatory changes, which have in fact materialized now with plus 0.9%. As a result, we've reached 13.1% of the set-one capital ratio, and our appetite is 11.5%, as defined by the board. So, there's been an expansion in all consecutive quarters, since the first quarter of March 2020, during the pandemic, when we made those material provisions. Since then, we've been expanding and growing our capital ratio. We have plus 0.4% growth in earnings already adjusted for dividends. We have the minus 0.3% of RWAs with the consumption we've had form credit, market and operational. And the plus 0.9% I mentioned is basically the evolution of our models and all the regulatory changes, which leaves the bank at a very adequate capital level. Regarding Itaú Argentina Bank, I'll try to be very objective, but it's important to emphasize this for you. Considering the earnings that we see on our balance sheet, the seven-month result of 578 million reals also poses an opposite effect in equity that doesn't go through P&L. which is the effect of inflation and the foreign exchange variation of the equity in Argentina. So, if you look at earnings isolated, you get the feeling that it's an accretive investment. But deep down, when you consider the economic effect, from the stockholders' standpoint, we saw a seven-month loss in Argentina of 113 million reals. As a result, we made the decision to divest, especially in the retail business in Argentina, an operation that we had in this country for many years. We'll keep a very small operation, in this case a representative office focused on a few corporate groups. We have a very close relationship through capital market transactions, investment banking, some lending transactions. But we felt it was important to carry out this sale. The sale was completed satisfactorily with the regulator's approval and its financial settlement last Friday. From the earnings standpoint and the material fact where we announced the sale, we said that we'd post non-recurring result of approximately 1.2 billion rials. And this is the result that is actually materializing in this quarter's earnings. So this settlement of this impact on equity that has been accumulating over the years, which is the CTA that we disclosed on the balance sheet, and the balance sheet as of September 30th does not include any more the effects of Argentina, because from July onwards we have the effect of only one month in the quarter, which is July. We started treating this asset as available for sale and no longer as a bank consolidated on our balance sheet. The result excluded was a credit portfolio of 4 billion rials and operating revenues of 1.9 billion rials, a non-interest expenses of approximately 650 million rials and earnings of 578 million rials reported in PNL, which is the figure I've showed you just now. Thus, we no longer include Argentina in our earnings. As a result, we simply took the guidance that had been released to you last quarter and we made the adjustment by excluding the impact of Argentina. How did we make this adjustment? We went back to the guidance and looked at what we had projected line by line for Argentina over 12 months, and we simply excluded them from the projection. And now we are restating the guidance without any changes. Basically, what we're doing is excluding the effect of Argentina from the last five months, two months of which are from the last quarter and three months from the coming fourth quarter 2023. Thus, here you can see the figures adjusted across the board. The basic message is that our guidance is being reaffirmed. We continue to believe in the projections, and we are delivering earnings within these lines. Needless to say, geography can always change from one side to the other side, but all ranges described here absorb our best expectation of how we should end 2023. This concludes the presentation, and I'll now join Renato so that we can answer your questions during the Q&A. I'd like to thank you once again for your trust and say that we remain very confident in our agenda. We've been working tirelessly on this cultural transformation that I've talked about so much, this obsession with the client, with expanding all NPSs, ensuring that our business keeps evolving and growing. We still have a lot of opportunity for growth, and we're going to continue evolving at the bank, but always with that focus and that long-term view. Creating shareholder value is a mantra for us, and it's something we have very strong in our DNA. Then, we're not going to fight for growth that leads to one or two quarters with better earnings that is not sustainable in the long term. We are going to keep this long-term view, as we've always done here at Itaú Unibanco. Thanks everyone once again for your time. I'll join Renato and we'll continue our talk. Thank you very much. See you in two minutes. All the best to everyone.