Jul 25, 2012
Executives
Alfredo Egydio Setubal – Executive Vice President and Investor Relations Officer Sérgio Ribeiro da Costa Werlang – Executive Vice President, Risk Control and Finance Caio Ibrahim David – Chief Financial Officer Rogerio Calderon – Corporate Controller and Head of Investor Relations.
Analysts
Daniel Abut – Citi Carlos Macedo – Goldman Sachs Saul Martinez – JPMorgan Mario Pierry – Deutsche Bank Marcelo Telles – Credit Suisse Marcelo Henriques – BTG Pactual Victor Galliano – HSBC
Operator
Ladies and gentlemen, thank you for standing by. We inform you that this conference call aims exclusively to discuss the earnings results of Itau Unibanco Holding regarding the Second Quarter of 2012.
Queries related to Redecard’s public offering shall be addressed to the Investor Relations division of Itau Unibanco Holding. At this time, all lines are in a listen-only mode.
Later, there will be a question-and-answer session and instructions to participate will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded and broadcast live on www.itau-unibanco.com/ir.
A slide presentation is also available on this site. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996.
Actual performance could differ materially from those anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors. With us today in this conference call in Sao Paulo are Alfredo Egydio Setubal, Executive Vice President and Investor Relations Officer; Sérgio Ribeiro da Costa Werlang, Executive Vice President of Risk Control and Finance; Caio Ibrahim David, Chief Financial Officer; and Rogerio Calderon, Corporate Controller and Head of Investor Relations.
First, Mr. Alfredo Setubal will comment on the second quarter 2012 results.
Afterwards, management will be available for a question-and-answer session. It is now my pleasure to turn the call over to Mr.
Setubal.
Alfredo Egydio Setubal – Executive Vice President and Investor Relations Officer
So, good morning for those in U.S. and good afternoon for those who are in Europe.
It’s a pleasure for us to be here again to speak about our second quarter results of 2012. For those who are following through the Internet, we are starting on page two, the slide number two, highlights.
The first highlight is the result, the result – recurring result, recurring income, R$3.6 billion in the second quarter what means ROE annualizes of $19.4 million. This means an increase of 8.1% when we compare the second quarter of 2011.
For the full year of 2012, the net income achieved R$7.1 billion with a ROE of $19.7 million. This result means a increase of 2.5% when we compare to 2011.
The second highlight is the loan portfolio that we are going to speak more deeply in the coming slides, but anyway, we achieved R$432 billion in credits here including endorsements, sureties and private securities that we held in treasury of large companies. This means growth, including all these – all these 3.6% growth when we compare to March 12, 2012 and 15.2% when we compare June 2011.
The third highlight is related to our financial margins with clients. The financial margin with clients achieved R$12.3 billion in this quarter.
The net interest margin with the clients increased 30 basis point, achieving 10.9% especially because of the impact of the SELIC rates that the Central Bank is doing in the last coupon meetings during the year since last August when it is started to reduce the SELIC rates. The credit spreads remained almost flat with a small reduction of 10 basis points achieving 13.4%.
And when we look at the risk adjusted credit spreads, then that spread also a decrease – a increase of 10 basis points achieving 7.5% in this quarter. The fourth highlight is related to our banking fees and results from the insurance, pension plans and capitalization business.
These operations grew 0.6% in the second quarter when we compare to the first quarter of 2012, achieving R$5.8 billion in the period. When we compare to last year we see a increase in these revenues and result of 11.5%.
Fifth highlight is related to our non-performing loan ratio and our loan losses. Our expenses net of credit recovery achieved R$4.9 billion in the second quarter.
The 90-day – the total provisions created in this quarter achieved R$6.0 billion. The 90-day NPL achieved 5.2% in the second quarter with a 10 basis points growth quarter-on-quarter and 70 basis points when we compare to June 2011.
And we are going to talk more about this and in the coming slides also. This sixth highlight is related to our non-interest expenses.
The growth in the quarter 3.2% and when we compare 12 months 5.8%, in line what we expected. That is a reduction in the pace of growth of expenses during the year.
Seventh highlight is related to efficiency ratio. The efficiency ratio in this quarter increased 50 basis points.
The ratio reached 44.8% meaning up to 180% increase compared to the first half of 2011. In the last 12 months our efficiency ratio reached 45.9% which means an improvement of 330 basis points also in line with the expectations that we’ve have for this year.
And the last highlight is related to our unrealized gain. We have R$5.8 billion in unrealized gain and from this R$1.5 billion is related from our available for sale portfolio of securities.
Going to the slide number four, we have here our results. The total recurrent net income R$3.6 billion, net income R$3.3 billion.
The difference is related essentially to the sale of our position – our stake on BPI in Portugal through Itaúsa of Barcelona. More details here we can see the operating revenues of R$20.2 billion, an increase of 1.8% in the quarter and 12.2% when we compare to June of that year.
We can see here the financial margin with clients that we already talked during the highlights a decrease in the quarter of 0.1%. Margin with the market, a increase of 18.4% in the quarter achieving R$1.1 billion and an increase of 28.3% in 12 months, here more related to our structural positions and also for a better quarter four for the market especially for tour fixed income.
We can see also banking fees of R$5 billion, an increase of 1.5% in the quarter. Results from insurance R$1.4 billion, an increase of R$0.3 million and when we compare 12 months almost 17%.
Good news came from loan losses and within claims, our expenses of loan – for loan losses was a little bit lower than the first quarter. We had a decrease of 0.7% achieving almost R$6 billion here, what was good, because it was in the lower range of the banks that we provided at the end of the second – of the first quarter when we announced the expectations for losses for the second and third quarter.
So here, it was a better number, better for us. It was a good news also.
Recovery, a little bit lower also when we compare to last quarter 5.6% lower in terms of recovery of credit. Operating expenses, as I said, we continue to be very focused on controlling the non-interest expenses and the growth of this line when we see 12 months at 5.8% is a good number for this line.
The slide number five, we can see here more visual – some highlights, operating revenues totaled R$40.2 billion, an increase of 12.2% year-over-year. Loan loss provisions expenses, the total for this first semester is R$12 billion, an increase of 26.7% when we compare to the first quarter – for the first semester of 2011.
Non-interest expense is 5.8% as I mentioned and recurring net income R$7.1 billion, an increase of 2.5% when we compared to the first semester of 2011. Page, slide six, we can see here the net interest margin with declines, with a decrease as I mentioned of 50 basis points, achieving 11% when we compare 12 months and 30 basis points when we compare to the first quarter of 2012.
Banking fees increase of 11.5% in the quarter, we are including here the results from the insurance business and our ROE 19.4% in the quarter, a little bit lower than the 20% of the first quarter of 2010 and ‘12. And when we compare 12 months, 19.7% lower than the – almost 22% that we showed in the first quarter – in the first semester of 2011.
On page seven, we can see the financial margin. As I mentioned in the highlight, there is more reduction of 10 basis points in the gross credit spreads achieving 13.4%.
When we see the dotted line, when we can see the risk-adjusted NIM, with this slide also a reduction, achieving 6.6% of reduction. So, we’ll continue to see a trend of some reduction here related to the reduction of the SELIC rates and also the spreads.
On slide number eight, we see some other highlights related to our balance sheet. Assets, we had a decrease in this quarter, a decrease of 0.9%, especially related this decrease also the reduction of the portfolio of vehicle financing.
So, we have this reduction on average, lower pace of credit growth in this period. Stockholders’ equity, only by capitalization of profits increased 4.3% achieving 75.6%.
The loan portfolio here only not including the securities of large corp that we hold on our treasury book, so the number is R$413 billion, an increase of 3.2% in this quarter compared to the first quarter. And funding to the total deposits and events with clients R$942 billion, an increase of 1.8%.
On page nine, we can see more details about our loan portfolio, when we see by the type of line and product that we have. So the total of R$413 billion, R$147 billion is related to individuals.
We see that during this quarter we had a decrease of 0.2% on the credit related to individuals mainly because of the reduction that we are doing in our car financing business during. This quarter we reduced the portfolio of car financing 4.2% and also a reduction when we see 12 months almost 6%.
So, this is part of our strategy to reduce a little our exposure in the car finance in the local Brazilian market. But when we see the other lines credit cards and personal loans, we see a good growth when we compare it to the first quarter.
And mortgage that continues to be strong almost 8% growth in this quarter and 43% when we compare to last year. So, if you view those, the main issue here is related to car finance that we’re going to give you more details in the coming slide.
When we see the numbers related to companies, we can see that we showed a growth of 4.3% here. We achieved R$241 million, corporate increased 5.8 in the quarter.
And here we have and impact of the evaluation of the real against the dollar in our credit portfolio denominated in dollar currency. When we see it is very small in middle market.
We continued to be selective here since the middle of last – the beginning of last year. So, we continued to have a small piece of growth when we see this portfolio.
So, in 12 months the growth was only by 6.3% and in the quarter 1.9%. We’ve had some growth in the (indiscernible) countries that we have corporate and retail operations.
The growth of the credit portfolio was 14.8% in the quarter, here because we have more activity of corporate business in Chile and also because of the valuation of the real related to the dollar. On slide number 10, there we can see more details about normal credit ratios because ratio for the total portfolio increased by 10 basis point achieving 5.2%.
We can see here a decrease in the NPL over 90 days for companies. We reduced this from 2.7% to 3.5% and we see an increase also in the portfolio of individuals that increased from 6.7 to 7 at 0.3.
Here we have also impact of the increase of the delinquency in car vehicles. At the same time that this portfolio is reducing so it has a reduction of the portfolio of course has an impact in this credit ratio for individuals, the total reach point will be those in terms of credit.
It’s a good news on this sharp decide when we see 15 to 90 days NPL ratio. We can see that both for individuals and for companies, these numbers are much better what we can expect a lower NPL creation for the coming quarter.
This trend continues too in the coming quarters. The total balance of provisions is $27.1 billion at the end of this first semester.
On slide 11, we can see our delinquency for the vehicle car finance portfolio. We can see from long period of time of monthly granting of credit.
We can see Itau Unibanco line in red and the markets without Itau Unibanco in dark, in black. We can see that we had some periods at the beginning or at the end of 2010 and beginning of 2011 that our numbers were worst than the industry and this is what we are making provisions now and last quarter.
The first and the second quarter of 2012 more particularly but with the measures that we took at the beginning of last year when we saw this trend, we have now much better ratios when we compare to the market. So also this give us much confident that we took the correct measures to avoid worst problems related to this credit portfolio and what we are seeing in this quarters.
And we will continue to see in the coming quarters is more related to the credit granted in the past, when we see the credit granted today at the end of the last year, we can see much better numbers and positions. On slide 12, you can see other numbers related to the measure that we took related to vehicle portfolio and the reduction in the number of payments that we did, we have now 42 months in terms of payment.
And also in the orange line the average down payment that increased from 28% to 35%. So as the value of the collateral is much better and now in this situation.
We see in the charts below that we reduce very deeply the 60 month term of no down payment and on the chart at the right side we see what we expected in terms of trend because of this measure then because of these much better numbers that we have in terms of delinquency. What we expected in the coming two quarters for the second semester in terms of lower loss provisions for these credit lines.
So, we can see much better trend in terms of provisions for current finance. On slide 13, we can see all the funding and all the proprietary capital several name that and AUM that we have the total with R$1.2 trillion.
On page 14, no problems in terms of funding for the growth of trend portfolio, we have room to continue to grow deposit is not an issue here in Brazil concerning the credit portfolio. Slide 15, Banking fees and insurance result 12 month growth for 11.5% inline with the numbers that we provided and here we can see also that we had the impact of Orbitall that we sold we don’t have more revenues from Orbitall in terms of processing status of this company was provided On slide 16 non-interest expenses.
As I said we continued to be very focused on these and we’re very optimistic that we will continue to reduce the pace of the growth of these non-interest expenses. In 12 months the growth was 5.8%, in the quarter 3.2%.
We continued to be very optimistic that we’re going to reduce even more these. On slide 17 our managerial composition of net income.
We can see in the second quarter that the commercial bank was responsible for 32% of our net income Itaú BBA 17%, insurance 13% consumer credit 8% and our market activities and corporations in the now the use of the excess of capital that we have in 29%. In terms of BIS ratio, we have 16.9%.
We can see in the chart beside these the composition of the reasons of the growth where did this growth came and also we have the approval of the Central Bank today that of our Tier 2 issue of R$1.7 billion subordinated debt. So, our number today is higher then this is 17.2% because of these approval that was pending in the Central Bank.
In terms of – on slide 19, our market capitalization has decreased during last year – this year because of the financial credit crisis in Europe, in Brazil, in the U.S. so the bank share suffered a lot in all these end markets.
And our market capitalization also achieving R$127 billion by the end of this semester. And our shares continued to have more liquidity in the New York Stock Exchange.
The total liquidity is R$751 billion to-date it was a good number. On slide 20 we have some new expectations for 2012.
And the first conference call of the year when we released the results for 2011 we said that our expectation for credit growth was 14% to 17%. Now with the revision that we did and because of the measures that we took and are taking in our credit portfolio, we expect that our credit portfolio to grow at 10% this year especially because we are decreasing our credit portfolio and car financing from R$60 billion by the end of 2011 to R$50 million to R$52 billion in this segment.
So, this impacts the growth of our total portfolio. If we don’t go and see vehicles, we expect a growth of 13% to 15% for the whole year of 2012.
So, we're reducing our expectations in terms of credit growth In terms of NPL, the beginning of the year we expected the Itau to be stable. In the conference call the first quarter we changed to show the loan loss expenses and stable NPL.
And this also we’re reducing our expectations of loan loss provision of expenses that will be created in the third and fourth quarter. So third quarter now we expected the loan loss provisions to be between $R6 billion and R$6.5 billion for the third quarter and R$5.7 billion and R$6.2 billion for the third quarter and R$ 5.7 million is year.
In terms of fees and result for insurance, we are keeping our 10% to 12% growth for the year. No interest expenses also we are reducing.
We expect now the growth to expect it to be between 3.5% and 6.5% for the whole year and even with the difficulties to increase the revenues line, because – especially because we are going to grow less than expected in terms of credit, but anyway because of the good numbers in terms of expenses, we are maintaining our 200 basis points to 300 basis points reduction, improvement in the efficiency ratio. The final slide is related to our new JV that we announced with Banco BMG.
We are creating a new bank, where Itaú Unibanco will keep 70% of the shares in Banco BMG that will continue to make its operations will have 30% in total capital, initial capital for this new venture is R$1 billion. And with this new venture we will have 70% of the creation of payroll credits that Banco BMG will sell to this new venture.
We expected this venture to achieve R$12 billion in terms of payroll credits in two years. So, this is in line with the strategy of changing a little bit mix of credit of Itaú Unibanco, especially related to the credit of individuals.
We expected now this payroll business to grow and help us to reduce the dependency in car finance and credit cards, they are in business, they are very good, will continue to be good, but of course it’s more risky and we want to reduce the risk of our credit portfolio in the coming years. So, this was in line with this strategy that we announced from quarters ago that we are going to go in this direction of changing the mix of our individuals’ credit portfolio.
So, this finished the first part of our conference call. And now we are all here open to answer your questions about these quarters and the trends for the coming quarters.
Thank you.
Operator
Excuse me ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Mr.
Daniel Abut with Citi.
Daniel Abut – Citi
Good morning. Couple of questions.
Alfredo, in the prior conference call, you did say that even though this year was going to be sub-par in terms of earnings growth given the significant increase in provisions that you have seen, particularly in the first half, but to some extent into the second half as well, but you still expected some low single-digit earnings growth for the year before. So, following the first half you are delivering that, you explained in page five that if we look at the net income, recurring net income for the first half of the year it’s only 2.5% growth compared to the first half of 2011.
Do you still feel comfortable that this kind of low single-digit earnings growth for the year as a whole remains a realistic assumptions, particularly given the more encouraging trend that you are starting to see on the asset quality side? And the second question on expense growth given that you have lower the guidance for expense growth this year and given the progress you are making on your efficiency improvement program, even that, that program last at least through the end of last year is this the level of cost growth that we should expect for this year – for next year as well or there is something more concentrated in this year in terms of your cost efforts that’s and steady translate into a way your expense are going to be heading next year?
Alfredo Egydio Setubal
Hello, Daniel. Yes, we expected some low-single digits growth for the year that’s the number, that’s the expectation that we have.
Of course due to the condition especially also because we continued to have some growth, some good, some big numbers in terms of NPL and expenses creation for loan losses. Of course we cannot expect big increase in terms of results.
But we do expect some growth for the results. We continued to work well in terms of expenses.
We continued to see some growth in terms of credit portfolio. So, one by the order, we – our budgets in to see some growth in terms of result, but we have to see especially the trend related to our provision for loan losses.
I think the biggest driver for this is this line of provisions that we have, how much we will have to make in the second semester. But we don’t see big changes in the scenario related to the economy.
We expect the economy to be in the better shape by the end of the year and next year, so we don’t see unemployment growing. So, this scenario that we are seeing is a better scenario of course we had some uncertainties coming from – especially from Europe of course it is predictable what can happen in Europe and what if something bad happens there what we would be the real impact in the Brazilian economy.
But anyway what we can see we are confident that the results will be in a good line and probably with small growth when we compare to last year.
Rogerio Calderon
I can take the second one, Rogerio speaking Daniel. You referenced about the pace for expense growth, next year at the pace we are posting now is sustainable for next year.
We have a long-term view in terms of expenses growth. We drive the banking orders to keep expenses grow in line with inflation in order to have all that productivity benefits we have in order to fund the organic growth of the bank.
So, we do believe that we'll be able to keep the same pace of growth in terms of expenses for next year and we do reaffirm that we have conditions to reach the expectation we have in terms of efficiency ratio. Of course it’s important to remember that the level of top line growth is an additional challenge here, but the bank is going to the right direction in terms of gaining efficiency.
So, we're going to be if not at 41% we're going to be really close to 41% as we had established before.
Alfredo Egydio Setubal
This year 3.5 to 6.5 is not the line that’s kind of the pace you think normally next year, but longer term we would like to keep as inflation is likely to pull somewhere between that range and that you still see going forward that we’re getting close not exceeding the 41% gross income ratio by the end of next year.
Daniel Abut – Citi
Absolutely.
Alfredo Egydio Setubal
Thank you.
Operator
And our next question comes from Mr. Carlos Macedo with Goldman Sachs.
Carlos Macedo – Goldman Sachs
Good morning gentlemen. Thank you for the opportunity to ask questions.
I have a couple of questions that are a little bit of follow-up to Daniel’s question on efficiency. So, I'll go first with the more difficult part of the equation, which is margins.
Margins dropped again in the quarter. Of course, the base rate, SELIC going down as an impact in new margins.
The question is Rogerio, I think in the previous call, you mentioned that you still expect margins to increase like something like 12% this year versus last year, because of the hedges that you have against lower rates. So, that’s something – is that expectation something that you still have a 12% increase in net interest income in 2012, what if not given the results of the quarter.
I think now year-to-date you are going at 10. Should we expect that to improve going forward despite rates being lower?
And the second question was again regarding expenses and particularly headcount, the headcount dropped below 100,000 for the first time since the merger. Is there more cutting to be done?
Will you lower headcount further or will additional gains and efficiency from that perspective come, for instance, shifting back office away from Sao Paulo, which is a very expensive location or other things like that?
Rogerio Calderon
Okay. Carlos, we have reduced the expectation for credit growths.
We have now an estimate of credit growing around 10% when you include out of loans inside is 13% to 15% tax out of loans as you know. So, we believe the contraction terms of the spreads, it is still in a slow movement, but we do see some contraction in the origination, particularly because of the mix, particularly because we are driving the bank to a lower risk type of credit and because of that, we have an expectation that the top-line should grow below 10% is slightly below 10%.
Regarding your question on expenses, we had an important impact in the second quarter 2012 because of the selling of Orbitall. So, a portion of the headcount reduction is due to the selling of Orbitall as well as the cumulative figure includes some reductions of own partnerships etcetera that reduces our headcount Looking forward, we do have some perspectives of keeping – gaining efficiency taking into consideration, the opportunities we have in terms of normal turnover of the bank.
It’s very important to highlight this point, particularly at this point of the year, because what we are doing is actually capturing benefits out of the normal turnover of the bank. Every time, we can keep doing the same level of business, we doubt replacing people.
We take this advantage and we captured this benefit. We should keep doing the same.
Carlos Macedo – Goldman Sachs
So, just you will take out the tangible attrition in order not hire, but just hire selectively I guess to replace. Are there other things that you can do, if you could give us some color in order to achieve this very low inflation rate of pace of growth given that volumes will be growing faster than inflation?
What is in the pipeline to be done, so that we can at least have some comfort that you will be able to achieve this?
Rogerio Calderon
So, lots of initiatives you know the product efficiency, so we have lots of synergies capturing. We have a base effect remember that we have as you mentioned we have a lower headcount now.
So, we have some we have on one hand, we have the new labor agreement to come. But on the other hand, we have a lower level of headcount due to the normal attrition as you mentioned.
So, we do have in our budgets, all the conditions to post inside the range we just supplied to you and we are pretty confident that we are going to do so.
Carlos Macedo – Goldman Sachs
Including next year as you said around inflation next year, right?
Rogerio Calderon
Yes, long-term view is the expenses growing in line with the expenses, so, every inflation and every additional improvement or increasing in our activities should be funded by the gains we have inefficient.
Carlos Macedo – Goldman Sachs
Okay. Thank you, Rogerio.
Rogerio Calderon
Thank you, Carlos.
Operator
And now our next question comes from Mr. Saul Martinez with JPMorgan.
Saul Martinez – JPMorgan
Hi, good morning guys. I have to say I’m a little bit surprised by the response on the – to the cost question.
My understanding was that – is that the target was really to improve the efficiency ratio as opposed to targeting a certain number of, a certain percentage cost growth, i.e., inflation. Is something changed, because it seems if volumes pick up at some point and you do start to see a bit better top line, wouldn’t it be more – wouldn’t it be better to invest in your business and try to capture that growth even if cost growth is a little bit higher in environment, where revenue growth starts to pick up and hence you can – hence you can invest in your business and still grow your cost base a little bit as long as it’s growing below inflation, you get the operating leverage.
But, it seems to target inflation in an environment, but would perhaps the economic environment improves and top line improves, I don’t know, on the surface it seems to be a little bit short-sighted. Has something changed in terms of how you are thinking about the cost, I know it was 200 to 300 basis points the improvement that you are targeting as opposed to select percentage growth figure?
Rogerio Calderon
No, nothing changed, Saul, Rogerio speaking. Sorry, if I gave you a different perspective or a different conclusion, on first slide I just said.
Our long-term perspective is of course taking into consideration the normal business, but our preference is, of course, has been where things growing and all what we have behind the targets of the bank remain on efficient not in cost-cutting definitely.
Saul Martinez – JPMorgan
Okay. So, the inflation figure you gave assumes a certain growth in your top line in the coming years that’s similar to what you are growing today?
Rogerio Calderon
Yes, actually it’s expected that the country and all the environment should improve and we expect that next year – from next year, we could be growing in a higher level. And the measure I made in terms of inflation is a sort of an overall perspective we have in long-term, but what we are going to do is taking all the opportunity to keep growing.
Of course, it’s not a barrier to keep or to prevent from growing because of the targets on costs, what is driving the bank is definitely efficient.
Saul Martinez – JPMorgan
Okay. So, okay, fair enough.
Follow-up question on your expectations for financial margins, I think you addressed it, but your NIM from spreads into their transactions has been very resilient and we have seen a pretty sharp reduction in lending spreads according the Central Bank data. Can you talk a little bit more in detail about what your expectations are there, you mentioned you expect a little bit of a decline, but why in part of that mix, but why shouldn’t we see a broader decline that really compresses your margin if new origination is being done at much lower spreads?
Sérgio Ribeiro da Costa Werlang
Saul, this is Sérgio. I would comment a little bit on the Central Bank data then I’ll pass on to Rogerio.
Saul Martinez – JPMorgan
Great.
Sérgio Ribeiro da Costa Werlang
The Central Bank has two measures of spreads. One is not very well-known and its published in the financial stability report and its quite comparable to our net interest margins and it has a much smoother behavior than the other one, which is more let’s say famous and this monthly release.
The order spreads have been created. This order measure which as you mentioned has shown sharp reductions.
It has been created in 1999. Now, it turns out to the mix of products that the market now has is quite different from the mix of products, which is considered under this, under this basis of the Central Bank.
Let me give you two examples, just to illustrate the points. By then in 1999, real estate loans for individuals were actually at the quite low level in the economy.
So, it was decided not to be included. Another portfolio, which was not very large was some NDS loans that are given through the financial sector and which became quite important.
And these two, they have very, very small spreads and we translate, quite – they have quite smaller selections, what I mean is the following with this introduction. You should not use the big number that there is released monthly by the Central Bank in terms of fall spreads to imagine that this will have an immediate one-to-one impact on the balance sheet of the financial sector as a whole.
Saul Martinez – JPMorgan
Yeah, that’s helpful.
Rogerio Calderon
Saul, just complementing a little bit, Sergio has mentioned a lot in terms of the average of this spread particularly I just want to add if you look particularly on specific segments auto loans for instance what we have is a reduction, first of all what you'll see in the date from Central Bank is origination remember that we are more selective. So, we are originating lower level of risk in our portfolio, and as a consequence, our credit spreads are lower.
It does not mean that the final contribution is going to be lower, but it does mean that the next or the gross spread is lower at origination. It takes some more time because of the replacement of the portfolio as you know.
So, the NIM we show in our statement of income is actually a consequence of our stock and not out of our origination that is it does reduces, but reduces because of mix, because of some specific things liking auto loans, again, the commissions to the car dealers has been reduced. So, at the end of the day, it does not impact the profitability of the bank, but it represents a reduction on the spreads for the final customer.
I also want to remind you that we have made a very important shift in terms of the mix of our personal loans. We are now originating much more payroll discounted type of credit what drives this spread down but does not remove any profitability or much on the country.
Saul Martinez – JPMorgan
Okay. So, I guess if I look at the spread on credit transaction coming from like ‘12 and at the end of 2010 to like '11 10.9 now.
Is that the kind of compression that you see a gradual compression of about a percentage point a year? Would that be a reasonable assumption to kind of use for the rate of compression in your lending spreads?
Rogerio Calderon
Yeah, it’s a similar pace. Of course, when we have some affiliation in the credit origination, it could accelerate a little bit.
Saul Martinez – JPMorgan
Got it.
Rogerio Calderon
But we don’t think is going to be a major change. We do believe that it will take some years and this from our perspective will give us enough time to reduce the level of provisions we have in relation to the top line.
Remember that at now we have the worse picture because we are moving from higher risk to lower risk. But if you posting the consequence of that higher risk portfolio originated some time ago so with this time change we could be benefiting out of this change.
Saul Martinez – JPMorgan
Okay, got it. Thanks a lot.
Rogerio Calderon
Thank you.
Operator
(Operator Instructions) And our next question comes from Mr. Mario Pierry with Deutsche Bank.
Mario Pierry – Deutsche Bank
Hello everybody let me ask you two questions the first one on your NPL ratio, you did do a good job showing to us that the increasing NPLs in the individual segments was primarily related to the order portfolio in primarily related to the slow down in the loan book. But I was wondering if you can provide us any color or how your other portfolios are performing in particular credit cards and also how cost flow do you feel with the health of your corporate portfolio.
I know there you showed an improvements on your overall corporate portfolio, was some of your peers are having some problems. So, I was just wondering if you think that the problems that we're seeing the other banks is specific or do you think this could become a concern for the industry as a whole and then I'll ask you my second question later?
Rogerio Calderon
Hey Mario, Rogerio speaking, we have this NPL increasing over 90 days, this is a consequence of mainly two factors or almost everything coming from this one. We have some increase in the level contributed by personal loans, because of the acceleration we did in the past.
So, this is a mix change and we do have this increase of auto loans as you mentioned. I just remember that all of these movements are included in our expectation just released positively on our lower level of expenses further debts in the coming quarters.
When looking at the companies, we have a decrease of 20 basis points in the portfolio of companies. This decrease was observed in the both lines is more companies and corporates both at the same level.
I just, as you mentioned, that year, of course, I am not going to comment on this, but I just want to reaffirm that we look at SME with a different perspective. We name SMEs here at Itau Unibanco companies with revenues limited to R$150 million, what is different from some of the other competitors, but in those cases, we don’t have any negative movement both are improving at the same level 20 basis points.
Two additional data are important to analyze the future of this NPL, particularly own individuals. We have – we see two very positive indicators, the early delinquency is 15 to 19 days is actually in a lower level decelerating from the over 90.
This is a consequence of the decisions we took before, so more selective. Of course, we are originating better quality of creditors.
And as time goes on, we have a better performance of the delinquency in our portfolio. The other important indicator show improvement is the NPL creation.
So, the level of NPL creation has reduced from first quarter to the second quarter and we do believe that this new level reached is a stable level. So, we should see a more resilient level of NPL creation in the coming quarters at the lower level than what we showed in the first quarter?
Mario Pierry – Deutsche Bank
Okay, that’s clear. My second question then is related to the negotiations, your annual negotiations of the labor union, I read here in the local press that the union is asking for 10% increase in wages this year.
Is this a type of increase that you have baked into your forecast when you gave your expense growth of 3.5% to 6.5%?
Rogerio Calderon
Mario, yes this is all included in our expectation for efficient ratio and expenses. We do have some expectation that contemplated in our budgets.
Let’s wait and see
Mario Pierry – Deutsche Bank
Okay, so but like I would imagine that normally the union asks for big number and then you efficiently are able to reduce this more in line with inflation?
Rogerio Calderon
Yeah, in our advantage, we have a lower level than what they have initially asked for. And normally if you look at the history of our other negotiations, normally, the first initiative from the unions came in a higher level than the final agreements that we have at the end.
Mario Pierry – Deutsche Bank
Great, thank you.
Operator
And our next question comes from Mr. Marcelo Telles with Credit Suisse.
Marcelo Telles – Credit Suisse
Hi, hello everyone. I have a question regarding your fee guidance, you basically maintained the same 10%, 12% guidance that had provided at the end of last year, but I remember, when all these discussions about lower credit spreads started one of the arguments is that banks and yourselves would be able to increase fees in order to compensate for follow-up credit spreads and you maintained this 10% to 12%.
I want to know what is the reason for that and if you think that maybe next year we can expect some acceleration in fee growth? And then after that – and then my second question would be still on the margins, because looking if you look at the agreement you guys have the BMG and so on.
I believe that your mix it might change in a meaningful way right, very high growth in mortgages, high growth in payroll lending. And my assessment is even if you look in terms of your credit spread after provisions, I would imagine that those segments would still be, would still have lower risk adjusted spreads than other segments.
Therefore, we should expect a decline in your margins. Aside from the impact of lower rates, it is easier to predict, but how do you respond to that and why are you so confident that the spreads or the margin after provisions will not go down?
Thank you.
Rogerio Calderon
Marcello, we agree with your point on fees and that’s exactly why we are not reducing an expectation in terms of fee income despite we have a lower contribution from the auto loan segments and also Orbitall, that reduces our fees on this specific business. So, despite we have those reductions since the first moment we launched the guidance on fee income.
We are keeping what if you consider everything the same. It would imply actually an increasing expectation in fees and we are keeping the same despite of these reductions in terms of growth.
Remember that, auto loans represents a very important contribution in terms of fee income and also the investment bank had a lower level of activities than what we had forecasted at the beginning when we launched the guidance. I think if you want everything in a more negative or lower dynamics in terms of growth beginning from the growth of the Brazilian economy, so all included just by keeping the fee income perspective, we think we have a positive re-approach of this perspective.
In terms of margins, as you mentioned we are moving, we are changing the mix of the portfolio towards lower risk and the margins, the gross margin, the gross or the margin before the bad debt should be impacted over time. It takes sometime as I mentioned in the prior question, but this trend is what we also believe it’s going to happen.
When looking at the margin after bad debt, then it’s different, because the level of the bad debt that we have now is pretty high. So, it tends to reduce as a proportion of the margin, so second part of this price.
So, we don’t think that we are going to deep pressure down. We don’t share the view of this major compression in the margin after bad debt.
Marcelo Telles – Credit Suisse
Thank you.
Operator
And our next question comes from Mr. Marcelo Henriques with BTG Pactual.
Marcelo Henriques – BTG Pactual
Hello guys. I have two questions.
One, I want to stress a little bit the discussion on the NII and margins and trying to separate 2012 and 2013, looking at your numbers at least from our perspective, when you look at the whole NII even it’s improved with the market, it seems very reasonable to assume that you’re going to have very difficulties in increasing this number, in absolute terms until the end of the year. If you assume that as you always say that margins from the market should go should be between R$800 million to R$900 million.
And the fact that on the client side, the interest rates will be lower on average in the next two quarters if you compare to the second quarter 2012? And then you continue have a very low loan growth, so it seems unlike that you can improve this number.
So, on 2012 statistically, I’m just wondering how cost that you are of reaching a number which is pretty much around 10%. And moving forward to 2013 and it’s difficult to see, but maybe have a pickup in volumes as it is, growth is still very low.
But on the margin side that’s my question on the margin side and I understand from your comments that it’s very hard to compare the Central Bank data with the numbers that other banks report. But the reduction was very pronounced and even if you’re going feel like half of what happened in the Central Bank, what should we expect from margin reduction in 2013 would from a client perspective with 40 bps, 50 bps decline would be its something that should be reasonable?
Rogerio Calderon
Okay, Marcelo looking firstly to the coming quarters as you mentioned. We just released our expectation for the current growth in comparison auto loans it means that our final portfolio growth at the end of the year is going to reach around 10%.
We believe that’s the level of contraction that we’re seeing in the margins are going to be moving at the same pace in the coming quarter. So, we do believe that the NII growth should be lower than 10% close to 10%.
When mentioning our margins with the markets that includes the contribution from trading, but this also includes the assets and liability management of the bank. We believe that we are going to be positing the same perspective that you just mentioned and that we normally announced to the markets were around R$900 million every quarter.
So, we believe that at the end of the year we are going to be close to 10% but lower than 10% in terms of NII. When looking at the next periods 2013 onwards we believe that we’re going to have a contribution from the bank.
So, despite of this reduction in the margins we do believe we are going to obtain the benefits of this change because mainly when you look at the data from the Central Bank what we have is the change of the. So, we know that the spread measured by Central Bank is actually now based on the fact of portfolio that is not what we have majorly in our portfolio is not as a consequence is doubtfully impacting these spreads and the losses on the credit.
So, we believe that we are going to post better figures in terms of the amounts of losses on credit. This is pretty important when you forecast our expectation for margins.
Marcelo Henriques – BTG Pactual
Would you agree that it is easier or let’s say less difficult to keep your margins more resilient in a sense that you are not growing you are actually decelerating your loan book and so you can move towards 2013 and if you want to reaccelerate that your margins should compress much further than what happened this year. And also mentioned that the interest rates on average in 2013 should be much lower than this year is actually that’s what the yield curve is saying.
So, I'm just wondering I know you’re not providing guidance for 2013, but what should I mean should we expect a much larger compression of in 2013 than what you’re seeing now?
Rogerio Calderon
It’s important that you made a good point. Volume should increase remember that we are – these movements on the spreads moving the credit growth towards lower risk is actually what we have decided to do, what we have announced a year ago, so we're moving on that direction.
We just announced this BTG agreement the new bank on the payroll BMG agreements that the new origination on this payroll debit loans. So, this is all related to increasing credit volumes of the bank.
So, it’s probably another benefits on our margins as well.
Marcelo Henriques – BTG Pactual
Okay.
Rogerio Calderon
And SELIC, you remember that SELIC is reducing this year, but the SELIC expect is for next year, the difference is some guys in the markets are actually pointing SELIC up.
Marcelo Henriques – BTG Pactual
Okay. And so just one last question on loan loss provision.
If I’m looking it right when you report by segment and if I look the numbers specifically on Itau EBITDA, your loan loss provision, the expense is right increased from – increased almost three times quarter-over-quarter, I mean from R$79 million or R$80 million something like this to R$230 million or R$220 million. And one of your competitors actually two of them is saying that this quarter is specifically they have to increase provisioning on the large corporate side.
So, I am just wondering if this is related as well because I know that only Itau based specifically that’s where you handed the large corporate. So, I am just wondering if this is related and if you see this continue?
Rogerio Calderon
Marcelo, this is all contained in our expectation of the debt expense for the rest of the year. The movements that you saw in the second quarter, 40% is related to ForEx impact and all the other movements are related to the mix of the portfolio maturity not special case, not specifically anything.
The only deal actually improved 20 basis points for large corporate and this is all included in the bad debt expectation.
Marcelo Henriques – BTG Pactual
Okay, got it. Thank you.
Thank you very much.
Operator
And our next question comes from Mr. Victor Galliano with HSBC.
Victor Galliano – HSBC
Thank you. Yeah just a couple of questions here one on the NPLs and looking in particular the vehicle and what you put there on slide on page 12, which is very interesting.
So, are you saying that 2011 quarterly average of provision of R$607 million, is that kind of a normalized level that you would expect to be kind of heading back to or is there any effective contamination that I say in Q3 or Q4 in that provision number. In other words, could this actually could a normalized provision for vehicle loan portfolio be lower than the R$607 million, that’s my first question.
The second one is what – do you disclose what percentage of your total loan portfolio is fixed rate and of this, what percentage would mature in the next 180 days? Those are my questions.
Rogerio Calderon
I am trying to pick the figures here to address the second question. Regarding your first question actually the propositional level of bad debt expenses back to this level we announced here is a good proxy.
But as the portfolio is now at a lower level, the nominal amount should be than lower than R$600 million.
Victor Galliano – HSBC
Right.
Rogerio Calderon
And also currency is actually mentioning here also there is a mix change in terms of the quality of origination. So, we are originating the credit now at a lower risk.
If you look at your left hand side, you will see the terms are shorter and the level of down payments are higher, so the quality of the portfolio is actually better so, it should improve as well as a consequence of the mix. Fixed grades is around 80%, and I think maturity a good guess we would not verifying refine a calculation here is around two years.
Victor Galliano – HSBC
Two years is the average and 80% of your portfolio is fixed rate.
Rogerio Calderon
Yes.
Victor Galliano – HSBC
80% wow.
Rogerio Calderon
So just remember that’s Itau fixed it rates, it has a short duration.
Victor Galliano – HSBC
Yeah, sure.
Rogerio Calderon
So it’s actually some lines despite of the fixed rate they have a behavior that is similar to a floating rates behavior.
Victor Galliano – HSBC
Right so, really fixed rates it’s – would it be half of that, would it be 40% do you think in terms of that would really have a sort of average maturity of two years?
Rogerio Calderon
I don’t have this figure here we are going to study if we can supply this information to the markets in the future.
Victor Galliano – HSBC
Fair enough. Thank you, Rogerio.
Rogerio Calderon
It’s a good quality of information. Thank you for the suggestion.
We are keeping note of this Victor.
Victor Galliano – HSBC
Okay, thanks Victor.
Rogerio Calderon
Thank you very much.
Operator
And our next question comes from Mr. (indiscernible) with Morningstar Equity Research.
Unidentified Analyst
Hi good morning guys and thank you very much for taking my call. But I have a question about you – I really appreciate your information on vehicle loans.
I was wondering if you can provide some more similar color on your mortgages, and in particular, with the credit quality of your newest mortgages, your latest vintages, and then a follow-up on that, also on your mortgages what’s the average rate of the new mortgages that you are bringing into pipeline?
Rogerio Calderon
The level of growth maybe Mac, I could start by saying that the mortgage business in Brazil is a low almost zero risk, because the loan to fund the value of the collateral is actually pretty high, the average loan to value is around 65%, 70%. So, the value of the collateral is pretty high.
The interest rate paid is the lowest one in the country, the level of over 90 days is close to zero to give you a good figure on this. And we keep originating as a very, very high level and we another good example is that we offer terms that to 20, 25 years the average originations around 15 years much lower than what we offer.
And at the end of the day, we have about eight years in terms of down payment, because we have lots of prepayments in this portfolio as well.
Unidentified Analyst
Okay. So, Just to recap you said loan to value at between 65% and 70% right and your NPLs of 90 plus are close to zero, is that what I heard?
Rogerio Calderon
Close to 65 and close to zero as you mentioned.
Unidentified Analyst
Yeah, in the NPLs, okay, okay that is very useful.
Rogerio Calderon
It’s – it’s I think it’s also interesting to highlights to you Mac that we have constant amortizations came in Brazil, what gives benefit to banks as well, because the amortization keeps earlier than what normally you see in other parts of the world.
Unidentified Analyst
Okay, I understood. That’s very useful.
Thank you very much gentlemen.
Rogerio Calderon
Thank you.
Operator
This concludes today’s question and answer session. Mr.
Setubal at this time you may proceed with your closing statements.
Alfredo Egydio Setubal – Executive Vice President and Investor Relations Officer
Thank you all for participating with us at this conference call. We continue to be very comfortable with the direction and policy and strategy that we have.
Thank you and waiting for you for the next conference call.
Operator
That does conclude our Itau Unibanco Holding earnings conference for today. Thank you very much for your participation and have a good day.