Oct 24, 2012
Executives
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 Rogério Calderón - Corporate Controller and Head of Investor Relations.
Analysts
Mario Pierry - Deutsche Bank Carlos Macedo - Goldman Sachs Philip Finch - UBS Saul Martinez - J.P. Morgan Victor Galliano - HSBC Marcelo Telles - Credit Suisse Boris Molina - Santander Fabio Zagatti - Barclays Eduardo Nishio - Brasil Plural Jorg Friedemann - Bank of America
Operator
Ladies and gentlemen, thank you for standing by. We inform you that this conference call aims exclusively to discuss the Earnings Results of Itaú Unibanco Holding regarding the Third Quarter of 2012.
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.Itaú-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 Rogério Calderón, Corporate Controller and Head of Investor Relations. First, Mr.
Alfredo Setubal will comment on the third quarter 2012 results. Afterwards, management will be available for a question-and-answer session.
It’s now my pleasure to turn the call over to Mr. Setubal.
Alfredo Egydio Setubal
Good morning for those who are in the U.S. Good afternoon for those who are in Europe.
We have a presentation here for the third quarter. It’s a pleasure to be back.
For those who are following through the slides, we are starting with slide number two, the highlights for the results. The first one is the result itself.
We achieved a recurring net income of R$3.4 billion in the quarter. This means annualized ROE of 17.7 and also decreased when we compare to the second quarter of 2012 of 4.8%.
When you look -- when we look for the nine months period of 2012, the recurring result reached R$10.5 billion with an annualized ROE of 19% and a decrease compared to last year of 3.2%. The second highlight is the loan portfolio growth.
Here, we are showing the numbers with all the endorsements, sureties and private securities that we held in our treasury portfolio. This total number achieved R$437 billion with the growth of 1.1%, when we compare to June of this year.
We are going to go much more in details in the coming slides when we talk about the credit. The third highlight is our financial margins with clients.
The total was R$12 billion in the third quarter. It’s a 3% reduction when we compare to the second quarter of this year.
The net interest margin with clients reached 10.6% in this quarter, with a decrease of 30 basis points, when we compare to the second quarter essentially, because of the reduction on the SELIC rates during this period and also because of the higher growth in the loan portfolio of lower risk and spread clients in this period. And the strategy that we are following of reducing the credit risk of the credit portfolio of the bank in the coming quarters.
The spread reduced -- decreased 60 basis points, achieving 12.8% and the risk adjusted credit spread or net spread what we call is net spread shows 50 basis point decrease achieving 7%. The fourth highlight is banking fees and the results from the insurance business and pension plans and capitalization.
The banking fee and insurance, the revenues achieved are R$5.7 billion in this quarter. The first nine months of this year, this revenue increased 8.7% when we compare to achieving R$17.2 billion in these 2012 nine months.
The fifth highlight is the non-performing loan ratio and loan loss. Expenses achieved net of the credits recovery in the quarter total of R$4.8 billion, with a decrease of 1.7% to the previous quarter.
The 90-day NPL achieved 5.1% with a decrease of 10 basis points and what is good is that 15-19 day NPL ratio that reduce 30 basis points that maybe showing, indicating a downward trend in these ratio for the coming quarter, of course. For the next two quarters, we expect loan losses expenses to achieve something between R$5.5 billion and R$6 billion.
Number six is the non-interest expenses, we show a decrease of 3.1%, a nominal decrease in this quarter when we compare to the previous quarter and when we compare 12 months, September-over-September, we still show increase of 2.7%, which is much below the inflationary levels. The seven highlight is the efficiency ratio has achieved 45.5%, increased when we compare to the last quarter, mainly because we are not increasing the revenues in the pace that we were planning because of the strategy in reducing the credit, the risk of the credit portfolio.
When we analyze 12 months, we see a better number 45% and a decrease of 240 basis points in the ratio when we compare to last year. Unrealized gains is the last highlight.
We showed R$6.9 billion with an increase of 19.9% in the quarter and also we have unrealized gains in our available for sale portfolio securities portfolio of R$2.4 billion. So going in more details about all these highlights, this is the first glance that we showed.
We go into page four, we see our results. So going back to the margin with clients, we saw the decrease of 3% in the quarter mainly because we are reducing our credit portfolio related to cars financing and we continue to be very conservative in the small companies.
So these also reduce our margin with clients with lower volumes as we continue to this space of reducing the risk of our portfolio. Of course, we have also -- the competition is more active and this means less spread in some of our credit lines and also because we are reducing the risk of the credit portfolio.
Of course, we operating it with lower spreads with better quality client. So all this together represented this reduction in this quarter of 3%.
When we see this -- the line of financial margin with the market, we see also reduction in this quarter, important reduction of almost 25%. But just to remember, in the last conference call when we showed the second quarter, we said that this -- the number of the second quarter was higher than the average of the quarters.
And this third quarter is much more in line what we can expected in terms of performance for our operations in the market through our treasury in the past. We see also that the result from insurance business, increase of 2.1% in the quarter and a good number of almost 16% when we analyzed 12 months.
In terms of loan losses, I think the expenses for the loan losses, we stay in the same level of the second quarter around R$6 billion and also the same level of recoveries of credit written off, almost in the same level of the second quarter. So, we continue that -- we continue to be very confident that the expenses for loan losses will continue to reduce.
And as I've said before, we expected this coming quarter, the first quarter to be something between R$5.5 billion and R$6 billion in terms of expense. In terms of non-interest expenses, this was a good number.
We continue to be very focused on controlling expenses. And we were able to show a R$3.1 reduction, nominal reduction in the quarter each with R$145 million, that was the impact that we had in the quarter, because of the annual negotiation with the union in terms of salaries negotiation.
So R$3.1 reduction was a very good number. And when we analyzed 12 months, we see also R$2.7 that's very good because inflation level is around 5.2%.
So, we continue to be delivering good numbers in terms of expense. And these together, we show these R$3.4 billion in terms of recurring results with a decrease of almost 5% in the quarter and 3.2% when we compare the whole year 2012 with the nine months of 2012 and nine months of 2011.
On page five, the highlight we can see here in more visible rate. Our revenues growing 12 months for 8.2%, loan losses provision, we achieved almost R$18 billion so this continue to be a very high number that we are working hard to reduce.
Non-interest expense is almost R$25 billion, this increase of only 2.7% and the recurring net income with the decrease of 3.2% are R$10.5 billion by the end of September. On page six, net interest margin, we can see here the reduction with the margin with clients of 70 basis points, when we compare nine months with last year and 30 basis points when we compare to the second quarter of this year.
Banking fees and the results from the insurance business increase of 8.7% in reserve fees for this effect. So the recurring ROE of 17.7 is among the -- in the quarter, among the lowest of the bank, in the history of the bank with the recent years but we show 19% when we analyze the results for the nine months of this year.
On page seven, we can see the financial margin, the gross and the net and the SELIC rates of CI showing that we have been following the reduction of the gross spreads achieved 12.8 in this quarter when we compared to 13.4 for the second quarter of this year. As I said, the main reasons here is the lower pace of our growth in terms of credit portfolio.
So we are reducing substantially the car financing portfolio. So we are losing market share and also being much more selective in terms of car financing and also because of this reduction of SELIC rate and this new mix of credit with better times, of course, we are operating in a lower spread environment to achieve better quality clients in this new mix of credit portfolio that we want to have in the coming quarter.
So these, of course, impact of the financial margin would decline and the trends both for the gross credit spreads and the net credit spread within the net credit spread reduce from 7.57 and also in the same trends that we see in demand. On page eight, we see that we finished, we’re paying R$160 billion in terms of total assets with a growth of 8%, stockholders’ equity of almost R$79 billion, a growth of 4.4%; the loan portfolio with the endorsements and sureties but not with the private securities, up 417 here is a low growth because of this reduction and a strategy that we adopted in the credit portfolio.
And funding client money total including the assets under management of R$965 billion. So going in more details in the credit portfolio on page nine, we can see here the reduction on the card financing.
They grew -- we were at R$60 billion level by the end of the year. And we finished this portfolio with R$ 44 billion by the end of September.
And we will continue to reduce in the coming quarters this portfolio. Probably, this year, we will finish something between 50 and 52 -- with R$52 billion.
And probably, we are going to see a reduction yet in the first quarter of 2013. So this, of course, will impact the growth of our total portfolio, even though we are growing in our credit line.
But the impact of the card finance in terms of growth of the portfolio will continue at least in the next two coming quarters. Mortgage continues to be a good business and showing the good growth, 6% in the quarter, 32% in 12 months.
In terms of company, I think we continue to reduce and to be much less activity of the very small inflow company. That’s the reason our credit portfolio in these segment is not growing and decreased in this quarter 2.4% and the growth was only 1.1%.
We continue to grow our middle company portfolio but when we analyzed very small inflow we are much more conservative in reducing the portfolio. And this is compensate by a much bigger growth in terms of corporate, large companies that show a growth of 3.7% in this quarter and 16.4 in the 12 months.
Going to page 10, we can see the NPL ratios over 90 days. We had a small reduction in this quarter from 5.2 to 5.1.
We see reduction in the company's portfolio reducing from 3.5 to 3.3. And increase in the portfolio in the ratio of the individual’s portfolio and this increase one of the reason for that is that we achieve making provisions for the current financing portfolio and we are reducing the portfolio.
So the NPL ratio in this portfolio is increasing even though the quality of our view contracts are much better as I will show in the next slide than in the text. So this is one of the reason.
When we analyze the NPL from 15 to 90 days, we continue to see the third quarter in a row with much better numbers even for companies and for individuals. The average of the bank reduce from 4.8 to 4.2.
So this give us confidence that we are in the correct rate to reduce the risk of our credit portfolio and reduce the level of expenses for loan losses. The total allowance for loan losses is R$27.7 billion by the end of September.
On page 11, we can see the 90 days NPL ratio by vintage, when we compare four and six months after they originate. Let’s focus on the four months that will show the NPL over 90 days.
We can see that by the end of 2009, our numbers and the market results Itaú Unibanco was almost the same 0.47%, 0.48%. We had our worst performance when we compared to the market almost all this period to the first quarter of 2011.
And when we took some measures to reduce the risk of this portfolio. And we today are in a much better position because we -- at this stage, these divisions when we compare to the market and today our portfolio is showing much better ratios than the portfolio when we compare to the market.
So, I think also these show the trend that we are in the correct trend to reduce the risk of the portfolio and to operate with clients that show the better quality portfolio. On page 12, we can see that in 2010 we operated with three months in this portfolio and in the third quarter we operating 42 months in the portfolio.
We are not anymore financing 100 of the vehicle. So the client has to put 20, 30% to get the financing for their rest of the current cost.
And this also brings better quality and better clients to our portfolio. In the third quarter these credit portfolio of vehicles we made R$171 million in terms of loan losses provisions and we expected a reduction in this coming quarter to something around R$800 million in level of business.
On page 13, show here all the funding and assets under management and working capital of the bank for once that we achieved R$1.2 trillion that is a very comfortable provision in terms of deposits and client money. On page 14, we continue to be very confident in terms of the disposal of very good in terms of funding level for the growth portfolio especially in this month that we are growing in a lower base because of the strategy of reducing the risk of our portfolio.
On page 15, you can see more details of our service fees. We can see that the main reason when we are not achieving the guidance in terms of growth of tariffs and service fee for this year is located especially in the fees that we collect from the lower operation and guarantee that we provided to clients that show a reduction of almost 20% when you compare 12 months and 6.5% in this quarter.
So I think that’s the main reason when we analyze for the line's asset management, current accounting, the accounting -- checking account service is good in terms of volume. They are not suffering any kind of pressure here.
And also another point of pension when we compare is that results of Itaú processing services during this year and this impact our service fees and when we -- you compare to last year. So I think in general, we’re not achieving the guidance, especially because we are reducing our credit portfolio that also provide less credit in this -- service related to the loan.
When we go to page 16, we see non-interest expenses and efficiency ratio. Here is a very good number, a nominal reduction of 3.1% in the quarter when we compare to the second quarter and only increase of 2.7 when we compared to last year.
So we continue to be very focused in this strategy of reducing the cost of the bank to compensate the reductions on spread due to the much higher level of competition in the market and also reduction in our spread related to the strategy of reducing the risk of our credit portfolio that brings different mix of products and also a different clients -- much better client in terms of quality of credit that also operate this lower spread. Here it is important to say that we are controlling much more the cost of the bank in the areas that don't put any risk in terms of quality of our services and also in terms of technology.
We continue to invest in new branches. We continue to invest a lot in terms of technology, in terms of quality of our services.
We are not cutting cost in these areas. On page 17, we can see the distribution of our recurrent result, our company composition in the managerial way proceed.
We can see in the third quarter that the commercial bank was responsible for 30% of the results, Itaú BBA 16%, insurance 13%, consumer credit 9% and activities with the market and the access of capital of 32%. In terms of BIS ratio, page 18, we are very comfortable at 17.5 and, of course, at this movement in this quarter that we are growing less, the credit portfolio is less funding as our gross net capital.
On page 19, our daily trading continues to be good, $R742 million in line with the other classes and giving opportunities to all kind of investors to buy and sell our shares. The last three slides, an important message.
The first one on page 20 is Redecard that we were successful in the tender offer that we made to buyback -- to buy the shares of Redecard and CVM also, as I lifted the company last week. So, we are in the process of making all the necessary corporate transactions to maximize the value of the company that we intend to do it, during this third quarter to the end of the year.
On page 21, as I’ve said we announced a huge amount of investments in technology. In the last two weeks -- two weeks ago, R$10.4 billion between 2012 to 2015.
This means R$2.7 billion in data processing systems from third parties, R$0.8 billion in software acquisition and R$4.6 billion, internally developed softwares. And also we started this year, the construction of a new data center for the bank, that process will be completed by the end of next year.
So in 2015, we will raise these funds to use this new data center. Hence this infrastructure, we can grow in the coming years.
The bank needs more capacity to audit transactions in terms of technology and profit. So it’s a very important investment.
Looking at 2012, on the next fiscal. On page 22, we announced that yesterday when we released the third quarter results that we sold to Experian, our shares in the company that I have earned.
And these 16.34% that we have in the company, that was sold and the result before taxes that will appear in our non-recurring results of the fourth quarter is R$1.5 billion. So with this, we finished our presentation and we open out here that we are in the conference call to answer the questions that you probably have.
Operator
(Operator Instructions) Our first question comes from Mr. Mario Pierry with Deutsche Bank.
Mario Pierry - Deutsche Bank
Good morning, everybody and thank you for taking my question. Let me ask you two questions, Alfredo.
The first one is related to your provision charges. As you’ve made your case throughout the presentation that your spreads have been under pressure from a changing the loan mix, but provisions have not yet reflected this change in the loan mix.
But when you gave your guidance for provision charges in the fourth quarter and first quarter -- fourth quarter this year and first quarter next year, you are pretty much guiding for provision charges to remain relatively flat. So I was wondering, why do you think provisions should be flat in first quarter next year, especially also as you’ve showed that some NPL ratios are already improving?
And then my second question is related to your tax rate, your effective tax rate next year. As you show the acquisition of Redecard created goodwill of about R$10 billion.
So, I was wondering if you expect any improvements in your effective tax rate next year.
Alfredo Egydio Setubal
Mario, it’s Alfredo. Relating to your first question of the mix and the provisions, we expected that the coming quarter to show a reduction in the nominal level of our provisions then we show in the last two quarters as it was around 5.9.
We are seeing something between 5.5 and 6, is probably conservative, I agree. We expected a lower number, when we compared to the two previous quarters.
In the next year, probably we are going to increase our portfolio -- our credit portfolio again in a more normal base when we compare to the market. So we will also need more provisions in these -- related to this growth of the portfolio.
And also the mix -- I think that the mix will take us with a lower level of provisions because we are in the lower -- we are changing the mix of the credit portfolio, especially cards. As I showed some slides, are also reducing the very small portfolio of companies.
That also will bring lower provision, but also we are operating with lower strength. So the reduction in the margin is also related to the mix, and that I think today represents most of the reduction in the margin is the mix and of course part is the stress because the competition is much more active.
Everybody wants to make more revenue. So the competition of course is much higher.
So we expect a nominal reduction in the coming quarter in terms of loan losses provisions and also in 2014, even growing the portfolio we expect good reduction in the loan losses provisions.
Mario Pierry - Deutsche Bank
Thank you, Alfredo. But just to get a better idea, when you say a good reduction in provisions, what does that mean?
Does it mean double-digit reduction or is it single digits?
Rogério Calderón
Mario, it’s Rogério speaking. We actually don’t have such level of precision to give you right now.
But we expect the level of reduction to be actually bigger than the one we are presenting regarding the first quarter, because you should remember that in the first quarter we have seasonality against us. And then it should improve even better in the following quarters.
If you also consider that some level of recoveries should increase, it’s a good sign of sizeable improvements. We don’t have the figure to give you, but we are really positive on this.
Mario Pierry - Deutsche Bank
Okay.
Rogério Calderón
Now let me address the second question. You mentioned goodwill, we are finishing our analysis, that goodwill manner is under analysis.
We are, we need to finish the presence in order to separate what is tangible from non-tangible, et cetera. But it may cause a positive impact on our results next year.
Yeah, it may cause.
Mario Pierry - Deutsche Bank
Okay. And just to understand also, once you separate what is tangible and what is intangible, is there a guideline on how many years you have to almost access goodwill?
Rogério Calderón
We are still finishing this, but it’s probably around six, eight years or close to that but not -- we have not finished it yet.
Mario Pierry - Deutsche Bank
Sure. When do you expect in order to have more information on this?
Rogério Calderón
Probably next call, we should have this information to give to all of you.
Mario Pierry - Deutsche Bank
Okay. Great.
Thank you.
Rogério Calderón
Thank you.
Operator
Excuse me. Our next question comes from Mr.
Carlos Macedo with Goldman Sachs.
Carlos Macedo - Goldman Sachs
Good morning, Rogerio. Good morning Alfredo.
I actually have a couple of questions. The first one is related to your expenses.
You had a very impressive performance in the expense line this quarter with reduction in admin expenses and flat personnel expenses. I realize that you still have severance expenses.
They are inside that personnel expense. I was just wondering if, when do we rebase?
In other words, when do we reach a period at where expenses start growing again and inflation are maybe at slightly higher level? Do we still have more efficiencies to come from this expense number?
And the second question is related to your tax line. We did see a fairly low effective tax rate, of course there might have been some changes in accounting in the quarter.
I was just wondering, what should we expect in terms of the effective tax? Are there more tax credits that you can take advantage of, over the following periods or should we expect the tax line to increase?
Alfredo Egydio Setubal
Okay. Carlos, I will answer the first question and Rogerio will answer the second one.
I think, we continued to be very focused on the reduction at the expenses of the bank. We expect the next year, also the growth of the expenses to be below the inflation levels.
We are working hard to be the lowest as possible in terms of expenses. We continue to get some synergies and changing process, and putting new system in place, and all this together are working very well in terms of reducing process and costs for the bank.
As I said before, we are not reducing expenses, putting quality and important investment in risk. We have a very strong brand and a very good level of clients, and we don’t want to put our franchise in risk when we're saying that we are controlling the expense.
So we continued to be very focused on clients and quality of relationship. We're making all this investments in terms of technology that we announced it.
And we continue to see opportunities as we seek, and we continue to see the opportunities in terms of process, in terms of getting more efficiency. So next year, we will continue to be very focused on this level of growing below inflation.
I think, we have some synergies to capture yet. And probably in 2014, we're going to see the same trends.
Let's see the evolution of next year, but our expectation is that in the coming two years, we’ll be very -- continues to be very tough in terms of controlling the expenses not only personal, but other expenses like trade biz, like use of telephone. Everything is under analyzes in this tune and we'll continue.
We continue to renegotiate with our providers, and we continue to be very focused in these equation. We see a scenario of lower spreads, with economy not performing so good like in some years in the past.
So we have to compensate all these with a much better, and a much efficiency bank to keep the level of returns that we expected. I think this quarter, in our view; the ROE was a point of, out of the line.
I think we expected to increase ROE next year to more stable levels than we showed in the last 12 months. That's the way we are working in terms of expenses and also in the strategy of reducing the risk of our credit portfolio.
Rogério Calderón
Addressing the second question, Carlos, our current normal level of effective tax rate is 27%, 28%. Of course, we had some volatility in this figure to recognize eventual increasing tax spreads here or there, or because of the different compositions between the different tax rates we have in different entities.
Remember that we have some entities that are on 34%, much are on 40%. And so when you blend the mix, there are some volatility on this.
We don't expect movements on these effective tax rates up to the third quarter next year. We still have the social contribution credits to fulfill our effective tax rates up to the third quarter next year.
We’ll have stronger third quarter next year. Our effective tax rate should go up to around 31%, 32%.
Remember that we are giving all this informations ex any eventual benefit from the Redecard goodwill, as I addressed to Mario in the previous question.
Carlos Macedo - Goldman Sachs
Okay. Perfect.
So you still have tax credits that will last more or less one year?
Alfredo Setubal
Three quarters next year, yeah. As from the third quarter next year, we will have this increasing impact ex Redecard benefits.
Carlos Macedo - Goldman Sachs
Okay. Perfect.
Thank you, Rogério. Thank you, Alfredo.
Operator
Excuse me. Our next question comes from Mr.
Philip Finch with UBS.
Philip Finch - UBS
Good morning, gentlemen. Thank you for hosting the call and offering the opportunity to ask some questions.
I have two questions, please. The first is regarding your loan growth expectations going forward.
We’ve clearly seen the rate of growth slowdown in previous quarters. The question is, when could we start to see this start to reaccelerate and bearing in mind that you’ve indicated earlier in the presentation that you’re planning to continue to shrink your vehicle portfolio?
And the second question is really to do with the ROE performance of your bank, which came in the third quarter at a low level. What is a level that you think that the bank should be able to achieve?
Is this a one-off, what we saw in the third quarter or are we likely to see structurally lower ROEs going forward? Thank you.
Alfredo Egydio Setubal
This is Alfredo. Regarding to the low end growth expectation, so we are -- if you take off the car financing and the reduction is more and there is more companies.
The pace of the other lines are good, are around 14%-15%, when we take off these two lines. So the issue is these two credit lines.
As I said, we will continue to reduce, and we expect it by the end of this year, the car financing portfolio to finish something between R$50 billion and R$52 billion. In the first quarter of next year, probably the portfolio will reduce R$2 billion more or R$3 billion more I think.
So when we consider the car financing, we see probably two quarters of reduction of these portfolios. So, we have around R$7 billion of reduction of our total portfolio coming from this line.
And also you probably see one quarter more of the reduction on the credit portfolio related to a small and very small comp. So answering your question, probably, by the second quarter of 2013 our credit portfolio will start to grow in a base of the market or depending on the market -- the economy conditions and the scenario that we foresee.
At that moment, it would be even higher than the market. But I see second quarter and ahead, as the time that the portfolio will grow at least in the same level of the market.
In terms of ROE, it's difficult to measure. We don’t like to give numbers in this arena, but we expected to have ROEs, the normalized ROEs in terms of our result due to all these efforts that we are doing in terms of reducing the risk of the portfolio, that of course will give us a positive impact in terms of the level of provisions, loan losses provision that we will need to make in the coming quarters.
All these efforts in terms of reducing, deducting the expenses of the bank, no interest expenses of these compound. We see, let’s say something little bit higher of the average that we have in the first nine months of this quarter is whether we target in terms of ROE for the coming years.
Philip Finch - UBS
That’s very helpful. Thank you very much.
Operator
Our next question comes from Mr. Saul Martinez with J.P.
Morgan.
Saul Martinez - J.P. Morgan
Hi. Thanks for taking my call.
I know you’re going to give guidance on -- official guidance on 2013 after the fourth quarter results. But can you just comment a little bit about what your initial views are for net interest margins and NII growth next year given all the trends that you are talking about, still couple more quarters of decline in some of your higher margin lending segments followed by increases.
Can you guys give us a sense for how you’re seeing NII evolve next year? And then, secondly, kind of a related question I suppose.
Just on your overdraft rate, it seems like the public banks have really reduced rates aggressively, private banks have not. Do you see any pressure from reduction in your overdrafts?
Obviously, it’s a small portfolio, but the yields are extremely high. So reductions do have some impact on your NII evolution.
Just curious to see whether you have any thoughts on that.
Rogério Calderón
Saul, it’s Rogério. We expect the credit growth to be -- next year to be more accelerated than this year.
So you should expect and maybe I should start saying that we have not finished at all, the exercise for the budget for next year. But we have and most of the players in the markets and agents, and our analysts are pointing to around 15% credit growth for next year.
If we consider credit growth at this level, probably, our net interest income before the debt should be growing low-single digits, positive but low-single digits. And definitely considering the adjustments that we are doing in our mix of the portfolio, we expect an additional growth leveraged by lower levels bad debt provisions.
So looking at the net interest income adjusted by bad debt provision, then this growth should be much or bigger than what I am saying in high single digits or even low double digits. But when we’re looking before but that's probably low single digits, since we are adjusting the mix of the portfolio.
Saul Martinez - J.P. Morgan
Okay. Fair enough.
And on overdraft?
Rogério Calderón
Could you repeat, we didn't…
Saul Martinez - J.P. Morgan
Yeah. I’m just curious if you have any thoughts, obviously it seems like overdraft rates or [checkered special] rates on from public banks have been reduced quite a bit.
Private banks have been slower to reduce, but do you see any pressure on your margin coming from reductions in rate on [checkered special].
Rogério Calderón
It's always, Alfredo.
Alfredo Egydio Setubal
I think in terms of these overdraft tariffs, I think it is important to say that this is a very convenient product for the client. It is a product they can, should use day to day, five days but is not a credit that the client should remain along period.
So we have mechanism to when we see that the client is using in a wrong way this credit line, we provide an offer, the clients different product more adjusted to the needs that he has. So I think the difference between the banks, looking from this perspective of convenience for the clients is not very important because the clients should use these for very few days and not for a long period of time.
But I would like to use your question to make some comments on tariffs in general and tariffs that we provide. I think the competition, of course, is in the newspaper is very aggressive and is growing.
But you have to analyze, in the case of Itaú Unibanco, we are a very segmented bank. Itaú was before and Unibanco also was, and we increased the segmentation of channels in our strategy in the last years.
So we have a very strong commercial air in the bank to serve all these different channels and different kind of clients and profile of clients that we have. And it's very important to say that, because our prices, in terms of investment products, in terms of tariff, in terms of credit, everything has been and always has been adjusted to each profile and each channel of the banks.
So the retail, because the retail use all this distribution they have, all the service that we provide to the private bank and to large companies. We have different strategies and different managers and different product and services.
So when we see competition more aggressive and we analyze our prices. We think the prices that we have are very competitive, because most of the banks are reducing the tariffs and the service feeds.
They don't operate in a multi-channel strategy like we do and other banks do. So we make some adjustments in terms of prices of tariffs, in terms of prices of some investment products.
But we don't need to make much reduction or change in the strategy, because our prices are according to the profile of the clients, and not the same price for all the clients that the way some banks operate. So it is important to analyze that the impact of all these, in our case, because of the segmentation in product and prices.
And we have hundreds and thousands of clients, Personnalite, for example, that is one of the channel that I mentioned. They don't think there is any tariff.
They don't pay for any service because the volume of investments, the volume of transactions that they do with us, we don't charge anything from them. So it is important to understand that what is happening in the market is effecting of course.
I'm not minimizing the impact of the competition and so on. Of course, these will bring less revenues from service, less revenues from tariff, of course, less spread, not only because of complex seasonalities, but because we are changing the mix of the credit portfolio.
But the impact is lower because we have this multi-channel strategy than in other bank.
Saul Martinez - J.P. Morgan
Okay. That's fair enough.
I appreciate the thoughtful response.
Operator
Excuse me. Our next question comes from the Mr.
Victor Galliano with HSBC.
Victor Galliano - HSBC
Hi. Yeah.
Good morning. Thanks for the opportunity.
Just on what you were saying about provisions earlier. I mean, looking at the guidance that you’re giving for just the vehicles portfolio loan, I mean, that comes down, should come down by around close to R$200 million quarter-on-quarter and yet the guidance seems very conservative.
I mean, is this is a case of just being conservative given what has happened during the course of the year and giving yourselves some scope here to be conservative on your estimates? Or is there actually some other area outside of vehicles that in the consumer window a very small and SME portfolio that is still being a little bit problematic in terms of credit quality?
That’s my first question. And my second question really relates to the kind of derisking and repricing of the loan portfolio.
I mean, you’ve put a very good chart in here on page 16 of the MD&A. How do you feel this will continue to progress, judging by what Rogério said about the growth of NII.
We’re going to continue to see quite a lot of margin and spread pressure still coming through into Q4 and Q1. My question is, did you feel the kind of the full impact in the quarter of repricing and derisking the portfolios in Q3, or was this just a partial effect and we’re going to see much more than in Q4 and Q1 of '13?
Alfredo Egydio Setubal
Starting from the end, Victor, we still see -- we still see the coming quarters being adjusted because of the mix of the portfolio. What is going to happen, however, in the favor of the better results is the fact that the delinquency should improve much strongly as strong as the second quarter next year.
Why not in the first quarter? Because first quarter normally is being impacted by some level of seasonality that goes against the delinquency improvements.
And maybe I should lead to the first part of your question. We still have some impacts on the auto loans portfolio to be reported in the fourth quarter, is likely in the first quarter next year and then the equal should contribute much strongly to that improvement in the bad debt provisions as I mentioned before.
And what we should expect is the auto loans portfolio to be back to its normality. Since, we are not originating the same sort of credits without first or very low first down payments that causes this increasing delinquency.
I understand what you said. Next quarter and first quarter, I think next quarter we still have some impacts from the auto loans and first quarter except for seasonality, the improvement should be even bigger.
Seasonality will prevent this benefit to be noted in the first quarter, but second quarter on we should see much stronger benefit out of this.
Victor Galliano - HSBC
Okay. Thank you.
Operator
Excuse me. Our next question comes from Mr.
Marcelo Telles with Credit Suisse.
Marcelo Telles - Credit Suisse
Hi. Good afternoon, gentlemen.
I have two questions. One is just a follow-up, on asset quality.
I know there is the seasonality -- does the seasonality first quarter of the year and so on. But what would you expect in terms of reduction in the NPL ratio that I don’t know if you want to say 60 day or 90 day NPL ratio in all by the ends of 2013, I don’t know if you are able to share that with us.
And the other question is on the improvement that you posted on your commercial delinquency. I think there was that 20 basis points decline quarter-over-quarter.
What was the driver there was like the improvement in the SME segment or there was some improvement in large corporations?
Rogério Calderón
Okay. Marcelo, what’s driving the improvement in delinquency is a long list actually.
We have all the interest without any section, the recent origination in better quality, asset quality than what we had before. So, with the maturity of the portfolios you should expect for improvement in all without any sections all the lines of our credit portfolio.
And signs are actually less appealing. If you look, not only they are over 90 days then I should highlight the point that even though we had some increasing in the over 90 days for individuals.
We should remember that we still have some statistical impacts from the reduction of auto loans portfolio. So, what we have in the auto loans is the NPL ratio increasing despite of weather origination and weather delinquency because of the reduction of the total portfolio.
So, this is actually a much deterioration in the delinquency, but in the statistical influence. If you remove that even individuals would improve in the third quarter.
So, corporate is already improving. We have the early delinquency 50 to 90 days.
Improving order lines 30 basis points, if you look at the data in the September target remembering that’s we had strikes and strike impact, particularly impact this early delinquency. Coverage is increasing all the lines.
New vintage is improving all the segment. NPL recreation is reducing total overdue reducing nominal terms.
So any overdue more than 15 days is actually lower in September than what we posted in June. So, all the signs are positive and we should see continuously these benefits.
Regarding the first part of your question on any guidance on NPL, we have been trying not to give any NPL ratio guidance. We don’t have to guide on the total bad debt expenses.
However, at the beginning of the year, we announced our NPL ratio guidance saying that NPL ratio should increase in the beginning of the year in the first quarter of the year and then start to decrease with back to the more or less the same level at the beginning of the year. So, we guided that market for our stability in the NPL ratio, when comparing beginning of the year with the end of the year, with some increasing in the first part of the year and then decreasing.
We think it’s going to happen exactly like what we said in the beginning of the year. It should be back to the same level of the beginning of the year.
And then further improvements next year, since we are going to collect more benefits out of this changing now our portfolio mix.
Marcelo Telles - Credit Suisse
Thank you, Rogerio. One follow-up question if I may.
Just regarding the -- I don’t know if you could tell us what the status of the negotiation is regarding the potential changes in the treatment of tax credits for the purpose of Basel III. Is there anything you should -- can you expect maybe, let’s say a softer regulation in that regard?
Thank you.
Sérgio Ribeiro da Costa Werlang
Hi. This is Sérgio.
Marcelo Telles - Credit Suisse
Hi, Sérgio.
Sérgio Ribeiro da Costa Werlang
Hi, Marcelo. We are positive that there is going to be at least for the deferred tax assets generated by the provision for loan losses.
But there will be some changes. But we are following closely, but we are still positive of that.
It’s typically on the loan losses part.
Marcelo Telles - Credit Suisse
Thank you.
Operator
Our next question comes from Mr. Boris Molina, Santander.
Boris Molina - Santander
Yeah. Good morning and thank you for taking my question.
I had a question regarding your IT investment planning and the sizeable project, so I was wondering how -- could you expect us to see how this is going to naturally be impacting cost in terms of how you are going to account for this or you are going to capitalize this up for investments or whether you are going to expand it, because it could have a legal complications in May 2014 in terms of efficiency and costs. And the second part of the question is, there is a certain amount of investment in new software development.
So, I would like to know what are the modules or if it’s a complete rewrite of your IT software platform, what are the enhancements that you plan to make and what type of your [LTO] efficiency gains could we expect particularly, because that still works with a relatively high ratio employees per branch. And how could we see this overall efficiency improving in the medium to long term?
I mean, it gives the impression that this is a transformational IT project that we should keep an eye on. So, let’s see if you have more color on this.
Alfredo Egydio Setubal
Alfredo Egydio speaking. We of course this -- those investments are going to impact our total expenses as mainly as a consequence of the increasing depreciation, since the investments are going to be in ‘02 to be done since now up to 2015.
But when we supplied you with our guidance of the total expenses growing below inflation in the years 2013 and ‘14, this is also in compensate in that calculation. So despite of this growing or increasing depreciation overtime, we still have gains in efficiency to offset and to be positive on this growing the low inflation over the next two years, we have not the previous quarter, the other years before that or after that.
But we expect, theoretically saying we expect our improvement, our efficiency gains to be enough to compensate this. In terms of the total investments, what we are doing IT platform they scale up in different steps.
We -- last time we had strong investments on this area was to prepare the banks for 20, 30 years. This is what we are doing now.
So you should expect really this big investment to prepare the bank for the next 30 years. What means that the bank is going to gain to make a lot or to collect not a lot of benefits out of these investments.
We have some technical date on this that we could supply to you, but gains in electricity for instance and also in processing it’s almost 10 times, the processing per second that we have today is going to be in the future. We need to tackle the future challenges for the bank in a growing environment.
Boris Molina - Santander
Thank you very much.
Operator
Excuse me. Our next question comes from Mr.
Fabio Zagatti with Barclays.
Fabio Zagatti - Barclays
Hi. Thanks for taking these questions.
Just to make sure we all got this correct. So, would you expect net interest income pre-provision to grow in the single-digits in 2013?
Actually I guess that you mentioned low single-digits assuming 15% credit growth. And then on a post loan loss provision basis, did you mean NII growth could be in the low double digits?
And if this is indeed right, I mean even if you don’t provide an ROE guidance for 2013, but based on a very simple math of the other assumptions that we have for OpEx mainly I mean is it fair to say that the risks are that ROE should remain below, let’s say an 18% level, so below the historical levels as you’ve previously suggested in this call? And then I have a second question.
Thanks.
Rogério Calderón
So, Fabio your understanding is correct on what I have said. It’s probably to grow NII before bad debts, probably to grow low-single digits and probably after bad debts to be around high-single digits or low-double digits.
Regarding ROE, it's always very important to remember what we constantly say to you. Guidance that’s what we manage the bank stated on creating spread over the cost of capital.
So, every time we talk on return on equities. It’s very important to remember that these figures could move depending on the cost of equity, depending on the cost of capital.
So if we consider stability on the current levels, we think that the nominal level of ROE that we have reported in the third quarter is below our potential, because of this abnormal level of delinquency. So from this level we are posting today.
We expect improvements in the ROE. I think we will be able to give you more precision on this in the next quarter.
But definitely, we expect improvements from the current level to post inline with the average we have on the last 12 months.
Fabio Zagatti - Barclays
Okay. Thanks, Rogério.
And then I will like to ask more thoughtful and related question. What do you think could be a trigger for improvement in market segment powers the banking sector in Brazil after all that we have been true with all the risk of continue government intervention.
I believe we have reach to a point, where a new circle like this one just established today, reading that bank profitability fell to the lowest level since the 90s ends up paradoxically being a positive. Because it somehow shows that government initiatives have had some impact so far.
So, I would really like to hear from you where you guys believe that we are in this cycle of ROE compression risks being priced in? Thank you.
Alfredo Egydio Setubal
Your question of course is very difficult to give a precise answer. We look in around the world -- looking other countries like Australia, like Chile, like Canada and so on.
We see that in this environment they are much more stable and much more operating with a much lower spread and so on. The returns of the banks in these countries are much higher.
It is around 20%, 18%. So, we are very confident that in Brazil the level of returns will be close to the historical levels of the last year.
We're operating the bank in these with this strategy and targeting these levels of ROE. And we think that if possible we are seeing that is possible to operate and bring different kind of clients in the different environment.
These -- all these that is happening here in Brazil is interesting to show that the demand is elastic according to the price. In the past, the banks in general, the systems were operating -- feeling that the clients that don't need money, that they have their own savings and investment.
They will not even considering using credit in their life. And what we have seen is a different scenario.
We have seen clients with investment using part of these investments and savings to pay part of the mortgage and financing the Redecard is the same. So, we think that all these really will bring more clients and will bring more volume to the system.
And we are seeing that probably of these we will bring NPL levels and provision for loan losses to a much lower level in the coming year. So, these all together in our view give us confident that the returns will continue to be in a good level for the investors.
And for the fondness of the system in these transition periods. You asked us, in most part of the curve, we are in this transition period.
I really don't know exactly but I think the worst pressure that doesn't mean that we are not going to see more pressure. I think probably we’ll continue to see more pressure.
Because all the banks need more volume, all the banks need more revenues to compensate the pressure in spread and so on. So, but looking ahead we are very calm.
We are very confident that this is part of the transition period. I think the economy of Brazil will continue to grow and this will bring new clients, new opportunities, a better environment in terms of growth for the companies fundamental for a sound financial system.
So, I don’t know exactly what point of the curve we are. But looking some years ahead, I think we are very confident that the financial system will continue to serve well and in a lower spread environment by providing good returns of capital for the investments.
And of course, if all this scenario continues to be in a good direction. Of course, the cost of capital that Rogerio was talking in the previous answer, we'll reduce also.
And I think it is important that this system will continue to be able to provide a premium over the cost of capital. And we are very confident that we are -- we will continue to provide a premium over the cost of capital.
Because and probably the cost of capital, we'll continue to reduce in Brazil probably the interest rate all around the Europe and U.S. and Japan and many countries, you consider to be low and for many, many years.
So, I think in the new environment, we have to adjust our strategy. We have to adjust our target for new -- this new environment of lower interest rate, lower cost of capital in the world and Brazil respond to these for the coming years.
It is a transition period. And we are confident looking ahead.
Fabio Zagatti - Barclays
Thanks, Alfredo. It seems very helpful.
Operator
Excuse me. Our next question comes from Mr.
Eduardo Nishio with Brasil Plural.
Eduardo Nishio - Brasil Plural
Hi, good morning. Thank you for taking my question.
I have two questions. First, regarding Redecard, I’d like to know what will be the strategy after delisting the company in terms of pricing in particular MDRs.
And also regarding this topic, giving the latest news flow on MDRs particularly relating to some regulatory pressure to reduce MDRs and maybe brand sharing. What do you see coming up in this front and that’s on Redecard.
On loan and I’ld like to know in the auto segment, what do you see, if you still see some leftovers in terms of provisions for 2013. And on the SME segment, why not growing at a faster pace now given that SME has a lower duration and all in all probably the worse in terms of provision, it has already gone for now.
And for you would be in a better position to go back and grab market share in that segment as well? Thank you.
Alfredo Egydio Setubal
This is Alfredo. I will start answering the second question.
I think when you analyze the credit portfolio for SMEs. What we are doing in this direction of reducing the risk of our portfolio.
This reduced the risk -- the credit portfolio for very small and it’s small comp, if you analyze the few middle company -- middle market company, our portfolio is growing in a very good pace. But this is offset by the reduction of this low and very small portfolio, the credit portfolio.
And why we are doing that, because it’s very difficult to increase the quality of the portfolio in this segment. I think we are increasing the collaterals.
We are doing something, but there is a limit that what kind of collateral and guarantee that these kind of companies can provide to us. So, we are reducing very small and small companies to the limits, where we think the collateral and the guarantee is good.
If this is different in the middle -- this traditional middle market companies that we are growing and continuing to grow. So, these I think we have still one quarter yet to adjust these small and mid-size, small and very small portfolios.
Rogério Calderón
This is Rogério addressing the first products regarding credit card, I think what is important to highlight here is then when we bought Redecard (inaudible) according to that you all know to have a better ability to scale less business in Redecard by gathering different products. So it is a new actually I think in summary, we should say that we have this another -- a new models to operate Redecard in which we should be able to capture growing volumes with gains in synergy both for demonstrative sites and particularly on different revenues streamlines, since we would be able to supply Redecard with a much broader list of products.
That's the reason for this strategical movement and this is what’s going to happen over the coming periods. Particularly, when you address that -- MDR, there are lots of change in the dynamics of the business and it maybe -- we may see some additional pressure on MDR.
But the whole strategy that we are addressing, but that is actually to offset this to compensate with much broader volumes and products looking at MDR from a different perspective. And always you should remember that when we look at the credit card business, we are looking at a market at a segment that is growing on average 20% year-on-year for three or four years on a row.
So, it's really plenty of opportunities to come and we are trying to collect all the benefits of this growing environment.
Eduardo Nishio - Brasil Plural
Okay. So now you not really a strong pressure on MDR are you seeing for 2013 and ‘14, right?
Rogério Calderón
From the perspective of Hipercards, we will be able to overcome with any marginal pressure on MDRs with the strategy as a whole.
Eduardo Nishio - Brasil Plural
Okay. And on the outer segment any leftovers for in terms of provision for 2013 or it will be clearing 2013?
Rogério Calderón
It's going to be clearly the strong 2000 and actually we may have some residual in the beginning of the year but it's not really worth while.
Eduardo Nishio - Brasil Plural
Okay. Thank you.
Rogério Calderón
Well, thank you, Nishio. We still have a question, I think.
Operator
Excuse me. Our last question comes from Mr.
Jorg Friedemann with Bank of America.
Jorg Friedemann - Bank of America
Thank you very much for taking my question. Actually, it's a follow-up on the Redecard issue.
I just like to hear your opinion about the recent turmoil on the sector more regards with the potential regulatory scrutiny in the business. So, any chances that to you that to classify as more likely in the business model to change going forward.
I know to have a new regulatory body that will be in charge of the sector and so and so forth. Thank you.
Rogério Calderón
Well, actually we have been preparing our business in credit cards and Redecards and Hipercards. Actually from the last two years to face the change in the business environment.
And of course, this is -- when we look at the future, it's possible that we had some additional movements where I think we should not deny this possibility, but does not mean that it is likely to happen. It’s possible when -- and rightly we’ve been doing actually to do all that is possible for us to be able to be in good shape despite of any additional pressure.
Remember that even with pressure, this is a very, very good market with very attractive growing perspective, profitability, now we have a new opportunity to enhance the business here inside Itau. It’s really very positive for us.
Jorg Friedemann - Bank of America
So, just to clarify Rogerio…
Rogério Calderón
And maybe the best example on this is the fact that even under these turmoil as you said, we never change it. They’re offering -- the price offering that we had offered since the beginning of this transaction, despite of these additional pressures.
We still had the confidence that the future cash flow of the business could be defended.
Jorg Friedemann - Bank of America
Yeah. I think that the biggest concern that the market has to be at the moment is potential political interference.
So, my question is according to the recent discussions that we -- I'm pretty sure that you guys have with government officials. You don’t feel anything is roughly to be coming on?
Rogério Calderón
We have no further comments on this. It would be speculative to say if we believe is government is going to do one thing or another thing, it’s possible.
We should be prepared to do, to take the best from our business, not to be concerned with any other thing. The business model was designed to protect our ability to keep posting good results on this business.
Jorg Friedemann - Bank of America
Perfect.
Rogério Calderón
That’s what I could add.
Jorg Friedemann - Bank of America
I think that perfect. And taking that into consideration would it be fair to assume that even though NII will be under pressure as you commented already.
Fee income would still be in a good position next year potentially flirting with the double-digit?
Rogério Calderón
Perfect. Actually, when we mentioned that’s our strategy is actually converting into reality when we look at the figures with revenues spreads reducing, but the mix changing et cetera and loan loss provision should be lower in the future, efficiency be collected.
We also should add that’s we have a very positive view on fee income to grow and Redecard is a very important part and parcel of this strategy.
Jorg Friedemann - Bank of America
Okay. Thank you very much.
Rogério Calderón
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
Hi. Thank you everybody for participating in this conference call.
And just to add that we continue to be very confident in the strategy of reducing the risk of our credit portfolio, controlling expenses to provide good returns in the coming years for our shareholders. Thank you and we are here for any questions that you have and going to be together again in the beginning of next year to the results of the fourth quarter.
Thank you.
Operator
That does conclude our Itaú Unibanco Holding earnings conference call for today. Thank you very much for your participation.
You may now disconnect.