May 3, 2013
Executives
Alfredo Egydio Setubal – Executive Vice President and Investor Relations Officer Caio Ibrahim David – Chief Financial Officer Rogério Calderón – Corporate Controller and Head of Investor Relations
Analysts
Jorge Kuri – Morgan Stanley Carlos Macedo – Goldman Sachs Philip Finch – UBS Securities Mario Pierry – Deutsche Bank Daniel Abut – Citigroup Global Markets Inc. Daniel Sasson – Credit Suisse Saul Martinez – JPMorgan Securities LLC.
Ian Smith – AXA Investment Managers Marcelo Henriques – BTG Pactual Boris Molina – Santander
Operator
Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Itaú Unibanco Holding Conference Call to discuss First Quarter 2013 Earnings Results.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time.
(Operator Instructions) As a reminder, this conference is being recorded and broadcast live on the investor relations website at www.itaú-unibanco.com/ir. A slide presentation is also available on this site.
The replay of this conference call will be available by phone on 55-11-4688-6312, access code 0600682 pound key. 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 São Paulo are Mr.
Alfredo Egydio Setubal, Executive Vice President and Investor Relations Officer; Mr. Caio Ibrahim David, Chief Financial Officer; and Mr.
Rogério Calderón, Corporate Controller and Head of Investor Relations. First, Mr.
Alfredo Setubal will comment on first quarter 2013 earnings results. Afterwards, management will be available for a question-and-answer session.
It’s now my pleasure to turn the call over to Mr. Alfredo Setubal.
Alfredo Egydio Setubal
Good morning to everybody. Good afternoon for those who are in Europe and we will start on slide number 2, highlights for the first quarter.
First one is the result R$3.5 billion, was a little increase of 0.3% when we compare to last quarter of 2012 and recurring ROE of 19.9. The second point is related to managerial financial margin that in total achieved R$11.5 billion in this first quarter.
When we analyze, the decrease of this margin of R$1.1 billion when we compare to the last quarter of 2012 is due to the decrease of R$278 million in margin with the market in our treasury operations; R$800 million in margin with the clients and inside this R$800 million, we have a reduction of R$255 million due to fewer calendar days in this quarter. So anyway we have a decrease in this line in this quarter – this first quarter.
Also related to the margin when we compare these numbers to 12 months ago, the first quarter of 2012, we see a reduction of R$1.7 billion. These $1.7 billion is split in R$361 million reduction in margin with the market.
We have reduction of the Selic rates that actually decreased this margin in R$507 million. Reduction of our working capital related to the acquisition of Redecard minority shareholders.
This impacted almost R$290 million. And of course the change in the mix of our credit portfolio that is part of our strategy where we have been doing in the last one year and a half is changing the mix of products impact R$365 million.
On the other hand, because of the strategy of reducing the risk of our credit portfolio, we have been able to show another quarter of reduction in nominal NPL ratio. We improved 30 basis points achieving 4.5% when we compare to the 12 months ago, the improvement was even better 60 basis points in this period even considering that the first quarter is not the best one in terms of seasonality in the credit portfolio.
With this, the allowance for loan losses decreased 14% in this quarter and 20.5% when we compare to March of last year. Financial margin of credit, the net expenses show some stability in this quarter achieving R$5.8 billion with an increase of R$1.6 billion when we compare to last year.
Banking fee continues to grow R$5.1 billion in this quarter when we compare to last year R$18.8 billion. This includes also the result of R$1.4 billion for our Insurance business in 12 month.
Another good point is the non-interest expense. We have a nominal reduction of R$211 million and we were able to increase finally R$4.1 million in total expenses when we compare to March 2012 below the inflation rate for this period.
We do our best in terms of revenues, expenses and NPLs, our efficiency ratio risk-adjusted decreased 60 basis points when we compare to the previous quarter. On Slide 3, we can see the results.
As I said, we have this more difficult period again with financial margin with the clients with a decrease of 6.8% in the quarter and 10.8% when we compare 12 months, achieving almost R$11 billion. Here is our challenge that we can post growth for the next quarters.
Expenses for loan losses, R$4.9 billion, in line with the expectation that we realized when we released the results for the last year. Another point of increased importance is expenses that we’re continuing the trend of reduction.
And we’ll continue to work hard this year and next year to reduce to get the bank more efficient considering that we want to keep good ROEs for our shareholders. So the efficiency ratio is important and especially working to reduce the nominal expenses as part of our strategy, and we will continue in the coming quarters.
Another point that I want you to pay attention is the income tax and social contribution. In this quarter, we had a reduction due to the operation of Redecard.
And this level of provisions for income tax will remain recurring six years in our expectation. So in your models, you can consider this recurrence for at least for six years in terms of income tax.
At the end, we have a recurrent net income of R$3.5 billion, which is an increase of 0.3% in the quarter when we see the numbers of last year of almost 1%. On slide four, we can see the banking operations and the insurance operations status.
I think in MD&A you’ll have much more information and much more analysis of these two operations. But anyway we can see that from our recurring net income of R$3.5 billion, banking operations was responsible for R$2.8 billion and the insurance of R$5.46 million.
Considering all these, we see that the banking operation has an ROE of 20% and our risk adjusted efficiency ratio of 75.3 and the insurance operation with a ROE of 36.8 and our risk adjusted efficiency ratio of 70.1. So, it is another way to look at our consolidated numbers and as I said we have much more details in the MD&A.
On slide number 5, we can see the financial margins. We can see the gross credit spreads reducing again this quarter.
The peak was last year 13.4, now we achieved a 11.6 and we can see because of the best numbers of provision for loan losses, the demand for credit spreads achieved 7% on a little increase when we compare to the 6.9 of the last two quarters. On slide number 6, we can see now the variation of the financial margin, which in the last 12 months we had last year – financial last year 11.7% and we achieved 10.9% this quarter, the 210 positive in those margin because of the increase of the volume of the credit.
255 in this quarter related to the reduction in the quarter, this first quarter when we compare to last quarter of last year the numbers of current update because of holidays and February number of days. So we had less days this quarter.
Product mid report was a reduction of R$73 million, 322 because of mix of clients and spread, 208 districts related to Selic and 78 related to equity. If we look now on the sharp evolution of the mix portfolio, the credit portfolio, we see that we were changing the mix to a lower relative in the last quarter most wanting to have a year where we’ve been changing that line increasing our corporate portfolio related to large companies.
We’ve been reducing our credit portfolio related to car financing out of loan where we continue to decrease little our small and micro-companies in terms of midsized companies we are able to keep the level. And we will continue to grow the mortgage business and also we are increasing our business in the both America and the countries that we are present especially related to large companies in these countries.
So we are increasing our credit portfolio in those countries. Now Slide number 7, financial margin of credit and allowance for loan losses.
We continue to see the trends good trends in terms of reduction of expenses net extent – net of recovery in terms of loan losses. We continue the trend of reducing the provisions due to the charges of reduced rate of the credit portfolio.
On Slide number 8, we see that this quarter we had some newer gains and if I mention margin with the market, we achieved 600 million. When we average our numbers 830 some quarter better, some quarter is lower.
But in a way in this quarter due to the market conditions, we believe a lower result. On slide number nine, we can see the banking fees and results from insurance.
I would like you to pay attention on current account services. We continue to increase these numbers especially because of the segmentation that we have created in the bank in the retail especially.
Where I know we can see the growth of processing services for our clients that are – have been able to increase the offer product and in these segmentation that we have. So we continue to grow in these lines.
But anyway we are in a good position here in terms of growth, also in terms of credit card operation. On Slide number 10 we have a numbers of insurance operations that I said had much more details in the MD&A.
But anyway this operation that is growing is gaining importance in terms of results and the consolidated numbers of Itaú Unibanco Holding remembering that we sold out to insurance and residential insurance to Portu Seguro and we now have 30% of the capital of the group Portu Seguro and we don’t operate more in cards and in residential. So in Pension funds we continue in the capitalization markets, we continue in bank insurance they could guarantee liability and so on.
We didn’t direct this our prime basis here at the bank. So we have claims ratio up of 38.4% that’s a good number as the results of the insurance results of 18.5% of the total reserves of the bank.
And you can see now on the left side, lower left side of this graph how we started from R$2.38 billion in premiums and how we reduced the recurring net income of R$546 million and on the right side the combined ratio that is 82.4% a good number. That as I said is a market that is growing in general much that we continue to invest especially in the Pension funds and you have more detail in the MD&A.
On page 11, loan ratio, we continue to see the results of our strategy of reducing the risk of loans portfolio under new and lower risk spreads and lower – and so the expenses for loan losses when we compare to our credit portfolio continues to reduce. It was exactly one year ago of 1.79 and we finished this quarter in 1.74, so that was increased.
We continued to have good provisions for loan losses and we continue to keep 4.1 billion in complementary provisions for credit in our expected loss model that we use for many quarters. On Page 12, we see the NPL ratio over 90 days.
We continue to see, as I said, the trend of getting better, much better numbers here. The peak was 5.2 in June last year, now we reduce to 4.5 at both segment of individuals and companies showing improvements.
With the strategy and the lower level of provisions, we have been able to increase, for the third quarter in a row, the coverage ratio of 90-day coverage ratio that achieved 161% this quarter. When we see on slide 13, we see the 15 to 90 days NPL ratio.
We see a deterioration in this quarter, but if you go back and look all the first quarters of every year, there is a natural trend that in the first quarter we see some deterioration because of we produce more credit and are difficult to pay at the beginning of the year. So we – because it's normal it doesn't pay – you don't pay much attention, much relevance in the smaller duration this quarter.
On Page 14, non-interest expenses, we continue to focus and to reduce nominal expenses. We expected to continue to grow lower than inflation this year again.
So it’s part of strategy to keep good ROE in this more difficult scenario of margins. On page 15, efficiency ratio adjusted – and risk-adjusted efficiency ratio.
We show a little better number this quarter when we analyzed the risk-adjusted and a positive ratio when we compare the efficiency of additional ratio, that’s much related to traditional efficiency ratio to the sort of analogy and the margin contraction in this quarter, not related to expenses. On slide 16, we can see a growth of our asset that continue above R$1 trillion in this quarter, a growth of almost 15% in 12 months and 1.4 in this quarter.
Stockholders’ equity increased 0.3% this quarter achieving R$74 billion. On slide 17, we see the loans by type of clients.
We finish with total loans including endorsement and sureties of R$434 billion. We have also almost 22 billion in corporate bond, private securities before this are – bonds of credit.
So the total credit exposure that we have is R$456 billion, using these numbers, we saw a growth of 9.2% in the last 12 months and 1.5% in this quarter. The growth has been below the market average, and because we continue to reduce the risk of – and the total amount of our current financing business, remembering that we achieved more than R$60 billion.
And now we have R$48.2 billion and you have some contraction to perhaps considering this quarter. We also continue to reduce very small companies, and so this segment continue to contract its annual portfolio.
The others we continue to grow for mortgage in a good rate. We continue to increase our payroll loan that achieve R$16.2 billion in this quarter.
And the JV Itaú and BMG is working well in this quarter. One page 18, we can see that we have no problem in terms funding and repo funds, and so on which is almost R$1.5 trillion in performance.
On page 19, we see that the ratio between the funding and loan portfolio is very comfortable in terms of funding, and of course, because we are not growing so fast the private portfolio. On page 20, we have the BIS ratio, 17.7 considering the increase this quarter, and 11.7 in the Tier 1 category in the quarter.
On page 21, we can see that there is Basel III was implemented to-date with the measures that our BIS ratio Q1 would be almost 10% what is above the requirement. So we don’t see issues related to Basel III.
We continue to consider that we would be able to generate enough capital to face the growth of the banking in the coming year. On page 22.
The recurring ROE, 19.1, a little below in that quarter. As I’m achieving the good number, and it means a lot of return for our shareholders.
Market capitalization on the slide 23, R$161 million, we consider it as a very good liquidity of our shares both in New York stock exchange improving. Now on slide 24, the expectation for 2013.
We keep the same level of prediction that we release when we announced the results for last year. We continue to believe in credit portfolio of growth of 11 to 14.
We believe in the second semester, the growth will be higher because the adjustment in the portfolio especially the cost, already will be finished, so we will start to grow more in line with the market as a total credit portfolio of the bank. General expenses for provision for loan losses, we keep the expectation to R$19 billion to R$22 billion for the total year.
In banking fees, we are showing a growth of 15 to 18. If you compare to the net expectation that we released was 11 to 14.
But here it’s just adjustment and because of the reclassification of the numbers of hedging client that we release next week, before the release of the results. So here it’s not revision of the expectation when adjusted – more adjustment with the new numbers including this reclassification of hedge factor.
The new number is 15 to 18 and we are in line with that estimate. Non-interest expenses grows to 4% to 6%.
This year we’ve also continued to be below inflation. And risk-adjusted efficiency ratio improved up to 200 to 400 basis points in the year.
So we keep the same level of expectation for the coming quarters. With this, I finish the presentation, and we are all open to your questions.
Operator
(Operator Instructions) Our first question comes from Jorge Kuri with Morgan Stanley.
Jorge Kuri – Morgan Stanley
Hi. Good morning, everyone.
And I wanted to ask a question about margins, and it seems to me that you feel more comfortable that margins are probably going to behave better going forward, and what we’ve seen over the last couple of quarters. And I’m just trying to get to that.
As per your disclosure there, asset sensitivity of your balance sheet is such that the maximum re-pricing gap is roughly 121,000. And Selic rates fell a lot in the second and third quarter of last year.
Actually that was the biggest decline in Selic in that cycle happened in those quarters. You know the two combined were more than 200 basis points.
So all else equal, we really haven’t seen the full negative impact of margins from falling Selic. And in addition, your loan book continues to have lower profitability as long as the front book is not improving.
You know we’ve seen that the front book is only growing in corporate lending and government on lending. So by definition as your back book continues to amortize on your front book is not really growing, you know, special continues to come down probably more so going forward.
So can you help us understand the assumptions behind your view on margins, maybe we can share the math behind your assumptions, that will be fantastic. Thank you.
Alfredo Egydio Setubal
Jorge, this is Aflredo speaking. We expected the margin to continue to be a challenge for the bank for division as a whole.
We are very confident in our strategy related to continue to changing the mix of the portfolio, and we have been able to show much better provisions for loan losses, and we continue to believe that these numbers will continue to reduce in the coming quarters due to the new mix of the credit portfolio. And also we continue to be confident in the strategy of controlling more of the expense.
So the challenges that remains really is in the margin with the clients, because margin with the market is the volatility of the market. In some quarters, we’ll go better.
In some apparent quarters, we don’t go so well. And we are not changing the limits of the treasury, the VARs and so on.
So this is difficult to forecast. In terms of margin with the client, we believe that because we changed the mix and of course we do have some impact to absorb in the coming quarters, especially in the second quarter, that will continue to reduce – complementing in very small companies.
But anyway we continue to see the trends of a better margin with the clients in the coming quarters. Because we already changed the lot and turned over a lot of the portfolio, and most of the credit portfolio is already in the new spreads.
So when we need this credit, the impact will be much lower than in the past. And we believe with economy continuing the pace of growing, and we expect it to grow something along 3% this year.
In terms of margin with the clients, probably you’ll see the first quarter of 2013. We believe that we are strong now to the coming quarters.
We are going to see some increase already in the margin with the clients. We don’t see much pressure in terms of clients in the market.
We are changing our mix of the credit portfolio. Of course, it will continue, but in a lower pace.
So all this together make us much more confident that in the coming quarters we are going to see some recovery in the margin with the client. And we expect to remain flat this year when we compare to last year.
Of course, it’s not easy and not minimizing the difficulties. But the numbers, the stimulation that we have, the expectation and what we see in the market the expectations also of our directors that are dealing with the clients, the channels give us confidence that we need to believe that the trends will change in the coming quarters when we analyze the margin with the client.
Of course not easy, we have the competition. We have the competitions of the economy.
We have to see what will happen in this increase in Selic, how much this will impact the economy and so on. But anyway we’re still in the best numbers that we had to-date we said probably the worst in terms of margins of course in this first quarter of 2013.
Jorge Kuri – Morgan Stanley
And I guess the part I don’t understand is your disclosure account actually is different. I mean it is clear from disclosure that when you look at your GAAP your asset sensitivity GAAP, the worst part of it is 12 months out and as I said before rates fell a lot in the second and third quarter, so I mean, I guess what I’m having a hard time to reconsolidating it just doesn’t seem that, that’s going to be the case and so on.
Has the GAAP changed? Are you hedging the GAAP?
I mean, can you just give us a little more details why the disclosures are different than what your expectation is?
Roberto Egydio Setubal
Roberto speaking, we are not sure that we are understanding your question, but if you are referring to the average price of the portfolio, we think that the major compression was actually finishing its impacts and so the first quarter what means, and what Alfredo just mentioned in that, that from the perspective of the margin with the clients, we think that we have touched the bottom level in the first quarter. And from now on we expect these lines to grow.
It’s not going to be a big roads quarter-on-quarter, it’s going to be a gradual moment towards. Why?
Because we have less stress in terms of – spreads like how we have volumes accelerating so the pressure on the – the naming impacts of the average week price of the portfolio is going to be lower than the growth in volumes, what points the margin with the clients to go up. When you look at the margin, not only the margin with the clients but the margin with credit as a whole what also includes are some of the impact in the flow and the Selic impact that you announced when you address a question.
The pressure on the average Selic is from now on is going to be reduced from the pressure we saw in the first quarter. If you remember last year the Selic drop was in beginning of the year, so we’re moving the difference when the year went on.
So all said, we believe based on our simulation on our budget efforts, et cetera, that margin with clients are going to – is going to go up. Questions remains on how difficult it is going to be to reach the flattish level, as Alfredo mentioned, we’ve recognized.
That is not an easy task, but we think it is still possible. And that’s what we are doing here to deliver to you.
We are pretty confident that this is going to happen as stronger one.
Jorge Kuri – Morgan Stanley
All right. Great.
Thanks you.
Operator
Our next question comes from Carlos Macedo with Goldman Sachs.
Carlos Macedo – Goldman Sachs
Good morning, gentlemen. Thanks for taking my questions.
I actually have a couple. The first is, a little bit of a follow-up on Jorge’s question on – but not on margins but rather NII growth.
I mean margins of product, NII growth. NII has actually contracted almost – margin with clients as you like to put it, contracted 11% year-over-year.
And part of that is because of weaker loan growth or the – not weak, but very low loan growth that you have been able to put forth over the last few quarter of course, take into consideration the general level of risk in the economy and all that. I would like you to give us some color on the bank’s appetite for credit.
And how much could we expect an acceleration on this credit help NII growth achieve your objectives for the year and maybe be flat or something like that? The second question will be on expense, 4% year-over-year growth in expense.
That’s in line with your guidance. Even though it does look like there’s still a larger amount of severance in there.
And just wondering, is there room for that to come below guidance throughout the year? What kind of confidence do you have in that sense?
Thank you.
Alfredo Egydio Setubal
So in terms of our risk at the tax, Carlos, we are happy with the bigger selectivity we have been applying with very well succeeded results. In terms of our asset quality improvements, we don’t plan to change anything on this.
But we should recognize that the first quarter has a lower level of activity. So we expect some acceleration in the coming quarters.
We think that by applying the same level of selectivity, we are going to keep protecting our asset quality. Our growth is going to accelerate towards our guidance, so we believe that 11% to 14% is feasible too and we are going to reach that level on an underlying basis probably between the second and third quarter.
We started to growing very, very well in the most important lines on our currency status and we thank to the personal loans, particularly those based on the restructuring payroll allowance. This is growing at very fast level, fast speed.
Also happening the same with mortgage and when looking at the company’s loans to last companies, we also expect the major products on infrastructure drastically speed up, as fund goes on during the year and this should help the loans to large companies to keep at this high level that we have been posting. So in summary we believe that credits growth is going accelerate from and we don’t expect to change anything in terms of our risk appetites to deliver this higher level.
Carlos Macedo – Goldman Sachs
Just question on that, obviously the auto loan book has been the ones that’s been dragging down the growth for a while. Is the turnover in that book done, I mean, and it’s still declined 5% this quarter.
Roberto Egydio Setubal
Not yet, that’s pretty close, not yet but pretty close to the turning point. We expect the turning points to happen by May, eventually by June some origination warrants have reduced in the, I mean, return to the system, reducing at the beginning of the third quarter, now accelerating again.
So we expect the origination to become positive, marginally positive as from the mid year balanced probably to start to recover as from the third quarter. It still is expecting some reduction, some construction in the balance of auto loans by the second quarter.
But the point is very well transitionally because this is going to reduce the burden we have in terms of delivering the full growth for the portfolio. Of course, when we stop shrinking the portfolio of auto loans it’s going to be easier to go towards the double-digit growth.
Second question was regarding expenses, we had – when we look at their analysis figures in terms of expenses, we are still below inflation. We have announced some reclassifications in our figures, those are impacting actually impacting higher expenses growth without these adjustments we did, the expenses growth would have been 2.504 and this is the trend that we expect, so pretty close to the low end of the range.
You refer to the seven and this has too impacted the expenses last year, but impacted not in the first quarter in the following quarter. So we should expect this benefit if I could say in the coming quarters.
Carlos Macedo – Goldman Sachs
Okay. So you’re still maintaining your guidance 428, but would you say that it’s the likelihood of being towards the low end of the guidance is stronger?
Roberto Egydio Setubal
Yeah, we keep the same guidance 46% in spite of additional difficulties due to this by bringing this difference of consolidation in our figures. If we have to reset the guidance it would have reached probably – I mean the bottom level would have reached 4.5 to 5%.
We have not restated because we are pretty confident that we’re going to deliver better than this figure then we don’t need to revise the guidance because we’re going to deliver better than expected.
Carlos Macedo – Goldman Sachs
Okay. Do you have, just a final wrap up?
Do you have any views yet on the level of collected bargaining for this year and how that could impact into your guidance?
Roberto Egydio Setubal
We have of course we have included this in our budget that is behind our guidance. We expect them increasing solid it’s a little bit higher than inflation line with previous years.
Carlos Macedo – Goldman Sachs
Okay. Thank you, Egydio.
Thank you, Alfred.
Operator
Our next question comes from Philip Finch with UBS.
Philip Finch – UBS Securities
Good morning, gentlemen. Thank you for the presentation and for taking our questions.
A few questions, please, so first the more general one. I’m really asking whether you are seeing signs that Redecard is picking up and if so can you give us some examples of that?
Second, on slide six, you gave a very useful loan mix evolution chart; do you have a target for where you want your loan mix to be going forward, are we there yet or could we see the evolution continue? And lastly, one of your slides you showed fair improvements in terms of the MPR ratio a 60 basis points improvement in recent quarters, you’re now at 4.2 – sorry – 4.5%, do you have a normalized level that you’re targeting as well?
Thank you.
Alfredo Egydio Setubal
There was an economic growth in terms of the environment. We believe that economy will grow around 3% probably this will be a higher and the bank will continue to increase probably more 180 points, it will – coming at 18 of the coupon.
We think it is a – number of scenario cost is now the excitement, of course we bring some risk in terms of credit, credit was solid because – increasing the fleet always bring more risk. But anyway we believe that the scenario is reasonable to continue the credit that I mentioned in the last question and especially in this.
In terms of ideal growth portfolio, I think we are much closer now than we were when we started this movement one year ago. And we have been – had some growth to come in the payroll business because we just started the deal with P&G so we have room here to increase and to reduce the average of risk for dividend portfolio.
Some reductions in the years to come in this quarter related to car financing. And in terms of knowing very more companies, I think we are going to grow probably from the third or fourth quarter because these operations as we announced is now integrated, is the retail operation of the bank.
So we believe in this quarter, we can be again be able to get more control of these two segments of the company. So I think we are closer to the portfolio that we wanted to and used to see in the coming quarters the growth in pay roles, continue the growth rate in mortgage and in large companies, so there some changes to happen, but I think that most of them are Redecard.
Caio Ibrahim David
And your third question regarding NPL is obviously related to the optimum portfolio breakdown that Alfredo was mentioning, we – although we are closer to this optimum picture, we still have the portfolio running. That is going to keep delivering improvement in NPL.
We are not guiding the market in terms of NPL revolution. But we think that the level that we have reached by the first quarter end it’s 4.5 is not the lowest, so we expect NPL to go lower, probably at a lower pace than what we quoted in the first part, but it’s still dragging down, not difficult to believe that it’s going to keep closer to the 4.4 by the year end.
But we – what we have the most confidence on is a guidance on the loan loss provision’s expenses, we have created the guidance and from the current level we – it’s – nothing is changing, it’s probably to be closer to the lower end of R$19 billion to R$22 billion total.
Philip Finch – UBS Securities
Great. Thank you very much.
That’s all I’m showing.
Operator
Our next question comes from Mario Pierry with Deutsche Bank.
Mario Pierry – Deutsche Bank
Hi, good morning everybody. Let me ask you two quick questions.
First is on your tax rate, you seem to suggest that your effective tax rate for the next six years should remain around the 27% level. But in the last quarter’s conference call, I recall that you were guiding for 32% to 34% effective tax rates.
So, can you just tell us what has changed in your view, why now are you guiding for the benefits already currently running through your income statement? And the second question is related to your credit card loyalty program, earlier this year you’ve changed the conversion ratio of points, I was wondering if you’re feeling any impact from these changes on the growth of your credit card balances?
Thank you.
Roberto Egydio Setubal
Thank you, Mario. Good question.
The first one, yeah, we were actually finishing all the presence regarding Redecard when we announce that expectation, it was actually – our expectation result the impact or the material impact that we are going to post due to the Redecard capital transaction in December. So from now on, the expected range of our effective tax rate to be between 27% and 29% adjusted all their patient that it’s a fixed number that is going to reduce our tax burden every year.
So, when the net income increases, the net income before tax increases. Of course, the benefits of this credits on the Redecard transaction reduces proportionally.
So, right now it’s around 27%, its going to be between 27% and 29% the next six years. In terms of our credit card loyalty program, in spite of the adjustments we made, the change we announced, we have kept our market share.
We had not noted any impact in our market share so far.
Mario Pierry – Deutsche Bank
Okay. Thanks.
Rogério, just can you share with us what is this fixed number that’s going to reduce your tax burden every year?
Rogério Calderón
It’s around 150, R$160 million per quarter. If you remember we announced it – I think was 3.7 billion tax benefit and this is in spread out six years around 600 per year, what means a 150 or 165 per quarter.
Mario Pierry – Deutsche Bank
Perfect. Great.
Thank you.
Alfredo Egydio Setubal
Thank you.
Operator
Our next question comes from Daniel Abut with Citi.
Daniel Abut – Citigroup Global Markets Inc.
Good morning, gentlemen. Two question, even that you are disclosing now, now that we have all the information of the final rules of Basel III and you did a very good job in one of the slides of explaining, how comfortable your capitalization is and there all the scenario up to 2019.
And even there is another slide, you actually when you disclosed – when you recompose the ROE you are showing that the excess capital is a drive on the ROE. Will that make sense to consider an increase in your dividend payout ratio?
Again given that you now know that you have very comfortable rate to Basel III, asset growth is likely to remain much lower than in the past, and is unlikely you’re going to be doing any acquisitions outside Brazil, in Latin America even the big difference and evaluation that Rogério refers to. Wouldn’t that be a way to support your ROE given the consequence for capital situation?
Alfredo Egydio Setubal
All the numbers show some good perspective considering Basel III, but on the other hand we are assuming our conditions of the market, the pressure, competition, uncertainty that keep us more conservative in terms of keeping the same level of dividend that we used to pay that is around 33 something of the net income. We are not planning any changes in that.
It’s giving us a more clear vision about what will happen in the financial system in the country with the delinquency and everything together. So at the moment, we are not considering any changes in this level of capital.
We understand that we are in what seems to be a comfortable position. But anyway we wanted to keep this capital to see really what is happening in Brazil, outside Brazil and other uncertainties that is around the global economy and also, specifically, in Brazil.
Daniel Abut – Citigroup Global Markets Inc.
Thank you, Alfredo.
Operator
Our next question comes from Daniel Sasson with Credit Suisse.
Daniel Sasson – Credit Suisse
Hi, everyone. Good morning.
Thanks for taking my questions. The first one is on asset quality.
I understand that even with the 30 bps improvement in NPRs you posted this quarter, you still see room for further improvements in NPR ratios throughout 2013. And on the back of that, you think you’re on track to deliver provision expenses distributed to be in guidance.
But thinking forward, however, I know that it’s still too early for official guidance as our estimates for 2015. But I’m curious if next year when you probably have our loan book mix closer which already considered to be ideal in the payroll mortgage and large corps, do you see the possibility of provision expenses was falling or being flat in absolute terms for the rest of 2013?
And I’ll ask my second question later.
Rogério Calderón
Hey, Daniel. It’s Rogério.
We believe that most of the benefits out of our mix change is going to be finished during 2013. We think that the quality – the asset quality is going to improve, and we still see some potential reduction in our nominal amount for loan loss provisions in 2014.
Of course, this is very much dependent upon the acceleration of the economy. If we had the credit portfolio growing faster than the current speed, then eventually we don’t have the same deliver – to give you to the shareholders.
But of course it’s going to be on the upside circumstance. Considering everything the same level that has being posted right now, we – as we see some marginal reduction in our total amount of loan loss provisions for next year, but it’s going to be closer to 90 million lower than that, but closer too.
Second?
Daniel Sasson – Credit Suisse
Yeah. Thanks a lot for that.
My second question is on the evolution of NII, especially regarding margins with clients. I’d like to know if you decreased your spreads and margins in revolving credit lines so in terms by expanding share of credit card base rates for the revolving portion of credit cards.
The reason I’m asking that is to see if you’re really aligned with your main private competitor that announced this kind of changes for the whole customer base. But you’re implementing that in a more gradual manner with your.
Rogério Calderón
No. This is a gradual change.
We don’t have any major impact. Of course there’s the seasonality in the first quarter, when some of the lines have – had been reduced more than orders during last year.
And of course, as they account for a bigger portion in the first quarter sometimes, they increase the impact when you look – when you compare different quarters. We don’t see any major impact.
And particularly, when we look from the current level one onwards, then we see the positive. Why?
Because we had lower spread contraction as we mentioned at the beginning of this conference call. And we have the volumes accelerating.
So we see NII or at least on its portion regarding margin with the client to grow from the level presented in the first quarter.
Daniel Sasson – Credit Suisse
Okay. Thank you, Rogério.
Operator
Our next question comes from Saul Martinez with JPMorgan.
Saul Martinez – JPMorgan Securities LLC.
Hey, guys. Thanks for taking my question.
I hate to beat a dead horse, because it seems like everybody has asked about NII, but I’m going to as well. It’s more of a broad question and that’s just, can you just – what’s your level of confidence that NIIs hit the bottom in nominal terms in 1Q?
And you’ve always said or you’ve consistently said in the recent quarters that the hardest thing in terms of your projections, in terms of your guidance and expectations is to talk about NII, because of all the moving parts. And some of the things that and they also ask because some of the things you’ve said on the surface to me do seem a little inconsistent, you mentioned NII being flat in 2013 versus 2012, that I mean, you just mathematically given 1Q that’s very difficult to reach.
And you’ve also said that you don’t see a big quarter-on-quarter increases in NII. You don’t see very big quarter-on-quarter increases, you’re not going to get anywhere near flat 2013 versus 2012.
So if you can just comment on your level of comfort that all the things you mentioned about repricing and mostly being over. How comfortable you are at that?
And what your level of confidence is that the first quarter or before in terms of net interest income? Then I have a follow-up question as well.
Alfredo Egydio Setubal
We fully agree, we recognize that it’s going to challenging to reach this level. It will require something like 5% or 6% less interest income growth every quarter.
We are counting on growing volumes and we are counting on reducing pressure on expense from now, and we think it’s possible. As we’ve said before, we recognize how difficult it is, but we haven’t given up, so we think its possible and we are doing for that.
It does not happen; it’s going to be closer to that anyway.
Saul Martinez – JPMorgan
You think that 5% to 6% Q-on-Q growth on average 2Q to 4Q is a realistic possibility?
Alfredo Egydio Setubal
Depending on the volume, yes.
Saul Martinez – JPMorgan
Okay. Second question is on your, I mean, obviously you can’t talk about individual client exposures and there have been some concerns around individual specific exposures to Batista group.
But is there any risk that – I’ll ask the question in a broader fashion. Is there a risk that exposure is to select large corporate clients’ poses a risk to the very positive outlook for loan loss provision in this year?
Alfredo Egydio Setubal
Thank you for your question. We are limited to answer on specific clients due to the Brazilian law at center.
But we must recognize that we are a leading bank in Brazil. We, of course, have a large exposure to all the large corporate segments and regardless of not being able to give you more details about clients’ exposure.
It’s only natural that large companies, which had large exposure in financial system, we also have large exposures on our balance sheet. So after having said that, we are reiterating that our guidance of R$19 billion to R$22 billion, of course, encompasses all risk we have, all the strategic analysis we do.
And we are reiterating that under any of those sequences we are going to deliver our loan loss provisions in side the guidance.
Saul Martinez – JPMorgan
Okay, all right. Thank you very much, Egydio.
Operator: Our next question comes from Ian Smith with AXA Investment Managers.
Ian Smith – AXA Investment Managers
Hi, guys. Just a couple of questions on asset quality, is okay.
The first one is on just the shorter term NPL ratios, sort of 50 day to 90 day and the one day ratio. Both picked up in the quarter, is that just completely a seasonal factor or you are seeing anything there that might give you some room for caution on your guidance of the 90 day and 60 day ratio is falling through the year further.
And just following the renegotiated loan portfolio, I think it came down slightly, but it is still above 5% of the overall loan portfolio. How do you see that moving going forward?
I suppose it kind of plays into sales question on certain large corporate accounts. Do you anticipate that restructured loan portfolio will continue to trend or do you see profitable room for that to growth through the year?
Alfredo Egydio Setubal
Okay, Ian, thank you. In terms of our early delinquency, it’s all related to the seasonality of the first quarter.
The average NPL early delinquency measured from 15 overdue to 90 days, increased 40 basis points. It happened to the same last year.
If you look at from December 2010 to March 2011, it went up actually 80 basis points. If you look backwards to December 2009 to December 2010, it was 40 basis points.
You can go further and the best you are going to see that this is very much the same trend. We actually don’t see any reason for major effects on this.
Remember that we also look at our portfolio details-by-details and we’ll see – we see the trends very much in line with our expectations, normally the second quarter and I think it gives me a very good opportunity to highlight this point. Normally the recovery happening in the second quarter is not stronger than the third quarter, because we have the impact of this increasing a little in the first quarter.
So normally the second quarter tends more towards the stability event, we improve a stronger third quarter when there are positive cycle in asset quality as we see in our books. You also mentioned the renegotiation we have.
We have actually changed the way we present this theory, these are explained in the MD&A, we have not sheltered anything in terms of our strategy on renegotiation and this is actually reducing now the reduction with is the function of the volumes of over due, so last year and when we expect these amounts to reduce, remember that we are focusing towards lower risk, so renegotiation tends to break line permanently actually. It’s now representing 3.8% of the total portfolio coming from percent that we sent down is expected.
Ian Smith – AXA Investment Managers
That’s it. Thanks very much.
Operator
Our next question comes from Marcelo Henriques with BTG Pactual.
Marcelo Henriques – BTG Pactual
Hi guys. Thank you for taking my question.
I also have more like a broader question and it's a discussion between margins and NPLs. In my opinion, of course, they go hand by hand, right?
I mean if you have more risk, you should charge more. If you have lower risk, you should charge less.
So no wonder the NPL failed because you are – definitely when risks cost more, then the margins also collapsed. But I’m wondering the dynamics of the NIM versus NPL I mean if that a risk adjusted NIM going forward you see a little over or higher than what we are seeing today.
In my opinion just to give a background what I think you got. I think if it was like some years ago when you had a fewer of very high demand for credit because the credit was even less penetrated, the public banks were not that aggressive.
You know you did have very, let’s say good room to have more bargaining power with your spread, pricing, given the environment. The population was less leverage so on and so forth.
But going forward, the scenario seems to have change quite a bit. There were some certain credit segments that were really fatigue.
No wonder, you’re not growing there, actually you’re declining. When you talked to the banks including public I mean everyone wants to grow in payroll and mortgage and large corporate you know the traction.
So everybody is like pointing against the same direction, and it seems like the demand it’s not as heated as it was a while ago, because the credit kind of already penetrating some segments and not to mention the overall relish of the middle class. What I’m trying to get is that how confident are you that the NIM adjusted to risk going forward even if going through a lower risk environment this could be beneficial to the profitability of the bank in a way that if this scenario persist longer it means that your ability to price better or to have a better spread or to keep the spread just at the risk in a better – higher than in the past pretty hard in my opinion.
So it’s a broader discussion it’s more like a theme and it’s not about the next quarter or whatever but it does seem comprise the profitability of the bank, so I’m just learning what are your thoughts on this?
Rogério Paulo Calderón Peres
Well, in terms of our net interest margin, if you look on Page 5 you credit is spreads is actually showing stability and now showing first signs of real increasing. When of course we look at the risk adjusted net interest margin not to only on credit there is an impact here of the order floating activities I mean Selic is impacting a little bit this order line.
But if you just look at the green line in the chart here, there is a pointing to the trends on credit that risk adjusted credit spread is actually stable or now marginally going at. We expected same trends to keep happening in the comment coming quarters then why it’s possible for us to believe that we’re going to keep leading these movements towards lower bids.
This is based on the strategy. So we definitely believe that we’re going to have to show better condition than they are.
There is no growing on those segments we should look at the segments, one revenue each time. If you look at the payroll loans you should consider the fact that we are growing on the figures be built up by BMG sales force, so it is actually either to grow because we are not stealing from the markets, we are replacing one of the previous agents in the market that be the math of new portfolio here and this is showing a growth if you compare our growths its higher than 20% in the quarter closer to 50% year-on-year and this is going to keep being delivered at a very fastest speed so 60%, 70% year-over-year on payroll loans.
If you look at the mortgage then we should highlight our partnerships with the home brokerage that give us a solid base for keeping – growing. This is not based on the markets every day, so it’s actually a very solid relationship with the originators of this type of transaction.
The third line that’s because my attention is the large corporations and then we’ve had our franchise, our market share is very important among of the largest banks in the Brazil, and then more the economy pulls grows on this we are going to keep delivering a very good and attractive growth on those lines. So this is going to help us to keep this movement towards lower risk, what should led to net interest margin in credits to go upside.
Marcelo Henriques – BTG Pactual
No, I understand the green line in the next quarter. And so I was just -- that why I was asking going forward if the trend continues to be declining risk-adjusted margins or actually if you're not seeing this at all?
I mean it's a reverse. The trend is still continue to go up, if it was the case or slightly up if it was that case in the first quarter.
So that's why I asked more in a long – mid to long-term perspective and not the second quarter, third quarter, if the trend is – I mean given the environment that we have if you're seeing the trend in the coming years in a declining trend or upward trend or stable. Because when I had the discussion about the spread in Brazil, it would go down, blah, blah, blah.
But you had the argument that the NPL should also go down, and then you're not going to see a contraction in the NIM or in the risk-adjusted NIM. I am just wondering if that changed given the circumstances that taking place, in the mid to long-term you’re not in the second quarter, third quarter?
Rogério Paulo Calderón Peres
Marcelo, when analyzing our behavior, right now, I think it’s very important to look at the risk adjust net interest margin, because we are changing from high risk to low risk. Of course, this is causing the figures, the gross figures, the spreads to go down, and this should offset, if our strategy is right and we are confident that it’s right.
It should be offset by this lower level of loan loss provisions, so driving net interest margin – one day, of course, when everything if they finish it, this trend on net interest margin adjusted by which is going to finish, and then the growths – when looking at future the growth should be based on volumes with a more stable, risk-adjusted net interest margin. But in the short-term, we expect net interest margin – risk-adjusted net interest margin to keep improving, slightly, gradually as I said before.
Marcelo Henriques – BTG Pactual
Thank you, Calderón. Thank you.
Operator
Our next question comes from Boris Molina with Santander.
Boris Molina – Santander
Yes, good morning. Thanks for taking my question.
I have a question related to your appetite for market risk. If we look at your MD&A, I think it was the slide on Page 24, you showed the maximum bar on your balance sheet and it has gone up dramatically over the last 12 months related to recent history.
And also when we look at the volatility of your mark-to-market of available for sale securities versus equity, excluding your hedges, it has been a standard deviation of this mark-to-market around R$131 million over the last decade. Over the last couple of – actually, the last four, five quarters it has risen to around R$600 million and you had very positive returns at the end of that year coinciding with this increase in your max bar.
However, this performance reversed dramatically in the first quarter with a R$900 million loss after taxes. So I was wondering what explains the change in this appetite for market risk?
Should we expect this level of volatility in terms of gains and losses in available-for-sale securities to continue going forward and was this change in risk appetite driven by the need to have the treasury operations try to offset weak performance in your – in the retail banking operations?
Caio Ibrahim David
Hi, Boris, this is Caio, thanks for the question. There is no change in the risk appetite for market risk at all.
As Alfredo mentioned before we are maintaining the [broad and price] limits of the trading book, so what pretty much obvious first quarter was related to the volatility of this yield curve, so fixed rates in Brazil change the lot in terms of this year volatility and that’s pretty much the impact on this. So there is no change in the trading book risk side and risk framework.
And, of course, what we’re seeing in terms of available for sales is also part of the question. It’s the related reduced volatility that I’ve just mentioned.
And when we’re talking about the available for sales securities we are talking the structural part of it is for the portfolio. So we are not talking any more about the trading or now about the banking book.
So when you see this volatility through the shareholders equity, it’s related to the banking book it’s structural. So doesn’t mean that we are assuming additional risk.
Just as our asses and liability management question here that is basically on this analysis.
Boris Molina – Santander
I would like to assume that the mark-to-market in your PGBL and VGBL portfolios does not affect this figure. I think it's all in the trading, in the trading that has mark-to-market risk…
Caio Ibrahim David
Excuse me, could you repeat.
Boris Molina – Santander
Yes, looking through your disclosures in the account, the big PGBL and VGBL portfolios are the units that back the technical resource, R&D in the trading book or in the value for sales. So this volatility that we are seeing that I just mentioned is not related to because that’s another bank, but this is – you have to fill throughout this the PGBL and VGBL are available for securities.
I just wanted know if this is the case?
Caio Ibrahim David
No. That’s not our case.
Boris Molina – Santander
Okay. Thank you.
Caio Ibrahim David
Sure. Absolutely.
Thank you.
Operator
This concludes today’s question-and-answer session. Mr.
Alfredo Setubal, at this time you may proceed with your closing statement.
Alfredo Egydio Setubal
Thank you everybody for participating in this conference call. We feel very confident in the strategy and reducing risk and expenses and knowing that it’s challenging for growing the revenues.
It is not easy, but we are confident that we are going to do that. And we expect you to be back again for the next conference call for the second quarter and will (inaudible).
Operator
This does conclude our Itaú Unibanco Holding earnings conference for today. Thank you very much for your participation.