Jul 31, 2013
Executives
Alfredo Setubal – EVP and IR Officer Rogério Calderón – Corporate Controller and Head, IR
Analysts
Daniel Abut – Citibank Carlos Macedo – Goldman Sachs Philip Finch – UBS Securities Amit Mehta – PIMCO Marcelo Cintra – Deutsche Bank
Operator
Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Itau Unibanco Holding Conference Call to discuss Second 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.itau-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 3921256 hash tag. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996.
Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors. With us today in this conference call in Sao Paulo are Mr.
Alfredo Egydio Setubal, Executive Vice President and Investor Relations Officer; Mr. Caio Ibrahim David, Chief Financial Officer; and Mr.
Rogerio Calderon, Corporate Controller and Head of Investor Relations. First, Mr.
Alfredo Setubal will comment on second 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 Setubal
Hello. Good morning for those who are in the US, in Brazil, in the America zone.
Good afternoon for who are in Europe. Welcome to our conference call for the second quarter.
For those who are following through the Internet and through the slides, we start in slide number 2, highlights of the quarter. The first one is the results R$3.6 billion, means an increase of 3.1% when we compare it to the first quarter of this year and R$7.1 billion for the whole semester.
The second point is our recurring ROE. With these results, the ROE was 19.3%, a little bit higher than the first quarter at 20 basis points even considering that we had a drop in our results from the financial margin with our client in a total of R$329 million when we compare to the first quarter of this year.
So this is a good operational banking result for this period considering this drop that we are going to talk more later. Another highlight of our performance is the credit portfolio; the growth was 2.5% in the quarter and 8% when we consider the 12 months.
We continue to reduce our current [ph] finance portfolio. So we had a reduction in 12 months in the portfolio of 20%.
If we consider these reductions, our portfolio in 12 months which had – grow around 12%, more in line with the financial system when we saw the data that released by the Central Bank. Financial margin of clients, we grew 3.4%, the totaling R$11.3 billion, reversing the trend of the last four quarters, it is important with the first quarter that we are able to roll this line.
In our view is the turning point that probably will continue to grow slowly this line. I think most of the adjustment in our credit portfolio is done and also in terms of spreads we are not seeing the spreads reduction in the last month, and some line is even growing due to the economic environment being [inaudible].
So we believe that financial margin with clients we will start to grow quarter by quarter, let’s see. Financial margin with credit, net of the loan losses provision expenses, we showed a growth of 7.6% in the quarter and that’s also a R$6.3 billion.
What is very important is that the quality of the credit portfolio continues to improve, the 90-day NPL decreased again this quarter and decreased 30 basis point, achieving 4.2% where there’s a good level and a huge reduction when we compare to the same periods of the last year, reduction is 100 basis points. Also it’s good to see that the NPL between 15 days and 90 days decreased also in a very important base, 60 basis points in this quarter and 110 basis points when we considered 12-month.
So, I think it’s good. It’s good to see that our policies of reductions of the risk of the credit portfolio that we started almost more than 18 months ago continue to show a very positive trend in terms of quality and in terms of decreasing the provisions for loan loss.
Another point that is important is the banking fee, an increase of 5.4% and we achieved R$5.4 billion in the quarter. The result also from our insurance operation including pension plan and capitalization and so on achieved the R$1.4 in the period, 5.7% increase for the good [ph] 11.2% when we consider 12-month, so our insurance operation that we manage are very good and growing also in a very good pace.
Another point is that is part of our strategy in the last two years, so it is [ph] control of our non-interest expense, the growth in the period was 4.2% when we compare to the first quarter or the seasonal, the growth in the second quarter, and when we compare 12 months, we continue to grow about 4.5% as lower than inflation for this period. If we made an adjustment of the consolidation of the Redecard to make it more comparable with last year, we see that the growth of our expenses is 2.5%, so much lower than the growth of the inflation in the same period.
And considering all these in terms the revenues, losses, claims and so on, our efficiency risk-adjusted ratio increased 70 basis points towards a good number in line with our expectation and our guidance. Going to page 3, we see our results in a little bit more detail.
We see here the financial margin with markets with a decrease of 55% in the quarter. This is more related to the volatility of the market especially in our case related to the fixed bonds and external bonds that we are going to show you in the coming slides later.
But we continue in a very good pace in terms of loan losses and claims. The total in the quarter was R$4.1 billion with a reduction compared to the same – to the first quarter of this year of 5.8%.
So we continue to go in line with the expectation of our – expenses for this year related to the good quality of the new loans that we provide in the last month that are making our credit portfolio even better. So we finish here with the recurring result of R$3.6 billion with a growth of 3% when we compare it to the first quarter and is stable when we compare the semester of this year with the first semester of last year.
On page 4, we show a split between our banking operations and our insurance operations. We can see that from our R$3.6 billion of net result recurring, a 2.9 from our banking operations.
This means and when we compare the location of capital, ROE of 20.4%, efficiency ratio of 52% and efficiency ratio adjusted to risk is 75.4%. Insurance almost R$600 million in results for the quarter, ROE of 35.3% and efficiency ratio of 33.4%, and risk-adjusted efficiency ratio of 65.3%.
So I think we were able to show very solid numbers both for banking operation and insurance. On page 5, we can see the financial margin.
The financial margin has been reducing in the last five quarters. The peak in this table we see the 13.4%.
We finish this quarter with 11.4%, and we see that the base of reduction reduce than we expected due to the increase of the interest rate and more stable spread, and as I said in some lines, even growing the spread, that these line that we will start to grow or stabilize at least in the coming quarters. We can see them [ph] also in the net credit spread, it’s the green line that we have been growing them – the net credit spread in the last three quarters where we achieve 7.2%.
And the risk-adjusted margin with clients that also is growing. So in our view, we are almost done in terms of adjusting our credit portfolio with the newest [ph] spread and adjusted and also with the new interest rate, we believe that the financial margin will start to increase again.
On page 6, we can see how we finished the first quarter with R$10.9 million in margin with clients and we finished R$11.3 million and how this was done. So R$ 219 million was related to the growth of the loan volumes [ph].
R$121 million is related to more calendar days in this year period compared to the first quarter. Selic already improved R$115 million in revenues.
And then we see product mix and product mix in spread also reducing – still reducing the margin but in a much lower pace and much lower numbers when we compare to other quarters, things we began to reduce our risk appetite and also the reduction in spread in the whole financial market. So that also give us more confidence that these financial margin with clients we start to grow in the coming quarters and continue these trend in the coming quarters that we saw in the second quarter.
So, also we had a positive of R$64 million in equity in earnings with the – our affiliate companies. On slide number 7, we see as these trends also in the financial margin of credit achieving R$6.3 million and the expenses for allowance for loan losses.
Here net of recoveries of credits and write offs R$3.6.million; I think the trends are very positive in both lines and also give us confidence for the coming quarters. And on slide 8, we saw the last quarters, the trends of the financial margin with the markets.
We have been in a lower base here and especially in the last two quarters and this quarter especially due to more productivity in the market as I said especially related in our case the fixed bonds and external debt bonds. So we finished with the lower result in financial margin with the markets and probably the whole history of the bank acquisitions [ph] and merger and even lower when we compare just Itau and [inaudible] and some others.
On page 9, we see the banking fees and result from insurance. As I said the insurance in our case, we are not in the health insurance as you know.
We are more related with our participation with Porto Seguro and directly with what we call the bank assurance product that we sell through our network of branches. But this insurance business has been very good and growing 11% in the last 12 months almost 6% in this quarter.
So it is a good number and also the service fees that continue to grow, almost 21% – more than 21% in the last 12 months and more than 5% in this quarter when we compare to first quarter. Here we have the impact, of course, of the Redecard that now we have 100% of the company.
On page 10, we can see a little more detail of our insurance operations. I think it’s important to see that also here we saw a reduction in claims.
It was [ph] good for us in terms of the reduction of our risk, of our asset and our business and continues to – the insurance business continues to grow in a better pace than the banking activities of Itau Unibanco. On page 11, we can see the loan ratios.
As I said, we are in 4.2% when we consider the total NPL ratio over 90 days for our credit portfolio. Both individuals and companies are reducing and this is the lowest level that we release in case [ph] the merge of Itau and Unibanco at the end of 2008.
So I think that the policies of reducing the risk are showing at the result. We can see also in the bottom chart of this page, it has a coverage ratio that continues to increase for the fourth quarter in a row.
So all the numbers goes well in the change of our policies. On page 12, we see here the extent for provision for loan losses also reducing due to lower provision than we are making in the quarters.
We continue to have a very good level of provision. We continue with R$5.1 billion in complementary provision for losses in our expected loss models.
So we didn’t touch these complementary provisions in the last two years. On page 13, we see this trend of the NPL ratio between 15 days and 90 days.
Also here we can see good numbers and good trends that also give us a confidence that the NPL provision will continue to reduce in the coming quarters. We see here a drop of 60 basis points in our portfolio in terms of delays of our clients both individuals and companies in the same trend.
We see here in the bottom of the page, the NPL creation and write-off also in the good trend. So everything in line with our policies of reducing the risk.
And on page 14, another important part of our strategy, that is the control of the no interest in expenses. We continue to have a very good trend, 4.6% in the last 12 months.
While it’s a good number below the inflation and in review is running at a base of 6.5%. If we adjust the total expenses which is through consolidation of Redecard that we bought in the second semester of last year, we saw that the growth of our expenses is only 2.5%.
So we continue the good trend in terms of controlling the expenses as part of our strategy to keep high levels of return for our shareholders. You saw on slide 15, the trend of our efficiency ratio.
The efficiency ratio traditional measure is increasing because we are not able yet, until now to increase the margin of the clients. As I said, with four quarters in reducing this line of deficiency ratio deteriorated.
But when we analyze the efficiency ratio adjusted with the provision for loan losses and the claims in terms of insurance business, we see that we are improving our numbers and I think it is very important that the trends of this risk adjusted efficiency ratio because it show that our strategy is going well. On slide 16, we saw the number of assets we finished with R$1.57 trillion they were all assets, total assets.
With a growth in the quarter of R$2.8 billion – 2.8% and 19% in 12 months. In terms of stockholders’ equity, we have a growth of 1.8% in the quarter, the total of R$75.78 billion is the end result, stockholders’ equity.
On slide 17, we see more detailed of our loans by type of client and we finish the total credit risk considering private securities that we have in our portfolio with R$467 billion, this is the number of our credit exposure for individuals and companies by the end of the quarter. We continue to decrease our financial – vehicles financing portfolio.
We finished with R$45 billion, a decrease of almost 20% in 12 months. And probably we are going to see some reduction yet in the coming quarter.
The payroll loans is increasing in a good pace. We finished with R$18.4 billion in payroll loans.
3.8 of this came from our JV already with the – local BMG, so the JV is also contributing to the growth of this business that is a business that is important as part of our strategy of reducing the risk of our credit portfolio. Mortgage also as part of the strategy of growing – lower risk portfolio.
We finish with R$21 billion with individuals in this portfolio with a growth of 32%. And we continue to be very confident that the portfolio – price that we are providing the loans or mortgage is good and we – in our ratio of loan to value of the houses and apartment and so on, are very low, lower than 8% in the origination which we analyze our growth of portfolio mortgage will be closer to 60%.
So we are very confident that it’s a good business as we continue to seek specialties but as I said, the profile of our client is more related to high income individuals. In the companies – we continue to see a reduction in very small, in the small companies.
Middle market companies, we are growing a little bit the portfolio but anyway, when we saw these three segment together, we continue to see a reduction in the portfolio both in the quarter and in 12 months. So, it’s part of our strategy of reducing the risk of the portfolio.
In – by the other hand, corporate is growing. We continue to see a reasonable demand for credit related to large companies in Brazil and the growth in the 12 months is almost 16%.
Latin America is the client that we have in the countries that we have banks as we operate in retail and wholesale banking and the growth here was 11.3% in the quarter. But this is more related to the devaluation of the real – of course we have some growth also in the portfolio, in the local currencies.
But when we translate that to dollars and to reais, we saw this kind of growth in our portfolio. On page 18, we see here all the funding and assets under management that we have and working capital of the bank, R$1.5 trillion with a growth of 3.1% in the quarter.
On slide 19, we see that the – as we – the pace of growth of our portfolio is not very high, the funding is very good, they’re very good level to fund the new loan. On page 20, we see the movement, the changes in our stockholders’ equity.
We show a growth of 1.8%. We started in the first day of this quarter with 74.4.
We have a net income in this period of 3.6, so this is an increase in our stockholders’ equity. We pay dividends and interest of over 700 million for the reductions, 1.2 also a reduction in the asset valuation adjustment for the available for sale securities.
And we bought R$300 million in June, in shares, we repurchased our own shares in June. And so that’s the explanation why our portfolio had an increase of 1.8 and finishing of R$75.8 billion.
On slide 21, we can see these adjustments to market value, this reduction in our portfolio of R$1.2billion related to our, as I said to our bonds, particular bond portfolio, behavioral [ph] view and also related to this, external debt bonds that we carry outside to hedge our support to bankers and that’s in dollars, that we have that compose our – in our BIS numbers. So we should – we can see here in this page that we consider assets and it’s also influenced of the – liability that influence all our numbers.
Also expect in reality in our portfolio should have been only R$500 million. So that explains our reduction in the stockholders’ equity in the quarter.
On page 22, the BIS ratio of 17.5, a little bit lower than – by the end of the quarter, or the first quarter but there is to – very, very comfortable to face the new operations of the bank. On – this is slide number 21, we can see the ROE, the recurrent ROE, which we consider only the operations of the banks not considering the treasury operations just to show the number of our – of this recurrent banking business.
We can see that this green line that shows that we have been growing our banking ROE in the last five quarters not considering the – as I said, the treasury operation with the market. So we finish with an operational ROE of 21.2%.
This total number as I said at the beginning considering our all the operation was 19.3 but here we rationalize that it’s important to see that our operations are very good and very solid and growing. On slide 24, you can see the how much we paid in terms of dividend and we continue with the quality of distributing around 30% of the net income.
On slide 25, the market capitalization on the bank by the end of the quarter R$122 billion, decreased this year also because of the evaluation of the Bovespa index and its rating continuing a very good level. On slide 26, we see the traditional segmentation that we made between – among the commercial banking, the consumer credit, wholesale banking and activities with the market and the excess of capital.
We see the thrown lower net income of R$3.6 billion. We see here that R$1.69 billion came from our commercial banking as with daily [ph] operation with a RAROC of 33%.
Consumer credit, we see here also impacted by the car financing business, R$485 million with a RAROC of 21%. Wholesale banking R$774 million.
Here also with loan losses and claims considering these lines, so R$774 million and a RAROC of 13.6%. In market and excess of capital, R$671 million with a RAROC of 12%, so that the composition of – in a managerial way as to see the four big segments that we use it to win [ph].
On page 27 is the IFRS numbers. Their net income is a little bit higher.
The net income in the utilization is R$3.78 billion as opposed to R$3.6 that we released in the Brazilian GAAP. This is related to the way the utilization that we need to approve loan losses and interest rate but this is not very big but we have some numbers [inaudible].
And on slide 28, we saw here the expectations for the rest of the year. Total credit portfolio, we are changing our expectation from 11% to 14% growth to 8% to 11% growth assuming this is more realistic considering that we have still some adjustment to make and car financing portfolio and the lower base that the economy is growing in our expectation around 2%.
All the others we are keeping the expenses provision for loan losses between R$19 billion and R$22 billion. We are running in a base of R$20 billion but we decided to keep the expectation in the same level.
Banking fees growth of 15% to 18%. Non-interest expenses, 4% to 6%.
These two we maintain and also the risk-adjusted efficiency ratio that we expected it to grow, to improve 200 to 400 basis points and we are in line with this also [ph]. And to finalize page 29, the new acquisitions and partnerships that we announce in the second quarter, the acquisition of the Redecard from Citibank for R$2.7 billion and we need the approval of the authority peer [ph] to go on with this transaction.
Cencosud was a JV in Chile in line with the strategy that we have also here in Brazil, with other retailers like PBDE [ph] and Wal-Mart and Café Pu [ph] in the same line. We made this JV with Cencosud and Chile and Argentina.
We bought two branches of Citibank in Uruguay to improve our share of high income individuals in Uruguay. We announced the acquisition through our JV, Itau BMG in payroll business of the BMG Seguradora Insurance Company and also we have the new occupational rehab [ph], the new reinsurance business in Brazil that we have now for 15%.
So this finishes our presentation and we are opening our lines to the questions that we will probably have [ph].
Operator
Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions) Our first question comes from Mr.
Daniel Abut with Citibank.
Daniel Abut – Citibank
Good morning, Alfredo. I have a general question on your trends with respect to the ROE.
As you correctly explained, we saw already an improvement this quarter even though there were some particulars about the quarter like your lower than normal financial margin with the market. And you also said that you expect this trend of improving the contribution from the financial margin with client that started this quarter to continue going forward.
So if I read between the lines, those two statements, it seems to me that the ROE should continue to improve from the 19.3% as we go forward. So where do you think the ROE is getting, where do you think you can sustain it going forward as this trend continue.
And in particular, if you confluence [ph] that with the page for that you show that the ROE of the insurance operation is 35%, the ROE of their banking operations 20.4% but there’s a drag on your overall ROE coming from their excess capital, which is producing only an ROE of 4.2%, is there anything that could be done to address that excess capital over time either via an increased dividend or via – put it into working acquisitions that could diminish that drag going forward and also favor the re-rating of your ROE?
Alfredo Setubal
Hello, Daniel. Thank you for your question.
I think the trend that we are seeing in terms of margin in our case as I said we are almost done in terms of reducing and adjusting the credit portfolio in terms of risk especially in the car financing. So this is, probably, this quarter we are going to see some reduction also but it is almost there.
The spreads are stable in some lines, in some products are even higher than in the past, so we see and [inaudible] that is growing up again and the lower pace of economy probably we’re not going to see much more pressure in terms of spread in the financial season in Brazil. So altogether, we see that this line will continue to grow and we will continue to have good numbers in terms of provisions for loan losses as I’ve said and I showed in some slides.
The delays are very low, so this is a good sign that probably the provision will continue to reduce in the coming quarters. The profile of credit portfolio is much better now than it was in the past.
So everything goes in line and then also the control of expenses, I think, will continue to show numbers of growth [ph] of expenses below inflation. So when we consider all these together, we see that they are really of the operation of the bank as showed in slide 23.
It is above 20% already if we analyze this quarter, standalone. It was 21.3%, not considering the market operation.
So I think it’s something around 20%. It is feasible to achieve.
Of course, it will be very difficult to make provision predictions and so on to the treasury operations especially in this environment that we are here in Brazil and also the international market also on very high volatility. And so – if we analyze our operations, I think with – ROEs are already in the 20s, low 20s, so I think it seems to us [ph] considering the delays and so on, what we see in terms of numbers and spreads and so on, that is sustainable for the coming quarters.
Rogério Calderón
[Inaudible] Rogério Calderon. I’m going to address the second question.
The reason we posted this chart regarding the two main operations we have in the bank is actually to reinforce how important is the banking operations and how profitable and efficient is our business when we consider the banking operations by itself. But your question, I fully understand your question regarding excess of capital, I think we can say here is that we permanently look at the capital position trying to conclude if the capital we are carrying in our balance sheet is enough or not, if it’s in excess or not.
You’re going to remember that we use more than R$10 billion last quarter last year to buy a minority interest in Redecard. This is a good example of how we can use our [inaudible] excess of capital.
It was a reduction of our capital position, balanced it by a reduction of cash, a very good example of how we intend to invest our capital. So we had similar transactions in this last quarter such as credit card and some others as Alfredo just mentioned.
We also have a buyback program that has been in full course. We bought 9 million shares during the second quarter.
We also increased the dividend payout by 10% in this quarter. So altogether, it this sort of actions we are taking regarding our capital management.
I’m going also to call your attention for the fact that we still have some doubts on the regulations regarding BIS III, so we can do some movements but we need to be prudent in the way we move because we don’t have it, the final words regarding BIS III. But we are keeping very much attention on this as well.
Daniel Abut – Citibank
Thank you, Rogério.
Operator
Excuse me. Our next question comes from Mr.
Carlos Macedo with Goldman Sachs.
Carlos Macedo – Goldman Sachs
Good morning, gentlemen. Congratulations on the strong results.
I have a couple of questions. Both are generally related to credit.
First, your new guidance for growth has – loan accelerating from around 6%, you’re now to – on the bottom end of the guidance, 8%. Does that mean there is a greater appetite for loans at the bank or is that just the reflection of a much easier, basic comparison at the end of next year.
And the second question is regarding your provision expense guidance. You did lower your loan growth guidance but did not touch your provision expense guidance, given the level of improvement that you’ve seen in NPLs, what is the likelihood that that guidance is really a little bit too conservative and that you actually will end up tracking not only the lower end of that guidance, so really below that guidance.
Thanks.
Rogério Calderón
[Inaudible]. So first, regarding our growth expectations, we don’t intend to change anything in terms of our risk appetite, credit risk appetite.
We see some accelerations in the second half of the year. This is related to the maco scenario.
It’s also related to some level of acceleration in the car loan that is still behind what we had at the beginning of the year in terms of expectation, but marginally improving from the first half of the year. So altogether, we see some acceleration in the second half of the year but it’s going to be in between 8% to 11% as we mentioned.
Carlos Macedo – Goldman Sachs
Okay, just one follow up question quickly. Previously, you had mentioned that the target for the BMG partnership was to reach R$12 billion in loans at the end of 2013, and you’re at R$3.8 billion at the end of the second quarter.
Does that target still remain?
Rogério Calderón
Yes, it still remain, and if we are – base it on the pace we are right now, eventually, we may be over that figure in the periods we were mentioning. It was in the – by the end of 2014, remember it is the two-year periods when we mentioned this targets.
And we are a little bit ahead of the schedule on this implementation. Back to your second question, I think it’s fair to say that if conditions are kept at the current circumstances we have and you highlighted that most of the – most or all of the indicators regarding delinquency are behaving very well, so if all the conditions are kept, it’s probably likely that we are going to post our total expenses on loan loss closer to the low end of the guidance.
Carlos Macedo – Goldman Sachs
Okay, thank you, Rogério.
Operator
Excuse me. Our next question comes from Mr.
Philip Finch with UBS.
Philip Finch – UBS Securities
Good morning everyone. Thank you for taking my question.
Really to do with the slide decks of your presentation which shows the evolution of your loan portfolio mix where we’ve seen in the last 12 months the SME and the auto portfolio shrinking quite a lot. I guess, the question really is, from where you are today, how much more – how much further change could we see in that mix especially in regard to the SME and the vehicle segments?
Thank you.
Rogério Calderón
Yeah, so specifically on vehicles, it’s a long story actually. What we are seeing now is worse than what we had at the beginning of the year.
So we were expecting inflection points in this credit portfolio by the second quarter. And now, we don’t expect to see the inflection points or the beginning of the restarting growth in the year 2013, probably just in 2014.
What it means is that by the year end, probably, our total portfolio on auto loans is going to be around R$41 billion, R$42 billion. When looking at this, it means we see marginally an acceleration from now on and the figure that we are posting now that shows a negative growth close to 6%, 5.7%; it’s probably to be much lower if not positive by the year end.
So growing from now on but not growing because of any change in terms of our risk appetite, but related to the fact that we expect some acceleration in the economy, not a huge one but a positive trend in the second half of the year. Also, and back to the vehicles loans, we do believe that the performance in the second half tends to be better than the performance in the first half but not enough to make the credit portfolio as a whole to restructure growth, it’s balanced [ph].
Philip Finch – UBS Securities
Okay. Thank you.
So just to summarize, can we say that the current mix [ph] you have today is close to the optimal mix that you would like to have?
Rogério Calderón
It’s closer but not [inaudible]. Probably, we have advanced maybe 70%, 80% of the total change of the mix portfolio because we still have and this is not only regarding Itaú Unibanco but the whole market probably.
We still expect mortgage to outgrow, to outpace the other lines of credit in this country.
Philip Finch – UBS Securities
Okay. That’s very clear.
Thank you very much.
Operator
Excuse me. Our next question comes from Amit Mehta with PIMCO.
Amit Mehta – PIMCO
Hi, thanks very much for taking the question. I just really wanted to get more color on your margin trends –
Rogério Calderón
Excuse me, Amit, we cannot hear you.
Amit Mehta – PIMCO
All right. Can you hear me clearer now?
Rogério Calderón
Much better, thank you.
Amit Mehta – PIMCO
All right. Thanks.
I just wanted to get more color on your net interest margin trends. I know you highlight a lot of the derisking of the book has occurred, but is there a lag in the margin trend that we might see going forward, and also is there anything that you’re doing specifically on your financial book where you think you can get a stronger performance going forward compared to the depressed quarter we’ve just seen.
So, if you could just elaborate on those margin trends from here, please.
Rogério Calderón
Okay, margin – our net interest margin with clients is, we do believe that the compression tends to decelerate further on and we expect to see net interest income is likely improving from now on, and probably such line [ph] at the interest income, two post growths in comparison to same periods last year is from the fourth quarter, so a better thing. We expect that by the fourth quarter this year, our net interest income should be outperforming a year ago.
What is not happening now, we said last conference call that we were expecting net interest income to accelerate, to grow, to restart to grow. As on the second quarter, this is what’s happening.
It is still timid in terms of movements. We expect some acceleration by the fourth quarter; we are going to be in a point that we will be outperforming last year fourth quarter.
This is really very important when addressing our net interest income expectations. Regarding the financial margins or the way we call margin with the markets, we still see some movements in the markets, some higher volatility than normal.
What makes it more difficult, the performance in this area, always remembering that we operate in very low-level of acceptable value at risk, what means that, it’s very efficient to control or to protect our shareholder total value, but it’s on the same hands, it does not allow treasury to take higher positions. What could make faster any recovery is a well superior decision.
So everything said, we do believe that we can perform better than what we posted in the second quarter regarding this line because the second quarter was actually the worst ever in our performances, but we recognize that the conditions are, if you [inaudible] right now to better perform but keep expecting performance to be better than what we posted in the second quarter, what is the positive outcome of this picture is that in spite of this not as good performance in terms of margin with the markets, our bottom line improvement comparing to same quarter last year is a meaningful improvement. What it means is that is that in case we were running at the normal level, our financial margin with the markets, we could be on a higher than 20% ROE as Alfredo just mentioned it.
Amit Mehta – PIMCO
Okay. So just to quickly follow up, just to understand clearly, on the financial margin, should we anticipate now an 800 plus result would be more exceptional because of where your risk tolerance is in terms of VAR or are we actually at a very depressed period because of the volatility?
And then also, I mean, your ROE, I accept the ROE is obviously physically – has shown an improvement, i.e. it’s 19%.
But, I mean, a lot of that has come from shrinkage of equity rather than from increase in profitability. So, I mean, the positive thing now is that these shareholder’s funds aren’t going backwards as we’ve seen in the past.
So, can you just elaborate, a, on the quantum of financial margin contribution and obviously, I’m hoping now that the equity doesn’t go backwards much further as we’ve seen over the last quarters or at least not improve – the pace has decelerated in terms of decline.
Rogério Calderón
Not sure I fully understood what you said, the sound was actually very pretty low here. From the portion that I heard, I could hear, what we can say is that we never supply any guidance in terms of our performance in this line, the margin with the markets.
However, of course, we believe that we can perform better than what we posted in the second quarter. The average we posted in our charts is actually a reference based on the past that does not imply any guidance for the future although, as I said, we expect to perform better in this light.
And in terms of the margin with the client [ph] definitely this is going to improve; I’m referring to the bottom line to be higher and then the ROE is a consequence.
Philip Finch – UBS Securities
Okay. Thanks very much.
Rogério Calderón
Thank you.
Operator
Ladies and gentlemen, as a reminder, if you would like to post a question, please press the star key followed by the one key on your touchtone phone. Our next question comes from Mr.
Marcelo Cintra with Deutsche Bank.
Marcelo Cintra – Deutsche Bank
Hi, good morning everyone and thank you for taking my question. Well, look, during the Portuguese conference call, you guys mentioned the focus on the credit card business which is also in line with the recent transactions that the bank did.
However, when we look at the transaction’s value growth of the credit card issued by Itaú, we see a deceleration over the past two quarters and transactions grew only 9% in the second quarter while the industry is growing close to 20% and your main peer is bolstering [ph] stronger growth sequentially. So I just would like to better understand if you guys are seeing a steeper competition on the segment and if this could represent a concern for us and what’s your overview for the following quarters for the credit card industry specifically?
Thank you.
Alfredo Setubal
This does not represent any concern. The trend in this business is a positive trend.
We have fully committed to serving this area. It’s very much related to the strategy we have defined that is related to the payments industry, more services fees added to our revenues.
So everything that is related to acquiring [ph] business as well, the movements we made regarding Redecard [ph] the recent movements you mentioned, Marcelo, related to the acquisition of credit card and [inaudible] and also the Uruguay and operations of Citibank that has an important portion of Redecard in that market. So this is very much related.
The fluctuations you saw in the balance sheet are much more related to the seasonality of this product by the year end and beginning of the year as a consequence of the movement in the fourth quarter. We don’t see any measure or any issue regarding any concern on our evolution in this business.
Marcelo Cintra – Deutsche Bank
Okay, thank you. And just a follow up given that you mentioned Redecard.
I just would like to have more color on the integration of Redecard business and if the bank is already offering like some bundled products of acquiring and also banking product and if you guys still expect to keep accelerating transactions growth on the acquiring business. Thanks.
Alfredo Setubal
We are at full speed in that strategy. We have explained it to you.
That is posing together the benefits of operating under a single bank business that also has an acquiring business. What it means that when Redecard is dealing with a client’s – it’s not dealing only as a front, supplier but also as a channel.
What it means, that the bank business operations or the produce could be actually offered by this channel as well. This is under full implementation.
Actually, we are also increasing this strategy engaging more SMEs in this business and it’s pretty positive. This is an strategy that allow us to keep or even increasing our market share without the damages [ph] in terms of margins or prices.
Marcelo Cintra – Deutsche Bank
Well, that’s perfect, thank you very much.
Operator
Excuse me. Our next question comes from Mr.
Daniel Abut with Citibank.
Daniel Abut – Citibank
Just a quick follow up, Rogério, if I recall correctly. In the last quarterly conference call, you did say that although it was early to give any guidance in terms of loan loss provision for next year, you could see a scenario where 2014 becomes a second consecutive year in which the loan loss provision on an absolute amount base is declined again, although not as much as in 2013.
You are trending as Alfredo said towards a R$20 billion level for this year although it could be even lower than that, closer to a 19 bordering over the guidance [ph]. Last year was R$24 billion.
Do you still see a relative scenario where 2014 could be below that R$19 billion to R$20 billion that you may end up booking in 2013?
Rogério Calderon
Yes. We have the same picture, Daniel.
That means that we expect loan loss provisions to being a lower nominal amount in 2014 than in 2013. Of course, this is related to the growth and we believe that at the level of growth that we are expecting right now, it’s possible to pose a lower figure total amount in loan loss provisions in 2014 than what we are doing right now.
I’m referring of course to nominal amount of loan loss provisions.
Daniel Abut – Citibank
Right. So in 2013, end [ph] in R$20 billion for the sake of argument, it could be below R$20 billion.
Rogério Calderon
That’s right.
Daniel Abut – Citibank
Okay. Thank you, Rogério.
That’s very useful.
Operator
Excuse me. Our next question comes from Mr.
Amit Mehta with PIMCO.
Amit Mehta – PIMCO
Sorry. I mean, slightly related to that same question asked by Daniel.
I’m just curious. How do your account for your loan loss assumption given the risk of rising unemployment situation?
We’ve seen a recent turn in the employment data. I’m just wondering, a, what your expectations for that trend when you kind of give that confidence in guidance, hopefully?
Rogério Calderón
We consider all the movements in the macro data when we make our models to have the final figure on loan loss provisions. You mentioned the unemployment level.
It’s actually pretty stable right now. There is a possibility that we keep – if we keep with decelerating the economy, it’s possible that we have an increasing unemployment.
However, this is still pretty light and we don’t think that is going to have any major impact. Anyway, it’s very important to remember that our credit portfolio now, based on several quarters under a more selective approach is actually much stronger against any slight movement.
So we are less dependent on this no movement such as this one, the level of collaterals in the operation that certainly [ph] brings much more quality to the asset. Anyway, it’s always considered in the model and keep in mind that our models are based on expected losses.
So it’s not based on what is incurred in the past, but based on what is expected in the future. What it means is that every time we have any concern or any movement negative, this is considering now our models to come up with a final figure.
Amit Mehta – PIMCO
Okay. I appreciate that comment, so then maybe you can just quickly elaborate one more step for me.
Given the mix shift in the loan portfolio, how much improvement have you created in the credit loss expected loss charge potentially going forward, so how much enhancement have you done to the credit risk cost that you may incur going forward?
Rogério Calderón
Could you elaborate a little bit more. We are not sure we understand you question.
Amit Mehta – PIMCO
Okay. If I give you an example.
Let’s assume your credit portfolio had a certain make up two years ago where you had more auto exposure and the expected loss under your models was, let’s say 350 basis points. Now, you’ve changed the mix of your loan portfolio to improve it and your expected loss may be 300 basis points.
You’ve obviously improved the expected loss outcome by 50 basis points, by the mix in the shift of the portfolio, a mix shift in the portfolio. So I’m trying to understand, given that you’ve de-risked the portfolio, effectively how much do you think you’ve de-risked your credit loss expectations?
Because for the margin compression, you’re accepting to tolerate, you must also get the offset on the credit losses as well.
Rogério Calderón
So if I understand your question. I think the expected loss model we have, this is fully impacted by the potential default and to the loss given default.
And this is all encompassed in the model. What it means, that this is – as we have changed the mix of our portfolio, probably around 70%, 80% towards the optimum level, this is probably what we have so far.
So what it means is that we can have probably a marginal additional improvements of maybe 20%, 30%. But this is a very rough calculation.
We can go into further details in trying to come up with a figure. But just by first idea, we think, as this is captured by the model and we have advanced probably 70%, 80% to the optimum level.
This means that probably, we can improve maybe 20%, 30% more out of what we have things now. With of course a loss given default [ph] in a lower level than what we had before.
Amit Mehta – PIMCO
Okay. Thank you very much.
Operator
(Operator instructions) This concludes today’s question-and-answer session. Mr.
Alfredo Setubal, at this time, you may proceed with your closing statement.
Alfredo Setubal
We thank you everybody for participating with us. I think it was a very good conference call and we were able to show you the stronger results that we released and the strategies showing the results both in terms of ROEs and in terms of losses, provision losses.
So I think we are in a good trend. Thank you for your time and we expect to have you all again for the release of the third quarter.
Thank you.
Operator
This concludes Itau Unibanco Holding Earnings conference call for today. Thank you very much for you participation.
You may now disconnect.