Apr 30, 2014
Executives
Alfredo Egydio Setubal - Executive Vice President, Investor Relations Officer, Director, Member of Nomination & Corporate Governance Committee and Member of Disclosure & Trading Committee Marcelo Kopel - Director of Branch Network Products, Operations and Planning Caio Ibrahim David - Chief Financial Officer, Executive Officer and Member of Disclosure & Trading Committee
Analysts
Daniel Adrian Abut - Citigroup Inc, Research Division Jorge Kuri - Morgan Stanley, Research Division Carlos G. Macedo - Goldman Sachs Group Inc., Research Division Tito Labarta - Deutsche Bank AG, Research Division Marcelo Telles - Crédit Suisse AG, Research Division Aníbal Valdés - Barclays Capital, Research Division Natalia Corfield
Operator
Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Itaú Unibanco Holdings conference call to discuss 2014 first quarter results.
[Operator Instructions] As a reminder, this conference is being recorded and broadcast live on the Investor Relations website at www.itau.com.br/investor-relations. A slide presentation is also available on the site.
And the replay of this conference call will be available by phone on (55-11) 3193-1012 or 2820-4012. Access code 1259686#.
Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of 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 risk 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. Marcelo Kopel and Mr.
Rogério Calderón, Corporate Controller and Investor Relations. First, Mr.
Alfredo Setubal will comment on the 2014 first quarter results. Afterwards, management will be available for a question-and-answer session.
It is now my pleasure to turn the call over to Mr. Alfredo Setubal.
Alfredo Egydio Setubal
Good morning, everyone. Thank you for being with us for this conference call.
And for those who are following through the internet, for the slides, we start on Slide #2, the highlights for the quarter. The first one is the results.
The recurrent net income, BRL 4.5 billion, with a growth of 29% when we compare to the first quarter of 2013. The second highlight is the ROE at 22.6%, also a good improvement when we compare to the first quarter 2013, 350 basis points.
And also, the quality of the credit portfolio with the NPL of 90 days, over 90 days, 3.5% with increase of 100 basis points compared to the last year first quarter. The financial margin with clients achieved BRL 11.9 billion in this quarter, with a growth of 8.6%, when we compare to first quarter of 2013, and a reduction, a seasonal reduction of 0.8% in the first -- when we compare to the last quarter of 2013.
Financial margin with the market, BRL 614 million, is under the volatility of the market and difficult to forecast and to see the numbers that is -- have been very volatile in the last quarters. But anyway, it is a good number when we compare to the last 5, 6 quarters.
It's a good result in this line. Loan losses expenses provisions, BRL 4.3 billion in the quarter, with a decrease of 13.9% when we compare to the first quarter of 2014 and an increase of 1.4% here more related when we compare to the last quarter of 2013, more related to the Credicard business that we assumed the acquisition last December.
So in all the lines, of course not only this one, then we have the impact of this acquisition. Commissions and fees both growth -- both in the -- when we compare it to the fourth quarter and first quarter of 2013, a big increase in this line.
And we achieved this quarter, BRL 6.1 billion, which is a very good number this quarter. Non-interest expenses, a growth of 9.2% in 12 months.
Of course this, with the impact of the Credicard operation, when we compare to the last quarter, 3.4% reduction. If we took out Credicard numbers just to make things more comparable with last year, the growth of non-interest expenses, which should have been 6% in the quarter, what is a number below the current inflation that we have in Brazil for this period.
So we continue very tough in terms of controlling the non-interest expenses. Efficiency ratio was a better number, 47.7%, and risk-adjusted efficiency ratio achieved 66.4%.
The loan portfolio is in a lower pace due especially for the pace of the economy that is not very excited and very heated this year, continue the trend of last year. So the loan portfolio decreased 0.3% this quarter because mainly of the exchange variation for this period.
If the real shouldn't appreciate, the growth of the portfolio should be 0.8%, still low, but better -- should be better. The growth in 12 months, 11.4%.
On Page 3, we see the growth of the ROE. This growth, like when we compare to the last year, we have been growing, both showing ROEs above 20% since the third quarter of 2013.
Because of this strategy, I think is the result of the strategy that we made in the last years to increase commissions and fee, decrease the risk of the credit portfolio and, of course, improve that we had in the control of cost. So is a good return, 22.6% for this quarter.
NPL, above 90 days, continue to drop since the second quarter of 2012. And it's the best number, this 3.5%, that we have since the merger of Itaú Unibanco, and is a good number even considering that this first quarter usually is unfavorable in terms of seasonality for the period.
Efficiency ratio. This quarter, 14 -- 47.7%, also an increase when we compare to 2013.
And we will continue in the efforts of growing revenues and controlling cost to achieve even better numbers throughout this year. And the risk-adjusted efficiency ratio, 66.4%, also a very good number, and the better -- the best number ever that we showed in this line.
On Page 4, a more detailed result. We see the financial margin with clients growing 8.6% in 12 months, and with the reduction of 80 basis points in this current quarter.
This is more related to the first quarter that usually is the weakest quarter for the banks and for credit portfolio, but also related to the low pace of the economy that we are seeing here in Brazil. We continue to see the economy perform very low in terms of growth.
We have a 1.4% GDP forecast for this year. So this growth of our credit portfolio, it will be limited during this year due to this pace, what will reflect, of course, in the pace of the growth of this financial margin, these declines.
What is good to compensate is, as I mentioned at the beginning, that commission and fees are growing very -- in a very good pace, 18.3% in 12 months and 0.3% in this quarter, what will help to compensate the lower pace that we will see in the growth of the credit portfolio with our clients. Loan losses continue to reduce, BRL 4.2 billion in this quarter, what is a good number in line with the expectations that we have that this line will continue to reduce during this year of 2014.
And the reduction, when we analyze 12 months, almost 14%. Recovery of credit in this quarter was lower than last quarter of last year.
And we will continue to keep the expectation that we have for loan losses, net of recovery that we announced at the beginning of this year, after the first conference -- during the first conference call of the results of 2013. Expenses, BRL 9 billion.
I think we continue to focus a lot here, and we'll continue to do that to be able to compensate lower revenues due to the pace of the economy, especially related to credit. So at the end, our net recurrent result, BRL 4.5 billion, is a very good number, with a growth of 29% in 12 months.
Margin with market on Page 5, as I said, is very volatile, but anyway the second best number that we released when we compare the 5 last quarters of the deck. Recurrent ROE, I think we have a good number.
When we -- the chart shows, as we have been showing in the last quarters, the numbers with the treasury gains, the results with the market considering this, 23.2%, I think is also -- shows that we have a good result and a solid and sustainable result for the bank when we look specifically the operational side of our operations. On Page 7, the loan portfolio.
We achieved a total risk in terms of credits of BRL 508 billion, with a growth of 10.3% when we compare to 12 months, and 0.8% in the quarter here, including all the endorsements, sureties, private securities and the traditional credit portfolio. When we analyze closely the credit portfolio, we see that we continue to reduce our car finance business, the vehicle finance.
We have reduction of 8% in this quarter, achieving BRL 37 billion. We continue to expect this portfolio to reduce these coming quarters because the demand for cars and the pace of the economy continue to be very, very low.
But the other hand, we see growth of payrolls, payroll loans. We expect this segment continue to grow in terms of volumes, especially after the announcement that we made yesterday of the new structure of the JV with Banco BMG that we are going to talk later.
And also, we expect that the mortgage loans to continue the pace of growth that in this quarter was 4.2%. So mortgage and payrolls will continue to lead the growth in terms of credit for individuals.
And of course, with the acquisition of Credicard, this business of credit cards, will also contribute for the growth of the portfolio. In terms of companies, we don't see much demand for credit, for corporates, for large companies.
In this quarter, the growth was 0.6%. And we don't see a good environment for companies to really making a huge investment this year due to the uncertainties that always come together with elections.
We continue to reduce the portfolio, especially of small, very small companies. This reflects the size of the portfolio considering always very small and middle market companies.
We reduced the portfolio this quarter of 1.9%. So this trend, I think will continue in the coming quarters of reducing this portfolio due especially to the pace of the economy that we are seeing in Brazil.
On Page 8, a breakdown of the financial margin with client. We start -- we finished last year in the fourth quarter, $11.9 billion.
In this year, in this quarter, we finished with $11.8 billion. So a small reduction, what is seasonal also because the first quarter usually is the weakest quarter for the bank in terms of business.
But anyway, the compositions from where we were and where we achieved this quarter was related to BRL 251 million with Credicard new business that they started with us this quarter. Loan operations revenues, $247 million.
We had 2 calendar days left this quarter, $260 million, so in terms of reduction of less revenues. Mix of products, clients and spreads also a reduction, it's due -- related to the adjustment of the credit portfolio and spread that we are finishing in terms of adjusting the risk appetite, BRL 255 million.
And Selic and other are also reduction of $74 million. So that's the compositions, the breakdown of the differences of the margin with client.
On Page 9, net interest margin, quite stable, the gross credit spreads in this quarter and also compared to the last 2 quarters of 2013. So we are not seeing much pressure in terms of spreads this period.
And the net credit spread, we have a small reduction more related to the recoveries, lower recoveries in this period. On Page 10, credit quality.
As I mentioned at the beginning, the NPL ratio continue to reduce to record levels. We finished with 3.5% this quarter.
And the peak of this ratio was in June 2012 when this number was 5.2%. So with the adjustment of the risk appetite in the credit portfolio, we were able to reduce substantially and achieve 3.5%.
And both segments have been contributing to this, both individuals that achieved 5.4% in the periods, and companies, large and middle and small companies, 1.9%. So we continue to decrease, and we expect some improvements in the coming quarters yet.
The coverage ratio has improved a little to -- from 174% to 176%, which is very comfortable for the credit portfolio that we have. On Slide 11, credit quality.
Loan loss provision expenses also improving, and we expected these numbers to be -- continue to improve, even considering the numbers that also are included here for the Credicard operations. The total provisions finished this quarter with BRL 25 billion, with a reduction of $26.4 billion from the end of 2014.
On Slide 12, we can see the -- for 15 to 90 days NPL ratio that is usually seasonal in this first quarter. It was quite stable when we compare to the last 2 quarters, with some deterioration, seasonal deterioration related to individuals.
You can see that off in this quarter since June '09 that on the first quarter, always have some deterioration, seasonal deterioration. But if we analyze, this year was the lower pace of deterioration when we compare to the last 2 or 3 years, first quarter that we see that is -- where we can see the seasonality of these numbers.
Commissions and fees on Page 13. '14 is doing good.
We have very good numbers. We are increased in this quarter of 0.3% and 18.3% when we analyze and compare to the first quarter of 2013, achieving more than BRL 6 billion in this line.
Considering the results of the insurance business, we can see BRL 7.4 billion in total result and fees for this period. And also, we have revenues that came from Credicard.
To make things more comparable, excluding the Credicard business, to compare to last quarter's 2013, we can see BRL 7.2 billion in this line. On Page 14, we can see the split of our results between banking operations, insurance and excess of capital.
We can see that from the results of BRL 4.5 billion, BRL 3.7 billion came from the banking operations, with an ROE of 22.6% and efficiency ratio of our banking operations of 50.3%. The insurance operations contributed with BRL 600 million -- and BRL 608 million with an ROE of 58% and efficiency ratio of 35.3%.
And the excess of capital with an ROE of only 6.3% reduced at the end the composition of our ROE, consolidated ROE. The insurance operation in more detail on Page 15 is something that we continue to focus.
We concentrate our business on the bancassurance operations. The revenues, net of claims of BRL 1.1 billion in this period, in this quarter.
And we opine here that from these revenues, 58% came from the bancassurance; 31% came from the pension business, that is insurance in Brazil, as you know; and capitalization, 11%. So we continue to focus on bancassurance, remembering that we don't operate in the health insurance.
That is very good in terms of revenues but also brings a lot of claims, so we are focusing in our business with Porto Seguro, where we have 30%, and bancassurance. In this line, as we know, we announced that we are selling the big risk company that we have related to big companies, large companies, in terms of insurance.
On Page 16, noninterest expenses. We finished a quarter with BRL 9 billion, an increase of 9.2%, considering first quarter of 2013.
But here, we include, of course, the consolidation of Credicard that we bought from Citibank by the end of the year. If we exclude the Credicard expense, just to make things more comparable with last year, we can see that the growth in 12 months was 6%, that is below inflation just as a matter of -- to make things more comparable.
Stockholders' equity evolution on Page 17. We started the quarter with BRL 81 billion.
We have a net income of BRL 4.4 billion in this period. We paid dividends of BRL 3.5 billion in the period, related mostly to the results of last year, of course.
Asset valuation, BRL 300 million; equity transactions, BRL 200 million negative; and stock options and others increased the stockholders' equity in BRL 100 million. So that's why we started with BRL 81 billion and finished with BRL 82.2 billion in the quarter.
This network shows BIS ratio of 15.6%, with a reduction related to new regulations of the Central Bank, 11.1% Tier 1. And if you adjust for Basel III, our Tier 1 would be 9.6% in this quarter.
Market capitalization, BRL 167 billion with a daily liquidity of BRL 718 million per day, splitted almost equally between New York ADRs and BOVESPA here in Brazil. On Page 20, the IFRS numbers.
The number of -- the net -- the recurring net income increased a little to BRL 4.66 billion, especially related to the difference in provisions for loan losses. The ROE, remain now mostly the same, 22.6%, both in Brazilian GAAP and IFRS.
On Page 21, just to remember the outlook expectation that we have for 2014 that we are not changing at this moment. We will keep this, so the expectations to loan portfolio is to grow between 10% and 13%.
Loan loss provision expenses, net of recoveries between BRL 13 billion and BRL 15 billion. Commissions, fees and results for our Insurance business, a growth of 12% to 14%.
Non-interest expenses growth of 10.5% to 12.5%. And excluding to the Credicard, just to make things more comparable, 5.5% to 7.5% is the growth that we expect.
Efficiency ratio, an improvement of 50 to 175 basis points. On Page 22, what we announced yesterday, in line with the growth of the portfolio, especially related to loan payrolls, we Banco BMG will concentrate all the current operations of payroll business in the JV that we have together with them, Itaú BMG.
And so Itaú Unibanco will reduce the participation of the JV to 60%, coming from 70%, and Banco BMG will increase from 30% to 40%. But by the other hand, all the business will be under the JV.
What we expected is that our loan portfolio in this JV alone will be over BRL 20 billion by the end of the year. That is a number that today is around BRL 12 billion.
And of course, we'll continue to grow our own business of payrolls through the branches. In this case, more related to the private sector employees business.
To finalize, on Page 23, we made a different -- a very important improvement. We consolidate our annual report, including GRI sustainability ratios, the 20-F and the debt report into one.
So it makes things easier for the investors and analysts of equity and credit to make analysis of the bank. And we also, for the first time, and the first bank in Brazil to release the integrated report.
That is a new approach to show the numbers and the strategy of the bank in an easier way for investors and for shareholders and so on. What shows more detail an easier way, as I said, in our strategy and the numbers of the bank.
So everything is on our website. So if you want to release and download this, I think it is important with our new approach in line with the transparency of the bank to our shareholders, stakeholders and [indiscernible].
So this ends the presentation, and we are open for questions from you.
Operator
[Operator Instructions] Our first question comes from Daniel Abut with Citi.
Daniel Adrian Abut - Citigroup Inc, Research Division
Normally, as it was and then I will try again. I suspect what the answer will be, but let me try again.
If I look at Page 6, when you look at the evolution of the ROE, you correctly explained there that now, for 3 consecutive quarters, you'll be boasting ROEs, significantly above 20%, 21% to 24%. On a trailing basis, for 4 consecutive quarters, you're actually now significantly above 20%.
When you have indicated where you think you can sustain your ROEs, you normally say at least 20%. It continues to seem to me that, that is too conservative, that your track record over the last 3, 4 quarter clearly show that you can sustain, at least as far as we can see, long-term, long-term, who knows, but at least in the foreseeable future, well above 20%.
What do you see in terms of ROE in the foreseeable future? Let's say, 2014 to 2015.
What's a more realistic level than just 20%? And my second question.
If I look at Page 8, when you look at the -- you show the evolution of your loan portfolio mix, which is a clear reflection of your strategy. When you started this, the risk in strategy about 2.5 years ago, the composition of what could be considered relatively higher risk and relatively lower risk.
If I consider relatively lower risk, corporate loans, mortgage loans, payroll loans in Latin America, was about, if I'm not mistaken, about 2/3 relatively high risk, 1/3 relatively low risk. Now fast forward to first quarter 2014, that's about 50-50.
You continue to go faster in the relatively low risk, i.e. corporate mortgages, payroll, Latin America.
If I look ahead over the next few years, where do think that mix can evolve in terms of relatively low risk, relatively high risk, from the current roughly 50-50 that you are right now?
Marcelo Kopel
Daniel, it's Marcelo speaking. I'll start with the second question since the first one is a recurring one.
But I'll start with the second one then. The loan portfolio mix, as a matter of fact, we've been, as you correctly pointed, we've been shifting it towards less-riskier portfolio.
We rebalanced that. In my -- over the course of the next years, you may see it skewing to 60% or even 70% of less risky assets in favor of the risky assets.
So you could -- in the longer term, 70-30 could be something. Regarding the other question.
We've been saying that, for short-term, you may see higher ROEs in our case because of favorable market or interest rate environment or the benefits, the early benefits of the derisking strategy where we have significant benefits from reduction in NPLs and gains of efficiencies. So short term, I will confirm that you would see, as you are already seeing, high ROEs.
But longer term, a sustainable level, we still believe 20% is the number. And I'll make a caveat here that we constantly look at the benchmark rate in our cost of capital.
So if you have a higher cost of capital, the way we look at it is the spread over the cost of capital. So depending on how the cost of capital behaves, you could see the number going up or going down.
Daniel Adrian Abut - Citigroup Inc, Research Division
Let me just, if we follow-up, Marcelo. When you say short term and long term, how do you define a short term?
Marcelo Kopel
I'd say 2 to 3 years. And longer term, we'll say, 3 year -- 2 years onwards.
But Daniel, it's very important for us to keep an eye on the cost of capital. This is really key for our -- in our equation.
Daniel Adrian Abut - Citigroup Inc, Research Division
No doubt. But is it fair to say then that over the next 2 to 3 years, it wouldn't be a surprise if you keep posting ROEs above 20% and then longer term, beyond 3 years, 20% is a realistic target?
Marcelo Kopel
That in the current environment, Daniel. And needless to say that things are kind of in a changing pace here in Brazil.
So this is, to the extent the current environment or slightly better happens, this is what we believe.
Operator
Our next question comes from Jorge Kuri with Morgan Stanley.
Jorge Kuri - Morgan Stanley, Research Division
Jorge Kuri here. I have 2 questions, if I may.
On asset quality, you've been moving towards lower riskier products, and that has had an impact on your reported NPLs. And we've seen NPLs come down over the last 6 quarters, basically.
I guess my question is, at what point the normal aging of the portfolio -- because even though your overall loan book hasn't expanded, when you look at it on a consolidated basis, there are products that have been growing a lot, like payroll loans, for example, or credit cards. And those will age and will start to show NPLs.
So at what point do you think it's fair to expect to see the trend in NPLs to turn around and move higher, just from a normal part of the cycle and, obviously, overlaid with the fact that you are also derisking. It's probably not an easy question, but to the extent that you can help us understand how those 2 factors affect your NPLs are going to play out on a consolidated basis.
That's question one. Question two refers to payroll loans.
It does seem that every bank, and again, I guess, this is also part of the de-risking process, most of the banks are focusing exactly on the same thing. They're moving away from risk, focusing on safer products, payroll loans, particularly -- everyone's focusing on payroll loans.
And we are seeing, at least from the numbers that the Central Bank reports on spreads, on origination. But the spreads and origination on payroll loans are coming down basically every quarter.
And that's really the product that's growing in Brazil. So wanted to get your -- now that you're putting even more emphasis on payroll loans with the announcement you made, how do you see that playing out?
I mean, are we going to continue to see spreads come down? How much more can spreads come down?
How do you think this is going to affect your overall financial margins? I mean, you did present on Page 8 sort of like the impact of -- the mix of products, clients and spread continues to negatively affect growth, so that NII is growing lower than loans.
So how does that play out?
Marcelo Kopel
Jorge, thank you for your question. I'll start with the second question, then we'll move back to the first one.
Yes, as a matter of fact, everybody's really focusing on less riskier products. And it's important for us, the JV we announced reemphasizes our commitment to this market and the ability to distribute this product.
We have our own distribution throughout our branches and the way we sign up with companies as well, so to have their payroll signed up with us for this type of loans. But we also, it's important the JV we have because that expands our distribution capacity.
Spreads, yes, spreads are coming down, but in a way that -- see, when you look at on a risk-adjusted basis, it's a still very interesting return for us. And therefore, we will continue to work on that.
But one important thing here, Jorge, is we are not doing only this. We are looking to do more corporates.
We are looking to do other types of lending. The reality is that, as we saw the vehicle finance portfolio is at a lower pace than anyone in the market has expected.
So if we didn't have that slowdown, the mix of the portfolio, where you have higher returns blended with slightly lower returns, will help mitigate the pressure on NII and the net interest margin. So because we are seeing that strong slowdown in some of the portfolios, that is, at this point in time, putting more pressure, if anything.
One thing that we see going forward is, with the JV, we gain more scale. So if we don't see the returns coming from the NII line, we may see it going from -- coming from the cost line and other efficiencies that we may capture.
So that's one of the things that we look on, specifically on payroll. Regarding asset quality and the fact that the NPLs are going down and the mix is pushing it down, when you look at the speed we renew our portfolios, Credicard has a very short -- it's a very short-term duration.
So the product that have longer duration are basically mortgages and vehicles. So in those 2 cases, the new vintages we are bringing, they are coming with the better quality, much better quality than the vintages we had before, specifically in the case of vehicles.
And this will help, at least keep NPLs at a healthy level or at the level we are seeing now. If things improve even more or if the economy improves even more, we may see some slight improvement on that.
But the way we see it is, it's in a way that we are comfortable and we are managing our risk. We are not changing our risk appetite.
So I don't know if that addresses your question.
Jorge Kuri - Morgan Stanley, Research Division
Well, partly, yes. But I guess that we all know that credit quality goes in cycles.
It goes up, goes down. And you -- if you look at the path many years of cycles, cycles normally last 6, 7 quarters, and then they turn around.
And I guess, my question is, you are already seeing 6 consecutive quarters of NPL improvement, which is in line with previous cycles. The question is more specific.
When do you think that turns? When do you think that, from a normal aging of books, you will start to see NPLs go up again?
I'm not asking you to tell me when we're going to see a massive NPL problem. It's just in the normal cycle, when do you expect this trend to turn?
Marcelo Kopel
Jorge, I appreciate your point. But had we done the same thing we've done in the past, I couldn't agree more with you that a cycle could come.
But we changed -- since we changed the -- materially changed and we continued to change and foster the strategy of less-risky products, when you look at our portfolio of mortgages. The loan to value of the portfolio is around 40%.
New originations are coming between 60% and 80%. When you look at our vehicle finance, the way we are doing it now, loan-to-value is around 60%.
When you look at corporates and when you look at small enterprises. Small enterprises, we are doing, emphasizing collateralized loans backed up on receivables.
So I would agree with you that a cycle could come had we changed our strategy and focused on the derisking. So my -- I could agree with you, had we done the same thing, but we are not doing it the same way we've done in the past.
Jorge Kuri - Morgan Stanley, Research Division
So that means you expect NPLs to continue to improve for how long then?
Marcelo Kopel
I'd say if they level off at the stage we are, and I think we'll be okay. But if the, let's say, payroll becomes even more relevant and if the -- like in the previous question, I was saying that we could reach between 60% and 70% of our assets skewed to more less-risky assets, then you could see some improvement in NPL.
So that basically will come with the execution of our strategy.
Operator
Our next question comes from Carlos Macedo with Goldman Sachs.
Carlos G. Macedo - Goldman Sachs Group Inc., Research Division
A couple of questions. First, on expenses, you did report fairly subdued level of growth and expenses in the quarter and also year-on-year.
The difference between the expense growth with and without Credicard -- the Credicard acquisition was around 3%. Your guidance for the year says around a 5% difference between the 2.
Assuming that, as the year goes by, you'll be able to crystallize or to make or to find more synergies within the operations, which I think is a reasonable assumption, do you still hold that 5% difference? Or should we expect that we're going to see better cost or lower cost growth given that the integration is proceeding and that the starting point is at much lower?
The second question that I have is related to loan growth. Of course, loan growth has been weak.
The economy isn't really forthcoming for further loan growth. The outlook that you have is still -- you're maintaining your guidance of growth for the year, which kind of implies an acceleration through the end of the year.
What would actually make that happen? Would it take more credit appetite from Itaú?
Would it take a bigger amount of demand for loans from the general public? Would it be on the consumer side?
Would it be at the corporate side? What exactly are you seeing for the next, say, 12 months that would allow you to meet your guidance in loans and loan growth?
Marcelo Kopel
Thank you for your questions. I'll start with the last one.
When we talk about loan growth, there's a lot of moving parts as of the economy is in a slow pace. Too many moving parts we saw about auto financing.
But at the same time, we just announced the BMG, the next step on the BMG joint venture. So given the moving parts we have, at this stage, we don't see a need to change our guidance.
We are comfortable with the guidance. It's a 10% to 13% range for the year.
So we would stick to that for the moment. If things materially change and we need -- and we have a few that we need to change it, we'll definitely address that in one of our conference calls.
Regarding expenses...
Carlos G. Macedo - Goldman Sachs Group Inc., Research Division
Marcelo, just if I can interrupt, just a quick follow-up then. If that's the case, and if you exclude the Credicard acquisition from your loan book, then your growth is below 10%.
What would actually take you to 10% to get to the bottom of the guidance? Would it be greater demand or just greater appetite from Itaú?
Marcelo Kopel
No, we are not changing -- that's a good point, Carlos. We are not changing the risk appetite.
And regarding the Credicard acquisition, that was embedded in our guidance. So we already have Credicard embedded in our guidance.
What we didn't have was the next step on the joint venture with BMG. So as I said, there are many moving parts at this stage, but we don't feel the need to revise our guidance.
Regarding expenses, there's seasonality throughout the year. As you know, we are one of the biggest sponsor -- we are one of the major sponsors of the World Cup.
And associated with that, there are seasonality on the expenses for the year. So again, we don't see a need to revise the guidance now.
As a matter of fact, you correctly pointed that we have room for the integration on Credicard. There could be opportunities and synergies that could be captured.
But we will probably address that in the follow-up quarters.
Carlos G. Macedo - Goldman Sachs Group Inc., Research Division
Okay. So, but the difference of -- the 3% difference in growth in expenses both year-over-year and quarter-over-quarter that comes from the integration of Credicard.
The guidance is 5%. There could be upside potential from that guidance, right?
In other words, it could be 3%, it could be even less.
Marcelo Kopel
Yes, that could be. But as I said, we need to -- it's the first quarter.
The operations aren't really with us. We are in the process of migrating systems and portfolios.
So at this stage, we are holding ourselves to the previous guidance.
Operator
Our next question comes from Tito Labarta with Deutsche Bank.
Tito Labarta - Deutsche Bank AG, Research Division
My question, a bit of a follow-up on the asset quality question. Looking at more from the provisioning level.
We did see provisions rise a bit on a quarter, even before recoveries growth provisions did show small increase. But if we do think asset quality can't potentially improve further, do you think that provisioning levels can also come down along with that?
I mean, you're somewhat on track to deliver on your guidance of BRL 13 billion to BRL 15 billion in provisions. But just want to get a sense, if you do think asset quality can potentially improve, does that mean provision levels can come down, or what we saw in the quarter is the indication that it should grow roughly in line with loans or maybe begin to grow faster than loans going forward, since you did see a pickup compared to last quarter.
Marcelo Kopel
Tito, thank you for your question. At this stage, the way we are seeing our cost of credit is within the range or slightly better than the range we guided earlier in the year.
And we continue to see that for the rest of the year. You may see a reduction on our cost of credit expense.
This quarter, in particular, we had seasonality on the recoveries, but that was expected. So we are within the trend.
One may argue that we are in the lower range of our guidance. But that will -- as we move on towards the year, we will see how close we are to the low end or to the midpoint of our guidance.
So as of now, we are comfortable with the guidance and should expect expenses to behave within that.
Tito Labarta - Deutsche Bank AG, Research Division
Okay. So just the pickup, the small pickup we saw was mainly due to seasonality.
But you're saying, if asset quality improves, you could kind of revisit this number in the future if you do see some changes with your expectations to asset quality, given your loan mix?
Marcelo Kopel
Yes, the pickup was really for Credicard, BRL 200-plus million on that line. So as we see, eventually, slight improvements in the quality, you may see a pickup on the expense, as you correctly pointed.
Operator
Our next question comes from Made O'Leary [ph] with Looming Sales [ph].
Unknown Analyst
I have a couple of questions, if I may. The first one is related to the merger with CorpBanca.
Could you please provide an update on the status of the merger, and when we should expect a completion of the transaction? And second question is related to BMG.
If you could please elaborate a little bit more on the recent announcement and the rationale for the decrease of Itaú's participation or stake at the JV.
Marcelo Kopel
Well, starting with the CorpBanca, the timetable for that, we expect that to be a fourth quarter event, given all the necessary approvals we need to go through. We need to have Brazilian regulators, Chilean, Colombian and also in the U.S.
and Panama. We just got a note that the Colombian regulators did approve the transaction, which is in line with our expectation.
So it becomes -- it would probably become a fourth quarter event. Regarding the JV, the way it's going to work is we will -- by a capitalization BMG will increase its share on the JV.
Whereby, we're going to be issuing shares, and BMG will be the only one subscribing those shares. So basically, will be diluted and reach a 60% level.
So -- and the way it's going to work is 100% of the loans originated by the JV compared to the 70% that was previously originated to the JV. So therefore, the funding of all the originated loans will stay within the JV.
Unknown Analyst
And what is the rationale for this change?
Marcelo Kopel
The rationale for this change is the market -- from our perspective, it's a market that we -- one of the priority markets for us; want to continue to increase our distribution. And that was a second step.
When we announced the JV 2 years -- at the end of 2012, one of our goals was to achieve BRL 12 billion by the end of 2 years. We are now at BRL 12 billion before that.
And we believe that the success of that made us do the second step, which was already part of the original transaction. So it's a market that we want to be and we want to have the JV being a key part of our distribution.
Operator
Our next question comes from Daniel Martinez with Credit Suisse.
Marcelo Telles - Crédit Suisse AG, Research Division
Marcelo Telles, Credit Suisse. I have 2 questions.
Actually, one, the first one of credit spreads. How do you see credit spreads evolving in your main business lines going forward?
I mean we've seen, based on a central bank data that credit spreads data have been a rising trend, and with interesting result, public banks increasing spreads materially on working capital loans now, for the first time, matching pretty much with the levels of the private sector banks. So I was wondering if you see more room in general.
But particularly, on the commercial side, if there's room for further increases. And the other question, just if you can remind me, what was the -- what would be your core Tier I ratio under Basel III, including CorpBanca.
I know in your presentation, you have 9.6%, but I'm just not sure whether this includes CorpBanca or not.
Marcelo Kopel
Talking about the CorpBanca. When we did our first calculation, the initial impact of CorpBanca would be something around 15 bps.
And when we do it looking on a perspective basis with the full implementation of Basel, would be around 50 basis points. Regarding credit spreads, we are seeing, as you said, slight adjustment, the market adjusting spreads.
In our case, we are doing slight adjustment in certain projects. But you have to remember that there's a difference between what private banks were doing and public banks were doing.
So as a matter of fact, you're seeing the change in the spread as a whole for the market. But there are distinct adjustments between the banks.
In our case, there are slight adjustments in certain products, and it's just a reflection of the increasing Selic and adjusting for the risk as well.
Marcelo Telles - Crédit Suisse AG, Research Division
Kopel, as a follow-on, just one more question. In the event of a much bigger, let's say, pullback of public banks, particularly on the SME side going forward, how do you think that would impact your asset quality?
Do you think that will have any impact at all? Or maybe you are very different segments, I mean, how much overlap you think there is in that segment, at least for you?
Marcelo Kopel
We have very little overlap on that, Telles. And one of the things that we say, and just to link that to the previous question about spreads.
The way the market was pricing certain risks, there's a group of clients that we like the risk, but the pricing of that risk wasn't adequate to what we saw. We still like the risk, but at the right price.
So if the market is adjusting that, that could be an opportunity for us in that particular segment. In terms of a pullback from the banks, there is little overlap.
So we are not seeing any, let's say, spillover effect over our portfolio, or nothing material that could say -- that could bring us to a jump in our delinquency.
Operator
Our next question comes from Aníbal Valdés with Barclays.
Aníbal Valdés - Barclays Capital, Research Division
The first question is regarding -- as regarded to the number that you show for fully loaded Basel III Core Tier 1 capital ratio of 9.6%. In your press release, you mentioned that, that number, the 9.6%, is after some -- after the applications of some mitigation measures.
I just wanted to understand better what those mitigation measures are? And also, if it's fair to say that the deductions that you show in the first quarter from Core Tier 1 capital, for the prudential adjustments, it's equivalent to 20% of the total adjustments that you would have to make towards Basel III full implementation?
That's the first question.
Marcelo Kopel
Okay. What we see as the mitigating measures is basically regarding diversification on insurance and some risk mitigating factors -- some other risk mitigating factors.
Regarding your question, on the second question, the reduction in capital. Basically, the reductions that were already mandated by the Central Bank, they were already scheduled as the next year reductions are.
So it was basically following the regulations that were released, and that impacted the whole system.
Aníbal Valdés - Barclays Capital, Research Division
Yes, I'm sorry, I think maybe I was not clear enough. On the mitigation measures, is that related to the reversal of excess provisions or liberation of excess capital in the insurance company, or the spinoff or certain businesses to raise capital?
I mean, how should I understand that what are the sources of those mitigation measures? And how much money would that be?
Just to have a better idea of that fully loaded 9.6%, how much you're accounting in terms of reais, BRL 1 billion for mitigation measures and what are the sources of those mitigation measures?
Caio Ibrahim David
Aníbal, this is Caio speaking. And just to follow up on Kopel's answer.
That's pretty much related to optimization of the insurance company's capital. So we sure have some room for moving towards that direction, and that's why we are mentioning here that we are considering some mitigations to show exactly the figure that we expect to have in the coming quarters regarding this, after this optimization that I just mentioned to you.
And in this figure, that there was no reversal of any provisions at the balance sheet of the bank.
Aníbal Valdés - Barclays Capital, Research Division
And in terms of money, how much you are accounting for those mitigation measures?
Caio Ibrahim David
Well, we are talking about a couple billion reais here of optimization in the whole structure of insurance companies, plus no financial companies in our structure here at the bank and relating to those companies. But it is something that is planned already.
So there is no further, I'd say, difficulties to get there. It's just a matter of time to do that kind of optimization here.
Aníbal Valdés - Barclays Capital, Research Division
And is it also fair to say that the deductions that you saw for prudential adjustments in the first quarter this year are equivalent to 20% of the total reductions or that's more than that or less?
Caio Ibrahim David
Well, it's pretty much the whole impact of the Basel III schedule, which is implemented by the Brazilian Central Bank in line with the BIS schedule. So that's pretty much what we see as a reduction in the Tier 1 cap during the first quarter, especially because we did not grow the risk-weighted assets this quarter.
So that's pretty much the result of this.
Aníbal Valdés - Barclays Capital, Research Division
Yes, I'm sorry, but the schedule is 20% each year, right, beginning this year of that deduction of the macro-prudential reduction so?
Caio Ibrahim David
Yes, that's not our macro-prudential, it's just the schedule. And we're going to see the same effect in the first quarter of the coming years.
That's why, which is important, we are looking at the common equity Tier 1 as the capital ratio to be followed by the bank as a forecast to manage our balance sheet risk exposure.
Aníbal Valdés - Barclays Capital, Research Division
All right. So Caio, so that the 6 -- I'm sorry about it.
But is it fair to say that BRL 6 billion or the BRL 5.9 billion of deductions that you apply on the first quarter is 20% of the total deduction, is that correct?
Caio Ibrahim David
I would say, yes. But the team here will conform to you exactly the breakdown of this, okay?
Aníbal Valdés - Barclays Capital, Research Division
Okay. And quickly, the second question is regarding write-offs of loans.
You have been talking a lot about asset quality improvement. And the truth is that, well, the asset quality improvement has been very significant over the past 1 year, 1.5 year.
But the -- when you look at the write-off as a percentage of the total portfolio, I calculate that currently there are 5.5%. So the question is that, given that NPLs are currently at 3.5%, and you mentioned that you might see even a further improvement in terms of asset quality, what do you, are you expecting in terms of write-offs as a percentage of the loan portfolio?
Will we see also an improvement in that metric? Or you think that it will stabilize around 5.5% or maybe 5% going forward?
Just having more color in terms of write-offs.
Marcelo Kopel
When you look at this quarter in particular, there was an item. Regardless of if we segregate the specific seasonality, there was an additional write-off regarding 2 vehicle financing.
So when you look at the trend, the trend as the charge-offs should be reduced. Okay, so then depending on how the portfolio behaves overall, that will give you the answer on the percentage of the charge-offs over the portfolio.
But it's important to emphasize that this event in this quarter, the number of this quarter had that particular 2 impacts of seasonality and the vehicle finance additional charge-off.
Aníbal Valdés - Barclays Capital, Research Division
All right. In terms of annual charge-offs, what are you expecting -- if the level of NPL stays at 3.5%, what -- I mean, going forward what would you expect in terms of charge-offs as a percentage of loan portfolio for the next years?
Is that materially lower?
Marcelo Kopel
I'm sorry, we don't guide for the -- looking forward for the percentage we expect.
Operator
Our next question comes from Natalia Corfield with JPMorgan.
Natalia Corfield
It's a follow-up on your Common Equity Tier 1. How much would this ratio be, if we disregard these mitigants that you are considering?
And I'm talking about the fully loaded of 9.6%. That's the question.
Marcelo Kopel
It would be around 8.5% and 9%.
Natalia Corfield
So it would be lower?
Marcelo Kopel
Yes.
Natalia Corfield
9%?
Marcelo Kopel
Yes.
Natalia Corfield
Okay. All right.
And another question. In terms of asset quality.
You've been guiding for a continued reduction. But I'd like to know, given what you're expecting for 2015, what do you -- what can we see in terms of asset quality?
Marcelo Kopel
We continue -- again, the strategy won't change. So to the extent there is no material change in the economic environment and nothing that will deteriorate the overall environment, the asset quality should remain relatively stable to what we are seeing now.
And remember, there is the economy that rules everything that happens, and there's our strategy that is being executed, consistently executed over the last quarters, and we continue to execute that moving forward.
Natalia Corfield
Right. But you're -- you have a GDP growth expectation for 2014 of 1.4%, which is kind of low.
If we have something similar for 2015, do you think you will have a stable asset quality, or do you think you can have some deterioration?
Marcelo Kopel
Our view is that we're going to have it stable. And by the way, our forecast for next year, GDP growth is 2%.
So it's not materially different than what we have for this year.
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 Egydio Setubal
I'd like to thank you, everybody, for participating with us in this conference call. I think we have very solid results, very good numbers, and more importantly, very sustainable numbers for the coming quarters.
Thank you, everybody, and wish to see again on the next conference call to review our second quarter result. Thank you.
Operator
That does conclude our Itaú Unibanco Holding earnings conference for today. Thank you very much for participation.
You may now disconnect.