Nov 4, 2015
Executives
Eduardo Vassimon - Executive Vice President, Chief Financial Officer and Chief Risk Officer Marcelo Kopel - Investor Relations Officer
Analysts
Philip Finch - UBS Carlos Macedo - Goldman Sachs Tito Labarta - Deutsche Bank Marcelo Telles - Credit Suisse Saul Martinez - JPMorgan Aníbal Valdés - Barclays Capital Victor Galliano - Barclays Carlos Gomez-Lopez - HSBC Boris Molina - Santander Investment Securities Inc.
Operator
Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holding Conference Call to discuss 2015 third quarter 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.com.br/investor-relations. A slide presentation is also available on this site.
The replay of this conference call will be available until November 10 by phone on 551131931012 or 28204012, access code 9067132#. 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.
Eduardo Vassimon, Executive Vice President, CFO Chief Financial Officer, and CRO Chief Risk Officer; and Mr. Marcelo Kopel, IRO, Investor Relations Officer.
First, Mr. Eduardo Vassimon will comment on 2015 third quarter results.
Afterwards, management will be available for a question-and-answer session. It’s now my pleasure to turn the call over to Mr.
Eduardo Vassimon.
Eduardo Vassimon
Good morning, good afternoon. Welcome again.
For those that are following us at Internet, we are at Slide #2. I start highlighting the recurring net income of the third quarter BRL6.1.
We consider it to be robust result, particularly considering the environment in Brazil, the economic conditions prevailing in the country. This result is stable considering what we saw last quarter and is roughly 21% higher than the same result in the first nine months of last year.
Recurring return on equity was 24%. Credit quality is stable both for NPL 90 days, 15 to 90 days.
We’re going to talk a lot about credit quality in the next slide, because we consider this to be one of the main points of interest of the market. Moving to Slide #3, given the particular relevance of non-recurring events, this quarter we produced this slide where we’d like to highlight two main events as a positive non-recurring event, the social contribution rate increase that was basically BRL4 billion, impacting bottom-line.
And as a negative impacting event was complementary provision for loan losses, BRL2.8 billion after taxes. Before taxes, this figure is around BRL4.7 billion.
We’re going to talk more about this in the next few slides. Going to Slide #4, here again, 24% return on equity on a trialing 12-month of 24.5%, very similar to the figures we saw in the previous quarters.
And recurring return on average assets is stable in the several former quarters at 1.9%. Moving to Slide #5, we have the P&L.
I’d like to highlight here the positive increase in financial margin with clients 4.5% in this quarter and 16.4% in 12 months. This increase is related to the re-pricing process of risk that we have been conducting in the several previous quarters, and we continue this quarter.
Higher funding efficiency and a higher SELIC rate also contributed to this positive growth. Another that I’d like to highlight is the financial margin with the market BRL2.3 billion.
That’s an unusual result, higher than what we consider to be unusual result. We’re going to talk more about that in the next slides.
Commissions and fees show the 10% growth, so slightly above inflation. Result from insurance 1.5% drop.
This is related to the fact that the bank is no longer operating in some segments of insurance that we do not consider to be core like large risks and extended warranty. And we like to call your attention to the fact that retained claims dropped 22% in 12 months, so that the net between results from insurance and repayment claims showed a nominal increase in nine months.
Operating expenses in 12 months grew 8.5%, below inflation. Here again, we are going to give you additional details a little bit ahead.
And the bottom-line in terms of recurring net income around 21% growth when compared to the first nine months of last year. Going to Slide #6, we have the credit portfolio.
The total credit portfolio shows the 10.1% growth in 12 months. If we exclude FX rate variation effect, we reach a flattish number.
And in 12 months, in the quarter a reduction of 1.1%, is of course is related to the challenging economic environment where we see a lower credit demand and also reflects a tighter and the rising credit standard that we have being adopting now for several quarters. When we look at the fiscal business year, we see that payroll loans have grown 25% in 12 months.
But when see the growth in this particular quarter was modest 0.4%. This is basically because the process of buying portfolios has ended and so now we are going to see a more organic growth.
Another line that shows good growth in 12 months is mortgage loans, close to 22% in 12 months, and a robust 5.5% this quarter. Vehicle loans continue to go down 9% in this quarter.
Corporate loans 9%, slightly below inflation, but if we take out FX rate variation fact this will be a negative growth. So this shows very clear the challenging economic environment we are living.
Moving to Slide #7, we have here the breakdown of our P&L into two pieces. On one side, the Credit and Trading, that’s more related to the economic cycle, and the one that - the other side Insurance and Services, that’s more resilient to economic cycle.
The first piece shows the return on equity 15%, little bit below cost of capital, while Insurance and Services shows a very stronger return on capital. Moving to Slide #8, we have the financial margin with clients breakdown.
We see on the right side of the - for table, the three lines of this that have been showing a more robust growth in the past few years. And Latin America consistent with our regional expansion strategy, and mortgage loans and payroll loans consistent with our strategy of moving to lower risk lines of business.
The corporate segment also shows an increase and this is to large extent related to FX effects. On the lower part of this page, we see a positive evolution of the financial margins with clients, basically related to the repricing process and the increase of the SELIC rate.
Move to Page 9, we see the financial margin annual terms. Spread-sensitive operations shows stability at 10.8%, if you can see there the FX effect, these would be 10.9%, it was slight increase.
Adjusted by risk, we see a reduction the green line from 7.1% to 6.9%. This 6.9% would be 7.0% considering the FX effect.
Moving to Slide #10, I’m talking about financial margin with market that as I mentioned is, we will not consider this BRL$2.3 billion, as a usual result. These was due to the very high volatility, we absorb in this third quarter.
Just give an example, FX rates show the 28% devaluation in the period. So the ability to take advantage of higher volatility and some directional positions in FX and this rate allowed us to produce this area robust result.
But again, what we do not consider this as a usual result, a more usual result would probably be around in annual return for BRL5 billion that would be more in line with historical standard for this line considering, of course, that this is intrinsically volatile line of the P&L. Moving to Slide 11, I’m starting to talk about credit quality, on the first part of the slide, we see 15 to 90-day NPL ratio, we see a stability at 3% for the total portfolio, excluding effect of FX rate variation, the total portfolio would have increase the NPL, would have increase 10 bps.
For individuals, we see a small reduction of here that we believe to be consistent with the process of adjusting our credit policy that I’m starting to show consistent results for this 15 to 90-day NPL rate. Companies showed an increase of 10 bps in this period.
Going to the lower part of the Slide with 90-day NPL ratio is stable in the total of 3.3% that would have been 3.4% excluding FX rate variation. When you look at individuals, we see a relevant increase of 50 basis points from 4.6% to 5.1%, that’s above what we expect in this particular line up business.
Looking ahead, we expect to see additional increases in NPL if individuals for 90-day, although if lower pace, more moderate pace. This company NPL ratio for 90-day showed a reduction of 20 basis points here, also we expect to see in the future increases of this indicator, particularly because we have some particular cases of corporate loans, relevant to corporate loans that we will roll over for 90-day as to the situation.
And those loans are already to large expanding position. Moving to Slide #12, we see here in 90-day coverage ratio, very relevant increase from 187% to 214% of the coverage ratio.
Basically due to the complementary position, we made in this quarter of BRL4.7 billion. Just remind that this is above this BRL4.7 billion is above the minimum required by local regulators.
As we mentioned already in the past, we’re going to manage the bank looking to merge this coverage ratio, we follow as of course, with this is not something where we have specifically target. And we possibly are going to see a reduction in this figure, looking ahead is some transactions may become past - rollover to 90-day past due.
Considering the lower - looking the lower part of this page, we see the coverage ratio by segment in the retail banking segment, we see a figure this quarter similar to do one, we absorb within June, and in the wholesale banking portfolio, we saw an increase giving the more anticipatory aspects of this provision. Moving to Slide #13, we compare here the individuals 90-day NPL ratio, with the same figure the same indicator excluding fully provisioned credits.
In the second concept, we see a much more modest increase of 20 basis points for individuals. For companies, we see a stability around 5.6% of NPL - 90-day NPL, when we exclude fully provisioned credits.
And finally in this page below, we have a breakdown between very small, small and middle market companies on one side and corporate on to other side. And we see a reduction in corporate indicator and a slight increase in the very small, small and middle market companies that naturally segment that’s more sensitive to the economic cycle.
Moving to Slide #14, we are showing this for the first time using the present challenging credit scenario. We are showing here renegotiated loan operations, we see an increase - a loan increase of BRL1 billion in this portfolio from BRL12.5 billion to BRL13.5 billion, roughly speaking one-third of this increase is related to FX effect.
When we see there as a percentage of the total loan portfolio, we see 2.8% that historically low and basically stable, when we look back the several quarters before this one. On the lower part, the delinquency and allowance for loan loss coverage.
We see a consistent increase in this indicator reaching 233%, the 90-day NPL balance shows a nominal reduction from BRL2.7 billion in June to BRL2.5 billion in September, bringing the 90-day NPL ratio down from 21.5% to 18%. Moving to Slide #16, loan loss provision expands as a percentage of total loan portfolio, basically stable around 4.8%, 4.9% in the past few quarters.
In the lower part, we see a reduction in NPL creation from BRL5.6 billion to BRL5.2 billion, and also reduction in write-offs from BRL4.7 billion to BRL4.3 billion. So, NPL creation as a percentage of loan portfolio basically stable around 1% to 1.1% in the past few quarters.
The last slide on credit good Slide #16, we see the evolution of loan loss provision expenses by segment as expected we see year-end decrease in the whole sale portfolio from BRL1.8 billion to BRL1.4 billion raise and increase of the retail portfolio expenses from BRL3.7 to BRL4.3 billion. Moving to Slide #17 again quickly here, just to highlight that we’ve been doing commission in fees and results from insurances like the above inflation 10.2%.
On Slide #18, non-interest expenses in 12 months we show 8.5% increase that’s below inflation if we do not going to see the operations of broader term of course affected by effects these would have been 6% growth only in 12 months. If we take the particular quarter to third quarter there is substantial increase of 9.3% basically due to the 15.2% increase in the personal expenses.
Here is important to explain that when we book these in September we were still negotiating with banks we used to negotiate with the union and what we booked in September was the proposal we had on the table that time that it was a combination of percentage increase with lump sum payment. So, these lump sum payment was booked at the end of the negotiations it turned to be only a percentage increase with no lump sum.
So that we are going to see in the first quarter reversal of these lump sum payment provision and all considered we are going to see a more reduction in the first quarter of personal expenses. In the lower part of the stage, we see the trailing 12 months the efficiency ratio continue to going down or going to particular quarter in the third quarter, we saw some increase.
Moving to page 19, talking about capital we had 90 basis points reduction in common equity it went from 13.2% to 12.3%, the net income of the piece was basically offset by increase in tax credits and the combination of dividend distribution mainly and the growth in RWA in this case related to assets to do some continuous reduction. When we look at the set 1 fully loaded we see a reduction here coming from the common equity 1 0.3% [ph] and anticipating the schedule of Basel rules will reach 9.8%.
This is influenced by the FX devaluation in the period giving the structure of our investment a broader the hedge of this investment. Considering the FX rates prevailing the past two days these 9.8% would be to be something between 10% and 10.5%.
So, we are very confident that we all capitalized given the ability to generate positive and perspective of loan growth in our credit portfolio we expect to see this will increase in the next quarters. Going to page 20, just to quickly highlight here that in this historical series we are seeing the high in terms of net dividend yield and low in terms of price to earnings.
We consider to be attractive stock price of our bank today. Moving to page 21, just to briefly mention this shares buyback program this year has been particularly active in buy backing shares for capital management or for compliancy dollar long-term compensation program we have bought close to 87 million shares so far this year.
We have an open program of 50 million shares of which we have already used 13.3 million shares. And finally moving to slide 22 the 2015 outlook our expectations for this year for the total loan portfolio growth using the FX devaluation we expect to be above this 7% that’s the top of this interval here.
In terms of managerial financial margin giving the good result with markets and the repricing risk process here again we expect to be slightly above the top of this interval for provision for loan losses net accrual of loans we expect at the end of the year to be around BRL80 billion that’s the top of this interval. For services fees and results for insurance operations are probably going to be closer to the low end of this range.
And finally moving towards expenses, we are probably going to be closer to the high end, because of FX effects we are here very committed to working hard to deliver not only this year but the years ahead below inflation expenses growth. So with that, I finish my presentation and Marcelo Kopel and myself are available for possible questions that you may have.
Thank you.
Operator
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] our first question comes from Philip Finch with UBS.
Philip Finch
Thank you. A wonderful compliancy presentation.
I have three quick questions please, first in terms of credit quality, you talk about how the delinquencies will likely go up in the coming quarters on the one hand and then you’ve also been adding to your complementary provisions and boosting your coverage ratios. So, going forward what cost of with positions to loans company assumed going forward you mentioned that you’ve been running at around 4.8%, 4.9% in recent quarters, is that the run rate that we can still assume or should we assume higher cost of risk going forward.
Second question is regarding your loan growth stripping out FX loan growth was flat year-on-year looking into 2016, can we assume this remains the case or we going to see negative loan growth in which segments and when could we anticipate any form of recovery in credit demand and lastly in terms of geographical revenue diversification what are you planning to do outside Brazil. Obviously you got Corpbanca Chile and Columbia, but are you looking beyond that to Mexico or Peru?
Thank you.
Eduardo Vassimon
Good morning Philip. Well, we are still in the process of working on our 2016 budget given the level of incertitude that we still have in the bridging economic and political scenario, we don’t have any specific expectations regarding the ratio you mentioned, what we can say is that given the current scenario yes, we expect to see NPL ratios to continue to grow up on a moderate pace, but it’s premature to have any more precise assessment on the ratio mentioned and also the same is true for credit growth.
We do not see any relevant - by all means, any relevant credit growth next year. The Brazilian economy most probably are going to contract further next year, although in a - possibly in a slower pace than what we are seeing this year.
In terms of geographical diversification, we have this strategy of overtime reducing little bit dependence on Brazilian business. Of course, we will also be very Brazilian based bank.
But with the merger with CorpBanca, we are probably going to be close to 20% of revenues arising from…
Marcelo Kopel
Credit assets.
Eduardo Vassimon
Sorry, well, credit assets, not necessary revenues, our credit assets outside Brazil. Yes, Mexico and Peru are countries that would be interested to be in the future.
But we don’t see this frankly in the near future. Our focus now is to consolidate CorpBanca operation.
Philip Finch
Okay. Thank you very much, Eduardo.
Operator
Our next question comes from Carlos Macedo with Goldman Sachs.
Carlos Macedo
Good afternoon, gentlemen. Thanks for taking questions.
First question, regarding the excess provisions you made in the quarter, you now have a very large balance of excess provisions. You haven’t used those excess provisions if I’m not mistaken for six or seven years.
Under what conditions would you use these excess provisions? What would be the situation which you’re prompted to use them?
Second question, regarding the securities in your book, I mean, we saw on the held to maturity book there was a fairly substantial decline in the market value. The security is also available for sale to some degree.
Is that something that concerns you regarding capital for the near future, what’s the maturity once the securities continue to mature? Is that something that we should be concerned about?
We saw the impact that had on Bradesco’s capital, not as much for Itau. Is that something that should be something that we worry about over the next few quarters?
Thank you.
Eduardo Vassimon
Hello, Carlos. To your first question, we have built this additional provision cushion precisely to face possible more challenging environment in the future.
I think that we’d possibly use this if conditions continue to deteriorate further in the next quarter. So it’s not something that we don’t - we cannot exclude using this in the future, again, if conditions continue to deteriorate.
We don’t have any particular trigger for that to be to some extent a judgment call. But this was just precisely to use in a more stressful scenario.
In terms of reduction on our bonds available for sale and held to maturity, given the volatility in the third quarter, yes, we had some reduction. But as I briefly mentioned during the call, we are not - by all means, we’re not worried our capital basis.
Again, our full CET 1 ratio, given present market conditions would be already above 10%. The ability to generate profits, combined with the lower credit demand I think will make us, will put us in a very comfortable position in terms of capital both in absolute and relative terms.
Carlos Macedo
Okay. Thank you, Eduardo.
One question regarding the first answer, you said that you don’t manage the bank looking at the coverage ratio and obviously you have a lot of rules that you need to follow. Is there - and there are no specific triggers that will be needed to use that excess provision, but just conceptually thinking, would this be because of the chunkiness of the wholesale book?
Would you think that it would be something that would be driven by, say, a one-time event in wholesale, as opposed to a more structural event in retail or is there a - really no rule that you will follow for that?
Eduardo Vassimon
There is really no rule, but both the events management are theoretically covered by this increase in provision. It could be used it, conditions in generalized affect the retail portfolio, could be used, there is a specific large cases in the quarter.
As we mentioned, we don’t have a target for coverage ratio, but as you can see in the chart is we are probably at the high point ever in terms of coverage ratio. So, looking ahead, I think it’s reasonable to expect some reduction, some conversions to the historical levels.
Carlos Macedo
Okay. Perfect.
Thank you, Eduardo.
Operator
Our next question comes from Tito Labarta with Deutsche Bank.
Tito Labarta
Hi, good morning. Thanks for the call.
A couple questions as well. Just following up a little bit more in terms of asset quality, I know it’s hard to see into next year, just given the environment, but maybe if you can provide - maybe quantify a little bit when you say some moderate deterioration next year, I mean do you think like, would you say that what we saw in the consumer portfolio about 50 basis points segment that type of deterioration per quarter or even maybe a little bit less, as you mentioned?
Is that what you would consider to be moderate also in terms of the corporate NPLs that can pick up? If you can maybe just give some color on how you see moderate?
Is that couple of basis points per quarter or anything significant that worries you particularly with the additional provisions that your booking - is there anything that could kind of surprise you or be worse than expected? As much color as you can give on that I would appreciate it.
And then also in terms of your margins, you continue to see some margin expansion. How do you see your margin evolving into next year?
Do you think you can see further margin expansion? Has that now peaked in terms of your ability to increase spreads?
And then, just finally in terms of the trading gains, I know this quarter was very high, but do you think that will reverse a bit in the fourth quarter, at least what you seen up until now, you think you give back some of those gains this quarter? Thank you.
Marcelo Kopel
Hi, Tito, it’s Kopel speaking. Let’s start from backwards on your questions.
Taking about the trading gains, when we talk about unusual level of gains and this is an example. This quarter in particular is an unusual level for the gains.
What we been saying to the market is that the usual level we could expect is around BRL5 billion for the year, which will mean BRL1.2 billion, BRL1.25 billion a quarter. So that’s something that you can keep in mind for that.
Okay. Then, your question about margin expansion in 2016, when you look at our NIM for this year it’s been growing, slowly growing throughout the year as we being increasing prices on our spreads on the new originations and as we being on the renewals of the back book we’ve been re-pricing those as well.
This is an ongoing process. Okay.
Part of the book has been re-priced and the new originations are coming day-after-day. So for next year, even things stay at where they are the average NIM for next year should be higher than the average NIM for this year.
So that’s what’s - that’s something that you could work with. And the third part or the beginning of your question which is asset quality and to your point about this level of increase, the 50 bps that we saw in individuals, to be fair they were above our expectations.
When we mentioned that we were expecting a moderate increase in the second quarter we were not referring to a 50 bps increase. So it’s somewhere lower than that that we consider moderate.
And we don’t see that happening quarter-over-quarter. And just to finish and wrap up to that point, when you talk about and you may ask about the peak of the delinquency, which you could, you know, in our base case now you’re talking about more towards the end of 2016 and then beginning of 2017.
So these are the things that we can consider and we don’t consider 50 bps as a moderate increase.
Tito Labarta
Great. Thanks.
That’s helpful. Just how about on the corporate portfolio, also when you kind of see moderate there and given that’s probably could be some chunkiness there or something major.
How do you see that could evolve, because you are already at pretty high levels compared to over the last year and a half. So, if you could maybe give some color on the corporate side as well?
Marcelo Kopel
Right. Corporate is more discrete behavior, right, so it’s not that you model and use the statistics.
We have a meaningful step up on our comp base for this year. That could be additional cases next year, but we are departing from a meaningful base for this year.
So as Vassimon mentioned during his presentation, we are seeing some cases that we’ve been providing already in preemptive provisioning for those, which will probably show up in the NPLs of the fourth quarter, but those are basically being to a large extent already provision. So we depart from a high comp base for next year, that could be some increase.
But departing from a very high level, so therefore, that increase should be something lower than the increase you could see on the individuals.
Tito Labarta
Okay, fair enough. That’s very helpful.
And then, sorry, just one follow-up on the trading, I understand on average about BRL1.2 billion per quarter makes sense, I was just trying to get a sense, given you had such a huge gain in the third quarter, do you think you could give some of that back in the fourth quarter, could it be lower than or is it continue to be high. Just kind of get some more color on the fourth quarter, given we’re already more than a month into it?
Marcelo Kopel
I mean, you could use that number as a proxy for the fourth quarter as well.
Tito Labarta
Yes, the BRL1.2 billion.
Marcelo Kopel
Yes, something in that neighborhood.
Tito Labarta
Great, fair enough. All right.
Thank you very much.
Operator
Our next question comes from Marcelo Telles with Credit Suisse.
Marcelo Telles
Hi, hello everyone. Thanks for the time.
I have two questions. The first one is still regarding the trading.
Looking at the, how much you’ve been hedging of your investment in foreign subsidiaries, it seems that you remained under hedged versus your dollar exposure to mean, you would be let’s say long dollars at that stage at least at the end of the third quarter. So there will be probably the second quarter in a row that you’d be with that position.
Is that something that you could expect that to be more structural EBITDA for some time, given the high market volatility, which, of course, in fact this has helped you show their balance sheet to some extent compared to some of your peers. So would expect that to change at some point, what do you think we should see that for to last a little bit longer?
And the second point regarding asset quality, what is the scenario that you are working in terms of GDP growth next year. What are the downside risk that you see and in your view, how would the loss of investment grade by Moody’s would impact the quality of your loan book?
Thank you.
Eduardo Vassimon
Hi, Marcelo, this is Vassimon.
Marcelo Telles
Hi, Vassimon.
Eduardo Vassimon
Hi. On your first question on trading, as you mentioned, you will see a picture of the position at the last day of the third quarter.
So there is not a necessary reflects, our position that’s much more dynamic. Having said that, we have part of our investment a broader, a small part with the still where the hedge is more difficult, because of the liquidity aspects of markets, for instance you see in Argentina and Paraguay.
So this is one of the factors that explains why in certain point in time, you may not see a fully hedged figure. And of course, the order aspect is FX position that we may have from time-to-time, that dynamic and in this particular cases not - cannot be considered as a structural position.
So coming back to the previous question, I think this trading results by nature volatile, but our best guess as a more, quote unquote, usual result would be around BRL1.2 billion to BRL1.3 billion per quarter. Your second question about asset quality and liquidity growth.
The call of our economic department today is a drop of 1.5% GDP in next year. What starts to seem a little bit optimistic seeing from now.
So, we’re probably going to see a reduction GDP that’s higher than, of course in part the whole credit environment. And in terms of the loss possible - loss of investment grade, I believe that to a large extent is already priced in.
I know you will see the prices of Brazilin NB [ph] or-CDS. It’s where the price of our non-investment grade country.
Of course, this makes the refinancing aboard more expensive, but relevant part of this could be refinanced domestically either through institutional investors or banks, of course, we are following this process very cautiously and analyzing companies on a case-by-case basis.
Marcelo Telles
Excellent. Thanks for your time.
Operator
Our next question comes from Saul Martinez with JPMorgan.
Saul Martinez
Hi, good afternoon guys. I have two questions.
I am going to follow first, I am going to follow-up on the question of cost of risk, and follow in that was asked earlier, and understanding that you can’t give specific guidance or specific numbers. I’ll ask in a little bit more of a conceptual way how you think about, and how we should think about it.
This credit cycle is obviously challenging for - to analyze because on the one hand you have de-risked as you’ve explained, many times before a pretty aggressively. There is a mix shift.
You are not growing into the cycle, but at the same time Brazil is going to have a contraction in GDP that over a two, three year period that it hasn’t seen like probably since the 1930s at least, which obviously is going to hit asset quality. By looking at your cost of risk metrics, net cost of risk is up about 100 basis points this year versus last year.
In the last couple of cycles, you’ve seen, I think 11 and 12 about 120, 130 basis point increase in 2008, 2009 solid, I think a little bit more than that. Previous cycles, you may have seen more than that.
How should we think about the increase in cost of risk from trough to peak given the moving parts and the trends that I mentioned, should do you think this is a cycle that because you have been de-risking that wins out and you don’t see as much of an increase or do you think that we should be working with an increase in the cost of risk from trough to peak, whether it’s 2016 or 2017. It sounds like you have been to 2016, that is worse than in past cycles.
So, conceptually how should - how do you think about it, how do you think the market should think about it? The second question is somewhat related on corporate credit, clearly this is a product where a relatively small number of cases can impact provisions quickly, your expected losses are generally lower, I realize that you were starting from a high levels, as you mentioned, but unexpected losses can be much bigger giving your concentration risk.
How are you seeing that the tail risks today associated with corporate credit? Do you think the economic backdrop of further downgrade, that limit company’s ability to fund themselves externally?
How do you see the probability or the likelihood of that producing the stress scenario? And again, I realize it’s not the base case scenario but how relevant risk do you see with corporate credit and provision spiking much more than what the base case suggests?
Marcelo Kopel
Hi, Saul, it’s Kopel. Let’s start with your first point regarding the - what could be, how we grow between the low-end of the NPL’s into behind of that.
And to make a - to give you like a more short-term answer from what we have seen internally and we are still working on that in finishing. If you take the 2009 number which were repeat their given all the different components you said about the risking about GDP contracting about and I’m adding to that the slow growth we’ve been having in the portfolio all that combined at this point makes us understand that we will not reach at the peak that we had in 2009 that’s the view we have at the moment, okay.
Moving to your corporate lending question about they are more binary or they are more like the big one-time events in each of the case is given that they’re big credits. If these happen and the market has been working on some cases and we are part of that work with the market.
So, if that happens and these crisis are not necessarily fully provided for which we’ve been downgrading quite a bit of them in advance there is these additional provision that could help us shelter at least part of this pressure.
Saul Martinez
Okay. Now that’s helpful.
I guess on my first question Marcelo it wasn’t more related if you reach the peak of the NPLs, because your mix is dramatically different it’s more the delta that you see in 2009, the delta that you see in 2012 versus 2010 and how that compares to the delta on whether to NPL or really more on cost of risk provisions to loan and the question is more along the lines of how likely, if my numbers are right 100 basis points to 150 basis points I trust the peak in the last two cycles you’ve had a 100 basis points all ready these things that they could get worse than what you’ve seen in the past cycle or is it too early to tell?
Eduardo Vassimon
Hi Saul, this is Vassimon. I think it’s too early to tell, because you’re still in the mid of the process.
I think we could not discuss the possibility of being higher than what we saw in terms of difference between bottom and top what you saw in 2009, but it’s really difficult to call it at this point, we are definitely in a very severe economic situation. So, again we are going to see yields going up see for now, it’s difficult to say but we cannot exclude the possibility of having delta that’s higher than we observe historically.
And having said that as Kopel mentioned you’re seeing from today we do not expect to reach the levels we saw in the last cycle.
Saul Martinez
Okay, that’s great. Thank you very much.
Operator
Next question Aníbal Valdés with Barclays.
Aníbal Valdés
Hi, good morning everyone. Marcelo, so I’m more interested in the underlying dynamics of the loan portfolio.
So the first question is as related to the indicators, so we saw the increase in the individual portfolio NPLs, but the early delinquency rates, which is between 15 to 90 days did ensure a pick up, so clearly tense us a surprise. So how can you explain that the early delinquency rate doesn’t show such a dramatic increase in the previous quarters; while you have the increase of 50 basis points over 90 days?
So that’s one of the things that I would like to further understand. And the other one regarding the dividends portfolio, what things are you seeing in that portfolio, you said deterioration across the board and in credit cards, and consumer loans and vehicle financing or is it specific product in a specific region and is or is it abrupt probably in a loan portfolio?
Thank you.
Marcelo Kopel
Aníbal, first off with the - where are we seeing the increase in NPLs is coming from credit cards and personal installment loans which are secured lines and these are more sensitive to an environment where we are, but just to make a point on the credit cards as you probably have seen three quarters of our portfolio are comprised of options X and where we are seeing the increase in NPLs is not coming from transactors that are becoming revolvers and getting delinquent, but we are seeing the increase in NPLs within the revolvers portfolio. So, it’s not that people who are changing their behaviors and where they are typically people who use the credit cards as a means of payment and now transactors and becoming revolver.
So, that’s one element that I would like to make on the credit cards and I mention also these in NPLs for personal installment loans, then regarding the NPLs in short-term and talk to the short-term and the long-term as we’ve been dynamically managing our credit policies the fact that we have a reduction in this quarter shows that certain vintages where that we did raise the bar and cut the underwriting increase, the underwriting standards have a better behavior and therefore rolled over to a lesser extent and the vintages that rolled over this quarter, okay. But that was a meaning that we expect at the next quarter you would have a similar behavior therefore, we are still expecting an increase in the NPLs for individuals in the following quarters actually.
Aníbal Valdés
Thank you, Marcelo.
Operator
Our next question comes from Victor Galliano with Barclays.
Victor Galliano
Yes, just a couple of follow-ups from me. In terms of capital and you shows us that you are fully loaded Tier 1 for 3Q, does that also include the impact of Corpbanca?
That’s my first question. And my second one on renegotiated.
You gave us broad picture, the amended portfolio and then you gave us the renegotiated loans, which are BRL13.5 billion out of the I think BRL21.9 billion portfolios you have there. Those BRL13.5 billion are those all loans that are overdue or how do you separate the BRL13.5 billion from the BRL21.9 billion if you see where I’m coming from?
Marcelo Kopel
Hi Victor, it’s Marcelo talking about the renegotiated loans and as you correctly pointed out that there is a larger portfolio BRL20 billion which is comprised by two pieces and the renegotiated loans are inserted into that portfolio which is the BRL13.5 billion that we have and in this portfolio what you have is on page 14 of our presentation the breakdown of how much of that are overdue credits which is a BRL2.5 billion out of the BRL13.5 billion renegotiated loans. So, that’s how you should read our numbers.
Victor Galliano
So there is BRL2.5 billion overdue for more than 90-days or starting from one day of the due, how do we?
Marcelo Kopel
Yes. It’s 90 days overdue sorry, it’s 90 days overdue.
Victor Galliano
Okay.
Marcelo Kopel
Okay. And then your second question about the capital Corpbanca is not included in that 9.8 that we show on the capital projections and either are the future profitability.
So, Corpbanca will be a new effect of approximately 80 basis points in our numbers okay. Therefore, we should do the math and also taking to consideration that these FX has an important increase in our number the sensitivity now is that looking at current FX rates we are more like between 10% and 10.5% at the moment.
Victor Galliano
So, an 80% on 10, 10.5 is what you are saying?
Marcelo Kopel
Yes. I’m saying that the 9.8% today that we show in page 19 talks to 10% to 10.5% in during the FX movement, okay which we do see the DTA and so on and so forth.
Victor Galliano
Okay all right. Thank you very much.
Marcelo Kopel
You’re welcome.
Operator
Our next question comes from Carlos Gomez-Lopez with HSBC.
Carlos Gomez-Lopez
Hello good morning. Thank you for taking the call.
Just to give you a break on asset quality and questions from others. First in the use of the DTA that you make, you mentioned a BRL514 million provision for contingencies and in the last you mentioned it at least largely refers to economic plans that’s a large amount, that’s almost BRL1 billion pre-tax.
Is this something that you expected to be a one-off, it is a recurrent and would it include provisions for collective claims? And the second question is what do you expect your tax rate to be in 2016 given the past changes?
Thank you.
Marcelo Kopel
Hi, Carlos, it’s Kopel speaking. The BRL540 million that we had in our recurring is comprised by a number of things including the economic plan.
We did have a corporate restructuring or legal entity restructuring, which accounted for less - for more than - for approximately more than half of this BRL540 million. So this is not something that we’ll be repeating itself, okay, and that’s why it was classified as a one-time there is non-recurring item.
Okay, and then…
Carlos Gomez-Lopez
Could you give more - so, could you give more detail legal entity restructuring or what?
Marcelo Kopel
Sure, sure. We’ve reorganize our legal entity aboard, outside Brazil and by doing that certain taxes were triggered and this is a reflection of those taxes related to this reorganization.
Carlos Gomez-Lopez
Excellent. Thank you.
Eduardo Vassimon
This is Vassimon, Carlos. On your question about the tax rate, with the increases we expect to see this close to 37% next year.
Carlos Gomez-Lopez
All right. That includes already the reduction of interest loan capital to 5% presumably?
Eduardo Vassimon
Yes.
Carlos Gomez-Lopez
Thank you very much.
Operator
Our next question comes from Boris Molina with Santander.
Boris Molina
Yes, I had a question regarding the outlook for pricing and corporate spreads. If you look at the spread over SELIC of non-year mark loans in Brazil, its - larger driver of your corporate spreads.
This have continued to expand on a pre-provision or pre-NPL level, throughout the last year-and-a-half even in the last month, despite of the headlines spreads decline and the relevant spread continue to expand? However, when you did that in the non-performing loans for non-earmarked for private sector, basically the risk adjusted spread on that measure, having flat for almost a year-and-a-half, almost a year.
And so the behavior of the banking industry seems to be that they are increasing spreads along with cost of risk. Now my question has to do, you know, what is the behavior you’re going to be like if you have pre-provision cost of risk ahead of time?
Is there any room for the spread for companies to continue to expand, because when we look at it on a cyclical adjusted basis for secured personal loan like credit cards we see the spreads going back to record highs and peak levels we’ve seen in the past cycles? But this is not the case for corporate lending.
So if we think that in over - becoming religious function in terms of the way the fiscal accounts are being managed and very ineffective management, is there room for the industry to price higher. The current cost of risk going forward related to the levels you have right now.
Do you think that’s corporate spreads can continue to expand it 2016, more if you can kind of your outlook for further spread expansion in 2016?
Marcelo Kopel
Hi, Boris, thank you for your question. Let me just put things into context, yes, as you pointed out banks have been pricing the increasing risk, when you look depending on, how you look at the series, the fact that spreads after cost of risks have been relatively stable, it confirms that banks have been pricing that accordingly.
In the scenario described, where risks tend to increase, two things can happen in our case, to the extent the credit is the credit that we would like to underwrite, we will price it accordingly, okay, but there will be cases where we may forego credits, in the sense of making new credits, given the fact that, it’s not a matter of price, but it becomes that it’s the fact that they became riskier than we would like to underwrite. And therefore, you would have a volume impact and because we will forego those particular credits to the market.
So in another words, we would probably not put ourselves in a diverse selection situation just because we can price it more.
Boris Molina
Okay, wonderful. So basically, you would - you could price it right and the operation could take place at the right price, but because of the risk you will just basically declined to take the volume?
Marcelo Kopel
Yes. Their situations where certain clients, that doesn’t become a matter of price, but it becomes - they don’t see our credit appetite.
Boris Molina
So if you think about it in this context then, the buildup of excess provisions of that we’ve seen in the last year-and-a-half is truly alarming, because it gives an idea of level of expected losses, expect on your corporate loan book for the provision coverage has been higher. So seen in this slide is not that the spread to good borrowers subsidized weak borrowers, it’s that the weak borrowers are pretty large and that is reflected in your wholesale corporate coverage ratio?
Marcelo Kopel
I don’t think, the work should be alarming, because as you will recall at the end of last year, we expected a softer economy and we built BRL1.1 billion of additional complementary provision, okay. And this is another buildup we’ve been doing for a softer economy.
And as Vassimon mentioned before, that could be instances that we make possibly use this coverage, okay. But again, the visibility is low at the moment.
Therefore, where we are now, we will continue to proactively provision credits to the extent we feel then they are weaker. I’m talking about the corporate loan specifically.
And we will continue to do that on the rollovers of the individual portfolio as well. So I wouldn’t use the word alarming as per the situation, but it’s a delicate situation in the sense that we are very careful of the underwriting standards.
Boris Molina
Okay. Wonderful.
Thank you so much.
Operator
Our next question comes from Eduardo Nishio with Banco Plural [ph].
Unidentified Analyst
Thank you for taking my question. I have two questions.
First one is regarding your wholesale banking. If you look at to the performance of the wholesale banking units, you see that we are underperforming for quite while the other units.
And it has been widely commented in press that the wholesale banking is under a degree of validation. I was wondering if you can comment little bit more, give us a little more color on what’s going on there.
And if you can give us the broader plan, and if we can expect some improvements in the near term or when it is going to happen, I would appreciate it. That’s the first question.
Then I will do my second later. Thank you.
Eduardo Vassimon
Hi, Eduardo, this is Vassimon. Yes, it’s true that Brazil’s of the wholesale bank division were not too brilliant recently.
But it’s basically related to the economic situation, in terms of increasing cost of credit risk. So this is the main driver of the underperforming of this division.
And the adjustments that have been made in this structure of the bank reflect of a major restructure of the executive committee of the bank in beginning of this year, and are not related to the recent performance of the division. Historically, whole sale banking has been performing very well.
In this particular year again, given the economic situation, was a poor performance. And it changes our adjustment in the structure without changing, by all means, the focus and the relevance and the importance of the division.
Unidentified Analyst
Okay. Thank you.
My second question is a follow-up on a comment that the peak in delinquency would be in the first-half of 2016. I was wondering if you can develop a little bit more.
Usually you look at to the past environment; the economic downturn has been worse than I think most expected. We’re probably going through the worst economic environment since the ‘30s and the unemployment is expected to peak in the second-half of 2016.
Just wondering if you could - how comfortable or confident you are with this - with the delinquency peaking in the first-half instead of a more prolonged difficult scenario? Thank you.
Eduardo Vassimon
Eduardo, I think it was some type of misunderstanding. What we mentioned is that we believe this from today and given all the incertitude of the environment that we expected the delinquency to peak between the second-half - of the end of next year and the beginning of 2017.
So not in the first-half of next year, because again, we are expecting 2016 to show another GDP drop. So we don’t see situation improving in the first-half of next year.
We’re expecting again to have it peaking by the end of next year, beginning 2017.
Unidentified Analyst
Perfect. Thank you so much.
Operator
[Operator Instructions] This concludes today’s question-and-answer session. Mr.
Eduardo Vassimon, at this time you may proceed with your closing statements.
Eduardo Vassimon
Thank you again for participating in our conference call. Just to reiterate our message that we believe that third quarter results were quite positive given the very challenging environment of the Brazilian economy.
We believe that we have reinforced and protected substantially our balance sheet with additional provisions that were built in this quarter. We believe that we are well capitalized and prepared to take advantage of the improvement of the environment that we may see again one year or two years in the future.
Thank you again.
Operator
That does conclude our Itau Unibanco Holding earnings conference call for today. Thank you very much for your participation, and have a good day.