May 4, 2016
Executives
Marcelo Kopel - Investor Relations Eduardo Vassimon - EVP, CFO and Chief Risk Officer
Analysts
Jorge Kuri - Morgan Stanley Carlos Macedo - Goldman Sachs Philip Finch - UBS Lucas Lopes - Credit Suisse Victor Galliano - Barclays Capital Marcelo Telles - Credit Suisse Carlos Gomez - HSBC
Operator
Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holding Conference Call to discuss 2016 first 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 May 10 by phone on 55-11-3193-1012 or 28204012, access code 0027080#. 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, and CRO Chief Risk Officer; and Mr. Marcelo Kopel, IRO.
First, Mr. Eduardo Vassimon will comment on 2016 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.
Eduardo Vassimon.
Eduardo Vassimon
Good morning, good afternoon. Welcome.
We are starting at Page 2 with the highlights of the period. We had R$5.2 billion recurring net income in the first quarter, around 10% below what we had in the first quarter of 2015.
We consider these results to be quite reasonable given the economic environment. I’d like to highlight some aspects in this page, in credit quality we saw an increase in NPLs compared with the challenging economic environment.
Financial margin with the market saw the strong R$1.7 billion in this quarter. Provision for loan losses, a relevant increase of 18% compared with the last quarter of 2015.
Here I think it’s important to reaffirm the guidance we provided in February. We don't see this figure to be repeated in the next quarter.
We're going to talk more about credit quality in the slides ahead. Non-interest expenses showed a good performance with growth well below inflation in 12 months.
Credit portfolio given the economic situation showed a contraction of 5.6% in this squatter. Moving to Page 3.
This resulted in slightly below 20% return on equity. In 12 months we have 22.7% return on equity.
On Page 4, we have the P&L. I’d like to call your attention to some particular point.
Again financial margin with market, strong at R$1.7 billion. Financial margin with clients in 12 months, 5% increase, so below inflation, basically related to the weak demand and our more restrictive credit policies.
Provision for loan losses, again a high number here, 6.4 net of recoveries. This is basically concentrated as we are going to see more details in the wholesale segment and have basically an anticipatory element in it.
So we don't see this to be again -- to be repeated in the next quarters. We can see here also in that there is a lower implicit tax rate.
We had indicated in our previous call an implicit tax rate of 33%. We are revising this indication 29%.
What has changed since the last call is that Brazilian Congress did not approve the limits on interest on capital for social contribution. So in average we see 29%, a adequate implicit tax rate.
Moving to Page 5. We have here the breakdown between Brazil and Latin America.
Ex-Brazil, this is going to be more important in the future after CorpBanca operations. Here we see a 8% reduction in the bottom line for Brazilian operations and a 30% for Latin America.
This reduction is concentrated in Chile due to some specific sectors. On Page 6, we provide a pro forma table with the CorpBanca.
As you may know, we legally started the integration on April 1. So CorpBanca will be fully integrated, fully consolidated in our figures in the second quarter.
And the idea of this table is basically to show that in several lines we basically doubled the size in Latin America ex-Brazil, for instance, financial margin 1.9 times, and assets and credit portfolio 2.2 times. Moving to Page 7, we have the breakdown here in our P&L between, on one side, credit and trading, that’s more volatile part of our P&L with more risk, and on the other side, insurance and services, that’s more stable and sensitive to the economic cycles.
We can see here that from the last quarter of last year to this first quarter, we had a relevant reduction in credit and trading basically related to the increase in provisions for credit, while we see some stability in insurance and services, where reduction in revenues was compensated by a reduction in expenses. On Page 8, we have the breakdown of the credit portfolio.
In the final line we see a 5.3% contraction -- nominal contraction for credit portfolio in this quarter given the economic environment. If we eliminate the FX effects, this reduction would be a little bit lower, 3.5%, in twelve months 4.2% reduction.
I'd like to call your attention to some lines – specific lines, credit card loans, for instance, given again the weak economic environment and also more conservative credit criteria, we saw a reduction of 3% in credit card loans. Vehicle finance continued to go down, a very weak demand in this segment.
And mortgage loans performed well with the two-digit growth, 17% in twelve months. Moving to Page 9, in the upper part, we see the loan portfolio mix.
We have a reduction in the corporate segment and we see the continuation of more structural movement of increasing the less risky lines of business – mortgage loans, and payroll loans continued to grow in relative terms. On the lower part of this page 9, we see the financial margin with clients breakdown.
And we can see the single most important element that explains the reduction is the reduction of our loan book – reduction of the balance. Moving to Page 10, financial margin, annualized average rate, basically stable around 11%.
When we include the risk elements, we see a strong reduction in this margin, we don't see this as a trend, and it’s again related to the high level of provisions that we booked in this first quarter. On Page 11, financial margin with market.
We had again a strong R$1.7 billion in the first quarter. We don't see this figure as recurring.
What we consider to be a “more normal” line with something between R$1.2 billion and R$1.3 billion per quarter. So we are reaffirming our expectation of R$5 billion in this line for the whole year of 2016.
Moving to Page 12, starting to talk about credit quality. In the upper part, we have the 15 to 90-day NPL ratio.
The total ratio increased 50 basis points from 2.6% to 3.1%, of course, reflecting the challenging economic environment. When we look at the individuals, there was a 40 bps increase.
Here we see clearly there is a seasonality element. In previous years, we had between 20 and 40 basis points.
This year we had a 40 basis points increase. Cooperate, we see a relevant increase of 60 basis points.
Corporate is by definition more volatile, this indicator. On the lower part of this Page 12, we have the 90-day NPL ratio.
Total ratio increased 40 basis points from 3.5% to 3.9%. Here just to highlight that this 3.5% would have been 3.7% if we had not had the financial asset transfer that we disclosed in the last call, that occurred in February.
In any case, of course, there is a deterioration of the economic situation. But here we see clearly the effect of the nominal reduction of our loan book.
For instance, in the case of individuals, out of this 20 basis points of increase from 5.4% to 5.6%, approximately two-thirds is explained by this reduction of the balance. The same applies for very small small and middle market companies.
Out of this 70 basis points from 3.6% to 4.3% bps, 30 bps is related to the reduction of the balance. This segment is probably the one where we are facing more challenge in terms of managing credit risk is a segment that’s suffering particularly from the economic situation.
Looking forward we expect to see increases -- moderate increases for individuals and also for corporate. Corporate is by nature more volatile.
But in any case we don't see relevant increases in those indicators. Moving to Page 13.
And we here show the 90 day NPL ratio, excluding fully provisioned credit. And we can see both for individuals and for companies, a stable level for individuals, actually small reduction from 2.3% to 2.2% and for companies a small increase from 0.6% to 0.7%.
So showing a stability after this exclusion. On the lower part of this page, we have NPL creation and write-offs.
We -- for the first time we present the breakdown of the NPL creation between retail and wholesale. We see a nominal reduction of NPL creation for retail and a relevant increase for wholesale.
This increase is partially explained by the same transfer of assets that I referred to in the previous slide. Here I think it's important to note that the total amount of NPL creation that would be R$5.9 billion and at the retail and wholesale is well below the level of provisions that we need in this same quarter.
So the ratio of provisions to NPL creation is over 120% in this quarter, shown in our view the anticipatory element that we mentioned related to the wholesale book. Going to Page 14, renegotiated loan operations.
We see a stability in the nominal amount around R$23 billion, despite a very challenging economic environment. We had some recovered credit particularly in the corporate segment that explains the absence of an increase in this figure.
On the lower part of this Page 14, we have NPL ratio for renegotiated portfolio, increasing from 18% to 20% compatible again with the credit environment. And we see our costs go 184% in 90-day NPL coverage.
Moving to Page 15, I think it's a particularly important page. We see here the breakdown of provision for loan losses by segment.
We can see here a nominal reduction of provisions in the retail segment from R$4.6 billion to R$4.3 billion. We expect this figure to increase moderately in the next quarters, in the retail elements.
And in wholesale we can clearly see that the substantial increase of R$1.4 billion from last quarter to this first quarter, reaching R$2.9 billion is an element that has a strong anticipatory weight. We see this figure to going down in the next quarter, in a magnitude that's bigger than an increase we will see in retail banking.
So in net terms, we see a R$7.2 billion going down. And that's again why we are confident that this provision for loan losses will be within the guidance that we provided in our previous call.
We've seen here also some increase in the coverage ratio from 208% to 210%. We expect this coverage ratio to go slightly down over the next quarters.
Moving to Page 16, I think here is worth investing some time. We are presenting here our allowance for loan losses in a different way.
On the right side, we have -- the way we have been presenting these elements. Recall here regulatory breakdown in three categories: specific allowance, generic allowance and complementary allowance.
On the left side, we have a new approach, we are moving to this new approach, that in our view reflects in a better way the way we manage the bank. We have here three categories from bottom up.
We have overdue operations, so this R$11.9 billion is the amount of provisions related to operations that are overdue, and this is the minimum required by Brazilian Central Bank. In the middle, we have allowances for loan losses related to what we call aggravated risks.
Here we have the amount of provisions related to overdue transactions that exceeds the minimum required by Central Bank and also allowance for loan losses related to renegotiated transactions. In the first block, we can clearly see in green that most of the provision is related to fully provisioned operations and in the second block most is related to renegotiations.
And finally on the upper part of this chart, we see R$15.8 billion of provisions related to expected and/or potential losses. Here we are talking operations that do not present any type of -- that are not overdue but reflects our -- for retail basically our statistic models of expected loss and for wholesale, creative [ph] downgrades and analysis by sector, so there is a judgement element here, that constitutes this R$15.8 billion.
So in essence, we consider the complementary allowance as very similar to the part of the generic allowance that's not related to overdue transactions or to renegotiated transactions. And we are moving to this new approach, also because it's closer to the concepts of IFRS 9 that we expect at some point in time will be adopted by Brazilian regulations.
And we’re continuing to disclose the previous concepts and the new one to allow you to follow this transition. But again we believe that this new approach reflects in a better way the form we manage the bank in terms of provisions.
Moving to Page 17, talking about commissions and fees and result for insurance. We have a below inflation growth in 12 months, 4.5%.
This reflects partially the economic environment and in the case of credit operations and guarantees, the reduction in our credit portfolio. In terms of credit card, we have here also the impact of a more conservative credit policy.
In terms of the proportion of those commission fees and result for insurance. So there is some of the same element in financial margin, we see that we are within the historical pattern between 34% and 35%.
Moving to Page 18, non-interest expenses. We have here, I believe, a very positive picture.
We had a 3.4% growth in twelve months and 8% contraction in this quarter. And if we exclude the operations abroad, that have FX impact, in twelve months would have a 1.9% growth, and also well below inflation reflecting our efforts and our commitment to reducing costs in the bank.
This is reflected in the quite positive efficiency ratio that we presented in this quarter 43%. If we take the trailing twelve months, we see the continuation of downward trend with reaching 43.9% and a negative figure when we incorporate the risk element.
Because again we had a high number of provisions in this particular quarter. Moving to Page 19, talking about capital.
I'd like to focus here on the lower part of this page, on the 12.7% indicator that corrected to one fully loaded by Basel rules, so anticipating the schedule, this figure was 11.8% in December. So a good evolution.
If we did add CorpBanca that we show immediately on the right side, 1.1% and this figure has been getting additional information, so allowing us to have a more precise figure. We would have still 11.6% corrected to one after deducting the effects of CorpBanca, that again will take place in the second quarter.
So 11.6% correct to one, we believe to be a very comfortable level of capital that will allow us, if and when we feel comfortable in terms of a better credit environment to grow our credit portfolio. So we’re prepared to grow.
I think we’re in a very good position for that. On Page 20, talking about our forecast.
We are reaffirming the forecast, the range for all lines. And we are particularly confident in, when we talk about lines related to P&L.
This first line is more challenging. The total credit portfolio growth is related of course to several factors, including FX rates.
And today we believe we will be close to the lower bound of this range. Financial margin with clients.
Here again we believe we will be close to 2% , the lower end of this range. In terms of provisions for credit, we believe we will be a little bit above the midpoint here.
Commissions and fees, here again reaffirming our guidance but closer to the low end, close to 6% growth in the year. And finally non-interest expenses again, here close to 5%, close to the low end of this range.
In the next page, stock market performance. Despite the rally of the past few weeks, historical trends are still below historical standards with a 8.8% price to earnings ratio.
In terms of liquidity, or good life of liquidity, with a sound breakeven between domestic markets and external markets. So with that, I conclude my presentation.
Marcelo Kopel and myself will be available for the questions that you may have. Thank you.
Operator
[Operator Instructions] Our first question comes from Jorge Kuri, Morgan Stanley.
Jorge Kuri
Hi, good morning everyone. Two questions if I may.
The first one is on your expectation for SELIC rates and what does that mean for your financial margins and revenues? I see from your institutional percentage and you’re expecting SELIC to be at 10% year end 2017, 12.25 this end of this year.
So can you remind us what your asset sensitivity is, for every 100 basis point decline in SELIC rates, all else equal, what happens to your financial margins? What is the decline in financial revenues for you?
And in the context of what could potentially be a slow growth environment on the volume side, given that you're expecting the company to contract 4% this year, basically be flat in 2017, it’s hard to see how there’s going to be any volumes. What’s the expectation for revenue growth when you put together the decline in rates margins and the low volume for 2017?
And then my second question is on -- I just wanted to get your general view on the ground. And I hope I'm not misrepresenting your comments but it does seem that you are portraying us that the first quarter sort of like to be the worst of the year, that from here things could potentially improve.
If that’s certainly the case, when you look at how you’ve reiterated your guidance. Your financial revenues are running well below the low end of the guidance.
And your provisions are already at the high end of the guidance and you expected them to improve from here, see the same. So what is it that you're seeing that gives you confidence that from here we're going to stabilize or improve?
The numbers that we see -- and granted obviously, banks have a lot of lead indicators that we don't see -- the numbers that we see continue to show a deterioration overall. And an acceleration of the deterioration actually, if we look at unemployment, the last print that came out last week was outright scary.
Chapter 11 filings, so I mean most numbers that you look at still show an economy that continues to be sort of like on a freefall. Thank you.
Eduardo Vassimon
Good morning, Jorge. It’s Vassimon.
Start with the SELIC effect, given the present position we have, a SELIC reduction would have close to neutral impact on our P&L. We have a little bit more assets than liabilities index in SELIC, actually index in CDI but that’s very close to SELIC, so a reduction in SELIC would do some reduction in revenues here.
On the other side, and assuming that a reduction in SELIC would be, at least partially followed by a reduction in the whole interest rates, would benefit from a more structural prefixed position, loan position that we have. On that terms, in economic and net terms, would be close to neutral.
Having said that, it would have a positive impact, that’s more difficult to measure, that would be the reduction of the cost for economic agents. So the potential improvement of credit conditions for both individuals and companies.
In terms of volume of credit and – we as I mentioned during the presentation, we are reaffirming our guidance for 2016. We are still not in a position to give a forecast for 2017.
We see as I mentioned particularly the credit portfolio guidance to be particularly challenging given the environment. But linking this to your second question, we started to see some signs of stabilization, some indicators.
We see several confidence indicators stabilizing, still at a low, very low level, it’s true but stabilizing those confidence indicators in our view would be the first step to a possible improvement of the whole economy in the future. We continue to see -- you are right – an increase in unemployment.
They should peak close to the -- in the beginning of next year. And that's why we continue to see, as I think I briefly mentioned deterioration in the NPLs going forward.
But on the other hand we can see a better political environment. I think we are reaching a more stabilized political environment that could lead to a recovery in confidence.
We're not seeing this yet clearly. But what we have seen is the stabilization of some leading indicators, basically confidence indicators.
So that's why we are reiterating our guidance in the low end, in particular related to provisions as I mentioned, we did a substantial amount in a more anticipatory way that we do not expect to be repeated in the next quarters.
Operator
The next question comes from Carlos Macedo, Goldman Sachs.
Carlos Macedo
Thank you, good morning. I have a couple of questions.
Just following up on Jorge’s question. I'm struggling to see how you're going to get to your loan growth guidance.
I mean, it implies that your loans are going to grow 10% through the end of this year, which given the context, I mean if you do grow 10%, then I would be concerned with your provision guidance. Because it doesn't seem like the environment to be more aggressive in giving out loans.
At the same time that underscores the concern on your NII guidance. With loans you are not going to grow as much, if rates are going to come down, I know yours is neutral to slightly asset sensitive.
But you're down 4%, 5% year on year to get to 1%, 2% up, it’s going to be challenging. I just wanted to stand, if there's anything that you expect to change materially over the next couple of quarters that will allow you to reach those two guidances.
And just following up on Jorge’s second question, talking about asset quality, I am not as concerned on the provision guidance, it seems fairly adequate. I am more concern of on what to think about next year.
Again you haven't mentioned, you said you can't really do any analysis but -- or any guidance but when do you expect the NPL cycle to peak? I mean Bradesco said in their call that they expect it to flatten out late this year, early 2017.
But that they don't expect any improvement until 2018, of course it's a different bank, different portfolio. And you probably have a different answer.
But what do you see for that and what would that imply just conceptually in terms of provision expenses for next year vis-a-vis this year?
Eduardo Vassimon
Good morning, Carlos. It’s Vassimon.
Let me start with the second question. As I mentioned, too early to talk about two2017 but we are -- our economic areas revising their projections and I think we could see a better picture for 2017.
We could see something around 1% growth next year. And this would lead naturally to a better environment.
In terms of NPLs peaking, we see the beginning of next year and as the most probable period for having that. So we are a little bit more constructive on the scenario for next year with some stabilization already in the second half of this year.
And I will pass to Kopel in relation to the first –
Carlos Macedo
Just, Vassimon if you allow me just a follow up on that. If that really is environment conceptually would you probably see provisions coming down in 2017 from 2016, if the environment falls with what you just said?
Eduardo Vassimon
Yes, no doubt. I mean if this is the scenario we would see a reduction in the provision and actually if the environment improves, we start to improve already this year, we could see some reduction in the amount of provisions we have today, because it was made in a rather conservative way and anticipatory way.
And if the deterioration is not there, I think we would be in a position to reduce part of our provisions.
Marcelo Kopel
Hi Carlos, Kopel speaking here. On your first two questions which are -- one linked directly to the other one.
The portfolio growth is really a reflection, as Vassimon said about the overall economic environment and how we are seeing it one of the portfolios. Obviously there is an FX component on that which doesn't fall necessary to NII but may distort the number.
The reason why -- and this is the reason why Vassimon pointed out to the low end of the guidance. It could be affected by the FX.
As I said, when we provided the guidance, the FX rate at the end of the year was 4.50. We revised this – our economic team to 2.75.
So right off the bat there is an element of that, so I wouldn't -- it's important, I wouldn't and that's why we're seeing it near to the low end of the guidance. Okay.
Regarding NII growth, we did see the portfolio increasing – the NII increasing year over year around 5%. This is below inflation but that talks to the below growth or the no growth that we're seeing in the portfolio.
Some repricing that is happening in the back book and some expansion in certain portfolio. So it is a challenging environment, meaning the guidance has its challenges as you described.
But as of now we are still maintaining the low end for both items given that there is -- there could be a perspective that could change that in the latter part of the year.
Carlos Macedo
But it does – I mean it does consider that maybe things improve towards the second half of the year.
Marcelo Kopel
Yeah. First, it’s stopped deteriorating like Vassimon described which is confidence levelling off at a low level but levelling off.
We cannot discard that once you have political clarity and stability, the economic agents can start resuming their day to day in a more active way. And the bank is well capitalized and ready -- well funded and well capitalized for that moment to happen.
Operator
The next question comes from Philip Finch, UBS.
Philip Finch
I've got a couple questions as well. I'm surprised but encouraged that provisions seem to have peaked at and will be coming -- becoming lower in the next few quarters.
Related to this, you have R$11 billion of complementary provisions. My question is, what do you plan to do with this additional provisioning?
Is that an area of a specific concern of specific companies that we – you plan to use this for in the future? And my second question is regarding your capital position where we've seen steady but impressive progress in terms of the capital buildup.
So on Slide 19 of your presentation, you show the Basel III fully applied level that you estimate at 12.6%. So here, a question first of all is, what is an optimal level of capital that you would like to run at going forward?
And two, what is your estimate in terms of internal capital generation per year that you expect to achieve going forward? And once you exceed that optimal level, what are you planning in terms of capital deployment?
Eduardo Vassimon
Good morning, Philip. In terms of the provision, as we mentioned in the presentation we tend to see the additional provision – the complementary provision in a similar way we treat the generic provision that's not related to overdue or renegotiated transactions.
So the movement in this type of provision will be related to our expectation, again our models for retail basically, our judgment for retail, our analysis of the market situation of sectors. So if there is some improvement, we will be reducing this provision, this would be a natural movement.
If there is some deterioration we would see some migration from this block to the lower block. So it’s dependent upon the market scenario.
But yes we will consider definitely reducing the amount of this provision should the situation improve. In terms of capital position, we believe that given the fact that Brazil lost its investment grade, we have to work with a slightly higher level of capital because of the increased level of non-investment grade country.
So we would like to see corrected to one consistently above 12% as a comfortable level. If we go consistently beyond this level, then a natural movement would be -- to be more active in the buyback activity.
So this would be our response to additional capital that we could have.
Philip Finch
Thank you, and would it be fair to say that internal capital generation, because they are around 100 basis points per annum?
Marcelo Kopel
Yes, Philip, it’s Marcelo. Around 80 to 100 bps is a fair assumption.
Operator
The next question comes from Lucas Lopes, Credit Suisse.
Lucas Lopes
Thanks for taking my question. Perhaps the first one is very straightforward.
I like to understand whether the 50 basis point spike in the 60-day NPL has contributed materially to the deceleration in the market clients that are increasing the roll-off. And allow me to ask a second one, the banks have been expecting the increases to peak at end of this year or in the beginning of the next one?
I want to learn if anything has changed in that regard, and I understand that you have mentioned the provision could decline next year, which is actually more important. But I'm also interested to know your view on NPL?
Marcelo Kopel
Regarding the over 60 NPL, there was a variance between the fourth quarter and the first quarter, was around somewhere between R$500 and R$600 million. So the slowdown in NII does have some sort of impact from that but in a R$14 billion line, you may say that this was a not relevant impact.
Even if you consider that you’re stooping for the funding costs, which shows up in the margin with the clients. And you have the loans as non-accrual.
So there was an increase – this 600 million that I mentioned to you but this was not the main response to that. It was a factor but not a determinant factor on that.
What’s your second question?
Lucas Lopes
Regarding your expectation on the peaking in NPLs.
Marcelo Kopel
Well, Vassimon mentioned that, we should probably peak in the first part of 2017and that’s correlated directly to the unemployment expectation. So needless to say, that if for any reason in terms of expectations and the trend of the deterioration of unemployment being better, or less severe than what we're seeing, it could be a less severe peak.
But nevertheless it’s in the first half of 2017 is our expectation for NPLs.
Operator
The next question comes from Nicolas Riva [ph], Citi.
Unidentified Analyst
Thanks Marcelo and Eduardo for taking my questions. The first one is on your guidance what it means for EPS.
So you already said that you expect to be at the lower end of the loan growth guidance and also NII and fees. So if I assume zero percent loan growth this year, around 2.5% in the net interest income with clients, our R$24 billion in loan loss provisions, OpEx around 5.5% and then fees growing 6.5%, with a tax rate at 29% that you said today.
Then I'm getting R$20 billion for the net income, which is a contraction this year of about 15%. So I wanted to ask you if my R$20 billion for this year, 15% EPS contraction is in line with what you have?
And the second one, on Sete Brasil. You of course mentioned that you increased loan loss provisions in your wholesale book for specific economic groups in the first quarter.
If you can disclose at all, what's -- now that Sete filed for bankruptcy in Friday what's your exposure to Sete Brasil? If you increase loan loss provisions specifically for Sete in the second – in the first quarter how much it was?
And if now when a company is bankrupt do you need to increase your loan loss provisions for a company that already filed for bankruptcy?
Eduardo Vassimon
Hi Nic, this is Vassimon. Starting with the second question.
As you know I cannot comment on a specific company. Having said that we are very very comfortable with the level of provisions we have for the wholesale sector.
We tend to do it in an anticipatory way and particularly for companies where we see very low probability of recovery we go to 100% provision. So and this is reflected in the high number we have in the potential – the provision for potential losses in wholesale.
As a policy we have at least 50% of provisions for companies that go to Chapter 11, except in very specific cases where we have very strong guidance and I can’t recall any cases recently of the situation. But this is more when there is a surprise in a shutter level.
There are cases where our shutter level is not surprising, typically in those cases. We have already been provisioning for these events.
So we are very comfortable with the level of provision we have. In the most critical cases we have 100%.
We are particularly well provisioned in oil and gas sector. But I cannot comment on a specific case.
I'll pass to Kopel on the first question.
Marcelo Kopel
On your first question based on your assumptions your math is okay.
Operator
The next question comes from Diego Koni [ph], Scotiabank.
Unidentified Analyst
Hi hello, thanks for taking my questions. Actually I wanted to have a follow up on Sete Brasil.
They filed for bankruptcy last week. And they disclosed that Itaú’s exposure is about $R2 billion.
So I would like to understand a little bit if you can disclose, the amount that you already have provision or the percentage that you have on that so we know what to expect going forward. And also on the effective tax rate, you registered about 25% this quarter which is a very low level.
So I wanted to understand a little bit where that came from and what we can expect going forward?
Eduardo Vassimon
As to Sete Brasil, I am sorry I have to repeat the answer I gave to Nicholas, we cannot comment on specific names. We are very comfortable that we have provisions, we’re having in the wholesale portfolio, and corporate portfolio, particularly in the oil and gas sector.
When there is a Chapter 11 we provision at least 50% but this is mainly when there is a surprise. Typically when such level is not surprised we have already provisioned most of the credit.
And in the credits that are more critical in the sense that we have a very low probability of recovery. We go for 100% provision.
So that's what I can say, I cannot comment on specific names. In terms of the tax rate, we had 26% this first quarter.
And it was basically due to the effect of interest on capital. Interest on capital as you know is related to the size of the net worth and the GLP rate.
The GLP rate increased this first quarter. Our net worth increased in the last quarter that’s the basis for that.
And this amount to be the -- is not related to the size of the pre-profit. So when we take a higher number of interest on capital compared with a lower pre-tax rate, we reached this effect.
Besides we have a mix of financial and non-financial companies basically already or acquired company, that has a lower tax rate.
Operator
The next question comes from Victor Galliano, Barclays.
Victor Galliano
Hi, yes I have a couple of questions as well. Just firstly to continue with the coverage of delinquencies.
And just looking at your different buckets in terms of D, E, F and G categories of loans. I see that you've maintained the 1005 coverage – dedicated coverage to E, F, and G, but in the case of the D loans, that coverage has halved.
At the end of Q4, it was 43% coverage, it’s not 21%. I mean they’re still a 100% higher, more than twice what it needs to be the legal minimum.
But just trying to understand here, is this an indication that you see that the very highest risk of your delinquencies in the E, F, and G buckets and you are less concerned about the -- shall we say the write-off at this point in time of the D bucket, is that a reason for lowering the level of coverage there. Just if you can talk us through why that coverage has come down in the D bucket?
And my second question is about capital. Just looking at your capital deductions, and the schedule anticipation of those Basel III rules, on Page 19 of the slide, I see that the deduction is actually lower in the first quarter this year than it was in any of the quarters last year.
Can you just talk us through that as well?
Marcelo Kopel
Hi Victor. Well, as Vassimon said we did have some migrations in this quarter.
We had important migrations and downgrades that were proactively done in the portfolio and that gets reflected in the letters. And obviously this creates some dynamic between the provisions and how we see that.
So this explains why you're keeping – you’re seeing a high coverage rate in certain cases. And the reason why you see the letter D or the portfolio in D doesn't necessarily is linked to the delinquency.
It's something that we're evaluating and some of the migration that went from D to E and F was also not related to delinquency. So the bottom line of that is the coverages that – to what we're seeing in the portfolio classified as E, and just remember that the minimum required by the Central Bank is 10% at that particular bucket.
So we are comfortable with that and we will be managing on a dynamic basis the overall portfolio. Please keep in mind also that looking at the provisions the way we classified now then between delinquent, aggravated and the potential, the way we see the coverage is more holistically.
So even though you have something classified as a D now, if it’s something that was aggravated, you may not necessarily see that in the latter but you could have coverage for that.
Victor Galliano
So we should look more of your new definitions on Page 16 really of overdue, aggravated and potential.
Marcelo Kopel
Yes.
Eduardo Vassimon
On your question of – this is Vassimon on capital. If I understood well, you're referring to the actions of schedule anticipation.
Victor Galliano
Yes.
Victor Galliano
And what happens is simply the fact that every year in the first quarter we have 20% lead on our phasing in of Basel. So every year we move we move 20% forward.
So in two more years this number will be – by definition will be zero. That's what the complaints we were getting.
Eduardo Vassimon
Victor, just to add one last comment to what I said before. When you get the total provisions that we have and you use what we call in the accounting, the complementary provision.
The way, the exercise we do to fill up the different buckets in our portfolio, we start from the more aggravated letter which obviously is not age because age is already fully provisioned. So you’re getting to the app and the G and so on and so forth.
So as you move credit upward in the scale. So you move credit upward in the scale, so we had more migration as I said from Guy to Lee into West you fill in more provisions throughout those buckets.
Victor Galliano
Yeah, it’s impressive that you've actually covered the E category by 100%, is that has almost double quarter on quarter.
Eduardo Vassimon
That’s part of the whole exercise.
Operator
The next question comes from Mani Bolls worth [ph] Barclays.
Unidentified Analyst
I just have a follow up on what Victor just asked. Because I'm a bit lost in the numbers, trying to make sure everything is okay.
Related to the deductions of Basel III related to common equity. Because quarter over quarter the deductions just went up 15%.
If we had considered that you were applying a 20% additional deduction to the stock of deduction that you would have to apply in the first quarter. That's around R$5 billion and that $5 million per year is consistent with the 1.4% in deductions that you used say.
It would cost in terms of capital ratios, if you were to anticipate those deductions. So I just have trouble looking here at the deductions that you have for the first quarter which are R$11.7 billion compared to R$10.1 billion in the fourth quarter 2015.
And on the back of the envelope number which would be consistent with the 1.4% in additional deduction that you have to impose to your separation if you were to anticipate all the deductions going forward. The number would be closer to $5 billion per year and not R$1.6 billion per year which is the change quarter over quarter, from fourth quarter last year into first quarter this year.
So if you can -- let me know if something changed or you moved the products that’s within the capital structure of the bank debt kind of like compensated for that, R$5 billion deduction that we were expecting. Thank you.
Marcelo Kopel
Whenever -- I will make reference to the charts that we have in the presentation and the free cash, we have sharks in the fourth quarter, and if it’s not enough we can take the question offline. But let’s start with the deductions.
In the fourth quarter we had 1.9 percentage points of deduction related to the Basel III in anticipation of the deductions which basically accounted for -- remember the phasing is only five years. In 2016 we had 40% phasing.
So there was a 60% of the phasing built in in this 1.9 percentage point. Now that number talks to the 1.4 that you see in the schedule that we have here.
Okay, so this is how one thing relates to the other one. Talking about the tax credits that we had.
We did have an important use of tax credits. In the fourth quarter these accounted for -- the future use of those accounted for 1.8 percentage points.
Now they account for only one. So this is future uses them, so the reduction of that implies that there was usage of that in the quarter, and primary related to taxable income but mostly also related to the movement of the currency, because as you know, as the real appreciated it produces local taxable income for us related to the hedges we have for our foreign investments.
So those are the two elements and last but not least, these related assets in general also benefited from the appreciation of the real against the dollar. And we have less lending in our portfolio.
So these are the elements that explain this. If this just didn’t cover your specific question, we can take it offline with the numbers and the percentages.
Operator
The next question comes from Marcelo Telles, Credit Suisse.
Marcelo Telles
I have two questions, but I try to get away a little bit of this provision discussion, and focus more on the NII performance. Regarding this anticipation of provisions that you’ve made in the quarter, as you mentioned, did you –are you still recording any interest on these loans?
And if you are, would you consider at some point have it stopped accruing this interest on these loans and the opportunity to move out the leased categories? And my second question is, regarding your NII growth – not for 2017 -- how should we think about your top line growth in an environment – let’s say, no credit growth rate stable or potentially coming down, with the credit spreads currently at all time highs – how confident are you that you'll be able to grow your NII next year?
And I am not considering NII with the treasury.
Eduardo Vassimon
Good morning Marcelo. This is Vassimon.
In terms of booking revenues, we follow strictly the Central Bank rule. Up to 60 days, we book up to 60 days, we stop booking.
So nothing different from that. For 2017 we still have some level of uncertainty, so it's too early to say.
We are again a little bit more constructive on the scenario because we believe that a potential political stability could bring more visibility to the – probability to the scenario that could lead to some growth next year around 1%. But it's too early to talk about the effect of this scenario on NII.
Marcelo Telles
So I wanted to follow up, so thanks for your answer Vassimon. So based on the first, so given that you're anticipating provision, I mean that you are still most likely -- I would assume that you still accrue the interest on these loans front now, because they haven't really gone through the NPL category, which is the majority of them.
And regarding your -- my second question, I mean just digging a little bit deeper, I know it's early, but what do we know right now is that your portfolio is going down. And that has certainly let's say a carryover effect into 2017, right?
And given that the effective reprice of the backlog should be approached this year. Do you think that – albeit too long assuming flat NII next year and that would be kind of a reasonable scenario, or be too harsh on the outlook for next year?
Eduardo Vassimon
Marcelo, on the first question. Yes we continue to book revenues because we basically did some downgrades in several corporate clients but they continue to perform -- normally they continue to pay normally.
So they’re not OERES [ph], we are booking normally those revenues. Provided again that it’s not overdue more than sixty days.
As to 2017, again difficult to say, I believe that we could have a rather fast process of increasing credit portfolio if we are comfortable with the scenario. We have liquidity, we have capital, we prepare to take advantage of a more positive scenario.
So I think it’s premature to say that this means a flattish NII for 2017.
Operator
The next question comes from [indiscernible] JP Morgan.
Unidentified Analyst
Hi good morning, thank you for the opportunity. I have actually in addition to the slide that you presented showing the breakdown of financial margin, I think on Slide 9 of the presentation.
You put in the same pie chart the delta and you put together the mix of products, clients and the spreads. If you could -- my question is if you could provide a little bit more color.
I am basically talking about the R$15.5 billion in 4Q’15 going to R$14.8 billion and the R$31 million coming from the three drivers. If you could provide a little more breakdown how much has that been spreads and how much that has been actually mix in products, because I believe those are varied strong oscillations in the same bucket.
So we have an idea on how they're offsetting each other. And my second question, if I also may, we continue to see very strong spread increase in Central Bank data.
Last month again over 400 basis points on growth. So my question is, assuming that you continue to grow zero percent in your loan book, the repricing effect given the new spreads, for how long do you believe that this could offset the mix shift, or that you could still basically have a net positive effect of the loan book being repricing?
Basically just to see for how long we can continue to mitigate the worsening credit quality or if we still have a booster for NII growth in ’17?
Marcelo Kopel
I think one of your first answer, you’re already providing in your second question, which is spreads are mediating to some extent the fact that we are growing on, less we keep products like mortgages, and payroll. So it’s getting to a point that the backbook is repricing.
But growing into those products brings us to a point where we will not be able to shelter indefinitely the fact that we are not growing the portfolio with the repricing of the portfolio and the mix shift. And that talks to the fact that we are signaling to the market the low end of our NII guidance.
So one thing talks to the other one. And as you move forward, you would see in the following quarters that behavior to happen.
Your second point about the zero growth and spread increase and the impact of that. I mean so much you can do in terms of increasing your new originations to a point that you start getting into adverse selection.
Because rates are high enough and spreads are high enough, I think what we will see, and that talks about what Vassimon said before. In the event that we see the SELIC rate going down, which is our scenario, the SELIC going down 200 basis points from the mid part of the year and to the end of the year.
And confidence improving and things marginally starting to improve, you may see some pickup in EPS [ph] very selectively. But everything now is basically at the same time putting pressure on NII growth.
And that's why we are signalling it to the bottom part of our guidance.
Unidentified Analyst
Since you mentioned the 100 basis points, I remember – not the guidance but the impact of 100 basis points decrease on NII, what is the latest number on that, that you believe is the impact – or earnings?
Marcelo Kopel
Well, the shift in the interest rate curve, if it’s a full shift in the curve, give our structural positions, the economic impact of that is basically neutral. So what you would have to factor in is how structurally the country is behaving differently that this will allow us to resume growth but in the positions we have today, this retro positions we have today, this is kind of neutral, that mix – that shift in the yield curve.
Unidentified Analyst
No, perfect but not the yield curve, when does the CorpBanca comes in and cuts rates in 100 basis points, what's the impact on that? It used to protect 800 million from a mix –
Marcelo Kopel
That’s purely looking at the loan cash position that we have. That's why I'm giving you the answer on the overall structural positions we have.
If you look at only -- On the cash yes, you could do the math. But if we look at the overall structural positions, it's kind of neutral.
Operator
The next question comes from Carlos Gomez, HSBC.
Carlos Gomez
Hello, good morning. Going back to the loan growth for this year.
When I look at your book in reais, it is now the question of about 5%, 6% per year. So it will be, as mentioned earlier by Carlos, a very quick turnaround, which areas do you think that you can grow an uptick here.
You're not growing mortgages 70%, can that grow faster? Can you start lending to all those faster?
What can turn around?
Eduardo Vassimon
Hi Carlos, it is Vassimon. We do recognize first that this is a challenging guidance, a challenging forecast given the present environment.
We will continue to move to more -- to less risky lines of business, our mortgage and payroll lines that should grow more than average, and in a situation where we see some improving in the economy, clearly corporate portfolio is an area where we could see some growth. And restructuring for instance, would reflect an improvement in the confidence, this is the case.
Operator
The next question comes from Victor Galliano, Barclays.
Victor Galliano
I just have a quick follow-up here on moving away from all the financials, I'm thinking more in terms of strategy. If you could just give us sort of 5 minutes on how you see the digital branches start to developing and I can see here that you've basically cut about 150 branches over the last couple of years in Brazil.
How do you see that developing? Do you see that as something that will gather momentum going forward and could it be a significant contributor to controlling cost going forward?
Eduardo Vassimon
Victor, this is Vassimon. Yes, actually we are already seeing part of this movement.
The digital branches are both more convenient to the clients and much cheaper than the traditional branches. We expect this year to have a similar number of reduction in physical branch, between 100 and 150 branches, and the continuation of the migration process from customers to digital branches.
The level of satisfaction that we measure very frequently is quite high. I mean clients are very happy because they have the ability to do banking in different hours in a more direct and more modern way through different channels.
So this is definitely one of the main structural projects that we have in the bank. I think this should go in a faster pace going forward.
Of course we have a process of communicating well to the clients of having in the adequate environment in terms of technology and people are prepared to give an adequate service in this new environment. But that's very positive trend.
That will continue to be reflected in the cost and we are -- not only we are rationalizing internally in terms of using more technology back office in our operations. But the use of the digital branch in the front office is a also relevant source of reducing costs.
End of Q&A
Operator
This concludes today's question and answer session. Mr.
Eduardo Vassimon, at this time you may proceed with your closing statements.
Eduardo Vassimon
Just to reaffirm that this was quite reasonable quarter in our view given the present economic environment. We are reaffirming our forecast.
All lines we are confident that we'll be able to deliver within the range indicated. The provisions we needed this quarter in a relevant amount, we don't see this to be repeated in the future.
And we are I believe particularly well positioned to take advantage of a possible improvement in the scenario given our position in terms of capital. And we expect that a possible stabilization of the political situation would lead to better confidence in the economy and the other developments of the situation as a whole.
So thank you again for your attention.
Operator
That does conclude our Itau Unibanco Holding earnings conference for today. Thank you very much for your participation.
You may now disconnect.