Nov 1, 2016
Executives
Eduardo Vassimon - EVP, CFO and CRO Marcelo Kopel - IR Officer
Analysts
Domingos Falavina - JP Morgan Carlos Macedo - Goldman Sachs Tito Labarta - Deutsche Bank Jorge Kuri - Morgan Stanley Mario Pierry - Bank of America/Merrill Lynch Nicolas Riva - Citigroup Marcelo Telles - Credit Suisse Carlos Gomez - HSBC
Operator
Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holding Conference Call to discuss 2016 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 broadcasted live on Investor Relations website at www.itau.com.br/investor-relations. The audio webcast works with Internet Explorer 9 or above and Chrome, Firefox and Mobile device, iOS 8 or above and Android 3.0 or above.
A slide presentation is also available on this site. The replay of this conference call will be available until November 7th by phone on 55-11-3193-1012 or 28204012, access code 5591183#.
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 2016 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. We'll start our presentation at page three with the highlights of the period.
We have BRL5.6 billion recurring net income. We considered these results to be robust, particularly taking into consideration a still challenging economic environment.
We're seeing more positive perspectives for our NPLs. Talking about the credit quality, we had 3.9% NPL on 90-day.
This is higher than what we presented in the previous quarter. But it was affected by one specific economic group that is [Indiscernible] for some time 100% provision for and it private companies of the oil sector.
If we discounted this effect, we would have had a stable NPL 90-day at 3.6%. In Brazil, NPL 90-day was 4.8% and here again, excluding this specific economic group, we would have had 4.4%, slightly lower than the number we had in the second quarter.
Moving to page four, we have here the recurring -- equity recurring return on assets, return on equity close to 20%, recurring return on assets at 1.6%, the same level of the previous quarter. Moving to page five, we have the P&L.
here I would like to highlight some specific points. We have a positive growth of financial margin with client 6.9%.
This is positively impacted by the fact that in the previous quarter, we have an impairment of around BRL540 million, which we disclosed extensively in the previous quarter. But even discounting this would have had more 2% growth in this line.
Financial margin with the market, we had strong BRL1.7 billion this quarter, 16% higher than what we had in second quarter. Commission and fees 12 months 7.3%.
And I'd like to call your attention to the results from loan losses, a reduction of 2.5% in this quarter. Although in 12 months, we had over 20% growth -- 24.5%.
Non-interest expenses showed a substantial increase at 8.4%, but here we had some extraordinary events. When we exclude those events, we have had basically a flat number in terms of expenses when compared to the previous quarter.
Those extraordinary events are basically two elements. First is in methodology enhancement for calculating labor claims.
This amounts to BRL687 million. And the other element lump sum bonus we paid to [Indiscernible] totaling BRL 275 million.
This is part of the agreement reached with union. So part of the revenue was an increase of 8% and this lump sum of BRL3,500 per employee.
So, both these lump sum bonus and this adjustment in the labor claims are events that -- although accounted as recurrent results, are extraordinary in the sense that we will not expect them to be repeated in the next quarter. So, for projecting next quarters, in our review should exclude those two elements.
Moving to page seven, we have the breakdown of our P&L between credit and trading on one side and insurance and services on the other side. We have results in this third quarter that are quite similar to the ones referred in the second quarter.
And insurance and service, it has been more stable part of our P&L, accounts for approximately [6%] of our bottom-line. Moving to page eight where we have the credit portfolio.
I’d like to call your attention to the growth few lines. First one is credit cards loans; we had 2.4% growth in this quarter, recovering partially the contraction that we saw in the past in this particular segment.
And the other one is market loans, keeping basically the same behavior of previous quarter, in line with our strategy of moving to less risky experience with strong 2.9% growth in this quarter. Altogether given the economic environment, we had a small reduction on the reduction of 0.6% in this quarter compared to the second quarter.
In the lower part of page eight, we have more information here on our Latin America portfolio. On the left side, we see growth of 2.8% for individuals and 0.6% for companies.
And on the right side, we see the -- based on by country where we can verify a clear concentration of our LatAm portfolio in Chile and Columbia. They together represent approximately 85% of our LatAm portfolio.
Moving to page nine, we have the loan portfolio mix. When we see here Brazil-only, we continue to see a contraction in the vehicle finance portfolio, given among other things the -- a reduction in market itself of our sales.
Credit cards as I mention is showing some recovery. And both mortgage loan and payroll loans keeping the same trend as previous quarter in line again with our strategy of moving to less risky portfolios.
In the upper part of this page nine, we see the consolidated loan portfolio, including Latin America, which represents already 20 -- close to 27% of our loan portfolio. But considering that we have in the biggest part of the portfolio, Chile, only 33% economic interest.
The figure could be 12.5% as indicated here in yellow. Moving to page 10, I'm talking about financial margin, good evolution in financial margin, in both the regular let's say, let's -- financial margin and also the risk adjusted financial margins both presenting a good evolution.
Moving to page 11, we had a stronger market result -- financial margin market at BRL1.7 billion, basically flat in Latin America and improvements in Brazil. And when we look ahead, it is reasonable to expect for the next quarter an amount that is compatible with the average of previous 12 months.
Of course, considering that this naturally aligned at more relativity. Moving to page 12, and starting to talk about credit quality.
We have here the 90-day NPL ratio. When we exclude this particular case, [Indiscernible] in the beginning of the presentation of this economic growth that's already 100% provision, we have had a flat number of at 3.6% for the total in Brazil as more reduction be [seeing] -- reduction of this particular group from 4.5% to 4.4% and a slight increase in Latin America to 1.2% to 1.1%.
In the lower part of this page 12, we have Brazil with the breakdown by the main segments and here I think we have quite positive information with the reduction of NPL for individuals. So, for the second quarter, we had a reduction now at 5.7%.
So, we believe that shows that this segment is performing quite well and most probably we had seen the peaks of NPL for individuals in the first quarter of this year. For large companies -- for corporate, when we exclude this oil company, we have had a reduction from 1.6% to 1.4%.
And as to SMEs, we still have more challenges requirements still going up, the NPL, although at a lower rating. Let me move to page 13 to see the short-term fixed income NPL ratio.
We see good behavior of [Indiscernible], so going down 50 basis points from 4.3% to 3.8%, encourages us to say that we believe that this segment should also show more complete signs of stabilization in the next few quarters. We reviewed those flat at 4.2%.
Latin America also flat at 2.1%. And for the quarter, Brazil, this reduction reflect that this particular oil company moved from 15 to 19 -- over 90 days NPL.
So, it's more reasonable to see for this particular airline of business flat around 1.5 in the three last quarters. Moving to page 14 and showing the NPL ratio excluding fully provisional credits, we have in Brazil, individuals with a stable -- as more reduction from 3.3% to 2.2% and also a reduction in companies, again excluding the fully provisional credits from 1.1% to 0.9%, so more compatible with historical standards.
In the lower part of this page 14, we see the NPL creation and we have here when we deduct this particular oil company, our reduction both in companies, in wholesale and retail. Retail, for the third consecutive quarter, we have nominal reduction of NPL creation, so again, compatible with scenario of improvement for this particular line of business.
And for wholesale, we also see a reduction when we excluded this oil company. When we see the ratio between the NPL creation and loan portfolio for wholesale is only 0.5% year reduction from previous quarters always considering the exclusion of this oil company and a stable ratio for the NPL creation to loan portfolio for retail at 1.9%, very stable with several previous quarters.
Moving to page 15, and talking about renegotiated loan portfolio. We had some increase from BRL24.1 to BRL25.3 billion is increases compatible with the economic environment where we still see challenging credit conditions.
But most of this increase is related to operations, transactions that are not -- so in the bottom of this figure from BRL5.6 billion to BRL6.2 billion in September showing what believed to be a more creative approach to renegotiations. In the lower part of this page 15, we see the NPL -- 90-day NPL coverage, here excluding this oil company case, would be 188%, so solid figure compatible with historical standards.
For 90-day NPL, in the range in the previous three quarters, in the range of keeping 20 to 22%, again here excluding this oil company. When you see the nominal figures, we had in June BRL5 billion.
We had a huge increase of 1.7 and this is almost 100% related to this oil company, if we exclude this oil company, this figure as indicated here in third year 2.49, it has been BRL5.1 billion a small increase. Moving to page 16, we have provision for loan losses by segment and we had a good reduction in the retail banking segment and hereby the way, we believe that in this cycle the peak of retail in terms of provision loss in the last quarter of last year at BRL4.6 billion.
And for the bank as a whole, we are confident that in this cycle the peak was in the first quarter at BRL7.8 billion. Moving to page 17, we have here the coverage ratio for 90-day NPLs.
In this total, this yellow figure, we have 204% that’s a very robust number in our view and we have also recalculated this series 4.09 excluding this particular oil company case and this dotted orange line, we viewed them at 214%, the highest figures in two years. So we consider that we have a quite comfortable level of coverage for NPLs.
Moving to page 18, we have a breakdown of our allowances for loan losses by type of risk. In the bottom what we call -- reduced, is the minimum requirement of the Brazilian Central Bank.
The intermediate [Indiscernible] the required rate is related to transactions that are overdue where we have more provisions than the minimum required by Central bank, and also provisions related to renegotiation. And finally, the upper part is what you call potential where we do not have anything overdue or renegotiated, but according to our modules and our judgments, we have provisions related to expected losses.
So, altogether have small increase from BRL38.5 to BRL39.1 billion of allowance for loan losses. Moving to page 19, we have tier formation for provisions and NPL by segment and the upper part for retail, we continue to be around 100%, so some quarters are slightly above and some quarters as is the case of third is slightly below, but in historic perspective around 100%.
Our wholesale banking in Brazil, we are 79% including everything if excluding the particular oil case that again 100% provision would have been at 256% and excluding this very same case in total would be at 128%. Moving to page 20, and talking about commission and fees and insurance, the results we had a flat figure for this quarter when compared to second one at BRL7.8 billion and 7.3% growth in 12 months.
This figure is negatively affected by credit operations and guarantees provided line that of course is pretty much related to the economic environment and our credit policy and in this particular line, we showed nominal reduction of 0.7% in 12 months. Moving to page 21, and talking about non-interest expenses.
Again here, we showed huge increase of 8.4%, but excluding extraordinary advance that again, we don’t expect to be repeated and would have had a flat figure from nominal expenses in third quarter very similar to the second quarter. We have again excluded this because we believe that to forecast to project the expense in the next quarter is something that we should not see in the future.
In the lower part of this page 21 on the right side, just to highlight the fact that in line with our strategy of getting more and more digital, we are expanding our digital branch network. Moving to page 22.
Here very quickly just to highlight the fact that efficiency ratio without considering extraordinary items that I referred through would have been 44.9%, so below this 46.7 that we observed in the previous quarter. Moving to page 23 and talking about capital.
We have highlighted here in the bottom, but this page, the CET1 fully loaded according to Basel rules, so anticipating this schedule we are today at 14.1% and discounting both the Citibank and the Itau BMG transactions that were announced, we would have been at 13.6% also those transaction are still dependent on regular authority approval. So 13.6 after those transaction still very comfortable level and putting us in a very comfortable position for taking advantage of potential union credit cycle.
On page 24, talking about our forecast, we have reaffirmed all the lines of this forecast, so we believe that all lines will be within the range indicated in this page. For credit portfolio, we believe that we'll be closed to the bottom of this range.
For financial margins with clients, we believe that the final figure will be between the midpoint and the lower point of the range. Provisions for loan losses net of recovery will be, in our view, very close to the bottom point of this range.
Commissions and fees will also be closed to the bottom and non-interest expenses despite the extraordinary items would be still within the range, although goals to the top of this range. On page 25, we give some information on Citibank's and Itau BMG's transactions that were announced both aligned with our strategies of reporting our activity in retail.
In the case of CDI and the Itau finance [Indiscernible] both came subject to some closing provisions approvals from regulators, particularly Brazilian Central Bank and the Brazilian Antitrust Authority banks. Finally on page 26, we invite you all to participate in our Annual Meeting that will take place on November 17th in São Paulo.
To conclude, again, we believe that this was a robust quarter with positive perspectives for NPLs, expenses under control and resilient margins. So, thank you and now Marcelo Kopel and myself will be available for the 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 Domingos Falavina with JPMorgan.
Domingos Falavina
Hi, good morning, Vassimon and Kopel and everyone on the team. First congratulations the strong set of figures.
I have two questions. The first one regards provisions, we noticed a significant improvement in new and the information I think you mentioned in fact three consecutive quarters of decrease.
And if we repeat the last quarter or second, we were most likely get below the guidance. So my question is do you have room or do you have big even in the forecast any increase in additional provisions or the BRL23 billion to BRL26 billion does not incorporate any kind of rebuilding of additional provision?
And then I go to the second.
Eduardo Vassimon
Thank you, Domingo. As to the provisions, on the -- given the what we have seen in the previous months, we are I would say more confident in relation to provisions related to individuals while for companies I think we are still in the process of stabilizing collateral but its less clear than for individuals.
So we see -- you might see some volatility in the provisions possible for companies. And as I mentioned during the call seeing from today our best expectation is to be very, very close to the bottom of the guidelines, the forecast as we mentioned.
We will not discard to be slightly below the -- could be slightly above, slightly below it. But again we are more confidence for and give you those.
Domingos Falavina
Okay. Perfect.
The second question is on more on the NII on SELIC, Itau has its loan book and it seems like very anticipated reference rate decrease in Brazil and if you are counter-logical to me that one bank could benefit while the other won't. So, in this sense, my question is how can you benefit from anticipated SELIC decrease on the NII, can you capture through trading gains or potentially some other lines we have seen?
Eduardo Vassimon
We naturally -- we in the management part of our structural book we do consider scenarios, economic scenarios and we tend to anticipate movements when we consider appropriate in the interest rate. And we have done to represent recently so that can as move this fact of reduction of interest rate.
And also reduction in interest rates of course normally occurs and we believe this is the case now. In a scenario where we've seen improvements in the economic environment as a whole.
So in a scenario where we will see more demand for credit and a reduction in NPLs. So there is one for positive time, one positive aspect that will be improvement in the whole environment in the economic conditions.
Domingos Falavina
Perfect. Thank you very much.
Congratulations again.
Operator
Our next question comes from Carlos Macedo with Goldman Sachs.
Carlos Macedo
Thanks. Good morning, Vassimon and Kopel.
Hi, guys thanks for taking question. Main question here goes back to capital; I mean I've been asking this question I think pretty myself for three, four straight conference calls.
You're accumulating accumulating 30 to 40 basis points a quarter and you're fully loaded fully mitigated to one ratio, 14.6 now I think in the tax credit that's in the year and half. If you keep the same trend and have growth you're going to be well over 16.
And that's not efficient right, what's the plan here? I mean you're talking about growth coming back in and leasing some growth but at the same time we're talking about may be mid-single-digits loan growth in 2017 may be little bit stronger in 2018.
That's not where they are going to make a dent. You hadn't really bought back in shares this year.
You don’t talk about increasing the payout. The acquisitions that you made were strategically important for your presence in Brazil, don't really -- haven't really made a dent and into that big capital level hat that you have.
So is it going to be acquisitions, is it going to be more buybacks, is it going to be a higher payout? How you are going to turn this around because 16.5, I don’t think many banks in the world can say that they have that and I don’t think you feel comfortable with it.
I remember Roberto talking at the beginning of the year that they I mean you guys is one of the bank at 12 to12.5. Could you give us some light into to what the current thinking is?
And more importantly the timetable for implementing that thinking.
Eduardo Vassimon
Good morning, Carlos. Yes, we -- as Roberto mentioned and previously we believe that believe 12 to 12.5 would be a reasonable level of capital normal more stable condition if we get there we still in a not so stable economic environment.
And we don't see us reaching 16.5% with no action. We expect some growth starting next season and from pick-up in credit growth in 2018.
We have made those few transactions small, but together consumed 0.5%. And we will be following a possible for acquisition particularly outside Brazil.
Of course we are in short-term more folks on consolidating the CorpBanca deal but if there are good opportunities in the right time we consider expanding our presence in LatAm areas. For this is not enough, we consider be more aggressive in buyback shares.
So, -- and we will do this I would say during the next year we will probably have a more clear picture on -- in terms of demand for credit, in terms of the whole economic environment. And we are not going to be sitting and just seeing the capital accumulating to 16% or 17% level.
Carlos Macedo
Okay. Thanks Vassimon.
I mean just -- I think the most you've bought back in any given quarter has been BRL1.2 billion, and again, you're accumulating BRL4 billion of capital every quarter, it doesn't - again buybacks are only part of the answer, right. Is there no chance that you raised the dividend payout even if temporarily?
Marcelo Kopel
Carlos, this is Kopel. I think what you should -- the answer is would be a combination of things, because just one thing we'll not address the accumulation at all.
So, it will be a combination of things and if special dividend or temporary increase in payout is needed to address that, it could be used. But don't see one of the one option excluding the other one.
They should be probably used or they will be happening at the same time.
Carlos Macedo
Okay. Just as a follow-up to that, because it's just capital sitting on the other side of the balance sheet.
The excess reserves now at BRL10.4 billion, you're talking about NPLs improving the cycle turning growth coming back. Is there a plan to make use of that or again is it just going to sit there for a rainy day, in case the cycle doesn't turn out the way expected to.
Eduardo Vassimon
Hey Carlos this is Vassimon. This excess provision should not be seen as reserve for rainy day.
When we built it -- most of it, we had very low level profitability and across approaching in our judgments at that time. But I think we have to look at this more as a regular process of having provisions according to our expectations for losses according to our models.
So, in the third quarter, we saw some -- sorry, in the second quarter, we saw some reduction in this complementary provision. In this quarter, we have increased a little bit, so we're going to see this fluctuate according to our judgement and our models.
So -- and what we can see from now is that for next year, we expect to have a lower level of provision expenses.
Carlos Macedo
And that--
Eduardo Vassimon
Sorry, just to complete. So, this complementary provisions now you should be seeing as part of the management of our expected loss model.
Carlos Macedo
So, it would be reasonable to save in a lower level of provisions that you could eventually use these excess provisions. If your -- or in other words, that level of excess provisions come down if you started seeing the risk for what you provisioned them for decrease?
Eduardo Vassimon
At the level, provisions should reflect over assessment of the risk. If the environment improves, we'll have a lower level of provisions.
Carlos Macedo
Okay, perfect. Thank you, Vassimon and thank you, Kopel.
Operator
Our next question comes from Tito Labarta with Deutsche Bank.
Tito Labarta
Hi, good morning, thanks for the call and taking my questions. Couple of questions also.
Following up just a little bit more on provisions. Just want to get a sense, looking through the cycle as things improve over time.
If we look from 2013, 2015, you're provisioning around 3% to 3.5% of loans this year and above 4%. Just like over time once you get through the asset quality cycle, what's kind of a sustainable cost of risk in a normal environment?
I'm not saying you're going to get there next year or 2018, just given your loan book where is today, do you think in a normal environment you'd be provisioning around that 3% to 3.5% or -- and I don't know how long you'll take to get there, just want to get a sense once you get through the asset quality cycle, what you would expect based look in terms of the cost of risk? And my second question, just following up in terms of loan growth.
Which segments do you think you could grow in as the economy improves? You mentioned growing in mortgages; we saw payroll loans have been kind of flat over the last year, you saw a pickup in credit cards this quarter.
As the economy improves, what segments do you think there could be some demand where you'd be most willing to lend? Thank you.
Marcelo Kopel
Hi, Tito, it's Kopel speaking. I think fortunately or unfortunately Brazil is possible to have comparable periods here in Brazil.
But you mentioned something around 3.5%, in your number, which looking at the history for the net provisions, that was the number that we achieved on average through several quarters during 2015 and that could be a number -- if you want to pencil a number, that could be a number that you can pencil. But again we're still going through a cycle.
We have many things ahead of us like elections in 2018; structural reforms that need to take place. So, in lack of a better number, you could use that -- pencil that number for the time being.
But it's more or like a temporary thing until we can get something more longer term view which we don't have it now. In terms of growth, we're getting out of a cycle, but not throughout out of the cycle.
GDP growth be in the positive territory next year, somewhere between 1.5% and 2%. So, that could provide an opportunity for the market to grow at a modest single-digit number.
And throughout 2018, with things progressing in the political and economic agenda, you can get some acceleration to that. But as of now seeing from where we are trying to compare that with the fast growth where penetration of credit through GDP was at a much lower level, we do envision that being the case.
Eduardo Vassimon
Tito, this is Vassimon. Just to complement, what we're seeing is that inventories are going down rather quickly, so demand is higher than prediction today.
So, industry should follow some recovery. For individuals, the main focus is probably taking a little bit more time because we're still going to see increase in unemployment although at lower pace.
We expect and employing to keep the first half of next year, but the level that we should reach by end of this year would be already close to the peak. So, we're I think in the process of approaching the peak and then in the second half of next year, we should have starting the reduction of unemployment level.
So, it will be in our view a slow and gradual process.
Tito Labarta
Okay. Thanks.
That's helpful.
Operator
The next question comes from Jorge Kuri with Morgan Stanley.
Jorge Kuri
Hi, good morning, Jorge Kuri from Morgan Stanley. Two questions if I may, the first one is on the macro environment.
Can you give us a sense of what you guys are sensing being close to the economy on how things have progressed over the last three months? We've seen some macro indicators coming weaker than expected and consensus numbers for GDP growth next year have come down around 10 basis points now, the market expects 1.2% GDP growth versus 1.3% before.
What is it that you're seeing? Are you seeing signs of improvement duration?
What -- you're very close to the economy, so wondering what is it that you're seeing? And especially in the context of your 2% GDP growth for next year, which is obviously much higher than what the consensus is today?
Eduardo Vassimon
Good morning Jorge. We expected a growth to be between 1.5% and 2% next year.
We're seeing mixed signals here, what I believe is rather normal in when you are leading economic cycle. Confidence has clearly improved; both for consumers industry and entrepreneurs commerce industry, but these times are not yet robust.
As I mentioned previously, we believe that this will be a rather slow process of recovery. But we’re confident that we're starting -- we're going to see more positive figures in the next few months.
Again, it would be a slow, but the signs that we have, the indicators that we follow including some indicators that we build for credit purpose internally are showing clearly that things stopped getting worse and are starting to get slowly better. And interactions we have with the main companies also show that the mood has improved.
There is still some reluctance in investing because there idle capacity is high. And of course, the whole environment is still dependent on the consolidation of the fiscal measures.
As the congress approved a very important measure -- sorry Lower House approved a very important measure, receiving for expansion, this still has to go through Senate, then we have Social Security Reform, you have other relevant reforms. So, the mood is positive.
I think the political scenario is more stable. We see I think good environment for a more liberal approach to economic issues.
But it will take time, it will be a slow process, but we believe in -- consistently in the right direction.
Jorge Kuri
Thanks. And I have a second question, if I may.
Just to clarify, I saw in your institutional presentation that your GDP growth estimate is 2%, is that sort of like -- that's your economies number but the bank is working with a different 1.5% to 2%, or -- just to clarify what is that you are expecting?
Eduardo Vassimon
Good question. Thank you, Jorge.
Yes, our economic area is forecasting 2%. In our budget and our models, Jorge, slightly more conservative looking to 1.5%.
Jorge Kuri
Got it. Perfect.
So, my second question, if I may is on sensitivity to lower rates. I also saw in your institutional presentation that your economy is expecting rates to go down to 10% by the end of next year, which is a bit more aggressive than consensus, also in line with what we expect, a 10%, so that's a pretty pointy reduction in rates.
And I know that these things do not work in isolation and you made it very clear. Variables moved all around on the lower rates, means all other parts of the business will changed, but most banks globally provide very good visibility on an all else equal, obviously, being the key word here.
And assumption what is the impact that every 100 basis point reduction in SELIC rates has in your bottom-line? We got those numbers from banks in Mexico, banks in Peru, banks in Chile, banks in Columbia.
I'm sure it's not a very difficult number to put together. So, wondering given that 2017 is going to be a very characteristic year because of the sharp reduction in rates in an environment of relatively modest growth, I think it's important for the market to understand again on an all else equal, what does this mean for your business?
Marcelo Kopel
Hi, Jorge, Marcelo here. Yes, I understand the context of the market providing that.
But the concept of all else equal for Brazil is really something harder to say. So we will not disclose a number for that.
But I'll make a few considerations adding to what you already preempted in your question which is things don't work in isolation and most of the spread is not driven by the funding cost, but is driven by the credit perception. And so therefore we do engage in a reduction in NIM and it’s a fact.
We envisioned that this will happen gradually for a couple of reasons. One the portfolio integration, second, because credit spreads will go down to the extent actual credit is perceived with less risk.
Third, competition is being rational, okay, so that helps us well. And the point here is really in the quarter, we're more let's say sensitive to that which is in for example in the funding cost.
This will have a new impact this year making efficiency out of your bond rate. But at the same time, we tend to increase the duration of our placements that protect those liabilities in the sense that this should help smoothen the impact.
So if you look at our ALM and the value at risk at this particular, you would see an increase in our value at risk which talks to having longer duration position to smoothen the impact of that. Needless to say that, it’s impossible in a situation like that to keep postponing forever the impact of reduction in interest rate, the only thing that we have here is how we transition in the scenario where you are having the pressure on interest rate going down and we are still not ready to make growth, make up for all this reductions.
So we should see the combination of reduction in rate, bringing them down gradually, a pickup on credit cost which should help our shelter part of that and to some extent, our modest growth in credit and in 18, credit should accelerate further and the bulk of the reduction should be already baked in on the numbers, but that’s not the perfect scenario. Apart from being perfect, on economy that is still in a slow mode.
Jorge Kuri
All right. So in absence of you providing what I think its basic disclosure for most banks globally.
So what's your best guess Marcelo, single-digit loan growth that probably means average-on-average in, I guess low single-digit growth, plus NIM compression, what does that means for revenues. Can you see financial revenues grow next year or you think that the working scenario should be flat too long?
Marcelo Kopel
I think if we see modest growth on the portfolio, NII should be added [Indiscernible] than the portfolio, okay. And that just talks to what we just spoke about NIM trending down in the gradual way, but that would be the indication we will provide in the absence of having promo guidance to give it to you.
Jorge Kuri
All right. Thanks.
Operator
The next question comes from Mario Pierry with Bank of America Merrill Lynch.
Mario Pierry
Yes, good morning everybody. Congratulations on the solid results.
Just one question related to the competitive environment that you're seeing, as we have seen a lot of consolidation in Brazil recently in light of Bradesco and HSBC. You've been buying Citibank and also doing a transaction with BMG to buy the entire stake there.
At the same time, we've seen the public sector banks with some capital problems. So, I just want to get from you, what is your desire them to or your willingness to regain some of the market share that you were willing to lose in the last few years when you didn't feel comfortable with the economic environment, especially given your high capital ratios.
So can we see Itau over the next few years regaining back some of the market share that you lost and also -- what does this mean for credit spreads, is the competitive environment is improving? Thank you.
Eduardo Vassimon
Good morning, Mario. The environment we see is a very competitive one, but a rational competitiveness and we see that both private and public banks showing good level of discipline in pricing in capital deployments.
So I think, we have a good environment for competition. In the past, this was not necessary case and although of course, market share is important, we always try to price at the calculated risk and we are not getting to get into irrational competition, so this cause us in the past to lose in some specific segment a little bit of market share.
I think in this new environment of rational competition, given our capital position that's quite strong, I think would well place it to possibly regain a little bit of market share.
Mario Pierry
And then in terms of regards to the credit spreads given okay, is a rational competitive environment. Seems like no one wants to be -- mostly be the first lender here, especially as no one seems completely comfortable with the economic environment yet.
Does that mean then the credit spreads remain elevated for a few more months?
Marcelo Kopel
Yes, I would agree with that. I believe that credit spread, of course, will follow a risk perception, but I have the impression that will go down in a slower pace than at the risk itself given this more rational environment.
So, I don't see a spread getting compressed in the short-term. And so I think it’s a favorable environment where we'll start to see less risk and still good level of spreads.
But of course, overtime, they will convert and reflect a lower level of risk.
Mario Pierry
Perfect. Thank you.
Operator
The next question comes from Nicolas Riva with Citi.
Nicolas Riva
Hey, thanks a lot Marcelo for taking my questions. My first question is on the fourth quarter.
Typically, the fourth quarter is the strongest quarter of the year. And if I look at the third quarter, you had some one-time expenses about BRL900 million in provisions for labor claims and bonus payments for the labor agreement.
The guidance for loan loss provisions for the full year implies loan loss provisions about flat quarter-on-quarter in the fourth quarter. So, my question is, in the fourth quarter, it would be realistic to assume net income of about BRL6 billion -- BRL6 billion is net income for the fourth quarter?
And my second question is on loan growth. So, you already said that for next year, we should expect to see loan growth in mid-single-digits more or less for next year.
Now, if I look at your corporate and SME loan books, we saw a decline -- on a quarter-on-quarter basis, we saw declines of 3% quarter-on-quarter from corporates and 2% quarter-on-quarter for SMEs. So, my question is, when are you seeing really the inflection and growth to resume really in the corporate and SME books?
Thanks.
Marcelo Kopel
Hi Nicolas. Regarding the credit growth, it should materialize strongly -- or stronger actually in the second half of next year.
We're still seeing companies adjusting especially on the corporate segment. You're still seeing companies adjusting.
Vassimon mentioned before that there's a lot of idle capacity in the economy, so typically postpones the [Indiscernible] for companies should be coming back to the market. And when they come back, it's going to be mostly driven by working capital than to longer term financing given the installed capacity that they have.
So, this is one thing. And the needless to say that growth would be uneven throughout the different segments.
So, you'll see segments or different pockets of the economy growing at different paces. Regarding our fourth quarter estimates, we can really comment on numbers for the fourth quarter, but Vassimon mentioned a couple of -- gave some color in terms of the [Indiscernible] so you may well get to -- the number you provided or something around that, but its more on you to put numbers.
But one thing that we need to remember is the fourth quarter typically brings additional volumes on certain portfolios that when you look at on perspective basis, regardless, if they are delinquent or not, you tend to build provisions for them just because unexpected losses. So, the trend on some of the segments is the one we've seeing, but you may get some fluctuation as Vassimon mentioned in terms of quarter-on-quarter.
But we're confident with the intervals we provided.
Nicolas Riva
Thanks Marcelo.
Operator
The next question comes from Marcelo Telles with Credit Suisse.
Marcelo Telles
Hello Vassimon, Kopel, everyone. Thanks for the time.
Congratulations on the results. I have two questions, the first one; you mentioned earlier that you would expect some level of decrease in provision expenses next year.
And my question to you is, what is the level of let's say, GDP growth expected for next year that you think would prevent you from reducing provisions. I know you were expecting 2%, but what sort of level of GDP growth you think could lead -- your provisions not to improve next year?
And I ask that because we all know that the, level of corporate leverage is very high, almost three times net debt to EBITDA pretty much all-time high levels and there's a big like operational leverage component there, so was wondering either to have it done any work in terms of the sensitivity to GDP and cost of risk in your case. And then my second question is regarding operating expenses.
You've been doing a good job on costs. But when you look in terms of what you're going to achieve this year, I think your guidance 2% to 5% growth, but you have a big decline in your loan portfolio, 10% decline more or less.
And how should we think about your operating expense evolution next year and on, let's say if your volume stops declining. So, you have maybe some modest growth for next year, do you think you could see a pickup in OpEx?
Or you think you can still deliver operating expenses growth below inflation? Thank you.
Eduardo Vassimon
Good morning Marcelo.
Marcelo Telles
Good morning.
Eduardo Vassimon
As to the relation between provisions and GDP, I mean I don't have the answer here. I have to make some simulations.
But we expect in our base case that's 1.5%, a decrease in provisions. If it turns out to be a substantially different from that then we could -- we should revise this expectation, but should be something relevant to change this assumption.
As to operating expenses, yes, we believe that we will be able to deliver below inflation growth next year.
Marcelo Telles
Okay, great. Thank you.
Operator
The next question comes from Carlos Gomez with HSBC.
Carlos Gomez
Hi, good morning and again, congratulations. I have another question on the capital, but I want to focus on the denominator of the capital ratio if you page 41 of your MD&A and you look at the composition of your risk weighted assets, you see a very, very sharp decline in the category of 85%, it was from BRL150 billion to BRL94 billion.
So, I wanted to know, if there was anything specific that brought strategic decline? And on a wider basis, if our numbers are correct, your loan portfolio, given that your purchased CorpBanca, quarterly CorpBanca has grown 4% and yet your risk weighted assets have declined 8% year-on-year.
Could you tell us how much of that is mix and how much is change in the capital of [Indiscernible] of Central Bank. Thank you.
Marcelo Kopel
Carlos for your first question, there was a migration what we call SPR85, which is the percentage that is -- [Indiscernible] from 85% to 100%. And that's the change in classification given a clarification provided by the Central Bank.
So, this is basically a migration from one line to the other one, okay. Regarding CorpBanca, as we mentioned, I don't have -- I need to confirm, but that got to have to have something regarding FX, but we will take that offline with you.
Carlos Gomez
Okay. Thank you very 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 sir.
Eduardo Vassimon
Thank you all for participating in our call. Just to reaffirm that we believe this will be -- this third quarter will be our solid one in terms of results.
We have good perspective in terms of NPLs and expenses under control and resilient margins. So, thank you all.
Operator
That does conclude our Itau Unibanco Holding earnings conference for today. Thank you very much for your participation.
You may now disconnect.