Aug 1, 2017
Executives
Candido Bracher - Executive President and CEO Marcelo Kopel - Investor Relations Officer
Analysts
Mario Pierry - Bank of America Merrill Lynch Eduardo Rosman - Banco BTG Pactual S.A Jorg Friedemann - Citi Philip Finch - UBS Tito Labarta - Deutsche Bank Domingos Falavina - JP Morgan Rafael Frade - Bradesco Carlos Macedo - Goldman Sachs Eduardo Nishio - Brasil Plural Natalia Corfield - JP Morgan Olavo Arthuzo - Santander Investment Securities Inc.
Operator
Good morning, ladies and gentlemen. Welcome to Itau Unibanco Holding Conference Call to discuss 2017 Second 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 August 7th by phone on 55-11-3193-1012 or 28204012, access code 3987548#.
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. Candido Bracher, Executive President and CEO, Mr.
Caio Ibrahim David, Executive Vice President, CFO and CRO, and Mr. Marcelo Kopel, Investor Relations Officer.
First, Mr. Candido Bracher will comment on 2017 second 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.
Candido Bracher.
Candido Bracher
Good morning. It's a pleasure to talk to you about our second quarter 2017 results.
Talking first on Slide 3. Into venture main themes, we see challenges looking ahead.
There are six topics which I will briefly describe. In this quarter, we will explore the main evolution points in the digital front.
First, focus on clients. First and foremost, we will strive to offer our clients a significant enhancement of products and services.
We want to reach a new level of customer satisfaction. We know this is not an overnight, but it should be a permanent objective of the bank.
In order to improve client satisfaction, we must keep in touch with each potential measure. Financial systems worldwide and growing deep structure change and we strive to place at forefront of this move.
We shift implement the best practices available not limited to the ones available to the financial system. In order to continue improving clients experience and our efficiency.
This digital transformation and client simplicity with prior and adjustment of our HR practices, in order to faster even more the corporative world and communities and to drive ourselves while promoting a fair and meritorious employment. And we already talk at lengths here about risk management in previous presentations, but we shall keep perfecting our risk management tools when we continue to move forward with our internationalization process.
At the moment, we strive to reach in the countries where we already have presence the same management qualities which we accomplished in Brazil rather than expanding our business abroad. This all should allow us to keep a consistent level both ability and value creation to our shareholders.
In Slide 4, we'll go into more detail about our investments in the digitalization of our services in product. And also present the innovations that we have recently implemented.
Today, internet and mobile transactions already represent 77% of our client transaction. Digital clients amounts to 13.6 million and mobile users amount to 10 million, an increase of 15% over the last six months.
The speed at which the world is becoming increasingly digital is unprecedented and financial services are no exception. In particular mobile services have enjoyed exponential growths.
Our mobile apps already represent the number one channel to each our clients access bank. Innovation in this environment requires a very strong customer focus, a deep understanding of customer experience motive functional teams to work in agile methods and competitive investment in data and analytics.
Our initiatives in digital platforms, digital branches, mobile and internet channels have seen relevant development. The highlight here the launch of our Itau Light app targeted at less digital limited clients that offers a simple interface and runs on entry level smartphones and has been a new force in digitalizing previously non-digital clients.
A second development to point out, is a new internet banking channel of our SME clients and credit card holders with a new and improved customer interface. Finally, in this quarter we've reached the milestone of 100,000 bank accounts opened to our mobile app in a fully digital process.
Turning now to Page 5 and our results, but still before talking about our financial results. I would like to make a few general comments about this quarter.
This quarter as you all know was impacted by a significant change in mood which was triggered by event that caused great instability because of those events. In the likelihood of any reforms approved reduced negatively effecting confidence levels in Brazil.
These events postpone the recovery of present demand which was beginning to happen, then we probably resume in a more modest pace in the second half of the year. It's important to note, that we observe a relatively calm period in the market following a short high-volatility span.
This can probably be attributed to the good reception the market has from the economic team and the expectation that this team will remain in its functions. As a result of that, demand for credit and financial services was affected but not as seriously as one would have feared given the intensity of the events.
Now on Slide 5, we highlighted the key performance figures from our second quarter results. Bank posted a BRL6.2 billion of recurring net income in the quarter and BRL12.3 billion in the first half of 2017.
This represents 15% increase when compared to the same period in 2016. The recurring ROE in the first half of 2017 was 21.8%.
Focusing on the first half of the year figures compared to the same period of last year. The highlight was to decline of our cost of credit.
We will comment on the operational trends of our result in the following slide. In Slide 6, we show a big history of quarterly recurring ROE, which highlights the subtlety of our performance even in an adverse environment.
In the second quarter of 2017, the recurring consolidated return on equity was 21.5% and the consolidated recurring return on assets was 1.7%. When we segregate the Brazilian operations, the ROE was 22.7%.
On Slide 7 now, if we look on the right side with the first half of the year figures. We can notice a small contraction in the operating revenues of 22%.
Which was due mainly to a decrease on the credit portfolio in the period which affected our financial margin slightly, but this effect was more than compensated by a substantial decline in cost of credit and increase in commission on fees hence strict cost control. The combination of these results led to a retained net income increase of 15% in the period when compared to the same period of the previous year.
Slide 8, we disclosed the breakdown of our cost and loss in Brazil and Latin American operations. Please note that Latin American operations are in the building process.
Notably, Itau CorpBanca which was merged one-year ago and still has significant [technical difficulty]. Slide 9, where we present our business model chart.
In this chart we break down the income statement between credit operations, trading, insurance and services and excess cap. Throughout the first five years we've placed special focus on our services business.
And the results presented in this chart are simply are reflection of this strategy. You can see that insurance and services business accounts today for more than 50% of our recurring net income.
It is one of the reasons why we've been able to keep our profitability at current levels in such an adverse scenario for credit operations. But an important point to mention here is that, we see now in this quarter that the credit business is recovered and showing returns in lines of with our cost of equity.
The net effect you see, nearly 14.9% recurring ROE and our credit operations which is above our cost of credit, which is 14.5%. On Slide 10, talking about credit portfolio what you observe here is the impact of low credit demand environment which translate into originations yet enable throughout base amortization, even if they are growing.
Nevertheless the reduction pace of our loan book has been slowing down as the year-over-year compression in this quarter is 30 bps lower then what was presented last quarter. Here our expectations for the loan portfolio to stabilize in the second semester and we're prepared to resume credit growths whenever credit demand are low.
Side 11, financial margin with clients. We see that, despite this more difficult economic scenario and the Selic rate reduction, our net interest margin remains stable at 10.3% in the quarter.
The risk adjusted net interest margin improved significantly due to better cost of the risk in the quarter. The lower part of the chart represent the evolution of our financial margin with clients.
Despite the effect of the new recovery relation and the lower Selic rate which affected our liability margins, there was some compensating factors in the quarter that allowed our financial margin with clients to increase, like higher number of calendar days, from structure operations of the wholesale segment and higher gains, commercial derivatives in our Latin American operations. Going forward, where one could expect that the drop in the Selic rate will cost pressure over our liabilities margin.
Slide 12 financial margin with the market. We've had another positive quarter here which given the unexpected events of May 2017, we consider to be especially good result.
Looking ahead now, we believe that for the full year 2017 the financial margin is the market, we reach a level around BRL6 billion. Because the financial margin as the market have some correlation with the Selic rate.
Therefore, [indiscernible] scenario where average Selic rate will be single-digit from 2018 up proves to be correct, it is very likely that this margin trend is to reduce in the future. Slide 13 now.
Comment on our credit quality. Here and there are good years.
As you can see there was a 20 bps improvement in our total 90 days NPL ratio in the quarter. There were improvements in the individuals, in SMEs and corporate for improvements across the board here.
Regarding the 15 to 90-day NPL ratio there were also improvements in our segments in Brazil. For the corporate segment, we've mentioned in the last conference call that 130 bps increased observing the first quarter was related to the construction companies exposures.
In this quarter, there was 100 bps improvement as these exposures were renegotiated and therefore included in our renegotiated portfolio. In Slide 14, we see the NPL creation.
If there was an improvement in the overall level of the NPL creation in the quarter, mainly led by a significant improvement in the wholesale segment. There is more increase in the retail segment here it is due to fixed process analytics, not a trend.
Page 15 now, provision for loan losses and cost of credit. We see, there were improvements in the overall provision expenses though mainly to the wholesale segment.
Retail provision expenses increased a little bit in the period but as I said this is a normal behaviour for second quarter as you can see in the result of adjustment. There was also a small increase in Latin America locations.
The same trend we can see for cost of credit, but we delivered bigger improvement in cost of credit since there were less impairment expenses in this quarter. Page 16, represent our total allowance by type of risk.
The bank's overall level of allowance reduced margin in the quarter from BRL37.6 billion for the BRL37.4 billion. Considering the sum of allowances for aggravated and overdue loans, there was a reduction from BRL20.5 billion to BRL20.2 billion in the quarter which is in line with the improvement observed in the 90-day NPL ratios.
Therefore, there was a slight increase in the potential provisions from BRL17.1 billion to BRL17.2 billion. Page 17 represent our coverage ratio and here you see that, in the coverage ratio 243% increasing from 231% last quarter.
Such high coverage level is not only due to the NPL improvement but also due to some credit exposures from the wholesale segment for which we have made anticipatory provisions, but that are neither defaulting nor improving sufficiently for the provisions to be reversed. These effect can be seen as the wholesale segment coverage ratio reached 715% in this quarter.
In Page 18, commission and fees and result from insurance. Here we see that, commission and fees has increased 4.9% when compared with first half of 2017 with the same period in the previous year.
You can however see good performance of our asset management fees in line with solid growth of our assets under management in the period. We see also decline in results from insurance and this is explained mainly by the sale of our group life insurance to Prudential that became effective in April this year.
The discontinuing of our extended guaranty activity and to the fact that lower inflation and lower Selic rate negatively affected the remuneration of insurance assets. That all said, the key performance in the segment is still below optimal and we are working on improvements which should bear results going forward.
To Page 19, non-interest expenses. Expense evolution is in line with our plans compared in the first half of 2017 as the first half of 2016, non-interest expenses growth was only 1%.
Now on Page 20, moving to our core capital ratio. As of June 30, our common Equity Tier I considering full application of BASIL III an impact of Citibank retail business acquisition and the investments in XP.
The tax provision reached 13.5%. As you may notice, we continue to observe organic capital generation.
Even continuing with our buyback program during this year, where we bought back 37.9 million shares in to July, 2017. [Indiscernible].
On Slide 21, you see there are two important observations to make. The first one is purely technical and related to the fact that we're re-classifying discounts granted for margins to cost of credit line.
This amount should be added to the results on loan losses plus impairment line that should now be named cost of credit. And in this quarter, the guidance then, which was BRL14.5 billion to BRL17 billion compared to BRL15.5 billion to BRL18 billion increase in the forecast of 2017.
I'll now talk about our forecast. We reiterate here all our ranges for the - having said that, the events of last May led us to believe that we would deliver credit portfolio growth around the bottom of the forecast range.
Regarding financial margins with clients, we believe that we were in the year, through the bottom and midpoint of the range. For cost of credits, we believe we were under year around the top point of the range.
For commission and fees and results from insurance operations, we now estimated that we were in the year around the middle of the range. And to finalize, the net interest expenses, we believe we were under between the needle and the best part of the range.
Just to finish on Slide 22, you may see the invitation details of our Annual APIMEC meeting which will be held on September 26. We would like to bring forth the invitation for you all and remember that the event will also be webcasted with simultaneous English translation.
That finishes our presentation and now I'd like to open for questions-and-answers.
Operator
[Operator Instructions] our first question comes from Mario Pierry, Bank of America Merrill Lynch.
Mario Pierry
Let me ask you two questions, please. The first one is related to your ROE of your credit operations that you showed on Page 9, you're showing the ROE of 14.5% significant improvements from a year ago, your ROE now is in line with your cost of capital.
I was wondering as far as I remember the target has always been to reach the cost of capital, but I was wondering if you do think you could go above your cost of capital at least this year given the expected improvements in provisions, so that's question number one. Question number two has to do with the big spike up your wholesale coverage ratio to 715% as you mentioned, it seems like you made some provisions in anticipation.
But if you could give us a little bit more color what sectors are of concern and that led you to boost such coverage ratio. Thank you.
Candido Bracher
Thank you, Mario for your questions. The first question you asked whether the ROE credit operations could go above cost of capital, 14.5% as the result of the expected improvement in credit quality.
And my answer is, yes it's good. I think modestly because expect to see improvement in credit quality to be slow overtime and not to be in a jump and also cost of credits could see some reduction maybe further due to, - with the lower yield after bonds in which we base our evaluation of cost of goods.
So here yes, it seems it's possible that it's ROE and credit will be above the cost of credit. Now as to our coverage ratio.
Maybe it's good to hear that I'm at risk of going a bit so much in to detail, that I explained the dynamics of this provision, that is complementary allowance which - which we have made. As the provisions hit the companies, when we looked at many companies and here especially companies in some way related to the Lava Jato scandal but not exclusively.
In fact many companies in that faced it - EBITDA's were dropping at the same time interest rates were going up, exchange rate was devaluing so the relation net debt to EBITDA was increasing much more what has been forecasted when we extended this credit. As a result of that, we make anticipatory provisions and to provide potential allowances for these companies.
I mean based on the expected loss method which we use. And this provisions they tend to accumulate, how is the way this coverage level decreases?
And I even said in the last quarter that I expected it to decrease and I was wrong. The lower it is, - it decreased in one or two ways, either these companies for which we made anticipatory provisions, they effectively default and when they do default the provision is transferred from the potential provision to the regulatory provision or they improve to a point where the expected loss is reduced, they can be upgraded and the provisions can be reversed.
What happened in this quarter is that, neither of this two things happened to which the bulk of the companies. They have neither defaulted nor improved to a point where the provisions could be reversed.
And I think given our scenario now of a slow improvement in the economy in Brazil, that this trend maybe can continue for some time but the companies are in this twilight zone, let's see. So it's not impossible that the coverage ratio could even increase from the point where it is.
Because NPL may reduce, so not because the provisions will increase but because NPL might may reduce until the coverage ratio could be a bit reduced. I hope this answers your question.
Mario Pierry
Yes, so just to be clear. So this increase is primarily because you had more companies having problems or you see more companies having problems than before and that led for you to reduce the risk rating of some of these companies or the expected losses are now higher than you expected.
Candido Bracher
No the main reason for the coverage ratio increase is the decrease in the NPL 90.
Mario Pierry
So it's just primarily the, is that the NPL has come down not necessarily because the provisions went up. Okay, very clear.
Thank you very much.
Candido Bracher
Provisions as I said, they went from 17.1 to 17.2, the potential provisions.
Mario Pierry
Thank you.
Candido Bracher
Although this is not the one that did. Okay.
Operator
The next question comes from Eduardo Rosman, Banco BTG Pactual.
Eduardo Rosman
I have two questions. The first one is kind of a follow-up on Mario's question.
It's on your cost of equity. I remembered the last year when Mr.
Setubal presented fourth quarter 2016 results, he mentioned the cost of equity above 18% for Itau Chile which is very high, right? Of course given all the improvements, since then the cost of equity has been improving the last quarter, if I'm not wrong, you mentioned the cost of equity of 14.5%, I think?
But this was before May, right? So I wanted to know if cost of equity increased since then or not.
And what are the drivers that could bring this cost of equity down in the next 12 months? So this would be question number one.
Question number two would be on trying to understand a little bit how do you see your results next year, right? Because you still have very weak lending activity.
It seems that given all the political uncertainty, we're not going to see any big acceleration until Presidential elections are held, and beside at the Selic rate will also be a lot lower next year. It seems the NII will barely grow if it grows at all.
And when I look to your other P&L lines, you're already delivering very good figures in most of them. Expenses are growing only 1% in nominal trends.
Cost of credit coming down, that's why your pre-tax is going to go up probably more than 20% this year. So of course, that this is very good but it also creates a tough base of comparison for next year.
So my question is, what to expect for the next year and if you guys think that it's possible to grow above inflation earnings next year? That's it.
Thank you.
Candido Bracher
Thank you Rosman for your questions. The first one concerning cost of equity.
Yes, I mean last quarter our cost of equity was 14.5% and it remains in this level and in the event that may have not altered this, I mean there was a brief spike in the formulas which we follow, which are basically based on which premium. But our - improved back, its within our present cost of equity is not in state of range in which we position it so and we don't like to change the cost of equity, very often.
So we expect for it to get out of the brand and the brand is and since introduced again, so it remains at 14.5%. As to 2018, we're not making any forecast, any guidance on 2018 results.
What can be said is that, we will keep our focus on cost control, on improving efficiency and of course we're ready to grow assets as soon as the demand picks up. I think it's such an assumption that if the assets do not increase, unpaid loans do not increase into, it will be difficult to grow results next year.
But next year I mean, further demand for loans behaves going forward this year and beginning of the next.
Eduardo Rosman
Perfect. Just a follow-up on the cost of equity question.
Do you think it's possible to forecast that could come down before Presidential elections next year? Or no, until then given all the uncertainty, probably we are not going to see any changes?
Candido Bracher
I don't see cost of equity coming down very significantly in Brazil. I mean when we compare the cost of equity we use in Brazil, when the cost of equity that European and American banks since for them around 9% or 10%.
It appears to us, in that there's difference four to five points I mean at least fairly represent the success of risk in the different markets. Having said that, I mean it could go down marginally.
Yes, I think it could go down marginally, I think in the next quarters.
Eduardo Rosman
Thank you very much.
Operator
The next question comes from Jorg Friedemann, Citi.
Jorg Friedemann
So I'm also having two questions today. Just in the first point, in the NPL progression.
I'd like to understand how do you see the prospect for NPLs going forward. I'm particularly referring here to the NPL creation in the retail book that iterated a bit and also the increase in renegotiations.
So just wondering if putting altogether these trends together, what you just commented on the corporate book, you believe that really the worst is already behind of us. And my second question is related to the prospects for NII, net interest margin.
You mentioned during your presentation that you had at least three potential impact that are affecting NII. Of course the most important ones credit growth, but also I think you referred to a stricter operations that help us the NII this quarter, plus the mix, the shift.
So I just wondering if you could comment on your prospects for NII with normalization of those conditions and your guidance implies that as light pick up credits volume. So if you also believe that worst is behind in terms of NII or if this pressure of lower rates will not be compensated by pick up in credit volumes.
Thank you very much.
Candido Bracher
Thank you, Jorg. First on NPL, how do we see it?
The NPL creation in retail book in this quarter, we attribute it to seasonality. It was second quarter seasonality.
Here we think that the trend is sustainable towards more reduction in the NPL 90 in this book. Good question, you asked me whether the for corporate to identify simply the worst is already behind us.
Yes, I mean this is my impression. And as to the renegotiations you mentioned.
I think they're a natural consequence of that dynamics have explained before. So when these companies which have had debt amended today, [indiscernible] and when they have difficulty in meeting their commitments in the agreed dates and which nature, we have to leave them some room for breathing and to recuperate and this is going to renegotiation of queries.
Following the renegotiation, as I said before one or two things may happen either they default because they cannot recuperate or they improve their conditions and then we're able to reverse the provisions. In both the cases the provision close out of the complementary allowance of the potential allowance.
Concerning NII, I think is very much I mean - what I said on the slide. First I mean going forward, as one could expect here that a drop in the Selic rate will cause some pressure on our liabilities model, which are important part of NII.
Of course I mean if we manage to have credit growth we can compensate for that. So I mean I think this is all reflected in the guidance.
I have this given concerning NII.
Jorg Friedemann
Okay, that's perfect. Thank you.
Operator
Your next question comes from Philip Finch, UBS.
Philip Finch
Couple questions from my side. First of all regarding loan growth, can you shed some color in terms of what you're seeing in terms of loan origination and which segments do you think will most likely rebound service on the 2Q numbers.
I think on Slide 10 around sequentially credit cost growth was slightly positive, all the other segments there are negative. Going forward, which segment should we assume to recover first and then maybe an explanation, why?
And linked to this first question, do you have any visibility in terms of the sensitivity to economic recovery in terms of credit demands of GDP growth were to recover sharply next year to 2% or more. What does that mean for credit demand, is that a lag?
Does it come back quicker? For any color in that front will be very helpful.
Second question is regarding asset quality and specifically Slide 15 in your presentation. So whether it's a top chart or the bottom chart you're seeing the level of provisions to loans or cost of credit in Q2 approaching or at historically low levels or trust levels.
So the question is going forward I mean how much more paces [ph] have come down given that you could argue that the loan composition of your book is so much extensive than it had been previously. Thank you.
Candido Bracher
We'll give you a very generic answer on your first question because it's not very clear towards I mean which segments could first respond to an economic recovery and increased demand in both. But what we see is that, I mean working capital needs which comes before investments needs.
So I mean generally this could mean the reaction coming first in individuals than in corporates. In corporates, it's [technical difficulty] for working capital.
Although I mean if we experience a more robust recovery in the economy I think corporate loans have more potential to grow going forward not in the first moment, but going forward. And then your question on asset quality and on Slide 15.
I mean how much more room for improvement there is, I think there is room for improvement. I mean we have relative to small loan book now which was built conservatively and which has a high level of provisions.
So when we look forward and in the corporate segment I mean we haven't [technical difficulty] to look forward [technical difficulty] name-by-name basis and not only statistical. I mean - there is still some room for improvement, not too much but still some room for improvement.
Philip Finch
Great, thank you very much.
Operator
The next question comes from Tito Labarta, Deutsche Bank.
Tito Labarta
Couple questions, also. I guess first on your financial margin with clients looking at Slide 11.
I mean we could say, it's probably held up pretty well given the reduction in interest rates, the lower rates on credit cards. I know the lack of competition has spread somewhat high.
But we think once the rates have finished coming down maybe by year end and maybe as growth starts to come back. How much do you think this financial margin with clients can come down from this 10.3%?
I know you don't have a long history given the incorporation of CorpBanca, but just trying to get maybe a little sensitivity of that line to the lowest weak in a more normalized environment with better growth, do you see it falling below 10% because any color you can give on that would be very helpful. And my second question, you started the call talking a lot about your digital strategy lot of interest and mobile transactions have picked up quite a bit.
What does that mean for expense growth over the next few years maybe you think continue to grow in line with inflation, is there maybe some additional investments that can position above that or maybe some benefits in improvements and efficiency because of that. So you can maybe give some color on how you see, in fact expense growth for the next couple of years will be helpful?
Candido Bracher
Thank you, Tito. So on your first question, I mean the trend in financial margin is --.
I mean as I mentioned in Selic rate throughput some pressure, the reduction in the Selic rate input some pressure on this margins and for it to grow we'll need adverse in the loan portfolio. Having said that, what we look more here is the financial margin with clients adjusted by risk which has been growing and here I mean with that, that we'll be able to keep this margin stable overtime [ph].
Your second question, how much our investments in technology development may affect our total levels of course investment in the bank. And here I mean I don't have a precise answer to you, but you must remember that technology has global effect when it brings to cost.
I mean it increases cost because it requires a lot of investments and we make investment and we want to increase the rate at which we are able to produce our heads and things like that we're investing a lot in adapting our way of production here in handling the community sales, the agile sales working, this all represents investments. On the other hand, technology presents great possibilities of course production like cloud computing for instances is a great example of that.
So I think that all things added, one should at least compensate the order and we shall be able to keep a very strong hand on cost grow ups.
Tito Labarta
Thanks, Candido. Sorry go ahead.
Candido Bracher
I was just going to complement that the lower inflation environment of course also helps.
Tito Labarta
Right, makes sense. Thanks Candido.
That's helpful. Maybe just one follow-up on the first answer you mentioned looking the financial margin adjusted for risk, which was 7.3% has come up from 5.4% in the first quarter 2016.
When you say it can remain stable, you mean around this 7.3% more or less is that kind of what you're thinking in terms of the stability?
Candido Bracher
Actually it's on average. We can have this margin around, but on average.
I mean of course it will float around.
Tito Labarta
Sure. Okay.
Thanks that's very helpful.
Operator
Our next question comes from the Domingos Falavina, JP Morgan.
Domingos Falavina
Actually I have two questions. My first one is regarding the asset quality trends, which at least to us, it was bit surprisingly good on the early delinquencies.
Specifically on the 15 to 90 on the SMEs which is supposed to be a bit less volatile I guess than the large quarters and still it came down substantially. So my question I guess on this part of asset quality like, if could explain a little bit more, what happened on the SMEs, if it is just you being more cautious or the market getting better.
And what kind of coverage ratio do you feel comfortable working because I understand that you explained that your coverage went up because new NPL provision came down but you could have provision less to and kept the coverage flat. So I guess my question is, like what's kind of reasonable for the year end coverage ratio.
And my second question, it has to do a little bit with the NII and we've been a bit more concerned the NII we're looking at the loan shrinking 3% a year. Previous year guidance it basically implies in 2018 starting with loan book, the same record started 2017 and then we have all the additional headwinds right, Selic coming down, spreads coming down and so on.
So just on the top of line and then we look at Bloomberg estimates and it bakes in like the market baking either flat or slightly growing, NII. My question is more directionally if you believe it's reasonable to assume top line growing in 2018.
And that's it. Thank you.
Candido Bracher
[Indiscernible] questions. So first on asset quality trend concerning 16 to 90 days SMEs.
Here what I can tell you is that, our experience is that the most recent range of credit we have made it, the vintages, the most recent vintages of credits are showing better results. So it seems that we still can enjoy this trend for sometime in the results.
Then you asked me about what my guidance would be for the year and coverage ratio. And I don't know, here really it depends on so many variables [indiscernible] unless quarter that's a general trend was for it to decrease because of cost 231 was already at very high level and it seemed that instance to know about this coverage ratio should reduce.
But since there is a possibility given the very slow growth of the economy here, that this credit for which we have the complementary allowance that they neither default nor improve to a point of being [technical difficulty] and that at same time NPL will reduce, so it could, really I mean it could operate on - in this short period of time. If you could ask me about what would my forecast be to the end of 2018, then I would say that surely I mean it should be more significantly lower than it is today, but for the end of this year I'm not comfortable in making any forecast like that.
Your question about NII. I think you're right, I mean there are some headwinds on NII and in the Selic rate is, especially remained headwind and we also had the credit card, the changing credit card rules and since like this my impression here is that, in order for NII to grow next year, it will be necessary our growth in assets, which right now is higher than we can foresee.
Domingos Falavina
Very clear. Thank you very much.
Operator
Your next question comes from Rafael Frade, Bradesco.
Rafael Frade
Just going back to NII. You have I think released that there were structure operation with corporate client.
I would like to have an idea of how relevant it was for the NII given that you highlight this. And in second, in spite the lower interest in fact the results with working capital it grew QOQ mostly it seems because of larger base.
I would like to understand a little bit this base, I saw that there were some change for example in the capital that are allocated in the insurance company. it seems that maybe some update goes through this line because the result of all of this is that, when you respect for the NII for the year, we're getting a little a hard to reach it because it is maybe basically the NII need to be almost flat on part of the second half and given the lower interest rates it seems a little harder, so we would like to understand this is a little better.
Candido Bracher
Okay, thanks Rafael. Not quite sure I got your second question precisely, but I'll try to answer it.
Concerning the NII, I mean this structure operation with corporate client. It was around BRL100 million with the results, the impact on NII.
And yes, you're right I mean we expect our NII to be relatively stable throughout the year now. Having balancing positive and negative effects which we ahead it seems that the most probable scenario for us, is for it remain on this level.
Rafael Frade
Right, thank you. Candido.
Just a follow-up on this case, just that I'm seeing more negative than the positives that are basically the lower interest rate and the impacts on credit card. Which ones would be the positive that you think that could compensate for that?
Candido Bracher
It's important, in credit cards the main impact was already in this quarter. We expect this situation now to stabilize would even improve a bit as the instalment portfolio I mean should grow a bit more light [ph].
Rafael Frade
All right, that's perfect. Thank you.
Operator
Our next question comes from Carlos Macedo, Goldman Sachs.
Carlos Macedo
Actually I have a couple of questions. First question is related to loan growth because you said you're going to lend when the demand comes looking to the second half of the year.
Your guidance implies an annualized growth rate of between 5% and 12% which is something that, the market hasn't done for a while and you haven't done for a while. Where do you think that growth will come in the second half of the year?
And to get to the bottom end of your guidance which would imply 5% annualized. Second question, going back to capital 14.5% that doesn't even consider the BRL8 billion you have in excess of reserves that essentially is capital in the other side of the book.
Obviously what you've been doing even with XP, if you haven't really made a dent into that capital and that just continued to, is going to continue to build those longest risk rated assets don't grow. Buybacks aren't making a dent.
I mean is there a time where you were considered make a payment of complementary dividend something large in order to get capital back to more manageable or lower position.
Candido Bracher
Thanks Carlos for questions. Concerning loan growth, we're already seeing originations growing, not yet.
And even in this quarter, we were already hand off to offset the amortization, we expect this trend to continue and to allow us to reach the bottom part of our guidance. I mean we see in our sectors more or less widespread and I think we had a good chance of getting it.
Concerning our capital level, I mean you're right we keep running accumulating capital. Of course our preferred rate to deploy this capital would be through a growth in RWA but it's not coming significantly and possibly not coming in the future and then we'll have to consider alternatives as the one you mentioned of, in delinquents [ph].
Carlos Macedo
But is this is the - I'm sorry just a follow-up. I mean you already raised the payout and that helps - to lower that just basically stems the flow.
It doesn't lower it from current level, would that be? Is there a deadline or a time table for you think about that and given where our risk rated assets or the way the risk weighted assets are growing or is there, or is it something that will be decide when the conditions present themselves?
Candido Bracher
We're permanently thinking about these aspects. I mean we're evaluating this cautiously.
And I think that, if we come to the conclusion that it's a structural situation that we cannot offer with national evolution of our business even with acquisitions, we may have had to decided something based on dividend. The format which it will take its [indiscernible].
Carlos Macedo
Okay, thanks for the answers.
Operator
Your next question comes from Eduardo Nishio, Banco Plural.
Eduardo Nishio
I've two questions. First one is, regarding REDE, your acquiring unit.
The one which have been running below market average was wondering, was the full acquiring Candido, what strategy on REDE, if you plan to grow with more faster than what has been done so far. And my second question is bit more in the long-term, looking to your forecast in your macro forecast here.
You're seeing and just was going to 7%, GDP roughly 3% on normalized environment, how do you see that environment your normalized growth in loans. And how you see that recovering overtime, if you see a spike before and then come down later or will be a gradual growth in normal growth overtime.
Thank you. Sorry and perhaps if you can elaborate a little bit on cost and entire having the banks moving towards the direction.
Cost, technology and perhaps cost of risk and how do you see this playing around in the more normalized environment. Thank you.
Candido Bracher
Thank you, Eduardo for your question. I believe we covered everything.
Let me start by REDE. The situation here in REDE is not yet when were you can speak about growth in numbers in REDE.
We're still facing an adverse competitive scenario which started a couple years ago, with opening after market and since then what we had seen is newcomers also with new technologies in gaining market share in this market and we consequently losing some market share. We are presently intensely reviewing our commercial structure and our commercial practices in REDE, in this acquiring business.
Aiming at first stabilizing this negative trend and then - since what our goal is right now and most of our efforts are placed. The second question concerning macroeconomic forecast.
I mean, we see really I mean some improvement in economic growth for next year and our economies posted 2.8 when we project our business, we do not use such an intense - such a large figure. But I think economic growth would be gradual and here this is just guessing exercise could gradual on Q, the result of the elections and then we have the result of the elections depending on how the market is, the new presence will have a spike in growth.
Finally, you asked about cost, technology and cost of risk. Cost of risk as I mentioned we see improvement and it's still second half of this year and next year as in credit quality it has basically improved and if the economy is recovering it is to be expected that this positive trend we're seeing in credit will endure.
On technology I believe I already answered it. Here we're investing sizably on technology aiming at much better digital customer experience and the strategic investments, we must also say we have a very high regulatory demand for our technology services as every bank in this market has.
And in terms of cost, nothing much new I mean we keep tight leash on cost in the bank and especially like to administer them close or below inflation levels.
Eduardo Nishio
Okay, thank you so much.
Operator
Your next question comes from Natalia Corfield, JP Morgan.
Natalia Corfield
My question a little bit going back to your regulatory capital and also involving your subordinated debts. As was mentioned you're [indiscernible] capital right now and your subordinated debt is losing capital treatments due to BASIL III rules.
Especially the Itau [indiscernible] I believe probably is counting very little now for capital. So my question is, do you have any strategy with regards to the subordinated debts.
I know - like all of them trading above par right now. I wouldn't make sense to replace some of this debt, that will be my question.
Candido Bracher
Thanks Natalia for your question. I think that if we had a lower level of capitalization then we could consider, I mean replacing an issue, some new subordinated debt.
At 13.5% common equity Tier I that doesn't make sense for us right now to consider this hypothesis.
Natalia Corfield
No for sure, that's clear but for instance you have a portion of your subordinated debt is moving capital treatment right now. So would it make sense for you to keep the risk, to have this that few even like they have a higher coupon and be or not helping you in terms of capital as much as they used to do like few years ago.
Candido Bracher
Yes. I mean you're right in mentioning in that, the subordinated debt is entering in the phase when it loses its capital effect.
But so far it still has some capital effect and so I think we're not simply the short-term of [indiscernible] in single-digit [ph].
Natalia Corfield
Okay, thank you.
Operator
Your next question comes from Olavo Arthuzo, Santander.
Olavo Arthuzo
I just wanted to go back and clarify some points related to the excess of capital, the bank that in this quarter it increased once again. And talking about expansion in Latin America we use to hear from you that the focus was the integration of the operations Itau CorpBanca but today looking to all their adjustments that were made throughout 2016 and the expectations that those operations report higher and more normal returns going forward.
So do you see some move for M&A's or investments but outside of Brazil?
Candido Bracher
Thanks Olavo for your question. So concerning Itau CorpBanca, we have merged a year ago, more than one year and two months ago.
We still see a lot of work ahead of us in the integration of this operation. Especially if we move to Colombia now, so we are not in this moment contemplating the possibility of breaking other oppositions.
Of course we'll always should have something very interesting appear in the market which gives us a significant market share and so on. We'll consider that, but nothing at this - despite - as it is so far.
Olavo Arthuzo
Okay.
Operator
[Operator Instructions] this concludes today's question-and-answer session. Mr.
Candido Bracher at this time, you may proceed with your closing statements.
Candido Bracher
Thanks very much and thank you all for participating in the call. Thanks for your very good questions and I hope, my answers were adequate.
I would now like to pass over to Marcelo Kopel, who's going to make some remarks.
Marcelo Kopel
Yes, just to say a few words. We have Marcelo Barreto here with us today and he's transitioning from the IR role into Treasury.
A very important function, a treasury. It's part of his career development and I would like to take the opportunity to thank him for all the work he's been doing for IR.
It's been a pleasure to work with him and I'm sure you guys share the same view. So thanks for him being here and - making some changes and announcing them shortly in the IR team.
So thanks everyone and look forward to seeing you.
Operator
That does conclude our Itau Unibanco Holding earning conference for today. Thank you very much for your participation.
You may now disconnect.