Oct 30, 2018
Operator
Good morning, ladies and gentlemen, and welcome to Itaú Unibanco Holding Conference Call to Discuss 2018 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 the Investor Relations website at www.itau.com.br/investor-relations.
A slide presentation is also available on this site. 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, President and CEO; Mr. Caio Ibrahim David, Executive Vice President, CFO, and CRO; Mr.
Alexsandro Broedel, Group Finance Director and Head of Investor Relations; and Mr. Mr.
Milton Maluhy Filho, Itaú CorpBanca CEO. Mr.
Milton is participating this conference call as the Future CFO and CRO of the Itaú Unibanco. First, Mr.
Candido Bracher will comment on 2018 third 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
Thank you. Good morning and welcome to our third quarter 2018 earnings conference call.
Starting our presentation on slide 2, we had another solid quarter with our recurring net income reaching R$6.5 billion and the consolidated ROE of 21.3% and of 22.4% in our Brazilian operation. You can see that the growth of 1.2% of our financial margin with clients and the reduction of 9.4% of the cost of credit were the main drivers of the third quarter results.
This positive performance was partially offset by the 2.1% decrease of our fees in result from insurance and by the 3.1% increase in our non-interest expense. The higher expenses were mainly influenced by ForEx variation and by the collective agreement with the bank employees’ union.
Nevertheless, our expenses from Brazilian operations excluding the impact from Citibank retail business grew 0.9% over the past 12 months, well below inflation for the period. Additionally, the credit portfolio grew 10.6% over the last three years, while the non-performing loans over 90 days improved 30 basis points at the same time.
It’s important to note that the 10 basis points deterioration of the NPL ratio in the quarter was mainly due to a few corporate cases that were already properly provisioned. Lastly, our capital ratios continue to improve despite a credit growth in 2018.
The Tier 1 capital ratio reached 14.8%, which already considers the fully loaded Basel III capital requirement and also the impact of XP Investimentos minority interest acquisition. On slide 3 we present our income statement.
You can see that our accumulated performance over the first nine months of 2018 generated a 10.1% growth in income deferred tax and minority interest. This performance was partially offset by a temporary higher effective tax rate in the period.
The higher tax burden is caused by the accounting of our tax credit at a 40% rate, while we pay current taxes at a 45% rate in accordance with current regulation which should expire at the end of the year. Now on slide 4, the financial performance reported on slide 3 is an essential element of our value creation process.
Here on slide 4 we show that our value creation reached R$7.2 billion in 2018, an increase of 36% on the last four years which confirms our focus on capital discipline. Also essential to our value creation process is our investment in technology, which as shown on page 5 has increased 67% since 2014.
This investment is a far amount important to generate both cost efficiency and product quality. This investment has promoted the constant evolution of our digital platform including the user experience of our clients.
This led to a constant growth in the adoption of our digital channels by our clients as they already amount to almost 11 million individuals by the end of September. Through our app, we opened more than a 160,000 new current accounts in the third quarter, a 30% growth compared to the previous quarter.
Our digital branches represent more than 30% of the operating revenues in the retail business with an efficiency ratio that is more than 4,000 basis points better than at brick and mortar branch. These are some of the important KPIs tracked during our digital transformation journey.
Now on slide 6 we see our business model with the breakdown of our income statement between credit, trading, insurance, services and excess capital. We evaluate our business allocating capital to each and every transaction in the bank, creating a more critical capital management approach.
This process allowed us to enforce our value creation in each area of the bank, bringing it to each manager and station. As previously shown in this presentation, our value creation increased R$1 billion during the first nine months of the year, as has been the case in recent years.
Our insurance and service operations continue to account for the bulk of the value created. But it is important to point out that credit transactions have consistently created value throughout 2018.
Turning to slide 7, our credit origination remained strong mainly in our individuals and SMEs credit portfolio. As mentioned in the first quarter, this growth is driven by credit demand from our clients and much by the loosening of our risk appetite and credit strength.
On the corporate portfolio, the origination remained subdued due to lower demand from our clients and our minimum value creation requirements. However, this does not implicate in our reduced relationship with our large corporate clients as we continue to advise and help them to access the debt capital markets in which we play a leading role both in the distribution and in the origination of corporate debt.
Now turning to our credit portfolio on slide 8, you can observe a growth rate of 2.1% in the quarter and of 10.6% over the last 12 months. This performance is concentrated in our individuals and SMEs portfolios, which in aggregate grew 11.9% over the last 12 months.
Our portfolio in Latin America continues to be affected by ForEx variation, especially when compared to last year. If we strip out the affect, the portfolio would have grown by 5.2% in the last 12 months instead of the 27.4% as the table shows.
That brings us to slide 9 where we show our financial margin with clients growing by 1.2%, primarily because of the continuing change in the credit portfolio mix, coverage products with higher spreads as shown on the previous slide. Our risk-adjusted NIM increased 10 basis points in the quarter, also in line with the improvement of the credit quality of our portfolio.
Also of note is the fact that before the easing cycle of the SELIC rate, we were constantly questioned about the negative impact that our lower SELIC would have in our financial margin. Now two quarters after the stabilization of the SELIC, the figures shown here indicates that our NIM is less sensitive to market volatility than people originally thought.
Slide 10 shows our financial margin. This revenue as you know includes not only our trading gains, but also our assets and liability management and it remained relatively stable in this quarter despite the market volatility in the period.
Turning now to slide 11, we will take a look at our credit quality indications. Our non-performing loans over 90 days increased 30 basis points over the year consistent with our risk appetite and strategy.
In this quarter, the 10 basis points increase is caused by the corporate book and refers to the delinquency of a few companies that were properly provisioned and did not cause any negative effect in our P&L. The NPL over 90 days of our SMEs portfolio reached 3.4% this quarter, which represents a 150 basis points improvement over the past year.
In addition, the delinquency of the individuals portfolio which remained stable in this quarter, shrink 60 basis points over the last 12 months. Those portfolios are at the lowest delinquency ratios since the Itaú and Unibanco merger.
Moving on to slide 12, we can see that our cost of capital has reached 2.1%, once again the lowest point since the merger between Itaú and Unibanco. Now on slide 13, we show our coverage ratio, which has declined 1,300 basis points in the quarter.
As mentioned previously, this indicator was likely to decline either due to the default of exposure while these provisions already drifted or due to the upgrade of the credit ratings from clients whose financial has improved. During this quarter, both factors contributed to the decline.
Slide 14 gives a breakdown of our revenues from services and insurance. And as you can see, these revenues were down by 2.1% in the quarter.
Commissions and fees declined 1.1% in the quarter, mainly due to the advisory services and brokerage. This line was naturally impacted by the pre-election in [Indiscernible].
Despite the higher competition in our seasoned services business, its revenues still show a good performance, growing 6.8% in 2018. It is fair to say that without the effects from the Citibank retail business; revenues grew 5.2% in the same period.
As for the lower result on our insurance operation in the quarter, it is related to the liability of deficit test revenue recognized in the second quarter. Since this test is held, once every six months we have no impact this quarter.
Now turning to our non-interest expenses on slide 15, we had an increase of 3.1% in the quarter. This growth was mainly related to the effects of ForEx variation in our expenses in Latin America as well as the impact of the collective agreement with the bank employees’ union.
We note that our expenses from the Brazilian operation excluding the impact of the Citibank retail operation grew 0.9% over the past 12 months, well below inflation for the period. On slide 16 now we show our Basel III Tier 1 capital ratios which increased 60 basis points in the quarter, reaching 14.8% already accounting the 19 bps impact on the acquisition of XP Investimentos.
This evolution was due to our net income in the year as well as to the effect of Resolution 4680 which changed the treatment of deferred tax assets originated from hedging strategies of international investments. Now on slide 17, we are glad to announce that we have received the final approval from the Brazilian legislators to acquire the minority interest of 49.9% in XP Investimentos.
The total transaction value was R$6.7 billion and the financial settlement took place at the end of August. This acquisition reflects our strategy to diversify our net income to our less volatile revenues.
With this now we conclude the presentation and are open for the questions which 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 Eduardo Hoffmann from [Indiscernible]
Unidentified Analyst
Hi. Good morning, everyone.
I have a couple of questions on the acquiring segment. The first one is regarding the competitive environment in industry where we can see that your price has declined a lot in the third quarter when compared to the previous ones.
We did some calculation here and we can see here that you calculated as the revenues divided by the card volumes declined 13 basis points to “1.08.” So, I wanted to understand what drove let’s say the lower prices this quarter, if this was something more proactive from you.
Also, what do you think we can expect if these prices should continue moving down or if you believe that from now on this should be a more stable level. So, if you can elaborate a little bit we would be grateful?
And the second question is also let’s say -- also on the industry. We saw CLO announcing recently it is leading the banking [ph] lock agreement.
So, I wanted to know if it make a sense for HIG to remain in the agreement or not or if it make sense to have the agreement at all from now on. I think clearly, some of the new entrants they have been able to be very aggressive on prices because they do a lot more prepayment than incumbents.
So, I wanted to understand here the view of the bank. For the bank I understand that the end of this agreement is bad because it increases the risk on the loans that have policy over less collateral, but on the other hand this could help HIG to become more competitive when compared to the other one.
So, if you can talk a little bit about these as well I would be thankful as well? Thanks.
Candido Bracher
Good morning, Eduardo. Thank you for your questions.
So, first on the acquiring business and their competitive environment in the [Indiscernible] I think it’s no secret to everybody witnessing, I mean how competitive this business has become the past two years and it’s becoming seasonably more competitive. In this scenario we have first lost some market share due to the competition, but we have restructured our activity in many ways with investment and we have been able now to stop this loss in market share.
So, after the prices, I mean we don’t make the prices; the competition makes the prices, the market makes the prices. So, I can tell everyone if they will keep on falling or not.
But I could say that I’ve seen or seeing the market that indicates that the competition will ease in the near future. So, I mean we -- as you know, I mean we have created credit cards in order to compete in other segment.
We have increased significantly our sales force. And we will keep on competing in this market expecting to bring all the better service to our clients and to be a strong competitor in this sector.
About the [ph] SEG, I mean the agreement. [ph] Cello has announced that it will lead the SEG.
We have announced as well that we are leading the SEG. Yet, I expect this should not happen, neither for Cello nor for us.
I believe at the end of this agreement is first and foremost a loss to the system not to the bank especially a loss to the clients. And the clients today have access to this type of credit that in Portuguese we call fumaça, smoke, which is ability to discount revenues which are still to be made or sales which are still to be made and I mean this SEG enables.
So, there is credit to be made. It’s a safer credit and first it has a lower interest rate which is very beneficial to clients.
Without this agreement, without the SEG, such credits goes to fumaça, cannot be made. There is an effort led by the Central Bank to establish a way in which this could continue being made.
An agreement has already been reached on this market should function in the future, but it takes some time, it takes about two years for all the technical evolution to be made. And then when this is done and ready, all the participants will have excess to discounting receivables in the market thus improving the rates for the companies.
And what is being worked upon now is the solution for the [Indiscernible] I mean between now and two years from now. I trust that the efforts of the Central Bank and of the banks that will succeed and we will be able to find some way of function that will enable this credit to fumaça to keep on being made.
And so, we won’t have to leave the agreement.
Unidentified Analyst
No of course, very, very [Indiscernible]. Just a small follow up on the fumaça question.
Do you expect any increase in provisions because of the let’s say of the deterioration of these collaterals or you don’t think that this -- you don’t think this is going to happen?
Candido Bracher
I don’t think nothing significant can happen there as well.
Unidentified Analyst
Okay. Thank you very much.
Candido Bracher
You’re welcome.
Operator
The next question comes from Carlos Macedo Goldman Sachs.
Carlos Macedo
Yes, good morning. Gentlemen, thanks for taking questions, there are couple of questions on one of the banking side.
First, you mentioned during your presentation that much of the growth that you’ve been seeing so far, the acceleration at least has been driven by demand and not by appetite, I think I asked this question over the last couple of quarters. Now that the elections in Brazil are done, we have an outcome, of course we still need to see the new President come to power and govern, but what will it take for the risk appetite of the bank to improve?
I mean on the asset quality side, NPLs are at the lowest levels they’ve been as you said since the merger and cost of risk hasn’t been pretty much flat. What does it takes for you to risk appetite to increase and what would that mean for loan growth if it did?
And I have a second question that’s an asset quality specifically on the consumer side, the volatility on the corporate, but the consumer side has been pretty steady. Do you see any room for further improvement there given where you are?
Cost of risk there hasn’t really declined that much, it’s actually been going, trending a little bit upwards at least on the retail side. How do we think about that going forward in terms of the cost of risk of that specific segment?
Thank you.
Candido Bracher
Thanks for your question Carlos Macedo. You said you’ve been making these questions for the past two quarters, making the same question, this time I may give you a different answer.
So, as to risk appetite, so first just to be precise on what is risk appetite and what is not risk appetite. Risk appetite for us means that we don’t lend to companies or two individuals with at least a probability of default above a certain level which established at different levels for different segments.
So, how have we then been able to increase our portfolio and to increase our credit activity? Because companies get better when the economy gets better and their probability of default decreases.
So, companies which were out of the risk appetite, they get in the risk appetite as the economy improves and as the input. So, changing the risk appetite would mean accepting lending to companies with -- companies and individuals with the higher probability of default.
We think that the steadiness we have seen in the improvement of company and the perspectives we have ahead that may encourage us to review these levels of probability of default below which we do not lend. I mean we are studying this as we speak and we may submit to our board some measure in this direction over the course of this next quarter.
So, this is your first question. On your second question if I understood was something about the perspectives of the cost of risk in the consumer side.
It has been improved very significantly. At some moment it should stabilize.
We do not see the signs of it yet, it continues to -- so far it continues to improve albeit at a slower pace, but it’s continuously improved.
Carlos Macedo
Okay. Thank you, Candido.
Just to follow up on the first question. I don’t want to flatten around your guidance for next year, but a stronger risk appetite, I mean you’re already growing at 13% per year.
Would that mean loan growth potentially stay in the mid-teens next year if the risk appetite doesn’t really go up or is that a little bit too aggressive for the size of the market as it is now and the process that we have for GDP growth?
Candido Bracher
I cannot right now estimate I mean what the loan growth look like for next year, but what seems safe to say is that the growth for next year will lean more upon credit than it has been this year.
Carlos Macedo
Okay, perfect. Thank you, Candido.
Candido Bracher
You’re welcome.
Operator
The next question comes from Jason Mollin, ScotiaBank.
Jason Mollin
Hello. Thank you for the opportunity to ask questions.
My first question is again on loan loss provisions and the declines we’ve seen and I would call normalization I guess of the cost of credit as well as loan loss provisions to loans. We’ve seen in the chart you showed for all the history there, we are at the lowest levels.
Should we expect levels to increase as loan growth accelerates or can they continue to decline would be my first question?
Candido Bracher
Thank you, Jason. As loan growth accelerates, you have a natural tendency for these levels to increase because you have to make provisions for the new loans.
However, given the very high level of…
Unidentified Corporate Representative
Coverage ratio.
Candido Bracher
The very high level of the coverage ratio that we present. As I have been saying over the past quarter, this level tends to decrease over time.
It will decrease because some companies will default and they were added to the denominator or it will increase because some companies will improve and the provisions will be reversed. I think this is pure trend that of normalization as you named it, I mean which we should see still for one or two years ahead.
And so, this trend of course tends to reduce the cost of credit. I mean what will be the balance between both trends, I mean one of increase because using the total portfolio and one of decreasing because of the coverage ratio, I don’t know.
Jason Mollin
Well, thank you for that. Let me ask the second question on the credit card business.
So, cards now represent about 35% of the loan book at close to around R$69 billion, only less than 9% of revolving credit. We know we have, I think you reported about 83% are transactional charges including installments without interest.
So, I just wanted to understand how you see the potential changes in these markets, specifically the use of interest-free installments? And if -- I mean we’ve seen some push to reduce the use of interest-free installments and move to installment payment and charging interest rate, how do you think about this issue and what are the implications for Itaú and the credit card market in general?
Candido Bracher
Okay, Jason. Well, as you know, I mean interest-free installment is embedded in the culture of this [Indiscernible].
So, something in the [Indiscernible] every retailer sells on interest-free installments. Just recently, one year ago, the retailers have been allowed to have a discount when the sale is not made in interest-free installments.
As this had become more widespread than there tends to be a tendency to increase the interest-bearing credit, which is where we place our efforts. So, our main efforts in the credit card area is to increase the interest-bearing portfolio.
I think we are being successful there. I think this is a trend which should increase as we go forward, but it’s a long -- I don’t think interest-free installments will ever be excluded it would rather be finished.
I mean they are too much of a traditional already in the market and a lot of the retail market depends upon it. But as we create alternatives for it and the alternatives I mean with a discounted value and then their interest in the financings, I think we’ll be able to grow our credit card portfolio that bears interest.
Jason Mollin
Can you share a little bit of this 83% that you call, I recall transactional charges. What portion of that is the interest-free installment versus just the usage when the card payment is due by the client paying it off in full?
What percentage of that is actually due to this interest-free installment product?
Candido Bracher
Jason, I don’t have this figure right now with me, I’ll have ask Gustavo to call you back with this.
Jason Mollin
Right. Thank you very much.
Candido Bracher
You’re welcome.
Operator
The next question comes from Jorg Friedemann, Citibank.
Jorg Friedemann
Thank you very much for the opportunity. I have also two questions.
The first is related to your fee income business. I was particularly intrigued by the performance of the asset management fees.
So, just wondering if you could describe a bit, what drove the performance in this quarter. If you could attribute that only to competition or it could also be the initial signs of the effect of Itaú opening its platform and migrating a bit from the pure asset management fees to distribution fees something that will be accommodated over time?
And my second question is related to costs, of course it became very clear to us in your presentation that the book of the increase has been related to the LatAm unit given the depreciation of the real during the quarter as well, but you also had this impact of the labor agreement. So, just wondering if we strip it out the effects impact what we could think about structural growth.
The question is more related if the LatAm unit will continue pushing the costs above the inflation for the foreseeable future? Thank you very much.
Candido Bracher
Thank you, Jorg. First your question on the asset management.
No, it has -- the decrease in fees in asset management is not related to our change in spend or distributing more third party products or so. It’s very specific in this quarter.
It’s due to smaller performance fees. I mean we had -- we have most of our funds this year in the first quarter after mute in the industry.
And so, performance fees were very strong in the first semester than versus a bit less in this third quarter. So, this was the reason for the impact in the asset management fees.
As to costs, I mean costs related to the Latin American costs, if they will be above or below our inflation in Brazil is related potentially to the exchange rate variation, you cannot forecast that. Locally, the costs tend to increase below inflation as is the case in Brazil and as we intend to continue to do so.
Jorg Friedemann
That’s perfect. Just a brief follow up on that part of Latin America.
Some of the units, particularly Chile and hopefully Colombia, some are recovering. And the question is more related to if this growth observed abroad could continue pressuring expenses in the quarters ahead or if you believe that at some point we will convert to the guidance this year and lower levels for next year?
That was a bit more of my point. Sorry if that was not clear.
Candido Bracher
I think that improvement in performance, especially in Chile and Argentina, they have more to do with the way management is holding and with the way new managing guidelines are being implemented in these banks than with we invest in itself. So, I think, I mean we’ll be able to keep on improving the performance there, keeping expenses below inflation in these countries.
Jorg Friedemann
That’s perfect, very clear. Thank you very much.
Operator
The next question comes from Rafael Frade, Bradesco
Rafael Frade
Hi. Good morning, all.
My question is related to the guidance you referred on press release, you reaffirmed the guidance, but you don’t mention anything during our initial presentation. I would like just to get a sense of how are you seeing big adds for the year.
I feel like now seems to be looking for credit, it seems that probably it will be above your guidance, it seems maybe we can dig more in the lower end of the guidance. So, I would like to hear you’re talking about it?
Candido Bracher
Okay. Thanks for the question, Rafael.
As you know, I mean we provide guidance for these various lines and we know that you make your calculations and you end up with our guidance for final results. We do the same thing here.
And when we look at this calculation, we think that we’ll be well within the guidance -- the results that you have circulated for final results. As to the individual lines, you’re right; I mean there are some cases where we will be along the extremes of the guidance either positive or negative.
Rafael Frade
Okay. Thank you.
Operator
The next question comes from Domingos Falavina, JPMorgan.
Domingos Falavina
Thank you, Candido and team for taking the question as well. My two quick questions, one is on headcounts, we noticed about 1,000 employee increases q-on-q.
And I believe in addition to the FX and also the salaries, one of the reasons for the OpEx increase according to the release was the efforts or the focus on the commercial efforts on the acquirer as well as on the insurance. So, if you could provide a little bit of detail of these headcount increase, what percentage you want to acquire or how many people actually you did increase or acquire sales effort by and as well as your insurance?
And then I go for the second question.
Candido Bracher
Thank you for your question, Domingos. Yes.
I mean you’re right. I mean there has been headcount increase and there will continue to be investment in people in these two areas, I mean the insurance and the acquiring business.
I think that this past quarter our figures that they were around 300 for the acquiring business and 400 for the insurance. We expect to have of course efficiency gains in many other areas of the bank which will offset the impact on costs created by this investment in this area.
Domingos Falavina
No, super clear. Thank you.
And one additional one on the acquire, it seems that the POS rental is sort of the most commonly used negotiation tool to retain clients and it seems Itaú really focusing on keeping these client relationships as seen by the number of clients as well as by the volume growth. My question is when you look at this POS rental revenue stream, do you see that decreasing or becoming irrelevant and how long.
Is that something that you believe will continue to be a relevant stream or will cease to be important in the short term?
Candido Bracher
Yes, you are right in saying. We are trying to adapt our product and our offer to consumer needs, to client needs.
And one of the main victims of it is the POS rental and apparently it will continue to do so. POS rental tends to continue to decrease.
Domingos Falavina
Okay, very clear. Thank you very much.
A - Candido Bracher You’re welcome.
Operator
The next question comes from Marcelo Telles, Credit Suisse.
Marcelo Telles
Hi. Good morning, Candido.
Good morning, everyone. Thanks for your time.
I have two questions. The first one and it’s more of a broad question regarding fintechs.
I mean how do you see the threat of fintechs to your business, particularly considering your expectation of probably like accelerating your loan portfolio down the road. So, where you see the biggest threats from fintechs for you?
Is that something that could perhaps change the dynamics a little bit in terms of this loan growth acceleration into the future? And my second question is regarding costs, kind of a follow up on Falavina’s question.
Considering that you expect to accelerate your loan growth going forward, how should we think about your operating cost base down the road? Can you still continue to deliver the strong cost control you’ve delivered in recent years or you think because of higher lending growth we might start to see an acceleration on your operating expense base?
Thank you.
Candido Bracher
Thank you, Marcelo. So, first your question on fintechs.
I must tell you that I see the fintechs activity much more challenging for us in the service side than on the credit side, at least for the near future. And most of the activity we’ve seen in fintechs and new competition, I mean they come on the investments, they come on the acquiring business, mainly they come on services.
In credit, do not see yet such an intense activity by fintechs. And we see the quality of our credit operations improving very consistently with the use of artificial intelligence, with the use of technology the way our credit models are improving.
So, here we have the impression that we can compete on a more even basis using technology to compete against fintechs. So, my expectation is that the credit portfolio will experience good growth ahead of us.
And going to your second question, I don’t see a huge impact in costs in the growth of the portfolio. I think we have established structure and within this structure I mean we will be able to grow the portfolio without adding much cost.
I mean these are part of the scale gains. It’s a completely different scenario than in the acquiring business or in the insurance business, but we need more people to increase sales.
I mean we don’t need more people to increase our credit activity.
Marcelo Telles
Thank you, Candido, very clear. Just one additional question if I may regarding Rede.
Where do you think you are from a technology standpoint and from a services standpoint compared to new comers in that business? Do you think you still have to deal with a lot of like legacy issues that have been potentially part of your business?
If you could just elaborate a little bit on the service and on the technological strategy of [ph] Rede that will be great?
Candido Bracher
Okay. Marcello, I think we have still quite a way to go in our acquiring business.
I think we can improve much more there. It’s not the case of credit card; credit card is already born with the new scheme with the new platform.
But in the traditional hedge I see a lot of room for improvement in our -- in the quality of our offer to our clients. And we are following up all the aspects of this offer and we are following closely the improvement in each of them.
And we think we will be able to improve much more and offer much more competition to the market.
Marcelo Telles
Thank you very much.
Candido Bracher
You’re welcome.
Operator
Our next question comes from Philip Finch, UBS.
Philip Finch
Thank you, Mr. Bracher for the presentation.
Couple of questions also for me. First a follow up to my fellow’s question on disruption risk.
We’ve seen a few new digital players come into the market in last year also offering free banking, free checking accounts transfers. Is that putting pressure on you, are you seeing any customers switching to these new start-ups or digital players and are you planning to also reduce your fees as well related to this.
So, I guess ultimately, you’re benefiting from cost reduction as a result of technology, digital banking. Is there a risk that these cost benefits are going to be passed through to your customers partially or fully via lower fees?
And the second question is regarding your digital -- sorry, your dividend payment or payout outlook. So, in previous calls you’ve mentioned the potential for higher dividend payments given that while at not least you’ve issued some additional Tier 1 capital.
Now loan growth clearly has picked up much faster than anticipated, does this in any way reduce the potential for dividend payment going forward? Thank you.
Candido Bracher
Philip, thank you for your questions, both very good. First question deserves a little longer answer.
Of course with this fintechs and all this new competition is a threat to the business. I have no illusions that this will not somehow affect our margins.
It seems that the margins will suffer as they always suffer when there is attrition, when there is increased competition. As to the way we compete, I have seen this phrase between somewhere which made sense for me which is that incumbents must find innovation before innovators find distribution.
This is more or less the race as such. So, we as incumbents must find innovation must be able to compete with the products offered by this new competition.
And this is what we are doing and which is why I have shown here our investments in technology I mean we could go on much longer about investments in technology, but we could mention that we have traveled the number of scientists in the data scientist in the bank and many other progresses which we are seeing in order to have keep improving our effort as new competitors appear in the market. So, I think that in this game we can compete very well, but margins will be compressed.
I think it will be more so in services than in credit. I think in credit, there is our condition to compete and our gains of scale and really in the accumulated knowledge on credit evaluation that we have presents and enable us to compete even more strongly in credit than in service.
But I think this is the name of the game going forward to face this competition in every market we mentioned here defying the insurance business, we have the cash management business. There are many businesses like this.
We have I believe we offer the benefit of complex of structured financial products, the possibility of being a one stop shop and so on. And we think that if we are able to constantly improve the quality of our products to constantly improve the user experience of our products, which is our main focus now, we will succeed in this competition and we will keep the high levels of returns that we have in offering to our investors.
Second question on dividend payouts. Yes, as you know, our risk appetite states that we should have by the beginning of the year 13.5% Basel III capital one -- Tier 1 ratio.
And what’s above it and we will not be consumed by acquisitions or by expected changes in regulation will be distributed as discussed. So, as I look to next year, I think that we’ll have a very fair level of the distribution.
If portfolio grows much faster than we expect then of course [Indiscernible] dividends because more capital will be required to keep the 13.5% lift.
Philip Finch
Okay, perfect. Thank you very much Mr.
Bracher.
Candido Bracher
You’re welcome.
Operator
The next question comes from [Indiscernible] Citibank.
Unidentified Analyst
Hi, Candido and team, good morning. Thanks for the question.
I have a few questions about credit card [ph] port. Is it possible to share more details about the recent performance of this business?
For instance, what is the current POS data for credit card bought? How many clients, I mean credit card port has been able to add to its portfolio on a monthly basis?
And if you could also, if possible of course share with us some numbers about SME and market share in the [Indiscernible] segment both current market share and the market share of net additions that would be great? And the last question that I have is why Itaú decided to use the systems of First Data to do the processing of credit card port transactions instead of using Rede?
These are my questions. Thank you.
Candido Bracher
Thanks Felipe for the questions. Concerning credit card port, we are not disclosing any information on this.
But the information I can give you is that we are on track to reaching our goal of 120,000 clients by the end of the year. Why did we decide to use First Data and not Rede as the platform supplier for credit card port because we are experimenting with different occurrences.
We think this is part of our striving to offer our customers a better user experience and we are challenging our own internal platform for the right reason we expect to have both improving. There is also -- I could have answered this another way too and it would also be through Felipe this question about First Data.
You know that in every company and in every bank there is a competition for IT resources. We have a high competition for IT resources in the bank.
We have a very clear and established method of measuring the net present value of each investment that we propose to technology. So, when a new product comes which has a longer ramp up, it’s easier for them and it’s easier to calculate the results in the process of this investment if you do no rely on our internal IT, but if you can hire it externally.
Unidentified Analyst
Okay Candido, thank you very much for the answers.
Candido Bracher
Thank you, Felipe.
Operator
The next question comes from Nicolas Riva, Bank of America.
Nicolas Riva
Yes. Thanks very much, Candido for letting me ask questions.
I’ve two questions, the first one on the level of NPL creation. So, we did see an increase in this level in the quarter about R$5 billion.
You do mentioned the rollover of some overdue loans which were 15:90 ratio overdue and now they are more 90 ratio overdue, but if you can comment on this increase of the equations, if it’s something that concerns you for coming quarters? And then my second question on your guidance for loan growth.
So, in the call you seem to be more positive on credit growth going forward, but if I look at the guidance for loan growth, you didn’t change it for this year, the 4% to 7%. And if I look at what implies for the fourth quarter, it seems to imply basically zero growth quarter-on-quarter for the fourth quarter.
And my question there is, if the acceleration that you are seeing in loan growth will be more of a 2019 story rather than fourth quarter story? Thanks.
Candido Bracher
Hi, Nicolas. Thank you for your questions.
Concerning the NPL creation, it gives companies that went in arrears over 90 days in this quarter. These are cases dated back to 2015-2016.
In 2015 and 2016, we identified companies which were much weaker due to the huge prices that we went through. We have made precautionary provisions for these clients.
And we forward these clients very closely in a different area of the bank that we created especially to follow up clients like these since. So that -- I mean when these clients, eventually defaulters was the cases in this company is now the level of provisioning is very high, in this case it was above 80% in the case of both.
And we expect we will not lose 80% of this credit eventually forward. So, this does not present any special concern to me going forward.
And as I look into our book of similar situations, which is some companies improving others still deserving a closer attention. Expect if the economy as a whole improves, we may have more positive than negative surprises in this portfolio going forward.
And we have not seen new companies being added to this portfolio. So, we are not doing this year, it has not been significant.
The number of new cases added to these cases that’s our bigger concern. Guidance for loan growth.
We affirmed the guidance in general with this [ph] CAGR. It’s claimed that I mentioned in the previous question.
In some lines we maybe around the top or the bottom of the guidance.
Nicolas Riva
Okay. Thanks very much, Candido.
Candido Bracher
You’re welcome, Nicolas.
Operator
The next question comes from Carlos Gomez, HSBC.
Carlos Gomez-Lopez
Good morning and thank you for taking the call. I had a question about two products.
If I look at page 69 of your presentation, I want to ask you about legal financing and mortgages. [Indiscernible] more than you were before, but you are regaining ground.
What will be your aspiration telling them you want to cover loan portfolio as large as you had in the past. Do you think it will be a particular percentage of your total, your legal loan portfolio or do you had a market share target as an institution?
And on mortgages which are now 21% of your legal loans, at what point is funding going to become an issue and would you need some instruments in terms of Rede’s accounts? Thank you.
Candido Bracher
So, about your -- thank you Carlos for your questions. About legals, I mean this is a market which we think we’re growing and where our presence will grow.
As you know, we have been -- we have restructured completely our activity in this market. We were once market leaders there and now we are a much smaller participant in the market and we want to regain the reign here and we have invested a lot in the quality of our products, in the processing, in the technology in order to give better user experience to have quicker turn time to customers and we think we will be growing this portfolio consistently above inflation going forward.
I’m sorry your second question, Carlos?
Carlos Gomez-Lopez
About the funding for the mortgage portfolio.
Candido Bracher
Funding for the mortgage portfolio does not present a special concern right now. I mean as you know the mortgage portfolio is funded fundamentally by what we talked our benefits for clients.
I mean the savings, the progress of the bank and we have a very comfortable margin to fund the expected growth of this mortgage portfolio.
Carlos Gomez-Lopez
So, you don’t expect any problem in the next let’s say two or three years and you have enough of that [Indiscernible]?
Candido Bracher
I expect the portfolio to grow, but I don’t expect problems in funding.
Carlos Gomez-Lopez
Thank you very much.
Candido Bracher
Thank you, Carlos.
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
Well, just to thank you very much for the interest in ourselves, excellent questions you made and that we are confident that we will continue to show strong results going forward. Thank you very much.
Operator
That does conclude our Itaú Unibaco Holding earnings conference for today. Thank you very much for your participation.
You may now disconnect.