Q2 2023 Itaú Unibanco Holding SA Earnings Call

[music].

Hello, Good morning.

Everyone. My name is an absolute Liam and I'm, the head of Investor Relations and market intelligence.

Got it. Thank you very much for attending this conference call to discuss our earnings for the second quarter of 2023, and the team to do that which we are broadcasting directly from our office here at five year Lima Avenue and some callouts today's event will be divided into two parts.

The first part Milton will detail, our quarterly performance and earnings that it was a system. This will be followed by a Q&A session during which analysts and investors will have the opportunity to interact directly with us.

Oh boy.

I'd like to give them some instructions so that we make the best use of our time today, but can you start the cynical of sites for those who are watching on our website. There are three audio options on the screen protocols the entire content in Portuguese the entire content in English or in the original audio school start in the first two options there is simultaneous translate.

So basically kind of a data to choose your options just quick on the flag that is in the upper left corner of your screen.

As always questions can also be sent via Whatsapp.

To do this I can just click on the button on the screen.

For those who are watching on our website or alternatively send a message to the number 11 97854579.

Our presentation today is available for download on the website screen.

As well as on our IR website.

Utah.

Upper and thousands because we thought I will now hand over to Milton <unk>, who will start the earnings presentation and I'll be back later to moderate the Q&A session.

Milton the floor is yours.

Yeah.

Hum.

Good morning, everybody welcome to our earnings presentation for the second quarter of 2023.

Thank you <unk>.

Straight to the figures in Los Angeles, we have a very direct presentation today in order to give you an overview of the figures pick out some highlights.

And at the end, we'll talk about guidance documents. So let's get started joy. This quarter. We've delivered eight 7 billion Reals in earnings which represents a growth of three 6% with a very strong Roy profitability of 29%.

21.5% in Brazil in our opinion. These are two very strong results for the.

The margin with clients grew by three 7% reached $24 9 billion Reals and as you will see from the figures. This is a core result, with little impact from working capital in terms of our margin with the market. This was yet another very strong quarter. We were aware of the challenges faced in this area, but despite these we've been able to continue to do.

Deliver quarter after quarter seen 65% granted the delinquency ratio is stable with a growth of 0.1 percentage points as we've been anticipating for several quarters things, meaning these are entirely in line with our expectations and consistent with the information we've provided to you in the past was the efficiency ratio is 39 point.

6% on a consolidated basis.

And in Brazil, we reached the lowest ratio ever.

Which is great news and was driven by the key top line growth and cost control will get into a bit more detail on both of the units agenda. So little later Wooster as far our loan portfolio I've set out to you on past calls that the adjustments that have been made to this portfolio such as derisking in some segments, which were significant to our delinquency ratio.

And cost of credit as such it's only natural that we're seeing the portfolio's growth decelerate somewhat we managed to obtain 0.6% growth in the quarter and the individual loans portfolio and eight 9% year on year only slightly below double digit.

In the SME portfolio, the volume was virtually flat given the impact of foreign exchange rates on these portfolio, especially in the middle market year on year growth was four 4% in Latin America. The figures reflect the impact of changes in foreign exchange rates at St and if not for this impact the consolidated figures would have grown by 1.3% quarter over.

Quarter and by 7% year over year.

So the key point, we can take away from portfolio figures is that we've never stopped growing at any point in the cycle in terms of both number of clients and targets.

We also did all of this while de risking the portfolio and give you. An example, we saw a reduction in the credit card portfolio during the quarter, which was very much by design, we decided to make a key intervention in the portfolio, especially in those channels, we call. The open sea, where we noticed accelerated delinquency rate.

Over offering of products and a very high level of debt service burden Digitalization also has driven an expansion in the number of credit card until recently, we had an average of 1.7 cards per individual whereas currently we have four cards per individual in the market, which indicates an oversupply. Despite all this effort and I'll talk more about the <unk>.

Quincy rates in a while but suffice to say that during this quarter. We started turning things around we don't show a breakdown by portfolio, but note that the credit card N. P. L has already reduced by 20 basis points this quarter with a portfolio decelerated. This shows how important it was to make these adjustments in a timely manner now in other segments such as mid.

All in high income and higher revenue businesses, both in retail and wholesale is in the eights.

More resilient clients in the cycle.

We've continued to grow well above double digits offering for somebody and in the more affluent segments sort of add more than 20%. So clearly growth has not gone away. Obviously, we're coming from a more challenging credit environment, but we're starting to see positive signs.

Both vehicles.

Of course, you've got coming from the line and we'll continue to reach to anticipate the cycle. So we can continue to deliver sustainable results and good profitability.

Martin.

It's going to fall off.

I mean, I think at all in terms of financial margin with clients. The key message is that most of the result came from our core business.

As you can see working capital accounted for $2 8 billion Reals last quarter and $2 9 billion reality this quarter, representing only a slight change. So most of these earnings are consistent with the core margin with clients. So this is great news for our margin with yet another quarter of growth I think when we look at the annualized average margin.

Right, we see a quarter on quarter expansion to eight 8% in this quarter from eight 4% in the second quarter of last year and even adjusted for risk. We managed to maintain at the same level I would also remind you that in the fourth quarter of 2022, considering everything when we set about credit conduits and ratios, we have the impact of that large retail.

Out of which you are already aware when we look at the margin in Brazil. The story is similar we saw quarter on quarter NIM growth to nine 6% from nine 2% in the second quarter of 2022 and in terms of the risk adjusted margin. We also see a recovery. This is great news since despite all the challenges and portfolio adjustment, we kept increasing our <unk>.

Margin with clients as for the margin with the market as I had already anticipated we had a very good quarter since in both the last quarter in the preceding ones. We've been running at an average of 600 million reals per quarter in the current quarter. We reached 1.1 billion Realogy with growth both in Brazil, and Latin America and at a slightly lower hedging.

Cost of our capital ratio as the interest rate gap close to 11, we ended up having a slightly lower hedging costs. So another sound quarter and despite the existing interest rate challenges, we've been able to take advantage of the opportunity.

I'd like to spend some time on this slide since here, we need to explain in detail some assumptions Syncrude I'll walk you can cut across a proposed phase.

The main message here is the discussion that you tell when he bonkers sensitivity to interest rate cycle.

There are those who understand exactly how our sensitivity changes throughout the cycles. There are those who have questions and there are those who think that we could be more sensitive in an interest rate cut cycle than in the hype cycle. There are several of them suddenly stuff on.

What we have sought to do here is Michelle I'll provide.

So a summary.

Of how our NIM evolves.

During a long interest rate cycles.

Super hub.

We've normalized certain impact in terms of organic first we match. The NIM that is we brought together the margin with the market and our margin with clients because after all the interest rate cycle effects both.

NASA nest historic second.

We've eliminated some effects from the historical perspective to get a comparison basis.

Normalized the overdraft cap eliminated the impact of the overhead which is important and the hedging costs that the capital ratio, which I was talking about just now is also gone. It may have some sensitivity to interest part, but this has nothing to do with the bank's core business. We made two further adjustment one was in the fourth quarter of 2000.

19th since this was the last pre pandemic in a quarter, where we had a 100 baselines and we adjusted to fixed demand that's because as we change the mix overtime. This naturally changes our NIM. If we have a more secured portfolio, we get a lower NIM and if we have a clean portfolio are higher now than what we wanted to show was the sensitivity to <unk>.

Interest in our NIM as a function of the interest rate cycle by locking in a 100 baseline. So you will see that when we go back to 2016, we see reasonable stability. We go from 105. We go to 102, we go through 99, one or two again and we get to 100 interest went from 14% to 6% and kept reducing to reach.

3% here in 2020, we introduced a program called Travis CEA, which naturally had a strong impact on the NIM because they've renegotiations with our clients. So this helps understanding that the main impact comes from the Travis CF program as we can see interest rates continue to fall then they go back up.

But our NIM remains pretty stable what is the message we want to get across here, it's about our ability to manage risk and the risk factors to which our balance sheet is exposed in the sensitive we use this type of risk management across all our business lines, whether in the margin with clients or the management of our products and commercial.

And above all in the management of risk factors within the Treasury Department in the margin with the market and as you've seen we have been able to manage risks very well. Therefore, we do not go long only and our position regardless of whether we are in an interest rate hike or cut cycles, we actively manage risk factors at the bank we have.

A very dynamic approach to risk manage and these are the results produced throughout the cycle.

I think I've made this clear but of course, the IR team is available to answer any questions and clarify detail, but I hope. This material has been a little clear how interest sensitive our NIM in <unk>.

I think she is paid in commission and fees and result from insurance operations, we expected a slightly more robust performance fee from capital markets activity in the first half of 2023, then we actually got and I'll talk a little bit about that in the guidance later, but nevertheless, we were able to grow quite strongly in the credit and debit card.

That's what you need.

With a year on year increase of 10, 9% with a 22% in the acquirer earnings our acquiring business reached a volume of 208 billion Reals and a 22% growth in revenue. So we're having a very special year in the hedge business.

But when we look at asset management, we see a drop in the quarter and year on year.

If these things while reminding you that typically the effects of performance fees are recognized in the second quarter, but this was a weaker six month period in terms of performance fees for the industry as a whole and for US It was no different.

Already starting to see stronger activity for the second half of the year and an expectation of recovery, but it may not be enough for us to make up for what we werent able to capture in the first half and here I'm talking about the whole industry, which went through a tougher market this year.

On the advisory services and brokerage front, we kept on performing very well in terms of investment banking, leading most of the transactions that came to the market with huge transactions primarily follow on but we also maintained a leadership role in the D. C. M. Marc basic however, it's very important to make clear that during this first half year.

In the fixed income capital markets fell by 45% and in fact, showing much weaker activity in the market than we had anticipated looking at the second half we can already see a rebound.

But perhaps not enough to offset the market volume drop in the first half.

Rhonda.

Interesting falloff as for ECM activity was also resumed and we've been discussing this with the market. So we have positive expectations going forward. The last item I wanted to address are the earnings from our insurance pension and premium bonds operations, which grew by two 9% in the quarter and 17.5.

5% year on year and when we look at premiums earned we grew by 12% and the recurring results in our core insurance business showed less volatility with a very satisfactory loss ratio in a segment that represents less volatility and bring more profitability overall posted year on year growth.

Last year, our recurring insurance results grew by 50% and this year, we've already grown 24% from pro forma Hillman. This shows that our strategy has been successful and that we found a way to expand our insurance operation, which has been a major contributor to delivering and creating value.

Finally in terms of fund management, we posted growth of 4.7% both in the open platform and in our own product because we've continued to expand our funding for settlement.

That was the headline message here.

I'll spend a few minutes talking about credit.

First when we look at the NPL 15 to 90 days weather in Brazil, Latin America or overall, we see similar figures.

Okay.

But more important than the 2.5% obtained is the trend since we don't see any big impact on short term delinquency either in Brazil or in Latin America, which is great news for sort of the overview for Brazil illustrates the point I mentioned to you last quarter, which is that we did expect this increase since there's a seasonality effect.

In the first quarter, which historically tends to drive delinquency ratios, while the second quarter tends to see a recovery in.

In the last couple of years this hasn't happened because of the pandemic, which is something we had already talked about the key issue here, which I mentioned on the last call is that we expect it to recover about 10 basis points in the short term delinquency and that's what ended up happening I've already mentioned several times, but I'd like to stress again, the extent to which we.

<unk> been able to predict and anticipate the bank cycles and to make projections using the tools. We have available I think this is very important not only in terms of transparency to you, but also for our management and decision making ability we have great news regarding the NPL 15 to 90 days in Brazil for Smes, which remained stable we have no spin.

Civic concerns in this regard as for the large corporate index changes are small and I don't think this is a fair indicator for large corporates and when we look at the consolidated figures here in the NPL 90 days, we see a slight increase of 10 basis points in Brazil, and an increase of 10 basis points on a consolidated basis and also a decrease of 10 basis.

Points in Latin America, as I mentioned in the first slide and I think the key thing here is how we break down. This information we've been telling you for a few quarters since the end of last year that at the start of the year, we were going to stabilize the 90 day NPL of individuals and in the first quarter of this year, we'd already have stabilized. This delinquency ratio as you can see here in fact, the NPL 90 days was stable and.

This implies two further affair.

Losses per person I had said that we could expect a change of about 10 basis points and we've been able to work within that estimate our expectation going forward remains the same more or less 10 basis points, which is the more positive expectation compared to this especially in the fourth quarter and the second effect, which is particularly important.

And which I just commented on is a natural slowdown in portfolios due to decisions that were made several quarters ago. Thus the denominator effect of the ratio does not favor I still we've been able to stabilize significantly the delinquency ratios of individuals'. The NPL 90 days for Smbs in Brazil shows an increase that is.

Totally within our expectations, we have no concerns on this and I wanted to make this very clear to you. When we project what may come in the next two quarters, our best expectation is stability with a more positive than a negative outlook. This means that looking to the future I believe we have more chance of surprising you positively than negatively to give you a good overview.

View of this trend stability is a good goal for us to pursue especially since the short term delinquency rate is stable, but we are very comfortable with our delinquency ratios among SME and while in large corporates as I've. Just said this isn't the best indicators, it's still at its lowest level in the NPL 90 days theory has shown in the previous.

Slide, especially for individuals in Brazil, the credit card portfolio has already reversed its trend despite the drop in its balanced because we saw a drop of 20 basis points in the delinquency rate, which is quite a positive development and is very much in line with what we would have hoped to see given the number of interventions. We've made in this portfolio throughout the cycle the cost.

If credit came highly inline totaling $9 4 billion reality and a cost of credit over portfolio ratio of 3.3% I'd remind you that the fourth quarter of 2022 was affected by the retailer event already mentioned, thus we continue to operate at levels very similar to pre pandemic and in line with the expected.

<unk>, we've been talking about for a long time the coverage ratio did not show any variation remained very stable at 212% in the retail segment. Our coverage ratio was far above what we were operating at an average looking back at the pre pandemic time accordingly, our balance sheet shows a very healthy coverage and protection our.

Balance sheet, our provision for loan losses in our portfolio are very well protected as you can see here and we have continued to make a provision for our NPL formation. As you may have noted we do not manage our balance sheet based on our NPL formation, but our expected loss models have led us to recognize a provision of approximately 100.

Percent of the NPL formation, which also shows that we've been delivering significant result.

With in our opinion, an adequate level of provision Sachin maybe Chris the main political.

Our non interest expenses grew by 7.5% year over year.

I would remind you that the last quarter was a more difficult tomorrow.

And is usually a quarter with lower costs.

As a result total non interest expenses grew by 4.1% in Brazil.

I would draw your attention to the efficiency ratio as we remained within the margin by reducing our efficiency ratio, which saw performance at 39, 6% on a consolidated basis and 37, 7% in Brazil.

Based on the same logic I've been talking about a lot which involves the focus on the top line our focus on costs higher productivity and more investment in technology, we were able to achieve these results.

Looking now at investment challenge has always been to come in well below inflation in our core costs of the bank.

We've been able to do this quarter after quarter losses and in terms of investments, we continued to invest in our platforms, while upgrading and expanding our business in it.

Due to the sudden question basically what we're not going to do is stop investing in the future because of worries about the outcome in the next three or six months.

My experience of those muscles, we will keep investing heavily in the franchise is strong and the experience of our clients and in all business expansions that will bring long term results to eat out, but when you put them on.

So much at all.

For Muslim Cooper at all.

So we talk a lot about digital transformation cultural transformation and efficiency. Mrs. We found a way to try perhaps make it perceptible to you what has been our journey in these areas.

I think this table pretty much summarizes the message that I'm trying to get across is maybe it makes it a little clearer.

This is a vision of how we serve our clients proactively and reactively.

So I think there are swings miss.

When clients get in touch and there are 30 million interactions per month, Wyoming. So you can see that it grows.

But it grows much less than proactive services what is the message here firstly, our ability to predict to anticipate to record everything that our clients actually say, what fosterville is our artificial intelligence models and our ability to retain these interactions or have them through digital channels is already at 92.

2%.

We talked to clients much more proactively while trying to help them on a journey trying to spell out a need or a security event and trying to anticipate any problems.

And we've been able to do this with a significant increase in volume we've already managed to reach a degree of stability between quarters, but with a material drop in the cost per unit. If we look at the index 100 graph, we saw 52% drop in the period from 2022 today, which shows the results of the huge technological effort.

And the investment we've been making here at the bank to improve the client experience. Our NPS was 71 point, which is an increase of nine points compared to 2020.

And reflects the digital and cultural transformation client centricity and the delivery of very powerful results. So far.

Fourth we recorded 210 million proactive calls made per quarter.

Equality.

Currently 100% of our contacts are recorded singing qualified on a modernized platform.

Where we can centrally read using robots pretty consisting of both artificial intelligence and models to understand the client's risk problems or suitability for business.

This has generated a lot of business for the bank. So these proactive interactions are not only service like there everything that generates earnings and digital channels.

Currently we can perform 90% of account approvals by our branches automatically. In addition, we performed 95% of automated approvals through our digital channels without any type of intervention and we posted a 99, 9% decrease in the time required to open an account previously it took us 28 hours, which didn't make any sense, but this.

Does have a lot to do with our installed structure and legacy systems. After upgrading these we were able to open an account in four minutes, sometimes there's acute change, especially in terms of client experience and perception and here. We've also chosen a very important journey, which is the mortgage loan journey. The degree of digitalization increased by 87 percentage.

And speaking of experience and client Centricity, we've been able to make at least half the volume of private credit production of mortgage loans with the best NPS in the market. We are suffering this shows that once again this investment of this vision and this transformation have generated in produce.

<unk> allowed counterbalancing forces.

A pretty mirror surplus capital I think we have great news to share with you.

Our tier one capital ratio was 12, 2%.

Which represents a growth of 20 basis points.

As you can see here.

Pro forma.

For this quarter, we are bringing pro forma figures deposit of the pro forma table has two columns first I think you've heard a lot about the new Basel model credit risk new weightings.

We did an extensive job here at the bank basis from which we've already benefited at the beginning of the month and 80 basis points of capital.

This is a very relevant effect, we were talking about 50 basis points and this was our best estimate of course, when we introduced the weightings when we manage to understand the standard in detail and could dive into the processes. We found 80 basis points of opportunity here, which is very significant news. Another highlight is that we have.

Continued evolving our internal models and this also at the beginning of the month, which resulted in a benefit of 0.2% zinc.

This shows that we are growing by 1% in the CET, one core capital from 12.2% to 13.1%.

Our core capital is 13.1% and our total capital is 14.7% what we do not have yet and will be a negative issue for capital and for the industry as a whole not only in Brazil, but worldwide is Basel three operational risks for which the Central Bank is currently riding the applicable standard orders, we've already looked into the public consultation.

Carried out simulations, but our best expectation is that we have to wait until the end of the year for further details on Murphy's, possibly the new standard will be implemented by 2025, we still don't know if it will be phased in although we hope so.

Naturally we will have to show the expected impacts with Vodafone, but I think overall the news in terms of capital is quite positive as we have really completed a cycle of continuous evolution and our capital ratios.

Last but not least I'd like to pass on a few messages about our guidance.

The first is that we maintained our guidance in almost every line.

This means that the ranges that were previously stipulated still meet our current best projects are just not enough, but this shows the predictability transparency and the ability to look through the cycle in terms of every kind of impact and how we are managing the bank's balance sheets.

Perhaps coming this.

This way pretty much everything is kept unchanged in the guide.

What we are reviewing seer is the best information available to date and it indicates that we in fact had a higher degree of optimism that didn't materialize in terms of service and insurance revenue.

We expected stronger activity in the first half of the year, both in performance fees and in the investment banking operation as I told you just now the volumes were little lower than we thought it would be better to revise the growth for Canada, which we previously estimated at between 7.5 and 10.5% to between five and 7% which represents our best estimate.

Today, we've made a smaller adjustment to the effective tax rate, which we expected to be between 28.5, and 31, 5% and now we expect between 27% to 29%. We are very thorough and we thought that for transparency sake. It was worth making this adjustment to make our best expectations clear tiered.

In the second half of the year and the commissions and fees and result from insurance operation lines, We expect an increase in activity, but not enough to recover what was in the guidance, but I fully expect a better second half with more activity.

And despite these changes in the structure.

Vacation is that what was implied in our net income for the bank and I wouldn't change from what we're looking at for our best projections today somebody noticed.

I will put them on S amusement.

Accordingly, our best earnings expectation remains the same.

Just with a slightly different structure, but with the bottom line is still very much in line with our expectations at the beginning of the year.

But it wasn't working out this year.

Great.

Before I joined Hinata for the Q&A I'd like to thank you on behalf of Ito any Banca myself of course and on behalf of all our teams for the recognition you've given us an institutional investor.

So we were very honored by that recognition on the buy side and the sell side.

We came first in all eight categories, which was very nice for us.

Yes.

We were in those positions last year and achieve them again this year amortization of goodwill I would like to tell you that this naturally fits us with pride and only increases our sense of responsibility of course, we are happy but it is our nature to be down to Earth humbled and without any type of consumer.

What we really want us to continue delivering managing the bank in the best possible way and more than that to maintain a very close relationship with new investors and analysts our clients and stakeholders.

How about it.

Would especially like to thank you, our investor base, and our base of analysts who do an exquisite job.

So all feedback that comes from you who are in contact with the Investor Relations Department. The feedback that we receive on coins or on a daily basis is very valuable for us to continue evolving. We've always wanted you as partners in this evolution and I think we are succeeding in that so once again a special thank you to all of them and also to my Investor Relations.

<unk>, who also do a really excellent job I'd like to finish by saying to all stakeholders, who are watching us that I think this was yet another sound quarter and we have the opportunity to share our earnings with you almost things we've talked about clients about culture about digital transformation, which we've tried to make just a little more tangible Rosemary we want to say again that.

For us it is a never ending game, it's not just one quarter. It's the next in the next in the next half we are here for the long term there are long term decisions and we are not trying to optimize the next quarter's earnings. What we want is in fact to build a platform of bank capable Bang as we've done throughout our whole history to.

Deliver sustainable earnings and strong performance in our view given the existing scenario and challenges.

So thank you again I will now join him not to for the Q&A and then we will be able to discuss a little more about your question of challenges on considerations again. Thank you very much and we'll see you shortly.

Yeah.

Well actually I.

Got it well, we will start now Milton nostril heavier here.

We're going to start with the Q&A session now remember that we do it in two languages.

We will answer the question in the language that we get the question. If you want the translation we have the audio in Portuguese and English. Please choose your language.

Once again questions can be submitted via Whatsapp, there number nine seven a two five.

798.

Plus 50 511 as well.

No we have.

The question.

Make sure we are going to take the microphone I'm going to ask your question that has to do with the yesterdays operational event a lot of our partners were affected.

Affected by the intermittent availability of our system. So I thought that it was very good as we start the Q&A and ask you what happened.

How do we solve it and what did we learn banker Renato. Thank you excellent question to start.

Well I'm going to begin by saying that the word that happened.

Well yesterday actually I would like to apologize.

All of you investors clients partners stakeholders that we're impacted of course, we work every single day, so that events such as these do not happen again and if they should happen we try to recover as quickly as we can it wasn't an internal platform in there.

Bank debt degradation, the entire environment. So it took a bit longer than what we wanted to actually.

Recover the environment.

Was it something very specific I think that we have a very important learning. This is a part of the evolution of the bank that transformation of itself to learn how to deal with situations such as these we have a lot of resilience calm and we have to recognize that we are not perfect and we need to advance and we have learnings that remain.

Good.

The glass is half.

Half full I would like to apologise airport.

Well I think a marathon.

Let's talk to the analyst.

We haven't broken up Arrow for Santander, Hi, Andrea welcome.

Yeah, but he got the bulk of it. Thank you very much for the opportunity.

Congratulations on the results actually.

I wanted to for you to shed some light in 2024.

We here in the back we updated our model where the numbers of the second quarter.

<unk> delivered.

As expected it wasn't very difficult to analyze.

Dan well.

Looking at 'twenty, two 'twenty floor.

I can see 10, 24 10, 15% of growth in the revenue. This is this growth.

Some investors that we talk to you they are not so sure that growth.

There is a doubt about how we're going to behave with the market the interest rate the margins of the clients in the second quarter. We saw that we have a deceleration in the crowded I mean, the provision banker.

Banking fees is a it's a bit weaker so I believe that the first question Milton is well without trying to get the data beforehand do you agree that <unk> would be able to deliver 10% 15%.

More of revenue in 2024, and where are you going to get there from what are the indices.

We're going to make a difference in 2024.

Well, thank you Enrique.

Let me start.

We are continuing to be positive and optimistic about the scenario and the evolution of the bank. The margin improved the first quarter. There were challenges as you know challenges in the capital markets and the credit portfolio people well, we've been working over the last few quarters the future.

The impact there and the performance fees as well the portfolio is naturally in the aggregate. They grew less as you can observe that was by design. So when we look at the results of the portfolio. We are very comfortable because we're leaving a cycle of adjustments that are very important post pandemic are normal.

The normalization of delinquency. So we are positioning the bank in a very important position if it wasn't for.

The de risking of the portfolio of our delinquency entities would be 180 points above what we have so the strategy was out of which we do the bottom line management as well.

We don't look at it and that sort of isolated a line of course topline is important it shows strength engagement the capacity to extract value, but we have to work in the other two lines were the same emphasis.

Our expectation is that the cost of credit maybe peaked.

And we hope for a PD expense that is more expand more well nominally I'm not talking about a delay.

Of course, we have the events in the wholesale.

We have this and well independent part of costs I imagine that we have an efficiency work that we're doing.

Naturally we're going to seek to have a balance between the capacity to generate value in the portfolio as we've been growing in several core.

Segments, where the bank.

20% the non aggregated number doesn't help because if you just look at the portfolio.

Credit cards, any adjustments will impact our hope, but even in a credit card we have been growing in the target.

So this is our capacity to choose.

The moment of the cycle that we are working with.

Up ahead, we're going to have a second quarter there is good.

Or.

More market activities more activities for the assets for the portfolios.

And we can see a pipeline that is important and the and the wholesale with a structure operations that can help in the second semester and that that is the work that is very important to review the strategy of wholesale retail accurately as a whole are separating the individuals from companies we have on our ROE.

Of each business, we did the inflection for two quarters in my opinion is that we're going to improve.

Thereby step the profitability of our retail so retail with better profitability.

Wholesale still very strong delivery results the cost of credit agenda is stable. So I think that was it.

You know that level of the cost of credit nominally is.

Falling behind and of course wholesale we have uncertainties the margins of the market. The results on the cost of credit is always available, but we always what we're hoping for a bar benign credit cycle or wholesale in comparison until the beginning of the year. So we have good conditions, we have conditions to deliver a good profitability I believe that.

You can see.

The 'twenty 'twenty four if it's going to be 10% to 15%. We don't know the number yet we're working with the numbers. We're beginning the budgeting of the bank over the next few months and we're going to have a better vision of our capacity, but directionally our expectation is to get into the year. Good 2020 for regardless of the crisis and we know how to.

Work with the cycles, either we are more sensitive to one side or the other that opinion well. If you look at the margin with the market through the cycle with all of the interest rate curve, we were always capable of delivering the results regardless of the moment of the curve that we're working with so we do not believe in a single direction and their capacity to manage actively.

The risk factors and the balance sheet has allowed us to deliver earnings that are solid and we are going to continue to do so.

Thank you.

Very good Milton and now we have the second question Renato Melania from autonomous Renato Please take the floor.

So thank you.

You're muted.

Hi, guys.

Basically we can a postscript stuffed up thinking about the capital position that is very comfortable and the growth there hasn't.

Really taken an acceleration what is your opinion on the payout.

Hi, Renato.

Volvo.

Thank you for the question.

To be very direct we have a grade recovery and our capital levels over the first last quarters.

We have an organic growth improving profitability earnings and then the turn of the quarter, we have the benefits, but they lay out the risk of crowded 80 basis points. The improvement of the internal models now our risk appetite from the board is 11 and a half.

And maybe one and a half 13%. Therefore, so the most important thing in the second quarter is that we know the details of the multi layer three operational risks guidelines is lantus and leads us to believe that we're going to get the information out of second quarter. We're waiting for that data. So we can have a better projection now directionally, yes, there is.

Our expectation in the payout increase it is not our objective to retain the results where the capital beyond necessary and that necessarily answered the way the opportunities of growth the opportunities for capital allocation. So we are always looking at that we're doing our plans.

And the scenario that is longer and it got better but there is an increment in the pay out.

Going to publish that information as soon as we have the data the operational risks in our best estimation might impact.

<unk> basis points in the bank it can be more it depends on the norm of the operational risks.

We anticipate that in our projection, but we are very optimistic and the idea is before the payout we should do that in the second semester as soon as we have the data we can share it with you.

Thank you Milton.

Next question, where does for Morgan Stanley Jorge Kuri, how hard would you see your thanks for thanks for joining our call today.

Hi, everyone. Good morning, and congrats on the numbers I wanted to ask you about them.

<unk> reform and there's the discussion about eliminating the IOC tax as well as potentially reducing the corporate tax rate and taxing dividend.

C has according to your disclosure as IOC has represented roughly at 10%.

Tax break for you guys over the last five years on average.

So in a scenario in which indeed, the IOC is eliminated and the corporate taxes tax rate doesn't change much what can you do to offset that 10 percentage point hit on your profitability.

That will go out the window with IOC.

Good to see you again. Thank you for your question, let me go with there. So our view today is constructive about our you'll see we don't know yet how the second phase of this tax reform will be.

Design and discussed in the Congress, especially in the Congress.

But we know and we understand that they are you'll see it has an important role, especially for a segment like ours that pays the higher.

Tax not only locally, but also worldwide compared to other banks and other sectors in the world. So I think the government has that very clear.

Understand the impact of the out Youll see especially for banks due to the capital base that we need it's not opex planning is because the level of capital we need to retaining the operation has to do with regulatory issues. So that's why we have a very capital intense activity in Brazil. So our view is that.

We have to wait and see of course, we always heard that the idea is to be a neutral before talking about the all youll see so if there was any change in deal Youll see we heard about the ace, but its something that its a practice in Europe , especially and you'll know that.

There are other ways of doing that you have somehow to reduce the corporate task otherwise I think it's gone up produce an effect that it's not positive at the end of the day for the society, because you'll have a risk to pass through to the prices and the cost of credit might be impacted by the increase or the reduction of the <unk>.

You'll see so I think it has a relevant role.

In our tax payments at the end of the year I think the government has been very clear and you won't produce the effect of the first true up the reduction also a leaky.

You do a major impacting day are you'll see I think it will be a repricing in the industry as a whole. So we are constructive. So at this point. If you ask me I think the government will try to do something very very balanced and neutral in terms of tax impact for us and for the industry. So this is all review I'm talking about the financial English.

Due to the impact them, but the level of tax that we already paid the level of corporate tax that we have in Brazil, 45, plus the other taxes that we have it goes more than 45%. So I think there you'll see has an important benefit, especially for the price of credit are.

And impacting their consumption in the activity so on and so forth some constructive about this topic.

Thank you Ms dental.

Proposal for Ghana and shut in on your next question, we have Danielle Vos from credit Suisse Hello Welcome.

Thank you for the opportunity to ask a question now I wouldn't make a direct for the credit for the.

Retail portfolio is growing 9% per year still so there is a high income average income is growing double digits right. So we have that massification operation. So we need to understand the profile of the curve in those segments.

<unk> continued to grow double digits in the high income and thinking about the math.

Should there be an improvement in the risk indicators, what is the strategy of eat out to regain share in that segment or not gaining this segment not gaining anything in that segment. If you can give me that opinion. Thank you well. Thank you for your opinion and the question. There are a few things well we are growing above them.

Low digits in the target.

Hi.

Income.

Well of course that there is a lower demand than what we've won that it could have been so there is a cycle of reduction of rates the demand tends to grow. It says these are clients, where the less credit.

Credit demand so they take credit in a very specific line.

The increase of the demand will come and there will be natural elasticity, where the interest rate. We can see that we're growing and it's not a credit it's engagement. It's important to leave the lever of the Brexit because defend alone credit it's a lever.

However for the penetration of the engagement with our clients and what creates value is the vision of the client and the relationship as a whole. So we can see in the wholesale and opportunity.

And the retail and opportunity to grow in individuals and companies, we have an opportunity to advance in our in.

And clients we.

We didn't explore the bulk.

Full client full bank.

Offerings for the clients, we always serviced the client with one product a variation of one product the relationship with the client, but we have the modernization of the platform and therefore and without these solutions. We couldn't do this engagement in this cross sale that is so important well give a full bank experience where the basis of the clients that already have a relationship with them.

And we know the behavior. So this is the great opportunity that we see we have a lot of work done there well thinking about eight hours a day and we've already given an opinion.

And we will continue having results on that and should there be anything relevant we will implement it we will discuss this with you and yes, I think that credit will be a lever there are opportunities for expansion and even in the segments. We have to be careful with the simplification of the high medium and low income because.

Every public there is a way to sort of a joke.

It services and seek opportunities even in the low income it doesn't mean that we left and we still have an important role.

In our portfolio, we did a derisking, but it's important that.

The release of 180.

Delinquency blinds and that could have impacted our results, but we still have 20, 75% and the client that has lower income that we have a very close relationship.

We have the JV is where the financial with.

The retailers and of course, we can work that client with it.

Product correct risks and we believe in that and in a more benign scenario up ahead, if it happens.

And we are here to make the decisions every single day, and we will obviously grow in our business.

And we will accelerate where we have to accelerate taking care that we can deliver upper formats that is sustainable throughout the cycle. So we are optimistic we know that individuals is something that will have increases in profitability.

In the near future. That's why we hold thank you. So next question will be from really Hernandez J P. Yuri Fernandes.

J P. Morgan Hi, Hi, everyone. Thank you for the results I got a question about the network. So I think they are the leaders of the market. We don't have that share because we don't have the industry data, but it seems that you're the leader So I wanted to see your strategy.

The radar or network, we see an increase in the revenue, but we know that this is very competitive I know that you'll have a customer centricity our opinion and we have two separate just the acquiring products, but we have the salt Lake.

Cut it cuts that should benefit the industry, so being very practical what is your opinion enterprise the networks should be more aggressive. So can you give us some color in that operation.

Thank you Jody.

I think that the numbers backs publishers in the numbers and on.

On August 10th the data will be publically about other results, but I wanted to tell you a few things individually we have to look at the balance of the network, we cannot compare anybody because radar for some time, it's not a vehicle that is separate.

Independent of the bank and it is something that is completely integrated.

And a couple of choice strategy without a detonator Jose this is reporting directly with.

With Android Rodriguez and it is completely integrated infrastructure. So this is the vision of the client yes, if we're gonna be leader as a second that's not wide Moon says, it's not the market share per market share and I can say that I've set in there in that chair 10 years ago our.

Is there and I know that dynamic I know how much the invoicing of big companies affect us and our strategy has not been a.

Renting market share or gaining market share because if that is the fight. This is a hyper price. This is a fight for negative margins for a contribution with the only objective is to increase the market share and this is not our objective and that's why we gave more disclosure in the growth of revenues there in the market share itself I think the most.

I chair as a consequence of our capacity to a catheter look for a capillary to be closer to the clients to deliver value we've done.

Very important review of the strategy of reader of the network that is very good we have an integration with the bank of retail which is working and this is a bridge for it. So it is the important thing it's not getting more people more effort all the time because that doesn't solve it because these are not discussions that happened we had neither.

<unk> proposition.

And you understand the need of the client and the network is not a standalone mono liner.

It's not only a company that is independent and this is in our value proposition with the relationship with the client. It has an important role for several other business lines, having a 100% of the acquiring business is a competitive advantage advantage and very few can do the integration that we can so we are very optimistic with the advances this is going to be a girl.

Great year for <unk>, we are going to have a great growth and result in a bank as a whole we do not see that cannibalization. If the dispute export markets are naturally we will see the renting of market share that will happen and we will now take part in that this is not our spirit our spirit is true create long.

Term solutions that are sustainable.

<unk> integrated with a value proposition for the clients.

Optimistic we've been having capillarity and a targeted segments. That's what we seek we could reprice with all of the events have increase of interest rate reviews that were done after a long time and with an N P S level and thresholds much higher than what we saw.

So we're very optimistic with the evolution of <unk> as a whole. Thank you very much.

Next question, we have Rafael rather from Citibank.

Welcome.

Hi, everyone.

I think that you did a very clear case on the capacity youre at capacity I'll throw out the cycle.

Of always managing well the reduction in increase of the entry of the rate of the interest rates in our financial margin, but recently quarter per quarter. We've seen the margin with the liabilities that is indicated by you as a beneficiary of the increase of the spread.

And Theyre well that line, we are going to see.

The opposite with the reduction of the.

The interest rate so.

Yes.

How should we think about that.

Is this.

I'm going to not allow the reduction of nims or there will be.

A higher impact so the margin of the liability it was very significant and maybe it can be.

Our buy and where the reduction of the interest rates. Thank you.

Yeah.

But liability is something that is very present in our capacity in our work.

By attracting our resources, we always capture investments and resources of clients and there is a double effect. It's not just the selic rate by the volume effect that we've done we have an increase in their platform of the offerings we have.

Migration with for the fixed income where the interest rates, we have more products of fixed income in a bank and we are.

We are ready to have the the client without conflicts due to the profitability of the product the way that we do the hedging of our liabilities. It doesn't allow us to be successful susceptible for the short term movements, one side or the other we had the pass through of the interests of the increasingly interest.

We didn't capture that in the line because we do our dynamic hedging with the longer daylight several vertices and we manage that I'll throw out the cycle. So on the side of the inquiry.

He didn't capture 100% of the increase there was a process that is still happening and when we get into a reduction cycle. It also well, it's a long cycle. So we kind of have those effects.

Sure. So that allows us to have flexibility in time. So we can do the active management and at the moment that the interest rates drop on the other hand, you start to have a better capillarity and crowded you'll have other opportunities that the cycle has cross sells with insurance for example, if you will.

He is the one that takes alone its associated showed the crowded so the more credit you capillary the most the more you'll get that since you have a reduction and adjustment in the portfolio naturally you have the insurance business that grows 25%. It had in the first quarter a bit of a slowdown in the loans. So the opportunity is.

One side or the other and so that's when you look at the long serious we have cycles of interesting increase in interest rates and drop in interest rates and we could defend Andy adjustments as that mix of the wholesale and retail mix in retail the adjustment of crowded.

It happens a slow slow case by case or the working capital adjustments that we do as well. So the bank can anticipate days event and protect itself in situations.

More skewed.

Skewed cycles, one side of the Arthur So we always have an additional challenge on one side or the other and this is the compensation that we will do in the management of the portfolio.

Thank you Milton.

Next question might be a PRA Bank of America, Hi, Mario.

Paul.

Yes.

Congratulations on the results. My question is also on the regulatory side, while we continue to hear a lot of satisfaction on the government on the interest rates of the credit cards I know that the banks are working but it seems that the news is always in the newspapers every single week.

Dissatisfaction of the government so I wanted to understand on the potential.

While the interest rates as a credit cards, how are the talks how do you expect that this will be developed and also I wanted to explore more of the impact of the different rollout impact how do you think that it impacts your operations. Thank you very much Mario.

Thank you for your question good to see you let me give you a few comments.

First of all the cap of the crowded card, it's not a cap it's rotary crowded rotary.

Credit in the interest rates on the credit card well, we invested the most over the last few months was simply in being able to share with the market. It's not the banks the market is the government the central Bank.

The well.

Well the retailers all the stakeholders I mean, so we can start with a common point from all of us at the inception of estrogen that diagnosis is important favorite a burn some banks did the work if everybody is taking part in this process.

Discussing in a very open way this and I think that this was very positive and constructive Congress government regulatory.

Well, we have retail every body credit card companies everybody knows about the challenges that we have some numbers we talk about the interest rates of the run rate of 100% Rotary Oh credit card in the individual's portfolio International is 3% of the result, so if we have.

Now, where we have another 2% so we're discussing 3% of the.

The whole portfolio no client is 12 months and downgrade because the regulation of the Central Bank defined that after 30 days you have to offer something better more deadlines better conditions, so the client and the rotary <unk>.

On average 18 days.

Staying at the credit card so that rate is virtual it's simply annualize, but it's not a real rate of his practice, but that's the one that is published and it generates the discomfort another information in Brazil, Venezuela, and 75% of the credit card portfolio does not pay for the interest well, 25% base. When you go to other economies.

And the.

Hum.

Well you can see that the.

70% pays for debt interest and 30% doesn't so there is a cross subsidy and I talk about this every single business, we'll try to do its interpretation we want to leave.

And unstable balanced to a stable balance and credit cards, and so what we want and I say this I just talked about are ready well you mentioned that we took over.

Well, we're going to see the numbers well, let you see that we are the biggest issuance issuer and acquiring business in a country. We are seeing this from a what we want to solve something that is structural I'm not going to defend well.

Well the receivables.

In the because radar has installment well we have to build a solution that is good for everyone that it is good for the consumer.

As sustainable that is good for retail I think that it has to be good for everyone. I think that this is the north we had great talks we are working in that direction and we do not believe that the cap is the best path. The impact is very relevant it's not good it's not good for the regulator for the.

Our Ministry.

The economy is not good for retailers.

Because this is an artificial lever so let's work with the root cause and that's what we believe our best information is that we are going to work over the next 90 days and about the disciplinary group to deliver a solid proposition for the central bank or the economy for the ministry of economy.

And the business well.

So we can advance this is.

Not easy.

And we are optimistic that there are mechanisms to advance and this is what we defend.

The stable.

Equilibrium with all the parties and Ministry of Finance et cetera, well. Thank you.

The next question is another Goodman from XP welcome.

Hi, everyone.

Good morning, Thank you for the opportunity.

Congratulations on the results in regards to the guidance it seems fair to reveal for the tariffs and the survey says given the starting point and the first quarter.

Quarter, but Milton was commenting on the expectation for the recovery in the capital market activities that guidance can be reviewed with a possible reacceleration that a stronger with the regaining of the GCM ECM activities can you comment on the expectations for the investment bank.

For the second semester. Thank you.

Thank you Bernardo Thank you for taking part in our call. Thank.

Thank you for the question.

Now we've done an exercise of sensitivity under review of the guidance. So our best information is that we can navigate the next two quarters within the same range within the new range that was published.

Considering a replenishing of the activities we are expecting good activities.

The second semester, but not enough that we can recover the first semester. So basically three lines that are suffering here, we have the activity of the market of the investment banking capital markets all of that that you commented.

We have the performance fees of the funds, we are going through a process of <unk>.

More difficult activities in the bonds.

More it's more difficult to win where the market with a high volatility and in the second semester, we are well the performance fee.

On the market depositions the managers, it's very difficult to foresee there is a third of the fact that you do with the credit which is the insurance for the loans.

Is intrinsic it is very much involved and the operation of FERC credit so as the credit activity restarts, we havent expansion also of the loans.

We do not think that this is going to be enough for recovered the recovery of the first six months of the year. So I don't I don't see a change in the guidance in the next quarter. So I would love to come here and say that we are reviewing the guidance.

Going up but this is the best information that we have today, but now within the geography that had been signed between five and seven which is what we published I think it's reasonable that the bank is going to be within those thresholds any positive surprises I think that the range will accommodate better before we give the floor to Gustavo.

Well, Matt Apache asked two questions about the couple of D. A.

Rotary and that umbrella and if he can answer about dozen rollout Mario.

Let's go back to the point sorry.

There isn't rolla is two points that are important first the engagement of the clients is very good the awareness level that was created is very solid and we've seen we realize that there is an increasing demand and federal channels seeking those agreements we renegotiated over 200.

And contracts.

The net net we actually had.

About 600000 individuals that are on the on the blue no longer into Red and the number may be as even over 700000 individuals. So the effect on the bank, we're going to see the dynamics in September the bids on to arrange one on the range to the stimulus is already there.

There so we expect.

Something in the range. One this is not going to be sufficiently enough from the standpoint of the bank to.

So federal way the cost of credit or the delinquency indicators I don't think that there's going to be.

A material impact, but I think it's positive for the society. It has an impact that is relevant for the clients and they help them in a very difficult post panamax cycle. So yes.

We expect the result, I do not see materiality in their results in terms of financial highlights.

It's very uncertain, because we're going to know the how the dynamic of the beta is going to be from September onwards, maybe.

I can give you in the future more contracts information more volume information, but what economically that means we have to wait for the next quarter, because I need more data okay.

Okay. Thank you Milton and now we go to the next question Gustavo Robin but are there Scott welcome.

Milton However, in Idaho, Milton Thank you for the opportunity.

To change gears, let's talk about efficiency I think that the bank has done an excellent work in that.

Well, if you look at a number of 37% of efficiency for a bank of your size and robustness of it all it really calls your attention to the numbers.

I wanted to understand if there is a target.

Is there is any objective here that we can work with or the next two three years in terms of efficiency can we think about 35%.

Something in that matter I know that there is a write off to the side of the revenue, but you know getting the revenue as it is just thinking about costs.

Can you still do something.

Maybe to seek the 35% or even something lower.

Gustavo.

I think that in Indiana. Our objective is to continue to improve if you ask me if its 35 36, whereas if it.

This stabilization of demand.

It depends on the dynamic of cost and revenue. We are working diligently I think that the revenues have followed us all through the cycle and the agenda for cost as well. So that's why we have the corner costs that we show and we absorb the run the bank and the inflation.

We saw the cost of customer service the reduction is very relevant so the investment digital investment of the bank.

As for as an objective to deliver the best value proposition and a better experience for the clients and offering that is more customized but also we have the objective of the cost of service in a market that is ever more competitive so we need to advance I'm not talking about a remote bank no. This is.

Not it but being a digital.

The company is to service the clients are in and optimize waste.

And in a way that technology allows you to do so so we are still in a redundancy phase operationally speaking.

As you migrate to the cloud you still had systems legacy.

In the data centers that are all so youll have operational efficiencies that will be captured we still have opportunities.

Or advances in the business model structure the model of service for their clients I'm optimistic I think that this is an agenda that we will continue to work with with a lot of emphasis.

Water after a quarter and we regardless of the topline cost is something to an agenda that has to be present all throughout every day. So once again I am constructive I don't know if there's stability will be 35, 36, where it will land, but that's the ballpark.

And time will tell it will really depend on the dynamic of topline and another thing is that when we give that the closer of costs. We first got all the costs in there. So we have expenses, we don't have expenses and other expenses. The dollar expenses. So the other segment that is important the numbers can be seen as that we then.

Our cost agenda, we do not forgo.

All of the provisions that are adequate ALDA peer Roes the labor expenses.

I mean, all of that is cost for the organization.

Always with the provisioning level that is very adequate if you look at our patrimony aligns our asset life, well that delivery of cost. It has no relation with the reduction of structural provisions that we understand that are important for the bank. So regardless, we continue to deliver powerful results.

So I think that it's important that we understand our provisions in the different lines and we can we can follow up on those lines we have.

<unk> on the long term, even though that my sacrifice and efficiency indicators from one quarter to another thank you.

Marius question Thiago Batista UBS.

Hi, guys.

Welcome.

You actually.

My question is credit card well you commented that you had a drop leaves I mean, we can see that.

E. A H the first dropdown in the first year. So I wanted to understand if that drop into clients was because of a change in our mix and our high income or is it the same base and you could see that improvement well also with that when I look at the proper.

Stability of your business that this quarter with single digit I think it was.

10, and then it dropped quarter on quarter. So it was single digit that's water that improvement improvement in profitability goes through credit cards and credit.

Credit cards are relevant actor in credit.

Well several questions here, let me do a deep dive that we look at the financial system National system and expansion of the delinquencies are above 90 days. So when we look at well hours, we reduced it to <unk>.

Ante basis points. So we are in we are.

Outside of the curve of the behavior of the market. So the portfolio drops also nominally the finance also drops and.

So it shows that the denominator effect has a role and we still reduced well there is a mix effect that is very important I think that we did a derisking derisking of the portfolio and we are growing in the segments that we have a level of return that is more healthy for the portfolio further new.

Works that are going to be produced after that time does take time.

It's difficult for you to take to change the portfolio from 90 day, but all are all of those periods.

Periods.

Well, we have the mobile 30 all of these are indicators are healthy. So we have the mix there is important here.

For the Derisking of the portfolio than just looking at the same base and imagine you Hollywood work and since our low income operation, Indiana has one of the levers as a credit card and as I said, if we kept a constant mix credit card has a role in that mix, we would have worse in our delinquency indicators in 100.

Haiti.

Points.

Lower profitability.

The business credit the business of credit cards that can be separated so as the with the <unk>.

The checking is that it's been growing it's been it's very adequate we're very happy with our results.

With a market that is the open ocean.

We have an adjustment in the portfolio.

It suffers.

And the finance and.

In the middle of the path, but both businesses and as the lower capital cost not the account holder the others. So our work is to regain the so we can go back to the hurdle of the capital that takes some time and that was our biggest vendor of our credit.

The size of our portfolio is disproportionate in regards to the market in regards to individuals and the size of our portfolio. If you consider Carrefour bank, 30% of market share. So they took a very relevant number.

That generates higher impacts the credit activity and the business model, we publish 10%. So it's not single data, but it's a photo charter 10% on the other how do we have an important expansion in the revenues of services and insurance showing that the credit of the of the credit card for them on.

Your line or are the one that doesn't have a full bank offering it's very dependent on credit.

But for the other businesses the credit is an important lever for the cross sell so we can capture all of the value creation A&D revenues of insurance and.

The services and the other big opportunity that I just mentioned our expectation is that we can work. This base, leaving a vision that is not for a bank to a full bank with bank with clients that we have records and that we know and they have <unk> that are close to zero there of the organization, where we have to do is <unk>.

Mentor businesses.

Here, we have an opportunity is not just a challenge from the credit standpoint business opportunities that are very strong and we maybe have the biggest base biggest basis of clients that are already.

The bank that are not export and we have an integrated modernized platform and we can do so.

Thank you Milton.

Now next question from Rosman BTG.

Okay.

Everyone. My question is a follow up of Thiago question and also the answer of Milton about that client of the open Ocean Open sea, we've seen the banks suffering.

Where the open ocean.

The finance there is a digital bank that has performed better so far so I wanted to understand what is the relevance of that client that is the open Ocean open sea and a result of it a veto bank I think the number is small if you can quantify please and how do you work to transform this client and our fall.

Bank.

Being the main one do you need a migration to add the system is ready for that all the technological background is ready and set up if you can tell us more about that theme I'm sure.

Or do you fear rosman.

I think the first message here that I think that it's important you chair is that that client. If you look at the bottom line of the bank. The last line. It's a client that added very little value to the readers are much less arjo than what we've seen and these typically operations in the past call. It always.

Returned their cost of capital so it's a director for the arrow, but it helps and generates value in terms of scalability for the operation and the results and obviously with this cycle. The external channel is more challenging not just worth gratify with vehicles other businesses.

On the exclusively on the external channel. So there is a reduction and the contribution for these clients where the bank is specifically in terms of profitability, even though there is a positive income the profitability isn't offender.

We could regardless, we could absorb all these effects in the balance sheet as you can see.

So I see that on the other things there are opportunities for you to transform our clients do you have a single a.

Opinion, a review of our product and then we can engage in the the decline and you can be the main bank of the clients and other accessory bank because the accessory bank, we have an effect in credit card term of sudden death.

So you'll have a client that is using your credit card until the day that they cannot pay their credit card in the door and they are going to use the other credit cards that they had so the relationship and the engagement with the company is key if eurobank centralized where you'll have the day to day, where you have mechanism of debit in the car.

Holder and you have an integrated work with the client you also benefit from the cost of credit you tend to be the last bank debt are not naturally going to do.

Nokia database. So they tend to preserve of course the income of the client is the income of the claim or they try to preserve their relationship with the organization and a bank that is the main bank. So to me is a theme of being the main bank, you'll need us technological solution. So sure you do not do that with brute force its not a call center, it's not going to be an in app.

I'm trying to do a phishing no no no the fishing in the sense of triangle originated transaction with that client, it's all going to work.

But if you build an integrated experience that this is the work that we've been doing.

It doesn't matter if the client gets in where the channel with a product and what is the product that they chose to do a relationship with the bank.

And that logic die the checking account is the only center overview of relations with the.

Client you'll have a credit card you have savings I mean that the customer will start a relationship from where they once you start if you can throw a super App you can do it in an integrated offering for the clients that we think will work it changes the efficiency changes and this is what we believe we are not there yet there is an important.

Happening.

Yeah.

But we will get there and this might be a watershed moment, we didn't we never had the tools and the technology to do that captured.

Naturally this integration. So now I think that we have a solution that is much better to generate that engagement with our clients and our client there is none with her behavior score the client that we have sufficient data to do the credit decision. So I am optimistic the contribution can be important and I think that the client contributes very little.

In terms of bottom line because of the cost of credit they have unimportant ROE and the cost of credit as a whole and this is the biggest offender portfolio than most often at a cost of credit is the credit card portfolio.

We are delivering our cost of credit of death is where the biggest portfolio on the market two times, maybe the second.

Second place a big difference and still working with the cost of credit that the operation can absorb so this shows how much opportunity we have on the other hand, so we can advance.

Thank you Milton.

With us are couture la boxer from Goldman Sachs Hello, Tito Thanks for joining the call hi, Thanks, Renata Hamilton how are you well. Thank you for the call and taking my question My.

My question just to get a little more color on the NII you know very good performance in both the market NII in the client NII. This quarter I guess in the context of your rates are coming down now how should we think about the market and I and how that will evolve in a lower rate environment, but also the client NII right as you potentially.

We accelerate loan growth into next year, she had declined and I gross.

Well benefit from a lower rate environment as you grow the loan book more than maybe the mix could potentially help if asset quality begins to improve just to think about.

Both the marketing client and I in the context of a lower rate environment into next year.

Thank you to you too good to see you Oh, I think a little bit what I was mentioning before I think.

You have to look both sides, okay. The investment side and also the credit side.

And we've been able to deliver a good performance throughout the cycle, because we've been balancing a lot of the portfolio.

Decisions like that so in one way you have some positive from the investment side with interest rates going up you have more volumes, we think for rates going up but then when you go in the cycle. When you have a reduction of the interest rate you will see an opportunity in credit.

In front of US where you can eat calibrate if you can bring a more balance to the mix of the portfolio can take more risk you can go to product the mix of the retail you can change the mix of the wholesale can change. So then it's always a playoff taking a little bit more risk scenario that allows you to do so with metal batteries spread.

Then in the other side you may lose a little bit off the benefits not only investments on the liability side. So this is the balance that we've been pursuing a I think in the mid to long term, it's better for us to work in our environment, where we have a lower interest rate. So it's not true when they say that interest rate.

High interest rates is good for the banks. It is good in the short term you'll have some benefits in the short term, but the cost of credit and the capability to increase portfolio reduced so strongly the cost of credit inquiries and the capability decrease but at the end of the day on the balance of that you'll have more negatives than positives. So you have less project.

The wholesale market.

Lots of work there. So we are positive thinking didn't downturn, we will see more activity in the downturn of the cycling the reduction of the interest rate.

The economy.

Follow me evolving in the coming quarters, we see more positives and negatives and then if we have to adjust the structure of the cost.

The portfolio, we will do so whenever we feel comfortable to improve our performance so I'm positive about that.

And then we have to look at adjusted NII or just to name.

To understand how we can manage throughout the cycle and the NII.

There is two impacts, especially for this year one of them is the average balance of the portfolio. So we cannot look at the picture at the end of the cycle at the end of the quarter, because we still have an average balance higher than what we see especially when the portfolio reduces.

And in the second semester, we expect more activity in general we see a good pipeline on the wholesale side, where we can bring more economics to the operation and this will benefit as well our NII. That's why we keep corporate for NII, even though the mix may change a little bit.

Thanks Nicole.

Actually for the next two questions is what we're gonna stay in English.

Next question comes from Nicolas Riva from Bank of America, Hello, Nicholas.

IRA and I thought on hi, Milton Thanks for the chance to ask questions.

I have two questions. The first one on Capitol Hill Milton you you alluded to this positive impact you are getting on capital beginning July 1st from some changes in operational risk lower operational risks.

Can you estimate the positive impact of a 100 basis points. If you can provide a bit more color on actually what what is changed regarding operational risks.

So that's my first question and then my second question I know that I have been asking this I think that we've seen in past earnings calls but.

I wanted to ask I wanted to confirm if the if your strategy around the call options on the tier one and tier two bonds still held in the sense that with the theater to once.

With the 2029th in the 2031, if we should still expect that what's most likely to happen is that you would call. These bonds.

Being that they start losing capital treatment if not called.

And two with the 81 bonds, if we could.

I expect that in that case.

You would only call them. Once you can issue a new bar at very similar coupons for the ones who are currently paying on on the burps. Thanks.

In Q, so on the operational risk to your first question.

I think there was a public calls hoping to be coming from the regulator, telling us how if this is not a Brazilian discussions with our bank basal discretion.

And of course, there are some specific items for Brazil.

Some discussions that we're having with the regulator as well to avoid double accounting for some specific topics just to give you an idea when we do labor profusion and when we do tax provisions at the end of the day, some operational risk, but as those are two very relevant lines for the bank, we do on our expected loss provision.

We provision in the balance sheet, so that when there was a discussion between the central Bank. If there is this I L. M. That's an index that can be won or can be more than one depending on how the central bank regulate step that we say that there's a double counting because whenever I provision and I expected loss model I take it from capital.

So if I take that in consideration when I look my.

Statistical loss going back then it will be double accounting, that's why we discuss these highlights I L. M equals to one and then the central bank and regulate the level of provisions in pillar two of Basel area and Basil a guarantee that we have the sufficient capital for those lines in those.

Specific provision so I.

I think this is the major impact in terms of evolution on the regulation that has to do a lot with your historical has to do with new models. I think it's an evolution that is happening would why wouldn't it make sense and we believe so but we have some comments and then of course the industry throughout the supra and also the banks have been conversations very close.

With the regulators, so, let's wait and see our base case, it's a 100 basis point, if it's the worst case could be 180. This could be a number but are we work much more with a 100 basis as the base case due to all the discussions and the logic behind this evolution on the basal three.

No risk.

Talking about the bolt.

It keeps the same strategy so whenever we get close to the co option, we will understand if it's better to access market or.

If it's an economic perspective, it's better not to exercise the call.

This is what we've been communicating to the market anticipating including anticipating the communication guarantee that we've been very transparent on that.

The chip through the same way around as you've just mentioned if we start to lose the capital benefit because of the five years close to their maturity vendors start to reduce 20% per year. Then we will decide if it's unexpected or not.

Tier two we don't have an issue relevant different territories you can see in our figures we are very comfortable with the level of capital that we have so on the economic side. This will be the key lever to make the decision we will keep pricing it's difficult to anticipate the market may change to interest rates may change.

But today it forth.

Not to exercise the call. We can do that at least 100 5200 basis points lower than if we would go to the market, especially in a market. That's been a lot of discretion software. They can reduce reuse event 81. So we don't see a very open market for that and we don't know what level of price new ones.

<unk> will be priced so we'll be monitoring the market and if it's the case.

You are not exercise the call we will depending many issues many.

Leavers, but the cost is the most relevant one.

Thanks, Peter and just before we move to the next and last question I just want to acknowledge that he got a question via Whatsapp from Alexa, who they're from Jefferies and she was asking the same question about th ones. Therefore, we would pass the question to you, but because nickel was already asked so we're going to we're going to take that us take that.

Is that sort of synergies exactly efficiency.

Right. So the last but not least we have with us Carlos Gomez Lopez from HSBC.

Carlos Thanks for joining the call.

Thank you for extending the call and taking my question.

So I'm going to do a minor issue.

It is also about tax can you comment on the possible fit to refresh that refund the reform on indirect taxation and whether it changes how you manage the bank or in the future.

Do you expect the cost base might be do you see any anything tangible there.

And also related to taxes as part of the tax discussion is there a possibility that they will review the way in which our foreign subsidiaries.

And therefore, how you envision your foreign business. Thank you.

Well. Thank you Carlos good to see you again. Thank you for your question Olivia G T a reform.

We have to separate the bank all three major business.

Business lines, all services piece and so what.

We are in the general provision so whatever it's the rate if it's 25, that's what's been seen we don't have the numbers defined yet will be paying 25% of services and fees.

And it's going to be exactly like any other company, a drugstore or anyone so what makes us complete make complete sense, but then we have two other provisions that we are in a special regime that's to be regulated one off that is the spread as you know.

No country in any country that was the V. P was implemented.

The spread is not taxed.

Today, just to give you a number the cost of credit the rates that we charged from our clients 20% of that is explained by the physical things, which is the actual regime, where we pay for 65 over this spread so the VA T on that side, what we've been hearing is that the idea is not to enhance or to increase.

That fruit, if you're a T because imagine what would happen if the 465 goes to 25%, even if you've seen our non cumulative regime.

You are huge inquiries. So this is not the idea. This is what we've been hearing because this will produce oh, the worst possible effect that we want to price and then we were in fact very strongly bid activity. So this is the second word and the third one it's the payment.

Ecosystems and at CNA special regime, as well and it's very easy to explain so we were discussing about interest rate on credit cards, but imagine if the V. A T.

In fact, the interchange you don't have any pass through but interest rate on the credit card business. So that's why we want to have a special discussions because there is no pass through through the cycle in the chain on the V. A T over interchange. So the idea is that we can take a look on that otherwise we may have to gross up that from the Brent.

And to have a new interchange fees.

Published or <unk>.

We'll go to the interest rate on the revolving on the installments without with interest. So you can produce a very strong impact. So that's the idea what why it separate so let's see we still have the discretion on the Senate. If there was any change it will come back to the lower chamber. So we have to wait and see.

Understand the real impact, but mostly it will make the activity a little bit more expensive. There is no other way of doing social most part of that will go to price there is a pass through okay.

They'll all be in the other side on the reform we don't have at this moment.

A very deep knowledge about what would be the second chapter of the second chapter of the tax reform.

We have to wait and see if theres a lot of discussions going on I think the focus on the priorities to approve the actual the one that it was approved already in the lower chamber, So, let's wait and see.

So we can have a little bit more color.

There is there is a project that is in the Congress, but it's an old one so we imagine that some reforms.

Some changes will be done.

By the technical team and a lot of discussions in the coming months involving all the segments. The sectors. So this is how I see that so let's wait and see.

Thank you.

Commercial fees, I said, Oh Trump it won't reference cut towards the critical seconds or at least all 14 questions. There was the last question and with that we will close the Q&A, but also we will call the earnings call, but before we say goodbye.

Going to answer all questions that we received via Whatsapp, we got a lot of questions.

Thank you very much for all of you that were in our call Milton the floor is yours.

For your final thoughts thank you.

It's always a great pleasure. Thank you once again for <unk>.

Here they can part in our call and it's good that we have an open communication spend communication I. Just thank you about the recognition that we got and with a lot of humility that says the word everybody is.

Certain of the challenge is everybody is working with a lot of energy.

To continue to deliver the results and surprising our customers. This is our agenda for transformation. So thank you for your time for your questions always I would like to thank the 101000 youtubers.

I do.

Strong work with high levels of energy and we are at a special moment very happy with what we delivered but certain that this isn't a never ending game, it's not going to be over the next this quarter, there's going to be over the next few quarters, we're going to discuss the perspective. The publications are always welcome with.

Focus and discipline and energy so we can deliver that level of profitability and performing above the average of the market. Thank you very much and we will see each other in the next earnings call.

We will see each other into bilateral meetings. Thank you.