Itaú Unibanco S A : Audio transcription 2Q22

Results 2Q22

Opening

[Renato] Good morning, everyone. I'm Renato Lulia, Group Head of Investor Relations and Market Intelligence at Itaú Unibanco. Thank you very much for participating in our video conference to talk about the results of the second quarter of 2022.

We are broadcasting this event directly from our studio here at the Itaú BBA office at Faria Lima. I would like to give some instructions for the best use of our meeting today. For those who are using our website, there are three audio options on the screen. All content in Portuguese, all content in English, or in its original audio.

For the first two alternatives, we will have simultaneous translation. To choose your option, just click on the flag in the upper left corner of your screen. Questions can also be sent via WhatsApp: just click on the button on the screen. For those who are using the website or send a message to the number (11) 94552-0694.

Today's presentation will be available for download on our website and, as always, on our RI site. Now, I will give the floor to Milton, who will start the presentation of the results, and then I will come back to moderate the Q&A session. Milton, over to you!

[Milton] Good morning, everyone. Welcome once again to our earnings video conference, this time to talk about the results for the second quarter of 2022. I will go through an information session and some slides, and then we will have our traditional Q&A chat with investors. Thank you very much.

Slide 2 (quarter highlights)

So, we released a result of BRL 7.7 billion. It is the recurrent managerial result with a growth of 4.3% in relation to the previous quarter.

I want to draw attention to the ROI of 20.8 in the consolidated period. However, in Brazil, we are operating with a return of 21.6, which is strong. About the loan portfolio, I would like to highlight that we reached BRL 1.84 trillion. There is a 5% growth in the consolidated period, 5.5% in Brazil. I will detail it shortly.

The annualized average margin reached 8.4%. It has a growth of 0.5% in the quarter and 9.2% in Brazil, with a growth of 0.3%. Our delay rate, measured with delays of more than 90 days, reached 2.7% on a consolidated basis, an increase of 0.1%, and 3% in Brazil, also with a growth of 0.1%.

Finally, our consolidated efficiency ratio reached 40.8% in Brazil. Another quarter in which we reached the best index of the series here, 38.7%. These are some of the highlights. I'll go into a little more detail on the next slides.

Slide 3 (credit portfolio)

Speaking specifically of the credit portfolio, "individuals" grew by 7.2%, driven by credit cards, which affects consumption, increasing demand. So, this boosted credit card billing a lot, which has a natural impact on the portfolio. Personal loans growing by 6.8%. Within the personal loan portfolio, I would highlight... We have overdrafts, installment plans, and compositions.

But I would like to highlight the overdraft growth of 8% and 7.5% for installment plans. Both lines have grown above 50% year over year. But the main highlight is that 80% of this growth in the quarter came from the Personnalité and Uniclass segments.

Just to remind you that we went through a valley in these portfolios, and we have been recovering over time. Payroll-deductible loans had an important effect in the quarter, with a 5% increase in the payroll loan margin. So, it had a strong effect on the quarter. It should continue to grow over the next few years but at a different pace.

I would also draw attention to "large companies", with a growth of 4.1%, causing the portfolio in Brazil to grow 5.5% in the quarter and 25% year over year. Considering Latin America, this portfolio grew by 3.2%. But excluding the exchange variation, it grew 4.5%. Some important information about consignment. We had strong growth in the public agency. You may remember that I've been saying that it was precisely in this payroll business that we had our lowest share.

We repositioned the bank, we have been working with much more emphasis and, with that, we have been able to penetrate a lot in the public agency. It grew 12% in the quarter and 90% year over year. I also want to draw attention to the growth of micro, small and medium-sized companies. They originated a growth of 9.4% in the quarter, but 72% of it in this quarter was thanks to companies with higher revenue. So, the profile of our customers, where we have grown our portfolio the most, are companies with higher revenues in the micro, small and medium-sized segments. Finally, we announced a goal for the market to reach BRL 400 billion by 2025, structuring capital market operations and credit origination for sectors with a positive impact on ESG.

We have already reached 56% of the target, which means that we ended the quarter with more than BRL 224 billion in structured and disbursed operations. So, we continue at a very strong pace to meet our goal by 2025.

Slide 4 (financial margin with customers)

We had a very strong quarter in terms of financial margin with clients, as you can see from the numbers.

The financial margin in the line grew BRL 1.9 billion, up 9.7% quarter over quarter, a very strong result. But the important thing is that in the core, where you have the volume, spreads, operations in Latin America & Others, and funding, we grew by BRL 1.6 billion. A growth of 8.8% driven by the average volume, as you can see, but with an impact on all lines, including product mix, a greater number of calendar days in the quarter, spreads, and, above all, liability margins with interest rate increases and Latin America & Others has other launches that are also in this line.

And our working capital, which is allocated to the financial margin with customer line, because it is the capital used for loan portfolios with customers, also grew by BRL 400 million. So, a very solid growth. I mentioned earlier that our average annualized margin reached 8.4% on a consolidated basis. In Brazil, we reached 9,2% with the increases that I have already mentioned to you.

Slide 5 (financial margin with the market)

Speaking of margin with the market, I think we have good new, given the scenario. We have been saying since the beginning of the year, when we made the guidance, that this year would

be a more difficult year for the market margin due to all the volatility, the external scenario, interest rates, and rates opening. Still, we managed to generate a good result. If you look here at 0.6, BRL 600 million in total. Remember that here we have the cost of the capital ratio hedge, which has cost us around BRL 500 million per quarter.

The guidance given at the beginning of the year would cost around two billion, which means that the margin alone was BRL 1.1 billion in the quarter. A good result, considering all the challenges. Obviously at a slightly lower level, but much closer to what we saw in the series. Remember that last year we had some exceptional quarters in the margin with the market.

Slide 6 (services and insurance)

Services and insurance, let's see. Credit and debit cards growing at 6.6%, very strong. It has an effect of more invoicing in the issuance, but it affects the acquisition as well, not only with more volumes, but also with more penetration of financial products. I wanted to draw attention to the resource administration line. We had an exceptional quarter, excellent results, not only in the usual management but also in the performance of our funds, which had an important effect this quarter. We also had a very good quarter in economic and financial advice. Although the equity capital market is weaker, we saw a super opportunity in the fixed income market. We had solid results.

And the last line to which I would like to draw attention to in this table is insurance. In the insurance result, we reached a 1.8 billion margin. But what I would like to point out is that we have some launches in this line. We have the result of the core insurance operation. We have the actuarial result, the imbalance between assets and liabilities, and inflation indexes, which is the liability adequacy test.

We also have equity in the earnings of Porto, which has already been disclosed. So, in our core insurance operation, we have had a very expressive growth. I've been telling you for some time that we were having consecutive quarters of excellent growth. So, as you can see here, earned premiums grew 23.6% in the quarter. And the recurring managerial result grew by 88.7%. Another rhythm, another level. Good expectations for insurance operation. Card, as I mentioned before, grew by 33% year over year, and in acquiring, 22.1%.

Here, the highlight was our acquisition of Avenue. It is at an even smaller portion than the control but structured to achieve it in some time. It will complement our investment ecosystem, having an additional offer, and a new value proposition for our clients who want to invest in the international market.

Slide 7 (credit quality)

Credit quality. Good news. The delays from 15 to 90 are stable, as you can see, both in Brazil and in Latin America, as in the overview. In Brazil, the short delays for individuals, companies, and large companies were very well behaved, which is good news, given the scenario, and the challenges that we have seen. In the long delay, as I was already anticipating, we had a slight total growth of 0.1%, both in Brazil and in Latin America.

Looking at portfolios, we had a small growth in individuals, which I have been anticipating since the third quarter of last year. On the other hand, when we look at small and medium-sized companies, we had a certain decrease of 0.1%. In large companies, 0.4%. So, I think the delay rates are well behaved. We have challenges ahead, but I think we've managed to perform well despite that.

Slide 8 (quality and cost of credit)

As of relative indicators, there are two important pieces of information. All the delinquency rates that you saw on the previous slide are not impacted by portfolio sales. There were no portfolio sales in the quarter. This is very important information because when you sell active portfolios, it has an impact on the delinquency rates. In terms of credit quality, we also did not have a relevant increase in renegotiations, which is another lever that keeps our delinquency rates at lower levels.

Then, you can see here that this portfolio had a very small nominal growth, only 3.2%, which we call a renegotiated portfolio and that is great news. Growth of only 2%. Despite this, with very solid coverage of 195% over delays above 90 days.

The cost of credit reached 2.8% of the portfolio, still at a lower level than what we observed in the pre-pandemic, reaching BRL 7.5 billion. Nominals are expected to grow with much more portfolios. So, analyzing the relative indicators, it is much more important to have this relative measure.

We have good news about flexible portfolios. We reached BRL 24.1 billion. This portfolio has been dropping over time, we were amortizing around four or five billion per quarter. The speed is still very good. We will continue to disclose this portfolio. The good news is that 65% of this portfolio is backed by Real collateral, which is great. And we have a coverage of 267% on arrears above 90 in this portfolio. There was this drop of 11.2%, therefore, it's performing great. And there were no renegotiations in this portfolio, which is its normal behavior.

The coverage ratio is pretty good. We had a slight drop in Brazil and retail. Remember that we operated from 2015 to 2019 with a coverage ratio of 167% in the retail portfolio. We operate today with 195%, still well above what we have operated in the past. And we continued to provision 100% of NPL Creation in the quarter, which is also good news. In other words, the balance sheet is very well protected and well provisioned.

Slide 9 (non-interest expenses)

Non-interest expenses. Good news too. We had a growth of 6% in the semester and 5.6% in the quarter. The inflationary pressure, measured by the salary readjustment, IPCA, and IGP-M, is above double digits and we have been able to deliver a very solid cost agenda, with an efficiency program, and bring the bank's cost index to a very adequate level. A very solid efficiency index, as I have already mentioned.

We reached the lowest level, 38.7% in Brazil, and 40.8% in the consolidated. A downward trajectory, which is great news. But all this without ceasing to invest in the bank's core. Our cost agenda is tactical, strategic, and long-term oriented. So, if you look just to the core, we grew 0.9% in the semester, comparing the first half of 2021 with the first half of 2022. But in this same period, we have more than one billion in investments, going through the expenses line. And all expenses are following those lines. There are no other income and expenses. It's all included in these balance sheet lines.

So that's how we've been able to perform. It shows our discipline, focus, and concern for the future.

Slide 10 (capital)

Good news also about capital. We had a stable capital ratio here in this period. We went from 11.1% to 11.1%. So, the difference is decimal. Our level 1 reached 12.6%. The profit represents a 0.5% aid. Risk-weighted assets consume 0.3% and naturally have other effects listed here, such as prudential adjustments and the purchase of XP stakes.

The good news is that the exchange rate had an important variation, an appreciation from the first to the second quarter. And our index hedge has been very efficient. Its cost is at the margin of the market, which I have already mentioned. But if you look here, we are insensitive to the exchange rate, which was not true in the past. So, the capital ratio is quite defended with the index hedge.

Slide 11 (guidance 2022)

Finally, I would like to draw your attention to the guidance. What is the story we tell in it? Guidance is the management's most optimistic expectation with the challenges we see and the results we expect for the rest of the year. Therefore, we want, whenever possible, to be proactive in bringing you adjustments based on new information.

We understand that it was important to make some adjustments to four lines of guidance this quarter. The information is here. We changed the loan portfolio guidance. We imagined a growth of 9% to 12%. We are revising it to 15.5% and 17.5%. When we look at Brazil, we imagined a growth of 11.5% to 14.5%. We are talking about growth between 19% and 21%. The financial margin with customers was between 20.5% and 23.5%. We are revising to 25% and 27%. When I look at Brazil, on a consolidated basis, it was between 22% and 25%. We are revising it to 26.5% and 28.5%. Looking at the cost of credit, we have more growth in the portfolio and, naturally, it is necessary to make some adjustments to it. And the relative performance of net interest income has been very positive. We go from 25 to 29, to 28 to 31 billion in the consolidated. In Brazil, from 23 to 27, to 26 to 29 billion.

Finally, we know that increasing the portfolio, doing more business, and being closer to customers naturally generates more cross-sells. So, we understood that it was also important to review the line of revenue from services and insurance. We have had a better performance than we initially imagined. So, between 3.5% and 6.5% in the consolidated to 7% to 9%. In Brazil, between 4% and 7% to 7.5% to 9.5%.

On the other lines, both the financial margin with the market and the non-interest expenses and tax rate line were maintained.

So that's what I had to share with you, but I wanted to reinforce an invitation. On September 1st, we will hold Itaú Day. We inaugurated this format last year. The theme, as it has to be every year, will be about customers and we want to bring you much more details about what we have been doing, our strategy, and to tell you a little about the results.

These events are the thread of a story. We want to show what we said in the past, how we are delivering what was said, how we imagine the future, and how we imagine making it a reality. Implementation is as important as the story that is told. And I think we've been successful both in the narrative and the execution. Currently, 67% of our customers are engaged. We will explore this concept with you on Itaú Day. We gained more than 2.1 million new engaged customers, based on the metrics we track. Engaged customers grow faster than total customers. So, more than having customers, it's important to have engaged customers. And engaged customers are