Good morning, ladies and gentlemen. Welcome to Itaú Unibanco Holding conference call to discuss 2019 first quarter results. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call, please press the star key followed by zero. As a reminder, this conference is being recorded and broadcasted live on investor relations website at www.itau.com.br/investor-relations. A slide presentation is also available on the site. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Private Securities Litigation Reform Act of 1995. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors.
With us today in this conference call in São Paulo are Mr. Candido Bracher, President and CEO, Mr. Milton Maluhy Filho, Executive Vice President, CFO and CRO, Mr. Alexsandro Broedel, Group Executive, Finance Director and Head of Investor Relations, and Mr. Marcos Magalhães, CFO of Rede. First, Mr. Candido Bracher will comment on 2019 first quarter results. Afterwards, management will be available for a question and answer session. It is now my pleasure to turn the call over to Mr. Candido Bracher.
Well, good morning, everybody. Welcome to our first quarter 2019 earnings conference call. We will start the presentation on slide two, where we show the main highlights of our performance for the quarter. You see that our recurring net income was BRL 6.9 billion, which represented a 7.1% growth when compared to the same period in 2018, resulting in a ROE of 23.6%. This performance was mainly related to an improvement in our financial margin with clients, which was partially offset by a lower financial margin with the market. Our cost of credits remained relatively stable, and non-interest expenses were up by 4.1% below the inflation for the period. In the next slides, we will provide further details on these figures.
On slide three, we show the value created by the bank, which amounted to BRL 2.9 billion on the quarter, in line with our focus on creating value for our more than 1.2 million individual shareholders. Actually, the BRL 2.9 billion is a record figure in our history. On page four, we show that our total credit portfolio grew 7.7% over the last 12 months, driven by individuals and SMEs which have grown 12.7% and 17.6% respectively. Origination continues strong in both portfolios, resulting in richer credit mix, which will be shown in the next slide.
In addition, we observed in this quarter an upsurge on the corporate origination at 18% growth, while corporate bonds issuance remained solid. On slide five, the BRL 1.1 billion increase in NII was mainly due to the change in the mix of our credit portfolio as shown in the previous slide, and superior average balances.
This NII performance resulted in an NIM of 10% for the quarter. On slide six, we show our financial margin with the market, which amounted to BRL 1.2 billion, well in line with our expectations and guidance. Turning to slide seven now, we show our credit quality information. Short-term delinquency increased 13 basis points in the quarter due to seasonal effects on the individual's portfolio related to a higher concentration of expenses for households such as cars and housing taxes, among others. It is important to mention that despite this increase and the change of the credit mix towards higher interest bearing loans, short-term delinquency ratio is below the level seen in the same period in 2018. The 90-day delinquency ratio increased 11 basis points in the quarter, but is also below the level seen in the same period in 2018.
The increase in the quarter is due to a couple of cases on the wholesale portfolio that were already fully provisioned. This event led to the decrease of our NPL 90-day coverage ratio as we have been anticipating. It is important to highlight that the coverage ratio for the retail NPL 90 days continue to show stability despite the change in mix towards higher risk and interest bearing loans. Lastly, the cost of credit ratio increased 30 basis points in the quarter, as would be expected given the credit portfolio growth and acceleration of the change in credit mix in the period. Slide eight shows our revenues from services and insurance, which grew 1% when compared to the same period in 2018. This small growth is a direct result of the competitive environment, especially related to the acquiring business.
Also of note is the impact of the regulatory cap on the interchange fees from debit transactions, which started to impact our operations on the fourth quarter last year. Turning now to slide nine, we show that our non-interest expenses grew 4.1% when compared to the first quarter 2018. Our cost-to-income ratio improved to 140 basis points on the quarter, but is still above the same period of last year. We intend to continue to work tirelessly to keep costs under control and improve operational efficiency. Slide 10 now illustrates the strong organic capital generation of the bank as we finish this quarter with a Tier 1 ratio of 14.6%, coming from 13.5% in the end of 2018. The main driver of this growth was our profitability in the quarter, as well as the lower density of our risk-weighted assets.
Also of note was the approval by the Central Bank of Brazil of the additional Tier 1 instrument we issued on the local market in the beginning of the year, which added 30 basis points to our capital ratio. Slide 11, we talk about our new initiative on the acquiring business. Rede will no longer charge interest on the prepayment of credit card transactions, which will be paid in T+2. This is valid for credit card purchases with no installments and to clients with a conta domicílio and annual revenue up to BRL 30 million, which covers about 98% of the market. We see this as a way to better serve our clients and harmonize practices with international standards. On slide 12, we present our revised guidance for the year. We revised the guidance as a consequence of two management initiatives.
First, the new acquiring payment arrangements with Rede previously mentioned. Second, a more rigorous revision of our cost structure, motivated by our perception of a more modest macroeconomic growth for 2019. As a matter of fact, in the beginning of the year, we estimated GDP growth at 2.5% when we gave the initial guidance, and now our economic team estimates GDP growth at 1.3%. Therefore, we revised downwardly our expectations for financial margin with clients and also fees and insurance. Additionally, we reduced our expectation for non-interest expenses growth for the year. When seen in aggregate, these changes do not have a significant impact on the guidance implied net income. With this, we conclude this presentation and are now open to any questions you may have. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star key followed by the one key on your touch-tone phone now. The questions will be limited to two per participant. If at any time you would like to remove yourself from the questioning queue, press star two. Our first question comes from Jorg Friedman, Citibank.
Thank you very much for the opportunity, gentlemen. I have two questions. The first, it became evident in this quarter, and according to what Candido just mentioned, that the environment is tougher for revenue growth and the bank is trying to curb costs to defend profitability. However, I was surprised by the significant cut in the OpEx guidance. I was just wondering if you could provide a bit more color on the reasons behind lower cost growth for this year. Are you reducing investments in any specific areas or trying to simply optimize cost through enhancement of process? This is the first question. The second question, I know that methodology that takes into consideration profitability and the expansion of risk-weighted assets to come up with your payout. In this quarter, in particular, we saw an optimization of risk-weighted assets.
I believe that this is related to a stronger growth in the retail portfolio that demands a lower RWA. At the same time, your profitability continues to be very solid. You added 8 basis points in terms of your common equity Tier 1 just with internal capital generation. In addition, you also had a bit more AT1. Taking into consideration all of these dynamics and where you are in terms of common equity Tier 1, you believe that you could have how much of payout this year? Thank you very much.
Thank you, Jorg. Let me take your two questions. First, on our cost, the changing of the guidance in cost and all the actions we have taken since the beginning of the year in order to control and reduce cost expansion in the bank. Actually, they were not caused by the perception of higher competition in the market, or a more competitive environment. The main reason was the perception of slower economic growth. As I mentioned when we began the year estimating GDP growth of 2.5%, and now we are estimating it at 1.3%. We had early on the game the perception that the economic growth this year would not accommodate a cost growth as we had anticipated. The measures we have taken, they involved virtually every sector of the bank.
We have gone in detail through the costs in every executive director area, and there were cost reductions across the board in the bank. They did not affect us actually specifically, nor did they affect investments specifically. Second, the payout. The payout is not a target in itself. The payout is a consequence of the level of capital that we want to have. The board establishes that by the beginning of the year, we should have a Tier 1 capital of 13.5%, taking into consideration the expected portfolio growth for the year, the expected RWA growth for the year, possible investments, and possible changes by the regulator which may require more or less capital. Taking all this in the year into consideration in what process we got in the year at 13.5% , the Tier 1. This is what we will continue to do.
In terms of date, we are still far away at this date. It will be only the end of the year that we will make these calculations. Seen from today, they point to a significant payout again for the year 2019.
Yeah, no, that is perfect. I really appreciate, Candido. Just following up very quickly on the first point. If I understood it correct, you are not curbing any investment in technology and the plans that you had in terms of restructuring some business areas, such as insurance, for instance. Everything continues as before, the result of the lower cost guidance is more related to enhancement of process. Is that correct?
We are certainly not cutting any investment in technology. To be very transparent with you, in insurance, we are not cutting any investment as well, but we are lengthening the profile of the investment. Not because we wanted to save money with that, but because we found out that it takes a little longer to train the workforce that we hire. So the rhythm of hiring is going to be a little slower than we had originally anticipated, Jorg.
No, that's perfect. Thank you very much for the clarifications.
Thank you.
The next question comes from Mario Pierry, Bank of America Merrill Lynch.
Good morning, everybody. Let me ask you two questions as well. First question, Candido, you mentioned you now expect a weaker economic recovery in Brazil this year. You reduced your GDP forecasts. But at the same time, you are maintaining your loan growth guidance unchanged. I was wondering, how do you expect loan growth to be throughout the year, especially if the economy is to be decelerating? If you can talk about how you see demand from large corporates? The large corporate segment continues to contract while consumer lending has been growing at a double-digit pace. If you can just give us some color here with your appetite for lending, what kind of trends you are seeing, and why you maintained your guidance for loan growth unchanged even though you expect a weaker economy. The second question is related to the strategy at Rede.
It seems like some of this change in your guidance is self-inflicted. Your lower fee income generation, some of your margin as well is because of the actions you are taking at Rede. However, you started to be more aggressive in prices in the second quarter last year. It seems to me that even though you are reducing prices, you are not seeing the benefits either in volumes or in revenues. When do you expect that to change? If you can give us some color as well with regards to the profitability of Rede on a standalone basis, if you are already operating with a return on invested capital below your cost capital or if you are still being profitable in the business. Thank you.
Mario, thank you very much for the two good questions. First, the guidance for loan growth, despite the fact that we see the economic growth by half of what we saw in the beginning of the year. There is one factor, which is that despite expecting the economy to grow less this year, we expect the pension reforms will be approved in the second half of the year. The loan growth is measured by the figure at year-end. This plays a role in there. But the main factor I would say is that we are feeling encouraged by the loan growth we are experiencing, not only in individuals and SMEs, but mainly in March and more recently, we saw an upsurge in the demand for corporate loans, at prices which are compatible with our cost of capital.
We remain confident that, given these expectations, we will finish the year within the limits of our guidance for loan growth. Now, in relation to Rede. It is difficult to make precise forecasts in a market which is changing so fast as the acquiring market in Brazil, to be honest with you. Last year, as a matter of fact, we have started to lower our rates in the second quarter. As a consequence, we leveled our market share, and we stopped losing market share. But I must say that I think that in last year movements, we were mainly followers. We reduced our margins following the market. With this recent movement, we anticipated what we saw as an unavoidable trend in the market.
To pay in T+2 is what markets in the whole world do, didn't do in Brazil because of our historic, very high-interest rate, volatile inflation and so on. The recent stability in interest rates and inflation under control, I think will drive the market inevitably to the T+2 standard. Here we basically anticipated this move. You are correct in saying that the change in guidance was mainly provoked by self-inflicted measures. Be it the measures related to hedge and T+2, be it the additional cost controls and cost savings that we have implemented.
Thanks. Just a follow-up. It seems like your competitors now are following you in reducing prices in the acquiring business as well. Where do you think this stops, right? Because it seems like, okay, last year you were, like you mentioned, being a follower, now you're being a leader, but then someone else might want to be a follower. How do you see the profitability of this business then over the long term?
I think the profitability of this business will suffer if you don't take into consideration increases in volume. If you don't take into consideration innovations, which I think is inevitable in this market. Certainly, it's not a market where you can give yourself the luxury of protecting your margins, and seeing your market share be washed away very fast. You have to play along. That's competition.
Okay. Thank you.
By the way, I will ask Marcos Magalhães, CEO from Rede, to complement.
Just one thing I think is important to stress is that, despite competition being very fierce on pricing, it has not been irrational competition. Going towards maybe what Candido says in terms of what is standard international practices, I think that the margins of this business in Brazil will also converge to international standards. As of now, it is still a couple of inches, notches above international benchmarks. We believe that that will go, and, again, it is not at this point as we do not see it as irrational competition.
Okay. Thank you. Just to take the opportunity. When you mentioned that the profitability of margins in line of international standards, international standards do not have prepayment. What kind of margins are you talking about?
I am just talking about several margins. If you get the ratios for pre-tax profit over revenues, that is a good figure where the market should go to.
Okay. Thank you.
The next question comes from Eduardo Rosman, BTG .
Hi, good morning, everyone. I have two questions. The first one is on fee income, right? Because even if we exclude the hedge and the credit card business, I think that the performance overall is too weak. I know that we're seeing a pressure across the board, asset management business, investment banking, credit cards, et cetera. I just wanted to get your thoughts about how should we think about growth in the fee income business going forward. Should we expect growing in line with inflation now the new normal or not? This is my first question. Second question is on your value creation. When we look to your slide number three, we can see that your value creation is probably reaching record high levels, right?
I wanted to ask how you think about this metric, if it's still possible to improve the gap of the ROE to the cost of equity rate? If you think it's going to be more like the ROE going up or cost of equity needs to move down, how much can move down? If you can talk about that as well, it would be interesting. Thank you very much.
Thank you, Eduardo. On your first question, how do we see the growth in fee income, if we see it going along with inflation, if this is the new normal? No, I don't. I think, we are living a special situation this year and last year with the pressures from the acquiring business, and it's important to add the interchange cap, which was published by the regulator and the effects started to be felt in the last quarter of last year. But I see them more in combined between inflation and GDP growth. I think that as GDP starts to grow again, we will have an increase in demand for all of this business which generates fee income. So I expect, for this year, we have provided the guidance to 5%, but I expect these figures to improve and to be better as the economy starts to grow.
On our second question on value creation, I don't see this gap widening, the gap between ROE and cost of cap. I think it is at a historically high level. I see the cost of capital reducing as the pension reform gets approved and so on. Yet, despite not seeing this gap widening, I see value creation improving through volumes. The value creation is not only the result of the gap, but is also the result of how much capital you apply to the business, how much results you generate. I think that a more healthy way of growing value creation will be to grow portfolio and to grow business in general, which we expect to have as the economy starts growing again.
No, perfect. Thank you very much, Candido.
Our next question comes from Jason Mollin, Scotiabank.
Hello. Thank you for the opportunity to ask a question. Candido, my first question is on a follow-up on costs. We have seen Itaú's focus on cost efficiency in the past, of course, obviously in an accelerated fashion after the merger with Unibanco, but it seems as if that has always been a focus for the group. What drove the timing for this renewed focus now in the first quarter versus the end of last year and what I guess you referred to as self-inflicted pain, and this change in guidance? Could we see this again? Is there more room to really tighten down more? I guess if you look at Brazil globally, cost-to-assets for the banks are on the high side. So how low can we go?
You just mentioned, and this was related to my first question I was going to ask, in terms of value creation, it really is, I think, important to talk about revenues and not just cutting costs. If really you are thinking that where we are now at record value creation, very high earnings, and it is not going to come, when can we expect this volume? Is it really next year or the year after? Where can we go to in terms of that volume growth, loan growth? Can we get back to 15% loan growth in Brazil? Where is the long-term kind of recovery and loan growth rate for you guys? Thank you.
Thank you, Jason. Your first question on costs, what drove the timing of these measures of cost controls? What drove it was the perception that the economy would not grow as expected this year. When we looked at the difficulties we would have in growing fees and et cetera this year, that we would not get a tailwind from economic growth, we decided to be much more austere in cost management in the bank. Is there more room to control costs? Yes, there is. I think there always is, but especially with the investments we are making in technology. So we expect that over the next years, we will have a significant improvement in costs in the bank. We may say also that there may be, all these innovations will also bring a reduction in fees in general, in margins in general.
We have our efficiency ratio now at 46.3%, and I believe there is room to improve more. Let us take your observation in view as what concerns the timing. We are now working on costs way beyond the end of this year. So we are already projecting and the same austerity for the periods ahead. The second question, concerning volumes and when can we expect them to come back. I do not have the precise figure with me now, Jason, but I have seen it recently. I am sure that in corporates, we are still below the levels of the end of 2014 or 2015. In individuals, we are more or less about the same level of growth, but taking inflation into consideration and so on. So I believe, there must be significant room for growth in assets and in income in the years to come.
I think what we depend on is on economic growth, and economic growth depends on fiscal stability, and fiscal stability depends on pension reform. This is more or less how we see it. The perspective of approving a good pension reform in the second half of this year, I think opens very constructive perspectives for 2020 and beyond.
Much thanks.
The next question comes from Nicolas Riva, Bank of America.
Thanks very much, Candido, for taking my question. Just two questions. The first one on capital, we did see the decline in the CET1 because you paid the additional dividends and the interest on capital. Right now, it is at 13.3%. I think you said earlier in the call you made a target of 13.5%. Was that 13.5% a target for the CET1 or actually for the Tier 1? Just to get an idea if you are done basically with this process of optimizing the capital structure. Then the second question on the guidance. You changed the guidance for net interest income, but did not change the guidance for loan growth. Was the reason for this basically more competition from other banks in terms of pricing or a different assumption for the Selic? Thanks.
Thank you, Nicolas. On the first question, you are right. For Tier 1 capital, 13.5% is the level we want to have every beginning of the year for Tier 1 capital. Our core equity, Tier 1 now is at 14.6% at the end of this. Sorry, our Tier 1 is now at 14.6% at the end of this quarter. The core Tier 1 is 13.3%. You are right. The second question, why did we adjust the guidance for financial margins clients and for fee income and not for total credit portfolio? One reason is because we looked mainly at self-inflicted, as someone mentioned, as self-inflicted factors, which were the measures we had in CEG when adjusting the guidance. The main is that we feel encouraged by the growth we are witnessing in credit demand.
We are seeing a healthy demand from individuals and SMEs, and starting at the end of last quarter, we are seeing an upsurge in also the demand for corporate loans. So we feel encouraged that we will be able to meet this goal established in our guidance for loan growth. Also, because we do expect the approval of the pension reform in the second half of the year, and I think this will drive demand for loans, especially in the corporate sector, even further.
Thanks, Candido. One follow-up there. The revenues from the prepayment business from Rede, they are all booked in the fee income line or also on the NII line? Because you mentioned Rede as a driver also of what happened in the change of guidance for net interest income, but I was not sure if it is booked in NII or just in fee income, the prepayment business of Rede.
Our next question comes from Otávio Tanganelli, Credit Suisse.
Hi, good morning, everyone. Marcelo Telles from Credit Suisse. Thanks, Candido, for your time. I have a couple questions. The first one, regarding your NII guidance for the year, particularly the client NII. Even though you brought it down from 9%-12%, it seems somewhat like a challenging target considering that you are 7% up year-on-year. You probably have to grow 4.5% per quarter over the next three quarters in order to reach that guidance. Which to me sounds-
Sorry.
Too optimistic. Hello?
Oh, sorry. Could you please start your question again since I didn't hear from the beginning? Sorry.
Of course. Sorry. Marcelo Telles here from Credit Suisse. Thanks for your time. I have two questions. The first one regarding your client NII growth target of 9%-12%. Even though you trimmed versus your previous guidance for a little bit, it does seem somewhat optimistic, right? Considering that you grew a little over 7% year-on-year, and it means you'd have to grow 4.5% per quarter over the next three quarters in order to reach that target. My question to you is what makes you comfortable that you can achieve this target? Especially considering that you mentioned the economy is a little bit lower than you expected and perhaps, probably the growth could be more skewed towards the second part of the year. If you could elaborate on that, I'll appreciate it.
My second question is, you did mention that this ongoing cost effort that Itaú is making is something that is probably not just a one-year thing, but it is an ongoing effort. Maybe you can see that going forward. Considering that the fee growth has slowed down, that you are being able to really control your costs very well, and you mentioned that you do not expect your ROE gap to your cost of equity to widen. Is it fair to say that, on the positive side, you can continue to keep your excess return as it is today because you still see room to offset, let's say, some potential revenue pressure, particularly on the fee side with more cost-cutting down the road? I am trying to look beyond 2019 in that question. Thank you.
Okay. Thank you, Marcelo. First, concerning NII growth, which we are guiding it between 9% and 12% for the year. We are confident that we will be able to deliver this growth in NII, and the reasons are the following. One is that we expect some more economic activity now. We expect the pension reform approval in the second half and so on. The main reason, though, is that average portfolio growth between 2019 and 2018 is much higher than we had between 2018 and 2017. As you know, the NII is made on the average portfolio, not every portfolio on the end of the period. This gives us also confidence in being able to reach this NII target. The other very important point is the change in mix that we are experiencing.
We are really experiencing a much more intensive growth in individuals and SMEs portfolios, which have a better, higher margin than corporates and so on. This change in mix, as you can see, by the way, in the presentation, this change in mix is the main explanation for the growth in NII. In what concerns costs, yes, I see our cost control going beyond 2019, in 2020. I think we are keeping this more and more under control. I think the technology will enable a structural cost transformation in the bank going forward. Also something that will always require investments. I think that there is a limit to the ability to improve profitability based on cost reduction.
We expect profits in the future to come mainly from growth in assets and growth in income and economic growth in general, although we intend to keep costs strictly under control going forward.
Yes. Thanks, Candido. Just one follow-up on your short answer. Is it fair to say that even though you may have some competitive pressure to some of your revenue lines, you can actually, because you will continue to control cost and we probably have a very positive credit cycle ahead, that you can maintain your excess return similar to the levels that you have today, at least over the short to medium term. Is that the right answer?
It's certainly in this direction that all our efforts here go, Marcelo. But as the example in Rede has shown well, competition must be taken into consideration when building these scenarios ahead.
Excellent. Thank you very much. Appreciate it.
The next question comes from Domingos Falavina, JP Morgan.
Thank you very much for taking the questions, and good morning to all. Also two quick questions. The first one is just again on Rede positioning. When we look at the medium-term history, Rede was one of the market share losers, I think, given the growth of Cetip and Ativa and all the way by growing 0% to 1% with industry growing 10% year-on-year, all the way up to the fourth Q 2017, first Q 2018. And over here, on the ground is basically there's been a strategy change and even management speech yourself, changes pretty drastically as far as the profitability pool of the industry and decided to change the attitude, we should say, and pricing as well. We start seeing volumes growing 55% year-on-year, 8%, 14%, 18% in the fourth Q, which is above industry growth. Industry was growing 15%.
In this first Q, we saw basically growth decelerating to 14%, which implies maybe in line, maybe a little bit below industry growth, potentially market share losses. Then we noticed the second round of aggressive measures as far as Q2. My question is, at what level of growth, assuming the industry grows 15%, will you be okay with Rede card printing growth? Is it like market growth or is it +1%, +2%, you want to be a gainer? At what point you're going to revisit price and say, "We have to go on a second round." So that's the first question. The second question is on Iti. You have a very good app, Venmo-like for transferring. It's been removed from the App Store. We can no longer download it.
Some of the rumors we hear is that you may be launching some kind of digital initiative, digital banking around that software. I'm just curious to see why exactly what you removed. Is it just rumor, or do you have actually something in mind for more the low-income portion of the population on the digital side? Thank you.
Hi, Domingos. Thank you for the questions. I will ask Marcos Magalhães to help me with the first answer. Just the first part of the first question. Why have we changed our stance in Rede in regards to competition? I think we changed it twice, as I mentioned. First, during 2017 and so on, we tried to protect margins. This evidently didn't work. There was a moment, beginning of 2018, when we decided we would play along with the market and protect our market share. This worked in the sense of protecting the market share at the expense of compressing margins, which is what happens in highly competitive markets. Now we have, so to say, taking a lead in leading the industry towards this T+2 initiative.
We are exercising, and we are in constant discussion here on how to cope with this much more competitive environment. There is a learning process in there. We feel that we are doing better now. I will pass to Marcos to complete the answer.
Two points to add to that, Domingos. First is the difference in growth between the first quarter of this year and the fourth of last year. There is a seasonality involved in terms of our client portfolio mix. That pretty much explains the variance of growth in the fourth to the first quarter.
Magalhães, I am comparing year-on-year growth. Seasonality shouldn't impact year on year, right?
No, it does impact because the portfolio mix changed in that year. When you look at fourth quarter, year over year and the first quarter year over year, the reason in the change in growth rate is related to that. Second point is our long-term pursuit here is to level market share. We don't have a goal to be the largest player in the market in terms of market share. We do have a goal to keep our operations relevant in the market share in the market, and that means for us to sustain our share on the long term.
It's clear. The goal is to grow in line with the market, I believe.
Yes.
Clear. Thank you. On the Itaucard?
On our second question, on the Itaucard. Well, the Itaucard, I think, was an excellent product, I agree with you. I got some criticism at home because we have discontinued it. But the fact that the market did not seem to think it was such a great product and adoption was not to the standards that we demanded from our new products. These are the simple reasons why it has been discontinued. In what concerns new initiatives, we are always thinking about them. We are always working on new products to satisfy our customers. But there's nothing to be advanced right now in this field.
Thank you very much.
The next question comes from Jorge Kuri, Morgan Stanley. Mr. Jorge Kuri, you may proceed.
Good morning, everyone. I have two questions, if I may. One on the bank and another one on acquiring. Can you walk us through what happened with delinquency in the first quarter? We did see a meaningful uptick in most of the metrics, whether NPLs, bad debt formation, renegotiated loans, cost of risk, all of them moved in the wrong direction, I guess. Is this mostly seasonal? Is this mostly because the economy has been weaker than expected? Are you seeing similar trends so far in the second quarter? What is your expectation of how this is going to shape out? My second question, just, I guess taking advantage of Mr. Marcos Magalhães on the call, is about Rede overall from a strategic perspective. I am guessing some people would disagree that the main disadvantage was pricing at Rede.
Some people would argue that, and certainly your competitors argue that the difference between themselves and the incumbents is they provide much better products, services, customer experience, and that that is what merchants really value. Are you only going the pricing route and how sustainable is that strategy? Everyone moves to free T+2 tomorrow, and then you are still the same company with the same disadvantage on prices, product, service, quality, purchase and procedure, et cetera. Is there, in addition to prices, a parallel effort at the company to try to provide a much better customer experience, and hence, more sustainable competitive advantages? If I just may ask a third question, sorry. You did mention that you thought that profitability had to converge to international standards because there is no reason why Brazil should have higher profitability in the payment space. I am not sure I understand that.
The bank generates 23% return on equity. I do not see banks globally generating 23% return on equity. Does that mean that we should also expect the bank to have single-digit ROE like every other bank in the world? How do we reconcile this comment? Thank you.
Hi, Jorge. Thanks for your very provocative questions, as usual. Let me start by the first one here on credit. First, what is happening on credit is totally within our expectations. We are not surprised by anything that has happened. It is the result of three movements, and please remind me if I forget. The first is what we show in our product mix. We are moving the credit mix towards assets where margins are higher, but also where delinquency is higher, individuals and SMEs. This change in mix and the portfolio growth in itself commands higher provisions. The second effect is the seasonal effect in the first quarter of the year. That always happens in the first quarter of the year. Last year it had been weaker. It had been only 20 basis points.
This year it came to 40 basis points again, as it has been in the previous years. So no surprise here. The third aspect has more to do with the corporate world, which is the decline in the coverage ratio. This decline in the coverage ratio, you will remember, I have been announcing for over a year now. It is the results, and Alison, we make provisions which are cautionary. We have made quite a few of them during the years of crisis and after, because there were companies which had not defaulted yet but which probably default, as you know, we probably have properties that default. The probability of default we saw increasing in the period. With these companies, two things may happen. One is that they actually do default.
We had this case in this semester, where two companies did default, it passed the 15 to 90 days to the over 90 days a year. These two companies were already 100% provisioned for a long time. What happened was just what we expected. The other thing that may happen is that companies may improve, simply, and their probability of default may improve, and we may deem the provision is no longer necessary for these companies. This also happened in this quarter. We had a couple or three companies, which fit in this description. So, when you combine all this, we see that the expected losses, in general, are exactly according to what we have forecasted. You can see that this is perfectly in line with the guidance we have provided for cost of credit. So, here, everything, we had absolutely no surprises in the credit front.
I will answer the third question and then pass to Marcos to answer the second question. When I mentioned that in the payment arena, profitability could go to international levels, I am just recognizing a de facto situation which exists that-
Ladies and gentlemen, please hold. Ladies and gentlemen, please hold.
Hello?
Speakers, you may proceed.
Jorge, sorry, we got cut. I do not know when did you stop hearing me?
Oh, thanks, Candido. You were actually starting explaining the question I asked about profitability converging to payments. You were just starting the answer to that.
Okay. Let me come to this. This comment I made is direct. It derives from witnessing the very strong competition in this sector, and the enormous margin compression that we have been experiencing there for three years now, probably. The market is changing here. This is a market where innovation and technology are making a big difference, as well as a normalization of the interest rates in Brazil. All this is leading to this conversion, which I see in this market. Measures as the one we have taken this week, they are designed to grant us a lead in the industry, and enabling us to keep on serving these clients as broadly as we can in the bank. We certainly do intend to maintain the differentiated returns on equity that we have.
We think that we will be able to make it, not by avoiding competition. On the contrary, by facing competition directly. Let's pass now to Marcos.
Okay. Just adding a few points to what Candido said. When you talk about convergence, remember that also the product, the way it works in Brazil is converging also to international practice. For example, rent, something that is very typical of our market, it's non-existent in other marketing that's going down towards the sale of the POS, for example. We talk about the settlement period, which is also shortening by stronger competition and by also strength of regulation. This convergence is making the product converge to international practice. That's where we infer it will converge to profitability on that segment as well. Talking about better service or user experience, that's a very good question, Jorge, and thanks for bringing that up. Certainly, we are focusing on that. We have many fronts. We're working on improving our customer service or the user experience. We have goals to increase our NPS.
All of our employees, we have goals on that respect. But linking to what we did in terms of pricing change is that by our measure, half of the gap in the NPS towards our competitors is by virtue of pricing. NPS measures satisfaction, but part of satisfaction comes also from pricing. Half of the difference, half of the gap is for pricing. That's why we decided to level that.
All right. Thanks everyone for your thoughtful answers. Thanks a lot.
Thank you.
The next question comes from Olavo Arthuzo, Santander.
Hi, Candido. Thank you for taking my question. It's just one, and it's related to the guidance for the year. There were two main revisions, one on the revenue side and the other on expenses. Sorry for my insistence on this topic, but my point here is that given that the competitive scenario in the acquire industry is becoming day by day more challenging, we do understand the recent change on strategy. Thus, the change in the guidance of the year. On the other side, since the management of operating expenses rely basically on in-house initiatives, why this change in so short period of time? Would I be wrong to assume that bank is perceiving a more lackluster scenario for top-line growth and to rebalance or offset this weaker-than-expected performance of revenues and deliver a higher return, they are shifting their mindset and starting to cut cost?
But more important than this, are you seeing this movement in your competitor too, or only Itaú shifting the strategy from products and growth to cost management after these four months of the year? Thank you.
Hi, Olavo. Thanks for your question. Yes, it is true. We decided to be much more aggressive in dealing with these costs once we realized that the economy would not grow as we had expected when we supplied the guidance. As I mentioned already, our expectation for GDP growth was cut by half virtually, from 2.5% to 1.3%. And this is what led us to be much more active on cost control than we were initially. We normally don't talk about competitors here, so when we refer to the competition, but I should just observe and you know that our main competitor's guidance for costs is already very low. Ours was the highest guidance for costs.
Okay. Thank you very much, Candido.
Thank you, Olavo.
The next question comes from Jason Mollin, Scotiabank.
Thank you. Just a quick follow-up on the comment that the outlook for the economy is positive getting a pension reform in the second half of the year. What is the downside risk if we do not get this pension reform? What is the outlook? How is Itaú Unibanco preparing for this? What could that scenario look like? Thank you.
Thanks, Jason. The scenario is not good. If the pension reform does not get approved, we will have the relation, public debt over GDP, it will keep on increasing. This will cast doubts on the stability of inflation, probably. Interest rates will have to rise. We may see some pressure on the exchange rate. Also, the spread, the level of confidence as a whole in the economy is going to drop. Unfortunately, this is not a scenario we are unaccustomed to. We have lived with this scenario very frequently in the past and we know what to do in these situations. I just hope and expect that we will not have to use this toolkit this time.
Thank you very much.
Next question, Carlos Gomez, HSBC.
Thank you. Good morning. I am not going to ask about the current business for a change. My questions are the following. Number one, on the tax rate, your tax rate is now at 32%, our calculation, your peers are at 30.9%. Part of it probably has to do with your international operations, but is there anything more structural or is there something temporary, and you would expect to converge with your peers at some point? The second refers to the guidance, but in a different way. I am actually surprised that you have reduced your NII guidance by only 6.5%. When I look at your economic forecast, six months ago, you were expecting Selic at 8% for this year. Three months ago, you were expecting 6.5%.
Now you expect 5.75%, and it seems to us that what you expect your NII to do has not really moved a lot in line with interest rates. We know that you are relatively insensitive, but still the impact seems quite minor. Could you comment on that? Thank you.
Thanks, Carlos. I will comment on your second question, and then I will ask Alexsandro Broedel to comment on the tax rate issue. You are right when you observe that we had a Selic rate. We must just point out that it is end-of-the-year Selic rate. That we had an end-of-the-year Selic rate at 8.5% at our first forecast, and then that now we have 5.75%, and in the middle we had the 6.5%. What changed is I am not in the economic team making economic forecasts, but as I understand from the economic team, what changed is the perception of when the pension reform would be approved. We started the year, the end of last year, we believed the pension reform could be approved early this year.
If it were the case, then we expect economic pickup derived from that, from the levels we had, and this would drive the need for higher interest rates in order to keep inflation under control. As we've seen, inflation is well behaved. Now in recent months, it has shown a couple of higher indexes, but our economic team believes it's well under control. The expectations for the pension reform have moved to the second half of the year. It's widely expected in the market now that if it were not for the fiscal weakness, structural weakness of Brazil, interest rates could be lower. This scenario has been building, this consensus has been building in the economy. Now the expectation is that immediately after the approval of the reform, there could and there should be a drop in the Selic rate.
Afterwards, as the plan unfolds and the economy starts growing and so on, the question of raising interest rates may come again into place. But the important, why this is the effect in our NII reasonably limited is because in both cases, be it when it was 8.5%, be it now when it's 5.75%, we are only referring maybe to the last couple of months in the year. So the effect of this is rather limited. Alexsandro, go ahead.
Carlos, two main reasons to reconcile our effective tax rate with this comparator of ours that you mentioned. The first one is goodwill amortization. Our level of goodwill amortization at the moment is much lower than this case that you mentioned, so that affects our effective tax rate. The second reason is ROE. So higher your ROE, higher our effective tax rate, because the benefit of interest on capital is pretty much fixed over the year, because that depends on the amount of your book value of equity and the amount of the, so the rate that applies to a book value of equity. So these are the two main reasons that reconcile our number with theirs.
Thank you. If I can follow up on the interest rate, you now expect rates to be lower than in 2024, 4% if I've seen you correctly. Wouldn't that have an implication of your NII for 2020?
A lower interest rate in 2024, yes, a lower interest rate has. If you look at the chart we show in page, not this one here. Page five. In page five, we show our NII, how it has evolved as the Selic rate dropped from 10.9% to, here it is 6.4% because it is the interbank rate. So it has dropped 4.5 points. As you see from our NII level, it has kept well to around 12% or a high 11%. It is not that the interest rate does not affect our NII, but it affects in different manners and quite often in compensating manners. Volumes tend to grow. There are many compensating factors, and this is what explains that our NII was virtually unchanged as the interest rates suffered this drop, which we have seen.
I expect this to remain the same way and ensure the rates drop further next year.
Thank you very much.
You are welcome.
This concludes today's question and answer session. Mr. Candido Bracher, at this time, you may proceed with your closing statements.
Just to thank everybody for your attention and your interest in our results and the very good questions. Thank you.
That does conclude our Itaú Unibanco Holding earnings conference for today. Thank you very much for your participation. We would like to invite you to join the conference in Portuguese at 11:30 A.M. You may now disconnect.