Good morning, ladies and gentlemen, and welcome to Itaú Unibanco holding conference call to discuss 2018 second quarter results. At this time, all participants are in a listen only mode. For the question- and- answer session, an instruction 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 broadcast live on Investor Relations website at www.itau.com.br/investor-relations. The audio webcast works with Internet Explorer 9 or above, and Chrome, Firefox and mobile devices, iOS 8 or above, and Android 3.0 or above. A live presentation is also available on this site. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Private Securities Litigation Reform Act of 1995.
Actual performance could differ materially from that anticipated in any forward-looking comment 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. Caio Ibrahim David, Executive Vice President, CFO and CRO, Mr. Alexsandro Broedel, Group Executive Finance Director and Head of Investor Relations, Marcos Magalhães, Merchant Acquire Executive Director. First, Mr. Candido Bracher will comment on 2018 second quarter results. Afterwards, management will be available for a question and answer session. It is now my pleasure to turn the call over to Mr. Candido Bracher.
Good morning, and welcome to our second quarter 2018 earnings conference call. Before I talk about our achievements, macroeconomic scenarios. Since the beginning of the year, we have revised down our expectations of GDP growth in 2018 from 3% to 1.3%. This revision is mainly related to three factors. The impact coming from the truckers' strike, an event which directly affected the economy and also the entrepreneurs and investors' level of confidence. Second, the greater uncertainty regarding the approval of additional fiscal reforms, especially the pension reform. Finally, the relative disappointment with the pace of job creation in the formal labor market. Although, it's important to say, we are still seeing positive formal job creation. Despite this negative revision in GDP growth, inflation remains under control and will continue to enable interest rates to be at low levels, reducing pressure on disposable income.
Although the economy is not growing at the pace we expected at the beginning of the year, we still see some improvement in the macroeconomic fundamentals. Besides talking about the economy, I also want to share with you two commercial initiatives that we have just announced. The first one is related to our insurance operations, where we've replicated the open platform solution we have already adopted in the investment business. This means that we started to offer products from all the insurers in our platform, focused on meeting our customers' needs. The second commercial initiative is related to our acquiring business. We launched the Credicard [hub], the merchant acquiring segment, with a POS machine family that can be purchased through its website. The first machines launched are the Pop Credicard and the Mega Pop Credicard.
Besides selling POS machines, the strategy is a simple commercial proposal based on shorter payment terms to retailers and competitive rates for debit and credit card transactions. With this operation, we aim at reaching self-employed individuals, micro entrepreneurs, and small companies. This initiative complements our product offering in the acquiring market. Today, I have invited Marcos Magalhães, the head of our acquiring business, to address in the Q&A session any questions you may have about this new product. With these initiatives, we reinforce our intention to better serve our customers and our confidence in the Brazilian market. Moving now to slide three, to highlight our financial performance in the quarter. The key figures for the period. You see that our retailing net income remained almost stable in the quarter in the level of BRL 6.4 billion.
This result was supported by higher financial margin with clients, higher commission and fees, and lower cost of credit. These positive effects were compensated by a decrease in our financial margin with the market and higher non-interest expenses. Concerning non-interest expenses, it is important to stress that excluding the exchange rate variation in our Latin American operations, the growth was 4.4% in the quarter. We also continue to see improvements in the quality of our credit portfolio, with our non-performing loan 90 days reaching 2.8%. Lastly, our credit portfolio increased 3.7% this quarter, led by individuals and SME loans, and also by our Latin American portfolio. On slide four, we present our income statement. I would like to highlight our first semester 2018 results, in which the income before tax and minority interest grew 10.5%. This performance is a result of lower cost of credit and higher fee and commission.
This performance was partially compensated by a temporarily higher effective tax rate as a result of accounting of deferred tax assets at a 40% tax rate, while keeping a 45% tax rate. On slide five, we present the evolution of the profitability and cost efficiency of our operation. Our recurring ROE reached 21.6% in the second quarter, in line with the average return of the previous six quarters. On slide six, I present our business model chart, in which we break down the consolidated income statement of the first half of this year. As we see, the insurance and services business lines continue to be the main driver behind our profitability and represent almost 60% of our net income.
Although the insurance and services business continue to be responsible for almost all our value creation, I would like to point out that since the fourth quarter of 2017, our credit business creates value. As you see on the second column, we see a value creation of BRL 0.5 billion for credit with recurring ROE in credit of 14.5%. This compares to a cost of credit during the first semester of 13.5%. After the first semester, we have lifted our cost of credit to the level of 14.5% also. We see that our credit portfolio was at 3.7% in the quarter. Our performance for individuals had positive evolutions in the quarter as we continue to see healthy demand from our clients. I want to highlight the increase of 3.5% in personal loans and of 6.4% in car finance.
In the SME portfolio, we had another positive quarter with a 4.1% growth led by the stronger demand in the period. Looking at the past 12 months, the total portfolio grew 6.1%. Even excluding the impact of the acquisition of Citi's retail portfolio in Brazil, the individuals and the SMEs delivered a good performance. On Lat corporates, we continue to see a subdued demand for loans. The reason for that are related to a still active capital market for the issuance of corporate debt, as I mentioned in the first quarter earnings call. Excluding the effect of foreign exchange variation, the corporate portfolio would have decreased 3.1% in the quarter and 10.5% in the year. The Latin American portfolio would have increased 2% in the quarter and 3.1% in the year.
Finally, our total portfolio would have increased without the foreign exchange variation, 0.4% in the quarter and 0.9% in the year. On slide eight, we see that our credit origination continues to show positive evolution. The origination of our consolidated credit portfolio grew 14% when compared to the same period last year. This increase was led by the stronger demand from our clients in both individuals and SMEs. I mentioned that the credit origination to individuals is already higher than in 2014. I'd like to stress that this growth was exclusively driven by a better demand from our clients, as we have not changed the risk appetite for the bank.
As I mentioned in the previous slide, when it comes to Lat corporates, the demand is still moderate, but we continue to advise and help these companies to fund themselves in the capital markets as shown by the securities chart on the bottom right, where you see that the new private securities issuance is 60% above what was the level in 2014. On slide nine, we show our net interest margin and the changes in the financial margin risk loss. This quarter, you see we delivered a 4.5% growth in the financial margin risk loss. This result, as you see in the bottom of the page, was mainly due to the change in credit mix towards higher yielding products and due to higher number of calendar days. We also saw a positive evolution in the Latin American financial margin driven by foreign exchange rate variations.
What we can see here as the individuals and SMEs portfolio grow while the Lat corporate portfolio doesn't grow, it is positive for the credit mix and generates an increase in the financial margin risk loss. In the same period, our consolidated NIM remained stable, while the NIM from our Brazilian operations increased 20 basis points. The net interest margin is increasing 20 basis points in the local currency. More importantly, we saw an increase of 20 basis points in the consolidated and 50 basis points in the Brazilian book adjusted net interest margin due to lower cost of deposits. On slide 10, I present the evolution of the financial margin with the market.
The decline observed this quarter is mainly a result of lower gains in the trading book and was in line with the guidance we have supplied in the beginning of the year, in line with our expectations. Moving now to slide 11, credit quality. We see that our delinquency ratios continue to show healthy trends. The 90-day NPL ratio improved 30 basis points compared to the previous quarter and reached 2.8%. I highlight the important decrease of 60 basis points in our NII and of 10 basis points in the individual portfolio in Brazil. We also had a decrease in the non-performing loan ratio for corporates related to a renegotiation of a specific case which we mentioned in the previous quarter. This exposure was later sold to third parties. In the 15 - 90-day non-performing loan ratio, we saw an increase of 90 basis points in the corporate segment.
I highlight that this deterioration was not concentrated in any client or specific sector and is composed of companies that already have adequate levels of provisioning for their respective risks. This increase was compensated by an improvement of 60 basis points in the Latin American portfolio, leading to stability in our early delinquency ratios. On slide 12, we present the evolution of our NPL creation. Our total NPL creation reached BRL 3.8 billion, a significant decrease compared to the previous quarter, mainly due to a specific exposure from the wholesale portfolio that negatively impacted this indicator in the first quarter. As I mentioned in the previous slide, this specific exposure was renegotiated and later sold in the second quarter. The NPL creation of retail segment is a result of the credit origination growth.
Even though we are still seeing some improvement in the credit quality of some individual portfolios, it's important to highlight that as our loan book has resumed growing, the NPL creation for this portfolio will continue to present nominal increase. On slide 13, we present the evolution of provisions for loan losses and cost of credit. The increase in our provision for loan losses this quarter is related to the growth in the retail portfolio, to the revision of pre-approved limits mainly of credit cards, and also due to the impact of foreign exchange rate variations. Despite the increase in provision expenses, our cost of credit decreased in the quarter due to lower impairment charges and better recovery. Now turning to slide 14, we present our coverage ratio that reached 148% this quarter.
As I have mentioned in previous conference calls, we may experience some volatility in our coverage ratio mainly because of the wholesale portfolio. In this quarter, the increase of our coverage ratio was a result of some specific exposure of the wholesale portfolio that was renegotiated and sold afterwards. In the long term, we expect the coverage ratio to go down due to improvement in credit ratings of corporates. But until then, we may see some volatility. Page 15, in commissions, fees and results from insurance operations presented, we had an increase of 3.4% in the quarter. This performance was mainly driven by the 9.1% growth in asset management fees associated with higher asset under management and performance fees and two more working days in the period. We also had an increase of almost 30% in advisory and brokerage fees related to our investment bank.
Now turning to our non-interest expenses on slide 16. We had an increase of 5% in the quarter. This growth was mainly due to the advertising expenses related to the soccer World Cup and to foreign exchange variation in our Latin American operations. I want to highlight that compared to the first half of 2017, expenses from Brazil, excluding the income from Citibank, increased 10%, much below the inflation for the last 12 months. In the quarter, we saw a reduction of 56 brick-and-mortar branches in Brazil associated with synergies coming from the cessation of Citibank's retail operations in Brazil. On slide 17, I comment on our capital ratio. Our Tier 1 capital ratio reached 14.2%.
The 70 basis points increase in 2018 was mainly due to earnings accumulation in the period, and also by the approval from the Brazilian Central Bank of our additional Tier one issues on March 2018. I also want to mention that we are going to pay BRL 4.7 billion of complementary dividend and interest on capital on August 30, 2018. Now, a new slide, on slide 18. I want to share with you some figures related to our digital transformation journey. In the first half of 2018, as you see in the top left of the chart, we reached a milestone with more than 10 million clients using our internet, mobile, or SMS channels. It's important to say that mobile is already our most successful digital channel, with more than 8 million users. Also, for the first time, we break down our financial transactions into digital channels.
In the retail bank, 80% of authorized originations, 38% of all the investments, and almost 80% of repayments were made using digital channels. To our left, we opened more than 120,000 new current accounts in the second quarter, which is close to 12% of the total accounts opened in the period. As you see in the chart, this figure is increasing rapidly and we expect it to continue to increase. Now, in the middle bottom about our digital branches, you see that they already represent 30% of the operating revenues in the retail business with an efficiency ratio that is more than 4,000 basis points better than a brick and mortar branch. You see brick and mortar branches have an efficiency index of 69.8 and digital branches of 36.2.
Although we have seen a positive evolution in our digital assets, we still have a long road ahead of us to better educate our clients in the benefits of using our digital channels. On slide 19, I present the distribution of added value in the second quarter. Itaú Unibanco added BRL 18.3 billion to society that helped to boost the economy and to stimulate the transformational power of thousands of people. Of that value, 18% was designated to our more than 130,000 direct shareholders and approximately one million indirect shareholders in the group through investment and banking friends. 33% to taxes, fees, and contributions, 29% to our employees, and 18% as investments in our groups. Now on slide 20, I would like to reiterate the forecast for 2018 that we originally disclosed at the beginning of the year.
We are comfortable that the range we presented then still represents our best estimate for the year, even taking into account the revision in the decimals for this. Last, on slide 21, I want to invite you for the annual APIMEC meeting on September 12th. The event will be hosted in São Paulo but will also be broadcast with simultaneous English translation. With that, I finish this presentation, and now I would like to open for the questions- and- answers. 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 touchtone phone now. If at any time you would like to remove yourself from the questioning queue, press star two. Our first question comes from Philip Finch, UBS.
Good morning. Thank you for your presentation. Two questions for you, please. My first one is regarding your effective tax rate, which was at 34.4% in the second quarter, a bit higher than what we were expecting. Can you discuss with us what you think could be a recurring level of taxes, bearing in mind any changes in the level of social contributions? My second question is regarding the FX impact of your second quarter results. Obviously, the BRL was not insignificant in the second quarter. So how did that impact your numbers, not just non-GAAP, but NII as well as costs or even taxes? Thank you.
Thanks for your question, please allow me to phone direct to Caio to then answer your questions.
Hi, Philip. Thanks for your question. Considering that the social contribution for next year will be around 15%, which is what we expect, the tax rate will be around 30%. That is the forecast that we are using for next year. Continue.
In the scenario that the social contribution does not come down, what should we assume then?
That, of course, would be a little bit higher than this, around 30% more or less. Regarding your FX, yes, please go ahead.
Also on the FX question as well, please, go ahead.
In terms of FX assets in our balance sheet, as you know, we have our investments abroad pretty hedged. That contributes to not have that bigger impact in our P&L. Of course, when you have a devaluation of the BRL, you have some impact in the deferred tax assets.
Which is pretty much related to an impact in the shareholders' equity. But we manage that part well in that sense, so it's part of the risk management of the bank regarding market risk.
Were your costs in any way inflated because of FX?
Inflated? Yes, Philip. Our costs were inflated because of FX, because of the costs in our Latin American operations. The BRL devaluated in Rio, the country where we have operations. So this provoked expressing BRL terms, this increases the level of expenses. Although, relating to the level of expenses, it's important to stress that we have seen this second quarter increase in expenses every year for the past three or four years. On top of the effect, you have the effect of the first quarter, which has seasonally a lower cost. So in the second quarter, we see increases. This year, besides the seasonal effect, we also had the FX rate and also other minor effects as the soccer World Cup. All that taken as well.
Thank you very much.
We are comfortable with the guidance we have supplied for expenses for this year.
Okay. Thanks again.
The next question comes from Carlos Macedo, Goldman Sachs.
Hi. Thanks. Good morning, Candido. Caio, a couple of questions on loan growth here. First question, you kept your guidance for loan growth. You are already going ahead of it. Of course, FX helped a lot this quarter. But when you look at origination rebounding and you look at the levels of where you would be growing in Brazil, in the consumer book and in SMEs, should we think that it is possible you are at least going to get to the top of the guidance, if not surpass it? Second question, you mentioned, Candido, that you have not increased the risk appetite yet. The bank is still running with the same risk appetite. There is more of a demand function for that acceleration in growth. What would it take for the bank's risk appetite to increase? What are you looking at? Is it unemployment? Is it GDP growth?
Is it the results of the elections in Brazil? The operations outside of Brazil are doing really well. CorpBanca started to turn the corner. Paraguay, Uruguay, for small as they are, they are doing really well. What would it take for you to really say, "Okay, now we can do it. Now we are going to lower the ratings on the corporate book. We are going to grow a little bit more now there, take a look and increase our limits." What would it take?
Two tough questions. Excellent questions, Carlos. On the first question, you are right. We are seeing good momentum in assets growth. We are also seeing good momentum in services fees and income growth. This is what makes us comfortable with the guidance we have supplied. We are going to stay. We have chosen now not to indicate anymore within the guidance in which part we are seeing. Only saying that we are comfortable with the interval we have supplied. But I agree with you that there is positive momentum in this asset part of the book. As to risk appetite, let me make one comment first. There are profitable segments of the market that we are not taking, that we have decided not to.
This is a structural decision taken a very long time ago when we, because of our perception that the higher-risk segments of the market bring more volatility to results. We have made an option to have growing results with low volatility. When you say to change the risk appetite, what it would take for us to change the risk appetite is basically until we have the impression that another level of clients of higher risk has become less risky because of GDP growth, because of sustainable economic growth that passes ahead. We do not have it yet. So we do not see yet that sustainability in economic growth, which can give us a comfort that companies will emerge from a more risky part of the spectrum to become safer credits.
Just to follow up, you are relatively conservative, though, attacking the parts of the market where you see less volatility. The consumer book or the parts of the consumer book where you have recently accelerated origination fall into that category, like some parts of auto, payroll loans, mortgages. That would be accurate to say, right?
Yes, that is what we say. That does not mean that we are not intensifying our commercial efforts. This appetite is not the only driver of asset growth. Assets also can grow because we make better efforts in the segments which we have already decided to serve, and this is what we are doing. That is right.
Okay, perfect. Thank you. Thank you for the-
Thank you, Carlos.
The next question comes from Mario Pierry, Bank of America Merrill Lynch.
Good morning, everybody. Congratulations on the results. Let me ask you two questions as well. The first one is related to your net interest margin with clients in Brazil. You showed that your margin expanded 20 basis points quarter-on-quarter. Is it fair to say that you think that we have seen the bottom on margins in Brazil? If you can also give us a little bit more details on this improvement this quarter. Clearly, a part of this improvement is related to the mix effect. But I wanted to understand from your perspective, if you can give us some color on spreads. Credit spreads. If you can talk on a product-by-product basis, if we're still seeing spreads coming down or do you think they have normalized. Second question is related to your asset quality. You showed very clearly the NPLs and provision charges are near historical lows.
At the same time, when we look at it, 250% coverage of NPLs. When I look at your corporate book or your wholesale book, your coverage ratios are around 950%. What I'm trying to understand here, looking forward, is there room for provision charges to still continue to come down? These are my questions. Thank you.
Thank you, Mario. Very good questions. First, concerning our net interest margin and our financial margin with clients. We are happy to see how resilient this margin is proving to be and that we are able to grow. If you remember just one year ago or so, there were significant doubts in the market on how this margin would react to the drop in the Selic rate. I believe that what we are showing is that this margin is quite resilient to the drop in the Selic rate. As we show in the bottom, the reason is not because spreads are not falling. This is why we break down in the bottom of the page, the different effects, and you see that we lose BRL 12 million in this margin because of asset stress. I still see a trend for spreads to reduce in the low single.
I think that partially they will reduce because we will have better credit conditions. We will have the finance minister cheaper, the positive information about the companies. The government is also working in some tax effects. I think that the general trend is that credit is going to become cheaper. This growth is because, frankly, I expect to see a more vivid growth in assets, certainly depending on the results of the elections. Because I think that this move in the mix toward lines of higher spreads, this is a trend that will still continue for quite some time. I think that the possibility of increased lines of higher spreads as an individual, that is a tendency that will stay for quite some time. Now, on asset quality and coverage ratios. I must confess that I am also disappointed that this coverage margin does not drop fast enough.
Almost one year ago, I said that the long-term trend will be to drop although we could have some short-term volatility, and this is still the scenario. The dynamic here is very simple. We have today about BRL 36 billion, BRL 36.5 billion of provisions. A significant part of this, almost BRL 10 billion, is Credicard provisions. Provisions which we have made for credits for companies that are still not out of the woods after the recession. Some of them are improving, some of them are being renegotiated, and some of them will default, are defaulting and will default. So if these companies default, of course, the NPL 90-days will increase, the coverage ratio will decrease. If these companies improve, we will be able to revert the provisions and also in this case, the coverage ratio will decrease. We may see that, and some effects are already happening.
When I refer to what credits that we sold in this quarter, we sold this credit for a higher price than the amount we had left provisions. So this provoked a positive effect. So the positives are certainly decrease the coverage ratio. At the same time, the NPL 90 drops and then the coverage ratio increases again. So we do see some volatility in this coverage ratio. But yes, I think the answer to your question is yes, there is the potential in the medium run for this coverage ratio to decrease significantly, and therefore to have lower provisions, especially in the corporate book.
Very clear. Thank you, Candido.
The next question comes from Jorge Kuri, Morgan Stanley.
Hi, good morning. Jorge Kuri from Morgan Stanley. Could you please give us some details on your Credicard hub initiative? Can you describe what the offering is going to be? Is it going to be a payment solution only? Is it going to be in a full ecosystem of products and services in helping micro merchants from the business centers better are going to have prepaid cards just as the competitors that are in that micro merchant space do? Is it required to have a bank account with Credicard hub? How do you distribute the product? Are you going to have salespeople? Are you going to leverage the branches? Are you going to advertise? What do you think the cost of acquisition is going to be? What targets do you have of active merchants or TPV by the end of this year and next year? Thank you.
Thank you very much for the question, Jorge. I will pass the phone to Marcos Magalhães, who is executive director of our end business.
Hi, Jorge. Marcos here. Thanks for the question. First, let me comment on why we decided to launch this product. The main reason is that for our traditional acquiring operation, this segment is pretty much new. Our current offering traditionally didn't tap into that sort of segment, self-employed and micro merchant segment. The commercial agenda that we planned for our business, we devised this opportunity a while ago, and we finally launched this introducing the initial products that were announced as of last week. The idea is to have a very simple product offering. We believe that this market is yet sub-penetrated. Currently, we estimate that the penetration is around 20%-ish. So there is still a lot of room to grow.
When we studied the market, we also understood that there is quite exclusivity in terms of the other, the remaining 80% that did not enter the payment industry at all. We decided also to simplify the pricing. There is only one offering with a very aggressive pricing scheme. We do that, again, by simplifying the product and firstly all the operational efficiency benefits, the consumer benefit or the micro merchant benefit. We launched initially with the settlement being offered through a bank account or a saving account, not only a credit account, but a saving account as well. It is very flexible in that respect. Going forward, it is also the plan to allow the settlement to be done into a prepaid card, as you mentioned. But again, always at the discretion of the client.
If the client want to have a prepaid card to sell, he will have it. Otherwise, he can use whatever credit account or saving account that he might wish to. As for the other points regarding this will evolve into an ecosystem. Yes, of course, it depends on the traction that we expect from the product. But naturally, other products might be distributed through these into a cross-sell agenda.
Thanks for that. That was very useful. Just let me, the last two parts of my question on how do you plan to distribute the product? Is it through online? Is it through the branches? Is it through salespeople? What do you think the cost of acquisition is and what are the targets that you have set for the business, either active merchants by year-end 2019 or 2018 or TPV as well? Thank you.
The main channel that we believe is self-service. It is digital channel. We do not expect to distribute these in other channels, and the main thing for that is that we believe that this kind of targets that we are aiming can be found at a very low cost of acquisition through these domains. As of the branches, in our phase, we do not see much overlap in our branches with the staff that we plan to introduce these in our branches at this point. As of for volumes, what we disclosed is the initial goal of h aving around 100,000 - 150,000 co-customers by this year-end, that is what we have disclosed so far.
Thanks a lot.
Ladies and gentlemen, as a reminder, if you would like to pose a question, please press the star key followed by the one key on your touchtone phone. The next question comes from Jason Mollin of Scotiabank.
Hi. My question is about the sensitivity of your guidance to economic growth and FX volatility. I understand the comments that you are not changing the guidance despite the lower economic growth. Itaú Unibanco has lots of earnings drivers and lots of businesses, and I also recognize how resilient they have been. How should we think about the sensitivity of your business to these kinds of things? The BRL moved 17% in the quarter. Interest rates on the long side moved up and have come back a little bit. We are seeing economic growth expectations slow. How should we think about it? It seems like the origination, you have not seen a negative impact of this volatility as of yet in the second quarter. Should we expect that? If you can just provide some color. Thank you.
Thanks for the question, Jason. I would not say that we did not see a negative impact in the origination with sentiment in the market. I think origination would have been better had we picked more from the purpose drive if the perspectives for the elections were clear, if we have more confidence, especially in the corporate sector. When you look at the corporate sector, you see that in the last quarter, there is no growth at all. But also in the confidence sentiment in general, in the public sentiment in general, I think we can expect a more intense growth in demand for products specifically, but also for services if we have better economics. Having said that, and we try to have low volatility in our results by design.
Because we concentrate ourselves in the less riskier parts of the market, this is why we are not so much affected in the short term by the economic growth. As to FX volatility, we try to operate hedged in FX and in interest rates as much as we can. When we see this movement, and we had movement this, quite a significant movement this quarter, our hedging instruments protect our balance sheet. But expenses will be impacted by more diverse currency because of all the expenses which are made in the offshore banks and different currencies. They are hedged by our end results. Results won't be affected necessarily. The results in Chile, the results in Argentina or in Uruguay and Paraguay will not be affected by the level of FX rate in Brazil.
But the costs in our business, the line of expenses in our balance sheet will be affected by this change. Another important effect of the exchange rate is not on results, is on capital. And you will notice if you go to our MD&A, that we have actively managed our foreign investment in order to avoid the capital consumption, which is normally created by forex devaluation.
That's very helpful. Maybe just a follow-up question on your slide on digital transformation as well. You're showing it's an interesting move from 22% digital operations representing 22% of your operating revenues, moving up to 30% in the second quarter 2018. Can you talk about how you're measuring that? How should we think about you measuring these kind of retail operating revenues? Is there a deposit spread in there? I think clearly it's fee income, loan spread, et cetera. Any color would be helpful. Thanks.
Okay. This is Alexsandro here. Hi, Jason. Alexsandro here. Yes, basically we use the same criteria that we use to measure on the other parts of our financials. For example, if you think about means, for example, we take into account the mean of the transactions originated on the digital branches. So, we consider the spread, we consider the cost allocated, the full cost allocated and its flat and everything else. So it's really an application of our normal criteria to the digital banks and the digital multiple banks. I'm not sure if I answered completely.
Thank you.
Yeah.
Again, if you want to pose a question, please press star one. The next question comes from Eduardo Nishio, Banco Plural.
Hi. Thanks for taking my question and for the presentation. I have two questions as well. First one is on regulation. If you can share your thoughts on recent CPI, Parliamentary Commission of Inquiry, recommendations to Central Bank. I know that Minister Bittar was very supportive with the end of the cross-subsidies in the sector. If you can give any color on what might happen, it would be very helpful. My second question, if you could give us an update on the XP deal, I would also appreciate it. Thank you.
Thank you for your questions, Nishio. Relatively to the CPI in the Congress and its conclusions, I believe that the conclusions of the CPI were positive to the market. They dealt with real problems in the economy. One of these real problems is the very high nominal level of interest rates in credit cards. As you know, one of the main reasons for these very high nominal levels of interest rates in credit cards is the cross-subsidy. In our case, for instance, at Itaú Unibanco, our total credit card portfolio is BRL 60 billion. Out of which BRL 5 billion bear interest and BRL 55 billion don't bear interest. Out of the spread of this BRL 5 billion, we must pay all the delinquencies of all the BRL 60 billion portfolios. This is what causes rates to be so high.
One idea that came out of the CPI is to incentivize a new market, an additional alternative to the installments without interest, which would be the financing in the credit card. In this case, you would probably reduce the payments to the merchant from 30 days to 15 days or even to two days. I imagine that this is a more logical evolution. It's a gradual process and until the product has to be created, has to be adopted by many banks as this ends, we will later gain some market share over the installments, resulting in just creating a better balance in the economy. We will have a higher portion of our credit card portfolio, banks will have a higher portion of their credit card portfolio bearing interest. On the XP transaction, I think there's no comment to be made.
We need to await a decision by the Central Bank of Brazil as to the approval of the transaction. Thank you.
Thank you. Just a follow-up question. There will be probably a shift in economics of the industry, right? We have probably you bear the float from 30 to two days, let's say. On the other hand, you have the interest on the payment with varying interest on credit cards, right? Is that correct?
Let me. When you go to a merchant to buy a shoe, the merchant will offer you two alternatives. One alternative is to pay up front. One alternative is, as you have today, installment without interest. So your shoe will cost BRL 100 and you can pay it in five installments without interest, that is true. Other alternative, new alternative will be, well, you can buy your shoe financed in the credit card with the interest of the credit card, but in this case, the shoe will not cost BRL 100, but will cost BRL 92. And the merchant, if he sells BRL 100 in installments, he will receive the money also in installments 30 days after each installment. And if he sells it in this new modality, he will receive the funds two days after the sale.
Well, thank you. Thank you so much.
You are welcome.
The next question comes from Mario Pierry, Bank of America Merrill Lynch.
Yes. Let me ask one more question then. We are looking on page 15 of your presentation, and you show that your headcounts, especially in Brazil, continues to go up. I think your headcount is up 6% year-on-year. You did have here the integration with Citibank. You also show on page 17, the significant investments in technology, the digital transformation that you are making. I was just wondering, given the benefits or the potential synergies with Citibank, all the investments in technology, why should your headcounts continue to go up? Do you think that the trend in the future is to see much lower expenses going forward? Thank you.
Thank you, Mario. We are still growing our headcount mainly because the investment in people we are making in our new insurance platform and in the acquiring business. They outnumber the economy people, I think improving. I think we are very much in an investing phase in this bank. It is fair to say, on the medium run, that I expect the efficiency of Itaú Unibanco to improve significantly.
Okay. Is it fair to assume then that expenses for you are unlikely, that they should be growing in line with inflation going forward?
I think they should be growing below inflation going forward.
Okay. Thank you.
Thank you.
Once again, if you want to pose a question, please press star one. The next question comes from Carlos Gomez-Lopez, HSBC.
Hi, good morning. My question is on the cost of credit and the recovery from delinquency reduction. How much lower do you think it can get? And when do you expect the bottom in terms of cost of credit, meaning the maximum amount of recoveries, different from in this current vintage?
I'm not sure I understood your question, Carlos. It was concerning the provisions, how much lower it can get, how much lower the delinquency rates can get?
Correct. How much lower can they get? How much lower can the cost of credit be? When do you think we will reach that point?
I think they can go lower. We still see an improving trend. Of course, the provisions, they will increase as the portfolio increases proportionately. But the cost of credit can still go lower because we are seeing still an improvement in the quality of credit. I estimate that we could see until the end of the year an improvement in this. We see the new vintages coming with better figures, better delinquency rates than the old vintages.
Do you think that they're going to continue to improve next year or the year after? Potentially a much separate one.
Well, I cannot see that far forward. We still have the elections in the middle of the year and so on. But I think it is prudent to say that we can see them still improving until the end of this year.
Thank you very much.
Thank you.
This concludes today's question- and- answer session. Mr. Candido Bracher, at this time, you may proceed with your closing statements.
Thank you. I would like to thank you all for your attention and for your questions. I think our results this quarter, we came with a top line which was not to our liking because it was below the previous quarter. But when we look inside the figures, we see very healthy trends. We see a growing credit portfolio. We see growing fees and incomes. We see a growing financial margin with clients. And we see that to the other side were costs, which were normally higher in the second quarter because of trends which we verify as the year, and because of a lower financial margin with the markets, which is perfectly in accordance with the guidance we have provided and with our forecast. Looking forward, we see a continuation of these positive trends in the balance sheets of loan income. Thank you very much.
That does conclude our Itaú Unibanco Holding earnings conference for today. Thank you very much for your participation. You may now disconnect.