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. Later, we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded and broadcasted live on the Investor Relations website at www.itau.com.br/investor-relations. 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 slide presentation is also available on this site. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks, and other factors. With us today in this conference call in São Paulo are Mr. Candido Bracher, President and CEO; Mr. Caio Ibrahim David, Executive Vice President, CFO, and CRO; Mr. Alexsandro Broedel, Group Finance Director and Head of Investor Relations; Marcos Magalhães, Merchant Acquirer 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.

Morning and welcome to our second quarter of 2018 earnings conference call. Before I talk about our figures, I'd like to briefly speak about the macroeconomics in there. 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 troika [ph] 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 reforms, especially the pension [ph] reform. And finally, the relative disappointment with the pace of job creation in the former labor market. Although it's important to say we are still seeing positive far more 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. And although the economy is not growing at the pace we expected in the beginning of the year, we still see some improvement in the macroeconomic fundamentals. In fact talking about 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 replicated the open platform solution we have already adopted in the investment. This means that we started to offer products from other insurers in our platform, focused on meeting our customers. The second commercial initiative is related to our acquiring business. We launched the Pop Credicard trend [Indiscernible] segment, it appeared in our 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 to have a simpler commercial proposal based…

Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Philip Finch, UBS.

Good morning Mr. Bracher. Thank you for your presentation. Two questions from me, please. My first one is regarding your effective tax rate, which was at 33.4% in the second quarter, a bit higher than what we were expecting. Now can you discuss with us what you think would be a recurring level of taxes, bear in mind, potential changes in the level of financial contribution? And my second question is regarding the FX impact on your second quarter results. Obviously, the real weakened not insignificantly in the second quarter. So, how did that impact your numbers, not just loan growth, but NII as well as cost for even taxes? Thank you.

Thanks for your question, Philip. I will hand the phone here to Caio Ibrahim to answer your questions.

Hi, Philip. Thanks for your questions. Considering that the social contribution for next year would be around 15%, which is pretty much what we expect. Effective tax rate would be around 30%, that's the forecast that we are using for next year.

And in the scenario that the social contribution doesn’t come down, what should we see there?

That, of course, would be a little bit higher than this around 32% more or less. Regarding your FX -- yes, go ahead.

Sorry, I was just going to ask about the FX question as well. Please go ahead.

In terms of FX, FX in our balance sheet as you know, we have our investment abroad fully hedged. So that contributes to -- do not have that wagering impacts on our P&L. Of course, when you have the evaluation of the real, you have some impacts in the deferred tax assets, which is pretty much related to an impact in the shareholders' equity. But well, we manage that part well in that financially part of the risk management of the bank regarding market risk.

And 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. So, the cost -- the real devaluated in real terms against the currencies of the countries where we have operations. So, this provokes us -- expressed in real terms, I mean to think we adjust the level of FX. Although, relating to the level of expenses, it's important to express that we have seen this second quarter increase in expenses every year for the past three or four years. And then despite the fact -- on top of the FX effect, you have the effect of the first quarter, it has seasonably a lower cost. So, in the second quarter, we see increases. This year, besides this seasonal effects, we also have the FX rate and some other minor effects of the Soccer World Cup. All that's taken into account--

Thank you very much.

Just expressing, all that taken into account, I mean we're comfortable with the guidance we have supplied for expenses for the 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're already growing ahead of it, of course, the FX helped this quarter. But when we look at origination rebounding, and you look at the levels of where you're already growing, and in Brazil and in your consumer book and in SMEs. Shouldn't we think that it's possible -- you're, at least, you're going to get to the top of the guidance if not surpass it? Second question, you mentioned that you're not -- you haven't increased the risk appetite yet. The bank is still running at the same risk appetite, it's more of a demand function for that acceleration and 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 result of the elections in Brazil? I mean, the operations outside of Brazil are doing really well. [Indiscernible] as a peer stepped turn a 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're going to lower the ratings on the corporate book, we're going to grow a little bit more now there? Take a look and increase our limits. What would it take?

Thanks for the questions. Excellent questions Carlos. So, on your first question, you're right, I mean we are seeing good momentum in FX 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. In which part of the guidance we're going to stay. We have chosen now not to indicate anymore -- within the guidance in which part we are staying. And we're 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 catering, that we have decided not to enter. And this is a structural decision taken already some time ago when we have -- because of our perception that the higher risk segments of the market bring more volatility to results. And we have made an option to have growing results with low volatility. So, whenever the change in risk appetite, what it would take for us to change the risk appetite is basically, I mean, to have the impression that another level of clients of higher risk has become less riskier because of GDP growth, because of sustainable economic growth perspective I had and we don't have it yet. So, we don't see yet that sustainability and economic growth, which can give us the comfort that companies will emerge from a more risky part of the spectrum to become safer credit.

So, just to follow-up. The strategy, therefore, is to remain relatively conservative, though. Attacking the parts of the market where you see less volatility. So, the consumer book or the parts of the consumer book that you have recently accelerated origination fall into that category, like some parts of auto, period loans, or mortgages, that will be accurate to say, right?

Yes, I mean that's accurate to say. I mean that doesn't mean that we're not intensifying our commercial efforts. So, risk appetite is not the only driver of asset growth. Assets also can grow because you make better efforts and the segments which you have already decided to serve and this is what we're doing. That's right.

Okay, perfect. Thank you. Thank you, Candido.

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 say that we have seen the bottom on margins from Brazil win. 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 the product-by-product basis, if you'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. But at the same time, when we look at your coverage ratios, they are historical highs, 250% coverage of NPLs. When I look at your corporate book or your wholesale book, your coverage ratios are around 950%. So, 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, Pierry, 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, I mean how this margin would react to the drop in the credit rates. And I believe this is what we are showing is that this margin is quite resilient to the drop in the credit rate. Then 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 effect and you see that we lose R$12 million in gross margin because of assets spreads. And I still see a trend for spreads to reduce in the local market. I think that partially they will reduce because we will have better credit conditions, we will have the capacity to achieve the risk of positive information about the company. I mean the government is also working in some tax effects of each. I think the general trend is that credit is going to become cheaper. But we expect to grow this margin because frankly, I expect to see more vivid growth in assets, especially depending on the results of the elections and because I think that this move in the mix toward [Indiscernible] of higher spread, this is a trend that we'll still continue for quite some time. I mean I think the possibility of increased lines so far as spreads in individuals and SMEs is a tendency that will stay for quite some time. Now, on asset risk quality and corporate ratios. I must confess that I'm also…

Perfectly. 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 POP 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 a full ecosystem of products and services in helping micro-merchants from your business better. Or is it going to have a prepaid cards just as their competitors that are in that micro-merchants space? Is required to have a bank accounts? With credit Credicard POP, I believe, your competitors don't require one? How are you going to distribute the product? Are you going to have salespeople? Are you going to leverage the branches? Are you going to advertise? You know what do you think the cost of acquisition is going to be? And 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 your question, Jorge. I will pass the floor to Marcos Magalhães, the Executive Director for Acquiring business. Marcos Magalhães: Jorge, Marcos here. Thanks for the questions. First let me comment on the -- on why we decided to launch these products. And the main reason is that because for our traditional acquiring operation, this segment is pretty much new. We don't -- our current offering traditionally didn't tap into that sort of segment, self-employed and micro-merchant segment. So, in the commercializing that we planned for our business, we advised this opportunity a while ago, and we finally launch this introducing the initial POP as 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%, 20%-ish. So, there is still a lot of room to grow. When we started the market, we also understood that there is a price elasticity in terms of the other -- the remaining 80% that you didn't answer the payment industry, if you will. And so we decided to also to simplify the pricing, to create only one with a very aggressive price, if you will. And we did that, again, by simplifying the product and plus all the operational efficiencies that we gained through the consumer benefit or the micro-merchant benefit. We lost initially with the sentiment being offered through our bank account or a saving account, not only current account, also saving account as well. And so it's very flexible in that respect. Going forward, it is also the plan to allow the settlement to be done in the prepaid card as you mentioned, but again always at the discretion of the client. So, if the clients want to have our prepaid card settled, he will have it, otherwise he can use whatever -- credit account or saving account that he might wish to. And as far the points regarding this will result into ecosystems, yes, of course, depends on the traction that we expect from the project, but naturally, other products might be distributed through these into our cross-sell agenda.

Thanks for that. That was very useful. Just let me -- in the last two parts of my question on how do you plan to distribute the product? Is it through a line? Is it through branches? Is it through salespeople? What do you think cost of acquisition is? And what are the targets that you've set for the business, are they active merchants by year end 2019, or 2018 or TPV as well? Thank you. Marcos Magalhães: Okay, the main channel that we believe are self-serving so its digital channel. We don't expect to distribute these model 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, we -- in our case, we don't see much overlap in our branches with this target group. So, it is not our priority to introduce in our branch at this point. As of volumes, what we disclosed is the initial goal of having around 100,000 to 150,000 credit customers by this year end, and that's what we have disclosed so far.

All right. Thanks a lot.

[Operator Instructions] The next question comes from Jason Mollin, Scotiabank.

Hi. My question is about the sensitivity of your guidance to economic growth and FX volatility. I understand that the comments that you're not changing the guidance despite the lower economic growth. Itaú Unibanco has lots of earning drivers and lots of businesses, and I also recognize how resilient they have been, but how should we think about the sensitivity of your business to the times of it -- I mean, the real moved 17% in the quarter. Interest rates, on the long side, moved up and have come back a little bit. We're seeing more growth expectations slow? I mean how should we think about it. I mean it seems like the origination has not -- you haven't seen a negative impact of this volatility as of yet in the second quarter. Should we expect that? And if you could just provide some color? Thank you.

Thanks for your questions Jason. So, I would not say that we did not see a negative impact in the origination from this worse sentiment in the market. I think origination would have been better had the -- if it was for the further strike, if the perspectives for the elections were clear. And so, if you have a more -- especially, the corporate sector. When you look at the corporate sector, you see that in the last corporate, there's no growth at all. But also, in the confidence sentiment in general, in the project sentiment, in general, I think we can expect a more dense growth in demand for credit, specifically, but also for services if we have better economics. Having said that and we try to be -- to have lower volatility in our results by design. So, because we concentrate ourselves in the less riskier parts of the markets, maybe this is why we are not so much affected by 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. So, when we see this movement -- and we had moments this quarter, significant movements this quarter. Our hedging instruments, I mean protect our balance sheet. But expenses will be impacted by more developed currency because of all the expenses, which are made in the offshore banks and these are not hedged. They are hedged by their own results. But if results won't be affected, necessarily the results in Chile, the results in Argentina, [Indiscernible] will not be affected by the level of FX rate in Brazil. But the costs and the line of expenses in our balance sheet will be affected by this way. Another important effect of the exchange rate is not on results, is on capital. And you will notice if you go through our MD&A that we have actively managed our foreign investments 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 of 2018. Can you talk about what -- like how you're measuring that? Is that -- how should we think about your measuring this kind of retail operating revenues? Is there a deposit spread in there? Is there I think thing clearly it's fee income, loan spreads, et cetera, any color would be helpful. Thanks.

Okay. To details on the account, I will pass it on to ask to Alexsandro. Go ahead.

Hi Jason, Alexsandro here. Yes, basically the same criteria that you use to measure on the other parts of our financial spreads. For example, take about mean for example, we take into account the mean of the transactions originated on the digital branches. So, you can see that the spread continue the cost is allocated. The full cost allocated system and with cash allocated and everything else. So, it's pretty allocation of our normal criteria to the digital banks and the brick and mortar rate. Not sure if I answered it completely.

Thank you.

[Operator Instructions] The next question comes from Eduardo [Indiscernible].

Hi. Thank you. Thank you for taking my question and for the presentation. I have two questions as well. First one is on revelation. If you can share your thoughts on recent CPE [Indiscernible] commission inquiry, recommendation to Central Bank. I know that Mr. [Indiscernible] was very supportive with the end of the cross subsidies in the sector. If you can give any color on what might happen, will be very helpful? And my second question, if you could give us an update on the shift in XP deal, I will also appreciate it. Thank you.

Thank you for your questions, [Indiscernible]. So, relatively to the CPE in the Congress and its conclusions, I believe that the conclusions of the CPE were positive to the market. That is real problems in the economy. One of those real problems is the very high nominal level of interest rates in credit cards. And as we know, one of the main reasons for this very high-level number of levels as interest rates in credit cards is cross-subsidies. In our case, for instance of Itaú, our total credit card credit portfolio is R$60 billion, out of which R$5 billion bear interest and R$55 billion don't bear interest. So, -- and out of the spread of this R$5 billion, we must pay all the delinquency of all the R$60 billion portfolio. So, this is what causes rates to be so high. One idea that came out of the CPE is to incentivate a new market, an additional alternative to the installments results without interest, which will be refinancing in the credit card and in this case, you would probably reduce the payment to the merchants from 30 days to 15 days or even to a five until two days. So, I think we made -- I imagine that this is a more logical evolution. It's a gradual process. So the project has to be created, has to be adopted by many banks as this bank will later gain some market share over the installment resulting just creating a better balance in the economy. So, we will have a higher portion of our credit card portfolio, banks will have higher portion of their credit card portfolio bearing interest. On the XP transition, I think there's no comment to be made. I mean we still await a decision by the Central Bank as to the approval of the transaction. Thank you.

Thank you. Just a follow-up question. So, there'll be probably a shift on economics of the industry, right? So we have -- probably you bear the float from 30 to two days, let's say. And then on the other hand, you have the increase on the payment with bearing interest credit cards, right. Is that correct?

So, when you go to a merchant to buy a shoe, the merchant will offer you two alternatives or three. One alternative is to pay at site. One alternative is we have today, installment result interest. So, you can -- your shoe will cost R$100 and you can pay it in five installments without interest, of R$20 each installment. And another alternative, a 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 won't cost a R$100, but it will cost R$92. And the merchant, if he sells R$100 in installments, he will receive the money also in installments 30 days after each installment. And if he sells it into the new modality, he will receive the funds two days after the sale.

Got it. Thank you. Thank you so much.

You're welcome.

The next question comes from Mario Pierry, Bank of America Merrill Lynch.

Yes. Let me ask one more question. Looking on page 15 of your presentation and you show that your headcount, especially in Brazil, continues to go up, right. I think your headcount is up 6% year-on-year. You did have the integration of Citibank. But also, you show on page 17 the significant investments in technology, the digital transformation that you're making. So, I was just wondering, given the benefits or the potential synergies with Citibank, all the investments in technology, why should your headcount continue to grow up? Or do you think that the trend in the future is to see much lower expenses going forward? Thank you.

Thank you, Mario. We're still growing our headcount, mainly because the investment in people we are making in our new insurance platform and in the acquiring business. We outnumber the economies of people we are having due to technology improvements. I think we're very much in investing phase in the bank and it's fair to say on the medium run that I expect the efficiency in the bank to improve significantly.

So, is it fair to assume 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.

[Operator Instructions] The next question comes from Carlos Gomez, HSBC.

Hi, good morning. hello. My question is from the cost of credit and you have credit [Indiscernible] reduction. How much lower do you think it can get? And what do you expect the bottom in terms cost of credit? Meaning the maximum amount of your recoveries, the green point in this credit cycle? Thank you.

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 get? And where do you think we will reach that point?

I think, they can go lower. You still see I mean this improving trend. Of course, the provisions, they will increase as the portfolio increases; proportionate to it. But the cost of credit can still go lower because we are seeing still an improvement in the quality of credit. I think I estimate that we can see until the end of the year an improvement in this indexes. And we're going to see the new vintages coming with the better figures, or better delinquency rates than the older vintages.

So, you think the delinquencies can -- again, continue to improve, let's say, next year or the year after? So, we are not at the bottom yet?

Well, I can't see that far forward. We still have the elections in the middle of the year. So, I think it's 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. So, I'd like to thank you all for your attention and for your questions. I think our results this quarter, they came with topline, which was not to our liking, because it was blow the previous quarter. But when we look inside the figures, we see very healthy trends. We see growing credit portfolio, we see growing fees and incomes, we see growing financial margin with clients and the effects to the other side were costs, which were normally higher this second quarter because of trends which we verify every year, and because of our lower financial margin with the market which is perfectly in accordance with the guidance we have provided and with our forecast. So, I mean looking forward to see a continuation of this positive trends in the balance sheet of growing. 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.