UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 20-F
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2013
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934
Commission file number: 001-15276
ITAÚ UNIBANCO HOLDING S.A.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Federative Republic of Brazil(Jurisdiction of incorporation)
Praça Alfredo Egydio de Souza Aranha, 10004344-902 São Paulo, SP, Brazil
Alfredo Egydio Setubal (Investor Relations Officer)e-mail: aes-drinvest@itau-unibanco.com.brTelephone number: +55-11-5019-1549
Securities registered or to be registered pursuant to Section 12(b) of the Act:
*Not for trading purposes, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None.
Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act:
The number of outstanding shares of each class of stock of ITAÚ UNIBANCO HOLDING S.A., as of December 31, 2013 was:2,518,215,040 Common Shares, no par value per share
2,509,814,670 Preferred Shares, no par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
INTRODUCTION
The information found in this annual report on Form 20-F is accurate only as of the date of this annual report on Form 20-F and information incorporated by reference is accurate only as of the date of the document in which it is contained. Our activities, the condition of our finances and assets, the results of transactions and prospects may have changed since that date.
Information contained in or accessible through the websites mentioned in this annual report on Form 20-F is not part of this annual report unless we specifically state that it is incorporated by reference and is part of this report. All references in this annual report on Form 20-F to websites are inactive textual references and are for information only.
FORM 20-F CROSS-REFERENCE INDEX
(for the purpose of filling with the United States Securities and Exchange Commission)
Annex A – Annual Report
Index
Macroeconomic context
Most of the needed fiscal adjustment in Europe has been made. As a result, confidence and financial conditions have been improving and economic growth seems to have resumed in the second half of 2013. Downside risks have diminished significantly, but have not disappeared. Unemployment rates in Europe as of December 2013 were very high and are expected to decline slowly as real gross domestic product, or GDP, recovery is expected to maintain slow rates through the end of 2014. In that scenario, the necessary further fiscal and structural reforms could become politically impracticable.
In addition, high unemployment rates have prompted a decline in inflation to very low levels as of December 2013, below the European Central Bank’s, or ECB’s, target. The ECB has responded accordingly by cutting interest rates in 2013 and pledging to maintain monetary easing in the future. However, additional stimuli may be required to counterbalance deflationary forces. In that case, there is a risk that the ECB could be constrained to provide further monetary stimulus, including through unconventional monetary policy tools.
The unprecedented monetary policy measures implemented by developed countries since 2008 created a period of significantly increased liquidity for emerging markets that boosted asset prices. However, as the U.S. economy recovers and its outlook improves, the U.S. Federal Reserve has begun to cautiously reduce the monetary stimulus. A gradual monetary policy normalization has been absorbed relatively well by the emerging markets so far.
However, the smooth exit from a period of extraordinary monetary stimulus remains a challenge in the coming years. This transition may result in higher volatility of asset prices in emerging markets and may potentially impact our operational results.
U.S. real GDP grew 1.9% in 2013 and we forecast a 3.0% growth in 2014. U.S. economic growth accelerated to an annualized rate of 3.7% in the second half of 2013, temporarily boosted by inventory accumulation. Final demand increased at a moderate 2.6% annualized growth rate. Nonetheless, economic conditions seem to be improving. The 2014 fiscal year budget should result in less fiscal uncertainty, which in turn might increase investor confidence. Moreover, conditions in the U.S. financial markets remain conducive to economic growth. The export outlook has been improving in tandem. Finally, the job market is showing robust signs of strengthening, with monthly job creation averaging approximately 180,000 positions in 2013.
In China, GDP grew 7.7% year-over-year in 2013. The increase in activity occurred as Chinese policymakers reinforced their commitment to curtailing short-term volatility in growth rates and introduced limited stimulus measures to support economic activity. In November 2013, the Chinese government outlined reform plans intended to improve the overall productivity of the Chinese economy. This is expected to help rebalance the economy and sustain growth in the medium-term, although some implementation risks remain.
In Latin America, economies have shown lower growth rates in 2013 than those observed in the preceding three years. In the countries where inflation is low, central banks are able to react through monetary easing in spite of a less expansionist monetary policy in the U.S. This is the case of Colombia, Peru and Mexico.
Apart from a looser monetary policy, Mexico’s economy is expected to benefit in 2014 from higher growth in the U.S. and a higher public deficit. Economic reforms, especially the energy reform approved at the end of 2013, are expected to increase potential growth over the next few years.
In Argentina, controls over exchange rate transactions were not able to avoid losses of reserves in 2013 and the Argentine central bank had to increase the pace of nominal devaluation. However, higher exchange rate depreciation has not been accompanied by a tighter monetary policy, so inflation is expected to rise further.
Our results of operations since the last quarter of 2008 have been partially negatively affected by the global financial markets crisis. Fiscal problems in advanced economies, sluggishness in developed countries and inflation and other issues in developing economies may have an impact on future growth in Brazil and, therefore, on our results of operations.
The Central Bank reduced the benchmark interest rate payable to holders of securities issued by the Brazilian government and traded through the Special Clearing and Settlement System (Sistema Especial de Liquidação e Custódia, or the “SELIC”) from a high of 19.75% in May 2005 to a low of 7.25% in October 2012.
In January 2014, the SELIC rate was raised to 10.5%. As a proportion of GDP, bank lending increased to 56.5% in December 2013, compared to 53.8% in December 2012. The recent increase in interest rates has also triggered an increase in the reference interest rate (Taxa Referencial, or “TR”), from approximately 0.0% in December 2012 to approximately 0.05% in December 2013.
Consumer price inflation decreased in 2012 but remained at high levels, reflecting higher commodity prices, exchange rate depreciation and an overheated labor market. The Consumer Price Index (Índice de Preços ao Consumidor Amplo, or IPCA) decreased to 5.8% in 2012, compared to 6.5% in 2011. The twelve-month IPCA inflation rate ending in December 2013 reached 5.9%, above the Central Bank’s target of 4.5%, mainly due to increases in the price of food and services. Inflation averaged 5.5% from 2004 to 2013.
The monetary tightening cycle implemented by the Central Bank since April 2013 is expected to keep inflation under control but could also impact domestic activity. If inflation persists or economic activity declines, income of families may decrease in real terms and could eventually lead to higher delinquency rates in the Brazilian banking system.
The Brazilian government has provided tax incentives in order to stimulate domestic activity. In the future, the Brazilian government could further reduce taxes to stimulate economic growth. We are exposed to tax policy and regulatory changes, which are sometimes adopted on short notice.
In addition, Brazil has experienced a large number of regulatory changes, such as changes in reserve and capital requirements, as well as other macro-prudential policies (such as capital controls). In the second half of 2012, the Central Bank also altered the rules for reserve requirements. In September 2012, the additional reserve requirement for demand deposits decreased from 6.0% to zero, and in March 2013, the additional reserve requirement for time deposits decreased from 12.0% to 11.0%. In July 2013, the Central Bank brought forward the timeframe for the revocation of the rule that reduces interest applicable to reserve requirements over time deposits to March 2014. This reduction was aimed at stimulating the transfer of liquidity from larger to smaller financial institutions and resulted in more than R$46 billion being injected in smaller financial institutions.
The Brazilian real depreciated in relation to the U.S. dollar, reaching R$2.36 per US$1.00 as of December 31, 2013, from R$2.05 per US$1.00 as of December 31, 2012. Rising risk premiums in emerging markets and the partial withdrawal of monetary stimuli in the United States were the main drivers behind this movement. On December 18, 2013, the Central Bank announced the extension of its foreign exchange intervention program (which started on August 22, 2013), with some modifications. At least until June 2014, the Central Bank is expected to offer US$1 billion per week in the derivatives (“swaps”) market.
Brazil’s current account deficit (net balance from trade of goods and services and international transfers) reached 3.7% of the GDP as of December 31, 2013, an increase from 2.4% as of December 31, 2012. Despite the widening of its current account deficit, Brazil maintains its external solvency, with US$376 billion in international reserves and US$312 billion in external debt as of December 31, 2013.
Real total outstanding loan growth slowed to 10.0% in 2012 (from 11.5% in 2011), due to higher non-performing loans (credit transactions with at least one payment overdue for over 90 days) during 2011 and the first half of 2012 and a modest increase in economic activity in 2012. While outstanding loan growth varied across the financial industry, state-owned financial institutions continued to widen their market share.
These trends continued in 2013, with the credit market showing limited signs of improvement. Real year-over-year total loan growth in Brazil has slowed down from 10.0% by the end of 2012 to 8.2% in December 2013. Total new loans in Brazil grew at a real annual average of 5.1% until December 2013. Growth of non-earmarked credit transactions has continued to decline, and growth of credit transactions earmarked for specific purposes (e.g., rural lending) is also beginning to decelerate. Consumer non-performing loans in Brazil have decreased, from 5.6% of total consumer loans as of December 2012 to 4.4% as of December 2013. Commercial non-performing loans have also decreased, from 2.2% of total commercial loans in December 2012 to 1.8% in December 2013.
Initiatives by the Brazilian government to decrease interest rates on consumer borrowing may also affect our results. In 2012 and the beginning of 2013, the government used two instruments to reduce interest rates for new credit transactions: lower funding costs through cuts of the SELIC rate and price competition through state-owned financial institutions. With the increase in the SELIC rate starting in April 2013, interest rates on consumer borrowing started increasing again. However, spreads remained practically stable. The average interest rate for new credit transactions increased to approximately 19.7% in December 2013 from 18.0% in December 2012, after a decrease from 22.8% in December 2011. Although funding rates may increase again due to monetary policy tightening, price competition through state-owned financial institutions may still be used as an instrument to keep rates at historically low levels in Brazil.
Furthermore, regulatory changes for the domestic banking sector have recently been released, such as new rules for implementation of the Basel III framework in Brazil, including further modifications to capital requirement models. These changes have the potential to adversely affect our operations and profitability.
In mid-2013, a series of protests occurred throughout Brazil. The Brazilian government has announced its intention to address certain issues raised by protesters, including the quality of public services, political reform and fiscal responsibility. As a result, a political reform has started to be discussed in Brazil, but no decision has been made.
The table below shows the real GDP growth, the inflation rate, exchange rate variation and the interest rates in Brazil as of and for the years ended December 31, 2013, 2012, 2011, 2010 and 2009:
Context of Itaú Unibanco Holding
Dear Stakeholder,
Our economic scenario went through significant changes in 2013, mainly due to the recovery of the US economy, which strengthened the US dollar and led to the fall in prices of assets in emerging markets. The Brazilian GDP increased below the expected rate for the year, but unemployment remained close to the historical lowest levels. We have noted a lower growth in credit in Brazil, unemployment rates are falling and types of loans with longer terms have gained more space, such as real estate loans.
In 2013 we proved that the strategy we adopted two years before was the right one. In 2011 we thought ahead of the market and increased the control over risks and expenses, by engaging the whole bank, which led to our reaching good results. Accordingly, we again prove that team work, constantly focused on our clients, makes all the difference to create value to our stockholders over time.
In 2013 and early 2014 we moved forward in our strategy to internationalize the bank in Latin America, and became the leaders in customer satisfaction. We have recently announced the merger of our Chilean operation with Corpbanca, which is pending approval from regulatory bodies. This operation will make us the fourth largest bank in Chile and the fifth largest in Colombia. Our investment of R$11.1 billion in technology will enable us to offer safer and more expeditious service to our customers. Also in 2013, with the acquisition of Credicard, we are now responsible for offering and distributing financial products and services of the Credicard brand, thus contributing to the increase in our service revenues.
Our path shows that we anticipate scenarios, either favorable or challenging ones. Now is the time for us to remain attentive to the control over risks and expenses, by keeping a fair risk appetite and striving not to miss any opportunities to increase our revenues on a sustainable manner throughout our several business areas.
In 2014 our institution will celebrate its 90th anniversary. We are the largest private bank in Brazil and an important competitor in Latin America. Few institutions have managed to build up such a successful history. This would not be possible if we could not count on a sound corporate structure, and a set of values, beliefs and attitudes adopted all the time by all our employees, as well as a strong governance structure. Today the controlling ownership group ensures a long-term vision and the commitment to a professional management, by clearly defining the role that each employee plays in the organization, strengthened by our corporate vision to “be the leading bank in sustainable performance and customer satisfaction”.
Accordingly, we invite you to read this report, which consolidates Form 20-F, Annual and Debt Reports, details our context, profile, business, governance, risk management and financial performance. Our common objective remains unchanged: Improve and strengthen our Corporate Governance practices, as well as to expand the dialogue with our stakeholders.
Have a good reading!
Yours faithfully,
Pedro Moreira Salles
Chairman of the Board of Directors
Over the past years, we have witnessed times of uncertainty in Brazil and in the world, with a slower growth of the Brazilian economy and volatility in the international market, which has affected the bank’s results.
In view of this economic scenario, we have been internally re-discussing our strategy in banking operations for two years. We reduced the risk profile of our loan portfolio, focused more on banking service fees and revenue from insurance operations, adopted a strict policy for the control of expenses and intensified our efforts to improve efficiency.
The expectation that the reduction in the margins would be offset by lower losses from the expenses for allowance for loan losses has materialized. Our banking service fees and revenue from insurance operations grew 17.2%. Our expenses grew only 4.8%, resulting in a lower risk-adjusted efficiency ratio. In 2013, our net income was R$16.5 billion, an increase of 30.0% from 2012, and the annualized return on average stockholders’ equity reached 21.0%, the best result since the merger of Itaú and Unibanco, reflecting the improvement of the bank’s operational quality. This performance is directly related to the improvement in the quality of credit, which results from higher selectivity in the granting of credit and higher growth of lower-risk products, with a focus on the larger offer of value-added services to clients and cost control. As a result, our risk-adjusted efficiency ratio for the year reached 69.5%.
Our total loan portfolio grew 12.2% in relation to December 31, 2012 to R$411.7 billion. The default rate reached 3.7%, the lowest level since the merger, which is the result of our prioritizing lower risk portfolios, and it is expected to continue to drop. Among the highlights are the payroll loan, real estate loan and corporate loan portfolios, which increased 66.6%, 32.8% and 21.9%, respectively. Loans in Latin America, excluding Brazil, totaled R$36.3 billion, an increase of 33.5% in the year. These portfolios are expected to continue to grow in 2014.
We maintain our intention to expand our operations in Latin America, particularly in the retail segment. In 2013, we announced the acquisition of the retail operation of Citibank in Uruguay, which has already been approved by the regulatory bodies. At the beginning of 2014, we formalized the merger of Banco Itaú Chile with CorpBanca, which has operations in Chile and Colombia. Itaú CorpBanca will be one of the most robust institutions in Latin America. At the moment, we do not intend to expand our operations in Paraguay and Uruguay, where we are already strong, but we are interested in entering the Mexican and Peruvian markets.
In 2013, we acquired shares of BMG Seguradora, the retail operation of Citibank in Uruguay and Credicard. This last acquisition is in line with the repositioning of the REDE brand, which will enable our evolution in services of electronic payment methods.
The investment of R$11.1 billion in technology will contribute to improve processes, reduce costs and increase productivity gains. As a result, we will increase the availability of our products and services, including the development of tools to meet the growing use of electronic channels. The construction works of our new data center are expected to be completed in the first quarter of 2014.
In 2014, we will maintain our strategy, which has proved to be right, generating return for our shareholders. We will maintain our focus on the improvement of credit quality, on the sustainability of the banking service fees and on the discipline in cost control, emphasizing the quality of services in general, cross selling and customer service.
This is the first report that combines the annual report, the Form 20-F and the prospectus for the issue of debt. This initiative allows for cost reduction, efficiency increase and productivity gain.
We thank all our shareholders for the trust placed in us.
Enjoy your reading.
Roberto Setubal
CEO
Expand our operations in Brazil and abroad
We intend to expand our operations in Brazil and abroad. In January 2014, we announced the merger of Banco Itaú Chile S.A. with CorpBanca S.A. to form Itaú CorpBanca S.A., which we will control. Through this merger we expect to become the fourth largest bank in Chile and the fifth largest bank in Colombia in terms of outstanding loans. The merger is still subject to regulatory approvals in Brazil, Chile, Colombia, Panama and the United States.
In 2013, we carried out a series of transactions aimed at expanding our operations in Brazil. In December, 2013 we concluded the acquisition of 100.0% of the shares of Banco Citicard S.A. and Citifinancial Promotora de Negócios S.A., for approximately R$2.8 billion in cash, including the “Credicard” brand. In Latin America, we acquired Citibank Uruguay on June 28, 2013, including both retail banking and credit card operations. In addition, in order to consolidate and expand operations in Europe, in 2013 we completed the transfer of the central administration and registered offices of Banco Itau BBA International from Lisbon to London by means of a cross-border merger. Please refer to section Itaú Unibanco Holding, item Our Business, Our International Business, Other International Operations, Itau BBA International for further details about Itau BBA International’s business.
In 2012, we successfully acquired the remaining 49.9% of Redecard from minority shareholders by means of a tender offer, for R$11.8 billion. On July 9, 2012, we entered into an association agreement with Banco BMG S.A., aiming at the offering, distribution and commercialization of payroll advance loans. We were also authorized by the Colombian regulatory authorities to structure our wholesale and investment banking operations in Colombia through Itaú BBA SA Colombia. We expect these transactions, which added to the significant steps taken in 2011 described below, to expand our wholesale and investment bank operations abroad, our offering of products and services and our distribution channels.
In 2011, we entered into an agreement with Munita, Cruzat & Claro, one of the leaders in third party wealth management services in Chile. Also in 2011, we acquired HSBC Bank’s high net worth portfolio in Chile, strengthening our position in the Chilean market, with a network of 88 branches in that country. In addition, we started operations in Switzerland through a subsidiary of Banco Itau BBA International located in Zurich to provide services to private banking clients, both Brazilian and Latin American, who seek global investment opportunities. In April 2011, we entered into an agreement to acquire 49% of Banco CSF S.A. or Banco Carrefour, responsible for the offer and distribution, on an exclusive basis, of financial, insurance and pension plan products and services in the distribution channels operated under the “Carrefour” brand in Brazil.
Continue to improve efficiency
After the completion of the integration of Itaú and Unibanco branches in 2010, we established an Efficiency Program aimed at identifying, implementing, and monitoring costs and revenues, in addition to promoting a strong culture of operational efficiency. In 2011, we fully integrated all systems from Unibanco (including legacy information) into Itaú Unibanco’s systems. In 2012 and 2013, we focused on increasing cost savings by reducing unnecessary costs, promoting the simplification and centralization of processes and job descriptions, promoting synergy gains and combining the management of certain business units.
We also aim at simplifying our structure in order to sustain growth. We are committed to improve processes, to streamline operations, to be more efficient in everything we do with the clear purpose of client satisfaction. As an example of how we propose to meet the expectations of an increasingly demanding market, in the beginning of 2013 we announced changes to our executive structure, which we believe will enable us to organize our operations in a simpler and more efficient manner.
Grow our loan portfolio while maintaining asset quality
The growth of our loan portfolio and the maintenance of asset quality are central aspects of our strategy. We are constantly seeking to improve our models for risk management and our economic forecasts and scenario modeling. We intend to increase the average volume of loan operations to maintain and even grow our market share, depending on product, market and client type, including through the development of new products for specific client demographics.
In 2012 and 2013, we focused on the improvement of our asset quality by increasing credit selectivity and by changing our loan portfolio mix by prioritizing the sale of less risky products, such as real estate and payroll loans, and reducing the origination of higher risk portfolios, such as vehicle loans.
Develop strong relationships with our clients based on client segmentation
We will continue to work on our client segmentation strategy in order to identify our clients’ needs and enhance our relationship with our client base, as well as to increase market penetration. We believe that our client segmentation tools and strategy provide us with an important competitive advantage developed over the course of more than 25 years. We aim to fulfill clients’ financial needs through a wide product portfolio, including by cross-selling banking and insurance products and making sales through a variety of channels. We are focused on delivering “best-in-class” client service, in order to maintain and increase client satisfaction and increase portfolio profitability.
In 2013, we moved our middle-market banking business (companies with an annual revenue between R$30 million and R$300 million) from our Commercial Bank – Retail segment to our Wholesale segment. Starting in the first quarter of 2013, these clients became by Itaú BBA clients and, as a consequence, to receive services more in line with their needs.
Higher service fee-based income growth
We constantly seek, implement and focus on the sale of new products and services which, we believe add value to our customers and, at the same time, allow us to increase our fee-based income. This increase is mainly due to an increased volume of packages and services, one of the most significant of which is a package that converts fees paid by clients into mobile phone credits. New subscriptions to current account service packages and the adjustment of services provided to our Uniclass clients and by our Itaú Empresas business unit also contributed for this growth. In addition, we continue to focus on increasing our revenues from insurance services. Please refer to section Itaú Unibanco Holding, item Our Business, Commercial Bank – Retail, Overview of Accountholder Products and Services, Retail Banking for further details about Uniclass clients.
Context of this report
This edition of our annual report brings structural and conceptual changes from previous editions. Such changes represent the search for innovation, transparency, and efficiency in obtaining information and in the communication with the public of interest. This report unifies the content of our major annually released reports, such as the annual report on Form 20-F, the Annual Report, and the Offering Memorandum for the Medium-Term Note Program, or MTN Program. The annual report on Form 20-F, filed with the U.S. Securities and Exchange Commission, or SEC, served as reference for the minimum content of this report.
The annual report is the account of our strategy, our structure, our activities, our operations, and mainly the way in which we generate value for our publics of interest, including the society, shareholders, clients, and employees.
We used plain and straightforward language to be clear to all audiences who may consult this annual report. For technical terms and specific market expressions, we have included a glossary for the reader to better understand this annual report.
The information presented is aligned with Pronouncement 13 of the Comitê de Orientação para Divulgação de Informações ao Mercado, or CODIM (Market Information Disclosure Steering Committee), a Brazilian joint initiative of entities representing the capital markets, focused on improving transparency and information reporting in the Brazilian capital markets.
This annual report contains data from January 1 to December 31, 2013, presenting our corporate and business structure, governance and finacial performance, among other matters. The description of our challenges for 2014 in the medium and long term results from interviews carried out with our executives and are aligned with our quarterly conference calls on results.
This annual report includes information on all entities subject to the significant influence or control of Itaú Unibanco Holding S.A. Any potential changes or impacts on the data collected as a result of certain transactions, the acquisition or sale of assets, or any important change for the business is indicated throughout this report.
The survey of material topics that show the evolution of our practices was carried out in accordance with our strategy of sustainability. In 2013, we also adopted the guidelines of the Dow Jones Sustainability Index, or DJSI, of the New York Stock Exchange – one of the most important references to evaluate sustainability management in the stock markets. In 2013, we included BM&FBovespa’s Corporate Sustainability Index in this analysis.
The audit of our financial statements in IFRS is carried out by PricewaterhouseCoopers, or PwC.
Comments and suggestions regarding this report should be sent do the following address: relacoes.investidores@itau-unibanco.com.br.
We use accounting practices adopted in Brazil and applicable to institutions authorized to operate by the Central Bank for our reports to Brazilian shareholders, filings with the Securities and Exchange Commission of Brazil (the “CVM”) and calculation of payments of dividends and tax liabilities.
The National Monetary Council (CMN) establishes that financial institutions meeting certain criteria, such as Itaú Unibanco Holding, are required to present consolidated financial statements in accordance with IFRS.
The segment-related data have been derived from our management reporting systems and are not based on IFRS, nor were they prepared in accordance with these accounting standards.
Please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 34 – Segment Information for further details about a discussion on the main differences between our management reporting systems and the consolidated financial statements according to IFRS.
Our consolidated financial statements for December 31, 2013, 2012 and 2011 were audited by PricewaterhouseCoopers Auditores Independentes, an independent audit firm, as stated in its opinion in section Performance, item Financial Performance in this report.
Please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 2 – Significant Accounting Policies for further details about the significant accounting policies applied in the preparation of our consolidated financial statements according to IFRS.
Additionally, acronyms used repeatedly in this annual report will be explained or detailed in the section “Glossary”, as well as the full name of our subsidiaries and other entities referenced in this annual report.
The reference date for the quantitative information for balances found in this annual report is as of December 31, 2013 and for results is for the year ended December 31, 2013, except where otherwise stated.
Our fiscal year ends on December 31 and, in this annual report, any mention to any specific fiscal year refers to the 12-month period ended on December 31 of that year.
The information found in this annual report is accurate only as of the date of such information or as of the date of this annual report, according to the situation. Our activities, the situation of our finances and assets, the results of transactions and prospects may have changed since that date.
This document contains information, including statistical data, about certain markets and our competitive position. Except as otherwise indicated, this information is taken or derived from external sources. We indicate the name of the external source in each case where industry data is presented in this annual report. We cannot guarantee the accuracy of information taken from external sources, or that, in respect of internal estimates, a third party using different methods would obtain the same estimates as us.
Information contained in or accessible through the websites mentioned in this annual report does not form part of this report unless we specifically state that it is incorporated by reference and forms part of this report. All references in this report to websites are inactive textual references and are for information only.
The words “believe”, “may”, “will”, “estimate”, “continue”, “anticipate”, “intend”, “expect” and similar words are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in such forward-looking statements.
In numbers
The following selected financial data must be read in conjunction with the section Performance, item Results and Consolidated Financial Statements (IFRS) included in this annual report.
The data presented in the tables below have been derived from our audited consolidated financial statements for the years presented, which have been prepared in accordance with IFRS as issued by IASB, unless otherwise indicated.
1. The average balances are calculated on a monthly basis. Please refer to section Attachments – Selected statistical information, item Average balance sheet for further details.
Information on earnings and dividends per share
Selected consolidated ratios
Other data
2013 highlights
Citibank in Uruguay – On June 28, 2013, through our subsidiary Banco Itaú Uruguay S.A., we signed an agreement with Citibank N.A., Uruguay branch, for the acquisition of their retail operations in Uruguay, positioning us to assume a portfolio of over 15,000 clients in current account, savings account and time deposits. The transaction closed on December 13, 2013 after all applicable regulatory approvals were obtained.
BMG Seguradora S.A. – On June 25, 2013, through Banco Itaú BMG Consignado S.A., or Itaú BMG Consignado, we entered into an agreement with the controlling shareholders of Banco BMG S.A., or Banco BMG, for the acquisition of 99.996% of the shares issued by BMG Seguradora S.A., or BMG Seguradora, for the approximate amount of R$85 million. BMG Seguradora entered into exclusivity agreements for the distribution of insurance products that will be linked to the products sold by Itaú BMG Consignado and Banco BMG as a condition precedent to the closing. The transaction has been approved by the Administrative Council for Economic Defense (CADE), the Central Bank and the Superintendency of Private Insurance (SUSEP) and the closing of the transaction occurred on January 27, 2013. The acquisition of the shares of BMG Seguradora has been subject to ongoing review by SUSEP.
Cencosud – On June 17, 2013, we signed a Memorandum of Understanding (“MOU”) with the Chilean retail chain Cencosud S.A., sealing a strategic alliance for 15 years. The purpose of this association was to offer consumer finance products and services, in particular those related to credit cards, in Chile and Argentina. The association’s activities would be carried out by special purpose entities in Chile and Argentina, 51.0% of which would be held indirectly by us and 49.0% by Cencosud. On December 23, 2013 we announced that despite having acted in strict compliance with the contents of the MOU and used our best efforts to negotiate definitive contracts with Cencosud, we have failed to succeed in said negotiations, as a result of which the association will not be carried out.
IRB – Brasil Resseguros S.A. – In the privatization process of IRB, our subsidiaries Itaú Seguros S.A. and Itaú Vida e Previdência S.A. (the “Itaú Insurance Companies”) signed, on May 24, 2013, the Shareholders’ Agreement of IRB with a duration of 20 years. The agreement establishes the voting rights and new governance of IRB, which now has private companies in its controlling group. The Itaú Insurance Companies contributed an approximately R$2.3 million capital increase to the privatization process of IRB, giving the Itaú Insurance Companies a 15% interest in IRB’s total and voting capital stock.
Credicard – On May 14, 2013, we entered into an agreement with Banco Citibank S.A. for the acquisition of Credicard and Citifinancial, including the “Credicard” brand, for the approximate amount of R$2.8 billion. Responsible for the offer and distribution of financial products and services, mainly personal loans and credit cards, Credicard and Citifinancial have a base of 4.8 million credit cards whose loan portfolio totals R$7.3 billion (gross amount in December 2012). The transaction closed on December 20, 2013, after all applicable regulatory approvals were obtained.
Banco Itaú BMG Consignado S.A. – In April 2013, the Central Bank approved the association between Itaú Unibanco and Banco BMG, to be carried out by means of Itaú BMG Consignado and aimed at the offering, distribution and sale of payroll loans in Brazil.
Authorization in the United Kingdom – In February 2013, Itau BBA International Ltd. started its operations in London. The bank started its operations by means of the merger of Banco Itau BBA International, S.A., a bank headquartered in Portugal, and Itau BBA International plc, and a subsequent name change as of May 17, 2013. The process was approved by local regulatory agencies and the Central Bank in December 2012.
Please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 3 – Business Development, for further information.
New “Hiper” Brand – In October 2013, we launched “Hiper”, our new credit card brand available to all Brazilian consumers and accepted in over one million establishments accredited by Rede throughout Brazil. The Hiper branded products will initially be issued by Banco Itaucard S.A., or Itaucard, to our account holders and non-account holders in Brazil and may only be used for credit functions. The “Hiper” brand will not substitute the “Hipercard” brand but, rather, be another option for our clients, with different benefits from those offered for “Hipercard”, such as:
Redecard is now Rede – In 2013, we announced that Redecard S.A. would change its name to Rede. The rebranding is part of the company’s strategy to further expand its business into the digital arena, which also included the launching of e-Rede (e-commerce gateway platform) and m-Rede (mobile POS platform) in 2013.
The company’s new name, “Rede”, meaning “network” in Portuguese, summarizes the company’s key attributes, evoking technology, agility and modernity, in addition to having a youth and connectivity appeal. With the goal of being the main partner of sellers of goods and services, including small businesses and entrepreneurs, that seek to expand the potential of their businesses. Rede offers its clients a range of products to capture transactions that accompany innovative market trends, such as the increased need for payment mobility.
Use of Social Media – In less than three years, our Facebook page has reached over 6.5 million fans, and we were the bank with the highest number of fans in the world, as of December 2013. In addition to our Facebook page, we had over 168,000 followers on Twitter, over 78.2 million views on our YouTube channel, 210,000 followers on Google Plus and 7,900 followers on Instagram, as of December 2013.
In line with our strategy to seek efficiency in our business, in 2013 we announced several innovations for our clients, such as sending receipts of payments and taking out travel insurance through mobile phones and programming deposits in investment funds through the internet.
Our new data center under construction in the state of São Paulo, will include cutting-edge features that are designed to give us even more flexibility and security to serve our clients. Construction work is progressing as planned and is expected to be completed in the first quarter of 2014, when the setup and migration of our technology systems are expected to start. In January 2013, our executive project was certified as Tier III by the Uptime Institute, a consulting company which evaluates capacity and expected availability of a data center, and ranks the project in one of four tiers. This new data center is expected to be one of the largest in Brazil, with capacity to support the expansion of the bank’s operations in the coming decades, while maintaining our commitment to ensure availability of financial services and seek continuous improvement in quality, speed and client satisfaction.
In line with our strategy to improve efficiency in our businesses, new features have been made available in our digital channels, such as internet banking and mobile banking, and investments have been made to improve and create new tools to meet the expansion of these channels, providing quality in transactions in an agile, modern and safe environment. These new features and improvements include:
“The IT unit is working close to business units, being part of the day-by-day agenda of the businesses.”
Alexandre de Barros, Itaú Unibanco Executive Vice-President – IT
All IT projects are jointly executed with the business, legal and marketing units, taking into consideration sustainability aspects. It is noteworthy that all projects have valuation analysis in order to be approved and prioritized.
We have workplace contingency and disaster recovery processes for our main businesses. Our backup site is also located in the state of São Paulo. Both our primary and secondary data centers have dedicated power systems and generators that are designed to start automatically whenever a power outage occurs.
IR Magazine Awards Brazil 2013 – Given by IR magazine, in partnership with the Brazilian Institute of Investor Relations (IBRI), this award reflects the result of a survey of the Brazilian companies with the best “investor relations” practices, conducted by the Getulio Vargas Foundation, or FGV, with approximately 400 portfolio managers and investment analysts. We were acknowledged in 4 categories in 2013: Best Annual Report, Best Conference Call, Best Meeting with the Investment Analysts Community and Best Investor Relations in the Financial Sector.
World’s Best Bank Award 2013/Global Finance 2013 – The winners of this award are chosen in a survey with analysts, executives and consultants from financial institutions, and we were acknowledged in the following categories:
The 100 companies with the best reputation in Brazil– This survey published by “Exame.com” and by “Exame” magazine, lists the companies with the best image in the Brazilian market. We ranked first in the financial sector.
The best of Dinheiro 2013 – Promoted by “Isto É Dinheiro” magazine, this annual award acknowledges the best Brazilian companies of the year by using management criteria such as financial sustainability, human resources, innovation and quality, social and environmental responsibility and corporate governance. We ranked first in the banking sector ranking for the seventh time.
Época NEGÓCIOS 360º– Compiled by Época magazine, this guide is organized in partnership with the Dom Cabral Foundation, which carries out a thorough assessment of the largest Brazilian companies taking into consideration criteria such as financial performance, corporate governance, human resources practices, innovation, vision for the future and social and environmental responsibility. We achieved the first place in the bank sector in 2013 for the second time since this award was created in 2012.
Latin American Executive Team 2013 – Organized by the “Institutional Investor” magazine, this ranking is based on a survey conducted with over 800 managers of investment and pension funds (buy-side analysts), brokers and investment banks (sell-side analysts) operating in Latin America. We won six out of eight categories: “Best Investor Relations” by sell-side and buy-side analysts, “Best CEO” by sell-side and buy-side analysts, “Best Bank CFO” by buy-side analysts and “Best Investor Relations Professional” by buy-side analysts.
Best Cash Management Bank in Brazil – We were recognized for the sixth consecutive year by “Euromoney” magazine, one of the most important financial market publications.
Latin Finance’s Banks of the Year Awards 2013 – Considered the leading source of value-added financial markets intelligence for Latin America and the Caribbean, Latin Finance magazine elected us as the Best Bank in Latin America and the Best Bank in Brazil. Itaú BBA was also acknowledged by Latin Finance as the Best Investment Bank in Brazil.
Melhores e Maiores da Exame – Itaú Unibanco was ranked as the number one bank among the 50 largest Brazilian banks by assets. With 40 years of tradition, this is one the most respected surveys in Brazil.
Valor 1000 – Itaú Unibanco ranked first in two categories of the Valor 1000 survey: Equity and Net Income. In its 13thyear, the Valor 1000 Yearbook ranks the thousand largest companies in Brazil by net revenue, based on the IFRS balance sheet for the previous year.
The most admired companies in Brazil (Carta Capital magazine) – We were named the most admired company in the retail banking segment. In the overall ranking (which includes all economic sectors), the bank was ranked in fifth place. Roberto Setubal, our CEO, was ranked in third place among the most admired business leaders.
Most valuable brand in Brazil (Interbrand)– With a market value of R$19.3 billion, we were considered Interbrand’s Most Valuable Brand in 2013. It was the tenth time the bank ranked first.
Global Custodian – Awarded by this acknowledged publication in the securities services sector. We were selected as the “Best Custodian” in the “Agent Banks in Emerging Markets” survey, in the following markets:
International Law Office – We were awarded the “Best Legal Team” in Latin America by this website in the “Regulatory (Financial Services)” category. Deemed one of the most significant acknowledgments in the legal sector, the ILO Latin American Counsel Awards 2013 had over 4,000 indications of professionals from law firms and advisory offices from Latin America. This award is promoted by the “International Law Office” website in partnership with the “Association of Corporate Counsel”.
The World’s Biggest Public Companies 2013– We were ranked 42nd among the 2,000 largest companies in the world, according to Forbes magazine, and “the number one” financial institution in Brazil in the general ranking of Brazilian financial institutions. Revenue, net income, assets and market value for the year 2012 were taken into consideration in the compilation of such list.
Reactions Latin America Awards– Published by the British magazine “Reactions”, this award acknowledges the main insurance companies in Latin America. Itaú Seguros was elected the best insurance company in Brazil.
The 1,000 Best Investment Funds of 2013 – awarded by the “Exame” Guide of Personal Investments. We were elected the Best Manager of the Year in a survey conducted by the Center of Finance Studies of FGV (GVCef- FGV). This award highlighted the best managers for retail, high-end clients, companies and institutional investors. Among 1,000 open-end funds
analyzed, we were also elected in the Best Manager categories for the following products:
Bank of the year (The Banker) – We were recognized as 2013’s bank of the year in Brazil and Paraguay by “The Banker” magazine, one of the most recognized financial market publications in the world.
Aberje Awards – We were elected by the Brazilian Association of Corporate Communication, or Aberje, as company of the year in business communication. We also won the award in “Internal Communication and Relations”, with the case “Financial education at IU: a challenge that begins with the employees”.
Best Companies to Launch a Career – We received the highest score in the banking and financial services sector in the list of Best Companies to Launch a Career in 2013, published by Você S/A., a Brazilian magazine.
Awards for Excellence – Itaú Unibanco was recognized by Euromoney magazine as the best bank in Uruguay in 2013.
Sustainability
Exame Sustainability Guide – We are the first financial institution to be recognized by the Exame Guide, published by Exame magazine, as the most sustainable company of the year. We were also acknowledged as the model-enterprise in the “financial institutions” category. This recognition is the most important sustainability prize in Brazil.
Itaú Unibanco is also the first Latin American company present in the ranking “The World’s Top 20 Green Banks in 2012”, organized annually by the Bloomberg Markets magazine, which analyzes banks’ sustainability efforts, including investments in clean energy and waste reduction.
Dow Jones Sustainability World Index 2013/2014 – We were selected to be included in this index for the fourteenth consecutive year. We are the only Latin American bank that is included in the index since its launch in 1999.
BM&FBovespa’s Corporate Sustainability Index (ISE) 2013/2014 – We were selected to be included in this index in 2014 for the ninth consecutive year. The companies that comprise the index are references in socially responsible investment and act as business benchmarks in Brazil.
Additionally, we were elected one of the Brazilian companies with the best environmental practices in the Prêmio Época Empresa Verde by Época, a Brazilian magazine. We were also acknowledged as one of the leading companies in the climate change award Prêmio Época de Mudanças Climáticas.
We were also acknowledged in six categories in the Prêmio Amigo do Esporte 2013 by the Brazilian Ministry of Sports, and are considered one of the companies that invested the most in the sports sector through the Brazilian sport incentive law, supporting sports and para-sports projects.
Merger with Corpbanca
On January 29, 2014 we entered into an agreement with CorpBanca and its controlling shareholders, establishing the terms and conditions for the merger of the operations of Banco Itaú Chile and CorpBanca in Chile and Colombia. The agreement represents an important step in our internationalization process and for our strategy of becoming the leading bank in Latin America. As a result of the merger, we expect to be the fourth largest bank in Chile and the fifth largest bank in Colombia in terms of outstanding loans.
The transaction contemplates a capital contribution by us in the amount of US$652 million and the execution of a shareholders’ agreement between ourselves and CorpBanca’s controlling shareholders, pursuant to which we and CorpBanca’s controlling shareholders will have the right to nominate members of the board of directors of Itaú CorpBanca, the new entity resulting from this merger, in accordance with our respective ownership interests (33.58% and 32.92% of Itaú CorpBanca’s share capital, respectively). Together, we and CorpBanca’s controlling shareholders will have the power to elect the majority of the members of the board of directors of Itaú CorpBanca, the majority of which we will nominate. In addition, except for certain strategic matters subject to our and CorpBanca’s controlling shareholders joint approval, CorpBanca’s controlling shareholders will always vote in accordance with our decisions.
Itaú CorpBanca, controlled by Itaú Unibanco, will provide its clients with a wide and innovative range of financial products and services, by means of an extensive branch network in Chile (217 branches) and in Colombia (172 branches), keeping the quality of services that distinguishes the operations of both banks.
The consummation of the transaction is subject to the satisfaction of certain conditions precedent, including the approval at the stockholders’ meeting of CorpBanca and the approval of regulatory authorities in Brazil, Chile and Colombia, as well as in other jurisdictions in which CorpBanca does business. We estimate that this transaction will not have significant accounting effects on our results.
Audit Committee
On December 31, 2013, Eduardo Augusto de Almeida Guimarães ceased to be a member of our Audit Committee.
On February 27, 2014 and March 20, 2014, respectively, the Board of Directors of Itaú Unibanco Holding S.A. elected for the Audit Committee Mr. Sérgio Darcy da Silva Alves and Mr. Diego Fresco Gutierrez. Both Mr. Alves and Mr. Gutierrez were elected for the ongoing term of office, which will expire when those members elected at the first Board of Directors meeting after the Annual Shareholders’ Meeting of 2014 take office. Mr. Alves and Mr. Gutierrez are not members of any other committees of Itaú Unibanco Holding S.A. They hold no other positions within the Itaú Unibanco Group or in any publicly held companies that are not part of the Itaú Unibanco Group. The biographies of the new Audit Committee members are summarized below:
Diego Fresco Gutierrez – Mr. Diego Fresco Gutierrez was elected as member of our audit committee in March 2014 (with investiture pending of approval by the Central Bank). He joined PricewaterhouseCoopers in 1990 as a trainee and was partner there from 2000 to June 2013, specializing in external audit and Capital Markets Accounting Advisory Services. He has been a member of the Commission on Corporate Governance on Financial Institutions of the Brazilian Institute of Corporate Governance (IBGC) since 2013. Mr. Gutierrez holds a degree in accounting sciences from Universidad de la Republica Oriental del Uruguay and is a CPA licensed in the state of Virginia (United States of America) since 2002.
Sérgio Darcy da Silva Alves – Mr. Sérgio Darcy da Silva Alves was elected as member of our audit committee in February 2014. His election was approved by the Central Bank on March 19, 2014 and he is expected to take office in April 2014. He was a member of the audit committee of Banco Santander S.A. from October 2006 to March 2013. He has been coordinator of the regulatory committee and member of the audit committee of the BM&F – Commodities and Futures Exchange since January 2007. He was also Deputy Governor of the Central Bank of Brazil, responsible for Financial System Organization and Rulemaking Matters, from September 1997 to April 2006. Mr. Alves is an economist graduated from Universidade Federal do Rio de Janeiro (UFRJ) and holds a degree in Accounting Sciences from Associação de Ensino Unificado de Brasília.
Corporate reorganization
On January 31, 2014, we reorganized our corporate structure to transfer Itaú BBA’s institutional treasury and corporate banking activities, including its securities and loan portfolios and all other assets and liabilities related to such activities, to Itaú Unibanco. Itaú BBA will retain its investment banking and cash management activities. This internal corporate reorganization is not expected to result in any material change to our regular course of business, including our internal governance, brands and management models of the affected business units.
The main motivation for the corporate reorganization was the optimization of the capital structure of Itaú Unibanco, due to the new Basel III rules, and the intention to concentrate all financial intermediation activities of Itaú Unibanco’s Group into Itaú Unibanco.
This transaction is pending final approval by the Central Bank and the Central Bank of the Bahamas.
Changes in the Investor Relations unit
On February, 2014, we announced that Rogério Calderón, currently responsible for Investor Relations and International Finance, has decided to leave Itaú Unibanco Group on April 30, 2014 to pursue other professional activities.
Marcelo Kopel has been selected to assume Rogério Calderón’s functions. Marcelo Kopel, currently Director for Branch Network Products, Operations and Planning, has more than 25 years of experience in the financial area, having had a notable career as a Director of Finance of Redecard, Citibank, Credicard, Banco ING Brasil e América Latina and Bank of America.
The intention is to conclude the transition process for the transfer of activities and for introducing Marcel Kopel to the investor and analyst community by April 30, 2014.
Our history and profile
Our history
Opening of the first branch
Change of corporate name to Banco Federal de Crédito S.A., later Banco Federal Itaú and, subsequently, Federal Itaú Sul Americano S.A., after mergers with other Brazilian banks
Major investment in technology
Implementation of the “Development Plan”, increasing the number of branches and conducting campaigns to increase deposits
Merger of Itaú América after the takeover of Banco da América
Mergers of Casa Bancária Moreira Salles, Banco Machadense and Casa Bancária de Botelhos originating Banco Moreira Salles, subsequently União de Bancos Brasileiros S.A.
Opening of the first branch in Rio de Janeiro, the capital of the country at that time
Large investment in professional qualification and technology
Organization of BIB – Banco de Investimentos do Brasil
Expansion of operations, then with the largest network of branches in Brazil
Takeover of Banco Aliança, a milestone for expansion in the Northeast region
Establishment as a multiservice bank
Takeovers of domestic banks, such as Banco União Comercial, making Itaú the second largest private bank in Brazil
Strengthening the brand and increasing competitiveness
Service automation, pursuant to the concept of “electronic bank”
Expansion in the number of branches, which had a new design concept
Acquisition of Banco Francês e Brasileiro S.A., predecessor to Itaú Personnalité
Acquisition of state banks Banerj and Bemge
Adherence to the multiservice bank system, commencement of operations of the Commercial Bank, Investment, Consumer Credit and Mortgage Loan portfolios
Investment in training and automation of services
Segmentation of clients and services and improvement of customer service
Assumed leadership in the credit financing market
Expansion of activities in the insurance industry
Acquisitions of other financial institutions, such as Banco Nacional, making Unibanco one of the three largest financial institutions in Brazil
Takeover of Banco Bandeirantes and Credibanco, when the Unibanco was ranked among the five largest banks in Latin America and the third largest private bank in Brazil
Creation of a new image of Unibanco, called “Unibanco’s Way”: a simple, straightforward, positive, good-humored and transparent bank
Since the establishment of the first branch in Minas Gerais, Brazil, where the oldest institutions that make up the conglomerate were established, until the association between Itaú Holding Financeira and Unibanco – União de Bancos Brasileiros carried out in 2008, nine decades of growth and development led us to today’s most valuable brand position in the Brazilian market and largest financial institution in Latin America in terms of market capitalization.
This association gave rise to the largest Brazilian private bank and one of the 30 largest banks worldwide in market value as of January 31, 2014. Itaú, operating since 1945 in the capital city of the State of São Paulo, and Unibanco, organized in 1924 in the city of Poços de Caldas, State of Minas Gerais, developed similar and supplementary characteristics over time. Mergers, acquisitions and takeovers characterized their growth.
Both Itaú and Unibanco were able to anticipate market challenges, consolidating their businesses during Brazilian economic crises and expanding operations in growth periods. They were pioneers in the use of technology to process banking business and client services and made major investments in automation and support through modern operating centers.
We have been expanding our business since the association through actions such as the acquisitions of Credicard in 2013 and the total outstanding shares of Redecard in 2012. As of December 31, 2013, our total assets exceeded R$1.0 trillion and we had a market capitalization of R$157.0 billion.
As supporters of art, culture and social and environmental responsibility, we have provided our companies with autonomous and effective structures to spread knowledge and practices that promote sustainability. As evidence of this, we are the only Latin American bank that forms part of the Dow Jones Sustainability Index for 14 consecutive years.
Our objective is to be the leading bank in sustainable performance and client satisfaction. For us, sustainable performance means creating shared values for employees, clients, shareholders and society, so as to ensure the longevity of our business.
Our culture
Our corporate culture is expressed by a set of ten principles that guide the way we do business and outline the approach we expect our teams to take to turn our vision into reality. This set of principles is called Nosso Jeito de Fazer (“Our Way of Making it Happen”) and we reinforce such values with our employees through a number of initiatives, such as (i) making employee’s alignment with expected behaviors based on such principles part of their performance assessment processes, (ii) campaigns in our communication channels, and (iii) events, an example of which is our annual meeting with managers (“Meeting of Leaders”).
Our ten principles are:
“We’re building a corporate culture to inspire our employees to be proud to be part of the Itaú Unibanco Group, reinforced by our effort to create value for employees, clients, shareholders and society”.
José Castro de Araújo Rudge. Itaú Unibanco’s Executive Vice-PresidentHuman Resources, Marketing and Institutional Relations
Simplify to grow
In 2013, we held our fourth Meeting of Leaders, in which we presented the main guidelines and strategies developed for our organization in the short and long term.
The theme of the meeting and the related project was “Simplify to Grow”, which represents our commitment to improve processes, streamline operations and become more efficient in everything we do with the clear purpose of satisfying our clients. Our belief is that we can be as great as our clients allow us to be.
In the beginning of 2013, we announced significant changes in our executive management structure, one of the many examples of actions we have been taking in order to meet an increasingly demanding market and enable us to organize in a simpler and more efficient
way. Please refer to section Our governance, item Management Structure, Our Directors and Executive Officers, for further information about changes to our management structure.
A key factor in this evolution is the commitment of all our employees, who are ultimately responsible for implementing this project. “Simplify to Grow” is intended to push us to an even higher and more differentiated level of efficiency in providing our products and services. We will, therefore, maintain and intensify our programs to foster a meritocratic culture so as to attract and retain the best professionals and provide them with an environment that allows them to grow.
Employees
The number of employees within the Itaú Unibanco Group decreased from 96,977 in 2012 to 95,696 in 2013. The decrease in the number of employees is explained by the restructuring resulting from the integration of our systems and processes in a single platform, which allowed us to capture synergies between operating structures and to review certain business strategies.
The tables below show, the total number of employees for the years ended December 31, 2013, 2012 and 2011, segmented by region (Brazil and abroad) and operating unit:
Brand
Our brand increasingly represents the transformation in the lives of the individuals, the society and the country we want to promote. This is reflected in our products, services and attitudes. Our financial education initiatives encourage people to have a more balanced relationship with money, choose the best type of credit and plan their investments.
We are always trying to broaden the dialogue with our stakeholders. In 2013, our brand was named the most valuable in Brazil for the tenth consecutive year, with an estimated value of R$19.3 billion, according to consulting firm Interbrand. Interbrand’s analysis is based on the ability of our brand to generate financial results, influence the selection process of clients, and ensure long-term demand.
In 2013, we launched the #issomudaomundo (#thischangestheworld) platform for the purpose of establishing a link between our goal of improving people’s lives, our causes and the many projects in education, culture, sports and urban mobility that receive investments from us.
In a 2013 survey conducted by Millward Brown, a research institute, we achieved important results for the brand already in the first year of this platform: an increase of 58% in the perception as a “Bank that helps improve people’s lives” and of 44% as a “Bank that works as a transforming agent in people’s lives”. Additionally, according to a study conducted by Oficcina Sophia, a research institute, there was an increase of 62% in the number of non-clients who considered us as an option and of 146% in our prestige among non-clients.
Our Facebook page reached more than 6.5 million fans and we are the bank with the highest number of fans in the world, according to the Socialbakers monitoring platform. In addition to this social network, in Twitter, we have more than 168,200 followers and in YouTube, we have over 78.2 million views of our own content in our channel. We have a structure to monitor our social media profiles, providing information regarding our services, launching products, advertisements and interacting with the general public and our clients.
According to SCUP and Socialmetrix monitoring platforms, we have been mentioned more than 833 thousand times in social networks (such as Facebook, Instagram, Google Plus and Twitter), 45% of which consisted of posts on the financial segment and 54% of which were more positive references than the average in social networks. Part of this is the result of our focus on social welfare as well as by our efforts to improve client service. By the end of 2013, we had provided 24/7 services to our clients in an average time of six minutes after the first contact by the client – a decrease of approximately 95% in relation to 2012.
Under the #issomudaomundo (#thischangestheworld) campaign, we had a number of films made exclusively for the internet to explain the bank’s causes. This was the first step of our brand as a content producer, sharing a point of view and seeking to establish connections based on our beliefs. The films were viewed by more than 19.8 million people in our YouTube channel and were shared by 106,600 people. One of the films was the 20th most shared film in the world in 2013. A survey conducted by Nielsen, together with Facebook, determined that the films resulted in an increase of 17.4% in a one-month period in the support for the causes supported by us with an increase of 16% in the intention of non-clients to become clients.
Patents
We are the owners of patents and patent applications in Brazil and abroad for a method for generating a virtual keyboard for entry of a security code or user PIN number. Applications related to this patent are still pending analysis in Brazil, Uruguay, Chile and Venezuela. We are the owners of a patent for such method in Germany, Argentina, Austria, Belgium, Denmark, Spain, Finland, France, Greece, the Netherlands, Ireland, Italy, Luxembourg, Peru, Portugal, United Kingdom, Sweden and Switzerland. Additionally, we are the owners of a patent application for a method for identifying a financial institution’s access PIN, which is still pending analysis in Brazil.
In Brazil, the effective term for protection of invention patents is 20 years from the date when the patent application is made. The effective terms and requirements for extension of patents outside of Brazil depend on the laws of each country or region where a patent is registered.
Main shareholders
We are controlled by IUPAR, which is jointly controlled by Itaúsa and Cia. E. Johnston. Itaúsa is controlled by members of the Egydio de Souza Aranha family, and Cia. E. Johnston is controlled by members of the Moreira Salles family.
Except for the shares indirectly owned by our controlling shareholders (through their participation in IUPAR and Itaúsa), the members of our Board of Directors and our Board of Officers, on an individual basis and as a group, beneficially own less than 1% of our common shares and less than 1% of our preferred shares.
According to Brazilian regulation and as approved by the Central Bank, foreign investors may have a maximum of 30% of our common shares.
The table below presents information on the persons that, to our knowledge, held over 5% of our common or preferred shares at January 31, 2014:
As of January 31, 2014, 15,787,358 common shares and 1,530,558,587 preferred shares were held by non-Brazilian investors (calculated based on the investors’ addresses indicated in our records related to the shares that are in our custody), representing 6.5% and 62.7%, respectively, of the total of each class outstanding.
Ownership structure
The following chart is an overview of the ownership structure of the Itaú Unibanco group as of January 31, 2014, which includes our controlling shareholders and some of our main subsidiaries:
IUPAR shareholders’ agreement
Itaúsa and Cia. E. Johnston have a shareholders’ agreement that governs their relationship as controlling shareholders of IUPAR and, indirectly, as our controlling shareholders and as controlling shareholders of our subsidiaries. Please refer to www.itau.com.br/_ arquivosestaticos/RI/pdf/IUPARingles.pdf?title= Shareholders Agreement – IUPAR, for further details. Its main terms and conditions are described below.
The Board of Directors and the Board of Officers of IUPAR are composed of four members each: two members are nominated by Itaúsa and two members by Cia. E. Johnston for each one of these bodies. Pursuant to the IUPAR shareholders’ agreement, IUPAR shares held by Itaúsa and Cia. E. Johnston cannot be transferred to third parties until November 3, 2018. After this period, if any shareholder party to the IUPAR shareholders’ agreement decides to transfer its IUPAR shares to a third party, the other shareholders will have preemptive rights or tag-along rights. If both Itaúsa and Cia. E. Johnston decide to transfer all of their shares held in IUPAR or the total shares held by IUPAR in Itaú Unibanco Holding to third parties, Itaúsa may exercise its tag-along rights, so as to include in the sale all or part of the shares directly held by it in Itaú Unibanco Holding. All shares held directly by Itaúsa in Itaú Unibanco Holding may be freely transferred.
IUPAR shareholders’ agreement is effective for a 20-year period from January 27, 2009, and may be automatically extended for successive 10-year periods, except if otherwise indicated.
Transfer of control and increase of interest in the share capital
Subject to the provisions of the IUPAR shareholders’ agreement, our Bylaws do not contain any provision that is intended to delay, defer or prevent a change in our shareholding control or that would operate only with respect to a merger, acquisition or corporate restructuring of the company or its subsidiaries. However, according to Brazilian regulation all such transactions must be carried out in accordance with procedures established by CMN and be previously approved by the Central Bank.
Brazilian legislation provides that acquisition of control of a publicly held company triggers the requirement for the acquiring party to make a tender offer for all outstanding common shares, at a price equivalent to at least 80% of the price per share paid to the controlling shareholders. Additionally, our Bylaws establish the same price rule for the holders of our preferred shares.
Such legislation also requires our controlling shareholders to make a tender offer for all of our shares if they increase their interest in our share capital to a level that materially and negatively affects the liquidity of our shares.
Adoption of multiple voting
Under Brazilian Corporate Law, shareholders that represent at least 10% of share capital with voting rights may demand a multiple voting process up to 48 hours before a general shareholders’ meeting. Each share will be entitled to as many votes as the members of the board being elected, and the shareholder has the right to concentrate votes in one candidate or distribute them among several candidates. The presiding officer must inform the shareholders in advance about the number of votes required for the election of each member of the Board of Directors.
Whenever the election of the Board of Directors is held under the multiple vote process and the common or preferred shareholders exercise their right of electing one director, the controlling shareholder will have the right to elect directors in the same number as those elected by the other shareholders plus one, regardless of the number of directors that, according to our Bylaws, compose the board.
Additionally, as our Bylaws do not provide for staggered intervals, our directors may be reelected consecutively without interruption. Whenever the election has been conducted through a multiple voting process, the removal from office of any of our directors by our shareholders, at a shareholders’ meeting will result in the removal from office of all of the remaining directors and a new election shall be arranged. In order not to affect the management of the company as a result of the removal of directors, Brazilian Corporate Law provides that despite the removal, the same directors may continue to exercise their functions until the newly elected board members take office.
Our shares
Our share capital is represented by common and preferred shares traded on the BM&FBovespa under the symbol “ITUB3” (common shares) and “ITUB4” (preferred shares). Common shares entitle the holder to one vote at our general shareholders’ meetings. Preferred shares are nonvoting but entitle the holder to:
IUPAR and Itaúsa together hold approximately 90% or our common shares. The voting rights of our controlling shareholders do not differ from the voting rights of other holders of ordinary shares.
Brazilian Corporate Law sets forth that preferred shareholders may vote when the company does not pay fixed or minimum dividends to which they are entitled for the period established in the company’s Bylaws, which may never exceed three consecutive fiscal years. The preferred shareholders maintain such right until the payment is made if these dividends are not cumulative or until cumulative dividends are paid.
The creation of a new class of shares with priority over preferred shares, as well as any change in preference or in rights associated with preferred shares, must be approved by at least 50% of common shares and also approved by shareholders representing the majority of preferred shares in a special general meeting. Please refer to section Our governance, item Management structure, Annual General Shareholders’ Meeting, for further information about the calling procedures for general and special shareholders meetings.
The following table sets forth the preferred share price per period:
Share prices for the most recent six months are as follows:
Source: Economática System
The following table sets forth, for the period indicated, the high and low sales prices in U.S. dollars for the ADS in the over the counter market and NYSE during the period indicated.
Marketing and distribution channels
We provide integrated financial services and products to our clients through a variety of marketing and distribution channels. In addition to our traditional portfolio of banking products, we offer products such as insurance, investments, foreign exchange and brokerage.
In the commercial banking – retail segment, we provide Itaú Uniclass clients exclusive services such as dedicated managers, investment advisory services, exclusive cashiers, telephone service through branch managers and higher credit limits. We also provide advisory services on investments and real estate loans to our high-end clients through Itaú Personnalité. Our portfolio of corporate products suited for large companies is managed by our wholesale banking segment.
Our distribution network is divided into physical channels, which include branches, ATMs and CSBs (which are banking service centers located at certain corporate clients), and digital channels, such as internet banking, mobile banking and telephones.
Banking transactions carried out through the internet and mobile channels have grown significantly in recent years.
Branches
Our branch network serves as a distribution network for all of the products and services we offer to our clients.
In 2013, we opened branches especially refurbished for shopping malls, with a new visual identity and service proposal. Located in different cities in São Paulo and Rio de Janeiro, the space presents a new concept of client service, with a differentiated layout inspired by the design of a retail store. Focusing on the relationship with the client as a way to strengthen contact with the public, this branch is open from 12 p.m. to 8 p.m., with exclusive service to our clients from 5 p.m. on. The first branch with this concept was opened in 2012 in the Villa Lobos shopping mall in the city of São Paulo.
Similarly, we also implemented changes in service hours for certain branches located in commercial hubs, which now open at 8 a.m. or 9 a.m. and close at 6 p.m. or 8 p.m. This initiative was designed to adapt our services to the routine of our clients. We intend to extend this model to other malls and trade centers in Brazil in the next few years.
ATMs
ATMs are low-cost alternatives to employee-based services and give us points of service at significantly lower costs than branches. Our clients may conduct almost all account-related transactions through ATMs.
We also have arrangements with other network operators, such as the brands “Cirrus” and “Maestro” to allow our clients to use limited services through their networks.
Since 2012, we have made differentiated services available to certain registered clients. In addition to services available to our clients in general, these registered clients are able to withdraw funds and check current account balances and statements just by using biometric technology. Biometrics enables these registered clients to carry out transactions with fingerprint identification, without typing a password or using a card, providing more security and convenience for our clients. To be able to use biometrics, clients simply register with any Itaú Unibanco branch.
Customer site branches
The range of services provided at CSBs may be the same as those provided at a full service branch, or more limited according to the size of a particular corporate client and its needs. CSBs represent a low-cost alternative to opening full service branches. In addition, we believe CSBs provide us with an opportunity to target new retail clients while servicing corporate clients and personnel.
Internet banking and mobile banking
“Itaú 30 Horas” is a convenience service that enables users to carry out banking transactions in ATMs, telephones, mobiles, on the Internet and at branches.
The Internet banking channel became important in recent years given the continuous growth in demand for online transactions. We have had Internet banking since 1998, offering products to our individual and corporate clients, such as credit, investments, insurance and others. In 2013, our transactions through this channel represented 45.7% of our total client transactions.
One of our most important recent technological innovations has been in mobile banking applications, which allow clients to access their accounts and perform banking transactions using smartphones or tablets. In 2013, we had 724.3 million mobile banking transactions.
The graph below shows our branches, CSBs and ATMs network broken down by types of services provided and geographic distribution:
In Brazil and abroad, as of December 31, 2013, 2012 and 2011:
By our distribution network throughout Brazil as of December 31, 2013, 2012 and 2011:
Our business
The services offered by our Commercial bank – Retail segment to a diversified base of individuals and companies include insurance, pension plan and capitalization products, credit cards, asset management, credit products and are customized and developed to meet clients’ demands. Our marketing strategies are tailored to each client profile and implemented through the most suitable distribution channels. We aim to increase the number of products used by our clients, thus diversifying our revenue sources. This segment represents an important funding source for our operations and generates significant financial income and banking fees.
The Commercial bank – Retail segment is comprised of the following specialized units:
The Wholesale bank is responsible for our corporate and investment banking activities. Our wholesale banking management model is based on building close relationships with our clients by obtaining an in-depth understanding of clients’ needs and offering customized solutions. Corporate activities include providing banking services to large corporations and investment banking activities include offering funding resources to the corporate sector, including through fixed and variable income instruments. In October, we announced certain changes to our management structure, pursuant to which our middle-market banking business became part of the wholesale banking operating segment.
Through the Consumer credit – Retailsegment, we implement our strategy of expanding our offering of financial products and services beyond our current accountholders. As such, this segment oversees the financing of vehicles outside our branch network, the offering of credit cards to individuals who are not accountholders, and lending to lower income consumers.
The Activities with the market and corporationsegment manages interest income associated with our capital surplus, subordinated debt surplus and the net balance of tax credits and debits, as well as net interest income from the trading of financial assets through proprietary positions (desks), management of currency interest rate gaps and other risk factors, arbitrage opportunities in the foreign and Brazilian domestic markets, and mark-to-market of financial assets. This segment also includes, when applicable, the effect of non-recurring items that are not reflected in our managerial statement of income.
We also have a broad range of operations outside of Brazil and have built our international presence based on strategically positioned units in the Americas, Europe and Asia. This creates significant synergies in foreign trade finance, the placement of Eurobonds and in the offering of more sophisticated financial transactions and private banking operations. These operations are presented both in the Commercial banking – retail and in the Wholesale banking segments.
Please refer to section Performance, item Financial performance, Results, and section Performance, item Consolidated financial statements (IFRS), Note 34 – Segment Information, for further information about our segments.
We offer a wide range of banking products and services to a diversified base of individuals and companies, our account holders and non-account holders. We have over 40 million clients and 32,891 points of service throughout Brazil and abroad represented by 4,142 branches, 885 CSBs and 27,900 ATMs as of December 31, 2013. In addition, we also provide our clients with means of accessing and checking accounts, making payments, investments and other banking transactions without the assistance of a manager, through our “Itaú Unibanco 30 Horas” platform. Our products portfolio includes loans and a number of investment, insurance, foreign exchange and brokerage options, among others.
Our commercial banking business segment is segregated according to costumer profiles. This allows us to be closer to our clients, understand their needs and offer the most suitable products to meet their demands.
We provide exclusive services to our Itaú Uniclass retail bank clients (a detailed description of which follows in the Retail Banking section below). We offer expert services to our high-end clients by means of Itaú Personnalité and, with over 20 years of experience in wealth management, Itaú Private Bank, which provides wealth management services and is the largest private bank in Latin America. To meet the needs of our corporate clients, Itaú Empresas serves very small and small companies through a dedicated structure, with specific products and services.
In 2013, we advanced in our agenda of increasing processes and services automation, generating productivity and scale gains. Biometrics is an illustrative example of a service which resulted in increased convenience for our clients, who can operate an ATM without the need of physical card, with greater safety.
“We are focused on the right product, to the right client, in the right channel. We apply the customer centricity concept, to identify which kind of relation the customer has with us, pointing his needs - because we must provide his needs.”
Marco Bonomi, Itaú Unibanco Executive Vice-President – Retail Bank
Retail banking
Our core business is retail banking and through our retail operation we offer a dedicated service structure to consumer clients throughout Brazil. Our client service structure is targeted to offer the best solutions for each client profile. We classify our retail clients as individuals with a monthly income below R$10,000.00.
Our Itaú Uniclass services are available at every branch for clients who earn more than R$4,000 or R$5,000 per month, depending on the region, an innovation for Brazil’s banking sector. We offer unique services to our Itaú Uniclass clients, including investment advisory services, exclusive cashiers, special telephone service and higher credit limits and a large team of dedicated relationship managers.
Our retail network is focused on building lasting, transparent relationships with our clients.
Personnalité
We began providing customized services to higher-income individuals in 1996 with the creation of Itaú Personnalité. Itaú Personnalité currently serves individuals who earn more than R$10,000 per month or have investments in excess of R$100,000.
Itaú Personnalité’s is focused on providing (i) financial advisory services by managers who understand the specific needs of our higher-income clients, (ii) a large portfolio of exclusive products and services and (iii) special benefits based on the type and length of relationship with the client, including discounts on various products and services. Itaú Personnalité services its clients through a dedicated network comprised of 275 branches, located in the main Brazilian cities. Itaú Personnalité clients also have access to the Itaú Unibanco network of branches and ATMs throughout the country, as well as Internet and telephone banking.
In 2013 we launched the new digital channel to Personnalité clients, with the new website for this segment, which offers additional contact channels, such as videochats and online customer services.
The table below shows our market position and information about competitors for the business listed below:
1. Including Itaú Personnalité.
Source: Central Bank and Itaú Unibanco Holding.
Very small and small companies
To meet the needs of our corporate clients we offer customized solutions and provide detailed advice on all products and services to:
All our managers are certified by the Brazilian Financial and Capital Markets Association (ANBIMA), and throughout the year they receive training to offer the best solutions for each client profile. Our clients rely on our ability to provide products, terms and rates customized to their needs.
Our strategy is to capture market opportunities by meeting the needs of these companies and their owners, particularly with respect to the management of cash flow, credit facilities, investment needs and services.
As was the case in 2012, improving our credit portfolio and reducing our overdue loan portfolio remained our goal in 2013: credit processes, policies and tools were enhanced and we intensified our revenue collection.
Focused on meeting our clients’ needs, we developed “conta certa”, an account plan with customizable service bundles, and we extended our offerings in electronic channels enabling clients to borrow and purchase a wide range of services without having to go to one of our branches.
Improving and simplifying our operational and commercial processes were also in our agenda as we worked on simplifying time-consuming processes such as current account opening and organized our operational and commercial units to work in a standardized manner, similar to franchises.
Public sector
Our public sector business operates in all divisions of the public sector, including the federal, state and municipal governments (in the Executive, Legislative and Judicial branches).
To service public sector clients, we use platforms that are separate from our retail banking branches, with teams of specially trained managers who offer customized solutions in tax collection, foreign exchange services, administration of public assets, payments to suppliers, payroll for civil and military servants and retirement. Based on these platforms, we have a significant amount of business with public sector clients, particularly in those Brazilian states where we acquired previously state-owned financial institutions.
In December 2013, we had 2,602 public sector clients and 15 offices in Brazil.
Wealth Management & Services
“Pioneer in Brazil, we develop solutions to the investors, doing business locally and internationally.”
Alfredo Setubal – Itaú Unibanco Holding’s Board Member and Itaú Unibanco Executive Vice-President – Wealth Management & Services
Private Bank
Headquartered in São Paulo, Itaú Private Bank is a leading wealth management player in Latin America, with R$194,836 million in assets under management as of December 31, 2013. Our dedicated team of more than 635 professionals provided comprehensive financial services to more than 11,500 families from most countries in Latin America as of December 31, 2013. We serve our clients from our seven offices in Brazil and our offices located in Chile, Uruguay, Paraguay, Miami, New York, Switzerland, Luxembourg, Cayman and Bahamas.
Our clients have access to a complete portfolio of products and services, ranging from investment management to wealth planning, credit and banking solutions. In addition to our in-house customized products and services, we offer our clients access to an open architecture of alternatives from third-party providers. Our team of more than 120 private bankers as of December 31, 2013, supported by a team of investment advisors and product specialists, are dedicated to understanding and addressing the needs of our clients.
Our market strategy is to consolidate our leadership position in the domestic market in Brazil and aggressively grow our market share in other major markets in the region such as Chile, Peru, Colombia, Mexico and Argentina.
Aligned with our mission to be the leading company in client satisfaction and sustainable performance, we decided to focus our strategic priorities on the following initiatives:
As client satisfaction is a top priority for us, we have also focused on initiatives to strengthen our relationship with our clients. In 2013 we performed our comprehensive client satisfaction survey for the 11th consecutive year and we hosted our “Client Advisory Board” for the third consecutive year. We promoted almost 200 events in 2013, including investment workshops, lunches with executives and specialists, and invitations to cultural and sport events.
Itaú Asset Management
Itaú Asset Management is specialized in managing client assets in investment funds, such as fixed income, multimarket, equity and indexed funds, and assets held in managed accounts and mutual funds, both in Brazil and abroad. Our asset management business offers products for all segments of retail and wholesale banking, structuring and managing investment funds according to specific business segment profiles.
We follow different investment strategies for the various funds we manage to ensure performance and suitability to the profile of each client. In keeping with this approach, we also have a dedicated team carrying out comprehensive risk management analyses to support our portfolio managers. In addition, we have developed a proprietary methodology that integrates environmental, social and corporate governance (ESG) factors into our assessments of portfolio companies. This help us in more accurately pricing the risks and opportunities that may affect their market value.
We were selected as the Best Fund Manager of 2013 by the Brazilian magazine Exame. The analysis was conducted by the Fundação Getulio Vargas Center for Finance Studies, which evaluated over 1,000 open-end funds. Our recognition by the market through this award, particularly in the currently demanding market environment, reflects our focus on quality management and our commitment to consistent performance that is aligned with our clients’ risk profiles.
The table below shows our market position and information about competitors for the business listed below.
Source: Itaú Unibanco Holding and ANBIMA (December 2013).
Itaú securities services
Itaú Securities Services is composed of four main business units: local custody, international custody, fiduciary services, and corporate solutions. To be efficient, these businesses have the technology as a foundation.
Pension funds, insurance companies, asset managers, international institutional investors and equity and debt issuers are our primary clients in these businesses, representing approximately 2,092 clients in 21 countries as of December 31, 2013.
On December 31, 2013, Itaú Securities Services reached R$900,101 million of assets under custody.
Itaú Securities Services business units provide the following services:
Our focus is to be a full service provider for institutional clients by offering integrated solutions and an exclusive channel with specialized professionals.
As a result, Itaú Securities Services received industry awards voted on by clients as the “Best Brazilian Custodian” for domestic clients (for the fifth consecutive year), international clients (for the fourth consecutive year) and recognized as a “Top Rated” service provider in the region of the Americas and Caribbean (for the second consecutive year) according to the “Global Custodian” Magazine. In 2013, we were also recognized by “Global Finance” Magazine as “Best Custodian” in Brazil for international clients. Our management and business governance model was awarded in 2013 the highest distinction “Troféu Governador do Estado” by the Management Excellence Institute of São Paulo.
The table below shows the market position and information about competitors in the business listed below:
Source: Itaú Unibanco Holding, ANBIMA and BM&FBovespa (December 2013).
Corporate social responsibility
The Itaú Social Excellence Fund (Fundo Itaú Excelência Social or “FIES”), launched in 2004, is a socially responsible investment fund. It invests in companies with superior corporate social responsibility practices with the goal of achieving higher long-term returns than those offered by the main Brazilian financial market indices. In addition to analyzing the risks and returns of companies, fund managers take into account three fundamental criteria relating to companies: corporate social activities, environmental protection aspects and good corporate governance practices. Every year the fund manager donates 50.0% of the FIES’ accumulated asset management fees to social projects in the following categories: environmental education, employment education and childhood education.
Real estate financing and mortgages
Our mortgage business is dedicated to:
We believe we have been leaders in mortgage loans to individuals among Brazilian private banks from 2008 to 2013, having reached approximately 40% of market share in financed amount as of December 31, 2013, which reflects our focus in this business aligned to the bank’s strategy in migrating to less riskier portfolios. Furthermore, we are one of the largest banks in the commercial real state lending market, with a share of approximately 22% of financed amount as of December 31, 2013.
We offer products through our network of branches, real estate developers, real estate brokers, including our partnership with Coelho da Fonseca Empreendimentos Imobiliários Ltda. and our join venture with LPS Brasil Consultoria de Imóveis S.A. (Lopes) called “Credipronto”. These two long-term agreements provide us with exclusive real estate financing origination at a large number of locations throughout Brazil.
Since 2007, real estate and mortgage transactions in the Brazilian market have been carried out mainly through first mortgages and a system of mortgage lien called “alienação fiduciária”, pursuant to which the buyer becomes the owner of the property after all payments have been made, making it easier for the bank (lender) to recover the property in case of default. In other words, this system resulted in lower legal and credit risks if compared to other types of guarantees.
Another positive feature of the Brazilian market is the “constant amortization system” (CPM), pursuant to which decreasing installments provide faster amortization of a contract, reducing our loan-to-value indicator at a faster rate than other amortization systems.
As of December 31, 2013, the majority of our outstanding loans to individuals were granted in the form of first mortgages and 98% were guaranteed by mortgage liens (“alienação fiduciária”). In 2013, our entire credit origination was based on the “constant amortization system” (CPM) and our loan to value ratio reached 40%, compared to 41% in 2012.
The table below shows the market position and information about competitors for the business listed below:
Source: Itaú Unibanco Holding.
Our strategy is to expand our activities in businesses with historically lower spreads and losses, achieving a leading position in the offering, distribution and sale of payroll loans in Brazil.
To expand this business and complement our strategy, on July 9, 2012 we signed an association agreement with Banco BMG S.A. to offer, distribute and market payroll loans originated by that financial institution. Itaú BMG Consignado, the entity resulting from this association, began operations in December 2012 and is present throughout the Brazilian territory. This association was designed with the purpose of diversifying our loan portfolio, supplementing our payroll loan strategy, and improving the risk profile of our portfolio of loans to individuals. Itaú BMG Consignado also enables us to expand our business in the payroll loan sector in line with our values and transparency principles, following best management practices and policies.
Our strategy of higher growth in the National Institute of Medical Assistance and Social Welfare (Instituto Nacional de Seguridade Social – INSS) beneficiaries sector, combined with certain credit policies we adopted, allowed our portfolio evolution to be followed by a decrease in delinquency levels.
This increase in payroll loans resulted in a higher share of payroll loans within the individuals loan portfolio, from 9.0% as of December 2012 to 13.5% as of December 2013.
Based on Central Bank data and publicly available financial information, our main competitors in this business are Banco do Brasil S.A., Banco Bradesco S.A. and Caixa Econômica Federal.
Insurance
Our insurance business provides a wide range of life and accident products, automobile and property insurance, extended warranty, travel insurance and corporate solutions for legal entities. Focused on streamlining the portfolio and distribution of our products, our insurance policies are sold, among other channels, in our branches, in association with retailers and major insurance companies, via telemarketing, Internet, ATMs, self-service terminals and mobile applications.
We operate in selected insurance segments, focusing on profitability and exploring the expansion of the channels for the offering of insurance, pension plan and capitalization products. The profitability of our operation and income generation potential with no implication of credit risk make the insurance business strategic for us, increasing revenue diversification and making our portfolio of products offered to our clients more complete.
We expanded our distribution channels to our account holding clients, beyond the traditional branch relationship manager, to digital channels, teller and ATM terminals, maximizing the return on the client flow at the branches. Insurance for personal loans sold on the Internet in 2013 had an increase of 37% in items sold against previous year. Travel insurance also excelled in the channel offer expansion and currently available on our mobile channel in addition to other traditional channels.
In 2013, we also started to develop a new Internet channel to offer our products to non-banking clients and non-credit card holders.
Our strategy to increase our level of penetration in the Brazilian insurance market varies according to the sectors we choose to compete in. In January 2014, we informed our intention to sell our high-risk insurance operation, which deals with large insurance policies for corporate losses through a bidding process. For individuals and small and medium company markets, we focus on our banking client and credit card base, increasing client penetration. We are working on improving client penetration in property and casualty insurance for small and medium companies.
Following our goals of market share increase in our chosen markets and improving client service, we have established a partnership with Porto Seguro Group, leader of the housing and automobile insurance sector in Brazil, and currently hold 30% of the equity of Porto Seguro S.A. The partnership includes an operating agreement with Porto Seguro Group to offer and distribute, on an exclusive basis, residential and automobile insurance products to clients in our network in Brazil and Uruguay.
On June 25, 2013, through Banco Itaú BMG Consignado, an entity indirectly controlled by us, we entered into a share purchase agreement with the controlling shareholders of Banco BMG pursuant to which we agreed to acquire 99.996% of the shares issued by BMG Seguradora. All regulatory approvals have been obtained. BMG Seguradora will enter into exclusivity agreements with Banco BMG and Banco Itaú BMG Consignado for the purpose of distributing insurance products to be offered jointly with the products distributed by such financial institutions.
In May, 2013, as part of the opening of the Brazilian reinsurance market to private reinsurance companies and the privatization process of IRB – Brasil Resseguros S.A., or IRB, our subsidiaries Itaú Seguros S.A. and Itaú Vida e Previdência S.A. entered into a shareholders’ agreement with the Brazilian government, certain other Brazilian financial institutions and a private equity fund, providing for voting rights and a new corporate governance structure for IRB, which includes private sector companies in its controlling group. The shareholders’ agreement, valid for 20 years, became effective on October 1, 2013 and provides for ownership of 15% of IRB’s equity by our subsidiaries. The transaction was approved by the Administrative Council of Economic Defense (CADE), the Superintendency of Private Insurance (SUSEP) and the Court of Auditors (TCU).
Source: SUSEP
Private pension plans
We offer private pension plans to our clients as an option for wealth and inheritance planning and income tax purposes (these products are tax-deferred). We provide our clients with a solution to ensure the maintenance of their quality of life, as a supplement to government plans, through long-term investments. Private pension products are divided into two major groups:
For corporate pension plans, we offer expert advice services and develop custom solutions for each organization. We have established long-term partnerships with our corporate clients, maintaining close relationships with their Human Resources units and adopting a communication strategy focused on the financial education of their employees.
Source: SUSEP (Balance of provisions – Pension Plans for Individuals and Companies).
Capitalization
Capitalization products are fixed deposits products pursuant to which a client makes a one-time deposit or monthly deposits of a fixed sum that will be returned with accrued interest at the end of an agreed term. By acquiring the product, the client is automatically qualified to participate in periodic raffles, each time with the opportunity to win a significant cash prize. During the term of the product, the client can withdraw the balance deposited, less fees for early withdrawal.
To meet the needs of our clients, we launched a new capitalization certificate (PIC), pursuant to which the client can make different average monthly payments, according to the client’s profile, which allows us to tailor our approach according to each client segment and to strengthen our long-term relationships with clients.
We distribute our capitalization products through our branch network, electronic channels and ATMs.
Source: SUSEP.
Our activities in this business range from typical operations of a commercial bank to capital markets operations and advisory services for mergers and acquisitions. These activities are fully integrated, which enables Itaú BBA to achieve a performance tailored to our clients’ needs.
One of the most important features of Itaú BBA is the set of initiatives linked to improving efficiency in our operations. These continuous actions, which are expected to continue to grow in the coming years, are designed to increase revenues, improve processes and reduce costs.
We focus on assessment practices and mitigation of environmental risks seeking to ensure the sustainability of the cash flows of our clients and manage our credit risk. These practices have been disseminated to other market participants through programs and partnerships with clients and international organizations such as the “Outreach Program for Latin America”, a forum for the dissemination and analysis of social and environmental risk in Latin America, led by Itaú BBA with the support of the International Finance Corporation, the Inter-American Development Bank and the United Nations.
In 2013, the servicing of middle-market corporate clients, comprising companies with annual revenues from R$30 million to R$300 million, was migrated to Itaú BBA. This structure is intended to offer more specialized services, with more agility and variety of products, in order to enable a closer relationship with our clients and to increase our penetration in the middle-market corporate segment.
“Our objective is to be the Latin American reference in Wholesale Banking. Focused on relationship with clients and investors, being partners on business with them and seeking their needs, through a solid and talented team.”
Cândido Bracher – Itaú Unibanco Holding’s Board member and Executive Vice-President – Wholesale Bank
Investment banking
Our investment banking business assists companies raising capital through fixed income and equity instruments in public and private capital markets, and provides advisory services in mergers and acquisitions. We advise companies, private equity funds and investors in the structuring of variable income products and in mergers and acquisitions. From research to execution, we believe we offer a wide portfolio of investment banking services with respect to Brazilian and other Latin American companies.
In investment banking, the fixed income department acts as bookrunner or manager in the issuance of debentures, promissory notes and securitization transactions.
Source: (1) ANBIMA Origination ranking by number of deals, (2) ANBIMA Distribution ranking, (3) Thomson ranking by number of deals.
Brokerage (Itaú Corretora)
Itaú Corretora has been providing brokerage services in BM&FBovespa since 1965. The brokerage services are also provided to international clients via our broker-dealers in New York, Hong Kong and Dubai. It ranked sixth among all BM&FBovespa brokers on equity trading volume and second in number of commodities and derivatives contracts in the period between January and December 2013.
Additionally, our research team ranked first in both Latin America and Brazil in the “Institutional Investor Research Ranking”, a research conducted among institutional investors.
The table below shows the market position and information about competitors for the businesses listed below:
Large companies
We offer products and services to companies with revenues over R$300 million. As of December 31, 2013, we had more than 3,000 clients.
Itaú BBA’s wholesale bank operating strategy is to offer efficient, differentiated services which meet the demands of our clients. We create and offer products and services for every business need, and conduct a segmentation based on each client profile.
Trade financing
Our trade financing business consists of the management of financial products for export and import, foreign loans, guarantees, remittance of funds and international exchange. Our export financing to larger corporate clients is generally unsecured, but some transactions require complex guarantees, particularly those originally structured to be syndicated.
Middle-Market banking
In 2013, our middle-market banking business increased its portfolio of clients with low probability of default.
In October 2013, Itaú Unibanco’s middle-market banking business (which includes companies with annual revenues of more than R$30 million up to R$300 million), comprised of the “upper middle” and “middle” corporate divisions, became part of the Itaú BBA management structure.
We are working to create and implement a new model, to be a market benchmark in all dimension, such as credit, product, people, among other, in order to establish a differentiated and sustainable growth for our Wholesale Bank.
We offer a full range of financial products and services to middle-market clients, including deposit accounts, investment options, insurance, private retirement plans and credit products. Credit products include investment capital loans, working capital loans, inventory financing, trade financing, foreign currency services, equipment leasing services, letters of credit and guarantees. We also carry out financial transactions on behalf of middle-market clients, including interbank transactions, open market transactions and futures, swaps, hedging and arbitrage transactions. We also offer a broad number of cash management services to our middle-market clients, including collection services, electronic payment services and Internet office banking.
“In 2013, we defined our organizational structure for this segment, consolidating our business model and simplifying its management. We promoted a unification of our operations, standardizing processes in order to attend our several businesses.”
Márcio Schettini – Itaú Unibanco’s Executive Vice-President – Consumer Credit, Real State, Vehicle Financing and Insurance
Credit cards and commercial agreements
Through proprietary and partnership operations with major retailers, telephone carriers, automakers and airline companies established in Brazil, we offer a wide range of credit and debit cards to more than 58.2 million current and non-current account holders (in number of accounts as of December 31, 2013).
Our main goals in the credit card business are to continually grow our portfolio, improve its profitability, manage the quality of our assets and pursue the total satisfaction of our clients. To this end, our credit card division focuses on the development of new products, assessment of our partnerships, control of the credit quality of our portfolio and on more efficient cost management.
In May 2013, we announced the acquisition of Banco Citicard S.A. and of Citifinancial Promotora de Negócios e Cobrança Ltda. for approximately R$2.8 billion, including the “Credicard” brand. Credicard distributes financial products and services, especially credit cards and personal loans, and had a portfolio of 4.8 million credit card accounts as of December 31, 2012. All regulatory approvals for this transaction have been obtained.
Also in May 2013, we changed our credit card reward program, called“Sempre Presente” (Always Present), and created a new platform for redemption of airline mileage awards, the“Ponto Viagem” (Travel Points), www.pontoviagem.net website, and awards in retail partners’websites.
In October 2013, we launched “Hiper”, our new credit card brand available to all Brazilian consumers and accepted in over one million merchants acquired by Rede throughout Brazil. The “Hiper” branded products will initially be issued by Banco Itaucard S.A., or Itaucard, to our account holders and non-account holders in Brazil and initially available with credit functions. The “Hiper” brand will not substitute the “Hipercard” brand but, rather, be another option for our clients, with different benefits from those offered for “Hipercard”, such as:
Source: Itaú Unibanco Holding and CardMonitor.
In 2012 we announced our intention to acquire all outstanding shares of REDE, then Redecard, through a public tender offer aimed at cancelling Redecard’s authorization as a publicly-held company registered with the CVM. The tender offer targeted the acquisition of common shares of Redecard corresponding to approximately 50.0% of its share capital. On April 12, 2012, we confirmed that the price to be paid in cash would be R$35.00 per share (the “Tender Offer Price”). The tender offer was successfully completed on September 24, 2012. As a result of the auction, we acquired, through an affiliate, 298,989,137 common shares of Redecard, representing 44.4% of Redecard’s share capital, bringing the total amount of common shares owned by us to 94.4% of Redecard’s share capital. On October 18, 2012, Redecard’s registration as a publicly held company was cancelled. As of December 31, 2012, we held through our affiliates, 100.0% of Redecard’s shares, as a result of subsequent purchases. The shares were purchased at the Tender Offer Price for a total amount of R$11,752 million.
In October 2013, our acquirer business launched a new brand concept and changing its name from Redecard to REDE, to be in line with our business strategy, which now has a broader scope encompassing digital payments. The name REDE summarizes the company’s key attributes, evoking technology, agility and modernity, in addition to having a youth and connectivity appeal. While the company will continue to focus on large companies and merchants, it will also focus on end-users, particularly by offering technology-based services available through digital and mobile media.
REDE is one of the two largest multi-brand acquirers of credit, debit and benefit card transactions in Brazil. REDE’s activities include merchant acquiring, capturing, transmission, processing and settlement of credit and debit card transactions, prepayment of receivables to merchants (resulting from sales made with credit cards), rental of point-of-sale terminals, or POS, check verification through POS terminals, and the capture and transmission of transactions using coupons, and loyalty programs. Our goal is to be the main partner for merchants that are seeking higher business potential. For those partners, REDE offers a series of products that follow the market’s latest trends. Among these products we highlight e-REDE, a single platform for efficient, fast and complete solutions for online payments using a robust antifraud system, and Mobile REDE, which captures the transaction using a device attached to the smartphone or tablet. It allows card reading and input of purchase data for client’s signature.
In 2013, we continued to focus on investments in IT, infrastructure and POS modernization, and through e-REDE we intensified and improved the quality of our electronic payments platform, offering not only the acquisition service, but also an antifraud gateway. Through Mobile REDE, we reinforced our position in new payments solutions for freelancers and micro entrepreneurs.
In May 2010, Hipercard, also a subsidiary of Itaú Unibanco, entered into an agreement with REDE, pursuant to which starting in the second quarter of 2010, REDE would start acquiring Hipercard transactions and Hipercard would have access to REDE’s nationwide infrastructure and network, which improved the efficiency and speed of Hipercard’s merchant affiliations.
In 2013, REDE and Hipercard captured of R$323 billion in transactions with credit cards and debit cards, an increase of 16.2% from 2012. The number of transactions captured and processed reached 3.7 billion, representing an increase of 11.2% from 2012. In December 2013, we had 1.56 million installed POS terminals throughout Brazil, representing an increase of 8.9% from 2012. Without giving effect to Hipercard’s installed POSs, which were migrated to REDE in 2013, we had an increase of 23.6% in number of POS terminals from 2012 to 2013. The number of REDE’s affiliated clients grew 18.7% in 2013. As of December 31, 2013, REDE was present in almost all municipalities in Brazil with electric power and telecommunications network. We generally consider each POS to represent one client.
The following table sets forth the financial volume of transactions in billion of reais and the amount of transactions of credit and debit cards processed by us in 2013, 2012 and 2011:
Vehicle financing
In 2013, we granted R$18.9 billion in vehicle and heavy vehicle financing, a decrease of 14.2% compared to the same period of 2012.
Each vehicle financing application is reviewed based on credit scoring and dealer scoring systems. Applications with high credit scores are subject to electronic validation according to our credit policy and by credit bureaus. During 2013, we continued to focus on increasing the efficiency of our credit proposal analysis process. In December, 2013, 92.0% of all credit proposals were analyzed and decided in approximately 5 minutes, an improvement when compared to 16 minutes in June 2013. This efficiency was obtained due to an improvement in our systems. Please refer to section Performance, item Financial Performance, Assets, loan and lease operations, Loan approval process, for further information.
Since 2012, we have reduced our risk exposure in this sector and focused on clients with better risk profiles, which allowed us to improve the credit quality of our vehicle loan portfolio.
In August 2013, we renewed our commercial cooperation agreement with Fiat, leader in the Brazilian vehicle industry until 2023. The agreement provides us with exclusivity to offer vehicle financing in Fiat’s marketing campaigns to sell new vehicles, and to use the Fiat brand in other activities related to vehicle financing.
Source: Itaú Unibanco Holding, Cetip and Fenabrave.
Consortia
A consortium is a self-financing system created in Brazil with a view to foster savings for the purchase of vehicles and other assets, such as real estate. Pursuant to consortium agreements, participants are pooled according to the specific asset they elect to purchase (e.g., a vehicle of a particular manufacturer and model), which will be paid for in installments. Payments made by the participants of a given consortium are used to create a “pool” of funds, which are used by one or more members of the consortium at a time to acquire the assets elected by the participants, e.g., once a month, and such members continue to make payments as scheduled. Generally, participants may receive the asset, (i) during the course of the consortium agreement (before all installments are paid), if the participant pays an amount (in addition to the regularly scheduled installment due) that is higher than such an additional amount offered by any other consortium member for that period, or (ii) during the course of the consortium agreement (before all installments are paid), if the participant is selected by random drawing, organized by the bank, to receive the asset, while continuing to pay for the remaining installments as scheduled.
As consortia are regarded as a provision of services under Brazilian law, the management of consortia does not give rise to default risk or regulatory capital requirements for us.
Since consortia do not charge interest rates, our revenues come mainly from the administration fee charged from clients.
Given these characteristics, this business is strategic to us, contributing to revenue diversification and to a more complete product portfolio offering to our clients. In October 2013, we launched a new line of consortium products for the acquisition of heavy vehicles, which supported a growth of 28.1% in active participants among all the consortia we manage from November 2012 to November 2013. In the same period the number of consortia participants in the Brazilian market, excluding the motorcycle segment, increased 14.8%.
Microcredit
Our microcredit unit offers low-income entrepreneurs who do not have the necessary attributes to participate in the traditional financial system the chance to expand and develop their businesses. Itaú Microcrédito’s loan officers reach out to new and existing clients, offering loans (coupled with a free loan-protection microinsurance) and disseminating financial concepts related to the responsible use of money.
A major benefit arising from this initiative is that micro-entrepreneurs start to develop a relationship with the formal market. Our microcredit activities are split into two levels:
Our investment in microcredit consolidates our strategy to act as agents of transformation in society. Microcredit is also important as it reinforces our vision of sustainability and increases our ability to spread our knowledge in financial education. The end goal is to create a virtuous cycle in which the bank stimulates the social and economic development of Brazil’s low-income population.
Our international business
Itaú Unibanco Holding’s global footprint
As of December 31, 2013 we were present in 19 countries outside of Brazil, seven of which are in Latin America. In Argentina, Chile, Paraguay and Uruguay, we offer commercial banking (retail) and wholesale banking with the main focus on commercial banking. In Mexico, we operate in the credit card segment and we are in the initial phase of opening
a brokerage company and an investment bank. We also have an Itaú BBA representation office in Peru, and are gradually intensifying our presence in Colombia through our investment banking and corporate operation.
Additionally, we have operations in Europe (France, Germany, Luxembourg, Portugal, United Kingdom, Spain and Switzerland), in the United States (Miami and New York), in the Caribbean (Cayman Islands and the Bahamas), in the Middle East (Dubai), and in Asia (Hong Kong, Shanghai and Tokyo). These are operations that mainly serve institutional, investment banking, corporate and private banking clients.
Please refer to section Performance, item Financial Performance, Results, Revenues from Operations in Brazil and Abroad, for further information.
Latin America is a priority in our international expansion plans due to the geographic and cultural proximity to Brazil. Our purpose is to be recognized as “the Latin American bank”, becoming a reference in the region for all financial services provided to individuals or companies. Our target is to grow in a sustainable way, maintaining a strong relationship with the local retail and wholesale market.
In order to support our more than 1.8 million clients, as of December 31, 2013 we had a network of 246 branches and client service branches (CSBs) in Latin America (ex-Brazil). In Paraguay, we had 37 non-bank correspondents, which are points of service with a simplified structure, strategically located in supermarkets to provide services to our clients in that country. We also have 38 points of service through OCA S.A., our credit card operator in Uruguay.
“2013 represented the end of 7 years of consolidation in the region, reaching scale for a new cycle of performance and growth. Our 2014 priority in Latin America is integration” Ricardo Marino – Itaú Unibanco Holding’s Board Member and Itaú Unibanco’s Executive Vice-President – Latam
1. As of December 31, 2013.
Banco Itaú Argentina
We have operated in Argentina since 1979, where we focus on large companies with business ties to Brazil. In 1994, we initiated our retail operations in Buenos Aires. In 1998, we increased our presence by buying Buen Ayre Bank, subsequently renamed Banco Itaú Argentina. The GDP of Argentina increased 3.1% in 2013.
Through Banco Itaú Argentina we offer products and services in corporate banking, small- and middle-market companies and retail banking. Our corporate banking business focuses on large and institutional clients, providing lending, structured finance, investment and cash management services. Our small- and middle-market operations provide credit for working capital and investments in production capacity increases. Our retail banking business focuses on middle and upper-income clients and services offerings include current and savings accounts, personal loans and credit cards.
Banco Itaú Chile
Our business in Chile is mainly focused on retail and high-income clients, but we also operate with middle-market and large corporate clients. In 2013, we opened 7 new branches, totaling 98 branches in our service network in Chile as of December 31, 2013. The GDP of Chile increased 4.0% in 2013.
We started our activities in Chile in 2007, after Bank of America Corporation transferred the operations of BankBoston Chile and BankBoston Uruguay to us. In 2011 we acquired the high net worth portfolio of HSBC Bank and in 2012 we completed the acquisition of 50.0% of Munita, Cruzat & Claro, a leader in wealth management in Chile.
Today, we are one of the leaders in wealth management and have the second fastest growing loan portfolio in Chile, according to the Superintendency of Banks and Financial Institutions – SBIF as of November 2013. Moreover, our foreign trade portfolio and student loan program have increased as of December 31, 2013.
In line with our commitment with the Chilean market, we launched the “It Now IPSA”, the first exchange traded fund (ETF) that tracks the return of the shares of the 40 largest funds in the local market. Our ETFs are traded under the brand “It Now”. In the coming years, our expectation is to grow between 20% and 30% in the ETF industry worldwide and we believe Chile will be part of this expansion.
Please refer to section Itaú Unibanco Holding, item 2013 Highlights, Recent Developments, for further information about the merger of Banco Itaú Chile with CorpBanca.
Banco Itaú Uruguay
Our banking operations in Uruguay include Banco Itaú Uruguay, OCA (the largest credit card issuer in Uruguay) and the pension fund management company Unión Capital AFAP S.A., making us one of the leading financial operations in Uruguay. Our strategy in Uruguay is to serve a broad range of clients through customized banking solutions. The GDP of Uruguay increased 3.8% in 2013.
Our retail banking business is focused on individuals and small business clients, with more than 297,000 clients as of December 31, 2013. Retail products and services focus on the middle and upper-income segments, and also include current and savings accounts, payroll payment, self-service areas and ATMs in all branches, and phone and Internet banking. The wholesale banking division is focused on multinational companies, financial institutions, large and middle market companies and the public sector, providing lending, cash management, treasury, trade and investment services. Additionally, our private banking business unit provides a full portfolio of local and international financial market products.
We have been the second largest private bank in Uruguay in terms of market share since July 2012 and have been recognized as the best bank in Uruguay by “Euromoney” magazine. With the purpose of maintaining this pace of growth and local penetration, in June 2013 we entered into an agreement to purchase the retail operations of Citibank in Uruguay, assuming a portfolio of over 15,000 account holder clients. The assets acquired at that time involve mainly credit card operations under the Visa, Mastercard and Diners brands, representing a portfolio of US$45.6 million in credit card loans and US$12.6 million in personal loans. This transaction closed in December 2013, after approval by the local regulatory authorities.
Banco Itaú Paraguay
Our operations in Paraguay began in 1978 and comprise retail and wholesale banking, through Banco Itaú Paraguay S.A., formerly known as Interbanco. In 1995, Interbanco was acquired by Unibanco, and the “Itaú” brand has been present in the country since 2010. The GDP of Paraguay increased 13.0% in 2013.
Banco Itaú Paraguay distributes products and services to small and middle market companies, agribusiness, large companies, institutional clients and consumer clients. Banco Itaú Paraguay’s main sources of income are consumer banking products, primarily credit cards. The retail segment also focuses on payroll clients. Under corporate banking, Banco Itaú Paraguay has a well-established presence in the agribusiness sector, which has performed very well.
Our strategy for the retail and middle-market segments in the last years resulted in a significant increase in our local market share. We are the leading player in the credit card segment and hold the first position among banks in Paraguay based on results, return on average equity and deposits, according to the Central Bank of Paraguay in November 2013. In 2013, 2012 and 2011, we were considered the highest regarded brand in Paraguay according to the Brazilian Institute of Public Opinion and Statistics – Paraguay Branch, and were recognized as the best bank in Paraguay by “Global Finance” magazine.
Colombia
In Colombia, our wholesale and investment bank has been operating since the end of 2012. Our target market in Colombia consists of institutional investors and large Brazilian companies operating in Colombia as well as Colombian companies operating in Brazil. The product portfolio includes loan operations, foreign trade financing, foreign exchange and derivatives and investment bank activities, such as advising on mergers and acquisitions and accessing the capital markets. We estimate that the GDP of Colombia increased 4.1% in 2013.
Our presence in Colombia is increasing, and we aim to be one of the three main investment and wholesale banks in Colombia in the next five years.
Please refer to section Itaú Unibanco Holding, item 2013 Highlights, Recent developments, for further information about the merger of Banco Itaú Chile with CorpBanca.
Peru
In Peru, we have a representation office and are considering expanding our activities into corporate and investment banking, following the same strategy as in Colombia, so as to take advantage of the strong growth experienced by Peru. The GDP of Peru increased 5.0% in 2013.
Mexico
In Mexico, we operate in the credit card segment and we are in the initial phase of opening a brokerage company and an investment bank. The GDP of Mexico increased 1.1% in 2013.
We manage proprietary portfolios and raise funds through the issuance of securities in the international market. Fund raising through the issuance of securities, certificates of deposit, commercial paper and trade notes can be conducted by our branches located in the Cayman Islands, Bahamas and New York, as well as through Itaú Bank Ltd., a banking subsidiary incorporated in the Cayman Islands.
Our proprietary portfolios are mainly held by Itaú Bank and our Cayman Islands branch. These offices also enhance our ability to manage our international liquidity.
Through our international operations, we establish and monitor trade-related lines of credit from foreign banks, maintain correspondent banking relationships with money centers and regional banks throughout the world and oversee our other foreign currency-raising activities.
On February 1, 2013, Banco Itau BBA International S.A., headquartered in Portugal, was merged into Itau BBA International Limited, headquartered in the United Kingdom. On May 17, 2013, the entity was registered as a public-limited company under the trade name Itau BBA International plc. The purpose of this restructuring process is to allow Itau BBA International to improve its performance and sources of funding, expand its client base, strengthen its position as an international platform for the group, achieve greater diversification of risk and increase profitability indicators.
Additionally, Itaú BBA participates in the international capital markets as a dealer, as it has equity and fixed income sales and trading teams in São Paulo, New York, London, Hong Kong and Tokyo. As of December 31, 2013 we had the best research analyst team in Latin America according to Institutional Investor Magazine and provide extensive coverage of over 205 listed companies in Brazil, Mexico, Chile, Colombia, Peru, Panama and Argentina. Our international fixed income and equity teams are active in trading and offering Brazilian and Latin American securities to institutional investors.
Competitive strengths
We believe the following strengths provide us with significant competitive advantages and distinguish us from our competitors.
Our exclusive ATM network allows us to offer a wide range of products and services to our clients which we see as one of our competitive strengths.
Additionally, we have refurbished branches especially for shopping malls. These branches have a new visual identity and service proposal, offering a new concept of client service and a differentiated layout inspired by the design of a retail store. Shopping mall branches have extended hours, which offers added convenient for our clients. Please refer to section Itaú Unibanco Holding, item Our Profile, Marketing and Distribution Channels, for further information.
We have an extensive network with 4.1 thousand branches, 885 client site branches, or CSBs, and 27.9 thousand ATMs in Brazil and abroad, as of December 31, 2013.
Information for the investor
Each shareholder has the preemptive right to subscribe for shares in any capital increase, in proportion to his equity interest, except in specific cases, in compliance with Brazilian Corporate Law.
Our Bylaws authorize the Board of Directors to increase our share capital up to a limit of 6.6 billion shares, of which 3.3 billion must be common shares and 3.3 billion must be preferred shares (authorized capital). Up to the limit of our authorized capital, the issuance of our shares may be made without considering our shareholders preemptive rights if (i) made for the sale on a stock exchange; (ii) by a public subscription; and (iii) exchange for our shares in a public offering for the acquisition of our control. Regardless of this provision, all increases in our share capital must be ratified by our shareholders and approved by the Central Bank.
Withdrawal rights are not available to shareholders whose shares have liquidity and are actively traded in the stock market in cases of merger or takeover or in case the company elects to take part in a group of companies.
Common and preferred shares should be reimbursed upon cancellation of their registration at fair value, calculated based on the criteria set forth by under Brazilian Corporate Law. If the general shareholders’ meeting in which the resolution that gave rise to withdrawal rights was approved is held more than 60 days after the date when the last balance sheet was approved, the shareholder may demand that his shares are redeemed at a value based on a new balance sheet, dated up to 60 days after the date of the general meeting.
Our preferred shares may be registered in Brazil through the Central Bank, in compliance with Brazilian regulation, which enables foreign investors to invest in almost all financial assets and carry out almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are met. A foreign investor in our preferred shares may face delays in registering our shares, which may delay any remittances abroad. These delays may also adversely affect the amount of U.S. dollars received by such non-resident investor.
Please refer to section Itaú Unibanco Holding, item Information for the Investor, Considerations For Foreign Investors in ADS, Other Information about our ADS Program, for further information.
An investor may hold the ADSs directly, registered under his or her name, or indirectly, through a broker or another financial institution. The holders of our ADSs do not have the same rights as our shareholders and the depositary and holders of corresponding shares in Brazil. The deposit agreement determines the rights and obligations of the ADS holders and is governed by New York law.
In the event of a capital increase that maintains or increases the proportion of our capital represented by preferred shares, the holders of ADSs, except as described above, have preemptive rights to subscribe only to newly issued preferred shares. In the event of a capital increase that reduces the proportion of capital represented by preferred shares, the holders of ADSs, except as described above, have preemptive rights to preferred shares in proportion to their interests and to common shares only to the extent necessary to prevent dilution of their interests.
Please refer to section Itaú Unibanco Holding, item Information for the Investor, Considerations For Foreign Investors, Other Information about our ADS Program, for further information.
The mandatory dividend may be paid as dividends or interest on capital. The main difference between these forms of payment is tax-related. The payment of dividends is tax-free for shareholders. The payment of interest on capital is subject to withholding income tax at a 15% rate.
Any payment of interest on capital to holders of preferred shares, including holders of ADSs, whether Brazilian residents or not, is subject to Brazilian withholding tax at a rate of 15%, or 25% if the shareholder is a resident of or domiciled in a tax haven jurisdiction or a privileged tax regime, respectively. The amount paid to shareholders as interest on capital, net of any withholding tax, may be included as part of the mandatory dividend. In such cases, we are required to distribute to shareholders an amount sufficient to ensure that the net amount received by shareholders, after the payment by us of applicable withholding taxes in respect of the distribution of interest on capital, is at least equal to the mandatory dividend. Please refer to section Itaú Unibanco Holding, item Information for the Investor, Considerations For Foreign Investors in ADS, Taxation, for further details.
Our Shareholder Remuneration Policy, approved by our Board of Directors, establishes the monthly payment of R$0.015 per share as an advance mandatory dividend. The date used in Brazil as a reference to determine which shareholders are entitled to receive the monthly dividend is determined according to the shareholding position registered on the last day of the preceding month. With respect to our ADSs, however, the date used to determine the shareholders that are entitled to receive the monthly dividend is three days after the Brazilian reference date. In both cases, monthly dividends for a given month are paid on the first business day of the next month.
Once our net income is calculated, we intend to pay the difference between the accumulated amount of advanced monthly dividends and the amount equivalent to the mandatory dividend, calculated as mentioned before. Additionally, our Board of Directors may declare interim dividends, which will be submitted for ratification at our annual shareholders’ meeting.
A shareholder may claim payment of any dividend for a period of three years counted from the dividend payment date. After this period we have no responsibility for such payment.
Shareholders not residing in Brazil must register with the Central Bank so that dividends, interest on capital and other amounts related to their shares can be remitted abroad in a foreign currency.
Currently, we pay dividends and interest on capital equivalent to or higher than the mandatory dividends, but this may not continue to happen if our shareholders decide that such distribution is not advisable in view of our financial condition. In this case, if our Fiscal Council is constituted, it must issue an opinion about that decision, and Management must present a report to the CVM detailing the reasons for the suspension of the dividend payment. Profits not distributed due to a suspension of the dividend payment must be allocated to a special reserve and, if it is not absorbed by losses in subsequent years, it must be paid as dividends as soon as our financial position so permits.
Please refer section Performance, item Consolidated Financial Statements (IFRS), Note 21, b, and section Our Risk Management, item Regulatory Environment, Implementation of Basel III in Brazil.
History of payment of dividends1
The following table shows dividends and interest on capital paid or declared to the holders of our common and preferred shares since 2011.
On November 28, 2013, our Board of Directors declared the payment of interest on capital, in the amount of R$0.20360 per share (or R$0.17306 per share, net of taxes) to be paid out on February 28, 2014 to all shareholders of record as of the close of trading on December 20, 2013. On February 3, 2014, our Board of Directors declared interest on capital in the amount of R$0.5236 per share (or R$0.44506 per share, net of taxes) to be paid out on February 28, 2014 to all shareholders of record as of the close of trading on February 18, 2014.
Risks related to our ADSs
Before investing in our shares and ADSs, it is important for the investor to know that, in addition to the risks related to our business, which may impact the value of our securities and our ability to perform certain obligations, including the payment of dividends and interest in equity, the investor will be exposed to additional risks, as described below. Additional risks and uncertainties that we are unaware of, or that we currently deem to be immaterial, may also become important factors that affects us.
The relative price volatility and limited liquidity of the Brazilian capital markets may significantly limit the ability of our investors to sell the preferred shares underlying our ADSs, at the price and time they desire.
The investment in securities traded in emerging markets frequently involves a risk higher than an investment in securities of issuers from the U.S. or other developed countries, and these investments are generally considered more speculative. The Brazilian securities market is smaller, less liquid, more concentrated and can be more volatile than markets in the U.S. and other countries. Thus, an investor’s ability to sell preferred shares underlying ADSs at the price and time the investor desires may be substantially limited.
The preferred shares underlying our ADSs do not have voting rights, except in specific circumstances.
Pursuant to our Bylaws, the holders of preferred shares and therefore of our ADSs are not entitled to vote in our general shareholders’ meetings, except in specific circumstances. Even in such circumstances, ADS holders may be subject to practical restrictions on their ability to exercise their voting rights due to additional operational steps involved in communicating with these shareholders, as mentioned below.
According to the provisions of the ADSs deposit agreement, in the event of a general shareholders’ meeting, we will provide notice to the depositary bank, which will, to the extent practicable, send such notice to ADS holders and instructions on how such holders can participate in such general shareholders’ meeting, and ADS holders should instruct the depositary bank on how to vote in order to exercise their voting rights. This additional step of instructing the ADS depositary bank may make the process for exercising voting rights longer for ADS holders.
Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares.
We may not be able to offer the U.S. holders of our ADSs preemptive rights granted to holders of our preferred shares in the event of an increase of our share capital by issuing preferred shares unless a registration statement relating to such preemptive rights and our preferred shares is effective or an exemption from such registration requirements of the Securities Act is available. As we are not obligated to file a registration statement relating to preemptive rights with respect to our preferred shares, we cannot assure the preemptive rights will be offered to you.
In the event such registration statement is not filed or if the exemption from registration is not available, The Bank of New York Mellon, as depositary bank, will attempt to sell such preemptive rights within the exercise period, and, in case such a sale is effective, our ADS holders will be entitled to receive the proceeds from such sale. However, the U.S. holders of our ADSs will not receive any value from the granting of such preemptive rights if the depositary bank is unable to sell the preemptive rights during the exercise period.
The surrender of ADSs may cause the loss of the ability to remit foreign currency abroad and of certain Brazilian tax advantages.
While ADS holders benefit from the electronic certificate of foreign capital registration obtained in Brazil by the custodian for our preferred shares underlying the ADSs, which permits the depositary bank to convert dividends and other distributions with respect to the preferred shares underlying the ADSs into foreign currency and remit the proceeds abroad, the availability and requirements of such electronic certificate may be adversely affected by future legislative changes.
If an ADS holder surrenders the ADSs and, consequently, receives preferred shares underlying the ADSs, such holder will not be able to remit abroad foreign currency upon disposition of preferred shares or receipt of distributions unless the investor obtains (i) an electronic certificate of foreign capital registration, the Electronic Declaratory Registration of Foreign Direct Investment (RDE-IED), or (ii) qualifies under Brazilian foreign investment regulations that entitle certain foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining a separate electronic certificate of foreign capital registration, the Electronic Declaratory Registration of Portfolio (RDE – Portfolio). Moreover, upon receipt of the preferred shares underlying the ADSs, Brazilian regulations require the investor to enter into corresponding exchange rate transactions and pay taxes on these exchange rate transactions.
The tax treatment for the remittance of dividends and distributions on, and the proceeds from any sale of, our preferred shares is less favorable in case a holder of preferred shares obtains the RDE-IED instead of the RDE-Portfolio. In addition, if a holder of preferred shares attempts to obtain an electronic certificate of foreign capital registration, such holder may incur expenses or suffer delays in the application process, which could impact the investor’s ability to receive dividends or distributions relating to our preferred shares or the return of capital on a timely manner.
The holders of ADSs have rights that differ from those of shareholders of companies organized under the laws of the U.S. or other countries.
Our corporate affairs are governed by our Bylaws and Brazilian Corporate Law, which may have legal principles that differ from those that would apply if we were incorporated in the U.S. or in another country. Under Brazilian Corporate Law, the holders of ADSs and the holders of our preferred shares may have different rights with respect to the protection of investor interests, including remedies available to investors in relation to any actions taken by our Board of Directors or the holders of our common shares, which may be different from what is provided in U.S. law or the law of another country.
Other information about our ADS program
American depositary shares
In the United States, our preferred shares are traded in the form of ADSs, with each ADS representing one preferred share. ADSs are issued by The Bank of New York Mellon, as depositary, under a Deposit Agreement, dated as of May 31, 2001, as amended and restated as of February 20, 2002 and as of March 30, 2009, effective as of April 3, 2009, among us, the depositary and the owners and beneficial owners of ADSs from time to time. The depositary’s principal executive office is located at One Wall Street, New York, New York 10286.
We do not treat ADS holders as our shareholders and ADS holders have no shareholder rights, which are governed by Brazilian Corporate Law. The depositary is the holder of the preferred shares underlying the ADSs. Holders of ADSs have ADS holder rights.
Fees and expenses
The following table summarizes the fees and expenses payable by holders of ADSs to the depositary:
Payment of taxes
The depositary may deduct the amount of any taxes owed from any payments to investors. It may also sell deposited securities, by public or private sale, to pay any taxes owed. Investors will remain liable if the proceeds of the sale are not sufficient to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to investors any proceeds or send to investors any property remaining after it has paid the taxes.
Reimbursement of fees
The Bank of New York Mellon, as depositary, has agreed to reimburse us for expenses we incur that are related to establishment and maintenance of the ADS program. The depositary has agreed to reimburse us for our continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADSs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of United States federal tax information, mailing required tax forms, stationery, facsimile, and telephone calls. It has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to us based on applicable performance indicators relating to the ADS facility. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of fees the depositary collects from investors.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs in case of exercise of withdrawal rights or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deducting from cash distributions, by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide services subject to fees until its fees for those services have been paid.
Reimbursement of fees incurred in 2013
In 2013, we received from the depositary US$14.7 million for promoting and encouraging the ADR program in the market, out-of-pocket maintenance costs for the ADSs (as described above), any applicable performance indicators relating to the ADS facility, underwriting fees and legal fees.
Majority of independent directors
The NYSE rules require that the majority of the board members be independent. Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company. However, under NYSE rules, listed companies (whether U.S. or foreign) of which more than 50% of the voting power is held by another company, such as in our case, are not required to comply with such requirement.
Brazilian legislation does not have a similar requirement. Nevertheless, our Board of Directors has four directors considered independent pursuant to the criteria established in our corporate governance policy. For further information on the composition of our Board of Directors, see section Our governance, item Management structure, Our Directors, Officers and Committee members.
Additionally, Brazilian Corporate Law, the Central Bank and the CVM have established rules that address the duties and responsibilities of companies’ officers and directors and their professional qualification, so as to ensure the proper operation of the Board.
Executive sessions
NYSE rules require that directors who are not officers meet at regularly scheduled executive sessions without the presence of directors who are also officers of the company.
Brazilian legislation does not have a similar requirement. However, we hold meetings of our directors who are not officers without the presence of directors who are also officers, with no fixed periodicity. Brazilian Corporate Law allows up to one third of the members of the Board of Directors to be also members of the Board of Officers.
Nomination and Corporate Governance Committee and Compensation Committee
NYSE rules require that listed companies have a nomination and Corporate Governance Committee and also a Compensation Committee, each entirely composed of independent Directors and governed by a charter on the purposes and responsibilities of such Committee. However, under NYSE rules, listed companies (whether U.S. or foreign) of which more than 50% of the voting power is held by another company, such as in our case, are not required to comply with such requirement.
Pursuant to Brazilian legislation, we are not required to have a nomination or Corporate Governance Committee. However, we opted for forming a Nomination and Corporate Governance Committee responsible, in general, for matters related to the company’s governance, including suggesting corporate governance guidelines to the Board of Directors and overseeing their compliance, and the selection, nomination and assessment of the Board of Directors.
Pursuant to Brazilian legislation, listed companies are not required to have a Compensation Committee. Nonetheless, we are required to establish a Compensation Committee pursuant to Brazilian banking regulation. In accordance with such regulation, our Compensation Committee reports to the Board of Directors and members of the Compensation Committee are not required to be independent.
NYSE rules require that listed companies have an Audit Committee that (i) is composed of at least three independent members who have knowledge of finance; (ii) complies with SEC rules related to the Audit Committee of companies registered with NYSE; (iii) has at least one member who is an expert in accounting or financial management; and (iv) is governed by a charter that expressly sets out the purposes and responsibilities of the Committee and that establishes annual performance assessments.
The applicable Brazilian legislation regulates independent audit services rendered to financial institutions and requires the establishment of an Audit Committee composed of at least three members. Our Audit Committee, formed on April 28, 2004, meets applicable Brazilian legal requirements, is elected annually by the Board of Directors and is composed of members and professionals with proven technical qualification compatible with the responsibilities of this Committee.
According to the SEC, foreign private issuers that meet certain requirements are not required to have an Audit Committee. We believe that our Audit Committee is compliant with the requirements of Rule 10A-3(c)(3) and that it is able to act independently when performing its responsibilities. Our Audit Committee, to the extent permitted by Brazilian legislation, performs all functions required by Rule 10A-3 of the Exchange Act.
In line with the applicable Brazilian legislation, hiring independent auditors is the responsibility of the Board of Directors, whereas the recommendation for hiring and removing independent auditors is the responsibility of the Audit Committee. Thus, our Board of Directors acts in lieu of the Audit Committee, as permitted by Rule 10A-3(c)(3)(v) of the Exchange Act, for the purpose of hiring our independent auditors.
Shareholders’ approval of management members’ compensation and long-term incentive programs
NYSE rules require that shareholders have the opportunity to vote on all share-based compensation plans and significant changes thereto, including significant increases in the number of shares available to the plan, with a few exceptions.
Brazilian legislation sets forth a similar requirement, as it establishes the need for approval of the aggregate compensation of Management members (including shares) and stock option plans at the Annual General Shareholders’ Meeting. Please refer to section Our governance, items Directors’ and Senior Management’s compensation and Long-Term incentive programs for further information.
Corporate governance guidelines
NYSE rules require that listed companies adopt and disclose their corporate governance guidelines.
Brazilian legislation does not establish a similar requirement. However, we have a corporate governance policy that consolidates the corporate governance principles and practices that we adopt. We believe such corporate governance principles and practices, consistent with Brazilian legislation, are compatible with the guidelines established by the NYSE. We adopt stricter rules than those required by Brazilian legislation, since we voluntarily adhered to BM&FBovespa Level 1 of corporate governance and grant tag-along rights to all shareholders, regardless of their voting rights. Please refer to section Our governance, item Our practices, for further information.
Code of Ethics
NYSE rules require that listed companies adopt and disclose a Code of Ethics for their Directors, officers and employees. NYSE also requires that listed companies inform NYSE promptly about any waiver of the code provisions for directors or officers.
Brazilian legislation does not have a similar requirement. However, we have a Code of Ethics that, among other matters, governs the conduct of all directors, officers and employees of the Itaú Unibanco Group, detailing the principles that guide our attitudes and practices.
Internal audit
NYSE rules require that listed companies maintain an internal audit function to provide Management and the Audit Committee with ongoing assessments of the company’s risk management processes and internal control systems.
Brazilian banking legislation establishes a similar requirement, since it requires that financial institutions have an internal audit function. Our internal audit function is responsible for assessing the sufficiency and effectiveness of our operating and management controls, as well as the adequacy of our risk identification and risk management processes. In addition, our internal audit function is independent from management in carrying out its activities and has access to all places, information and people deemed necessary for it to carry out its duties. The internal audit function is administratively subordinated to the Chairman of the Board of Directors, and its activities are supervised by the Audit Committee.
Exchange controls
Individuals or legal entities domiciled outside Brazil may own our stock. However, the right to convert dividend payments and proceeds from the sale of our shares into foreign currency and to remit such amounts abroad is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investment be registered with the Central Bank and the CVM. Foreign investors may register their direct investment in our shares under Law No. 4,131, dated September 3, 1962, or CMN Resolution No. 2,689, dated January 26, 2000.
Law No. 4,131 is the main legislation concerning foreign capital and direct equity investments in Brazilian companies and applies to any capital that enters the country in the form of foreign currency, goods and services. Except for registration of the capital inflow/outflow with the Central Bank, non-resident investors directly investing in equity of Brazilian companies do not need any specific authorization to make such investments.
Registration under Resolution No. 2,689 affords favorable tax treatment to non-resident investors who are not residents or domiciled in tax haven jurisdictions, as defined by Brazilian tax laws.
Under Resolution No. 2,689, non-resident investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with Resolution No. 2,689, the definition of non-resident investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered outside Brazil.
Under Resolution No. 2,689, a non-resident investor must:
Additionally, the investor operating under the provisions of Resolution No. 2,689 must be registered with the Brazilian internal revenue service (Receita Federal). This registration process is undertaken by the investor’s legal representative in Brazil.
Pursuant to Resolution No. 2,689, securities and other financial assets held by foreign investors must be registered, kept safe or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM.
The trading of securities under the regime of Resolution No. 2,689 is restricted to transactions carried out in stock exchanges or through organized over-the-counter markets licensed by the CVM, except for transactions resulting from subscriptions, stock dividends, conversion of debt securities into shares, securities-referenced indexes, purchase and sale of shares of opened-end investment funds in securities and, when previously authorized by the CVM, cases resulting from going private transactions, cancellation or suspension of trading, judicial settlements and trading of shares covered by shareholder agreements.
In addition, any transfer or ownership assignment of investments in securities or other financial instruments held by non-resident investors not foreseen by Resolution No. 2,689 is prohibited, except for transfers resulting from mergers, spin-offs and other corporate reorganizations carried out abroad, as well as the cases of hereditary succession.
Further information for the investor
2014 corporate calendar
Annual report hard copy
Investors may receive a hard copy of this annual report, including complete audited financial statements of the last fiscal year, free of charges, by requesting a copy to Investor Relations department, by e-mail, investor.relations@itau-unibanco.com.br, indicating your contacts and the complete address.
Our corporate information and contacts
We are organized as a publicly held corporation for an unlimited period of time under the laws of Brazil. Our head offices are located at Praça Alfredo Egydio de Souza Aranha, 100, 04344-902, São Paulo (SP), Brazil and our telephone number is +55 (11) 2794 3547. We are primarily governed by Brazilian Corporate Law and our Bylaws. Our Tax Payer’s Registry (CNPJ) is 60.872.504/0001-23, and we are registered with the São Paulo Commercial Registry (Junta Comercial do Estado de São Paulo) under NIRE. 35300010230. Our corporate purpose, as set forth in Article 2 of our Bylaws, is to perform banking activity in all its authorized forms, including foreign exchange transactions. Our agent for service of process in the United States is the general manager of our New York branch, which is located at 767 Fifth Avenue, 50th floor, New York, NY 10153.
We focus on creating value for shareholders and we consider corporate governance a continuous and long-term process for this purpose.
The adoption of good corporate governance practices adds value to a company, facilitates its access to capital and contributes to its longevity. Therefore, we have adopted corporate governance practices aligned with best practices adopted in the Brazilian and foreign markets. We seek constant development of our management policies and mechanisms so as to ensure excellence in our practices and sustainable growth for our company.
In line with such principles, we voluntarily adhered to the Code of Self-Regulation and Good Practices for Publicly Held Companies of the Brazilian Association of Publicly Held Companies, or Abrasca, which was based on the best corporate governance practices in effect in Brazil and abroad. In addition, we were named to the Dow Jones Sustainability Index for the 14th consecutive year, and are the only Latin America bank to be part of this index since it was created in 1999. Additionally, we have been named to the Corporate Sustainability Index of the BM&FBovespa for the nineth consecutive year.
In the U.S., our ADS are listed as Level 2 on the NYSE, which means that, in addition to the criteria established by the CVM and the BACEN, we are subject to additional criteria established by the NYSE and the SEC.
We have adopted a Code of Ethics that applies to all of our employees, directors and officers. In 2013, as part of our constant development of corporate governance practices, we revised our Code of Ethics, which is widely disseminated within our company. Please refer to www.itau.com.br/_arquivosestaticos/RI/pdf/Itaucode.pdf?title= Itaú Unibanco’s Code of Ethics for our Code of Ethics. Our Code of Ethics is based on principles that support a corporate culture focused on valuing people, on the strict compliance with rules and regulations and on a permanent pursuit for development.
Additionally, we adopted the Policy of Material Information Disclosure, which deals with the public disclosure of material information pursuant to CVM regulation. We also adopted a Policy on Trading of Securities, which restricts the trading of securities during certain periods and requires management to publicly announce all transactions carried out with our securities, as permitted by CVM regulation.
Please refer to www.itau.com.br/_arquivosestaticos/RI/pdf/en/ENGLISHpolitica_ gc.pdf?title=Corporate Governance Policy, for our governance principles and practices we adopt.
Our practices
Over the course of our history, as part of our corporate governance initiatives, we have made several decisions regarding the improvement of the disclosure of our information and the protection of minority shareholders rights. For example, we are listed as a publicly held company on BM&FBovespa and our shares have been publicly traded since our foundation in 1944. In 2001, we were one of the first companies to voluntarily adhere to Corporate Governance Level 1 of the BM&FBovespa. In 2002, we listed our Level 2 ADSs on the NYSE, complying with both the SEC’s criteria and U.S. legal requirements, such as the Sarbanes-Oxley Act of 2002.
Since 2002, with the commitment to strengthen our position in the Brazilian capital market, we have made a number of presentations in the regional offices of Association of Capital Market Investment Analysts and Professionals (APIMEC). We have also made presentations in the United States and Europe since 1996. In these presentations, we have the opportunity to provide the financial community with details on our performance, strategies to add value, future perspectives and other important issues.
Management structure
Our management is structured so as to ensure that matters are extensively discussed and decisions are made on a collective basis. The chart below presents our management bodies, their main functions and the management members that compose them.
It is the responsibility of our Board of Directors to call a shareholders’ meeting. The first notice of the shareholders’ meeting must be published no later than fifteen days before the date of the meeting on the first call. Brazilian Corporate Law establishes that under specified circumstances, the meeting may also be convened by the fiscal council or any shareholder.
The notice of a shareholders’ meeting must be published three times, on different dates, in official newspapers widely circulated in São Paulo, our principal place of business, setting forth the place, date and time of the meeting, the day’s agenda and, in the event of an amendment to our Bylaws, a description of the proposed change.
In addition to the requirements of Brazilian Corporate Law, we also publish notices in three different languages (Portuguese, English and Spanish) on our website and email our subscribed investors and shareholders, as well as through CVM, BM&FBovespa, the SEC, the NYSE and the BCBA.
As a general rule, Brazilian Corporate Law provides that a quorum for a shareholders’ meeting consists of shareholders representing at least 25% of a company’s issued and outstanding voting share capital, on the first date the meeting is called for, and, if a quorum is not reached, any percentage of the company’s voting share capital on a second date the meeting is called for. Generally, our meetings are held with a quorum representing two thirds of our voting share capital.
In order to attend a shareholders’ meeting, shareholders must present an identification document. A shareholder may be represented at a shareholders’ meeting by a proxy appointed less than a year before the meeting. The proxy must be a shareholder, an officer of the company, a lawyer or a financial institution. Investment funds must be represented by their investment fund officer.
In 2012, we made an “Online Meeting” tool available. This tool is an electronic voting platform that provides shareholders with more accessibility, allowing them to exercise their voting rights in advance, from any place.
The same calling procedures for general shareholders’ meetings apply for special shareholders’ meetings.
Board members must act impartially, in compliance with pre-established rules, so as to prevent conflicts of interest. Such rules include:
The Board of Directors’performance is assessed yearly to ensure that board members are aligned with the organization’s values and that they represent the interests of our shareholders.
Our Board of Directors is currently composed of twelve members, four of which are independent (33%), six are jointly nominated by Itaúsa and Cia. E. Johnston, and, due to its direct participation in our capital, two are nominated by Itaúsa. Our board members meet on a regular basis eight times a year and on a special basis whenever necessary.
Pursuant to our Bylaws, the age limit for holding a position on our Board of Directors is seventy years old. Also, pursuant to our Bylaws, the positions of Chairman of the Board of Directors and Chief Executive Officer or principal executive officer cannot be held by the same person.
Pursuant to Brazilian law, the election or reelection of each member of our Board of Directors is subject to approval by the Central Bank. All directors are elected for a term of one year and can be reelected upon the Central Bank’s approval. Also under Brazilian law, an acting director retains his position until he is reelected or his successor is elected.
Please refer to www.itau.com.br/_arquivosestaticos/RI/pdf/InternalCharterof... pdf?title=Internal Charter of the Board of Directors , for further information.
The committees may hire outside experts but must always be careful to maintain the integrity and the confidentiality of their work.
Please refer to www.itau.com.br/investor-relations/corporate-governance/rules-and-policies, for each committee rules.
The main focus of its work was on the improvement of the Internal Audit procedures and the monitoring of the evolution of Itaú Unibanco Group’s internal controls and compliance.”
Gustavo Jorge Laboissiere Loyola
Independent Director and Chairman of the Audit Committee
The Audit Committee is a statutory body responsible for overseeing the quality and integrity of our financial statements, the compliance with legal and regulatory requirements, the performance, independence and quality of the services provided by our independent auditors and of the work performed by our internal auditors, and the effectiveness of the internal controls and risk management systems. It was established in April 2004 at a general meeting of our shareholders and it is the single body responsible for overseeing companies of the Itaú Unibanco Group that are authorized to operate by the Central Bank or supervised by the SUSEP.
All Audit Committee members are independent, pursuant to CMN regulation, and the Board of Directors will terminate the term of office of any member of the Audit Committee if such member’s independence is affected by any conflict or potentially conflicting situation. In order to meet the requirements of the SEC and the NYSE, the Audit Committee has an independent financial expert: Mr. Guy Almeida Andrade.
The Audit Committee assessments are based on information received from management, external auditors, internal auditors, the units responsible for the risk management and internal controls and on the Audit Committee’s members own analyses resulting from direct observation. After establishing an operations schedule to comply with its duties, the Committee met 31 times in the period from February 2013 to January 2014.
Among the opportunities analyzed, investments that will reinforce the bank’s presence in the credit card segment and, in particular, in Latin America, were recommended. In this context, it is worth mentioning the acquisition of the credit card and consumer credit activities of Credicard and the merger of our banking operations in Chile and Colombia with Corpbanca.”
Nildemar Secches
Independent Director and member of the Strategy Committee
The Strategy Committee is responsible for leading discussions of critical strategic matters to us. Its duties include, but are not limited to: proposing budgetary guidelines for the Board of Directors, issuing opinions and recommendations on the strategic guidelines and investment opportunities in order to support the decisions of the Board of Directors.
Pedro Luiz Bodin de Moraes
Independent Director and Chairman of the Capital and Risk Management Committee”
The Capital and Risk Management Committee is responsible for supporting the Board of Directors in performing its responsibilities related to our capital and risk management as well as submitting reports and recommendations on these topics for the approval of the Board of Directors. Its duties include, but are not limited to, establishing our risk appetite and minimum return expected on our capital, overseeing our risk control and management activities in order to assure their adequacy to the risk levels assumed and the complexity of our operations as well as the compliance with regulatory requirements. It is also responsible for promoting the improvement of our risk culture.
The assessment of all executive officers was also discussed and agreed upon the suggestion of the CEO. The result of the assessments of the work of the committees, Board of Directors, CEO and Chairman of the Board of Directors was also discussed.
Several other topics were discussed so that they can be further elaborated in the future mainly related to:
Henri Penchas
Director and member of the Nomination and Corporate Governance Committee
Please refer to section Our Governance, item Management Structure, for further information about changes in our Board of Officers.
The Nomination and Corporate Governance Committee is responsible for stimulating and overseeing discussions of matters related to our governance. Its duties include, but are not limited to, analyzing and issuing opinions on situations of potential conflicts of interest between the directors and companies of the Itaú Unibanco Group, periodically reviewing the criteria for nomination of our independent directors, in accordance with governance principles and applicable regulation, giving methodological and procedural support for the assessment of the board, directors, committees and chief executive officer, and discussing and making recommendations on the succession of the directors and chief executive officer.
The committee also reviewed the talent attraction program: internship and trainee programs, international sponsorships and attraction of students who have obtained a postgraduate degree abroad. Finally, we analyzed issues related to the internal climate based on our satisfaction surveys; topics such as relationships in the work environment and turnover were discussed and quantitative targets were proposed to management.”
Chairman of the Board of Directors and Chairman of the Personnel Committee
The Personnel Committee is responsible for establishing the main guidelines related to personnel. Its duties include, but are not limited to, establishing guidelines related to talent attraction and retention, recruiting and qualification, and our long term incentive programs.
An important point was the observation of the effects of Resolution No. 3,921 of the Central Bank, which determined the parameters for the compensation paid to senior managers of financial institutions.
In order to support our internal models, the Compensation Committee bases its analysis on local and international compensation surveys that are frequently updated, monitoring the market trends. Additionally, it counts on the active participation of the risk and finance units in the discussions related to this topic, thus ensuring that all factors are considered in our internal models.”
Israel Vainboim
Independent Director and member of the Compensation Committee
The Compensation Committee is responsible for leading discussions of matters related to our management compensation. Its duties include, but are not limited to, developing the Compensation Policy for our management members, proposing to our Board of Directors different methods of fixed and variable compensation, in addition to benefits and special recruiting and termination programs, discussing, analyzing and overseeing the implementation and operation of our existing compensation models, discussing the general principles for the compensation of our employees and recommending its improvement to the Board of Directors.
Independent Director and Chairman of the Related Parties Committee
The Related Parties Committee is responsible for analyzing transactions between related parties in the circumstances specified by our Transactions with Related Parties Policy in order to ensure equality and transparency in such transactions. It is entirely composed of independent members.
Member: M
Independent Member: I
Committee President: P
1. Non-executive member of Itaú Unibanco Holding S.A.
On February 21, 2013, we announced certain changes to our senior management:
Board of Directors
Age: 54
Current position: Chairman of the Board of Directors since February 2009
Term of office: until the directors elected at the Annual Shareholders’ Meeting of 2014 take office
Other positions within the Itaú Unibanco Group:Chairman of the Board of Directors of Companhia E. Johnston de Participações and IUPAR – Itaú Unibanco Participações S.A. since 2008
Other positions in publicly held companies that are not part of the Itaú Unibanco Group: member of the Board of Directors of Totvs S.A. since March 2010
Member of the following Committees: Compensation, Strategy, Nomination and Corporate Governance, and Personnel Committees
Professional history: he has served as Chairman of the Board of Directors of Companhia E. Johnston de Participações and IUPAR – Itaú Unibanco Participações S.A. since 2008. He served as Executive Vice President from November 2008 to August 2009. He served as Vice Chairman of the Board of Directors of Banco Itaú BBA S.A. from February 2009 to April 2012, Vice Chairman of the Board of Directors and CEO of Unibanco Holdings S.A. from April 2004 to November 2008, and as Corporate Vice President at Unibanco – União de Bancos Brasileiros S.A. from April 2004 to November 2008. He also served as Vice Chairman of the Board of Directors of Porto Seguro S.A. from November 2009 to March 2012, as Chairman of the Board of Directors of Unibanco Seguros S.A. from December 1995 to February 2009, and as Chairman of the Board of Directors of E. Johnston Representação e Participações S.A. from 2001 to February 2009.
Education: bachelor’s degree, magna cum laude, in economics and history from the University of California, Los Angeles. He also attended the international relations master’s program at Yale University and the OPM – Owner/President Management Program at Harvard University.
Alfredo Egydio Arruda Villela Filho
Age: 44
Current position: Vice Chairman of the Board of Directors since November 2002
Term of office: until the date the directors elected at the Annual Shareholders’ Meeting of 2014 take office
Other positions within the Itaú Unibanco Group:member of the Board of Directors of Itaúsa since 1995, serving as Vice Chairman since May 2011, and CEO since September 2008
Other positions in publicly held companies that are not part of the Itaú Unibanco Group: no
Member of the following Committees: Disclosure and Trading, Nomination and Corporate Governance, and Compensation Committees
Professional history: he has been a Member of the Board of Directors of Itautec S.A. since April 1997 and Vice Chairman of the Board of Directors since January 2010. He also served as Chairman of the Board of Directors of Itautec S.A. from April 2009 to January 2010 and as Vice Chairman of the Board of Directors from April 1997 to April 2009. He has been a Member of the Board of Directors of Duratex S.A. since 1996 and Vice Chairman since 2008. He was also a Member of the Board of Directors of Elekeiroz S.A. from April 2004 to April 2010, Chairman of the Board of Directors from April 2009 to November 2009 and Vice Chairman of the Board of Directors from April 2004 to April 2009 and from November 2009 to April 2010. He served as Vice Chairman of the Board of Directors of Itaú Unibanco S.A. from 2001 to March 2003.
Education: bachelor’s degree in mechanical engineering from Mauá Engineering School of the Mauá Technology Institute (IMT) and postgraduate degree in business administration from the Getulio Vargas Foundation (FGV)
Roberto Egydio Setubal
Age: 59
Current position: Vice Chairman of our Board of Directors and Chief Executive Officer since March 2003
Term of office: for his position as Board Member, until the date the directors elected at the Annual Shareholders’ Meeting of 2014 take office; for his position as Chief Executive Officer, until the date those elected at the first Board of Directors meeting after the Annual Shareholders’ Meeting of 2014 take office
Other positions within the Itaú Unibanco Group:Executive Vice President of Itaúsa since May 1994. He has served as Chairman of the Board of Directors of Itaú BBA S.A. since February 2003
Member of the following Committees: Strategy, Capital and Risk Management, and Personnel Committees
Professional history: he has served as President and CEO at Itaú Unibanco S.A. since April 1994 and as General Manager from 1990 to 1994. He has been the Vice President of the Institute of International Finance since September 2003, a Member of the Board of the International Monetary Conference a Member of the International Advisory Committee of The Federal Reserve Bank of New York a Member of the International Advisory Committee of the NYSE since April 2005, and a Member of the China Development Forum since 2010. He was the President of the National Federation of Banks (FENABAN) and of the Brazilian Federation of Banks (FEBRABAN) from April 1997 to March 2001 and member of the Board of Directors of Petróleo Brasileiro S.A. – PETROBRAS from March 2002 to January 2003.
Education: bachelor’s degree in production engineering from the Polytechnic School of the University of São Paulo (USP) and master’s degree in science engineering from Stanford University
Alfredo Egydio Setubal
Age: 55
Current position: member of the Board of Directors since 2007, Executive Vice President and Investor Relations Officer since 2003
Term of office: for his positions as Board Member, until the date the directors elected at the Annual Shareholders’ Meeting of 2014 take office; for his position as Executive Vice President and Investor Relation Officer, until the date those elected at the first Board of Directors meeting after the Annual Shareholders’ Meeting of 2014 take office
Other positions within the Itaú Unibanco Group:Vice Chairman of the Board of Directors of Itaúsa since 2008
Member of the following Committees: Disclosure and Trading and Nomination and Corporate Governance Committees
Professional history: he has served as Executive Vice President at Itaú Unibanco S.A. since March 1996 and was Investor Relations Officer from 1995 to 2003. He served as Executive Officer from 1993 to 1996 and Managing Officer between 1988 and 1993. He has been a Member of the Board of Directors of the Securities Dealers’ Association (ADEVAL) since 1993, BM&FBovespa (formerly Bovespa) since 1996 and of the Brazilian Association of Publicly Held companies (Abrasca) since 1999. He was Chairman of the Board of Directors of the Brazilian Institute of Investor Relations (IBRI) from 2000 to 2003 and Member of the Board of Directors from 1999 to 2000 and 2004 to 2009. He was a Member of the National Association of Investment Banks (ANBID) (now Brazilian Financial and Capital Markets Association – Anbima) from 1994 to August 2003 and its President from August 2003 to August 2008, and Member of the Board of Directors of the Brazilian Settlement and Custody Company (Companhia Brasileira de Liquidação e Custódia – CBLC), from 1998 to 2003.
Education: bachelor’s and postgraduate degrees in business administration from Getulio Vargas Foundation (FGV)
Other positions: he has served as Financial Officer for the São Paulo Museum of Modern Art (MAM) since 1992.
Candido Botelho Bracher
Current position: member of the Board of Directors since November 2008 and Executive Vice President since May 2005
Term of office: for his position as Board Member, until the date the directors elected at the Annual Shareholders’ Meeting of 2014 take office; for his position as Executive Vice President, until the date those elected at the first Board of Directors meeting after the Annual Shareholders’ Meeting of 2014 take office
Other positions within the Itaú Unibanco Group:member of the Board of Directors of Banco Itaú BBA S.A. since February 2003 and CEO since April 2005
Other positions in publicly held companies that are not part of the Itaú Unibanco Group: member of the Board of Directors of the São Paulo Stock Exchange – BM&FBovespa S.A. and member of the Board of Directors of Pão de Açúcar – Cia. Brasileira de Distribuição
Member of the following Committees: Capital and Risk Management and Personnel Committees
Professional history: he was Managing Vice President of Banco Itaú BBA S.A. from February 2003 to April 2005 where he was responsible for the Commercial, Capital Markets and Human Resources Policies units. He served as an officer at Banco Itaú BBA Creditanstalt S.A. from 1988 to 2003.
Education: bachelor’s degree in business administration from the São Paulo Business Administration School of the Getulio Vargas Foundation (FGV)
Demosthenes Madureira de Pinho Neto
Age: 53
Current position: member of the Board of Directors since April 2012
Other positions within the Itaú Unibanco Group:no
Member of the following Committees: Capital and Risk Management and Nomination and Corporate Governance Committees
Professional history: he served as Executive Officer of Itaú Unibanco S.A. from December 2008 to April 2011, Executive Vice President at Itaú BBA S.A. from November 2008 to April 2009, Vice Chairman at Unibanco – União de Bancos Brasileiros S.A. from July 2005 to April 2011 and Executive Officer at Unibanco Asset Management from August 2002 to July 2005. He was Vice President of the National Association of Investment Banks (ANBID) from 2000 to 2003, Executive Officer at Dresdner Asset Management from November 1999 to 2002, Director of Foreign Affairs at the Central Bank from 1997 to 1999 and General Monetary and Financial Policy Coordinator for the Ministry of Finance.
Education: bachelor’s and master’s degrees in economics from the Pontifical Catholic University of Rio de Janeiro (PUC-Rio) and postgraduate degree in economics from the University of California in Berkeley
Age: 61
Current position: member of the Board of Directors since April 2006 and Chairman of the Audit Committee since September 2008
Term of office: for his position as Board Member, until the date the directors elected at the Annual Shareholders’ Meeting of 2014 take office; for his position as member of the Audit Committee, until the date those elected at the first Board of Directors meeting after the Annual Shareholders’ Meeting of 2014 take office
Member of the following Committees: Capital and Risk Management and Related Parties Committees
Professional history: he was President of our Fiscal Council from March 2003 to April 2006. He has been a Partner at Tendências Consultoria Integrada S/S Ltda. and Tendências Conhecimento Assessoria Econômica Ltda. He has also been a Managing Partner at Gustavo Loyola Consultoria S/C since February 1998. He served as governor of the Central Bank from November 1992 to March 1993 and from June 1995 to August 1997 and as deputy governor for Financial System Regulations and Organization of the National Financial System at the Central Bank from March 1990 to November 1992.
Education: bachelor’s degree in economics from the University of Brasília and postgraduate degree in economics from the Getulio Vargas Foundation (FGV)
Age: 67
Current position: member of the Board of Directors since November 2002
Other positions within the Itaú Unibanco Group:Executive Vice President of Itaúsa since April 2009 and Investor Relations Officer since 1995. He has served as a Member of the Board of Directors of Banco Itaú BBA S.A. since February 2003
Member of the following Committees: Compensation, Strategy, and Nomination and Corporate Governance Committees
Professional history: he served as Senior Vice President from April 1997 to April 2008; Executive Vice President from April 1993 to March 1997; Executive Director responsible for financial controls of Itaú Unibanco S.A. from 1988 to 1993. He was an executive officer of Itaúsa from December 1984 to April 2008. He has served as a Member of the Board of Directors and Member of the Audit and Risk Management Committee of Duratex S.A. since April 2013 and as a Member of the Board of Directors of Elekeiroz S.A. since April 2013. He has been a Member of the Board of Directors, CEO and Member of the Disclosure Committee of Itautec S.A. – Itautec Group since April 2013. He served as Vice Chairman of the Board of Directors of Banco Itaú BBA S.A. from February 2003 to April 2008.
Education: bachelor’s degree in mechanical engineering from Mackenzie University and postgraduate degree in finance from the Getulio Vargas Foundation (FGV)
Age: 69
Current position: member of the Board of Directors since November 2008
Professional history: he was a Member of the Board of Directors of Unibanco – União de Bancos Brasileiros S.A. from 1988 to 2009 and CEO of Unibanco Holdings S.A. from 1994 to 2007, having acted as Chairman of the Board of Directors from 2007 to 2009. He served as CEO of União de Bancos Brasileiros S.A. (Unibanco) from 1988 to August 1992, Managing Vice President from 1978 to 1988 and was responsible for the back office of the Unibanco Group from 1973 to 1977.
Education: bachelor’s degree in mechanical engineering from the Federal University of Rio de Janeiro (UFRJ) and MBA from Stanford University
Age: 65
Other positions in publicly held companies that are not part of the Itaú Unibanco Group: Chairman of the Board of Directors of Brasil Foods (BRF) since April 2007, Vice Chairman of the Board of Directors of WEG S.A. since 1998, Vice Chairman of the Board of Directors of Iochpe-Maxion since 2004, Member of the Board of Directors of Suzano Papel e Celulose since May 2008 and of Ultrapar S.A. since April 2002
Member of the following Committees: Strategy, Related Parties, and Personnel Committees
Professional history: he was the CEO of Perdigão S.A. from January 1995 to October 2008. He was also the General Corporate Officer of the Iochpe-Maxion Group from 1990 to 1994. He served as a Director of the National Economic and Social Development Bank (BNDES) from 1987 to 1990.
Education: bachelor’s degree in mechanical engineering from the University of São Paulo (USP), in São Carlos, postgraduate degree in finance from the Pontifical Catholic University of Rio de Janeiro (PUC-Rio) and postgraduate degree in economics from Unicamp, in Campinas
Other positions: he served as President of the Association of Chicken Producers and Exporters from 2001 to 2003.
Age: 57
Member of the following Committees: Compensation, Related Parties, and Capital and Risk Management Committees
Professional history: he served as a Member of the Board of Directors at Unibanco – União de Bancos Brasileiros S.A. from April 2003 to August 2009. He was an Officer and Partner at Banco Icatu S.A. from 1993 to 2002 and an Officer from 2002 to 2003. He has been a Partner at Icatu Holding S.A. since 2003. He served as Monetary Policy Director of the Central Bank from 1991 to 1992 and Director of the National Economic and Social Development Bank (BNDES) from 1990 to 1991.
Education: bachelor’s and master’s degrees in economics from the Pontifical Catholic University of Rio de Janeiro (PUC-Rio), postgraduate degree in economics from the Massachusetts Institute of Technology (MIT)
Ricardo Villela Marino
Age: 39
Current position: member of the Board of Directors since April 2008
Other positions within the Itaú Unibanco Group:alternate Member of the Board of Directors of Itaúsa since April 2011 and Executive Vice President of Itaú Unibanco S.A. since September 2009
Member of the following Committees: Strategy and Personnel Committees
Professional history: he served as our Senior Managing Officer from May 2005 to August 2006, Managing Officer from April 2004 to April 2005, Head of the derivatives dealing desk from 2003 to 2004 and Head of business intelligence from 2002 to 2003. He has served as an Alternate Member of the Board of Directors of Itaúsa since April 2011 and as an Alternate Member of the Board of Directors of Duratex S.A., Elekeiroz S.A. and Itautec S.A. since April 2009. He was President of the Latin American Federation of Banks (FELABAN) from 2008 to 2010.
Education: bachelor’s degree in mechanical engineering from the Polytechnic School of the University of São Paulo and master’s degree in business administration from MIT Sloan School of Management, Cambridge, USA
Board of Officers
Caio Ibrahim David
Age: 45
Current position: Executive Officer since May 2010
Term of office: until the date the officers elected at the first Board of Directors meeting after the Annual Shareholders’ Meeting of 2014 take office
Other positions within the Itaú Unibanco Group:Managing Vice President of Itaú Unibanco S.A. since April 2013
Member of the following Committees: Disclosure and Trading Committee
Professional history: he joined Itaú Unibanco S.A. in 1987 as a trainee, having worked in the controller’s and market and liquidity risk control departments. He was an executive officer of Itaú BBA from April 2008 to July 2010. He has served as a Member of the Board of Directors and CEO of Investimentos Bemge S.A. since October 2010 and as a Member of the Board of Directors of Dibens Leasing S.A. – Arrendamento Mercantil since April 2010. He also served as Executive Officer of Itauseg Participações S.A. (a BM&FBovespa-listed company until November 2012), from April 2010 until its delisting. He served as Vice Chairman of the Board of Directors of Redecard S.A. from May 2010 to December 2012. He worked as an associate at Bankers Trust in New York in the Global Risk Management unit in 1998.
Education: bachelor’s degree in engineering from Mackenzie University (1986-1990), postgraduate degree in economics and finance (1992-1993) from the University of São Paulo (USP), master’s degree in controllership from the University of São Paulo (USP) (1994-1997), and MBA from the New York University (1997-1999) with specialization in finance, accounting and international business
Claudia Politanski
Age: 43
Current position: Executive Officer since November 2008
Other positions within the Itaú Unibanco Group:Executive Officer from April 2009 to April 2013 and Executive Vice President, since April 2013, at Itaú Unibanco S.A. She is currently responsible for our legal division and serves as general legal counsel.
Professional history: she joined União de Bancos Brasileiros S.A. (Unibanco) in 1991 and was elected Executive Officer in March 2007. Officer from January 2005 to February 2007 and Deputy Director from June 2001 to December 2004.
Education: bachelor’s degree in law from the University of São Paulo (USP), Master of Laws (LLM) from the University of Virginia and MBA from Dom Cabral Foundation, in Minas Gerais.
Eduardo Mazzilli de Vassimon
Current position: Executive Officer since January 2013
Other positions within the Itaú Unibanco Group: Managing Vice President of Itaú Unibanco S.A. since January 2013 and member of the Board of Directors of Banco Itaú BBA S.A. since April 2003
Member of the following Committees: no
Professional history: he has been a Member of the Board of Directors of Banco Itaú BBA S.A. since April 2003. He also served as Managing Vice President from April 2003 to December 2008, and was responsible for the international, financial institutions, products, client desk and treasury departments. He has served as General Manager of Itaú Unibanco from 1980 to 1990. He served as Vice Chairman of the Board of Directors at Investimentos Bemge S.A. since February 2013. He worked at Banco BBA-Creditanstalt S.A. as Deputy Foreign Exchange Director from 1990 to 1991 and as International Unit Director from 1992 to 2003.
Education: bachelor’s degree in economics from the School of Economics of the University of São Paulo (USP) (1980) and in business administration from Getulio Vargas Foundation (FGV) (1980). Master’s degrees from the São Paulo Business Administration School of the Getulio Vargas Foundation (FGV) (1982) and from École dês Hautes Études Commerciales, in France (1982).
Ricardo Baldin
Current position: Executive Officer since April 2009
Other positions in publicly held companies that are not part of the Itaú Unibanco Group: member of the Audit Committee of Porto Seguro S.A. since October 2011
Professional history: he was an Executive Officer at Itaú Unibanco S.A. from April 2009 to April 2011. In 1997, he was hired as a trainee by PricewaterhouseCoopers where he was a partner for 18 years. As an independent auditor, he was the partner responsible for financial institutions. He was also the partner responsible for the financial institutions group of PricewaterhouseCoopers in South America, where he was responsible for the coordination of many projects in the region, including the assessment of the Ecuadorian financial system. He was the Director of the National Association of Financial, Business Administration and Accounting Executives (ANEFAC) and he was also responsible for the financial institutions group of the Institute of Independent Auditors of Brazil (Ibracon).
Education: bachelor’s degree in Accounting from Vale do Rio dos Sinos University, São Leopoldo, state of Rio Grande do Sul (1978) and continued education certificates in management and finance from the Dom Cabral Foundation and Getulio Vargas Foundation (FGV)
Alexsandro Broedel Lopes
Current position: Officer since May 2012
Other positions within the Itaú Unibanco Group:Officer at Itaú Unibanco S.A. since May 2012
Professional history: he has been an Officer at Investimentos Bemge S.A. since June 2012 and an Executive Officer since June 2012 and an Officer at Dibens Leasing S.A. – Arrendamento Mercantil since April 2013. He has been a Full Professor of Accounting and Finance at the University of São Paulo (USP) since 2002, teaching in undergraduate, master’s and postgraduate level courses in the finance and accounting fields. He served as a Commissioner at the Brazilian Securities Commission (CVM) from 2010 to 2012. He is a member of the Standards Advisory Council and of the IFRS Foundation Education Advisory Group.
Education:Ph.D. in accounting and finance – Manchester Business School (2008); postgraduate degree in controllership and accounting – University of São Paulo (USP) (2001); bachelor’s degree in accounting – University of São Paulo (USP) (1997); bachelor’s degree in Law – University of São Paulo (USP) (2012). He was also awarded the Prêmio Unibanco de Desempenho Universitário (Unibanco Award for University Performance) and the Prêmio Prof. Ari Toríbio de Melhor Trabalho de Conclusão de Curso (Prof. Ari Toríbio Award for the Best Course Final Paper).
Ana Tereza de Lima e Silva Prandini
Age: 35
Current position: Officer since April 2012
Professional history: she served as an Executive Officer at Dibens Leasing S.A. – Arrendamento Mercantil from April 2012 to January 2014. She held many administrative positions in risk control and credit risk units within Itaú Unibanco Holding S.A. from 2008 to 2012. She was the Manager of the Treasury and Liquidity & Exposure to Interest Rates (Banking Portfolio) groups of Banco Citibank S.A. from 2006 to 2008 and Risk Control Supervisor and Treasury Analyst at Banco Itaú S.A. from 2001 to 2005. She worked as a trainee and civil engineer at Figueiredo Ferraz Engenharia de Projetos from 2000 to 2001.
Education:bachelor’s degree in civil engineering from Unicamp, in Campinas (1996-2000); MBA in market finance from Instituto Brasileiro de Mercado de Capitais (IBMEC), in São Paulo (2002-2003); monitoring risk and financial derivatives markets from IBMEC, in São Paulo (2004-2005); scholarship student at the Research Support Foundation of the State of São Paulo (FAPESP).
Eduardo Hiroyuki Miyaki
Age: 41
Current position: Officer since April 2011
Other positions within the Itaú Unibanco Group:Officer at Itaú Unibanco S.A. from April 2010 to August 2011
Professional history: he was as Compliance Manager and Officer in the Money Laundering Prevention program of Itaú Unibanco S.A. from 1996 to 2003. He was the manager responsible for the Internal Audit Department of our Asset Management and Treasury units from 2003 to 2004. He was also the manager of our Internal Audit, Capital Markets, Insurance and Securities units from 2005 to 2010.
Education: bachelor’s degree in civil engineering from the University of São Paulo (USP) and postgraduate degree in sanitation from Gunma University, in Japan. He also has a postgraduate degree in business administration from the Getulio Vargas Foundation (FGV). He has an MBA degree in finance and foreign affairs from the New York University, Leonard Stern School of Business.
Emerson Macedo Bortoloto
Age: 36
Current position: Officer since September 2011
Professional history: he joined the Itaú Unibanco Group in July 2003, holding positions in the Internal Audit Department. Since November 2008, he has been responsible for evaluating processes related to market, credit and operational risks, in addition to auditing projects and continuous audit. He was also responsible for audits in the processes of information technology and retail credit analysis and granting at Itaú Unibanco S.A. He also worked at Ernst & Young Auditores Independentes from May 2001 to June 2003. He worked at Banco Bandeirantes S.A. from 1992 to 2001 and was responsible for performing IT and operational process audits.
Education: bachelor’s degree in data processing technology from Tibiriça Integrated Schools and postgraduate degree in audit and consultancy in information security from Associated Schools of São Paulo (FASP). In 2004, he obtained the CISA certification issued by ISACA. He has an MBA degree in Internal Audit from the Institute Foundation of Accounting, Actuarial and Financial Research (FIPECAFI).
Robert George Stribling
Age: 60
Current position: Officer since July 2012
Professional history: he was Group Risk Officer at Suncorp Group Ltd. from 2010 to 2012. Before that, he was National Manager at the National Australia Bank in China from 2007 to 2008 and Risk Officer at the National Australia Bank in Australia from 2005 to 2007. He was Operational Officer and Market Risk Chief at the ANZ Banking Group from 2001 to 2005.
Education: bachelor’s degree in human relations & organizational behavior from the University of San Francisco and postgraduate degree in banking
Rodrigo Luis Rosa Couto
Age: 38
Current position: Officer since December 2011
Other positions within the Itaú Unibanco Group:Officer at Itaú Unibanco S.A. since November 2011
Professional history: he joined us in 2008, holding a position in the corporate risk management sector. He has been an Officer at Dibens Leasing S.A. – Arrendamento Mercantil since April 2013. Before that, he was an associate at McKinsey & Company from September 2005 to February 2008. He also worked as an Inspector at the Central Bank from 1998 to 2003.
Education: bachelor’s degree in business administration with an emphasis on finance from the Federal University of Rio Grande do Sul (1993-1997) and MBA, finance major, from the Wharton School of the University of Pennsylvania (2003-2005)
Rogério Paulo Calderón Peres
Age: 51
Other positions within the Itaú Unibanco Group:Officer at Itaú Unibanco S.A. since April 2009
Professional history: he has been Managing Vice President at Investimentos Bemge S.A. since June 2012 and Chairman of the Board of Directors since April 2013. He has been an Officer at Dibens Leasing S.A. – Arrendamento Mercantil since April 2013. He was an Executive Officer at Unibanco – União de Bancos Brasileiros S.A. from 2007 to 2009. He was a Member of the Board of Directors of Fosfertil, Ultrafertil and Fertifos and a Member of the Audit Committee of the Bunge Foundation, Bungeprev and Fosfertil. He was Executive Vice President of the Bunge Group – Bunge Brasil S.A. from 2003 to 2006.
Education: bachelor’s degree in business administration from the Fundação Getulio Vargas (FGV), and in accounting from the Fundação Paulo Eiró. He has completed a postgraduate course from the e-business education series from Darden Graduate School of Business Administration of the University of Virginia. He also attended courses at the Summer Executive Business School at the University of Western Ontario Canada, the Center for Executive Development Faculty of Princeton University, Management of Continuing Education and Training Professionals in Arundel, England, and Executive Business Development at the Getulio Vargas Foundation (FGV).
Fiscal Council
Alberto Sozin Furuguem
Age: 70
Current position: member of the Fiscal Council since April 2006
Term of office: until the date those elected at the Annual Shareholders’ Meeting of 2014 take office
Professional history: he worked at the Central Bank as an Economist and Head of the Economic Department (1981-1983), Officer (1985), Regional Delegate in São Paulo (1991-1992) and Clerk (1963-1966). He also worked at the Ministry of Finance as Minister Mário Henrique Simonsen’s Assistant and at the Government of the State of Rio de Janeiro as a Development Bank Officer (1975-1979) and Central Bank Officer (1985).
Education: graduated in economics, with a postgraduate degree from the Getulio Vargas Foundation
Other positions: no
Iran Siqueira Lima
Current position: member of the Fiscal Council since March 2003
Professional history: he worked at the Central Bank holding various positions from 1967 to 1993, including: Deputy Head of the Capital Markets Inspection Department (1976-1979), Head of the Capital Markets Department (1979-1984), Officer of the Capital Markets Department (1984), Officer of the Inspection Department (1985) and Regional Delegate in São Paulo, State of São Paulo (1991 and 1993). In 1986, he took a leave of absence from the Central Bank and served as Officer of the Capital Markets Department at Banco da Cidade S.A. In that same period (1986-1988), he founded a consulting firm in the capital markets field, where he held the position of Managing Partner from 1987 to June 1988. In July 1988, he returned to the Brazilian federal government to work as Secretary of Budget and Control of Government Companies (SEST) (1988-1990). From May 1991 to December 1992, he was Economic and Finance Officer at Telebrás – Telecomunicações Brasileiras S.A. and was a Member of the Board of Directors of the National Economic and Social Development Bank (BNDES), of Telesp – Telecomunicações de São Paulo and of Telebrás – Telecomunicações Brasileiras S.A. Since 1972, he has been teaching courses related to accounting and finance in the following universities: Association of Unified Education of the Federal District (AEUDF), University of Brasília (UnB), University of São Paulo (USP), and the MBA courses of the Institute Foundation of Accounting, Actuarial and Financial Research (FIPECAFI).
Education: bachelor’s degree in economics from the University of the State of Rio de Janeiro (UERJ) (1969) and bachelor’s degree in accounting from the Association of Unified Education of the Federal District (AEUDF) (1973), postgraduate degree in economics engineering and industrial administration from Candido Mendes University (1971) and master’s and postgraduate degrees in accounting and controllership from the University of São Paulo (USP – 1976 and 1998, respectively).
Luiz Alberto de Castro Falleiros
Age: 56
Current position: member of the Fiscal Council since April 2012
Professional history: he has been a member of the Board of Directors and Coordinator of the Audit Committee at Tiradentes University since January 2009, a Consulting Advisor at Perfipar since October 2011, a member of the Fiscal Council at Total Agroindústria Canavieira since August 2011, an alternate member of the Fiscal Council at AES Tiete, Tupy S.A. and the Energy and Environment Institute since April 2010. He was a member of the Fiscal Council at Banco Indusval from April 2010 to April 2012. Additionally, he was General Manager at Banco Alfa de Investimento S.A. from May 1998 to February 2000, Superintendent of Market Relations at Companhia de Saneamento Básico do Estado de São Paulo (SABESP) from May 1997 to April 1998, Deputy Investment and Underwriting Officer at Banco ABC – Roma S.A. from September 1991 to June 1996, Underwriting and Investment Analysis Manager at Banco Multiplic S.A. from May 1986 to September 1991, and Analysis Coordinator at Cia. Suzano de Papel e Celulose from October 1984 to April 1986. Since April 2000, he has been a Partner at FASCE Assessoria e Consultoria Empresarial S/C Ltda.
Education: bachelor’s degree in economics from Unicamp, in Campinas (1978) and MBA in Finance from the Schools of Campinas (FACAMP – 2004)
Alkimar Ribeiro Moura
Age: 72
Current position: member of the Audit Committee since May 2010
Term of office: until the date those elected at the first Board of Directors meeting after the Annual Shareholders’ Meeting of 2014 take office
Professional history: he was an Independent Member of the Supervision Board of the São Paulo Stock Exchange – BM&FBovespa S.A. from October 2007 to September 2010, a Member of the Board of Directors of Banco Nossa Caixa S.A. from May 2006 to February 2007, CEO of Banco do Brasil S.A. from April 2001 to January 2003 and Vice President of Finance and Capital Markets of Banco do Brasil S.A. from April 2001 to January 2003. He was as a member of the Board of Directors of Cia. Brasil de Seguros from May 2001 to February 2003 and of Banco Bandeirantes S.A. from May 1999 to December 2000. He was Deputy Governor for Financial System Regulations and Organization of the National Financial System at the Central Bank from February 1996 to September 1997.
Education: bachelor’s degree in economics from the Federal University of Minas Gerais and master of arts degree from the University of California, in Berkeley, and Ph.D. in applied economics from Stanford University.
Other positions: he has been a Professor of economics at the São Paulo Business Administration School of the Getulio Vargas Foundation (FGV) since August 1969.
Eduardo Augusto de Almeida Guimarães
Current position: member of the Audit Committee since December 2008
Term of office: until December 31, 2013
Professional history: he was CEO of Banco do Estado de São Paulo – Banespa from 1999 to 2000, CEO of Banco do Brasil S.A. from 2001 to 2003, a Member of the Board of Directors of Fertibrás S.A. from 2005 to 2007 and a Member of the Audit Committee of Globex – Utilidades Domésticas S.A. from 2008 to 2009 and Member of the Audit Committee of Unibanco – União de Bancos Brasileiros S.A. from April 2004 to December 2008. He was President of the Brazilian Institute Foundation of Geography and Statistics (IBGE) from 1990 to 1992 and Secretary of the National Treasury of the Ministry of Finance from 1996 to 1999. He has also held various academic positions, such as Full Professor of the Institute of Economics of the Federal University of Rio de Janeiro (UFRJ), Professor of the Department of Economics of the Pontifical Catholic University of Rio de Janeiro (PUC-Rio) and Professor of the School of Economics and Business Administration of the Fluminense Federal University.
Education: bachelor’s degree in civil engineering and economics. He has a master’s degree in Production Engineering from the Federal University of Rio de Janeiro (UFRJ) and Ph.D. in economics from the University of London.
Geraldo Travaglia Filho
Age: 62
Current position: member of the Audit Committee since January 2013
Professional history: he served as Executive Officer of Itaú Unibanco S.A. and Itaú Unibanco Holding S.A. from November 2008 to April 2009 and Executive Officer at Banco Itaú BBA S.A. from November 2008 to January 2010 and as Financial Executive Officer of Redecard S.A. from May 2009 to April 2010. He served as Corporate Vice President at União de Bancos Brasileiros S.A. (Unibanco) from April 2004 to April 2009.
Education: bachelor’s degree in business administration from the University of São Paulo (USP) and specialization in bank management from the Wharton School of the University of Pennsylvania
Guy Almeida de Andrade
Professional history: he served as a member of the Audit Committee of Unibanco – União de Bancos Brasileiros S.A. from April 2004 to December 2008. He started his career in 1974 and has worked since 1982 as a partner at Magalhães Andrade S/S Auditores Independentes. Until December 2014, he will hold the position of Chairman of the Board of Directors of the Institute of Independent Auditors of Brazil (Ibracon), where he also was a Member of the Board of Directors from 2009 to 2011 and President of the National Board from 2002 to 2004. He served at the International Federation of Accountants (IFAC) as a Member of the Nominating Committee from 2007 to 2010, Chairman of the Audit Committee from 2003 to 2006 and Member of the Board of Directors in 2000, a position he held again from 2003 to November 2006. He was an Alternate Officer from Brazil of the Inter-American Association of Accounting from 1999 to 2003.
Education: bachelor’s degree in Accounting from the School of Economics and Business Administration of the University of São Paulo (FEA/USP) and bachelor’s degree in Business Administration from Mackenzie University
Luiz Alberto Fiore
Current position: member of the Audit Committee since February 2012
Professional history: in 1973, he joined Deloitte Touche Tohmatsu, where was a partner in the External Audit and Corporate Finance Departments from 1985 to 2010. He was also a Member of the Board of Officers and Board of Directors of Deloitte Brazil from 1987 to 2008 and a Member of the International Board of Deloitte Corporate Finance from 1998 to 2005. He was an Independent Auditor at PricewaterhouseCoopers from 1971 to 1973.
Education: bachelor’s degree in business administration from the Pontifical Catholic University of São Paulo (ESAN-PUC-SP) in and bachelor’s degree in accounting from Mackenzie University.
Other positions: he has worked as a Consultant at São Judas University since 2010.
Directors’ and Senior Management’s compensation
Our compensation policy is built upon our principles and practices and is intended to better align the interests of our shareholders and our Management. Regarding variable compensation, the purpose of our compensation policy is to attract, retain and reward Management achievements. Our compensation policy also intends to stimulate the adoption of prudent levels of risk exposure in the short, medium and long term.
Accordingly, our compensation policy sets forth that of the total aggregate variable compensation paid to Management members, at least 50% must be paid in shares or share-based instruments, and at least 50% must be deferred for future payment in a minimum period of three years. Deferred and unpaid portions may be proportionally retained due to a significant reduction of realized recurring net income or negative result for the current period.
We have established a profit sharing plan for our Management and the plan and its rules have been approved by our Board of Directors. Under the terms of such plan, each beneficiary of the plan is assigned annually a base amount for computation of payments under the profit sharing plan. The final amount of the payment to an individual is based on the consolidated results of the Itaú Unibanco Group, the results of the business unit to which the individual belongs and the individual’s performance. This individual amount is determined by multiplying the base amount by an index applicable to all participants, which depends on our level of return on shareholders’ equity.
Our governance structure for the establishment of compensation sets forth clear and transparent processes, and is overseen by the Compensation Committee which reports to our Board of Directors. Its responsibilities comprise the formulation of our compensation policy, which must be submitted to the approval and annual review of the Board of Directors, among others. Additionally, our Compensation Committee acts as an important intermediate with the Central Bank, increasing the accuracy and transparency of information provided to this regulatory body. Please refer to www.itau.com.br/_arquivosestaticos/RI/pdf/CompensationCommittee.pdf?title=Compensation 20Committee 20Internal 20Charter, for further information.
The maximum amounts to be paid to Management are proposed by the Board of Directors and approved at our Annual General Shareholders’ Meeting. For 2013, an aggregate compensation amount of R$140.5 million was approved for management members, of which up to R$15.5 million was for directors and up to R$125 million for officers.
Additionally, for 2013, our Annual General Shareholders’ Meeting approved an individual monthly fixed compensation of R$15,000 for the members of our fiscal council and R$6,000 for their alternates.
In 2013, we recorded expenses for Management compensation and the stock option plan of the Itaú Unibanco Group in the amount of approximately R$706.8 million. Such amount includes fees in the approximate amount of R$278.6 million, profit sharing of approximately R$258.9 million and contributions to pension plans of approximately R$3.2 million. In addition, management received benefits, such as health and dental care, which totaled R$3.0 million.
Please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 35 – Related Parties – (b) Compensation of the Key Management Personnel, for further details.
Our compensation policy is in conformity with the guidelines of Brazilian regulation.
Please refer to section Our Risk Management, item Regulatory Environment,
Compensation of Directors and Officers of Financial Institutions, for further information.
Brazilian legislation does not require the disclosure of individual compensation of our management, except for the highest and lowest amount received, and it is not necessary to identify those individuals. The Brazilian Institute of Financial Executives of Rio de Janeiro (Instituto Brasileiro de Executivos de Finanças – IBEF Rio de Janeiro) filed, on behalf of its members, a lawsuit challenging the legality of this disclosure requirement, and an injunction was granted to suspend such requirement. We do not intend to make this disclosure until the matter is finally determined.
Our Compensation Policy provides for post-employment benefits for our directors and officers, including medical benefits such as health plan and annual medical check-up. Except for the benefits established by our Compensation Policy, we do not have service contracts with our directors providing for benefits upon termination of employment.
Long-Term incentive programs
We have a long term incentive program through which employees and management of the Itaú Unibanco Group, or beneficiaries, receive stock options. These options enable employees and Management to share the risk of fluctuation of the price of our preferred shares with other shareholders and is intended to integrate the beneficiaries of our Stock Option Plan into the development process of our group in the medium and long term.
Our Personnel Committee manages the stock option plan, including matters such as strike prices, vesting periods and effectiveness of simple and partner options, in compliance with the rules set forth in the stock option plan.
Options may only be granted to beneficiaries if there is net income sufficient for the distribution of mandatory dividends. Please refer to section Itaú Unibanco Holding, item Information for the Investor, Shareholders’ Payment, for further information on the payment of dividends. Also, to avoid the dilution of shareholders, the sum of shares to be used for compensation of Management and options to be granted each year will not exceed the limit of 0.5% of total shares outstanding at the closing balance sheet date of the same year. In the event the number of shares delivered and options granted is below the 0.5% limit, the difference may be added for purposes of share based compensation or granting of options in any one of the seven subsequent fiscal years.
In 2013, 5,196,008 options were granted pursuant to our stock option plan. On December 31, 2013, we still had 76,062,424 options to be exercised by the beneficiaries, comprising 603 beneficiaries of simple options and 252 beneficiaries of partners’ options.
Please refer to section Performance, Item Consolidated Financial Statements (IFRS), Note 22 – Stock Option Plan.
Risk factors
This section addresses the risks we consider relevant for our business and for investment in our securities. Should any of these events occur, our business and financial condition, as well as the value of the investments made in our securities, may be adversely affected. Accordingly, investors should carefully assess the risk factors described below and the information disclosed in this document.
Other risks that we currently deem irrelevant or are not aware of may give rise to effects similar to those mentioned above should they actually occur.
Our operations are dependent upon the performance of the Brazilian economy and, to a lesser extent, the economies of other countries in which we do business. The demand for credit and financial services, as well as clients’ ability to pay, is directly impacted by macroeconomic variables, such as economic growth, income, unemployment, inflation, and fluctuations in interest and foreign exchange rates. Therefore, any significant change in the Brazilian economy and, to a lesser extent, in the economies of other countries in which we do business may affect us.
Despite Brazil’s high economic growth in recent years, growth rates began to slow down in 2011. Growth may be limited by a number of factors, including structural factors, such as inadequate infrastructure (risks of potential energy shortages, deficiencies in the transportation sector, among others) and lack of qualified professionals, which contribute to reduce the country’s productivity and efficiency levels. Depending on their intensity, these factors could lead to decreasing employment rates and to lower income and consumption levels, which could result in increased default rates and, therefore, have a material adverse effect on us.
Brazilian authorities exercise influence on the Brazilian economy. Changes in monetary, fiscal and foreign exchange policies and in the Brazilian government’s structure may adversely affect us.
Brazilian authorities intervene from time to time in the Brazilian economy, through changes in fiscal, monetary, and foreign exchange policies, which may adversely affect us. These changes may impact variables that are crucial for our growth strategy (such as foreign exchange and interest rates, liquidity in the currency market, tax burden, and economic growth), thus limiting our operations in certain markets, affecting our liquidity and our clients’ ability to pay and, consequently, affecting us.
In addition, changes in the Brazilian government’s structure may result in changes in government policies, which may affect us. This uncertainty may, in the future, contribute to an increase in the volatility of the Brazilian capital markets, which, in turn, may have an adverse impact on us. Other political, diplomatic, social and economic developments in Brazil and abroad that affect Brazil may also affect us.
Inflation and fluctuations in interest rates may have a material adverse effect on us.
Sudden increases in prices and long periods of high inflation may cause, among other effects, loss of purchasing power and distortions in the allocation of resources in the economy. Measures to combat high inflation rates include a tightening of monetary policy, with an increase in the SELIC interest rate, resulting in restrictions on credit and short-term liquidity, which may have a material adverse effect on us. Changes in interest rates may have a material effect on our net margins, since they impact our funding and credit granting costs.
In addition, increases in the SELIC interest rate could reduce demand for credit, increase the costs of our reserves and the risk of default by our clients. Conversely, decreases in the SELIC interest rate could reduce our gains from interest-bearing assets, as well as our margins.
Instability of foreign exchange rates may negatively affect us.
Brazil has a floating foreign exchange rate system, pursuant to which the market establishes the value of the Brazilian real in relation to foreign currencies. However, the Central Bank intervenes in the purchase or sale of foreign currencies for the purpose of easing variations and reducing volatility of the foreign exchange rate. In spite of those interventions, the foreign exchange rate may significantly fluctuate. In addition, in some cases, interventions made with the purpose of avoiding sharp fluctuations in the value of the Brazilian real in relation to other currencies may have the opposite effect, leading to an increase in the volatility of the applicable foreign exchange rate.
Instability in foreign exchange rates may have a material adverse effect on us, since a potential depreciation of the Brazilian real could have adverse effects on our business, including (i) losses on our liabilities denominated in or indexed to foreign currencies; (ii) a decrease in our ability to pay for obligations denominated in or indexed to foreign currencies, as it would be more costly for us to obtain the foreign currency required to meet such obligations; (iii) a decrease in the ability of our Brazilian borrowers to pay us for debts denominated in or indexed to foreign currencies, and (iv) negative effects on the market price of our securities portfolio. On the other hand, an appreciation of the Brazilian real could cause us to incur losses on assets denominated in or indexed to foreign currencies. For further information on how the effects of these variables may affect us, please see “The value of our securities and derivatives is subject to market fluctuations due to changes in Brazilian or international economic conditions and may produce material losses” below.
An expansionist fiscal policy may affect us.
An excessively expansionist fiscal policy, combined with increased intervention by the Brazilian government in the economy, could generate a loss of confidence of local and foreign investors. Less credibility could lead to the downgrading of the Brazilian sovereign debt, and negatively impact the local economy, causing the depreciation of the Brazilian real, an increase in inflation and interest rates and a deceleration of economic growth, thus adversely affecting us.
Crises and volatility in the financial markets of countries other than Brazil may affect the global financial markets and the Brazilian economy, and, consequently, us.
The economic and market conditions of other countries, including the U.S., countries of the European Union, and emerging markets, may affect the credit availability and the volume of foreign investments in Brazil to varying degrees. Crises in these countries may decrease investors’interest in Brazilian assets, which may materially and adversely affect the market price of our securities, making it more difficult for us to access capital markets and, as a result, to finance our operations in the future.
Banks that operate in countries considered to be emerging markets, including us, may be particularly susceptible to disruptions and reductions in the availability of credit or increases in financing costs, which may have a material adverse impact on their operations. In particular, the availability of credit to financial institutions operating in emerging markets is significantly influenced by movements of aversion to global risk. In addition, any factor impacting investors’ confidence, such as a downgrade in credit ratings or an intervention by a government or monetary authority in one of such markets, may affect the price or availability of resources for financial institutions in any of these markets, which may affect us.
Global financial crises of recent years have reduced the capacity of a number of global financial institutions to lend funds and generated losses. In addition, the downgrade of credit and debt securities ratings and uncertainty regarding the solvency of certain financial institutions and of the financial services industry in general have led to liquidity problems in the market as a whole and could have led to losses, default or bankruptcy of additional financial institutions.
The disruptions and volatility in the global financial markets caused by the recent global financial crises have brought significant consequences to Brazil and to other countries in which we operate, such as volatility in the prices of equity securities, interest rates and foreign exchange rates. Higher uncertainty and volatility resulted in a slowdown in the credit market and the economy, which, in turn, increased unemployment rates and reduced the purchasing power of consumers. Global financial crises may affect in a material and adverse way the market price of securities of Brazilian issuers and have a material adverse effect on us. Additionally, as we primarily lend to Brazilian borrowers, such events may significantly impair our clients’ ability to perform their obligations and increase overdue or non-performing loan operations, resulting in an increase of the risk associated with our lending activity, which may force us to review our risk management and loan loss reserve models.
Continuing or increased disruption or volatility in the global financial markets, or even the deterioration of the economic conditions of certain countries, could lead to other negative effects on the financial and economic environment in Brazil and other countries in which we operate, which could have a material adverse effect on us, in addition to those mentioned above.
Please refer to section Context, item Macroeconomic Context, Global and Brazilian Context for further details about data and economic indicators.
Changes in the law or regulations applicable to financial institutions may affect our ability to grant loans and collect debts in arrears, which may have an adverse effect on us.
Other changes, including with respect to restrictions on remittances abroad and other exchange controls, may also have a material effect on us.
In addition, the interpretation of the law by courts and agencies in a manner that differs from our legal advisors’ opinions may have a material impact on us.
Financial crises may also cause the Brazilian government to change laws and regulations applicable to Brazilian financial institutions. For example, in response to the global financial crisis which began in late 2007, Brazilian national and intergovernmental regulatory entities, such as the Basel Committee on Banking Supervision, proposed regulatory reforms to prevent the recurrence of similar crises, including the Basel III framework, which increased minimum regulatory capital requirements. Please refer to section Our risk management, item Regulatory Environment, Basel III Framework for further details about regulatory capital requirements. Based on our current regulatory capital ratios, as well as our assumptions on expected returns and asset growth, we do not anticipate that additional regulatory capital will be required to support our operations in the near future. However, once the implementation of the Basel III framework is completed for Brazilian banks and its effects fully assessed, we may need to reassess our funding strategy for regulatory capital.
Moreover, the Brazilian Congress is considering enacting new legislation that, if signed into law as currently drafted, could adversely affect us, including by making the collection of amounts from insolvent individual borrowers more difficult.
We also have operations in countries outside of Brazil, including Argentina, Chile, Colombia, Paraguay, Portugal, United Kingdom, Uruguay and the United States. Changes in the laws or regulations applicable to our business in the countries where we operate, or the adoption of new laws, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States, and related regulations, may have an adverse effect on us.
Increases in compulsory deposit requirements may have a material adverse effect on us.
Compulsory deposits are reserves that financial institutions are required to maintain with the Central Bank. Compulsory deposits generally do not provide the same returns as other investments and deposits because a portion of these compulsory deposits does not bear interest; instead, these funds must be held in Brazilian federal government securities and used to finance government programs, including a federal housing program and rural sector subsidies. The Central Bank has periodically changed the minimum level of compulsory deposits. Increases in such level reduce our liquidity to grant loans and make other investments and, as a result, may have a material adverse effect on us.
We are subject to regulation on a consolidated basis and may be subject to liquidation or intervention on a consolidated basis.
We operate in a number of credit and financial services related sectors through entities under our control. For regulation or supervision purposes, the Central Bank treats us and our subsidiaries and affiliates as a single financial institution. While our consolidated
capital base provides financial strength and flexibility to our subsidiaries and affiliates, their individual activities could indirectly put our capital base at risk. Any investigation or intervention by the Central Bank, particularly in the activities carried out by any of our subsidiaries and affiliates, could have a material adverse impact on our other subsidiaries and affiliates and, ultimately, on us.
If we or any of our financial subsidiaries become insolvent, the Central Bank may carry out an intervention or liquidation process on a consolidated basis rather than conduct such procedures for each individual entity. In the event of an intervention or a liquidation process on a consolidated basis, our creditors would have claims on our assets and the assets of our consolidated financial subsidiaries. In this case, credits of the same nature held against us and our consolidated financial subsidiaries would rank equally in respect of payment. If the Central Bank carries out a liquidation or intervention process with respect to us or any of our financial subsidiaries on an individual basis, our creditors would not have a direct claim on the assets of such financial subsidiaries, and the creditors of such financial subsidiaries would have priority in relation to our creditors in connection with such financial subsidiaries’ assets. The Central Bank also has the authority to carry out other corporate reorganizations or transfers of control under an intervention or liquidation process.
Tax reforms may have a material adverse impact on us.
The Brazilian government regularly amends tax laws and regulations, including by creating new taxes, which can be temporary, and changing tax rates or their calculation basis, including in respect of tax rates applicable solely to the banking industry. Tax reforms may reduce the volume of our transactions, increase our costs or limit our profitability, and thus have a material effect on us.
Holders of our shares and ADSs may not receive any dividends.
According to our Bylaws, we are obligated to pay our shareholders at least 25% of our annual adjusted net income, which may differ significantly from our net income calculated under IFRS. However, this adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed by Brazilian Corporate Law. In addition, Brazilian Corporate Law allows us to suspend the mandatory distribution of dividends in any particular year if our Board of Directors informs our shareholders that such distribution would be incompatible with our financial condition. Therefore, in the occurrence of such event, the holders of our shares and ADSs may not receive any dividends.
Furthermore, due to the implementation of Basel III rules, if financial institutions are not in compliance with the CMN’s capital requirements, the Central Bank may reduce the amount of planned dividends or determine that no dividends will be distributed.
Please refer to section Itaú Unibanco Holding, item Our profile, Shareholders’ payment and section Our risk management, item Regulatory environment, Basel III framework, Implementation of Basel III in Brazil for further details about the payments for the ADS holders and CMN’s capital requirements.
The value of our securities and derivatives is subject to market fluctuations due to changes in Brazilian or international economic conditions and, as a result, may subject us to material losses.
The securities and derivative financial instruments in our portfolio may cause us to record gains and losses, when sold or marked to market (in the case of trading securities), and may fluctuate considerably from period to period due to domestic and international economic conditions. If, for example, we enter into derivative transactions to hedge against decreases in the value of the Brazilian real or in interest rates and the Brazilian real appreciates or interest rates increase, we may incur financial losses and such financial losses could have a material adverse effect on us. In addition, we may incur losses from fluctuations in the market value of positions held, including risks associated with transactions subject to variations in foreign exchange rates, interest rates, price indexes, and equity and commodity prices, along with various indexes on these risk factors, which could also have a material adverse effect on us.
We cannot predict the amount of realized or unrealized gains or losses for any future period, and variations from period to period have no practical analytical value in helping us to make such a prediction. Gains or losses on our investment portfolio may not contribute to our net revenue in the future or may cease to contribute to our net revenue at levels consistent with more recent periods or may not contribute at all. We may not successfully realize the appreciation or depreciation now existing in our consolidated investment portfolio or in any assets of such portfolio.
Operational risk factor
Failures or defects in our business systems and human error or misconduct may adversely affect us.
Although we have in place information security controls, policies and procedures designed to minimize human error, and make continuous investments in infrastructure, management of crises and operations, the operational systems related to our business
may stop working properly for a limited period of time or may be temporarily unavailable due to a number of factors. These factors include events that are totally or partially beyond our control such as power outages, interruption of telecommunication services, generalized system failures, as well as internal and external events that may affect third parties with which we do business or that are crucial to our business activities (including stock exchanges, clearing houses, financial dealers or service providers) and events resulting from wider political or social issues, such as cyber-attacks or unauthorized disclosures of personal information in our possession.
Operating failures, including those that result from human error and fraud, not only increase our costs and cause losses, but may also give rise to conflicts with our clients, lawsuits, regulatory fines, sanctions, intervention, reimbursements and other indemnity costs, all of which may have a material adverse effect on us.
Competition risk factor
The increasingly competitive environment and recent consolidations in the Brazilian banking industry may have a material adverse effect on our business.
The Brazilian market for financial and banking services is highly competitive. We face significant competition from other large Brazilian and international banks. Competition has increased as a result of recent consolidations among financial institutions in Brazil and of regulations that increase the clients’ ability to switch business between financial institutions. Please refer to section Our risk management, item Regulatory environment, Antitrust regulation for further information about the competition on the Brazilian Markets. Such increased competition may adversely affect us by, among other things, limiting our ability to retain or increase our current client base and to expand our operations, or by impacting the fees and rates we adopt, which could reduce our profit margins on banking and other services and products we offer.
Credit risk factors
Changes in the profile of our business may adversely affect our loan portfolio.
While the quality of our loan portfolio is associated with the default risk in the sectors in which we operate, changes in our business profile may occur due to our organic growth or merger and acquisition activity, changes in the local economic scenario and, to a lesser extent, in the international scenario, in addition to changes in the tax regimes applicable to the sectors in which we operate, among other factors. Any changes affecting any of the sectors to which we have significant lending exposure may have a material adverse impact on us. Furthermore, our historical loan loss experience may not be indicative of our future loan losses.
For example, in recent years, Brazilian banks have experienced an increase in loans to consumers, particularly in the automotive sector. However, this increased demand for vehicle financing was subsequently followed by Brazilian families becoming highly indebted, which led the automotive sector to face high nonperforming loan rates, giving rise to loan losses for financial institutions due to an increased volume of provisions and a decrease in loans for vehicle acquisition.
We may incur losses associated with counterparty exposure risks.
We may incur losses if any of our counterparties fail to meet their contractual obligations, due to bankruptcy, lack of liquidity, operational failure or other reasons that are exclusively attributable to our counterparties. This counterparty risk may arise, for example, from our entering into reinsurance agreements or credit agreements pursuant to which counterparties have obligations to make payments to us and are unable to do so, carrying out transactions in the foreign currency market (or other markets) that fail to be settled at the specified time due to non-delivery by the counterparty, clearing house or other financial intermediaries. We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients, and their failure to meet their contractual obligations may adversely affect us.
Exposure to the Brazilian federal government debt may adversely affect us.
Like most Brazilian banks, we invest in debt securities issued by the Brazilian government. As of December 31, 2013, approximately 15.8% of all our assets and 61.0% of our securities portfolio were comprised of these debt securities. Accordingly, any failure by the Brazilian government to make timely payments under the terms of these securities, or a significant decrease in their market value, may have a material adverse effect on us.
Underwriting risk factor
Inadequate pricing methodologies for insurance, pension plan and capitalization products may adversely affect us.
Our insurance and pension plan subsidiaries establish prices and calculations for our insurance and pension products based on actuarial or statistical estimates. The pricing of our insurance and pension plan products is based on models that include a number of assumptions and projections that may prove to be incorrect, since these assumptions and projections involve the exercise of judgment, including as to the levels and timing of receipt or payment of premiums, contributions, provisions, benefits, claims, expenses, interest, investment results, retirement, mortality, morbidity and persistency. We could suffer losses due to events that are contrary to our expectations directly or indirectly associated to biometric and economic assumptions, as well as to the actuarial bases used for contribution and provision calculations, may take place.
Although the pricing of our insurance and pension plan products and the adequacy of the associated reserves are reassessed on a yearly basis, we cannot accurately determine whether our assets supporting our policy liabilities, together with future premiums and contributions, will be sufficient for the payment of benefits, claims, and expenses. Accordingly, the occurrence of significant deviations from our pricing assumptions could have an adverse effect on the profitability of our insurance and pension products. In addition, if we conclude that our reserves and future premiums are insufficient to cover future policy benefits and claims, we will be required to increase our reserves and record these effects in our financial statements, which may have a material adverse effect on us.
Management risk factors
Our policies, procedures and models related to risk control may be ineffective and our results may be adversely affected by unexpected losses.
Our risk management methods, procedures and policies, including our statistical models and tools for risk measurement, such as Value at Risk (VaR), and default probability estimation models, may not be fully effective in mitigating our risk exposure in all economic environments or against all types of risks, including those that we fail to identify or anticipate. Some of our qualitative tools and metrics for managing risk are based on our observations of the historical market behavior. In addition, due to limitations on information available in Brazil, to assess clients’ creditworthiness we rely largely on credit information available from our own databases, on certain publicly available consumer credit information and other sources. We apply statistical and other tools to these observations and data to quantify our risk exposure. These tools and metrics may fail to predict all types of future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses, therefore, could be significantly greater than indicated by historical measures. In addition, our quantified modeling may not take all risks into account. Our qualitative approach to managing those risks could prove insufficient, exposing us to material unexpected losses.
Our results of operations and financial position depend on our ability to evaluate losses associated with risks to which we are exposed and on our ability to build these risks into our pricing policies. We estimate our allowance for loan losses according to regulatory principles. The calculation also involves significant judgment on the part of our management. Those judgments may prove to be incorrect or change in the future depending on information as it becomes available. These factors may adversely affect us.
Damages to our reputation could harm our business and outlook.
We are highly dependent on our image and credibility to generate business. A number of factors may tarnish our reputation and generate a negative perception of the institution by our clients, counterparties, shareholders, investors, supervisors, commercial partners and other stakeholders, such as noncompliance with legal obligations, making irregular sales to clients, dealing with suppliers with questionable ethics, clients data leakage, inadequate behaviors by our employees, and third-party failures in risk management, among others. In addition, certain significant actions taken by a third party, such as competitors or other market participants, may indirectly damage our reputation with clients, investors and the market in general. Damages to our reputation could have a material adverse effect on us.
Strategy risk factors
Our controlling shareholder has the ability to direct our business.
As of December 31, 2013, IUPAR, our controlling shareholder, directly owned 51.00% of our common shares and 25.54% of our total share capital, having the power to control us, including the power to appoint and remove our directors and officers and determine the outcome of any action requiring shareholder approval, including transactions with related parties, corporate reorganizations and the timing and payment of dividends.
In addition, IUPAR is jointly controlled by Itaúsa, which, in turn, is controlled by the Egydio de Souza Aranha family and the Moreira Salles family. The interests of IUPAR, Itaúsa and the Egydio de Souza Aranha and Moreira Salles families may be different from the interests of our other shareholders.
Our Board of Directors is currently comprised of 12 members, only four of whom are deemed independent in accordance with our Corporate Governance Policy. Our shareholders do not have the same protections as if the majority of our Board of Directors’ members were independent, since our directors’ interests may not be aligned at all times with the interests of our shareholders.
In addition, some of our directors are affiliated with IUPAR and circumstances may arise in which the interests of IUPAR and its affiliates conflict with the interests of our other shareholders. To the extent that these and other conflicting interests exist, our shareholders will depend on our directors duly exercising their fiduciary duties as members of our Board of Directors.
The integration of acquired or merged businesses involves certain risks that may have a material adverse effect on us.
As part of our growth strategy in the Brazilian financial sector, we engaged in a number of mergers, acquisitions and partnerships with other companies and financial institutions in the past and may carry out further transactions in the future. However, any such transactions involve risks, such as the possible incurrence of unanticipated costs as of result of difficulties in integrating systems, finance, accounting and personnel platforms, or the occurrence of unanticipated contingencies. In addition, the expected operating and financial synergies and other benefits from such transactions may not be achieved.
There is also the risk that antitrust and other regulatory authorities may impose restrictions or limitations on the transactions or on the businesses that arise from certain combinations.
If we are unable to take advantage of business growth opportunities, cost savings and other benefits we anticipate from mergers and acquisitions, or if we incur greater integration costs than we have estimated, then we may be adversely affected.
Risk and capital management
We regard risk management as an essential instrument to optimize the use of our resources and to assist us in selecting business opportunities in order to maximize value creation to shareholders.
Our risk management process includes:
The purpose of the identification of risks is to map the internal and external risk events that may affect the strategies and goals of our business and support units, with potential impacts on our results, capital, liquidity and reputation.
Risk management processes permeate our entire institution and are aligned with the guidelines of our Board of Directors and senior management which, through the committees described below determine overall risk management objectives by establishing targets and limits applicable to our business units. The control and capital management units, in turn, support our management by means of monitoring procedures and risk and capital analysis.
Our organizational risk management governance is structured in compliance with regulations in Brazil and abroad and in line with market best practices. Control of our credit, market, operational, liquidity and underwriting risks is performed in a centralized manner by an independent unit, led by a Vice-President reporting to the CEO and to the Board of Directors, in order to ensure that such risks are managed pursuant the Itaú Unibanco Group risk appetite and our existing policies. This independent unit is also responsible for centralizing our capital management. Centralized control is intended to provide the Board of Directors and senior management with a global view of our exposures to risks, as well as with a prospective view of our capital adequacy, so as to optimize and expedite corporate decisions.
We manage proprietary information technology (IT) systems to comply with Central Bank’s capital reserve requirements, as well as for risk measurement, following regulations and regulatory models. We also coordinate actions among different units to verify compliance with qualitative and quantitative requirements established by relevant authorities to maintain the minimum required capital and monitor risks.
In 2013, our risk control unit and our business units worked together to build a new governance in credit modeling, create indicators to identify early delinquency and minimize risks in our information security.
“Additionally, we mapped operational risks of each the business units and those related to their activities, considering the potential risk that each one represents and the quality of the control environment. This matrix gives us a clear direction to focus our efforts”
Eduardo Vassimon, Itaú Unibanco Holding’s Executive Director – Risks Control
Please refer to section Our governance, item Management structure, Board of Directors and Board of Officers for further details about our Board of Directors responsibilities.
The Board of Directors is our highest authority in risk and capital management.
In addition, we established committees that are responsible for risk and capital management and report directly to the Board of Directors. Committee members are elected by the Board of Directors. At the executive level, risks are managed by the Superior Committees, which are chaired by our Chief Executive Officer.
Please refer to section Our governance, item Our management structure, Committees of the Board of Directors – Capital and Risk Management Committee – for further details about the responsibilities of this Committee.
Please refer to www.itau.com.br/_arquivosestaticos/RI/pdf/RiskandCapitalCommitteeInternal. pdf, for further details.
The following committees are part of our risk management governance structure:
Board Risk and Capital Management Committee (CGRC):supports the Board of Directors in discharging its duties related to our risk and capital management by meeting every two months and submitting reports and recommendations to assist the Board of Directors in its decision-making with respect to:
Audit Committee: we have a single Audit Committee overseeing all entities within the Itaú Unibanco Group that are either authorized to operate by the Central Bank or supervised by the SUSEP. In accordance with its internal regulation, approved by the Board of Directors, the Audit Committee meets at least quarterly and when our CEO deems necessary and is responsible for supervising the quality and integrity of our financial statements and compliance with legal and regulatory requirements, as well as supervising audit activities (both internal and independent).
Please refer to section Our governance, item Our management structure for further details about the responsibilities of this Committee.
Superior Risk Policies Committee (CSRisc):the CSRisc meets at least every two months and is responsible for:
Superior Institutional Treasury Committee (CSTI):meets every month and its main responsibilities include, within the authority level established by the CSRisc, discussing and deciding on:
Superior Institutional Treasury and Liquidity Committee (CSTIL): meets on a quarterly basis and its main responsibilities include:
Superior Credit Committee (CSC): meets on a weekly basis to discuss our credit risk and is our highest authority on approval of individual credit levels. Its main responsibilities include:
Superior Audit and Operational Risk Management Committee (CSAGRO): meets at least on a quarterly basis and seeks to understand the risks associated with our processes and business, defines guidelines for managing operational risks, and assesses the results of our internal control and compliance system. Its responsibilities include:
Superior Institutional Risk Policies Committee (CSNIR): meets on a quarterly basis and reviews, validates and approves, within the authority level established by the CSRisc, our risks control and capital management institutional policies.
Model Assessment Technical Committee (CTAM):meets on a monthly basis and assesses risk models, based on the opinion of our independent model validation unit. Its main responsibilities include:
Decisions by the CTAM are subsequently presented to the CSRisc in order to ensure that our senior management members are also informed about such decisions.
Superior Product Committee (CSP): meets on a weekly basis and is the highest authority to approve our products, operations, services and related processes. Its main responsibilities include:
Superior Foreign Units Committee (CSEXT):meets on a quarterly basis, supervises our businesses abroad and is the highest authority for approving initiatives, transactions, services and processes in the markets where we operate outside Brazil. Its main functions include:
Credit risk is the possibility of losses due to (i) the failure by the borrower, issuer or counterparty to perform their respective financial obligations under agreed upon terms; (ii) the devaluation of the credit agreement arising from a deterioration of the risk rating of the borrower, issuer or counterparty; (iii) the reduction of earnings or remuneration; and (iv) the benefits granted upon renegotiation or the recovery costs.
Our credit risk management structure aims to maintain the quality of our credit portfolio consistent with risk appetite levels for each market segment in which we operate. Our credit risk management institutional policy is approved by our Board of Directors and applicable to all companies and subsidiaries in Brazil and abroad.
Our credit policy is developed based on internal factors, such as borrower rating criteria, performance and evolution of portfolio, default levels, return rates, and allocated economic capital, and on external factors related to the economic environment, interest rates, market default indicators, inflation and changes in consumption levels.
Our credit risk management governance is conducted through corporate bodies that report to the Board of Directors or to our executive officers and act primarily by assessing competitive market conditions, setting our credit limits, reviewing control practices and policies and approving actions at different authority levels. The risk communication and reporting process, including the disclosure of institutional policies on credit risk management, is also part of this governance structure.
The credit rating for our wholesale transactions is based on information such as the economic and financial conditions of a potential borrower, its cash-generating capabilities, the economic group to which it belongs and the current and prospective situation of the economic sector in which it operates. Credit proposals are analyzed on a case-by-case basis through our internal approval governance structure.
With respect to our retail transactions (individuals, small and middle-market companies), rating is assigned based on two statistical models: application (in the early stages of our relationship with a customer) and behavior(used for customers with whom we already have a relationship). Decisions are made based on scoring under these models and resulting ratings are continuously monitored by our credit risk independent unit. In some cases, an individual analysis of specific cases may be performed, in which case credit approval is submitted to the applicable authority levels.
We seek to strictly control our credit exposure to clients and counterparties, taking action to remediate occasional situations in which our actual exposure exceeds targeted levels. In the cases where our actual exposure exceeds targeted levels, we may seek enforcement of contractual provisions such as the right to demand early payment or require additional guarantees.
Please refer to section Performance, item Consolidated financial statements (IFRS), Note 36 - Management of Financial Risks for further details about credit risk.
Market risk
Market risk is the possibility of losses resulting from fluctuations in the market value of positions held by a financial institution, most typically caused by variations in foreign exchange rates, interest rates, Brazilian inflation indexes, equity and commodity prices, along with various indexes for these risk factors. Market risk management is the process by which our management monitors and controls risk of variations in the value of financial instruments due to market movements, while aiming to optimize the risk-return ratio through an adequate limits structure, effective risk management models and related management tools.
Our policies and general market risk management framework are consistent with the principles of CMN regulations. These principles guide our approach to market risk control and management across all business units and legal entities of the Itaú Unibanco Group.
Our market risk management strategy is aimed at balancing corporate business goals, taking into account, among other things:
Our market risk management framework is subject to the governance and hierarchy of committees, with specific limits assigned to different portfolios and levels (for example, Banking Portfolio, Trading Portfolio, Equities Desk), as well as classes of market risk (such as interest rate risk and foreign exchange risk). Daily risk reports, used by the business and control units, are also sent to senior management. In addition, our market risk management and control process is subject to periodic reviews. The key principles underlying our market risk control are as follows:
Market risk is controlled by an unit that is independent from our “risk originating” business units and is responsible for performing the daily activities of: (i) risk measurement, and assessment; (ii) monitoring of stress scenarios, limits and alerts; (iii) application of stress scenarios, analysis and tests; (iv) reporting of risk findings to responsible individuals within the relevant business unit, in accordance with our governance requirements; (v) monitoring the necessary actions to readjust positions and/or levels of risk to make them viable; and (vi) providing support for the launch of new financial products. To this end, we have a structured process of communication and information flow that provides information to our Superior Committees and monitors compliance with the requirements of Brazilian and relevant foreign regulatory agencies.
Our structure of limits and alerts follows the guidelines of the Board of Directors and is approved by the Superior Risk Policies Committee (CSRisc) after endorsement by the Superior Institutional Treasury Committee (CSTI). The limits range from aggregated risk indicators at the portfolio level to more granular limits at the individual desk level. This structure of limits and alerts promotes the effectiveness and coverage of control and is reviewed at least annually. Limits and alerts are calibrated based on projections of future balance sheets, stockholders’ equity available to support trading activities and the risk profile of each organizational entity, defined in terms of risk measurement as used within the risk management process. Market risk limits are monitored on a daily basis by our independent Market Risk Control Unit, which reports breaches of limits and discusses them with the relevant committees in accordance with the following procedure:
Additionally, our Board of Directors members have established certain limits of tolerance to high-level risks that are specifically applicable to treasury activities. These limits of tolerance are monitored on a daily basis by our independent risk unit, and any breach is reported to the Committees, to the Board of Officers and the Board of Directors in accordance with the procedure mentioned above. Potential breaches are also reported to executive officers through the CSRisc, which meets every two months, and to the Board of Directors members through the CGRC, which meets every two months and reports its activities to all Board of Directors members.
We hedge transactions with clients and proprietary positions, including foreign investments, in order to mitigate risks arising from fluctuations in market risk factors (e.g., prices) and to prevent positions from breaching limits. Derivatives are commonly used for these hedging activities. When these transactions are classified as hedges for accounting purposes, specific supporting documentation is reviewed, allowing for an ongoing follow up of the hedge effectiveness (retrospectively and prospectively) and of any changes in the accounting process. The accounting and managerial hedging procedures are governed by our internal institutional polices. Our market risk framework categorizes transactions as part of either the Banking Portfolio or the Trading Portfolio, in accordance with general criteria established by the Basel Capital Accords.
The Trading Portfolio is composed of all transactions with financial and commodity instruments (including derivatives) held with the intention of trading, to benefit from arbitrage opportunities, or using such transactions to hedge risk within this portfolio, and that have no restriction on trading. Profits are based on changes in actual or expected prices in the short term.
The Banking Portfolio is predominantly characterized by trades originated from the banking business that are not classified in the trading portfolio and related to the management of our balance sheet. Treasury transactions in the banking portfolio are executed in conjunction with active management of financial risks inherent in our overall balance sheet, and are held without intent to trade in the short term. The banking portfolio may include derivatives. As a general rule, this desk’s portfolios are held without intent of resale and time horizon of medium and long term.
Market risk exposures that are inherent to many financial instruments, including derivatives, are composed of various risk factors. A risk factor refers to a market parameter whose variation impacts the evaluation of a certain position. The main risk factors measured by us are:
Market risk is analyzed based on the following key metrics:
In addition to the risk metrics described above, sensitivity and loss control measures are also analyzed. They include:
Please refer to our Consolidated Financial Statements (IFRS), Note 36 - Management of Financial Risks for further details about Market Risk
VaR – Consolidated Itaú Unibanco Holding
The internal VaR model we use assumes a one-day holding period and a 99.0% confidence level. Volatilities and correlations are estimated based on a volatility-weighing methodology that confers greater weight to the most recent information.
The table below shows the Consolidated Global VaR, comprising our Trading and Banking portfolios, and our subsidiaries abroad Itaú BBA international, Banco Itaú Argentina, Banco Itaú Chile, Banco Itaú Uruguay, Banco Itaú Paraguay and Itaú BBA Colombia showing where there are higher concentrations of market risk. We adhered to our policy of operating within low limits in relation to capital and maintained our conservative management and portfolio diversification approach through the period.
1. Reduction of risk due to the combination of all risk factors.
On December 31, 2013, our average global VaR was R$224.5 million, or 0.27% of our consolidated stockholders’ equity on December 31, 2013, compared to our average global VaR of R$289.7 million on December 31, 2012 or 0.38% of our consolidated stockholders’ equity on December 31, 2012, and to R$142.0 million on December 31, 2011, or 0.19% of our consolidated stockholders’ equity on December 31, 2011. The Total VaR of our foreign units represented less than 1% of our stockholders’ equity on December 31, 2013.
VaR – Institutional Treasury trading portfolio
The Institutional Treasury unit segregates its risk management from the Banking and Trading Portfolios.
We recently enhanced its internal VaR methodology used for the Trading Book, migrating from the “parametric” approach to a “historical simulation” approach. This new approach uses four years of historical market data, performs a full revaluation of all positions, considers both one-day and ten-day holding periods, and reports risk at various confidence levels, including the 99.0% confidence level used under the parametric methodology. The historical simulation methodology is generally recognized to improve risk measurement for nonlinear financial products (such as options), and to more effectively capture both basis risk and statistically unusual (or “fat tail”) events. This new approach calculates VaR on both an unweighted “simple returns” basis and on a “volatility weighted” basis. We are in the process of extending the use of the historical simulation methodology beyond the Trading Book to include all other relevant portfolios that give rise to market risks.
The Trading Portfolio takes positions aiming to optimize risk-weighted results. The Trading Portfolio seeks the best domestic and foreign market opportunities within the pre-established limits and strives to create a well-diversified risk exposure.
Our total average Trading Portfolio VaR was R$40.2 million on December 31, 2013, compared to R$54.3 million on December 31, 2012 and to R$69.1 million on December 31, 2011.
Sensitivity analyses (trading and banking portfolios)
As required by Brazilian regulation, we conduct sensitivity analysis for market risk factors considered important. The highest resulting losses are presented below, by risk factor, in each such scenario and are calculated net of tax effects, providing a view of our exposure under circumstances.
The sensitivity analyses of the trading and banking portfolios presented here are based on a static assessment of the portfolio exposure. Therefore, such analyses do not consider the dynamic response capacity of management (e.g., treasury and market risk control unit) to initiate mitigating measures and minimize the possibility of significant losses. In addition, the profit or loss presented does not reflect accounting profit or losses since the analysis is intended to assess risk exposure based on the fair value of financial instruments, regardless of whether financial instruments are accounted for on an accrual basis or not.
1. Amounts net of tax effects.
In order to measure these sensitivities, the following scenarios are used:
Interest rate sensitivity
Interest rate sensitivity is the relationship between market interest rates and net interest income arising from the maturity or the characteristics of the renegotiation of prices of interest-bearing assets and liabilities.
Our strategy for interest rate sensitivity considers the return rates, the underlying risk level and the liquidity requirements, including the minimum regulatory cash reserves, mandatory liquidity ratios, withdrawals and maturity of deposits, capital costs and additional demand for funds.
The pricing structure is matched when equal amounts of these assets or liabilities mature or are renegotiated. Any mismatch of interest-bearing assets and liabilities is known as a gap position. A negative gap indicates liability sensitivity and normally means that a decline in interest rates would have a positive effect on net interest income, while a positive gap indicates asset sensitivity and normally means that an increase in interest rates would have a positive effect on net interest income. Additionally, the interest rate sensitivity may vary in the renegotiation periods presented due to the different renegotiation dates within the period. Also, variations among the different currencies in which the interest rate positions are denominated may arise.
These relationships are material for a particular date and significant fluctuations may occur on a daily basis as a result of both the market forces and management decisions. Our Superior Institutional Treasury and Liquidity Committee (CSTIL) analyzes the Itaú Unibanco Group’s mismatch position on a monthly basis and establishes limits for market risk exposure, interest rate positions and foreign currency positions.
Please refer to section Our Risk management, item Risk Management – Liquidity risk for further details.
The table below presents the position of our interest-bearing assets and liabilities as of December 31, 2013. This is a snapshot view, and accordingly, does not reflect the interest rate gaps that may exist at other times, due to changing asset and liability positions, and management’s actions to manage the risk in these changing positions.
Exchange rate sensitivity
Most of our operations are denominated in or indexed to Brazilian reais. We also have assets and liabilities denominated in foreign currency, mainly in U.S. dollars, as well as assets and liabilities that, although denominated in Brazilian reais, are indexed to U.S. dollars and, therefore, expose us to the exchange rate risk. The Central Bank regulates our maximum open, short and long foreign currency positions.
Please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 36 – Management of financial risks for further details.
The gap management policy adopted by the Superior Institutional Treasury and Liquidity Committee takes into consideration the tax effects on this position. Since the gains from the foreign exchange rate variation on investments abroad are not taxed, we set up a hedge (a liability in foreign currency derivative instruments) in an amount sufficient so that our total foreign exchange exposure, net of tax effects, is consistent with our low risk exposure strategy.
Our foreign exchange position on the liability side is composed of various elements, including the issuance of securities in international capital markets, credit from foreign banks used to finance import and export transactions, and dollar-linked on-lendings from government financial institutions. The proceeds of these operations are usually invested in loans and in the purchase of dollar-linked securities.
1. Predominantly U.S. dollar.
Backtesting
The effectiveness of the VaR model is validated by the use of backtesting techniques that compare hypothetical daily results with the estimated daily VaR. The number of exceptions (i.e. deviations) with respect to the pre-established VaR limits should be consistent, within an acceptable margin, with the hypothesis of 99.0% confidence intervals (i.e., there is a 1.0% probability that the financial losses are higher than the losses estimated by the model), considering a period of 250 business days (ending on December 31, 2013). The backtesting analysis presented below takes into consideration the ranges suggested by the Basel document “Supervisory Framework for the use of backtesting in conjunction with the internal models approach to market risk capital requirements”.
The ranges are divided into:
The exposure graph illustrates the reliability of risk measures generated by the models we use in the Institutional Treasury Trading Portfolio (foreign units are not included in the graph given the immateriality of amounts involved). The graph shows the adequacy level of the market risk models used by us, presenting the risk (absolute value) vs. return pairs for the period considered. Since the diagonal line represents the threshold where risk equals return, all the dots below this line indicate exceptions to the estimated risk. For the exposure of the Institutional Treasury Trading Portfolio, the hypothetical losses exceeded the VaR estimated by the model on 3 days in the period.
Operational risk
Operational risk is defined as the possibility of losses arising from failure, deficiency or inadequacy of internal processes, people or systems or from external events that affect the achievement of strategic, tactical or operational objectives. It includes legal risk associated with inadequacy or deficiency in contracts signed by us, as well as penalties due to noncompliance with laws and punitive damages to third parties arising from the activities undertaken by us.
Internally, we classify the following as first-level operational risks:
In line with CMN regulation, we have an operational risk management governance structure and an institutional policy, which are annually approved by the Board of Directors and are applicable to our local and foreign companies and subsidiaries.
Our operational risk management structure is composed of activities of operational risk control and management, the purpose of which is to support proper identification and assessment of risks and our decision-making process, the creation of value for stockholders and the protection of our assets and image.
Our operational risk management structure is supported by a governance process that is structured through discussion forums and committees that report to the CSAGRO and CSRisc, which, in turn, report to the Board of Directors, and is based on well-defined roles and responsibilities in order to reinforce the segregation of the business and management and control activities. This structure is intended to ensure independence between our units and, consequently, informed decisions with respect to risks. This independence is reflected in the risk management carried out on a decentralized basis under the responsibility of the business units and in the centralized control carried out by the operational risk and internal control and compliance units.
The purpose of operational risk management is to identify, evaluate, measure and respond to our operational risks and monitor such risks in order to maintain losses and risks within the limits established by the Board of Directors and to ensure compliance with our internal guidelines and with current regulation.
The managers of our business and support units use corporate methodologies that are built and made available by the operational risk and internal control and compliance units to support the management process. Examples of such methodologies currently in use include those for the identification of risks, self-evaluation of risks, approval of processes and products and the monitoring of key risk indicators that are supported by a database of operational losses.
The set of principles, governance, roles and responsibilities, methodologies and procedures that support our operational risk management process applied to products, services, activities, processes and systems is described and published in our operational risk management institutional policy.
The sophistication of the banking business and the evolution of technology have increased the complexity of our risk profiles and affected our operational risk management. As a result, we have established a specific structure for operational risk distinct from those traditionally applied to market and credit risks.
In line with the principles established by the CMN, we established an operational risk management policy, which is composed of a set of principles, procedures and guidelines for the management of products, processes and system’s risks, taking into consideration their respective natures and complexities. The operational risk management policy defines procedures for identifying, assessing, measuring, responding to, monitoring and reporting operational risk, as well as the roles and responsibilities of participants in the process.
Crisis management and business continuity
The purpose of our Business Continuity Program is to protect our employees, ensure the continuity of the critical functions of our business lines, safeguard revenue and sustain both a stable financial market in which we operate and the trust of our clients and strategic partners in providing our services and products.
Our Business Continuity Program is composed of procedures for relocating and/or recovering operations in response to a variety of interruption levels and can be divided into two key elements:
In order to keep continuity solutions aligned with applicable requirements with respect to processes, minimum resources and legal requirements, among others, the Business Continuity Program applies the following tools to analyze our organization:
Please refer to www.itau.com.br/_arquivosestaticos/RI/pdf/en/Corporate_Business_ Continuity_Policy.pdf, for further details about our Corporate Business Continuity Policy.
Liquidity risk
Liquidity risk is defined as the likelihood that an institution will not be able to effectively honor its expected and unexpected current and future obligations, including those from guarantee commitments, without affecting its daily operations and not incurring significant losses.
Our liquidity risk control is carried out by our risk unit that is independent of our business units and is responsible for determining the composition of our reserves, proposing assumptions for the performance of cash flows in different timeframes, proposing liquidity risk limits in accordance with the independent unit’s risk appetite, communicating any mismatches in our cash flow (between input and output) evaluating liquidity risk on an individual basis in the countries where we operate, simulating the behavior of cash flows in stress conditions, assessing and reporting in advance the risks inherent to new products and operations and reporting the information required by the regulatory agencies. All activities are subject to assessment by our independent validation, internal controls and audit units.
Please refer to section Performance, item Financial performance, Results, for further details about liquidity and capital resources.
Our main sources of funds are interest-bearing deposits, deposits received under securities repurchase agreements, debt in the interbank market and debt in the institutional market.
Please refer to section Performance, item Financial performance, Liabilities, for further details about funding.
Please refer to section Performance, item Consolidated financial statements (IFRS), Note 17 – Deposits, for further details.
Please refer to section Performance, item Consolidated Financial statements (IFRS), Note 19 – Securities Sold under Repurchase Agreements and Interbank and Institutional Market Debts, for further details.
Due to our stable sources of funds, which include a broad base of deposits and a large number of foreign banks with which we have long standing relationships, as well as credit lines available through which we have access to more funds, historically we have not made drawings under such credit lines.
We are investing in the improvement of our liquidity risk management structure. We always maintain a highly-liquid portfolio of marketable securities (operational reserve) available, which represents our main source of liquidity. Our operational liquidity reserve, which is the total amount of the assets that may be promptly converted into cash based on market practices and legal regulations, includes, in general: cash and deposits on demand, funded positions of securities purchased under agreements to resell to our clients and unencumbered government securities.
According to Brazilian legislation, dividends in kind may only be paid if the parent company that distributes such dividends has accounted for profit in its financial statements. Additionally, subsidiaries that are financial institutions are prohibited from lending us money but they can make deposits with us by means of Interbank Deposit Certificates (CDIs). These restrictions did not have and are not expected to have a relevant impact on our ability to meet our cash obligations.
Please refer to section Our risk management, item Regulatory environment, for further details about the implementation of Basel III in Brazil.
Please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 36 – Management of Financial Risks, for further details about liquidity risk.
Please refer to section Performance, item Financial performance, for further details about results.
Social and environmental risk
In managing our business, we continuously take into consideration the risk of potential losses due to exposure to social and environmental events arising, directly or indirectly, from the performance of our activities. These events may arise from (i) our direct operations which may have an impact on the environment or human health, or (ii) actions of borrowers, issuers and counterparties that, somehow, generate losses to us.
Our management of social and environmental risks follows the stages of assessment, management, organizational training and participation of stakeholders. This process permeates all of our management levels and is structured by specific governance structures and policies that formalize the mechanisms for the management of social and environmental risk, in addition to strengthening our sustainability agenda in our decision-making process.
The Social and Environmental Risk Committee is a permanent non-statutory management body whose purpose is to establish our governance structure and policies for social and environmental risk issues for us.
Please refer to www.itau.com.br/_arquivosestaticos/RI/pdf/en/SOCIAL_ENVIRONMENTAL_RISK_ POLICY.pdf, for further details about our Social and Environmental Risk Policy.
In order to avoid losses and also meet the interests of stakeholders, we have been developing internal processes aimed at the management, control and mitigation of events that may lead to our exposure to social and environmental risks, and at the maintenance of a transparent management. These include, for example, the incorporation of social and environmental variables in the processes of credit assignment, contracting of suppliers, insurance underwriting and acquisition of real estate properties for our own use, which are formalized in our social and environmental risk policies.
Insurance risk, pension plan and capitalization products risk
The portfolio of our insurance companies is comprised of life, large risk and extended warranty insurance, as well as pension plans and capitalization products. Insurance risk relates to underwriting risk, market risk, counterparty credit risk, and longevity risk, among others, with respect to such products.
With respect to insurance:
In line with national and international recommended practices and in order to ensure that risks arising from insurance products, pension plans and capitalization products are properly identified, measured, assessed, reported and approved within our relevant groups, we have a risk management framework, whose guidelines are established pursuant to our internal policies, approved by our Board of Directors and applicable to companies and subsidiaries subject to those risks, in Brazil and abroad.
Our risk management process for insurance products, pension plans and capitalization products is based on responsibilities defined and distributed between our control and business units, promoting independence between them.
The main responsibilities of our insurance risk control unit include:
Our risk management framework is structured to allow the Superior Committees to participate in decisions that may involve certain levels of risks related to our insurance business, according to the thresholds and guidelines established in our policies.
Capital management
The Board of Directors is our highest authority in capital management and is responsible for monitoring capital adequacy, approving the Internal Capital Adequacy Assessment Process (ICAAP) report and analyzing the results of the independent validation of ICAAP’s models and processes, performed by our internal controls and model validation teams, as well as approving our institutional capital management policy.
ICAAP is a process that aims to evaluate our capital adequacy level given our risk profile, our strategic guidelines and the economic environment. In order to independently validate the effectiveness of ICAAP’s processes and models, our internal controls team is responsible for evaluating our governance framework, processes, policies and activities of monitoring and reporting. Our team responsible for the technical validation of models analyzes the documentation, data, methodology, performance and the use of the models involved.
At the executive level, the CSRisc is responsible for approving risk assessment and capital calculation methodologies, as well as reviewing, monitoring and recommending capital-related documents and topics to the Board of Directors. Supporting our governance framework, we have a structure that is dedicated to managing our capital, coordinating and consolidating information and related processes, all subject to our independent validation, performed by our internal control and audit departments.
In the capital management context, we prepare a capital plan consistent with our strategic planning and designed to maintain an adequate and sustainable capital level, taking into account analyses of the economic, competitive and political environment, in addition to other external factors. Our capital plan comprises the following:
Money laundering prevention
Politically exposed persons
Regulatory environment
1. Our credit classification also takes into account the client´s credit profile, which may negatively impact the past due classification.
In the event an insurance company is declared bankrupt, the insurance company will be subject to a special procedure administered by the SUSEP or by the ANS. If an insurance company is declared bankrupt and (i) its assets are not sufficient to guarantee at least half of the unsecured credits or (ii) procedures relating to acts that may be considered bankruptcy-related crimes are in place, the insurance company will be subject to ordinary bankruptcy procedures.
There is currently no restriction on foreign investments in insurance companies in Brazil.
Brazilian legislation establishes that insurance companies must buy reinsurance to the extent their liabilities exceed their technical limits under the rules of the regulatory body (CNSP and SUSEP), and reinsurance contracts may be entered into through a direct negotiation between the insurance and reinsurance companies or through a reinsurance broker authorized to operate in Brazil.
The Brazilian securities market is regulated by:
• The Brazilian Securities and Exchange Commission (CVM), which is responsible for issuing specific rules for the securities market (which in Brazil includes derivatives) and overseeing exchange and organized over-the-counter markets;
• The CMN, which is responsible for the general guidelines to be followed in the organization and operation of the securities market and the regulation of foreign investments in Brazil; and
• The Central Bank, which is responsible for authorizing brokerage houses.
According to the Brazilian Corporate Law, a company is considered publicly or closely-held depending on whether the securities issued by it are accepted for trading in the securities market or not. All publicly-held companies, such as ourselves, are registered with the CVM and are subject to information disclosure and reporting requirements.
Message from the CFO
Dear Reader,
The year of 2013 was particularly important because it showed the assertiveness of a strategy established in 2011, which was based on a reassessment of the institution’s risk appetite, focused on the improvement of the quality of the loan portfolio, on an effective control of costs and on an agenda for the increase of revenue arising from non-credit products, such as services and insurance. Accordingly, in 2013, Itaú Unibanco Holding was able to increase its profitability and create value for its shareholders.
As it is always in the search for high performance through sustainable results, the institution has obtained important gains from the simplification of processes, the increase in productivity and efficiency in the many product lines and distribution channels, and the quality of the services offered to our clients.
Additionally, the investments in new technologies, such as mobile, internet banking and other means of payment, have allowed for a gradual migration to an increasingly virtual business model and, therefore, even more efficient, agile and modern.
In this rapidly-transforming environment, the Finance unit has had the opportunity to increasingly contribute to support the business units and strategy development of Itaú Unibanco Holding. This contribution is based on the control and planning of operations and on the establishment and strengthening of partnerships with all business units.
Furthermore, the simplification and centralization of processes in the Finance unit that took place in 2013 have brought about gains in productivity, quality and efficiency. Two illustrative examples are: the combined and integrated information management, which ensures greater timeliness and agility to the institution’s decision-making process, and the development of a new operational platform, which integrates all of Itaú Unibanco Group´s administrative activities, such as payments, procurement and trips.
With respect to the financial statements, we continue to invest in order to ensure high levels of transparency, consistency and quality, both under IFRS and BRGAAP. In 2013, we were on the top of the Company Reporting IFRS Annual Report Benchmarking survey ranking, a report that analyzes the financial statements disclosed by many companies from around the world on an independent, technical and in-depth basis. This is a very nice recognition.
Now, you will have the opportunity to read about Itaú Unibanco Holding’s financial performance.
Chief Financial Officer of Itaú Unibanco Holding S.A.
Executive Vice-President of Itaú Unibanco S.A.
Financial performance
Fair value of financial instruments
Financial instruments recorded at fair value on our balance sheet include mainly securities classified as held-for-trading and available-for-sale as well as other trading assets, including derivatives. Securities classified as held-to-maturity are recorded at amortized historical cost on our balance sheet, and their corresponding fair values are shown in the notes to our consolidated financial statements. We present information on the fair value of our financial instruments in the table below as of December 31, 2013, 2012 and 2011.
We note that Brazilian government bonds represented over 74.7% of our portfolio of held-for-trading securities in 2013. Brazilian government bonds represented 10.8% of total assets in the same period.
Available-for-Sale
Listed below are financial assets that, according to management’s understanding, may be sold in response to, or before changes in, market conditions and are not classified as financial assets at fair value through profit or loss, loans and receivables or held to maturity. Please refer to section Performance, item Consolidated financial statements (IFRS), Note 10 – Available for Sale Financial Assets, for further details.
Brazilian government bonds and debt securities of companies represented 28.9% and 49.8%, respectively, of our portfolio of available-for-sale securities in 2013. Brazilian government bonds and debt securities of companies classified as available-for-sale securities, which are used as hedge for our subordinated debt portfolio, represented 2.7% and 4.7%, respectively, of total assets in the same period.
Held-to-Maturity
Listed below are non-derivative financial assets that with respect to which we have the intention and financial ability to held to maturity. Please refer to section Performance, item Consolidated financial statements (IFRS), Note 11 – Held to Maturity Financial Assets, for further details.
Derivatives
These are classified on the date of their acquisition in accordance with management’s intention to use them as a hedging instrument, as determined by Brazilian regulation. Our derivatives portfolio (assets and liabilities) is composed of futures, forward, swaps, options and credit derivatives, as stated in the table below:
Derivative financial instruments
Please refer to section Performance, item Consolidated financial statements, Note 8 – Derivatives for further details.
Distribution of our financial assets by maturity
For the purpose of analyzing the exposure of variations in foreign exchange rates, the table below presents the composition of our derivative financial instruments on December 31, 2013 in reais and in foreign currency, including the instruments denominated in foreign currencies. For the fair value of derivative financial instruments, please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 7 – Financial Assets Held for Trading and Designated at Fair Value through Profit or Loss and Note 36 – Management of Financial Risks.
Exposure to GIIPS
Our gross exposure to the sovereign bonds of the GIIPS countries as well as to financial institutions and other corporations and small businesses and individuals domiciled in those countries as of December 31, 2013, is set forth in the table below.
The gross exposure presented above, primarily related to our exposure to corporate credits, amounted R$2,380 million as of December 31, 2013, with co-obligations in the amount of R$681 million. The exposure presented above has been calculated based on our estimated realizable value, which is updated depending on its nature (such as pledged amounts in current accounts used to collect customer receivables, financial investments, real estate, machinery and equipment or others), except for guarantees provided by third parties, in which case the amount corresponds to the outstanding debt. Our derivatives related to GIIPS countries amounted to R$3.0 million as of December 31, 2013.
Compulsory deposits with the Central Bank
The Central Bank requires compulsory deposits from Brazilian financial institutions.The compulsory deposits are mechanisms to control the liquidity of the Brazilian financial system as well as a monetary policy resource of the Brazilian government. These requirements are applied to banking transactions, such as demand deposits, savings account deposits and time deposits. See below the compulsory deposit rates required for each type of investment:
1. Most recent regulation on the matter.
2. This is a compulsory investment of resources that is made in eligible transactions, that is, the funds are granted to other economic entities.
3. Remuneration on funds in savings deposits:
For deposits made until March 5, 2012, inclusive: TR + 6.17% p.a.
For deposits made after March 5, 2012:
a. If the target of the SELIC rate is higher than 8.5% p.a.: TR + 6.17% p.a.
b. If the target of the SELIC rate is lower than 8.5% p.a.: TR + 70% of the target of the SELIC rate p.a.
The most recent changes to the compulsory deposit rates were:
• The additional requirement on time deposits was reduced from 12% to 11% in November 2012.
The regulations that govern the compulsory deposit rates are frequently changed by the Central Bank in accordance with the economic scenario and in response to its views on Brazilian monetary policy. On December 31, 2013, we recorded the amount of R$77,010 million in compulsory deposits in cash compared with R$63,701 million on December 31, 2012, R$71,877 million and R$57,253 million of which are interest-bearing. Please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 5 – Central Bank Compulsory Deposits for further details.
Loan and lease operations
Substantially all of our loans are granted to clients domiciled in Brazil and are denominated in Brazilian reais. Additionally, 60.0% of our credit portfolio consists of transactions with fixed interest rates and 40.0% of transactions with variable interest rates.
As of December 31, 2013, total loan and lease operations reached R$411,702 million, a 12.2% increase compared to December 31, 2012. Loans to individuals increased by 10.9%, while loans to companies increased by 10.1% compared to 2012. During 2013, we increased the volume of credit card lending, payroll loans, mortgage loans and loans to corporate clients, but decreased the volume of loans to individuals for vehicles and personal loans and to small companies.
With respect to loans and leases that are not classified as non-accrual or overdue and that have not been renegociated as of December 31, 2013, we are unaware of any information about borrowers’credit problems that could cause us to have doubts regarding their ability to pay us.
As of December 31, 2013, loans to individuals totaled R$167,431 million, an increase of 10.9% compared to December 31, 2012. The increase is primarily a result of the increases of 31.1% in credit cards loans to R$53,149 million, mainly due to the impact of the acquisition of Credicard, of 32.8% in mortgage loans to R$24,492 million, mainly due to our focus on portfolios with lower delinquency rates, of 66.6% in payroll loans to R$22,571 million, due to a continued growth in our retail branch payroll loan operations and to the association agreement with BMG, aiming at the offering, distribution and commercialization of payroll loans through the incorporation of a new financial institution, Itaú BMG Consignado. This association supplemented our payroll loan distribution strategy and improved the risk profile of our loan portfolio. Vehicle financing
decreased 21.4% as of December 31, 2013 compared to 2012, totaling R$40,584 million, as a result of continued application of stricter requirements for granting such loans in this period, which has led to increased down payment requirements and shorter financing terms.
As of December 31, 2013 loans to companies totaled R$208,014 million. Loans to small and medium businesses decreased 4.2% in 2013 compared to 2012, totaling R$81,601 million. Loans to corporate clients increased 21.9% in 2013 compared to 2012, totaling R$126,413 million.
The balance of our foreign loans from our operations in Latin America outside Brazil (Argentina, Chile, Colombia, Uruguay and Paraguay) totaled R$36,257 million as of December 31, 2013, an increase of 33.5% compared to 2012, mostly as a result of the growth of operations in the countries where we operate. The growth was due to a combination of the development of our operations and the devaluation of the real against several foreign currencies, particularly the U.S. dollar.
As of December 31, 2012, total loan and lease operations reached R$366,984 million, a 6.0% increase compared to 2011. Loans to individuals increased by 1.0%, while loans to companies increased by 6.4% compared to 2011. During 2012, we increased the volume of credit card lending, payroll loans, mortgage loans and loans to corporate clients, but decreased the volume of loans to individuals for vehicles and to small companies.
As of December 31, 2012, loans to individuals totaled R$150,921 million, an increase of 1.0% compared to December 31, 2011. The increase was primarily a result of the increases of 31.9% in mortgage loans, to R$18,445 million and of 34.1% in payroll loans, to R$13,550 million, as a result of our focus on less risky portfolios, partially offset by a decrease of 14.6% in vehicle financing, to R$51,646 million as of December 31, 2012, in each case compared to 2011, as a result of continued application of our stricter requirements for granting loans during this period, which have led to increased down payment requirements and shorter financing terms.
As of December 31, 2012, loans to companies totaled R$188,914 million, an increase of 6.4%, compared to 2011. Loans to small and medium businesses decreased 0.5%, as of December 31, 2012 compared to 2011, totaling R$85,185 million. Loans to corporate clients increased 12.8%, as of December 31, 2012 compared to 2011, totaling R$103,729 million, in particular in export/import financing, payroll loans acquired from other financial institutions and working capital facilities.
The balance of our foreign loans from our operations in Latin America outside Brazil (Argentina, Chile, Uruguay and Paraguay) totaled R$27,149 million as of December 31, 2012, an increase of 41.0% compared to 2011. The growth was due to a combination of the increase in our operations and the devaluation of the realagainst several foreign currencies, particularly the U.S. dollar.
The following table presents our loan and lease portfolio by category of transaction, presented in accordance with U.S. GAAP.
Indexation
Most of our portfolio is denominated in Brazilianreais. However, a portion of our portfolio is indexed to foreign currencies, primarily the U.S. dollar. The foreign currency portion of our portfolio consists of loans and financing for foreign trade and onlending operations. Our loans indexed to foreign currencies or denominated in U.S. dollars represented 28.7%, 23.9% and 22.1% of our loan portfolio as of December 31, 2013, 2012 and 2011, respectively.
The results of the credit portfolio monitoring activities are reported to our Senior Management. These results provide the Senior Management a global view of our group’s exposure to risk, indicators of deterioration in portfolio quality and the impact on us of potential changes in the economic environment.
Our credit risk management governance is based on committees, which report to our Senior Management. Our Senior Management is responsible for assessing the market’s competitive conditions, establishing our credit limits and approving risk control policies and practices. Please refer to section Our Risk Management, item – Risk and Capital Management, Risk Management Credit Risk.
Individuals
Our branch network extends nationwide and adopts a client segmentation strategy pursuant to which products and services are developed to meet the specific needs of a diversified client base. Credit products offered at our branch network and through our electronic channels include overdraft protection, credit cards, personal loans and vehicle financing, among others.
Credit may be granted to individuals on a pre- approved basis or through a traditional approval process, as further described below. Under both circumstances, decisions are made based on credit quality principles, such as credit rating supported by statistical models, percentage of a client’s committed income or credit restrictions, defined by us or the market.
In all cases, an internal credit score is applied and a cut-off threshold is defined for each product line.
In the case of pre-approved credit, if a client’s risk profile is within the cut-off threshold and parameters established under our credit policy, the credit is considered pre-approved and is automatically available to the client. In the cases where credit is not pre-approved, credit review is carried out through a traditional process under which proposals are assessed on an individual basis by a credit expert. Under this process, approvals are decided by a credit desk, since commercial managers do not have authority to approve individual applications.
Documentation required at the moment the client decides to open an account with us or when we grant a loan includes an application form with the client’s signature, personal identification and proof of income.
Credit cards
This business comprises Itaucard and Hipercard (starting from 2013 the “Hiper”) credit cards as well as credit cards from associations and commercial agreements with important
retailers. Our credit cards are available to account-holding or non-account holding clients, and can be applied for by telephone, internet or points of service at our partner institutions.
The credit granting process for credit cards includes a pre-qualification phase in which internal or market restrictive filters are applied. For eligible clients, the maximum credit amount offered takes into consideration the client’s risk, based on statistical models specifically designed for credit cards (application score) and on the applicants’ income. A fixed interest rate is applied to revolving credit transactions.
Personal loans
Our decision on whether to grant loans to our account holders takes into account the client’s income level and our internal client credit rating, which is based on internally developed statistical models. Through these models, we determine which clients will receive credit offers and in which amounts, the maximum number of installments and the maximum amount for monthly installments, based on fixed interest rates.
Payroll loans
Our payroll loan is available to account-holding or non-account holding clients. Fixed installments are directly deducted from the borrower’s salary by the employer and transferred to the bank’s account, without being recorded in the debtor’s account.
The maximum percentage of installment is defined by law and is limited to 30% of a client’s net income.
Our strategy in this sector is to focus on loans to retirees and pensioners of the government, which, combined with our good management practices and credit policies, allows us to increase the portfolio with low delinquency levels compared to other portfolios.
Documentation required includes personal identification, proof of payroll and residence and proof of the bank account where the client receives payroll benefits. If the salary is deposited at our bank, this documentation is not necessary.
Itaú BMG Consignado is the financial institution controlled by Itaú Unibanco Holding that aims at the offering, distribution and sale of payroll loans in Brazil. This operation started in December 2012 and enables us to expand our business in this sector.
Vehicle financing proposals are submitted through (i) partner car dealers throughout Brazil for all types of clients (whether account holders or not) or (ii) directly at our branches or through electronic channels for account holders.
A client’s internal credit rating and the terms and conditions of the proposed transaction are taken into account. If the proposed transaction meets all of our credit policy requirements, which determine maximum installment amounts, loan to value (LTV), and maturity, and the client’s personal information is validated by credit protection services, the loan is automatically approved.
A fixed interest rate is set based on the credit rating and the characteristics of the transaction. All vehicle financing transactions are guaranteed by the asset itself, and the maximum LTV is defined to support any possible stress periods.
Mortgage loans
In addition to our branch network, we have entered into partnerships with large real estate brokers in Brazil, which originate real estate financing transactions for us on an exclusive basis and in different cities across the country.
The approval of real estate loans is based on assumptions involving the portion of a client’s income to be committed to loan repayments, the client rating according to our internal rating system and the maximum LTV, so that even under a stress scenario LTV is kept at adequate levels. Interest rates are fixed.
The data included in the financing proposal is analyzed, validated and confirmed by supporting documentation provided by the client. The proposal may be rejected if the information provided to us is found to be inconsistent, the proposal fails to meet our current policy requirements or any requested information fails to be provided.
Credit to very small and small companies
We offer products such as working capital financing and discount of trade receivables to very small and small companies.
Credit limits to very small and small companies are assigned according to a client’s revenues and are based on a business risk assessment, as well as on other criteria such as the financial condition of the entity’s shareholders or owners, the identification of possible credit restrictions and an evaluation of the economic sector in which the company operates.
Similarly to our procedures for granting of loans to individuals, credit may be granted to very small and small companies pursuant to a pre-approved limit or subject to an individual analysis by a credit desk.
Documentation required includes the company’s governing documents, proof of revenues and information on the partners or shareholders.
Much of the credit for companies requires guarantees. Transactions to finance the production of goods usually require machinery and equipment as collateral. Working capital financing may be collateralized by trade receivables, checks receivable or credit cards receivable or may be collateralized by the company’s partners or shareholders and/or third parties.
Interest rate can be fixed or variable depending on the product that is chosen by the client.
Corporate credit
The credit analysis process for middle market and large companies is carried out based on the financial condition of such companies and any economic groups to which they belong. The credit analysis takes into account the company’s history, financial capacity and adequacy of the requested transaction to the client’s needs. This analysis is based on the company’s financial statements (balance sheet, statement of income, statement of cash flows), on-site meetings with the company, market conditions, analysis of the economic sector in which the entity operates and inquiries into credit protection services. An environmental analysis is carried out simultaneously with our credit analysis, and a plan of action may be created as a result of this analysis for the company to comply with the requirements determined by our internal environmental policy or a recommendation to deny the credit may be issued.
The proposed maximum credit amount and the client internal rating, with a cut-off defined, are submitted to the appropriate credit authorization levels depending on the amount involved, term of the transaction and available guarantees, in accordance with our governance policies. Interest rate can be fixed or variable depending on the product that is chosen by the client within the credit limit approved.
International units
Credit granting in our subsidiaries follows the same corporate governance and policies described above. All subsidiaries are subject to a centralized management that monitors the performance of our portfolio, establishes rules for credit granting and is responsible for the corporate governance related to credit granting.
Risk-Mitigating instruments
As part of our credit risk control, we have institutional policies establishing guidelines and duties in connection with the requirement for guarantees and each business unit is responsible for establishing, in their own credit policies, credit risk management rules for the acceptance of such guarantees.
Guarantees are required to mitigate our risk exposure to certain transactions. Guarantees may be personal or in the form of security interest or other legal arrangements designed to mitigate credit risk.
In order to be considered a risk-mitigating instrument, guarantees must meet the certain legal requirements.
All guarantees that may impact credit risk, capital allocation and accrual are periodically reviewed by us, ensuring that the guarantees are legally enforceable.
Loan and lease operations by maturity
The following table sets out the distribution of our credit portfolio by maturity, including non-overdue and overdue, by type:
Distribution of the credit portfolio by maturity according to the type and lease – non-overdue
Non-Overdue 12/31/13
Non-Overdue 12/31/12
Non-Overdue 12/31/11
Distribution of the credit portfolio by maturity according to the type and lease – overdue
Overdue 1 12/31/13
Overdue 1 12/31/12
Overdue1 12/31/11
Loan and Lease Operations by interest rate
The following table sets out the classification of our credit portfolio into fixed and variables rates, including non-overdue and overdue:
Classification of the credit portfolio into fixed and variable rates – non-overdue
Non-Overdue1 12/31/13
Classification of the credit portfolio into fixed and variable rates – overdue
Overdue1 12/31/13
Overdue1 12/31/12
Loan and lease operations by economic activity
The following table sets out the composition of our credit portfolio, including non-accrual loan operations, by economic activity of the borrower.
On December 31, 2013, there was no concentration of loan and lease operations exceeding 10% of the total portfolio that had not been disclosed in a category of loan and losses.
Rating of the loan and lease portfolio
We present below the rating of our loan and lease portfolio based on the probability of default.
The credit rating in corporate transactions is based on information such as economic and financial condition of the counterparty, its cash-generating capabilities, the economic group to which it belongs, the current and prospective situation of the economic sector in which it operates, the collateral offered and the use of proceeds. The credit proposals are analyzed on a case by case basis, through an approval-level mechanism subordinated to the Superior Credit Committee.
Regarding retail transactions (individuals, small and middle-market companies) the rating is assigned based on application and behavior score statistical models. Decisions are made based on scoring models that are continuously updated by an independent unit. Exceptionally, there may also be an individualized analysis of specific cases where approval is subject to competent credit approval levels. The risk ratings are grouped in four categories: lower risk, satisfactory, higher risk and impaired. Please refer to section Performance, item Financial performance – Allowance for loan and lease losses, for further details on the individual and collective analyses.
Non-Accrual loans
We consider all loans overdue for 60 days or more as non-accrual loans and, accordingly, cease the accrual of financial charges on them. In 2013, we did not have any material non-accrual loans.
Write-Offs
Loans and leases are written off against the allowance for loan and lease losses when the loan is not collected or is considered permanently impaired. We usually write off loans when they are overdue for 360 days, except for loans with original maturity in excess of 36 months, which are written off when they are overdue for 540 days. However, write-offs may be recognized earlier than 360 days if we conclude that the loan is not recoverable.
Please refer to section Performance, item Assets – Loan and lease operations – Renegotiated loans for further details.
Information on the quality of loans and leases
The table below shows our non-accrual loans together with certain asset quality ratios.
Short-term Borrowings
Short-term borrowings are included in our balance sheet under the “Open market” line item. The main category for short-term borrowings is “Deposits received under securities repurchase agreements with own and third-party financial assets”.
Off-Balance sheet arrangements
We do not have any off-balance sheet arrangements, other than the guarantees we granted that are described in Note 36 – Management of Financial Risks, item 3 – Collateral and policies for mitigating credit risk and 5 – Credit risk exposure of our consolidated financial statements and derivative financial instruments discussed above. Please refer to section Our risk management, item Risk and capital management, Exchange rate sensitivity for further details.
“Two years ago we anticipated the today’s scenario and worked to reduce credit risks and to improve cost control focusing on efficiency. This was a winning strategy that benefited the result of 2013 and can benefit 2014.”
Alfredo Setubal – Itaú Unibanco Holding’s Board Member, Investor Relations Officer and Itaú Unibanco Executive Vice-President – Wealth Management & Services
The highlights for 2013, 2012 and 2011 are presented below:
For the year ended December 31, 2013, our net income attributable to the owners of the parent company was R$16,424 million and increased 30.0% compared to the previous year when net income reached R$12,634 million. Compared to the year ended December 31, 2011, net income reached R$13,837 million in 2012, decreasing by 8.7%.
Our performance ratio, ROAE (return on average equity), calculated by dividing net income by average stockholders’ equity, reached 20.9% in 2013, a 440 basis points increase compared to 2012, when our performance ratio reached 16.6%, which represented a decrease of 390 basis points compared to of the ratio of 20.5% in 2011.
As of December 31, 2013 our stockholders’ equity grew 9.6% compared to that as of December 31, 2012, and reached R$83,223 million. As of December 31, 2012, growth was 2.7% compared to our stockholders’ equity as of December 31, 2011, totaling R$75,902 million. As of December 31, 2011 our stockholders’ equity was R$73,941 million.
As of December 31, 2013, loans to individuals totaled R$167,431 million, an increase of R$16,510 million, or 10.9%, compared to December 31, 2012, primarily as a result of a 66.6% increase in payroll loans due to a continued growth in our retail branch payroll loan operations and to the association agreement with BMG, aiming at the offering, distribution and sale of payroll loans through the incorporation of a new financial institution, Itaú BMG Consignado, an increase of 31.1% in credit card loans mainly due to the impact of the acquisition of Credicard, and an increase of 32.8% in mortgage loans due to the focus we have been giving to portfolios with lower delinquency rates. Vehicle financing decreased 21.4% as of December 31, 2013 compared to 2012, to R$40,584 million, as a result of the continued application of stricter requirements for granting loans in this period, which have led to increased down payment requirements and shorter financing terms.
As of December 31, 2012, loans to individuals totaled R$150,921 million, an increase of R$1,530 million compared to December 31, 2011, or 1.0%, primarily as a result of a 31.9% increase in mortgage loans and to a 34.1% increase in payroll loans. Vehicle financing decreased 14.6% in 2012 compared to 2011, to R$51,646 million as of December 31, 2012, as a result of the continued application of stricter requirements for granting loans during this period, which have led to increased down payment requirements and shorter financing terms.
As of December 31, 2013, loans to companies totaled R$208,014 million, with an increase of R$19,100 million, or 10.1% compared to 2012. As a result of our focus on portfolios with lower delinquency rates, loans to large companies increased 21.9% while loans to small and middle-sized companies decreased 4.2%.
As of December 31, 2012, loans to companies totaled R$188,914 million, an increase of R$11,300 million, or 6.4%, compared to 2011. Loans to small and medium businesses decreased R$464 million, or 0.5%, as of December 31, 2012 compared to 2011, totaling R$85,185 million. Loans to large companies increased R$11,764 million, or 12.8%, as of December 31, 2012 compared to 2011, totaling R$103,729 million.
In addition, the depreciation of the real against other currencies, especially the U.S. dollar, also contributed to the growth of our medium to large companies’ portfolio since certain of our loans are denominated, or originated in, such currencies.
The balance of loans from our operations in Latin America outside Brazil (Argentina, Chile, Colombia, Paraguay and Uruguay) ▲ increased 33.5% as of December 31, 2013 compared to 2012 and ▲ increased 41.0% as of December 31, 2012 compared to 2011. In both years, the growth was due to a combination of the increase in our operations and the devaluation of the real against several foreign currencies, particularly the U.S. dollar.
The 90-day non-performing loans ratio (90-day NPL ratio), calculated by dividing 90-day non-performing loans by our loan portfolio, reflects the mechanics of our provisioning model. When the non-performing loan ratio decreases, an increase in the coverage ratio is expected.
As of December 31, 2013, our 90-day NPL ratio reached 3.7%, an improvement due to decreases in the 90-day NPL ratios for both individuals and companies. The ratio for individuals dropped 110 basis points compared to December 31, 2012. This is the lowest level since the Itaú and Unibanco association in November 2008.
As of December 31, 2012, our 90-day NPL ratio decrease to 4.8%, compared to 4.9% as of December 31, 2011.
During 2011, delinquency levels increased, both in our portfolio and in the Brazilian financial system. This increase led to higher incurred losses, especially in the small companies and vehicle financing portfolios, and to an increase in expenses for allowance for loan and lease losses from 2010 to 2011. As a consequence, we tightened our underwriting standards and required either more collateral or higher down payments, and reduced the maturity of loans within these portfolios. These changes, combined with the slowing growth of the Brazilian market, resulted in a slight reduction of our small companies’loan portfolio and in our vehicle financing portfolio.
The coverage ratio, calculated by dividing the provisions for allowance for loan and lease losses by 90-day non-performing loans, reached 147% as of December 31, 2013, an increase of 10 basis points compared to 2012 and as of December 31, 2012, the coverage ratio increased 60 basis points compared to 2011. When the non-performing loan ratio decreases, an increase in the coverage ratio is expected. The provisions for allowance for loan and lease losses are reversed only when there is a strong indication of the recovery of overdue loans, increasing the coverage ratio.
Certain effects of foreign exchange rates on our income
The variation of the real can affect our net interest margin (which includes net interest and similar income and expenses, dividend income, net gain (loss) from investment in securities and derivatives and foreign exchange results and exchange variation on transactions). A certain amount of our financial assets and liabilities are denominated in or indexed to foreign currencies, primarily the U.S. dollar. When the real depreciates, we incur losses on our liabilities denominated in or indexed to foreign currencies, such as our U.S. dollar-denominated long-term debt and short-term borrowings, because the cost in reais of the related interest expense increases. At the same time, we realize gains on monetary assets denominated in or indexed to foreign currencies, such as our dollar-indexed trading securities and loans, due to increased interest income from such assets measured in reais. When the real appreciates, the effects are the opposite of those described above. Consequently, the management of the gap in foreign currencies can have material effects on our net income. Our foreign currency gap management also takes into account the tax effects of such positions. As the profits from exchange rate variation on investments abroad are not taxable, we seek to maintain sufficient hedges (a liability position in foreign exchange derivatives) to reduce the potential effects from our total foreign-exchange exposure, net of tax effects.
Unless otherwise indicated, the discussion in this section Performance, item Financial Performance, Results, relates to our annual average interest rates and yields. Interest rates cited are measured in reais and include the effect of the variation of the real against foreign currencies.
Net income
The following table shows the main components of our net income:
Our results of operations are affected by changes in SELIC rates and in exchange rates (U.S. dollar compared to Brazilian real). In 2013, we observed a decrease in the average SELIC rate to 8.3% from 8.6% in 2012 and compared 11.8% in 2011. The Brazilian real depreciated 14.7% in 2013, 8.9% in 2012 and 12.6% in 2011.
Banking product
Banking product is the sum of our operating revenues, net of funding costs, as detailed in the table above. Please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 23 – Interest and Similar Income and Expense and Net Gain (Loss) from Investment Securities and Derivatives, Note 24 – Banking Service Fees and Note 25 – Other Income for further details.
In 2013, the 2.3% decrease in interest and similar income compared to 2012 was mainly due to decreases in interest on trading assets, in interest on loan and leases and in interest on Central Bank deposits, partially offset by increases in interest on securities purchased under resale agreements and dividends on available-for-sale securities. The decreases in interest for trading assets and on Central Bank compulsory deposits are both related to the reduction in the SELIC rate to 8.3% in 2013 from 8.6% in 2012. The decrease of 2.6% in interest on loan and leases is due to a change in our loan portfolio mix towards lower risk clients and products, consequently resulting in lower spreads and delinquency levels.
In 2012, the 1.0% decrease in interest and similar income compared to 2011, was mainly due to the reduction in the SELIC rate, which resulted in a decrease in interest on Central Bank compulsory deposits and in interest on financial assets held for trading, partially offset by the increase of 4.5% in interest on loan and lease transactions (mainly due to the increase in volumes) and in interest on available-for-sale financial assets.
Changes in volume and yield/rate in loan and lease transaction, trading assets and Central Bank compulsory deposits are detailed below (see Attachments: item Select Statistical Information, Changes in Interest Income and Expenses – Volume and Rate Analysis for further information).
R$ million
Below is the composition of the carrying amount of loan operations and lease operations by type, sector of debtor, maturity and concentration:
The increase in loan and lease transactions, both in 2012 and in 2013 was due to the higher average volumes of loans and lease transactions, principally due to the growth in the volume of credit card lending, payroll loans, mortgage loans and loans to corporate clients.
Since 2011, we have focused on reducing the risks of our loan portfolio. As a result, our mortgage, payroll, corporate and Latin America (ex-Brazil) loan portfolios have grown more rapidly, while our vehicle and small companies’ portfolios have decreased. Our mortgage loan portfolio has grown in line with the market and we have maintained a conservative
approach regarding collaterals. In 2013, the LTV (loan-to-value: ratio between the amount of the financing and the value of the real estate properties) of vintages originated remained steady at approximately 60%. Our payroll loan portfolio has grown faster than our personal loan portfolio not only because of the emphasis we have given to it within our branch network but also because of our association with Banco BMG for payroll loan origination, which reached a balance of R$7,111 million on December 31, 2013. In Latin America, excluding Brazil (i.e., Argentina, Chile, Colombia, Paraguay and Uruguay) we grew 33.5% in 2013 and 41.0% in 2012, both because of organic growth and because of the depreciation of the realagainst the currencies of those countries.
The changes in SELIC also affected our total interest expenses. In 2013, the SELIC fell to 8.3% as of December 31, 2013 compared to 8.6% as of December 31, 2012 and 11.8% as of December 31, 2011.
In 2013, the decrease in the SELIC rate reduced our interest expenses for securities sold under repurchase agreements and for deposits, despite a growth in the average balances of these portfolios compared to 2012 and 2011 (for further details, see section Performance, item Financial Performance Liabilities, Funding).
Dividend income totaled R$205 million for the year ended December 31, 2013, R$323 million for the same period in 2012, and R$361 million for the same period in 2011, due to lower income from dividends of other companies.
Net gain (loss) from investment securities and derivatives totaled a loss of R$5,924 million for the year ended December 31, 2013, a gain of R$1,463 million for the same period in 2012, and a gain of R$1,251 million for the same period in 2011, mainly to our risk management strategy, particularly those associated with derivative instruments used to hedge our investments abroad.
Foreign exchange results and exchange variation on transactions totaled R$6,594 million for the year ended December 31, 2013, R$3,755 million for the same period in 2012 and R$4,998 million for the same period in 2011. The changes were due mainly to the effect from derivative financial instruments used to hedge the impact of exchange rate variation on our investments in subsidiaries abroad.
The following table shows the main components of our non-interest income:
In 2013, our non-interest income increased, due to an increase in banking service fees, income from insurance, private pension and capitalization transactions before claim and selling expenses, and was partially offset by a decrease in other non-interest income (consisting mainly of gains on sale of assets held for sale, fixed assets and investments in associates and joint ventures and reversal of provisions).
In 2012, our non-interest income increased, due to an increase in other non-interest income, income from insurance, private pension and capitalization transactions before claim and selling expenses, and was partially offset by a decrease in banking service fees.
Banking service fees refer to the sum of fees from current account services, asset management, collection, credit card services, guarantees issued and credit lines, brokerage commission and other fees. In 2013, the increase in banking service fee revenues was mainly due to income from fees from credit card services, influenced by the larger revenues from credit card annual fees, increase in sales and the increase in the number of equipment (POS) rented during in the period, and to income from current account services, influenced by the increase in the volume of product packages and services, one of the most significant of which is a package that converts fees paid by clients into mobile phone credits. New subscriptions to current account service product packages and the adjustment of services provided to our Uniclass clients and by our Itaú Empresas business unit also contributed for this growth. The growth in banking service fees and other fees income is in line with our strategy to diversify our income, mainly to make it less dependent on changes in interest rates.
In 2012, the decrease in banking service fees revenues was mainly due to a lower income from asset management (mainly from private pension funds) and to a decrease in checking account fees (which followed price changes by our competitors), partially offset by an increase in our volume of transactions with clients.
In 2013, income from insurance, private pension and capitalization transactions before claim and selling expenses increased, mainly due to lower expenses as a result of change in reserves for insurance and private pension, partially offset by the decrease in income from insurance and private pension.
In 2012, income from insurance, private pension and capitalization transactions before claim and selling expenses increased, mainly due to a higher volume of pension plan transactions, related to the 28.3% growth in the technical provisions from private pension, totaling R$81,198 million, and an increase in the retained premiums, principally group life and DPVAT (mandatory insurance for personal injury caused by motor vehicles).
In 2013, other income decreased, mainly influenced by the effect of the sale of our interest in Serasa S.A. in 2012.
In 2012, other income reflected the sale of our 16.14% interest in Serasa S.A. to Experian Brasil Ltda., which generated a gain of R$1,542 million in 2012.
In 2013, our expenses for allowance for loan and lease losses decreased 25.5%, mainly related to a lower delinquency ratios in our small companies and personal loans portfolios, which contributed with R$5,614, or 92%, to the R$6,126 million total decrease. The delinquency ratios of our vehicle loan portfolio are still in a downward trend and the expenses for allowance for loan and lease losses decreased 14.0% in 2013. These reductions are due to the changes in our portfolio mix, initiated in the second half of 2011 and still ongoing.
In 2012, our expenses for allowance for loan and lease losses increased R$3,944 million, or 19.7%, mainly because of the higher delinquency ratios observed in the personal and small companies loan portfolios. In the second half of 2011, we decided to change our portfolio mix to include lower-risk loans and clients (real estate, payroll, corporate and Latin America loan portfolios), and this change resulted in the reduction of delinquency ratios (as presented below) and, consequently, in a reduction in expenses for allowance for loan and lease losses. Because the effects of such a change take time to be observed in a large portfolio, the results of this change to our portfolio mix became more evident in 2013, when expenses decreased R$6,126 million, or 25.5%, compared to 2012.
The NPL ratios presented as of December 31, 2013 are their lowest levels since the November, 2008, the year of the association of Itaú and Unibanco.
In 2013, the recovery of loans written off as losses increased by 8.5%, or R$398 million. In 2012, primarily due to a change in accounting criteria, our recovery decreased R$814; if this change was disregarded, these recoveries would have decreased R$205 million. The change resulted in discounts granted in the renegotiation of credits already written off as losses (in the total amount of R$609 million) being deducted from income from recovery of loans written off as losses instead of being deducted from interest and similar income, as in 2011.
In 2013 expenses for claims decreased R$165 million, primarily due to a reduction in the claims ratio to specified and all risks, credit life and warranty extension – assets. In 2012 the increase of R$874 million in expenses for claims was mainly due to a growth of 37.4% in our insurance portfolio and to an increase in the claim ratios of group life and specified and all risks.
Recovery of claims under reinsurance decreased R$205 million in 2013, mainly due to a reduction in the recovery of claims from corporate insurance risks that have reinsurance. In 2012, recovery of claims under reinsurance increased R$350 million, or 37.4%, compared to 2011.
We have kept a tight control on costs and have partially offset the rise in costs (brought by the growth of operations, by the rise in salaries and benefits due to collective labor agreements and by the impact of inflation in our administrative costs) with efficiency gains. In 2013, the number of employees decreased 1.3% to 95,696, in spite of the arrival of 1,194 employees from Credicard in December 2013. In 2012, the number of employees decreased 7.2% to 96,977, mainly due to restructuring initiatives in our consumer credit business unit that integrated systems and processes into a single platform. This restructuring was conducted with a view to capture synergies across our consumer operations and in connection with a strategic review of certain businesses.
In 2013, the increase in personnel expenses was mainly a result of the growth in expenses related to compensation, payroll taxes, benefits and profit sharing, which contributed with R$1,042 million to the R$1,528 million increase in personnel expenses. The increase was mainly due to the annual collective bargaining agreement reached in October 2013, which increased these expenses by 8.0%, on top of the agreement reached in September 2012, which grew compensation by 7.5% and benefits by 8.5%. In 2012, the increase in personnel expenses was mainly a result of the growth in expenses related to employee terminations and labor claims, which contributed R$906 million to the R$959 million increase in personnel expenses. The growth of 9.0% in compensation, charges and benefits was due to the collective bargaining agreement reached in September 2011 and the increases of 7.5% in compensation and of 8.5% in benefits from the collective bargaining agreement from 2012, which were offset by the efficiency gained from the reduction in employees mentioned above.
In 2013, administrative expenses increased by 4.7%, mainly because of growths in advertising, promotions and publication expenses and rent, which represented with R$545 million of the R$592 million increase in administrative expenses. The increase in advertising, promotions and publications expenses was related to the FIFA Confederations Cup, Rock In Rio, Itaú Bike and the repositioning of the Rede and Hiper brands. Despite the organic growth of our operations and the effect of inflation on most contracts and costs, such as utilities, rent and other, administrative expenses grew by only 1.4% in 2012 (while consumer inflation increased by 5.8%, according to the IPCA index), offset by decreases in expenses with installations, transportation and materials.
In 2013, other non-interest expenses decreased 4.2%, mainly due to the fact that the disposal of our investment in Banco BPI S.A., increased such expenses by R$302 million in 2012. Our other expenses increased R$1,265 million in 2012, mainly due to increases of R$312 million related to our credit card rewards program, R$302 million due to the disposal of our investment in Banco BPI S.A. and R$713 million from provisions for civil lawsuits, which include provisions for civil lawsuits related to economic plans. Please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 26 – General and Administrative Expenses and Note 32 – Provisions, Contingencies and Other Commitments for further details.
In 2013, tax expenses (ISS, PIS, Cofins and other tax expenses) amounted to R$4,341 million, a decrease of R$156 million, due to a reduction in banking product. In 2012, tax expenses (ISS, PIS, Cofins and other tax expenses) amounted to R$4,497 million, an increase of R$330 million, or 7.9% compared to 2011.
Certain amounts of income and expenses are recognized in our income statement but do not affect our taxable basis. Conversely, certain amounts are considered taxable income or deductible expenses in the calculation our taxes on income but do not affect our income statement. Those items are referred to as “permanent differences”. Our total income tax and social contribution includes current income tax and social contribution as well as deferred income tax and social contribution. The former is the tax expense under Brazilian tax laws for the period, and the latter is the tax expense resulting from permanent differences.
In 2013, income tax and social contribution amounted R$4,343 million, a decrease of R$118 million, or 2.8%. In 2012 amounted R$4,225 million, a reduction of R$584 million, or 2.8% compared to 2011.
Basis of presentation of segment information
Our segment information is based on reports used by senior management to assess the financial performance of our businesses and to make decisions regarding the allocation of funds for investment and other purposes.
Segment information is prepared according to accounting practices adopted in Brazil (our segment information is not prepared in accordance with IFRS) but includes the following pro forma adjustments: (i) the recognition of the impact related to allocated capital using a proprietary model; (ii) the use of funding and cost of capital, according to market prices, using certain managerial criteria; (iii) the exclusion of non-recurring events from our results and (iv) the reclassification of the tax effects from hedging transactions we enter into for our investments abroad. Please refer to section Performance, item Consolidated Financial Statements (IFRS), Note 34 – Segment Information for further details.
Capital and funding costs are allocated to each segment based on Tier I Capital rules and according to a proprietary model, while the surplus capital and subordinated debt are allocated to the segment Activities with the market and Corporation. The tax effects of payments of interest on our own capital have been allocated to the segments proportionally to the amount of the Tier I Capital of each segment. Additionally, share of income of unconsolidated companies not related to segments and non-controlling interest were allocated to the segment Activities with the market and Corporation.
The Efficiency and Risk Adjusted Efficiency ratios are calculated based on managerial information, as presented below:
The Efficiency and Risk Efficiency Ratios are non-GAAP measures and we disclose them herein as we consider them to be an important measure to understand how we manage our overhead costs. We disclose this measure to the market on a quarterly basis.
Low efficiency ratios indicate a better performance, once this ratio measures the proportion of expenses over revenues. The risk-adjusted efficiency ratio includes the risk portions associated with banking transactions (result of the allowance for loan and lease losses and recovery of loans written off as losses) and insurance and pension plan transactions (claims).
In 2013, we made changes to our consolidation criteria for managerial results in order to better align our presentation of managerial results with the way our management monitors results. These adjustments only rearrange certain revenues and costs within units, therefore they do not affect the net income disclosed. In addition, because of changes implemented in our structure, we changed the names of our segments to: (i) Commercial Bank – Retail, (ii) Wholesale Bank, (iii) Consumer Credit – Retail and (iv) Activities with the market and Corporation. The results of middle market companies, previously allocated to the Commercial Bank segment, are now reported in the Wholesale Bank segment. Our consolidated financial statements for the years 2012 and 2011 do not present the changes in our structure implemented in 2013.
We present below a summary of the results from our operating segments. The adjustments column presents effects of the differences between the segmented results (substantially in line with the accounting practices adopted in Brazil) and those calculated according to the principles adopted in our consolidated financial statements in IFRS. The following discussion should be read in conjunction with our consolidated financial statements, especially Note 34 regarding segment information in section Performance, item Consolidated Financial Statements (IFRS) as well as the information included section Itaú Unibanco Holding, item In Numbers, Selected Financial Data (IFRS).
1. Includes net interest and similar income and expenses, dividend income, net gain (loss) from investment securities and derivatives, results from foreing exchange variation of transactions abroad.
Revenues from operations in Brazil and abroad
We conduct most of our business activities in Brazil, but we do not break down our revenues by geographic market within Brazil. Our interest income from loans and leases, banking service fees and income from insurance, private pension and capitalization transactions are divided between revenues earned in Brazil and abroad. The following information is presented in IFRS, after eliminations on consolidation.
The table below presents revenues abroad by business segments:
Commercial bank – retail
Consolidated statement of income
As from the first quarter of 2013, the results of the middle market companies, previously allocated to the Commercial Bank segment, have been reported in the Wholesale Bank segment.
In 2013, the net income for the Commercial Bank – Retail segment increased 12.1% mainly due to the positive impact in net income of a 50.2% decrease in the losses on loans and claims mainly influenced by the change in the credit profile of our portfolio. Furthermore, income from insurance, private pension and capitalization transactions before claim and selling expenses increased 37.0% and non-interest expenses decreased 4.1%, mainly due to the migration of the middle market companies to the Wholesale Bank segment. On the other hand, with a negative impact on the net income, interest margin decreased 27.6% also as a consequence of the middle market migration along with the change in our credit portfolio mix.
In 2012, net income for our Commercial Bank – Retail segment decreased 17.4%, mainly because of the increase in delinquency observed in our personal loans portfolio. The increase in revenues was driven by the 12.6% growth of banking service fees (related to the increase in volume of services and in our customer base), the 3.8% growth in interest margin, driven by a 12.8% growth of the loan portfolio, and the 15.3% growth in income from insurance, private pension, and capitalization transactions (mainly because of the growth in pension plans and in life insurance premiums). These positive effects were not enough to offset the 38.9% increase in losses on loans and claims. The increase in expenses for allowance for loan and lease losses was mainly due to the increase in delinquency levels observed in our portfolios of personal loans and of loans to small companies, along with the growth in our total loan portfolio.
Non-interest expenses increased below inflation, mainly driven by a higher volume of transactions, as a result of a growth in our banking operations, as well as by an increase in personnel expenses, which were affected by the collective bargaining agreements reached in both 2011 and 2012.
Wholesale bank
As from the first quarter of 2013, the results of the middle market companies previously allocated to the Commercial Bank segment have been reported in Wholesale Bank segment.
In 2013, net income for our Wholesale Bank segment increased 72.4% from the previous year. Banking product increased 101.8% as the interest margin and the banking service fees were 108.4% and 63.1% higher than in 2012. In addition to the effect of the result of the middle market companies, the increase in the corporate loan portfolio and in fees from investment banking, cash management and payments services (with REDE) were responsible for this sharp improvement in banking product.
Losses on loans and claims increased 284.3%, due to the migration of middle market companies from the Commercial Bank – Retail segment. Our expenses for allowance for loan and lease losses with middle market companies were R$2,454 million in 2013, 15.5% lower than in 2012. Also with negative impact on net income, the non-interest expenses increased 83.2% as we had more expenses with information technology, telecommunication and debt collection.
In 2012, net income for our Wholesale Bank (previously Itaú BBA) segment decreased by 9.2%, mainly because of the increase in expenses for allowance for loan and lease losses that reflected a recognition of general provisions for certain economic groups as a result of their classification into risk rating categories. The increase in interest margin was mainly due to the 13.8% increase in the large companies’ credit portfolio and an increase in income from dividends. Banking service fees also grew, due to an increase in revenues from investment banking transactions and fees from credit transactions.
Our expenses for allowance for loan and lease losses reflected the growth of our loan portfolio and the rating revision of some economic groups, as previously mentioned, although there was no increase in overdue balances in our corporate portfolio and 92.1% of such portfolio had “B” or better ratings in accordance with criteria set forth in CMN regulation as of December 31, 2012. Non-interest expenses increased because of the impact of the collective bargaining agreements on personnel costs and the 14% increase in the number of employees in the segment.
Consumer credit – retail
In 2013, net income for our Consumer credit – Retail segment increased 42.2% from 2012, mainly due to the 4.8% increase in the banking product and the 6.2% decrease in losses on loans and claims. In 2013, we were more conservative in our credit appetite with respect to the vehicles portfolio, applying stricter requirements for granting loans in this period, which have led to increased down payment requirements and shorter financing terms. This strategy reduced our expenses for allowance for loan and lease losses from R$6,111 in 2012 to R$5,996 in 2013, an 1.9% decrease year over year. The 4.8% improvement in banking product was the result of the 11.1% increase in the interest margin that was partially offset by the decrease of 3.9% in banking services fees. The increase in the interest margin was mainly due to the results of Itaú BMG Consignado and to the change in the consolidation criteria of our subsidiaries FIC and Luizacred, which were consolidated proportionally based on our fifty percent interest in 2012, and in 2013 became fully consolidated. The banking services fees decrease was mainly due to the decrease in our vehicles portfolio granting.
In 2012, net income for our consumer credit segment decreased 13.8% because of the sharp growth of 16.0% in loan loss provision expenses. The increase in delinquency observed in our vehicle loan portfolio not only increased our loan loss provision expenses but also drove our interest margin and credit fees down, as the portfolio decreased by 14.6%. However, the growth in interest revenues and service fees from our non-account holders’ credit card portfolio offset the decreases in revenues from the vehicle portfolio and allowed the segment to absorb part of the losses. The growth in credit card fees from Redecard, in particular, was instrumental for this offsetting. Also, there was a reduction in our non-interest expenses, mainly as a result of the restructuring of our consumer credit business unit, which included a revision of agreements and partnerships along with a reduction in the number of employees. This restructuring was partially offset by the increases in compensation and benefits caused by the collective bargaining agreements.
Activities with the market and corporation
The Activities with the Market and Corporation segment includes the result from the investment of our excess capital, costs from our excess subordinated debt and the net balance of tax assets and liabilities. It also includes the financial margin on market transactions, costs of treasury operations, equity in the earnings of companies that are not linked to any segments, as well as adjustments related to minority shareholdings in subsidiaries and our interest in Porto Seguro S.A.
In 2013, net income from Activities with the Market and Corporation decreased 27.8% as interest margin decreased 35.7% and non-interest expenses increased 65.0% from the previous year. Non-interest expenses increased in 2013 compared to 2012, mainly due to lower expenses in post-employment benefits in 2012 related to certain pension plans granted to employees in the past (please refer to section Performance, item Consolidated financial statements (IFRS) – Note 29 Post-employment benefits).
Losses on loans and claims decreased from R$251 million in 2012 to a loss of R$82 million in 2013. These changes were due to differences in revenues and expenses allocation to other operating segments.
In 2012, the segment’s net income increased 37.5% mainly because of the 15.7% increase in net interest margin, which was primarily due to higher gains from the investment of our excess capital compared to 2011. Income tax and social contribution increased due to higher income before income tax and social contribution. The decrease of R$296 million in non-controlling interest in subsidiaries was mainly due to our acquisition of the remaining minority shares of Redecard on September 24, 2012.
Changes in cash flows
The following table sets forth the main variations in our cash flows:
Operating activities
In 2013, the changes in cash flows from operating activities resulted from an increase in deposits, in securities purchased under agreements to resell them to our clients and funds from interbank markets partially offset by increases in loan transactions and in compulsory deposits with the Central Bank. In 2012, the changes in cash flows from operating activities resulted primarily from an increase in deposits received under securities repurchase agreements and a decrease in compulsory deposits with the Central Bank. This was
partially offset by increases in securities purchased under agreements to resell, loan transactions and financial assets held for trading and other assets. In 2011, the changes in cash flows from operating activities resulted mainly from increases in loan transactions and securities purchased under agreements to resell, partially offset by an increase in deposits.
Investing activities
In 2013, 2012 and 2011, the increase in purchase of available-for-sale assets was the main cause for the outflows in our cash flow from investing activities offset by cash received from sale of available-for-sale assets.
Financing activities
In 2013, the changes in cash flows from financing activities were primarily a result of a decrease in redemptions in institutional markets and dividends and interest on capital paid. In 2012, the changes in cash flows from financing activities were primarily a result of a decrease in redemptions of our subordinated debt in institutional markets and the acquisition of the remaining minority interest in Redecard, partially offset by an increase in funding from institutional markets. In 2011, the changes in cash flows from financing activities were primarily a result of a decrease in redemptions of our subordinated debt in institutional markets and dividends and interest on capital paid, partially offset by an increase in funding from institutional markets. Furthermore, we paid dividends and interest on capital in the amount of R$5,206 million and R$4,588 million in 2012 and 2011, respectively. In 2012 we purchased an amount of R$122 million in treasury shares, which generated a cash outflow of the same amount.
Liquidity and capital resources
Our board of directors determines our policy regarding liquidity risk management, and establishes broad quantitative liquidity risk management limits in line with our risk appetite. The Superior Institutional Treasury and Liquidity Committee (CSTIL), composed of members of senior management, is responsible for strategic liquidity risk management in line with the board-approved liquidity risk framework and risk appetite. In establishing our guidelines, the Superior Institutional Treasury and Liquidity Committee (CSTIL) considers the liquidity implications of each market segment and product. The institutional treasury unit of Itaú Unibanco Holding is responsible for day-to-day management of the Itaú Unibanco Group’s liquidity profile, within the parameters set by the Board of Directors and the Superior Institutional Treasury and Liquidity Committee (CSTIL).This includes an oversight responsibility with respect to all business units operating outside of Brazil.
We maintain separate liquidity pools at our Brazilian operations and at each of our subsidiaries in Latin America and Europe. Our Brazilian operations include the financial institutions in Brazil and the entities used by the Brazilian operations for funding and serving their clients abroad. Each subsidiary in Latin America (e.g., in Chile, Argentina, Uruguay and Paraguay) and in Europe has its own treasury function with appropriate autonomy to manage liquidity according to local needs and regulations, while remaining in compliance with the liquidity limits established by Itaú Unibanco Holding senior management. In general, there are rarely liquidity transfers between subsidiaries or between the head office and a subsidiary, except under very specific circumstances (e.g., targeted capital increases). The United Kingdom and Colombia are the only countries in which we operate where local regulators have established local liquidity levels and regulations.
CMN regulation also establishes capital conservation and countercyclical buffers for Brazilian financial institutions, and determines their minimum percentages as well as which sanctions and limitations will apply in case of non-compliance with such additional requirements. Please refer to section Our risk management – Regulatory environment, Implementation of Basel III in Brazil for further details.
We define our consolidated group operational liquidity reserve as the total amount of assets that can be rapidly turned into cash, based on local market practices and legal regulations. The reserve generally includes: cash and deposits on demand, funded positions of securities purchased under agreements to resell and unencumbered government securities.
The following table presents our operational reserve as of December 31, 2013, 2012 and 2011, as well as the yearly average.
1. Average calculated based on the quarterly Financial Reports.
Management controls our liquidity reserves by projecting the resources that will be available for investment by our treasury department. The technique we employ involves the statistical projection of scenarios for our assets and liabilities, considering the liquidity profiles of our counterparties.
Short-term minimum liquidity limits are defined according to guidelines set by the Superior Institutional Treasury and Liquidity Committee (CSTIL). These limits aim to ensure that the Itaú Unibanco Group always has sufficient liquidity available sufficient to cover unforeseen market events. These limits are revised periodically, based on the projection of cash needs in atypical market situations (i.e., stress scenarios).
Management of liquidity makes it possible for us to simultaneously meet our operating requirements, protect our capital and exploit market opportunities. Our strategy is to maintain adequate liquidity to meet our present and future financial obligations and to capitalize on business opportunities as they arise.
We are exposed to effects of the disruptions and volatility in the global financial markets and the economies in those countries where we do business, especially Brazil. However, due to our stable sources of funding, which include a large deposit base, the large number of correspondent banks with which we have long-standing relationships, as well as facilities in place which enable us to access further funding when required, we have not historically experienced liquidity challenges, even during periods of disruption in the international financial markets. Please refer to section Performance – Financial Performance, item Liabilities for further details about Funding.
The following table sets forth our average deposits and borrowings:
Our principal sources of funding are interest-bearing deposits, deposits received under repurchase agreements, on-lending from government financial institutions, lines of credit with foreign banks and the issuance of securities abroad. Please refer to section Performance, item Consolidated Financial Statements, Note 17 – Deposits – for further details about Funding.
Some of our long-term debt provides for acceleration of the outstanding principal balance upon the occurrence of specified events, which are events ordinarily found in long-term financing agreements. As of December 31, 2013, none of these events, including any events of default or failure to satisfy financial covenants, have occurred, and we have no reason to believe that it is reasonably likely that any of these events will occur in 2014.
Under Brazilian law, cash dividends may only be paid if the subsidiary paying such dividends has reported a profit in its financial statements. In addition, subsidiaries that are financial institutions are prohibited from making loans to Itaú Unibanco Holding, but they are allowed to make deposits in Itaú Unibanco Holding, which represent interbank certificates of deposit (Certificado de Depósito Interbancário, or “CDI”). These restrictions have not had, and are not expected to have, a material impact on our ability to meet our cash obligations.
Seasonality
Generally our retail banking and our credit card businesses have some seasonality, with increased levels of retail and credit card transactions during the Christmas season and a subsequent decrease of these levels at the beginning of the year. We also have some seasonality in our banking service fees related to collection services at the beginning of the year, which is when taxes and other fiscal contributions are generally paid.
Consolidated financial statements (IFRS)
The following financial statements, together with the report of the independent registered public accounting firm, are part of this annual report:
Management’s Report on Internal Control over Financial Reporting
The management of Itaú Unibanco Holding S.A is responsible for establishing and maintaining adequate internal control over financial reporting for the company.
The company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). The company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposals of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to allow for the preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those controls determined to be effective may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or a decline in the level of compliance with policies or procedures may occur.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, our management used the criteria set forth in “Internal Control – Integrated Framework (1992)”issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation and those criteria, our management has concluded that our internal control over financial reporting was effective as of December 31, 2013.
In connection with the evaluation required by the Exchange Act Rule 13a-15(d), our management, concluded that the changes that occurred during the year ended December 31, 2013 have not materially affected, or are not reasonably likely to materially affect, our internal control over financial reporting.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, has been audited by PricewaterhouseCoopers Auditores Independentes, an independent registered public accounting firm, as stated in their report which appears herein.
A signed original copy of this report has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request.
Date: April 1, 2014
Report of Independent Registered Public Accounting Firm
To the Board of Directors and ShareholdersItaú Unibanco Holding S.A.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, cash flows and changes in stockholders’ equity present fairly, in all material respects, the financial position of Itaú Unibanco Holding S.A. and its subsidiaries (“Itaú Unibanco Holding”) at December 31, 2013 and December 31, 2012 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, Itaú Unibanco Holding maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Itaú Unibanco Holding’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express opinions on these financial statements and on the Itaú Unibanco Holding’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
São Paulo, Brazil
April 1, 2014
Itaú Unibanco Holding S.A.
Consolidated Balance Sheet
(In millions of Reais)
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statement of Income – Periods ended
(In millions of Reais, except for number of shares and earnings per share information)
Consolidated Statement of Comprehensive IncomePeriods ended
(*) Amounts that will not be subsequently reclassified to income.
Consolidated Statement of Changes in Stockholders’Equity (Notes 21 and 22)
Periods ended December 31, 2013, 2012 and 2011
Consolidated Statement of Cash Flows
(*) Includes the amounts of interest received and paid as shown above.
Notes to the Consolidated Financial Statements At December 31, 2013, 2012 and 2011
(In millions of Reais, except information per share)
Note 1 – Overview
ITAÚ UNIBANCO HOLDING S.A. (ITAÚ UNIBANCO HOLDING) is a publicly-held company,organized and existing under the Laws of Brazil. The head office of ITAÚ UNIBANCO HOLDING is located at Praça Alfredo Egydio de Souza Aranha, n° 100, in the city of São Paulo, Brazil.
ITAÚ UNIBANCO HOLDING provides a wide range of financial products and services to individual and corporate clients in Brazil and abroad,whether these clients are Brazilian-related or non-related customers throughout its international branches,subsidiaries and affiliates. In Brazil we serve retail clients through the branch network of Itaú Unibanco S.A. (“Itaú Unibanco”) and to wholesale clients through Banco Itaú BBA S.A. (“Itaú BBA”), and overseas through branches in New York,Grand Cayman, Tokyo, and Nassau,and through subsidiaries mainly in Argentina, Chile, the US (New York and Miami), and Europe (Lisbon, London, Luxembourg and Switzerland), Cayman Islands,Paraguay and Uruguay. In 2012, we started operations in Colombia, which will gradually strengthen over 2013.
ITAÚ UNIBANCO HOLDING is a holding company controlled by Itaú Unibanco Participações S.A. (“IUPAR”), a holding company which owns 51% of our common shares, and which is jointly controlled by (i) Itaúsa Investimentos Itaú S.A., (“Itaúsa”), a holding company controlled by members of the Egydio de Souza Aranha family, and (ii) Companhia E. Johnston de Participações (“E. Johnston”), a holding company controlled by the Moreira Salles family.Itaúsa also directly holds 38.7% of ITAÚ UNIBANCO HOLDING common shares.
As described in Note 34, the operations of ITAÚ UNIBANCO HOLDING are divided into four operating and reportable segments: (1) Commercial Bank – Retail, which offers a wide range of banking services for retail individuals (under several areas specialized in distribution and under several brands,such as Itaú, Uniclass and Personnalité) or high net worth clients (Private Bank) and for companies (very small and small companies), including services such as asset management, investor services, insurance,private pension plans, capitalization plans and credit cards issued to account holders; (2) Consumer Credit - Retail,which offers financial products and services to an universe beyond account holders such as vehicle financing,credit card transactions and consumer financing; (3) Wholesale Bank,which offers wholesale products and services to large and medium-sized companies,as well as investment bank activities, and (4) The Activities with the Market + Corporation segment basically manages the interest income associated with ITAÚ UNIBANCO HOLDING capital surplus,subordinated debt surplus and the net balance of tax credits and debits,as well as the net interest income from the trading of financial assets through proprietary positions (desks), management of currency interest rate gaps and other risk factors and arbitrage opportunities in the foreign and domestic markets.
These consolidated financial statements were approved by the Executive Board on February 03, 2013.
Note 2 – Significant accounting policies
The significant accounting policies applied in the preparation of these consolidated financial statements are set out below.
2.1. Basis of Preparation
These consolidated financial statements of ITAÚ UNIBANCO HOLDING were prepared taking into consideration that the National Monetary Council (CMN) Resolution No. 3,786 established that starting December 31, 2010, annual consolidated financial statements shall be prepared in accordance with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standard Board (IASB).
These consolidated financial statements have been presented following the accounting practices described in this note.
In the preparation of these consolidated financial statements, ITAÚ UNIBANCO HOLDING adopted the criteria for recognition, measurement,and disclosure established in the IFRS pronouncements issued by the IASB,and the interpretations of the International Financial Reporting Interpretation Committee (IFRIC) described in this note. For this reason, these Consolidated Financial Statements are in full conformity with the pronouncements issued by the IASB and the interpretations issued by the IFRIC.
The Consolidated Statement of Cash Flows shows the changes in cash and cash equivalents during the period from operating,investing, and financing activities.Cash and cash equivalents include highly-liquid financial investments (Note 2.4c).
Cash flows from operating activities are presented under the indirect method.Consolidated net income is adjusted for non-monetary items, such as measurement gains and losses, changes in provisions and in receivables and liabilities balances. All income and expense arising from non-monetary transactions, attributable to investing and financing activities,are eliminated. Interest received or paid is classified as operating cash flows.
In order to improve the presentation and classification of insurance operations in the Consolidated Statement of Income,in accordance with IFRS 4, reclassifications adjustments were made in relation to insurance operations. Previously,income from insurance activities was presented in the Consolidated Statement of Income net of reinsurance held under the line item Income from Insurance and Private Pension and gross figures were presented in Note 30b III.In these financial statements this information will be presented by their gross amounts on separate line items in the Consolidated Statement of Income under the lines Income from insurance and private pension and Reinsurance premiums.Expenses for claims which previously were presented net under the line item Expenses for claims will also be presented gross of the recovery values of claims with reinsurance held under the line item Expenses for claims and Recovery with Reinsurance Claims.
2.2. New pronouncements; changes to and interpretations of existing pronouncements
a) Accounting pronouncements applicable for period ended December 31, 2013
b) Accounting pronouncements recently issued and applicable in future periods
The following pronouncements will become applicable for periods after the date of these consolidated financial statements and were not early adopted:
is allowed by IASB. Any possible impacts arising from adopting this amendment will be assessed up to the date this standard comes into force.
2.3. Accounting estimates and judgments
The preparation of consolidated financial statements in accordance with IFRS requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities,and contingent assets and liabilities at the date of the consolidated financial statements,as well as the reported amounts of revenue, expenses,gains, and losses over the reporting and subsequent periods,because actual results may differ from those determined in accordance with such estimates and assumptions.
All estimates and assumptions made by Management are in accordance with IFRS and represent the current best estimates made in conformity with the applicable standards. Estimates and judgments are evaluated on an ongoing basis, considering past experience and other factors.
The Consolidated Financial Statements reflect a variety of estimates and assumptions.The critical accounting estimates and assumptions that have the most significant impact on the carrying amounts of assets and liabilities are described below:
a) Allowance for loan and lease losses
ITAÚ UNIBANCO HOLDING periodically reviews its portfolio of loans and receivables to evaluate the existence of impairment.
In order to determine the amount of the allowance for loan and lease losses in the Consolidated Statements of Income with respect to certain receivables or group of receivables, ITAÚ UNIBANCO HOLDING exercises its judgment to determine whether objective evidence indicates that an event of loss has occurred.This evidence may include observable data that indicates that an adverse change has occurred in relation to the expected cash inflows from the counterparty or the existence of a change in local or international economic conditions that correlates with impairment. Management uses estimates based on the history of loss experience in loan operations with similar characteristics and with similar objective evidence of impairment. The methodology and assumptions used for estimating future cash flows are regularly reviewed by Management, considering the adequacy of models and sufficiency of provision volumes in view of the experience of incurred loss.
ITAÚ UNIBANCO HOLDING uses statistical models to calculate the Allowance for Loan and Lease Losses in the homogeneous loan portfolio.ITAÚ UNIBANCO HOLDING periodically carries out procedures to improve these estimates by aligning the required provisions to the levels of losses observed by the historical behavior (as described in Note 2.4g VIII). This alignment aims at ensuring that the volume of allowances reflects the current economic conditions,the composition of the loan portfolios, the quality of guarantees obtained and the profile of our clients. In 2013, there were no such improvements of model assumptions, in 2012, the improvement of model assumptions gave rise to a growth in the level of provisions in the amount of R$ 1,492.
The allowance amounted to R$ 22,235 (R$ 25,713 at December 31, 2012).
If the present value of the estimated cash flows were to have a positive or negative variation of 1%, the Allowance for Loan and Lease Losses would be increased or decreased by approximately R$ 3,895 (R$ 3,413 at December 31, 2012).
The details on methodology and assumptions used by the Management are disclosed in note 2.4g VIII.
b) Deferred income tax and social contribution
As explained in item 2.4n, deferred tax assets are recognized only in relation to temporary differences and loss carryforwards to the extent that it is probable that ITAÚ UNIBANCO HOLDING will generate future taxable profit for their utilization. The expected realization of ITAÚ UNIBANCO HOLDING´s deferred tax asset is based on the projection of future income and other technical studies, as disclosed in Note 27.The carrying amount of deferred tax assets was R$ 39,545 (R$ 35,003 as of December 31,2012).
c) Fair value of financial instruments, including derivatives
The fair value of financial instruments is measured on a recurring basis,in conformity with the requirements of IAS 39 –“Financial instruments: recognition and measurement.Financial instruments recorded at fair value are assets amounting to R$ 257,223 (R$ 248,202 at December 31,2012) of which R$ 11,366 are derivatives (R$ 11,597 at December 31,2012) and liabilities in the amount of R$ 11,776 (R$ 11,711 at December 31,2012) of which R$ 11,405 are derivatives (R$ 11,069 at December 31,2012). The fair value of financial instruments, including derivatives that are not traded in active markets, is calculated by using valuation techniques. This calculation is based on assumptions that take into consideration ITAÚ UNIBANCO HOLDING Management´s judgment about market information and conditions existing at the balance sheet date.
ITAÚ UNIBANCO HOLDING ranks the fair value measurements using a fair value hierarchy that reflects the significance of inputs adopted in the measurement process. There are three broad levels related to the fair value hierarchy, detailed in Note 31.
The team in charge of the pricing of assets, in accordance with the governance defined by the committee and regulatory circulars, carries out critical analyses of the information extracted from the market and from time to time reassesses the long-term of indexes.At the end of the monthly closings, the areas meet for a new round of analyses for the maintenance of the classification in connection with the fair value hierarchy.
ITAÚ UNIBANCO HOLDING believes that all methodologies adopted are appropriate and consistent with market participants.Regardless of this fact, the adoption of other methodologies or use of different assumptions to estimate fair values may result in different fair value estimates.
The methodologies used to estimate the fair value of certain financial instruments are described in Note 31.
d) Defined benefit pension plan
At December 31, 2013, an amount of R$ (358) (R$ 29 at December 31, 2012) was recognized as an asset related to pension plans.The current amount of the pension plan obligations is obtained from actuarial calculations that use a variety of assumptions.Among the assumptions used for estimating the net cost (income) of these plans is the discount rate.Any changes in these assumptions will affect the carrying amount of pension plan assets and liabilities.
ITAÚ UNIBANCO HOLDING determines the appropriate discount rate at the end of each year,which is used for determining the present value of estimated future cash outflows necessary for settling the pension plan liabilities.In order to determine the appropriate discount rate, ITAÚ UNIBANCO HOLDING considers the interest rates of the Brazilian federal government bonds that are denominated in Brazilian Reais,the currency in which the benefits will be paid, and that have maturity terms approximating the terms of the related liabilities.
Should the discount rate currently used be lower by 0.5% than Management’s estimates,the actuarial amount of the pension plan obligations would be increased by approximately R$ 672, with impact on the amount recognized with effect on Stockholder’s Equity – Other Comprehensive Income before taxes – of R$ 392, net of the effects of Asset Ceiling.
Other important assumptions for pension plan obligations are in part based on current market conditions.Additional information is disclosed in Note 29.
e) Contingent assets and liabilities
ITAÚ UNIBANCO HOLDING periodically reviews its contingencies. These contingencies are evaluated based on Management´s best estimates,taking into account the opinion of legal counsel, when there is a likelihood that financial resources will be required to settle the obligations and the amounts may be reasonably estimated.
Contingencies classified as probable losses are recognized in the Balance Sheet under Provisions.
Contingent amounts are measured using appropriate models and criteria, despite the uncertainty surrounding the ultimate timing and amounts,as detailed in Note 32.
The carrying amount of these contingencies was R$ 18,862 (R$ 19,209 at December 31, 2012).
f) Technical provisions for insurance and pension plan
Technical provisions are liabilities arising from obligations of ITAÚ UNIBANCO HOLDING to its policyholders and participants.These obligations may be short-term liabilities (property and casualty insurance) or medium and long-term liabilities (life insurance and pension plans).
The determination of the actuarial liability is subject to several uncertainties inherent in the coverage of insurance and pension contracts, such as assumptions of persistence,mortality, disability,life expectancy, morbidity,expenses, frequency and severity of claims,conversion of benefits into annuities, redemptions and return on assets.
The estimates for these assumptions are based on the historical experience of ITAÚ UNIBANCO HOLDING, benchmarks and experience of the actuary, in order to comply with best market practices and the continuous review of the actuarial liability. The adjustments resulting from these continuous improvements, when necessary,are recognized in the statement of income for the corresponding period.
Additional information is described in Note 30.
g) Goodwill
The impairment test involves estimates and significant judgments, including the identification of cash generation units and the allocation of goodwill to such units based on the expectations of which ones will benefit with the acquisition. Determining expected cash flows and risk-adjusted interest rate for each unit requires that management exercises judgment and estimates.At December 31, 2013 and 2012,ITAÚ UNIBANCO HOLDING did not identify goodwill impairment losses.
2.4. Summary of main accounting practices
a) Consolidation
I. Subsidiaries
Before January 1, 2013, ITAÚ UNIBANCO HOLDING consolidated its subsidiaries,defined in accordance with IAS 27 – “Consolidated and separate financial statements”,and its specific purpose entities, defined in accordance with the SIC 12 – “Consolidation – special purpose entities”,in its Consolidated Financial Statements. As of January,2013, ITAÚ UNIBANCO
HOLDING adopted IFRS 10 – “Consolidated financial statements”, which replaced IAS 27 and SIC 12.
In accordance with the IFRS 10, subsidiaries are all entities in which ITAÚ UNIBANCO HOLDING holds control.ITAÚ UNIBANCO HOLDING controls an entity when it is exposed to,or is entitled to, its variable returns derived from its involvement with such entity, and has the capacity to impact such returns.
Subsidiaries are fully consolidated as from the date in which ITAÚ UNIBANCO HOLDING obtains its control and are no longer consolidated as from the date such control is lost.
On January 1, 2013 ITAÚ UNIBANCO HOLDING assessed its investments to determine whether the conclusions regarding the consolidation in accordance with IFRS 10 differ from those conclusions reached in accordance with IAS 27 and SIC 12.
No adjustment is required for those investments already consolidated in accordance with IAS 27 and SIC 12 and which remain consolidated in accordance with IFRS 10 on January 1, 2013 or for those investments not consolidated in accordance with IAS 27 and SIC 12 and which continue not being consolidated in accordance with IFRS 10.
The effects arising from adopting the IFRS 10, which gave rise to the change in the accounting policy,resulted in an increase of R$ 489 in the non-controlling stockholders’ equity. We present below the overall amounts related to our investments,previously not consolidated, which started to be consolidated on January 1, 2013:
The following table shows the main consolidated subsidiaries and consolidated joint ventures,as well as the interests of ITAÚ UNIBANCO HOLDING in their voting capital at December 31, 2013, and December 31, 2012:
(1) New company name of Banco Fiat S.A.
(2) Joint ventures previously proportionately consolidated, fully consolidated as of 01/01/2013.
(3) Company merged on 02/01/2013 by Itaú BBA International Limited.
(4) New company name of Banco Banerj S.A.
(5) Company merged on 07/31/2013 by Itaú Unibanco S.A.
(6) New company name of Fiat Administradora de Consórcios Ltda.
(7) Does not include Redeemable Preferred Shares.
(8) New company name of FAI – Financeira Americana Itaú S.A. – Crédito, Financiamento e Investimento.
ITAÚ UNIBANCO HOLDING is committed to maintaining the minimum capital required by all those joint ventures,for all entities FIC - Financeira Itaú CBD S.A Crédito,Financiamento e Investimento the minimum capital percentage is 25.0% higher than that required by the Central Bank of Brazil (Note 33).
II. Business combinations
Accounting for business combinations under IFRS 3 (R) is only applicable when a business is acquired.Under IFRS 3 (R), a business is defined as an integrated set of activities and assets that is conducted and managed for the
purpose of providing a return to investors, or cost reduction or other economic benefits. In general,a business consists of inputs, processes applied to those inputs and outputs that are, or will be,used to generate income. If there is goodwill in a set of activities or transferred assets, this is presumed to be a business.For acquisitions that meet the definition of business, accounting under the purchase method is required.
The acquisition cost is measured at the fair value of the assets transferred,equity instruments issued and liabilities incurred or assumed at the exchange date,plus costs directly attributable to the acquisition. Acquired assets and assumed liabilities and contingent liabilities identifiable in a business combination are initially measured at fair value at the date of acquisition, regardless of the existence of non-controlling interests. The excess of the acquisition cost, plus non-controlling interests, if any,over the fair value of identifiable net assets acquired, is accounted for as goodwill.
The treatment of goodwill is described in Note 2.4k. If the cost of acquisition, plus non-controlling interests,if any, is lower than the fair value of identifiable net assets acquired, the difference is directly recognized in income.
For each business combination, the purchaser should measure any non-controlling interest in the acquired company at the fair value or amount proportional to its interest in net assets of the acquired company.
III. Transactions with non-controlling stockholders
IFRS 10 – “Consolidated financial statements” establishes that changes in an ownership interest in a subsidiary,which do not result in a loss of control, are accounted for as capital transactions and any difference between the amount paid and the carrying amount of non-controlling stockholders is recognized directly in consolidated stockholders’ equity.
b) Foreign currency translation
I. Functional and presentation currency
The consolidated financial statements of ITAÚ UNIBANCO HOLDING are presented in reais,which is its functional currency and the presentation currency of these consolidated financial statements.For each subsidiary and investment in associates and joint ventures,ITAÚ UNIBANCO HOLDING defined the functional currency.
IAS 21 – “The effects of changes in foreign exchange rates” defines the functional currency as the currency of the primary economic environment in which the entity operates. If the indicators are mixed and the functional currency is not obvious,Management has to use its judgment to determine the functional currency that most faithfully represents the economic effects of the entity’s operations, focusing on the currency that mainly influences the pricing of transactions. Additional indicators are the currency in which financing is made or in which funds from operating activities are generated or received,as well as the nature of activities and the extent of transactions between the foreign subsidiaries and the other entities of the consolidated group.
The assets and liabilities of subsidiaries with a functional currency other than the Brazilian real are translated as follows:
II. Foreign currency transactions
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of income as part of foreign exchange operations and foreign exchange gains/ losses and amount to R$ 2,635 for the period for the period January 1, to December 31, 2013 (R$ 1,109 for the period January 1 to December 31, 2012 and R$ 2,186 for the period January 1 to December 31, 2011).
In the case of changes in the fair value of monetary assets denominated in foreign currency classified as available-for-sale,the exchange differences resulting from a change in the amortized cost of the instrument are separated from all other changes in the carrying amount of the instrument. The exchange differences resulting from a change in the amortized cost of the instrument are recognized in the income statement, while those resulting from other changes in the carrying amount, except impairment losses,are recognized in other comprehensive income until derecognition or impairment.
c) Cash and cash equivalents
ITAÚ UNIBANCO HOLDING defines cash and cash equivalents as cash and current accounts in banks (included in the heading cash and deposits on demand on the consolidated balance sheet), interbank deposits and securities purchased under agreements to resell that have original maturities of up to 90 days or less, as shown in Note 4.
d) CENTRAL BANK Compulsory deposits
The Central Banks of the countries in which ITAÚ UNIBANCO HOLDING operates currently impose a number of compulsory deposit requirements on financial institutions. Such requirements are applied to a wide range of banking activities and operations, such as demand,savings, and time deposits.In the case of Brazil, the acquisition and deposit of Brazilian federal government securities is also required.
Compulsory deposits are initially recognized at fair value and subsequently at amortized cost, using the effective interest rate method as detailed in Note 2.4g VI.
e) Interbank deposits
ITAÚ UNIBANCO HOLDING recognizes its interbank deposits in the balance sheet initially at fair value and subsequently at the amortized cost using the effective interest method as detailed in Note 2.4g VI.
f) Securities purchased under agreements to resell and sold under repurchase agreements
ITAÚ UNIBANCO HOLDING has purchased securities with resale agreement (resale agreements), and sold securities with repurchase agreement (repurchase agreement) of financial assets. Resale and repurchase agreements are accounted for under Securities purchased under agreements to resell and Securities sold under repurchase agreements,respectively.
The amounts invested in resale agreement transactions and borrowed in repurchase agreement transactions are initially recognized in the balance sheet at the amount advanced or raised, and subsequently measured at amortized cost. The difference between the sale and repurchase prices is treated as interest and recognized over the life of the agreements
using the effective interest rate method. Interest earned in resale agreement transactions and incurred in repurchase agreement transactions is recognized in Interest and similar income and Interest and similar expense, respectively.
The financial assets accepted as collateral in our resale agreements can be used by us,if provided for in the agreements, as collateral for our repurchase agreements or can be sold.
In Brazil, control over custody of financial assets is centralized and the ownership of investments under resale and repurchase agreements is temporarily transferred to the buyer.ITAÚ UNIBANCO HOLDING strictly monitors the fair value of financial assets received as collateral under our resale agreements and adjusts the collateral amount when appropriate.
Financial assets pledged as collateral to counterparties are also recognized in the consolidated financial statements.When the counterparty has the right to sell or re-pledge such instruments,they are presented in the balance sheet under the appropriate class of financial assets.
g) Financial assets and liabilities
In accordance with IAS 39, all financial assets and liabilities, including derivative financial instruments, shall be recognized in the balance sheet and measured based on the category in which the instrument is classified.
Financial assets and liabilities can be classified into the following categories:
The classification depends on the purpose for which financial assets were acquired or financial liabilities were assumed.Management determines the classification of financial instruments at initial recognition.
ITAÚ UNIBANCO HOLDING classifies financial instruments into classes that reflect the nature and characteristics of these financial instruments.
ITAÚ UNIBANCO HOLDING classifies as loans and receivables the following classes of balance sheet headings: Cash and deposits on demand,Central Bank compulsory deposits (Note 2.4d), Interbank deposits (Note 2.4e), Securities purchased under agreement to resell (Note 2.4f ), Loan operations (Note 2.4g VI) and Other financial assets (Note 2.4g IX).
Regular purchases and sales of financial assets are recognized and derecognized,respectively, on the trade date.
Financial assets are derecognized when the rights to receive cash flows from the assets have expired or when ITAÚ UNIBANCO HOLDING has substantially transferred all risks and rewards of ownership,and such transfer qualifies for derecognition, according to the requirements of IAS 39.Therefore, if the risks and rewards were not substantially transferred,ITAÚ UNIBANCO HOLDING evaluates the extent of control in order to determine whether the continuous involvement related to any retained control does not prevent derecognition. Financial liabilities are derecognized when discharged or extinguished.
Financial assets and liabilities are offset against each other and the net amount is reported in the balance sheet solely when there is a legally enforceable right to offset the recognized amounts and there is intention to settle them on a net basis,or simultaneously realize the asset and settle the liability.
I. Financial assets and liabilities at fair value through profit or loss – held for trading
These are financial assets and liabilities acquired or incurred principally for the purpose of selling them in the short term or when they are part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent history of short-term profit taking.
The financial assets and liabilities included in this category are initially and subsequently recognized at fair value.Transaction costs are directly recognized in the consolidated statement of income.Gains and losses arising from changes in fair value are directly included in the consolidated statement of income under Net gain (loss) from investment securities and derivatives. Interest income and expenses are recognized in Interest and similar income and Interest and similar expense,respectively.
II. Financial assets and liabilities at fair value through profit or loss – designated at fair value
These are assets and liabilities designated at fair value through profit or loss upon initial recognition (fair value option). This designation cannot be subsequently changed. In accordance with IAS 39, the fair value option can only be applied if it reduces or eliminates an accounting mismatch when the financial instruments are part of a portfolio for which risk is managed and reported to Management based on its fair value or when these instruments consist of hosts and embedded derivatives that shall otherwise be separated.
The financial assets and liabilities included in this category are initially and subsequently recognized at fair value.Transaction costs are directly recognized in the consolidated statement of income.Gains and losses arising from changes in fair value are directly included in the consolidated statement of income under Net gain (loss) from investment securities and derivatives – Financial assets designated at fair value through profit or loss.Interest income and expenses are recognized in Income and similar income and Interest and similar expense,respectively.
ITAÚ UNIBANCO HOLDING designated certain assets at fair value through profit or loss upon their initial recognition, because they are reported to Management and their performance is evaluated daily based on their fair value.
III. Derivatives
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. All derivatives are recognized as assets when the fair value is positive, and as liabilities when negative.
Certain derivatives embedded in other financial instruments are treated as separate derivatives,when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not recognized at fair value through profit or loss. These embedded derivatives are accounted for separately at fair value, with changes in fair value recognized in the consolidated statement of income in Net gain (loss) from investment securities and derivatives – Financial assets held for trading and derivatives – except when ITAÚ UNIBANCO HOLDING designates these hybrid contracts as a whole as fair value through profit or loss.
Derivatives can be designated as hedging instruments under hedge accounting and in the event they qualify,depending upon the nature of the hedged item, the method for recognizing gains or losses from changes in fair value will be different. These derivatives, which are used to hedge exposures to risk or modify the characteristics of financial assets and liabilities,and that meet IAS 39 criteria, are recognized as hedge accounting.
In accordance with IAS 39, to qualify for hedge accounting, all of the following conditions are met:
IAS 39 presents three hedge accounting categories: fair value hedge,cash flow hedge, and hedge of net investments in a foreign operation.
ITAÚ UNIBANCO HOLDING uses derivatives as hedging instruments under cash flow hedge strategies,fair value hedge and hedge of net investments, as detailed in Note 9.
Fair value hedge
For derivatives that are designated and qualify as fair value hedges,the following practices are adopted:
When the derivative expires or is sold or the hedge no longer meets the accounting hedge criteria or the entity revokes the designation, the entity should prospectively discontinue the accounting hedge.In addition, any adjustment in the book value of the hedged item should be amortized in income.
Cash flow hedge
For derivatives that are designated and qualify as a cash flow hedge,the effective portion of derivative gains or losses are recognized in Other comprehensive income – Gains and losses – Cash flow hedge, and reclassified to Income in the same period or periods in which the hedged transaction affects income. The portion of gain or loss on derivatives that represents the ineffective portion or the hedge components excluded from the assessment of effectiveness is recognized immediately in income. Amounts originally recorded in Other comprehensive income and subsequently reclassified to Income are recorded in the corresponding income or expense lines in which the related hedged item is reported.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting and also when ITAU UNIBANCO HOLDING redesignates a hedge,any cumulative gain or loss existing in Other comprehensive income is frozen and is recognized in income when the hedged item is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur,the cumulative gain or loss recognized in Other comprehensive income is immediately transferred to the statement of income.
Hedge of net investments in foreign operations
A hedge of a net investment in a foreign operation, including hedge of a monetary item that is accounted for as part of the net investment, is accounted for in a manner similar to a cash flow hedge:
Gains or losses on the hedging instrument related to the effective portion of the hedge which is recognized in comprehensive income are reclassified to the income statement upon the disposal of the investment in the foreign operation.
IV. Available-for-sale financial assets
In accordance with IAS 39, financial assets are classified as available-for-sale when in the Management’s judgment they can be sold in response to or in anticipation of changes in market conditions,and that were not classified into the categories of financial assets at fair value through profit or loss,loans and receivables or held to maturity.
Available-for-sale financial assets are initially and subsequently recognized in the consolidated balance sheet at fair value,plus transaction costs. Unrealized gains and losses (except losses for impairment, foreign exchange differences, dividends and interest income) are recognized, net of applicable taxes,in Other comprehensive income. Interest, including the amortization of premiums and discounts, is recognized in the consolidated statement of income under Interest and similar income. The average cost is used to determine the realized Gains and losses on Disposal of available-for-sale financial assets,which are recorded in the consolidated statement of income under Net gain (loss) from financial assets and liabilities – Available-for-sale financial assets.Dividends on available-for-sale assets are recognized in the consolidated statement of income as Dividend income when ITAÚ UNIBANCO HOLDING is entitled to receive such dividends,and inflow of economic benefits is probable.
ITAÚ UNIBANCO HOLDING assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale,a significant or prolonged decline in the fair value of the security below its cost is evidence of impairment, resulting in the recognition of an impairment loss. If any impairment evidence exists for available-for-sale financial assets,the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in income, is recognized in the consolidated statement of income as a reclassification adjustment from Other comprehensive income.
Impairment losses recognized in the consolidated statement of income on equity instruments are not reversed through the statement of income.However,if in a subsequent period the fair value of a debt instrument classified as an available-for-sale financial asset increases and such increase can be objectively related to an event that occurred after the loss recognition, such loss is reversed through the statement of income.
V. Held-to-maturity financial assets
In accordance with IAS 39, the financial assets classified into the held-to-maturity category are non-derivative financial assets that ITAÚ UNIBANCO HOLDING has the positive intention and ability to hold to maturity.
These assets are initially recognized at fair value, plus transaction costs, and subsequently measured at amortized cost, using the effective interest rate method (as detailed in item VI below). Interest income,including the amortization of premiums and discounts, is recognized in the consolidated statement of income under Interest and similar income.
When there is impairment of held-to-maturity financial assets, the loss is recorded as a reduction in the carrying amount through the use of an allowance account and recognized in the consolidated statement of income. If,in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the loss was recognized,the previously recognized loss is reversed. The reversal amount is also recognized in the consolidated statement of income.
VI. Loan operations
Loan operations are initially recognized at fair value, plus transaction costs and are subsequently measured at amortized cost using the effective interest rate method.
The effective interest rate approach is a method of calculating the amortized cost of a financial asset or liability and of allocating the interest income or expense over the relevant period. The effective interest rate is the discount rate that is applied to future payments or receipts through the expected life of the financial instrument that results in an amount equal to the net carrying amount of the financial asset or liability.When calculating the effective interest rate, ITAÚ UNIBANCO HOLDING estimates cash flows considering all contractual terms of the financial instrument, but does not consider future credit losses. The calculation includes all commissions paid or received between parties to the contract, transaction costs, and all other premiums or discounts.
ITAÚ UNIBANCO HOLDING classifies a loan operation as on non-accrual status if the payment of the principal or interest has been in default for 60 days or more. When a loan is placed on non-accrual status,the accrual of interest of the loan is discontinued.
When a financial asset or group of similar financial assets is impaired and its carrying amount is reduced through an allowance for loan losses, the subsequent interest income is recognized on the reduced carrying amount using the interest rate used to discount the future cash flows for purposes of measuring the allowance for loan losses.
Our Individuals portfolio consists primarily of vehicle financing to individuals,credit card, personal loans (including mainly consumer finance and overdrafts) and residential mortgage loans. The Corporate portfolio includes loans made to large corporate clients. Our Small/Medium Business Portfolio corresponds to loans to a variety of customers from small to medium-sized companies.The Foreign Loans Latin America is substantially comprised of loans granted to individuals in Argentina, Chile,Paraguay, and Uruguay.
At a corporate level, there are two groups (independent from the business areas): the credit risk group and the finance group, which are responsible for defining the methodologies used to measure the allowance for loan losses and for performing the corresponding calculations on a recurring basis.
The credit risk group and the finance group, at the corporate level,monitor the trends observed in the allowance for loan losses at the portfolio segment level,in addition to establishing an initial understanding of the variables that may trigger changes in the allowance for loan losses,the probability of default or the loss given default.
Once the trends have been identified and an initial assessment of the variables has been made at the corporate level,the business areas are responsible for further analyzing these observed trends at a detailed level and for each portfolio,for understanding the underlying reasons for the trends observed and for deciding whether changes are required in our credit policies.
VII. Lease operations (as lessor)
When assets are subject to a finance lease, the present value of lease payments is recognized as a receivable in the consolidated balance sheet under Loan operations and Lease Operations.
Initial direct costs when incurred by ITAÚ UNIBANCO HOLDING are included in the initial measurement of the lease receivable,reducing the amount of income to be recognized over the lease period.Such initial costs usually include commissions and legal fees.
The recognition of interest income reflects a constant return rate on the net investment of ITAÚ UNIBANCO HOLDING and is recognized in the consolidated statement of income under Interest and similar income.
VIII. Allowance for loan and lease losses
General
ITAÚ UNIBANCO HOLDING periodically assesses whether there is any objective evidence that a receivable or group of receivables is impaired.A receivable or group of receivables is impaired and there is a need for recognizing an impairment loss if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event (or events) has an impact on the estimated future cash flows that can be reliably estimated.
The allowance for loan and lease losses is recognized as probable losses inherent in the portfolio at the balance sheet date.The determination of the level of the allowance rests upon various judgments and assumptions,including current economic conditions, loan portfolio composition, prior loan and lease loss experience and evaluation of credit risk related to individual loans.Our process for determining the allowance for loan and lease losses includes Management’s judgment and the use of estimates.The adequacy of the allowance is regularly analyzed by Management.
The criteria adopted by ITAÚ UNIBANCO HOLDING for determining whether there is objective evidence of impairment include the following:
The estimated period between the loss event and its identification is defined by Management for each portfolio of similar receivables.Considering the representativeness of several homogeneous groups,management chose to use a twelve month period as being the most representative.For portfolios of loans that are individually evaluated for impairment this period is at most 12 months,considering the review cycle for each loan operation.
Assessment
ITAÚ UNIBANCO HOLDING first assesses whether objective evidence of impairment exists for receivables that are individually significant, and individually or collectively for receivables that are not individually significant.
To determine the amount of the allowance for individually significant receivables with objective evidence of impairment, methodologies are used that consider both the quality of the client and the nature of the transaction, including its collateral,to estimate the cash flows expected from these loans.
If no objective evidence of impairment exists for an individually assessed receivable,whether significant or not, the asset is included in a group of receivables with similar credit risk characteristics and collectively assessed for impairment. Receivables that are individually assessed for impairment and for which an impairment loss is recognized are not included in the collective assessment. The amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate.
For collectively assessed loans, the calculation of the present value of the estimated future cash flows for which there is collateral reflects the historical performance of the foreclosure and recovery of fair value, considering the cash flows that may arise from foreclosure less costs for obtaining and selling that collateral.
For the purpose of a collective evaluation of impairment, receivables are grouped on the basis of similar credit risk characteristics.The characteristics are relevant to the estimation of future cash flows for such receivables by being indicative of the debtors’ ability to pay all amounts due, according to the contractual terms of the receivables being evaluated. Future cash flows in a group of receivables that are collectively evaluated for purposes of identifying the need for recognizing impairment are estimated on the basis of the contractual cash flows of the group of receivables and historical loss experience for receivables with similar credit risk characteristics. The historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.
For individually significant receivables with no objective evidence of impairment, ITAÚ UNIBANCO HOLDING classifies these loans into certain rating categories based on several qualitative and quantitative factors applied through internally developed models.Considering the size and the different risk characteristics of each contract, the rating category determined according to internal models can be reviewed and modified by our Corporate Credit Committee,the members of which are executives and officers in corporate credit risk.ITAÚ UNIBANCO HOLDING estimates inherent losses for each rating category considering an internally developed approach for low-default portfolios,that uses our historical experience for building internal models,that are used both to estimate the PD (probability of default) and to estimate the LGD (loss given default.)
To determine the amount of the allowance for individually insignificant items loans are segregated into classes considering the underlying risks and characteristics of each group. The allowance for loan and lease losses is determined for each of those classes through a process that considers historical delinquency and loan loss experience over the most recent years.
Measurement
The methodology used to measure the allowance for loan and lease losses was developed internally by the credit risk and finance areas at the corporate level. In those areas and considering the different characteristics of the portfolios, different areas are responsible for defining the methodology to measure the allowance for each: Corporate (including loan operations with objective evidence of impairment and individually significant loan operations but with no objective evidence of impairment), Individuals,Small and Medium Businesses, and Foreign Units Latin America. Each of the four portfolio areas responsible for defining the methodology to measure the allowance for loan and lease losses is further divided into groups, including groups that develop the methodology and groups that validate the methodology. A
centralized group in the credit risk area is responsible for measuring the allowance on a recurring basis following the methodologies developed and approved for each of the four areas.
The methodology is based on two components to determine the amount of the allowance: The probability of default by the client or counterparty (PD), and the potential economic loss that may occur in the event of default, being the debt that cannot be recovered (LGD) which are applied to the outstanding balance of the loan. Measurement and assessment of these risk components is part of the process for granting credit and for managing the portfolio. The estimated amounts of PD and LGD are measured based on statistical models that consider a significant number of variables which are different for each class and include, among others,income, equity,past loan experiences, level of indebtedness,economic sectors that affect collectability and other attributes of each counterparty and of the economic environment. These models are regularly updated for changes in economic and business conditions.
A model updating process is started when the modeling area identifies that it is not capturing significant effects of the changes of economic conditions, in the performance of the portfolio or when a change is made in the methodology for calculating the allowance for loan and lease losses.When a change in the model is made, the model is validated through back-testing and statistical methods are used to measure its performance through detailed analysis of its documentation, by describing step-by-step how the process is carried out. The models are validated by an area independent from the one developing it, by issuing a technical report on the assumptions used (integrity, consistency,and replicability of the bases) and on the mathematical methodology used.The technical report is subsequently submitted to CTAM (Model assessment technical committee), which is the highest level of approval of model reviews.
Considering the different characteristics of the loans at each of the four portfolio areas (Corporate (with no objective evidence of impairment), Individuals, Small and Medium Businesses,and Foreign Units Latin America), different areas within the corporate credit risk area are responsible for developing and approving the methodologies for loans in each of those four portfolio areas.Management believes that the fact that different areas focus on each of the four portfolios results in increased knowledge,specialization and awareness of the teams as to the factors that are more relevant for each portfolio area in measuring the loan losses. Also considering such different characteristics and other factors, different inputs and information are used to estimate the PD and LGD as further detailed below:
Reversal, write-off, and renegotiation
If,in a subsequent period,the amount of the impairment loss decreases and the decrease is objectively related to
an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment is reversed.The amount of reversal is recognized in the consolidated statement of Income under Expense for allowance for loan and lease losses.
When a loan is uncollectible, it is written-off in the balance sheet under allowance for loan and lease losses.Write-off as losses occur after 360 days of credits have matured or after 540 days for loans with maturities over 36 months.
In almost all cases for loan products, renegotiated loans require at least one payment to be made under the renegotiated terms in order for it to be removed from nonperforming and nonaccrual status. Renegotiated loans return to nonperforming and nonaccrual status when they reach 60 days past due under the renegotiated terms,which typically corresponds to the borrower missing two or more payments.
IX. Other financial assets
ITAÚ UNIBANCO HOLDING presents these assets, which composition is detailed in Note 20a, in the consolidated balance sheet initially at fair value and subsequently at amortized cost using the effective interest method.
Interest income is recognized in the consolidated statement of income under Interest and similar income.
X. Financial liabilities at amortized cost
The financial liabilities that are not classified as at fair value through profit or loss are classified into this category and initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method.Interest expenses are presented in consolidated statement of income under Interest and similar expense.
The following financial liabilities are presented in the consolidated balance sheet and recognized at amortized cost:
h) Investments in associates and joint ventures
I. Associates
In accordance with IAS 28 – “Investments in associates and joint ventures”,associates are those companies in which the investor has significant influence,but does not have control. Significant influence is usually presumed to exist when an interest in voting capital is held from 20.0% to 50.0%. Investments in these companies are initially recognized at cost of acquisition and subsequently accounted for using the equity method.Investments in associates and joint ventures include the goodwill identified upon acquisition, net of any cumulative impairment loss.
II. Joint arrangements
Before January 1, 2013,ITAÚ UNIBANCO HOLDING consolidated proportionally its interest held in joint ventures,in conformity with the requirements of IAS 31 – “Interests in joint ventures”.As from that date, ITAÚ UNIBANCO HOLDING adopted IFRS 11 – “Joint arrangements”, thus changing its accounting policy from interest in joint business to the equity method.
In accordance with the IFRS 11, investments in joint business are classified as joint operations or joint ventures. The classification is dependent upon the contractual rights and obligations held by each investor,rather than the legal structure of the joint arrangements.
ITAÚ UNIBANCO HOLDING has assessed the nature of its joint arrangements and concluded that it has both joint operations and joint ventures.There was no change in the accounting treatment for joint operations.For joint ventures, ITAÚ UNIBANCO HOLDING adopted the new policy for interest in joint ventures, in accordance with the IFRS 11 transition provisions.
The effects arising from adopting IFRS 11, which gave rise to a change in the accounting policy,have not had significant impacts on the consolidated financial statements of ITAÚ UNIBANCO HOLDING. We present below the overall amounts related to our investments, previously proportionally consolidated, which started to be accounted for under the equity method on January 1, 2013:
(*) Composed of companies Olímpia Promoção e Serviços S.A., Rosefield Finance Ltd., MCC Securities Inc. and MCC Corredora de Bolsa.
ITAÚ UNIBANCO HOLDING’s share in profits or losses of its associates and joint ventures after acquisition is recognized in the consolidated statement of income. Its share of the changes in the reserves of corresponding stockholders’ equity of its associates and joint ventures is recognized in its own reserves of stockholders’ equity. The cumulative changes after acquisition are adjusted against the carrying amount of the investment. When the ITAÚ UNIBANCO HOLDING share of losses of an associates and joint ventures is equal or above its interest in the associates and joint ventures,including any other receivables, ITAÚ UNIBANCO HOLDING does not recognize additional losses, unless it has incurred any obligations or made payments on behalf of the associates and joint ventures.
Unrealized profits on transactions between ITAÚ UNIBANCO HOLDING and its associates and joint ventures are eliminated to the extent of the interest of ITAÚ UNIBANCO HOLDING. Unrealized losses are also eliminated,unless the transaction provides evidence of impairment of the transferred asset. The accounting policies on associates and joint ventures are consistent with the policies adopted by ITAÚ UNIBANCO HOLDING.
If the interest in the associates and joint ventures decreases, but ITAÚ UNIBANCO HOLDING retains significant influence or joint control,only the proportional amount of the previously recognized amounts in Other comprehensive income is reclassified in Income,when appropriate.
Gains and losses from dilution arising from investments in associates and joint ventures are recognized in the consolidated statement of income.
i) Lease commitments (as lessee)
As a lessee, ITAÚ UNIBANCO HOLDING has finance and operating lease agreements.
ITAÚ UNIBANCO HOLDING leases certain fixed assets. Leases of fixed assets,in which ITAÚ UNIBANCO HOLDING substantially holds all risks and rewards incidental to the ownership are classified as finance leases. They are capitalized on the commencement date of the leases at the lower of the fair value of the asset and the present value of the lease future minimum payments.
Each lease installment is allocated part to the liability and part to financial charges,so that a constant rate is obtained for the outstanding debt balance.The corresponding obligations, net of future financial charges,are included in Other financial liabilities. The interest expense is recognized in the consolidated statement of income over the lease term, to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Fixed assets acquired through finance lease are depreciated over their useful lives.
Expenses of operating leases are recognized in the consolidated statement of income,on a straight-line basis, over the period of lease.
When an operating lease is terminated before the end of the lease term, any payment to be made to the lessor as a penalty is recognized as an expense in the period the termination occurs.
j) Fixed assets
In accordance with IAS 16 – “Property, plant and equipment”,fixed assets are recognized at the cost of acquisition less accumulated depreciation, calculated using the straight-line method and rates based on the estimated useful lives of these assets.Such rates are presented in Note 15.
The residual values and useful lives of assets are reviewed and adjusted,if appropriate, at the end of each year.
ITAÚ UNIBANCO HOLDING reviews its assets in order to identify whether any indications of impairment exist. If such indications are identified,fixed assets are tested for impairment. In accordance with IAS 36 – Impairment of assets,impairment losses are recognized for the difference between the carrying and recoverable amount of an asset (or group of assets), in the consolidated statement of income. The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and its value in use.For purposes of assessing impairment, assets are grouped at the lowest level for which independent cash flows can be identified (cash-generating units). The assessment may be made at an individual asset level when the fair value less the cost to sell may be reliably determined.
ITAÚ UNIBANCO HOLDING in the period ended December 31, 2013, did not recognize any impairment losses related to fixed assets.(For the period ended December 31, 2012 did not recognize any impairment losses related to fixed assets and December 31, 2011 recognize any impairment losses in the amount of R$ 15).
Gains and losses on disposals of fixed assets are recognized in the consolidated statement of income under Other income or General and administrative expenses.
k) Goodwill
In accordance with IFRS 3 (R) – “Business combinations”,goodwill may arise on an acquisition and represents the excess of the consideration transferred plus non-controlling interest over the net fair value of the net identifiable assets and contingent liabilities of the acquiree.Goodwill is not amortized, but its recoverable amount is tested for impairment annually or when there is any indication of impairment, using an approach that involves the identification of cash-generating units and estimates of fair value less cost to sell and/or value in use.
As defined in IAS 36, a cash-generating unit is the lowest identifiable group of assets that generates cash inflows that are independent of the cash inflows from other assets or groups of assets.Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination.
IAS 36 determines that an impairment loss shall be recognized for a cash-generating unit if the recoverable amount of the cash-generating unit is less than its carrying amount. The loss shall be allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit, and then to the other assets of the unit on a pro rata basis applied to the carrying amount of each asset. The loss cannot reduce the carrying amount of an asset below the higher of its fair value less costs to sell and its value in use.The impairment loss of goodwill cannot be reversed.
Goodwill arising from the acquisition of subsidiaries are presented in the Consolidated Balance Sheet under the line Goodwill.
Goodwill of associates and joint ventures is reported as part of investment in the consolidated balance sheet under Investments in associates and joint ventures, and the impairment test is carried out in relation to the total balance of the investments (including goodwill).
l) Intangible assets
Intangible assets are non-physical assets, including software and other assets,and are initially recognized at cost. Intangible assets are recognized when they arise from legal or contractual rights,their costs can be reliably measured, and in the case of intangible assets not arising from separate acquisitions or business combinations,it is probable that future economic benefits may arise from their use.The balance of intangible assets refers to acquired assets or those internally generated.
Intangible assets may have finite or indefinite useful lives. Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives.Intangible assets with indefinite useful lives are not amortized,but periodically tested in order to identify any impairment.
ITAÚ UNIBANCO HOLDING semi-annually assesses its intangible assets in order to identify whether any indications of impairment exist, as well as possible reversal of previous impairment losses. If such indications are found, intangible assets are tested for impairment. In accordance with IAS 36, impairment losses are recognized as the difference between the carrying and the recoverable amount of an asset (or group of assets), and recognized in the consolidated statement of income. The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and its value in use.For purposes of assessing an impairment, assets are grouped into the minimum level for which cash flows can be identified. The assessment can be made at an individual asset level when the fair value less its cost to sell can be determined reliably.
In the period ended December 31, 2013, the ITAÚ UNIBANCO HOLDING recognized impairment losses in the amount of R$ 27, related to the association for the promotion and offer of financial products and services and impairment losses in the amount of R$ 6 corresponding to expenses from development of software (R$ 7 at December 31, 2012 and R$ 30 at December 31, 2011, related to the acquisition of rights to credit payroll and association for the promotion and offer of financial products and services), caused by results below expectations.
As set forth in IAS 38, ITAÚ UNIBANCO HOLDING elected the costing model to measure its intangible assets after its initial recognition.
m) Assets held for sale
Assets held for sale are recognized in the balance sheet when they are actually repossessed or there is intention to sell.These assets are initially recorded at the lower of: (i) the fair value of the asset less the estimated selling expenses,or (ii) the carrying amount of the loan.
Subsequent reductions in the carrying value of the asset are recorded as a loss due to decreases in fair value less costs to sell,in the consolidated statement of income under General and administrative expenses.In the case of recovery of the fair value less cost to sell, the recognized losses can be reversed.
n) Income tax and social contribution
There are two components of the provision for income tax and social contribution: current and deferred.
Current income tax expense approximates taxes to be paid or recovered for the applicable period.Current assets and liabilities are recorded in the balance sheet under Tax assets – income tax and Social contribution – current and Tax liabilities assets – income tax and Social contribution – current, respectively.
Deferred income tax and social contribution represented by deferred tax assets and liabilities are obtained based on the differences between the tax bases of assets and liabilities and the amounts reported in the financial statements at each year end. The tax benefit of tax loss carryforwards is recognized as an asset. Deferred tax assets are only recognized when it is probable that future taxable income will be available for offset. Deferred tax assets and liabilities are recognized in the balance sheet under Tax assets – Income tax and social contribution – Deferred and Tax liabilities – Income tax and social contribution – Deferred,respectively.
Income tax and social contribution expense is recognized in the consolidated statement of income under Income tax and social contribution, except when it refers to items directly recognized in Other comprehensive income,such as: deferred tax on fair value measurement of available-for-sale financial assets, and tax on cash flow hedges.Deferred taxes of such items are initially recognized in other comprehensive income and subsequently recognized in Income together with the recognition of the gain/loss originally deferred.
Changes in tax legislation and rates are recognized in the consolidated statement of income under Income tax and social contribution in the period in which they are enacted. Interest and fines are recognized in the consolidated statement of income under General and administrative expenses.Income tax and social contribution are calculated at the rates shown below,considering the respective taxable bases, based on the current legislation related to each tax, which in the case of the operations in Brazil are for all the reporting periods as follows:
(*) For non-financial operations consolidated in the financial statements the social contribution rate regards 9.00%.
To determine the proper level of provisions for taxes to be maintained for uncertain tax positions,a two-phased approach was applied, according to which a tax benefit is recognized if it is more probable than not that a position can be sustained.The benefit amount is then measured to be the highest tax benefit which probability of realization is over 50.0%.
o) Insurance contracts and private pension
IFRS 4 – “Insurance contracts” defines insurance contracts as contracts under which the issuer accepts a significant insurance risk of the counterparty, by agreeing to compensate it if a specified uncertain future event adversely affects it.
ITAÚ UNIBANCO HOLDING, through its subsidiaries, issues contracts to clients that have insurance risks, financial risks or a combination of both. A contract under which ITAÚ UNIBANCO HOLDING accepts significant insurance risks from its clients and agrees to compensate them upon the occurrence of a specified uncertain future event is classified as an insurance contract. The insurance contract may also transfer a financial risk, but is accounted for as an insurance contract, should the insurance risk be significant.
As permitted by IFRS 1, upon adoption of IFRS for the first time,ITAÚ UNIBANCO HOLDING elected not to change its accounting policies for insurance contracts,which follow accounting practices adopted in Brazil (“BRGAAP”).
Investment contracts are those that transfer a significant financial risk.Financial risk is the risk of a future change in one or more variables,such as interest rate, price of financial assets,price of commodities, foreign exchange rate,index of prices or rates, credit risk rating,credit index or other variable.
Investment contracts may be reclassified as insurance contracts after their initial classification, should the insurance risk become significant.
Investment contracts with discretionary participation features are financial instruments,but they are treated as insurance contracts, as established by IFRS 4.
Once the contract is classified as an insurance contract, it remains as such until the end of its life,even if the insurance risk is significantly reduced during such period,unless all rights and obligations are extinguished or expired.
Note 30 presents a detailed description of all products classified as insurance contracts.
In accordance with IFRS 4, an insurance contract is one that exposes its issuer to a significant insurance risk.An insurance risk is significant only if the insurance event could cause an issuer to pay significant additional benefits in any scenario, except for those that do not have commercial substance.Additional benefits refer to amounts that exceed those that would be payable if no insured event occurred.
Contracts that contemplate retirement benefits after an accumulation period (known as PGBL, VGBL and FGB) assure,at the commencement date of the contract, the basis for calculating the retirement benefit (mortality table and minimum interest). The contracts specify the annuity fees and, therefore,the contract transfers the insurance risk to the issuer at the commencement date,and they are classified as insurance contracts.
The payment of additional benefits is considered significant in all scenarios with commercial substance,since survival of the beneficiary may exceed the survival estimates in the actuarial table used to define the benefit agreed in the contract. The option of conversion into a fixed amount to be paid for the life of the beneficiary is not available.All contracts give the right to the counterparty to choose a life annuity benefit.
Insurance premiums
Insurance premiums are recognized over the period of the contracts in proportion to the amount of the insurance coverage.Insurance premiums are recognized as income in the consolidated statement of income.
If there is evidence of impairment losses with respect to receivables for insurance premiums,ITAÚ UNIBANCO HOLDING recognizes a provision, sufficient to cover this loss,based on the risk analysis of realization of insurance premiums receivable with installments overdue for over 60 days.
Reinsurance
Reinsurance premiums are recognized over the same period in which the related insurance premiums are recognized in the consolidated statement of income.
In the ordinary course of business, ITAÚ UNIBANCO HOLDING reinsures a portion of the risks underwritten, particularly property and casualty risks that exceed the maximum limits of responsibility that we determine to be appropriate for each segment and product (after a study which considers size, experience,specificities, and the necessary capital to support these limits).These reinsurance agreements allow the recovery of a portion of the losses from the reinsurer,although they do not release the insurer from the main obligation as direct insurer of the risks contemplated in the reinsurance.
Reinsurance assets are valued according to consistent basis of risk assignment contracts,and in the event of losses effectively paid are revalued after 365 days elapse in relation to the possibility of non-recovery of such losses. In the event of doubt, these assets are reduced based on the provision recognized for credit risk associated to reinsurance.
Acquisition costs
Acquisition costs include direct and indirect costs related to the origination of insurance.These costs, except for the commissions paid to brokers and others,are expensed directly in income as incurred. Commissions,on the other hand, are deferred and expensed in proportion to the recognition of the premium revenue, i.e.over the period of the corresponding insurance contract.
Liabilities
Reserves for claims are established based on historical experience, claims in process of payment, estimated amounts of claims incurred but not yet reported,and other factors relevant to the required reserve levels. A liability for premium deficiencies is recognized if the estimated amount of premium deficiencies exceeds deferred acquisition costs.Expenses related to recognition of liabilities for insurance contracts are recognized in the consolidated statement of income under Change in reserves for insurance and private pension.
Embedded derivatives
ITAÚ UNIBANCO HOLDING analyzes all contracts in order to check for any embedded derivates.In the cases where these derivatives meet the definition of insurance contracts on their own, we do not separate them. We have not identified any embedded derivatives in our insurance contracts,which may be separated or measured at fair value in accordance with IFRS 4 requirements.
Liability adequacy test
IFRS 4 requires that the insurance companies analyze the adequacy of their insurance liabilities in each reporting period through a minimum adequacy test. The liability adequacy test for IFRS was conducted by adopting the current actuarial assumptions for future cash flows of all insurance contracts in force on the balance sheet date.
As a result of this test, if the assessment shows that the carrying amount of the insurance liabilities (less related deferred acquisition costs of contracts and related intangible assets) is lower than the value of the estimated future cash flows,any identified deficiency will have to be recognized in income for the period.In order to perform the adequacy test,
insurance contracts are grouped in portfolios that are broadly subject to similar risks and which risks are jointly managed as a single portfolio.
The assumptions used to conduct the liability adequacy test are detailed in Note 30.
p) Capitalization plans
ITAÚ UNIBANCO HOLDING sells capitalization certificates, in which clients deposit specific amounts, depending on the plan, which are redeemable at the original amount plus interest. Clients enter,during the term of the plan, into raffles of cash prizes.
While for regulatory purposes in Brazil they are regulated by the insurance regulator,these plans do not meet the definition of an insurance contract under IFRS 4,and therefore they are classified as a financial liability at amortized cost under IAS 39.
Revenue from capitalization plans is recognized during the period of the contract and measured as the difference between the amount deposited by the client and the amount that ITAÚ UNIBANCO HOLDING has to reimburse.
q) Post-employments benefits
ITAÚ UNIBANCO HOLDING is required to make contributions to government social security and labor indemnity plans,in Brazil and in other countries where it operates, which are expensed in the consolidated statement of income as an integral part of general and administrative expenses,when incurred. Those contributions totaled R$ 1,547 from January 1 to December 31, 2013 (R$ 1,488 from January 1 to December 31,2012 and R$ 1,429 from January 1 to December 31, 2011).
Additionally,ITAÚ UNIBANCO HOLDING also sponsors defined benefit plans and defined contribution plans,accounted for pursuant to IAS 19 – “Employee benefits” up to December 31, 2012 and in accordance with the IAS 19 (revised in June 2011) – “Employee benefits” as from January 1, 2013.
Pension plans – Defined benefit plans
The liability (or asset, as the case may be) recognized in the consolidated balance sheet with respect to the defined benefit plan corresponds to the present value of the defined benefit obligations on the balance sheet date less the fair value of the plan assets.The defined benefit obligation is annually calculated by an independent actuarial consulting company using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated amount of future cash flows of benefit payments based on the Brazilian treasury long term securities denominated in reais and with maturity periods similar to the term of the pension plan liabilities.
The following amounts are recognized in the consolidated statement of income:
Actuarial gains and losses arise from the non-realization of the actuarial assumptions established in the latest actuarial evaluation as compared to those effectively carried out, as well as the effects from changes in such assumptions.Gains and losses are fully recognized in Other Comprehensive Income.
Pension plans – defined contribution
For defined contribution plans, contributions to plans made by ITAÚ UNIBANCO HOLDING, through pension plan funds, are recognized as an expense when due.
Other post-employment benefit obligations
Certain companies that merged into ITAÚ UNIBANCO HOLDING over the past few years were sponsors of post-employment healthcare benefit plans and ITAÚ UNIBANCO HOLDING is committed as per the acquisition contracts to maintain such benefits over specific periods, as well as in relation to the benefits granted due to a judicial sentence. Such benefits are also accounted for in accordance with IAS 19, in a manner similar to defined benefit plans.
r) Stock-based compensation
Stock-based compensation is accounted for in accordance with IFRS 2 – “Share-based payment” which requires the entity to measure the value of equity instruments granted, based on their fair value at the option grant date. This cost is recognized during the vesting period of the right to exercise the instruments.
The total amount to be expensed is determined by reference to the fair value of the options granted excluding the impact of any service and non-market performance vesting conditions (notably remaining an employee of the entity over a specified time period.) The fulfillment of on-market vesting conditions is included in the assumptions about the number of options that are expected to be exercised.At the end of each period, ITAÚ UNIBANCO HOLDING revises its estimates of the number of options that are expected to be exercised based on non-market vesting conditions. It recognizes the impact of the revision of the original estimates,if any, in the consolidated statement of income,with a corresponding adjustment to stockholders’ equity.
When the options are exercised, the ITAÚ UNIBANCO HOLDING treasury shares are generally delivered to the beneficiaries.
The fair value of stock options is estimated by using option pricing models that take into account the exercise price of the option,the current stock price, the risk-free interest rate,the expected volatility of the stock price and the life of the option.
All stock based compensation plans established by ITAÚ UNIBANCO HOLDING correspond to plans that can be settled exclusively through the delivery of shares.
s) Financial guarantees
In accordance with IAS 39, the issuer of a financial guarantee contract has an obligation and should recognize it initially at its fair value. Subsequently,this obligation should be measured at: (i) the amount initially recognized less accumulated amortization and (ii) the amount determined pursuant to IAS 37 – “Provisions, contingent liabilities and contingent assets”, whichever is higher.
ITAÚ UNIBANCO HOLDING recognizes the fair value of the guarantees issued in the consolidated balance sheet under Other liabilities.Fair value is generally represented by the fee charged to client for issuing the guarantee.This amount at the issuance date is amortized over the life of the guarantee issued and recognized in the consolidated statement of income under Banking service fees.
After issuance, if based on the best estimate ITAÚ UNIBANCO HOLDING concludes that the occurrence of a loss regarding a guarantee issued is probable,and if the loss amount is higher than the initial fair value less cumulative amortization of the guarantee,a provision is recognized for such amount.
t) Provisions, contingent assets and contingent liabilities
These are assessed, recognized and disclosed in accordance with IAS 37. Contingent assets and contingent liabilities are rights and obligations arising from past events for which materialization depends on future events.
Contingent assets are not recognized in the consolidated financial statements,except when the Management of ITAÚ UNIBANCO HOLDING understands that realization is virtually certain which, generally corresponds to lawsuits with favorable rulings, in final and unappealable judgments,withdrawal from lawsuits as a result of a payment in settlement or as a result of an agreement to offset against an existing liability.
Contingent liabilities mainly arise from administrative proceedings and lawsuits,inherent in the ordinary course of business, filed by third parties,former employees and governmental bodies, in connection with civil,labor, and tax and social security claims.
These contingencies are evaluated based on the Management’s best estimates,taking into account the opinion of legal counsel when there is a likelihood that financial resources are required to settle the obligations and the amounts can be estimated with reasonable certainty.
Contingent losses are classified as:
Contingent liabilities recorded under Provisions and those disclosed as possible are measured using best estimates through the use of models and criteria which allow their appropriate measurement even if there is uncertainty as to their ultimate timing and amount, and the criteria are detailed in Note 32.
The amount of court escrow deposits is adjusted in accordance with current legislation.
Contingent liabilities guaranteed by indemnity clauses provided by third parties,such as in business combinations carried out before the transition date to IFRS, are recognized when a claim is asserted,and a receivable is recognized simultaneously subject to its collectability.For business combinations carried out after the transition date,indemnification assets are recognized at the same time and measured on the same basis as the indemnified item, subject to collectability or contractual limitations on the indemnified amount.
u) Capital
Common and preferred shares, which are equivalent to common shares but without voting rights are classified in Stockholders’ equity.The additional costs directly attributable to the issue of new shares are included in Stockholders’ equity as a deduction from the proceeds, net of taxes.
v) Treasury shares
Common and preferred shares repurchased are recorded in Stockholders’ equity under Treasury shares at their average purchase price.
Shares that are subsequently sold, such as those sold to grantees under our stock option plan, are recorded as a reduction in treasury shares,measured at the average price of treasury stock held at such date.
The difference between the sale price and the average price of the treasury shares is recorded as a reduction or increase in Additional paid-in capital. The cancellation of treasury shares is recorded as a reduction in Treasury shares against Appropriated reserves,at the average price of treasury shares at the cancellation date.
w) Dividends and interest on capital
Pursuant to the Company’s bylaws, stockholders are entitled to a mandatory minimum dividend of 25% of net income for the year, as determined in accordance with the corporate law. Minimum dividend amounts established in the bylaws are recorded as liabilities at the end of each year.Any other amount above the mandatory minimum dividend is accounted for as liabilities,when approved by the stockholders at a Stockholder´s Meeting.Since January 1, 1996, Brazilian companies have been permitted to attribute a tax-deductible nominal interest rate charge on net equity (called interest on capital.)
Interest on capital is treated for accounting purposes as a dividend, and it is presented as a reduction of stockholders’ equity in the consolidated financial statements.The related tax benefit is recorded in the consolidated statement of income.
Dividends have been and continue to be calculated and paid based on the financial statements prepared under BRGAAP and not based on these consolidated financial statements prepared under IFRS.
x) Earnings per share
Earnings per share are computed by dividing net income attributable to the owners of ITAÚ UNIBANCO HOLDING by the weighted average number of common and preferred shares outstanding for each reporting year.Weighted average shares are computed based on the periods for which the shares were outstanding.
Earnings per share are presented based on the two types of shares issued by ITAÚ UNIBANCO HOLDING. Both types,common and preferred, participate in dividends on substantially the same basis, except that preferred shares are entitled to a priority non-cumulative minimum annual dividend of R$0.022 per share. Earnings per share are computed based on the distributed earnings (dividends and interest on capital) and undistributed earnings of ITAÚ UNIBANCO HOLDING after giving effect to the preference indicated above, without regard to whether the earnings will ultimately be fully distributed. Earnings per share amounts have been determined as if all earnings were distributed and computed following the requirements of IAS 33 – “Earnings per share”.
ITAÚ UNIBANCO HOLDING grants stock-based compensation whose dilutive effect is reflected in diluted earnings per share,with the application of the “treasury stock method“.Under the treasury stock method, earnings per share are calculated as if shares under stock-based compensation plans had been issued and as if the assumed proceeds (funds to be received upon exercise of the stock options and the amount of compensation cost attributed to future services and not yet recognized) were used to purchase shares of ITAÚ UNIBANCO HOLDING.
y) Revenue from services
ITAÚ UNIBANCO HOLDING provides a number of services to its clients,such as investment management, credit card, investment banking services and certain commercial banking services.
Services related to current accounts are offered to clients either in the format of packages or individually.These revenues are recognized when such services are provided.
Income from credit card commissions arises from the capture of these transactions and allocated to income on their capture and processing date.
Revenue from certain services such as fees from funds management, performance,collection for retail clients and custody, is recognized over the life of the related contracts on a straight-line basis.
The breakdown of the banking service fees is detailed in Note 24.
z) Segment information
IFRS 8 – “Operating segments” requires that operating segments are disclosed consistently with information provided to the chief operating decision maker, who is the person or group of persons that allocates resources to the segments and assesses their performance.ITAÚ UNIBANCO HOLDING considers that its Executive Board is the chief operating decision maker.
ITAÚ UNIBANCO HOLDING has four reportable segments: (i) Commercial Bank – Retail,(ii) Consumer Credit – Retail, (iii) Wholesale Bank,and (iv) Activities with the Market + Corporation.
Segment information is presented in Note 34.
Note 3 – Business development
a) BSF Holding S.A.
On April 14, 2011, ITAÚ UNIBANCO HOLDING entered into a sale and purchase agreement for the purchase and sale of shares with Carrefour Comércio e Indústria Ltda. (“Carrefour”) to acquire 49.0% of BSF Holding S.A. (“Banco Carrefour”), the entity responsible for the offer and distribution, on an exclusive basis,of financial, insurance and private pension products and services in the distribution channels of Carrefour Brazil operated under the “Carrefour” brand in Brazil.The completion of the operation was subject to the approval of the Central Bank of Brazil,which was obtained on April 23, 2012 and to the transfer of shares of BSF to ITAÚ UNIBANCO HOLDING, which was carried out on May 31, 2012.
Since May 31, 2012 we have accounted for this interest in BSF under the equity method (Note 13) and as transactions with related parties (Note 35).
The allocation of the difference between the investment held in BSF and the interest in its net assets,at the acquisition date, is shown below:
(*) Basically represented by credit card operations.
Goodwill arising from the operation is reported as part of investment in the heading Investments in associates and joint ventures (Note 13a), and the impairment test is analyzed in relation to the total investment balance (including goodwill).
b) FAI – Financeira Americanas Itaú S.A. Crédito, Financiamento e Investimento (“FAI”)
On August 9, 2012, ITAÚ UNIBANCO HOLDING informed that conclusion its partnership with LOJAS AMERICANAS S.A. (“LASA”), entered into in 2005, for the offering, distribution and sale,on an exclusive basis by FAI (entity jointly controlled by ITAÚ UNIBANCO HOLDING and LASA), of financial,insurance and pension plan products and services to customers of LASA and its affiliated companies.
As a consequence of said termination, ITAÚ UNIBANCO HOLDING and LASA entered into,on that date, a purchase agreement and other covenants under which LASA has agreed (i) to sell to ITAÚ UNIBANCO HOLDING the total interest it holds in the capital of FAI for the amount of R$ 95 million; and (ii) to acquire the operating right held by FAI with respect to the offering,distribution and sale, on an exclusive basis,of financial products and services through the distribution channels of LASA and/or its affiliates,at the approximate amount of R$ 112 million. The completion of the transaction was subject to approval of the Central Bank of Brazil,which was obtained on December 27, 2012.
As a result of this transaction, FAI is no longer an entity controlled jointly by ITAÚ UNIBANCO HOLDING and LASA, becoming a whole-owned subsidiary of ITAÚ UNIBANCO HOLDING. At December 31, 2012 the balance of FAI’s balance sheet accounts were fully consolidated; the net income for 2012, however,was partially consolidated.
The allocation of the difference between the amount paid for 50% of FAI and interest in its net assets at fair value resulted in the recognition of goodwill in the amount of R$ 15.
c) Redecard
On September 24, 2012, ITAÚ UNIBANCO HOLDING completed the auction of the Tender Public Offer (OPA) to cancel Redecard’s listed company register, pursuant to the OPA call notice published on August 23, 2012.
As a result of the auction, ITAÚ UNIBANCO HOLDING purchased,through its non-financial subsidiary Banestado Participações,Administração e Serviços Ltda., 298,989,237 common shares issued by Redecard,representing 44.4% of its capital, and now it holds 635,474,593 common shares, representing 94.4% of its capital. The shares were purchased for the unit price of R$ 35.00, totaling R$ 10,469.
With the purpose of completing the purchase of the remaining minority interest, ITAÚ UNIBANCO HOLDING acquired,by way of its subsidiary Banestado Participações,Administração e Serviços Ltda., 36,423,856 common shares (24,207,582 shares in October 2012; 9,893,659 shares in November 2012; and 2,322,615 shares in December 2012) for the amount, offered at the OPA of September 24, 2012, of R$ 35.00, plus SELIC variation for the period, redeemed 999,884 common shares and canceled 72,372 treasury shares, thus increasing its interest in the capital, from 94.4% to 100.0%, totaling the amount of R$ 1,283 (including fees and brokerage).
On October 18, 2012, the Brazilian Securities and Exchange Commission (CVM) cancelled Redecard’s registration as a publicly-held company.
Changes in stockholders’ equity of ITAÚ UNIBANCO HOLDING S.A., due to the purchase of shares from non-controlling stockholders of Redecard, are shown below:
(*) For non-financial subsidiaries, tax rate of Income Tax and Social Contribution is 34.00%.
d) Association with Banco BMG S.A.
On July 9, 2012 ITAÚ UNIBANCO HOLDING entered into an Association Agreement with Banco BMG S.A. (“BMG”), aiming at the offering, distribution and commercialization of payroll debit loans through the incorporation of a financial institution, the Banco Itaú BMG Consignado S.A. (“Itaú BMG Consignado”). After obtaining the previous approval required for starting operations,issued by the Administrative Council for Economic Defense (CADE) on October 17, 2012, the final documents were signed on December 13, 2012 and Banco BMG has been a stockholder of Itaú BMG Consignado since January 7, 2013. The completion of the operation was subject to the approval of the Central Bank of Brazil, which was obtained on April 18, 2013.
As a result of this transaction stockholders’ equity attributed to non-controlling stockholders increased by R$ 303.
e) Credicard
On May 14, 2013, ITAÚ UNIBANCO HOLDING, signed with Banco Citibank,a Share and Quotas Purchase Agreement for the acquisition of Banco Citicard S.A. and Citifinancial Promotora de Negócios e Cobranças Ltda., for the amount
of R$ 2,948 million (monetarily restated), including “Credicard” brand. The completion of this transaction was pending approval by the Central Bank of Brazil, which was obtained on December 12, 2013 and settled on December 20, 2013. The final allocation of the difference between the amount paid by Credicard and the interest in its net assets at fair value will be concluded over 2014.
Banco Credicard and Citifinancial are these entities responsible for the supply and distribution of financial products and services under “Credicard” brand, principally personal loans and credit cards.
In view of this transaction, ITAÚ UNIBANCO HOLDING now fully consolidates Banco Citicard and Citifinancial Promotora de Negócios e Cobranças Ltda. in the consolidated financial statements as from December,2013. The balances and results related to Credicard at December 31, 2013 are stated below:
(1) Basically represented by deferred tax asset balance.
(2) Basically represented by credit card operations.
f) Cencosud S.A.
On June 17, 2013, Itaú Unibanco Holding, signed a Memorandum of Understanding with Cencosud S.A. (“Cencosud”), a Chilean retail chain, aiming a strategic alliance,to be implemented, for a period of 15 years.
The implementation of the transaction was contingent on compliance with certain conditions precedent including the approval of the appropriate regulatory authorities. Even though ITAÚ UNIBANCO HOLDING acted strictly in compliance with the provisions of the Memorandum of Understanding entered into by the parties and made the best efforts in the negotiation of the definitive agreements with Cencosud,this negotiation was not successful, and therefore the intended partnership will not be closed.
g) BMG Seguradora S.A.
On June 25, 2013, ITAÚ UNIBANCO HOLDING, whereby Banco Itaú BMG Consignado S.A. (“JV”), which is a entity indirectly controlled by ITAÚ UNIBANCO HOLDING signed a Share Purchase Agreement with controlling shareholders of Banco BMG S.A. (“Sellers”) whereby JV agreed to acquire 99.996% of the shares issued by BMG Seguradora S.A.
BMG Seguradora generated R$ 62.6 million in retained premiums during 2012 and,from January to May 2013, a retained premiums’ volume of R$ 42.4 million, 77% higher than the volume generated during the same period of 2012.
BMG Seguradora celebrated exclusivity agreements with Banco BMG S.A and the JV for the purpose of distributing insurance products to be offered jointly with the products distributed by such financial institutions.
The approval by the Central Bank was obtained on December 19, 2013 and the transaction was settled on January 27, 2014 in the amount of R$ 88. Such acquisition is not expected to have any significant accounting impact on the results of ITAÚ UNIBANCO HOLDING, which will consolidate the transaction in its financial statements.
h) Citibank N.A. Uruguay Branch
On June 28, 2013, Ita Unibanco Holding, whereby its subsidiary Banco Itaú Uruguay S.A. (“BIU”) executed hereof a binding agreement with Citibank N.A. Uruguay Branch (“Citi”) establishing the rules for the acquisition by BIU of the retail business conducted by Citi in Uruguay.
As result of this transaction, BIU will assume a portfolio of more than 15,000 clients in Uruguay related to the retail business (bank accounts, saving and term deposits). The acquired assets include mainly the credit card operations conducted by Citi in Uruguay under the Visa, Mastercard and Dinners brand,which is represented in 2012 slightly more than 6% of the Uruguayan market share.
The amount involved in the transaction is not material for ITAÚ UNIBANCO HOLDING and,therefore, will not cause any material accounting effect in its results.
The closing of the transaction is subject to this fulfillment of certain conditions precedent, including the approval by competent regulatory authorities.
i) Partnership with Fiat
On August 20, 2013, ITAU UNIBANCO HOLDING informed that it renewed for another 10 years,by means of its subsidiary Itaú Unibanco S.A., the commercial cooperation agreement entered into with Fiat Group Automobiles S.p.A. and Fiat Automóveis S.A. (“Fiat”). This agreement sets forth: (i) exclusive financing offer in promotional campaigns held by Fiat car maker Fiat for the sale of new automobiles; and (ii) the exclusive use of Fiat brand in vehicle-financing related activities.
This operation is not expected to have significant effects on the results of ITAU UNIBANCO HOLDING.
Note 4 – Cash and cash equivalents
For purposes of consolidated statements of cash flows, Cash and cash equivalents in this note comprises the following items:
Amounts related to interbank deposits and securities purchased under agreements to resell not included in cash equivalents are R$ 7,061 (R$ 9,479 at December 31, 2012) and R$ 117,840(R$ 145,261 at December 31, 2012),respectively.
Note 5 – Central Bank compulsory deposits
Note 6 – Interbank deposits and securities purchased under agreements to resell
Note 7 – Financial assets held for trading and designated at fair value through profit or loss
a) Financial assets held for trading recognized at their fair value are presented in the following table:
The cost/amortized cost and fair value of financial assets held for trading by maturity are as follows:
Financial assets held for trading include assets with a fair value of R$ 82,394 (R$ 75,146 at December 31, 2012) that belong to investment funds wholly owned by Itaú Vida e Previdência S.A. The return of those assets (positive or negative) is fully transferred to customers of our PGBL and VGBL private pension plans whose premiums (less fees charged by us) are used by our subsidiary to purchase quotas of those investment funds.
The cost or amortized cost and fair value by maturity of financial assets designated as fair value through profit or loss were as follows:
Note 8 – Derivatives
ITAÚ UNIBANCO HOLDING enters into derivative financial instruments with various counterparties to manage its overall exposures and to assist its customers in managing their own exposures.
Futures– Interest rate and foreign currency futures contracts are commitments to buy or sell a financial instrument at a future date, at a contracted price or yield and may be settled in cash or through delivery. The notional amount represents the face value of the underlying instrument. Commodity futures contracts or financial instruments are commitments to buy or sell commodities (mainly gold, coffee and orange juice), at a future date,at a contracted price, which are settled in cash. The notional amount represents the quantity of such commodities multiplied by the future price at the contract date.Daily cash settlements of price movements are made for all instruments.
Forwards– Interest forward contracts are agreements to exchange payments on a specified future date,based on a market change in interest rates from trade date to contract settlement date.Foreign exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed price, at an agreed settlement date.Financial instrument forward contracts are commitments to buy or sell a financial instrument on a future date at a contracted price and are settled in cash.
Swaps– Interest rate and foreign exchange swap contracts are commitments to settle in cash at a future date or dates,based on differentials between specified financial indices (either two different interest rates in a single currency or two different rates each in a different currency), as applied to a notional principal amount. Swap contracts presented in Other in the table below correspond substantially to inflation rate swap contracts.
Options– Option contracts give the purchaser, for a fee,the right, but not the obligation, to buy or sell within a limited time a financial instrument including a flow of interest, foreign currencies, commodities,or financial instruments at a contracted price that may also be settled in cash, based on differentials between specific indices.
Credit Derivatives – Credit derivatives are financial instruments with value relating to the credit risk associated to the debt issued by a third party (the reference entity), which permits that one party (the purchaser of the hedge) transfers the risk to the counterparty (the seller of the hedge). The seller of the hedge should make payments as set forth in the contract when the reference entity undergoes a credit event, such as bankruptcy,default or debt restructuring. The seller of the hedge receives a premium for the hedge, but, on the other hand,assumes the risk that the underlying asset referenced in the contract undergoes a credit event, and the seller would have to make the payment to the purchaser of the hedge, which could be the notional amount of the credit derivative.
The total value of margins pledged in guarantee by ITAÚ UNIBANCO HOLDING was R$ 10,385 (R$ 4,895 at 12/31/2012) and was basically comprised of government securities.
The following table shows the composition of derivatives by index:
Derivative contracts mature as follows (in days):
See below the composition of the Derivative financial instruments portfolio (assets and liabilities) by type of instrument, stated fair value, and by maturity.
(*) Of the total asset portfolio of Derivative Financial Instruments, R$7,027 refers to current and R$4,339 to non-current.
See below the composition of the Derivative Financial Instruments portfolio (assets and liabilities) by type of instrument, stated fair value and by maturity.
(*) Of the total asset portfolio of Derivative Financial Instruments, R$6,914 refers to current and R$4,683 to non-current.
(*) Of the total liability portfolio of Derivative Financial Instruments, R$ (5,706) refers to current and R$ (5,699) to non-current.
(*) Of the total liability portfolio of Derivative Financial Instruments, R$ (5,517) refers to current and R$ (5,552) to non-current.
a) Information on credit derivatives
ITAÚ UNIBANCO HOLDING buys and sells credit protection mainly related to securities of Brazilian listed companies in order to meet the needs of its customers. When ITAÚ UNIBANCO HOLDING sells contracts for credit protection, the exposure for a given reference entity may be partially or totally offset by a credit protection purchase contract of another counterparty for the same reference entity or similar entity.The credit derivatives for which ITAÚ UNIBANCO HOLDING is protection seller are credit default swaps,total return swaps and credit-linked notes.
Credit Default Swaps – CDS
CDS are credit derivatives in which, upon a credit event related to the reference entity pursuant to the terms of the contract, the protection buyer is entitled to receive, from the protection seller,the amount equivalent to the difference between the face value of the CDS contract and the fair value of the liability on the date the contract was settled, also known as the recovered amount. The protection buyer does not need to hold the debt instrument of the reference entity for it to receive the amounts due pursuant to the CDS contract terms when a credit event occurs.
Total Return Swap – TRS
TRS is a transaction in which a party swaps the total return of a reference entity or of a basket of assets for regular cash flows, usually interest and a guarantee against capital loss. In a TRS contract, the parties do not transfer the ownership of the assets.
The table below presents the portfolio of credit derivatives in which ITAÚ UNIBANCO HOLDING sells protection to third parties, by maturity, and the maximum potential of future payments, gross of any guarantees, as well as its classification by instrument, risk and reference entity.
ITAÚ UNIBANCO HOLDING assesses the risk of a credit derivative based on the credit ratings attributed to the reference entity by independent credit rating agencies. Investment grade are those entities for which credit risk is rated as Baa3 or higher, as rated by Moody’s, and BBB- or higher, according to the ratings of Standard & Poor’s and Fitch Ratings. The maximum potential loss that may be incurred with the credit derivative is based on the notional amount of the derivative. ITAÚ UNIBANCO HOLDING believes, based on its historical experience, that the amount of the maximum potential loss does not represent the actual level of loss. This is so because, should there be an event of loss, the amount of maximum potential loss should be reduced from the notional amount by the recoverable amount.
The credit derivatives sold are not covered by guarantees, and during this period, ITAÚ UNIBANCO HOLDING has not incurred any loss related to credit derivative contracts.
The following table presents the notional amount of purchased credit derivatives whose underlying amounts are identical to those for which ITAÚ UNIBANCO HOLDING operates as seller of the credit protection.
b) Financial instruments subject to offsetting, enforceable master netting arrengements and similar agreements
The following tables set forth the financial assets and liabilities that are subject to enforceable master netting arrangements, as well as how these financial assets and liabilities have been presented in ITAÚ UNIBANCO HOLDING’s financial statements. These tables also reflect the amounts of collateral pledged or received in relation to financial assets and liabilities subject to enforceable arrangements that have not been presented on a net basis in accordance with IAS 32.
Financial assets subject to offsetting, enforceable master netting arrengements and similar agreements:
Financial liabilities subject to offsetting, enforceable master netting arrengements and similar agreements:
Financial assets and financial liabilities are offset in the balance sheet only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
Derivatives and repurchase agreements not set off in the balance sheet relate to transactions in which there are enforceable master netting agreements or similar agreements, but the offset criteria have not been met in accordance with paragraph 42 of IAS 32 mainly because ITAÚ UNIBANCO HOLDING has no intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
Note 9 – Hedge accounting
Hedge accounting varies depending on the nature of the hedged item and of the transaction. Derivatives may qualify for hedging instrument for accounting purposes if they are designated as hedging instruments under fair value hedges, cash flow hedge or hedge of net investment in foreign operations.
To hedge the variability of future cash flows of interest payments and in the foreign exchange rates ITAÚ UNIBANCO HOLDING uses DI Futures contracts exchange-traded at BM&FBOVESPA with respect to certain real-denominated variable-interest liabilities and interest rate swaps with respect to US dollar-denominated redeemable preferred shares issued by one of our subsidiaries and DI Futures contracts exchange-traded at BM&FBOVESPA, related to highly probable anticipated transactions, denominated in US dollars.
Under a DI Futures contract, a net payment (receipt) is made for the difference between a normal amount multiplied by the CDI rate and an amount computed and multiplied by a fixed rate. Under interest rate swap, a net payment (receipt) is made for the difference between an amount computed and multiplied by LIBOR and a notional amount computed and multiplied by a fixed rate. The gain (loss) from foreign exchange variation in Future DDI contracts is calculated by the difference between two periods of the market quotation between the US dollar and the Real.
ITAÚ UNIBANCO HOLDING cash flow hedge strategies consist of the hedge of the exposure to the variability in cash flows and in the foreign exchange on interest payments that are attributable to changes in interest rates with respect to recognized liabilities and changes in the foreign exchange rates of liabilities not recognized.
ITAÚ UNIBANCO HOLDING has applied cash flow hedge strategies as follows:
To evaluate the effectiveness and to measure the ineffectiveness of such strategies, ITAÚ UNIBANCO HOLDING uses the hypothetical derivative method. The hypothetical derivative method is based on a comparison of the change in the fair value of a hypothetical derivative with terms identical to the critical terms of the variable-rate liability, and this change in the fair value of a hypothetical derivative is considered a proxy of the present value of the cumulative change in the future cash flow expected for the hedged liability.
Hedge relationships were designated in 2008, 2009, 2010 and 2013, and related derivatives will mature between 2014 and 2018. Periods in which expected cash flows should be paid and affect the income statement are as follows:
Hedge of net investment in foreign operations
ITAÚ UNIBANCO HOLDING strategies of net investments in foreign operations consist of a hedge of the exposure in foreign currency arising from the functional currency of the foreign operation, with respect to the functional currency of the head office.
To hedge the changes of future cash flows of exchange variation of net investments in foreign operations, ITAÚ UNIBANCO HOLDING uses DDI Futures contracts traded at BM&FBOVESPA, Financial Assets and Forward contracts or NDF contracts entered into by our subsidiaries abroad.
In DDI Future contracts, the gain (loss) from exchange variation is computed as the difference between two periods of market quotation between the US dollar and Real. In the Forward or NDF contracts and Financial Assets, the gain (loss) from exchange variation is computed as the difference between two periods of market quotation between the functional currency and the US dollar.
ITAÚ UNIBANCO HOLDING applies the hedge of net investment in foreign operations as follows:
To evaluate the effectiveness and to measure the ineffectiveness of such strategies, ITAÚ UNIBANCO HOLDING uses the Dollar Offset Method. The Dollar Offset Method is based on a comparison of the change in fair value (cash flow) of the hedge instrument, attributable to changes in exchange rate and gain (loss) arising from the variation in exchange rates, on the amount of investment abroad designated as a hedged item.
Hedge relationships were designated in 2011 and 2012 and the hedge instruments will mature on the sale of investments abroad, which will be in the period when the cash flows of exchange variation are expected to occur and affect the statement of income.
The fair value hedge strategy of ITAÚ UNIBANCO HOLDING consists of hedging the exposure to variation of the fair value, of interest receipts, which is attributable to changes in interest rates related to recognized assets.
To hedge the variation in market risk in the receipt of interest, ITAÚ UNIBANCO HOLDING uses interest rate swap contracts related to fixed-rate assets expressed in unidad de fomento (CLF) and expressed in euros, issued by subsidiaries in Chile and London, respectively.
Under an interest rate swap contract, net receipt (payment) is made for the difference between the amount computed and multiplied by variable rate and an amount computed and multiplied by a fixed rate.
ITAÚ UNIBANCO HOLDING has applied fair value hedge as follows:
To evaluate the effectiveness and to measure the ineffectiveness of such strategy, ITAÚ UNIBANCO HOLDING uses the percentage approach and dollar offset method:
Hedge relationships were designated in 2012 and 2013 and the respective swaps will mature between 2016 and 2028. Receipts (payments) of interest flows are expected to occur on a monthly basis, and they will affect the statement of income.
Following we present gains (or losses) of the effective and ineffective portions of the strategies of cash flow hedge, hedge of net investment in foreign operations and fair value hedge.
a) Cash flow hedge
The effective portion is recognized in the stockholders’ equity, under other comprehensive income and the ineffective portion is recognized in the statement of income under net gain (loss) from investment securities and derivatives.
At December 31, 2013, the gain (loss) related to the cash flow hedge expected to be reclassified from Comprehensive Income to Income in the following 12 months is R$ (117) (R$ (376) at 01/01 to 12/31/2012 and R$ (167) at 01/01 to 12/31/2011).
b) Hedge of a net investment in foreign operations
DDI Futures is a futures contract in which participants may trade a clean coupon for any period between the first maturity of the futures contract of foreign currency coupon (DDI) and a later maturity.
NDF (Non Deliverable Forward), or Forward Contract of Currency without Physical Delivery is a derivative traded on over-the-counter market, which has the foreign exchange rate of a given currency as its subject.
c) Fair value hedge
The effective and ineffective portion are recognized in the statement of income under net gain (loss) from investment securities and derivatives.
The tables below present, for each strategy, the notional amount and the fair value of hedge instruments and the carrying amount of the hedged item:
(*) Hedge instruments include the overhedge rate of 40.00% regarding taxes.
The table below shows the breakdown by maturity of the hedging strategies.
(*) Classified as current, since instruments are frequently renewed,
Note 10 – Available-for-sale financial assets
The fair value and corresponding cost or amortized cost of available-for-sale financial assets are as follows:
The cost or amortized cost and fair value of available-for-sale financial assets by maturity are as follows:
Note 11 – Held-to maturity financial assets
The amortized cost of held-to-maturity financial assets is as follows:
The interest income from held-to-maturity financial assets was R$ 486 (R$ 471 from 01/01 to 12/31/2012 and R$ 360 from 01/01 to 12/31/2011).
The fair value of held-to-maturity financial assets is disclosed in Note 31.
The amortized cost of Held-to-Maturity Financial Assets by maturity is as follows:
Note 12 – Loan operations and lease operations portfolio
a) Composition of loan operations and lease operations
The breakdown of the Loan and Lease Operations Portfolio by debtor’s industry is evidenced in Note 36 item 5.1. Maximum exposure of Financial Assets segregated by business sector.
The accretion of the net present value of impaired loan operations and lease operations and the respective allowance for loan and lease losses are not presented using their gross amounts in the statement of income but on a net basis within interest and similar income. If they were presented at gross amounts, there would be an increase of R$ 1,681, R$ 1,852 and R$ 1,914 in interest and similar income as of December 31, 2013, December 31, 2012 and December 31, 2011, respectively, with the same impact on the allowance for loan and lease losses expenses.
b) Allowance for loan and lease losses
The changes in the allowance for loan and lease losses are shown in the table below:
The composition of the allowance for loan and lease losses by customers sector is shown in the following table:
ITAÚ UNIBANCO HOLDING assesses the objective evidence of impairment for loan operations and lease operations on an individual basis for financial assets that are individually significant and, in aggregate, for financial assets that are not individually significant. (Note 2.4g VIII)
The composition of the allowance for loan and lease losses by type of assessment for objective evidence of impairment is shown in the following table:
(*) As detailed in Note 2.4.g.VIII, corporate loans are first evaluated on an individual basis. In the event there is no objective indication of impairment, these are subsequently evaluated on an aggregate basis in accordance with the characteristics of the operation. As a result, an allowance for loan and lease losses for corporate loans is recognized, both in the individual and the aggregate evaluation.
c) Present value of lease operations
Bellow is the analysis of the present value of minimum future payments receivable from finance leases by maturity basically composed of individual operations – vehicles:
The allowance for loan and lease losses related to the lease portfolio amounts to: R$ 816 (R$ 1,513 at December 31, 2012).
d) Sale or transfer of financial assets
ITAÚ UNIBANCO HOLDING carried out operations related to the sale or transfer of financial assets in which there was the retention of credit risks of the financial assets transferred, through joint obligation clauses. Therefore, such operations remained recorded as loan operations and represent the following amounts at December 31, 2013 and December 31, 2012.
(*) Under Interbank Market Debt.
Note 13 – Investments in associates and joint ventures
a) The following table shows the main investments of ITAÚ UNIBANCO HOLDING:
At December 31, 2013, ITAÚ UNIBANCO HOLDING received / recognized for dividends and interest on capital of the unconsolidated companies, being the main Porto Seguro Itaú Unibanco Participações S.A. in the amount of R$ 175 (R$ 161 at December 31, 2012 and R$ 148 at December 31, 2011).
b) Other information
The table below shows the summary of the proportional interest in the aggregate financial information of the investees under the equity method of accounting.
The investees do not have contingent liabilities to which ITAÚ UNIBANCO HOLDING is significantly exposed.
Note 14 – Lease commitments as lease
a) Finance lease
ITAÚ UNIBANCO HOLDING is the lessee in finance lease contracts of data processing equipment, with the option of purchase or extension, without contingent rental payments or imposed restrictions. The net carrying amount of these assets is R$ 338 (R$ 248 at 12/31/2012).
The table below shows the total future minimum payments:
b) Operating leases
ITAÚ UNIBANCO HOLDING leases many properties, for use in its operations, under standard real estate leases that normally can be cancelled at its option and include renewal options and escalations clauses. No lease agreement imposes any restriction on our ability to pay dividends, engage in debt or equity financing transactions, or enter into further lease agreements, and there is no contingent payments related to the agreements.
The expenses related to operating lease agreements recognized under General and Administrative Expenses refer basically to rent agreements that total R$ 933 from 01/01 to 12/31/2013 (R$ 868 from 01/01 to 12/31/2012 and R$ 798 from 01/01 to 12/31/2011).
Minimum payments of services provided by third parties and rents according to operating and capital lease agreements with non-cancelable initial and remaining lease terms of more than one year are as follows:
Note 15 – Fixed assets
Note 16 – Intangible assets
Note 17 – Deposits
The table below shows the breakdown of deposits:
Note 18 – Financial liabilities held for trading
Financial liabilities held for trading are presented in the following table:
The effect of the changes in credit risk of these instruments is not significant at 12/31/2013 and 12/31/2012.
For shares, in view of the characteristics of the instrument, there is no definite value to be paid at the maturity date. For debt securities, the amount to be paid at maturity comprises several exchange rates and indices, and there is no contractual amount for settlement.
The fair value of financial liabilities held for trading by maturity is as follows:
Note 19 – Securities sold under repurchase agreements and interbank and institucional market debts
a) Securities sold under repurchase agreements and interbank market debt
The table below shows the breakdown of funds:
(*) It includes R$ 123.922 (R$ 127,652 at 12/312012) related to Debentures of own issue.
Funding for import and export financing represents credit facilities available for financing of imports and exports of Brazilian companies, in general denominated in foreign currency. The interest rate for each one of the operations (p.a.) is presented in the table below:
In “Securities sold under repurchase agreements”, we present the liabilities in transactions in which ITAÚ UNIBANCO HOLDING sells to customers in exchange for cash debt securities issued by its consolidated subsidiaries previously held in treasury, and where it undertakes to repurchase them at any time after the sale up to a repurchase deadline, at which time they must be repurchased by ITAÚ UNIBANCO HOLDING. The repurchase price is computed as the price paid on the sale date plus interest at rates ranging from 75% CDI to 13.23%. The deadline for repurchase expires in January 2027.
b)Institutional market debt
The table below presents the breakdown of funds obtained in Institutional markets:
The interest rate for each one of the operations (p.a.) is presented in the table below.
Note 20 – Other assets and liabilities
a) Other assets
b) Other liabilities
Note 21 – Stockholders’ equity
a)Capital
The Extraordinary Stockholders’ Meeting of April 19, 2013 approved the increase of subscribed and paid-up capital by R$ 15,000, with the capitalization of the amounts recorded in Revenue Reserve – Statutory Reserve, with a 10% bonus shares. Bonus shares started being traded on May 21, 2013 and the process was approved by the Central Bank on May 6, 2013. Accordingly, capital stock was increased by 457,093,610 shares.
Capital comprises 5,028,029,710 book-entry shares with no par value, of which 2,518,215,040 are common and 2,509,814,670 are preferred shares without voting rights; preferred shares have tag-along rights, in the event of a possible change in control, at a price equal to 80% of the amount per share paid for the controlling common shares. Capital stock amounts to R$ 60,000 (R$ 45,000 at December 31, 2012), of which R$ 41,602 (R$ 31,159 at December 31, 2012) refers to stockholders resident in Brazil and R$ 18,398 (R$ 13,841 at December 31, 2012) refers to stockholders resident abroad.
The table below shows the breakdown of and change in shares of paid-in capital and the reconciliation of balances at the beginning and end of the period:
See the detail below of the the average cost of treasury shares and their market price (in Brazilian reais per share):
b)Dividends
Stockholders are entitled to an annual mandatory dividend of not less than 25% of adjusted profit, pursuant to the provisions of the Brazilian Corporate Law. Both common and preferred shares participate equally, after common shares have received dividends equal to the annual minimum priority dividend of R$ 0.022 per share non-cumulative to be paid to preferred shares.
The calculation of the monthly advance of the mandatory minimum dividend is based on the share position on the last day of the prior month, with payment being made on the first business day of the subsequent month, in the amount of R$ 0.012 per share, and beginning with the payment of April 2012, it will be increased by 25%, to R$ 0.015 per share, according to the Board of Directors’ meeting held on February 6, 2012.
Below is a statement from dividends and interest on equity and the calculation of the minimum mandatory dividend:
Calculation of dividends and interest on capital
Payments/provision for interest on capital and dividends
c) Additional paid-in capital
Additional paid-in capital corresponds to: (i) the difference between the proceeds from the sale of treasury shares and the average cost of such shares, and (ii) the compensation expenses recognized in accordance with the stock option plan.
d) Appropriated reserves
e) Unappropriated reserves
Refers to balance of profit remaining after the distribution of dividends and appropriations to statutory reserves in the statutory accounts of ITAÚ UNIBANCO HOLDING.
Note 22 – Stock option plan
a) Purpose and guidelines of the plan
ITAÚ UNIBANCO HOLDING has a stock option plan for its executives. This program aims at involving the members of management in the medium and long-term corporate development process, by granting simple stock options or partner options, that are personal and cannot be pledged or transferred, entitling the holder to subscribe one authorized capital share or, at the discretion of the management, one treasury share which has been acquired for the purpose of reselling.
Such options may only be granted in years in which there are sufficient profits to enable the distribution of mandatory dividends to stockholders and at a quantity that does not exceed the limit of 0.5% of the total shares held by the stockholders at the base date of the year-end balance sheet. ITAÚ UNIBANCO HOLDING’s Personnel Committee is responsible for defining the quantity, the beneficiaries, the type of option, the life of the option under each series, which may vary between a minimum of 5 years and a maximum of 10 years, and the vesting and lockup periods for exercising the options. The executive officers and members of the Board of Directors of ITAÚ UNIBANCO HOLDING and of its subsidiaries, as well as employees may participate in this program, based on assessment of potential and performance.
ITAÚ UNIBANCO HOLDING settles the benefits under this plan solely by delivering its own shares, which are held in treasury until the effective exercise of the options by the beneficiaries.
b)Characteristics of the Programs
I – Simple Options
Prior programs
Before the merger, both Itaú and Unibanco each had Stock Option Plans (Prior Programs). The eligible beneficiaries of the program were granted simple options, depending upon the individual performance. The exercise price is calculated based on the average prices of preferred shares at the BM&FBOVESPA trading sessions over the period of at least one and at the most three months prior to the option issue date; the price is subject to a positive or negative adjustment of up to 20%, and restated until the last business day of the month prior to the option exercise date based either on the IGP-M or IPCA; in its absence, based on the index determined by the Committee. Options are no longer granted under this model.
Post-merger program
The eligible beneficiaries of the program are granted simple options, depending upon the individual employee performance. The exercise price is calculated based on the average prices of preferred shares at the BM&FBOVESPA in the last three months of the year prior to the granting date or alternatively subject to the positive or negative adjustments of up to 20% in the period. The exercise price is adjusted based on the IGPM or, in its absence, based on the index determined by the committee.
The vesting period is from one (1) to seven (7) years, counted from the issue date.
The ESM of April 19, 2013 approved the conversion of the Stock Option Plan of REDECARD S.A by Itaú Unibanco Holding S.A, with the exchange of RDCD3 to ITUB4 shares with no significant financial impacts.
II – Partner Plan
Executives selected to participate in the program may invest a percentage of their bonus to acquire shares or they have the right to receive shares (“Share-Based Instrument”). Title to the shares acquired, as well as the share-based instruments, should be held by the executives for a period from three to five years and they are subject to market fluctuation. At the times they acquire own shares and/or share-based instruments, partner options are granted in accordance with the classification of executives. Vesting periods of partner options or share-based instruments are from one to seven years. Share-based instruments and partner options are converted into shares of ITAÚ UNIBANCO HOLDING in the ratio of one preferred share for each instrument after the respective vesting period, with no payment of exercise price in cash.
The acquisition price of own shares and Share-Based Instruments is established every six months and is equivalent to the average preferred share quotation at the BM&FBOVESPA trading sessions in the 30 days prior to the determination of said price.
Title to the shares received after the vesting period of the Partner Options should be held, without any liens or encumbrances, for periods from five to eight years, as from the acquisition date of the shares.
The weighted average of the fair value of share-based instruments on the grant date was estimated for shares purchased in the fiscal year ended December 31, 2013 – R$ 34.66 per share (R$ 36.00 per share at December 31, 2012).
The fair value of Share-Based Instruments is the market price at the grant date for the preferred shares of ITAÚ UNIBANCO HOLDING, less the cash price paid by the beneficiaries. The amount received for the purchase of Share-Based Instruments was R$ 15 at December 31, 2013 (R$ 50 at December 31, 2012).
Summary of changes in the plan
(1) It refers to the conversion of the REDECARD Plan.
(2) Refers to non-exercise due to the beneficiary’s option.
(*) Refers to non-exercise due to the beneficiary’s option.
Summary of changes in Share-Based Instruments (SBI)
c)Fair value and economic assumptions for cost recognition
ITAÚ UNIBANCO HOLDING recognizes, at the grant date, the fair value of options through the Binomial method for simple options and the Black & Scholes method for partner options. Economic assumptions used are as follows:
Exercise price: for the option exercise price, the exercise price previously agreed-upon at the time the option was issued Is adopted, adjusted by the IGP-M variation.
Price of the underlying asset: the share price of ITAÚ UNIBANCO HOLDING (ITUB4) used for calculation is the closing price at BM&FBOVESPA on the calculation base date.
Expected dividends: is the average annual return rate for the last three years, of the dividends, plus interest on capital of the ITUB4 share.
Risk-free interest rate: the risk-free rate used is the IGP-M coupon rate at the expiration date of the option plan.
Expected volatility: calculated based on the standard deviation from the history of the last 84 monthly returns of closing prices of the ITUB4 share, released by BM&FBOVESPA, adjusted by the IGP-M variation.
(*) The fair value of partner options is measured based on the fair value of ITAÚ UNIBANCO HOLDING share at the granting date.
d)Accounting effects arising from options
The exercise of stock options, pursuant to the plan’s regulation, resulted in the sale of preferred shares held in treasury. The accounting entries related to the plan are recorded during the vesting period, at the portion of the fair value of options granted with effect on income, and during the exercise of options, at the amount received from the option exercise price, reflected in stockholders’ equity.
The effect of Income for the period from January 1 to December 31, 2013 was R$ (188) (R$ (177) from January 1 to December 31, 2012 and R$ (163) from January 1 to December 31, 2011) as contra-entry to Capital Reserve – Granted Options Recognized – Law No. 11,638 (Note 16c).
In the stockholders’ equity, the effect was as follows:
(*) Recorded in Additional paid-in capital
Note 23 – Interest and similar income and expense and net gain (loss) from investment securities and derivatives
a) Interest and similar income
b)Interest and similar expense
c)Net gain (loss) from investment securities and derivatives
(*) Includes the ineffective derivatives portion related to hedge accounting.
During the periods ended December 31, 2013, December 31, 2012 and December 31, 2011 ITAÚ UNIBANCO HOLDING has not recognized any impairment losses on held-to-maturity financial assets.
During the periods ended December 31, 2013, ITAÚ UNIBANCO HOLDING has recognized impairment losses in the amount of R$3 on available-for-sale financial assets, during the period ended December 31, 2012 and December 31, 2011 ITAÚ UNIBANCO HOLDING did not recognized impairment losses.
Note 24 – Banking service fees
Note 25 – Other income
(*) Basically composed of the result of the full disposal of investment in Serasa S.A. in the amount of R$1,542 from 01/01 to 12/31/2012.
Note 26 – General and administrative expenses
(*) From 01/01 to 12/31/2012 basically composed of the result of the full disposal of investment in Banco BPI S.A. in the amount of R$ (302).
Note 27 – Income tax and social contribution
ITAÚ UNIBANCO HOLDING and each of its subsidiaries file separate, for each fiscal year, corporate income tax returns and social contribution on net income.
a) Composition of income tax and social contribution expenses
I. Demonstration of Income tax and social contribution expense:
b) Deferred taxes
I. The deferred tax asset balance and respective changes are as follows:
(1) Effect of change in consolidation criteria (Note 2.4a I).
(2) Deferred income tax and social contribution assets and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 31,886 (R$ 28,381 at December 31, 2012) and R$ 328 ( R$ 3,038 at December 31, 2012).
(*) Deferred income tax and social contribution assets and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 28,381 and R$ 3,038.
II. The provision for deferred tax liability balance and respective changes are as follows:
(*) Deferred income tax and social contribution asset and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 28,381 and R$ 3,038.
III. The estimate of realization and present value of deferred tax assets and from the Provision for Deferred Income Tax and Social Contribution existing at December 31, 2013, in accordance with the expected generation of future taxable income, based on the history of profitability and technical feasibility studies, are:
(*) The average funding rate, net of tax effects, was used to determine the present value.
The projections of future taxable income include estimates related to macroeconomic variables, exchange rates, interest rates, volume of financial operations and services fees and others which can vary in relation to actual data and amounts.
Net income in the financial statements is not directly related to taxable income, due to differences between accounting criteria and tax legislation, besides corporate aspects. Accordingly, it is recommended that the trend of the realization of deferred tax assets arising from temporary differences, and tax loss carryforwards should not be used as an indication of future net income.
At 12/31/2013 and 12/31/2012 there are no deferred tax assets and liabilities which have not been recognized.
Note 28 – Earnings per share
Basic and diluted earnings per share were computed as shown in the table below for the periods indicated. Basic earnings per share are computed by dividing the net income attributable to the stockholder of ITAÚ UNIBANCO HOLDING by the average number of shares for the period, and by excluding the number of shares purchased and held as treasury shares by the company. Diluted earnings per share are computed on a similar way, but with the adjustment made in the denominator when assuming the conversion of all shares that may be diluted.
Potential anti-dilution effects of shares under our stock option plan, which were excluded from the calculation of diluted earnings per share, totaled 13,230,933 preferred shares at 12/31/2013, 12,448,179 preferred shares at 12/31/2012 and 8,688,900 preferred shares at 12/31/2011.
Note 29 – Post-employment benefits
As prescribed in IAS 19 (R1), we present the policies of ITAÚ UNIBANCO HOLDING and its subsidiaries regarding employee benefits, as well as the accounting procedures adopted. The effects from adopting IAS 19 (R1), when applicable, are presented on a comparative basis in the notes to the financial statements; however, these effects have no impact on the financial statements of December 31, 2012.
ITAÚ UNIBANCO HOLDING and some of its subsidiaries sponsor defined benefit plans, including variable contribution plans, the basic purpose of which is to provide benefits that, in general, represent a life annuity benefit, and may be converted into survivorship annuities, according to the plan’s regulation. They also sponsor defined contribution plans, the benefit of which is calculated based on the accumulated balance of individual accounts at the eligibility date, according to the plan’s regulation, which does not require actuarial calculation, except as described in Note 29d.
Employees hired up to July 31, 2002, by Itaú, and up to February 27, 2009, by Unibanco, are beneficiaries of the above-mentioned plans. As regards the new employees hired after these dates, they have the option to voluntarily participate in a variable contribution plan (PGBL), managed by Itaú Vida e Previdência S.A.
a)Description of the plans
Retirement plans are managed by closed-end private pension entities (EFPC), with independent legal structures, as detailed below:
b)Governance
The closed-end private pension entities (EFPC) and the benefit plans they manage are regulated in conformity with the related specific legislation. The EFPC are managed by the Executive Board, Advisory Council and Fiscal Council, with some members appointed by the sponsors and others appointed as representatives of active and other participants, pursuant to the respective Entity’s by laws. The main purpose of the EFPC is to pay benefits to eligible participants, pursuant to the Plan Regulation, maintaining the plans assets invested separately and independently from ITAÚ UNIBANCO HOLDING.
c)Defined benefit plans
I. Main assumptions used in actuarial valuation of retirement plans
The mortality tables adopted correspond to those disclosed by SOA – Society of Actuaries, the North-American entity which corresponds to IBA – Brazilian Institute of Actuarial Science, which reflects a 10% increase in the probabilities of survival as compared to the respective basic tables.
The life expectancy in years by the AT-2000 mortality table for participants of 55 years of age is 27 and 31 years for men and women, respectively.
Actuarial assumptions adopted are consistent with the group of participants of each benefit plan, pursuant to the studies carried out by an independent external actuarial consulting company, for biometric/demographic assumptions.
II. Risk Exposure
Through its defined benefit plans, ITAÚ UNIBANCO HOLDING is exposed to a number of risks, the most significant ones are:
- Volatility of Assets
The actuarial liability is calculated by adopting a discount rate defined on the income from securities issued by the Brazilian treasury (government securities). If the actual income from plan assets is lower than expected, this may give rise to a deficit. The plans have a significant percentage of fixed-income securities pegged to the plan commitments, aiming at minimizing volatility and the short and medium-term risk.
- Changes in Investment Income
A decrease in income from public securities will imply a decrease in discount rate and, therefore, will increase the actuarial liability. The effect will be partially offset by the recognition of these securities at market value.
- Inflation Risk
Most of the employee benefit plans are pegged to the inflation rates, and a higher inflation will lead to higher obligations. The effect will also be partially offset because a significant portion of the plan assets is pegged to government securities restated at the inflation rate.
- Life Expectancy
Most of the plan obligations are to provide life benefits and therefore the increase in life expectancy will result in increased plan liabilities.
III. Management of defined benefit plan assets
The general purpose of managing EFPCs funds is to search for a long-term balance between assets and obligations with payment of retirement benefits, by exceeding the actuarial targets (discount rate plus benefit adjustment index, established in the plan regulations).
Regarding the assets guaranteeing the actuarial liability reserves, management should ensure the payment capacity of retirement benefits in the long-term by avoiding the risk of mismatching assets and liabilities in each pension plan.
The allocation of plan assets and the allocation target by type of asset are as follows:
The defined benefit plan assets include shares of ITAÚ UNIBANCO HOLDING, its main parent company (ITAÚSA) and of subsidiaries of the latter, with a fair value of R$ 596 (R$ 589 at 12/31/2012 and R$ 531 at 12/31/2011), and real estate rented to Group companies, with a fair value of R$ 474 (R$ 498 at 12/31/2012 and R$ 298 at 12/31/2011).
Fair Value
The fair value of the plan assets is adjusted up to the report date, as follows:
Fixed-Income Securities and Structured Investments – accounted for at market value, considering the average trading price on the calculation date, net realizable value obtained upon the technical addition of pricing, considering, at least, the payment terms and maturity, credit risk and the indexing unit.
Variable income securities – accounted for at market value, being so understood the share average quotation at the last day of the month or at the closest date on the stock exchange on which the share has posted the highest liquidity rate.
Real Estate – stated at acquisition or construction cost, adjusted to market value upon reappraisals made in 2012, supported by technical appraisal reports. Depreciation is calculated under the straight line method, considering the useful life of the real estate.
Loans to participants – adjusted up to the report date, in compliance with the respective agreements.
Fund Allocation Target
The fund allocation target is based on Investment Policies that are currently revised and approved by the Advisory Council of each EFPC, considering a five-year period, which establishes guidelines for investing funds guaranteeing Actuarial Liability and for classifying securities.
IV. Net amount recognized in the balance sheet
Following is the calculation of the net amount recognized in the balance sheet, corresponding to the defined benefit plan:
V. Change in the net amount recognized in the balance sheet:
VI. Total amounts recognized in Income for the Period and Stockholders’ Equity – Other Comprehensive Income (OCI)
During the period, the contributions made totaled R$ 68 (R$ 57 from 01/01 to 12/31/2012 and R$ 42 from 01/01 to 12/31/2011). The contribution rate increases based on the beneficiary’s salary.
In 2014, contribution to the retirement plans sponsored by ITAÚ UNIBANCO HOLDING is expected to amount to R$ 57.
The estimate for payment of benefits for the next 10 years is as follows:
VII. Sensitivity of defined benefit obligation
The impact, due to the change in the assumption – discount rate by 0.5%, which would be recognized in Actuarial liabilities of the plans, as well as in Stockholders’ Equity – Other Comprehensive Income of the sponsor (before taxes) would amount to:
d) Defined contribution plans
The defined contribution plans have assets relating to sponsors’ contributions not yet included in the participant’s account balance due to loss of eligibility to a plan benefit, as well as resources from the migration from the defined benefit plans. The fund will be used for future contributions to the individual participants’ accounts, according to the rules of the respective benefit plan regulation.
I. Change in the net amount recognized in the Balance sheet:
II. Total amounts recognized in income for the period and Stockholders’ Equity – Other Comprehensive Income (OCI):
During the period, the contributions to the defined contribution plans, including PGBL, totaled R$ 183 (R$ 196 from 01/01 at 12/31/2012 and R$ 193 from 01/01 at 12/31/2011), of which R$ 136 (R$ 146 from 01/01 at 12/31/2012 and R$ 144 from 01/01 at 12/31/2011) were pension funds.
e) Other post-employment benefits
ITAÚ UNIBANCO HOLDING and its subsidiaries do not offer other post-employment benefits, except in those cases arising from obligations under acquisition agreements signed by ITAÚ UNIBANCO HOLDING, as well as in relation to the benefits granted due to a judicial sentence, in accordance with the terms and conditions established, in which health plans are totally or partially sponsored for specific groups of former workers and beneficiaries.
Based on the report prepared by an independent actuary, the changes in obligations for these other projected benefits and the amounts recognized in the balance sheet, under liabilities, of ITAÚ UNIBANCO HOLDING are as follows:
I. Change in the net amount recognized in the balance sheet:
II. Total amounts recognized in Income for the Period and Stockholders’ Equity – Other Comprehensive Income (OCI):
III. Assumptions and sensitivity at 1%
For calculation of projected benefits obligations in addition to the assumptions used for the defined benefit plans (note 29c I), an 9.72% p.a. increase in medical costs assumption is assumed.
Assumptions about medical care cost trends have a significant impact on the amounts recognized in income. A change of one percentage point in the medical care cost rates would have the following effects:
Note 30 – Insurance contracts
a) Insurance contracts
ITAÚ UNIBANCO HOLDING, through its subsidiaries, offers to the market Insurance and private pension. Products are offered through insurance brokers (third parties operating in the market and its own brokers), Itaú Unibanco branches and electronic channels, according to their characteristics and regulatory requirements.
In all segments, a new product is created when new demands and opportunities arise in the market or from a specific negotiation.
The products developed are submitted to a committee, coordinated and controlled by the Governance of Products, in which all flows comprising the operational, commercial, legal, accounting, financial, internal control and technology aspects are analyzed, discussed and approved by the various areas involved.
The governance process of product evaluation is regulated by the Corporate Policy on Product and Operations Evaluation, and requires the integration of activities between product and evaluation areas, forming an organized group of activities that aims to add value to customers and to promote competitive differentials.
Internal rules provide for and support product evaluation and approval flows, attribution of responsibilities, provisions for carrying out processes, and also maximum and minimum balance limits, contribution, minimum premium and other, which aim at preserving the consistency of the process and product results.
There are also policies on underwriting risks in each segment, such as technical actuarial limits per insurance line and coverage, which are controlled systemically or operationally.
This product creation process involves the following steps:
For private pension products, registration with the Brazilian Securities and Exchange Commission (CVM) and approval of actuarial technical notes and rules from SUSEP for sales is also required. It is also possible to custom minimum amounts, fund management and entry fees, actuarial table and interest upon negotiation with evaluation of an internal pricing model agreed in a specific contract.
There are policies on appropriate balances and minimum contributions to each negotiation. Risk benefits, considered ancillary coverage, follow their own and specific conditions, such as coverage limits, target audience and proof of good health, among others, according to each agreement. In addition, increased risks may exceed the loss coverage through reinsurance.
Each product has rules according to the channel and segment to which it will be sold. Pricing policies are determined according to internal models, in compliance with the corporate standard pricing model developed by the Risk and Financial Controls Area, in the context of the Governance of product evaluation.
The cost management of insurance and private pension products includes the groups of administrative, operating and selling expenses, where administrative expenses based on the recognition by cost centers, are allocated to products and sales channels according to the definition of the respective activities, following the corporate managerial model of the ITAÚ UNIBANCO HOLDING. Operating and selling expenses are based on the line for product identification and policy segmentation in order to define the sales channel.
b) Main products
I. Insurance
ITAÚ UNIBANCO HOLDING, through its insurance companies, supplies the market with insurance products with the purpose of assuming risks and restoring the economic balance of the assets of the policyholder if damaged.
In this segment, clients are mainly divided into the Individual (Retail, UniClass, Personnalité and Private) and Corporate (Companies, Corporate and Condominium) markets.
The contract entered into between the parties aims at guaranteeing the protection of the client’s assets. Upon payment of a premium, the policyholder is protected through previously-agreed replacement or indemnification clauses for damages. ITAÚ UNIBANCO HOLDING insurance companies then recognize technical reserves administered by themselves, through specialized areas within the conglomerate, with the objective of indemnifying the policyholder’s loss in the event of claims of insured risks.
The insurance risks sold by insurance companies of ITAÚ UNIBANCO HOLDING are divided into property and casualty, and life insurance.
II. Private pension
Developed as a solution to ensure the maintenance of the quality of life of participants, as a supplement to the government plans, through long-term investments, private pension products are divided into three major groups:
III. Income from insurance and private pension
The revenue from the main insurance and private pension products is as follows:
c) Technical reserves for insurance and private pension
The technical provisions of insurance, pension plan and capitalization are recognized according to the technical notes approved by SUSEP and criteria established by current legislation.
I. Insurance and private pension:
II. Change in reserves for insurance and private pension
The details about the changes in balances of reserves for insurance and private pension operations are as follows:
II.I – Change in technical provisions
II.II – Technical provisions balances
d) Deferred selling expenses
Deferred acquisition costs of insurance are direct and indirect costs incurred to sell, underwrite and originate a new insurance contract.
Direct costs are basically commissions paid for brokerage services, agency and prospecting efforts and are deferred for amortization in proportion to the recognition of revenue from earned premiums, that is, over the coverage period, for the term of effectiveness of contracts, according to the calculation rules in force.
Balances are recorded under gross reinsurance assets and changes are shown in the table below:
The amounts of deferred selling expenses from reinsurance are stated in Note 30I.
e) Table of loss development
Changes in the amount of obligations of the ITAÚ UNIBANCO HOLDING may occur at the end of each annual reporting period. The table below shows the development by the claims incurred method. The first part of the table shows how the final loss estimate changes through time. The second part of the table reconciles the amounts pending payment and the liability disclosed in the balance sheet.
I. Gross of reinsurance
Ia. Administratives claims – gross of reinsurance
Ib. Judicial claims – gross of reinsurance
II. Net of reinsurance
IIa. Administratives claims – net of reinsurance
IIb. Judicial claims – net of reinsurance
Variations observed in the estimates of losses occurred in 2010 result mainly from atypical events, with gross amounts frequently higher than the average previously observed. However, as the percentages for reinsurance are high, the net analysis is not affected by this factor. In addition, in view of the high volatility inherent in the analysis of reinsurance gross data, particularly in all risks operations, the analysis of amounts net of reinsurance is recommended.
The breakdown of the table development of claims between administrative and legal evidences the reallocation of claims up to a certain base date and that become legal ones afterwards, which may give the wrong impression of need for adjusting the provisions in each breakdown.
Additionally, it is important to emphasize that ITAU UNIBANCO HOLDING recognizes a provision for claims incurred by not enough reported (IBNER) with the purpose of covering the expected adjustment amount for claims (not on an individual basis) at the moment of recognizing the Provision for Unsettled Claims, particularly in lawsuits, in which the development of claims is very slow.
f) Liability adequacy test
As established in IFRS 4 – “Insurance contracts”, an insurance company must carry out the Liability Adequacy Test, comparing the amount recognized for its technical reserves with the current estimate of projected cash flow.
The estimate should consider all cash flows related to the business, which is the minimum requirement for carrying out the adequacy test.
The Liability adequacy test did not show any deficiency in this period.
The assumptions used in the test were as follows:
g) Insurance risk – effect of changes on actuarial assumptions
Property insurance is a short-lived insurance, and the main actuarial assumptions involved in the management and pricing of the associated risks are claims frequency and severity. Volatility above the expected number of claims and amount of claim indemnities may result in unexpected losses.
Life insurance and pension plans are, in general, medium or long-lived products and the main risks involved in the business may be classified as biometric risk, financial risk and behavioral risk.
Biometric risk relates to: i) more than expected increase in life expectancies for products with survivorship coverage (mostly pension plans); ii) more than expected decrease in mortality rates for products with survivorship coverage (mostly life insurance).
Products offering financial guarantee predetermined under contract involve financial risk inherent in the underwriting risk, with such risk being considered insurance risk.
Behavioral risk relates to a more than expected increase in the rates of conversion into annuity income, resulting in increased payments of retirement benefits.
The estimated actuarial assumptions are based on the historical evaluation of ITAÚ UNIBANCO HOLDING benchmarks and the experience of the actuaries.
Sensitivity analysis were carried out with the amounts of current estimates based on the variations of the main actuarial assumptions. The results of LAT (Liability Adequacy Test) sensitivity analysis were as follows:
h) Risks of insurance and private pension
ITAÚ UNIBANCO HOLDING has specific committees to define the management of funds from the technical reserves for insurance and private pension, issue guidelines for managing these funds with the objective of achieving long-term return, and define evaluation models, risk limits and strategies on allocation of funds to defined financial assets. Such committees are comprised not only of executives and those directly responsible for the business management process, but also for an equal number of professionals that head up or coordinate the commercial and financial areas.
Large risks products are distributed by brokers. In the case of the extended warranty product, this is marketed by the retail company that sells the product to consumer. The DPVAT production results from the participation that the insurance companies of ITAÚ UNIBANCO HOLDING have in the Leading Insurance Company of the DPVAT consortium.
There is no product concentration in relation to insurance premiums, reducing the concentration risk of products and distribution channels. For large risks products, the strategy of lower retention is adopted, in accordance with certain lines shown below:
I) Underwriting risk management structure
The risk control of the insurance company is centralized by the independent executive area responsible for risk control, while the management of risk is the responsibility of the business units exposed to underwriting risk and the risk management area of ITAÚ UNIBANCO HOLDING insurance subsidiaries.
The underwriting risk management is the responsibility of the business area coordinated by the risk management area of ITAÚ UNIBANCO HOLDING insurance subsidiaries with the participation of the institutional actuarial area and product units and managers. These units, in their daily operations, accept risks based on the profitability of their businesses.
j) Duties and responsibilities
I. Independent executive area responsible for risk control
This area has the following attributes:
II. Executive area responsible for operational and efficiency risk
III. Business units exposed to underwriting risk
IV. Reinsurance area
V. Risk management area of ITAÚ UNIBANCO HOLDING insurance subsidiaries
VI. Actuarial area
VII. Internal controls area
VIII. Internal audit
Carry out independent and periodic checks as to the effectiveness of the risk control process of insurance and private pension operations, according to the guidelines of the audit committee.
Insurance and private pension managers work together with the investment manager to ensure that assets backing long-term products, with guaranteed minimum returns are managed according to the characteristics of the liabilities aiming at actuarial balance and long-term solvency.
A detailed mapping of the liabilities of long-term products that result in payment flows of projected future benefits is performed annually. This mapping is carried out in accordance with actuarial assumptions.
The investment manager, having this information, uses Asset Liability Management models to find the best asset portfolio composition that enables the mitigating of risks entailed in this type of product, considering its long-term economic and financial feasibility. The portfolio of backing assets are periodically balanced based on the fluctuations in market prices of assets, liquidity needs, and changes in characteristics of liabilities.
k) Market, credit and liquidity risk
Market risk is analyzed, in relation to insurance operations, based on the following metrics and sensitivity and loss control measures (Note 36 – Market risk):
Liquidity Risk
Liquidity risk is the risk that ITAÚ UNIBANCO HOLDING may have insufficient net funds available to honor its current obligations at a given moment. The liquidity risk is managed continuously based on the monitoring of payment flows related to its liabilities vis-à-vis the inflows generated by its operations and financial assets portfolio. Additionally, according to the principles of prudence and conservative accounting, ITAÚ UNIBANCO HOLDING has funds invested in short-term assets, available on demand, to cover its regular needs and any liquidity contingencies.
Credit Risk
Reinsurers – Breakdown
The rating agency used to classify the reinsurance companies is Standard & Poor’s.
Risk level of financial assets
The table below shows insurance financial assets, individually evaluated, classified by rating:
(*) Internal risk level ratings, with due associated probability of default, are detailed in Note 36.
(I) Reinsurance
Expenses and revenues from reinsurance premiums ceded are recognized in the period when they occur, according to the accrual basis, with no offset of assets and liabilities related to reinsurance except in the event there is a contractual provision for the offset of accounts between the parties. Analyses of reinsurance required are made to meet the current needs of ITAÚ UNIBANCO HOLDING, maintaining the necessary flexibility to comply with changes in management strategy in response to the various scenarios to which it may exposed.
With the approval of the Supplementary Law No. 126 of January 15, 2007, the reinsurance market was opened with the creation of three categories of companies authorized to operate in Brazil: local, admitted and occasional (the last two being respectively reinsurance companies with or without representative office in Brazil). The transition to the new market was made progressively, maintaining the right of local reinsurance companies at 60% of premiums ceded by insurance companies until January 2010; after this period, this percentage may be reduced to 40%. From March 31, 2011, this percentage of 40% shall be obligatorily ceded to local reinsurance companies.
Reinsurance assets
Reinsurance assets represent the estimated amounts recoverable from reinsurers in connection with losses incurred. Such assets are evaluated based on risk assignment contracts, and for cases of losses effectively paid, they are reassessed after 365 days as to the possibility of impairment; in case of doubts, such assets are reduced by recognizing an allowance for losses on reinsurance.
Reinsurance transferred
ITAÚ UNIBANCO HOLDING transfers, in the normal course of its businesses, reinsurance premiums to cover losses on underwriting risks to its policyholders and is in compliance with the operational limits established by the regulating authority. In addition to proportional contracts, non-proportional contracts are also entered into in order to transfer a portion of the responsibility to the reinsurance company for losses that exceed a certain level of losses in the portfolio. Non-proportional reinsurance premiums are included in Other assets – prepaid expenses and amortized to Other operating expenses over the effectiveness period of the contract on a daily accrual basis.
I. Changes in balances of transactions with reinsurance companies
II. Balances of technical reserves with reinsurance assets
III. Changes in balances of technical reserves for reinsurance claims
IV. Changes in balances of technical reserves for reinsurance premiums
V. Changes in balances of technical reserves for reinsurance commission
m) Regulatory authorities
Insurance and private pension operations are regulated by the National Council of Private Insurance (CNSP) and the Superintendence of Private Insurance (SUSEP). These authorities are responsible for regulating the market, and consequently for assisting in the mitigation of risks inherent in the business.
The CNSP is the regulatory authority of insurance activities in Brazil, created by Decree-Law No. 73, of November 21, 1966. The main attribution of CNSP, at the time of its creation, was to set out the guidelines and rules of government policy on private insurance segments, and with the enactment of Law No. 6,435, of July 15, 1977, its attributions included private pension of public companies.
The Superintendence of Private Insurance (SUSEP) is the authority responsible for controlling and overseeing the insurance, private pension, and reinsurance markets. An agency of the Ministry of Finance, it was created by the Decree-Law No. 73, of November 21, 1966, which also created the National System of Private Insurance, comprising the National Council of Private Insurance (CNSP), IRB Brasil Resseguros S.A. – IRB Brasil Re, the companies authorized to have private pension plans and the open-ended private pension companies.
n) Capital for insurance activity
CNSP – Conselho Nacional de Seguros Privados (National Council for Private Insurance) published on February 18, 2013 Rules N° 280 (revoked Resolution N° 411 of December 22, 2010), N° 282 (revoked Resolution N° 227 of December 06, 2010), N° 283 and N° 284. These Rules establish general guidelines for the operation of insurance companies and capital requirements for underwriting and operational risk. In January 2011, CNSP Resolution No. 228 of December 6, 2010 provided criteria for additional credit risk capital requirements for insurance companies. As of December 23, 2013, CNSP modified capital requirements publishing Rule No. 302 that came into effect on January, 1st, 2014, revoked Rules nº 282 and changed Rules nº 228 e 280.
Note 31 – Fair value of financial instruments
In cases where market prices are not available, fair values are based on estimates using discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions adopted, including the discount rate and estimate of future cash flows. The estimated fair value achieved through these techniques cannot be substantiated by comparison with independent markets and, in many cases, it cannot be realized in the immediate settlement of the instrument.
The following table summarizes the carrying and estimated fair values for financial instruments:
Financial instruments not included in the Balance Sheet (Note 36) are represented by Standby letters of credit and guarantees provided, which amount to R$ 71,162 (R$ 60,310 at 12/31/2012) with an estimated fair value of R$ 802 (R$ 728 at 12/31/2012).
The methods and assumptions adopted to estimate the fair value are defined below:
a) Cash and deposits on demand, Central Bank compulsory deposits, Securities purchased under agreements to resell, Securities sold under repurchase agreements and liabilities for capitalization plans – The carrying amounts for these instruments approximate their fair values.
b) Interbank deposits, deposits, Interbank market debt and Institutional market debt – ITAÚ UNIBANCO HOLDING estimates the fair values by discounting the estimated cash flows and adopting the market interest rates.
c) Financial assets held for trading, including Derivatives (assets and liabilities), Financial assets designated at fair value through profit or loss, Available-for-sale financial assets, Held-to-maturity financial assets and Financial liabilities held for trading – Under normal conditions, market prices are the best indicators of the fair values of financial instruments. However, not all instruments have liquidity or quoted market prices and, in such cases, the adoption of present value estimates and other pricing techniques are required. In the absence of quoted prices from ANBIMA, the fair values of bonds are calculated based on the interest rates provided by others on the market (brokers). The fair values of corporate debt securities are computed by adopting criteria similar to those applied to interbank deposits, as described above. The fair values of shares are computed based on their prices quoted in the market.
The fair values of derivative financial instruments were determined as follows:
d) Loan operations and lease operations – The fair value is estimated based on groups of loans with similar financial and risk characteristics, using valuation models. The fair value of fixed-rate loans was determined by discounting estimated cash flows, applying interest rates close to ITAÚ UNIBANCO HOLDING current rates for similar loans. For the majority of loans at floating rate, the carrying amount was considered close to their fair value. The fair value of loan and lease operations not overdue was calculated by discounting the expected payments of principal and interest through maturity, at the aforementioned rates. The fair value of overdue loan and lease transactions was based on the discount of estimated cash flows, using a rate proportional to the risk associated with the estimated cash flows, or on the underlying collateral. The assumptions related to cash flows and discount rates are determined using information available in the market and the borrower’s specific information of the debtor.
e) Other financial assets/liabilities – primarily composed of receivables from credit card issuers, deposits in guarantee for contingent liabilities and trading and intermediation of securities. The carrying amounts for these assets/liabilities substantially approximate their fair values, since they principally represent amounts to be received in the short term from credit card holders and to be paid to credit card acquirers, judicially required deposits (indexed to market rates) made
by ITAÚ UNIBANCO HOLDING as guarantees for lawsuits or very short-term receivables (generally with a maturity of approximately 5 (five) business days). All of these items represent assets/liabilities without significant associated market, credit and liquidity risks.
In accordance with IFRS, ITAÚ UNIBANCO HOLDING classifies fair value measurements in a fair value hierarchy that reflects the significance of inputs adopted in the measurement process.
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
An active market is a market in which transactions for the asset or liability being measured occur often enough and with sufficient volume to provide pricing information on an ongoing basis.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Level 2 generally includes: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or quoted prices vary substantially either over time or among market makers, or in which little information is released publicly; (iii) inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, etc.); (iv) inputs that are mainly derived from or corroborated by observable market data through correlation or by other means.
Level 3: Inputs are unobservable for the asset or liability. Unobservable information shall be used to measure fair value to the extent that observable information is not available, thus allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
Financial assets for trading, Available for sale, and Designated at fair value through profit or loss:
Level 1: Highly-liquid securities with prices available in an active market are classified in Level 1 of the fair value hierarchy.
This classification level includes most of the Brazilian Government Securities (mainly LTN, LFT, NTN-B, NTN-C and NTN-F), securities of foreign governments, shares and debentures traded on stock exchanges and other securities traded in an active market.
Level 2: When the pricing information is not available for a specific security, the assessment is usually based on prices quoted in the market for similar instruments, pricing information obtained for pricing services, such as Bloomberg, Reuters and brokers (only when the prices represent actual transactions) or discounted cash flows, which use information for assets actively traded in an active market. These securities are classified into Level 2 of the fair value hierarchy and are comprised of certain Brazilian government securities, debentures and some government securities quoted in a less-liquid market in relation to those classified into Level 1, and some share prices in investment funds. ITAÚ UNIBANCO HOLDING does not hold positions in alternative investment funds or private equity funds.
Level 3: When no pricing information in an active market, ITAÚ UNIBANCO HOLDING uses internally developed models, from curves generated according to the proprietary model. The Level 3 classification includes some Brazilian government and private securities (mainly NTN-I, NTN-A1, NTN-A3, CRI, TDA and CCI falling due after 2025, CVS and promissory notes) and securities that are not usually traded in an active market.
Derivatives:
Level 1: Derivatives traded on stock exchanges are classified in Level 1 of the hierarchy.
Level 2: For derivatives not traded on stock exchanges, ITAÚ UNIBANCO HOLDING estimates the fair value by adopting a variety of techniques, such as Black&Scholes, Garman & Kohlhagen, Monte Carlo or even the discounted cash flow models usually adopted in the financial market. Derivatives included in Level 2 are credit default swaps, cross currency
swaps, interest rate swaps, plain vanilla options, certain forwards and generally all swaps. All models adopted by ITAÚ UNIBANCO HOLDING are widely accepted in the financial services industry and reflect all derivative contractual terms. Considering that many of these models do not require a high level of subjectivity, since the methodologies adopted in the models do not require major decisions and information for the model are readily observed in the actively quotation markets, these products were classified in Level 2 of the measurement hierarchy.
Level 3: The derivatives with fair values based on non-observable information in an active market were classified into Level 3 of the fair value hierarchy, and are comprised of non-standard options, certain swaps indexed to non-observable information, and swaps with other products, such as swap with option and USD Check, credit derivatives and futures of certain commodities. These operations have their pricing derived from a range of volatility using the basis of historical volatility.
All aforementioned valuation methodologies may result in a fair value that may not be indicative of the net realizable value or future fair values. However, ITAÚ UNIBANCO HOLDING believes that all methodologies used are appropriate and consistent with the other market participants. However, the adoption of other methodologies or assumptions different than those used to estimate fair value may result in different fair value estimates at the balance sheet date.
Distribution by level
The following table presents the breakdown of risk levels at 12/31/2013 and 12/31/2012 for financial assets held for trading and available-for-sale financial assets.
The following table presents the breakdown of risk levels at 12/31/2013 and 12/31/2012 for our derivative assets and liabilities.
There were no significant transfers between Level 1 and Level 2 during the periods ended 12/31/2013 and 12/31/2012. Transfers into and out of Level 3 are displayed on changes of Level 3.
Measurement of fair value Level 2 based on pricing services and brokers
When pricing information is not available for securities classified as Level 2, pricing services, such as Bloomberg or brokers, are used to value such instruments.
In all cases, to assure that the fair value of these instruments is properly classified as Level 2, internal analysis of the information received are conducted, so as to understand the nature of the input used in the establishment of such values by the service provider.
Prices provided by pricing services that meet the following requirements are considered Level 2: input is immediately available, regularly distributed, provided by sources actively involved in significant markets and it is not proprietary.
Of the total of R$ 78,724 million in financial instruments classified as Level 2, at December 31, 2013, pricing service or brokers were used to evaluate securities at the fair value of R$ 24,410 million, substantially represented by:
Level 3 recurring fair value measurements
The departments in charge of defining and applying the pricing models are segregated from the business areas.
The models are documented, submitted to validation by an independent area and approved by a specific committee. The daily process of price capture, calculation and disclosure are periodically checked according to formally defined testing and criteria and the information is stored in a single and corporate history data base.
The most recurring cases of assets classified as Level 3 are justified by the discount factors used. Factors such as the fixed interest curve in reais and the TR coupon curve – and, as a result, its related factors – have inputs with terms shorter than the maturities of these fixed-income assets. For swaps, the analysis is carried out by index for both parties. There are some cases in which the inputs periods are shorter than the maturity of the derivative.
Level 3 recurring fair value changes
The tables below show the changes in balance sheet for financial instruments classified by ITAÚ UNIBANCO HOLDING in Level 3 of the fair value hierarchy. Derivative financial instruments classified in Level 3 mainly correspond to other derivatives – credit default swaps linked to shares.
Derivatives: in 2013 ITAÚ UNIBANCO HOLDING transferred R$ 11 in swaps from the Level 3 out of Level 2, in view of the availability of inputs verified for these derivatives.
Sensitivity analyses operations of Level 3
The fair value of financial instruments classified in Level 3 (in which prices negotiated are not easily noticeable in active markets) is measured through assessment techniques based on correlations and associated products traded in active markets.
Significant unverifiable inputs used for measurement of the fair value of instruments classified in Level 3 are: interest rates, underlying asset prices and volatility. Significant increases (decreases) in any of these inputs separately may give rise to significant decreases (increases) in the fair value.
The table below shows the sensitivity of these fair values in scenarios of changes of interest rates, asset prices, or in scenarios mixing shocks in prices with shocks in volatility for non-linear assets:
The following scenarios are used to measure the sensitivity:
Interest rate
Shocks at 1, 25 and 50 basis points (scenarios I, II and III respectively) in the interest curves, both for increase and decrease, considering the largest losses resulting in each scenario.
Currencies, commodities and ratios
Shocks at 5 and 10 basis points (scenarios I and II respectively) in prices of currencies, commodities and ratios, both for increase and decrease, considering the largest losses resulting in each scenario.
Non linear
Scenario I: Combined shocks at 5 percentage points in prices and 25 percentage points in volatility, both for increase and decrease, considering the largest losses resulting in each scenario.
Scenario II: Combined shocks at 10 percentage points in prices and 25 percentage points in volatility, both for increase and decrease, considering the largest losses resulting in each scenario.
Note 32 – Provisions, contingencies and other commitments
In the ordinary course of its businesses, ITAÚ UNIBANCO HOLDING is subject to contingencies that may be classified as follows:
a) Contingent assets: there are no contingent assets recorded.
b) Provisions and contingencies: the criteria to quantify contingencies are appropriate to the specific characteristics of civil, labor and tax litigation, as well as other risks.
- Civil lawsuits
Collective lawsuits (related to claims of a similar nature and with individual amounts not considered significant): contingencies are determined on a monthly basis and the expected amount of losses is accrued according to statistical references that take into account the type of lawsuit and the characteristics of the court (Small Claims Court or Regular Court).
Individual lawsuits (related to claims with unusual characteristics or involving significant amounts): determined periodically, based on the amount claimed and the likelihood of loss, which, in turn, is estimated according to the factual and legal characteristics related to such lawsuit. The amounts considered as probable losses are recorded as provisions.
Contingencies generally arise from revision of contracts and compensation for damages and pain and suffering; most of these lawsuits are filed in the Small Claims Court and therefore limited to 40 minimum monthly wages. ITAÚ
UNIBANCO HOLDING is also party to specific lawsuits over alleged understated inflation adjustments to savings accounts in connection with economic plans implemented by the Brazilian government.
The case law at the Federal Supreme Court (STF) is favorable to banks in relation to economic phenomena similar to savings, as in the case of adjustment to time deposits and contracts in general. Additionally, the Superior Court of Justice (STJ) has decided that the term for filing public civil actions over understated inflation is five years. In view of such decision, some of the lawsuits may be dismissed because they were filed after the five-year period.
No amount is recognized in the financial statements in relation to civil lawsuits which represent possible losses and which have a total estimated risk of R$ 2,095 (R$ 1,660 at 12/31/2012); these refer to claims for compensation or collection, the individual amounts of which are not significant and in this total there are no values resulting from interests in joint ventures.
- Labor claims:
Collective lawsuits (related to claims of a similar nature and with individual amounts not considered significant): the expected amount of loss is determined and accrued monthly based on the statistical share pricing model plus the average cost of legal fees. These are adjusted for the amounts deposited as guarantee for their execution when realized.
Contingencies are related to lawsuits in which alleged labor rights based on labor legislation, such as overtime, salary equalization, reinstatement, transfer allowance, pension plan supplement and other, are claimed.
There are no labor claims of significant amounts falling under the category of possible loss.
- Other risks
These are quantified and recorded as provisions mainly based on the evaluation of agribusiness credit transactions with joint obligation and FCVS (Salary Variations Compensation Fund) credits transferred to Banco Nacional.
The table below shows the changes in the balances of provisions for civil, labor and other provision and the respective escrow deposits:
(*) Civil provisions include the provision for economic plans amounting to R$ 247.
(*) Civil provisions include the provision for economic plans amounting to R$ 526.
(*) Civil provisions include the provision for economic plans amounting to R$ 431.
- Tax and social security lawsuits
Contingencies are equivalent to the principal amount of taxes involved in administrative or judicial disputes, subject to tax assessment notices, plus interest and, when applicable, fines and charges. The amount is recorded as a provision when it involves a legal liability, regardless of the likelihood of loss, that is, a favorable outcome is dependent upon the recognition of the unconstitutionality of the applicable law in force. In other cases, a provision is set up whenever the loss is considered probable.
The table below shows the changes in the balances of provisions and respective escrow deposits for tax and social security lawsuits:
The main discussions related to “Provisions” for tax are described as follows:
Tax contingencies not recognized in the balance sheet– in the accounting books no amount is recognized in relation to tax and social security lawsuits with possible loss, which total estimated risk is R$ 10,879. The main discussions are as follows:
c)Receivables – Reimbursement of contingencies
The Receivables balance arising from reimbursements of contingencies totals R$ 733 (R$ 790 at 12/31/2012) (Note 20a), basically represented by the guarantee received in the Banco Banerj S.A. privatization process of 1997, whereby the State of Rio de Janeiro created a fund to guarantee the equity recomposition with respect to civil, labor and tax contingencies.
b)Assets pledged as collateral for contingencies
Assets pledged as collateral for lawsuits involving contingent liabilities are restricted or deposited as shown below:
Escrow deposits are generally required to be made with the court in connection with lawsuits in Brazil and they are held by the court until a decision is made by the relevant court. In case of a decision against ITAÚ UNIBANCO HOLDING,
the deposited amount is released from escrow and transferred to the counterparty in the lawsuit. In case of a decision in favor of ITAÚ UNIBANCO HOLDING, the deposited amount is released at the full amount deposited adjusted.
In general, provisions related to lawsuits of ITAÚ UNIBANCO HOLDING are long term, considering the time required for the termination of these lawsuits in the Brazilian judicial system, reason why estimate for specific year in which these lawsuits will be terminated have not been disclosed.
In the opinion of the legal advisors, ITAÚ UNIBANCO HOLDING and its subsidiaries are not parties to any other administrative proceedings or legal lawsuits that could significantly impact the results of their operations.
IV. Program for Cash or Installment Payment of Federal Taxes – Law No. 12,865/13, as amended by Provisional Measure No. 627/13.
ITAÚ UNIBANCO HOLDING and subsidiaries adhered to the Program for Cash or Installment Payment of Federal Taxes, enacted by Law No. 12,865 of October 9, 2013. The program included the debits administered by the Federal Reserve Service of Brazil and the General Attorney’s Office of the National Treasury past due, and is defined in accordance with the Articles below:
The debits with the National Treasury related to PIS (social integration program) and COFINS (tax for social security financing), addressed by Chapter I of Law No. 9,718/98 (legal entities governed by private law), due by financial institutions and insurance companies, past due up to December 31, 2012;
The debits with the National Treasury related to IRPJ (corporate income tax) and CSLL (social contribution on net income), arising from profits earned by subsidiaries or affiliates abroad (Article 74 of Provisional Measure No. 2,158-35, of August 24, 2001), past due up to December 31, 2012;
This program refers to the renegotiation of federal debits administered by the Federal Reserve Service of Brazil and the General Attorney’s Office of the National Treasury past due, either registered or not as overdue tax liabilities, even when a tax foreclosure has been filed.
The net effect in income amounted to R$ 508, recorded under tax expenses, other income and income tax and social contribution.
Note 33 – Regulatory capital
ITAÚ UNIBANCO HOLDING is subject to regulation by the Central Bank of Brazil which issues rules and instructions regarding currency and credit policies for financial institutions operating in Brazil. The Central Bank also determines minimum capital requirements, fixed assets limits, lending limits, accounting practices and compulsory deposit requirements, and requires banks to comply with regulation based on the Basel Accord as regards to capital adequacy. Furthermore, the National Council of Private Insurance and SUSEP issue regulations on capital requirements which affect our insurance, private pension and capitalization operations.
The Basel Accord requires banks to have a ratio of regulatory capital to risk exposure assets of a minimum of 8%. The regulatory capital is basically composed of two tiers:
However, the Basel Accord allows the regulatory authorities of each country to establish their own parameters for regulatory capital composition and to determine the portions exposed to risk. Among the main differences arising from the adoption of own parameter pursuant to the Brazilian legislation are the following: (i) the requirement of a ratio of regulatory capital to risk-weighted assets at a minimum of 11%; with timeline to achieve 8% in 2019; (ii) certain risk-weighted factors attributed
to certain assets and other exposures; (iii) the requirement that banks allocate a portion of their equity to cover operational risks, ranging from 12% to 18% of the average gross income from financial operations. In addition, in accordance with Central Bank rules, banks can calculate compliance with the minimum requirement based on the consolidation of all financial subsidiaries supervised by the Central Bank, including branches and investments abroad.
Management manages capital with the intention to meet the minimum capital required by the Central Bank of Brazil. During the period ITAÚ UNIBANCO HOLDING complied with all externally imposed capital requirements to which we are subject.
The following table summarizes the composition of regulatory capital, the minimum capital required and the Basel ratio computed in accordance with the Central Bank of Brazil, both on a financial institution consolidation basis and on a full consolidation basis.
The funds obtained through the issue of subordinated debt securities are considered capital Tier II for purposes of capital to risk-weighted assests ratio, as follows:
(*) Subordinated CDBs may be redeemed from November 2011.
Note 34 – Segment Information
ITAÚ UNIBANCO HOLDING is a banking institution that offers its customers a wide range of financial products and services.
From the first quarter of 2013, the way of presenting the segments was changed, so that it is better aligned with the follow-up of the change in results. The nomenclature was changed in order to adjust it to the reality of the current structure, as we now have the following segments: Commercial Bank – Retail, Consumer Credit – Retail, Wholesale Bank and Activities with the Market + Corporation. The results of medium businesses, previously allocated to the former Commercial Bank segment, are now to be reported in the Wholesale Bank, and this was the main change of this presentation.
The current operational and reporting segments of ITAÚ UNIBANCO HOLDING are described below:
The result of the Commercial Bank – Retail segment arises from the offer of banking products and services to a diversified client base of individuals and companies. The segment includes retail clients, high net worth clients, Private Bank clients and the companies segment (small and medium businesses).
The result of the Consumer Credit – Retail segment arises from financial products and services offered to non-account holders. This segment comprises vehicle financing provided by units other than the branch network, offering of credit cards and offering of credits to the low income population.
The result of the Wholesale Bank segment arises from the products and services offered to medium businesses and the activities of Itaú BBA, the unit in charge of commercial operations with large companies and the performance in investment banking.
This segment records the result arising from capital surplus, subordinated debt surplus and the net balance of tax credits and debits. It also shows the financial margin with the market, the Treasury operating cost, the equity in earnings of companies not associated to each segment and the interest in Porto Seguro.
Segment information is prepared based on the reports used by top management (Executive Committee) to assess the performance and to make decisions regarding the allocation of funds for investment and other purposes.
The top management (Executive Committee) of ITAÚ UNIBANCO HOLDING uses a variety of information for such purposes including financial and non-financial information that is measured on different bases as well as information prepared based on accounting practices adopted in Brazil. The main index used to monitor the business performance is the Recurring Net Income and the Economic Capital allocated to each segment.
The segment information has been prepared following accounting practices adopted in Brazil modified for the adjustments described below:
Based on the managerial income statement, the segment information considers the application of the following criteria:
Allocated capital: The impacts associated to capital allocation are included in the financial information. Accordingly, adjustments were made to the financial statements, based on a proprietary model. For the financial statements by segment we adopted the Economic Allocated Capital (EAC) model, which, in addition to allocated capital tier I, considers the allocated capital tier II (subordinated debt) and the effects of the calculation of expected credit losses, additional to that required by the Central Bank of Brazil CMN Circular N° 2,682/99. Accordingly, the Allocated Capital comprises the following components: Credit risk (including expected loss), operational risk, market risk and insurance underwriting risk.
Income tax rate: We consider the total income tax rate, net of the tax effect from the payment of interest on capital, for the Commercial Bank – Retail, Consumer Credit – Retail, Wholesale Bank and Activities with the Market segments. The difference between the income tax amount calculated by segment and the effective income tax amount, as stated in the consolidated financial statements, is allocated to the Activities with the Market + Corporation column.
The managerial statement of income was used to prepare information per segment. These statements were obtained based on the statement of income adjusted by the impact of non-recurring events and the managerial reclassifications in income.
From the first quarter of 2013 on, some changes were made in the consolidation criteria for managerial results presented in order to better reflect the way Management monitors the bank’s figures. These adjustments change the order of presentation of the lines only and, therefore, do not affect the net income disclosed. Through these reclassifications, ITAÚ UNIBANCO HOLDING seeks to align the way it presents its results and enables a better comparison and understanding of the bank’s performance assessment.
We describe below the main reclassifications between the accounting and managerial results:
Banking product: The banking product considers the opportunity cost for each operation. The financial statements were adjusted so that the stockholders’ equity was replaced by funding at market price. Subsequently, the financial statements were adjusted to include revenues related to capital allocated to each segment. The cost of subordinated debt and the respective remuneration at market price were proportionally allocated to the segments, based on the economic allocated capital.
Hedge tax effects: The tax effects of the hedge of investments abroad were adjusted – these were originally recorded in the tax expenses (PIS and COFINS) and Income Tax and Social Contribution on net income lines – and are now reclassified to the margin. The strategy to manage the foreign exchange risk associated to the capital invested abroad aims at preventing the effects of the exchange rates variation on income. In order to achieve this objective, we used derivative instruments to hedge against such foreign currency risk, with investments remunerated in Reais. The hedge strategy for foreign investments also considers the impact of all tax effects levied.
Insurance: Insurance business revenues and expenses were concentrated in Income from Insurance, Pension Plan and Capitalization Operations. The main reclassifications of revenues refer to the financial margins obtained with the technical provisions of insurance, pension plan and capitalization, in addition to revenue from management of pension plan funds.
Other reclassifications: Other Income, Share of Income of Associates, Non-Operating Income, Profit Sharing of Management Members and Expenses for Credit Card Reward Program were reclassified to those lines representing the way the institution manages its business, enabling greater understanding for performance analysis. Accordingly, equity in earnings of investment in Banco CSF S.A. (“Banco Carrefour”) was reclassified to the financial margin line. Additionally,
for better comparison with the new consolidation criteria, 100.0% of the results from partnerships were consolidated (they were previously proportionally consolidated), and expenses for provisions associated to securities and derivatives were reclassified (from Non-interest expenses income to Expenses for allowance for loan losses).
The adjustments and reclassifications column shows the effects of the differences between the accounting principles followed for the presentation of segment information, which are substantially in line with the accounting practices adopted for financial institutions in Brazil, except as described above, and the policies used in the preparation of these consolidated financial statements according to IFRS. Main adjustments are as follows:
From January 1 to December 31, 2013
(In millions of reais except per share information)
The consolidated figures do not represent the sum of the segments because there are intercompany transactions that were eliminated only in the consolidated financial statements. Segments are assessed by top management, net of income and expenses between related parties.
From January 1 to December 31, 2012
The Consolidated figures do not represent the sum of the segments because there are intercompany transactions that were eliminated only in the consolidated financial statements. Segments are assessed by top management, net of income and expenses between related parties.
From January 1 to December 31, 2011
Information on income from financial operations by geographical area is as follows:
(1) Includes interest and similar income, dividend income, net gain (loss) from financial assets and liabilities, foreign exchange results, and exchange variation on transactions.
(2) ITAÚ UNIBANCO HOLDING does not have clients representing 10.0% or higher of its revenues.
Note 35 – Related parties
a) Transactions between related parties are carried out at amounts, terms and average rates in accordance with normal market practices during the period, as well as under reciprocal conditions.
Transactions between companies included in consolidation (Note 2.4a) were eliminated from the consolidated financial statements and take into consideration the absence of risk.
The unconsolidated related parties are the following:
The transactions with these related parties are mainly as follows:
(1) Until December 31, 2012, these were proportionally consolidated. As from January 1, 2013, they are fully consolidated in our consolidated financial statements.
(2) New company name of FAI – Financeira Americana Itaú S.A. – Crédito, Financiamento e Investimento.
In addition to the aforementioned operations, ITAÚ UNIBANCO HOLDING and non-consolidated related parties, as an integral part of ITAÚ UNIBANCO HOLDING Agreement for Apportionment of Common Costs, recorded in General and Administrative Expenses – Other, the amount of R$ 5 (R$ 8 from 01/01 to 12/31/2012 and R$ 8 from 01/01 to 12/31/2011) due to the use of the common structure.
Pursuant to the current rules, financial institutions cannot grant loans or advances to the following:
a)any individuals or companies that control the Institution or any entity under common control with the institution, or any executive officer, director, member of the fiscal council, or the immediate family members of these individuals;
b)any entity controlled by the institution; or
c)any entity in which the bank directly or indirectly holds more than 10% of the capital stock.
Therefore, no loans or advances were granted to any subsidiary, executive officer, director or family members.
b) Compensation of the key management personnel
Resolution n° 3,921, 11/25/2010 of the National Monetary Council, sets forth that the management’s variable compensation should be consistent with the institution’s risk management policies, and at least fifty percent (50%) should be mandatorily paid in shares and be deferred for payment in at least three (3) years.
To comply with the Resolution on compensation, ITAÚ UNIBANCO HOLDING was authorized by CVM to transfer, on a private basis, shares of its own issue held in treasury to its management members and the management members of its subsidiaries.
In the period from January 1 to December 31, 2013, the accounting effect of the compensation is recorded in Compensation of Key Management Members in Compensation and Profit Sharing, in compliance with statutory limits.
Compensation for the period paid to key management members of ITAÚ UNIBANCO HOLDING consisted of:
Note 36 – Management of financial risks
Credit risk
1. Credit risk measurement
Credit risk is the possibility of losses arising from the breach by the borrower, issuer or counterparty of the respective agreed-upon financial obligations, the devaluation of loan agreement due to downgrading of the borrower’s, the issuer’s, the counterparty’s risk rating, the reduction in gains or compensation, the advantages given upon posterior renegotiation and the recovery costs.
The credit risk management of ITAÚ UNIBANCO HOLDING’s is responsibility of all business units and aims to keep the quality of loan portfolio in levels consistent with the institution’s risk appetite for each market segment in which it operations.
ITAÚ UNIBANCO HOLDING establishes its credit policies based on internal factors, such as the client rating criteria, performance of and changes in portfolio, default levels, return rates, and the allocated economic capital; and external factors, related to the economic environment, market share, interest rates, market default indicators, inflation, changes in consumption.
ITAÚ UNIBANCO HOLDING has a structured process to keep a diversified portfolio deemed as adequate by the institution. The ongoing monitoring on the concentration level of portfolios, by assessing the economic activity sectors, major debtors and geographic regions, enables it to take preventive measures to prevent that defined limits be breached and ensure a properly diversified customer distribution.
The process for analyzing the policy and products enables ITAÚ UNIBANCO HOLDING to identify potential risks, so as to make sure that credit decisions make sense from an economic and risk perspective.
The centralized process for approval of credit policies and validation of models of ITAÚ UNIBANCO HOLDING assures the synchrony of credit actions.
The table below shows the correspondence between risk levels attributed by the group’s internal models (strong, satisfactory, higher risk and impairment) and the probability of default associated with each of these levels.
Regarding retail (individuals, small and middle-market companies), the rating is assigned based on application and behavior score statistical models. Decisions are made based on scoring models that are continuously followed up by an independent structure. Exceptionally, there may also be individualized analysis of specific cases where approval is subject to competent credit approval levels.
Government securities and other debt instruments are classified by ITAÚ UNIBANCO HOLDING according to their credit quality aiming at managing their exposures.
In line with the principles of CMN Resolution N° 3,721, of April 30, 2009, ITAÚ UNIBANCO HOLDING has structure and corporate guidelines on credit risk management, approved by its Board of Directors, applicable to companies and subsidiaries in Brazil and abroad.
2. Management risk limits
Centralized control of credit risk is conducted by independent executive area responsible for risk control, segregated from business trading units, as required by current regulations.
ITAÚ UNIBANCO HOLDING strictly controls the credit exposure of clients and counterparties, taking action to address situations in which the actual exposure exceeds the desired one. For that purpose, contractually provided actions can be taken, such as early payment or requirement of additional collateral.
3. Collateral and policies for mitigating credit risk
As a way to control the credit risk, ITAÚ UNIBANCO HOLDING has corporate guidelines that establish general rules and responsibilities for the use of guarantees; additionally, each business unit responsible for the credit risk management formalizes the use of such guarantees in its credit policies.
ITAÚ UNIBANCO HOLDING uses guarantees to increase its recovery capacity in transactions involving credit risk. The guarantees used may be personal, collateral, legal structures with mitigation power and offset agreements.
For the guarantees to be considered a risk mitigating instrument, requirements and guidelines of the standards that regulate them, either internal or external ones, must be complied with.
ITAÚ INIBANCO HOLDING ensures that any collateral kept is sufficient, legally valid (effective), enforceable and periodically reassessed.
ITAÚ UNIBANCO HOLDING also uses credit derivatives, such as single name CDS, to mitigate credit risk of its portfolios of loans and securities; these instruments are priced based on models that use the fair value of market inputs, such as credit spreads, recovery rates, correlations and interest rates.
The credit limits are continually monitored and changed according to customer behavior. Thus, the potential loss values represent a fraction of the amount available.
4. Policy on the provision
The policies on the provision adopted by ITAÚ UNIBANCO HOLDING are aligned with the guidelines of IFRS and the Basel Accord. As a result, an allowance for loan losses is recognized when there are indications of the impairment of the portfolio and takes into account a horizon of loss appropriate for each type of transaction. We consider as impaired loans
overdue for more than 90 days, renegotiated loans overdue by more than 60 days and Corporate loans below a specific internal rating. Loans are written-down 360 days after such loans become past due or 540 days of being past due in the case of loans with original maturities over 36 months.
5. Credit risk exposure
The table above presents the maximum exposure at December 31, 2013 and December 31, 2012, without considering any collateral received or other additional credit improvements.
For assets recognized in the balance sheet, the exposures presented are based on net carrying amounts. This analysis includes only financial assets subject to credit risk and excludes non-financial assets.
The contractual amounts of endorsements and sureties and letters of credit represent the maximum potential of credit risk in the event the counterparty does not meet the terms of the agreement. The vast majority of commitments (real estate loans, overdraft accounts, credit card and other pre-approved limits) mature without being drawn, since they are renewed monthly and we have the power to cancel them at any time. As a result, the total contractual amount does not represent our effective future exposure to credit risk or the liquidity needs arising from such commitments.
As shown in the table, the most significant exposures correspond to loan operations, financial assets held for trading, and securities purchased under agreements to resell, in addition to sureties, endorsements and other commitments.
The maximum exposure to the quality of the financial assets presented highlights that:
5.1 Maximum exposure of financial assets segregated by business sector
a) Loan operations and lease operations portfolio
b) Other financial assets (*)
c) The credit risks of off balance sheet items (endorsements and sureties, letters of credit and commitments to be released) are not categorized or managed by business sector.
6. Credit quality of financial assets
6.1 The following table shows the breakdown of loans operations and lease operations portfolio considering: loans not overdue and loans overdue either impaired or not impaired:
The following table shows the breakdown of loans operations and lease operations by portfolios of areas and classes, based on indicators of credit quality:
The table below shows the breakdown of loans operations and lease operations portfolio not overdue and not impaired, by portfolio of segments and classes, based on indicators of credit quality.
6.1.1 Loan operations and lease operations by portfolios of areas and classes, are classified by maturity as follows (loans overdue not impaired):
6.1.2 The table below shows other financial assets, individually evaluated, classified by rating:
6.1.3 Collateral held for loan and lease operations portfolio
The difference between the total loan portfolio and collateralized loan portfolio is generated by non-collateralized loans amounting to R$ 144,651 (R$ 109,607 at December 31, 2012).
ITAÚ UNIBANCO HOLDING uses collateral to reduce the occurrence of losses in operations with credit risk and manages and regularly reviews its collateral with the objective that collateral held is sufficient, legally exercisable (effective) and feasible. Thus, collateral is used to maximize the recoverability potential of impaired loans and not to reduce the exposure value of customers and counterparties.
Personal – This category of credit products usually requires collateral, focusing on endorsements and sureties. Vehicles – For this type of operation, clients’ assets serve as collateral, which are also the leased assets in leasing operations.
Mortgage loans – Regards buildings themselves given in guarantee.
Small, Medium Businesses and Corporate – For these operations, any collateral can be used within the credit policy of ITAÚ UNIBANCO HOLDING (chattel mortgage, assignment trust, surety/joint debtor, Mortgage and others).
Foreign loans – Latin America – For these operations, any collateral can be used within the credit policy of ITAÚ UNIBANCO HOLDING (chattel mortgage, assignment trust, surety/joint debtor, Mortgage and others).
7. Repossessed assets
Repossessed assets are recognized as assets when possession is effectively obtained.
Assets received from the foreclosure of loans, including real estate, are initially recorded at the lower of: (i) the fair value of the asset less the estimated selling expenses, and (ii) the carrying amount of the loan.
Further impairment of assets is recorded as a provision, with a corresponding charge to income. The maintenance costs of these assets are expensed as incurred.
The policy for sales of these assets (assets not for use) includes periodic auctions that are announced in advance and considers that the assets cannot be held for more than one year as stipulated by the BACEN. This period may be extended at the discretion of BACEN.
The amounts below represent total assets repossessed in the period:
Market risk is the possibility of losses resulting from fluctuations in the market values of positions held by a financial institution, including risks of transactions subject to variations in foreign exchange and interest rates, share, of prices indexes and commodity prices among other indexes on these risk factors.
The market risk management is the process through which the institution plans, monitors and controls the risks of variations in financial instruments market values due market changes, aiming at optimizing the risk-return ratio, by using an appropriate structure of Adequate management limits, models and tools.
The policy of risk management is in line with the principles of CMN Resolution No. 3,464, and posterior amendments, comprising a set of principles that drive the institution’s strategy of control and management of market risks in all business units and legal entities of ITAÚ UNIBANCO HOLDING.
The document set forth by the corporate guidelines on market risk management, that is not part of the financial statements, may be viewed on the website www.itau-unibanco.com.br/ri, in the section Corporate Governance/Rules and Policies/Public Access Report – Market Risk.
The risk management strategy of ITAÚ UNIBANCO HOLDING tries to achieving a balance between business objectives, considering among others:
The process for managing market risk of ITAÚ UNIBANCO HOLDING occurs within the governance and hierarchy of committees and limits approved specifically for this purpose, sensitizing different levels and classes of market risk.
This framework limits that covers from the monitoring of aggregate indicators of risk (portfolio level) to the monitoring of granular limits (individual desks level), assuring effectiveness and coverage of control. These limits are dimensioned considering the projected results of the balance sheet, expected performance and risk appetite of the institution, the level of equity and the profile of risk of each organization unit, which are defined in terms of risk measures used by management. Limits are monitored and controlled daily and excesses are reported and discussed in the corresponding committees. Additionally, daily risk reports used by the business and control areas, are issued to the top management.
The limit structure and warnings follow the guidelines of the Board of Directors and is established and approved by the Superior Risk Committee (CSRisc) after discussions and resolutions of the Superior Institutional Treasury Committee (CSTI) on metrics and market risk limits. The review of this structure of limits is performed at least annually.
The purpose of this structure is:
The market risk control and management process is periodically reviewed with the purpose of keeping the process aligned with best market practices and complies with continuous improvement processes at ITAÚ UNIBANCO HOLDING.
The market risk is controlled by an area independent from the business units and is responsible for carrying out daily measurement, assessment, analysis and reporting activities to the areas and relevant people, in accordance with
the governance established and following up the actions required for adjusting the position and/or risk level, when necessary. For that purpose, the ITAÚ UNIBANCO HOLDING has a structured reporting and information flow with the objective of providing input for the follow-up by senior-level committees and complying with the requirements of Brazilian and foreign regulatory agents.
ITAÚ UNIBANCO HOLDING hedges transactions with clients and proprietary positions, including foreign investments, aiming at mitigating risks arising from fluctuations in significant market factors and adjusting the transactions into the current exposure limits. Derivatives are the most frequently used instruments for these hedges. When these transactions are designed for as hedge accounting, specific supporting documentation is prepared, including continuous review of the hedge effectiveness and other changes in the accounting process. Accounting and managerial hedge are governed by corporate guidelines of ITAÚ UNIBANCO HOLDING.
The market risk framework categorizes transactions as part of either the banking portfolio or the trading portfolio, in accordance with general criteria established by the Capital Accord and subsequent amendments.
The trading portfolio consists of all qualifying transactions (including derivatives) held with intent to trade or to hedge risk within this portfolio, and that have no restriction.
The banking portfolio is basically characterized by transactions from the banking business, such as funding and loans, and also includes derivatives with eligible clients and transactions related to the management of the balance sheet of the institution, including by way of derivatives. It has the no-intention of resale and medium- and long-term time horizons as general guidelines.
The exposures to market risks inherent in the various products, including derivatives, are broken down into a number of risk factors. Market factors are primary components of pricing. The main risk factors measured by ITAÚ UNIBANCO HOLDING are:
Market risk for interest rate in the Trading and Banking Portfolio is managed by a combination of processes, including marking-to-market positions, calculating sensitivity to interest rate variations, Value at Risk (VaR) and running stress tests across the portfólio, these processes are consistent with ITAÚ UNIBANCO HOLDING’s institutional policies incorporated into the market risk framework.
To evaluate the share position of the banking and trading portfolios, Value at Risk (VaR) is applied, in addition to stress tests, as presented below in the paragraph about metrics.
Market risk is analyzed based on the following metrics:
In addition to the risk measures, sensitivity and loss control measures are also analyzed. They comprise:
ITAÚ UNIBANCO HOLDING uses proprietary systems to measure the consolidated market risk. The processing of these systems mainly takes place in São Paulo, in an access-controlled, of high availability, environment, with data safekeeping and recovery processes, and counts on such an infrastructure to ensure the continuity of business in contingency (disaster recovery) situations.
VaR – Consolidated ITAÚ UNIBANCO HOLDING
The internal VaR model (parametric) used by ITAÚ UNIBANCO HOLDING considers a one-day holding period and a 99% confidence level. Volatilities and correlations are estimated based on a volatility weighted methodology that gives greater weight to the most recent information.
The Consolidated Global VaR table provides an analysis of the exposure to market risk of ITAÚ UNIBANCO HOLDING portfolios, and to its foreign subsidiaries by showing where the largest concentrations of market risk are found. (foreign subsidiaries: Banco Itaú BBA International PLC, Banco Itaú Argentina S.A., Banco Itaú Chile S.A., Banco Itaú Uruguai S.A., Banco Itaú Paraguai S.A. and Itaú BBA Colômbia S.A. – Corporación Financiera).
ITAÚ UNIBANCO HOLDING maintaining its conservative management and portfolio diversification, continued with its policy of operating within low limits in relation to its capital in the period.
From January 1st to December 31, 2013, the average global VaR was R$ 224 million, or 0.27% of total stockholders’ equity (throughout 2012 it was R$ 290 million or 0.38%).
(in R$ milion)
(*) Adjusted to reflect the tax treatment of individual classes of assets.
(**) Determined in local currency and converted into Brazilian reais at the closing price on the reporting date.
The table on the position of accounts subject to interest rate risk group them by products, book value of accounts distributed by maturity. This table is not used directly to manage interest rate risks; it is mostly used to enable the assessment of mismatching between accounts and products associated thereto and to identify possible risk concentration.
The following table sets forth our interest-earning assets and interest-bearing liabilities and therefore does not reflect interest rate gap positions that may exist as of any given date. In addition, variations in interest rate sensitivity may exist within the repricing periods presented due to differing repricing dates within the period.
Position of accounts subject to interest rate risk (1)
Position of accounts subject to currency risk
The exposure to share price risk is disclosed in Note 7 related to financial assets held for trading and Note 10, related to available-for-sale financial assets.
Liquidity risk is defined as the existence of imbalances between marketable assets and liabilities due – mismatching between payments and receipts – which may affect payment capacity of ITAÚ UNIBANCO HOLDING, taking into consideration the different currencies and payment terms and their respective rights and obligations.
Policies and procedures
The management of liquidity risks seeks to guarantee liquidity sufficient to support possible outflows in market stress situations, as well as the compatibility between funding and the terms and liquidity of assets.
ITAÚ UNIBANCO HOLDING has a structure dedicated to improve the monitoring, control and analysis, through models of projections of the variables that affect cash flows and the level of reserves in local and foreign currencies.
The document that details the guidelines established by the internal policy on liquidity risk management, that is not part of the financial statements, may be viewed on the website www.itau-unibanco.com.br/ri, in the section Corporate Governance/Rules and Policies/Public Access Report – Liquidity Risk.
The liquidity risk measurement process makes use of corporate and own in-house developed application systems. ITAÚ UNIBANCO HOLDING manages proprietary IT systems to support the liquidity risk measurement process.
Additionally, ITAÚ UNIBANCO HOLDING establishes guidelines and limits. Compliance with these guidelines and limits is periodically analyzed in technical committees, and their purpose is to provide an additional safety margin to the minimum projected needs. The liquidity management policies and the respective limits are established based on prospective scenarios periodically reviewed and on the definitions of the top management.
These scenarios may be reviewed in view of cash requirements resulting from atypical market situations or arising from strategic decisions of ITAÚ UNIBANCO HOLDING.
In compliance with the requirements of CMN Resolution No. 4,090 of May 24, 2012 and BACEN Circular N° 3,393 of June 3, 2008, the Statement of Liquidity Risk (DRL) is sent to BACEN on a monthly basis, and the following items for monitoring and supporting decisions are periodically prepared and submitted to top management:
Primary sources of funding
ITAÚ UNIBANCO HOLDING has different sources of funding, of which a significant portion is from the retail segment. Total funding from clients reached R$ 501.1 billion (R$ 481.1 billion at 12/31/2012), particularly funding from time deposits. A considerable portion of these funds – 33.7% of total, or R$ 169.1 billion – is available on demand to the client. However, the historical behavior of the accumulated balance of the two largest items in this group – demand and savings deposits – is relatively consistent with the balances increasing over time and inflows exceeding outflows for monthly average amounts.
Control over liquidity
ITAÚ UNIBANCO HOLDING manages its liquidity reserves based on estimates of funds that will be available for investment, considering the continuity of business in normal conditions.
During the first quarter of 2013, ITAÚ UNIBANCO HOLDING maintained appropriate levels of liquidity in Brazil and abroad. Liquid assets (cash and deposits on demand, securities purchased under agreements to resell - funded position and free government securities) totaled R$ 91,1 billion and accounted for 53,9% of the short-term redeemable obligations, 18,2% of total funding, and 12,7% of total assets.
The table below shows the indicators used by ITAÚ UNIBANCO HOLDING in the management of liquidity risk:
The following table presents assets and liabilities according to their remaining contractual maturities, considering their undiscounted flows.
NOTE 37 – SUPPLEMENTARY INFORMATION
Provisional Measure No. 627: on November 11, 2013, the Provisional Measure No. 627 (MP 627/13) was published to amend the federal tax legislation on IRPJ, CSLL, PIS and COFINS. Said MP 627/13 provides for the following, among other matters:
Considering that said MP 627 has a significant number of proposed amendments and that the Brazilian Federal Revenue Service should, in compliance with the same MP, regulate a number of matters, it is possible that certain provisions are amended and/or clarified. However, based on the wording in force, we estimate that said MP 627/13 does not have any significant accounting effect on the consolidated financial statements of ITAÚ UNIBANCO HOLDING.
NOTE 38 – SUBSEQUENT EVENT
Itaú CorpBanca
On January 29, 2014, ITAÚ UNIBANCO HOLDING, together with its subsidiary Banco Itaú Chile S.A. (“BIC”) entered into an agreement (Transaction Agreement) with CorpBanca (“CorpBanca”) and its controlling stockholders (“Corp Group”) establishing the terms and conditions for the union of operations of BIC and CorpBanca Chile in Chile and in the other jurisdictions in which CorpBanca operates.
The operation will be consummated by means of (i) capital increase of BIC in the amount of US$ 652 million to be carried out by ITAÚ UNIBANCO HOLDING or one of its subsidiaries, (ii) merger of BIC into CorpBanca, with the cancellation of BIC shares and the issue of new shares, at the estimated rate of 85,420.07 shares of CorpBanca for each 1 share of BIC, to be approved at the stockholders’ meeting of CorpBanca upon the affirmative vote of two thirds (2/3) of shares issued by CorpBanca, so that the interests in the bank resulting from the merger (to be named “Itaú CorpBanca”) are 33.58% for ITAÚ UNIBANCO HOLDING and 32.92% for Corp Group, and (iii) subsequent integration of Itaú BBA Colombia, S.A. into the operations of Itaú CorpBanca or its subsidiaries.
Itaú CorpBanca will be controlled by ITAÚ UNIBANCO HOLDING, which will enter into a stockholders’ agreement with Corp Group when the operation is consummated. This agreement will entitle ITAU UNIBANCO HOLDING and Corp Group to appoint members for the Board of Directors of Itaú CorpBanca in accordance to their interests in capital stock, and this group of stockholders will have the privilege of electing the majority of members of the Board of Directors, and ITAÚ UNIBANCO HOLDING will be entitled to elect the majority of these members. The chairmen of the Boards of Directors of Itaú CorpBanca and its subsidiaries will be appointed by Corp Group, and their vice-chairmen by ITAÚ UNIBANCO HOLDING. The executives of Itaú CorpBanca and its subsidiaries will be proposed by ITAÚ UNIBANCO HOLDING and ratified by the Board of Directors of Itaú CorpBanca. The stockholders’ agreement will also set forth that Corp Group will be entitled to approve, together with ITAÚ UNIBANCO HOLDING, certain strategic matters of Itaú CorpBanca, and it will include provisions on the transfer of shares between ITAU UNIBANCO HOLDING and Corp Group, and also to third parties.
It is estimated that said operation will not have significant accounting effects on the results of ITAÚ UNIBANCO HOLDING, which will consolidate Itaú CorpBanca in its financial statements.
The consummation of said operation is subject to the satisfaction of certain conditions precedent, including the aforementioned approval by the stockholders’ meeting of CorpBanca and regulatory approvals in Brazil, Chile and Colombia, as well as in other applicable jurisdictions in which CorpBanca carries out activities.
Property, plant and equipment
We own our principal executive offices located in São Paulo, Brazil, and a number of other administrative buildings. Our offices and the main activities conducted in each of them are:
We also lease a portion of our administrative offices and the majority of our branches at competitive market prices from third parties and under renewable leases with terms ending from the first half of 2013 (which are in the process of being renewed under similar terms) to the fourth quarter of 2032. As of December 31, 2013, we owned approximately 13% of our administrative offices and branches (including electronic service points, banking sites and parking lots) and leased approximately 87%.
In addition, on January 27, 2012, we announced the construction of a new technology center in the state of São Paulo.
Information on trends
We expect many factors to affect our future results of operations, liquidity and capital resources, including:
• The effects of the variations in the value of the Brazilian real, foreign exchange rates and interest rates on our net interest income (please refer to section Performance, item Financial performance, Results, Our risk management, item Risk factors, Macroeconomic risks, for further details);
As part of our strategy, we continue to review growth opportunities, both in Brazil and abroad. Additionally, please refer to section Our risk management, item Risk factors for comments on the risks faced in our operations and that could affect our business, results of operations or financial condition.
Capital expenditures
On January 27, 2012, we announced the construction of a new technology center that constituted a total investment of approximately R$984.0 million for the first phase of the project (building). In September 2012, we announced an investment of R$10.4 billion in technology, innovation and services. In November 2013, we announced an additional investment of R$687.0 million, amounting to a total investment of R$11.1 billion in technology, innovation and services to be made in the period from 2012 to 2015, of which:
Our new data center under construction in the state of São Paulo, will include state-of-the- art features that are designed to improve flexibility and security. Construction work started in February 2012 and is progressing as planned, with 95% of the building concluded, and is expected to be completed in the first quarter of 2014. The setup and migration of our technology systems are expected to occur in the fourth quarter of 2014, for completion by July 2016. This new data center is expected to be one of the largest in Brazil, with capacity to support the expansion of our operations in the coming decades, while maintaining our commitment to ensure availability of financial services and seek continuous improvement in quality, efficiency and client satisfaction.
Our new technology center is being funded with internal resources. Of R$11.1 billion in investments for the period from 2012 to 2015, 49% have been spent from 2012 until December 31, 2013.
Please refer to section Performance, item Investments, for a discussion of our capital expenditures for the last three fiscal years.
Exchange rates
Source: Economática System.
Taxation for the ADS holders
Glossary
B
C
D
F
I
R
Selected statistical information
1. For the net yield on total average interest-earning assets, see Net Interest Margin and Spread.
PART I
PART II
We are not aware of any significant changes bearing on the financial condition since the date of the consolidated financial statements included in this annual report.
We are subject to the informational requirements for foreign private issuers of the Exchange Act. Accordingly, we are required to file reports and other information with the SEC, including annual reports on Form 20-F and reports on Form 6-K. You may inspect and copy reports and other information filed with the SEC at the public reference facilities maintained by the SEC at 100 F Street, N.W., Washington D.C. 20549 and at the SEC’s regional offices at 500 West Madison Street, Suite 1400, Chicago Illinois 60661, and 233 Broadway, New York, New York 10279. Copies of the materials may be obtained by mail from the Public Reference Room of the SEC at 100 F Street, N.W., Washington, D.C.20549 at prescribed rates. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at 1- 800-SEC-0330. In addition, the SEC maintains an Internet website at http://www.sec.gov, from which you can electronically access those materials, including this annual report and the accompanying exhibits. We also file financial statements and other periodic reports with the CVM located at Rua Sete de Setembro, 111, Rio de Janeiro, Rio de Janeiro 20050-901, Brazil. The CVM maintains an Internet website at http://www.cvm.gov.br.
Copies of our annual report on Form 20-F will be available for inspection upon request at our offices at Praça Alfredo Egydio de Souza Aranha 100, Torre Conceição, 9th floor- São Paulo - SP - 04344-902 – Brazil.
Investors may request a hard copy of this annual report on Form 20-F, including our complete audited Financial Statements of the fiscal year ended December 31, 2013, free of charge, to our Investor Relations Department by e-mail, investor.relations@itau-unibanco.com.br, indicating their contact information and complete address.
No matters to report.
(a) Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer (“CEO”), and our chief financial officer (“CFO”), of the effectiveness of our “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as required by paragraph (b) of the Exchange Act Rules 13a-15 or 15d-15, as of December 31, 2013.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Therefore, our management does not expect that the controls will prevent all errors and all fraud.
Based upon the evaluation performed, our CEO and CFO have concluded that as of December 31, 2013, our disclosure controls and procedures were effective to provide reasonable assurance that material information relating to us and our consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or a decline in the level of compliance with policies or procedures may occur.
Management Report
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, our management used the criteria set forth in “Internal Control – Integrated Framework (1992)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation and those criteria, our management has concluded that our internal control over financial reporting was effective as of December 31, 2013.
In connection with the evaluation required by the Exchange Act Rule 13a-15(d), our management, including our CEO and CFO, concluded that the changes that occurred during the year ended December 31, 2013 have not materially affected, or are not reasonably likely to materially affect, our internal control over financial reporting.
(c) Attestation Report of the Independent Registered Public Accounting Firm
The report of PricewaterhouseCoopers Auditores Independentes, our independent registered public accounting firm, dated April 1, 2014, on the effectiveness of our internal controls related to the financial statements as of December 31, 2013 is presented with our financial statements.
Please refer to Annex A—Performance—Consolidated Financial Statements (IFRS), page F-2, for further details about our independent auditor’s report.
PART III
We have responded to Item 18 in lieu of responding to this item.
The financial statements, together with the report of the independent registered public accounting firm, are part of this annual report:
Consolidated Financial Statements
Exhibit
We hereby agree to furnish to the SEC copies of any of our long term debt instruments and agreements as the SEC requests.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act, as amended, the registrant certifies that it meets all of the requirements for filing this annual report on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 1, 2014