EX-99.1 2 tv505798_ex99-1.htm EXHIBIT 99.1

 

Exhibit 99.1

 

 

 

 

 

Contents

 

Management Discussion & Analysis 03
   
Executive Summary 03
   
Income Statement and Balance Sheet Analysis 15
   
Managerial Financial Margin 16
   
Cost of Credit 18
   
Credit Quality 20
   
Commissions and Fees & Result from Insurance 23
   
Insurance, Pension Plan and Premium Bonds Operations 26
   
Non-interest Expenses 29
   
Balance Sheet 31
   
Credit Portfolio 32
   
Funding 34
   
Balance Sheet by Currency 35
   
Risk and Capital Management 36
   
Results by Business Segments 38
   
Results by Region - Brazil and Latin America 41
   
Activities Abroad 42
   
Additional Information 45
   
Itaú Unibanco Shares 46
   
Disclosure Criteria 47
   
Report of Independent Auditors 48
   
Complete Financial Statements 49

 

 

 

 

 

 

 

 

 

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Itaú Unibanco Holding S.A. 04

 

 

Management Discussion & Analysis Executive Summary

 

Managerial Income Statement

 

We present below the financial indicators of Itaú Unibanco at the end of the period.

 

In R$ millions (except where indicated), end of period  3Q18   2Q18   3Q17   9M18   9M17 
Results                         
Recurring Net Income   6,454    6,382    6,254    19,255    18,599 
Operating Revenues (1)   27,899    28,021    26,981    83,345    81,453 
Managerial Financial Margin (2)   17,408    17,295    16,769    51,702    51,569 
Performance                         
Recurring Return on Average Equity – Annualized (3)   21.3%   21.6%   21.6%   21.7%   21.7%
Recurring Return on Average Assets – Annualized (4)   1.6%   1.7%   1.7%   1.7%   1.7%
Nonperforming Loans Ratio (90 days overdue) - Total   2.9%   2.8%   3.2%   2.9%   3.2%
Nonperforming Loans Ratio (90 days overdue) - Brazil   3.5%   3.4%   3.8%   3.5%   3.8%
Nonperforming Loans Ratio (90 days overdue) - Latin America   1.3%   1.5%   1.4%   1.3%   1.4%
Coverage Ratio (Total Allowance/NPL 90 days overdue) (5)   235%   248%   246%   235%   246%
Efficiency Ratio (IE) (6)   48.8%   47.1%   47.3%   47.3%   45.5%
Risk-Adjusted Efficiency Ratio (RAER) (6)   61.3%   61.0%   63.3%   61.0%   63.7%
Shares                         
Recurring Net Income per Share (R$) (7)   1.00    0.98    0.96           
Net Income per Share (R$) (7)   0.96    0.96    0.93           
Number of Outstanding Shares at the end of period – in millions   6,476    6,476    6,504           
Book Value per Share (R$)   19.31    18.80    19.01           
Dividends and Interest on Own Capital net of Taxes (8)   2,259    3,066    6,501           
Market Capitalization (9)   284,295    260,639    281,964           
Market Capitalization (9) (US$ million)   71,004    67,597    89,004           
Balance Sheet                         
Total Assets   1,613,162    1,542,684    1,466,000           
Total Credit Portfolio, including Financial Guarantees Provided and Corporate Securities   636,428    623,256    575,184           
Deposits + Debentures + Securities + Borrowings and Onlending (10)   696,938    666,635    633,145           
Loan Portfolio/Funding (10)   76.1%   77.8%   73.9%          
Stockholders' Equity   125,035    121,758    123,631           
Solvency Ratio - Prudential Conglomerate (BIS Ratio)   16.9%   17.2%   19.5%          
Tier I Capital - BIS III   14.8%   14.2%   14.6%          
Common Equity Tier I - BIS III (11)   13.8%   13.2%   14.6%          
Liquidity Coverage Ratio (LCR)   170.9%   169.5%   200.7%          
Other                         
Assets Under Administration   1,093,487    1,050,220    938,494           
Total Number of Employees   100,756    99,914    96,326           
Brazil   87,070    86,144    82,401           
Abroad   13,686    13,770    13,925           
Branches and CSBs – Client Service Branches   4,917    4,904    4,919           
ATM – Automated Teller Machines (12)   47,887    47,650    46,700           

 

Note: (1) Operating Revenues are the sum of Managerial Financial Margin, Commissions and Fees, Other Operating Income and Result from Insurance, Pension Plan and Premium Bonds Operations before Retained Claims and Selling Expenses; (2) Detailed on Managerial Financial Margin section; (3) Annualized Return was calculated by dividing Recurring Net Income by Average Stockholders’ Equity. The quotient was multiplied by the number of periods in the year to derive the annualized rate. The calculation bases of returns were adjusted by the amount of dividends that has not yet been approved at shareholders’ or Board meetings, proposed after the balance sheet closing date; (4) Return was calculated by dividing Recurring Net Income by Average Assets; (5) Includes the balance of allowance for financial guarantees provided; (6) For further details on the calculation methodologies of both Efficiency and Risk -Adjusted Efficiency ratios, please refer to Non-Interest Expenses section; (7) Calculated based on the weighted average number of outstanding shares for the period; (8) Interest on own capital. Amounts paid/provisioned, declared and reserved in stockholders’ equity; (9) Total number of outstanding shares (common and non-voting shares) multiplied by the average price of the non-voting share on the last trading day in the period; (10) As detailed on the Balance section; (11) Includes impacts from schedule anticipation of deductions and the impact of the investment in XP Investimentos; (12) Includes ESBs (electronic service branches) and service points at third parties’ locations and Banco24Horas ATMs.

 

Itaú Unibanco Holding S.A. 05

 

 

Management Discussion & Analysis Executive Summary

 

Net Income and Recurring Net Income

 

Non-Recurring Events Net of Tax Effects

 

In R$ millions  3Q18   2Q18   3Q17   9M18   9M17 
Net Income   6,247    6,244    6,077    18,772    18,143 
(-) Non-Recurring Events   (207)   (138)   (177)   (484)   (455)
Impairment   (1)   (10)   (137)   (102)   (145)
∟ Adjustment to reflect the realization value of certain assets mainly related to technology                         
Goodwill Amortization   (206)   (150)   (125)   (502)   (373)
∟ Effect from the amortization of goodwill generated by acquisitions made by the conglomerate                         
Tax Contingencies and Legal Liabilities   -    (7)   -    (5)   (42)
∟ Mainly effects of our adherence to the program for the settlement or installment payment of federal, state and municipal taxes                         
Contingencies Provision   -    -    (61)   97    (101)
∟ Provisions for tax and social security lawsuits and losses from economic plans in effect in Brazil during the 1980's and early 1990's                         
Other   -    29    146    29    206 
Recurring Net Income   6,454    6,382    6,254    19,255    18,599 

 

Note: The impacts of the non-recurring events, described above, are net of tax effects.

 

Managerial Income Statement

 

In this report, besides the adjustment of non-recurring events, we apply managerial criteria to present our income statement. In relation to the accounting statement, these criteria affect the breakdown of our income statement but not the net income. Among the managerial adjustments, we highlight the tax effects of the hedge of investments abroad - originally included in tax expenses (PIS and COFINS) and income tax and social contribution on net income, which are reclassified to the financial margin. These reclassifications enable us to carry out business analyses from the management viewpoint and are shown in the table on the following page (Accounting and Managerial Statements Reconciliation) of this report.

 

In relation to the hedge of investments abroad, our strategy for foreign exchange risk management is aimed at mitigating, through financial instruments, the effects of foreign exchange variations and includes the impact of all tax effects. We present below the foreign exchange variation of the Brazilian real:

 

 

Itaú Unibanco Holding S.A. 06

 

 

Management Discussion & Analysis Executive Summary

 

Accounting and Managerial Statements Reconciliation

 

Accounting and Managerial Financial Statements Reconciliation | 3rd quarter of 2018

 

In R$ millions  Accounting   Non-recurring
Events		   Tax Effect
of Hedge		   Managerial
Reclassifications		   Managerial 
Operating Revenues   27,268    -    1,416    (786)   27,899 
Managerial Financial Margin   15,944    -    1,416    47    17,408 
Financial Margin with Clients   16,104    -    -    47    16,152 
Financial Margin with the Market   (160)   -    1,416    -    1,257 
Commissions and Fees   9,520    -    -    (887)   8,632 
Result from Insurance, Pension Plan and Premium Bonds   1,171    -    -    687    1,858 
Operations Before Retained Claims and Selling Expenses                         
Other Operating Income   461    -    -    (461)   - 
Equity in Earnings of Affiliates and Other Investments   184    -    -    (184)   - 
Non-operating Income   (12)   -    -    12    - 
Cost of Credit   (2,284)   -    -    (979)   (3,263)
Provision for Loan Losses   (3,704)   -    -    (200)   (3,904)
Impairment   -    -    -    (89)   (89)
Discounts Granted   -    -    -    (285)   (285)
Recovery of Loans Written Off as Losses   1,421    -    -    (406)   1,015 
Retained Claims   (320)   -    -    -    (320)
Other Operating Expenses   (16,239)   368    (129)   1,713    (14,286)
Non-interest Expenses   (14,745)   368    -    1,731    (12,646)
Tax Expenses for ISS, PIS, Cofins and Other Taxes   (1,475)   -    (129)   (18)   (1,622)
Insurance Selling Expenses   (18)   -    -    -    (18)
Income before Tax and Profit Sharing   8,426    368    1,288    (51)   10,031 
Income Tax and Social Contribution   (2,067)   (41)   (1,288)   (25)   (3,422)
Profit Sharing Management Members - Statutory   (76)   -    -    76    - 
Minority Interests   (35)   (120)   -    -    (155)
Net Income   6,247    207    -    -    6,454 

 

Accounting and Managerial Financial Statements Reconciliation | 2nd quarter of 2018

 

In R$ millions  Accounting   Non-recurring
Events		   Tax Effect
of Hedge		   Managerial
Reclassifications		   Managerial 
Operating Revenues   21,304    (40)   7,059    (301)   28,021 
Managerial Financial Margin   10,112    -    7,059    125    17,295 
Financial Margin with Clients   15,468    -    -    485    15,953 
Financial Margin with the Market   (5,356)   -    7,059    (360)   1,342 
Commissions and Fees   9,535    -    -    (809)   8,726 
Result from Insurance, Pension Plan and Premium Bonds   1,345    (56)   -    710    1,999 
Operations Before Retained Claims and Selling Expenses                         
Other Operating Income   210    -    -    (210)   - 
Equity in Earnings of Affiliates and Other Investments   144    -    -    (144)   - 
Non-operating Income   (43)   16    -    27    - 
Cost of Credit   (2,708)   -    -    (893)   (3,601)
Provision for Loan Losses   (3,635)   -    -    (637)   (4,271)
Impairment   -    -    -    (1)   (1)
Discounts Granted   -    -    -    (273)   (273)
Recovery of Loans Written Off as Losses   927    -    -    18    945 
Retained Claims   (335)   -    -    -    (335)
Other Operating Expenses   (14,709)   310    (662)   1,127    (13,934)
Non-interest Expenses   (13,789)   295    -    1,233    (12,261)
Tax Expenses for ISS, PIS, Cofins and Other Taxes   (901)   15    (662)   (106)   (1,654)
Insurance Selling Expenses   (19)   -    -    -    (19)
Income before Tax and Profit Sharing   3,552    270    6,396    (67)   10,151 
Income Tax and Social Contribution   2,911    (18)   (6,396)   7    (3,496)
Profit Sharing Management Members - Statutory   (60)   -    -    60    - 
Minority Interests   (159)   (114)   -    -    (273)
Net Income   6,244    138    -    -    6,382 

 

Itaú Unibanco Holding S.A. 07

 

 

Management Discussion & Analysis Executive Summary

 

3rd quarter of 2018 Income Statement

 

Operating Revenues Perspective

 

The Operating Revenues is composed by the sum of the main accounts in which revenues from banking, insurance, pension plan and premium bonds operations are recorded.

 

In R$ millions  3Q18   2Q18   ∆   3Q17   ∆   9M18   9M17   ∆ 
Operating Revenues   27,899    28,021    -0.4%   26,981    3.4%   83,345    81,453    2.3%
Managerial Financial Margin   17,408    17,295    0.7%   16,769    3.8%   51,702    51,569    0.3%
Financial Margin with Clients   16,152    15,953    1.2%   15,410    4.8%   47,366    46,719    1.4%
Financial Margin with the Market   1,257    1,342    -6.4%   1,359    -7.5%   4,337    4,850    -10.6%
Commissions and Fees   8,632    8,726    -1.1%   8,358    3.3%   25,887    24,240    6.8%
Result from Insurance, Pension Plan and Premium Bonds   1,858    1,999    -7.0%   1,853    0.3%   5,756    5,644    2.0%
Operations Before Retained Claims and Selling Expenses                                        
Cost of Credit   (3,263)   (3,601)   -9.4%   (3,990)   -18.2%   (10,651)   (13,745)   -22.5%
Provision for Loan Losses   (3,904)   (4,271)   -8.6%   (4,282)   -8.8%   (12,287)   (14,622)   -16.0%
Impairment   (89)   (1)   -    (262)   -66.2%   (277)   (812)   -65.9%
Discounts Granted   (285)   (273)   4.2%   (223)   27.8%   (842)   (770)   9.4%
Recovery of Loans Written Off as Losses   1,015    945    7.4%   777    30.7%   2,755    2,459    12.0%
Retained Claims   (320)   (335)   -4.6%   (320)   -0.1%   (934)   (902)   3.6%
Other Operating Expenses   (14,286)   (13,934)   2.5%   (13,505)   5.8%   (41,602)   (39,417)   5.5%
Non-interest Expenses   (12,646)   (12,261)   3.1%   (11,818)   7.0%   (36,583)   (34,370)   6.4%
Tax Expenses for ISS, PIS, Cofins and Other Taxes   (1,622)   (1,654)   -1.9%   (1,640)   -1.1%   (4,964)   (4,850)   2.4%
Insurance Selling Expenses   (18)   (19)   -5.1%   (47)   -60.9%   (55)   (197)   -72.3%
Income before Tax and Minority Interests   10,031    10,151    -1.2%   9,167    9.4%   30,158    27,389    10.1%
Income Tax and Social Contribution   (3,422)   (3,496)   -2.1%   (2,969)   15.3%   (10,379)   (8,628)   20.3%
Minority Interests in Subsidiaries   (155)   (273)   -43.2%   56    -378.5%   (524)   (163)   221.5%
Recurring Net Income   6,454    6,382    1.1%   6,254    3.2%   19,255    18,599    3.5%

 

Managerial Financial Margin Perspective

 

This perspective presents the income related to financial operations net of cost of credit.

 

In R$ millions  3Q18   2Q18   ∆   3Q17   ∆   9M18   9M17   ∆ 
Managerial Financial Margin   17,408    17,295    0.7%   16,769    3.8%   51,702    51,569    0.3%
Financial Margin with Clients   16,152    15,953    1.2%   15,410    4.8%   47,366    46,719    1.4%
Financial Margin with the Market   1,257    1,342    -6.4%   1,359    -7.5%   4,337    4,850    -10.6%
Cost of Credit   (3,263)   (3,601)   -9.4%   (3,990)   -18.2%   (10,651)   (13,745)   -22.5%
Provision for Loan Losses   (3,904)   (4,271)   -8.6%   (4,282)   -8.8%   (12,287)   (14,622)   -16.0%
Impairment   (89)   (1)   -    (262)   -66.2%   (277)   (812)   -65.9%
Discounts Granted   (285)   (273)   4.2%   (223)   27.8%   (842)   (770)   9.4%
Recovery of Loans Written Off as Losses   1,015    945    7.4%   777    30.7%   2,755    2,459    12.0%
Net Result from Financial Operations   14,145    13,694    3.3%   12,780    10.7%   41,052    37,824    8.5%
Other Operating Income/(Expenses)   (4,115)   (3,544)   16.1%   (3,613)   13.9%   (10,893)   (10,435)   4.4%
Commissions and Fees   8,632    8,726    -1.1%   8,358    3.3%   25,887    24,240    6.8%
Result from Insurance, Pension Plan and Premium Bonds Operations   1,521    1,645    -7.6%   1,487    2.3%   4,767    4,545    4.9%
Non-interest Expenses   (12,646)   (12,261)   3.1%   (11,818)   7.0%   (36,583)   (34,370)   6.4%
Tax Expenses for ISS, PIS, Cofins and Other Taxes   (1,622)   (1,654)   -1.9%   (1,640)   -1.1%   (4,964)   (4,850)   2.4%
Income before Tax and Minority Interests   10,031    10,151    -1.2%   9,167    9.4%   30,158    27,389    10.1%
Income Tax and Social Contribution   (3,422)   (3,496)   -2.1%   (2,969)   15.3%   (10,379)   (8,628)   20.3%
Minority Interests in Subsidiaries   (155)   (273)   -43.2%   56    -378.5%   (524)   (163)   221.5%
Recurring Net Income   6,454    6,382    1.1%   6,254    3.2%   19,255    18,599    3.5%

 

Itaú Unibanco Holding S.A. 08

 

 

Management Discussion & Analysis Executive Summary

 

Results

 

Recurring Net Income

 

 

Income Before Tax and Minority Interests

 

 

Performance:

 

Recurring net income for the third quarter of 2018 amounted to R$6.5 billion, a 1.1% increase from the previous quarter, with return on average equity of 21.3%.

 

The highlights of the quarter were the lower cost of credit and the increase in the financial margin with clients. These positive effects were partially offset by the increase in non-interest expenses. However, it is worth mentioning that the growth in non-interest expenses was driven by the growth of commercial teams, particularly for the branch network, insurance and acquiring operations. There was also the seasonal impact of the collective labor agreement and the effect of the foreign exchange variation in the period in our expenses on Latin America.

 

In relation to the result of the first nine months of 2018, we highlight the 10.1% increase in income before taxes and minority interests, compared to the same period of the previous year. The lower cost of credit and higher commissions and fees were the main drivers for this performance. This performance was partially offset by the recognition of deferred tax assets at a rate of 40%, in line with current legislation, which temporarily increased our effective tax rate in 2018. The combination of these factors resulted in a 3.5% increase in our year-to-date recurring net income compared to the same period of the previous year.

 

Loan portfolio grew 2.1% in the quarter and 10.6% year-on-year, and our delinquency ratios continue to improve both for individuals and very small, small and middle-market companies in Brazil.

 

Events in the quarter

 

Changes in the Executive Committee

 

We announced changes in the executive committee that will come into effect as from January 2019. Eduardo Vassimon, Wholesale General Director, reached the age limit for exercising the duties of this position and will be replaced by the current Vice President of Risk and Finance Control Area, Caio Ibrahim David. Milton Maluhy Filho will take up the position of Vice President of Risk and Finance Control Area.

 

Acquisition of minority interest in XP Investimentos

 

On August 10, 2018, we obtained the authorization from the Central Bank of Brazil to invest in XP Investimentos. In the first phase, we acquired 49.9% of XP Holding’s total capital by means of a capital increase in the amount R$600 million and the acquisition of shares in the amount of R$5.7 billion. The first acquisition was completed on August 31, 2018. This operation should not have any significant impacts on this year’s financial results and the impact of the first acquisition on our Basel ratio was 90 basis points.

 

Itaú CorpBanca

 

In accordance with the Announcement to the Market of October 12, 2018, we announced the indirect acquisition of Itaú CorpBanca shares for the approximate amount of R$365 million, as a result of Corp Group exercising a put option set forth in the stockholders’ agreement of April 1, 2016. Therefore, our interest ownership in Itaú CorpBanca increased to 38.14%, from 36.06%, without changing the governance of Itaú CorpBanca.

 

Itaú Unibanco Holding S.A. 09

 

 

Management Discussion & Analysis Executive Summary

 

Highlights in 3Q18

 

Financial Margin with Clients

 

 

In this quarter, the 1.2% increase in our financial margin with clients was due to the positive impacts of the better mix of products and of the higher number of calendar days compared to the previous quarter. These positive effects were partially offset by the reduction in spreads (mainly in overdraft).

 

In the first nine months of 2018, the better mix of products and the increase in the volume of loans more than offset the negative effects of the interbank deposit rate decrease on our liabilities financial margin and working capital and the reduction in spreads.

 

Further details on page 16

 

Cost of Credit

 

 

The decrease of 9.4% in our cost of credit in the quarter was driven by lower provisions for loan losses. In the Wholesale Banking in Brazil, we had reversal of provisions mainly due to risk rating improvement of a specific client. This positive variation was partially offset by the natural increase in Retail Banking expenses in Brazil, related to the segment loan portfolio growth.

 

In the first nine months of 2018, the reduction in cost of credit is related to the improvement of the credit quality of the portfolio in Brazil, both in the Retail and in Wholesale Banking segments.

 

Further details on pages 18-19

 

Commissions, Fees and Result from Insurance 1

 

 

In the quarter there was a decrease of 2.1% in commissions, fees and result from insurance. The decrease in commissions and fees is related to lower income from advisory services and brokerage that was partially offset by the increase in credit card revenues. The lower result in our insurance operations is related to the liability adequacy test revenue recognized in the second quarter.

 

In the first nine months of 2018 commissions, fees and result from insurance operations increased 6.5%. We highlight the increases in fund management fees, driven by higher volume of assets managed, and in current account services, due to the higher number of current account holders in the period.

 

Further details on pages 23-28

 

Non-Interest Expenses

 

 

The increase of 3.1% in non-interest expenses in the quarter was driven by higher personnel expenses, impacted by the collective labor agreement and the increase in the number of employees. There was also an increase in our expenses in Latin America (ex-Brazil) impacted by the foreign exchange variation in the period.

 

In the first nine months of 2018, non-interest expenses increased 6.4%, whereas expenses in Brazil (ex-Citibank) increased 0.9% from the same period of the previous year, below inflation for the period.

 

Further details on pages 29-30

 

Return on Equity

 

 

Efficiency Ratio (E.R.) and Risk-Adjusted Efficiency Ratio (R.A.E.R.)

 

 

Further details on page 30

 

¹ Result from insurance operations includes the result from insurance, pension plan and premium bonds, net of retained claims and selling expenses.

 

Itaú Unibanco Holding S.A.10

 

 

Management Discussion & Analysis Executive Summary

 

Highlights in 3Q18

 

Credit Portfolio with Financial Guarantees Provided and Corporate Securities

 

The increase in the loan portfolios for very small, small and middle-market companies and for individuals, both in the third quarter and in the year, was driven by higher credit demand from our clients.

 

The 1.6% decrease in the corporate loan portfolio in the quarter was due to the low demand for long-term credit, which migrated to the capital markets.

 

In R$ billions, end of period  3Q18   2Q18   ∆   3Q17   ∆ 
Individuals   200.0    195.0    2.5%   179.9    11.2%
Credit Card Loans   68.7    66.1    3.9%   57.2    20.1%
Personal Loans   28.9    28.3    1.9%   26.0    11.3%
Payroll Loans 1   46.0    45.4    1.2%   44.6    3.1%
Vehicle Loans   15.2    14.7    3.9%   13.9    9.7%
Mortgage Loans   41.2    40.5    1.8%   38.3    7.7%
Very Small, Small and Middle Market Loans 2   67.5    65.6    2.9%   59.1    14.3%
Individuals + Very Small, Small and Middle Market Loans   267.5    260.6    2.6%   238.9    11.9%
Companies   196.3    197.1    -0.4%   200.7    -2.2%
Corporate Loans   159.9    162.5    -1.6%   164.6    -2.8%
Corporate Securities 3   36.3    34.6    4.9%   36.1    0.6%
Total Brazil with Financial Guarantees Provided and Corporate   463.7    457.8    1.3%   439.6    5.5%
Latin America   172.7    165.5    4.3%   135.5    27.4%
Argentina   9.8    9.3    5.5%   7.0    39.6%
Chile   113.3    108.0    5.0%   89.4    26.8%
Colombia   30.8    30.3    1.5%   25.8    19.1%
Paraguay   8.2    7.7    6.9%   5.7    43.1%
Panama   1.3    1.4    -5.1%   0.8    58.0%
Uruguay   9.3    8.9    4.2%   6.7    38.0%
Total with Financial Guarantees Provided and Corporate Securities   636.4    623.3    2.1%   575.2    10.6%
Total with Financial Guarantees Provided and Corporate Securities (ex-foreign exchange rate variation) 4   636.4    628.7    1.2%   615.8    3.4%

 

(1) Includes operations originated by the institution and acquired operations. (2) Includes Rural Loans to Individuals. (3) Includes Debentures, Certificates of Real Estate Receivables (CRI) and Commercial Paper. (4) Calculated based on the conversion of the foreign currency portfolio (U.S. dollar and Latin American currencies). Note: the Mortgage and Rural Loan portfolios from the companies segment are allocated according to the client’s size. Further details on pages 32 and 33.

 

NPL Ratio (%) | over 90 days

 

 

The NPL ratio increase is associated with the delinquency of large companies in Brazil. This increase in the delinquency ratio of large companies was driven by the rollover of loans that were overdue between 15 and 90 days in the previous quarter that migrated to loans 90 days overdue and were already adequately provisioned. There was no concentration in a specific client or sector. However, it is worth mentioning the 30 basis point decrease in this ratio for very small, small and middle-market companies portfolio in Brazil.

 

In Latin America, the reduction was mainly driven by Chilean operations for both individuals and companies.

 

Further details on pages 20-22

 

Coverage Ratio | 90 days

 

 

The decrease in the coverage ratio in the quarter was related to the corporate segment in Brazil. This decrease in the corporate segment was due to the improvement of risk rating of an specific client that allowed the reversal of provisions for loan losses. In addition, certain clients became overdue and were already adequately provisioned.

 

Further details on pages 20-22

 

NPL Creation

 

 

The increase from the previous quarter was driven by the higher portfolio of loans more than 90 days overdue in the Wholesale Banking segment in Brazil with no concentration in a specific client or sector, that were already adequately provisioned.

 

Further details on pages 20-22

 

¹ Includes units abroad ex-Latin America. ² Excludes Brazil. ³ Calculated by dividing the total allowance by the balance of operations more than 90 days overdue and renegotiated operations, excluding double counting of renegotiated operations more than 90 days overdue.

 

Itaú Unibanco Holding S.A.11

 

 

Management Discussion & Analysis Executive Summary

 

2018 Forecast

 

We kept unchanged the ranges of our 2018 forecast. We present below our 2018 forecast including the effect of Citibank’s operations.

 

 

1) Includes units abroad ex-Latin America; 2) Includes financial guarantees provided and corporate securities;

3) Includes Result from Loan Losses, Impairment and Discounts Granted; 4) Commissions and Fees (+) Income from Insurance, Pension Plan and Premium Bonds Operations (-) Expenses for Claims (-) Insurance, Pension Plan and Premium Bonds Selling Expenses.

 

Although the growth plans and projections of results presented above are based on management assumptions and information available in the market to date, these expectations involve inaccuracies and risks that are difficult to anticipate and there may be, therefore, results or consequences that differ from those anticipated. This information is not a guarantee of future performance. The use of these expectations should take into consideration the risks and uncertainties that involve any activities and that are beyond our control. These risks and uncertainties include, but are not limited to, our ability to perceive the dimension of the synergies projected and their timing, political and economic changes, volatility in interest and foreign exchange rates, technological changes, inflation, financial disintermediation, competitive pressures on products, prices and changes in tax legislation, among others.

 

Itaú Unibanco Holding S.A.12

 

 

Management Discussion & Analysis Executive Summary

 

Sustainability

 

Integration of environmental, social and governance aspects into business

 

Financial institutions act as intermediaries of the global economy and, therefore, we play a significant role in the transformation of society. We understand that integrating ESG aspects into our business, in addition to mitigating risks, is vital to foster social and economic development in locations where our services are offered.

 

Analysis methodology for ESG evaluation in investments

 

 

Credit

 

The management of environmental and social risks in credit aims at identifying, measuring, mitigating and monitoring risks associated to social and environmental aspects in our business.

 

In 2017, we assigned approximately R$2.9 billion for loan operations that promote social and environmental benefits through our corporate segment.

 

Investments

 

Using our ESG integration methodology, we analyzed 99% of the companies listed on B3, and the ones that make up the IBrX-100 index and the Corporate Sustainability Index (ISE) of B3. 90% out of the corporate fixed-rate securities are also covered by the methodology.

 

TCFD: Task Force on Climate-Related Financial Disclosures

 

Climate risk and its variables are also covered by Itaú Unibanco’s risk analysis. This approach enables us to be in a strategic position to ensure the continuity of business and operations in view of climate change and the resulting impacts on the economy expected for the coming years.

 

In the beginning of 2018, a multidisciplinary working group was created to implement the recommendations of the document disclosed by the Financial Stability Board, “Task Force on Climate Finance Disclosure” (TCFD), and, in line with this topic, we created a Climate Finance agenda. This initiative encourages organizations from different sectors to get to know the physical climate risks, the ones created by them and the transition ones to which they are exposed, and proposes voluntary and consistent financial reporting related to climate, to ensure higher transparency to enable lenders, insurance companies and investors to make better business decisions.

 

Ecoefficiency

 

We are constantly focused on the management and rational use of natural resources, a strategy that allows the reduction of the environmental impact of our operations and the increase of our operational efficiency.

 

 

Major market sustainability indices

 

 

 

Transparency of social, environmental and governance data is a fundamental assumption for a sustainable performance. Our Integrated Report and Annual Report bring about information on our operations and may be accessed on www.itau.com.br/annual-report.

 

Itaú Unibanco Holding S.A.13

 

 

Management Discussion & Analysis Executive Summary

 

Digital Transformation

 

The technology behind the experience

 

The bank is strengthening its strategy to spearhead the search for groundbreaking solutions in order to sort out real-world problems with the adoption of technologies. Our focus is making people's lives easier by bringing more convenience, agility and security to the products and services we provide.

 

 

Virtual Assistant

 

To provide better service experiences, we use artificial intelligence

 

Technology that is about much more than solving doubts: it closes transactions for customers by integrating with their financial data. In addition, during the same chat session, the customer can call on a specialist who will have the chat thread.

 

98%* of doubts answered

 

85%* rate of correct responses

 

93%* of customers do not need to seek another form of service

 

*Results obtained in August 2018, with more than 500 thousands users.

 

Itaú: A founding member and only Latin America institution at Fintech @CSAIL/MIT CSAIL .

(Computer Science & Artificial Intelligence Lab): MIT’s largest lab and a global benchmark in AI.

 

Use of Digital Channels1

 

Individuals

 

Number of current account holders (in millions)

 

 

¹ Internet, mobile and SMS in the Retail Bank.

 

Companies

 

Number of current account holders (in millions)

 

 

New Accounts

 

Individuals accounts (in thousands)

 

 

 

 

Share of Transactions

through digital channels

 

   9M16   9M18 
Credit   16%   18%
Investments   30%   40%
Payments   60%   74%

 

*Note: Share of digital channels in the total volume (R$) of transactions in the Retail Bank segment

 

Itaú Unibanco Holding S.A.14

 

  

 

 

 

 

Management Discussion & Analysis Income Statement Analysis

 

Managerial Financial Margin

 

 

Highlights

 

·Financial margin with clients increased in the quarter driven by the positive impact of the mix of products and higher number of calendar days in the quarter.

 

·The risk-adjusted financial margin with clientes rate increased by 10 basis points due to the reduction of the cost of credit.

 

·Reduction in financial margin with the market in Latin America, driven by gains in the previous quarter from foreign exchange volatility and mark-to-market securities in Chile, which did not repeat in this quarter.

 

Managerial Financial Margin

Financial Margin with Clients
R$16,152 million ▲ + 1.2% (3Q18/2Q18)
  ▲ + 4.8% (3Q18/3Q17)
   
Financial Margin with the Market
R$1,257 million ▼ - 6.4% (3Q18/2Q18)
  ▼ - 7.5% (3Q18/3Q17)

 

 

Financial Margin with Clients

 

 

Financial margin with clients comprises our spread-sensitive operations, working capital and others. Spread-sensitive operations are: (i) the assets margin, that is the difference between the amount received in loan operations and corporate securities and the cost of money charged by treasury banking and (ii) the liabilities margin, which is the difference between the cost of funding and the amount received from treasury banking. Working capital margin is the interest on working capital at the Selic interest rate.

 

Change in the Financial Margin with Clients Breakdown

 

 

(1) Change in the composition of assets with credit risk between periods. (2) Considers credit and private securities portfolio net of more than 60 days overdue balance and balances do not include the effects of foreign exchange rate variations and spreads variation of assets with credit risk between periods.

 

1Mix of products (+ R$187 million): the increase in portfolios for individuals and very small, small and middle-market companies contributed to a higher share of products of these segments, such as personal loans, in the total financial margin with clients. The higher share of these products with higher spread gave rise to an increase in the margin with clients.

 

2Average asset portfolio, assets spreads and liabilities margin (- R$144 million): spread reduction in products, such as overdraft and working capital, was partially offset by the 0.3% growth in the average portfolio and the positive effect on liabilities margin from one additional business day in the quarter.

 

3Higher number of calendar days (+ R$122 million): in the third quarter of 2018, we had one additional calendar day compared to the previous quarter. Calendar days are used because most of our portfolio considers fixed rates.

 

4Working capital and other (+ R$17 million): associated with the increased average working capital balance.

 

 

5Financial margin with clients in Latin America (+ R$59 million): gains from foreign exchange variation and increase in the liabilities margin in this quarter.

 

Itaú Unibanco Holding S.A.16

 

 

Management Discussion & Analysis Income Statement Analysis

 

Annualized average rate of financial margin with clients

 

 

 

   3Q18   2Q18 
   Average(1)   Financial   Average Rate   Average(1)   Financial   Average Rate 
In R$ millions, end of period  Balance   Margin   (p.a.)   Balance   Margin   (p.a.) 
Financial Margin with Clients   676,946    16,152    9.8%   665,879    15,953    9.9%
Spread-Sensitive Operations   581,017    14,323    10.1%   572,345    14,192    10.3%
Working Capital and Other   95,928    1,829    7.7%   93,534    1,762    7.7%
Cost of Credit        (3,263)             (3,601)     
Risk-Adjusted Financial Margin with Clients   676,946    12,889    7.7%   665,879    12,353    7.6%

 

(1) Average daily balance.

 

Spread-Sensitive Operations:

 

▼- 20 bps

 

·spread reduction in products such as overdraft and working capital contributed to reduce the rate of spread-sensitive operations.

 

Working Capital and Other:

 

—0 bps

 

·the rise in the long-term yield curve in the last months have not affected our working capital and other rate, since our capital is invested throughout the long -term yield curve.

 

Financial Margin with Clients:

 

▼- 10 bps

 

·the fall in the rate of spread-sensitive operations contributed to the 10 basis point reduction in the consolidated rate.

 

Risk-Adjusted Financial Margin with Clients:

 

▲+ 10 bps

 

·increase in the risk-adjusted rate, driven by lower cost of credit in the quarter.

 

Financial Margin with the Market

 

 

Financial margin with the market includes (i) treasury banking, that manages mismatches of assets and liabilities (ALM - Asset and Liability Management), terms, and interest, foreign exchange and other rates and (ii) treasury trading, that manages proprietary portfolios and may assume guiding positions, in compliance with the limits established by our risk appetite.

 

 

(2) Includes units abroad ex-Latin America. (3) Excludes Brazil.

 

Financial margin with the market decreased 6% in the quarter. This reduction was driven by the margin with the market in Latin America (ex-Brazil) that recorded gains in the previous quarter from foreign exchange volatility and mark-to-market securities in Chile, which did not repeat in this quarter.

 

Itaú Unibanco Holding S.A.17

 

 

Management Discussion & Analysis Income Statement Analysis

 

Cost of Credit

 

 

Highlights

 

·The cost of credit decrease of 9.4% in the quarter was concentrated in the Wholesale Banking in Brazil. In this segment there was a reversal of provision for loan losses, due to the improved risk rating of a specific client.

 

·Compared to the first nine months of 2017, the cost of credit decreased R$3,094 million, mainly driven by a lower provision for loan losses and a decreased impairment of corporate securities of the Wholesale Banking in Brazil.

 

In R$ millions  3Q18   2Q18   ∆   3Q17   ∆  9M18   9M17   ∆ 
Provision for Loan Losses   (3,904)   (4,271)   -8.6%   (4,282)   -8.8%   (12,287)   (14,622)   -16.0%
Recovery of Loans Written Off as Losses   1,015    945    7.4%   777    30.7%   2,755    2,459    12.0%
Result from Loan Losses   (2,889)   (3,326)   -13.1%   (3,505)   -17.6%   (9,532)   (12,163)   -21.6%
Impairment   (89)   (1)   -    (262)   -66.2%   (277)   (812)   -65.9%
Discounts Granted   (285)   (273)   4.2%   (223)   27.8%   (842)   (770)   9.4%
Cost of Credit   (3,263)   (3,601)   -9.4%   (3,990)   -18.2%   (10,651)   (13,745)   -22.5%

 

Compared to the previous quarter, cost of credit reduced mainly due to a lower provision for loan losses in the amount of R$367 million, mainly driven by the improved risk rating of a specific Wholesale Banking client in Brazil. Income from recovery of loans written off as losses increased by R$70 million, concentrated in Latin America.

 

Comparing the first nine months of 2018 with the same period of the previous year, the lower cost of credit was mainly driven by the reduction of R$2,480 million in provision for loan losses in Brazil, both in the Retail (R$182 million) and in the Wholesale Banking (R$2,298 million), in line with the improved credit quality of the portfolio. Additionally, impairment charges on corporate securities in the Wholesale Banking in Brazil decreased by R$535 million and income from recovery of loans written off as losses increased by R$296 million, mainly in the Wholesale Banking in Brazil.

 

The ratio of cost of credit over total risk reached 2.1%. This is the lowest level since 2014.

 

Cost of Credit

 

 

(*) Average balance of the loan portfolio with financial guarantees provided and corporate securities, considering the last two quarters.

 

Provision for Loan Losses by Segment

 

 

(*) Average balance of the loan portfolio, considering the last two quarters.

 

Note: Retail Banking includes loan loss provisions expenses of Corporation segment. In the business segments section, Latin America is part of the Wholesale Banking.

 

· Wholesale Banking - Brazil: a reversal of R$298 million in the quarter, mainly driven by the improved risk rating of a specific segment client.

 

· Retail Banking - Brazil: the growth of the loan portfolio led to the natural increase of R$206 million in provision for loan losses in the quarter.

 

Recovery of Loan Written off as Losses

 

 

The increase of R$70 million was driven by Latin America operations. In the third quarter of 2018, we recorded sales of R$2.8 billion of credits that had already been written off as losses. This operation had a positive impact of R$47 million on recovery of loans written off as losses and of R$26 million on recurring net income.

 

Itaú Unibanco Holding S.A.18

 

 

Management Discussion & Analysis Income Statement Analysis

 

Loan Portfolio by Risk Level

 

 

Allowance for Loan Losses and for Financial Guarantees Provided

 

There was a reduction of 1.7% in the allowance for loan losses and for financial guarantees provided compared to the end of June 2018. This reduction was in the Wholesale Banking in Brazil, driven by the improved risk rating of a specific segment client, which affected the provision for financial guarantees provided. Also worth mentioning is the migration of the balance of the additional allowance to the specific provision in the Wholesale Banking in Brazil.

 

 

We present below the total allowance(*) allocation by type of risk:

 

Overdue Risk: Allowances for overdue loans, as required by the Brazilian Central Bank, related to the minimum provision required for overdue operations according to CMN Resolution No. 2,682/1999. We also present the amount for loans 100% provisioned and for loans that do not require 100% of provision.

 

Aggravated Risk: Allowances for overdue loans with aggravated risk ratings above the minimum required by the Brazilian Central Bank, and allowances for renegotiated loans. Regarding renegotiated loans, we segregate allowances over the minimum required by the Brazilian Central Bank for overdue operations and allowances for non-overdue operations.

 

Potential Risk: Allowances for expected losses related to Retail Banking operations and allowances for potential losses related to Wholesale Banking operations, which includes allowance for financial guarantees provided.

 

 

¹ Includes units abroad ex-Latin America. ² Excludes Brazil. ³ Allowance for potential losses includes the allowance for financial guarantees provided. (*) Total allowance includes the allowance for loan losses and the allowance for financial guarantees provided, which totaled R$1,269 million in September 2018 and is recorded in liabilities in accordance with CMN Resolution No. 4,512/16.

 

Itaú Unibanco Holding S.A.19

 

 

Management Discussion & Analysis Income Statement Analysis

 

Credit Quality

 

 

Highlights

 

·Nonperforming loans 90 days overdue ratio (NPL 90) increased 10 basis points. This was related to the 50 basis points increase in the corporate segment that was partially offset by a new reduction in very small, small and middle-market companies. The individuals segment NPL 90 ratio remained stable.

 

·Nonperforming loans between 15 to 90 days overdue ratio (NPL 15 - 90) decreased in all segments in Brazil. The ratio increase in Latin America operations was mainly in the companies portfolios in Chile and Colombia.

 

Nonperforming Loans

 

 

· Nonperforming loans - 90 days - Total: the 1.7% increase from the same period of the previous year was mainly driven by the rollover of loans of the corporate segment that were overdue between 15 and 90 days in the previous quarter, which were adequately provisioned.

 

NPL Ratio (%) | over 90 days

 

 

Analysis of the quarterly change in NPL 90 (%) | Credit Quality x Volume

 

 

· Consolidated: increased from the previous quarter, driven by the corporate segment in Brazil.

 

· Brazil1: the ratio increased from the previous quarter, driven by higher delinquency rate in the Corporate segment, due to the rollover of loans overdue between 15 and 90 days in the previous quarter.

 

· Latin America2: decreased in the quarter, mainly driven by the Chilean operations both for individuals and companies.

 

NPL Ratio - Brazil1 (%) | over 90 days

 

 

Analysis of the quarterly change in NPL 90 (%) | Credit Quality x Volume

 

 

· Individuals: the increase in nonperforming loans balance remains in line with the portfolio increase, with the ratio close to the lowest level since the merger between Itaú and Unibanco.

 

· Very small, small and middle-market companies: decreased for the 8th consecutive quarter, reaching the lowest level since the merger between Itaú and Unibanco, due to the quality of recent vintages.

 

· Corporate: increased from the previous quarter, driven by the rollover of loans overdue between 15 and 90 days that were adequately provisioned. There was no concentration in a specific client or sector.

 

NPL Ratio (%) | 15 to 90 days

 

 

* Note: Total and Latin America NPL Ratio (15-90 days) prior to June 2016 do not include CorpBanca.

 

Analysis of the quarterly change in NPL 15-90 (%) | Credit Quality x Volume

 

 

· Consolidated: the ratio decreased from the previous quarter, since the increase in Latin America was more than offset by the reduction in Brazil.

 

· Brazil1: decreased from the previous quarter, with lower delinquency rates in all segments.

 

· Latin America2: increased in the quarter, mainly in companies in Chile and Colombia.

 

¹ Includes units abroad ex-Latin America.² Excludes Brazil.

 

Itaú Unibanco Holding S.A.20

 

 

Management Discussion & Analysis Income Statement Analysis

 

NPL Ratio - Brazil1 (%) | 15 to 90 days

 

 

Analysis of the quarterly change in NPL 15-90 (%) | Credit Quality x Volume

 

 

· Individuals: delinquency rates decreased in the quarter, with highlights going to the credit card, personal loans and vehicles portfolios that experienced increase in credit and decrease in nonperforming loans.

 

· Very small, small and middle-market companies: decreased for the 4th consecutive quarter, reaching the lowest level since the merger between Itaú and Unibanco, due to the better quality of recent vintages.

 

· Corporate: decreased from the previous quarter, driven by the rollover of clients in that segment to the portfolio of loans more than 90 days overdue.

 

Coverage Ratio | 90 days

 

 

 

(i) Excluding the exposure of a corporate client, the Total coverage ratio would have been 244% and the Wholesale Banking in Brazil coverage ratio would have been 845%.

 

· Consolidated: coverage ratio decreased in the quarter, driven by the Wholesale Banking in Brazil, with improved risk rating of a specific segment client, in addition to the rollover of loans overdue between 15 and 90 days in the previous quarter that were adequately provisioned.

 

¹ Includes units abroad ex-Latin America.

 

Loan Portfolio Write-Off

 

 

(*) Loan portfolio average balance for the previous two quarters.

 

Loan portfolio write-offs decreased 7.4% from the previous quarter, mainly in the Retail Banking in Brazil. The ratio of written-off operations to the average balance of the loan portfolio remains consistent with the last quarters.

 

NPL Creation

 

 

(i) Excluding the exposure of a corporate cliente, the Total NPL Creation would have been R$4,471 million and the Wholesale Banking in Brazil NPL Creation would have been R$578 million.

 

Note: The NPL Creation is the balance of loans that became overdue for more than 90 days in the quarter.

 

· Consolidated: increased compared to the previous period, driven by the increase in the portfolio of loans more than 90 days overdue in the Wholesale Banking in Brazil, in operations that were adequately provisioned, with no concentration in a specific client or sector.

 

NPL Creation Coverage

 

 

Note: NPL Creation coverage ratio is calculated from the division of provision for loan losses by NPL Creation in the quarter.

 

In the third quarter of 2018, total NPL Creation coverage reached 79%, driven by the increase in NPL Creation and the decrease in provision for loan losses in the quarter. It is worth mentioning that the expected loss model includes provisions not only for operations with incurred losses, but also for operations that have not incurred losses yet.

 

· Retail Banking - Brazil: the NPL Creation coverage level reached 104%, in line with the historical levels.

 

· Wholesale Banking - Brazil: the NPL Creation coverage ratio was impacted by the increase in NPL Creation of the segment, in operations that were adequately provisioned, in addition to the improvement of the risk rating of a specific client that affected the provision for financial guarantees provided.

 

Itaú Unibanco Holding S.A.21

 

 

Management Discussion & Analysis Income Statement Analysis

 

Renegotiated Loans Operations

 

 

Renegotiated loans are all types of renegotiation, either overdue, non-overdue or from loans written off as losses.

 

Highlights

 

·The increase in renegotiated loans operations from the previous quarter is associated with some corporate operations, which were already adequately provisioned.

 

·The increase in total renegotiated loans portfolio 90-day NPL is also related to corporate segment, with no significant changes in coverage level, since the credits already had an adequate level of provisioning.

 

R$27.9 billion as of September 30, 2018

 

▲ + 1.4% (vs. Jun-18)

 

▲ + 5.4% (vs. Sep-17)

 

By overdue period

 

measured at the moment of renegotiation

 

Brazil1

 

 

1Includes units abroad ex-Latin America.

 

NPL of Renegotiated Loans Operations

 

 

Renegotiated Loans Coverage

as of September 30, 2018

 

 

* Measured at the moment of renegotiation.

 

Sale of Financial Assets

 

In the third quarter of 2018, we recorded sales of assets with no risk retention to non-related companies with face value of R$41 million. This operation had positive impacts of R$10 million on the cost of credit and of R$5 million on net income. In addition, we sold active portfolios of our Latin America operation with face value of R$208 million, which had positive impacts of R$50 million on the cost of credit and of R$27 million on net income. These operation had no significant impact on NPL ratios.

 

We recorded sales of assets already written off as losses, with no risk retention, with face value of R$2.8 billion, with impact of R$26 million on net income. These sales of assets already written off as losses had no impact on NPL ratios.

 

       3Q18     
       (Ex Sale of     
In R$ millions  3Q18   Assets)   ∆ 
Income Statement               
Operating Revenues   27,899    27,899    - 
Cost of Credit   (3,263)   (3,369)   107 
Provision for Loan Losses   (3,904)   (3,995)   91 
Impairment   (89)   (89)   - 
Discounts Granted   (285)   (253)   (31)
Recovery of Loans Written Off as Losses   1,015    968    47 
Other Operating Expense and Other1   (14,761)   (14,761)   - 
Income Tax and Social Contribution   (3,422)   (3,374)   (48)
Recurring Net Income   6,454    6,395    59 

 

1 Includes Other Operating Expenses, retained claims and minority interests in subsidiaries

 

Itaú Unibanco Holding S.A.22

 

 

Management Discussion & Analysis Income Statement Analysis

 

Commissions and Fees and Result from Insurance Operations1

 

 

Highlights

 

·A 2.1% decrease in the quarter, driven by the decrease in income from advisory services and brokerage, related to the lower market capital activity, and decrease in income from insurance operations. The decrease in income from insurance operations was due to the positive effect in the second quarter of 2018 related to the Liability Adequacy Test, which did not happen again in this quarter.

 

·Compared to the first nine months of 2017, the R$1,869 million increase was mainly driven by: (i) fund management fees, driven by the increase in the balance of investment funds and managed portfolios; (ii) current account services, due to the increase in the number of current account holders, in addition to the incorporation of Citibank´s retail operations; and (iii) credit card fees, due to the increased number of clients and transaction volume.

 

In R$ millions  3Q18   2Q18   ∆   3Q17   ∆   9M18   9M17   ∆ 
Credit Cards   3,168    3,050    3.9%   3,103    2.1%   9,357    9,069    3.2%
Current Account Services   1,829    1,819    0.5%   1,699    7.6%   5,466    5,028    8.7%
Asset Management   1,068    1,106    -3.4%   940    13.6%   3,188    2,617    21.8%
Fund Management Fees   890    942    -5.5%   780    14.1%   2,689    2,146    25.3%
Consortia Administration Fees   179    164    9.0%   161    11.1%   498    471    5.8%
Credit Operations and Guarantees Provided   817    847    -3.5%   829    -1.4%   2,509    2,492    0.7%
Credit Operations   468    474    -1.4%   457    2.4%   1,423    1,387    2.6%
Guarantees Provided   349    372    -6.1%   371    -5.9%   1,086    1,105    -1.8%
Collection Services   472    483    -2.3%   432    9.2%   1,413    1,269    11.4%
Advisory Services and Brokerage   279    418    -33.3%   410    -32.1%   1,018    998    2.0%
Other   249    285    -12.6%   306    -18.8%   797    886    -10.0%
Foreign Exchange Services   36    38    -4.8%   30    21.6%   109    85    28.2%
Custody Service and Portfolio Management   93    90    3.5%   92    1.4%   269    257    4.9%
Other Services   120    157    -23.6%   185    -35.3%   419    544    -23.0%
Latin America (ex-Brazil)   750    719    4.2%   638    17.5%   2,140    1,881    13.8%
Commissions and Fees   8,632    8,726    -1.1%   8,358    3.3%   25,887    24,240    6.8%
Result from Insurance Operations¹   1,521    1,645    -7.6%   1,487    2.3%   4,767    4,545    4.9%
Total   10,153    10,371    -2.1%   9,845    3.1%   30,654    28,785    6.5%

 

Breakdown of Commissions and Fees and Result from Insurance Operations1

 

 

Operational Coverage Ratio

 

The operational coverage ratio represents the extent to which non-interest expenses were covered by the commissions and fees added to the result from insurance1. This ratio reached 80.3% in the quarter.

 

 

¹ Result from Insurance, Pension Plan and Premium Bonds Operations net of retained claims and selling expenses; ² Operating Revenues including the Result from Insurance, Pension Plan and Premium Bonds Operations net of retained claims and selling expenses.

 

Itaú Unibanco Holding S.A.23

 

 

Management Discussion & Analysis Income Statement Analysis

 

Credit Cards

 

 

Credit card revenues increased R$119 million from the previous quarter, driven by increased interchange revenues and lower expenses on rewards programs. These effects were partially offset by lower revenues from rental of machines.

 

Compared to the first nine months of 2017, card revenues increased 3.2% driven by higher revenues from interchange, annuity fees and the integration of Citibank’s retail operations in Brazil. These effects were partially offset by lower revenues from rental of machines and MDR (Merchant Discount Rate).

 

Revenues | Acquiring and Issuance Services

 

 

· Card Issuance Activities

 

We are the leading player in the Brazilian credit card market, totaling approximately 31.6 million (in number of accounts) credit cards and 27.5 million (in number of accounts) debit cards.

 

We operate through Itaucard, Hipercard, Hiper, Credicard, joint ventures and commercial agreements with leading companies in sectors such as telecom, vehicles, retail and aviation operating in the Brazilian market.

 

 

Note: Debit cards include account holders only.

 

· Acquiring Activities

 

Our merchant acquiring business comprises the process of capturing transactions through affliation, management and relationship with merchants.

 

In the third quarter of 2018, the volume of credit and debit card transactions increased 7.4% from the previous quarter. Compared to the same period of the previous year, the 14.0% increase was driven by the market expansion at the end of the previous year.

 

 

Equipment Base

 

The increase in the equipment base due to the launch of the Pop Credicard was partially offset by the migration to non-POS solutions and the competition increase in the segment, influenced by the market opening.

 

 

Itaú Unibanco Holding S.A.24

 

 

Management Discussion & Analysis Income Statement Analysis  

 

Current Account Services

 

In the third quarter of 2018, revenues from current account services remained stable from the previous quarter.

 

Compared to the first nine months of 2017, these revenues increased 8.7% driven by higher number of current-account holders, in addition to the incorporation of Citibank´s retail operations.

 

Asset Management

 

· Fund Management

 

Fund management fees were lower by R$52 million in the quarter, driven by lower revenues from performance fees, partially offset by the 4.2% increase in assets under administration and higher number of business days.

 

Compared to the first nine months of 2017, fund management fees grew R$543 million, mainly driven by a 15.9% increase in AuM and by higher revenues with performance fees.

 

According to ANBIMA, in September 2018 we ranked second in fund management and managed portfolio*, with a 22.6% market share.

 

* Includes Itaú Unibanco and Intrag.

 

Portfolio Managed and Investment Fund

 

 

Note: It includes the open platform balance and does not include Latin America (ex-Brazil). As from the third quarter of 2017, we deconsolidated managed portfolios from the Itaú group, and, for comparison purposes, the previous quarters were reprocessed.

 

· Consortia Administration Fees

 

In September 2018, we reached approximately 393 thousand active contracts, down 1.5% from the previous quarter. Installments receivable totaled R$11.6 billion at the end of the period, with increases of 1.8% from June 2018 and of 5.8% from September 2017.

 

 

Loan Operations and Financial Guarantees Provided

 

A 3.5% decrease from the previous quarter, driven by the lower use of advances to deposit account holders. Compared to the first nine months of 2017, there was a 0.7% increase driven by a larger volume of credit origination in 2018.

 

In the chart below, we show the annualized ratio of revenues from loan operations to the loan portfolio and of revenues from guarantees provided to the financial guarantees provided portfolio.

 

 

¹ Includes units abroad ex-Latin America. (*) Loan portfolio and financial guarantees provided average balances for the previous two quarters.

 

Collection Services

 

Revenues from collection services decreased 2.3% compared to the previous quarter.

 

Compared to the first nine months of 2017, these revenues grew 11.4%, mainly driven by higher volume, pricing, increased offer and expansion of collection services due to the issuance and management of receivables in the mobile channel.

 

Advisory Services and Brokerage

 

Compared to the previous quarter, revenues from economic and financial advisory and brokerage services decreased R$139 million due to lower capital market activity.

 

Compared to the first nine months of 2017, these revenues increased 2.0%.

 

Fixed Income: we took part in local operations with debentures, promissory notes and securitization, which totaled R$25.1 billion up to September 2018, reaching the leadership position in the ANBIMA ranking.

 

Equities: We carried out three offerings in South America in the first nine months of 2018, which totaled US$3.6 billion in the Dealogic ranking.

 

Mergers and Acquisitions: in the first nine months of 2018, we provided financial advisory on 24 transactions in South America, totaling US$22.2 billion and reaching the leadership position in the Dealogic ranking.

 

Itaú Unibanco Holding S.A.25

 

 

Management Discussion and Analysis Itaú Insurance, Pension Plan and Premium Bonds  

 

Itaú Insurance, Pension Plan and Premium Bonds

 

Highlights

 

·Decrease in net income of Itaú Insurance, Pension Plan and Premium Bonds in this quarter was mainly driven by the gains from the liability adequacy test in pension plans in the second quarter of 2018, which did not repeat this quarter. Excluding this effect, the result from recurring activities would have been consistent with the previous quarter.

 

·Additionally, net contributions to pension plans decreased, and were offset by increase in earned premiums, especially the credit-related insurance portfolio.

 

As from the first quarter of 2018, we have disclosed the breakdown of Recurring Activities and Other Activities in Results from Itaú Insurance, Pension Plan and Premium Bonds. Major changes were the inclusion of IRB earnings in Recurring Activities and the reclassification of group life and credit life insurance portfolios distributed by brokers to Other Activities, since these portfolios are in run off.

 

Pro Forma Income Statement of Insurance Operations

 

   3Q18                 
       Recurring   Other   Recurring Activities 
In R$ millions  Total   Activities   Activities   2Q18   ∆   3Q17   ∆ 
Earned Premiums   1,025    946    79    917    3.2%   874    8.3%
Revenues from Pension Plan and Premium Bonds   174    174    -    308    -43.4%   242    -27.8%
Retained Claims   (320)   (246)   (74)   (241)   1.9%   (235)   4.7%
Selling Expenses   (18)   (2)   (17)   (1)   28.0%   (4)   -56.3%
Result from Insurance, Pension Plan and Premium Bonds   862    873    (11)   982    -11.1%   877    -0.4%
Managerial Financial Margin   31    (10)   42    68    -    101    - 
Commissions and Fees   567    564    3    524    7.5%   509    10.7%
Earnings of Affiliates   126    126    -    104    21.1%   75    68.5%
Non-interest Expenses   (545)   (518)   (27)   (487)   6.5%   (439)   18.1%
Tax Expenses for ISS, PIS and Cofins and other taxes   (83)   (81)   (2)   (85)   -4.6%   (72)   13.5%
Income before Tax and Minority Interests   957    952    5    1,106    -13.9%   1,051    -9.4%
Income Tax/Social Contribution and Minority Interests   (366)   (365)   (1)   (472)   -22.7%   (431)   -15.4%
Recurring Net Income   591    587    3    634    -7.4%   620    -5.2%
                                    
Allocated Capital   1,619    1,590    28    1,561    1.9%   1,343    18.4%
Average Allocated Capital   1,605    1,576    29    1,438    9.5%   1,343    17.3%
Recurring Return on Average Allocated Capital   147.3%   149.1%   48.1%   176.3%   -2,720bps   184.5%   -3,540bps
Efficiency Ratio (ER)   36.3%   35.2%   85.0%   30.6%   470bps   29.4%   580bps
Combined Ratio   63.9%   56.7%   150.2%   57.5%   -80bps   54.9%   170bps

 

Note: Combined Ratio for insurance activities. Non-interest Expenses considers Personnel Expenses, Other Administrative Expenses and Other Operating Expenses.

 

Recurring Activities   Other Activities
     
Recurring activities consist of the offering of bancassurance products related to Life, Property, Credit, Pension Plan and Premium Bonds, and our interest in Porto Seguro and in IRB.   Other activities correspond to Extended warranty, Health insurance and other discontinued insurance lines, whose portfolios are in run off.

 

Bankline/internet, mobile, ATMs, teller terminals and bankfone remain our key insurance and premium bonds products sales channels to account holders in the quarter, following our strategy to serve clients through the most efficient channels. In the third quarter of 2018, the amount of sales of insurance products and premium bonds to Digital Branches clients accounted for 20.8% of total sales.

 

We concentrate efforts on distribution through our own channels and on the expansion of the offer of insurance policies via an open platform, through which we provide products from partner insurance companies to our clients.

 

 

Itaú Unibanco Holding S.A.26

 

 

Management Discussion and Analysis Itaú Insurance, Pension Plan and Premium Bonds  

 

Insurance (Recurring Activities)

 

Our recurring insurance activities consist of the offering of bancassurance products related to life, property, credit life, and our interest in Porto Seguro and in IRB. We offer these products in synergy with retail channels – our branch network, partnership with retailers, credit card clients, real estate and vehicle financing and personal loans - and the wholesale channel. They have characteristics such as low volatility in result and less use of capital, making them strategic and relevant to the diversification of the conglomerate’s revenues.

 

68% share in the recurring net income of Itaú Insurance, Pension Plan and Premium Bonds

 

Pro Forma Income Statement of the Insurance Segment

 

In R$ millions  3Q18   2Q18   ∆   3Q17   ∆ 
Earned Premiums   946    917    3.2%1   874    8.3%
Retained Claims   (228)   (229)   -0.6%   (222)   2.5%
Selling Expenses   (1)   (1)   82.8%   (3)   -63.0%
Underwriting Margin   717    687    4.4%   648    10.6%
Managerial Financial Margin   (21)   (14)   48.9%   8    -372.7%
Commissions and Fees   114    106    7.2%   83    37.9%
Earnings of Affiliates   126    104    21.1%   75    68.5%
Non-interest Expenses   (265)   (255)   3.7%2   (216)3   22.7%
Tax Expenses for ISS, PIS and Cofins and other taxes   (42)   (42)   1.0%   (38)   9.4%
Income before Tax and Minority Interests   628    585    7.3%   559    12.4%
Income Tax/Social Contribution and Minority Interests   (227)   (241)   -5.8%   (210)   7.9%
Recurring Net Income   401    344    16.5%   348    15.1%
Efficiency Ratio (ER)   29.7%   30.4%   -70bps   27.9%   180bps

 

Highlights:

 

1. increase in earned premiums due to higher sales, especially in credit-related insurance policies, and higher number of calendar days;

 

2. higher expenses, mainly driven by higher personnel expenses due to the sales force expansion;

 

3. higher expenses, driven by the integration of operations from Citibank and the improvement in the managerial cost allocation model in 2018.

 

Earned Premiums Breakdown

 

 

Underwriting Margin

 

Note: the underwriting margin is the sum of earned premiums, retained claims and selling expenses.

 

Retained Claims Breakdown

 

 

Combined Ratio

 

It reflects the operating cost as a percentage of income from earned premiums.

 

Lower ratio, mainly due to the fall in loss ratio, since retained claims were stable and earned premiums increased.

 

 

 

Note: The combined ratio is the sum of retained claims, selling expenses, administrative expenses, other operating income and expenses, tax expenses for ISS, PIS and Cofins and other taxes divided by earned premiums.

 

The extended combined ratio is the sum of these same expenses divided by the sum of earned premiums, managerial financial margin and commissions and fees.

 

Itaú Unibanco Holding S.A.27

 

 

Management Discussion and Analysis Itaú Insurance, Pension Plan and Premium Bonds  

 

Pension Plan

 

Product and advisory service innovation has played a significant role in the sustainable growth of pension plan operations for individuals. For companies, we offer specialized advisory services and develop customized solutions. We establish long-term partnerships with our corporate clients, adopting a communication strategy designed for the financial education of their employees.

 

26% share in the recurring net income of Itaú Insurance, Pension Plan and Premium Bonds

 

Pro Forma Income Statement of the Pension Plan Segment

 

In R$ millions  3Q18   2Q18   ∆   3Q17   ∆ 
Revenues from Pension Plan   52    180    -71.0%1   95    -45.5%
Selling Expenses   (1)   (1)   -23.5%   (1)   -26.3%
Result from Pension Plan   52    179    -71.2%   95    -45.6%
Managerial Financial Margin   (15)   56    -2   49    - 
Commissions and Fees   450    418    7.6%3   427    5.4%
Non-interest Expenses   (186)   (164)   13.4%   (166)   12.1%
Tax Expenses for ISS, PIS and Cofins and other taxes   (34)   (37)   -10.0%   (26)   28.1%
Income before Tax and Minority Interests   266    451    -41.0%   378    -29.5%
Income Tax/Social Contribution and Minority Interests   (112)   (200)   -44.0%   (169)   -33.6%
Recurring Net Income   154    251    -38.6%   209    -26.2%
Efficiency Ratio (ER)   41.1%   26.7%   1,450bps   30.5%   1,060bps

 

Highlights:

 

1. decrease due to the liability adequacy test carried out in the previous quarter, in addition to lower contributions;

 

2. decrease due to a lower return on assets;

 

3. increase due to the higher average managed portfolio.

 

Pension Plan Contribution

 

 

Note: Total pension plan contributions = Contributions (+) Portability requests accepted. Net pension plan contributions = Contributions (+) Portability requests accepted (-) Redemptions (-) Portability requests assigned.

 

Technical Provisions

 

 

Note: Redemption Rate = Redemptions/Balance of Technical Provisions for Pension Plan

 

Market Share *

Technical Provisions

 

Total

23.3% ▲ + 30 bps
    (12 months)

 

Plans for Individuals

24.1% ▲ +40 bps
    (12 months)

 

* according to the National Federation of Pension and Life Insurance (FENAPREVI), in August 2018.

 

Premium Bonds

 

The PIC Premium Bonds product is targeted to clients who are interested in competing for prizes. This product can be purchased through single payment or monthly payment modality, in accordance with the profile and segment of each client.

 

5% share in the recurring net income of Itaú Insurance, Pension Plan and Premium Bonds

 

Pro Forma Income Statement of the Premium Bonds Segment

 

In R$ millions  3Q18   2Q18   ∆   3Q17   ∆ 
Revenues from Premium Bonds   105    117    -10.2%1   134    -21.8%1
Managerial Financial Margin   26    26    -0.8%   45    -41.5%2
Non-interest Expenses   (67)   (67)   0.1%   (57)   18.4%
Tax Expenses for ISS, PIS and Cofins and other taxes   (6)   (6)   -9.8%   (7)   -19.4%
Income before Tax and Minority Interests   58    69    -16.7%   114    -49.4%
Income Tax/Social Contribution and Minority Interests   (26)   (31)   -16.5%   (52)   -50.3%
Recurring Net Income   32    38    -16.8%   62    -48.6%
Efficiency Ratio (ER)   53.7%   49.1%   460bps   33.1%   2,060bps

 

Highlights:

 

1. due to lower revenues caused by the lower average ticket of products;

 

2. negative impact of the interbank deposit rate reduction on the remuneration of our assets.

 

· In the third quarter of 2018, we distributed prizes in the aggregate amount of R$11.8 million.

 

· We started the sale of premium bonds via mobile in December 2017. In the third quarter of 2018, this channel accounted for 8.1% of sales to current account holders.

 

13.5 million outstanding certificates

▲ + 2.7% (vs. 2Q18)

▲ + 3.6% (vs.3Q17)

 

Itaú Unibanco Holding S.A.28

 

 

Management Discussion & Analysis Income Statement Analysis  

 

Non-interest Expenses

 

 

Highlights

 

·Non-interest expenses increased 3.1% in the quarter, driven by the increase in the number of employees and the impact of the collective labor agreement on personnel expenses. In Latin America (ex-Brazil) we observed a 7.2% increase in non-interest expenses, mainly driven by foreign exchange variation.

 

·Compared to the first nine months of 2017, non-interest expenses increased 6.4%. Expenses incurred in Brazil (ex-Citibank) increased 0.9%, below the inflation rate for the period (4.5% - IPCA).

 

In R$ millions  3Q18   2Q18   ∆   3Q17   ∆   9M18   9M17   ∆ 
Personnel Expenses   (5,405)   (5,193)   4.1%   (5,020)   7.7%   (15,682)   (14,790)   6.0%
Compensation, Charges and Social Benefits   (3,643)   (3,528)   3.3%   (3,267)   11.5%   (10,588)   (9,769)   8.4%
Management and Employees' Profit Sharing (1)   (1,214)   (1,103)   10.1%   (976)   24.4%   (3,431)   (2,870)   19.5%
Employee Terminations and Labor Claims   (493)   (506)   -2.6%   (727)   -32.2%   (1,509)   (2,012)   -25.0%
Training   (55)   (56)   -1.5%   (50)   10.9%   (154)   (139)   11.1%
Administrative Expenses   (4,173)   (4,153)   0.5%   (3,961)   5.4%   (12,206)   (11,716)   4.2%
Third-Party Services   (1,018)   (1,000)   1.8%   (939)   8.4%   (2,953)   (2,844)   3.9%
Data Processing and Telecommunications   (916)   (852)   7.6%   (923)   -0.7%   (2,670)   (2,775)   -3.8%
Facilities   (677)   (685)   -1.1%   (657)   3.0%   (2,013)   (1,912)   5.3%
Depreciation and Amortization   (502)   (536)   -6.4%   (489)   2.6%   (1,576)   (1,458)   8.1%
Advertising, Promotions and Publications   (376)   (381)   -1.2%   (244)   54.0%   (981)   (711)   38.0%
Security   (166)   (169)   -1.5%   (161)   3.3%   (508)   (489)   3.9%
Financial System Services   (139)   (146)   -5.2%   (175)   -20.8%   (430)   (496)   -13.2%
Transportation   (80)   (75)   6.5%   (79)   1.6%   (230)   (228)   1.0%
Materials   (71)   (64)   9.9%   (80)   -11.2%   (203)   (216)   -6.1%
Travel   (53)   (56)   -5.4%   (50)   4.4%   (149)   (139)   7.7%
Other   (174)   (189)   -7.6%   (162)   7.4%   (492)   (450)   9.4%
Operating Expenses   (1,264)   (1,230)   2.8%   (1,382)   -8.5%   (3,662)   (3,703)   -1.1%
Provision for Contingencies   (101)   (156)   -35.0%   (469)   -78.4%   (423)   (1,082)   -60.9%
Selling - Credit Cards   (568)   (545)   4.3%   (480)   18.3%   (1,668)   (1,337)   24.8%
Claims   (90)   (77)   16.9%   (66)   36.8%   (242)   (210)   15.2%
Other   (504)   (452)   11.5%   (366)   37.7%   (1,329)   (1,075)   23.7%
Other Tax Expenses (2)   (82)   (80)   3.0%   (94)   -12.7%   (239)   (259)   -7.5%
Latin America (ex-Brazil) (3)   (1,721)   (1,605)   7.2%   (1,361)   26.4%   (4,795)   (3,902)   22.9%
Total   (12,646)   (12,261)   3.1%   (11,818)   7.0%   (36,583)   (34,370)   6.4%

 

(1) Includes variable compensation and stock option plans. (2) Does not include ISS, PIS and Cofins. (3) Does not consider overhead allocation.

 

The increase in non-interest expenses in the quarter is mainly driven by (i) higher personnel expenses associated to compensation, charges and benefits and to profit sharing, impacted by the effects of the collective bargaining labor agreement, and to the increase in the number of employees, and (ii) higher expenses in Latin America (ex-Brazil) impacted by the foreign exchange variation in the period.

 

Compared to the first nine months of 2017, the 6.4% increase was mostly driven by the integration of the retail operations acquired from Citibank. Additionally, personnel expenses were impacted by the increase in the number of employees and the collective labor agreement, partially offset by lower provisions for labor claims.

 

Administrative expenses increased 4.2% driven by higher marketing expenses for the World Soccer Cup and the launch of Pop Credicard. Compared to the same period of the previous year, expenses from Latin America (ex-Brazil) also increased, driven by the impact of the foreign exchange variation in the period and, in the second quarter of 2017, we had the refund of the fine paid to SBIF (Superintendencia de Bancos e Instituciones Financieras de Chile).

 

Expenses incurred in Brazil (ex-Citibank) increased 0.9% in the first nine months of 2018, below inflation for the period (4.5% - IPCA).

 

Number of Employees - in thousands

 

 

100.8 thousand

employees at the end of the 3Q18

 

▲ + 0.8% (3Q18/2Q18)

▲ + 4.6% (3Q18/3Q17)

 

The retail operations acquired from Citibank in Brazil and the new insurance consultants hired for the branch network resulted in the expansion of staff in the year. We are also hiring more personnel to the technology area to speed up our digital transformation process.

 

Note: For companies under our control, the total number of employees is considered. No employees are considered for companies not controlled by us.

 

Itaú Unibanco Holding S.A.29

 

 

Management Discussion & Analysis Income Statement Analysis  

 

Efficiency Ratio

 

We present the efficiency ratio and the risk-adjusted efficiency ratio, which includes the cost of credit (result from loan losses, impairment and discounts granted).

 

 

Risk-Adjusted = Non-Interest Expenses (Personnel Expenses + Administrative Expenses + Operating Expenses + Other Expenses) + Cost of Credit
Efficiency Ratio (Managerial Financial Margin + Commissions and Fees + Result of Insurance, Pension Plan and Premium Bonds + Tax Expenses for ISS, PIS, Cofins and Other Taxes)

 

Efficiency Ratio:

 

· 12-month period: increase of 240 basis points from the same period of the previous year. Non-interest expenses increased 6.4%, mainly driven by the integration of the retail operations acquired from Citibank. On the other hand, revenues increased only 0.7%, mainly as a result of the impact from the lower interbank deposit rate on our financial margin.

 

Risk-Adjusted Efficiency Ratio:

 

· 12-month period: decrease of 280 basis points from the same period of the previous year, driven by the 25.8% decrease in cost of credit as a result of lower provisions for loan losses and lower impairment charges on corporate securities.

 

Distribution Network

 

Points of Service | Brazil and Abroad

 

The agreement with Tecban and its shareholders, announced on July 18, 2014, establishes the substitution of our external ATMs network for Banco24Horas ATMs. This agreement is enabling the increase in the total number of available ATMs.

 

 

Note: (i) Includes Banco Itaú Argentina and banks in Chile, Colombia, Paraguay and Uruguay; (ii) Includes ESBs (Electronic Service Branches) and points of service in third-parties’ establishments. (iii) Does not include points of sale.

 

Branches and Client Service Branches | Brazil and Abroad

 

The number of brick-and-mortar branches in Brazil remained stable as a result of synergies from the retail operations acquired from Citibank.

 

 

(i) Includes IBBA representative offices abroad. Note: Includes Banco Itaú BBA, Banco Itaú Argentina and companies in Chile, Colombia, Panama, Paraguay and Uruguay.

 

Geographical Distribution of Service Network(*) -

Number of Branches and Client Service Branches

 

North   Northeast   Midwest   Southeast   South 
 115    336    314    2,951    671 

 

(*) In September 2018. Does not include branches and CSBs in Latin America and Itaú BBA.

 

Itaú Unibanco Holding S.A.30

 

 

Management Discussion & Analysis Balance Sheet  

 

Balance Sheet

 

 

Highlights

 

·Increase of 4.6% in total assets in the quarter and 10.0% increase in 12 months, driven by loans to individuals, very small, small and middle-market companies and Latin America. We also highlight the 15.7% increase in interbank investments.

 

·Annual growth of 26.3% in deposits, especially time deposits, due to the partial migration of funds derived from repurchase agreements backed by debentures (a 6.6% decrease in deposits received under securities repurchase agreements).

 

Assets                    
In R$ millions, end of period  3Q18   2Q18   ∆   3Q17   ∆ 
Current and Long-term Assets   1,578,127    1,514,685    4.2%   1,439,523    9.6%
Cash and Cash Equivalents   29,467    25,402    16.0%   19,089    54.4%
Interbank Investments   320,965    277,465    15.7%   287,701    11.6%
Securities and Derivative Financial Instruments   428,260    449,462    -4.7%   412,806    3.7%
Interbank and Interbranch Accounts   125,987    119,863    5.1%   126,804    -0.6%
Loan, Lease and Other Loan Operations   530,520    518,510    2.3%   467,831    13.4%
(Allowance for Loan Losses)   (34,227)   (34,308)   -0.2%   (34,702)   -1.4%
Other Assets   177,155    158,292    11.9%   159,993    10.7%
Permanent Assets   35,034    27,999    25.1%   26,477    32.3%
Total Assets   1,613,162    1,542,684    4.6%   1,466,000    10.0%
                          
Liabilities                    
In R$ millions, end of period  3Q18   2Q18   ∆   3Q17   ∆ 
Current and Long-Term Liabilities   1,471,863    1,405,008    4.8%   1,328,779    10.8%
Deposits   454,552    426,595    6.6%   359,904    26.3%
Deposits Received under Securities Repurchase Agreements   314,575    315,554    -0.3%   336,951    -6.6%
Fund from Acceptances and Issue of Securities   118,684    115,008    3.2%   106,638    11.3%
Interbank and Interbranch Accounts   49,129    42,871    14.6%   37,638    30.5%
Borrowings and Onlendings   67,258    61,872    8.7%   66,318    1.4%
Derivative Financial Instruments   31,827    31,655    0.5%   21,562    47.6%
Technical Provisions for Insurance, Pension Plans and Premium Bonds   196,748    191,765    2.6%   177,522    10.8%
Other Liabilities   239,090    219,688    8.8%   222,244    7.6%
Deferred Income   2,603    2,678    -2.8%   2,082    25.0%
Minority Interest in Subsidiaries   13,661    13,240    3.2%   11,508    18.7%
Stockholders' Equity   125,035    121,758    2.7%   123,631    1.1%
Total Liabilities and Equity   1,613,162    1,542,684    4.6%   1,466,000    10.0%

 

 

Itaú Unibanco Holding S.A.31

 

 

Management Discussion & Analysis Balance Sheet  

 

Credit Portfolio

 

 

Highlights

 

·In the quarter, all portfolios for individuals increased. The portfolio for very small, small and middle-market companies increased 2.8% in the quarter. These positive performances were due to higher demand from clients in these segments.

 

·The portfolio of large companies decreased 0.3% in the quarter. This performance is a result of the low demand for long-term credit observed in the segment.

 

Credit Portfolio by Product

 

In R$ billions, end of period  3Q18   2Q18   ∆   3Q17   ∆ 
Individuals - Brazil (1)   199.1    194.1    2.6%   179.0    11.2%
Credit Card Loans   68.7    66.1    3.9%   57.2    20.1%
Personal Loans   27.9    27.3    2.1%   25.0    11.6%
Payroll Loans (2)   46.0    45.4    1.2%   44.6    3.1%
Vehicle Loans   15.2    14.7    3.9%   13.9    9.7%
Mortgage Loans   41.2    40.5    1.8%   38.3    7.7%
Rural Loans   0.1    0.1    -13.9%   0.1    -25.5%
Companies - Brazil (1)   171.2    169.8    0.8%   162.1    5.6%
Working Capital (3)   87.6    86.1    1.7%   76.6    14.4%
BNDES/Onlending   18.0    19.3    -6.6%   26.6    -32.3%
Export / Import Financing   46.1    45.6    0.9%   39.4    16.8%
Vehicle Loans   3.6    3.2    13.3%   2.3    57.8%
Mortgage Loans   6.7    7.1    -5.3%   8.9    -24.9%
Rural Loans   9.3    8.5    8.9%   8.3    11.6%
Latin America (4)   160.2    154.6    3.6%   126.7    26.5%
Total without Financial Guarantees Provided   530.5    518.5    2.3%   467.8    13.4%
Financial Guarantees Provided   69.6    70.1    -0.8%   71.3    -2.3%
Total with Financial Guarantees Provided   600.1    588.6    1.9%   539.1    11.3%
Corporate Securities (5)   36.3    34.6    4.9%   36.1    0.6%
Total Risk   636.4    623.3    2.1%   575.2    10.6%

 

(1) Includes units abroad ex-Latin America. (2) Includes operations originated by the institution and acquired operations. (3) Also includes Overdraft, Receivables, Hot Money, Leasing, and other. (4) Includes Argentina, Chile, Colombia, Panama, Paraguay and Uruguay. (5) Includes Debentures, Certificates of Real Estate Receivables (CRI) and Commercial Paper.

 

Credit Concentration

 

As of September 30, 2018

 

Only 16.7% of the credit risk is concentrated on the 100 largest debtors.

 

      % of total   % of total 
In R$ billions  Risk*   credits   Assets 
Largest Debtor   5.3    0.9    0.3 
10 Largest Debtors   30.4    5.1    1.9 
20 Largest Debtors   46.8    7.8    2.9 
50 Largest Debtors   73.9    12.3    4.6 
100 Largest Debtors   100.3    16.7    6.2 

 

* Including financial guarantees provided

 

Credit Portfolio without Financial Guarantees Provided by Vintage

 

 

 

Companies Credit Portfolio by Business Sector

 

With Financial Guarantees Provided

 

In R$ billions, end of period  3Q18   2Q18   ∆ 
Public Sector   5.3    5.4    -3.5%
Private Sector | Companies   331.2    326.6    1.4%
Real Estate   20.7    21.5    -4.0%
Food and beverage   18.8    18.3    2.6%
Agribusiness and fertilizers   17.5    17.2    1.4%
Energy and water treatment   15.4    16.1    -4.6%
Transportation   16.5    15.8    4.5%
Vehicles and auto parts   13.7    15.3    -10.4%
Infrastructure work   11.9    11.7    1.4%
Banks and other financial institutions   11.5    10.9    5.8%
Petrochemical and chemical   10.5    10.1    4.2%
Mining   10.7    9.7    9.8%
Steel and metallurgy   9.5    9.6    -0.6%
Telecommunications   9.4    9.5    -1.6%
Pharmaceutical and cosmetics   7.7    7.7    -0.1%
Sugar and Alcohol   6.8    6.7    0.8%
Oil and gas   7.7    6.6    17.2%
Capital Assets   6.5    6.5    0.9%
Electronic and IT   5.9    6.3    -6.1%
Construction Material   6.0    6.2    -4.0%
Clothing and footwear   5.2    5.2    0.0%
Services - Other   43.7    41.9    4.3%
Commerce - Other   19.8    18.6    6.4%
Industry - Other   9.7    9.1    5.5%
Other   46.3    46.0    0.7%
Total   336.4    332.0    1.3%

 

Itaú Unibanco Holding S.A.32

 

 

Management Discussion & Analysis Balance Sheet  

 

Credit Portfolio1 (Individuals and Companies) - Brazil

 

 

(1) Without financial guarantees provided. (2) Includes Individuals and Companies. (3) Average origination per working day in the quarter.

Note: For further information on products, please see to our Institutional Presentation, available on our Investor Relations website.

 

Itaú Unibanco Holding S.A.33

 

 

Management Discussion & Analysis Balance Sheet  

 

Funding

 

Highlights

 

·Compared to the third quarter of 2017, time deposits growth is partially related to the migration of funds from debentures linked to repurchase agreements and to the incorporation of deposits from Citibank clients.

 

·Savings deposits increased 4.0% in the quarter and 17.9% when compared to the same period of the previous year.

 

After being purchased by the bank (the Conglomerate’s leading company, the debentures issued by the Conglomerate’s leasing companies are traded with characteristics similar to those of CDs and other time deposits, although they are classified as deposits received under securities repurchase agreements.

 

In R$ millions, end of period  3Q18   2Q18   ∆   3Q17   ∆ 
Demand Deposits   74,817    70,646    5.9%   58,609    27.7%
Savings Deposits   132,374    127,342    4.0%   112,249    17.9%
Time Deposits   244,247    225,762    8.2%   186,912    30.7%
Debentures (Linked to Repurchase Agreements and Third Parties’ Operations)   29,472    35,392    -16.7%   73,573    -59.9%
Funds from Bills (1) and Structured Operations Certificates   74,358    71,540    3.9%   67,827    9.6%
(1) Total - Funding from Account Holders and Institutional Clients   555,267    530,682    4.6%   499,170    11.2%
Onlending   19,017    20,221    -6.0%   25,575    -25.6%
(2) Total – Funding from Clients   574,284    550,902    4.2%   524,746    9.4%
Assets Under Administration   1,093,487    1,050,220    4.1%   938,494    16.5%
Technical Provisions for Insurance, Pension Plan and Premium Bonds   196,748    191,765    2.6%   177,522    10.8%
(3) Total – Clients   1,864,519    1,792,887    4.0%   1,640,762    13.6%
Interbank deposits   3,111    2,843    9.4%   2,131    46.0%
Funds from Acceptance and Issuance of Securities   44,327    43,468    2.0%   38,812    14.2%
Total Funds from Clients + Interbank Deposits   1,911,957    1,839,198    4.0%   1,681,704    13.7%
                          
Working Capital and Other   574,134    549,245    4.5%   529,735    8.4%
Repurchase Agreements (2)   285,104    280,162    1.8%   263,378    8.2%
Borrowings   48,240    41,652    15.8%   40,743    18.4%
Foreign Exchange Portfolio   77,621    61,963    25.3%   63,353    22.5%
Subordinated Debt   53,721    53,925    -0.4%   48,406    11.0%
Collection and Payment of Taxes and Contributions   5,786    4,544    27.3%   5,192    11.4%
Working Capital (3)   103,662    106,999    -3.1%   108,662    -4.6%
Total Funds (Working Capital, Raised and Managed Assets)   2,486,091    2,388,443    4.1%   2,211,439    12.4%

 

(1) Includes funds from Real Estate, Mortgage, Financial, Credit and Similar Notes. (2) Does not include own issued debentures classified as funding. (3) Stockholders’ Equity + Non-Controlling Interest – Permanent Assets.

 

Loans to Funding Ratio

 

In R$ millions, end of period  3Q18   2Q18   ∆   3Q17   ∆ 
Funding from Clients   574,284    550,902    4.2%   524,746    9.4%
Funds from Acceptance and Issuance of Securities Abroad   44,327    43,468    2.0%   38,812    14.2%
Borrowings   48,240    41,652    15.8%   40,743    18.4%
Other (1)   30,087    30,613    -1.7%   28,845    4.3%
Total (A)   696,938    666,635    4.5%   633,145    10.1%
(-) Reserve Required by Brazilian Central Bank   (89,451)   (93,008)   -3.8%   (98,792)   -9.5%
(-) Cash (Currency) (2)   (29,467)   (25,402)   16.0%   (19,089)   54.4%
Total (B)   578,019    548,225    5.4%   515,264    12.2%
Loan Portfolio (C) (3)   530,520    518,510    2.3%   467,831    13.4%
Loan Portfolio / Gross Funding (C/A)   76.1%   77.8%   -170bps   73.9%   220bps
Loan Portfolio / Net Funding (C/B)   91.8%   94.6%   -280bps   90.8%   100bps

 

(1) Includes installments of subordinated debt that are not included in the Tier II Referential Equity.

(2) Includes cash, bank deposits of institutions without reserve requirements, foreign currency deposits in Brazil, foreign currency deposits abroad, and cash and cash equivalents in foreign currency.

(3) The loan portfolio balance does not include financial guarantees provided.

 

Itaú Unibanco Holding S.A.34

 

  

Management Discussion & Analysis Balance Sheet

 

Balance Sheet by Currency

 

 

We have a foreign exchange risk management policy associated with our asset and liability positions, primarily intended to mitigate impacts from fluctuations in foreign exchange rates on consolidated results.

 

Brazilian tax legislation determines that gains and losses from exchange rate variation on permanent foreign investments must not be included in the tax basis. On the other hand, gains and losses arising from financial instruments used to hedge such asset positions are affected by tax effects. Therefore, in order not to expose net income to exchange rate variations, a liability position must be built at a higher volume than the hedged assets.

 

Assets | As of September 30, 2018

 

       Business in   Local   Foreign   Business 
In R$ millions, end of period  Consolidated   Brazil   Currency   Currency   Abroad 
Cash and Cash Equivalents   29,467    8,933    7,269    1,664    20,664 
Short - Term Interbank Investments   320,965    296,624    296,624    0    24,341 
Securities and Derivative Instruments   428,260    348,618    343,560    5,058    146,737 
Loans, Leases and Other Loan Operations   496,293    299,956    284,952    15,005    215,877 
Loans   530,520    326,896    311,891    15,005    223,165 
(Allowance for Loan Losses)   (34,227)   (26,939)   (26,939)   0    (7,288)
Other Assets   303,142    253,438    225,362    28,076    102,925 
Foreign Exchange Portfolio   77,632    46,714    18,999    27,715    83,853 
Other   225,511    206,724    206,364    361    19,072 
Permanent Assets   35,034    86,418    25,454    60,964    9,540 
Total Assets   1,613,162    1,293,987    1,183,221    110,766    520,085 
Derivatives - Purchased Positions                  238,187      
Total Assets After Adjustments (a)                  348,953      

 

Liabilities | As of September 30, 2018

 

       Business in   Local   Foreign   Business 
In R$ millions, end of period  Consolidated   Brazil   Currency   Currency   Abroad 
Deposits   454,552    286,154    285,566    588    168,526 
Funds Received under Securities Repurchase Agreements   314,575    285,369    285,369    0    29,206 
Funds from Acceptances and Issue of Securities   118,684    144,001    75,359    68,642    39,154 
Borrowings and Onlendings   67,258    41,374    20,783    20,592    45,422 
Interbank and Interbranch Accounts   49,129    48,297    44,658    3,640    831 
Derivative Financial Instruments   31,827    16,860    16,860    -    14,967 
Other Liabilities   239,090    147,465    123,333    24,132    147,474 
Foreign Exchange Portfolio   77,621    46,991    22,921    24,070    83,565 
Other   161,469    100,474    100,411    63    63,909 
Technical Provisions of Insurance, Pension Plan and Premium Bonds   196,748    196,511    196,511    -    237 
Deferred Income   2,603    2,080    1,306    774    522 
Minority Interest in Subsidiaries   13,661    861    861    -    12,800 
Stockholders' Equity of Parent Company   125,035    125,015    125,015    -    60,946 
Capital Stock and Reserves   106,264    108,173    108,173    -    58,066 
Net Income   18,772    16,842    16,842    -    2,879 
Total Liabilities and Equity   1,613,162    1,293,987    1,175,620    118,368    520,085 
Derivatives - Sold Positions                  278,287      
Total Liabilities and Equity After Adjustments (b)                  396,654      
Net Foreign Exchange Sold Position Itaú Unibanco (c = a - b)                  (47,701)     
Net Foreign Exchange Sold Position Itaú Unibanco (c) in US$                  (11,914)     

 

Note: Does not include eliminations of operations between local and foreign units.

 

Assets and liabilities denominated in foreign currencies

  

In R$ millions, end of period  3Q18   2Q18   ∆ 
Investments Abroad   60,964    61,279    -0.5%
Net Foreign Exchange Position (Except Investments Abroad)   (108,665)   (104,886)   3.6%
Total   (47,701)   (43,607)   9.4%
Total in US$   (11,914)   (11,309)   5.3%

 

The net foreign exchange position includes not only hedge positions of our investments abroad, but also directional positions in foreign currencies.

 

Itaú Unibanco Holding S.A.35

 

  

Management Discussion & Analysis Risk and Capital Management

  

Risk and Capital Management

 

 

We believe risk management is an essential tool to optimize the use of resources and select the best business opportunities to maximize value creation for shareholders. In this context, the risk appetite defines the nature and the level of risks acceptable and the risk culture guides the attitudes required to manage them.

 

With the aim of strengthening our values and aligning our employees' behavior with the guidelines established in risk management, we have adopted a number of initiatives to disseminate the risk culture. It strengthens the individual and collective responsibility of all employees in the management of the risks inherent to the performed activities, respecting our ethical way of doing business.

 

We take a prospective stance in relation to capital management and, through our Internal Capital Adequacy Assessment Process (ICAAP), we assess the adequacy of our capital to face the incurred risks, composed by credit, market, operational and other material risks. The result of the last ICAAP – dated as of December 2017 – showed that, in addition to having enough capital to face all material risks, we have a significant cushion, thus ensuring the soundness of our equity position.

 

Our risk management process includes:

 

·Identification and measurement of existing and potential risks in our operations.

 

·Alignment of institutional policies for risk management control, procedures and methodologies according to the guidelines of the Board of Directors and our corporate strategies.

 

·Management of our portfolio seeking optimal risk-return ratios.

 

For further information on the risk and capital management structure, please refer to the Investor Relations website at www.itau.com.br/investor-relations, section Reports - Pillar 3 and Global Systemically Important Banks.

 

Liquidity Coverage Ratio

 

(LCR)

 

In R$ millions  3Q18   2Q18 
HQLA*   179,507    172,178 
Potential Cash Outflows   105,058    101,584 
LCR (%)   170.9%   169.5%

 

For 2018, the minimum ratio required by the Brazilian Central Bank is 90%.

 

Values are calculated based on the methodology defined by the Brazilian Central Bank, which is in line with Basel III international guidelines.

 

*HQLA - High quality liquid assets: balance in the stock, which in certain cases weighted by a discount factor, of assets that remain liquid in the markets during a stress period, which can be easily converted into cash and that pose low risk.

 

Note: Potential Cash Outflows calculated in standardized stress, determined by Circular BACEN No. 3,749.

 

Value at Risk - VAR 1,2

 

It is a statistical metric that quantifies the maximum potential economic loss expected in normal market conditions.

 

In R$ millions, end of period  3Q18(2)   2Q18(2) 
VaR by Risk Factor          
Brazilian Interest Rates   720.0    912.4 
Currency   32.3    16.4 
Shares of Stock Exchange   37.9    27.3 
Commodities   1.4    1.0 
Diversification Effect   -496.9    -466.0 
Total VaR   294.7    491.1 
Maximum VaR in the quarter   476.3    603.6 
Average VaR in the quarter   376.4    431.0 
Minimum VaR in the quarter   294.7    317.2 

 

(1)Values represented above consider a 1-day time horizon and a 99% confidence level.
(2)The VAR by risk factors includes foreign companies.

 

Evolution of Itaú Unibanco’s VaR

  

 

 

Itaú Unibanco Holding S.A.36

 

  

Management Discussion & Analysis Risk and Capital Management

 

Capital

 

 

Highlights

 

·On September 30, 2018, our CET1 fully loaded with Basel III rules and considering the 90 basis points impact of the investment in XP Investimentos reached 13.8% and our Tier I capital ratio fully loaded reached 14.8%.

 

Capital Requirements

 

Our minimum capital requirements follow the set of rules disclosed by the Brazilian Central Bank, which implement the Basel III global capital requirements standards in Brazil. These requirements are expressed as ratios of available capital - stated by the Referential Equity, or of Total Capital, composed of Tier I Capital and Tier II Capital - and the risk-weighted assets, or RWA.

 

The following table presents the schedule for phased-in implementation by the Central Bank of the capital adequacy and liquidity coverage ratio requirements under Basel III, as applicable to Itaú Unibanco Holding.

  

   From January 1, 
Basel III Schedule (%)  2017   2018   2019 
Common Equity Tier I   4.5    4.5    4.5 
Tier I Capital   6.0    6.0    6.0 
Total Regulatory Capital   9.25    8.625    8.0 
Additional Common Equity Tier I (ACP)   1.5    2.375    3.5 
conservation buffer   1.25    1.875    2.5 
countercyclical buffer¹   -    -    - 
systemic   0.25    0.5    1.0 
Common Equity Tier I + ACP   6.0    6.9    8.0 
Total Regulatory Capital + ACP   10.75    11.0    11.5 
Liquidity Coverage Ratio   80    90    100 
Prudential adjustments deductions   80    100    100 

 

1 According to circular No.3,769 of Central Bank and the announcement no. 32,516/18, required ACP countercyclical is zero.

 

Solvency Ratios

 

In R$ millions, end of period  3Q18   2Q18 
Consolidated stockholders’ equity (BACEN)   139,082    135,734 
Deductions from Core Capital   (25,770)   (25,277)
Core Capital   113,313    110,457 
Additional Capital   8,073    7,746 
Tier I   121,386    118,203 
Tier II   15,866    15,869 
Referential Equity (Tier I and Tier II)   137,252    134,072 
Required Referential Equity   70,089    67,338 
ACPRequired   19,300    18,542 
           
Total Risk-weighted Exposure (RWA)   812,625    780,728 
Credit Risk-weighted Assets (RWACPAD)   713,435    685,245 
Operational Risk-weighted Assets (RWAOPAD)   72,833    70,468 
Market Risk-weighted Assets (RWAMINT )   26,356    25,015 
           
Tier I (Core Capital + Additional Capital)   14.9%   15.1%
Tier II   2.0%   2.0%
BIS (Referential Equity / Total Risk-weighted Exposure)   16.9%   17.2%

 

Main changes in the quarter:

 

Referential Equity: Increased 2.4% due to the net income in the period.

 

RWA: Increase of R$31,897 million, mainly due to the higher exposure of credit risk-weighted assets (RWACPAD) driven by the increase in our credit portfolio and by the exchange rate variation in the period.

 

BIS ratio: Decreased 30 basis points due to the impact of the investment in XP investimentos.

 

Note: Includes financial institutions, consortium managers, payment institutions, companies that acquire operations or directly or indirectly assume credit risk and investment funds in which the conglomerate substantially retains risks and benefits.

 

Capital Ratio according to Full Basel III Rules

 

On September 30, 2018, our CET1 fully loaded with Basel III rules and considering the 90 basis points impact of the investment in XP Investimentos reached 13.8% and our Tier I capital ratio fully loaded reached 14.8%.

 

 

 

(1) Includes deductions of Goodwill, Intangible Assets, Tax Credits, Equity Investments in Financial Institutions, Insurance and similar companies, and the increase of the multiplier of the amounts of market risk, operational risk and certain credit risk accounts. This multiplier is 11.6 nowadays and will be 12.5 in 2019. (2) Proforma impact in June 2018 based on preliminary information. In August 2018, the investment in XP Investimentos was acquired, in accordance with the authorization of the regulatory bodies.

 

Itaú Unibanco Holding S.A.37

 

  

Management Discussion and Analysis Segment Analysis

 

Results by Business Segment

 

 

The Pro Forma financial statements of Retail Banking, Wholesale Banking and Activities with the Market + Corporation presented below are based on managerial information derived from internal models to more accurately reflect the activities of the business units.

 

3rd quarter of 2018

 

Pro Forma Income Statement by Segment

 

           Activities with     
   Retail   Wholesale   the Market +     
In R$ millions  Banking   Banking   Corporation   Itaú Unibanco 
Operating Revenues   18,042    7,386    2,470    27,899 
Managerial Financial Margin   10,207    4,817    2,384    17,408 
Financial Margin with Clients   10,207    4,817    1,128    16,152 
Financial Margin with the Market   -    -    1,257    1,257 
Commissions and Fees   6,243    2,342    47    8,632 
Result from Insurance, Pension Plans and Premium Bonds Operations before Retained Claims and Selling Expenses   1,592    227    39    1,858 
Cost of Credit   (3,297)   34    (0)   (3,263)
Provision for Loan Losses   (3,688)   (216)   (0)   (3,904)
Impairment   6    (95)   -    (89)
Discounts Granted   (268)   (16)   -    (285)
Recovery of Loans Written Off as Losses   653    362    -    1,015 
Retained Claims   (301)   (18)   -    (320)
Other Operating Expenses   (10,175)   (3,867)   (244)   (14,286)
Non-interest Expenses   (9,010)   (3,526)   (110)   (12,646)
Tax Expenses for ISS, PIS, Cofins and Other Taxes   (1,161)   (339)   (122)   (1,622)
Insurance Selling Expenses   (4)   (2)   (12)   (18)
Income before Tax and Minority Interests   4,269    3,535    2,226    10,031 
Income Tax and Social Contribution   (1,632)   (1,017)   (773)   (3,422)
Minority Interests in Subsidiaries   (39)   (108)   (8)   (155)
Recurring Net Income   2,598    2,410    1,446    6,454 
Recurring Return on Average Allocated Capital   29.0%   19.0%   16.8%   21.3%
Efficiency Ratio (ER)   54.4%   50.2%   4.7%   48.8%
Risk-Adjusted Efficiency Ratio (RAER)   74.2%   49.7%   4.7%   61.3%

 

Note: Non-interest Expenses includes Personnel Expenses, Administrative Expenses, Other Tax Expenses and Operating Expenses.

 

Pro Forma Loan and Capital by Segment

 

           Activities with     
   Retail   Wholesale   the Market +     
In R$ millions  Banking   Banking   Corporation   Itaú Unibanco 
Loan, Lease and Other Credit Operations   230,524    299,996    -    530,520 
(Allowance for Loan Losses)   (14,811)   (12,351)   -    (27,163)
(Complementary Expected Loss Provisions)   -    -    (7,065)   (7,065)
Economic Allocated Capital - Tier I (*)   35,678    50,763    38,594    125,035 

 

(*) The Economic Capital allocated to the Activities with the Market + Corporation contains all the excess capital of the institution in order to arrive at the accounting net equity.

 

Itaú Unibanco Holding S.A.38

 

 

Management Discussion and Analysis

 Segment Analysis

 

Results by Business Segment

 

 

2nd quarter of 2018

 

Pro Forma Income Statement by Segment

 

           Activities with     
   Retail   Wholesale   the Market +     
In R$ millions  Banking   Banking   Corporation   Itaú Unibanco 
Operating Revenues   18,112    7,454    2,454    28,021 
Managerial Financial Margin   10,072    4,821    2,402    17,295 
Financial Margin with Clients   10,072    4,821    1,060    15,953 
Financial Margin with the Market   -    -    1,342    1,342 
Commissions and Fees   6,236    2,470    20    8,726 
Result from Insurance, Pension Plans and Premium Bonds Operations before Retained Claims and Selling Expenses   1,803    163    33    1,999 
Cost of Credit   (3,111)   (490)   1    (3,601)
Provision for Loan Losses   (3,483)   (789)   1    (4,271)
Impairment   -    (1)   -    (1)
Discounts Granted   (254)   (19)   -    (273)
Recovery of Loans Written Off as Losses   626    319    -    945 
Retained Claims   (317)   (18)   -    (335)
Other Operating Expenses   (10,025)   (3,754)   (155)   (13,934)
Non-interest Expenses   (8,831)   (3,404)   (27)   (12,261)
Tax Expenses for ISS, PIS, Cofins and Other Taxes   (1,183)   (347)   (123)   (1,654)
Insurance Selling Expenses   (11)   (3)   (4)   (19)
Income before Tax and Minority Interests   4,659    3,192    2,300    10,151 
Income Tax and Social Contribution   (1,747)   (996)   (753)   (3,496)
Minority Interests in Subsidiaries   (43)   (222)   (8)   (273)
Recurring Net Income   2,868    1,973    1,540    6,382 
Recurring Return on Average Allocated Capital   31.1%   15.6%   20.0%   21.6%
Efficiency Ratio (ER)   53.2%   48.0%   1.2%   47.1%
Risk-Adjusted Efficiency Ratio (RAER)   71.9%   55.0%   1.1%   61.0%

 

Note: Non-interest Expenses includes Personnel Expenses, Administrative Expenses, Other Tax Expenses and Operating Expenses.

 

Pro Forma Loan and Capital by Segment

 

           Activities with     
   Retail   Wholesale   the Market +     
In R$ millions  Banking   Banking   Corporation   Itaú Unibanco 
Loan, Lease and Other Credit Operations   224,907    293,603    -    518,510 
(Allowance for Loan Losses)   (14,672)   (12,050)   -    (26,723)
(Complementary Expected Loss Provisions)   -    -    (7,586)   (7,586)
Economic Allocated Capital - Tier I (*)   35,961    50,657    35,139    121,758 

 

(*) The Economic Capital allocated to the Activities with the Market + Corporation contains all the excess capital of the institution in order to arrive at the accounting net equity.

 

Itaú Unibanco Holding S.A.39

 

 

Management Discussion and Analysis Segment Analysis

  

Retail Banking

 

Highlights

 

·In the third quarter of 2018, net income decreased 9.4% from the previous quarter due to (i) the increase in the provision for loan losses, driven by the increase in the loan portfolio and (ii) higher personnel expenses related to the increase in the number of employees and the impact of the collective labor agreement.
·On the other hand, financial margin with clients increased of R$135 million as a result of the better mix of products and higher number of calendar days in the third quarter of 2018.

 

Retail banking comprises banking products and services to both current account and non-current account holders. The offered products and services includes: personal loans, credit cards, payroll loans, vehicle financing, mortgage loans, insurance, pension plan and premium bond products, and acquiring services, among others.

 

Profile of clients:

 

The client´s profiles determines the segment, which enables us to be closer to them and understand their needs, in addition to offer the most proper products to meet their requirements:

 

Retail (income up to R$4,000)

 

Uniclass (income between R$4,000 and R$10,000)

 

Personnalité (income above R$10,000 or holding investments over R$100,000)

 

Itaú Empresas (very small and small companies, revenues up to R$30 million)

 

Segment´s highlight

 

Customer Satisfaction

 

·Focus on customer satisfaction measured in all retail banking segments and redesign of journeys.

 

Digital Transformation

 

·Start of digital branches for very small companies segment.

 

Clients

 

More than 48 million clients in the Retail Bank in July 2018.

 

 

 

Wholesale Banking

 

Highlights

 

·Net income for the Wholesale Banking segment was up 22.1% from the second quarter of 2018, driven by a 72.6% decrease in the provision for loan losses due to the improved risk rating of a specific segment client.
·On the other hand, commissions and fees were down 5.2%, driven by the lower volume of operations in the capital markets, and non-interest expenses increased 3.6% as a result of the collective labor agreement.

 

Wholesale Banking comprises: i) the activities of Itaú BBA, the unit responsible for commercial operations with large companies and for investment banking services, ii) the activities of our units abroad, and iii) the products and services offered to high-net worth clients (Private Banking), middle market companies and institutional clients.

 

Profile of clients and areas of operation:

 

Middle-Market Companies 30,000 clients (economic groups) with revenues between R$30 million and R$200 million.

 

Corporate Approximately 5,900 large business groups and over 190 financial institutions with revenues over R$200 million.

 

Investment Banking Our activities help companies raise funds through fixed income instruments and equities in public and private capital markets, comprising mergers and acquisitions advisory services. We provide advisory services to companies, equities funds and investors willing to invest in variable income products and engage in mergers and acquisitions.

 

Private Banking With a full global wealth management platform, we are market leaders in Brazil and one of the main players in Latin America.

 

Asset Management Itaú Asset Management is specialized in managing clients’ assets. In September 2018, it held R$652.5* billion in managed assets, a market share of 14.6%.

 

Capital Market Solutions Our business units offer local custody, fiduciary, international custody services and corporate solutions.

 

Activities Abroad

Information on our activities abroad is presented on next pages.

 

 

 

(*) Source: ANBIMA (Brazilian Financial and Capital Markets Association) Management Ranking – September 2018. Includes Itaú Unibanco and Intrag.

 

Activities with the Market + Corporation

 

The Activities with the Market + Corporation column presents the result from capital surplus, excess subordinated debt and the net balance of tax assets and liabilities. It also shows financial margin with the market, costs of Treasury operations, the equity pickup of companies not linked to each segment and our interest in Porto Seguro.

 

Itaú Unibanco Holding S.A.40

 

  

Management Discussion and Analysis Brazil and Latin America

 

Results by Region (Brazil and Latin America)

 

 

We present below the income statement segregated between our operations in Brazil, which include units abroad excluding Latin America, and our operations in Latin America excluding Brazil.

 

Additional information on our activities abroad is available on next pages.

 

Quarterly Income Statement

 

   3Q18   2Q18   ∆ 
           Latin           Latin           Latin 
           America           America           America 
In R$ millions  Consolidated   Brazil 1   (ex-Brazil)   Consolidated   Brazil 1   (ex-Brazil)   Consolidated   Brazil 1   (ex-Brazil) 
Operating Revenues   27,899    25,057    2,842    28,021    25,068    2,952    -0.4%   0.0%   -3.7%
Managerial Financial Margin   17,408    15,352    2,056    17,295    15,105    2,190    0.7%   1.6%   -6.1%
Financial Margin with Clients   16,152    14,359    1,792    15,953    14,220    1,733    1.2%   1.0%   3.4%
Financial Margin with the Market   1,257    992    264    1,342    885    457    -6.4%   12.1%   -42.2%
Commissions and Fees   8,632    7,882    750    8,726    8,007    719    -1.1%   -1.6%   4.2%
Result from Insurance 2   1,858    1,822    36    1,999    1,956    43    -7.0%   -6.8%   -16.5%
Cost of Credit   (3,263)   (2,887)   (376)   (3,601)   (3,068)   (533)   -9.4%   -5.9%   -29.4%
Provision for Loan Losses   (3,904)   (3,390)   (514)   (4,271)   (3,650)   (621)   -8.6%   -7.1%   -17.3%
Impairment   (89)   (89)   -    (1)   (1)   -    -    -    - 
Discounts Granted   (285)   (283)   (1)   (273)   (270)   (3)   4.2%   4.8%   -49.7%
Recovery of Loans Written Off as Losses   1,015    875    140    945    853    92    7.4%   2.6%   52.2%
Retained Claims   (320)   (303)   (16)   (335)   (319)   (16)   -4.6%   -4.9%   1.4%
Other Operating Expenses   (14,286)   (12,468)   (1,818)   (13,934)   (12,214)   (1,720)   2.5%   2.1%   5.7%
Non-interest Expenses   (12,646)   (10,857)   (1,789)   (12,261)   (10,538)   (1,724)   3.1%   3.0%   3.8%
Tax Expenses and Other 3   (1,640)   (1,611)   (29)   (1,673)   (1,676)   3    -2.0%   -3.9%   -929.2%
Income before Tax and Minority Interests   10,031    9,398    632    10,151    9,467    684    -1.2%   -0.7%   -7.5%
Income Tax and Social Contribution   (3,422)   (3,270)   (152)   (3,496)   (3,349)   (147)   -2.1%   -2.4%   3.8%
Minority Interests in Subsidiaries   (155)   (47)   (108)   (273)   (51)   (222)   -43.2%   -7.1%   -51.4%
Recurring Net Income   6,454    6,082    372    6,382    6,067    315    1.1%   0.2%   18.4%
Share   100.0%   94.2%   5.8%   100.0%   95.1%   4.9%   -    -80bps   80bps
Recurring Return on Average Allocated Capital   21.3%   22.4%   12.2%   21.6%   22.6%   11.4%   - 30bps   - 20bps   120bps

 

Year-to-date Income Statement

 

   9M18   9M17   ∆ 
           Latin           Latin           Latin 
           America           America           America 
In R$ millions  Consolidated   Brazil 1   (ex-Brazil)   Consolidated   Brazil 1   (ex-Brazil)   Consolidated   Brazil 1   (ex-Brazil) 
Operating Revenues   83,345    75,070    8,275    81,453    74,817    6,636    2.3%   0.3%   24.7%
Managerial Financial Margin   51,702    45,680    6,023    51,569    46,915    4,654    0.3%   -2.6%   29.4%
Financial Margin with Clients   47,366    42,372    4,994    46,719    42,790    3,930    1.4%   -1.0%   27.1%
Financial Margin with the Market   4,337    3,308    1,028    4,850    4,125    725    -10.6%   -19.8%   41.9%
Commissions and Fees   25,887    23,747    2,140    24,240    22,359    1,881    6.8%   6.2%   13.8%
Result from Insurance 2   5,756    5,643    113    5,644    5,544    100    2.0%   1.8%   12.3%
Cost of Credit   (10,651)   (9,237)   (1,414)   (13,745)   (12,291)   (1,454)   -22.5%   -24.8%   -2.7%
Provision for Loan Losses   (12,287)   (10,598)   (1,689)   (14,622)   (13,078)   (1,544)   -16.0%   -19.0%   9.4%
Impairment   (277)   (277)   -    (812)   (812)   -    -65.9%   -65.9%   - 
Discounts Granted   (842)   (837)   (6)   (770)   (732)   (38)   9.4%   14.3%   -85.4%
Recovery of Loans Written Off as Losses   2,755    2,475    281    2,459    2,331    128    12.0%   6.2%   118.6%
Retained Claims   (934)   (883)   (51)   (902)   (873)   (29)   3.6%   1.1%   78.9%
Other Operating Expenses   (41,602)   (36,407)   (5,196)   (39,417)   (35,027)   (4,390)   5.5%   3.9%   18.3%
Non-interest Expenses   (36,583)   (31,462)   (5,121)   (34,370)   (30,096)   (4,274)   6.4%   4.5%   19.8%
Tax Expenses and Other 3   (5,019)   (4,944)   (74)   (5,047)   (4,931)   (116)   -0.6%   0.3%   -35.8%
Income before Tax and Minority Interests   30,158    28,544    1,614    27,389    26,626    763    10.1%   7.2%   111.5%
Income Tax and Social Contribution   (10,379)   (10,024)   (355)   (8,628)   (8,552)   (76)   20.3%   17.2%   369.9%
Minority Interests in Subsidiaries   (524)   (151)   (373)   (163)   (140)   (23)   221.5%   7.6%   1550.8%
Recurring Net Income   19,255    18,369    886    18,599    17,933    665    3.5%   2.4%   33.2%
Share   100.0%   95.4%   4.6%   100.0%   96.4%   3.6%   -    - 100bps   100bps
Recurring Return on Average Allocated Capital   21.7%   22.9%   10.4%   21.7%   23.0%   8.9%   -    - 10bps   150bps

 

1 Includes units abroad ex-Latin America.

2 Result from Insurance includes the Result from Insurance, Pension Plan and Premium Bonds Operations before Retained Claims and Selling Expenses.

3 Include Tax Expenses (ISS, PIS, COFINS and other) and Insurance Selling Expenses.

Note: Latin America information is presented in nominal currency.

 

Itaú Unibanco Holding S.A.41

 

 

Management Discussion & Analysis

 Activities Abroad

 

Global Footprint

 

 

Latin America

 

Latin America is a priority for our international expansion due to 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.

 

Over the past years, we consolidated our presence in Argentina, Chile, Paraguay and Uruguay. In these countries, we operate in retail, companies, corporate and treasury segments, with commercial banking as our main focus. With the recent merger between Banco Itaú Chile and CorpBanca, which assured our presence in Colombia and Panama, we expanded even more our operations in the region. In Mexico, we are present through an office dedicated to equity research activities.

 

 

 

Itaú CorpBanca

 

In Chile, Colombia and Panama we operate through Itaú CorpBanca, from which results have been consolidated since the second quarter of 2016.

 

This operation represents an important step in our strategy to expand our presence in Latin America, diversifying our operations in the region.

 

+ more information on the next page

 

 

 

Other Countries

 

Additionally, we have operations in Europe (Portugal, United Kingdom, Spain, France, Germany and Switzerland), in the United States (Miami and New York), in the Caribbean (Cayman Islands and Bahamas), in the Middle East (Dubai), and in Asia (Tokyo), mainly serving institutional clients, investment banking, corporate and private banking.

 

Itaú BBA International

 

In 2016, Moody’s assigned to, for the first time, Itau BBA International plc (domiciled in the United Kingdom) an investment grade, long-term deposit and issuer ratings of A3. In assigning the ratings, Moody’s recognized the strength of Itau BBA International plc’s strong macro profile and balance sheet.

 

Other operations

 

Our international units offer a variety of financial products through their branches. Fund raising can be conducted by our branches located in the Cayman Islands, Bahamas and New York. These offices also enhance our ability to manage our international liquidity.

 

Itaú Unibanco Holding S.A.42

 

 

Management Discussion & Analysis

 Activities Abroad

 

We present the results of Latin American countries in constant currency, thus eliminating the effect of exchange rate variation and hedge adjustments, and in managerial concept, which considers Brazilian accounting criteria, in addition to the allocation of Brazil’s cost structure, the impact of Brazilian income tax and social contribution and the allocation of the tax benefit of interest on own capital.

 

Itaú CorpBanca

 

The table below shows results obtained by Itaú CorpBanca in Chile, Colombia and Panama. Focused on medium companies, corporate and retail, Itaú CorpBanca offers a wide range of banking products.

 

 

 

In Chile, Itaú CorpBanca is the 4th largest private bank in terms of loans. Branches migration and client segmentation were completed in December, 2017. In Colombia, as from May 2017, we have operated under the “Itaú” brand.

 

In R$ millions (in constant currency)  3Q18   2Q18   ∆   
Operating Revenues   1,734    1,886    -8.0%  
Managerial Financial Margin   1,370    1,522    -10.0%1  
Financial Margin with Clients   1,203    1,210    -0.6%  
Financial Margin with the Market   167    312    -46.6%  
Commissions and Fees   365    364    0.3%  
Cost of Credit   (398)   (393)   1.2%2  
Provision for Loan Losses   (455)   (474)   -4.0%  
Discounts Granted   (2)   (1)   60.7%  
Recovery of Loans Written Off as Losses   58    82    -28.7%  
Other Operating Expenses   (1,141)   (1,144)   -0.2%  
Non-Interest Expenses   (1,138)   (1,141)   3.0%  
Tax Expenses for ISS, PIS, Cofins and Other Taxes   (3)   (3)   3.0%  
Income before Tax and Minority Interests   195    349    -44.0%  
Income Tax and Social Contribution   (6)   (38)   -84.2%  
Minority Interests in Subsidiaries   (109)   (231)   -52.7%3  
Recurring Net Income   80    81    -0.3%  
Return on Average Equity - Annualized   4.6%   4.6%   0bps   
Efficiency Ratio   65.7%   60.6%   510bps   

 

1. Lower margin with the market, mainly driven by the volatility of foreign exchange rates and by the marking to market of securities in Chile occurred in 2Q18 that did not repeat in this quarter;

 

2. Higher cost of credit due to credit recovery in the previous quarter, which did not repeat;

 

3. Minority interests are calculated based on the accounting figures of the operation in BRGAAP.

 

Banco Itaú Argentina

 

We offer products and services for corporate, small and middle-market companies and retail segments, focused on large companies that have trade relations with Brazil.

 

 

 

In R$ millions (in constant currency)  3Q18   2Q18   ∆   
Operating Revenues   340    281    21.2%  
Managerial Financial Margin   248    205    20.9%1  
Financial Margin with Clients   214    176    21.7%  
Financial Margin with the Market   34    29    15.9%  
Commissions and Fees   92    76    22.0%  
Cost of Credit   31    (30)   -2  
Provision for Loan Losses   (52)   (30)   71.4%  
Discounts Granted   -    -    -   
Recovery of Loans Written Off as Losses   83    1    -   
Other Operating Expenses   (203)   (171)   19.0%3  
Non-Interest Expenses   (177)   (149)   19.0%  
Tax Expenses for ISS, PIS, Cofins and Other Taxes   (26)   (22)   19.1%  
Income before Tax and Minority Interests   168    81    108.9%  
Income Tax and Social Contribution   (65)   (27)   137.5%  
Recurring Net Income   103    53    94.2%  
Return on Average Equity - Annualized   28.3%   16.1%   1,220bps   
Efficiency Ratio   56.4%   57.5%   -110bps   

  

1. Higher margin with clients due to the greater volume and spread in deposits, besides higher capital remuneration;

 

2. Increase due to higher result with credit recovery of corporate client in this quarter;

 

3. Higher operating expenses driven by the increase in personnel expenses due to collective agreement and bonus, in addition to an increase in the local inflation rate in the quarter.

 

Itaú Unibanco Holding S.A.43

 

  

Management Discussion & Analysis Activities Abroad

  

Banco Itaú Paraguai

 

In Paraguay, we offer products and services for small and medium companies, agribusiness and corporate segments, institutional clients and retail clients. The main sources of revenues in Paraguay are retail products, especially credit cards. In the corporate segment, we are a reference in agribusiness.

 

 

 

In R$ millions (in constant currency)  3Q18   2Q18   ∆   
Operating Revenues   249    264    -5.7%  
Managerial Financial Margin   175    193    -9.7%1  
Financial Margin with Clients   155    160    -3.3%  
Financial Margin with the Market   20    33    -40.9%  
Commissions and Fees   74    70    5.3%  
Cost of Credit   (18)   (8)   114.5%2  
Provision for Loan Losses   (20)   (18)   7.3%  
Discounts Granted   (0)   (2)   -   
Recovery of Loans Written Off as Losses   2    12    -85.5%  
Other Operating Expenses   (123)   (121)   1.5%  
Non-Interest Expenses   (122)   (121)   1.5%  
Tax Expenses for ISS, PIS, Cofins and Other Taxes   (1)   (1)   -   
Income before Tax and Minority Interests   108    134    -19.8%  
Income Tax and Social Contribution   (40)   (51)   -22.0%  
Recurring Net Income   68    83    -18.4%  
Return on Average Equity - Annualized   20.4%   25.0%   -460bps   
Efficiency Ratio   49.4%   45.9%   350bps   

 

1. Decrease driven by lower spread in loan operations;

 

2. Increase due to credit recoveries that occurred in the previous quarter, which did not repeat this quarter.

 

Banco Itaú Uruguai

 

We operate in the corporate, small and middle-market companies and retail segment, targeting medium and high-income clients. Through the OCA credit card company, more focused on the mass market, we complement our strategy of serving a wide range of clients through customized financial solutions.

 

 

 

In R$ millions (in constant currency)  3Q18   2Q18   ∆   
Operating Revenues   454    436    4.1%1  
Managerial Financial Margin   247    231    7.3%  
Financial Margin with Clients   201    190    5.7%  
Financial Margin with the Market   47    41    15.0%  
Commissions and Fees   207    206    0.4%  
Cost of Credit   10    (12)   -2   
Provision for Loan Losses   9    (13)   -169.6%  
Recovery of Loans Written Off as Losses   1    1    -   
Other Operating Expenses   (284)   (275)   3.5%3  
Non-Interest Expenses   (283)   (274)   3.5%  
Tax Expenses for ISS, PIS, Cofins and Other Taxes   (1)   (1)   -   
Income before Tax and Minority Interests   180    150    20.5%  
Income Tax and Social Contribution   (71)   (58)   23.1%  
Recurring Net Income   109    92    18.8%  
Return on Average Equity - Annualized   28.1%   25.3%   280bps   
Efficiency Ratio   62.5%   62.9%   -40bps   

  

1. Increase, mainly driven by higher spread in loan operations, in addition to higher funding margin by both volume and spread;

 

2. Decrease due to early settlement of clients operations;

 

3. Increase mainly driven by higher costs of cards processing.

 

Itaú Unibanco Holding S.A.44

 

 

 

 

 

 

 

Management Discussion & Analysis Our Shares

 

Our Shares

 

 

Our capital stock is comprised of common shares (ITUB3) and non-voting shares (ITUB4), both traded on B3 (São Paulo stock exchange). Non-voting shares are also traded as depositary receipts - ADRs - on the NYSE (New York Stock Exchange).

 

Market Capitalization

 

R$284 billion │ US$71 billion

 

Market capitalization is the total number of outstanding shares (common and non-voting shares) multiplied by the average price of the non-voting share on the last trading day in the period.

 

Market Consensus (ITUB4)

 

 

 

Corporate Structure Chart and Free Float Participation

 

 

 

Strengths of our structure

 

·Family controlling ownership ensuring a long-term view

 

·Professional management team

 

·Broad shareholder base (52.74% of our shares in free float)

 

·Strong corporate governance

 

Performance in the Capital Market

  

   (R$)   (R$)   (US$) 
   ITUB4   ITUB3   ITUB 
Price and Volume  (PN Shares)   (ON Shares)   (ADR) 
Closing Price at 9/28/2018   44.13    37.70    10.98 
Maximum price in the quarter   47.30    41.49    12.72 
Average price in the quarter   43.49    38.33    11.08 
Minimum price in the quarter   39.71    35.34    9.85 
Closing Price at 6/29/2018   40.34    35.90    10.38 
Closing price at 9/29/2017   43.35    38.40    13.70 
Change in the 3Q18   9.4%   5.0%   5.8%
Change in the last 12 months   1.8%   -1.8%   -19.9%
                
Average daily trading financial volume in 12 months - million   573.0    17.5    144.1 
Average Daily Trading Volume in 3Q18 - million   514.8    4.1    155.8 

 

Shareholder Base and Indicators  09/30/18   06/30/18   09/30/17 
Number of Shares - million   6,536    6,536    6,582 
Common Shares (ON) - million   3,306    3,306    3,352 
Non-Voting Shares (PN) - million   3,231    3,231    3,231 
Treasury Shares - million   60.1    60.6    78.0 
Number of Outstanding Shares - million   6,476    6,476    6,504 
Recurring Net Income per Share in the Quarter (R$)   1.00    0.98    0.96 
Net Income per Share in the Quarter (R$)   0.96    0.96    0.93 
Book Value per Share (R$)   19.31    18.80    19.01 
Price/Earnings (P/E) (1)   11.64    10.72    11.92 
Price/Book Value (P/B) (2)   2.29    2.15    2.28 

 

(1)Closing price of non-voting share at the period end/earnings per share. For calculation purposes, the retained earnings of the last 12 months were included;

(2)Closing price of non-voting share at the period-end/Book value per share at the period end.

 

Shareholders’ Remuneration

 

Shares Buyback Program

 

In the first nine months of 2018, we acquired 13.1 million preferred shares of own issue at the average price of R$38.89 per share. Including buybacks already carried out, our current program allows the acquisition of up to 14,195,517 common shares and up to 36.9 million preferred shares of own issue, and may be carried out up to June 19, 2019.

 

Itaú Unibanco Holding S.A.46

 

  

Management Discussion & Analysis Disclosure Criteria

 

Disclosure Criteria

 

 

General

 

Managerial financial statements relating to prior periods may have been reclassified for comparison purposes.

 

The tables in this report show the figures in millions or billions. Variations and totals, however, are calculated in units. Therefore, there may be differences due to rounding.

 

Future expectations arising from the reading of this analysis should take into consideration the risks and uncertainties that involve any activities and that are outside the control of the companies of the conglomerate (political and economic changes, volatility in interest and foreign exchange rates, technological changes, inflation, financial disintermediation, competitive pressures on products, prices and changes in tax legislation, among others).

 

Managerial Financial Margin

 

Spread-Sensitive Operations: consists of the results from credit assets, non-credit interest-bearing assets and liabilities.

 

Financial Margin with the market: consists basically of treasury transactions that include Asset and Liability Management (ALM) and proprietary trading operations.

 

Coverage and Extended Coverage Ratio

 

Coverage ratio is calculated by dividing the total allowance balance by the balance of operations more than 90 days overdue. The extended coverage ratio is calculated by dividing the total allowance balance by the balance of operations more than 90 days overdue and renegotiated operations, excluding double counting of renegotiated operations more than 90 days overdue. Total allowance includes the allowance for financial guarantees provided, which totaled R$1,269 million in September 2018 and is recorded in liabilities in accordance with CMN Resolution No. 4,512/16.

 

Itaú Insurance, Pension Plan and Premium Bonds

 

The combined ratio is the sum of retained claims, selling expenses, administrative expenses, other operating income and expenses, tax expenses for ISS, PIS and Cofins and other taxes divided by earned premiums.

 

The extended combined ratio is the sum of these same expenses divided by the sum of earned premiums, managerial financial margin and commissions and fees.

 

VaR (Value at Risk)

 

The Consolidated VaR of Itaú Unibanco is calculated based on the Historical Simulation methodology, which fully reprices all its positions based on historical series of asset prices. In the third quarter of 2016, we started to calculate VaR of the regulatory portfolio based on internal models approved by the Brazilian Central Bank. Therefore, the breakdown of risk factors was standardized to comply with Circular No. 3,646 of the Brazilian Central Bank.

 

Business Analysis

 

Pro Forma Adjustments - Adjustments made to the balance sheet and income statement for the year are based on managerial information from the business units.

 

The financial statements were adjusted in order to replace the accounting stockholders’ equity with funding at market prices. Subsequently, the financial statements were adjusted to include revenues linked to allocated capital at each segment. The cost of subordinated debt and the respective remuneration at market prices were allocated to segments on a pro rata basis, in accordance with the economic allocated capital.

 

Impacts related to capital allocation are included in the Pro Forma financial statements. To this end, adjustments were made to the financial statements, using a proprietary model.

 

Allocated Capital - The economic allocated capital model (EAC) was adopted for the Pro Forma financial statements by segment and, as of 2015, we changed our calculation methodology. In addition to the Tier I allocated capital, the EAC model includes the effects of the calculated expected loan losses, complementary to that required by the Brazilian Central Bank through CMN Circular No. 2,682/99.

 

Accordingly, the allocated capital includes the following components: credit risk (including expected losses), operational risk, market risk, and insurance underwriting risk.

 

Based on Tier I capital measure we determined the Return on Allocated Capital, which corresponds to an operational performance ratio consistently adjusted to the required capital needed to support the risks of the financial positions assumed in accordance with our risk appetite.

 

As of the first quarter of 2016, we have adopted the Basel III rules in our managerial capital allocation model.

 

Income Tax Rate - We adopt the full income tax rate, net of the tax effect of payment of interest on capital, for the Retail Banking, Wholesale Banking and Activities with the Market + Corporation segments. The difference between the income tax amount determined for each segment and the effective income tax amount, as stated in the consolidated financial statements, is allocated in the column Activities with the Market + Corporation.

 

Itaú Unibanco Holding S.A.47

 

 

 

 

 

(A free translation of the original in Portuguese)

 

Report of independent auditors on
supplementary information

 

To the Board of Directors and Stockholders
Itaú Unibanco Holding S.A.

 

Introduction

 

In connection with our review of the financial statements of Itaú Unibanco Holding S.A. (Bank) and Itaú Unibanco Holding S.A. and its subsidiary companies (Consolidated) as of September 30, 2018, and for the three month period ended September 30, 2018 on which we issued an unqualified report dated October, 30, 2018, we performed a review of the accounting information contained in the supplementary information included in the Management Discussion and Analysis Report.

 

Scope of the Review

 

We conducted our review in accordance with the professional standards issued by the Brazilian Federal Accountancy Council. Our review mainly comprised: (a) inquiry of, and discussion with, management responsible for the accounting, financial and operational areas of the Bank and its subsidiaries with regard to the main criteria adopted for the preparation of the accounting information presented as supplementary information and (b) review of the significant information and of the subsequent events which have, or could have, significant effects on the financial position and the operations of the Bank and its subsidiaries. The supplementary information included in the Management Discussion and Analysis Report is presented to provide additional analysis only and is not an integral part of the financial statements.

 

Conclusion

 

Based on our review, we are not aware of any material modifications that should be made to the accounting information contained in this supplementary information, in order for it to be adequately presented, in all material respects, in relation to the financial statements at September 30, 2018, taken as a whole, prepared in accordance with the accounting practices adopted in Brazil applicable to institutions authorized to operate by the Brazilian Central Bank (BACEN).

 

São Paulo, October 29, 2018

 

 

PricewaterhouseCoopers

Auditores Independentes

CRC 2SP000160/O-5

 

 

 

Washington Luiz Pereira Cavalcanti

Contador CRC 1SP172940/O-6

 

PricewaterhouseCoopers, Av. Francisco Matarazzo 1400, Torre Torino, São Paulo, SP, Brasil, 05001-903, Caixa Postal 61005,

T: +55 (11) 3674 2000, www.pwc.com.br

 

Itaú Unibanco Holding S.A.48

 

 

 

 

 

  

MANAGEMENT REPORT – January to September 2018

 

The Management Report and the Financial Statements of Itaú Unibanco Holding S.A. (Itaú Unibanco or Company) and its subsidiaries for the period from January to September 2018 follow the regulations established by the Brazilian Corporate Law, the National Monetary Council (CMN), the Central Bank of Brazil (BACEN), the Brazilian Securities and Exchange Commission (CVM), the National Council of Private Insurance (CNSP), the Superintendence of Private Insurance (SUSEP), the National Superintendence of Supplementary Pension (PREVIC), and the recommendations of the International Accounting Standards Board (IASB).

 

The information presented in this material is available on the Investor Relations website of Itaú Unibanco (www.itau.com.br/investor-relations > Results Center) and on the websites of CVM and of the Securities and Exchange Commission (SEC).

 

 

 

1Itaú Unibanco Highlights

 

1.1) Corporate Governance

 

Changes in the Executive Committee

As from January 2019 Caio Ibrahim David becomes the Wholesale General Director and Milton Maluhy Filho takes the position of Vice President of Risks and Finance, joining the Executive Committee

 

In September 2018 we announced some changes in our Executive Committee, as our Wholesale General Director Eduardo Vassimon has reached the limit age for exercising the duties of this position. Mr. Vassimon will be succeeded by Caio Ibrahim David, currently the Executive Vice President of the Risks and Finance Area, CFO and CRO, who is already a member of the Committee. Milton Maluhy Filho, who will end his term of office as CEO of Itaú Corpbanca in January, will take up the position from Mr. David. These changes were approved by the Nomination and Corporate Governance Committee and the Board of Directors.

 

1.2 Partnerships and Business

 

Minority interest in XP approved

Itaú Unibanco acquired 49.9% interest in capital, including 30.1% of total common shares

 

As disclosed in May 2017, Itaú Unibanco entered into an agreement to hold a minority interest in XP Investimentos, a company with a proven business model driven towards client experience. In accordance with this agreement, Itaú Unibanco will exert no influence in the commercial and operational policies of any company belonging to the group, nor will it have preference or exclusivity rights in the sale of its products. Accordingly, the management and running of XP business will remain fully independent, separated and self-ruling.

 

 

After approval from the Central Bank of Brazil, the financial settlement of this operation was carried out on August 31, 2018 by means of a capital contribution of R$600 million and the purchase of shares in the amount of R$5.7 billion1. 

 

This agreement also provides for a single additional operation in 2022, subject to future approval from the Central Bank of Brazil. If approved, it will enable us to hold up to 62.4% of XP’s total capital stock (equivalent to 40.0% of common shares) based on a multiple (19 times) applied to XP’s earnings, and it is certain that the control of the XP group will remain unchanged, held by the shareholders of XP Controle Participações S.A.

¹ Amounts were adjusted from May 11, 2017 up to the financial settlement.

 

Employee Benefits Market - Programa de Alimentação ao Trabalhador (PAT)

This partnership will enable us to increase the offer of products to corporate clients

 

 

 

In September 2018, we entered into a partnership with Edenred Participações S.A., the parent company of Ticket Serviços S.A. in Brazil, to operate in the employee benefits market, which is mainly regulated by the Programa de Alimentação do Trabalhador - PAT. This partnership will enable us to extend the benefits provided by Ticket to clients in the wholesale, middlemarket, very small and small companies segments, the workers of which may take advantage of Ticket’s experience in the management and development of employee benefit solutions, besides having access to one of the broadest benefits acceptance networks. 

 

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Under this agreement, we will make a minority investment of 11% in Ticket, by means of a capital increase to be paid (i) in cash, equivalent to the book value of such equity interest, and (ii) with the contribution of distribution exclusivity rights regarding Ticket Restaurante, Ticket Alimentação, Ticket Cultura and Ticket Transporte to Itaú Unibanco’s corporate client base during the term of this partnership. Ticket will continue to distribute its products by means of other trade agreements and remain under Edenred’s control and management. 

 

The completion of this transaction is conditioned on approvals from the Central Bank of Brazil and CADE, the Brazilian antitrust agency. We do not expect this agreement to have any material impact on our 2018 results.

 

POP Credicard

POS machines for self-employed individuals, micro entrepreneurs and small companies with short payment terms and lower fees

 

 

 

In July 2018, we announced the entry of the Credicard brand into the merchant acquiring segment, with a POS machine family used for payment with cards that will be offered for sale especially to self-employed individuals, micro entrepreneurs and small companies. The first machines launched are POP Credicard, a model with no printing coil, with chip and Wi-Fi capabilities, debit, credit, food and meal functions, and that is accepted by major brands, and Mega POP Credicard, which is similar to a traditional POS machine and features a printing coil to print proofs of payment, in addition to all the benefits above. With this initiative, we place ourselves among the best players of the sector, providing retailers with shorter payment terms and competitive fees.

 

 

 

Our choice of the Credicard brand was driven by its repositioning in the electronic payment means segment to keep up with technology and behavior changes in the world and meet the clients’ needs.

 

Interest held in Itaú CorpBanca

Under the Shareholders’ Agreement, we have increased our interest in the Chilean bank

 

In October 2018, we indirectly acquired 10.7 billion shares of Itaú CorpBanca for CLP65.7 billion, equivalent to approximately R$362.9¹ million, as a result of the Corp Group exercising a put option set forth in the shareholders’ agreement of Itaú CorpBanca. Accordingly, our interest in Itaú CorpBanca increased to 38.14%, from 36.06%, with no change in the governance of Itaú CorpBanca.

¹Based on the price of the financial settlement on October 17, 2018

 

No fees charged for Treasury Direct bonds, Pension funds and Fixed Income products

A novelty for all bank clients

 

In September 2018, we were able to show in practice what we have come here for: putting the client at the center of everything. Accordingly, we announced that we have straight away zeroed out our custody fees for Treasury Direct bonds offered by Itaú Corretora and for Fixed Income products (bank deposit certificates (CDB) from other managers, bills, debentures, real estate receivables certificates (CRI) and agribusiness receivables certificates (CRA)). Additionally, we also zeroed out the initial and final contribution fees for Private Pension plans¹ for all bank clients.

 

To access these no-fee products, Itaú Unibanco clients may access their account on the Internet or, if not an account holder, open an account via the Itaú Abreconta app. By following the route “Investimentos > Minha conta na Itaú Corretora”, clients will be able to register at our broker, a step required to trade treasury direct bonds. It is also important to complete the information requested so that clients get to know their investment profile and the options most fitting to meet their expectations. 

This initiative provides our clients with more investment options in a scenario of low interest rates.

 

For further information, please access https://www.itau.com.br/investimentos-previdencia/taxa-zero/

¹ Applicable to PGBL and VGBL products.

 

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PayPal

A digital payment platform

 

In August 2018, we announced a partnership in the digital segment between Itaú Unibanco, Rede and PayPal, as an alternative to ensure that our clients have more convenience when shopping online and to increase sales for retailers, providing more agility and security. The purpose is to create exclusive value proposals by combining expertise to speed up digital inclusion, boost the volume of global digital trade and further cooperate to mitigate risks for clients.

 

PayPal offers an open digital payment platform to its users, with 244 million active accounts, available in over 200 markets throughout the world.

 

1.3 Investor Relations

 

Apimec SP

Held on September 12, 2018, presentations given addressed our strategic frontlines and capital management

 

On September 12, 2018, we held our 23th Apimec meeting in São Paulo, with the record attendance of 667 guests, in addition to 158 participants on the Internet. Members of our Executive Committee and Board of Directors gave presentations on our stockholder-focused initiatives, highlighting the alignment of interests of stockholders and management members, in addition to the transformations experienced by Itaú Unibanco and in the scenario we find ourselves and how we intend to become a customer satisfaction benchmark.

 

We also addressed the evolution of our six strategic frontlines, which are divided into Transformational: People Management, Digital Transformation, and Customer Satisfaction, and into Continuous Improvement: Internationalization, Risk Management and Profitability, in addition to our capital management and the way our capital ratio would fare under normal and stress scenarios.

 

This event was transmitted live in Portuguese and English and is available on our Investor Relations website www.itau.com.br/investor-relations.

 

New Investor Relations Website

Launched at Apimec SP, our new website brings about new digital tools that benefit stockholders

 

In September 2018, we launched the new Investor Relations website, bringing new ways to communicate with our stockholders through ground-breaking solutions. Additionally, we have become the first IR department in Brazil to have a podcast dedicated to investors and a virtual assistant, allowing real-time interactions with users with the use of Artificial Intelligence, and therefore making website browsing easier.

 

Please, visit our website at: www.itau.com.br/investor-relations

 

1.4 Sustainability

 

Dow Jones Sustainability Index (DJSI)

We are the only Latin-American bank to make up the index since it was created in 1999

 

We were selected for the 19th consecutive year to make up the Dow Jones Sustainability Index (DJSI), the main sustainability index in the world, in its 2018/2019 edition. In this new edition, we achieved the best rate in the banking sector according to the “Environment Reporting”, “Fiscal Strategy”, “Financial Stability and Systemic Risk”, “Financial Inclusion”, “Corporate Citizenship and Philanthropy”, and “Social Reporting” criteria. Additionally, we were also selected to make up the Dow Jones Sustainability Emerging Markets Index.

 

Since its creation in January 1999, the DJSI has become an important benchmark for asset management institutions that make investments based on ESG (Environment, Social, and Governance) metrics, which, as a result, include shares of DJSI companies in its portfolio.

 

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Diversity Week

Commitments and initiatives to promote LGBT+ Rights are an important step to protect people’s rights

 

In the first week of August, we held the LGBT+ Itaú Unibanco Diversity Week, when topics such as sexual orientation, gender identity, and the significance of diversity in the workplace were addressed. This event was attended by a number of outstanding guests championing the LGBT cause, inside and outside the bank, and was concluded with the signing of the letter of commitment to the Forum on Companies and LGBT Rights. Therefore, we took another major step to reinforce the commitment to respecting and valuing the rights of lesbian, gay, bisexual, transvestite, and transgender persons, by engaging their value chain and raising awareness in society.

 

1.5) Regulatory Environment

 

Banking regulation is essential for the soundness and efficiency of the financial system. When amended, it may have direct impact on the bank’s results. We highlight below the main change in this quarter:

 

General Personal Data Protection Act

 

In August 2018, Law No. 13,709 was enacted, providing for personal data protection and aimed at protecting the fundamental rights to freedom, privacy and personality. A regulatory framework of paramount importance to society, this law will come into force in February 2020. This topic has always been a priority for Itaú Unibanco, as shown in our Corporate Policy on Information Security and Cyber Security, available on our IR website www.itau.com.br/investor-relations > Itaú Unibanco > Corporate Governance > Rules and Policies.

 

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2Awards and Recognition

 

In the third quarter of 2018, we received recognition that contributed to strengthen our reputation. The main awards received in the period are listed below:

 

Awards and Recognition

 

7th ZAPfest - Top Of Mind - RMC - Campinas Metropolitan Region

(Zap magazine – July 2018)

   Itaú Unibanco was elected Top Of Mind - RMC - Campinas Metropolitan Region, in the Bank segment.
     

Whow! de Inovação (Whow! Innovation) Award

(Padrão Group – July 2018)

   Itaú Unibanco was chosen the Whow! Company in the Banks segment.
     

Estadão Empresas Mais

(O Estado de S. Paulo newspaper – August 2018)

   Itaú Unibanco ranked first in the Banks category.
     

Valor 1000

(Valor Econômico newspaper – August 2018)

  

Itaú Unibanco ranked first in the "Finance - 100 largest banks" category. Rede ranked first in "Specialized services". In Capitalization, Itaú Unibanco ranked first in Stockholders' Equity.

     

Euromoney Real Estate Survey 2018

(Euromoney magazine – August 2018)

  

Itaú Unibanco was the winner in Latin America – category: Banks – sub-category Overall; it was also the winner in Brazil – Category: Banks – in subcategories: Loan Finance; Equity Finance; Debt Capital Market; Transactions; M&A Advisory; and Overall.

     

Institutional Investor Awards

(Institutional Investor magazine – August 2018)

   Itaú Unibanco was recognized for the sixth consecutive year in economy coverage in the Brazil category and ranked first, for the second year, in economy coverage in the Latin America category.
     

Marca Brasil (Brazil Brand) Award

(Trio International Distinction – August 2018)

   Itaú Unibanco was the winner in Category: “Accessibility: Banks” – sector: “Rehabilitation of people with disabilities”.
     

Fast Company’s 2018 Innovation by Design Awards

(Fast Company – September 2018)

   Itaú Unibanco earned an honorable mention in the “Graphic Design and Data Visualization" category.
     

2018 Latin America Executive Team

(Institutional Investor magazine – September 2018)

   Itaú Unibanco was first in this year edition in the banks ranking: the best CEO, the best CFO, the best Investor Relations program; the best ESG/SRI measures and the best Analysts' Day. In the buy-side category in connection with investment and pension funds, Itaú Unibanco was also the winner as the best Investor Relations executive and the Best Investor Relations team.
     

Melhores Empresas em Satisfação do Cliente (Best companies in customer satisfaction) Award

(Mesc Institute – September 2018)

   Itaú Unibanco was the winner in the Banks category and in the short-list of nominees in Life Insurance, Premium Bonds and Pension Plans.
     

Estadão Empresas Mais Award

(O Estado de S. Paulo newspaper – September 2018)

   Itaú Unibanco ranked first in Quantitative research in the Banks category and was also a Highlight in Fiscal Council in the Corporate Governance area.
     

Conarec

(Padrão Group – September 2018)

   Itaucard was the winner in the Cards category, and Rede won in the Acquiring Companies category.
     

Empresas que Melhor se Comunicam com Jornalistas

(Companies that best communicate with journalists)

(Negócios da Comunicação magazine – September 2018)

   Itaú Unibanco was recognized as one of the companies that best communicate with journalists in the Finance category.
     

As Melhores da Dinheiro (The best of Dinheiro) Award (IstoÉ Dinheiro magazine – September 2018)

   Itaú Unibanco was the champion in the Banks sector in the "The best of Dinheiro" ranking.
     

World’s Best Digital Bank Awards

(Global Finance – September 2018)

   Itaú Unibanco was the winner in the Best Digital Mortgage Bank In Latin America category. Itaú Unibanco of Paraguay was appointed for The World’s Best Consumer Digital Banks in Latin America 2018.

 

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3Selected Financial Information

 

We offer a comprehensive range of banking services to a wide variety of market segments, including individuals and companies. We segregate our operations into wholesale and retail and we are structured to meet all our clients’ needs, either credit, investment, insurance or financial services in general. We present below a summary of our financial information:

 

   Sept/30/2018   Sept/30/2017 
Profitability          
Net Income (R$ billion)   18.8    18.1 
Recurring Net Income (R$ billion)   19.3    18.6 
Recurring Return on Average Equity - Annualized   21.7%   21.7%
Gross Income Related to Financial Operations  (R$ billion)   33.8    39.4 
Assets          
Total Assets (R$ billion)   1,613.2    1,466.0 
Total Credit Portfolio, including Financial Guarantees Provided (R$ billion)   600.1    539.1 
Loan Portfolio/Funding(1)   76.1%   73.9%
Stockholders' Equity (R$ billion)   125.0    123.6 
Funding          
Demand, Savings, and Time Deposits (R$ billion)   451.4    357.8 
Debentures (Linked to Repurchase Agreemens and Third Parties' Operations) (R$ billion)   29.5    73.6 
Funds from Bills and Structured Operations Certificates (R$ billion)   74.4    67.8 
Free, Raised and Managed Assets (R$ billion)   2,486.1    2,211.4 
Capital and Liquidity          
Solvency Ratio - Prudential Conglomerate (BIS Ratio)   16.9%   19.5%
Fixed Asset Ratio   26.1%   23.5%
Total High-Quality Liquid Assets(2)(3) (R$ billion)   179.5    190.9 
Liquidity Coverage Ratio (LCR)(3)   170.9%   200.7%
Customer Service Network          
Total Number of Employees (individuals)   100,756    96,326 
Brazil   87,070    82,401 
Abroad   13,686    13,925 
Branches and Client Service Branches (CSBs) – units   4,917    4,919 
Digital Branches   173    156 
Branches - Brazil(4)   3,531    3,523 
CSBs - Brazil   700    718 
Branches + CSBs - Latin America   513    522 
Automated Teller Machines (ATMs) – units(5)   47,887    46,700 

 

(1) The loan portfolio does not include financial guarantees provided.

 

(2) Correspond to weighted inventories of assets that remain liquid in the market even in periods of stress, which can easily be converted into cash and are classified as low risk. Used for LCR calculation.

 

(3) We monitor the Liquidity Coverage Ratio (LCR), as it refers to free and highly liquid assets and net cash outflows over a 30-day period and is calculated based on the methodology defined by Circular No. 3,749, of the Central Bank of Brazil, in line with international guidelines. BACEN minimum requirement is 90% for 2018.

 

(4) Includes IBBA representative offices abroad.

 

(5) Includes CSBs (Client Service Branches), points of services in third parties’ establishments and Banco24horas ATMs.

 

From January to September 2018, net income was R$18.8 billion, up 3.5% from the same period of the previous year. Gross income related to financial operations was adversely impacted by the tax effect of our foreign investments hedge, which was offset in the tax lines of our statement of income. This income was also negatively impacted by the cycle of reductions in the Selic rate started in October 2016, which was offset by lower provisions for loan losses.

 

Our personnel, administrative and operating expenses increased 9.4% between the first nine months of 2017 and 2018, mainly driven by an increase in compensation and benefits and in credit card selling expenses. Our risk-adjusted efficiency ratio was 61.0%, down 270 basis points from the same period of 2017.

 

Itaú Unibanco is present in 19 countries with a team totaling 100.8 thousand employees on September 30, 2018, whose work is customer-satisfaction oriented accordingly. Employees’ fixed compensation plus charges and benefits totaled R$12.6 billion in the first nine months of 2018.

 

In this nine-month period, we highlight the 7.7% increase in commissions and fees from the same period of 2017, mainly those related to fund management, service packages, and credit cards.

 

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Loan portfolio reached R$600.1 billion at the end of September 2018, up 11.3% from the same period in 2017. From January to September of 2018, we recorded an increase in the portfolios for individuals and very small, small and middle-market companies.

 

We highlight below our loan portfolio with financial guarantees provided at the end of September 2018:

 

 

The strategic credit risk management supports the quality of our loan portfolio, and nonperforming loans over 90 days overdue closed the third quarter of 2018 at 2.9%, down 30 basis points from the same period of the previous year. 

 

 

3.1) Capital Management

 

Aimed at ensuring soundness and capital availability to support our business growth, regulatory capital levels were kept above those required by the Central Bank of Brazil, as evidenced by the Common Equity Tier I, Tier I, and BIS ratios, which reached, in the third quarter of 2018, 13.9%, 14.9% and 16.9%, respectively. These indicators provide evidence of our capacity of absorbing unexpected losses.

 

Furthermore, we intend to maintain the minimum level, established by the Board of Directors, of 13.5% for Tier 1¹ Capital fully loaded, which must be composed of at least 12% Common Equity Tier I. The percentage of dividends and interest on capital to be distributed to stockholders is directly related to the full Tier 1 Capital fully loaded established by the Board of Directors. This amount is determined based on profitability in the year, the prospective use of capital based on the expected business growth, share buyback programs, mergers and acquisitions and regulatory changes that may modify capital requirements, and changes in tax legislation. Therefore, the percentage to be distributed may change every year based on the company’s profitability and capital demands, and always takes into account the minimum distribution set forth in the Bylaws.

¹ Considers the Basel III requirements, and the ratio of September 2018 was 14.8%.

 

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For further information on capital management, see to the “Risk and Capital Management Report – Pillar 3” report on our website www.itau.com.br/investor-relations > Reports > Pillar 3 and Global Systemically Important Banks.

 

 

 

4Capital Markets

 

Itaú Unibanco is the largest private bank in Latin America, with market value of R$284.3 billion. We are ranked by Bloomberg among the 20 largest financial institutions in the world. We are deemed Brazil’s most valued brand by publications such as Interbrand, among other relevant recognition.

  

       R$   % 
Shares  September 30, 2018   September 30, 2017   Change 
Recurring net income per share(1)   2.97    2.86    4.0 
Net income per share(1)   2.90    2.79    3.9 
Book value per share(1)   19.31    19.01    1.6 
Number of outstanding shares (in millions)   6,476.0    6,504.4    (0.4)
Price of preferred share (ITUB4)(2)   43.90    43.35    1.3 
Price of common share (ITUB3)(2)   37.93    38.33    (1.0)
Price of preferred share (PN)(2)/Recurring net income per share   11.08    11.38    (2.6)
Price of preferred share (PN)(2)/Book value per share   2.27    2.28    (0.3)
Average Daily Trading Volume (in millions)   1,180.7    878.9    34.3 
B3 Volume (in millions)   621.3    426.3    45.7 
NYSE Volume (in millions)   559.4    452.5    23.6 
Market value (in billions)(3)(4)   284.3    282.0    0.8 

 

(1) Calculated based on the weighted average of the number of shares.

 

(2) Based on the average quotation on the last day of the period.

 

(3) Calculated based on the average quotation of preferred shares on the last day of the period (quotation of average preferred multiplied by the number of outstanding shares at the end of the period).

 

(4) Taking into account the closing price of common and preferred shares multiplied by total outstanding shares of each type of shares, the market value reached R$264.5 billion on September 30, 2018 and R$ 265.4 billion on September 30, 2017, resulting in a variation of -0.2%.

 

 

 

5Regulation

 

5.1) INDEPENDENT AUDITORS –CVM Instruction No. 381

 

Procedures adopted by the Company

 

The policy adopted by us, including our subsidiaries and parent company, to contract non-audit related services from our independent auditors is based on the applicable regulations and internationally accepted principles that preserve the auditor’s independence. These principles include the following: (a) an auditor cannot audit his or her own work, (b) an auditor cannot function in the role of management in companies where he or she provides external audit services; and (c) an auditor cannot promote the interests of its client. 

 

In the period from January to September 2018, the independent auditors and related parties did not provide non-audit related services in excess of 5% of total external audit fees.

 

According to CVM Instruction No. 381, we list below the non-audit services provided and related dates:

 

·January 11 and August 3- review of compliance with transfer pricing policies;
·February 1 and April 3 - review of tax-accounting bookkeeping; and
·February 15, May 23 and July 16-acquisition of technical materials.

 

Independent Auditors’ justification – PricewaterhouseCoopers

 

The provision of the non-audit services described above does not affect the independence or the objectivity of the external audit of Itaú Unibanco, parent and its subsidiary/affiliated companies. The policy adopted for providing non-audit related services to Itaú Unibanco is based on principles that preserve the independence of Independent Auditors, all of which were observed in the provision of the referred services, including the approval from Itaú Unibanco’s Audit Committee.

 

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5.2) BACEN –Circular No. 3,068/01

 

We hereby represent to have the financial capacity and the intention to hold to maturity securities classified in the “held-to-maturity securities” category in the balance sheet, in the amount of R$42.3 billion, corresponding to 9.9% of total securities and derivative financial instruments held in September 2018.

 

5.3) International Financial Reporting Standards (IFRS)

 

We disclosed the complete financial statements in accordance with the International Financial Reporting Standards (IFRS) at the same date of this publication, pursuant to CVM/SEP Circular Letter No. 01/13. The complete financial statements are available on the Investor Relations website of Itaú Unibanco (www.itau.com.br/investor-relations > Results Center).

 

 

 

6Information and Acknowledgments

 

We thank our employees for their dedication and skills, which have been essential to reaching consistent and differentiated results, and our stockholders and clients for their trust (Approved at the Board of Directors' Meeting of October 29, 2018).

 

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ITAÚ UNIBANCO HOLDING S.A.

 

BOARD OF DIRECTORS

Co-Chairmen

Pedro Moreira Salles

Roberto Egydio Setubal

 

Members

Alfredo Egydio Setubal

Amos Genish

Ana Lúcia de Mattos Barretto Villela (1)

Fábio Colletti Barbosa

Gustavo Jorge Laboissière Loyola

João Moreira Salles

José Galló

Marco Ambrogio Crespi Bonomi

Pedro Luiz Bodin de Moraes

Ricardo Villela Marino

 

AUDIT COMMITTEE

Chairman

Gustavo Jorge Laboissière Loyola

 

Members

Antonio Carlos Barbosa de Oliveira

Antonio Francisco de Lima Neto

Diego Fresco Gutierrez

Maria Helena dos Santos Fernandes de Santana

Rogério Paulo Calderón Peres

 

FISCAL COUNCIL

Chairman

José Caruso Cruz Henriques

 

Members

Alkimar Ribeiro Moura

Carlos Roberto de Albuquerque Sá

 

Accountant

Arnaldo Alves dos Santos

CRC - 1SP - 210.058/O-3

BOARD OF EXECUTIVE OFFICERS

Chief Executive Officer

Candido Botelho Bracher

 

Director-Generals

Eduardo Mazzilli de Vassimon

Márcio de Andrade Schettini

 

Executive Vice-Presidents

André Sapoznik

Caio Ibrahim David

Claudia Politanski

 

Executive Officers

Alexsandro Broedel Lopes (*)

Fernando Barçante Tostes Malta

Leila Cristiane Barboza Braga de Melo

Paulo Sergio Miron

 

Officers

Álvaro Felipe Rizzi Rodrigues

Andre Balestrin Cestare

Emerson Macedo Bortoloto

Gilberto Frussa

José Virgilio Vita Neto

Renato Barbosa do Nascimento

Rodrigo Luis Rosa Couto

Sergio Mychkis Goldstein

Tatiana Grecco

Tom Gouvêa Gerth

 

(*) Group Executive Finance Director and Head of Investor Relations

(1) Elected at the ESM of 04/25/2018, approved by the BACEN of 10/16/2018.

 

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ITAÚ UNIBANCO S.A.

 

Director-Generals

Eduardo Mazzilli de Vassimon

Márcio de Andrade Schettini

 

Executive Vice-Presidents

Alberto Fernandes

André Sapoznik

Caio Ibrahim David

Claudia Politanski

 

Executive Officers

Alexsandro Broedel Lopes

André Luís Teixeira Rodrigues

Carlos Eduardo Monico

Christian George Egan

Fernando Barçante Tostes Malta

Fernando Marsella Chacon Ruiz

Flávio Augusto Aguiar de Souza

João Marcos Pequeno de Biase

Leila Cristiane Barboza Braga de Melo

Luís Eduardo Gross Siqueira Cunha

Luiz Eduardo Loureiro Veloso

Marcelo Kopel

Marcos Antônio Vaz de Magalhães

Ricardo Ribeiro Mandacaru Guerra

Sergio Guillinet Fajerman

Wagner Bettini Sanches

 

Officers

Adriana Maria dos Santos

Adriano Cabral Volpini

Adriano Maciel Pedroti

Alessandro Anastasi

Álvaro Felipe Rizzi Rodrigues

Ana Lúcia Gomes De Sá Drumond Pardo

Andre Balestrin Cestare

André Carvalho Whyte Gailey

André Henrique Caldeira Daré

Andrea Carpes Blanco

Andréa Matteucci Pinotti

Atilio Luiz Magila Albiero Junior

Badi Maani Shaikhzadeh

Bruno Machado Ferreira

Carlos Augusto Salamonde (*)

Carlos Eduardo Mori Peyser

Carlos Henrique Donegá Aidar

Carlos Rodrigo Formigari

Carlos Orestes Vanzo

Cesar Ming Pereira da Silva

Cesar Padovan

Cícero Marcus de Araújo

Cintia Carbonieri Fleury de Camargo

Claudio César Sanches

Cláudio José Coutinho Arromatte

Cristiane Magalhães Teixeira Portella

Cristiano Guimarães Duarte

Cristiano Rogério Cagne

Eduardo Cardoso Armonia

Eduardo Corsetti

Eduardo Esteban Mato Amorin

Eduardo Estefan Ventura (*)

Eduardo Hiroyuki Miyaki

Eduardo Queiroz Tracanella

Emerson Savi Junqueira

Emilio Pedro Borsari Filho

Eric André Altafim

Estevão Carcioffi Lazanha

Fabiana Pascon Bastos

Fabiano Meira Dourado Nunes

Felipe de Souza Wey

Felipe Weil Wilberg

Fernando Della Torre Chagas

Officers (continued)

Fernando Julião de Souza Amaral

Fernando Mattar Beyruti

Flávio Delfino Júnior

Flavio Ribeiro Iglesias

Francisco Vieira Cordeiro Neto

Gabriel Guedes Pinto Teixeira

Gabriela Rodrigues Ferreira

Gilberto Frussa

Gustavo Trovisco Lopes

João Antonio Dantas Bezerra Leite

Jorge Luiz Viegas Ramalho

José de Castro Araújo Rudge Filho

José Virgilio Vita Neto

Laila Regina de Oliveira Pena de Antonio

Leon Gottlieb

Lineu Carlos Ferraz de Andrade

Livia Martines Chanes

Luís Fernando Staub

Luís Tadeu Mantovani Sassi

Luiz Felipe Monteiro Arcuri Trevisan

Luiz Fernando Butori Reis Santos

Luiz Severiano Ribeiro

Manoela Varanda

Marcello Siniscalchi

Marcio Luis Domingues da Silva

Marco Antonio Sudano

Mário Lúcio Gurgel Pires

Mario Magalhães Carvalho Mesquita

Matias Granata

Milena de Castilho Lefon Martins

Pedro Barros Barreto Fernandes

Renato Cesar Mansur

Ricardo Nuno Delgado Gonçalves

Ricardo Urquijo Lazcano

Rodnei Bernardino de Souza

Rodrigo Jorge Dantas de Oliveira

Rodrigo Luís Rosa Couto

Rodrigo Rodrigues Baia

Rogerio Narle Elmais

Rogerio Vasconcelos Costa

Sergio Mychkis Goldstein

Tatiana Grecco

Thales Ferreira Silva

Thiago Luiz Charnet Ellero

Valéria Aparecida Marretto

Vanessa Lopes Reisner

 

(*) Elected at the ESM of 10/01/2018, awaiting approval from BACEN.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

60

 

  

BANCO ITAÚ BBA S.A.

 

BOARD OF EXECUTIVE OFFICERS

Chief Executive Officer

Eduardo Mazzilli de Vassimon

 

Executive Vice-President

Alberto Fernandes

 

Executive Officers

André Luís Teixeira Rodrigues

Christian George Egan

Luís Eduardo Gross Siqueira Cunha

 

Officers

Adriano Cabral Volpini

Badi Maani Shaikhzadeh

Carlos Eduardo Mori Peyser

Carlos Henrique Donegá Aidar

Cristiano Guimarães Duarte

Cristiano Rogério Cagne

Eduardo Hiroyuki Miyaki

Eric André Altafim

Felipe Weil Wilberg

Flávio Delfino Júnior

Gabriel Guedes Pinto Teixeira

Gilberto Frussa

Matias Granata

Ricardo Nuno Delgado Gonçalves

Roderick Sinclair Greenlees

Rodrigo Luís Rosa Couto

Sergio Mychkis Goldstein

Vanessa Lopes Reisner

 

ITAÚ SEGUROS S.A.

 

Chief Executive Officer

Luiz Eduardo Loureiro Veloso

 

Officers

Adriano Cabral Volpini

Badi Maani Shaikhzadeh

Carlos Henrique Donegá Aidar

Eduardo Hiroyuki Miyaki

Luiz Fernando Butori Reis Santos

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

61

 

  

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Balance Sheet (Note 2a)

(In thousands of Reais)

 

Assets  Note  09/30/2018   09/30/2017 
Current assets      1,150,049,449    1,061,841,141 
Cash and cash equivalents      29,467,216    19,089,191 
Interbank investments  4b and 5   320,005,736    286,930,923 
Money market      289,178,229    255,961,956 
Money market – Assets Guaranteeing Technical Provisions – SUSEP  10b   2,940,980    3,414,121 
Interbank deposits      27,886,527    27,554,846 
Securities and derivative financial instruments  4c, 4d and 6   299,388,794    301,459,799 
Own portfolio      82,441,835    94,955,654 
Subject to repurchase commitments      6,349,261    13,583,555 
Pledged in guarantee      3,274,657    6,754,967 
Securities under resale agreements with free movement      2,123,590    4,627,124 
Deposited with the Central Bank of Brazil      2,927,414    3,971,674 
Derivative financial instruments      16,933,637    10,503,623 
Assets guaranteeing technical provisions - PGBL / VGBL fund quotas  10b   181,627,600    163,347,726 
Assets guaranteeing technical provisions – other securities  10b   3,710,800    3,715,476 
Interbank accounts      125,700,556    126,510,058 
Pending settlement      39,343,721    30,973,933 
Central Bank of Brazil deposits      85,956,574    94,820,219 
National Housing System (SFH)      7,269    9,775 
Correspondents      34,057    103,165 
Interbank onlending      358,935    602,966 
Interbranch accounts      245,925    289,652 
Loan, lease and other credit operations  7   259,492,594    225,171,100 
Operations with credit granting characteristics  4e   275,668,959    240,648,181 
(Allowance for loan losses)  4f   (16,176,365)   (15,477,081)
Other receivables      113,565,546    100,403,786 
Foreign exchange portfolio  8   59,098,387    48,848,267 
Income receivable      2,922,637    2,755,856 
Receivables from insurance and reinsurance operations  4m I and 10b   1,067,975    886,614 
Negotiation and intermediation of securities      11,917,155    7,004,044 
Deferred tax assets  13b I   23,053,749    27,855,272 
Escrow deposits for contingent liabilities and legal liabilities  11b and 11d   1,606,105    1,438,017 
Sundry  12a   13,899,538    11,615,716 
Other assets  4g   2,183,082    1,986,632 
Assets held for sale      1,454,415    1,115,333 
(Valuation allowance)      (666,519)   (476,768)
Unearned reinsurance premiums  4m I   10,247    3,777 
Prepaid expenses  4g and 12b   1,384,939    1,344,290 
Long term receivables      428,077,957    377,681,399 
Interbank investments  4b and 5   959,469    770,357 
Money market      202,087    91,705 
Interbank deposits      757,382    678,652 
Securities and derivative financial instruments  4c, 4d and 6   128,871,110    111,346,231 
Own portfolio      50,540,606    55,857,378 
Subject to repurchase commitments      18,973,955    15,952,469 
Pledged in guarantee      5,168,150    8,205,080 
Securities under resale agreements with free movement      33,254,978    14,865,373 
Deposited with the Central Bank of Brazil      567,104    - 
Derivative financial instruments      11,707,932    9,158,992 
Assets guaranteeing technical provisions – other securities  10b   8,658,385    7,306,939 
Interbank accounts      40,687    4,721 
Pending settlement      36,456    - 
National Housing System (SFH)      4,231    4,721 
Loan, lease and other credit operations  7   236,800,002    207,957,598 
Operations with credit granting characteristics  4e   254,850,950    227,182,767 
(Allowance for loan losses)  4f   (18,050,948)   (19,225,169)
Other receivables      60,931,599    56,907,514 
Foreign exchange portfolio  8   18,533,220    13,940,913 
Receivables from insurance and reinsurance operations  4m I and 10b   214,850    363,536 
Deferred tax assets  13b I   21,928,911    24,454,517 
Escrow deposits for contingent liabilities and legal liabilities  11b and 11d   12,008,912    12,002,857 
Sundry  12a   8,245,706    6,145,691 
Other assets - Prepaid Expenses  4g and 12b   475,090    694,978 
Unearned reinsurance premiums  4m I   -    9,735 
Prepaid expenses  4g and 12b   475,090    685,243 
Permanent assets      35,034,249    26,477,248 
Investments  4h and 14a   12,652,755    5,113,262 
Investments in associates and jointly controlled entities      12,332,627    4,792,267 
Other investments      528,945    529,821 
(Allowance for losses)      (208,817)   (208,826)
Real estate in use  4i and 14b l   6,300,547    6,370,028 
Real estate in use      4,299,563    4,303,867 
Other fixed assets      13,908,257    12,682,511 
(Accumulated depreciation)      (11,907,273)   (10,616,350)
Goodwill  4j and 14b ll   1,283,447    1,248,642 
Intangible assets  4k and 14b lll   14,797,500    13,745,316 
Acquisition of rights to credit payroll      1,186,379    1,006,923 
Other intangible assets      23,007,922    19,028,586 
(Accumulated amortization)      (9,396,801)   (6,290,193)
Total assets      1,613,161,655    1,465,999,788 

 

The accompanying notes are an integral part of these financial statements.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

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ITAÚ UNIBANCO HOLDING S.A.

Consolidated Balance Sheet (Note 2a)

(In thousands of Reais)

 

Liabilities  Note  09/30/2018   09/30/2017 
Current liabilities      863,270,527    778,663,170 
Deposits  4b and 9b   301,132,861    249,153,856 
Demand deposits      74,816,713    58,609,115 
Savings deposits      132,373,654    112,249,257 
Interbank deposits      3,034,060    1,772,574 
Time deposits      90,905,746    76,520,378 
Other deposits      2,688    2,532 
Deposits received under securities repurchase agreements  4b and 9c   252,640,301    253,918,844 
Own portfolio      46,118,273    64,853,295 
Third-party portfolio      189,685,299    169,533,676 
Free portfolio      16,836,729    19,531,873 
Funds from acceptances and issuance of securities  4b and 9d   39,951,699    52,160,410 
Real estate, mortgage, credit and similar notes      31,134,623    36,932,012 
Foreign borrowing through securities      6,847,008    13,315,846 
Structured operations certificates      1,970,068    1,912,552 
Interbank accounts      43,345,384    32,594,309 
Pending settlement      41,274,192    30,726,796 
Correspondents      2,071,192    1,867,513 
Interbranch accounts      5,783,226    5,044,131 
Third-party funds in transit      5,770,292    5,029,129 
Internal transfer of funds      12,934    15,002 
Borrowing and onlending  4b and 9e   46,360,218    40,655,955 
Borrowing      38,535,265    31,769,944 
Onlending      7,824,953    8,886,011 
Derivative financial instruments  4d and 6f   17,926,079    8,269,821 
Technical provision for insurance, pension plan and capitalization  4m II and 10a   7,212,694    3,310,228 
Other liabilities      148,918,065    133,555,616 
Collection and payment of taxes and contributions      5,786,200    5,192,325 
Foreign exchange portfolio  8   59,016,603    49,322,674 
Social and statutory  15b II   2,816,256    3,244,654 
Tax and social security contributions  4n, 4o and 13c   7,097,795    7,017,686 
Negotiation and intermediation of securities      9,188,723    7,309,807 
Subordinated debt  9f   3,284,900    11,220,255 
Provisions for contingent liabilities  11b   4,772,242    4,815,251 
Sundry  12c   56,955,346    45,432,964 
Long term liabilities      608,592,289    550,115,979 
Deposits  4b and 9b   153,418,710    110,750,432 
Interbank deposits      77,397    358,373 
Time deposits      153,341,313    110,392,059 
Deposits received under securities repurchase agreements  4b and 9c   61,934,973    83,032,539 
Own portfolio      7,576,452    37,593,406 
Free portfolio      54,358,521    45,439,133 
Funds from acceptances and issuance of securities  4b and 9d   78,732,677    54,477,840 
Real estate, mortgage, credit and similar notes      40,122,055    26,454,176 
Foreign borrowing through securities      37,479,783    25,495,748 
Structured Operations Certificates      1,130,839    2,527,916 
Borrowing and onlending  4b and 9e   20,897,488    25,662,333 
Borrowing      9,704,961    8,973,092 
Onlending      11,192,527    16,689,241 
Derivative financial instruments  4d and 6f   13,901,091    13,292,583 
Technical provision for insurance, pension plan and capitalization  4m II and 10a   189,535,201    174,211,559 
Other liabilities      90,172,149    88,688,693 
Foreign exchange portfolio  8   18,604,127    14,030,387 
Tax and social security contributions  4n, 4o and 13c   8,165,558    19,587,220 
Subordinated debt  9f   42,450,500    37,185,720 
Provisions for contingent liabilities  11b   9,610,340    11,888,570 
Debt instruments eligible as capital  9f   7,985,434    - 
Sundry  12c   3,356,190    5,996,796 
Deferred income  4q   2,602,643    2,081,538 
Capital      97,148,000    97,148,000 
Capital reserves      1,732,340    1,515,192 
Revenue reserves      31,741,787    29,953,140 
Asset valuation adjustment  4c, 4d and 15e   (3,623,962)   (2,576,589)
(Treasury shares)      (1,962,762)   (2,409,008)
Total stockholders' equity of controlling shareholders  15   125,035,403    123,630,735 
Non-controlling interests      13,660,793    11,508,366 
Total stockholders' equity  15f   138,696,196    135,139,101 
Total liabilities and stockholders' equity      1,613,161,655    1,465,999,788 

 

The accompanying notes are an integral part of these financial statements

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

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ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Income (Note 2a)

(In thousands of Reais)

 

      01/01 to   01/01 to 
  Note  09/30/2018   09/30/2017 
Income related to financial operations      106,837,515    114,534,093 
Loan, lease and other credit operations      57,096,302    55,564,909 
Securities and derivative financial instruments      36,021,640    39,237,917 
Financial income related to insurance, pension plan and capitalization operations  10c   7,499,333    13,042,506 
Foreign exchange operations      2,483,903    1,049,133 
Compulsory deposits      3,736,337    5,639,628 
Expenses related to financial operations      (64,883,700)   (63,359,276)
Money market      (49,019,654)   (48,855,114)
Financial expenses on technical provisions for insurance, pension plan and capitalization  10c   (7,102,978)   (12,538,595)
Borrowing and onlending  9e   (8,761,068)   (1,965,567)
Income related to financial operations before loan and losses      41,953,815    51,174,817 
Result of allowance for loan losses  7   (8,126,393)   (11,798,146)
Expenses for allowance for loan losses      (11,249,910)   (14,544,307)
Income related to recovery of credits written off as loss      3,123,517    2,746,161 
Gross income related to financial operations      33,827,422    39,376,671 
Other operating revenues (expenses)      (12,458,015)   (12,111,386)
Banking service fees  12d   19,019,437    17,574,513 
Income related to bank charges  12e   9,340,692    8,764,682 
Result from insurance, pension plan and capitalization operations  10c   2,705,639    2,579,818 
Personnel expenses  12f   (17,552,244)   (16,301,947)
Other administrative expenses  12g   (14,583,676)   (13,532,061)
Tax expenses  4p and 13a II   (4,639,179)   (5,449,497)
Equity in earnings of affiliates, jointly controlled entities and other investments      463,458    428,867 
Other operating revenues  12h   912,862    797,200 
Other operating expenses  12i   (8,125,004)   (6,972,961)
Operating income      21,369,407    27,265,285 
Non-operating income      7,480    (53,272)
Income before taxes on income and profit sharing      21,376,887    27,212,013 
Income tax and social contribution  4p and 13a I   (2,241,207)   (8,907,914)
Due on operations for the period      (6,415,233)   (4,959,202)
Related to temporary differences      4,174,026    (3,948,712)
Profit sharing – Management Members - Statutory      (180,749)   (154,203)
Non-controlling interests  15f   (183,364)   (6,710)
Net income      18,771,567    18,143,186 
Weighted average of the number of outstanding shares  15a   6,478,683,973    6,507,134,021 
Net income per share – R$      2.90    2.79 
Book value per share - R$ (outstanding at 09/30)      19.31    19.01 

 

The accompanying notes are an integral part of these financial statements.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

64

 

  

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Cash Flows

(In thousands of Reais)

 

      01/01 to   01/01 to 
   Note  09/30/2018   09/30/2017 
Adjusted net income      42,776,211    54,752,108 
Net income      18,771,567    18,143,186 
Adjustments to net income:      24,004,644    36,608,922 
Share-based payment      (378,881)   (90,965)
Adjustment to market value of securities and derivative financial instruments (assets / liabilities)      (8,558)   3,158,755 
Effects of changes in exchange rates on cash and cash equivalents      (2,417,923)   752,908 
Allowance for loan losses  7c   11,249,910    14,544,307 
Interest and foreign exchange expenses related to operations with subordinated debt      9,766,103    2,332,092 
Change in technical provisions for pension plan and capitalization  10c   14,390,097    12,538,595 
Depreciation and amortization      3,221,274    2,798,910 
Interest expenses related to provision for contingent and legal liabilities  11b   737,590    1,050,457 
Provision for contingent and legal liabilities  11b   1,768,498    2,983,692 
Interest income related to escrow deposits  11b   (138,273)   (261,388)
Deferred taxes (excluding hedge tax effects)      4,715,831    3,433,071 
Equity in earnings of affiliates, jointly controlled entities and other investments      (463,458)   (428,867)
Interest and foreign exchange income related to available-for-sale securities      (13,456,140)   (5,430,007)
Interest and foreign exchange income related to held-to-maturity securities      (4,411,241)   (785,136)
(Gain) loss on sale of available-for-sale financial assets      (109,709)   (258,152)
(Gain) loss on sale of investments      (87,021)   (198,133)
(Gain) loss on sale of Assets held for sale      216,925    354,515 
(Gain) loss on sale of fixed assets      (14,435)   (25,357)
Non-controlling interests  15f   183,364    6,710 
Other      (759,309)   132,915 
Change in assets and liabilities      3,304,749    (54,231,021)
(Increase) decrease in assets      (41,193,250)   (69,323,322)
Interbank investments      (27,935,456)   (22,056,414)
Securities and derivative financial instruments (assets / liabilities)      20,196,726    (37,247,713)
Compulsory deposits with the Central Bank of Brazil      12,880,367    (9,119,757)
Interbank and interbranch accounts (assets / liabilities)      3,927,300    1,159,514 
Loan, lease and other credit operations      (49,646,941)   5,594,682 
Other receivables and other assets      1,091,197    (4,301,650)
Foreign exchange portfolio and negotiation and intermediation of securities (assets / liabilities)      (1,706,443)   (3,351,984)
(Decrease) increase in liabilities      44,497,999    15,092,301 
Deposits      51,613,664    30,490,294 
Deposits received under securities repurchase agreements      (9,334,732)   (29,086,454)
Funds for issuance of securities      11,103,352    12,927,408 
Borrowing and onlending      3,816,666    (9,295,643)
Technical provision for insurance, pension plan and capitalization      (1,438,840)   8,400,663 
Collection and payment of taxes and contributions      5,480,481    4,914,767 
Other liabilities      (13,479,514)   339,744 
Deferred income      169,173    35,595 
Payment of income tax and social contribution      (3,432,251)   (3,634,073)
Net cash provided by (used in) operating activities      46,080,960    521,087 
Dividends / Interest on capital received from associates and jointly controlled entities      395,254    341,448 
Funds received from sale of available-for-sale securities      15,381,350    12,275,857 
Funds received from redemption of held-to-maturity securities      14,300,731    2,942,649 
(Purchase)/Disposal of Assets held for sale      66,070    (123,497)
Disposal of investments      93,497    403,717 
Sale of fixed assets      116,431    57,061 
Termination of intangible asset agreements  14b III   1,734    24,690 
(Purchase) of available-for-sale securities      (8,409,289)   (11,328,326)
(Purchase) of held-to-maturity securities      (2,463,399)   (259,857)
(Purchase) of investments      (7,095,295)   (431,951)
Disposal (Purchase) of fixed assets  14b I   (935,215)   (570,629)
Disposal (Purchase) of intangible assets  14b III   (1,001,719)   (877,245)
Net cash provided by (used in) investment activities      10,450,150    2,453,917 
Increase in subordinated debt      3,002,925    - 
Decrease in subordinated debt      (11,744,069)   (11,346,192)
Change in non-controlling interests      1,559,422    42,498 
Granting of stock options      1,133,502    866,971 
Purchase of treasury shares  15a   (510,308)   (1,376,812)
Dividends and interest on capital paid to non-controlling interests      (95,727)   (165,794)
Dividends and interest on capital paid      (19,801,309)   (10,089,058)
Net cash provided by (used in) financing activities      (26,455,564)   (22,068,387)
              
Net increase (decrease) in cash and cash equivalents      30,075,546    (19,093,383)
              
Cash and cash equivalents at the beginning of the period      71,235,353    96,048,488 
Effects of changes in exchange rates on cash and cash equivalents      2,417,923    (752,908)
Cash and cash equivalents at the end of the period  4a   103,728,822    76,202,197 
              
Cash and cash equivalents      29,467,216    19,089,191 
Interbank deposits      20,905,509    20,126,593 
Securities purchased under agreements to resell - Funded position      53,356,097    36,986,413 

 

The accompanying notes are an integral part of these financial statements.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

65

 

  

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Added Value

(In thousands of Reais)

 

      01/01 to       01/01 to     
   Note  09/30/2018       09/30/2017     
Income      130,697,232       132,398,888     
Financial operations      106,837,515         114,534,093      
Banking services      28,360,129         26,339,195      
Result from insurance, pension plan and capitalization operations      2,705,639         2,579,818      
Result from loan losses  7   (8,126,393)        (11,798,146)     
Other      920,342         743,928      
Expenses      (73,008,704)        (70,332,237)     
Financial operations      (64,883,700)        (63,359,276)     
Other      (8,125,004)        (6,972,961)     
Inputs purchased from third parties      (11,402,376)        (10,758,376)     
Materials, energy and others  12g   (238,898)        (250,946)     
Third-party services  12g   (3,234,198)        (3,069,347)     
Other      (7,929,280)        (7,438,083)     
Data processing and telecommunications  12g   (3,123,265)        (3,038,702)     
Advertising, promotions and publication  12g   (1,052,637)        (774,566)     
Installations      (1,249,731)        (1,208,948)     
Transportation  12g   (256,211)        (254,000)     
Security  12g   (565,304)        (542,060)     
Travel expenses  12g   (164,627)        (153,221)     
Other      (1,517,505)        (1,466,586)     
Gross added value      46,286,152         51,308,275      
Depreciation and amortization  12g   (1,991,485)        (1,662,076)     
Net added value produced by the company      44,294,667         49,646,199      
Added value received through transfer - Equity income      463,458         428,867      
Total added value to be distributed      44,758,125         50,075,066      
Distribution of added value      44,758,125         50,075,066      
Personnel      15,811,689    35.3%   14,731,489    29.4%
Compensation      12,153,284    27.2%   11,442,097    22.8%
Benefits      2,974,170    6.6%   2,667,110    5.3%
FGTS – government severance pay fund      684,235    1.5%   622,282    1.2%
Taxes, fees and contributions      8,801,690    19.7%   16,082,072    32.1%
Federal      7,742,167    17.3%   15,171,615    30.3%
State      21    0.0%   1,112    0.0%
Municipal      1,059,502    2.4%   909,345    1.8%
Return on third parties’ assets - Rent      1,189,815    2.7%   1,111,609    2.2%
Return on own assets      18,954,931    42.3%   18,149,896    36.2%
Dividends and interest on capital      7,709,082    17.2%   11,967,687    8.9%
Retained earnings (loss) attributable to controlling shareholders      11,062,485    24.7%   6,175,499    27.3%
Retained earnings (loss) attributable to non-controlling shareholders      183,364    0.4%   6,710    0.0%

 

The accompanying notes are an integral part of these financial statements.

 

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ITAÚ UNIBANCO HOLDING S.A.

Balance Sheet

(In thousands of Reais)

 

Assets  Note  09/30/2018   09/30/2017 
Current assets      12,278,881    22,538,597 
Cash and cash equivalents      665,008    384,326 
Interbank investments  4b and 5   50,574    3,733,318 
Money market      50,574    382,895 
Interbank deposits      -    3,350,423 
Securities and derivative financial instruments  4c, 4d and 6   9,923,907    15,258,761 
Own portfolio      9,923,907    15,253,390 
Pledged in guarantee      -    5,371 
Other receivables      1,634,249    3,157,919 
Income receivable  14a   29,950    545,799 
Deferred tax assets  13b I   687,934    184,396 
Escrow deposits - Civil, Labor, Tax and Social lawsuits      93    16,701 
Sundry  12a   916,272    2,411,023 
Other assets – prepaid expenses  4g   5,143    4,273 
Long term receivables      75,085,726    75,102,639 
Interbank investments – interbank deposits  4b and 5   68,681,567    74,750,604 
Securities and derivative financial instruments  4c, 4d and 6   2,767,075    49,586 
Own portfolio      -    2,199 
Derivative Financial Instruments      2,767,075    47,387 
Other receivables      3,637,084    302,449 
Deferred tax assets  13b I   1,670,929    301,617 
Escrow deposits - Civil, Labor, Tax and Social lawsuits      17,418    252 
Sundry  12a   1,948,737    580 
Permanent assets      109,000,722    85,441,551 
Investments - Investments in subsidiaries  4h and 14a   109,000,473    85,441,500 
Real estate in use  4i   249    51 
Total assets      196,365,329    183,082,787 
Liabilities             
Current liabilities      22,869,908    23,925,411 
Deposits  4b and 9b   20,179,972    17,321,236 
Demand deposits      14,056,529    - 
Interbank deposits      6,123,443    17,321,236 
Funds from acceptance and issuance of securities  4b and 9d   108,490    3,430,624 
Derivative Financial Instruments  4d and 6f   1,582,350    1,493,446 
Other liabilities      999,096    1,680,105 
Social and statutory  15b II   333,125    1,242,384 
Tax and social security contributions  4n, 4p and 13c   659,167    237,128 
Provisions for contingent liabilities      -    192,779 
Sundry      6,804    7,814 
Long term liabilities      47,961,870    33,582,540 
Deposits - Interbank deposits  4b and 9b   7,859,450    4,798,816 
Derivative Financial Instruments  4d and 6f   927    3,762,315 
Other liabilities      40,101,493    25,021,409 
Tax and social security contributions  4n, 4p and 13c   172,336    - 
Subordinated debt  9f   31,734,479    25,001,069 
Provisions for contingent liabilities      200,105    262 
Debt instruments eligible as capital  9f   7,985,434    - 
Sundry      9,139    20,078 
Stockholders' equity  15   125,533,551    125,574,836 
Capital      97,148,000    97,148,000 
Capital reserves      1,732,340    1,515,192 
Revenue reserves      29,160,487    31,554,495 
Asset valuation adjustment  4c and 4d   (544,514)   (2,233,843)
(Treasury shares)      (1,962,762)   (2,409,008)
Total liabilities and stockholders' equity      196,365,329    183,082,787 

 

The accompanying notes are an integral part of these financial statements.

 

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ITAÚ UNIBANCO HOLDING S.A.

Statement of Income

(In thousands of Reais)

 

      01/01 to   01/01 to 
   Note  09/30/2018   09/30/2017 
Income related to financial operations      8,299,177    3,089,767 
Securities and derivative financial instruments      8,299,177    3,089,767 
Expenses related to financial operations      (6,870,082)   (1,249,377)
Money market  9d   (6,870,082)   (1,249,377)
Gross income related to financial operations      1,429,095    1,840,390 
Other operating revenues (expenses)      12,141,618    14,442,001 
Personnel expenses      (102,526)   (140,033)
Other administrative expenses      (103,728)   (54,912)
Tax expenses  13a II   (232,401)   (341,579)
Equity in earnings of subsidiaries  14a I   12,615,402    15,016,416 
Other operating revenues (expenses)      (35,129)   (37,891)
Operating income      13,570,713    16,282,391 
Non-operating income      18,851    23,629 
Income before taxes on income and profit sharing      13,589,564    16,306,020 
Income tax and social contribution  4p   1,699,840    325,231 
Due on operations for the period      (317,409)   15,160 
Related to temporary differences      2,017,249    310,071 
Profit sharing – Management Member - Statutory      (5,113)   (21,003)
Net income      15,284,291    16,610,248 
Weighted average of the number of outstanding shares  15a   6,478,683,973    6,507,134,021 
Net income per share – R$      2.36    2.55 
Book value per share - R$ (outstanding at 09/30)      19.38    19.31 

 

The accompanying notes are an integral part of these financial statements.

 

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ITAÚ UNIBANCO HOLDING S.A.

Statement of Changes in Stockholders’ Equity (Note 15)

(In thousands of Reais)

 

       Capital   Revenue   Asset valuation   Retained   (Treasury     
   Capital   reserves   reserves   adjustment   earnings   shares)   Total 
Balance at 01/01/2017   97,148,000    1,589,343    24,687,292    (2,975,797)   -    (1,882,353)   118,566,485 
Purchase of treasury shares   -    -    -    -    -    (1,376,812)   (1,376,812)
Result of delivery of treasure shares   -    16,814    -    -    -    850,157    866,971 
Recognition of stock-based payment plans   -    (90,965)   -    -    -    -    (90,965)
Payment of interest on capital on 03/03/2017 – declared after 12/31/2016 - R$ 0.6591 per share   -    -    (5,047,692)   -    -    -    (5,047,692)
Financial guarantees provided - CMN Resolution nº 4,512 (Note 7c)   -    -    -    -    (220,902)   -    (220,902)
Asset valuation adjustments:                                   
Change in adjustment to market value   -    -    -    835,705    -    -    835,705 
Remeasurements in liabilities of post-employment benefits   -    -    -    (50,025)   -    -    (50,025)
Foreign exchange variation on investments abroad/ Hedge of net investment in foreign operations   -    -    -    (43,726)   -    -    (43,726)
Net income   -    -    -    -    16,610,248    -    16,610,248 
Appropriations:                                   
Legal reserve   -    -    830,512    -    (830,512)   -    - 
Statutory reserves   -    -    3,591,147    -    (3,591,147)   -    - 
Dividends and interest on capital   -    -    7,493,236    -    (11,967,687)   -    (4,474,451)
Balance at 09/30/2017   97,148,000    1,515,192    31,554,495    (2,233,843)   -    (2,409,008)   125,574,836 
Changes in the period   -    (74,151)   6,867,203    741,954    -    (526,655)   7,008,351 
Balance at 01/01/2018   97,148,000    1,733,611    33,806,424    (1,437,328)   -    (2,742,767)   128,507,940 
Purchase of treasury shares   -    -    -    -    -    (510,308)   (510,308)
Result of delivery of treasure shares   -    377,610    -    -    -    755,892    1,133,502 
Cancellation of Shares – Meeting of the Board of Directors at February 22, 2018   -    -    (534,421)   -    -    534,421    - 
Recognition of stock-based payment plans   -    (378,881)   -    -    -    -    (378,881)
Payment of interest on capital on 03/07/2018 – declared after 12/31/2017 - R$ 2.1126 per share   -    -    (13,672,862)   -    -    -    (13,672,862)
Unclaimed dividends   -    -    -    -    3,296    -    3,296 
Asset valuation adjustments:                                   
Change in adjustment to market value   -    -    -    (997,771)   -    -    (997,771)
Remeasurements in liabilities of post-employment benefits   -    -    -    5,495    -    -    5,495 
Foreign exchange variation on investments abroad / Hedge of net investment in foreign operations   -    -    -    1,885,090    -    -    1,885,090 
Net income   -    -    -    -    15,284,291    -    15,284,291 
Appropriations:                                   
Legal reserve   -    -    764,215    -    (764,215)   -    - 
Statutory reserves   -    -    6,814,290    -    (6,814,290)   -    - 
Dividends and interest on capital   -    -    1,982,841    -    (7,709,082)   -    (5,726,241)
Balance at 09/30/2018   97,148,000    1,732,340    29,160,487    (544,514)   -    (1,962,762)   125,533,551 
Changes in the period   -    (1,271)   (4,645,937)   892,814    -    780,005    (2,974,389)

 

The accompanying notes are an integral part of these financial statements.

 

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ITAÚ UNIBANCO HOLDING S.A.

Statement of Cash Flows

(In thousands of Reais)

 

      01/01 to   01/01 to 
   Note  09/30/2018   09/30/2017 
Adjusted net income      7,166,328    1,722,712 
Net income      15,284,291    16,610,248 
Adjustments to net income:      (8,117,963)   (14,887,536)
Granted options recognized and share-based payment – variable compensation      (378,881)   (90,965)
Interest and foreign exchange expense related to operations with subordinated debt      6,821,011    342,207 
Deferred taxes      (2,017,249)   (310,071)
Equity in earnings of subsidiaries  14a   (12,615,402)   (15,016,416)
Amortization of goodwill      38,620    38,620 
Effects of changes in exchange rates on cash and cash equivalents      33,911    149,077 
Other      27    12 
Change in assets and liabilities      27,477,033    (12,596,425)
(Increase)/decrease in interbank investments      13,884,699    (13,378,150)
(Increase)/decrease in securities and derivative financial instruments (assets / liabilities)      4,979,323    (13,820,511)
(Increase)/decrease in other receivables and other assets      160,312    7,161,782 
Increase/(decrease) in deposits      5,120,577    9,008,808 
Increase/(decrease) in other liabilities      3,313,436    (1,607,448)
Payment of income tax and social contribution      18,686    39,094 
Net cash provided by (used in) operating activities      34,643,361    (10,873,713)
Interest on capital / dividends received      3,625,894    18,531,461 
(Purchase) sale of investments      (14,499,995)   416,806 
(Purchase) sale of fixed assets      (229)   (18)
Net cash provided by (used in) investment activities      (10,874,330)   18,948,249 
Decrease in subordinated debt      (1,191,590)   (1,044,153)
(Decrease)/increase in funds for issuance of securities      (3,392,899)   (450)
Granting of stock options      1,133,502    866,971 
Purchase of treasury shares      (510,308)   (1,376,812)
Dividends and interest on capital paid      (19,801,309)   (10,089,058)
Net cash provided by (used in) financing activities      (23,762,604)   (11,643,502)
              
Net increase/(decrease) in cash and cash equivalents      6,427    (3,568,966)
              
Cash and cash equivalents at the beginning of the period      743,066    4,485,264 
Effects of changes in exchange rates on cash and cash equivalents      (33,911)   (149,077)
Cash and cash equivalents at the end of the period  4a   715,582    767,221 
              
Cash and cash equivalents      665,008    384,326 
Securities purchased under agreements to resell - Funded position      50,574    382,895 

 

The accompanying notes are an integral part of these financial statements.

 

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ITAÚ UNIBANCO HOLDING S.A.

Statement of Added Value

(In thousands of Reais)

 

      01/01 to   01/01 to 
   Note  09/30/2018   09/30/2017 
Income      10,362,024    3,483,473 
Financial operations      8,299,177    3,089,767 
Other      2,062,847    393,706 
Expenses      (6,914,122)   (1,292,542)
Financial operations      (6,870,082)   (1,249,377)
Other      (44,040)   (43,165)
Inputs purchased from third parties      (103,156)   (54,371)
Third-party services      (20,828)   (23,841)
Advertising, promotions and publication      (34,794)   (15,637)
Expenses for financial system services      (26,710)   (5,317)
Other      (20,824)   (9,576)
Gross added value      3,344,746    2,136,560 
Deprecitation and amortization      (38,647)   (38,633)
Net added value produced by the company      3,306,099    2,097,927 
Added value received through transfer - Equity income  14a   12,615,402    15,016,416 
Total added value to be distributed      15,921,501    17,114,343 
Distribution of added value      15,921,501    17,114,343 
Personnel      73,829    134,443 
Compensation      70,122    132,410 
Benefits      2,452    1,765 
FGTS – government severance pay fund      1,255    268 
Taxes, fees and contributions      562,809    369,111 
Federal      562,268    369,048 
Municipal      541    63 
Return on third parties’ assets - rent      572    541 
Return on own assets      15,284,291    16,610,248 
Dividends and interest on capital      7,709,082    11,967,687 
Retained earnings (loss) for the period      7,575,209    4,642,561 

 

The accompanying notes are an integral part of these financial statements.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

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ITAÚ UNIBANCO HOLDING S.A.

 

Notes to the Financial Statements

 

Period from 01/01 to 09/30 of 2018 and 2017

 

(In thousands of Reais)

 

Note 1 - Operations

 

Itaú Unibanco Holding S.A. (ITAÚ UNIBANCO HOLDING) is a publicly-held company, organized and existing under the Laws of Brazil. The head office is located at Praça Alfredo Egydio de Souza Aranha, n° 100, in the city of São Paulo, state of São Paulo, Brazil.

 

ITAÚ UNIBANCO HOLDING is present in 19 countries and offers a wide variety of financial products and services to individual and corporate customers, through its branches, subsidiaries and international affiliates. It operates in all modalities of banking activities, by means of its portfolios: commercial; investment; mortgage loans; loans, financing and investment; lease and foreign exchange transactions.

 

ITAÚ UNIBANCO HOLDING is a holding company controlled by Itaú Unibanco Participações S.A. (“IUPAR”), a holding company which owns 51.71% 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 39.21% of ITAÚ UNIBANCO HOLDING common shares.

 

These consolidated financial statements were approved by the Executive Board on October 29, 2018.

 

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Note 2 – Presentation and consolidation of the financial statements

 

a)Presentation

 

The financial statements of ITAÚ UNIBANCO HOLDING and of its subsidiaries (ITAÚ UNIBANCO HOLDING CONSOLIDATED) have been prepared in accordance with the accounting principles established by the Brazilian Corporate Law, including the amendments introduced by Laws nº. 11,638, of December 28, 2007, and nº. 11,941, of May 27, 2009 and in conformity, when applicable, with instructions issued by the National Monetary Council (CMN), Central Bank of Brazil (BACEN), the Brazilian Securities and Exchange Commission (CVM), the National Council of Private Insurance (CNSP), the Superintendence of Private Insurance (SUSEP) and the National Superintendence of Supplementary Pension – (PREVIC),which include the use of estimates deemed necessary to calculate the accounting provisions and the valuation of financial assets. Information in the financial statements and respective notes evidence all relevant information inherent in the financial statements, and only them, which are consistent with information used by management in its administration.

 

As set forth in the sole paragraph of article 7 of BACEN Circular nº. 3,068, of November 8, 2001, securities classified as trading securities (Note 4c) are presented in the Consolidated Balance Sheet under Current Assets, regardless of their maturity dates.

 

Lease Operations are presented at present value in the Consolidated Balance Sheet, being that the related income and expenses, which represent the financial results of these operations, are presented, grouped together, under Loan, Lease and Other Credit Operations in the Statement of Income. Advances on exchange contracts are reclassified from Other Liabilities – Foreign exchange portfolio to Loan operations. The foreign exchange result is presented on an adjusted basis, with reclassification of expenses and income, in order exclusively to represent the impact of variations and differences in rates on the balance sheet accounts denominated in foreign currencies.

 

b)Consolidation

 

As set forth in paragraph 1, article 2, of BACEN Circular nº. 2,804, of February 11, 1998, the financial statements of ITAÚ UNIBANCO HOLDING CONSOLIDATED include the consolidation of its foreign branches and subsidiaries.

 

Intercompany transactions, intercompany balances and intercompany results have been eliminated on consolidation. The investment funds of which ITAÚ UNIBANCO HOLDING CONSOLIDATED companies are the main beneficiaries or holders of principal obligations are consolidated. The investments in these fund portfolios are classified by type of transaction and were distributed by type of security, based on the same categories to which these securities were originally allocated. The effects of foreign exchange variations on investments abroad are classified under the heading Securities and derivative financial instruments in the Statement of Income for subsidiaries with the same functional currency as the parent company, and in Asset valuation adjustment for subsidiaries with a functional currency different from that of the parent company (Note 4t).

 

The difference in Net Income and Stockholders’ Equity between ITAÚ UNIBANCO HOLDING and ITAÚ UNIBANCO HOLDING CONSOLIDATED (Note 15d) results from the adoption of different criteria for the amortization of goodwill originating from purchases of investments, from the recording of transactions with minority stockholders where there is no change of control (Note 4r), and in the record of exchange variations on investments abroad, and hedges of these investments where the functional currency is different from that of the parent company, net of the respective deferred tax assets.

 

In ITAÚ UNIBANCO HOLDING, the goodwill recorded in subsidiaries, mainly acquisition by minority stockholders of REDE, is amortized based on the expected future profitability and appraisal reports, or upon realization of the investment, according to the rules and guidance of CMN and BACEN.

 

In ITAÚ UNIBANCO HOLDING CONSOLIDATED, from January 1st, 2010, the goodwill originating from the purchase of investments is no longer fully amortized as part of the consolidated financial statements (Note 4j). By December 31, 2009, the goodwill generated had been fully amortized in the periods in which investments were made.

 

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The consolidated financial statements cover ITAÚ UNIBANCO HOLDING and its direct and indirect subsidiaries. We present below the main companies which together represent over 95% of total consolidated assets:

 

               Interest in voting   Interest in total 
         Country of     capital at   capital at 
      Functional currency  Incorporation  Activity  09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Domestic                                
Banco Itaú BBA S.A.        Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itaú Consignado S.A.        Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itaucard S.A.        Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itauleasing S.A.        Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Cia. Itaú de Capitalização        Brazil  Capitalization   100.00%   100.00%   100.00%   100.00%
Dibens Leasing S.A. - Arrendamento Mercantil        Brazil  Leasing   100.00%   100.00%   100.00%   100.00%
Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento        Brazil  Consumer Finance Credit   50.00%   50.00%   50.00%   50.00%
Hipercard Banco Múltiplo S.A.        Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Itauseg Seguradora S.A.        Brazil  Insurance   99.99%   99.99%   99.99%   99.99%
Itaú Corretora de Valores S.A.        Brazil  Broker   100.00%   100.00%   100.00%   100.00%
Itaú Seguros S.A.        Brazil  Insurance   100.00%   100.00%   100.00%   100.00%
Itaú Unibanco S.A.        Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Itaú Vida e Previdência S.A.        Brazil  Pension Plan   100.00%   100.00%   100.00%   100.00%
Luizacred S.A. Sociedade de Crédito, Financiamento e Investimento        Brazil  Consumer Finance Credit   50.00%   50.00%   50.00%   50.00%
Redecard S.A.        Brazil  Acquier   100.00%   100.00%   100.00%   100.00%
Foreign                                
Itaú Corpbanca Colombia S.A.  (Note 2c)  Colombian Peso  Colombia  Financial institution   23.90%   23.90%   23.90%   23.90%
Banco Itaú (Suisse) SA     Swiss Franc  Switzerland  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itaú Argentina S.A.     Argentine Peso  Argentina  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itaú Paraguay S.A.     Guarani  Paraguay  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itaú Uruguay S.A.     Uruguayan peso  Uruguay  Financial institution   100.00%   100.00%   100.00%   100.00%
Itau Bank, Ltd.     Real  Cayman Islands  Financial institution   100.00%   100.00%   100.00%   100.00%
Itaú BBA Colombia S.A. Corporacion Financiera     Colombian Peso  Colombia  Financial institution   100.00%   100.00%   100.00%   100.00%
Itau BBA International plc     Dollar  United Kingdom  Financial institution   100.00%   100.00%   100.00%   100.00%
Itau BBA USA Securities Inc.     Real  United States  Broker   100.00%   100.00%   100.00%   100.00%
Itaú CorpBanca  (Note 2c)  Chilean Peso  Chile  Financial institution   36.06%   36.06%   36.06%   36.06%

 

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c)Business development

 

Citibank’s Retail Operations

 

On October 08, 2016, ITAÚ UNIBANCO HOLDING CONSOLIDATED entered, by means of its subsidiaries Itaú Unibanco S.A. (ITAÚ UNIBANCO) and Itaú Corretora de Valores S.A., into a share purchase and sale agreement with Banco Citibank S.A. and with other companies of its conglomerate (CITIBANK) for the acquisition of the retail banking activities carried out by Citibank in Brazil, including loans, deposits, credit cards, branches, assets under management and insurance brokerage, as well as the equity investments held by CITIBANK in TECBAN – Tecnologia Bancária S.A. (representing 5.64% of its capital) and in CIBRASEC – Companhia Brasileira de Securitização (representing 3.60% of its capital), for R$ 627,795.

 

The operation was structured in three phases:

 

  i.Acquisition of retail operations, cards and insurance brokerage on October 31, 2017;

 ii.Acquisition of securities brokerage on December 1st, 2017;

iii.Acquisition of ownership interest in TECBAN and CIBRASEC on December 26, 2017.

 

The difference between the amount paid and net assets acquired resulted in the recognition of goodwill due to expected future profitability on the acquisition date of R$ 630,629.

 

Gestora de Inteligência de Crédito S.A.

 

On January 21, 2016, ITAÚ UNIBANCO HOLDING CONSOLIDATED, through its subsidiary ITAÚ UNIBANCO, executing a non-binding Memorandum of Understanding with Banco Bradesco S.A., Banco do Brasil S.A., Banco Santander S.A. and Caixa Econômica Federal, aiming at the creation of a credit intelligence bureau that will develop a databank with the purpose of aggregating, reconciling and addressing master file and credit data of individuals and legal entities.

 

Gestora de Inteligência de Crédito S.A., located in the city of São Paulo, was organized as a corporation, and each of its shareholders will have a 20% interest in its capital.

 

After compliance with conditions precedent and approval by proper regulatory authorities, the operation was consummated on June 14, 2017. Ownership interest acquired will be assessed under the equity method.

 

Itaú CorpBanca

 

The ITAÚ CORPBANCA is controlled as of April 1st, 2016 by ITAÚ UNIBANCO HOLDING CONSOLIDATED. On the same date, ITAU UNIBANCO HOLDING entered into a shareholders’ agreement with CORP GROUP, which sets forth, among others, the right of ITAÚ 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 shareholders will have the right to appoint the majority of members of the Board of Directors of ITAÚ CORPBANCA and ITAÚ UNIBANCO HOLDING will be entitled to appoint the majority of members elected by this block.

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED, through its subsidiary ITB Holding Brasil Participações Ltda., indirectly acquired the following additional interests in the ITAU CORPBANCA’s capital:

 

•On September 14, 2017 – 1,800,000,000 shares (0.35%) for the amount of R$ 55,6 million, then holding 36.06%;
   
•On October 12, 2018 – 10,651,555,020 shares (2.08%) for the amount of R$ 362.9 million, then holding 38.14%.

 

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Acquisition of minority interest in XP Investimentos S.A.

 

On May 11, 2017, ITAÚ UNIBANCO HOLDING, through its subsidiary ITAÚ UNIBANCO, entered into an agreement for purchase and sale of shares with XP Controle Participações S.A. (XP CONTROLE), G.A. Brasil IV Fundo de Investimento em Participações, Dyna III Fundo de Investimento em Participações, among other parties (SELLERS), for acquisition of 49.9% of total capital (of which 30.1% of common shares) of XP Investimentos S.A. (XP HOLDING), through capital contribution in the amount of R$ 600 milions and acquisition of shares issued by XP HOLDING held by the SELLERS in the amount of R$ 5,700 milions, and such amounts were restated pursuant to contractual provision, totaling R$ 6,650 milions (FIRST ACQUISITION). A portion of this amount was withheld as a guarantee for possible future obligations of XP CONTROLE, for a 10-year period, and possible remaining balance will be paid to XP CONTROLE at the end of this term.

 

In addition to the FIRST ACQUISITION, the agreement sets forth only one additional acquisition in 2022, subject to future BACEN’s approval. Should it be approved, it will enable ITAÚ UNIBANCO to hold up to 62.4% of XP HOLDING’s total capital (equivalent to 40.0% of common shares) based on a multiple of result (19 times) of XP HOLDING, therefore being clear that the control over XP Group will remain unchanged, with XP CONTROLE’s shareholders.

 

ITAÚ UNIBANCO will act as minority partner and will have no influence in business and operating policies of XP HOLDING or any other company of XP Group.

 

Effective acquisitions and financial settlements occurred on August 31, 2018, after the satisfaction of certain contractual conditions and obtainment of regulatory and government authorizations required.

 

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Note 3 – Requirements regarding capital and fixed asset limits

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED is subject to the requirements of the Central Bank of Brazil (BACEN), which determines minimum capital requirements, procedures to assess information on globally systemic important banks (G-SIB), fixed asset limits, loan limits, accounting practices and compulsory deposit requirements, thereby requiring banks to conform to the regulation based on the Basel Accord for capital adequacy purposes. Additionally, both the National Council of Private Insurance (CNSP) and the Superintendence of Private Insurance (SUSEP) issue regulations on capital requirements that impact our insurance operations, and private pension and capitalization plans.

 

Further details on the Capital Management of ITAÚ UNIBANCO HOLDING CONSOLIDATED, which are not an integral part of the financial statements, can be found on the website www.itau.com.br/investor-relations section “Reports” / Pillar 3 and Global Systemically Important Banks.

 

a)Capital Requirements in Place and in Progress

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED’s minimum capital requirements comply with the set of BACEN resolutions and circulars, which established in Brazil the global capital requirement standards known as Basel III. They are expressed as ratios obtained from the ratio between available capital - represented by Referential Equity (PR), or Total Capital, composed of Tier I Capital (which comprises Common Equity and Additional Tier I Capital) and Tier II Capital, and the Risk-Weighted Assets (RWA).

 

For purposes of calculating these minimum capital requirements, the total RWA is determined as the sum of the risk weighted asset amounts for credit, market, and operational risks. ITAÚ UNIBANCO HOLDING CONSOLIDATED uses the standardized approaches to calculate credit and operational risk-weighted asset amounts.

 

As from September 1, 2016, BACEN authorized ITAÚ UNIBANCO HOLDING CONSOLIDATED to use market risk internal models to determine the total amount of regulatory capital (RWAMINT), replacing the RWAMPAD portion, as set forth in BACEN Circular nº 3,646.

 

From January 1, 2018 to December 31, 2018, the minimum capital ratio required is 8.625%, and, following the gradual decrease schedule, it will be 8% on January 1, 2019.

 

The table below shows Basel III implementation calendar for Brazil, as defined by BACEN, in which the figures refer to the percentage of ITAÚ UNIBANCO HOLDING CONSOLIDATED risk-weighted assets.

 

   As from January 1st 
Schedule for Basel III implementation  2017   2018   2019 (2) 
Common Equity Tier I   4.5%   4.5%   4.5%
Tier I   6.0%   6.0%   6.0%
Total capital   9.25%   8.625%   8.0%
Additional Common Equity Tier I (ACP)   1.50%   2.375%   3.5%
ACPconservation   1.25%   1.875%   2.5%
ACPcountercyclical (1)   0%   0%   0%
ACPsystemic   0.25%   0.5%   1.0%
Common Equity Tier I + ACP   6.0%   6.875%   8.0%
Total capital + ACP   10.75%   11.0%   11.5%
Prudential adjustment deductions   80%   100%   100%

 

(1)  ACP Countercyclical is triggered during the credit cycle expansion phase, and, currently, according to BACEN Circular 30,371, the amount required for the countercyclical capital is zero. Furthermore, in the event of increase in ACPCountercyclical, the new percentage will be effective only twelve months after it is announced.

(2)  Petition valid after of January 1st, 2019.

 

Additionally, in March 2015, Circular nº 3,751, of March 19, 2015, of the BACEN came into force, it provides for the calculation of relevant indicators to identify Global Systemically Important Banks (G-SIBs) among financial institutions in Brazil. Information on the values of the G-SIBs indicators, which are not part of its financial statements, can be found at www.itau.com.br/investor-relations section “Reports” / Pillar 3 and Global Systemically Important Banks.

 

In March 2017, Additional Common Equity Tier I Capital of systemic importance (ACPSystemic) went into effect, regulated by BACEN Circular nº 3,768, of October 29, 2015. The purpose of ACPSystemic is to reduce the probability of insolvency of an institution systemically important in the domestic level (D-SIB: Domestic Systemically Important Bank) and the impact on the stability of the financial system and economy. The calculation of ACPSystemic associates the systemic importance, represented by the institution’s total exposure, with the Gross Domestic Product (GDP).

 

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Further details on ACPSystemic, which are not part of the financial statements, can be viewed on the website www.itau.com.br/investor-relations section “Reports” / Pillar 3 and Global Systemically Important Banks.

 

b)Capital management governance

 

The Board of Directors is the main body in the management of ITAÚ UNIBANCO HOLDING CONSOLIDATED’s capital and it is responsible for approving the institutional capital management policy and guidelines for the institution’s capitalization level. The Board is also responsible for fully approving the ICAAP report (Internal Capital Adequacy Assessment Process), which is intended to assess the adequacy of ITAÚ UNIBANCO HOLDING CONSOLIDATED’s capital.

 

The “Public Access Report – Capital Management”, which are not part of its financial statements, which provides the guidelines established in the institutional capital management policy can be accessed at www.itau.com.br/investor-relations, section Itaú Unibanco, Corporate Governance, Regulations and Policies.

 

c)Composition of capital

 

The Referential Equity (PR) used to monitor the compliance with the operational limits imposed by BACEN is the sum of three items, namely:

·Common Equity Tier I: the sum of capital, reserves and retained earnings, less deductions and prudential adjustments.
·Additional Tier I Capital: consists of instruments of a perpetual nature, which meet eligibility requirements. Together with Common Equity Tier I it makes up Tier I.
·Tier II: consists of subordinated debt instruments with defined maturity dates that meet eligibility requirements. Together with Common Equity Tier I and Additional Tier I Capital, makes up Total Capital.

 

The table below presents the composition of the referential equity segregated into Common Equity Tier I, Additional Tier I Capital and Tier II Capital, taking into consideration their respective prudential adjustments, as required by current regulations.

 

Composition of Reference Equity  09/30/2018   09/30/2017 
Stockholders’ equity of Itaú Unibanco Holding S.A. (Consolidated)   125,035,403    123,630,735
Non-controlling interests   13,579,545    11,444,788 
Changes in Subsidiaries´ Interests in Capital Transactions   467,313    1,818,105 
Consolidated stockholders’ equity (BACEN)   139,082,261    136,893,628 
Common Equity Tier I prudential adjustments   (25,769,542)   (16,634,036)
Common Equity Tier I   113,312,719    120,259,592 
Instruments Eligible to Comprise Additional Tier   7,985,434    - 
Additional Tier I Prudential Adjustments   87,519    51,501 
Additional Tier I Capital   8,072,953    51,501 
Tier I (Common Equity Tier I + Additional Tier I Capital)   121,385,672    120,311,093 
Instruments Eligible to Comprise Tier II   15,778,051    19,722,563 
Tier II prudential adjustments   88,166    68,669 
Tier II   15,866,217    19,791,232 
Reference Equity (Tier I + Tier II)   137,251,889    140,102,325 

 

d)Risk-Weighted Assets (RWA)

 

According to CMN Resolution nº. 4,193, as amended, minimum capital requirements are calculated by the RWA amount, which is obtained by adding the terms listed below:

 

RWA = RWACPAD + RWAMINT + RWAOPAD

 

RWACPAD = portion related to exposures to credit risk, calculated using the standardized approach;

 

RWAMINT = portion related to capital required for market risk, composed of the maximum between the internal model and 80% of the standardized model, regulated by BACEN Circulars 3,646 and 3,674;

 

RWAOPAD = portion related to capital required for operational risk, calculated based on the standardized approach.

 

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The table below shows the amounts of risk weighted assets for Credit Risk (RWACPAD):

 

   09/30/2018 (1)   09/30/2017 
Risk exposures          
Exposure Weighted by Credit Risk (RWACPAD)   713,435,245    637,757,646 
a) Per Weighting Factor (FPR):          
FPR at 2%   137,512    159,988 
FPR at 4%   299,092    - 
FPR at 10%   346,498    - 
FPR at 20%   8,719,943    5,999,436 
FPR at 35%   19,194,178    15,271,501 
FPR at 50%   45,085,366    46,376,365 
FPR at 75%   153,953,135    133,580,404 
FPR at 85%   69,672,244    78,299,744 
FPR at 100%   341,341,063    315,584,487 
FPR at 250%   42,492,270    28,756,928 
FPR at 300%   15,609,669    3,464,851 
FPR up to 1250% (2)   2,300,961    4,248,698 
Derivatives - Changes in the Counterparty Credit Quality   5,893,961    6,015,244 
Default Funds (3)   3,957    - 
Securities (4)   8,385,396    - 
b) Per Type:   713,435,245    637,757,646 
Marketable securities   39,377,637    43,494,753 
Loan operations – Retail   119,876,138    104,667,219 
Loan operations – Non-retail   258,853,254    229,603,961 
Joint Liabilities - Retail   160,842    182,507 
Joint Liabilities - Non-Retail   46,026,737    45,224,270 
Loan commitments – Retail   33,875,114    28,726,048 
Loan commitments – Non-retail   10,543,623    9,119,746 
Derivatives – Future potential gain (5)   4,739,198    5,529,755 
Agency Transition   3,291,700    - 
Other exposures   196,691,002    171,209,388 

(1) As from the 4th quarter of 2017, retail business in Brazil of Citibank started to be fully consolidated in the financial statement of Itaú Unibanco.

(2) Considers the application of “F”» factor required by article 29 of BACEN Circular 3,644.

(3) As from the 1st quarter of 2018, balances related to Default Funds are being weighted in accordance with the calculation established in Art. 20-A of Circular 3,644 (amended by Circular 3,849), replacing FPR of 1250%.

(4) As from the 1st quarter of 2018, part of the balances related to Securitization are being weighted in accordance with the calculation established in Circular 3,848.

(5) Balances of Derivatives – Future Potential Gain are distributed into their respective FPRs.

 

The table below presents the market risk weighted assets (RWAMINT)

 

Composition of Market Risk-Weighted Assets (RWAMINT)

 

   09/30/2018(1)   09/30/2017(1) 
Market Risk Weighted Assets - Standard Aproach (RWAMPAD)   32,945,602    23,056,189 
Operations subject to interest rate variation   28,859,918    21,654,895 
Fixed rate denominated in reais   3,518,737    4,970,689 
Foreign exchange coupons   19,130,007    11,622,525 
Price index coupon   6,211,172    5,061,680 
Interest rate coupon   2    1 
Operations subject to commodity price variation   643,156    411,960 
Operations subject to stock price variation   417,897    273,083 
Operations subject to risk exposures in gold, foreign currency and foreign   3,024,631    716,251 
Minimum Market Risk Weighted Assets - Standard Aproach (RWAMPAD) (1) (a)   26,356,482    18,444,951 
Market Risk Weighted Assets calculated based on internal methodology (b)   23,377,894    18,864,113 
Reduction of Market Risk Weighted Assets due to Internal Models Aproach (IMA)   (6,589,120)   (4,192,076)
Market Risk Weighted Assets (RWAMINT) - maximum of (a) and (b)   26,356,482    18,864,113 

(1) Market risk weighted-assets calculated based on internal models, with maximum saving possibility of 20% of the standard model.

 

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At September 30, 2018, RWAMINT totaled R$ 26,356,482, which corresponds to 80% of RWAMPAD, higher than the capital calculated at internal models, which totaled R$ 23,377,894.

 

The table below presents the composition of the operational risk weighted assets (RWAOPAD):

 

   09/30/2018   09/30/2017 
Operational Risk-Weighted Assets (RWAOPAD)   72,833,292    63,012,661 
Retail   12,822,246    11,606,569 
Commercial   26,214,251    24,857,050 
Corporate finance   2,697,347    2,663,324 
Negotiation and sales   11,736,501    7,433,500 
Payments and settlements   8,281,707    7,532,335 
Financial agent services   4,342,495    3,892,102 
Asset management   6,714,978    5,009,943 
Retail brokerage   23,767    17,838 

 

e)Capital Adequacy

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED, through the ICAAP, assesses the adequacy of its capital to face the incurred risks, for ICAAP, capital is composed by regulatory capital for credit, market and operational risks and by the necessary capital to face other risks.

 

In order to ensure the soundness of ITAÚ UNIBANCO HOLDING CONSOLIDATED and the availability of capital to support business growth, the institution maintains PR levels above the minimum level required to face risks, as evidenced by the Common Equity, Tier I Capital and Basel ratios.

 

Composition of Referential Equity (PR)  09/30/2018   09/30/2017 
Tier I   121,385,672    120,311,093 
Common Equity Tier I   113,312,719    120,259,592 
Additional Tier I Capital   8,072,953    51,501 
Tier II   15,866,217    19,791,232 
Deductions   -    - 
Reference Equity   137,251,889    140,102,325 
Minimum Referential Equity Required   70,088,908    66,566,184 
Surplus Capital in relation to the Minimum Referential Equity Required   67,162,981    73,536,141 
Additional Common Equity Tier I Required (ACPRequired)   19,299,844    10,794,516 
Reference equity calculated for covering the interest rate risk of operations not classified in the trading portfolio (RBAN)   1,948,937    2,462,329 

 

The table below shows the Basel and Fixed Asset Ratios:

 

   09/30/2018   09/30/2017 
Basel Ratio   16.9%   19.5%
Tier I   14.9%   16.7%
Common Equity Tier I   13.9%   16.7%
Additional Tier I Capital   1.0%   0.0%
Tier II   2.0%   2.8%
Fixed Asset Ratio   26.1%   23.5%
Surplus Capital in Relation to Fixed Assets   32,854,488    37,164,656 

 

f)Capital for insurance activity

 

In December 2017, the National Council of Private Insurance (CNSP) issued CNSP Resolution nº. 321 and subsequent changes reported at Resolutions 343 and 360, which, among other things, addresses the minimum capital requirements for underwriting, credit, operational and market risks for insurers, open private pension entities, capitalization companies and reinsurers.

 

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Note 4 – Summary of the main accounting practices

 

a)Cash and cash equivalents - For the purposes of the Consolidated Statement of Cash Flows, this item includes cash and current accounts in banks (considered in the heading Cash and cash equivalents), interbank deposits and securities purchased under agreements to resell – funded positions that have original maturities of up to 90 days.

 

b)Interbank investments, remunerated restricted credits – Brazilian Central Bank, remunerated deposits, deposits received under securities repurchase agreements, funds from acceptance and issuance of securities, borrowing and onlending, subordinated debt and other receivables and payables – Operations with fixed remuneration and charges are accounted for at present value. Operations with post-fixed or floating remuneration and charges are accounted for at the adjusted principal amount. Operations subject to foreign exchange variation are accounted for at the corresponding amount in local currency. Liabilities are presented net of the transaction costs incurred, when relevant, calculated pro rate die.

 

c)Securities - Recorded at the cost of acquisition restated by the index and/or effective interest rate and presented in the Balance Sheet, according to BACEN Circular nº. 3,068, of November 8, 2001. Securities are classified into the following categories:

 

·Trading securities – Securities acquired to be actively and frequently traded, and adjusted to market value, with a counter-entry to the results for the period;

 

·Available-for-sale securities – Securities that can be negotiated but are not acquired for the purposes of active and frequent trading. They are adjusted to their market value, with a counter-entry to an account disclosed in stockholders’ equity;

 

·Held-to-maturity securities – Securities, except for non-redeemable shares, which the bank has the financial condition and intend, or is required to hold in the portfolio to maturity, are recorded at the cost of acquisition, or market value, whenever these are transferred from another category. The securities are adjusted using the accrual method through maturity, and are not adjusted to market value.

 

Gains and losses on available-for-sale securities, when realized, are recognized on the trade date in the statement of income, with a counter-entry to a specific stockholders’ equity account.

 

Decreases in the market value of available-for-sale and held-to-maturity securities below their related costs, resulting from non-temporary causes, are recorded in the results as realized losses.

 

d)Derivative financial instruments - These are classified on the date of their acquisition, according to whether or not management intends to use them either as a hedge, according to BACEN Circular nº. 3,082, of January 30, 2002. Transactions involving financial instruments, carried out at the client’s request, on their own account, or which do not comply with the hedging criteria (mainly derivatives used to manage the overall risk exposure), are stated at market value, including realized and unrealized gains and losses, which are recorded directly in the statement of income.

 

The derivatives that are used for protection against risk exposure or to modify the characteristics of financial assets and liabilities, which have changes in market value closely related with those of the items being protected at the beginning and throughout the duration of the contract, and which are found to be effective reducing the risk related to the exposure being protected against, are classified as hedges, in accordance with their nature:

 

·Market Risk Hedge – Financial assets and liabilities, as well as their related financial instruments, are accounted for at their market value, plus realized and unrealized gains and losses, which are recorded directly in the statement of income;

 

·Cash Flow Hedge - The effective amounts of the hedge of financial assets and liabilities, as well as their related financial instruments, are accounted for at their market value plus realized and unrealized gains and losses, net of tax effects, when applicable, and recorded in a specific account in stockholders’ equity. The ineffective portion is recorded directly in the statement of income;

 

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·Net Investment Hedge of Foreign Operations - Accounted for similarly to cash flow hedge, i.e. the portion of gains or losses on a hedging instrument that is determined to be an effective hedge is recognized in stockholders’ equity, and reclassified to income for the period in the event of the disposal of the foreign operation. The ineffective portion is recognized in income for the period.

 

e)Loan, lease and other credit operations (operations with credit granting characteristics) – These transactions are recorded at present value and calculated pro rata die based on the variation of the contracted index and interest rate, and are recorded on basis until the 60th day overdue in financial companies, according to the estimates of receipt. After the 60th day, income is recognized upon the effective receipt of installments. Credit card operations include receivables arising from the purchases made by cardholders. Funds corresponding to these amounts to be paid to the accrediting organization are in liabilities, in the heading Interbank Accounts – Receipts and Payments Pending Settlement.

 

f)Allowance for loan losses - The balance of the allowance for loan losses was recorded based on a credit risk analysis, at an amount considered sufficient to cover loan losses in accordance with the rules determined by CMN Resolution nº. 2,682 of December 21, 1999, which are as follows are:

 

·Provisions are recorded from the date on which loans are granted, based on the client’s risk rating and on the periodic quality evaluation of clients and industries, and not only in the event of default;

 

·Taking into account default exclusively, the write-off as losses occurs 360 days after the credits have matured or after 540 days for operations that mature after a period of 36 months.

 

The criterion adopted for recognition of a provision for Financial Guarantees pledged was based on the Expected Loss model.

 

g)Other assets - These assets are mainly comprised of assets held for sale relating to real estate available for sale, own real estate not in use and real estate received as payment in kind, which are adjusted to market value through a provision, according to current regulations, unearned reinsurance premiums (Note 4m I); and prepaid expenses, corresponding to disbursements, the benefits of which will be felt in future exercises.

 

From January 1st, 2015, ITAÚ UNIBANCO HOLDING CONSOLIDATED has adopted the option provided in BACEN Circular nº. 3,693, of December 20, 2013, which establishes accounting procedures for the compensation of local correspondents in connection with credit origination. These compensation amounts for local correspondents in connection with transactions originated after January 1st, 2017 will be fully recorded as expenses for the period.

 

h)Investments – Investments in subsidiary and affiliated companies are accounted for based on the equity method, The consolidated financial statements of foreign branches and subsidiaries are adapted to comply with Brazilian accounting practices and converted into Reais. Other investments are recorded at cost and adjusted to market value by making a provision in accordance with current standards.

 

i)Fixed assets - As provided for in CMN Resolution nº. 4,535, of November 24, 2016, these correspond to proprietary tangible assets and leasehold improvements, provided that they were used to carry out the company`s activities for a period of time longer than one year, and they should be recorded at fair value and adjusted for impairment, if applicable. Fair value comprises the purchase or construction price on demand, plus any import taxes and taxes not recoverable upon purchase, directly attributable costs required for the operation, and the initial estimate of costs of disassembling and removal of the asset and restoration of the place it is located, if the institution agrees to bear such costs at the asset purchase date. Monthly recognized depreciation takes into account the systematic allocation of the depreciated amount over the useful life of the asset.

 

j)Goodwill – Corresponds to the amount paid in excess for the purchase of investments and is amortized based on expected future profitability or as realized. It is tested semiannually for impairment.

 

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k)Intangible assets – Corresponds to non-monetary assets identified as intangible, purchased or developed by ITAÚ UNIBANCO HOLDING CONSOLIDATED, intended to be held by the company or exercised with that purpose, as provided for by CMN Resolution nº. 4,534, of November 24, 2016. It is composed of:

(i)The goodwill amount paid on the acquisition of the company, transferred to intangible assets in view of the transfer of the acquirer’s equity by the acquired, as set forth by Law nº. 9,532, of December 10, 1997, to be amortized based on the period defined in the appraisal reports;

(ii)Usage rights and rights acquired to credit payrolls and partnership agreements, amortized over the terms of the contracts or to the extent that the economic benefits flow to the company; and

(iii)Software and customer portfolios, amortized over terms varying from five to ten years.

 

l)Impairment of assets – A loss is recognized when there is clear evidence that assets are stated at a non-recoverable value. This procedure is adopted semiannually.

 

m)Insurance, pension plan and capitalization operations - Insurance premiums, accepted coinsurances and selling expenses are accounted for by issuing an insurance policy or in accordance with the insurance effectiveness term, through the recognition and reversal of the provision for unearned premiums and deferred selling expenses. Interest arising from insurance premiums installments is accounted for as incurred. Revenues from social security contributions, gross revenue from premium bonds and respective technical provisions are recognized upon receipt.

 

I -Credits from operations and other assets related to insurance and reinsurance operations:

 

·Insurance premiums receivable - Refer to installments of insurance premiums receivable, current and past due, in accordance with insurance policies issued;

 

·Reinsurance recoverable amounts – Refer to claims paid to the insured party while recovery of these paid amounts is pending from the Reinsurer, installments of unsettled claims and incurred but not reported claims - Reinsurance, classified in assets in accordance with the criteria established by CNSP and SUSEP legislation in force;

 

·Unearned reinsurance premiums – Recognized to determine the portion of unearned reinsurance premiums, calculated pro rata die, and for risks of policies not issued computed based on estimates, based on the actuarial technical study and in compliance with the criteria established by CNSP and SUSEP legislation in force.

 

II -The technical provisions for insurance, pension plan and capitalization are recognized in accordance with the technical notes approved by SUSEP and the criteria established by the current legislation.

 

II.I-Insurance and pension plan:

 

·Provision for unearned premiums – This provision is recognized, based on insurance premiums, for the coverage of amounts payable related to claims and expenses to be incurred, throughout their terms to maturity, in connection with the risks assumed at the calculation base date. The calculation is performed on the level of policies or endorsement of agreements in force, on a pro rata die basis. The provision includes an estimate for effective and not issued risks;

 

·Provision for unsettled claims – This provision is recognized for the coverage of amounts payable related to lump-sum payments and income overdue from claims reported up to the calculation base date, but not yet paid. The provision covers administrative and legal claims, gross of accepted coinsurance operations and reinsurance operations and net of ceded coinsurance operations. The provision should include, whenever required, IBNER (claims incurred but not sufficiently reported) for the aggregate development of claims reported but not paid, which amounts may be changed throughout the process up to final settlement;

 

·Provision for claims incurred and not reported – This provision is recognized for the coverage of expected unsettled amounts related to claims incurred but not reported up to the calculation base date, gross of accepted coinsurance operations and reinsurance operations, and net of ceded coinsurance operations;

 

·Mathematical provisions for benefits to be granted - Recognized for the coverage of commitments assumed to participants or policyholders, based on the assumptions set forth in the contract, while the event that gave rise to the benefit and/or indemnity has not occurred. The provision is calculated in accordance with the methodology approved in the actuarial technical note to the product;

 

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·Mathematical provisions for granted benefits - Recognized after the event triggering the benefit occurs, for the coverage of the commitments assumed to the participants or insured parties, based on the assumptions established in the agreement. The provision is calculated in accordance with the methodologies approved in the technical actuarial note on the product;

 

·Provision for financial surplus – Recognized to ensure the amounts intended for the distribution of a financial surplus, in accordance with the regulations in force, in the event that it is stated in the agreement. Corresponds to the financial income exceeding the minimum return guaranteed in the product;

 

·Supplemental Coverage Reserve - Recognized when technical reserves are found to be insufficient, as shown by the Liability Adequacy Test, which follows specific provisions in the prevailing regulation. ITAÚ UNIBANCO HOLDING CONSOLIDATED deducts the portion corresponding to the difference between the fair value and the carrying amount, at the base date, from securities pledged as collateral of technical reserves, classified in “Held-to-maturity securities”, up to the limit of the amount determined;

 

·Provision for redemptions and other amounts to be regularize – Includes amounts related to redemptions to regularize, returns on premiums or funds, transfers requested but, for any reason, not yet transferred to the insurance company or open private pension entity beneficiary, and where premiums have been received but not quoted;

 

·Provision for related expenses - Recognized for the coverage of expected amounts related to expenses on benefits and indemnities, due to events which have occurred and will occur.

 

II.II -Capitalization:

 

·Mathematical provision for capitalization – Recognized until the event triggering the benefit occurs, and comprised of the portion of the amounts collected for capitalization. It includes monetary restatement and interest, from the beginning of the validity date;

 

·Provision for redemption – Recognized from the date of the event triggering the redemption of the certificate and/or the event triggering the distribution of the bonus until the date of financial settlement, or the date on which the evidence of payment of the obligation is received;

 

·Provision for raffles unrealized – Comprises the portion of the amounts collected for raffles for each tickets, which have been funded but, at the recognition date, have not yet been realized;

 

·Provision for raffles payable – Recognized from the date when the raffle is drawn until the date of financial settlement, or the date when the evidence of payment of the obligation is received, or in conformity with other cases provided by law;

 

·Supplementary provision for raffles – Recognized to supplement the provision for raffles unrealized, and is used for coverage of possible shortfall related to the expected amount of raffles to be drawn;

 

·Provision for administrative expenses - Recognized for the coverage of the expected amounts of administrative expenses for the capitalization plans.

 

n)Contingent assets and liabilities and legal liabilities – tax and social security - Assessed, recognized and disclosed according to the provisions set forth in CMN Resolution nº. 3,823 of December 16, 2009, and BACEN Circular Letter nº. 3,429 of February 11, 2010.

 

I -Contingent assets and liabilities

 

Refer to potential rights and obligations arising from past events for which materialization depends on uncertain future events:

 

·Contingent assets - Not recognized, except where there is evidence of a high likelihood level of realization, usually represented by claims awarded a final and unappealable judgment and confirmation of the recoverability of the claim through receipt of amounts or through offsetting against another liability;

 

·Contingent liabilities - Basically arise from administrative proceedings and lawsuits inherent in the normal course of business filed by third parties, former employees and governmental bodies, in connection with civil, labor, tax and social security lawsuits and other risks. These contingencies are calculated on a conservative basis, usually recorded based on the opinion of legal advisors and considering the probability that financial resources shall be required to settle the obligation, the amount of which may be estimated with sufficient certainty. Contingencies are classified either as probable, for which provisions are recognized; possible, which are disclosed but not recognized; and remote, for which recognition or disclosure are not required. Any contingent amounts are measured through the use of models and criteria which allow adequate measurement, in spite of the uncertainty of their terms and amounts.

 

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Escrow deposits are restated in accordance with the current legislation.

 

Contingencies guaranteed by indemnity clauses in privatization processes and with liquidity are only recognized upon judicial notification with the simultaneous recognition of receivables, without any effect on results.

 

II -Legal liabilities – tax and social security

 

Represented by amounts payable related to tax liabilities, the legality or constitutionality of which are subject to judicial challenge, recognized at the full amount under discussion.

 

Liabilities and related escrow deposits are adjusted in accordance with the current legislation.

 

o)Provision for Financial Guarantees Provided – Recognized based on the expected loss model, in an amount sufficient to cover any probable losses over the whole guarantee period. As of January 1st, 2017, it is recorded in liabilities with a counter-entry to income for the period, in accordance with CMN Resolution nº. 4,512 of July 28, 2016. Any adjustments arising from the initial application of said resolution were recorded with a counter-entry to Stockholders’ Equity.

 

p)Taxes - consider for effects of respective calculation bases, the legislation in force applicable to each charge.

 

q)Deferred income – this refers to: (i) unexpired interest received in advance that is recognized in income as earned, and (ii) the negative goodwill on acquisition of investments arising from expected future losses, which has not been absorbed in the consolidation process.

 

r)Transactions with Non-Controlling Stockholders – Changes in ownership interest in subsidiaries, which do not result in loss of ownership control, are recorded as capital transactions, and any difference between the amount paid and the amount corresponding to the non-controlling stockholders is directly recorded in the Consolidated Stockholders` Equity.

 

s)Post-employments benefits

 

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:

 

·current service cost is defined as the increase in the present value of obligations resulting from employee service in the current period;

 

·interest on the net amount of assets (liabilities) of defined benefit plans is the change, during the period, in the net amount recognized in assets and liabilities, due to the time elapsed, which comprises the interest income on plan assets, interest expense on the obligations of the defined benefit plan and interest on the asset ceiling effects.

 

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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 of changes in these assumptions. Gains and losses are fully recognized in Equity Valuation adjustments.

 

Pension plans - defined contribution

 

For defined contribution plans, contributions to plans made by ITAÚ UNIBANCO HOLDING CONSOLIDATED, through pension plan funds, are recognized as expenses when due.

 

Other post-employment benefit obligations

 

Certain companies that merged into ITAÚ UNIBANCO HOLDING CONSOLIDATED over the past few years were sponsors of post-employment healthcare benefit plans. ITAÚ UNIBANCO HOLDING CONSOLIDATED is contractually committed to maintaining these benefits over specific periods, as well as the benefits granted based on judicial rulings.

 

Similarly to the defined benefit pension plans, these obligations are assessed annually by independent and qualified actuaries, and the costs expected from these benefits are accrued during the length of service. Gains and losses arising from adjustments and changes in actuarial assumptions are debited from or credited to stockholders’ equity in Equity asset valuation adjustment in the period in which they occur.

 

t)Foreign currency translation

 

I-Functional and presentation currency

 

The Consolidated financial statements of ITAÚ UNIBANCO HOLDING CONSOLIDATED are presented in Reais, which is its functional and presentation currency. For each subsidiary and investment in associates and joint ventures, ITAÚ UNIBANCO HOLDING CONSOLIDATED defined the functional currency, as provided for in CMN Resolution Nº 4,524, of September 29, 2016.

 

The assets and liabilities of subsidiaries are translated as follows:

 

·Assets and liabilities are translated at the closing rate at the balance sheet date;
·Income and expenses are translated at monthly average exchange rates.

 

Equity in the earnings of subsidiaries abroad is recognized as follows:

 

·For those with functional currency equal to Real: Income for the period;
·For those with functional currency different to Real:
a)Income for the period; Portion related to the subsidiary’s effective income; and
b)Stockholders’ equity: Portion related to foreign exchange adjustments arising from the translation process, net of tax effects.

 

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 securities and derivative financial instruments.

 

For subsidiaries abroad, any operations carried out in a currency other than their respective functional currencies will be translated at the foreign currency rates of the respective trial balance or balance sheet of ITAÚ UNIBANCO HOLDING CONSOLIDATED for monetary items, assets and liabilities recognized at fair or market value and for items not classified as monetary, provided that the subsidiary’s functional currency is equal to the Real. For other cases, operations are translated at the foreign exchange rate at the transaction date.

 

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Note 5 - Interbank investments

 

   09/30/2018   09/30/2017 
   0 - 30   31 - 180   181 - 365   Over 365   Total   %   Total   % 
Money market   179,887,657    100,810,686    8,479,886    202,087    289,380,316    90.2    256,053,661    89.0 
Funded position (1)   45,576,080    10,719,414    913,440    202,087    57,411,021    17.9    53,783,699    18.7 
Financed position   131,884,580    57,355,706    831,063    -    190,071,349    59.2    165,133,499    57.4 
With free movement   12,261,669    14,883,804    831,063    -    27,976,536    8.7    32,573,654    11.3 
Without free movement   119,622,911    42,471,902    -    -    162,094,813    50.5    132,559,845    46.1 
Short position   2,426,997    32,735,566    6,735,383    -    41,897,946    13.1    37,136,463    12.9 
Money market – Assets Guaranteeing Technical Provisions - SUSEP (Note 10b)   2,839,117    101,863    -    -    2,940,980    0.9    3,414,121    1.2 
Interbank deposits (2)   20,922,368    4,491,484    2,472,675    757,382    28,643,909    8.9    28,233,498    9.8 
Total   203,649,142    105,404,033    10,952,561    959,469    320,965,205    100.0    287,701,280    100.0 
% per maturity term   63.5    32.8    3.4    0.3    100.0                
Total – 09/30/2017   224,452,842    59,649,386    2,828,695    770,357    287,701,280                
% per maturity term   78.0    20.7    1.0    0.3    100.0                
(1)Includes R$ 2,509,631 (R$ 6,031,328 at 09/30/2017) related to money market with free movement, in which securities are restricted to guarantee transactions at the B3 S.A. - Brasil, Bolsa, Balcão (B3) and the Central Bank of Brazil (BACEN);
(2)Includes R$ 16,460,394 related to Compulsory Deposits with Central Banks of other countries.

 

In ITAÚ UNIBANCO HOLDING the portfolio is composed of Money market – Funded position falling due in up to 30 days amounting to R$ 50,574 (R$ 382,895 at 09/30/2017), Interbank deposits with maturity from 181 to 365 days amounting (R$ 3,350,423 at 09/30/2017) and over 365 days amounting to R$ 68,681,567 (R$ 74,750,604 at 09/30/2017).

 

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Note 6 – Securities and derivative financial instruments (assets and liabilities)

 

See below the composition by Securities and Derivatives type, maturity and portfolio already adjusted to their respective market values.

 

a)Summary per maturity

 

   09/30/2018   09/30/2017 
       Adjustment to market value                                     
   Cost   Results   Stockholders’
equity		   Market value   %   0 - 30   31 - 90   91 - 180   181 - 365   366 - 720   Over 720 days   Market value 
Government securities - domestic   131,449,627    (527,899)   (457,016)   130,464,712    30,4    902,493    16,542    1,113,036    5,149,154    17,338,888    105,944,599    144,437,880 
Financial treasury bills   26,481,813    (349)   (34)   26,481,430    6,2    -    -    697,393    -    1,868,880    23,915,157    34,723,270 
National treasury bills   21,211,377    (221,940)   24,446    21,013,883    4,9    893,770    -    224,946    1,301,540    11,795,448    6,798,179    30,740,307 
National treasury notes   47,282,115    (369,637)   (68,306)   46,844,172    10,9    8,722    16,522    147,150    2,243,648    664,764    43,763,366    49,015,216 
National treasury/securitization   180,948    (236)   17,186    197,898    0,0    1    20    75    137    80    197,585    227,149 
Brazilian external debt bonds   36,293,374    64,263    (430,308)   35,927,329    8,4    -    -    43,472    1,603,829    3,009,716    31,270,312    29,731,938 
Government securities - abroad   28,393,587    24,224    (145,015)   28,272,796    6,6    2,747,676    3,298,338    2,265,672    6,502,809    5,805,692    7,652,609    24,600,362 
Argentina   693,182    24,097    (3,597)   713,682    0,2    419,732    207,779    35,123    -    -    51,048    629,582 
Chile   7,828,677    (202)   (9,640)   7,818,835    1,8    524,093    29,362    52,501    185,739    2,290,578    4,736,562    6,666,645 
Colombia   6,983,045    224    17,036    7,000,305    1,6    123,284    107,650    376,187    2,794,245    1,319,845    2,279,094    4,964,462 
Korea   1,944,229    -    -    1,944,229    0,5    506,011    936,786    -    -    501,432    -    2,951,499 
Denmark   492,518    -    -    492,518    0,1    -    492,518    -    -    -    -    2,282,335 
Spain   3,079,731    -    -    3,079,731    0,7    -    671,476    -    994,234    1,414,021    -    2,934,431 
United States   2,389,235    9    (26,015)   2,363,229    0,6    362,207    -    787,562    754,828    -    458,632    1,292,751 
Mexico   2,391,964    (14)   (65,407)   2,326,543    0,5    531,522    624,954    519,555    640,068    26    10,418    4,167 
Paraguay   1,693,984    (47)   (53,800)   1,640,137    0,4    268,947    189,419    181,380    828,738    170,401    1,252    1,501,182 
Uruguay   894,244    160    (3,593)   890,811    0,2    11,880    38,394    313,364    303,083    109,356    114,734    1,371,989 
Other   2,778    (3)   1    2,776    0,0    -    -    -    1,874    33    869    1,319 
Corporate securities   60,497,286    (455,202)   (788,857)   59,253,227    13,9    7,946,469    2,078,220    1,918,983    5,471,172    9,799,313    32,039,070    60,757,447 
Shares   3,927,517    (460,826)   26,249    3,492,940    0,8    3,492,940    -    -    -    -    -    3,215,069 
Rural product note   4,102,611    -    (2,269)   4,100,342    1,0    148,375    249,793    283,968    450,402    214,592    2,753,212    1,901,673 
Bank deposit certificates   680,201    (25)   (105)   680,071    0,2    379,641    74,188    91,499    58,377    75,620    746    1,289,984 
Securitized real estate loans   12,004,247    (1,171)   (35,841)   11,967,235    2,8    -    23,343    -    455,281    276,485    11,212,126    15,327,057 
Fund quotas   2,685,580    8,045    -    2,693,625    0,7    2,693,625    -    -    -    -    -    2,571,256 
Credit rights   256,668    -    -    256,668    0,2    256,668    -    -    -    -    -    21,288 
Fixed income   1,186,484    (27,790)   -    1,158,694    0,3    1,158,694    -    -    -    -    -    2,273,194 
Variable income   1,242,428    35,835    -    1,278,263    0,3    1,278,263    -    -    -    -    -    276,774 
Debentures   25,276,408    3,234    (741,909)   24,537,733    5,7    49,663    341,648    398,593    2,018,468    6,199,957    15,529,404    21,752,205 
Eurobonds and others   6,194,731    (4,754)   (43,172)   6,146,805    1,4    379,722    506,638    820,994    1,599,742    1,195,465    1,644,244    6,504,440 
Financial bills   2,333,933    (316)   (113)   2,333,504    0,5    387,243    486,345    144,881    535,998    763,256    15,781    3,595,236 
Promissory notes   1,550,884    -    15,284    1,566,168    0,4    10,457    151,731    37,493    57,904    1,026,642    281,941    3,524,488 
Other   1,741,174    611    (6,981)   1,734,804    0,4    404,803    244,534    141,555    295,000    47,296    601,616    1,076,039 
PGBL / VGBL fund quotas ( 1 )   181,627,600    -    -    181,627,600    42,4    181,627,600    -    -    -    -    -    163,347,726 
Subtotal - securities   401,968,100    (958,877)   (1,390,888)   399,618,335    93,3    193,224,238    5,393,100    5,297,691    17,123,135    32,943,893    145,636,278    393,143,415 
Trading securities   259,730,754    (958,877)   -    258,771,877    60,4    189,071,705    676,786    1,492,307    6,114,086    6,352,613    55,064,380    260,222,983 
Available-for-sale securities   99,966,679    -    (1,390,888)   98,575,791    23,0    3,627,361    4,456,632    3,598,717    10,060,137    21,352,550    55,480,394    94,322,850 
Held-to-maturity securities ( 2 )   42,270,667    -    -    42,270,667    9,9    525,172    259,682    206,667    948,912    5,238,730    35,091,504    38,597,582 
Derivative financial instruments   17,999,214    10,642,355    -    28,641,569    6,7    7,416,859    2,798,185    3,558,953    3,159,640    3,026,577    8,681,355    19,662,615 
Total securities and derivative financial instruments   419,967,314    9,683,478    (1,390,888)   428,259,904    100,0    200,641,097    8,191,285    8,856,644    20,282,775    35,970,470    154,317,633    412,806,030 
                                                             
Derivative financial instruments (liabilities)   (23,309,186)   (8,517,984)   -    (31,827,170)   100,0    (7,017,117)   (2,669,432)   (4,815,667)   (3,423,863)   (5,686,177)   (8,214,914)   (21,562,404)

 

(1) The PGBL and VGBL plans securities portfolios, the ownership and embedded risks of which are the customer’s responsibility, are recorded as securities – trading securities, with a counter-entry to long term liabilities in Pension Plan Technical Provisions account (Note 10a);

(2) Unrecorded adjustment to market value in the amount of R$ 123,094 (R$ 1,402,200 at 09/30/2017), according to Note 6e.

 

During the period ended September 30, 2018, ITAÚ UNIBANCO HOLDING CONSOLIDATED recognized R$ (952,265) of impairment losses, of which R$ (832,712) of available-for-sale financial assets and R$ (119,553) of held-to-maturity assets. Net reversal loss totaled R$ 566,749( R$ (576,637) at 09/30/2017) recorded in the statement of income in the heading “Securities and Derivative Financial Instruments”.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

88

 

  

b) Summary by portfolio

 

   09/30/2018 
       Restricted to             
   Own portfolio   Repurchase
agreements		   Free portfolio   Pledged
guarantees (*)		   Central Bank   Derivative
financial
instruments		   Assets guaranteeing
technical provisions
(Note 10b)		   Total 
Government securities - domestic   64,325,729    17,905,607    32,798,226    2,306,400    3,494,518    -    9,634,232    130,464,712 
Financial treasury bills   24,752,459    6,599    -    911,451    -    -    810,921    26,481,430 
National treasury bills   9,229,836    11,770,258    -    13,789    -    -    -    21,013,883 
National treasury notes   27,407,564    6,128,750    -    990,029    3,494,518    -    8,823,311    46,844,172 
National treasury / Securitization   197,898    -    -    -    -    -    -    197,898 
Brazilian external debt bonds   2,737,972    -    32,798,226    391,131    -    -    -    35,927,329 
Government securities - abroad   23,522,410    320,856    2,292,974    2,136,556    -    -    -    28,272,796 
Argentina   653,238    1,670    -    58,774    -    -    -    713,682 
Chile   7,526,003    261,388    -    31,444    -    -    -    7,818,835 
Colombia   4,500,306    -    2,292,974    207,025    -    -    -    7,000,305 
Korea   1,560,041    -    -    384,188    -    -    -    1,944,229 
Denmark   147,756    -    -    344,762    -    -    -    492,518 
Spain   2,351,743    -    -    727,988    -    -    -    3,079,731 
United States   2,032,715    -    -    330,514    -    -    -    2,363,229 
Mexico   2,326,543    -    -    -    -    -    -    2,326,543 
Paraguay   1,573,385    57,798    -    8,954    -    -    -    1,640,137 
Uruguay   847,904    -    -    42,907    -    -    -    890,811 
Other   2,776    -    -    -    -    -    -    2,776 
Corporate securities   45,134,302    7,096,753    287,368    3,999,851    -    -    2,734,953    59,253,227 
Shares   3,492,940    -    -    -    -    -    -    3,492,940 
Rural product note   4,100,342    -    -    -    -    -    -    4,100,342 
Bank deposit certificates   589,043    -    -    605    -    -    90,423    680,071 
Securitized real estate loans   11,967,235    -    -    -    -    -    -    11,967,235 
Fund quotas   2,465,315    -    -    107,969    -    -    120,341    2,693,625 
Credit rights   256,668    -    -    -    -    -    -    256,668 
Fixed income   930,384    -    -    107,969    -    -    120,341    1,158,694 
Variable income   1,278,263    -    -    -    -    -    -    1,278,263 
Debentures   12,548,052    7,096,753    -    3,869,189    -    -    1,023,739    24,537,733 
Eurobonds and other   5,837,349    -    287,368    22,088    -    -    -    6,146,805 
Financial bills   833,054    -    -    -    -    -    1,500,450    2,333,504 
Promissory notes   1,566,168    -    -    -    -    -    -    1,566,168 
Other   1,734,804    -    -    -    -    -    -    1,734,804 
PGBL / VGBL fund quotas   -    -    -    -    -    -    181,627,600    181,627,600 
Subtotal - securities   132,982,441    25,323,216    35,378,568    8,442,807    3,494,518    -    193,996,785    399,618,335 
Trading securities   62,668,219    5,656,841    585,864    1,660,683    2,927,414    -    185,272,856    258,771,877 
Available-for-sale securities   56,577,485    13,915,315    15,035,696    6,782,124    567,104    -    5,698,067    98,575,791 
Held-to-maturity securities   13,736,737    5,751,060    19,757,008    -    -    -    3,025,862    42,270,667 
Derivative financial instruments   -    -    -    -    -    28,641,569    -    28,641,569 
Total securities and derivative financial instruments (assets)   132,982,441    25,323,216    35,378,568    8,442,807    3,494,518    28,641,569    193,996,785    428,259,904 
Total securities and derivative financial instruments (assets) – 09/30/2017   150,813,032    29,536,024    19,492,497    14,960,047    3,971,674    19,662,615    174,370,141    412,806,030 

(*) Represent securities deposited with Contingent Liabilities (Note 11d), Stock Exchanges and the Clearing House for the Custody and Financial Settlement of Securities.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

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c)Trading securities

 

See below the composition of the portfolio of trading securities by type, stated at cost and market value and by maturity term.

 

   09/30/2018   09/30/2017 
       Adjustment to                                     
   Cost   market value
(in results)		   Market value   %   0 - 30   31 - 90   91 - 180   181 - 365   366 - 720   Over 720 days   Market value 
Government securities - domestic   65,934,729    (527,899)   65,406,830    25.4    902,493    16,508    1,074,834    4,990,450    5,204,166    53,218,379    83,259,343 
Financial treasury bills   26,249,616    (349)   26,249,267    10.2    -    -    697,393    -    1,653,118    23,898,756    34,159,309 
National treasury bills   11,948,874    (221,940)   11,726,934    4.5    893,770    -    224,946    1,301,540    2,532,750    6,773,928    14,708,226 
National treasury notes   24,523,916    (369,637)   24,154,279    9.4    8,722    16,488    147,150    2,084,944    240,817    21,656,158    27,396,680 
National treasury / Securitization   653    (236)   417    0.0    1    20    75    137    80    104    666 
Brazilian external debt bonds   3,211,670    64,263    3,275,933    1.3    -    -    5,270    1,603,829    777,401    889,433    6,994,462 
Government securities - abroad   1,571,031    24,224    1,595,255    0.5    621,872    150,142    272,620    243,854    22,202    284,565    3,238,398 
Argentina   514,385    24,097    538,482    0.2    332,528    119,846    35,060    -    -    51,048    629,383 
Chile   369,993    (202)   369,791    0.1    279,393    824    2,885    602    15,490    70,597    150,147 
Colombia   359,049    224    359,273    0.1    -    3,532    153,604    52,613    280    149,244    2,039,765 
United States   120,633    9    120,642    0.0    -    -    -    120,642    -    -    76,197 
Mexico   10,458    (14)   10,444    0.0    -    -    -    -    26    10,418    4,167 
Paraguay   1,299    (47)   1,252    0.0    -    -    -    -    -    1,252    3,717 
Uruguay   192,699    160    192,859    0.1    9,951    25,940    81,071    68,123    6,406    1,368    333,902 
Other   2,515    (3)   2,512    0.0    -    -    -    1,874    -    638    1,120 
Corporate securities   10,597,394    (455,202)   10,142,192    3.9    5,919,740    510,136    144,853    879,782    1,126,245    1,561,436    10,377,516 
Shares   3,478,749    (460,826)   3,017,923    1.2    3,017,923    -    -    -    -    -    2,568,199 
Bank deposit certificates   177,169    (25)   177,144    0.1    34,794    33,182    32,917    -    75,505    746    39,942 
Securitized real estate loans   65,812    (1,171)   64,641    0.0    -    -    -    -    -    64,641    33,796 
Fund quotas   2,372,351    8,045    2,380,396    0.9    2,380,396    -    -    -    -    -    2,289,660 
Credit rights   256,668    -    256,668    0.1    256,668    -    -    -    -    -    21,288 
Fixed income   873,255    (27,790)   845,465    0.3    845,465    -    -    -    -    -    1,991,598 
Variable income   1,242,428    35,835    1,278,263    0.5    1,278,263    -    -    -    -    -    276,774 
Debentures   1,594,903    3,234    1,598,137    0.6    8,971    86,039    82,461    106,227    179,900    1,134,539    1,661,047 
Eurobonds and other   722,231    (4,754)   717,477    0.3    87,498    312    125    264,341    60,288    304,913    720,972 
Financial bills   2,095,176    (316)   2,094,860    0.8    387,243    390,603    29,350    508,627    763,256    15,781    2,987,328 
Other   91,003    611    91,614    0.0    2,915    -    -    587    47,296    40,816    76,572 
PGBL / VGBL fund quotas   181,627,600    -    181,627,600    70.2    181,627,600    -    -    -    -    -    163,347,726 
Total   259,730,754    (958,877)   258,771,877    100.0    189,071,705    676,786    1,492,307    6,114,086    6,352,613    55,064,380    260,222,983 
% per maturity term                       73.0    0.3    0.6    2.4    2.5    21.2      
Total – 09/30/2017   259,235,753    987,230    260,222,983    100.0    171,757,266    476,891    3,812,655    10,254,511    12,746,038    61,175,622      
% per maturity term                       65.9    0.2    1.5    4.0    4.9    23.5      

 

At 09/30/2018, ITAÚ UNIBANCO HOLDING’s portfolio is composed of Fund quotas fixed income without maturity (R$ 5,371 at 09/30/2017), Financial treasury bills income (R$ 8,175,553 at 09/30/2017) over 365 days, National trasury bils income R$ 3,691,697 over 365 days (R$ 7,077,837 at 09/30/2017) and National treasury bills income R$ 6,229,430 over 365 days.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

90

 

 

d)Available-for-sale securities

 

See below the composition of the portfolio of available-for-sale securities by type, stated at cost and market value and by maturity term.

 

   09/30/2018   09/30/2017 
       Adjustments to                                     
       market value                                     
   Cost   (in
stockholders'
equity)		   Market value   %   0 - 30   31 - 90   91 - 180   181 - 365   366 - 720   Over 720 days   Market value 
Government securities - domestic   35,198,905    (457,016)   34,741,889    35.1    -    34    38,202    158,704    7,172,510    27,372,439    37,210,038 
Financial treasury bills   232,197    (34)   232,163    0.2    -    -    -    -    215,762    16,401    563,961 
National treasury bills   5,475,673    24,446    5,500,119    5.6    -    -    -    -    5,475,868    24,251    7,137,084 
National treasury notes   15,987,480    (68,306)   15,919,174    16.0    -    34    -    158,704    392,520    15,367,916    17,216,317 
National treasury / Securitization   180,295    17,186    197,481    0.2    -    -    -    -    -    197,481    226,483 
Brazilian external debt bonds   13,323,260    (430,308)   12,892,952    13.1    -    -    38,202    -    1,088,360    11,766,390    12,066,193 
Government securities - abroad   26,386,242    (145,015)   26,241,227    26.7    2,002,520    3,114,721    1,927,940    6,059,737    5,783,457    7,352,852    20,941,214 
Argentina   178,797    (3,597)   175,200    0.2    87,204    87,933    63    -    -    -    199 
Chile   7,458,684    (9,640)   7,449,044    7.6    244,700    28,538    49,616    185,137    2,275,088    4,665,965    6,516,498 
Colombia   6,202,907    17,036    6,219,943    6.3    -    70,643    157,471    2,542,414    1,319,565    2,129,850    2,515,927 
Korea   1,944,229    -    1,944,229    2.0    506,011    936,786    -    -    501,432    -    2,951,499 
Denmark   492,518    -    492,518    0.5    -    492,518    -    -    -    -    2,282,335 
Spain   3,079,731    -    3,079,731    3.1    -    671,476    -    994,234    1,414,021    -    2,934,431 
United States   2,268,602    (26,015)   2,242,587    2.3    362,207    -    787,562    634,186    -    458,632    1,216,554 
Mexico   2,381,506    (65,407)   2,316,099    2.3    531,522    624,954    519,555    640,068    -    -    - 
Paraguay   1,692,685    (53,800)   1,638,885    1.7    268,947    189,419    181,380    828,738    170,401    -    1,497,465 
Uruguay   686,353    (3,593)   682,760    0.7    1,929    12,454    232,293    234,960    102,950    98,174    1,026,131 
Other   230    1    231    0.0    -    -    -    -    -    231    175 
Corporate securities   38,381,532    (788,857)   37,592,675    38.2    1,624,841    1,341,877    1,632,575    3,841,696    8,396,583    20,755,103    36,171,598 
Shares   448,768    26,249    475,017    0.5    475,017    -    -    -    -    -    646,870 
Rural product note   4,102,611    (2,269)   4,100,342    4.2    148,375    249,793    283,968    450,402    214,592    2,753,212    1,901,673 
Bank deposit certificate   503,032    (105)   502,927    0.5    344,847    41,006    58,582    58,377    115    -    1,250,038 
Securitized real estate loans   1,472,910    (35,841)   1,437,069    1.5    -    -    -    -    -    1,437,069    1,917,089 
Fund quotas   313,229    -    313,229    0.3    313,229    -    -    -    -    -    281,596 
Debentures   23,675,277    (741,909)   22,933,368    23.3    40,692    255,609    316,132    1,912,241    6,020,057    14,388,637    20,082,429 
Eurobonds and other   5,468,068    (43,172)   5,424,896    5.5    292,224    506,326    820,869    1,335,401    1,135,177    1,334,899    5,677,114 
Financial bills   238,757    (113)   238,644    0.2    -    95,742    115,531    27,371    -    -    607,908 
Promissory notes   1,550,884    15,284    1,566,168    1.6    10,457    151,731    37,493    57,904    1,026,642    281,941    3,524,488 
Other   607,996    (6,981)   601,015    0.6    -    41,670    -    -    -    559,345    282,393 
Total   99,966,679    (1,390,888)   98,575,791    100.0    3,627,361    4,456,632    3,598,717    10,060,137    21,352,550    55,480,394    94,322,850 
% per maturity term                       3.7    4.5    3.7    10.2    21.7    56.2      
Total – 09/30/2017   93,231,413    1,091,437    94,322,850    100.0    2,193,669    4,456,825    6,056,324    7,843,349    14,814,141    58,958,542      
% per maturity term                       2.3    4.7    6.4    8.3    15.8    62.5      

 

At September 30, 2018, at ITAÚ UNIBANCO HOLDING the portfolio is composed of Eurobonds, in the amount of R$ 2,780 with maturity from 181 to 365 (R$ 2,199 at 09/30/2017 over 365 days).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

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e)Held-to-maturity securities

 

See below the composition of the portfolio of held-to-maturity securities by type, stated at cost and by maturity term. Included in the carrying value at 09/30/2018, not considered in results, is an impairment loss of R$ 382,798 (R$ 421,811 at 09/30/2017).

 

   09/30/2018   09/30/2017 
   Carrying value   %   0 - 30   31 - 90   91 - 180   181 - 365   366 - 720   Over 720 days   Market
value		   Carrying
value		   Market value 
Government securities - domestic (1)   30,315,993     71.7     -    -    -    -    4,962,212     25,353,781     30,278,006    23,968,499    25,155,543 
National treasury bills   3,786,830    9.0    -    -    -    -    3,786,830    -    3,762,208    8,894,997    9,001,393 
National treasury notes   6,770,719    16.0    -    -    -    -    31,427    6,739,292    7,349,757    4,402,219    5,188,683 
Brazilian external debt bonds   19,758,444    46.7    -    -    -    -    1,143,955    18,614,489    19,166,041    10,671,283    10,965,467 
Government securities - abroad   436,314    1.0    123,284    33,475    65,112    199,218    33    15,192    436,474    420,750    426,719 
Colombia   421,089    1.0    123,284    33,475    65,112    199,218    -    -    414,293    408,770    408,531 
Uruguay   15,192    -    -    -    -    -    -    15,192    22,180    11,956    18,187 
Other   33    -    -    -    -    -    33    -    1    24    1 
Corporate securities   11,518,360    27.3    401,888    226,207    141,555    749,694    276,485    9,722,531    11,679,281    14,208,333    14,417,520 
Bank deposit certificate   -    -    -    -    -    -    -    -    -    4    4 
Securitized real estate loans   10,465,525    24.8    -    23,343    -    455,281    276,485    9,710,416    10,626,446    13,376,172    13,585,403 
Debentures   6,228    -    -    -    -    -    -    6,228    6,228    8,729    8,729 
Eurobonds and other   4,432    -    -    -    -    -    -    4,432    4,432    106,354    106,310 
Other   1,042,175    2.5    401,888    202,864    141,555    294,413    -    1,455    1,042,175    717,074    717,074 
Total (2)   42,270,667    100.0    525,172    259,682    206,667    948,912    5,238,730    35,091,504    42,393,761    38,597,582    39,999,782 
% per maturity term             1.2    0.6    0.5    2.2    12.4    83.1                
Total – 09/30/2017   38,597,582    100.0    491,171    238,430    9,099,242    354,183    2,553,547    25,861,009                
% per maturity term             1.3    0.6    23.6    0.9    6.6    67.0                

(1) Includes investments of Itaú Vida e Previdência S.A. in the amount of R$ 2,894,553 (R$ 2,638,968 at 09/30/2017).

(2) In order to reflect the current risk management strategy, in the period ended 06/30/2018, ITAÚ UNIBANCO HOLDING CONSOLIDATED changed the classification of Government Securities –Brazil, being R$ 3,707,489 for Available-for-Trading Securities and R$ 8,678,270 for Available-for-Sale Securities.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

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f)Derivative financial instruments

 

The globalization of the markets in recent years has resulted in a high level of sophistication of financial products used. As a result of this process, there has been increasing demand for derivative financial instruments to manage market risks, mainly arising from fluctuations in interest and exchange rates, commodities and other asset prices. Accordingly, ITAÚ UNIBANCO HOLDING CONSOLIDATED operate in the derivatives markets for meeting the growing needs of their clients, as well as enacting their risk management policy. This policy is based on the use of derivative instruments to minimize the risks resulting from commercial and financial operations.

 

The derivative financial instrument business with clients is carried out after the approval of credit limits. The process of limit approval takes into consideration potential stress scenarios.

 

Knowing the client, the sector in which it operates and its risk appetite profile, in addition to providing information on the risks involved in the transaction and the negotiated conditions, ensures transparency in the relationship between the parties and the supply of a product that better meets the needs of the client.

 

The derivative transactions carried out by ITAÚ UNIBANCO HOLDING CONSOLIDATED with clients are neutralized in order to eliminate market risks.

 

The derivative contracts traded by the institution with clients in Brazil include swaps, forwards, options and futures contracts, which are registered at the B3. Overseas transactions are carried out with futures, forwards (onshore), options and swaps mostly listed on the Chicago, New York and London Exchanges. It should be emphasized that there are over-the-counter operations, but their risks are low compared to the institutions’ total. Noteworthy is also the fact that there are no structured operations based on subprime assets and all operations are based on risk factors traded on stock exchanges.

 

The main risk factors of the derivatives, assumed at 09/30/2018, were related to the foreign exchange rate, interest rate, commodities, US Dollar coupon, Reference Rate coupon, LIBOR and variable income. The management of these and other market risk factors is supported by sophisticated statistical and deterministic models. Based on this management model, the institution, through the use of transactions involving derivatives, has been able to optimize the risk-return ratios, even in highly volatile situations.

 

Most derivatives included in the institution’s portfolio are traded on stock exchanges. The prices disclosed by stock exchanges are used for these derivatives, except in cases in which the low representativeness of price due to the liquidity of a specific contract is identified. Derivatives typically valued in this way are futures contracts. Likewise, there are other instruments whose quotations (fair prices) are directly disclosed by independent institutions and which are valued based on this direct information. A substantial portion of the Brazilian government securities, highly-liquid international (public and private) securities and shares are in this situation.

 

For derivatives the prices of which are not directly disclosed by stock exchanges, fair prices are obtained based on pricing models which use market information, deducted based on the prices disclosed for higher liquidity assets. Interest and market volatility curves which provide input for the models are extracted from those prices. Over- the-counter derivatives, forward contracts and securities with limited liquidity are in this situation.

 

The total value of margins pledged in guarantee was R$ 7,846,393 (R$ 9,013,115 at 09/30/2017) and was basically composed of government securities.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

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I - Derivatives by counterparty

 

See below the composition of the Derivative Financial Instruments portfolio (assets and liabilities) by type of instrument, stated at cost, market value, and maturity term.

 

   09/30/2018   09/30/2017 
   Cost   Adjustments to
market value (in
results /
stockholders' equity)		   Market value   %   0 - 30   31 - 90   91 - 180   181 - 365   366 - 720   Over 720 days   Market value 
Asset                                                       
Futures   -    -    -    0.0    -    -    -    -    -    -    227,411 
Swaps - adjustment receivable   3,181,558    8,094,583    11,276,141    39.3    81,404    132,403    805,715    813,810    2,065,795    7,377,014    9,144,523 
Option premiums   4,156,036    1,367,909    5,523,945    19.3    537,302    1,035,050    1,367,747    1,349,801    599,349    634,696    2,751,579 
Forwards (onshore)   6,073,824    (645)   6,073,179    21.2    5,050,769    639,046    292,356    90,272    736    -    3,347,408 
Credit derivatives - Financial institutions   133,714    56,003    189,717    0.7    -    1,487    333    3,005    13,869    171,023    174,899 
NDF - Non Deliverable Forward   4,218,575    273,871    4,492,446    15.7    1,155,801    974,841    1,085,953    872,519    332,326    71,006    3,893,422 
Target flow of swap - Companies   9,226    151,932    161,158    0.6    -    -    528    13,389    -    147,241    5,043 
Other derivative financial instruments   226,281    698,702    924,983    3.2    591,583    15,358    6,321    16,844    14,502    280,375    118,330 
Total   17,999,214    10,642,355    28,641,569    100.0    7,416,859    2,798,185    3,558,953    3,159,640    3,026,577    8,681,355    19,662,615 
% per maturity term                       25.9    9.8    12.4    11.0    10.6    30.3      
Total - 09/30/2017   14,088,815    5,573,800    19,662,615    100.0    4,187,885    2,308,793    1,748,062    2,258,883    2,546,531    6,612,461      
% per maturity term                       21.3    11.7    8.9    11.5    13.0    33.6      

 

   09/30/2018   09/30/2017 
   Cost   Adjustments to
market value (in
results /
stockholders' equity)		   Market value   %   0 - 30   31 - 90   91 - 180   181 - 365   366 - 720   Over 720 days   Market value 
Liabilities                                                       
Swaps - difference payable   (9,555,927)   (7,096,058)   (16,651,985)   52.3    (471,493)   (804,851)   (1,937,065)   (1,609,718)   (4,744,326)   (7,084,532)   (13,158,208)
Option premiums   (3,744,334)   (1,182,273)   (4,926,607)   15.5    (568,252)   (856,810)   (1,309,463)   (1,225,009)   (608,201)   (358,872)   (2,233,401)
Forwards (onshore)   (4,560,643)   4,448    (4,556,195)   14.3    (4,556,195)   -    -    -    -    -    (2,500,370)
Credit derivatives - Financial institutions   (132,999)   (16,717)   (149,716)   0.5    -    (41)   (100)   (792)   (4,867)   (143,916)   (70,275)
NDF - Non Deliverable Forward   (5,176,673)   (90,338)   (5,267,011)   16.5    (1,421,095)   (981,988)   (1,566,174)   (561,321)   (316,906)   (419,527)   (3,445,463)
Target flow of swap   (127,384)   (50,690)   (178,074)   0.6    -    -    -    (20,979)   -    (157,095)   (64,247)
Other derivative financial instruments   (11,226)   (86,356)   (97,582)   0.3    (82)   (25,742)   (2,865)   (6,044)   (11,877)   (50,972)   (90,440)
Total   (23,309,186)   (8,517,984)   (31,827,170)   100.0    (7,017,117)   (2,669,432)   (4,815,667)   (3,423,863)   (5,686,177)   (8,214,914)   (21,562,404)
% per maturity term                       22.0    8.4    15.1    10.8    17.9    25.8      
Total - 09/30/2017   (16,693,354)   (4,869,050)   (21,562,404)   100.0    (3,341,146)   (1,559,877)   (1,038,465)   (2,330,333)   (4,233,293)   (9,059,290)     
% per maturity term                       15.5    7.3    4.8    10.8    19.6    42.0      

 

The result of derivative financial instruments in the period totals R$ (785,164) ( R$ 2,980,833 at 09/30/2017).

 

At ITAÚ UNIBANCO HOLDING, the market values related to Swap contract positions involving asset position totaled R$ 2,691,687 (R$ 24,231 at September 30, 2017), involving Foreign Currency R$ 2,019,801 (R$ 23,834 at September 30, 2017) and interest R$ 671,886 (R$ 397 at 09/30/2017),and are distributed over 365 days, in the liabilities position totaled (R$ (1,583,277) (R$ (5,255,761) at 09/30/2017), involving Foreign Currency R$ (927) (R$ (1,785) at 09/30/2017) and are distributed over 365 days and involving Interest R$ (1,582,350) from 31 to 90 days, from 91 to 180 days (R$ (1,493,466) at 09/30/2017), over 365 days (R$ (3,760,530 at 09/30/2017), option contracts involved Securities in asset position totaled R$ 75,388 (R$ 23,156 at 09/30/2017) distributed over 365 days.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

94

 

 

II - Derivatives by index

 

   Memorandum account /
Notional amount		   Balance sheet
account receivable /
(received) (payable)
/ paid		   Adjustment to
market value (in
results /
stockholders'		   Market value 
   09/30/2018   09/30/2017   09/30/2018   09/30/2018   09/30/2018   09/30/2017 
Futures contracts   640,439,448    569,223,848    -    -    -    227,411 
Purchase commitments   390,347,087    259,466,710    -    -    -    227,411 
Shares   13,613,970    11,544,028    -    -    -    (3,176)
Commodities   301,900    135,469    -    -    -    671 
Interest   344,879,454    215,230,248    -    -    -    56,675 
Foreign currency   31,551,763    32,556,965    -    -    -    173,241 
Commitments to sell   250,092,361    309,757,138    -    -    -    - 
Shares   17,088,210    11,133,046    -    -    -    - 
Commodities   214,550    272,820    -    -    -    - 
Interest   201,025,966    246,045,799    -    -    -    - 
Foreign currency   31,763,635    52,305,473    -    -    -    - 
Swap contracts             (6,374,369)   998,525    (5,375,844)   (4,013,685)
Asset position   994,782,356    785,148,821    3,181,558    8,094,583    11,276,141    9,144,523 
Shares   174,327    335,584    -    -    -    1,231 
Commodities   12,410    -    11    46    57    - 
Interest   982,256,483    773,390,400    1,850,048    7,967,369    9,817,417    8,134,202 
Foreign currency   12,339,136    11,422,837    1,331,499    127,168    1,458,667    1,009,090 
Liability position   994,782,356    785,148,821    (9,555,927)   (7,096,058)   (16,651,985)   (13,158,208)
Shares   915,782    688,501    (12,322)   2,205    (10,117)   (1,723)
Commodities   -    453    -    -    -    (28)
Interest   967,564,085    764,283,446    (6,426,412)   (7,130,711)   (13,557,123)   (12,726,860)
Foreign currency   26,302,489    20,176,421    (3,117,193)   32,448    (3,084,745)   (429,597)
Option contracts   1,999,794,762    1,010,623,754    411,702    185,636    597,338    518,178 
Purchase commitments - long   341,982,821    169,836,032    2,404,379    1,602,661    4,007,040    1,172,247 
Shares   9,899,852    6,817,628    336,032    567,935    903,967    784,075 
Commodities   436,379    474,801    13,577    1,218    14,795    38,044 
Interest   279,214,706    128,817,700    253,065    (12,480)   240,585    70,863 
Foreign currency   52,431,884    33,725,903    1,801,705    1,045,988    2,847,693    279,265 
Commitments to sell - long position   684,129,242    363,171,476    1,751,657    (234,752)   1,516,905    1,579,332 
Shares   11,823,765    10,391,793    416,847    104,844    521,691    314,552 
Commodities   552,229    228,214    18,547    (9,583)   8,964    4,080 
Interest   633,443,809    323,928,993    336,267    225,507    561,774    419,499 
Foreign currency   38,309,439    28,622,476    979,996    (555,520)   424,476    841,201 
Purchase commitments - short   220,877,148    102,270,521    (1,930,648)   (1,285,499)   (3,216,147)   (782,649)
Shares   11,135,259    4,913,890    (183,579)   (435,588)   (619,167)   (422,357)
Commodities   601,962    225,433    (19,130)   (6,803)   (25,933)   (23,002)
Interest   154,470,813    66,456,362    (157,937)   56,616    (101,321)   (18,021)
Foreign currency   54,669,114    30,674,836    (1,570,002)   (899,724)   (2,469,726)   (319,269)
Commitments to sell - short position   752,805,551    375,345,725    (1,813,686)   103,226    (1,710,460)   (1,450,752)
Shares   9,643,643    10,059,087    (254,102)   (123,127)   (377,229)   (248,282)
Commodities   395,094    313,343    (13,040)   6,579    (6,461)   (4,460)
Interest   701,867,012    338,832,067    (493,093)   (269,347)   (762,440)   (449,758)
Foreign currency   40,899,802    26,141,228    (1,053,451)   489,121    (564,330)   (748,252)
Forward contracts   14,717,389    6,753,579    1,513,181    3,803    1,516,984    847,038 
Purchases receivable   2,078,763    1,087,107    2,077,958    (2,346)   2,075,612    1,095,134 
Shares   11,537    71,102    11,438    (199)   11,239    70,054 
Interest   2,067,226    1,016,005    2,066,520    (2,147)   2,064,373    1,025,080 
Purchases payable   -    -    (2,035,393)   -    (2,035,393)   (995,153)
Shares   -    -    (766)   -    (766)   (1,844)
Interest   -    -    (2,034,627)   -    (2,034,627)   (993,309)
Sales receivable   7,141,859    757,264    3,995,866    1,701    3,997,567    2,252,274 
Shares   1,522,833    757,264    1,503,284    1,637    1,504,921    749,254 
Interest   -    -    2,492,582    -    2,492,582    1,503,020 
Foreign currency   5,619,026    -    -    64    64    - 
Sales deliverable   5,496,767    4,909,208    (2,525,250)   4,448    (2,520,802)   (1,505,217)
Shares   777    864    (777)   1    (776)   (970)
Interest   2,493,803    1,504,614    (2,524,473)   4,448    (2,520,025)   (1,503,675)
Foreign currency   3,002,187    3,403,730    -    (1)   (1)   (572)
Credit derivatives   8,922,028    12,014,098    715    39,286    40,001    104,624 
Asset position   4,614,043    7,436,591    133,714    56,003    189,717    174,899 
Shares   1,824,726    1,877,955    42,699    69,407    112,106    77,185 
Interest   2,649,180    5,558,636    85,061    (13,308)   71,753    97,714 
Foreign currency   140,137    -    5,954    (96)   5,858    - 
Liability position   4,307,985    4,577,507    (132,999)   (16,717)   (149,716)   (70,275)
Shares   1,286,041    493,511    (50,413)   (21,344)   (71,757)   (13,267)
Interest   3,021,944    4,083,996    (82,586)   4,627    (77,959)   (57,008)
NDF - Non Deliverable Forward   249,004,897    282,618,526    (958,098)   183,533    (774,565)   447,959 
Asset position   121,341,367    150,263,773    4,218,575    273,871    4,492,446    3,893,422 
Commodities   148,028    86,564    17,293    (751)   16,542    9,564 
Foreign currency   121,193,339    150,177,209    4,201,282    274,622    4,475,904    3,883,858 
Liability position   127,663,530    132,354,753    (5,176,673)   (90,338)   (5,267,011)   (3,445,463)
Commodities   118,108    196,985    (15,087)   476    (14,611)   (16,581)
Foreign currency   127,545,422    132,157,768    (5,161,586)   (90,814)   (5,252,400)   (3,428,882)
Target flow of swap   2,768,509    285,045    (118,158)   101,242    (16,916)   (59,204)
Asset position   254,057    175,045    9,226    151,932    161,158    5,043 
Interest   10,000    -    259    127,482    127,741    - 
Foreign currency   244,057    175,045    8,967    24,450    33,417    5,043 
Liability position   2,514,452    110,000    (127,384)   (50,690)   (178,074)   (64,247)
Interest   1,313,282    110,000    (27,214)   (7,513)   (34,727)   (64,247)
Foreign currency   1,201,170    -    (100,170)   (43,177)   (143,347)   - 
Other derivative financial instruments   5,511,241    5,079,649    215,055    612,346    827,401    27,890 
Asset position   4,120,092    2,661,723    226,281    698,702    924,983    118,330 
Shares   371,155    395,198    20,530    10,511    31,041    30,728 
Interest   3,717,506    1,787,679    207,851    76,931    284,782    78,319 
Foreign currency   31,431    478,846    (2,100)   611,260    609,160    9,283 
Liability position   1,391,149    2,417,926    (11,226)   (86,356)   (97,582)   (90,440)
Shares   1,200,372    1,661,400    (11,051)   (52,763)   (63,814)   (80,636)
Interest   91,663    340,169    (1,050)   (6,265)   (7,315)   (4,797)
Foreign currency   99,114    416,357    875    (27,328)   (26,453)   (5,007)
         ASSET    17,999,214    10,642,355    28,641,569    19,662,615 
         LIABILITY    (23,309,186)   (8,517,984)   (31,827,170)   (21,562,404)
         TOTAL    (5,309,972)   2,124,371    (3,185,601)   (1,899,789)

 

Derivatives contracts mature as follows (in days)

 

Memorandum account / notional amount  0 - 30   31 - 180   181 - 365   Over 365   09/30/2018   09/30/2017 
Futures   231,015,892    262,136,968    35,937,047    111,349,541    640,439,448    569,223,848 
Swaps   16,172,699    168,732,528    105,145,991    704,731,138    994,782,356    785,148,821 
Options   884,038,234    738,490,736    322,148,521    55,117,271    1,999,794,762    1,010,623,754 
Forwards (onshore)   8,058,076    6,562,645    95,862    806    14,717,389    6,753,579 
Credit derivatives   -    1,450,733    616,953    6,854,342    8,922,028    12,014,098 
NDF - Non Deliverable Forward   72,073,574    121,750,408    36,231,118    18,949,797    249,004,897    282,618,526 
Target flow of swap   -    817    228,841    2,538,851    2,768,509    285,045 
Other derivative financial instruments   -    689,829    539,773    4,281,639    5,511,241    5,079,649 

 

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III - Derivatives by notional amount

 

See below the composition of the Derivative Financial Instruments portfolio by type of instrument, stated at their notional amounts, per trading location (organized or over-the-counter market) and counterparties.

 

   09/30/2018 
   Futures   Swaps   Options   Forwards
(onshore)		   Credit
derivatives		   NDF - Non
Deliverable
Forward		   Target flow of
swap		   Other
derivative
financial
instruments		 
B3   528,180,661    19,390,477    1,848,917,649    10,154,816    -    48,252,225    -    - 
Over-the-counter market   112,258,787    975,391,879    150,877,113    4,562,573    8,922,028    200,752,672    2,768,509    5,511,241 
Financial institutions   111,889,455    739,677,718    107,191,108    35,027    8,921,227    124,139,048    -    3,015,566 
Companies   369,332    148,068,510    43,255,640    4,527,546    801    76,203,413    2,768,509    2,495,675 
Individuals   -    87,645,651    430,365    -    -    410,211    -    - 
Total   640,439,448    994,782,356    1,999,794,762    14,717,389    8,922,028    249,004,897    2,768,509    5,511,241 
Total – 09/30/2017   569,223,848    785,148,821    1,010,623,754    6,753,579    12,014,098    282,618,526    285,045    5,079,649 

 

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IV - Credit derivatives

 

See below the composition of the Credit Derivatives (assets and liabilities) portfolio stated at their notional amounts, and their effect on the calculation of Required Reference Equity.

 

   09/30/2018   09/30/2017 
   Notional amount   Notional amount of credit       Notional amount of   Notional amount of credit     
   of credit   protection purchased with       credit protection   protection purchased with     
   protection sold   identical underlying amount   Net position   sold   identical underlying amount   Net position 
Credit swaps   (7,092,846)   1,829,182    (5,263,664)   (7,174,398)   4,839,700    (2,334,698)
Total   (7,092,846)   1,829,182    (5,263,664)   (7,174,398)   4,839,700    (2,334,698)

 

The effect on the reference equity (Note 3) was R$ 46,092 (R$ 45,632 at 09/30/2017).

 

During the period, there was no occurrence of a credit event as defined in the agreements.

 

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V - Hedge accounting

 

The effectiveness computed for the hedge portfolio was in conformity with the provisions of BACEN Circular nº. 3,082 of January 30, 2002, and the following hedge accounting structures are established:

 

I)Cash flow - the purpose of this hedge of ITAÚ UNIBANCO HOLDING CONSOLIDATED is to hedge cash flows of interest receipt and payment (CDB / Syndicated Loans / Assets Transactions / Funding and agreements to resell) and exposures to future exchange rate (anticipated transactions and unrecognized firm commitments) related to its variable interest rate risk (CDI / LIBOR/UF*/TPM*/Selic), and foreign exchange rate risk, making the cash flow constant (fixed rate) and regardless of the variations of DI CETIP Over, LIBOR/ UF*/ TPM* / Selic and foreign exchange rate.

 

*UF (Chilean Unit of Account) / TPM (Monetary Policy Rate).

 

   09/30/2018   09/30/2017 
   Hedge Instrument   Hedge assets   Hedge Instruments   Hedge assets 
Strategies  Nominal value   Adjustment to market
value (*)		   Book value   Nominal value   Adjustment to
market value (*)		   Book value 
Hedge of deposits and securities purchased under agreements to resell   30,230,484    (2,444,997)   29,350,964    73,452,219    (4,404,924)   70,799,533 
Hedge of syndicated loan   -    -    -    1,267,200    (5,692)   1,267,200 
Hedge of highly probable forecast transactions   13,193,297    (25,504)   13,165,090    249,631    (9,313)   236,451 
Hedge of assets transactions   7,789,604    160,387    7,629,121    23,496,496    660,143    22,836,025 
Hedge of Asset-backed Securities under Repurchase Agreements   36,960,604    (5,243)   36,209,216    29,618,694    707,932    28,937,245 
Hedge of UF - denominated assets   13,131,350    (65,937)   13,299,320    9,240,838    2,469    9,240,838 
Hedge of funding   3,326,655    (2,726)   3,317,291    5,018,508    38,496    5,018,508 
Hedge of loan operations   292,608    3,929    297,784    1,031,178    (38,404)   1,031,178 
Total        (2,380,091)             (3,049,293)     

(*) Recorded in Stockholders’ Equity under heading Asset Valuation Adjustments.

 

The gains or losses related to the accounting hedge of cash flows that ITAÚ UNIBANCO HOLDING CONSOLIDADO expect to recognize in results in the following 12 months amount to R$ (1,697,969) (R$ (1,524,891) at 09/30/2017).In the period ended was recognized amount of R$ (213,682) in result.

 

To hedge future cash flows of highly probable forecast transactions, arising from futures contracts in foreign currency, against exposure to future exchange rate, ITAÚ UNIBANCO HOLDING CONSOLIDATED negotiated DDI Futures contracts and Dollar Purchase Options on B3; NDF (Non Deliverable Forward) contracts and currency swaps traded in the over-the-counter market.

 

To hedge future cash flows of futures receipts and payments against exposure to variable interest rate (CDI / LIBOR / TPM / UF / Selic), ITAÚ UNIBANCO HOLDING CONSOLIDATED negotiated DI futures contracts on B3, interest rate swap and Euro-Dollar Futures on Chicago Stock Exchange.

 

II)Market risk –The hedging strategies against market risk of ITAÚ UNIBANCO HOLDING CONSOLIDATED consist of hedge of exposure to variation in market risk, in interest receipts, which are attributable to changes in interest rates related to recognized assets and liabilities.

 

   09/30/2018 
   Hedge instrument   Hedge assets 
Strategies  Nominal value   Adjustment to market value (*)   Book value   Adjustment to market value (*) 
Hedge of loan operations   7,384,776    (37,640)   7,384,776    36,755 
Hedge of available-for-sale securities   4,748,579    59,745    4,746,609    (56,516)
Hedge of funding   11,016,179    (37,935)   11,016,179    34,932 
Total        (15,830)        15,171 

 

   09/30/2017 
   Hedge instrument   Hedge assets 
Strategies  Nominal value   Adjustment to market value (*)   Book value   Adjustment to market value (*) 
Hedge of loan operations   5,450,666    (73,215)   5,450,666    72,502 
Hedge of available-for-sale securities   469,365    (29,197)   469,365    30,829 
Hedge of syndicated loan   760,480    470    760,480    (470)
Hedge of funding   10,916,599    32,386    10,916,599    (25,429)
Total        (69,556)        77,432 

(*) Recorded under heading Results from Securities and Derivative Financial Instruments.

 

To protect against market risk variation upon receipt and payment of interest, ITAÚ UNIBANCO HOLDING CONSOLIDATED uses interest rate swap contracts. Hedge items refer to prefixed assets and liabilities denominated in Chilean Unit of Account – CLF, and denominated in Euros and dollars, issued by subsidiaries in Chile, London and Colombia, respectively, maturing between 2018 and 2035.

 

Receipts (payments) of interest flows are expected to occur and will affect the statement of income in monthly periods.

 

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III)Hedge of net investment in foreign operations – ITAÚ UNIBANCO HOLDING CONSOLIDATED's strategy of net investments in foreign operations consist of a hedge of the exposure in foreign currency arising from the functional currency of foreign operations, compared to the functional currency of the head office.

 

   09/30/2018   09/30/2017 
   Hedge instrument   Hedge assets   Hedge instrument   Hedge assets 
Strategies  Nominal value   Adjustment to market value (*)   Book value   Nominal value   Adjustment to market value   Book value 
Hedge of net investment in foreign operations (*)   28,922,572    (6,905,088)   15,576,952    21,062,579    (2,040,014)   12,091,248 
Total        (6,905,088)             (2,040,014)     

(*) Recorded in Stockholders’ Equity under heading Asset Valuation Adjustments.

 

To hedge the changes of future cash flows of exchange variation of net investments in foreign operations, ITAÚ UNIBANCO HOLDING CONSOLIDATED uses DDI Futures contracts traded on B3, Financial Assets and Forward contracts or NDF contracts entered into by our subsidiaries abroad.

 

Receipts (payments) of interest flows are expected to occur and will affect the statement of income upon the total or partial disposal of investments.

 

IV)We present below the maturity terms of cash flow hedge, market risk hedge strategies and Hedge of net investiment in foreign operations:

 

   09/30/2018 
Strategies  0-1 year   1-2 years   2-3 years   3-4 years   4-5 years   5-10 years   Over 10 years   Total 
Hedge of deposits and securities purchased under agreements to resell   12,713,844    7,408,470    4,027,623    128,693    4,504,187    1,447,667    -    30,230,484 
Hedge of highly probable anticipated transactions   127,600    13,065,697    -    -    -    -    -    13,193,297 
Hedge of loans   6,466,914    -    1,322,690    -    -    -    -    7,789,604 
Hedge of assets denominated in UF   13,070,851    -    -    60,499    -    -    -    13,131,350 
Hedge of funding (Cash flow)   2,070,270    974,141    30,480    -    -    251,764    -    3,326,655 
Hedge of loan operations (Cash flow)   -    30,480    60,960    170,688    30,480    -    -    292,608 
Hedge of loan operations (Market risk)   151,112    1,396,633    1,714,065    1,714,484    414,148    788,453    1,205,881    7,384,776 
Hedge of funding (Market risk)   2,219,834    779,413    333,542    426,720    422,243    4,299,508    2,534,919    11,016,179 
Hedge of available-for-sale securities   4,431,977    -    -    -    -    316,602    -    4,748,579 
Asset-backed securities under repurchase agreements   26,537,400    5,703,500    1,424,435    -    3,295,269    -    -    36,960,604 
Hedge of net investment in foreign operations (*)   28,922,572    -    -    -    -    -    -    28,922,572 
Total   96,712,374    29,358,334    8,913,795    2,501,084    8,666,327    7,103,994    3,740,800    156,996,708 

(*) Classified as current, since instruments are frequently renewed.

 

   09/30/2017 
Strategies  0-1 year   1-2 years   2-3 years   3-4 years   4-5 years   5-10 years   Over 10 years   Total 
Hedge of deposits and securities purchased under agreements to resell   36,112,495    12,069,457    8,836,020    14,483,218    141,001    1,810,028    -    73,452,219 
Hedge of syndicated loan   1,267,200    -    -    -    -    -    -    1,267,200 
Hedge of highly probable anticipated transactions   155,969    93,662    -    -    -    -    -    249,631 
Hedge of loans   16,232,337    6,026,776    -    1,237,383    -    -    -    23,496,496 
Hedge of assets denominated in UF   7,389,478    1,567,713    235,057    24,795    23,795    -    -    9,240,838 
Hedge of funding (Cash flow)   1,516,462    689,797    711,121    789,969    483,998    827,161    -    5,018,508 
Hedge of loan operations (Cash flow)   -    -    24,795    49,590    138,852    817,941    -    1,031,178 
Hedge of loan operations (Market risk)   243,408    195,378    404,248    1,236,930    1,405,410    600,354    1,364,938    5,450,666 
Hedge of loan operations (Market risk)   -    760,480    -    -    -    -    -    760,480 
Hedge of funding (Market risk)   2,897,327    3,575,723    606,448    342,461    -    1,150,105    2,344,535    10,916,599 
Hedge of available-for-sale securities   -    -    216,879    -    -    252,486    -    469,365 
Asset-backed securities under repurchase agreements   152,588    24,725,060    3,951,900    571,100    -    218,046    -    29,618,694 
Hedge of net investment in foreign operations (*)   21,062,579    -    -    -    -    -    -    21,062,579 
Total   87,029,843    49,704,046    14,986,468    18,735,446    2,193,056    5,676,121    3,709,473    182,034,453 

(*) Classified as current, since instruments are frequently renewed.

 

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g)Sensitivity analysis (trading and banking portfolios)

 

In compliance with CVM Instruction nº. 475, ITAÚ UNIBANCO HOLDING CONSOLIDATED carried out a sensitivity analysis by market risk factors considered relevant. The biggest losses arising, by risk factor, in each scenario, were stated together with their impact on the results, net of tax effects, by providing an overview of ITAÚ UNIBANCO HOLDING CONSOLIDATED’s exposure under exceptional scenarios.

 

The sensitivity analyses of the banking and the trading portfolio shown in this report are an evaluation of a static position of the portfolio exposure and, therefore, do not consider management’s quick response capacity (treasury and control areas), which triggers risk mitigating measures, whenever a situation of high loss or risk is identified by minimizing the sensitivity to significant losses. In addition, the study's sole purpose is to disclose the exposure to risk and the respective protective actions, taking into account the fair value of financial instruments, irrespective of the accounting practices adopted by ITAÚ UNIBANCO HOLDING CONSOLIDATED.

 

Trading portfolio  Exposures  09/30/2018 (*) 
      Scenarios 
Risk factors  Risk of variations in:  I   II   III 
Interest Rate  Fixed Income Interest Rates in Reais   (144)   (41,833)   (105,435)
Foreign Exchange Linked  Foreign Exchange Linked Interest Rates   (218)   (28,997)   (68,912)
Foreign Exchange Rates  Prices of Foreign Currencies   (399)   (64,164)   (3,716)
Price Index Linked  Interest of Inflation coupon   (137)   (15,435)   (32,423)
TR  TR Linked Interest Rates   -    -    (1)
Equities  Prices of Equities   541    (2,689)   (15,043)
Other  Exposures that do not fall under the definitions above   (49)   (5,467)   (19,661)
Total      (406)   (158,585)   (245,191)

(*) Amounts net of tax effects.

 

Trading and Banking portfolios  Exposures  09/30/2018 (*) 
      Scenarios 
Risk factors  Risk of variations in:  I   II   III 
Interest Rate  Fixed Income Interest Rates in Reais   (5,791)   (1,215,750)   (2,414,640)
Foreign Exchange Linked  Foreign Exchange Linked Interest Rates   (2,444)   (290,005)   (563,546)
Foreign Exchange Rates  Prices of Foreign Currencies   (737)   (73,224)   (20,303)
Price Index Linked  Interest of Inflation coupon   (1,650)   (169,953)   (338,060)
TR  TR Linked Interest Rates   384    (102,459)   (245,361)
Equities  Prices of Equities   3,607    (77,811)   (165,287)
Other  Exposures that do not fall under the definitions above   (31)   171    (11,357)
Total      (6,662)   (1,929,031)   (3,758,554)

 (*) Amounts net of tax effects.

 

The following scenarios are used to measure the sensitivity:

 

·Scenario I: Addition of 1 base point in interest fixed rates, currency coupon, inflation and interest rate index, and 1 percentage point in currency and share prices;

 

·Scenario II: Shocks of 25 percent in interest fixed rates, currency coupon, inflation, interest rate indexes and currency and share prices, for both growth and decline, considering the highest possible resulting losses per risk factor;

 

·Scenario III: Shocks of 50 percent in interest fixed rates, currency coupon, inflation, interest rate indexes and currency and share prices, for both growth and decline, considering the highest possible resulting losses per risk factor.

 

Derivative financial instruments engaged by ITAÚ UNIBANCO HOLDING CONSOLIDATED are shown in the item Derivative financial instruments in this note.

 

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Note 7 - Loan, lease and other credit operations

 

a) Composition of the portfolio with credit granting characteristics

 

I – By type of operations and risk level

 

   09/30/2018   09/30/2017 
Risk levels  AA   A   B   C   D   E   F   G   H   Total   Total 
Loan operations   229,261,730    108,698,016    44,005,916    22,593,102    10,260,996    4,559,271    6,021,033    6,221,078    10,770,549    442,391,691    392,432,247 
Loans and discounted trade receivables   96,337,896    88,254,418    32,661,930    19,374,083    8,262,456    3,664,353    4,430,762    3,581,632    9,509,016    266,076,546    232,224,208 
Financing   56,945,755    13,329,122    8,764,524    2,081,181    1,343,784    409,612    762,325    2,295,256    787,681    86,719,240    80,168,467 
Farming and agribusiness financing   7,921,851    841,648    399,136    36,452    67,550    74,941    732    2,153    27,290    9,371,753    8,443,624 
Real estate financing   68,056,228    6,272,828    2,180,326    1,101,386    587,206    410,365    827,214    342,037    446,562    80,224,152    71,595,948 
                                                        
Lease operations   1,779,874    4,416,055    1,216,767    349,864    156,380    36,548    175,998    43,704    116,370    8,291,560    7,540,995 
                                                        
Credit card operations   312,272    63,697,755    2,948,531    2,526,528    922,004    626,331    647,185    518,867    2,910,923    75,110,396    62,542,024 
                                                        
Advance on exchange contracts (1)   2,292,605    1,017,166    257,563    76,323    64,471    19,346    32,553    47,499    43,590    3,851,116    4,231,179 
                                                        
Other sundry receivables (2)   9,571    452,573    420    20,314    1,412    174,986    45,355    1,122    169,393    875,146    1,084,503 
                                                        
Total operations with credit granting characteristics   233,656,052    178,281,565    48,429,197    25,566,131    11,405,263    5,416,482    6,922,124    6,832,270    14,010,825    530,519,909    467,830,948 
Financial Guarantees Provided (3)                                                69,585,299    71,253,053 
Total with Financial Guarantees Provided   233,656,052    178,281,565    48,429,197    25,566,131    11,405,263    5,416,482    6,922,124    6,832,270    14,010,825    600,105,208    539,084,001 
Total – 09/30/2017   197,343,891    160,257,582    45,760,257    20,299,393    10,010,592    8,639,988    7,346,136    4,499,479    13,673,630    467,830,948      

(1)Includes Advances on exchange contracts and Income receivable from advances granted, reclassified from Liabilities – Foreign exchange portfolio / Other receivables (Note 2a);

(2)Includes Securities and credits receivable, Debtors for purchase of assets and Financial Guarantees Provided paid;

(3)Recorded in Memorandum Accounts.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

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II – By maturity and risk level

 

   09/30/2018   09/30/2017 
   AA   A   B   C   D   E   F   G   H   Total   Total 
   Overdue Operations (1) (2) 
Falling due installments   -    -    1,974,904    1,790,988    1,280,393    1,140,277    1,367,362    1,816,598    3,672,744    13,043,266    13,195,490 
01 to 30   -    -    66,804    70,647    51,748    54,794    44,447    42,134    164,625    495,199    548,091 
31 to 60   -    -    50,910    51,567    39,470    32,048    35,219    49,974    129,207    388,395    446,322 
61 to 90   -    -    63,390    50,462    40,334    30,029    37,893    45,974    122,236    390,318    458,368 
91 to 180   -    -    143,986    145,708    115,510    97,692    96,245    223,328    354,421    1,176,890    1,212,351 
181 to 365   -    -    241,928    250,180    205,607    178,837    173,838    212,053    620,949    1,883,392    2,017,054 
Over 365   -    -    1,407,886    1,222,424    827,724    746,877    979,720    1,243,135    2,281,306    8,709,072    8,513,304 
Overdue installments   -    -    1,297,963    1,176,810    1,043,989    988,990    1,186,337    1,410,311    6,015,194    13,119,594    12,156,871 
01 to 14   -    -    7,669    31,263    24,582    16,672    20,041    27,307    66,818    194,352    181,476 
15 to 30   -    -    1,045,044    164,470    105,411    49,200    45,107    45,929    132,419    1,587,580    1,534,709 
31 to 60   -    -    245,250    780,956    203,767    120,321    106,791    97,161    221,770    1,776,016    1,629,366 
61 to 90   -    -    -    169,152    636,497    200,811    168,992    193,523    275,257    1,644,232    1,458,460 
91 to 180   -    -    -    30,969    73,732    552,508    769,688    934,239    1,067,514    3,428,650    3,410,601 
181 to 365   -    -    -    -    -    49,478    75,718    112,152    4,018,480    4,255,828    3,829,747 
Over 365   -    -    -    -    -    -    -    -    232,936    232,936    112,512 
Subtotal   -    -    3,272,867    2,967,798    2,324,382    2,129,267    2,553,699    3,226,909    9,687,938    26,162,860    25,352,361 
Specific allowance   -    -    (32,729)   (89,034)   (232,438)   (638,780)   (1,276,850)   (2,258,836)   (9,687,938)   (14,216,605)   (13,786,495)
Subtotal - 09/30/2017   -    -    3,008,836    3,109,180    2,462,145    2,062,276    2,367,071    2,427,183    9,915,670    25,352,361      
   Non-overdue operations 
Falling due installments   232,997,605    176,631,692    44,701,851    22,256,126    8,962,635    3,238,305    4,325,280    3,583,903    4,241,381    500,938,778    439,559,997 
01 to 30   16,686,499    39,263,115    6,352,205    3,055,656    1,340,130    377,652    221,203    193,072    540,406    68,029,938    61,087,718 
31 to 60   18,756,409    16,444,001    3,003,989    1,176,033    527,675    144,730    131,165    36,841    301,477    40,522,320    35,911,554 
61 to 90   11,920,253    11,873,901    2,762,221    919,386    495,091    114,107    151,360    401,960    804,045    29,442,324    23,348,872 
91 to 180   21,541,314    23,098,663    5,575,984    1,675,347    566,245    364,816    268,319    191,775    290,034    53,572,497    45,301,169 
181 to 365   29,995,112    21,479,072    6,432,704    2,619,179    1,051,774    377,201    371,342    312,242    591,195    63,229,821    55,241,221 
Over 365   134,098,018    64,472,940    20,574,748    12,810,525    4,981,720    1,859,799    3,181,891    2,448,013    1,714,224    246,141,878    218,669,463 
Overdue up to 14 days   658,447    1,649,873    454,479    342,207    118,246    48,910    43,145    21,458    81,506    3,418,271    2,918,590 
Subtotal   233,656,052    178,281,565    45,156,330    22,598,333    9,080,881    3,287,215    4,368,425    3,605,361    4,322,887    504,357,049    442,478,587 
Generic allowance   -    (891,408)   (451,563)   (677,950)   (908,088)   (986,165)   (2,184,212)   (2,523,753)   (4,322,887)   (12,946,026)   (12,170,767)
Subtotal - 09/30/2017   197,343,891    160,257,582    42,751,421    17,190,213    7,548,447    6,577,712    4,979,065    2,072,296    3,757,960    442,478,587      
Grand total   233,656,052    178,281,565    48,429,197    25,566,131    11,405,263    5,416,482    6,922,124    6,832,270    14,010,825    530,519,909    467,830,948 
Existing allowance   -    (891,408)   (484,292)   (766,984)   (1,140,526)   (3,180,259)   (6,921,432)   (6,831,587)   (14,010,825)   (35,496,307)   (36,629,564)
Minimum allowance required   -    (891,408)   (484,292)   (766,984)   (1,140,526)   (1,624,945)   (3,461,062)   (4,782,589)   (14,010,825)   (27,162,631)   (25,957,262)
Additional allowance included                                                       
Financial Guarantees Provided   -    -    -    -    -    (1,555,314)   (3,460,370)   (2,048,998)   -    (8,333,676)   (10,672,302)
Financial Guarantees Provided (6)   -    -    -    -    -    -    -    -    -    (1,268,994)   (1,927,314)
Additional allowance (3)   -    -    -    -    -    (1,555,314)   (3,460,370)   (2,048,998)   -    (7,064,682)   (8,744,988)
Existing allowance   -    (891,408)   (484,292)   (766,984)   (1,140,526)   (4,449,253)   (6,921,432)   (6,831,587)   (14,010,825)   (35,496,307)   (36,629,564)
Provision - delay(4)   -    -    (32,729)   (78,190)   (162,073)   (385,624)   (732,816)   (1,241,869)   (7,526,278)   (10,159,579)   (9,993,161)
Provision - aggravated(5)   -    (15,029)   (11,289)   (95,172)   (438,134)   (847,418)   (2,083,285)   (2,003,744)   (4,923,843)   (10,417,914)   (9,666,862)
Provision - potencial(3)   -    (876,379)   (440,274)   (593,622)   (540,319)   (3,216,211)   (4,105,331)   (3,585,974)   (1,560,704)   (14,918,814)   (16,969,541)
Grand total - 09/30/2017   197,343,891    160,257,582    45,760,257    20,299,393    10,010,592    8,639,988    7,346,136    4,499,479    13,673,630    467,830,948      
Existing allowance   -    (801,288)   (457,602)   (608,981)   (1,001,060)   (6,315,258)   (7,345,402)   (4,499,029)   (13,673,630)   (36,629,564)     
Minimum allowance required   -    (801,288)   (457,602)   (608,981)   (1,001,060)   (2,591,997)   (3,673,069)   (3,149,635)   (13,673,630)   (25,957,262)     
Additional allowance included                                                       
Financial Guarantees Provided   -    -    -    -    -    (3,723,261)   (3,672,333)   (1,349,394)   -    (10,672,302)     
Financial Guarantees Provided (6)   -    -    -    -    -    -    -    -    -    (1,927,314)     
Additional allowance (3)   -    -    -    -    -    (3,723,261)   (3,672,333)   (1,349,394)   -    (8,744,988)     
Existing allowance   -    (801,288)   (457,602)   (608,981)   (1,001,060)   (8,242,572)   (7,345,402)   (4,499,029)   (13,673,630)   (36,629,564)     
Provision - delay(4)   -    -    (30,088)   (81,416)   (173,836)   (375,404)   (699,833)   (1,082,640)   (7,549,944)   (9,993,161)     
Provision - aggravated(5)   -    (15,993)   (11,052)   (102,183)   (297,793)   (1,243,542)   (1,794,569)   (1,443,853)   (4,757,877)   (9,666,862)     
Provision - potencial(3)   -    (785,295)   (416,462)   (425,382)   (529,431)   (6,623,626)   (4,851,000)   (1,972,536)   (1,365,809)   (16,969,541)     

(1)Operations with overdue installments for more than 14 days or under control of administrators or in companies in the process of declaring bankruptcy;

(2)The balance of non-accrual operations amounts to R$ 18,778,534 (R$ 17,891,440 at 09/30/2017);

(3)Related to expected and potential loss;

(4)Provisions for delay, as required by BACEN, related to the minimum provision required for overdue operations, in accordance with CMN Resolution nº. 2,682/1999;

(5)Provisions for credits with aggravation of risk above the minimum required by BACEN for overdue operations and also provisions for credits that were renegotiated;

(6)Provision for financial guarantees provided, recorded in liabilities in accordance with Resolution nº. 4,512/2016 of the National Monetary Council (CMN) and Circular Letter nº. 3,782/2016.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements – September 30, 2018

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III – By business sector

 

   09/30/2018   %   09/30/2017   % 
Public Sector   2,601,270    0.5%   2,402,833    0.5%
Energy   1,087,757    0.2%   610,689    0.1%
Petrochemical and chemical   1,139,445    0.2%   1,362,364    0.3%
Sundry   374,068    0.1%   429,780    0.1%
Private sector   527,918,639    99.5%   465,428,115    99.5%
Companies   265,286,487    50.0%   236,693,313    50.6%
Sugar and alcohol   6,220,038    1.2%   7,382,877    1.6%
Agribusiness and fertilizers   16,680,924    3.1%   14,291,845    3.1%
Food and beverage   13,888,904    2.6%   11,077,820    2.4%
Banks and other financial institutions   8,191,626    1.5%   7,638,541    1.6%
Capital assets   4,503,437    0.8%   4,350,926    0.9%
Pulp and paper   2,022,566    0.4%   2,785,432    0.6%
Publishing and printing   1,014,591    0.2%   882,221    0.2%
Electronic and IT   4,123,484    0.8%   3,635,602    0.8%
Packaging   2,263,891    0.4%   1,885,513    0.4%
Energy and sewage   8,782,986    1.7%   9,214,215    2.0%
Education   2,118,747    0.4%   1,680,237    0.4%
Pharmaceuticals and cosmetics   5,147,755    1.0%   4,416,529    0.9%
Real estate agents   19,034,050    3.6%   19,846,894    4.2%
Entertainment and tourism   4,812,827    0.9%   4,179,601    0.9%
Wood and furniture   2,905,112    0.5%   2,335,674    0.5%
Construction materials   4,573,798    0.9%   4,544,249    1.0%
Steel and metallurgy   7,669,857    1.4%   7,195,064    1.5%
Media   650,662    0.1%   588,547    0.1%
Mining   6,379,818    1.2%   5,675,534    1.2%
Infrastructure work   9,379,378    1.8%   8,679,948    1.9%
Oil and gas (*)   6,335,727    1.2%   4,322,897    0.9%
Petrochemical and chemical   8,478,495    1.6%   6,594,083    1.4%
Health care   2,496,187    0.5%   2,117,286    0.5%
Insurance, reinsurance and pension plans   27,134    0.0%   47,359    0.0%
Telecommucations   1,972,039    0.4%   1,370,725    0.3%
Third sector   1,985,588    0.4%   2,602,307    0.6%
Trading   1,976,040    0.4%   1,280,258    0.3%
Transportation   15,235,592    2.9%   12,356,725    2.6%
Domestic appliances   1,818,590    0.3%   1,698,920    0.4%
Vehicles and autoparts   10,490,057    2.0%   12,505,244    2.7%
Clothing and shoes   4,693,795    0.9%   4,317,902    0.9%
Commerce - sundry   17,405,895    3.3%   13,195,917    2.8%
Industry - sundry   9,338,341    1.8%   7,081,680    1.5%
Sundry services   39,403,076    7.4%   32,617,348    7.0%
Sundry   13,265,480    2.4%   12,297,393    2.5%
Individuals   262,632,152    49.5%   228,734,802    48.9%
Credit cards   74,066,172    14.0%   61,637,409    13.2%
Real estate financing   69,882,406    13.2%   59,942,847    12.8%
Consumer loans / overdraft   102,762,186    19.3%   92,373,071    19.7%
Vehicles   15,921,388    3.0%   14,781,475    3.2%
Grand total   530,519,909    100.0%   467,830,948    100.0%

(*) Comprises trade of fuel.

 

IV - Financial guarantees provided by type

 

   09/30/2018   09/30/2017 
Type of guarantees  Portfolio   Provision   Portfolio   Provision 
Endorsements or sureties pledged in legal and administrative tax proceedings   34,125,281    (462,125)   35,568,027    (883,702)
Sundry bank guarantees   22,955,316    (656,869)   25,334,804    (857,463)
Other financial guarantees provided   7,363,471    (90,721)   4,412,571    (115,005)
Tied to the distribution of marketable securities by Public Offering   218,500    (267)   1,430,600    (396)
Restricted to bids, auctions, service provision or execution of works   4,153,920    (51,566)   3,661,848    (63,966)
Restricted to supply of goods   585,660    (6,017)   630,939    (5,666)
Restricted to international trade of goods   183,151    (1,429)   214,264    (1,116)
Total   69,585,299    (1,268,994)   71,253,053    (1,927,314)

 

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b)Credit concentration

 

   09/30/2018   09/30/2017 
Loan, lease and other credit operations (*)  Risk   % of
total		   Risk   % of
total		 
Largest debtor   5,266,471    0.9    4,671,465    0.9 
10 largest debtors   30,405,616    5.1    28,460,344    5.3 
20 largest debtors   46,822,142    7.8    44,739,250    8.3 
50 largest debtors   73,867,234    12.3    72,178,636    13.4 
100 largest debtors   100,330,428    16.7    97,438,020    18.1 

(*) Amounts include financial guarantees provided.

 

   09/30/2018   09/30/2017 
Loan, lease and other credit operations and securities of
companies and financial institutions (*)		  Risk   % of
total		   Risk   % of
total		 
Largest debtor   7,981,113    1.2    6,759,902    1.1 
10 largest debtors   44,159,947    6.4    39,507,588    6.4 
20 largest debtors   68,833,876    10.0    64,688,227    10.5 
50 largest debtors   108,456,583    15.8    104,679,894    17.0 
100 largest debtors   144,145,543    21.0    138,600,788    22.5 

(*) Amounts include financial guarantees provided.

 

c)Changes in allowance for loan losses and Provision for Financial Guarantees Pledged

 

   01/01 to
09/30/2018		   01/01 to
09/30/2017		 
Opening balance   (37,309,465)   (37,431,102)
Adjustments arising from the first-time adoption of Resolution nº. 4,512/16.   -    (401,640)
Net increase for the period   (11,249,910)   (14,544,307)
Required by Resolution nº. 2,682/99   (13,026,390)   (14,713,293)
Required by Resolution nº. 4,512/16   680,650    (80,230)
Additional allowance (1)   1,095,830    249,216 
Others   -    6,707 
Write-Off   13,916,357    15,545,362 
Exchange variation   (853,289)   195,416 
Closing balance (2)   (35,496,307)   (36,629,564)
Required by Resolution nº. 2,682/99   (27,162,631)   (25,957,262)
Specific allowance (3)   (14,216,605)   (13,786,495)
Generic allowance (4)   (12,946,026)   (12,170,767)
Additional allowance included Provision for Financial Guarantees Provided   (8,333,676)   (10,672,302)
Provision for Financial Guarantees Provided (5)   (1,268,994)   (1,927,314)
Additional allowance (1)   (7,064,682)   (8,744,988)
Existing allowance   (35,496,307)   (36,629,564)
Provision delay   (10,159,579)   (9,993,161)
Provision aggravated   (10,417,914)   (9,666,862)
Provision potential   (14,918,814)   (16,969,541)

(1)Refers to the provision in excess of the minimum required percentage by CMN Resolution nº. 2,682 of December 21, 1999;
(2)The allowance for loan losses related to the lease portfolio amounts to: R$ (306,300) (R$ (326,688) at 09/30/2017);
(3)Operations with overdue installments for more than 14 days or under responsibility of administrators or companies in the process of declaring bankruptcy;
(4)For operations not covered in the previous item due to the classification of the client or operation;
(5)Provision for financial guarantees provided, recorded in liabilities in accordance with Resolution nº. 4,512/2016 of the National Monetary Council (CMN) and Circular Letter nº. 3,782/2016.

 

At 09/30/2018, the balance of the allowance in relation to the loan portfolio is equivalent to 6.7% (7.8% at 09/30/2017).

 

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d)Renegotiation of credits

 

   09/30/2018   09/30/2017 
   Portfolio (1)   Allowance for
Loan Losses		   %   Portfolio (1)   Allowance for
Loan Losses		   % 
Total renegotiated loans   27,852,229    (11,372,328)   40.8%   26,420,184    (10,626,248)   40.2%
(-) Renegotiated loans overdue up to 30 days(2)   (9,928,507)   2,392,773    24.1%   (9,089,917)   2,087,170    23.0%
Renegotiated loans overdue over 30 days(2)   17,923,722    (8,979,555)   50.1%   17,330,267    (8,539,078)   49.3%

(1)The amounts related to renegotiated loans up to 30 days of the Lease Portfolio are: R$ 113,902 (R$ 154,975 at September 30, 2017);

(2)Delays determined upon renegotiation.

 

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e)Restricted operations on assets

 

See below the information related to the restricted operations involving assets, in accordance with CMN Resolution nº. 2,921, of January 17, 2002.

 

   09/30/2018   01/01 to
09/30/2018		   09/30/2017   01/01 to
09/30/2017		 
   0 - 30   31 - 180   181 - 365   Over 365
days		   Total   Income
(expenses)		   Total   Income
(expenses)		 
Restricted operations on assets                                   
Loan operations   58,415    1,158,168    8,647,171    9,863,754    1,204,654    2,402,536    102,884 
Liabilities - restricted operations on assets                                   
Foreign borrowing through securities   58,415    -    9,877,014    9,935,429    (1,205,598)   2,402,532    (103,111)
Net revenue from restricted operations                       (944)        (227)

 

At 09/30/2018 and 09/30/2017 there were no balances in default.

 

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f)Operations of sale or transfers and acquisition of financial assets

 

I -Credit assignments (transfers of receivables) carried out through December 2011 were recorded in accordance with the current regulations, together at that time with income recognition at the time of the assignment, regardless of the risks and benefits being retained or not, the amount of whereby the bank assumes joint obligations, at 09/30/2018 where the entity substantially retained the related risks and benefits, is R$ 90,578 (R$ 113,368 at 09/30/2017), composed of real estate financing of R$ 82,395 (R$ 103,637 at 09/30/2017) and farming financing of R$ 8,183 (R$ 9,731 at 09/30/2017).

 

ll -Beginning in January 2012, as provided for by CMN Resolution nº. 3,533/08, of January 31, 2008 and supplementary regulation, accounting records take into consideration the retention or non-retention of risks and benefits on sales or transfers of financial assets.

 

The breakdown of financial assets sale or transfer transactions with risk and benefit retention is presented below.

 

   09/30/2018   09/30/2017 
   Assets   Liabilities (1)   Assets   Liabilities (1) 
Nature of operation  Book value   Fair value   Book value   Fair value   Book value   Fair value   Book value   Fair value 
Mortgage Loan   1,981,231    1,896,969    1,973,047    1,888,785    2,493,804    2,450,114    2,485,490    2,441,800 
Working capital   2,193,455    2,193,455    2,159,656    2,159,656    2,709,312    2,709,312    2,632,812    2,632,812 
Vehicles (2)   -    -    1,301    1,301    -    -    2,741    2,741 
Companies - loan (2)   -    -    2,417    2,417    -    -    5,090    5,090 
Total   4,174,686    4,090,424    4,136,421    4,052,160    5,203,116    5,159,426    5,126,133    5,082,443 

(1)Under Other sundry liabilities;

(2)Assignment of operations that had already been written down to losses.

 

The sale or transfer transactions involving financial assets that posted loss, with no retention of risk if benefits affected the result of the period by R$ 163,679 (R$ 38,024 from January 1 to September 30, 2017).

 

Sales or transfers of financial assets of the active portfolio, with no retention of risks and benefits the amount R$ 979,131 (R$ 997,094 at September 30, 2017 ) with effect on the result R$ 71,934 (R$ 107,677 from January 1 to September 30, 2017), net of the Allowance for Loan Losses, were not carried out in this quarter.

 

During the period, financial assets were transferred without retention of risks and rewards between related companies in connection with those transactions whose likelihood of recovery was considered by Management as remote.

 

The portfolio transferred, in the amount of R$ 9,487,249 (R$ 10,556,672 at 09/30/2017) fully written down to losses, was realized for the amount of R$ 71,130 (R$141,565 at 09/30/2017) according to an external appraisal report. The transaction did not have impact on the consolidated results.

 

The portfolio transferred, in the amount of R$ 121,955, with provision average of 65% at portfolio, was realized for the amount of R$ 42,684 according to an appraisal report. The transaction did not have impact on the consolidated results.

 

There were acquisitions of loan portfolios with the retention of assignor’s risks during the period the amount R$ 252,249.

 

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Note 8 - Foreign exchange portfolio

 

   09/30/2018   09/30/2017 
Assets - other receivables   77,631,607    62,789,180 
Exchange purchase pending settlement – foreign currency   39,712,152    31,278,565 
Bills of exchange and term documents – foreign currency   12,998    5,628 
Exchange sale rights – local currency   38,574,015    32,019,218 
(Advances received) – local currency   (667,558)   (514,231)
Liabilities – other liabilities (Note 2a)   77,620,730    63,353,061 
Exchange sales pending settlement – foreign currency   38,126,603    32,394,707 
Liabilities from purchase of foreign currency – local currency   39,290,028    30,787,744 
Other   204,099    170,610 
Memorandum accounts   1,913,580    1,207,834 
Outstanding import credits – foreign currency   712,256    755,452 
Confirmed export credits – foreign currency   1,201,324    452,382 

  

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Note 9 – Funding, borrowing and onlending

 

a)Summary

 

   09/30/2018   09/30/2017 
   0-30   31-180   181-365   Over 365   Total   %   Total   % 
Deposits   247,087,920    32,010,264    22,034,677    153,418,710    454,551,571    45.1    359,904,288    39.2 
Deposits received under securities repurchase agreement   229,868,409    10,935,865    11,836,027    61,934,973    314,575,274    31.2    336,951,383    36.7 
Funds from acceptance and issuance of securities   5,086,633    15,639,171    19,225,895    78,732,677    118,684,376    11.8    106,638,250    11.6 
Borrowing and onlending   8,694,344    19,068,938    18,596,936    20,897,488    67,257,706    6.7    66,318,288    7.2 
Subordinated debt   2,210,002    754,268    320,630    50,435,934    53,720,834    5.2    48,405,975    5.3 
Total   492,947,308    78,408,506    72,014,165    365,419,782    1,008,789,761    100.0    918,218,184    100.0 
% per maturity term   48.9    7.8    7.1    36.2    100.0                
Total  –  09/30/2017   430,458,974    100,504,663    76,145,683    311,108,864    918,218,184                
% per maturity term   46.9    10.9    8.3    33.9    100.0                

 

b)Deposits

 

   09/30/2018   09/30/2017 
   0-30   31-180   181-365   Over 365 days   Total   %   Total   % 
Demand deposits   74,816,713    -    -    -    74,816,713    16.5    58,609,115    18.2 
Savings accounts   132,373,654    -    -    -    132,373,654    29.1    112,249,257    31.1 
Interbank   681,736    1,769,677    582,647    77,397    3,111,457    0.7    2,130,947    0.7 
Time deposits   39,213,129    30,240,587    21,452,030    153,341,313    244,247,059    53.7    186,912,437    50.0 
Other deposits   2,688    -    -    -    2,688    0.0    2,532    0.0 
Total   247,087,920    32,010,264    22,034,677    153,418,710    454,551,571    100.0    359,904,288    100.0 
% per maturity term   54.4    7.0    4.8    33.8    100.0                
Total  –  09/30/2017     199,413,750    28,580,524    21,159,582    110,750,432    359,904,288                
% per maturity term   55.4    7.9    5.9    30.8    100.0                

 

In ITAÚ UNIBANCO HOLDING, the portfolio is composed of Interbank Deposits with maturity within 0 to 30 days (R$ 9,504,595 at 09/30/2017), 31 to 180 days amouting to R$ 6,123,443 (R$ 7,816,641 at 09/30/2017), and over 365 days amounting to R$ 7,859,450 (R$ 4,798,816 at 09/30/2017), totaling R$ 13,982,893 (R$ 22,120,052 at 09/30/2017) and Demand deposits with maturity within 0 to 30 days amouting to R$ 14,056,529.

 

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c)Deposits received under securities repurchase agreements

 

   09/30/2018   09/30/2017 
   0 - 30   31 - 180   181 - 365   Over 365 days   Total   %   Total   % 
Own portfolio   25,793,550    10,834,472    9,490,251    7,576,452    53,694,725    17.1    102,446,701    30.4 
Government securities   17,737,117    -    -    5,574    17,742,691    5.6    23,403,654    6.9 
Corporate Securities   5,849,316    -    -    -    5,849,316    1.9    5,138,978    1.5 
Own issue   1,579,049    10,831,462    9,490,251    7,570,878    29,471,640    9.4    73,573,013    21.9 
Foreign   628,068    3,010    -    -    631,078    0.2    331,056    0.1 
Third-party portfolio   189,685,284    15    -    -    189,685,299    60.3    169,533,676    50.3 
Free portfolio   14,389,575    101,378    2,345,776    54,358,521    71,195,250    22.6    64,971,006    19.3 
Total   229,868,409    10,935,865    11,836,027    61,934,973    314,575,274    100.0    336,951,383    100.0 
% per maturity term   73.0    3.5    3.8    19.7    100.0                
Total – 09/30/2017   214,298,494    22,596,152    17,024,198    83,032,539    336,951,383                
% per maturity term   63.6    6.7    5.1    24.6    100.0                

 

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d)Funds from acceptance and issuance of securities

 

   09/30/2018   09/30/2017 
   0-30   31-180   181-365   Over 365 days   Total   %   Total   % 
Funds from bills:   4,899,880    13,247,419    12,987,324    40,122,055    71,256,678    60.0    63,386,188    59.4 
Financial   1,937,011    3,558,965    8,241,175    28,508,088    42,245,239    35.6    28,184,932    26.4 
Real estate   2,173,579    4,298,767    1,030,551    3,370,412    10,873,309    9.2    19,178,571    18.0 
Bills of credit related to agribusiness   789,290    5,389,687    3,715,598    8,243,555    18,138,130    15.2    16,022,685    15.0 
Trade Related – issued abroad - Structure Note Issued - Foreign   150,944    1,761,947    4,934,117    37,479,783    44,326,791    37.4    38,811,594    36.4 
Brazil risk note programme   16,021    185,171    439,151    2,696,958    3,337,301    2.8    5,835,923    5.5 
Structure note issued   70,823    783,867    910,469    3,917,058    5,682,217    4.8    5,057,827    4.7 
Bonds   25,452    510,613    3,500,376    23,214,175    27,250,616    23.0    22,512,116    21.1 
Fixed rate notes   -    237    -    5,064,408    5,064,645    4.3    2,946,407    2.8 
Eurobonds   -    571    -    11,810    12,381    0.0    16,139    0.0 
Mortgage notes   14,413    17,466    30,572    267,636    330,087    0.3    337,639    0.3 
Other   24,235    264,022    53,549    2,307,738    2,649,544    2.2    2,105,543    2.0 
Structured Operations Certificates (*)   35,809    629,805    1,304,454    1,130,839    3,100,907    2.6    4,440,468    4.2 
Total   5,086,633    15,639,171    19,225,895    78,732,677    118,684,376    100.0    106,638,250    100.0 
% per maturity term   6.3    21.6    17.1    55.0    100.0                
09/30/2017   6,915,780    23,388,580    21,856,050    54,477,840    106,638,250                
% per maturity term   5.1    22.0    17.0    55.9    100.0                

 

(*) As of 09/30/2018, the market value of the funding from Structured Operations Certificates issued is R$ 3,203,492 (R$ 4,689,887 at 09/30/2017) according to BACEN Circular Letter nº. 3,623.

 

ITAÚ UNIBANCO HOLDING’s portfolio is composed of Brazil Risk Note Programme with maturities of 91 days to 180 days amount of R$ 108,490 (R$ 73,420 at 09/30/2017), with maturities of 181 to 365 days amount of (R$ 3,357,204 at 09/30/2017), totaling R$ 108,490 (R$ 3,430,624 at 09/30/2017).

 

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e)Borrowing and onlending

 

   09/30/2018   09/30/2017 
   0-30   31-180   181-365   Over 365 days   Total   %   Total   % 
Borrowing   6,995,410    16,118,810    15,421,045    9,704,961    48,240,226    71.7    40,743,036    61.4 
Domestic   1,958,341    -    -    1,664    1,960,005    2.9    2,404,244    3.6 
Foreign (*)   5,037,069    16,118,810    15,421,045    9,703,297    46,280,221    68.8    38,338,792    57.8 
Onlending  -  Domestic – official institutions   1,698,934    2,950,128    3,175,891    11,192,527    19,017,480    28.3    25,575,252    38.6 
BNDES   246,547    1,046,862    1,206,034    6,240,506    8,739,949    13.1    11,992,424    18.1 
FINAME   1,340,855    1,859,353    1,931,449    4,448,698    9,580,355    14.2    12,936,888    19.5 
Other   111,532    43,913    38,408    503,323    697,176    1.0    645,940    1.0 
Total   8,694,344    19,068,938    18,596,936    20,897,488    67,257,706    100.0    66,318,288    100.0 
% per maturity term   12.9    28.4    27.7    31.0    100.0                
Total – 09/30/2017   8,121,004    17,767,543    14,767,408    25,662,333    66,318,288                
% per maturity term   12.2    26.8    22.3    38.7    100.0                

 

(*) Foreign borrowing are basically represented by foreign exchange transactions related to export pre-financing and import financing.

 

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f)Subordinated debt, including perpetual ones

 

   09/30/2018   09/30/2017 
   0-30   31-180   181-365   Over 365   Total   %   Total   % 
Financial treasury bills   2,190,400    678,505    94,995    4,592,363    7,556,263    14.1    18,240,328    37.7 
Euronotes   -    -    -    31,734,559    31,734,559    59.1    25,015,180    51.7 
Bonds   19,602    75,763    225,635    6,138,026    6,459,026    12.0    5,164,578    10.7 
Debt instruments eligible as capital   -    -    -    7,985,434    7,985,434    14.9    -    0.0 
(-) Transaction costs incurred (Note 4b)   -    -    -    (14,448)   (14,448)   (0.0)   (14,111)   (0.0)
Grand total (*)   2,210,002    754,268    320,630    50,435,934    53,720,834    100.0    48,405,975    100.0 
% per maturity term   4.1    1.4    0.6    93.9    100.0                
Total  –  09/30/2017   1,709,946    8,171,864    1,338,445    37,185,720    48,405,975                
% per maturity term   3.5    16.9    2.8    76.8    100.0                

 

(*) According to current legislation, the accounting balance of subordinated debt as of September 2018 was used for the calculation of reference equity as of December, 2012, totaling R$ 38,870,072.

 

Perpetual subordinate notes / Supplementary Capital (AT1), issued on December 12, 2017 and March 19, 2018, were approved by BACEN, increasing by 0.97 p.p. the Tier I Capital index of ITAÚ UNIBANCO HOLDING CONSOLIDADO.

 

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Description

 

Name of security / currency  Principal amount
(original currency)		   Issue   Maturity   Return p.a.   Account balance 
Subordinated financial bills - BRL                         
    1,395,100    2012    2018    112% of CDI    1,529,461 
    1,184,700              100% of CDI + 1.01% to 1.02%    1,221,869 
    2,000    2011    2019    109% to 109.7% of CDI    4,192 
    1,000    2012    2019    110% of CDI    2,061 
    12,000              11.96%    25,477 
    100,500              IPCA + 4.7% to 6.3%    182,897 
    1,000    2012    2020    111% of CDI    2,074 
    20,000              IPCA + 6% to 6.17%    43,520 
    6,000    2011    2021    109.25% to 110.5% of CDI    12,937 
    2,306,500    2012    2022    IPCA + 5.15% to 5.83%    4,503,659 
    20,000              IGPM + 4.63%    28,116 
                   Total    7,556,263 
Subordinated euronotes - USD                         
    1,000,000    2010    2020    6.2%    4,111,528 
    1,000,000         2021    5.75%    4,047,499 
    750,000    2011    2021    5.75% to 6.2%    3,079,689 
    550,000    2012    2021    6.2%    2,202,145 
    2,625,000         2022    5.5% to 5.65%    10,551,991 
    1,870,000         2023    5.13%    7,605,570 
    20,000    2017    -    6.12%    81,563 
    10,000    2018    -    6.5%    40,126 
                  Total    31,720,111 
Subordinated bonds - CLP                         
    11,048,394    2008    2022    7.4% to 7.99%    126,633 
    32,720,912         2033    3.5% to 4.5%    249,519 
    110,390,929         2033    4.8%    979,021 
    98,151,772    2009    2035    4.8%    890,466 
    2,000         2019    10.8%    2,854 
    94,500         2019    IPC + 2%    134,212 
    11,311,860    2010    2032    4.4%    86,276 
    24,928,312         2035    3.9%    198,492 
    125,191,110         2036    4.4%    944,399 
    87,087,720         2038    3.9%    687,846 
    68,060,124         2040    4.1%    529,589 
    33,935,580         2042    4.4%    258,220 
    104,000    2013    2023    IPC + 2%    142,181 
    146,000         2028    IPC + 2%    199,633 
    510,107    2014    2024    LIB    693,174 
    47,307,480         2034    3.8%    336,511 
                  Total    6,459,026 
Debt instruments eligible as capital - USD                         
    1,230,000    2017    -    6.12%    5,016,128 
    740,000    2018    -    6.5%    2,969,306 
                   Total    7,985,434 
                          
Total                       53,720,834 

 

ITAÚ UNIBANCO HOLDING’s portfolio is composed of Subordinated Euronotes with maturities over 365 days amounting to R$ 31,734,479 (R$ 25,001,069 at 09/30/2017) and Debt Instruments Eligible as Capital over 365 days amounting to R$ 7,985,434.

 

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Note 10 - Insurance, pension plan and capitalization operations

 

a)Composition of the technical provisions

 

   Insurance   Pension plan   Capitalization   Total 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
                                 
Unearned premiums   2,085,315    1,951,065    13,539    15,230    -    -    2,098,854    1,966,295 
Mathematical provision of benefits to be granted and benefits granted   204,584    75,344    188,881,264    169,354,892    -    -    189,085,848    169,430,236 
Redemptions and other unsettled amounts   12,035    11,070    280,498    219,838    -    -    292,533    230,908 
Financial surplus   1,909    1,802    589,697    609,189    -    -    591,606    610,991 
Unsettled claims   547,721    551,030    45,905    29,356    -    -    593,626    580,386 
Claims / events incurred but not reported   349,025    398,551    25,759    27,558    -    -    374,784    426,109 
Administrative and related expenses   27,676    28,061    102,473    78,783    8,375    12,022    138,524    118,866 
Mathematical provision for capitalization and redemptions   -    -    -    -    3,358,877    3,242,074    3,358,877    3,242,074 
Raffles payable and to be held   -    -    -    -    14,552    23,135    14,552    23,135 
Other provisions(1)   134,216    554,774    64,284    337,759    191    254    198,691    892,787 
Total (2)   3,362,481    3,571,697    190,003,419    170,672,605    3,381,995    3,277,485    196,747,895    177,521,787 

 

(1)It considers mostly the Supplemental Coverage Provision, regulated by SUSEP Circular nº. 517, of July 30, 2015;

(2)This table covers the amendments established by SUSEP Circular nº. 517, of July 30, 2015, also for comparison purposes.

 

The total of Technical Provisions represents the amount of obligations after the Liability Adequacy Test is carried out.

 

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b)Assets guaranteeing technical provisions - SUSEP

 

   Insurance   Pension plan   Capitalization   Total 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Interbank  investments – money market   714,331    751,699    814,589    1,149,953    1,412,060    1,512,469    2,940,980    3,414,121 
Securities and derivative financial instruments   1,598,683    1,862,910    190,237,048    170,553,587    2,161,054    1,953,644    193,996,785    174,370,141 
PGBL / VGBL fund quotas (1)   -    -    181,627,600    163,347,726    -    -    181,627,600    163,347,726 
Government securities - domestic   -    -    154,811,690    140,374,061    -    -    154,811,690    140,374,061 
National treasury bills   -    -    30,541,734    51,080,944    -    -    30,541,734    51,080,944 
National treasury notes   -    -    55,255,957    37,438,421    -    -    55,255,957    37,438,421 
Financial treasury bills   -    -    55,547,490    33,347,087    -    -    55,547,490    33,347,087 
Repurchase agreements   -    -    13,466,509    18,507,609    -    -    13,466,509    18,507,609 
Financial Treasury Bills   -    -    -    203,071    -    -    -    203,071 
National Treasury Bills   -    -    9,052,974    1,039,041    -    -    9,052,974    1,039,041 
National Treasury Notes   -    -    4,413,535    17,265,497    -    -    4,413,535    17,265,497 
Corporate securities   -    -    25,688,020    22,750,598    -    -    25,688,020    22,750,598 
Bank deposit certificates   -    -    615,488    311,257    -    -    615,488    311,257 
Debentures   -    -    3,010,511    1,124,126    -    -    3,010,511    1,124,126 
Shares   -    -    1,814,951    1,478,436    -    -    1,814,951    1,478,436 
Promissory notes   -    -    1,323,838    98,803    -    -    1,323,838    98,803 
Financial treasury bills   -    -    18,923,232    18,029,643    -    -    18,923,232    18,029,643 
Others   -    -    -    77,087    -    -    -    77,087 
Repurchase agreements - Debentures   -    -    -    1,631,246    -    -    -    1,631,246 
PGBL / VGBL fund quotas   -    -    863,977    284,783    -    -    863,977    284,783 
Derivative financial instruments   -    -    117,223    94,776    -    -    117,223    94,776 
Loans for shares   -    -    206,832    (172,803)   -    -    206,832    (172,803)
Accounts receivable / (payable)   -    -    (60,142)   16,311    -    -    (60,142)   16,311 
Other assets   1,598,683    1,862,910    8,609,448    7,205,861    2,161,054    1,953,644    12,369,185    11,022,415 
Government   710,474    876,710    8,424,871    6,851,858    498,887    259,946    9,634,232    7,988,514 
Private   888,209    986,200    184,577    354,003    1,662,167    1,693,698    2,734,953    3,033,901 
Receivables from insurance and reinsurance operations (2)   1,148,481    1,105,968    -    -    -    -    1,148,481    1,105,968 
Credit rights   1,008,773    953,750    -    -    -    -    1,008,773    953,750 
Commercial – extended guarantee   101,977    109,569    -    -    -    -    101,977    109,569 
Reinsurance   37,731    42,649    -    -    -    -    37,731    42,649 
Total   3,461,495    3,720,577    191,051,637    171,703,540    3,573,114    3,466,113    198,086,246    178,890,230 

 

(1)The PGBL and VGBL plans securities portfolios, the ownership and embedded risks of which are the customer’s responsibility, are recorded as securities – trading securities, with a counter-entry to lliabilities in Pension plan technical provision accounts (Note 10a);

 

(2)Recorded under Other receivables and Other assets.

 

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c)Financial and operating income

 

   Insurance   Pension plan   Capitalization   Total 
   01/01 to 09/30/2018   01/01 to 09/30/2017   01/01 to 09/30/2018   01/01 to 09/30/2017   01/01 to   01/01 to   01/01 to   01/01 to 
   Direct   Reinsurance   Withheld   Direct   Reinsurance   Withheld   Direct   Reinsurance   Withheld   Direct   Reinsurance   Withheld   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Financial income related to insurance, pension plan and                                                                                
capitalization operations   74,927    -    74,927    158,185    -    158,185    303,132    -    303,132    217,509    -    217,509    18,296    128,217    396,355    503,911 
Financial income   89,269    -    89,269    168,678    -    168,678    7,261,341    -    7,261,341    12,602,405    -    12,602,405    148,723    271,423    7,499,333    13,042,506 
Financial expenses   (14,342)   -    (14,342)   (10,493)   -    (10,493)   (6,958,209)   -    (6,958,209)   (12,384,896)   -    (12,384,896)   (130,427)   (143,206)   (7,102,978)   (12,538,595)
Operating income related to insurance, pension plan and                                                                                
capitalization operations   1,984,280    9,251    1,993,531    2,058,339    5,924    2,064,263    356,111    (2,950)   353,161    82,248    (2,698)   79,550    358,947    436,005    2,705,639    2,579,818 
Premiums and contributions   3,260,913    (9,458)   3,251,455    2,996,029    (26,329)   2,969,700    14,586,191    (2,950)   14,583,241    17,144,599    (2,698)   17,141,901    1,979,831    2,124,622    19,814,527    22,236,223 
Changes in technical provisions   (224,519)   1,170    (223,349)   215,531    (881)   214,650    (14,169,741)   -    (14,169,741)   (16,997,047)   -    (16,997,047)   2,993    3,696    (14,390,097)   (16,778,701)
Expenses for claims, benefits, redemptions and raffles   (951,481)   17,442    (934,039)   (934,605)   33,060    (901,545)   (55,486)   -    (55,486)   (58,918)   -    (58,918)   (1,624,991)   (1,692,633)   (2,614,516)   (2,653,096)
Selling expenses   (48,287)   97    (48,190)   (189,515)   74    (189,441)   (2,767)   -    (2,767)   (3,109)   -    (3,109)   (3,551)   (4,487)   (54,508)   (197,037)
Other operating revenues and expenses   (52,346)   -    (52,346)   (29,101)   -    (29,101)   (2,086)   -    (2,086)   (3,277)   -    (3,277)   4,665    4,807    (49,767)   (27,571)
Total income related to insurance, pension plan and capitalization operations   2,059,207    9,251    2,068,458    2,216,524    5,924    2,222,448    659,243    (2,950)   656,293    299,757    (2,698)   297,059    377,243    564,222    3,101,994    3,083,729 

 

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Note 11 – Contingent assets and liabilities and legal liabilities – tax and social security

 

ITAÚ UNIBANCO HOLDING, as a result of the ordinary course of its business, may be a party to legal lawsuits of labor, civil and tax nature. The contingencies related to these lawsuits are classified as follows:

 

a) Contingent Assets: There are no contingent assets recorded.

 

b) Provisions and contingencies: The criteria to quantify contingencies are adequate in relation to the specific characteristics of civil, labor and tax lawsuits portfolios, as well as other risks, taking into consideration the opinion of its legal advisors, the nature of the lawsuits, the similarity with previous lawsuits and the prevailing previous court decisions.

 

-Civil lawsuits:

 

In general, contingencies arise from claims related to the revision of contracts and compensation for damages and pain and suffering and the lawsuits are classified as follows:

 

Collective lawsuits: Related to claims of a similar nature and with individual amounts that are 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 nature of the lawsuit and the characteristics of the court (Small Claims Court or Regular Court). Contingencies and provisions are adjusted to reflect the amounts deposited as guarantee for their execution when realized.

 

Individual lawsuits: Related to claims with unusual characteristics or involving significant amounts. These are periodically calculated based on the calculation of the amount claimed. Probability of loss, which is estimated based on the characteristics of the lawsuit. The amounts considered as probable losses are recorded as provisions.

 

It should be mentioned that ITAÚ UNIBANCO HOLDING is a party to specific lawsuits related to the collection of understated inflation adjustments to savings accounts resulting from economic plans implemented in the 80’s and 90’sn. as a measure to combat inflation.

 

Although ITAÚ UNIBANCO HOLDING complied with the rules in effect at the time, the company is a defendant in lawsuits filed by individuals that address this topic, as well as in class actions filed by: (i) consumer protection associations; and (ii) the Public Prosecution Office on behalf of savings account holders. With respect to these lawsuits, ITAÚ UNIBANCO HOLDING records provisions when it is served and when the individuals apply to enforce the decision rendered by the Judicial Branch, using the same criteria adopted to determine provisions for individual lawsuits.

 

The Federal Supreme Court (STF) has issued some decisions favorable to savings account holders, but it has not established its understanding with respect to the constitutionality of the economic plans and their applicability to savings accounts. Currently, the appeals involving these matters are suspended, as determined by the STF, until it pronounces a final decision.

 

In December 2017, through mediation of the Federal Attorney’s Office (AGU) and of supervision of the Central Bank of Brazil (BCB), savers (represented by two civil associations, FEBRAPO and IDEC) and FEBRABAN entered into an instrument of agreement aiming at resolving lawsuits related to economic plans, and ITAÚ UNIBANCO HOLDING has already adhered to its terms. Said agreement was approved on March 1, 2018, by the Plenary Session of the Federal Supreme Court (STF) and, savers may adhere to their terms for a 24-month period, counted as from May 22, 2018 with the subsequent conclusion of lawsuits.

 

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No amount is recorded as a provision in relation to Civil lawsuits which likelihood of loss is considered possible, which total estimated risk is R$ 3,818,028 (R$ 3,615,964 at 09/30/2017), in this amount there are no values resulting from interests in joint ventures.

 

-Labor claims

 

Contingencies arise from lawsuits in which labor rights provided for in labor legislation specific to the related profession are discussed, such as: overtime, salary equalization, reinstatement, transfer allowance, pension plan supplement, among others, are discussed. These lawsuits are classified as follows:

 

Collective lawsuits: related to claims considered similar and with individual amounts that are not considered relevant. The expected amount of loss is determined and accrued on a monthly basis in accordance with a statistical share pricing model and is reassessed taking into account the court rulings. These contingencies are adjusted to the amounts deposited as guarantee for their execution when realized.

 

Individual lawsuits: related to claims with unusual characteristics or involving significant amounts. These are periodically calculated based on the calculation of the amount claimed. Probability of loss which, in turn, is estimated in accordance with the actual and legal characteristics related to that lawsuit.

 

No amount is recorded as a provision for labor claims for which the likelihood of loss is considered possible, and for which the total estimated risk is R$ 155,934 (R$ 56,808 at 09/30/2017).

 

-Other Risks

 

These are quantified and accrued mainly based on the evaluation of rural credit transactions with joint liability and FCVS (salary variations compensation fund) credits assigned to Banco Nacional.

 

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The table below shows the changes in the respective provisions for contingent liabilities and the respective escrow deposit balances:

 

                   01/01 to 
   01/01 to 09/30/2018   09/30/2017 
   Civil   Labor   Other   Total   Total 
Opening balance   5,299,650    7,282,610    150,685    12,732,945    12,663,668 
Effect of change in consolidation criteria   -    -    -    -    (1,392)
(-) Contingencies guaranteed by indemnity clauses (Note 4n I)   (243,221)   (997,546)   -    (1,240,767)   (1,321,770)
Subtotal   5,056,429    6,285,064    150,685    11,492,178    11,340,506 
Monetary restatement/charges   110,069    351,543    -    461,612    539,018 
Changes in the period reflected in results (Notes 12f and 12i)   228,024    1,344,739    246,540    1,819,303    2,890,079 
Increase (*)   580,638    1,480,083    246,867    2,307,588    3,551,777 
Reversal   (352,614)   (135,344)   (327)   (488,285)   (661,699)
Payment   (912,989)   (2,016,156)   -    (2,929,145)   (3,210,319)
Subtotal   4,481,533    5,965,190    397,225    10,843,948    11,559,283 
(+) Contingencies guaranteed by indemnity clauses (Note 4n I)   220,606    971,148    -    1,191,754    1,235,737 
Closing balance   4,702,139    6,936,338    397,225    12,035,702    12,795,020 
Closing balance at 09/30/2017   5,348,208    7,204,662    242,150    12,795,020      
Escrow deposits at 09/30/2018   1,543,006    2,332,374    -    3,875,380      
Escrow deposits at 09/30/2017   1,502,746    2,243,384    -    3,746,130      

 

(*) Civil provisions include the provision for economic plans amounting to R$ (176,116) (R$ 184,473 from 01/01 to 09/30/2017).

 

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-Tax and social security lawsuits

 

ITAÚ UNIBANCO HOLDING classify as legal liability the lawsuits filed to discuss the legality and unconstitutionality of the legislation in force, which are the subject matter of a provision, regardless of the probability of loss.

 

Tax contingencies correspond to the principal amount of taxes involved in tax, administrative or judicial challenges, subject to tax assessment notices, plus interest and, when applicable, fines and charges. A provision is recognized whenever the likelihood of loss is probable.

 

The table below shows the changes in the provisions and respective balances of escrow deposits for Tax and Social Security lawsuits:

 

       01/01 to 
   01/01 to 09/30/2018   09/30/2017 
   Legal             
Provisions  obligation   Contingencie   Total   Total 
Opening balance   4,736,215    2,266,944    7,003,159    8,245,149 
(-) Contingencies guaranteed by indemnity clauses (Note 4n I)   -    (66,190)   (66,190)   (68,734)
Subtotal   4,736,215    2,200,754    6,936,969    8,176,415 
Monetary restatement / charges   122,038    153,940    275,978    511,439 
Changes in the period reflected in results   (1,911)   (48,894)   (50,805)   93,613 
Increase   125,323    182,733    308,056    306,654 
Reversal   (127,234)   (231,627)   (358,861)   (213,041)
Payment   (268,163)   (26,624)   (294,787)   (47,437)
Subtotal   4,588,179    2,279,176    6,867,355    8,734,030 
(+) Contingencies guaranteed by indemnity clauses (Note 4n I)   -    67,704    67,704    71,346 
Closing balance (Note 13c)   4,588,179    2,346,880    6,935,059    8,805,376 
Closing balance at 09/30/2017 (Note 13c)   4,896,575    3,908,801    8,805,376      

 

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               01/01 to 
   01/01 to 09/30/2018   09/30/2017 
   Legal            
Escrow deposits  obligation   Contingencies   Total   Total 
Opening balance   4,549,151    621,058    5,170,209    4,846,526 
Appropriation of income   128,559    9,714    138,273    261,388 
Changes in the period   (131,526)   (17,391)   (148,917)   (18,592)
Deposited   102,081    10,891    112,972    193,793 
Withdrawals   (36,461)   (8,162)   (44,623)   (180,321)
Reversals to income   (197,146)   (20,120)   (217,266)   (32,064)
Closing balance   4,546,184    613,381    5,159,565    5,089,322 
Relocated to assets pledged in guarantee of contingencies (Note 11d)   -    (937)   (937)   (18,006)
Closing balance after relocated   4,546,184    612,444    5,158,628    5,071,316 
Closing balance at 09/30/2017   4,494,013    577,303    5,071,316      

 

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The main discussions related to the provisions recognized for Tax and Social Security Lawsuits are as follows:

 

·CSLL – Isonomy – R$ 1,328,661: discussing the lack of constitutional support for the increase, established by law nº 11,727/08, of the CSLL rate for financial and insurance companies from 9% to 15%. The balance of the deposit in court totals R$ 1,311,556;

 

·INSS – Non-compensatory amounts – R$ 657,369: the non-levy of social security contribution on amounts paid as profit sharing is defended

 

·PIS and COFINS – Calculation basis – R$ 632,223: defending the levy of PIS and COFINS on revenue, a tax on revenue from the sales of assets and services. The balance of the deposit in court totals R$ 607,533;

 

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Off-balance sheet contingencies

 

The amounts involved in tax and social security lawsuits for which the likelihood of loss is possible are not recognized as a provision. The estimated amounts at risk in the principal tax and social security lawsuits with a likelihood of loss deemed possible, which total R$ 21,681,641 are described below:

 

·INSS – Non-compensatory amounts – R$ 5,171,487: defends the non-levy of this contribution on these amounts, among which are profit sharing, stock options, transportation vouchers and sole bonuses;

 

·PIS and COFINS - Reversal of Revenues from Depreciation in Excess – R$ 3,616,122: discussing the accounting and tax treatment granted to PIS and COFINS upon settlement of leasing operations;

 

·IRPJ and CSLL – Goodwill – Deduction – R$ 2,656,485: the deductibility of goodwill with future expected profitability on the acquisition of investments;

 

·IRPJ, CSLL, PIS and COFINS – Requests for offsetting dismissed - R$ 1,694,137: cases in which the liquidity and the ability of offset credits are discussed;

 

·IRPJ and CSLL – Interest on capital – R$ 1,498,372: defending the deductibility of interest on capital declared to stockholders based on the Brazilian long term interest rate (TJLP) on the stockholders’ equity for the year and for prior years;

 

·ISS – Banking Institutions – R$ 1,163,015: these are banking operations, revenue from which may not be interpreted as prices for services rendered, and/or which arises from activities not listed under Supplementary Law nº. 116/03 or Decree Law nº. 406/68;

 

·IRPJ and CSLL – Deductibility of Losses in Credit Operations – R$ 751,150: assessments to require the payment of IRPJ and CSLL due to the alleged non-observance of the legal criteria for the deduction of losses upon the receipt of credits.

 

c)Receivables - reimbursement of contingencies

 

The receivables balance arising from reimbursements of contingencies totals R$ 1,006,167 (R$ 1,217,913 at 09/30/2017) (Note 12a). This value is derived basically from the guarantee in the privatization process of the Banco Banerj S.A., which occurred in 1997, when the State of Rio de Janeiro created a fund to guarantee civil, labor and tax contingencies.

 

d)Assets pledged as contingencies

 

Assets pledged as collateral for contingencies refer to lawsuits involving contingent liabilities and are restricted or in escrow deposits, as shown in the table below:

 

   09/30/2018   09/30/2017 
Securities (basically financial treasury bills – Note 6b)   748,481    951,620 
Deposits in guarantee   4,581,009    4,623,428 

 

ITAÚ UNIBANCO HOLDING’s litigation provisions are long-term, considering the time required to conclude legal cases through the court system in Brazil, which prevents the disclosure of a deadline for their conclusion.

 

The legal advisors believe that ITAÚ UNIBANCO HOLDING is not a party to this or any other administrative proceedings or lawsuits that could significantly affect the results of its operations.

 

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Note 12 - Breakdown of accounts

 

a)Other sundry receivables

 

   09/30/2018   09/30/2017 
Social contribution for offsetting (Note 13b I)   603,475    632,362 
Taxes and contributions for offsetting   8,408,390    7,217,575 
Escrow deposits for foreign fundraising program   941,297    613,074 
Receivables from reimbursement of contingent liabilities (Note 11c)   1,006,167    1,217,913 
Receivables from reimbursement of contingent liabilities   2,233,153    2,350,489 
(Allowance for loan losses)   (1,226,986)   (1,132,576)
Sundry domestic debtors   2,059,055    1,841,365 
Premiums from loan operations   111,027    433,409 
Sundry foreign debtors   3,748,354    1,598,121 
Retirement plan assets (Note 18)   1,084,891    1,087,458 
Recoverable payments   42,825    33,954 
Salary advances   335,847    283,474 
Operations without credit granting characteristics   2,886,173    2,530,854 
Securities and credits receivable   5,456,889    3,377,752 
(Allowance for loan losses)   (2,570,716)   (846,898)
Other   917,743    271,848 
Total   22,145,244    17,761,407 

 

In ITAÚ UNIBANCO HOLDING, Other Sundry Receivables is mainly composed of Taxes and Contributions for Offset R$ 1,979,010 (R$ 1,644,617 at 09/30/2017) (Note 13b I).

 

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b)Prepaid expenses

 

   09/30/2018   09/30/2017 
Commissions   293,570    672,779 
Related to vehicle financing   17,320    57,166 
Related to insurance and pension plan   23,039    101,795 
Restricted to commissions / partnership agreements   1,647    11,420 
Related to Payroll Loans   97,447    349,034 
Other   154,118    153,364 
Advertising   421,641    271,621 
Other   1,144,818    1,085,133 
Total   1,860,029    2,029,533 
(*)The impact on income related to commission from local correspondents, as described in Note 4g, was R$ 296,238 (R$ 272,318 at 01/01 to 09/30/2017).

 

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c)Other sundry liabilities

 

   09/30/2018   09/30/2017 
Liabilities from Payment Transactions   35,231,817    28,670,625 
Liabilities from transactions related to credit assignments (Note 7f)   4,136,421    5,126,133 
Provisions for sundry payments   3,441,230    4,597,539 
Sundry creditors - foreign   5,810,631    3,202,033 
Sundry creditors - local   2,384,333    2,114,425 
Provision financial guarantees provided (Note 7c)   1,268,994    1,927,314 
Personnel provision   2,218,040    1,990,765 
Creditors of funds to be released   1,240,771    821,295 
Liabilities for official agreements and rendering of payment services   904,582    826,753 
Provision for health insurance (*)   855,904    757,155 
Provision for retirement plan benefits (Note 18)   779,454    785,573 
Other   2,039,359    610,150 
Total   60,311,536    51,429,760 

(*) Provision set up to cover possible future deficits up to the total discontinuation of the portfolio, arising from the difference between monthly installments adjustments, authorized annually by the regulatory body, and the actual variation of hospital costs that affect the compensation of claims (Note 12i).

 

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d)Banking service fees

 

   01/01 to   01/01 to 
   09/30/2018   09/30/2017 
Asset management   4,714,186    4,069,010 
Funds management fees   4,215,750    3,597,774 
Consortia management fees   498,436    471,236 
Current account services   524,202    573,445 
Credit cards   8,088,732    7,687,807 
Relationship with stores   8,088,634    7,687,753 
Credit card processing   98    54 
Sureties and credits granted   1,994,230    1,920,994 
Loan operations   870,299    787,283 
Guarantees provided   1,123,931    1,133,711 
Receipt services   1,328,198    1,209,687 
Collection fees   1,126,449    1,018,670 
Collection services   201,749    191,017 
Other   2,369,889    2,113,570 
Custody services and management of portfolio   322,480    303,481 
Economic and financial advisory   503,402    505,974 
Foreign exchange services   112,177    88,620 
Other services   1,431,830    1,215,495 
Total   19,019,437    17,574,513 

 

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e)Income related to bank charges

 

   01/01 to   01/01 to 
   09/30/2018   09/30/2017 
Loan operations / registration   623,250    653,916 
Credit cards – annual fees and other services   2,846,847    2,635,071 
Deposit account   158,441    145,764 
Transfer of funds   291,886    215,927 
Income related to securities brokerage   560,346    525,881 
Service package fees   4,859,922    4,588,123 
Total   9,340,692    8,764,682 

 

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f)Personnel expenses

 

   01/01 to   01/01 to 
   09/30/2018   09/30/2017 
Compensation   (7,515,540)   (6,863,842)
Charges   (2,237,324)   (2,085,139)
Welfare benefits (Note 18)   (2,807,122)   (2,510,101)
Training   (167,048)   (157,009)
Labor claims and termination of employees (Note 11b)   (1,651,116)   (2,056,984)
Share-based payment   (167,728)   (148,437)
Total   (14,545,878)   (13,821,512)
Employees’ profit sharing   (3,006,366)   (2,480,435)
Total including employees’ profit sharing   (17,552,244)   (16,301,947)

 

g)Other administrative expenses

 

   01/01 to   01/01 to 
   09/30/2018   09/30/2017 
Data processing and telecommunications   (3,123,265)   (3,038,702)
Depreciation and amortization   (1,991,485)   (1,662,076)
Installations   (2,439,546)   (2,320,557)
Third-party services   (3,234,198)   (3,069,347)
Financial system services   (552,978)   (580,576)
Advertising, promotions and publication   (1,052,637)   (774,566)
Transportation   (256,211)   (254,000)
Materials   (238,898)   (250,946)
Security   (565,304)   (542,060)
Travel expenses   (164,627)   (153,221)
Other   (964,527)   (886,010)
Total   (14,583,676)   (13,532,061)

 

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h)Other operating revenue

 

   01/01 to   01/01 to 
   09/30/2018   09/30/2017 
Reversal of operating provisions   40,501    47,298 
Recovery of charges and expenses   118,208    95,145 
Other   754,153    654,757 
Total   912,862    797,200 

 

i)Other operating expenses

 

   01/01 to   01/01 to 
   09/30/2018   09/30/2017 
Provision for contingencies (Note 11b)   (487,988)   (1,139,531)
Civil lawsuits   (228,024)   (1,164,763)
Tax and social security contributions   (13,424)   8,244 
Other   (246,540)   16,988 
Selling - credit cards   (2,833,733)   (2,445,336)
Claims   (275,260)   (226,365)
Impairment – Operations with no Credit Granting Characteristics   (1,633,355)   (220,725)
Impairment – Other receivables Sundry   (167,363)   (249,284)
Provision for health insurance (Note 12c)   (13,706)   (15,109)
Refund of interbank costs   (217,174)   (229,319)
Amortization of investments/goodwill   (941,807)   (823,821)
Other   (1,554,618)   (1,623,471)
Total   (8,125,004)   (6,972,961)

 

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Note 13 - Taxes

 

ITAÚ UNIBANCO HOLDING and each one of its subsidiaries calculate separately, in each fiscal year, Income Tax and Social Contribution on Net Income.

 

Taxes are calculated at the rates shown below and consider, for effects of respective calculation bases, the legislation in force applicable to each charge.

 

Income tax   15.00%
Additional income tax   10.00%
Social contribution (1)   20.00%
PIS (2)   0.65%
COFINS (2)   4.00%
ISS up to   5.00%

 

(1)On October 06, 2015, law nº. 13,169, a conversion of provisional measure nº. 675, which increased the Social Contribution tax rate from 15.00% to 20.00% until December 31, 2018, for financial institutions, insurance companies and credit card management companies, was introduced. For the other companies, the tax rate remains at 9.00%;
(2)For non-financial subsidiaries that fall into the non-cumulative calculation system, the PIS rate is 1.65% and COFINS rate is 7.60%.

 

a)Expenses for taxes and contributions

 

I -Demonstration of Income tax and social contribution expense calculation:

 

   01/01 to   01/01 to 
Due on operations for the period  09/30/2018   09/30/2017 
Income before income tax and social contribution   21,376,887    27,212,013 
Charges (income tax and social contribution) at the rates in effect   (9,619,599)   (12,245,406)
Increase / decrease in income tax and social contribution charges arising from:          
Investments in affiliates and jointly controlled entities   82,766    153,648 
Foreign exchange variations on investments abroad   4,912,886    (736,790)
Interest on capital   2,737,069    2,859,279 
Corporate reorganizations (Note 4r)   470,804    470,886 
Dividends and interest on external debt bonds   376,136    296,922 
Other nondeductible expenses net of non taxable income (*)   (5,375,295)   4,242,259 
Income tax and social contribution expenses   (6,415,233)   (4,959,202)
Related to temporary differences          
Increase (reversal) for the period   4,172,366    (4,403,849)
Increase (reversal) of prior periods   1,660    455,137 
(Expenses)/Income related to deferred taxes   4,174,026    (3,948,712)
Total income tax and social contribution expenses   (2,241,207)   (8,907,914)

(*) Includes temporary (additions) and exclusions.

 

II -Composition of tax expenses:

 

   01/01 to   01/01 to 
   09/30/2018   09/30/2017 
PIS and COFINS   (3,106,614)   (4,155,102)
ISS   (971,200)   (821,622)
Other   (561,365)   (472,773)
Total   (4,639,179)   (5,449,497)

 

The tax expenses of ITAÚ UNIBANCO HOLDING amount to R$ 232,401 (R$ 341,579 at 09/30/2017) and are mainly composed of PIS and COFINS.

 

III -Tax effects on foreign exchange management of investments abroad.

 

In order to minimize the effects on income in connection with the foreign exchange variations on investments abroad, net of the respective tax effects, ITAÚ UNIBANCO HOLDING CONSOLIDATED carries out derivative transactions in foreign currency (hedges), as mentioned in Note 21b.

 

The results of these transactions are considered in the calculation base of income tax and social contribution, in accordance with their nature, while the foreign exchange variations on investments abroad are not included therein, pursuant to the tax legislation in force:

 

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b)Deferred taxes

 

  I - The Deferred Tax Asset balance and its changes, segregated based on its origin and disbursements incurred, are represented as follows:

 

   Provisions   Deferred Tax Assets 
   09/30/2017   09/30/2018   12/31/2017   Realization /
Reversal		   Increase   09/30/2018   09/30/2017 
Reflected in income and expense accounts             49,076,207    (18,771,449)   12,791,514    43,096,272    50,173,064 
Allowance for loan losses   70,294,892    59,359,946    28,446,922    (7,481,516)   2,594,088    23,559,494    30,070,483 
Related to income tax and social contribution loss carryforwards             6,284,551    (2,309,804)   1,981,409    5,956,156    5,830,147 
Provision for profit sharing   2,969,262    3,401,821    1,821,801    (1,821,801)   1,423,364    1,423,364    1,215,534 
Provision for devaluation of securities with permanent impairment   2,783,765    3,604,439    1,293,652    (1,070,863)   1,198,450    1,421,239    1,124,836 
Adjustment to market value of securities and derivative financial instruments (assets/liabilities)   315,093    874,971    210,561    (210,561)   347,745    347,745    133,135 
Adjustments of operations carried out on the futures settlement market   1,188,318    320,073    299,754    (299,754)   153,424    153,424    501,853 
Goodwill on purchase of investments   1,305,486    1,374,261    652,897    (326,107)   79,128    405,918    640,651 
Provision for contingent liabilities   14,379,006    11,940,932    5,192,543    (1,355,853)   1,016,903    4,853,593    5,953,544 
Civil lawsuits   4,992,932    4,206,606    1,974,092    (425,317)   160,123    1,708,898    1,978,276 
Labor claims   5,477,273    5,387,446    2,198,326    (822,683)   712,956    2,088,599    2,216,306 
Tax and social security contributions   3,908,801    2,346,880    1,020,125    (107,853)   143,824    1,056,096    1,758,962 
Legal obligation - tax and social security contributions   2,223,162    1,220,030    488,790    (60,130)   116,116    544,776    374,930 
Provision related to health insurance operations   757,155    855,904    340,591    (803)   5,655    345,443    302,535 
Other non-deductible provisions   7,568,104    9,649,643    4,044,145    (3,834,257)   3,875,232    4,085,120    4,025,416 
                                    
Reflected in stockholders’ equity accounts             1,895,172    (561,401)   552,617    1,886,388    2,136,725 
Corporate reorganizations (Note 4r)   2,307,946    461,574    627,739    (470,804)   -    156,935    784,702 
Adjustment to market value of available-for-sale securities   24,706    1,750,342    167,397    (46)   551,303    718,654    11,118 
Cash flow hedge   3,464,450    2,213,585    1,099,305    (90,551)   -    1,008,754    1,326,906 
Provision for retirement plan benefits   18,780    4,760    731    -    1,314    2,045    13,999 
Total (*)   109,600,125    97,032,281    50,971,379    (19,332,850)   13,344,131    44,982,660    52,309,789 
Social contribution for offsetting arising from Option established in article 8º of Provisional Measure nº. 2,158-35 of August             611,694    (8,219)   -    603,475    632,362 

(*) The accounting records of deferred tax assets on income tax losses and/or social contribution loss carryforwards, as well as those arising from temporary differences, are based on technical feasibility studies which consider the expected generation of future taxable income, considering the history of profitability for each subsidiary individually, and for the consolidated taken as a whole. For subsidiaries, Itaú Unibanco S.A e Banco Itaucard S.A, a requirement has been sent to Central Bank of Brazil, in compliance with paragraph 7 of article 1 of Resolution nº 4,441/15 and Circular nº 3,776/15.

 

For ITAÚ UNIBANCO HOLDING, Tax Credits totaled R$ 2,358,863 (R$ 486,013 at 09/30/2017) and are mainly represented by Tax Loss Carryforwards of R$ 1,751,485 (R$ 132,860 at 09/30/2017), Provisions for Escrow Accounts of R$ 112,766 (R$ 117,105 at 09/30/2017), Administrative Provisions of R$ 49,988 (R$ 79,350 at 09/30/2017), Provisions for Legal, Tax and Social Security Risks of R$ 81,506 (R$ 51,480 at 09/30/2017), the realization of which is contingent upon the outcome of the respective lawsuits and Adjustment to Market Value of Trading Securities and Derivative Financial Instruments of R$ 237,680 (R$ 942 at 09/30/2017).

 

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II -Provision for Deferred Income Tax and Social Contribution balance and the changes therein changes are shown as follows:

 

   12/31/2017   Realization /
Reversal		   Increase   09/30/2018   09/30/2017 
Reflected in income and expense accounts   13,364,175    (10,960,062)   2,154,546    4,558,659    15,868,838 
Depreciation in excess – leasing   613,348    (280,089)   -    333,259    721,816 
Restatement of escrow deposits and contingent liabilities   1,279,719    (9,484)   72,369    1,342,604    1,210,500 
Provision for pension plan benefits   304,032    (19,052)   13,526    298,506    312,846 
Adjustments to market value of securities and derivative financial instruments   8,498,725    (8,498,725)   591,820    591,820    10,732,661 
Adjustments of operations carried out on the future settlement market   1,575,716    (1,575,716)   1,456,365    1,456,365    1,820,220 
Taxation of results abroad – capital gains   2,316    (682)   -    1,634    1,803 
Other   1,090,319    (576,314)   20,466    534,471    1,068,992 
Reflected in stockholders’ equity accounts   233,603    (223,782)   23,778    33,599    397,128 
Adjustments to market value of available-for-sale securities   224,342    (223,782)   7,319    7,879    394,656 
Provision for pension plan benefits (*)   9,261    -    16,459    25,720    2,472 
Total   13,597,778    (11,183,844)   2,178,324    4,592,258    16,265,966 

(*) Reflected in stockholders' equity, pursuant to CVM Resolution n° 4,424/15 (Note 15).

 

At ITAÚ UNIBANCO HOLDING, the Provisions for Deferred Taxes and Contributions total R$ 16,024 (R$ 93,732 at 09/30/2017) and are basically comprised of Monetary Restatement of Escrow Deposits for Legal Obligations and Contingent Liabilities of R$ 3,995 (R$ 5,217 at 09/30/2017) and Adjustments to Market Value of Trading Securities and Financial Derivative Instruments of R$ 88,515 at 09/30/2017.

 

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III -The estimate of realization and present value of tax credits and social contribution to offset, arising from Provisional Measure 2,158-35 of 08/24/2001 and from the Provision for Deferred Income Tax and Social Contribution existing at September 30, 2018, are:

 

   Deferred tax assets           Provision for
deferred		             
Year of realization  Temporary
differences		   %   Tax loss/social
contribution loss
carryforwards		   %   Total   %   Social
contribution for
offsetting		   %   income tax
and social
contribution		   %   Net deferred
taxes		   % 
                                                 
2018   12,335,547    32%   40,492    1%   12,376,039    27%   6,095    1%   (626,965)   14%   11,755,169    29%
2019   13,891,083    36%   345,863    5%   14,236,946    32%   63,787    11%   (828,932)   18%   13,471,801    33%
2020   2,462,726    6%   2,361,808    40%   4,824,534    11%   484,771    80%   (32,586)   1%   5,276,719    13%
2021   2,908,229    7%   2,091,175    35%   4,999,404    11%   -    0%   (1,558,330)   34%   3,441,074    8%
2022   2,422,996    6%   1,076,728    18%   3,499,724    8%   48,822    8%   (202,881)   4%   3,345,665    8%
after 2022   5,005,923    13%   40,090    1%   5,046,013    11%   -    0%   (1,342,564)   29%   3,703,449    9%
Total   39,026,504    100%   5,956,156    100%   44,982,660    100%   603,475    100%   (4,592,258)   100%   40,993,877    100%
Present value (*)   35,942,618         5,249,033         41,191,651         552,806         (3,979,577)        37,764,880      

(*) 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 service fees and others, which can vary in relation to actual data and amounts.

 

Net income in the financial statements is not directly related to the taxable income for income tax and social contribution, due to differences between the accounting criteria and tax legislation, in addition to corporate aspects. Accordingly, we recommend that the trends for the realization of deferred tax assets arising from temporary differences, income tax and social contribution loss carry forwards are not used as an indication of future net income.

 

IV-Considering the temporary effects introduced by Law nº. 13,169/15, which increased the social contribution rate to 20% through December 31, 2018, tax credits were recognized based on their likelihood of realization. As at 09/30/2018 and 09/30/2017, there are no unrecognized tax credits.

 

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c)Tax and social security contributions

 

   09/30/2018   09/30/2017 
Taxes and contributions on income payable   3,990,349    3,346,563 
Taxes and contributions payable   2,092,567    2,095,802 
Provision for deferred income tax and social contribution (Note 13b II)   4,592,258    16,265,966 
Legal liabilities – tax and social security (Note 11b)   4,588,179    4,896,575 
Total   15,263,353    26,604,906 

 

At ITAÚ UNIBANCO HOLDING, the balance of tax and social security contributions totals R$ 831,503 (R$ 237,128 at 09/30/2017) and is mainly comprised of taxes and contributions on income payable of R$ 800,402 (R$ 128,922 at 09/30/2017) and provision for deferred income tax and social contribution R$ 16,024 (R$ 93,732 at 09/30/2017).

 

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Note 14 – Permanent Assets

 

a) Investment - Change of investments - ITAÚ UNIBANCO HOLDING

 

      Balance at 12/31/2017   Changes 09/30/2018             
      Book value                       Equity in earnings of subisidiaries   Exchange                   Equity in 
Companies  Functional
currency		  Stockholders'
equity		   Changes in
exchange
rates -
Functional
currency		   Adjustments
under investor
criteria (1)		   Unrealized
results		   Goodwill   Balance at
12/31/2017		   Amortization
of
goodwill		   Dividends /
interest on
capital
paid/provided
for (2)		   Earnings /
(Losses)		   Adjustments
under
investor
criteria (1)		   Unrealized
results		   Total   Variation –
Functional
currency
other than
the Real		   Adjustments
in marketable
securities of
subsidiaries
and other		   Corporate
Events (3)		   Balance at
09/30/2018		   Balance at
09/30/2017		   earnings of
subsidiaries
 from
01/01 to
09/30/2017		 
Domestic      74,937,305    287,331    436,488    (231,258)   5,279    75,435,145    (4,752)   (1,469,700)   11,741,504    96,645    110,418    11,948,567    1,090,349    (1,078,180)   14,499,995    100,421,424    78,514,597    14,890,572 
Itaú Unibanco S.A.      60,966,756    288,493    384,266    (155,558)   5,279    61,489,236    (4,752)   (769,700)   10,014,297    88,501    83,116    10,185,914    1,091,000    (999,392)   14,500,000    85,492,306    64,553,874    12,731,860 
Banco Itaucard S.A.      8,546,636    (287)   3,034    (53,498)   -    8,495,885    -    -    977,914    876    10,657    989,447    626    (52,289)   -    9,433,669    8,500,872    1,317,653 
Banco Itaú BBA S.A.      2,173,988    (1,047)   41,556    (22,202)   -    2,192,295    -    (500,000)   380,840    6,089    16,645    403,574    (1,982)   (26,233)   -    2,067,654    2,202,911    443,521 
Itaú BBA Participações S.A.      2,069,612    172    -    -    -    2,069,784    -    -    195,263    -    -    195,263    705    763    -    2,266,515    2,009,063    210,667 
Itaú Corretora de Valores S.A.      1,180,299    -    7,632    -    -    1,187,931    -    (200,000)   173,188    1,179    -    174,367    -    (1,029)   -    1,161,269    1,247,864    186,869 
Itaú Seguros S.A.      14    -    -    -    -    14    -    -    2    -    -    2    -    -    (5)   11    13    2 
Foreign      6,374,733    562,231    -    (11,533)   372,551    7,297,982    (33,868)   (130,022)   667,212    -    (377)   666,835    795,107    (16,985)   -    8,579,049    6,926,903    125,844 
Itaú Corpbanca  Chilean peso   3,217,382    351,329    -    -    372,551    3,941,262    (33,868)   (28,003)   5,988    -    -    5,988    470,085    (7,864)   -    4,347,600    3,737,126    (49,918)
BICSA Holdings, LTD.  Chilean peso   1,606,414    169,140    -    (11,533)   -    1,764,021    -    -    92,755    -    (377)   92,378    241,891    28    -    2,098,318    1,667,760    (62,612)
Banco Itaú Uruguay S.A.  Uruguayan peso   1,288,710    35,140    -    -    -    1,323,850    -    -    439,300    -    -    439,300    69,303    (9,163)   -    1,823,290    1,287,155    159,375 
OCA S.A.  Uruguayan peso   262,227    6,622    -    -    -    268,849    -    (102,019)   129,169    -    -    129,169    13,828    14    -    309,841    231,759    78,838 
ACO Ltda. (4)  Uruguayan peso   -    -    -    -    -    -    -    -    -    -    -    -    -    -    -    -    3,103    161 
Grand total      81,312,038    849,562    436,488    (242,791)   377,830    82,733,127    (38,620)   (1,599,722)   12,408,716    96,645    110,041    12,615,402    1,885,456    (1,095,165)   14,499,995    109,000,473    85,441,500    15,016,416 

 

(1) Adjustment arising from the standardization of the investee’s financial statements according to the investor’s accounting policies;

(2) Dividends approved and not paid are recorded as Dividends receivable;

(3) Corporate events arising from acquisitions, spin-offs, merges, takeovers, and increases or decreases of capital;

(4) Company incorporated on December 1st, 2017.

 

               Number of shares/quotas owned by   Equity share in capital 
       Stockholders’   Net income   ITAÚ UNIBANCO HOLDING   09/30/2018 (%) 
Companies  Capital   equity   for the period   Common   Preferred   Quotas   Voting   Share 
Domestic                                        
Itaú Unibanco S.A.   61,925,426    85,563,872    10,014,297    2,932,936,995    2,840,549,071    -    100.00    100.00 
Banco Itaucard S.A.   4,252,600    9,476,508    977,914    237,962,639,781    1,277,933,118    -    99.99    99.99 
Banco Itaú BBA S.A.   1,490,000    2,073,212    380,840    4,474,435    4,474,436    -    99.99    99.99 
Itaú BBA Participações S.A.   1,328,562    2,266,515    195,263    548,954    1,097,907    -    100.00    100.00 
Itaú Corretora de Valores S.A.   802,482    1,161,270    173,188    27,482,523    811,503    -    99.99    99.99 
Itaú Seguros S.A.   1,756,139    4,242,239    793,211    450    1    -    0.01    0.01 
Foreign                                        
Itaú CorpBanca   11,355,789    17,856,428    26,671    115,039,610,411    -    -    22.45    22.45 
BICSA Holdings, LTD.   1,324,733    2,110,229    92,755    -    -    330,860,745    99.99    99.99 
Banco Itaú Uruguay S.A.   541,174    1,823,289    439,300    4,465,133,954    -    -    100.00    100.00 
OCA S.A.   18,222    309,841    129,169    1,503,496,740    -    -    100.00    100.00 

 

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b)Fixed assets, goodwill and intangible assets

 

I)Fixed assets

 

       Real estate in use (2) (3)   Other fixed assets (2) (3)     
Real estate in use (1)  Fixed assets
under
construction		   Land   Buildings   Improvements   Installations   Furniture and
equipment		   EDP Systems   Other
(communication,
security and
transportation)		   Total 
Annual depreciation rates             4%   10%   10 to 20%    10 to 20%    20 to 50%    10 to 20%      
                                              
Cost                                             
Balance at 12/31/2017   365,704    975,333    3,106,582    2,203,443    1,955,671    1,151,278    6,447,547    1,149,215    17,354,773 
Acquisitions   296,148    -    -    24,399    6,064    39,407    460,526    108,671    935,215 
Disposals   -    (10,124)   (72,427)   (32,996)   (8,766)   (14,393)   (143,364)   (6,542)   (288,612)
Exchange variation   7,741    1,700    3,751    112,371    15,172    35,880    20,873    6,130    203,618 
Transfers   (189,671)   -    56,880    59,334    24,689    -    48,768    -    - 
Other   641    (46,661)   (14,569)   79,300    (4,286)   (28,541)   16,522    420    2,826 
Balance at 09/30/2018   480,563    920,248    3,080,217    2,445,851    1,988,544    1,183,631    6,850,872    1,257,894    18,207,820 
                                              
Depreciation                                             
Balance at 12/31/2017   -    -    (1,893,035)   (1,374,580)   (1,151,012)   (713,682)   (5,074,132)   (753,384)   (10,959,825)
Depreciation expenses   -    -    (59,907)   (140,425)   (115,709)   (70,146)   (469,261)   (90,058)   (945,506)
Disposals   -    -    20,775    21,883    2,508    10,249    125,829    5,372    186,616 
Exchange variation   -    -    10,612    (52,696)   2,825    (12,554)   (43,715)   (5,598)   (101,126)
Other   -    -    2,544    (84,616)   (1,783)   (2,345)   12,094    (13,326)   (87,432)
Balance at 09/30/2018   -    -    (1,919,011)   (1,630,434)   (1,263,171)   (788,478)   (5,449,185)   (856,994)   (11,907,273)
                                              
Book value                                             
Balance at 09/30/2018 (4)   480,563    920,248    1,161,206    815,417    725,373    395,153    1,401,687    400,900    6,300,547 
Balance at 09/30/2017 (4)   205,766    971,704    1,420,842    736,560    827,350    413,705    1,385,955    408,146    6,370,028 

(1) The contractual commitments for the purchase of the fixed assets totaled R$ 69,056 achievable by 2019;

(2) Includes amounts pledged in guarantee of voluntary deposits (Note 11d);

(3) Includes the amount of R$ 2,915 (R$ 3,418 at 09/30/2017) related to attached real estate.

(4) During the period, there was no impairment of assets recorded in Fixed assets.

 

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II)Goodwill

 

          Changes         
   Amortization
period		  Balance at
12/31/2017		   Acquisitions   Amortization
expenses		   Exchange
variation		   Other   Balance at
09/30/2018		   Balance at
09/30/2017		 
Goodwill (Notes 2b and 4j)  10 years   1,451,809    -    (188,339)   19,977    -    1,283,447    1,248,642 

 

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III)Intangible assets

 

       Other intangible assets     
Intangible (1)  Rights for
acquisition of
payroll (2)		   Association for the
promotion and offer
of financial products
and services		   Acquisition of
software		   Development of
software		   Goodwill on
acquisition
(Note 4k)		   Other intangible
assets		   Total 
Annual amortization rates   20%   8%   20%   20%   20%   10% to 20%     
                                    
Cost                                   
Balance at 12/31/2017   1,059,890    2,452,107    4,502,310    4,352,576    8,984,696    1,047,868    22,399,447 
Acquisitions   277,852    1,000    500,994    221,873    -    -    1,001,719 
Disposals   (146,740)   (23,519)   (310,348)   (1,688)   -    -    (482,295)
Exchange variation   -    145,211    397,133    -    887,688    40,541    1,470,573 
Other   (4,623)   86,063    12,856    46,897    9,652    (6,114)   144,731 
Balance at 09/30/2018   1,186,379    2,660,862    5,102,945    4,619,658    9,882,036    1,082,295    24,534,175 
                                    
Amortization                                   
Balance at 12/31/2017   (471,372)   (646,902)   (1,995,175)   (1,267,239)   (2,136,815)   (504,318)   (7,021,821)
Amortization expenses (3)   (167,316)   (167,409)   (443,758)   (492,132)   (794,472)   (22,342)   (2,087,429)
Disposals   146,740    23,519    310,302    -    -    -    480,561 
Exchange variation   -    (155,109)   (245,615)   -    (190,704)   (5,373)   (596,801)
Other   4,038    111,711    5,652    (46,897)   (9,652)   -    64,852 
Balance at 09/30/2018   (487,910)   (834,190)   (2,368,594)   (1,806,268)   (3,131,643)   (532,033)   (9,160,638)
                                    
Impairment (4)                                   
Balance at 12/31/2017   -    -    (54,286)   (342,475)   -    -    (396,761)
Additions / assumptions   -    -    (167,003)   (360)   -    -    (167,363)
Exchange variation   -    -    (11,913)   -    -    -    (11,913)
Balance at 09/30/2018   -    -    (233,202)   (342,835)   -    -    (576,037)
                                    
Book value                                   
Balance at 09/30/2018   698,469    1,826,672    2,501,149    2,470,555    6,750,393    550,262    14,797,500 
Balance at 09/30/2017   506,496    1,808,934    2,122,370    2,529,169    6,246,348    531,999    13,745,316 

(1) The contractual commitments for the purchase of the new intangible assets totaled R$ 727,612 achievable by 2020;

(2) Represents the recording of amounts paid for acquisition of rights to provide services of payment of salaries, proceeds, retirement and pension benefits and similar benefits;

(3) Amortization expenses related to the rights for acquisition of payrolls and associations are disclosed in the expenses on financial operations;

(4) Pursuant to BACEN Resolution nº. 3,566, of May 29, 2001 (Note 12i).

 

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Note 15 – Stockholders' equity

 

a)Capital

 

Capital is represented by 6,536,090,232 book-entry shares with no par value, of which 3,305,526,906 are common and 3,230,563,326 are preferred shares with no voting rights, but with tag-along rights, in the event of disposal of control, to be included in a public offering of shares, so as to ensure the price equal to eighty per cent (80%) of the amount paid per share with voting rights in the controlling stake, as well as a dividend at least equal to that of the common shares.

 

In Meetings of the Board of Directors held on 12/15/2017 and 02/22/2018, cancellations of 31,793,105 and 14,424,206, were approved, respective of common shares of own issue and shares held in treasury, with no change in capital, upon capitalization of amounts recorded in Revenue Reserves – Statutory Reserve.

 

The breakdown and change in shares of paid-in capital in the beginning and end of the period are shown below:

 

   Number     
   Common   Preferred   Total   Amount 
Residents in Brazil at 12/31/2017   3,299,073,506    1,116,291,341    4,415,364,847    65,482,470 
Residents abroad at 12/31/2017   20,877,606    2,114,271,985    2,135,149,591    31,665,530 
Shares of capital stock at 12/31/2017   3,319,951,112    3,230,563,326    6,550,514,438    97,148,000 
(-) Cancellation of Shares – Meeting of the Board of Directors at February 22, 2018   (14,424,206)   -    (14,424,206)   - 
Shares of capital stock at 09/30/2018   3,305,526,906    3,230,563,326    6,536,090,232    97,148,000 
Residents in Brazil at 09/30/2018   3,283,446,545    1,077,703,585    4,361,150,130    64,821,170 
Residents abroad at 09/30/2018   22,080,361    2,152,859,741    2,174,940,102    32,326,830 
Treasury shares at 12/31/2017 (1)   14,424,206    71,459,714    85,883,920    (2,742,767)
Purchase of treasury shares   -    13,100,000    13,100,000    (510,308)
(-) Cancellation of Shares – Meeting of the Board of Directors at February 22, 2018   (14,424,206)   -    (14,424,206)   534,421 
Result of delivery of treasure shares   -    (24,433,994)   (24,433,994)   755,892 
Treasury shares at 09/30/2018 (1)   -    60,125,720    60,125,720    (1,962,762)
Outstanding shares at 09/30/2018   3,305,526,906    3,170,437,606    6,475,964,512      
Outstanding shares at 09/30/2017   3,351,741,143    3,152,611,081    6,504,352,224      

(1) Own shares, purchased based on authorization of the Board of Directors, to be held in Treasury for subsequent cancellation or replacement in the market.

 

We detail below of the cost of shares purchased in the period, as well the average cost of treasury shares and their market price (in Brazilian reais per share):

 

   01/01 to 09/30/2018 
Cost / Market value  Common   Preferred 
Minimum   -    37.45 
Weighted average   -    38.95 
Maximum   -    40.06 
Treasury shares          
Average cost   -    32.64 
Market value at 09/30/2018   37.70    44.13 

 

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b)Dividends

 

Shareholders are entitled mandatory minimum dividends in each fiscal year, corresponding to 25% of adjusted net income, as set forth in the Bylaws. Common and preferred shares participate equally of income distributed, after common shares have received dividends equal to the annual minimum priority dividend to be paid to preferred shares (R$ 0.022 non-cumulative per share).

 

The calculation of the monthly advance of mandatory minimum dividend is based on the share position on the last day of the prior month, taking into consideration that the payment is made on the first business day of the subsequent month, amounting to R$ 0.015 per share.

 

I -Calculation of dividends and interest on capital

 

   09/30/2018 
Statutory net income   15,284,291 
Adjustments:     
(-) Legal reserve - 5%   (764,215)
Dividend calculation basis   14,520,076 
Mandatory dividend - 25%   3,630,019 
Dividends and Interest on Capital Paid/ Provided for/ Identified   7,572,108 

 

II – Stockholders' compensation

 

   Gross value per
share (R$)		   Gross   WTS   Net 
Paid / Prepaid        5,629,102    (121,619)   5,507,483 
Dividends - 8 monthly installments paid in February to September 2018   0.0150    777,311    -    777,311 
Dividends - paid on 08/30/2018   0.6240    4,041,001    -    4,041,001 
Interest on capital - paid on 08/30/2018   0.1252    810,790    (121,619)   689,171 
                     
Provided for (recorded in Other liabilities – Social and statutory)        97,139    -    97,139 
Dividends - 1 monthly installment paid on 10/01/2018   0.0150    97,139    -    97,139 
                     
Identified in Revenue Reserve In Stockholders’ Equity   0.3062    1,982,841    (15,355)   1,967,486 
Total from 01/01 to 09/30/2018        7,709,082    (136,974)   7,572,108 
Total from 01/01 to 09/30/2017        11,967,687    (529,516)   11,438,171 

 

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c)Capital reserves and revenue reserves - ITAÚ UNIBANCO HOLDING

 

   09/30/2018   09/30/2017 
Capital reserves   1,732,340    1,515,192 
Premium on subscription of shares   283,512    283,512 
Share-based payment plan   1,447,723    1,230,575 
Reserves from tax incentives and restatement of equity securities and other   1,105    1,105 
Revenue reserves   29,160,487    31,554,495 
Legal (1)   9,657,138    8,668,012 
Statutory (2)   19,503,349    22,886,483 

(1) It purpose is to ensure the integrity of capital, compensate loss or increase capital.

(2) Its main purpose is to ensure the remuneration flow to shareholders.

 

d)Reconciliation of net income and stockholders’ equity (Note 2b)

 

   Net income   Stockholders’ equity 
   01/01 to
09/30/2018		   01/01 to
09/30/2017		   09/30/2018   09/30/2017 
ITAÚ UNIBANCO HOLDING   15,284,291    16,610,248    125,533,551    125,574,836 
Amortization of goodwill   171,095    168,068    (193,510)   (420,857)
Corporate reorganizations (Note 4r)   1,384,719    1,384,959    (304,638)   (1,523,244)
Conversion adjustments of foreign investments (Note 4t)   1,931,462    (20,089)   -    - 
Foreign exchange variations of investments   (238)   (5,775)   -    - 
Hedge of net investments in foreign operations   3,376,042    (28,088)   -    - 
Tax effects – hedge of net investments in foreign operations   (1,444,342)   13,774    -    - 
ITAÚ UNIBANCO HOLDING CONSOLIDATED   18,771,567    18,143,186    125,035,403    123,630,735 

 

e)Asset valuation adjustments

 

   09/30/2018   09/30/2017 
Available-for-sale securities   (1,120,482)   400,996 
Hedge cash flow   (1,323,757)   (1,716,955)
Remeasurements in liabilities of post-employment benefits   (829,869)   (874,158)
Foreign exchange variation on investments abroad / Hedge of net investment in foreign operations   (349,854)   (386,472)
Asset valuation adjustments (*)   (3,623,962)   (2,576,589)

(*) net of tax effects.

 

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f)Non-controlling interests

 

   Stockholders’ equity   Net Income 
   09/30/2018   09/30/2017   01/01 to
09/30/2018		   01/01 to
09/30/2017		 
Itaú CorpBanca (Note 2c)   11,418,006    9,550,689    (17,068)   142,772 
Itaú CorpBanca Colombia S.A. (Note 2c)   1,380,598    1,098,662    (15,112)   (9,205)
Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento   399,802    468,228    (66,474)   (70,476)
Luizacred S.A. Soc. de Crédito, Financiamento e Investimento   359,905    306,395    (57,825)   (52,560)
Other   102,482    84,392    (26,885)   (17,241)
Total   13,660,793    11,508,366    (183,364)   (6,710)

 

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g)Share-based payment

 

ITAÚ UNIBANCO HOLDING and its subsidiaries have share-based payment programs aimed at involving its management members and employees in the medium and long term corporate development process.

 

These payments are only made in years where there are sufficient profits to enable the distribution of mandatory dividends, in order to limit the maximum dilutive effect to which stockholders are subject, and at a quantity that does not exceed the limit of 0.5% of the total shares held by the controlling and minority stockholders at the balance sheet date.

 

These programs are settled through the delivery of ITUB4 treasury shares to stockholders.

 

From 01/01 to 09/30/2018, the accounting effect of the Share-based payment in income was R$ (460,366) (R$ (381,343) from 01/01 to 09/30/2017).

 

I –Stock Option Plan (Simple Options)

 

ITAÚ UNIBANCO HOLDING has a Stock Option Plan (“Simple Options”) aimed at involving management members and employees in the medium and long term corporate development program of ITAÚ UNIBANCO HOLDING and its subsidiaries, offering them the opportunity to benefit from the appreciation that their work and dedication bring to the shares.

 

In addition to the awards provided under the Plan, ITAÚ UNIBANCO HOLDING also maintains control over the rights and obligations in connection with the options granted under the plans approved at the Extraordinary Stockholders’ Meetings held on April 24, 2009 and April 19, 2013 related to the Unibanco – União de Bancos Brasileiros S.A., Unibanco Holdings S.A. and Redecard S.A. stock option plans, respectively. Accordingly, the exchange of shares for ITUB4 did not have a relevant financial impact.

 

Simple options have the following characteristics:

 

a)Exercise price: calculated based on the average prices of shares in the three months of the year prior to the grant date. The prices determined will be inflation-adjusted to the last business day of the month prior to the option exercise date based on IGP-M or, in its absence, on an index to be determined internally, and should be paid within the period in force for the settlement of operations on B3.

 

b)Vesting period: determined upon issue, from one to seven years, counted from the grant date. The vesting period is normally determined at five years.

 

c)Fair value and economic assumptions for cost recognition: the fair value of Simple Options is calculated on the grant date based on the Binominal model. Economic assumptions used are as follows:

 

  (i)Exercise price: exercise price previously agreed upon the option issue, adjusted by the IGP-M variation;

 

 (ii)Price of the underlying asset (ITUB4 shares): closing price on B3 on the calculation base date;

 

(iii)Expected dividends: the average annual return rate for the last three years of dividends paid plus interest on capital of the ITUB4 share;

 

(iv)Risk-free interest rate: IGP-M coupon rate at the expiration date of the Simple Option;

 

 (v)Expected volatility: calculated based on the standard deviation from the history of the last 84 monthly returns of the ITUB4 share closing prices, disclosed by B3, adjusted by the IGP-M variation.

 

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   Simple options 
   Quantity   Weighted
average
exercise price		   Weighted
average
market value		 
Opening balance at 12/31/2017   16,342,906    37.81      
Options exercisable at the end of the period   16,342,906    37.81      
Options outstanding but not exercisable   -    -      
Options:               
Granted   -    -      
Canceled / Forfeited (*)   (7,020)   32.98      
Exercised   (9,665,713)   38.94    49.96 
Closing balance at 09/30/2018   6,670,173    39.65      
Options exercisable at the end of the period   6,670,173    39.65      
Options outstanding but not exercisable   -    -      
Range of exercise prices               
Granting 2010-2011        21.71 - 44.10      
Granting 2012        32.98      
Weighted average of the remaining contractual life (in years)   0.65           

(*) Refers to non-exercise based on the beneficiary’s decision.

 

   Simple options 
   Quantity   Weighted
average
exercise price		   Weighted
average
market value		 
Opening balance at 12/31/2016   38,033,506    36.94      
Options exercisable at the end of the period   23,440,177    40.98      
Options outstanding but not exercisable   14,593,329    30.45      
Options:               
Granted   -    -      
Canceled / Forfeited (*)   (38,177)   34.53      
Exercised   (13,993,381)   33.66    41.11 
Closing balance at 09/30/2017   24,001,948    38.05      
Options exercisable at the end of the period   24,001,948    38.05      
Options outstanding but not exercisable   -    -      
Range of exercise prices               
Granting 2010-2011        21.71 - 41.02      
Granting 2012        29.96      
Weighted average of the remaining contractual life (in years)   1.23           

(*) Refers to non-exercise based on the beneficiary’s decision.

 

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ll – Partner Plan

 

The employees and management members of ITAÚ UNIBANCO HOLDING and its subsidiaries may be selected to participate in the program investing a percentage of their bonus to acquire ITUB4 shares and share-based instruments. Accordingly, the ownership of these shares should be held by the beneficiaries for a period from three to five years, counted from the initial investment, and are thus subject to market price variation. After complying with the suspensive conditions set forth in the program, beneficiaries will be entitled to receive ITUB4 as consideration, in accordance with the numbers of shares provided for in the program regulation.

 

The acquisition prices of own shares and Share-Based Instruments are established every six months and are equivalent to the average of the ITUB4 quotation in the 30 days prior to the determination of the acquisition price.

 

The fair value of the ITUB4 as consideration is the market price at the grant date, less expected dividends.

 

The weighted average of the fair value of the ITUB4 shares as consideration was estimated at R$ 39.33 per share at 09/30/2018 (R$ 32.33 per share at 09/30/2017).

 

Law nº. 12,973/14, which adjusted the tax legislation to the international accounting standards and terminated the Transitional Tax Regime (RTT), set up a new legal framework for payments made in shares. We made changes to the Partner Plan, and adjusted its tax effects, with conform with this new legislation.

 

Changes in the Partner Program

 

   Quantity 
Closing balance at 12/31/2017   34,049,627 
New granted   6,608,237 
Cancelled   (345,435)
Exercised   (7,731,613)
Balance at 09/30/2018   32,580,816 
Weighted average of remaining contractual life (years)   2.61 

 

   Quantity 
Balance at 12/31/2016   35,462,379 
New granted   7,041,957 
Cancelled   (710,837)
Exercised   (7,523,051)
Balance at 09/30/2017   34,270,448 
Weighted average of remaining contractual life (years)   2.70 

 

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III-Variable Compensation

 

The policy established in compliance with CMN Resolution nº. 3,921/10 sets forth that fifty percent (50%) of the management’s variable compensation should be paid in cash and fifty percent (50%) should be paid in shares for a period of three years. Shares are delivered on a deferred basis, of which one-third (1/3) per year, will be contingent upon the executive’s remaining with the institution. The deferred unpaid portions may be reversed proportionally to the significant reduction of the recurring income realized or the negative income for the period.

 

The fair value of the ITUB4 share is the market price at its grant date.

 

The weighted average of the fair value of ITUB4 shares was estimated at R$ 51.07 per share at 09/30/2018 (R$ 38.23 per share at 09/30/2017).

 

Change in variable compensation in shares  2018 
   Quantity 
Balance at 12/31/2017   20,819,982 
New   7,031,460 
Delivered   (11,074,347)
Cancelled   (89,950)
Balance at 09/30/2018   16,687,145 

 

Change in variable compensation in shares  2017 
   Quantity 
Balance at 12/31/2016   24,539,406 
New   8,556,882 
Delivered   (12,048,631)
Cancelled   (216,336)
Balance at 09/30/2017   20,831,321 

 

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Note 16 – Related parties

 

a)Transactions between related parties are disclosed in compliance with CVM Deliberation n° 642, of October 7, 2010, and CMN Resolution n° 3,750 of June 30, 2009. These transactions 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 were eliminated from the consolidated financial statements and the lack of risk is taken into consideration.

 

The unconsolidated related parties are as follows:

 

·Itaú Unibanco Participações S.A. (IUPAR), the Companhia E.Johnston de Participações S.A. (shareholder of IUPAR) and ITAÚSA, direct and indirect shareholders of ITAÚ UNIBANCO HOLDING;

 

·The non-financial subsidiaries and joint-controlled entities of ITAÚSA, specially: Itautec S.A., Duratex S.A., Itaúsa Empreendimentos S.A. and Alpargatas S.A.;

 

·Fundação Itaú Unibanco - Previdência Complementar and FUNBEP – Fundo de Pensão Multipatrocinado, closed-end supplementary pension entities that administer retirement plans sponsored by ITAÚ UNIBANCO HOLDING CONSOLIDATED;

 

·Fundação Itaú Social, Instituto Itaú Cultural, Instituto Unibanco, Instituto Unibanco de Cinema, Associação Itaú Viver Mais and Associação Cubo Coworking Itaú, entities sponsored by ITAÚ UNIBANCO and subsidiaries to act in their respective areas of interest, as described in Notes 21e and 21j;

 

·Investments in Porto Seguro Itaú Unibanco Participações S.A., BSF Holding S.A. and XP Investimentos S.A..

 

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The transactions with these related parties are basically characterized by:

 

   ITAÚ UNIBANCO HOLDING  ITAÚ UNIBANCO HOLDING CONSOLIDATED
      Assets / (liabilities)   Revenue / (expense)      Assets / (liabilities)   Revenue / (expense) 
   Annual rate  09/30/2018   09/30/2017   01/01 to
09/30/2018		   01/01 to
09/30/2017		   Annual rate  09/30/2018   09/30/2017   01/01 to
09/30/2018		   01/01 to
09/30/2017		 
Interbank investments      68,727,675    78,481,218    3,542,957    4,258,564       -    -    -    - 
Itaú Unibanco S.A.  6.4% to 8.97% prefixed / 100% Selic   29,073,244    50,170,033    1,997,899    3,128,685       -    -    -    - 
Itaú Unibanco S.A. Grand Cayman Branch  5.83% to 6.3633%   11,111,380    8,790,442    452,659    398,745       -    -    -    - 
Itaú Unibanco S.A. Nassau Branch  5.125% to 6.5%   28,543,051    19,520,743    1,092,399    731,134       -    -    -    - 
Loan operations      -    -    -    -       156,644    97,611    7,883    1,636 
Alpargatas S.A.      -    -    -    -       51,206    97,611    2,152    1,636 
Other      -    -    -    -       105,438    -    5,731    - 
Derivative financial instruments - assets and liabilities      1,109,337    (5,346,557)   4,121,313    (1,455,319)      -    -    -    - 
Fundo de Investimento Multimercado      1,109,337    (5,346,557)   4,121,313    (1,455,319)      -    -    -    - 
Deposits      (13,981,733)   (22,118,959)   (341,763)   (275,392)      (168,217)   -    (160)   - 
Itaú Unibanco S.A. Nassau Branch  2.89% to 3.4% prefixed   (13,981,733)   (22,118,959)   (339,658)   (275,392)      -    -    -    - 
Other      -    -    (2,105)   -   75% to 96% of CDI   (168,217)   -    (160)   - 
Securities sold under repurchase agreements      -    -    -    -       (31,793)   (46,020)   (2,104)   (4,113)
Duratex S.A.      -    -    -    -   95% to 97,5% of CDI   (19,064)   (20,703)   (912)   (1,530)
Elekeiroz S.A.      -    -    -    -       -    (2,538)   -    (217)
Olimpia Promoção e Serviços S.A.      -    -    -    -   100% Selic   (1,829)   (11,035)   (814)   (1,078)
Alpargatas S.A.      -    -    -    -   97,5% of CDI   (4,598)   -    (70)   - 
Other      -    -    -    -   50,01% to 100,15% of CDI   (6,302)   (11,744)   (308)   (1,288)
Debentures      -    (56,671)   -    -       -    -    -    - 
Itaú Unibanco S.A. Nassau Branch      -    (56,671)   -    -       -    -    -    - 
Amounts receivable from (payable to) related companies / Banking service fees (expenses)      984,308    851,394    (12,057)   (3,419)      (102,710)   (118,974)   33,968    30,614 
Itaú Unibanco S.A.      910,511    775,649    -    (1)      -    -    -    - 
Itaúsa Investimentos Itaú S.A.      -    -    -    -       (280)   (238)   3,420    5,809 
Itaúsa Empreendimentos S.A.      -    -    -    -       -    (16)   1,271    (199)
Olimpia Promoção e Serviços S.A.      -    -    -    -       (1,874)   (1,749)   (17,780)   (17,003)
Fundação Itaú Unibanco - Previdência Complementar      -    -    -    -       (109,693)   (117,032)   37,450    35,345 
FUNBEP - Fundo de Pensão Multipatrocinado      -    -    -    -       298    298    4,610    4,515 
Other      73,797    75,745    (12,057)   (3,418)      8,839    (237)   4,997    2,147 
Rent revenues (expenses)      -    -    (183)   (287)      -    -    (34,360)   (49,309)
Itaúsa Investimentos Itaú S.A.      -    -    -    (20)      -    -    (1,665)   (1,814)
Itaú Seguros S.A.      -    -    (116)   (204)      -    -    -    - 
Fundação Itaú Unibanco - Previdência Complementar      -    -    -    -       -    -    (27,103)   (38,368)
FUNBEP - Fundo de Pensão Multipatrocinado      -    -    -    -       -    -    (5,592)   (8,654)
Other      -    -    (67)   (63)      -    -    -    (473)
Sponsorship expenses      -    -    -    -       -    -    (31,050)   (9,500)
Associação Cubo Coworking Itaú      -    -    -    -       -    -    (31,050)   (9,500)
Donation expenses      -    -    -    -       -    -    (93,920)   (93,727)
Instituto Itaú Cultural      -    -    -    -       -    -    (93,000)   (92,807)
Associação Itaú Viver Mais      -    -    -    -       -    -    (920)   (920)

 

In addition to the aforementioned operations, ITAÚ UNIBANCO HOLDING and non-consolidated related parties, as an integral part of the Agreement for apportionment of common costs of Itaú Unibanco, recorded in Other Administrative Expenses in the amount of R$ (6,892) (R$ (5.527) from 01/01 to 09/30/2017) in view of the use of the common structure.

 

In accordance with the rules in effect, the financial institutions cannot grant loans or advances to the following:

a) any individual or company that control the Institution or any entity under common control with the institution, or any officer, director, fiscal council member or direct relative of such individuals;

b) any entity controlled by the Institution; or

c) any entity of which the bank directly or indirectly holds at least 10% of the capital stock.

 

Therefore, no loans or advances are made to any subsidiaries, executive officers, Board of Directors members or their relatives.

 

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b)Compensation of management key personnel

 

Compensation for the period paid to Management Members and members of the Audit Committee of ITAÚ UNIBANCO HOLDING CONSOLIDATED consist of:

 

   01/01 to   01/01 to 
   09/30/2018   09/30/2017 
Compensation   368,797    327,345 
Board of Directors   29,648    39,760 
Management members   339,149    287,585 
Profit sharing   180,750    154,203 
Board of Directors   3,814    2,464 
Management members   176,936    151,739 
Contributions to pension plans   6,862    7,852 
Board of Directors   170    167 
Management members   6,692    7,686 
Stock option plan – Management members   157,980    137,302 
Total   714,389    626,703 

 

Information related to the granting of the share-based payment, benefits to employees and post-employment benefits is detailed in Notes 15g II and 18, respectively.

 

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Note 17 - Market value

 

The financial statements are prepared in accordance with accounting principles which assume the normal continuity of the operations of ITAÚ UNIBANCO HOLDING CONSOLIDATED.

 

The book value of each financial instrument, whether included or not in the balance sheet (comprises investments in affiliates and other investments), when compared to the value that might be obtained in an active market, or in the absence of such a market, using the net present value of future cash flows adjusted based on the current market interest, is approximately equal to the market value, or does not have a market quotation available, except for the instruments in the table below:

 

                   Effects (1) 
   Book value   Market   Results   Stockholders 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Interbank deposits   28,643,909    28,233,498    28,656,580    28,307,650    12,671    74,152    12,671    74,152 
Securities and derivative financial instruments   428,259,904    412,806,030    428,382,998    414,208,230    (1,650,592)   2,071,826    123,094    1,402,200 
Adjustment of available-for-sale securities                       (1,390,888)   1,091,437    -    - 
Adjustment of held-to-maturity securities                       (259,704)   980,389    123,094    1,402,200 
Loan, lease and other credit operations   495,023,602    431,201,384    500,325,943    439,227,444    5,302,341    8,026,060    5,302,341    8,026,060 
Investments                                        
B3   9,743    14,610    171,051    262,532    161,308    247,922    161,308    247,922 
Porto Seguro Itaú Unibanco Participações S.A. (2)   2,032,199    2,031,528    5,827,763    3,702,679    3,795,564    1,671,151    3,795,564    1,671,151 
Funding and borrowing (3)   414,283,118    336,424,670    414,484,767    336,974,999    (201,649)   (550,329)   (201,649)   (550,329)
Subordinated debt (Note 9f)   53,720,834    48,405,975    53,668,557    49,813,475    52,277    (1,407,500)   52,277    (1,407,500)
Treasury shares   1,962,762    2,409,008    2,653,348    3,379,348    -    -    690,586    970,340 

(1) This does not consider the corresponding tax effects;

(2) Parent company of Porto Seguro S.A;

(3) Funding is represented by interbank and time deposits, funds from acceptance and issuance of securities and borrowing.

 

Fair value is a measurement based, whenever possible, on information observable in the market. It is the price estimated at which a non-mandatory transaction to sell an asset or to transfer a liability would occur between market players, on the measurement date, under current market conditions. It does not represent unrealized results of ITAÚ UNIBANCO HOLDING CONSOLIDATED.

 

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To obtain the market values for these financial instruments, the following criteria were adopted:

 

·Interbank investments were determined based on their nominal amounts, monetarily restated as at their maturity dates and discounted to present value using future market interest rates and swap market rates for fixed-rate securities and using market interest rates for fixed-rate securities, achieved up to the closing of B3 at the balance sheet date, for floating-rate securities;

 

·Securities and derivative financial instruments, according to the rules established by Circulars nº. 3,068 and 3,082 of November 8, 2001 and January 30, 2002, respectively, issued by BACEN, are recorded at their market values, except for those classified as Held to Maturity. Government securities allocated in this category have their market value calculated based on the rates obtained in the market, and validated through the comparison with information provided by the National Association of Financial Market Institutions (ANBIMA). Private securities included in this category have their market value calculated using a criterion similar to the one adopted for Investments in Interbank Deposits, as described above;

 

·Loans with maturities over 90 days, when available, were calculated based on the net present value of future cash flows discounted at market interest rates effective on the balance sheet date;

 

·Investments - in companies B3 and Porto Seguro at the share value quoted on stock exchanges.

 

·Time and interbank deposits and funds from the acceptance and issuance of securities and foreign borrowing through securities, when available, were calculated based on their present value determined by future cash flows discounted at market rates obtained at the closing of B3 on the balance sheet date;

 

·Subordinated debt, based on the net present value of future fixed or floating cash flows in foreign currency, net of the market interest rates effective on the balance sheet date and considering the credit risk of the issuer. The floating cash flows are estimated from the interest curves of the indexation market places;

 

·Treasury shares are valued according to the average quotation available on the last trading day of the month or, if this is not available, according to the most recent quotation on prior trading days, published in the daily bulletin of each Stock Exchange.

 

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Note 18 – Post-Employments Benefits

 

The accounting policies and procedures adopted by ITAÚ UNIBANCO HOLDING CONSOLIDATED for employee benefits are summarized below.

 

The total amounts recognized in Income for the Period and Stockholders’ Equity – Asset valuation adjustment were as follows:

 

Total amounts recognized in Income for the period

 

   Defined benefit   Defined contribution (*)   Other benefits   Total 
   01/01 to   01/01 to   01/01 to   01/01 to   01/01 to   01/01 to   01/01 to   01/01 to 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Cost of current service   (52,023)   (50,622)   -    -    -    -    (52,023)   (50,622)
Net interest   (5,909)   (10,172)   50,643    56,906    (18,655)   (16,464)   26,079    30,270 
Contribution   -    -    (59,017)   (63,126)   -    -    (59,017)   (63,126)
Benefits paid        -    -    -    14,076    10,409    14,076    10,409 
Total Amounts Recognized   (57,932)   (60,794)   (8,374)   (6,220)   (4,579)   (6,055)   (70,885)   (73,069)

(*) In the period, contributions to the defined contributions plan, including PGBL, totaled R$ 174,089 (R$ 230,169 from January 1 to September 30, 2017), of which R$ 59,017 (R$ 63,126 from January 1 to September 30, 2017) arising from social security funds.

 

Total amounts recognized in Stockholders’ Equity – Asset valuation adjustment

 

   Defined benefit   Defined contribution   Other benefits   Total 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
At the beginning of the period   39,863    (69,512)   (1,369,678)   (1,323,234)   (76,583)   (48,400)   (1,406,398)   (1,441,146)
Effects on asset ceiling   17,812    7,711    13,424    (10,958)   -    -    31,236    (3,247)
Remeasurements   (36,641)   (4,995)   (10,476)   (16,748)   -    -    (47,117)   (21,743)
Balance arising from the acquisition of Citibank operations   (579)   -    -    -    -    -    (579)   - 
Total Amounts Recognized   20,455    (66,796)   (1,366,730)   (1,350,940)   (76,583)   (48,400)   (1,422,858)   (1,466,136)

 

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a)Retirement plans

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED and certain subsidiaries sponsor defined benefit and variable contribution plans, whose basic purpose is to grant benefits that, in general, provide a life annuity benefit, and may be converted into survivorship annuities, according to the plan's regulations. They also sponsor defined contribution plans, the benefit of which is calculated based on the accumulated balance at the eligibility date, according to the plan's regulations, which does not require actuarial calculation, except as described in Note 18c.

 

Employees hired prior to July 31, 2002, for those who came from Itaú, and prior to February 27, 2009 for those who came from Unibanco, are beneficiaries of the above-mentioned plans. As regards the 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.

 

Supplementary plans are managed by closed-end private pension entities with independent legal structures, as detailed below:

 

Entity   Benefit plan
Fundação Itaú Unibanco - Previdência Complementar   Supplementary retirement plan – PAC (1)
    Franprev benefit plan - PBF (1)
    002 benefit plan - PB002 (1)
    Itaulam basic plan - PBI (1)
    Itaulam Supplementary Plan - PSI (2)
    Itaubanco Defined Contribution Plan (3)
    Itaubank Retirement Plan (3)
    Itaú Defined Benefit Plan (1)
    Itaú Defined Contribution Plan (2)
    Unibanco Pension Plan (3)
    Prebeg benefit plan (1)
    UBB PREV defined benefit plan (1)
    Benefit Plan II (1)
    Supplementary Retirement Plan – Flexible Premium Annuity (ACMV) (1)
    REDECARD Basic Retirement Plan (1)
    REDECARD Supplementary Retirement Plan (2)
    REDECARD Pension Plan (3)
    ITAUCARD Retirement Defined Benefit Plan (1)
    ITAUCARD Supplementary Retirement Plan (2)
Funbep Fundo de Pensão Multipatrocinado   Funbep I Benefit Plan (1)
    Funbep II Benefit Plan (2)

(1) Defined benefit plan;

(2) Variable contribution plan;

(3) Defined contribution plan.

 

b)Governance

 

The closed-end private pension entities (EFPC) and 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 bylaws. The main purpose of the EFPC is to pay benefits to eligible participants, pursuant to the Plan Regulations, maintaining the plans assets invested separately and independently from ITAÚ UNIBANCO HOLDING CONSOLIDATED.

 

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c)Defined benefit plan

 

I -Main assumptions used in actuarial valuation of Retirement Plans

 

    09/30/2018   09/30/2017
Discount rate (1)   9.98% p.a.   10.24% p.a.
Mortality table (2)   AT-2000   AT-2000
    Itaú Experience   Itaú Experience
Turnover (3)   2008/2010   2008/2010
Future salary growth   5.04% to 7.12 % p.a.   5.04% to 7.12 % p.a.
Growth of the pension fund and social security benefits   4.00 % p.a.   4.00 % p.a.
Inflation   4.00 % p.a.   4.00 % p.a.
Actuarial method (4)   Projected Unit Credit   Projected Unit Credit

(1) The adoption of this assumption is based on interest rates obtained from the actual interest curve in IPCA, for medium term liabilities of retirement plans sponsored by ITAÚ UNIBANCO HOLDING CONSOLIDATED. At 12/31/2017 assumption were adopted consistently with the economic scenario at the balance sheet date rate, considering the volatility of the interest markets and the models adopted;

(2) The mortality tables adopted correspond to those disclosed by Society of Actuaries (SOA), the North-American Entity which corresponds to Brazilian Institute of Actuarial Science (IBA), which reflects a 10% increase in the probabilities of survival compared to the respective basic tables. The life expectancy in years per the AT-2000 mortality table for participants aged 55 years is 27 and 31 years for men and women, respectively;

(3) The turnover assumption is based on the effective experience of ITAÚ UNIBANCO HOLDING CONSOLIDATED, resulting in the average of 2.4% p.a. based on the 2008/2010 experience;

(4) Using the Projected Unit Credit, the mathematical reserve is determined based on the current projected benefit amount multiplied by the ratio between the length of service in the company at the assessment date and the length of service that will be reached at the date when the benefit is granted. The cost is determined taking into account the current projected benefit amount distributed over the years that each participant is employed.

 

In case of benefits sponsored by foreign subsidiaries, actuarial assumptions adequate to the group of participants and the country's economic scenario are adopted.

 

Biometric/demographic 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.

 

The main differences between the assumptions above and those adopted upon determination of the actuarial liability of defined benefit plans, for the purposes of recording in the balance sheet of the closed-end private pension entities (EFPCs) that manage them, are the discount rate and the actuarial method. Regarding the discount rate assumption, EFPCs adopt a rate consistent with the flow of receipts/payments, in accordance with the study conducted by an independent external consulting company. Regarding the actuarial method, the aggregate method is adopted, by which the mathematical reserve is defined based on the difference between the present value of the projected benefit and the present value of future contributions, subject to the methodology defined in the respective actuarial technical note.

 

II - Risk Exposure

 

Due to its defined benefit plans, ITAÚ UNIBANCO HOLDING CONSOLIDATED 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 based on the income related to securities issued by the Brazilian treasury (government securities). If the actual income related to plan investments 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, aimed at minimizing volatility and short and medium term risk.

 

- Changes in investment income

 

A decrease in income related to public securities will imply a decrease in the discount rate and, therefore, will increase the plan’s actuarial liability. The effect will be partially offset by the recognition of these securities at market value.

 

- Inflation risk

 

Most of the plan benefits 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.

 

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- Life expectancy

 

Most of the plan obligations are to provide life benefits, and therefore an increase in life expectancy will result in increased plan liabilities.

 

III –Management of defined benefit plan assets

 

The general purpose of managing EFPC funds is to search for a long term balance between assets and obligations to pay 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.

 

At 09/30/2018 and 09/30/2017 the allocation of plan assets and the allocation target for 2018, by type of asset, are as follows:

 

   Fair value   % Allocation
Types  09/30/2018   09/30/2017   09/30/2018   09/30/2017   2018 Target
Fixed income securities   17,382,507    16,072,635    96.01%   94.44%  53% to 100%
Variable income securities   17,281    232,570    0.10%   1.37%  0% to 20%
Structured investments   43,300    21,433    0.24%   0.13%  0% to 10%
Real estate   578,716    617,947    3.20%   3.63%  0% to 7%
Loans to participants   82,321    73,961    0.45%   0.43%  0% to 5%
Total   18,104,125    17,018,546    100.00%   100.00%   

 

The defined benefit plan assets include shares of ITAÚ UNIBANCO HOLDING CONSOLIDATED, its main parent company (ITAÚSA) and of subsidiaries of the latter, with a fair value of R$ 10,702 (R$ 225,115 at 09/30/2017), and real estate rented to Group companies, with a fair value of R$ 497,472 (R$ 528,929 at 09/30/2017).

 

Fair value - the fair value of the plan assets is adjusted up to the base 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, taken to be 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 based on reappraisals made in 2017, 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 base 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:

 

   09/30/2018   09/30/2017 
1 - Net assets of the plans   18,104,125    17,018,546 
2 - Actuarial liabilities   (14,813,331)   (14,008,515)
3- Surplus (1-2)   3,290,794    3,010,031 
4- Asset restriction (*)   (3,440,390)   (3,230,495)
5 - Net amount recognized in the balance sheet (3-4)   (149,596)   (220,464)
Amount recognized in Assets (Note 12a)   368,556    337,929 
Amount recognized in Liabilities (Note 12c)   (518,152)   (558,393)

(*) Corresponds to the excess of the present value of the available economic benefit, in conformity with Bacen Resolution nº 4,424/15.

 

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V -Changes in the net amount recognized in the balance sheet:

 

   09/30/2018 
   Plan net assets   Actuarial
liabilities		   Surplus   Asset Ceiling   Recognized
amount		 
Value at the beginning of the period   17,588,377    (14,490,542)   3,097,835    (3,217,361)   (119,526)
Cost of current service   -    (52,023)   (52,023)   -    (52,023)
Net interest (1)   1,275,037    (1,040,105)   234,932    (240,841)   (5,909)
Benefits paid   (823,952)   823,952    -    -    - 
Contributions of sponsor   50,980    -    50,980    -    50,980 
Contributions of participants   7,831    -    7,831    -    7,831 
Effects on asset ceiling   -    -    -    17,812    17,812 
Exchange variation   5,852    (10,141)   (4,289)   -    (4,289)
Remeasurements (2) (3)   -    (44,472)   (44,472)   -    (44,472)
Value at end of the period   18,104,125    (14,813,331)   3,290,794    (3,440,390)   (149,596)

 

   09/30/2017 
   Plan net assets   Actuarial
liabilities		   Surplus   Asset Ceiling   Recognized
amount		 
Value at the beginning of the period   16,520,045    (13,722,927)   2,797,118    (3,008,536)   (211,418)
Cost of current service   -    (50,622)   (50,622)   -    (50,622)
Net interest (1)   1,229,051    (1,008,649)   220,402    (230,574)   (10,172)
Benefits paid   (785,544)   785,544    -    -    - 
Contributions of sponsor   49,493    -    49,493    -    49,493 
Contributions of participants   9,285    -    9,285    -    9,285 
Effects on asset ceiling   -    -    -    7,711    7,711 
Exchange variation   (2,933)   2,472    (461)   -    (461)
Remeasurements (2) (3)   (851)   (14,333)   (15,184)   904    (14,280)
Value at end of the period   17,018,546    (14,008,515)   3,010,031    (3,230,495)   (220,464)

(1) Corresponds to the amount calculated on 01/01/2018 based on the beginning amount (Net Assets, Actuarial Liabilities and Restriction of Assets), taking into account the estimated amount of payments/ receipts of benefits/ contributions, multiplied by the discount rate of 9.98% p.a.(On 01/01/2017 the rate used was 10.24% p.a.);

(2) Remeasurements recorded in net assets and asset ceiling correspond to the income earned above/below the expected return rate;

(3) The actual return on assets amounted to R$ 1,275,037 (R$ 1,228,200 at 09/30/2017).

 

During the period, contributions made totaled R$ 50,980 (R$ 49,493 from 01/01 to 09/30/2017). The contribution rate increases based on the beneficiary’s salary.

 

In 2018, the expected contribution to retirement plans sponsored by ITAÚ UNIBANCO HOLDING CONSOLIDATED is R$ 55,682.

 

The estimate for payment of benefits for the next 10 years is as follows:

 

Period  Estimated
payment		 
2018   1,103,020 
2019   1,125,737 
2020   1,156,848 
2021   1,189,665 
2022   1,220,291 
2023 to 2027   6,562,643 

 

VI -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 – Asset valuation adjustment of the sponsor (before taxes) would amount to:

 

   Effects on actuarial liabilities
of the plans		   Effect which would be
recognized in Stockholders’
Equity (*)		 
Change in Assumption  Value   Percentage of
actuarial
liabilities		   Value 
- Decrease by 0.5%   740,200    5.11%   (268,981)
- Increase by 0.5%   (677,029)   (4.67%)   153,064 

(*) Net of effects of asset ceiling.

 

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d)Defined contribution plans

 

The defined contribution plans have pension funds set up using the portion of sponsors’ contributions not included in the participant’s accounts balance and by the loss of eligibility to a plan benefit, as well as by 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:

 

   09/30/2018   09/30/2017 
   Pension Plan
Fund		   Asset Ceiling   Recognized
Amount		   Pension Plan
Fund		   Asset Ceiling   Recognized
Amount		 
Amount - beginning of the period   1,633,690    (911,929)   721,761    1,287,213    (490,932)   796,281 
Net interest   117,911    (67,268)   50,643    94,494    (37,588)   56,906 
Contribution   (59,017)   -    (59,017)   (63,126)   -    (63,126)
Receivables – allocation of funds (*)   -    -    -    (12,826)   -    (12,826)
Effects on asset ceiling   -    13,424    13,424    (14,980)   4,022    (10,958)
Remeasurements   (10,476)   -    (10,476)   (16,748)   -    (16,748)
Amount - end of the period (Note 12a)   1,682,108    (965,773)   716,335    1,274,027    (524,498)   749,529 

(*) Refers to the allocation of the surplus of Plano Itaubanco CD’s social security fund.

 

e)Other post-employment benefits

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED do not offer other post-employment benefits, except in those cases arising from obligations under acquisition agreements signed by ITAÚ UNIBANCO HOLDING CONSOLIDATED, 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 CONSOLIDATED are as follows:

 

I -Change in the net amount recognized in the balance sheet:

 

   09/30/2018   09/30/2017 
At the beginning of the period   (256,723)   (221,125)
Cost of interest   (18,655)   (16,464)
Benefits paid   14,076    10,409 
At the end of the period (Note 12c)   (261,302)   (227,180)

 

The estimate for payment of benefits for the next 10 years is as follows:

 

Period  Estimated
payment		 
2018   14,986 
2019   16,029 
2020   17,060 
2021   18,154 
2022   19,271 
2023 to 2027   114,593 

 

II -Sensitivity Analyses - Cost of Healthcare

 

For calculation of benefits obligations projected beyond the assumptions used for the defined benefit plans (Note 18c l), the 8.16% p.a. increase in medical costs assumption is adopted.

 

Assumptions for rates related to medical assistance costs have a significant impact on the amounts recognized in income. A change of one percentage point in the medical assistance cost rates would have the following effects:

 

   Recognition  1% increase   1% decrease 
Service cost and cost of interest  Income   3,162    (3,000)
Present value of obligation  Asset valuation adjustment   31,686    (26,453)

 

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Note 19 – Information on foreign subsidiaries

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED has subsidiaries abroad, subdivided into:

 

• Foreign branches: Itaú Unibanco S.A. - Agências Grand Cayman, New York, Tokyo, Nassau Branch; Itaú Unibanco Holding S.A. - Agência Cayman and CorpBanca New York Branch;

 

• Latin America consolidated: basically compose of subsidiaries Banco Itaú Argentina S.A., Banco Itaú Uruguay S.A., Banco Itaú Paraguay S.A., Itaú CorpBanca and Itaú CorpBanca Colômbia S.A.

 

• Other foreign companies: basically compose of subsidiaries Itaú Bank Ltd., ITB Holding Ltd. and Itau BBA International plc.

 

More information on results of foreign units are in the Management’s Discussion and Analysis Report.

 

   Net income (loss) 
   01/01 a   01/01 a 
   09/30/2018   09/30/2017 
Foreign branches   1,262,507    1,572,551 
Latin America consolidated   1,146,883    488,083 
Other foreign companies   486,386    565,566 
Foreign consolidated   2,879,177    2,670,850 

 

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Note 20 – Risk and capital management

 

On February 23, 2017, BACEN published CMN Resolution 4,557, which was in force on August 21, 2017, and revokes CMN Resolutions 3,380, 3,464, 3,721, 3,988, and 4,090, which provide for the implementation of management structure of operating, market, credit, capital and liquidity risk, respectively.

 

Assuming and managing risks is one of the activities carried out by ITAÚ UNIBANCO HOLDING CONSOLIDATED’s and, accordingly, the institution should have established objectives for risk management. Accordingly, the risk appetite defines the nature and level of risks acceptable for the institution and the risk culture guides the attitudes required to manage them. ITAÚ UNIBANCO HOLDING CONSOLIDATED’s seeks robust process for risk management, which permeate the whole institution and that are the basis for strategic decisions to assure the sustainability of business.

 

These processes are aligned with the guidelines of the Board of Directors and Executives that, through corporate bodies, define the global objectives that are measured as goals and limits to the risk management units. Control and capital management units, in turn, support the ITAÚ UNIBANCO HOLDING CONSOLIDATED’s management by monitoring and analyzing risk and capital.

 

The principles providing the foundations for management of risk, risk appetite and guidelines on how ITAÚ UNIBANCO HOLDING CONSOLIDATED’s employees should behave on the day-to-day for decision-making purposes are as follows:

 

·Sustainability and Client Satisfaction: ITAÚ UNIBANCO HOLDING CONSOLIDATED’s vision is to be the leading bank in sustainable performance and client satisfaction and, therefore, it is committed to creating shared value to employees, clients, stockholders, and society, ensuring the continuity of business. ITAÚ UNIBANCO HOLDING CONSOLIDATED’s is committed to do business that is good both for the client and the institution itself.
·Risk Culture: The institution’s risk culture goes beyond policies, procedures or processes, as it strengthens the individual and collective responsibility of all employees so they do the right thing at the right moment and on the proper way, by respecting the ethical way of doing business. The Risk Culture is described below.
·Risk Pricing: ITAÚ UNIBANCO HOLDING CONSOLIDATED’s acts and assumes risks in business it knows and understands, avoiding risks that are unknown to the institution or that do not have a competitive edge, therefore carefully assessing the risk-return ratio.
·Diversification: the institution’s appetite is low with respect to volatility in results and, therefore, it operates with a diversified base of clients, products and business, seeking to diversify risks and giving priority to lower risk business.
·Operational Excellence: It is the wish of Itaú Unibanco to be an agile bank, with a robust and stable infrastructure to offer top services.
·Ethics and Respect for Regulation: for ITAÚ UNIBANCO HOLDING CONSOLIDATED’s, ethics is non-negotiable; therefore, the institute promotes an institutional environment that has integrity, guiding employees to cultivate ethics in relationships and business, and the respect for rules, as it cultivates the care for the institution’s reputation.

 

On August 21, 2017, CMN Resolution 4,557, which provides for the capital and risk management structure, came into force. In the resolution, noteworthy are the implementation of continuous and integrated risk management structure, requirements for definition of the “Risk Appetite Statement” (RAS) and the stress test program, the organization of the Risk Committee and nomination, before BACEN, of the Chief Risk Officer (CRO), with assignment of roles, responsibilities and independence requirements.

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED’s complies with the best risk and capital management practices set forth in CMN Resolution 4,557, so that there are no negative impacts resulting from its adoption.

 

Aiming to strengthen these values and align ITAÚ UNIBANCO HOLDING CONSOLIDATED’s employees’ behavior with its risk management guidelines, the institution adopts a number of initiatives to disseminate the risk culture. ITAÚ UNIBANCO HOLDING CONSOLIDATED’s risk culture is based on four basic principles: conscious risk-taking, discussion of the risks the institution faces, the corresponding action taken, and the responsibility of everyone to manage risks.

 

These principles lay down the basis for ITAÚ UNIBANCO HOLDING CONSOLIDATED’s guidelines by helping employees to consciously understand, identify, measure, manage and mitigate risks.

 

In addition to policies, procedures and processes, the risk culture strengthens the individual and collective responsibility of employees in the management of risks inherent in the activities performed individually, respecting the ethical way of managing business.

 

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ITAÚ UNIBANCO HOLDING CONSOLIDATED promotes the risk culture, emphasizing the behavior that will help people in any level of the institution to assume and manage risk on a responsible way. With these principles disseminated by the institution, there is an incentive for the risk to be understood and discussed frankly, maintained within the limits established for risk appetite, and so that each employee, regardless of their position, area or function, also assumes responsibility for managing risks of their business.

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED also provides channels for reporting operational failures, internal or external frauds, and conflicts in the work environment or situations that might cause disruptions and/or losses to the institution or adversely affect clients. Every employee and third party is responsible for reporting any issues on a promptly basis, as soon as they become aware of the fact.

 

The Board of Directors is the primary body in the establishment of guidelines, policies, and approval level for risk and capital management. The Capital and Risk Management Committee (CGRC), in turn, is responsible for supporting the Board of Directors in the performance of its roles related to capital and risk management. In the executive level, panels, presided over by the Chief Executive Officer (CEO) of Itaú Unibanco, are responsible for capital and risk management and which decisions are monitored in the scope of CGRC.

 

Additionally, the institution has panels, which exercise the responsibilities delegated in capital and risk management, presided over by the Executive Vice-President of the Risk and Finance Department (ARF).

 

Additionally, to support this structure, ARF is structured by specialized officers. The purpose is to ensure, on an independent and centralized basis, that risks and capital of the institution are management in compliance with established the policies and procedures.

 

A detailed description of this structure may be found in the Consolidated Annual Report, in the section our Risk Management. The Consolidated Annual Report is available on the website www.itau.com.br/investor-relations, the section Itaú Unibanco.

 

The risk management organizational structure of Itaú Unibanco is in compliance with the regulations in force in Brazil and abroad, and in line with the best practices of the market. The responsibilities for risk management at Itaú Unibanco are structured in accordance with three defense lines, to wit:

 

·in the first defense line, business areas and back-office corporate areas manage risks originated by them, through their identification, assessment, control and report thereof;
·in the second defense line, an independent unit controls risks on a centralized basis, aiming at assuring that the risks of ITAÚ UNIBANCO HOLDING CONSOLIDATED are managed in accordance with the appetite for risk, and the policies and procedures established. Thus, the centralized control provides the Board of Directors and the executives with a global vision of exposures of ITAÚ UNIBANCO HOLDING CONSOLIDATED so as to optimize and expedite corporate decisions;
·in the third defense line, internal audit performs the independent assessment of the activities carried out in the institution, enabling top management to measure the adequacy of controls, effectiveness of risk management and compliance with internal rules and regulatory requirements.

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED uses automated and robust systems to fully meet capital regulations and to measure risks following regulatory requirements and models in effect. It also coordinates actions to check for adherence to qualitative and quantitative requirements established by the regulatory bodies for compliance with the minimum mandatory capital requirement and risk monitoring.

 

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I – Market risk

 

Market risk is the possibility of incurring financial losses arising from the changes in the market value of positions held by a financial institution, including the risks of transactions subject to foreign exchange variation, interest rates, share prices, price indexes and commodity prices.

 

Market Risk Management Policy is in line with the principles of Resolution nº. 3,464, issued by the National Monetary Council (CMN) and posterior amendments, being a set of principles that drive strategy towards control and management of market risk of all institution.

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED’s market risk management strategy is aimed at balancing corporate business goals, taking into account, among other things:

 

·Political, economic and market conditions;
·Portfolio profile of ITAÚ UNIBANCO HOLDING CONSOLIDATED;
·Expertise within the group to support operations in specific markets.

 

The purpose of market risk control of ITAÚ UNIBANCO HOLDING CONSOLIDATED structure is:

 

·Providing visibility and assurance to all executive levels that the assumption of market risks is in line with ITAÚ UNIBANCO HOLDING CONSOLIDATED risk-return objective;
·Promoting a disciplined and informed discussion on the global risk profile and its evolution over time;
·Increasing transparency on the way the business seeks to optimize results;
·Providing early warning mechanisms in order to make the effective risk management easier, without jeopardizing the business purposes; and
·Monitoring and avoiding risk concentration.

 

The market risk is controlled by an area independent from the business areas, which is responsible for the daily activities of: (i) risk measurement and assessment, (ii) monitoring of stress scenarios, limits and warnings, (iii) application, analysis and tests of stress scenarios, (iv) risk reporting for individuals responsible within the business areas, in compliance with governance of ITAÚ UNIBANCO HOLDING CONSOLIDATED, (v) monitoring of actions required for adjustment of positions and/or risk levels to make them feasible, and (vi) support to the launch of new financial products with security.

 

The National Monetary Council (CMN) has regulations that establish the segregation of exposure to market risk at least in the following categories: interest rate, exchange rate, shares and commodities. Brazilian inflation indexes are treated as a group of risk indicators and receive the same treatment given to other risk indicators.

 

The structure of limits and warnings is in line with the Board of Directors’ guidelines, and it is reviewed and approved on an annual basis. This structure has specific limits aiming at improving the risk monitoring and understanding process, and at avoiding concentration. These limits are quantified by assessing the forecasted results of the balance sheet, size of stockholders’ equity, liquidity, market complexity and volatility, as well as the institution’s appetite for risk.

 

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In order to set up operations within the defined limits, ITAÚ UNIBANCO HOLDING CONSOLIDATED hedges transactions with clients and proprietary positions, including its foreign investments. Derivatives are commonly used for these hedging activities, and can be characterized as accounting or economic hedge, both governed by the institutional polices of ITAÚ UNIBANCO HOLDING CONSOLIDATED.

 

For a detailed vision of the accounting hedge topic, see Note 6 – Securities and Derivative Financial Instruments.

 

The market risk structure categorizes transactions as part of either the banking portfolio or the trading portfolio, in accordance with general criteria established by CMN Resolution nº. 3,464 and BACEN Circular nº. 3,354. The trading portfolio consists of all transactions involving financial instruments and goods, including derivatives, which are carried out with the intention of trading. The banking portfolio is basically characterized by transactions from the banking business, and transactions related to the management of the balance sheet of the institution. It has the no-intention of resale and medium and long term time horizons as general guidelines.

 

Market risk management analyses is conducted based on the following metrics:

 

·Value at risk (VaR): statistical measure that estimates the expected maximum potential economic loss under normal market conditions, considering a certain time horizon and confidence level;
·Losses in stress scenarios: simulation technique to assess the behavior of assets, liabilities and derivatives of a portfolio when several risk factors are taken to extreme market situations (based on prospective and historical scenarios);
·Stop loss: metrics which purpose is to review positions, should losses accumulated in a certain period reach a certain amount;
·Concentration: cumulative exposure of a certain financial instrument or risk factor, calculated at market value (“MtM – Mark to Market”); and
·Stressed VaR: statistical metric arising from VaR calculation, which purpose is to capture higher risk in simulations for the trading portfolio, considering returns that can be seen in historical scenarios of extreme volatility.

 

In addition to the aforementioned risk measures, sensitivity and loss control measures are also analyzed. They comprise:

 

·Mismatching analysis (GAPS): accumulated exposure by risk factor of cash flows expressed at market value, allocated at the maturity dates;

 

·Sensitivity (DV01- Delta Variation): impact on the market value of cash flows, when submitted to an one annual basis point increase in the current interest rates or index rate;

 

·Sensitivity to several risk factors (Greeks): partial derivatives of an option portfolio in relation to the prices of underlying assets, implied volatilities, interest rates and time.

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED uses proprietary systems to measure the consolidated market risk. The processing of these systems occurs in an access-controlled environment, being highly available, which has data safekeeping and recovery processes, and counts on such an infrastructure to ensure the continuity of business in contingency (disaster recovery) situations.

 

At September 30, 2018, ITAÚ UNIBANCO HOLDING CONSOLIDATED posted a Total VaR of R$ 294.7 million (R$ 436.2 million at September 30, 2017). Decrease in Total VaR Total verified in relation to the previous year was mainly due to lower exposition in the Interest Rate market.

 

The document “Public Access Report – Market Risk“, which includes the guidelines established by the institutional credit risk control policy, which is not an integral part of the financial statements, can be viewed at www.itau.com.br/investor-relations, under Itaú Unibanco, Corporate Governance, Regulations and Policies.

 

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II – Credit risk

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED understands credit risk as 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.

 

There is a credit risk control and management structure, centralized and independent from the business units, that provides for operational limits and risk mitigating mechanisms, in addition for establishing processes and tools to measure, monitor and control the credit risk inherent in all products, portfolio concentrations and the impacts from potential changes in the economic environment.

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED establishes its credit policy based on internal factors, such as client rating criteria, performance of and changes in portfolio, default levels, return rates, and allocated economic capital, among others, also considering external factors, such as interest rates, market default indicators, inflation, changes in consumption, among others.

 

To protect the institution against losses arising from loan operations, ITAÚ UNIBANCO HOLDING CONSOLIDATED considers all aspects that determine the client’s credit risk to define a provision level that is adequate with the risk incurred in each operation. For each operation, the assessment and rating of the client or economic group, the operation rating, and the possible existence of past-due amounts are taken into account and the volume of the regulatory provision is determined.

 

In compliance with CMN Resolution 3,721, the document “Public Access Report – Credit Risk“, which includes the guidelines established by the institutional credit risk control policy can be viewed at www.itau.com.br/investor-relations, under Itaú Unibanco, Corporate Governance, Regulations and Policies.

 

III – Operational risk

 

Operational risk is defined as the possibility of losses from failure of, insufficient or inadequate internal processes, people and systems, or from external events impacting the realization of strategic, tactical or operational objectives. It includes the legal risk, associated with the inadequacy or deficiency in agreements signed by the institution, as well as sanctions for failing to meet legal provisions and compensation for damages to third parties arising from activities performed by the institution.

 

The managers of executive areas adopt corporate methodologies developed and made available by the internal controls, compliance and operational risk area.

 

As part of governance of risk management process, consolidated reports on risk monitoring, controls, action plans and operating losses are periodically presented to the business areas’ executives.

 

In line with the principles of CMN Resolution No. 4,557, the document entitled “Public Access Report – Integrated Management of Operational Risk/ Internal Controls/ Compliance“, a summarized version of the institutional operational risk management policy, which is not an integral part of the financial statements, may be accessed on the website www.itau.com.br/investor-relations, section Itaú Unibanco, “Corporate Governance”, Rules and Policies.

 

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IV – Liquidity risk

 

Liquidity risk is defined as the institution’s possibility of not being able to efficiently meet its expected and unexpected obligations, both current and future, including those arising from the pledged guarantees, without affecting its daily operations and without incurring significant losses.

 

The control over liquidity risk is carried out by an area independent from the business area and responsible for establishing the reserve composition, estimating the cash flow and exposure to liquidity risk in different horizons of time, and monitoring the minimum limits to absorb losses in stress scenarios for each country where ITAÚ UNIBANCO HOLDING CONSOLIDATED operates. All activities are subject to verification by the independent validation, internal control and audit areas.

 

In compliance with Circular Letter n° 3,775 of BACEN, bank holding total assets over R$ 100 billion are required to report a standardized Liquidity Coverage Ratio (LCR) to the Central Bank of Brazil on a monthly basis as of October 2015. This ratio is calculated based on a methodology defined by the Central Bank of Brazil itself, and is in line with international guidelines of Basel.

 

The summarized index calculation is presented in the table below. In 2018, the index minimum requirement is 90%. Further details on the LCR for the period may be accessed at www.itau.com.br/investor-relations, section Reports, Pillar 3 and Global Systemically Important Banks, Risk and Capital Management Report.

 

Information on the Liquidity Coverage Ratio (LCR)  Third quarter of 2018 
   Total Adjusted Amount(1) 
Total high-quality liquid assets (2)   179,507,182 
Total potential cash outflows (3)   105,057,841 
Liquidity Coverage Ratio (%)   170.9%

(1) Corresponds to the amount calculated after the application of weighting factors and limits established by BACEN Circular nº. 3,749.

(2) HQLA - High quality liquid assets: balance in the stock, which in certain cases weighted by a discount factor, of assets that remain liquid in the markets during a stress period, which can be easily converted into cash and that pose low risk.

(3) Potential cash outflows calculated in standardized stress, determined by Circular nº. 3,749 (outflows), subtracted from (i) potential cash inflows calculated under standardized stress, set forth by Circular nº. 3,749 and (ii) 75% x Outflows, whichever is lower.

 

The document Public Access Report - Liquidity Risk, that expresses the guidelines set forth by the internal policy on liquidity risk, that is not part of the financial statements, may be viewed on the website www.itau.com.br/investor-relations, in the section Itaú Unibanco, Corporate Governance, Rules and Policies.

 

V - Insurance, Pension Plan and Capitalization Risks

 

The products that make up the portfolios of Insurance companies belonging to ITAÚ UNIBANCO HOLDING CONSOLIDATED are related to life and all risks insurances, private pension plans and capitalization. The main risks inherent in these products are described below and their definitions are presented in their respective chapters.

 

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·Underwriting risk: possibility of losses arising from insurance, pension plan and capitalization operations contrary to the institution’s expectations, directly or indirectly associated with technical and actuarial bases adopted to calculate premiums, contributions and provisions;
·Market risk;
·Credit risk;
·Operational risk;
·Liquidity risk.

 

The management process of insurance, pension plan and capitalization risks is independent and focused on the specifics of each risk.

 

VI - Social and Environmental Risk

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED understands social and environmental risk as the risk of potential losses due to exposure to social and environmental damages arising from the performance of its activities.

 

Mitigation actions concerning the social and environmental risk are carried out by mapping processes, risks and controls, monitoring new regulations on the subject, and recording any occurrences in internal databases. In addition to identification, the phases of prioritization, response, monitoring and reporting of assessed risks supplement this risk monitoring at ITAÚ UNIBANCO HOLDING CONSOLIDATED.

 

The Social and environmental risk management is carried out by the first line of defense in its daily operations, with the technical assessment of the legal and risk areas, which have a technical dedicated team. Business units also have governance for approval of new products, which includes the assessment of the social and environmental risk, therefore ensuring compliance with this requirement for all new products approved by the institution. Governance still has the Social and Environmental Risk Committee, which main duty is to guide the institutional understanding related to exposure to social and environmental risk for the institution’s activities.

 

ITAÚ UNIBANCO HOLDING CONSOLIDATED consistently seeks to evolve in the social and environmental risk governance, always attentive to any challenges to keep pace with the changes in and demands of society. Therefore, among other actions, Itaú Unibanco has assumed and incorporated into its internal processes a number of national and international voluntary commitments and pacts aimed at integrating social, environmental and governance aspects into business. Highlights go to the Principles for Responsible Investment (PRI), the Charter for Human Rights – Ethos, the Equator Principles (EP), the Global Compact, the Carbon Disclosure Project (CDP), the Brazilian GHG Protocol Program, and the Brazilian Pact for Eradicating Slave Labor, among others. ITAÚ UNIBANCO HOLDING CONSOLIDATED’s efforts to spread knowledge on the assessment of social and environmental criteria have been recognized in Brazil and overseas, as shown by our recurring presence in top sustainability indexes, both abroad, with the Dow Jones Sustainability Index, and more recently, with the Sustainability Index Euronext Vigeo – Emerging 70, and in Brazil, with the Corporate Sustainability Index, in addition to other numerous prizes with which ITAÚ UNIBANCO HOLDING CONSOLIDATED has been awarded.

 

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Note 21 – Supplementary information

 

a)Insurance policy - ITAÚ UNIBANCO HOLDING CONSOLIDATED despite the low risk exposure due to the physical non-concentration of their assets, it has a policy of guaranteeing their valuables and assets at amounts considered sufficient to cover possible claims.

 

b)Foreign currency – The balances in Reais linked to the foreign currencies were as follows:

 

   09/30/2018   09/30/2017 
Permanent foreign investments   60,963,937    73,973,216 
Net amount of other assets and liabilities indexed to foreign currency, including derivatives   (108,665,121)   (128,741,675)
Net foreign exchange position   (47,701,184)   (54,768,459)

 

The net foreign exchange position, considering the tax effects on the net balance of other assets and liabilities indexed to foreign currencies, reflects the low exposure to exchange variations.

 

c)Investment funds and managed portfolios - ITAÚ UNIBANCO HOLDING CONSOLIDATED, through its subsidiaries, manages the following types of funds: privatization, fixed income, shares, open portfolio shares, investment clubs, customer portfolios and group portfolios, domestic and foreign, classified in memorandum accounts, distributed as follows:

 

   Amount   Amount (*)   Number of funds 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Investment funds   911,301,892    777,506,070    911,301,892    777,506,070    5,939    5,501 
Fixed income   846,699,930    733,750,308    846,699,930    733,750,308    5,545    5,134 
Shares   64,601,962    43,755,762    64,601,962    43,755,762    394    367 
Managed portfolios   282,697,523    258,831,366    182,184,775    160,987,922    20,789    18,408 
Customers   219,282,995    198,507,678    162,188,371    141,832,412    20,715    18,326 
Itaú Group   63,414,528    60,323,688    19,996,404    19,155,510    74    82 
Total   1,193,999,415    1,036,337,436    1,093,486,667    938,493,992    26,728    23,909 

(*) Refers to the total amounts after elimination of double counting related to investments in investment fund portfolios.

 

d)Consortia funds

 

   09/30/2018   09/30/2017 
Monthly estimate of installments receivable from participants   167,685    172,454 
Group liabilities by installments   11,640,159    11,004,816 
Participants – assets to be delivered   9,843,014    9,232,614 
Funds available for participants   1,839,808    1,735,724 
(In units)          
Number of managed groups   554    567 
Number of current participants   392,538    388,236 
Number of assets to be delivered to participants   138,380    133,974 

 

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e)Fundação Itaú Social - ITAÚ UNIBANCO HOLDING CONSOLIDATED, through its subsidiaries, is the main sponsor of Fundação Itaú Social, the objectives of which are managing the “Itaú Social Program”, which aims at coordinating the organization’s role in projects of interest to the community by supporting or developing social, scientific and cultural projects, mainly in the elementary education and health areas and supporting projects or initiatives in progress, supported or sponsored by entities qualified to work in the ”Programa Itaú Social” (Itaú Social Program).

 

During the period from 01/01 to 09/30/2018 and 01/01 to 09/30/2017, the subsidiaries did not make donations and the foundation´s net assets totaled R$ 4,587,966 (R$ 3,966,424 at 09/30/2017). The funds to finance the objectives of the foundation and maintain its operating and administrative structure derive from donations and proceeds generated by its assets.

 

f)Instituto Itaú Cultural – ITAÚ UNIBANCO HOLDING CONSOLIDATED, through its subsidiaries, is the main sponsor of Instituto Itaú Cultural, an entity set up to promote and disseminate Brazilian culture across the country and abroad.

 

During the period from 01/01 to 09/30/2018 and 01/01 to 09/30/2017, the subsidiaries made donations in the amount of R$ 93,000 (R$ 92,807 from 01/01 to 09/30/2017) and the institute’s net assets totaled R$ 34,879 (R$ 32,616 at 09/30/2017). The funds to finance the objectives of the institute and maintain its operating and administrative structure derive from donations and proceeds generated by its assets.

 

g)Instituto Unibanco - ITAÚ UNIBANCO HOLDING CONSOLIDATED sponsors Instituto Unibanco, an entity whose objective is to support projects on social assistance, particularly education, culture, promotion of integration to labor market, and environmental protection, directly and/or supplementary, through the civil society’s institutions.

 

During the period from 01/01 to 09/30/2018 and 01/01 to 09/30/2017, the subsidiaries did not make donations and the institute’s net assets totaled R$ 1,897,238 (R$ 1,813,421 at 09/30/2017). The funds to finance the objectives of the institute and maintain its operating and administrative structure derive from donations and proceeds generated by its assets.

 

h)Instituto Unibanco de Cinema - ITAÚ UNIBANCO HOLDING CONSOLIDATED, through its subsidiaries, is the main sponsors Instituto Unibanco de Cinema, an entity whose objectives are the fostering of culture in general, and providing the low-income population with access to cinematography, videography and similar productions, for which it shall own and manage movie theaters, and theaters to screen films, videos, video-laser discs and other related activities, as well as to screen and divulge films of importance, especially those produced in Brazil.

 

During the period from 01/01 to 09/30/2018 and 01/01 to 09/30/2017, the subsidiaries did not make donations and the institute’s net assets totaled R$ 18,661 (R$ 19,534 at 09/30/2017). The funds to finance the objectives of the institute and maintain its operating and administrative structure derive from donations and proceeds generated by its assets.

 

i)Associação Itaú Viver Mais - ITAÚ UNIBANCO HOLDING CONSOLIDATED, through its subsidiaries, is the main sponsor Associação Itaú Viver Mais, an entity whose objective is the provision of social services for the welfare of beneficiaries, in the way and conditions established by its Internal Rules, and according to the funds available. These services may include, among others, the promotion of cultural, educational, sports, entertainment and healthcare activities.

 

During the period from 01/01 to 09/30/2018 and 01/01 to 09/30/2017, the subsidiaries made donations in the amount of R$ 920 (R$ 920 from 01/01 to 09/30/2017) and the association’s net assets totaled R$ 459 (R$ 774 at 09/30/2017). The funds to finance the objectives of the association and maintain its operating and administrative structure derive from donations and proceeds generated by its assets.

 

j)Associação Cubo Coworking - ITAÚ UNIBANCO HOLDING CONSOLIDATED, through its subsidiaries, is the main sponsor of Associação Cubo Coworking, an entity set up to encourage and promote: discussions, the development of alternative and innovative technologies, business models and solutions; the production and dissemination of the resulting technical and scientific knowledge; the attraction and gathering of new information technology talents that may be characterized as startups; research, development and establishment of ecosystems for entrepreneurship and startups.

 

During the period from 01/01 to 09/30/2018 and 01/01 to 09/30/2017, the subsidiaries made payments in the amount of R$ 31,050 (R$ 9,500 from 01/01 to 09/30/2017) and the association’s net assets totaled R$ 3,416 (R$ 3,386 at 09/30/2017). The funds to finance the objectives of the association and maintain its operating and administrative structure derive from payments and proceeds generated by its assets.

 

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k)Agreements for offsetting and settlement of liabilities within the scope of the National Financial System – Offset agreements were entered into within the scope of derivative contracts, as well as agreements for the offsetting and settlement of receivables and payables pursuant to CMN Resolution nº. 3,263, of February 24, 2005, the purpose of which is to enable the offsetting of credits and debits maintained with the same counterparty, and where the maturity dates of receivables and payables can be advanced to the date an event of default by one of the parties occurs or in the case of bankruptcy of the debtor.

 

l)Acquisition of minority interest in Edenred Participações S.A.

 

On September 4, 2018, ITAÚ UNIBANCO HOLDING, through its controlled company ITAÚ UNIBANCO, entered into, with Edenred Participações S.A. (EDENRED) a strategic partnership in the benefit market to workers governed mainly by PAT – Worker’s Meal Program. EDENRED is controlled by Ticket Serviços S.A. (TICKET) in Brazil.

 

The strategic partnership will enable ITAÚ UNIBANCO to add the benefits issued by TICKET to its current offer of products and services focused on clients of wholesale, medium, micro and small companies segments.

 

In addition, ITAÚ UNIBANCO will make a minority investment of 11% in TICKET, through a capital increase with contribution of (i) cash, equivalent to said interest in the company's equity value, and (ii) right to exclusive distribution of Ticket Restaurante, Ticket Alimentação, Ticket Cultura and Ticket Transporte products to the Bank’s legal entities base during the partnership term. TICKET will continue distributing its products through other commercial agreements and will continue under EDENRED’s control and management.

 

The effective acquisitions and financial settlements will occur after the required regulatory approvals.

 

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(A free translation of the original in Portuguese)

 

Report on review of interim financial statements

 

To the Board of Directors and Stockholders

Itaú Unibanco Holding S.A.

 

Introduction

 

We have reviewed the accompanying interim financial statements of Itaú Unibanco Holding S.A. (parent Company), which comprise the balance sheet as at September 30, 2018 and the related statements of income, changes in stockholders' equity and cash flows for the nine-month period then ended, as well as the accompanying consolidated interim financial statements of Itaú Unibanco Holding S.A. and its subsidiaries (“Consolidated”), which comprise the consolidated balance sheet as at September 30, 2018 and the related consolidated statements of income and cash flows for the nine-month period then ended, and a summary of significant accounting policies and other explanatory information.

 

Management is responsible for the preparation and fair presentation of the parent company and consolidated interim financial statements in accordance with accounting practices adopted in Brazil, applicable to institutions authorized to operate by the Brazilian Central Bank (BACEN). Our responsibility is to express a conclusion on these interim financial statements based on our review.

 

Scope of review

 

We conducted our review in accordance with Brazilian and International Standards on Review Engagements (ISRE 2410- Review of Interim Financial Information Performed by the Independent Auditor of the Entity). A review of interim financial statements consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Brazilian and International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion on the parent company and

consolidated interim financial statements

 

Based on our review, nothing has come to our attention that causes us to believe that the parent company and the consolidated interim financial statements referred to above do not present fairly, in all material respects, the financial position of Itaú Unibanco Holding S.A. and Itaú Unibanco Holding S.A and its subsidiaries as at September 30, 2018 and the parent company financial performance and cash flows, as well as the consolidated financial performance and the consolidated cash flows, for the nine-month period then ended, in accordance with accounting practices adopted in Brazil, applicable to institutions authorized to operate by the Brazilian Central Bank.

 

PricewaterhouseCoopers, Av. Francisco Matarazzo 1400, Torre Torino, São Paulo, SP, Brasil, 05001-903, Caixa Postal 61005,

T: +55 (11) 3674 2000, www.pwc.com.br

 

 

 

 

 

Itaú Unibanco Holding S.A.

 

Other matters

 

Statement of added value

 

We also have reviewed the interim statements of added value of ltaú Unibanco Holding S.A. and Itaú Unibanco Holding S.A. and its subsidiaries for the nine-month period ended September 30, 2018, presented as supplementary information. These statements have been submitted to the same review procedures described in the second paragraph above and, based on our review, nothing has come to our attention that causes us to believe that these statements are not prepared consistently, in all material respects, with the interim financial statements taken as a whole.

 

São Paulo, October 29, 2018

 

 
PricewaterhouseCóopers  
Auditores Independentes  
CRC 2SP000160/O-5  
   
 
Washington Luiz Pereira Cavalcanti  
Contador CRC 1SP172940/O-6  

 

 

 

 

ITAÚ UNIBANCO HOLDING S.A.

 

CNPJ. 60.872.504/0001-23 Listed Company NIRE. 35300010230

 

OPINION OF THE FISCAL COUNCIL

 

The effective members of the Fiscal Council of ITAÚ UNIBANCO HOLDING S.A., after having examined the financial statements for the period from January to September 2018 and verified the accuracy of all items examined, and in view of the unqualified opinion of PricewaterhouseCoopers Auditores Independentes, understand that these documents adequately reflect the company’s capital structure, financial position and the activities conducted during the period, and they have the conditions to be submitted to the appreciation and approval of the Stockholders.

 

São Paulo (SP), October 29, 2018.

 

JOSÉ CARUSO CRUZ HENRIQUES

President

 

ALKIMAR RIBEIRO MOURA CARLOS ROBERTO DE ALBUQUERQUE SÁ
Member Member

 

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