EX-99.1 2 tv505801_ex99-1.htm EXHIBIT 99.1

 

Exhibit 99.1

 

 

 

 

  

 

Report on review of consolidated

interim financial statements

 

To the Board of Directors and Stockholders

Itaú Unibanco Holding SA

 

Introduction

 

We have reviewed the accompanying consolidated interim balance sheet of Itaú Unibanco Holding S.A. and its subsidiaries ("Company") as at September 30, 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for the three-month and 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 these consolidated interim financial statements in accordance with International Accounting Standard (IAS) 34 - "Interim Financial Reporting" issued by the International Accounting Standards Board (IASB). 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 Reviews of Interim Financial Information (NBC TR 2410 - "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" and ISRE 2410 - "Review of Interim Financial Information Performed by the Independent Auditor of the Entity", respectively). A review of interim information 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 consolidated interim financial statements

 

Based on our review, nothing has come to our attention that causes us to believe that the accompanying consolidated interim financial statements do not present fairly, in all material respects, the financial position of Rail Unibanco Holding S.A. and its subsidiaries as at September 30, 2018, and their consolidated financial performance and cash flows for the three-month and nine-month period then ended, in accordance with IAS 34 - "Interim Financial Reporting", issued by the International Accounting Standards Board (IASB).

 

    
PricewaterhouseCoopers, Av. Francisco Matarazzo1400, Torre Torino, São Paulo, SP, Brasil, 05001-903, Cabal Postal 61005,
T: +55 (11) 3674 2000, www.pwc.com.br

  

 

 

  

 

Itaú Unibanco Holding S.A.

 

Other matters

 

Supplementary information -

consolidated statement of added val

 

We have also reviewed the consolidated statement of added value for the three-month and nine-month period ended September 3o, 2018, which is the responsibility of the Company's management. The presentation of this statement is required by the Brazilian corporate legislation for listed companies, but is considered supplementary information for purposes of International Financial Reporting Standards (IFRS). This statement was subject to the same review procedures described above and, based on our review, nothing has come to our attention that causes us to believe that they are not properly prepared, in all material respects, in relation to the consolidated financial statements taken as a whole.

 

Sao Paulo, October 29, 2018

 

 

PricewaterhouseCoopers

Auditores Independentes

CRC 2SPoom6o/0-5

 

 

Washington Luiz Pereira Cavalcanti

Contador CRC ISPI.7294o/0-6

 

 

 

 

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 National Monetary Council (CMN), in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB).

 

New accounting standard IFRS 9 on financial instruments became effective on January 1, 2018. This standard introduces significant amendments to classification and measurement, impairment and hedge accounting. The most significant change resulting from IFRS 9 is how banks account for loan losses. As from IFRS 9 these will be addressed as expected rather than incurred, as before.

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 20185

 

 

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, middle-market, 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.  

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 20186

 

 

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.

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 20187

 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 20188

 

  

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

 

7 th 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

(Padrao 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 Economico 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)

   Itau 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)

   Itau 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  

(Padrao 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)

(Negocios da Comunicacao 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   (IstoE 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 20189

 

  

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    18.7 
Recurring Net Income (R$ billion)   18.3    18.4 
Recurring Return on Average Equity - Annualized   19.8%   20.7%
Net Banking Product of Expected Losses from Financial Assets and Claims   66.8    71.5 
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(1)(2) (R$ billion)   179.5    190.9 
Liquidity Coverage Ratio (LCR)(2)   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(3)   3,531    3,523 
CSBs – Brazil   700    718 
Branches + CSBs - Latin America   513    522 
Automated Teller Machines (ATMs) – units (4)   47,887    46,700 

 

   Sept/30/2018   Dec/31/2017 
Assets          
Total Assets (R$ billion)   1,524.5    1,436.2 
Total Credit Portfolio, including Financial Guarantees Provided (R$ billion)   604.0    568.2 
Loan Portfolio/Funding(5)   76.1%   74.4%
Stockholders' Equity (R$ billion)   129.9    131.4 
Funding          
Demand, Savings, and Time Deposits (R$ billion)   451.4    400.8 
Debentures (Linked to Repurchase Agreemens and Third Parties' Operations) (R$ billion)   29.5    58.8 
Funds from Bills and Structured Operations Certificates (R$ billion)   74.4    65.7 

 

(1) 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.

 

(2) 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.

 

(3) Includes IBBA representative offices abroad.

 

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

 

(5) The loan portfolio was calculated in BRGAAP and does not include financial guarantees provided.

 

From January to September 2018, net income was R$18.8 billion, up 0.3% from the same period of the previous year.

 

Our general and administrative expenses increased 8.7% between the first nine months of 2017 and 2018, mainly driven by increases in compensation and benefits and 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, at September 30, 2018, 100.8 thousand employees who work focused on customer satisfaction. benefits totaled R$12.6 billion in the first nine months of 2018.

 

In this nine-month period, we highlight the 7.4% increase in commissions and fees from the same period of 2017, mainly those related to current account services, fund management and credit cards.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201810

 

 

Loan portfolio reached R$604.0 billion at the end of September 2018, up 6.3% from the end of 2017. From January to September of 2018, we recorded increases in the portfolios of loans to individuals and to 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. 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.

¹In BRGAAP.

 

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 chang 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%.

 

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’ brand by publications such as Interbrand, among other relevant recognition.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201811

 

  

       R$   % 
Shares  September 30, 2018   September 30, 2017   Change 
Net income per share - Basic(1)               
Common Shares   2.82    2.83    (0.4)
Preferred Shares   2.82    2.83    (0.4)
Net income per share - Diluted(2)               
Common Shares   2.80    2.81    (0.4)
Preferred Shares   2.80    2.81    (0.4)
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    10.9 
Market value (in billions)(3)(4)   284.3    282.0    0.8 

 

(1) Calculated by dividing the net profit attributable to shareholders by the average number of shares, excluding the number of shares purchased by the company.

 

(2) Calculated similarly to (1), including the denominator (adjusted weighted average shares) actions related to stock options granted to the Stock Option Plan, assuming the potential plan of stock option exercise (Note 21a).

 

(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$264.5 billion on September 30, 2018 and R$ 254.4 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 principlesisor 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.

 

5.2) Brazilian Accounting Practices (BRGAAP)

 

We disclosed the complete financial statements in accordance with Brazilian accounting practices (BRGAAP) 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).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201812

 

  

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Balance Sheet

(In millions of Reais)

 

Assets  Note  09/30/2018   12/31/2017   01/01/2017 
Cash and deposits on demand      29,467    18,749    18,542 
Financial Assets      1,396,078    1,330,251    1,246,833 
Compulsory deposits in the Central Bank of Brazil      85,957    98,837    85,700 
At Amortized Cost      1,001,990    905,729    902,289 
Interbank deposits  4   28,653    29,048    22,688 
Securities purchased under agreements to resell  4   293,994    244,707    265,050 
Securities  9   111,091    111,424    102,568 
Loan operations and lease operations portfolio  10   534,372    497,719    494,851 
Other financial assets  18a   68,912    59,568    53,895 
(-) Provision for Expected Loss      (35,032)   (36,737)   (36,763)
At Fair Value Through Other Comprehensive Income      48,793    52,149    40,039 
Securities  8   48,793    52,149    40,039 
At Fair Value Through Profit or Loss      259,338    273,536    218,805 
Securities  5   230,671    250,693    194,574 
Derivatives  6 and 7   28,667    22,843    24,231 
Investments in associates and jointly controlling entities  11   11,898    5,055    5,073 
Goodwill      11,641    10,716    9,675 
Fixed assets, net  13   7,219    7,359    8,042 
Intangible assets, net  14   8,635    8,667    7,381 
Tax assets      46,822    44,249    45,081 
Income tax and social contribution - current      1,946    2,336    2,703 
Income tax and social contribution - deferred  25b   38,265    35,869    38,202 
Other      6,611    6,044    4,176 
Assets held for sale  34.9   788    736    631 
Other assets  18a   11,941    10,457    10,056 
Total assets      1,524,489    1,436,239    1,351,314 

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201813

 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Balance Sheet

(In millions of Reais)

 

Liabilities and stockholders' equity  Note  09/30/2018   12/31/2017   01/01/2017 
Financial Liabilities      1,125,214    1,056,717    1,012,075 
At Amortized Cost      1,088,737    1,024,584    982,116 
Deposits  15   454,552    402,938    329,414 
Securities sold under repurchase agreements  17a   302,781    312,634    349,164 
Interbank market debt  17a   142,619    129,616    135,483 
Institutional market debt  17b   100,912    98,482    96,239 
Liabilities for capitalization plans      3,382    3,301    3,147 
Other financial liabilities  18b   84,491    77,613    68,669 
At Fair Value Through Profit or Loss      32,093    27,211    25,217 
Derivatives  6 and 7   31,886    26,746    24,698 
Structured notes  16   207    465    519 
Provision for Expected Loss  10   4,384    4,922    4,742 
Loan Commitments      3,060    3,015    2,761 
Financial Guarantees      1,324    1,907    1,981 
Reserves for insurance and private pension  28c ll   194,456    181,232    154,076 
Provisions  30   18,971    19,736    20,909 
Tax liabilities      6,198    7,836    4,950 
Income tax and social contribution - current      3,536    3,175    1,741 
Income tax and social contribution - deferred  25b II   376    391    (289)
Other      2,286    4,270    3,498 
Other liabilities  18b   34,743    26,362    26,920 
Total liabilities      1,379,582    1,291,883    1,218,930 
Capital  19a   97,148    97,148    97,148 
Treasury shares  19a   (1,963)   (2,743)   (1,882)
Additional paid-in capital  19c   1,928    1,930    1,785 
Appropriated reserves  19c   6,564    11,681    6,466 
Unappropriated reserves  19c   29,481    25,994    20,370 
Cumulative other comprehensive income      (3,279)   (2,632)   (3,792)
Total stockholders’ equity attributed to the owners of the parent company      129,879    131,378    120,095 
Non-controlling interests  19d   15,028    12,978    12,289 
Total stockholders’ equity      144,907    144,356    132,384 
Total liabilities and stockholders' equity      1,524,489    1,436,239    1,351,314 

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201814

 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Income
Periods ended

(In millions of Reais, except for number of shares and earnings per share information)

 

      07/01 to   07/01 to   01/01 to   01/01 to 
   Note  09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Banking product      26,897    29,802    75,482    86,708 
Interest and similar income  21a   34,468    35,644    99,664    112,455 
Interest and similar expense  21b   (17,489)   (19,203)   (50,797)   (62,854)
Dividend income      102    3    299    178 
Adjustments to Fair Value of Financial Assets and Liabilities  21c   (711)   2,386    (6,613)   5,604 
Foreign exchange results and exchange variations on transactions      (400)   541    1,046    767 
Banking service fees  22   9,188    8,591    27,168    25,302 
Income related to insurance, private pension and capitalization operations before claim and selling expenses      1,162    1,240    3,435    3,936 
Income related to insurance and private pension  28b III   5,697    6,881    17,847    20,141 
Reinsurance Premiums  28b III   (7)   (3)   (12)   (29)
Change in reserves for insurance and private pension      (4,636)   (5,775)   (14,752)   (16,606)
Revenue from capitalization plans      108    137    352    430 
Other income  23   577    600    1,280    1,320 
Expected Loss from Financial Assets and Claims      (1,523)   (3,958)   (8,664)   (15,202)
Expected Loss with Loan Operations and Lease Operations  10c   (2,660)   (3,635)   (8,886)   (13,132)
Expected Loss with Other Financial Assets      1,457    (4)   1,156    (1,169)
Expenses for claims      (325)   (329)   (961)   (928)
Recovery of claims under reinsurance      5    10    27    27 
Net Banking Product of Expected Losses from Financial Assets and Claim      25,374    25,844    66,818    71,506 
Other operating income (expenses)      (17,082)   (15,555)   (46,588)   (44,141)
General and administrative expenses  24   (15,608)   (13,666)   (42,472)   (39,078)
Tax expenses      (1,654)   (2,025)   (4,586)   (5,474)
Share of profit or (loss) in associates and jointly controlling entities  11   180    136    470    411 
Income before income tax and social contribution  25   8,292    10,289    20,230    27,365 
Current income tax and social contribution      (577)   (1,556)   (4,844)   (4,531)
Deferred income tax and social contribution      (1,384)   (2,673)   3,396    (4,119)
Net income      6,331    6,060    18,782    18,715 
Net income attributable to owners of the parent company  26   6,125    5,993    18,254    18,387 
Net income (loss) attributable to non-controlling interests  19f   206    67    528    328 
Earnings per share - basic  26                    
Common      0.95    0.92    2.82    2.83 
Preferred      0.95    0.92    2.82    2.83 
Earnings per share - diluted  26                    
Common      0.94    0.91    2.80    2.81 
Preferred      0.94    0.91    2.80    2.81 
Weighted average number of shares outstanding - basic  26                    
Common      3,305,526,906    3,351,741,143    3,305,526,906    3,351,741,143 
Preferred      3,170,314,227    3,148,333,412    3,173,157,067    3,155,392,878 
Weighted average number of shares outstanding - diluted  26                    
Common      3,305,526,906    3,351,741,143    3,305,526,906    3,351,741,143 
Preferred      3,218,309,547    3,201,020,557    3,207,330,578    3,194,672,190 

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201815

 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Comprehensive Income
Periods ended

(In millions of Reais)

 

      07/01 to   07/01 to   01/01 to   01/01 to 
   Note  09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Net income      6,330    6,060    18,782    18,715 
Financial assets at fair value through other comprehensive income      (93)   603    (865)   984 
Change in fair value      (313)   980    (1,643)   1,540 
Income tax effect      25    (368)   612    (605)
(Gains) / losses transferred to income statement  21c   353    (16)   301    89 
Income tax effect      (158)   7    (135)   (40)
Hedge      (253)   239    (2,055)   (172)
Cash flow hedge  7   125    (44)   56    (313)
Change in fair value      209    (187)   129    (577)
Income tax effect      (84)   143    (73)   264 
Hedge of net investment in foreign operation  7   (378)   283    (2,111)   141 
Change in fair value      (663)   568    (3,628)   178 
Income tax effect      285    (285)   1,517    (37)
Remeasurements of liabilities for post-employment benefits (*)      8    10    9    (49)
Remeasurements  27   13    (3)   24    (27)
Income tax effect      (5)   13    (15)   (22)
Foreign exchange differences on foreign investments      503    (456)   2,264    (140)
Total other comprehensive income      165    396    (647)   623 
Total comprehensive income      6,495    6,456    18,135    19,338 
Comprehensive income attributable to non-controlling interests      206    67    528    328 
Comprehensive income attributable to the owners of the parent company      6,289    6,389    17,607    19,010 

 

(*) Amounts that will not be subsequently reclassified to income.

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201816

 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Changes in Stockholders’ Equity (Notes 19 and 20)

Periods ended September 30, 2018 and 2017

(In millions of Reais)

 

    Attributed to owners of the parent company                    
                                        Other comprehensive income                    
                                        Financial Assets                       Total     Total        
                                        at Fair Value     Remeasurements     Cumulative           stockholders’     stockholders’        
                Additional                       Through Other     of liabilities of post-     translation     Gains and     equity – owners     equity – non-        
          Treasury     paid-in     Appropriated     Unappropriated     Retained     Comprehensive     employment     adjustments     losses –     of the parent     controlling        
    Capital     shares     capital     reserves     reserves     earnings     Income (1)     benefits     abroad     hedge(2)     company     interests     Total  
                                                                               
Balance at 01/01/2017   97,148    (1,882)   1,785    6,466    20,370    -    (1,249)   (815)   2,085    (3,813)   120,095    12,289    132,384 
Transactions with owners   -    (527)   (74)   7,493    -    (11,968)   -    -    -    -    (5,076)   (77)   (5,153)
Treasury shares   -    (527)   19    -    -    -    -    -    -    -    (508)   -    (508)
Acquisition of treasury shares (Note 19a)   -    (1,377)   -    -    -    -    -    -    -    -    (1,377)   -    (1,377)
Result of delivery of treasury shares   -    850    19    -    -    -    -    -    -    -    869    -    869 
Recognition of stock-based payment plans   -    -    (93)   -    -    -    -    -    -    -    (93)   -    (93)
(Increase) / Reduction of interest of controlling stockholders (Note 2.4a I and 3)   -    -    -    -    -    -    -    -    -    -    -    74    74 
Dividends / interest on capital – Special profit reserve (Note 19b)   -    -    -    7,493    -    (11,968)   -    -    -    -    (4,475)   (151)   (4,626)
Dividends / Interest on capital paid in 2017 - Year 2016 - Special profit reserve   -    -    -    (5,048)   -    -    -    -    -    -    (5,048)   -    (5,048)
Corporate reorganizations (Note 2.4 a III)   -    -    -    (518)   -    -    -    -    -    -    (518)   -    (518)
Other   -    -    -    -    (3)   -    -    -    -    -    (3)   -    (3)
Total comprehensive income   -    -    -    -    -    18,387    984    (49)   (140)   (172)   19,010    328    19,338 
Net income   -    -    -    -    -    18,387    -    -    -    -    18,387    328    18,715 
Other comprehensive income for the period   -    -    -    -    -    -    984    (49)   (140)   (172)   623    -    623 
Appropriations:                                                                 
Legal reserve   -    -    -    831    -    (831)   -    -    -    -    -    -    - 
Statutory reserve   -    -    -    3,812    1,776    (5,588)   -    -    -    -    -    -    - 
Balance at 09/30/2017   97,148    (2,409)   1,711    13,036    22,143    -    (265)   (864)   1,945    (3,985)   128,460    12,540    141,000 
Change in the period   -    (527)   (74)   6,570    1,773    -    984    (49)   (140)   (172)   8,365    251    8,616 
Balance at 01/01/2018   97,148    (2,743)   1,930    11,681    25,994    -    (239)   (825)   2,816    (4,384)   131,378    12,978    144,356 
Transactions with owners   -    780    (2)   1,449    -    (7,709)   -    -    -    -    (5,482)   1,522    (3,960)
Treasury shares   -    780    377    (534)   -    -    -    -    -    -    623    -    623 
Acquisition of treasury shares (Note 19a)   -    (510)   -    -    -    -    -    -    -    -    (510)   -    (510)
Cancellation of Shares – Meeting of the Board of Directors 02/22/2018   -    534    -    (534)   -    -    -    -    -    -    -    -    - 
Result of delivery of treasury shares   -    756    377    -    -    -    -    -    -    -    1,133    -    1,133 
Recognition of stock-based payment plans   -    -    (379)   -    -    -    -    -    -    -    (379)   -    (379)
(Increase) / Reduction of interest of controlling stockholders (Note 2.4a I and 3)   -    -    -    -    -    -    -    -    -    -    -    1,618    1,618 
Dividends / interest on capital   -    -    -    1,983    -    (7,709)   -    -    -    -    (5,726)   (96)   (5,822)
Dividends / Interest on capital paid in 2018 - Year 2017 - Special profit reserve   -    -    -    (13,673)   -    -    -    -    -    -    (13,673)   -    (13,673)
Corporate reorganizations (Note 2.4 a III)   -    -    -    (471)   -    -    -    -    -    -    (471)   -    (471)
Unclaimed dividends   -    -    -    -    -    3    -    -    -    -    3    -    3 
Other (3)   -    -    -    -    517    -    -    -    -    -    517    -    517 
Total comprehensive income   -    -    -    -    -    18,254    (865)   9    2,264    (2,055)   17,607    528    18,135 
Net income   -    -    -    -    -    18,254    -    -    -    -    18,254    528    18,782 
Other comprehensive income for the period   -    -    -    -    -    -    (865)   9    2,264    (2,055)   (647)   -    (647)
Appropriations:                                                                 
Legal reserve   -    -    -    764    -    (764)   -    -    -    -    -    -    - 
Statutory reserve   -    -    -    6,814    2,970    (9,784)   -    -    -    -    -    -    - 
Balance at 09/30/2018   97,148    (1,963)   1,928    6,564    29,481    -    (1,104)   (816)   5,080    (6,439)   129,879    15,028    144,907 
Change in the period   -    (780)   2    5,117    (3,487)   -    865    (9)   (2,264)   2,055    1,499    (2,050)   (551)

 

(1)Includes Share of Other Comprehensive Income of Investments in Associates and Joint Ventures related to Financial Assets at Fair Value Through Other Comprehensive Income.

 

(2)Includes Cash flow hedge and hedge of net investment in foreign operation.

 

(3)Includes Argentina´s hyperinflation adjustment.

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201817

 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Cash Flows

(In millions of Reais)

 

      07/01 to   07/01 to   01/01 to   01/01 to 
   Note  09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Adjusted net income      17,704    12,228    42,566    49,468 
Net income      6,331    6,060    18,782    18,715 
Adjustments to net income:      11,373    6,168    23,784    30,753 
Share-based payment      142    119    (379)   (93)
Financial assets through Profit or Loss and Derivatives      (655)   (303)   (655)   (303)
Effects of changes in exchange rates on cash and cash equivalents      (134)   (113)   (2,418)   753 
Expected Loss with Loan Operations and Lease Operations  10b   2,660    3,635    8,886    13,132 
Interest and foreign exchange expense from operations with subordinated debt      2,430    (366)   9,766    2,332 
Change in reserves for insurance and private pension      4,636    5,775    14,752    16,606 
Revenue from capitalization plans      (108)   (137)   (352)   (430)
Depreciation and amortization  13 and 14   909    810    2,645    2,401 
Interest expense from provision for contingent and legal liabilities      233    60    738    1,049 
Provision for contingent and legal liabilities      684    1,340    1,769    2,984 
Interest income related to escrow deposits      (55)   (87)   (139)   (261)
Deferred taxes (excluding hedge tax effects)  25b   6,196    (3,184)   8,890    (516)
Share of profit or (loss) in associates and joint ventures      (180)   (136)   (470)   (411)
(Gain) loss on Financial assets - At fair value through other comprehensive income  21c   353    (16)   301    89 
Interest and foreign exchange income of financial assets at fair value through other comprehensive income      (4,078)   (1,177)   (13,456)   (5,754)
Interest and foreign exchange of financial assets at amortized cost      (1,252)   (68)   (4,411)   (785)
(Gain) loss on sale of assets held for sale  23 and 24   74    117    218    355 
(Gain) loss on sale of investments  23 and 24   (11)   (195)   (127)   (214)
(Gain) loss on sale of fixed assets  23 and 24   (31)   (19)   (15)   (26)
Other      (440)   113    (1,759)   (155)
Change in assets and liabilities      2,537    (2,113)   (76,538)   (33,920)
(Increase) decrease in assets      16,958    (13,746)   (123,301)   (36,063)
Interbank deposits      (3,640)   904    (9,036)   1,235 
Securities purchased under agreements to resell      17,813    (6,504)   (92,255)   (6,489)
Compulsory deposits with the Central Bank of Brazil      (1,157)   (6,349)   12,880    (9,120)
Financial assets Through Profit or Loss      21,682    (8,442)   19,928    (31,729)
Derivatives (assets / liabilities)      (3,267)   (684)   (709)   1,261 
Loan operations      3,556    4,816    (26,737)   2,646 
Other financial assets      (6,138)   (3,895)   (9,440)   (2,266)
Other tax assets      (10,971)   6,868    (16,147)   5,006 
Other assets      (920)   (460)   (1,785)   3,393 
(Decrease) increase in liabilities      (14,421)   11,633    46,763    2,143 
Deposits      (37,322)   13,226    37,260    30,490 
Deposits received under securities repurchase agreements      163    (2,726)   (10,261)   (29,972)
Financial liabilities at fair value throught profit or loss      (33)   31    (258)   (31)
Funds from interbank markets      8,574    (2,988)   11,162    (1,798)
Other financial liabilities      7,752    3,709    6,759    (1,414)
Technical reserve for insurance and private pension      327    1,931    (1,528)   3,893 
Liabilities for capitalization plans      154    199    433    560 
Provisions      (1,632)   (972)   (3,407)   (2,698)
Tax liabilities      3,549    1,360    1,854    4,157 
Other liabilities      4,888    (1,481)   8,181    2,590 
Payment of income tax and social contribution      (841)   (656)   (3,432)   (3,634)
Net cash from (used in) operating activities      20,241    10,115    (33,972)   15,548 
Dividends / Interest on capital received from investments in associates and jointly controlled entities      442    58    631    333 
Cash received on financial assets - At fair value through other comprehensive income      11,552    821    15,030    11,908 
Cash received from redemption of financial assets at amortized cost      2,633    725    14,300    2,941 
Cash upon sale of other assets      64    38    179    168 
Cash upon sale of investments in associates and jointly controlled entities      11    314    127    338 
Cash upon sale of fixed assets  13   69    28    116    58 
Cash upon sale of intangible assets  14   -    8    2    26 
Purchase of financial assets at fair value through other comprehensive income      (11,498)   (5,008)   (56,610)   (11,799)
Purchase of financial assets at amortized cost      (1,930)   (164)   (2,463)   (260)
Purchase of investments in associates and jointly controlled entities      (6,623)   (429)   (6,639)   (429)
Purchase of fixed assets  13   (418)   (194)   (935)   (570)
(Cash upon sale) Purchase of intangible assets  14   (360)   (426)   (1,002)   (1,140)
Net cash from (used in) investing activities      (6,058)   (4,229)   (37,264)   1,574 
Funding from institutional markets      111    (2,583)   3,003    3,276 
Redemptions in institutional markets      (4,372)   (3,332)   (15,738)   (11,346)
Change in non-controlling interests stockholders      383    (127)   1,618    89 
Result of delivery of treasury shares      19    300    1,133    869 
Purchase of treasury shares      -    (95)   (510)   (1,377)
Dividends and interest on capital paid to non-controlling interests      -    (15)   (96)   (166)
Dividends and interest on capital paid      (4,950)   (2,522)   (19,801)   (10,089)
Net cash from (used in) financing activities      (8,809)   (8,374)   (30,391)   (18,744)
                        
Net increase (decrease) in cash and cash equivalents  2.4c   5,374    (2,488)   (101,627)   (1,622)
                        
Cash and cash equivalents at the beginning of the period      81,761    96,119    186,478    96,119 
Effects of changes in exchange rates on cash and cash equivalents      134    113    2,418    (753)
Cash and cash equivalents at the end of the period      87,269    93,744    87,269    93,744 
Cash and deposits on demand      29,467    19,089    29,467    19,089 
Interbank deposits      4,446    20,127    4,446    20,127 
Securities purchased under agreements to resell      53,356    54,528    53,356    54,528 
                        
Additional information on cash flow                       
Interest received      31,370    49,696    89,053    108,633 
Interest paid      (21,153)   (25,130)   (66,816)   (56,301)
Non-cash transactions                       
Loans transferred to assets held for sale      -    -    -    - 
Dividends and interest on capital declared and not yet paid      323    1,241    323    1,241 

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201818

 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Added Value

(In millions of Reais)

 

   07/01 to   07/01 to   01/01 to   01/01 to 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Income   43,183    45,366    118,549    135,261 
Interest, similar income and other   33,459    38,574    94,396    119,004 
Banking services   9,188    8,591    27,168    25,302 
Income related to insurance, private pension and capitalization operations                    
before claim and selling expenses   1,162    1,240    3,435    3,936 
Result of expected credit loss   (1,203)   (3,639)   (7,730)   (14,301)
Other   577    600    1,280    1,320 
Expenses   (19,864)   (21,806)   (57,437)   (70,343)
Interest, similar income and other   (17,489)   (19,203)   (50,797)   (62,854)
Other   (2,375)   (2,603)   (6,640)   (7,489)
Inputs purchased from third parties   (5,888)   (4,524)   (14,901)   (12,174)
Materials, energy and others   (189)   (183)   (568)   (546)
Third party services   (1,086)   (997)   (3,173)   (3,033)
Other   (4,613)   (3,344)   (11,160)   (8,595)
Data processing and telecommunications   (1,060)   (1,027)   (3,123)   (3,039)
Advertising, promotions and publication   (401)   (300)   (1,061)   (814)
Installations   (332)   (336)   (946)   (913)
Transportation   (89)   (87)   (256)   (254)
Security   (185)   (178)   (565)   (542)
Travel expenses   (58)   (56)   (165)   (153)
Other   (2,488)   (1,360)   (5,044)   (2,880)
Gross added value   17,431    19,036    46,211    52,744 
Depreciation and amortization   (853)   (749)   (2,475)   (2,237)
Net added value produced by the company   16,578    18,287    43,736    50,507 
Added value received through transfer   180    136    470    411 
Total added value to be distributed   16,758    18,423    44,206    50,918 
Distribution of added value   16,758    18,423    44,206    50,918 
Personnel   5,796    5,148    16,285    15,242 
Compensation   4,523    4,037    12,578    11,904 
Benefits   1,054    914    3,023    2,716 
FGTS – government severance pay fund   219    197    684    622 
Taxes, fees and contributions   4,239    6,848    7,955    15,849 
Federal   3,897    6,535    6,895    14,939 
Municipal   342    313    1,060    910 
Return on third parties’ assets - Rent   392    367    1,184    1,112 
Return on own assets   6,331    6,060    18,782    18,715 
Dividends and interest on capital   2,274    6,501    7,709    11,968 
Retained earnings / (loss) attributable to controlling shareholders   3,851    (508)   10,545    6,419 
Retained earnings attributable to non-controlling shareholders   206    67    528    328 

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201819

 

 

 

ITAÚ UNIBANCO HOLDING S.A.

Notes to the Consolidated Financial Statements

At 09/30/2018, 12/31/2017 and 01/01/2017 for balance sheet accounts and

From 07/01 to 09/30 of 2018 and 2017 and from 01/01 to 09/30 of 2018 and 2017 for income statement accounts

(In millions of Reais, except information per share)

 

Note 1 - Overview

 

Itaú Unibanco Holding S.A. (ITAÚ UNIBANCO HOLDING) is a publicly-held company, organized and existing under the Laws of Brazil. The head office 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. Its operations are divided into three segments: Retail Bank, Wholesale Bank, and Activities with the Market + Corporation. Further detailed segment information is presented in Note 32.

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201820

 

 

Note 2 – Significant accounting policies

 

2.1.Basis of preparation

 

The Consolidated Financial Statements of ITAÚ UNIBANCO HOLDING were prepared taking into account the requirements and guidelines set out by the National Monetary Council (CMN), which established that as from December 31, 2010 annual Consolidated Financial Statements are to be prepared in accordance with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB).

 

These interim financial statements were prepared in accordance with IAS 34 - Interim Financial Reporting using the option to present complete consolidated financial statements instead of condensed consolidated financial statements.

 

In the preparation of these Consolidated Financial Statements, ITAÚ UNIBANCO HOLDING adopted the criteria for recognition, measurement and disclosure established in the IFRS and in the interpretations of the International Financial Reporting Interpretation Committee (IFRIC).

 

The Consolidated Statement of Cash Flows shows the changes in cash and cash equivalents during the period, arising from operating, investing, and financing activities, and include highly-liquid investments (Note 2.4c).

 

The Cash flows of operating activities are calculated by the indirect method. Consolidated net income is adjusted for non-monetary items, such as measurement gains and losses, changes in provisions and in receivables and liabilities balances. All income and expense arising from non-monetary transactions, attributable to investing and financing activities, are eliminated. Interest received or paid are classified as operating cash flows.

 

Management believes that the information included in these Consolidated Financial Statements is relevant and a faithful representation of the information used in the management of the ITAÚ UNIBANCO HOLDING.

 

2.2.New accounting standards and new accounting standards changes and interpretations

 

a)Accounting standards applicable for period ended September 30, 2018

 

·IFRS 9 – Financial Instruments – The pronouncement replaces IAS 39 - Financial Instruments: Recognition and Measurement. IFRS 9 is applicable to all financial assets and liabilities and will be retrospectively adopted on the date the standard becomes effective, on January 1st, 2018. The new rule is structured to contemplate the pillars (l) Classification and measurement of financial assets, (ll) Impairment and (lll) Hedge accounting.

 

Transition for IFRS 9

 

The main changes identified by ITAÚ UNIBANCO HOLDING due to the adoption of IFRS 9 are related to the classification, measurement and impairment of financial assets. ITAÚ UNIBANCO HOLDING will continue applying the hedge accounting requirements set forth in IAS 39 and retrospectively applied the other criteria of IFRS 9 as from December 31, 2015. The effects on the transition date will be presented in the annual financial statements, which comprise the complete periods affected by the adoption of IFRS 9, proving more comparability and transparence of information. Further information on new classification requirements and accounting policies adopted are included in Note 2.4.

 

(I)Classification and Measurement of Financial Assets and Liabilities

 

IFRS 9 introduces the concept of business model and assessment of characteristics of contractual cash flows (Solely Payment of Principal and Interest Test –SPPI Test) for classification of financial assets.

·Business Model: represents the way the entity manages its financial assets;
·SPPI Test: assessment of cash flows generated by the financial instrument aiming at checking whether they represent solely payments of principal and interest.

 

ITAÚ UNIBANCO HOLDING conducted a detailed analysis of its business models and characteristics of its cash flows of financial assets, and the main changes resulting from the adoption of IFRS 9 are:

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201821

 

 

·The classification categories of financial assets Held to maturity, Available for sale, Held for trading and Loans and receivables have ceased to exist.

 

·Three measurement categories of financial assets were introduced:

 

-Amortized Cost: used when financial assets are managed to obtain contractual cash flows, constituted solely of payments of principal and interest. A significant portion of financial assets previously classified in Loans and Receivables, Held to Maturity and Available for Sale was accounted for in this category;

 

-Fair Value Through Other Comprehensive Income: used when financial assets are held both for obtaining contractual cash flows, constituted solely by payments of principal and interest, and for sale. The remaining portion of financial assets previously accounted for as Available for Sale was classified in this category; and

 

-Fair Value Through Profit or Loss: used for financial assets that do not meet the aforementioned criteria. Derivatives and financial assets Held for Trading were recorded in this category.

 

·In the initial adoption, there were designations of equity instruments at fair value through other comprehensive income.

 

·The existing designations of financial assets/liabilities at fair value through profit or loss were maintained and there were no new designations.

 

·Financial assets which cash flows were modified (without write-off) had their gross carrying amount recalculated, according to IFRS 9 requirements, and the effects of this change were recognized in profit or loss.

 

ITAÚ UNIBANCO HOLDING maintained the classification of financial liabilities unchanged, which continue being measured at amortized cost or fair value through profit or loss, in the event they had not been previously designated.

 

(II)Impairment

 

The requirements for assessment of impairment of financial assets are based on an expected credit loss model. The main changes in the accounting policy of ITAÚ UNIBANCO HOLDING for impairment are listed below.

 

The expected credit loss model includes the use of prospective information and classification of financial assets in three stages:

 

·Stage 1 – 12-month expected credit loss: represents default events possible within 12 months. Applicable to financial assets originated or purchased with credit recovery issues;

 

·Stage 2 – Lifetime expected credit loss of financial instrument: considers all possible default events. Applicable to financial assets originated or purchased without credit recovery issues and which credit risk has increased significantly; and

 

·Stage 3 – Credit loss expected for credit-impaired assets: considers all possible default events. Applicable to financial assets originated or purchased with credit recovery issues. The measurement of assets classified in this stage is different from Stage 2 due to the recognition of interest income by applying the effective interest rate at amortized cost (net of provision) rather than at the gross carrying amount.

 

An asset will migrate from a phase as its credit risk increases or decreases. Therefore, a financial asset that migrated to phases 2 and 3 may return to phase 1, unless it was originated or purchased with credit recovery issues.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201822

 

 

The change in the calculation model of expected credit loss gave rise to an increase in the provision recorded in the consolidated financial statements of ITAÚ UNIBANCO HOLDING due to the change in measurement of financial assets, and loss revaluation considering prospective criteria.

 

Further information on new classification requirements and accounting policies adopted are detailed in Note 2.4.

 

(III) Hedge accounting

 

The hedge accounting requirements are closed aligned with risk management and should be applied on a prospective basis. ITAÚ UNIBANCO HOLDING will continue applying all requirements for hedge accounting set forth in IAS 39, as permitted by IFRS 9.

 

Reconciliation of Stockholders' Equity and Net Income between IAS 39 and IFRS 9

 

      09/30/2017   01/01/2017 
   Reference  Stockholders'
Equity		   Net Income   Stockholders'
Equity		 
In accordance with IAS 39 (excluding non-controlling interests)      131,410    18,418    122,582 
Adjustments arising from changes in the financial asset write-off policy, net of tax effects  a   2,455    (26)   2,462 
In accordance with IAS 39 (excluding non-controlling interests)      133,865    18,392    125,044 
Expected loss  b   (8,492)   (581)   (7,853)
Loan operations and lease operations portfolio      (7,076)   306    (7,385)
Other financial assets      (1,416)   (887)   (468)
Change in financial assets  c   29    (7)   36 
Adjustment to fair value of financial assets  d   (789)   686    (787)
Deferred taxes on the above adjustments      4,106    56    3,712 
Interest of non-controlling stockholders      (259)   (159)   (57)
Total adjustments      (5,405)   (5)   (4,949)
In accordance with IFRS 9 - attributable to controlling stockholders      128,460    18,387    120,095 
In accordance with IFRS 9 - attributable to non-controlling stockholders      12,540    328    12,289 
In accordance with IFRS 9 - attributable to controlling and non-controlling stockholders      141,000    18,715    132,384 

(a)Change in the policy for partial write-off of financial assets, in accordance with IAS 8, which caused the proportional treatment as asset, aligning the recovery behavior of financial assets and their economic realization.
(b)Change in the calculation model based on loss incurred (IAS 39) for expected loss, considering prospective information.
(c)Adequacy of gross carrying amount of financial assets that had their cash flows modified (without write-off), and which balances were recalculated in accordance with IFRS 9.
(d)Change in the measurement model of financial assets due to the new categories introduced by IFRS 9.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201823

 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Balance Sheet at 01/01/2017

(In million Reais)

 

   IAS 39 01/01/2017           IFRS 9 01/01/2017
Assets  Categories  Balance   Reclassifications (a)   Remeasurements (b)   Categories  Balance 
Cash and deposits on demand      18,542    -    -       - 
Central Bank compulsory depositsn to Brazil      85,700    (85,700)   -       - 
Interbank deposits      22,692    (22,692)   -       - 
Securities purchased under agreements to resell      265,051    (265,051)   -       - 
Financial assets held for trading  Held for trading   204,648    (204,648)   -       - 
Pledged as collateral      12,950    (12,950)   -       - 
Other Financial assets held for trading      191,698    (191,698)   -       - 
Financial assets designated at fair value through profit or loss  Available for sale   1,191    (1,191)   -       - 
Derivatives      24,231    (24,231)   -       - 
Available-for-sale financial assets  Available for sale   88,277    (88,277)   -       - 
Pledged as collateral      17,435    (17,435)   -       - 
Other Available-for-sale financial assets      70,842    (70,842)   -       - 
Held-to-maturity financial assets  Held to maturity   40,495    (40,495)   -       - 
Pledged as collateral      11,778    (11,778)   -       - 
Other Held-to-maturity financial assets      28,717    (28,717)   -       - 
Loan operations and lease operations portfolio, net  Loans and receivables   463,394    (463,394)   -       - 
Loan operations and lease operations portfolio      490,366    (490,366)   -       - 
(-) Allowance for loan and lease losses      (26,972)   26,972    -       - 
Other financial assets      53,917    (53,917)   -       - 
Cash and deposits on demand      18,542    -    -       18,542 
Financial assets      -    1,252,330    (5,360)      1,246,833 
Central Bank compulsory deposits to Brazil      -    85,700    -       85,700 
At amortized cost      -    906,850    (4,561)  Amortized cost   902,289 
Interbank deposits      -    22,692    (4)      22,688 
Securities purchased under agreements to resell      -    265,051    (1)      265,050 
Securities      -    101,796    772       102,568 
Loan operations and lease operations portfolio      -    490,366    4,485       494,851 
Other financial assets      -    53,917    (22)      53,895 
(-) Provision for expected loss      -    (26,972)   (9,791)      (36,763)
At fair value through other comprehensive income      -    39,750    426   Fair value through other comprhensive income   40,039 
Securities      -    39,750    426       40,039 
At fair value through profit or loss      -    220,030    (1,225)  Fair value through profit or loss   218,805 
Securities      -    195,799    (1,225)      194,574 
Derivatives      -    24,231    -       24,231 
Investments in subsidiaries and jointly controlling entities      5,073    -    -       5,073 
Goodwill      9,675    -    -       9,675 
Fixed assets, net      8,042    -    -       8,042 
Intangible assets, net      7,381    -    -       7,381 
Tax assets      44,274    -    807       45,081 
Income tax and social contribution - current      2,703    -    -       2,703 
Income tax and social contribution - deferred      37,395    -    807       38,202 
Other      4,176    -    -       4,176 
Assets held for sale      631    -    -       631 
Other assets      10,027    -    29       10,056 
Total assets      1,353,241    (330,686)   (4,524)      1,351,314 
                           
   IAS 39 01/01/2017          IFRS 9 01/01/2017
Liabilities and stockholders' equity  Categories  Balance   Reclassifications (a)   Remeasurements (b)   Categories  Balance 
Deposits      329,414    (329,414)   -       - 
Securities sold under repurchase agreements      349,164    (349,164)   -       - 
Financial liabilities held for trading      519    (519)   -       - 
Derivatives      24,698    (24,698)   -       - 
Interbank market debt      135,483    (135,483)   -       - 
Institutional market debt      96,239    (96,239)   -       - 
Other financial liabilities      71,832    (71,832)   -       - 
Reserves for insurance and private pension      154,076    -    -       - 
Liabilities for capitalization plans      3,147    (3,147)   -       - 
Provisions      20,909    -    -       - 
Tax liabilities      5,836    -    -       - 
Income tax and social contribution - current      1,741    -    -       - 
Income tax and social contribution - deferred      643    -    -       - 
Other      3,452    -    -       - 
Other liabilities      27,110    -    -       - 
Total liabilities      1,218,427    -    -       - 
Financial liabilities      -    -    -       1,012,075 
At amortized cost      -    985,279    (3,163)      982,116 
Deposits      -    329,414    -       329,414 
Securities sold under repurchase agreements      -    349,164    -       349,164 
Interbank market debt      -    135,483    -       135,483 
Institutional market debt      -    96,239    -       96,239 
Liabilities for capitalization plans      -    3,147    -       3,147 
Other financial liabilities      -    71,832    (3,163)      68,669 
At fair value through profit or loss      -    25,217    -   Financial Liabilities Designated at Fair Value Through Profit or Loss   25,217 
Derivatives      -    24,698    -       24,698 
Others      -    519    -       519 
Provision for expected loss      -    -    4,742       4,742 
Loan commitments      -    -    2,761       2,761 
Financial guarantees      -    -    1,981       1,981 
Reserves for insurance and private pension      154,076    -    -       154,076 
Provisions      20,909    -    -       20,909 
Tax liabilities      5,836    -    (886)      4,950 
Income tax and social contribution - current      1,741    -    -       1,741 
Income tax and social contribution - deferred      643    -    (932)      (289)
Other      3,452    -    46       3,498 
Other liabilities      27,110    -    (190)      26,920 
Total liabilities      -    -    (1,076)      1,218,930 
Capital      97,148    -    -       97,148 
Treasury shares      (1,882)   -    -       (1,882)
Additional paid-in capital      1,785    -    -       1,785 
Appropriated reserves      3,443    -    3,023       6,466 
Unappropriated reserves      25,362    -    (4,992)      20,370 
Cumulative other comprehensive income      (3,274)   -    (518)      (3,792)
Total stockholders’ equity attributed to the owners of the parent  company      122,582    -    (2,487)      120,095 
Non-controlling interests      12,232    -    57       12,289 
Total stockholders’ equity      134,814    -    (2,430)      132,384 
Total liabilities and stockholders' equity      1,353,241    -    (1,927)      1,351,314 

(a)Reclassifications: refer to reclassifications of financial assets between categories of measurement at fair value and amortized cost;

(b)Remeasurements: refer to expected credit loss and adjustment to fair value of financial assets reclassified between measurement categories; and financial assets changed and not written-off, which balances were recalculated in accordance with IFRS 9.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201824

 

 

·IFRS 15 – Revenue from Contracts with Customers: The pronouncement replaces IAS 18 – Revenue and IAS 11 –Construction Contracts, as well as respective interpretations (IFRICs 13, 15 and 18). It requires that the recognition of revenue reflect the transfer of goods or services to the client. This standard is effective for the years beginning January 1st, 2018 and there are no impacts for the Consolidated Financial Statements of ITAÚ UNIBANCO HOLDING.

 

·Amendment to IFRS 4 –Insurance Contracts –Joint application of IFRS 9: The amendment enables entities that are issuers of insurance contracts to mitigate possible impacts of the adoption of IFRS 9 –Financial Instruments before the effectiveness of IFRS 17 –Insurance Contracts, through two options:

 

·Temporary exemption: adoption of IFRS 9 together with IFRS 17, i.e., as from January 2021. This option is applicable only to entities with significant insurance activities (over 80% of total liabilities) and that have not applied IFRS 9 in advance;

 

·Overlay approach: adoption of IFRS 9, however, for assets reclassified to the category Fair Value through Profit or Loss, transferring the effects of the adoption of IFRS 9 from Income for the Period to Other Comprehensive Income until the effectiveness of IFRS 17.

 

Liabilities related to insurance contracts are not representative as compared to total liabilities of ITAÚ UNIBANCO HOLDING.

 

In 2018, ITAÚ UNIBANCO HOLDING will adopt IFRS 9 for all financial assets of insurance entities, and, therefore, will not use the aforementioned options.

 

b)Accounting standards recently issued and applicable in future periods

 

·Change in Conceptual Framework –In March, 2018, o IASB issued a review of the Conceptual Framework and the main changes refer to: definitions of assets and liabilities, recognition criteria, write-off, measurement, presentation and disclosure for equity elements and result. These changes are effective for the years started on January 1st, 2020 and possible impacts are being assessed and will be completed by the date they are in force.

 

·IFRS 16 –Leases –The pronouncement replaces IAS 17 - Leases, and related interpretations (IFRIC 4, SIC 15 and SIC 27). It eliminates the accounting for operating lease agreements for the lessee, presenting only one lease model, that consists of: (a) recognizing leases which terms exceeds 12 months and with substantial amounts; (b) initially recognizing lease in assets and liabilities at present value; and (c) recognizing depreciation and interest from lease separately in the result. For the lessor, accounting will continue to be segregated between operating and financial lease. This standard is effective for annual periods beginning on January 1st, 2019. Possible impacts arising from the adoption of this standard are being assessed and will be completed by the date this standard is effective.

 

·IFRS 17 –Insurance Contracts: The pronouncement replaces IFRS 4 –Insurance Contracts and presents three approaches for assessment of insurance contracts:

 

·General Model: applicable to all contracts, particularly the long-term contracts;
·Premium Allocation Approach (PAA): applicable to contracts which term is up to 12 months and with modestly complex cash flows. It is simpler than the standard model; however, it can be used only when it produces results similar to those that would be obtained it the standard model was used;
·Variable Fee Approach: approach specific for contracts with participation in the result of investments.

 

Insurance contracts should be recognized based on the analysis of four components:

 

·Expected Future Cash Flows: estimate of all components of cash flow of the contract, considering inflows and outflows;

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201825

 

 

·Risk Adjustment: estimate of offset required by deviations that may occur between cash flows;
·Contractual Margin: difference between any amounts received before the beginning of the contract coverage and present value of cash flows estimated in the beginning of the contract;
·Discount: projected cash flows should be discounted at present value, to reflect the time value of money, at rates that reflect the characteristics of respective flows.

 

This standard is effective for annual periods beginning on January 1st, 2021. Possible impacts arising from the adoption of this standard are being assessed and will be completed by the date this standard is effective.

 

2.3.Critical accounting estimates and judgments

 

The preparation of Consolidated Financial Statements in accordance with IFRS requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and contingent assets and liabilities at the date of the Consolidated Financial Statements, as well as the reported amounts of revenue, expenses, gains and losses over the reporting and subsequent periods, because actual results may differ from those determined in accordance with such estimates and assumptions.

 

2.3.1 Critical accounting estimates

 

All estimates and assumptions made by Management are in accordance with IFRS and represent the current best estimates made in compliance with the applicable standards. Estimates are evaluated continuously, considering past experience and other factors.

 

The Consolidated Financial Statements reflect a variety of estimates and assumptions. The critical accounting estimates and assumptions that have the most significant impact on the carrying amounts of assets and liabilities are described below:

 

a)Expected Credit Loss

 

Significant judgments are required in the application of accounting requirements for measurement of expected credit loss, such as:

 

·Assessment term of expected credit loss: ITAÚ UNIBANCO HOLDING considers the maximum contractual period on which it will be exposed to financial instrument’s credit risk. However, the estimated useful life of assets that do not have a determined maturity is based on the period of exposure to credit risk. Additionally, all contractual terms are considered when determining the expected life, including prepayment and rollover options.

 

·Prospective information: IFRS 9 requires a balanced and impartial estimate of credit loss that comprises forecasts of future economic conditions. ITAÚ UNIBANCO HOLDING uses prospective macroeconomic information and public information with projections prepared internally to determine the impact of these estimates on the calculation of expected credit loss.

 

·Probability-weighted loss scenarios: ITAÚ UNIBANCO HOLDING uses weighted scenarios to determine credit loss expected in a proper observation horizon.

 

·Determining criteria for significant increase or decrease in credit risk: in each period of the consolidated financial statements, ITAÚ UNIBANCO HOLDING assesses whether the credit risk on a financial asset has increased significantly using relative and absolute triggers (indicators) by product and by country.

 

Brazilian and foreign government securities are considered with low credit risk, and therefore they remain in stage 1, in accordance with a study conducted by ITAÚ UNIBANCO HOLDING.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201826

 

 

b)Deferred income tax and social contribution

 

As explained in Note 2.4l, deferred tax assets are recognized only in relation to temporary differences and tax assets and loss for offset to the extent it is probable that ITAÚ UNIBANCO HOLDING will generate future taxable profit for its use. The expected realization of deferred tax assets is based on the projection of future taxable profits and technical studies, as disclosed in Note 25.

 

c)Fair value of financial instruments, including derivatives

 

The fair value of Financial Instruments is measured recurrently, in conformity with the requirements of IFRS 9 – Financial Instruments. The fair value of financial instruments, including derivatives that are not traded in active markets, is determined by using valuation techniques. This calculation is based on assumptions that take into consideration Management’s judgment based on market information and conditions in place at the balance sheet date.

 

ITAÚ UNIBANCO HOLDING ranks fair value measurements using a fair value hierarchy that reflects the significance of inputs used in the measurement process.

 

The fair value of Financial Instruments, including Derivatives, as well as the fair value hierarchy, are presented in Note 29.

 

The team in charge of the pricing of assets, in accordance with the governance defined by the committee and regulatory circulars, carries out critical analyses of the information extracted from the market and from time to time reassesses the long term of indexes. At the end of the monthly closings, the departments meet for a new round of analyses for the maintenance of the classification in connection with the fair value hierarchy. ITAÚ UNIBANCO HOLDING believes that all methodologies adopted are appropriate and consistent with market participants, however, the adoption of other methodologies or use of different assumptions to estimate fair values may result in different fair value estimates.

 

The methodologies used to estimate the fair value of certain financial instruments are described in Note 29.

 

d)Defined benefit pension plan

 

The current amount of pension plan obligations is obtained from actuarial calculations that use a set of assumptions. Among the assumptions used for estimating the net cost (income) of these plans is the discount rate. Any changes in these assumptions will affect the carrying amount of pension plan liabilities.

 

ITAÚ UNIBANCO HOLDING determines the appropriate discount rate at the end of each year, which is used for determining the present value of estimated future cash outflows necessary for settling the pension plan liabilities. In order to determine the appropriate discount rate, ITAÚ UNIBANCO HOLDING considers the interest rates of the Brazilian federal government bonds that are denominated in Brazilian Reais, the currency in which the benefits will be paid, and that have maturity terms approximating the terms of the related liabilities.

 

The main assumptions on Pension plan obligations are based on, in part, current market conditions. Additional information is disclosed in Note 27.

 

e)Provisions, contingencies and other commitments

 

ITAÚ UNIBANCO HOLDING periodically reviews its contingencies. These contingencies are evaluated based on Management´s best estimates, taking into account the opinion of legal counsel when there is a likelihood that financial resources will be required to settle the obligations and the amounts may be reasonably estimated.

 

Contingencies classified as probable losses are recognized in the Balance Sheet under Provisions.

 

Contingent amounts are measured using appropriate models and criteria, despite the uncertainty surrounding the ultimate timing and amounts. Provisions, contingencies and other commitments are detailed in Note 30.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201827

 

 

f)Technical provisions for insurance and pension plan

 

Technical provisions are liabilities arising from obligations of ITAÚ UNIBANCO HOLDING to its policyholders and participants. These obligations may be short term liabilities (property and casualty insurance) or medium and long term liabilities (life insurance and pension plans).

 

The determination of the actuarial liability is subject to several uncertainties inherent in the coverage of insurance and pension contracts, such as assumptions of persistence, mortality, disability, life expectancy, morbidity, expenses, frequency and severity of claims, conversion of benefits into annuities, redemptions and return on assets.

 

The estimates for these assumptions are based on the historical experience of ITAÚ UNIBANCO HOLDING, benchmarks and experience of the actuary, in order to comply with best market practices and the continuous review of the actuarial liability. The adjustments resulting from these continuous improvements, when necessary, are recognized in the statement of income for the corresponding period.

 

Additional information is described in Note 28.

 

2.3.2 Critical judgments in accounting policies

 

a)Goodwill

 

The impairment test for goodwill involves estimates and significant judgments, including the identification of cash generation units and the allocation of goodwill to such units based on the expectations of which ones will benefit from the acquisition. Determining the expected cash flows and a risk-adjusted interest rate for each unit requires that management exercises judgment and estimates. Semi-annually goodwill is submitted to the impairment test and, at September 30, 2018 and 2017, ITAÚ UNIBANCO HOLDING did not identify goodwill impairment losses.

 

2.4.Summary of main accounting practices

 

a)Consolidation

 

l.Subsidiaries

 

In accordance with IFRS 10 - Consolidated Financial Statements, subsidiaries are all entities in which ITAÚ UNIBANCO HOLDING holds control. ITAÚ UNIBANCO HOLDING controls an entity when it is exposed to, or is entitled to, its variable returns derived from its involvement with such entity, and has the capacity to impact such returns.

 

Subsidiaries are fully consolidated as from the date in which ITAÚ UNIBANCO HOLDING obtains control and are no longer consolidated as from the date such control is lost.

 

From the 3rd quarter of 2018, ITAÚ UNIBANCO HOLDING started adjusting the financial statements of its subsidiaries in Argentina to reflect the effects of hyperinflation, pursuant to IAS 29 – Financial Reporting in Hyperinflationary Economies.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201828

 

 

The following table shows the main consolidated companies, which together represent over 95% of total consolidated assets, as well as the interests of ITAÚ UNIBANCO HOLDING in their voting capital at 09/30/2018 and 12/31/2017.

 

      Functional
currency		  Incorporation
country		  Activity  Interest in voting
capital at		   Interest in total
capital at		 
               09/30/2018   12/31/2017   09/30/2018   12/31/2017 
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  Acquirer   100.00%   100.00%   100.00%   100.00%
Foreing                                
Itaú CorpBanca Colombia S.A.  (Note 3)  Colombian peso  Colombia  Financial institution   23.90%   23.90%   23.90%   23.90%
Banco Itaú Argentina S.A.     Argentinian 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 (Suisse) SA     Swiss franc  Switzerland  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 3)  Chilean peso  Chile  Financial institution   36.06%   36.06%   36.06%   36.06%

 

ITAÚ UNIBANCO HOLDING is committed to maintaining the minimum capital required by all these joint ventures, noteworthy is that for all Financeira Itaú CBD S.A Crédito, Financiamento e Investimento (FIC) the minimum capital percentage is 25% higher than that required by the Central Bank of Brazil (Note 31).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201829

 

 

II.Business combinations

 

In accordance with IFRS 3 –Business Combinations, a business is defined as an integrated set of activities and assets that is conducted and managed so to provide a return to investors, cost reduction or other economic benefits, and it should be recorded when a business is acquired. In general, a business consists of an integrated set of activities and assets that may be conducted and managed so as to provide a direct return, as dividends, lower costs or other economic benefits, to investors or other stockholders, members or participants. There is goodwill in a set of activities and transferred assets, it is presumed to be a business. For acquisitions that meet the definition of business, accounting under the purchase method is required.

 

The acquisition cost is measured at the fair value of the assets transferred, equity instruments issued and liabilities incurred or assumed at the exchange date, plus costs directly attributable to the acquisition. Acquired assets and assumed liabilities and contingent liabilities identifiable in a business combination are initially measured at fair value at the date of acquisition, regardless of the existence of non-controlling interests. The excess of the acquisition cost, plus non-controlling interests, if any, over the fair value of identifiable net assets acquired, is accounted for as goodwill.

 

The treatment of goodwill is described in Note 2.4i. If the cost of acquisition, plus non-controlling interests, if any, is lower than the fair value of identifiable net assets acquired, the difference is directly recognized in income.

 

For each business combination, the purchaser should measure any non-controlling interest in the acquired company at the fair value or amount proportional to its interest in net assets of the acquired company.

 

III.Transactions with non-controlling stockholders

 

IFRS 10 –Consolidated Financial Statements establishes that, changes in an ownership interest in a subsidiary, which do not result in a loss of control, are accounted for as capital transactions and any difference between the amount paid and the carrying amount of non-controlling stockholders is recognized directly in consolidated stockholders' equity.

 

b)Foreign currency translation

 

I.Functional and presentation currency

 

The Consolidated Financial Statements of ITAÚ UNIBANCO HOLDING are presented in Brazilian Reais, which is its functional and presentation currency. For each subsidiary and investment in associates and joint ventures, ITAÚ UNIBANCO HOLDING defined the functional currency, as set forth in IAS 21 –The Effects of Changes in Foreign Exchange Rates.

 

The assets and liabilities of subsidiaries with a functional currency other than the Brazilian Real 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;
·Exchange differences arising from currency translation are recorded in other comprehensive income.

 

II.Foreign currency transactions

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of income as part of foreign exchange results and exchange variations on transactions.

 

c)Cash and cash equivalents

 

ITAÚ UNIBANCO HOLDING defines cash and cash equivalents as cash and current accounts in banks (included in the heading cash and deposits on demand on the Consolidated Balance Sheet), interbank deposits and securities purchased under agreements to resell that have original maturities of up to 90 days or less.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201830

 

 

d)Central Bank Compulsory Deposits

 

The Central Banks of the countries in which ITAÚ UNIBANCO HOLDING operates currently impose a number of compulsory deposit requirements on financial institutions. Such requirements are applied to a wide range of banking activities and operations, such as demand, savings, and time deposits.

 

e)Financial assets and liabilities

 

Financial assets and liabilities are initially recognized at fair value and subsequently measured at amortized cost or fair value.

 

I -Classification and Measurement of Financial Assets

 

As from January 1, 2018, ITAÚ UNIBANCO HOLDING applies IFRS 9 –Financial Instruments and classified its financial assets in the following measurement categories:

 

·Amortized Cost;

 

·Fair Value Through Other Comprehensive Income;

 

·Fair Value Through Profit or Loss.

 

The classification and subsequent measurement of financial assets depend on:

 

·The business model under which they are measured;

 

·The characteristics of its cash flows (Solely Payment of Principal and Interest Test –SPPI Test).

 

Business model: represents how financial assets are managed to generate cash flows and does not depend on the Management’s intention regarding an individual instrument. Financial assets may be managed with the purpose of: i) obtaining contractual cash flows; ii) obtaining contractual cash flows and sale; or iii) others. To assess business models, ITAÚ UNIBANCO HOLDING considers risks that affect the performance of business model; how business managers are compensated; and how the performance of business model is assessed and reported to Management. If cash flows are realized differently from ITAÚ UNIBANCO HOLDING’s expectations, the classification of remaining financial assets maintained in this business model is not changed.

 

When the financial asset is maintained in business models i) and ii) the application of the SPPI Test is required.

 

SPPI Test: assessment of cash flows generated by financial instrument with the purpose of checking whether they represent solely payments of principal and interest. To fit into this concept, cash flows should include only consideration for the time value of money and credit risk. If contractual terms introduce risk exposure or cash flow volatilities, such as exposure to changes in prices of equity instruments or prices of commodities, the financial asset is classified at fair value through profit or loss. Hybrid contracts should be assessed as a whole, including all embedded characteristics. The accounting of a hybrid contract that contains an embedded derivative is performed on a joint basis, i.e. the whole instrument is measured at fair value through profit or loss.

 

Amortized Cost

 

The amortized cost is the amount through which the financial asset or liability is measured at the initial recognition, plus updates performed using the effective interest method, less amortization of principal and interest, adjusted for any provision for expected credit loss.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201831

 

 

Effective Interest Rate

 

The effective interest rate is the rate that discounts estimated future receipts or payments over the expected life of the financial asset or liability.

 

To calculate the effective interest rate, ITAÚ UNIBANCO HOLDING estimates cash flows including all contractual terms of the financial instrument, but does not include future credit losses. The calculation includes all commissions paid or received between parties to the contract, transaction costs, and all other premiums or discounts.

 

The interest revenue is calculated by applying the effective interest rate to the gross carrying amount of a financial asset. In case of financial assets with recovery issues, the adjusted effective interest rate is applied (considers the expected credit loss) at the amortized cost of the financial asset.

 

Fair Value

 

Fair value is the price that would be received for the sale of an asset or that would be paid for the transfer of a liability in a normal transaction between market players on the measurement date.

 

Details of the fair value of financial instruments, including Derivatives, as well as about the hierarchy of fair value are detailed in Note 29.

 

Based on these factors, ITAÚ UNIBANCO HOLDING applies the following criteria to each classification category:

 

·Amortized Cost
-Assets managed to obtain cash flows constituted of solely payments of principal and interest (SPPI Test);
-Initially recognized at fair value plus transaction costs;
-Subsequently measured at amortized cost, using the effective interest rate;
-Interest, including amortization of premiums and discounts, are recognized in the Consolidated Statement of Income in the heading Interest and similar interest.

 

·Financial Assets at Fair Value through Other Comprehensive Income
-Assets managed both to obtain cash flows constituted of solely payments of principal and interest (SPPI Test), and for sale;
-Initially and subsequently recognized at fair value plus transaction costs;
-Unrealized gains and losses (except for expected credit loss, foreign exchange differences, dividends and interest income) are recognized, net of applicable taxes, in the heading Other comprehensive income.

 

·Financial Assets at Fair Value through Profit or Loss and Financial Assets Designated at Fair Value
-Assets that do not meet the classification criteria of previous categories; or assets designated in the initial recognition at fair value through profit or loss to reduce “accounting mismatches”;
-Initially and subsequently recognized at fair value;
-Transaction costs are recorded directly in the Consolidated Statement of Income;
-Gains and losses resulting from changes in the fair value are recognized in the heading Net gain (loss) on investment securities and derivatives.

 

The average cost is used to determine the gains and losses realized on disposal of financial assets at fair value through other comprehensive income, which are recorded in the Consolidated Statement of Income in the heading Net gain (loss) on investments in securities and derivatives. Dividends on assets at fair value through other comprehensive income are recognized in the Consolidated Statement of Income as Dividend income when it is probable that ITAÚ UNIBANCO HOLDING’s right to receive such dividends is established.

 

Regular purchases and sales of financial assets are recognized and derecognized, respectively, on the trade date.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201832

 

 

Financial assets are derecognized when rights to receive cash flows expire or when ITAÚ UNIBANCO HOLDING transfers substantially all risks and rewards of ownership, and such transfer qualifies for write-off in accordance with IFRS 9 requirements.

 

Otherwise, control should be assessed to determine whether the continuous involvement related to any retained control does not prevent write-off.

 

Financial assets and liabilities are offset against each other and the net amount is reported in the Balance Sheet solely when there is a legally enforceable right to offset the recognized amounts and intention to settle them on a net basis, or simultaneously realize the asset and settle the liability.

 

Financial Assets Designated at Fair Value

 

ITAÚ UNIBANCO HOLDING irrevocably designates financial assets at fair value through profit or loss in the initial recognition (fair value option), when the option significantly reduces or eliminates measurement or recognition inconsistencies that could otherwise arise from the measurement of assets or liabilities or recognition of gains and losses on these assets and liabilities in different bases.

 

Equity Instruments

 

An equity instrument is any contract that evidences a residual interest in an entity’s assets, after the deduction of all its liabilities, such as Shares and Units.

 

ITAÚ UNIBANCO HOLDING subsequently measures all its equity instruments at fair value through profit or loss, except when Management opts, in the initial recognition, for irrevocably designating an equity instrument at fair value through other comprehensive income if it is held with a purpose other than only generating returns. When this option is selected, gains and losses on the fair value of an instrument are recognized in Other comprehensive income and are not subsequently reclassified to the Consolidated Statement of Income, even in the sale. Dividends continue being recognized in the Consolidated Statement of Income when ITAÚ UNIBANCO HOLDING’s right is established.

 

Gains and losses on equity instruments measured at fair value through profit or loss are accounted for in the Consolidated Statement of Income.

 

Expected Credit Loss

 

ITAÚ UNIBANCO HOLDING assesses on a forward-looking basis the expected credit loss associated with financial assets measured at amortized cost or through other comprehensive income, loan commitments and financial guarantee contracts. The recognition of the provision for expected credit loss is carried out monthly with a contra-entry in the Consolidated Statement of Income.

 

In case of financial assets measured at fair value through other comprehensive income, ITAÚ UNIBANCO HOLDING recognizes the provision for losses in the Consolidated Statement of Income with a contra-entry to Stockholders’ equity in Other comprehensive income, without effect in the gross carrying amount of the financial asset.

 

Expected Credit Loss Measurement

 

·Financial assets: loss is measured at present value of the difference between contractual cash flows and cash flows that ITAÚ UNIBANCO HOLDING expects to receive discounted at the effectively charged rate;

 

·Loan commitments: loss is measured at present value of the difference between contractual cash flows that would be due if the commitment was contracted and the cash flows that ITAÚ UNIBANCO HOLDING expects to receive;

 

·Financial guarantees: the loss is measured at the difference between the payments expected for refunding the counterparty and the amounts that ITAÚ UNIBANCO HOLDING expects to recover.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201833

 

 

In each reported period, ITAÚ UNIBANCO HOLDING assesses if the credit risk of a financial asset increased significantly by analyzing reasonable and sustainable information that is relevant and available without cost or undue effort, including qualitative, quantitative and forward-looking information. Forward-looking information is based on macroeconomic scenarios that are reassessed on an annual basis or when market conditions so require.

 

ITAÚ UNIBANCO HOLDING applies the three-stage approach to measure the expected credit loss, in which financial assets migrate from one stage to the other in accordance with changes in credit risk.

 

An asset will migrate from a stage as its credit risk increases. If, in a subsequent period, the quality of the financial asset improves or if the significant increase in credit risk previously identified is reversed, the financial asset may return to stage 1, unless it is a financial asset originated or purchased with credit recovery issues.

 

Brazilian and international government securities are considered low credit risk financial assets, in accordance with a study conducted by ITAÚ UNIBANCO HOLDING, and therefore they remain in stage 1.

 

ITAÚ UNIBANCO HOLDING assesses if the credit risk significantly increases on an individual and collective basis. For collective assessment purposes, the financial assets are grouped on the basis of shared credit risk characteristics, considering the type of instrument, credit risk classifications, date of initial recognition, remaining term, industry, counterparty’s geographic location, among other relevant factors.

 

The effects of changes of cash flows of financial assets and other details of methodologies and assumptions used by Management to measure the provision for expected credit losses, including the use of forward-looking information, are detailed in Note 34.

 

Changes in Contractual Cash Flows

 

When contractual cash flows of a financial asset are renegotiated or otherwise modified and this does not substantially change its terms and conditions, ITAÚ UNIBANCO HOLDING does not write it off. However, the gross carrying amount of this financial asset is recalculated as the present value of contractual cash flows renegotiated or changed, discounted at the original effective interest rate. Any costs or fees incurred adjust the modified carrying amount and are amortized over the remaining term of the financial asset.

 

If, on the other hand, the renegotiation or change substantially modifies the terms and conditions of the financial asset, ITAÚ UNIBANCO HOLDING writes off the original asset and recognizes a new one. Accordingly, the renegotiation date is considered the initial recognition date of the new asset for expected credit loss calculation purposes, including to determine significant increases in credit risk.

 

Anyhow, ITAÚ UNIBANCO HOLDING also assesses if the new financial asset may be considered as originated or purchased with credit recovery issues, particularly when the renegotiation was motivated by the debtor’s financial constraints. Differences between the carrying amount of the original asset and fair value of the new asset are immediately recognized in the Consolidated Statement of Income.

 

Transfer of Financial Assets

 

Financial assets are written off when the rights to receive cash flow are extinguished or when ITAÚ UNIBANCO HOLDING substantially transfers all risks and benefits of the property and such transfer is eligible for write-off in accordance with IFRS 9 requirements. In the event it is not possible to identify the transfer of all risks and benefits, the control to determine if the continuous involvement related to the transaction does not prevent the write-off.

 

If the retention of risks and benefits is characterized in the assessment, the financial asset remains recorded and a liability is recognized for the consideration received.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201834

 

 

Write-off of Financial Assets

 

When there are no reasonable expectancies of recovery of a financial asset, considering recovery historical curves, its total or partial write-off is made concurrently with the reversal of the related provision for expected credit loss, without effects in the Consolidated Statement of Income of ITAÚ UNIBANCO HOLDING. Subsequent recoveries of amounts previously written off are accounted for as income in the Consolidated Statement of Income.

 

II –Classification and Measurement of Financial Liabilities

 

Financial liabilities are initially recognized at fair value and subsequently measures at amortized cost, except for:

 

·Financial Assets at Fair Value Through Profit or Loss: classification applied to derivatives and other financial liabilities designated at fair value through profit or loss to reduce “accounting mismatches”. ITAÚ UNIBANCO HOLDING irrevocably designates financial liabilities at fair value through profit or loss in the initial recognition (fair value option), when the option eliminates or significantly reduces measurement or recognition inconsistencies.

 

·Loan Commitments and Financial Guarantees, as detailed in Note 2.4e VIII.

 

Write-off and Change of Financial Liabilities

 

ITAÚ UNIBANCO HOLDING excludes a financial liability from the Consolidated Balance Sheet when it is extinguished, i.e., when the obligation specified in the contract is discharged, cancelled or expires.

 

A change of debt instrument or substantial modification of terms of a financial liability is accounted for as extinction of the original financial liability and a new one is recognized.

 

III – Securities purchased under agreements to resell

 

ITAÚ UNIBANCO HOLDING has purchased securities with resale agreement (resale agreements), and sold securities with repurchase agreement (repurchase agreement) of financial assets. Resale and repurchase agreements are accounted for under Securities purchased under agreements to resell and Securities sold under repurchase agreements, respectively.

 

The difference between the sale and repurchase prices is treated as interest and recognized over the life of the agreements using the effective interest rate method.

 

The financial assets accepted as collateral in our resale agreements can be used by us, if provided for in the agreements, as collateral for our repurchase agreements or can be sold.

 

In Brazil, control over custody of financial assets is centralized and the ownership of investments under resale and repurchase agreements is temporarily transferred to the buyer. ITAÚ UNIBANCO HOLDING strictly monitors the fair value of financial assets received as collateral under our resale agreements and adjusts the collateral amount when appropriate.

 

Financial assets pledged as collateral to counterparties are also recognized in the Consolidated Financial Statements. When the counterparty has the right to sell or re-pledge such instruments, they are presented in the balance sheet under the appropriate class of financial assets.

 

IV - Derivatives

 

All derivatives are accounted for as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

 

The assessment of active hybrid contracts that are in the scope of IFRS 9 is carried out as a whole, including all embedded characteristics, whereas the accounting of an asset hybrid contract is carried out on a joint basis, i.e. the whole instrument is measured at fair value through profit or loss.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201835

 

 

When a contract has a host component outside the scope of IFRS 9, such as a lease agreement receivable or an insurance contract, or even a financial liability, embedded derivatives are treated as separate financial instruments if their characteristics and economic risks are not closely related to those of the host component, and the latter is not accounted for at fair value through profit or loss. These embedded derivatives are accounted for separately at fair value, with variations recognized in the Consolidated Statement of Income in the heading Net gain (loss) from investment in securities and derivatives.

 

ITAÚ UNIBANCO HOLDING will continue applying all accounting hedge requirements set forth in IAS 39; however, it may adopt the requirements of IFRS 9, according to the Management’s decision. According to this standard, derivatives may be designated and qualified as hedge instruments for accounting purposes and, depending on the nature of the protected item, the method for recognizing gains or losses of fair value will be different.

 

To qualify for hedge accounting, all of the following conditions are met:

 

·At the inception of the hedge there is formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge;
·The hedge is expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk, consistent with the originally documented risk management strategy for that particular hedging relationship;
·For a cash flow hedge, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss;
·The effectiveness of the hedge can be reliably measured, i.e. the fair value or cash flows of the hedged item that are attributable to the hedged risk and the fair value of the hedging instrument can be reliably measured;
·The hedge is assessed on an ongoing basis and it is determined that the hedge has in fact been highly effective throughout the periods of Financial Statements for which the hedge was designated.

 

IAS 39 presents three hedge strategies: fair value hedge, cash flow hedge, and hedge of net investments in a foreign operation. ITAÚ UNIBANCO HOLDING uses derivatives as hedging instruments under cash three hedge strategies, as detailed in Note 7.

 

For derivatives that are designated and qualify as fair value hedges, the following practices are adopted:

 

a)The gain or loss arising from the new measurement of the hedge instrument at fair value should be recognized in income; and

 

b)The gain or loss arising from the hedged item, attributable to the effective portion of the hedged risk, should adjust the book value of the hedged item and also be recognized in income.

 

When the derivative expires or is sold or the hedge no longer meets the accounting hedge criteria or the entity revokes the designation, the entity should prospectively discontinue the accounting hedge. In addition, any adjustment in the book value of the hedged item should be amortized in income.

 

Cash flow hedge

 

For derivatives that are designated and qualify as a cash flow hedge, the effective portion of derivative gains or losses are recognized in Other comprehensive income –Cash flow hedge, and reclassified to Income in the same period or periods in which the hedged transaction affects income. The portion of gain or loss on derivatives that represents the ineffective portion or the hedge components excluded from the assessment of effectiveness is recognized immediately in income. Amounts originally recorded in Other comprehensive income and subsequently reclassified to Income are recorded in the corresponding income or expense lines in which the related hedged item is reported.

 

When the derivative expires or is sold or the hedge no longer meets the accounting hedge criteria or the entity revokes the designation, any cumulative gain or loss existing in Other comprehensive income is frozen and is recognized in income when the hedged item is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss recognized in Other Comprehensive Income is immediately transferred to the statement of income.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201836

 

 

Hedge of net investments in foreign operations

 

The hedge of a net investment in a foreign operation, including hedge of a monetary item that is accounted for as part of the net investment, is accounted for in a manner similar to a cash flow hedge:

 

a)The portion of gain or loss on the hedge instrument determined as effective is recognized in other comprehensive income;

 

b)The ineffective portion is recognized in income.

 

Gains or losses on the hedging instrument related to the effective portion of the hedge which is recognized in comprehensive income are reclassified to the disposal of the investment in the foreign operation.

 

V - Loan operations

 

ITAÚ UNIBANCO HOLDING classifies a loan operation as on non-accrual status if the payment of the principal or interest has been in default for 60 days or more. In this case, accrual of interest is no longer recognized.

 

Both the credit risk and the finance areas are responsible for defining the methodologies used to measure the allowance for loan losses and for assessing changes in the provision amounts on a recurring basis.

 

These areas monitor the trends observed in expected credit loss by segment level, in addition to establishing an initial understanding of the variables that may trigger changes in the allowance for loan losses, the probability of default or the loss given default.

 

Once the trends have been identified and an initial assessment of the variables has been made at the corporate level, the business areas are responsible for further analyzing these observed trends at a detailed level and for each portfolio, in order to understand the underlying reasons for the trends observed and for deciding whether changes are required in our credit policies.

 

VI - Lease operations (as lessor)

 

When assets are subject to a finance lease, the present value of lease payments is recognized as a receivable in the consolidated balance sheet under Loan operations and Lease Operations.

 

Initial direct costs when incurred by ITAÚ UNIBANCO HOLDING are included in the initial measurement of the lease receivable, reducing the amount of income to be recognized over the lease period. Such initial costs usually include commissions and legal fees.

 

The recognition of interest income reflects a constant rate of return on the net investment of ITAÚ UNIBANCO HOLDING and is recognized in the Consolidated statement of income under Interest and similar income.

 

Vll - Capitalization plans

 

For regulatory purposes in Brazil they are regulated by the insurance regulator. These plans do not meet the definition of an insurance contract under IFRS 4, and therefore they are classified as a financial liability at amortized cost under IFRS 9.

 

Revenue from capitalization plans is recognized during the period of the contract and measured as the difference between the amount deposited by the client and the amount that ITAÚ UNIBANCO HOLDING has to reimburse.

 

VIIl – Loan Commitments and Financial Guarantees

 

ITAÚ UNIBANCO HOLDING recognizes in the Consolidated Balance Sheet, as an obligation, on the issue date, the fair value of loan commitments and financial guarantees. The fair value is generally represented by the fee charged from the client. This amount is amortized for the instrument term and is recognized in the Consolidated Statement of Income in the heading Banking service fees.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201837

 

 

After the issue, based on the best estimate, if ITAÚ UNIBANCO HOLDING concludes that the credit loss expected in relation to the guarantee issued is higher that the fair value less accumulated amortization, this amount is replaced by a provision for loss.

 

f)Investments in associates and joint ventures

 

I –Associates

 

In conformity with IAS 28 - Investments in Associates and Joint Ventures, associates are companies in which the investor has a significant influence but does not hold control. Investments in these companies are initially recognized at cost of acquisition and subsequently accounted for using the equity method. Investments in associates and joint ventures include the goodwill identified upon acquisition, net of any cumulative impairment loss.

 

II – Joint arrangements

 

ITAÚ UNIBANCO HOLDING reviews the nature of its joint business to assess whether it has joint operations and joint ventures. Joint ventures are recognized by the equity method in conformity with the requirements of IFRS 11 – Joint Arrangements.

 

ITAÚ UNIBANCO HOLDING’s share in profits or losses of its associates and joint ventures after acquisition is recognized in the Consolidated statement of income. Its share of the changes in the reserves of corresponding stockholders’ equity of its associates and joint ventures is recognized in its own reserves of stockholders’ equity. The cumulative changes after acquisition are adjusted against the carrying amount of the investment. When the ITAÚ UNIBANCO HOLDING share of losses of an associates and joint ventures is equal or above its interest in the associates and joint ventures, including any other receivables, ITAÚ UNIBANCO HOLDING does not recognize additional losses, unless it has incurred any obligations or made payments on behalf of the associates and joint ventures.

 

Unrealized profits on transactions between ITAÚ UNIBANCO HOLDING and its associates and joint ventures are eliminated to the extent of the interest of ITAÚ UNIBANCO HOLDING. Unrealized losses are also eliminated, unless the transaction provides evidence of impairment of the transferred asset. The accounting policies on associates and joint ventures are consistent with the policies adopted by ITAÚ UNIBANCO HOLDING.

 

If the interest in the associates and joint ventures decreases, but ITAÚ UNIBANCO HOLDING retains significant influence or joint control, only the proportional amount of the previously recognized amounts in Other comprehensive income is reclassified in Income, when appropriate.

 

Gains and losses from dilution arising from investments in associates and joint ventures are recognized in the consolidated statement of income.

 

g)Lease commitments (as lessee)

 

As a lessee, ITAÚ UNIBANCO HOLDING has finance and operating lease agreements.

 

ITAÚ UNIBANCO HOLDING leases certain fixed assets, and those substantially holding the risks and benefits incidental to the ownership are classified as finance leases.

 

Each lease installment paid is allocated part to liabilities and part to financial charges, so that a constant rate is obtained for the outstanding debt balance. Corresponding obligations, net of future financial charges, are included in Other financial liabilities. Interest expenses are recognized in the Consolidated Statement of Income over the lease term, to produce a constant periodic interest rate on the remaining liabilities balance for each period.

 

Expenses related to operating leases are recognized in the Consolidated statement of income, on a straight-line basis, over the period of lease.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201838

 

 

When an operating lease is terminated before the end of the lease term, any payment to be made to the lessor as a penalty is recognized as an expense in the period the termination occurs.

 

h)Fixed assets

 

According to IAS 16 – Fixed assets are recognized at cost of acquisition less accumulated depreciation, and adjusted for impairment, if applicable. Depreciation is calculated using the straight-line method and rates based on the estimated useful lives of these assets. These rates and other information are presented in Note 13.

 

The residual values and useful lives of assets are reviewed and adjusted, if appropriate, at the end of each period.

 

ITAÚ UNIBANCO HOLDING reviews its assets in order to identify whether any indications of impairment exist. If such indications are identified, fixed assets are tested for impairment. In accordance with IAS 36 –Impairment of assets, impairment losses are recognized for the difference between the carrying and recoverable amount of an asset (or group of assets), in the Consolidated statement of income. The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and its value in use. For purposes of assessing impairment, assets are grouped at the lowest level for which independent cash flows can be identified (cash-generating units). The assessment may be made at an individual asset level when the fair value less the cost to sell may be reliably determined.

 

Gains and losses on disposals of fixed assets are recognized in the Consolidated statement of income under Other income or General and administrative expenses.

 

i)Goodwill

 

In accordance with IFRS 3 – Business combinations, goodwill may arise on an acquisition and represents the excess of the consideration transferred plus non-controlling interest over the net fair value of the net identifiable assets and contingent liabilities of the acquiree. Goodwill is not amortized, but its recoverable amount is tested for impairment semi-annually or when there is any indication of impairment, using an approach that involves the identification of cash-generating units and estimates of fair value less cost to sell and/or value in use.

 

As defined in IAS 36 – Impairment of assets, a cash-generating unit is the lowest identifiable group of assets that generates cash inflows that are independent of the cash inflows from other assets or groups of assets. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination.

 

IAS 36 determines that an impairment loss shall be recognized for a cash-generating unit if the recoverable amount of the cash-generating unit is less than its carrying amount. The loss shall be allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit, and then to the other assets of the unit on a pro rata basis applied to the carrying amount of each asset. The loss cannot reduce the carrying amount of an asset below the higher of its fair value less costs to sell and its value in use. The impairment loss of goodwill cannot be reversed.

 

Goodwill arising from the acquisition of subsidiaries is presented in the Consolidated Balance Sheet under the line Goodwill.

 

Goodwill of associates and joint ventures is reported as part of investment in the Consolidated Balance Sheet under Investments in associates and joint ventures, and the impairment test is carried out in relation to the total balance of the investments (including goodwill).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201839

 

 

j)Intangible assets

 

Intangible assets are non-physical assets, including software and other assets, and are initially recognized at cost. Intangible assets are recognized when they arise from legal or contractual rights, their costs can be reliably measured, and in the case of intangible assets not arising from separate acquisitions or business combinations, it is probable that future economic benefits may arise from their use. The balance of intangible assets refers to acquired assets or those internally generated.

 

Intangible assets may have finite or indefinite useful lives. Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. Intangible assets with indefinite useful lives are not amortized, but periodically tested in order to identify any impairment.

 

ITAÚ UNIBANCO HOLDING semi-annually assesses its intangible assets in order to identify whether any indications of impairment exist, as well as possible reversal of previous impairment losses. If such indications are found, intangible assets are tested for impairment. In accordance with IAS 36, impairment losses are recognized as the difference between the carrying and the recoverable amount of an asset (or group of assets), and recognized in the Consolidated statement of income. The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and its value in use. For purposes of assessing impairment, assets are grouped at the lowest level for which independent cash flows can be identified (cash-generating units). The assessment may be made at an individual asset level when the fair value less the cost to sell may be reliably determined.

 

As set forth in IAS 38, ITAÚ UNIBANCO HOLDING elected the cost model to measure its intangible assets after its initial recognition.

 

The breakdown of intangible assets is described in Note 14.

 

k)Assets held for sale

 

Assets held for sale are recognized in the balance sheet when they are actually repossessed or there is intention to sell. These assets are initially recorded at the lower of: (i) the fair value of the asset less the estimated selling expenses, or (ii) the carrying amount of the related asset held for sale.

 

l)Income tax and social contribution

 

There are two components of the provision for income tax and social contribution: current and deferred.

 

Current income tax expense approximates taxes to be paid or recovered for the applicable period. Current assets and liabilities are recorded in the balance sheet under Tax assets – income tax and social contribution - current and tax liabilities – income tax and Social contribution – current, respectively.

 

Deferred income tax and social contribution represented by deferred tax assets and liabilities are obtained based on the differences between the tax bases of assets and liabilities and the amounts reported in the financial statements at each year end. The tax benefit of tax loss carry forwards is recognized as an asset. Deferred tax assets are only recognized when it is probable that future taxable income will be available for offsetting. Deferred tax assets and liabilities are recognized in the balance sheet under Tax assets – Income tax and social contribution – Deferred and Tax liabilities – Income tax and social contribution - Deferred, respectively.

 

Income tax and social contribution expense is recognized in the Consolidated statement of income under Income tax and social contribution, except when it refers to items directly recognized in Other comprehensive income, such as: deferred tax at Fair Value Through Other Comprehensive Income and tax on cash flow hedges. Deferred taxes of such items are initially recognized in Other comprehensive income and subsequently recognized in Income together with the recognition of the gain / loss originally deferred.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201840

 

 

Changes in tax legislation and rates are recognized in the Consolidated statement of income under Income tax and social contribution in the period in which they are enacted. Interest and fines are recognized in the Consolidated statement of income under General and administrative expenses.:

 

To determine the proper level of provisions for taxes to be maintained for uncertain tax positions, a two-phased approach was applied, according to which a tax benefit is recognized if it is more probable than not that a position can be sustained. The benefit amount is then measured to be the highest tax benefit which probability of realization is over 50%.

 

m)Insurance contracts and private pension

 

IFRS 4 – “Insurance contracts” defines insurance contracts as contracts under which the issuer accepts a significant insurance risk of the counterparty, by agreeing to compensate it if a specified uncertain future event adversely affects it. An insurance risk is significant only if the insurance event could cause an issuer to pay significant additional benefits in any scenario, except for those that do not have commercial substance. Additional benefits refer to amounts that exceed those that would be payable if no insured event occurred.

 

At the time of the first-time adoption of IFRS, ITAÚ UNIBANCO HOLDING decided not to change its accounting policies for insurance contracts, which follow the accounting practices generally accepted in Brazil (“BRGAAP”).

 

Although investment agreements with discretionary participation characteristics are financial instruments, they are treated as insurance contracts, as established by IFRS 4, as well as those transferring a significant financial risk.

 

These agreements may be reclassified as insurance contracts after their initial classification should the insurance risk become significant.

 

Once the contract is classified as an insurance contract, it remains as such until the end of its life, even if the insurance risk is significantly reduced during such period, unless all rights and obligations are extinguished or expired.

 

Note 28 presents a detailed description of all products classified as insurance contracts.

 

Private pension plans

 

Contracts that contemplate retirement benefits after an accumulation period (known as PGBL, VGBL and FGB) assure, at the commencement date of the contract, the basis for calculating the retirement benefit (mortality table and minimum interest). The contracts specify the annuity fees and, therefore, the contract transfers the insurance risk to the issuer at the commencement date, and they are classified as insurance contracts.

 

Insurance premiums

 

Insurance premiums are recognized by issuing an insurance policy or over the period of the contracts in proportion to the amount of the insurance coverage. Insurance premiums are recognized as income in the Consolidated statement of income.

 

If there is evidence of impairment losses with respect to receivables for insurance premiums, ITAÚ UNIBANCO HOLDING recognizes a provision, sufficient to cover this loss, based on the risk analysis of realization of insurance premiums receivable with installments overdue for over 60 days.

 

Reinsurance

 

Reinsurance premiums are recognized over the same period in which the related insurance premiums are recognized in the consolidated statement of income.

 

In the ordinary course of business, ITAÚ UNIBANCO HOLDING reinsures a portion of the risks underwritten, particularly property and casualty risks that exceed the maximum limits of responsibility that we determine to be appropriate for each segment and product (after a study which considers size, experience, specificities, and the necessary capital to support these limits). These reinsurance agreements allow the recovery of a portion of the losses from the reinsurer, although they do not release the insurer from the main obligation as direct insurer of the risks contemplated in the reinsurance.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201841

 

 

Acquisition costs

 

Acquisition costs include direct and indirect costs related to the origination of insurance. These costs, except for the commissions paid to brokers and others, are expensed directly in income as incurred. Commissions are deferred and expensed in proportion to the recognition of the premium revenue, i.e. over the period of the corresponding insurance contract.

 

Liabilities

 

Reserves for claims are established based on historical experience, claims in process of payment, estimated amounts of claims incurred but not yet reported, and other factors relevant to the required reserve levels. A liability for premium deficiencies is recognized if the estimated amount of premium deficiencies exceeds deferred acquisition costs. Expenses related to recognition of liabilities for insurance contracts are recognized in the Consolidated statement of income under Change in reserves for insurance and private pension.

 

Embedded derivatives

 

We have not identified any embedded derivatives in our insurance contracts, which may be separated or measured at fair value in accordance with IFRS 4 requirements.

 

Liability adequacy test

 

IFRS 4 requires that the insurance companies analyze the adequacy of their insurance liabilities in each reporting period through a minimum adequacy test. ITAÚ UNIBANCO HOLDING conducts the liability adequacy test under IFRS by adopting current actuarial assumptions for future cash flows of all insurance contracts in force at the balance sheet date.

 

Should the analysis show insufficiency, any deficiency identified will be immediately accounted for in income for the period.

 

The assumptions used to conduct the liability adequacy test are detailed in Note 28.

 

n)Post-employments benefits

 

ITAÚ UNIBANCO HOLDING is required to make contributions to government social security and labor indemnity plans, in Brazil and in other countries where it operates, which are expensed in the consolidated statement of income as an integral part of general and administrative expenses, when incurred.

 

Additionally, ITAÚ UNIBANCO HOLDING also sponsors Defined Benefit Plans and Defined Contribution Plans, accounted for in accordance with IAS 19 –“Employee benefits”.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201842

 

 

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 defined benefit obligations at the balance sheet date less the fair value of plan assets. Defined benefit obligations are calculated on a yearly basis by an independent actuarial advisor based on the projected unit credit method. The present value of defined benefit obligations is determined by discounting the estimated amount of future cash flows of benefit payments based on Brazilian government securities denominated in Reais and with maturity periods similar to the term of the pension plan liabilities. They are recognized in the Consolidated statement of income:

 

·Current service cost – 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.

 

Actuarial gains and losses arising from the non-adoption of the assumptions established in the latest evaluation, as compared to those effectively carried out or changes in such assumptions, as well as the effects of changes in these assumptions. Gains and losses are fully recognized in Other comprehensive income.

 

Pension plans - defined contribution

 

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

 

Other post-employment benefit obligations

 

Certain companies that merged into ITAÚ UNIBANCO HOLDING over the past few years were sponsors of post-employment healthcare benefit plans and ITAÚ UNIBANCO HOLDING is contractual committed to maintain such benefits over specific periods, as well as in relation to the benefits granted due to a judicial ruling.

 

Likewise the defined benefit pension plans, these obligations are assessed annually by independent and qualified actuaries, and costs expected from these benefits are accumulated during the employment period and gains and losses arising from adjustments of practices and changes in actuarial assumptions are recognized in Stockholders’ equity, under Other comprehensive income, in the period they occurred.

 

o)Share-based payment

 

Share-based payment is accounted for in accordance with IFRS 2 - “Share-based payment” which requires the entity to measure the value of equity instruments granted, based on their fair value at the option grant date. This cost is recognized during the vesting period of the right to exercise the instruments.

 

The total amount to be expensed is determined by reference to the fair value of the options granted excluding the impact of any service and non-market performance vesting conditions (notably remaining an employee of the entity over a specified time period). The fulfillment of on-market vesting conditions is included in the assumptions about the number of options that are expected to be exercised. At the end of each period, ITAÚ UNIBANCO HOLDING revises its estimates of the number of options that are expected to be exercised based on non-market vesting conditions. It recognizes the impact of the revision of the original estimates, if any, in the consolidated statement of income, with a corresponding adjustment to stockholders’ equity.

 

When the options are exercised, the ITAÚ UNIBANCO HOLDING treasury shares are generally delivered to the beneficiaries.

 

The fair value of stock options is estimated by using option pricing models that take into account the exercise price of the option, the current stock price, the risk-free interest rate, the expected volatility of the stock price and the life of the option.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201843

 

 

All stock based compensation plans established by ITAÚ UNIBANCO HOLDING correspond to plans that can be settled exclusively through the delivery of shares.

 

p)Provisions, contingent assets and contingent liabilities

 

Provisions, contingent assets and contingent liabilities are assessed, recognized and disclosed in accordance with IAS 37 - Provisions, Contingent Liabilities and Contingent Assets. Contingent assets and liabilities are potential rights and obligations arising from past events for which materialization depends on uncertain future events.

 

Contingent assets are not recognized in the Consolidated Financial Statements, except when the Management of ITAÚ UNIBANCO HOLDING understands that realization is virtually certain, which generally corresponds to lawsuits with favorable rulings, in final and unappealable judgments, withdrawal from lawsuits as a result of a payment in settlement or as a result of an agreement to offset against an existing liability.

 

Contingent liabilities mainly arise from administrative proceedings and lawsuits, inherent in the ordinary course of business, filed by third parties, former employees and governmental bodies, in connection with civil, labor, and tax and social security claims.

 

These contingencies are evaluated based on Management’s best estimates, and are classified as:

 

·Probable: in which liabilities are recognized in the consolidated balance sheet under Provisions.
·Possible: which are disclosed in the Consolidated Financial Statements, but no provision is recorded.
·Remote: which require neither a provision nor disclosure.

 

Contingent liabilities recorded under Provisions and those disclosed as possible are measured using best estimates through the use of models and criteria which allow their appropriate measurement even if there is uncertainty as to their ultimate timing and amount, and the criteria are detailed in Note 30.

 

The amount of court escrow deposits is adjusted in accordance with current legislation.

 

Contingent liabilities guaranteed by indemnity clauses provided by third parties, such as in business combinations carried out before the transition date to IFRS, are recognized when a claim is asserted, and a receivable is recognized simultaneously subject to its collectability. For business combinations carried out after the transition date, indemnification assets are recognized at the same time and measured on the same basis as the indemnified item, subject to collectability or contractual limitations on the indemnified amount.

 

q)Capital

 

Common and preferred shares, which are equivalent to common shares but without voting rights are classified in Stockholders’ equity. The additional costs directly attributable to the issue of new shares are included in Stockholders’ equity as a deduction from the proceeds, net of taxes.

 

r)Treasury shares

 

Common and preferred shares repurchased are recorded in Stockholders’ equity under Treasury shares at their average purchase price.

 

Shares that are subsequently sold, such as those sold to grantees under our share-based payment, are recorded as a reduction in treasury shares, measured at the average price of treasury stock held at such date.

 

The difference between the sale price and the average price of the treasury shares is recorded as a reduction or increase in Additional paid-in capital. The cancellation of treasury shares is recorded as a reduction in Treasury shares against Appropriated reserves, at the average price of treasury shares at the cancellation date.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201844

 

 

s)Dividends and interest on capital

 

Minimum dividend amounts established in the bylaws are recorded as liabilities at the end of each year. Any other amount above the mandatory minimum dividend is accounted for as a liability when approved by stockholders at a Stockholders´ Meeting.

 

Interest on capital is treated for accounting purposes as a dividend, and it is presented as a reduction of stockholders' equity in the consolidated financial statements. The related tax benefit is recorded in the consolidated statement of income.

 

Dividends have been and continue to be calculated and paid based on the financial statements prepared under Brazilian accounting standards and regulations for financial institutions and not based on these Consolidated financial statements prepared under IFRS.

 

Dividends and interest on capital are presented in Note 19.

 

t)Earnings per share

 

Earnings per share are computed by dividing net income attributable to the owners of ITAÚ UNIBANCO HOLDING by the weighted average number of common and preferred shares outstanding for each reporting year. Weighted average shares are computed based on the periods for which the shares were outstanding.

 

ITAÚ UNIBANCO HOLDING grants stock-based compensation whose dilutive effect is reflected in diluted earnings per share, with the application of the “treasury stock method“. Under the treasury stock method, earnings per share are calculated as if shares under stock-based compensation plans had been issued and as if the assumed proceeds were used to purchase shares of ITAÚ UNIBANCO HOLDING.

 

Earnings per share are presented in Note 26.

 

u)Revenue from services

 

Services related to current account are offered to clients in packages and individually, and their income is recognized when these services are provided.

 

Revenue from certain services, such as fees from funds management, performance, collection for wholesale and custody clients is recognized when the services are provided over the life of the respective contracts. Incremental costs are recognized as expenses when incurred.

 

The breakdown of the Banking Service Fees is detailed in Note 22.

 

v)Segment information

 

Segment information is disclosed consistently with the internal report prepared for the Executive Committee, which makes the operational decisions of ITAÚ UNIBANCO HOLDING.

 

ITAÚ UNIBANCO HOLDING has three reportable segments: (i) Retail Banking (ii) Wholesale Banking and (iii) Activities with the Market + Corporation.

 

Segment information is presented in Note 32.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201845

 

 

Note 3 –Business development

 

Citibank’s Retail Operations

 

On October 08, 2016, ITAÚ UNIBANCO HOLDING 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$ 628.

 

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$ 631.

 

Gestora de Inteligência de Crédito

 

On January 21, 2016, o ITAÚ UNIBANCO HOLDING, 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 closed 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. 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, through its subsidiary ITB Holding Brasil Participações Ltda., indirectly acquired the following additional interests in the capital of ITAÚ CORPBANCA:

 

• On September 14, 2017 – 1,800,000,000 shares (0.35%) for the amount of R$ 55.6, then holding 36.06%;

 

• On October 12, 2018 – 10,651,555,020 shares (2.08%) for the amount of R$ 362.9, then holding 38.14%.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201846

 

 

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 and acquisition of shares issued by XP HOLDING held by the SELLERS in the amount of R$ 5,700, and such amounts were restated pursuant to contractual provision, totaling R$ 6,650 (FIRST ACQUISITION). A portion of this amount were 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.

 

Note 4 - Interbank deposits and securities purchased under agreements to resell

 

   09/30/2018   12/31/2017 
   Current   Non-current   Total   Current   Non-current   Total 
Interbank deposits (1)   27,885    762    28,647    28,034    1,014    29,048 
Securities purchased under agreements to resell (2)   281,492    12,501    293,993    244,503    196    244,699 
Total (3)   309,377    13,263    322,640    272,537    1,210    273,747 

(1)Includes R$ 16,460 (R$ 7,220 at 12/31/2017) related to Compulsory Deposits with Central Banks of other countries, of which R$ 14,575 (R$ 6,171 at 12/31/2017) interest-bearing deposits and R$ 1,885 (R$ 1,049 at 12/31/2017) non-interest-bearing deposits.
(2)The amounts of R$ 2,510 (R$ 3,664 at 12/31/2017) are pledged in guarantee of operations on B3 S.A. - Brasil, Bolsa, Balcão (B3) and Central Bank and the amounts of R$ 221,292 (R$ 185,296 at 12/31/2017) are pledged in guarantee of repurchase agreement transactions, in conformity with the policies described in Note 2.4d.
(3)Includes losses in amounts R$ 7 (R$ 8 at 12/31/2017).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201847

 

 

Note 5 – Financial assets held for trading and designated at fair value through profit or loss - Securities

 

a) Financial assets held for trading recognized at their fair value are presented in the following table:

 

   09/30/2018   12/31/2017 
   Cost   Adjustments to Fair
Value (in Income)		   Fair value   Cost   Adjustments to Fair
Value (in Income)		   Fair value 
Investment funds   4,455    (896)   3,559    4,135    (622)   3,513 
Brazilian government securities (1a)   186,845    (595)   186,250    207,418    426    207,844 
Government securities – aboard (1b)   1,532    24    1,556    3,917    32    3,949 
Argentina   514    24    538    1,446    20    1,466 
Chile   395    -    395    57    -    57 
Colombia   356    -    356    2,080    12    2,092 
United States   121    -    121    100    -    100 
Mexico   10    -    10    5    -    5 
Paraguay   1    -    1    3    -    3 
Uruguay   132    -    132    193    -    193 
Other   3    -    3    33    -    33 
Corporate securities (1c)   38,056    (681)   37,375    33,816    (175)   33,641 
Shares   7,372    (446)   6,926    6,080    (121)   5,959 
Bank deposit certificates   867    -    867    335    -    335 
Securitized real estate loans   1,515    (38)   1,477    1,779    16    1,795 
Debentures   4,763    (194)   4,569    3,290    (74)   3,216 
Eurobonds and other   868    (4)   864    684    4    688 
Financial credit bills   21,256    -    21,256    21,170    -    21,170 
Promissory notes   1,324    -    1,324    391    -    391 
Other   91    1    92    87    -    87 
Total   230,888    (2,148)   228,740    249,286    (339)   248,947 

1)Financial assets at fair value through profit or loss – Securities pledged as Guarantee of Funding of Financial Institutions and Clients were: a) R$ 4,852 (R$ 30,325 at 12/31/2017), b) R$ 263 (R$ 46 at 12/31/2017) and c) R$ 10 (R$ 28 at 12/31/2017), totaling R$ 5,125 (R$ 30,399 at 12/31/2017).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201848

 

 

The cost and fair value of Financial Assets at Fair Value Through Profit or Loss are as follows:

 

   09/30/2018   12/31/2017 
   Cost   Fair value   Cost   Fair value 
Current   37,456    36,110    50,174    49,512 
Non-stated maturity   10,957    9,613    10,214    9,469 
Up to one year   26,499    26,497    39,960    40,043 
Non-current   193,432    192,630    199,112    199,435 
From one to five years   147,199    146,650    147,700    147,805 
From five to ten years   37,143    36,919    41,279    41,499 
After ten years   9,090    9,061    10,133    10,131 
Total   230,888    228,740    249,286    248,947 

 

Financial Assets at Fair Value Through Profit or Loss include assets with a fair value of R$ 181,628 (R$ 169,178 at 12/31/2017) that belong to investment funds wholly owned by Itaú Vida e Previdência S.A. The return of those assets (positive or negative) is fully transferred to customers of our PGBL and VGBL private pension plans whose premiums (less fees charged by us) are used by our subsidiary to purchase quotas of those investment funds.

 

b) Financial assets designated at fair value through profit or loss are presented in the following table:

 

   09/30/2018 
   Cost   Adjustments to
Fair Value (in Income)		   Fair value 
Brazilian external debt bonds   1,881    50    1,931 
Total   1,881    50    1,931 
                
   12/31/2017 
   Cost   Adjustments to
Fair Value (in Income)		   Fair value 
Brazilian external debt bonds   1,670    76    1,746 
Total   1,670    76    1,746 

 

The cost and fair value by maturity of financial assets designated as fair value through profit or loss were as follows:

 

   09/30/2018   12/31/2017 
   Cost   Fair value   Cost   Fair value 
Current   1,174    1,213    1,006    1,041 
Up to one year   1,174    1,213    1,006    1,041 
Non-current   707    718    664    705 
From one to five years   707    718    664    705 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201849

 

 

Note 6 – Derivatives

 

ITAÚ UNIBANCO HOLDING enters into derivative financial instruments with various counterparties to manage its overall exposures and to assist its customers in managing their own exposures.

 

Futures – Interest rate and foreign currency futures contracts are commitments to buy or sell a financial instrument at a future date, at a contracted price or yield and may be settled in cash or through delivery. The notional amount represents the face value of the underlying instrument. Commodity futures contracts or financial instruments are commitments to buy or sell commodities (mainly gold, coffee and orange juice), at a future date, at a contracted price, which are settled in cash. The notional amount represents the quantity of such commodities multiplied by the future price at the contract date. Daily cash settlements of price movements are made for all instruments.

 

Forwards – Interest forward contracts are agreements to exchange payments on a specified future date, based on a market change in interest rates from trade date to contract settlement date. Foreign exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed price, at an agreed settlement date. Financial instrument forward contracts are commitments to buy or sell a financial instrument on a future date at a contracted price and are settled in cash.

 

Swaps – Interest rate and foreign exchange swap contracts are commitments to settle in cash at a future date or dates, based on differentials between specified financial indices (either two different interest rates in a single currency or two different rates each in a different currency), as applied to a notional principal amount. Swap contracts presented in Other in the table below correspond substantially to inflation rate swap contracts.

 

Options – Option contracts give the purchaser, for a fee, the right, but not the obligation, to buy or sell within a limited time a financial instrument including a flow of interest, foreign currencies, commodities, or financial instruments at a contracted price that may also be settled in cash, based on differentials between specific indices.

 

Credit Derivatives – Credit derivatives are financial instruments with value relating to the credit risk associated to the debt issued by a third party (the reference entity), which permits that one party (the purchaser of the hedge) transfers the risk to the counterparty (the seller of the hedge). The seller of the hedge should make payments as set forth in the contract when the reference entity undergoes a credit event, such as bankruptcy, default or debt restructuring. The seller of the hedge receives a premium for the hedge, but, on the other hand, assumes the risk that the underlying asset referenced in the contract undergoes a credit event, and the seller would have to make the payment to the purchaser of the hedge, which could be the notional amount of the credit derivative.

 

The total value of margins pledged in guarantee by ITAÚ UNIBANCO HOLDING was R$ 13,392 (R$ 18,284 at 12/31/2017) and was basically comprised of government securities.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201850

 

 

Derivative financial instruments

 

See below the composition of the Derivative financial instruments portfolio (assets and liabilities) by type of instrument, stated fair value, and by maturity.

 

   09/30/2018 
   Fair value   %   0-30
days		   31-90
days		   91-180
days		   181-365
days		   366-720
days		   Over 720
days		 
Assets                                        
Swaps – difference receivable   11,280    39.2    85    132    806    814    2,066    7,377 
Option premiums   5,383    18.8    539    1,035    1,369    1,350    599    491 
Forwards (onshore)   6,271    21.9    5,232    646    302    90    1    - 
Credit derivatives - financial Institutions   189    0.7    -    1    -    3    14    171 
NDF - Non Deliverable Forward   4,493    15.7    1,156    975    1,086    873    332    71 
Check of swap - Companies   161    0.6    -    -    1    13    -    147 
Other   890    3.1    591    16    5    3    6    269 
Total   28,667    100.0    7,603    2,805    3,569    3,146    3,018    8,526 
% per maturity term             26.5    9.8    12.4    11.0    10.5    29.8 

 

   09/30/2018 
   Fair value   %   0-30
days		   31-90
days		   91-180
days		   181-365
days		   366-720
days		   Over 720
days		 
Liabilities                                        
Swaps – difference payable   (16,652)   52.2    (471)   (805)   (1,937)   (1,610)   (4,744)   (7,085)
Option premiums   (4,926)   15.4    (568)   (857)   (1,309)   (1,225)   (608)   (359)
Forwards (onshore)   (4,643)   14.6    (4,643)   -    -    -    -    - 
Credit derivatives - financial Institutions   (150)   0.5    -    -    -    (1)   (5)   (144)
NDF - Non Deliverable Forward   (5,267)   16.5    (1,421)   (982)   (1,566)   (561)   (317)   (420)
Check of swap - Companies   (178)   0.6    -    -    -    (21)   -    (157)
Other   (70)   0.2    -    (4)   (2)   (2)   (10)   (52)
Total   (31,886)   100.0    (7,103)   (2,648)   (4,814)   (3,420)   (5,684)   (8,217)
% per maturity term             22.3    8.3    15.1    10.7    17.8    25.8 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201851

 

 

Derivative financial instruments

 

See below the composition of the Derivative financial instruments portfolio (assets and liabilities) by type of instrument, stated fair value, and by maturity.

 

   12/31/2017 
   Fair value   %   0-30
days		   31-90
days		   91-180
days		   181-365
days		   366-720
days		   Over 720
days		 
Assets                                        
Futures contracts   158    0.7    153    11    (2)   (3)   38    (39)
Swaps – difference receivable   9,190    40.2    189    187    327    744    1,661    6,082 
Option premiums   3,337    14.6    430    440    353    955    865    294 
Forwards (onshore)   6,911    30.3    6,529    293    46    43    -    - 
Credit derivatives - financial Institutions   137    0.6    -    -    1    8    21    107 
NDF - Non Deliverable Forward   2,950    12.9    677    717    624    610    166    156 
Check of swap - Companies   68    0.3    -    -    6    -    -    62 
Other   92    0.4    -    -    -    3    5    84 
Total   22,843    100.0    7,978    1,648    1,355    2,360    2,756    6,746 
% per maturity term             34.9    7.2    5.9    10.3    12.1    29.6 

 

   12/31/2017 
   Fair value   %   0-30
days		   31-90
days		   91-180
days		   181-365
days		   366-720
days		   Over 720
days		 
Liabilities                                        
Swaps – difference receivable   (13,692)   51.2    (65)   (202)   (451)   (1,711)   (3,747)   (7,516)
Option premiums   (2,793)   10.4    (332)   (174)   (304)   (821)   (889)   (273)
Forwards (onshore)   (6,272)   23.5    (6,272)   -    -    -    -    - 
Credit derivatives - financial Institutions   (58)   0.2    -    -    (1)   (2)   (7)   (48)
NDF - Non Deliverable Forward   (3,745)   14.0    (927)   (735)   (547)   (785)   (225)   (526)
Check of swap - Companies   (122)   0.5    -    -    (73)   -    -    (49)
Other   (64)   0.2    -    (2)   (2)   (6)   (9)   (45)
Total   (26,746)   100.0    (7,596)   (1,113)   (1,378)   (3,325)   (4,877)   (8,457)
% per maturity term             28.4    4.2    5.2    12.4    18.2    31.6 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201852

 

 

The following table shows the composition of derivatives by index:

 

   Off-balance sheet
notional amount		   Balance sheet account
receivable / (received)
(payable) / paid		   Adjustment to market
value (in results /
stockholders' equity)		   Fair value 
   09/30/2018   09/30/2018   09/30/2018   09/30/2018 
Futures contracts   640,439    -    -    - 
Purchase commitments   390,346    -    -    - 
Shares   13,614    -    -    - 
Commodities   302    -    -    - 
Interest   344,878    -    -    - 
Foreign currency   31,552    -    -    - 
Commitments to sell   250,093    -    -    - 
Shares   17,088    -    -    - 
Commodities   215    -    -    - 
Interest   201,026    -    -    - 
Foreign currency   31,764    -    -    - 
Swap contracts   -    (6,371)   999    (5,372)
Asset position   994,782    3,184    8,096    11,280 
Shares   174    -    -    - 
Commodities   12    -    -    - 
Interest   982,257    1,853    7,968    9,821 
Foreign currency   12,339    1,331    128    1,459 
Liability position   994,782    (9,555)   (7,097)   (16,652)
Shares   916    (12)   2    (10)
Interest   967,564    (6,426)   (7,131)   (13,557)
Foreign currency   26,302    (3,117)   32    (3,085)
Option contracts   1,998,181    403    54    457 
Purchase commitments – long position   340,369    2,395    1,471    3,866 
Shares   8,286    324    436    760 
Commodities   436    14    1    15 
Interest   279,215    255    (12)   243 
Foreign currency   52,432    1,802    1,046    2,848 
Commitments to sell – long position   684,129    1,752    (235)   1,517 
Shares   11,824    417    105    522 
Commodities   552    19    (10)   9 
Interest   633,444    336    226    562 
Foreign currency   38,309    980    (556)   424 
Purchase commitments – short position   220,877    (1,931)   (1,286)   (3,217)
Shares   11,135    (184)   (435)   (619)
Commodities   602    (19)   (7)   (26)
Interest   154,471    (158)   57    (101)
Foreign currency   54,669    (1,570)   (901)   (2,471)
Commitments to sell – short position   752,806    (1,813)   104    (1,709)
Shares   9,644    (254)   (123)   (377)
Commodities   395    (13)   7    (6)
Interest   701,867    (493)   (269)   (762)
Foreign currency   40,900    (1,053)   489    (564)
Forward operations (onshore)   14,717    1,624    4    1,628 
Purchases receivable   2,079    2,276    (3)   2,273 
Shares   12    11    -    11 
Interest   2,067    2,265    (3)   2,262 
Purchases payable   -    (2,036)   -    (2,036)
Shares   -    (1)   -    (1)
Interest   -    (2,035)   -    (2,035)
Sales receivable   7,141    3,996    2    3,998 
Shares   1,523    1,503    2    1,505 
Interest   -    2,493    -    2,493 
Foreign currency   5,618    -    -    - 
Sales deliverable   5,497    (2,612)   5    (2,607)
Shares   1    (1)   -    (1)
Interest   2,494    (2,611)   5    (2,606)
Foreign currency   3,002    -    -    - 
Credit derivatives   8,922    1    38    39 
Asset position   4,614    134    55    189 
Shares   1,825    43    68    111 
Interest   2,649    85    (13)   72 
Foreign currency   140    6    -    6 
Liability position   4,308    (133)   (17)   (150)
Shares   1,286    (50)   (22)   (72)
Interest   3,022    (83)   5    (78)
NDF - Non Deliverable Forward   249,004    (959)   185    (774)
Asset position   121,341    4,218    275    4,493 
Commodities   148    17    -    17 
Foreign currency   121,193    4,201    275    4,476 
Liability position   127,663    (5,177)   (90)   (5,267)
Commodities   118    (15)   -    (15)
Foreign currency   127,545    (5,162)   (90)   (5,252)
Check of swap   2,769    (118)   101    (17)
Asset position   255    9    152    161 
Interest   10    -    128    128 
Foreign currency   245    9    24    33 
Liability position   2,514    (127)   (51)   (178)
Interest   1,313    (27)   (8)   (35)
Foreign currency   1,201    (100)   (43)   (143)
Other derivative financial instruments   5,150    186    634    820 
Asset position   3,901    192    698    890 
Shares   152    (14)   10    (4)
Interest   3,718    208    77    285 
Foreign currency   31    (2)   611    609 
Liability position   1,249    (6)   (64)   (70)
Shares   1,058    (6)   (31)   (37)
Interest   92    (1)   (6)   (7)
Foreign currency   99    1    (27)   (26)
    Asset    18,156    10,511    28,667 
    Liability    (23,390)   (8,496)   (31,886)
    Total    (5,234)   2,015    (3,219)

 

Derivative contracts mature as follows (in days): 

Off-balance sheet – notional amount  0 - 30   31 - 180   181 - 365   Over 365   09/30/2018 
Futures contracts   231,016    262,136    35,937    111,350    640,439 
Swaps contracts   16,173    168,733    105,146    704,730    994,782 
Options   884,037    738,491    322,149    53,504    1,998,181 
Forwards (onshore)   8,058    6,562    96    1    14,717 
Credit derivatives   -    1,451    617    6,854    8,922 
NDF - Non Deliverable Forward   72,074    121,749    36,231    18,950    249,004 
Check of swap   -    1    229    2,539    2,769 
Other derivative financial instruments   -    584    500    4,066    5,150 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201853

 

 

The following table shows the composition of derivatives by index:

 

   Off-balance sheet
notional amount		   Balance sheet account
receivable / (received)
(payable) paid		   Adjustment to market
value (in results /
stockholders' equity)		   Fair value 
   12/31/2017   12/31/2017   12/31/2017   12/31/2017 
Futures contracts   607,980    8    150    158 
Purchase commitments   323,102    8    150    158 
Shares   18,149    -    -    - 
Commodities   187    -    -    - 
Interest   275,155    7    (3)   4 
Foreign currency   29,611    1    153    154 
Commitments to sell   284,878    -    -    - 
Shares   11,359    -    -    - 
Commodities   168    -    -    - 
Interest   245,230    -    -    - 
Foreign currency   28,121    -    -    - 
Swap contracts   837,299    (4,770)   268    (4,502)
Asset position   837,299    3,630    5,560    9,190 
Shares   350    -    1    1 
Interest   825,811    2,937    5,314    8,251 
Foreign currency   11,138    693    245    938 
Liability position   837,299    (8,400)   (5,292)   (13,692)
Shares   1,088    (1)   -    (1)
Interest   814,141    (8,244)   (5,275)   (13,519)
Foreign currency   22,070    (155)   (17)   (172)
Option contracts   1,847,829    452    92    544 
Purchase commitments – long position   245,514    1,256    392    1,648 
Shares   8,655    396    618    1,014 
Commodities   367    11    18    29 
Interest   204,674    202    (44)   158 
Foreign currency   31,818    647    (200)   447 
Commitments to sell – long position   736,856    1,457    232    1,689 
Shares   11,795    358    34    392 
Commodities   269    4    -    4 
Interest   700,658    416    348    764 
Foreign currency   24,134    679    (150)   529 
Purchase commitments – short position   88,688    (1,008)   (229)   (1,237)
Shares   9,159    (128)   (527)   (655)
Commodities   278    (6)   (14)   (20)
Interest   51,477    (155)   65    (90)
Foreign currency   27,774    (719)   247    (472)
Commitments to sell – short position   776,771    (1,253)   (303)   (1,556)
Shares   10,241    (261)   (33)   (294)
Commodities   222    (8)   4    (4)
Interest   742,475    (435)   (378)   (813)
Foreign currency   23,833    (549)   104    (445)
Forward operations (onshore)   9,954    639    -    639 
Purchases receivable   1,654    1,861    -    1,861 
Shares   25    25    -    25 
Interest   1,629    1,836    -    1,836 
Purchases payable - Interest   -    (1,644)   -    (1,644)
Sales receivable   737    5,049    1    5,050 
Shares   737    729    1    730 
Interest   -    4,320    -    4,320 
Sales deliverable   7,563    (4,627)   (1)   (4,628)
Shares   3,261    1    -    1 
Interest   4,302    (4,628)   (1)   (4,629)
Credit derivatives   10,110    (30)   109    79 
Asset position   5,831    38    99    137 
Shares   1,955    22    69    91 
Interest   3,876    16    30    46 
Liability position   4,279    (68)   10    (58)
Shares   769    (21)   4    (17)
Interest   3,510    (47)   6    (41)
NDF - Non Deliverable Forward   252,628    (948)   153    (795)
Asset position   119,312    2,781    169    2,950 
Commodities   80    6    1    7 
Foreign currency   119,232    2,775    168    2,943 
Liability position   133,316    (3,729)   (16)   (3,745)
Commodities   175    (14)   -    (14)
Foreign currency   133,141    (3,715)   (16)   (3,731)
Check of swap   955    (73)   19    (54)
Asset position - Foreign currency   514    -    68    68 
Liability position - Interest   441    (73)   (49)   (122)
Other financial instruments   4,225    90    (62)   28 
Asset position   2,464    100    (8)   92 
Shares   191    (9)   5    (4)
Interest   2,147    109    (15)   94 
Foreign currency   126    -    2    2 
Liability position   1,761    (10)   (54)   (64)
Shares   1,404    (1)   (57)   (58)
Interest   327    (2)   (2)   (4)
Foreign currency   30    (7)   5    (2)
    Asset    16,180    6,663    22,843 
    Liability    (20,812)   (5,934)   (26,746)
    Total    (4,632)   729    (3,903)

 

Derivative contracts mature as follows (in days): 

Off-balance sheet – notional amount  0 - 30   31 - 180   181 - 365   Over 365   12/31/2017 
Futures contracts   187,771    152,660    87,819    179,730    607,980 
Swaps contracts   37,526    135,791    115,296    548,686    837,299 
Options   418,679    290,491    457,164    681,495    1,847,829 
Forwards (onshore)   6,997    1,933    1,024    -    9,954 
Credit derivatives   -    510    1,230    8,370    10,110 
NDF - Non Deliverable Forward   63,446    136,650    39,109    13,423    252,628 
Check of swap   -    293    -    662    955 
Other derivative financial instruments   -    474    851    2,900    4,225 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201854

 

 

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   528,181    19,390    1,848,918    10,155    -    48,252    -    - 
Over-the-counter market   112,258    975,392    149,263    4,562    8,922    200,752    2,769    5,150 
Financial institutions   111,889    739,677    107,191    35    8,921    124,139    -    3,016 
Companies   369    148,069    41,642    4,527    1    76,203    2,769    2,134 
Individuals   -    87,646    430    -    -    410    -    - 
Total   640,439    994,782    1,998,181    14,717    8,922    249,004    2,769    5,150 

 

   12/31/2017 
   Futures   Swaps   Options   Forwards
(onshore)		   Credit derivatives   NDF - Non
Deliverable
Forward		   Target flow of
swap		   Other derivative
financial
instruments		 
B3   476,031    24,339    1,746,729    4,023    -    76,838    -    - 
Over-the-counter market   131,949    812,960    101,100    5,931    10,110    175,790    955    4,225 
Financial institutions   131,525    525,855    69,460    -    10,110    118,743    -    1,792 
Companies   424    173,129    31,340    5,931    -    56,905    955    2,433 
Individuals   -    113,976    300    -    -    142    -    - 
Total   607,980    837,299    1,847,829    9,954    10,110    252,628    955    4,225 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201855

 

 

a) Information on credit derivatives

 

ITAÚ UNIBANCO HOLDING buys and sells credit protection mainly related to securities of Brazilian listed companies in order to meet the needs of its customers. When ITAÚ UNIBANCO HOLDING sells contracts for credit protection, the exposure for a given reference entity may be partially or totally offset by a credit protection purchase contract of another counterparty for the same reference entity or similar entity. The credit derivatives for which ITAÚ UNIBANCO HOLDING is protection seller are credit default swaps.

 

Credit Default Swaps – CDS

 

CDS are credit derivatives in which, upon a credit event related to the reference entity pursuant to the terms of the contract, the protection buyer is entitled to receive, from the protection seller, the amount equivalent to the difference between the face value of the CDS contract and the fair value of the liability on the date the contract was settled, also known as the recovered amount. The protection buyer does not need to hold the debt instrument of the reference entity for it to receive the amounts due pursuant to the CDS contract terms when a credit event occurs.

 

   09/30/2018 
   Maximum potential
of future payments,
gross		   Before 1 year   From 1 to 3
years		   From 3 to 5
years		   Over 5 years 
By instrument                         
CDS   7,093    1,970    1,818    3,035    270 
Total by instrument   7,093    1,970    1,818    3,035    270 
By risk rating                         
Investment grade   1,495    355    374    677    89 
Below investment grade   5,598    1,615    1,444    2,358    181 
Total by risk   7,093    1,970    1,818    3,035    270 
By reference entity                         
Brazilian government   3,746    1,417    1,174    1,075    80 
Government – abroad   355    61    52    160    82 
Private entities   2,992    492    592    1,800    108 
Total by entity   7,093    1,970    1,818    3,035    270 

 

   12/31/2017 
   Maximum potential
of future payments,
gross		   Before 1 year   From 1 to 3
years		   From 3 to 5
years		   Over 5 years 
By instrument                    
CDS   6,416    1,200    2,412    2,804    - 
Total by instrument   6,416    1,200    2,412    2,804    - 
By risk rating                         
Investment grade   1,416    449    347    620    - 
Below investment grade   5,000    751    2,065    2,184    - 
Total by risk   6,416    1,200    2,412    2,804    - 
By reference entity                         
Brazilian government   3,597    406    1,671    1,520    - 
Government – abroad   329    144    90    95    - 
Private entities   2,490    650    651    1,189    - 
Total by entity   6,416    1,200    2,412    2,804    - 

 

ITAÚ UNIBANCO HOLDING assesses the risk of a credit derivative based on the credit ratings attributed to the reference entity by independent credit rating agencies. Investment grade are those entities for which credit risk is rated as Baa3 or higher, as rated by Moody's, and BBB- or higher, according to the ratings of Standard & Poor’s and Fitch Ratings. The maximum potential loss that may be incurred with the credit derivative is based on the notional amount of the derivative. ITAÚ UNIBANCO HOLDING believes, based on its historical experience, that the amount of the maximum potential loss does not represent the actual level of loss. This is so because, should there be an event of loss, the amount of maximum potential loss should be reduced from the notional amount by the recoverable amount.

 

The credit derivatives sold are not covered by guarantees, and during this period, ITAÚ UNIBANCO HOLDING has not incurred any loss related to credit derivative contracts.

 

The following table presents the notional amount of purchased credit derivatives whose underlying amounts are identical to those for which ITAÚ UNIBANCO HOLDING operates as seller of the credit protection.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201856

 

 

   09/30/2018 
   Notional amount of credit
protection sold		   Notional amount of credit protection
purchased with identical underlying
amount		   Net position 
CDS   (7,093)   1,829    (5,264)
Total   (7,093)   1,829    (5,264)

 

   12/31/2017 
   Notional amount of credit
protection sold		   Notional amount of credit protection
purchased with identical underlying
amount		   Net position 
CDS   (6,416)   3,694    (2,722)
Total   (6,416)   3,694    (2,722)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201857

 

 

b) Financial instruments subject to offsetting, enforceable master netting arrangements and similar agreements

 

The following tables set forth the financial assets and liabilities that are subject to offsetting, enforceable master netting arrangements, as well as how these financial assets and liabilities have been presented in ITAÚ UNIBANCO HOLDING's consolidated financial statements. These tables also reflect the amounts of collateral pledged or received in relation to financial assets and liabilities subject to enforceable arrangements that have not been presented on a net basis in accordance with IAS 32.

 

Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements:

 

   09/30/2018 
   Gross amount of
recognized		   Gross amount offset in the   Net amount of financial assets
presented in the statement of		   Related amounts not offset in the statement of financial
position (2)		     
   financial assets (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral received   Net amount 
Securities purchased under agreements to resell   293,987    -    293,987    (898)   -    293,089 
Derivatives   28,667    -    28,667    (4,578)   -    24,089 

 

   12/31/2017 
   Gross amount of
recognized		   Gross amount offset in the   Net amount of financial assets
presented in the statement of		   Related amounts not offset in the statement of financial
position (2)		     
   financial assets (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral received   Net amount 
Securities purchased under agreements to resell   244,699    -    244,699    (575)   -    244,124 
Derivatives   22,843    -    22,843    (3,138)   -    19,705 

 

Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements:

 

   09/30/2018 
   Gross amount of
recognized		   Gross amount offset in the   Net amount of financial liabilities
presented in the statement of		   Related amounts not offset in the statement of financial
position (2)		       
   financial liabilities (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral pledged   Net amount 
Securities sold under repurchase agreements   302,781    -    302,781    (25,432)   -    277,349 
Derivatives   31,886    -    31,886    (4,578)   (1,257)   26,051 

 

   12/31/2017
   Gross amount of
recognized		    Gross amount offset in the   Net amount of financial liabilities
presented in the statement of		   Related amounts not offset in the statement of financial
position (2)		       
   financial liabilities (1)    statement of financial position   financial position   Financial instruments (3)   Cash collateral pledged   Net amount 
Securities sold under repurchase agreements    312,634     -    312,634    (14,489)   -    298,145 
Derivatives    26,746     -    26,746    (3,138)   (452)   23,156 

(1)Includes amounts of master offset agreements and other such agreements, both enforceable and unenforceable;
(2)Limited to amounts subject to enforceable master offset agreements and other such agreements;
(3)Includes amounts subject to enforceable master offset agreements and other such agreements, and guarantees in financial instruments.

 

Financial assets and financial liabilities are offset in the balance sheet only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

 

Derivatives and repurchase agreements not set off in the balance sheet relate to transactions in which there are enforceable master netting agreements or similar agreements, but the offset criteria have not been met in accordance with paragraph 42 of IAS 32 mainly because ITAÚ UNIBANCO HOLDING has no intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201858

 

 

Note 7 – Hedge accounting

 

There are three types of hedge relations: Fair value hedge, Cash flow hedge, and Hedge of net investment in foreign operations.

 

In hedge accounting, the groups of risk factors measured by ITAÚ UNIBANCO HOLDING are:

 

·Interest Rate: Risk of loss in transactions subject to interest rate variations;
·Currency: Risk of loss in transactions subject to exchange variation.

 

The structure of risk limits is extended to the risk factor level, with specific limits that aim at improving the monitoring and understanding process, as well as avoiding concentration of these risks.

 

The structures designed for categories of interest rate and exchange rate are realized considering aggregate risks when there are compatible hedge instruments. Due to a management’s decision, in certain cases risks are hedged for the term and limit of the hedge instrument risk factor.

 

The other risk factors hedged by the institution are presented in Note 34.

 

To protect cash flows and fair value of instruments designated as hedged items, ITAÚ UNIBANCO HOLDING uses derivative financial instruments and financial assets. Currently, Futures Contracts, Options, NDF (non-deliverable forward), Forward, Swap and Financial Assets are used.

 

ITAÚ UNIBANCO HOLDING manages risks through the economic relationship between hedge instruments and hedged items, where the expectation is that these instruments move in opposite directions and in the same proportion, with the purpose of neutralizing risk factors.

 

The designated coverage ratio is always 100% of the risk factor eligible for coverage. The sources of ineffectiveness are in general skrelatedandpossible mismatchestotheof termscounte between the hedge instrument and the hedged item.

 

a)Cash flow hedge

 

The cash flow hedge strategies of ITAÚ UNIBANCO HOLDING consist of a hedge of exposure to variations in cash flows, payment of interest and exposure to interest rate, which are attributable to changes in interest rates related to assets and liabilities recognized and changes in interest rates of unrecognized assets and liabilities.

 

ITAÚ UNIBANCO HOLDING has applied cash flow hedge strategies as follows:

 

Interest rate risks

 

·Hedge of time deposits and repurchase agreements: hedge of the variability in cash flows of interest payments resulting from changes in the DI interest rate, through futures contracts;
·Hedge of Syndicated Loan: hedge the variability in cash flow of interest payments resulting from changes in the LIBOR interest rate, through futures contracts;
·Hedge of asset transactions: to hedge the variations in cash flows of interest receipts resulting from changes in the DI rate, through futures contracts;
·Hedge of assets denominated in UF*: to hedge the variations in cash flows of interest receipts resulting from changes in the UF*, through swap contracts;
·Hedge of Funding: to hedge the variations in cash flows of interest payments resulting from changes in the TPM* rate and foreign exchange, through swap contracts;
·Hedge of loan operations: variations in cash flows of interest receipts resulting from changes in the TPM* rate, through swap contracts;
·Hedge of asset-backed securities under repurchase agreements: changes in cash flows from interest received on changes in Selic (benchmark interest rate), through futures contracts.

 

*UF – Chilean unit of account / TPM –Monetary policy rate

 

To evaluate the effectiveness and to measure the ineffectiveness of such strategies, ITAÚ UNIBANCO HOLDING uses the hypothetical derivative method. The hypothetical derivative method is based on a comparison of the change in the fair value of a hypothetical derivative with terms identical to the critical terms of the variable-rate liability, and this change in the fair value of a hypothetical derivative is considered a proxy of the present value of the cumulative change in the future cash flow expected for the hedged liability.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201859

 

 

a) Hedge Cash flow

 

        09/30/2018  
        Carrying amount of the hedged item     Variation in the amounts
used to calculate hedge		     Cash flow hedge  
Hedged item   Heading   Assets     Liabilities     ineffectiveness     reserve  
Interest rate risk                                    
Hedge of deposits and repurchase agreements   Securities purchased under agreements to resell             27,026       (716)       (2,145)  
Hedge of assets transactions   Loan operations and lease operations and Securities     7,629               160       160  
Hedge of Asset-backed securities under repurchase agreements   Securities purchased under agreements to resell     36,209               (5)       (5)  
Hedge of loan operations   Loan operations and lease operations     298               4       4  
Hedge of funding   Deposits             3,317       (3)       (3)  
Hedge of assets denominated in UF   Securities     13,299               (66)       (66)  
Foreign exchange risk                                    
Hedge of highly probable forecast transactions         128               8       8  
Total         57,563       30,343       (618)       (2,047)  

 

        12/31/2017  
        Carrying amount of the hedged item     Variation in the amounts
used to calculate hedge		     Cash flow hedge  
Hedged item   Heading   Assets     Liabilities     ineffectiveness     reserve  
Interest rate risk                                    
Hedge of deposits and repurchase agreements   Securities purchased under agreements to resell     -       62,667       (3,227 )     (3,227 )
Hedge of assets transactions   Loan operations and lease operations and Securities     23,490       -       429       429  
Hedge of Asset-backed securities under repurchase agreements   Securities purchased under agreements to resell     31,099       -       672       672  
Hedge of loan operations   Loan operations and lease operations     1,124       -       14       14  
Hedge of funding   Deposits     -       6,444       (16 )     (16 )
Hedge of assets denominated in UF   Securities     15,227       -       (28 )     (28 )
Foreign exchange risk                                    
Hedge of highly probable forecast transactions         219       -       (5 )     (5 )
Total         71,159       69,111       (2,161 )     (2,161 )

 

For strategies of deposits and repurchase agreements to resell, asset transactions and asset-backed securities under repurchase agreements, the entity frequently reestablishes the coverage relationship, since both the hedged item and instruments change over time. This is so because they are portfolio strategies, reflecting guidelines for risk management strategy approved in the proper approval level.

 

The amount of R$ (1,698) in Reserve of Cash Flow Hedge will be recognized in result for the maturity term of the hedged item. In the period ended September 30, 2018, the amount of R$ (187) was recognized in Result related to this deferral.

 

   09/30/2018 
   Notional   Carrying value (*)   Variations in fair value used
to calculate hedge		   Variation in hedge
instrument value
recognized in Other		   Hedge ineffecti-
veness recognized		   Amount reclassified from
Cash flow hedge reserve		 
Hedge Instruments  amount   Assets   Liabilities   ineffectiveness   comprehensive income   in income   to income 
Interest rate risk                                   
Interest rate futures   71,777    57    32    (623)   (561)   62    - 
Interest rate Swap   15,899    4    66    60    (62)   (2)   - 
Foreign currency risk                                   
DDI futures   862         4    (3)   (3)   (1)   - 
Option   118    8         8    8         - 
Total   88,656    69    102    (558)   (618)   59    - 

(*) Amounts recorded in the Derivatives.

 

   12/31/2017 
   Notional     Carrying value (*)   Variations in fair value used
to calculate hedge		   Variation in hedge
instrument value
recognized in Other		   Hedge ineffecti-
veness recognized		   Amount reclassified from
Cash flow hedge reserve		 
Hedge Instruments  amount   Assets   Liabilities   ineffectiveness   comprehensive income   in income   to income 
Interest rate risk                                   
Interest rate futures   118,441    13    (32)   (2,278)   (2,126)   152    - 
Interest rate Swap   22,795    14    (44)   (38)   (31)   7    - 
Foreign currency risk                                   
DDI futures   78    -    -    1    1    -    - 
Option   154    9    -    (6)   (6)   -    - 
Total   141,468    36    (76)   (2,321)   (2,162)   159    - 

(*) Amounts recorded in the Derivatives.

 

For strategies of deposits and repurchase agreements to resell, asset transactions and asset-backed securities under repurchase agreements, the entity frequently reestablishes the coverage relationship, since both the hedged item and instruments change over time. This is so because they are portfolio strategies, reflecting guidelines for risk management strategy approved in the proper approval level.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201860

 

 

b) Hedge of net investment in foreign operations

 

ITAÚ UNIBANCO HOLDING strategies of net investments in foreign operations consist of a hedge of the exposure in foreign currency arising from the functional currency of the foreign operation, with respect to the functional currency of the head office, by contracting futures, DDI, NDF and financial assets.

 

The risk hedged in this type of strategy is the foreign exchange risk.

 

ITAÚ UNIBANCO HOLDING does not use the qualitative method to assess the effectiveness and measure the ineffectiveness of these strategies.

 

To evaluate the effectiveness and to measure the ineffectiveness of such strategies, ITAÚ UNIBANCO HOLDING uses the Dollar Offset Method. The Dollar Offset Method is based on a comparison of the change in fair value (cash flow) of the hedge instrument, attributable to changes in exchange rate and gain (loss) arising from the variation in exchange rates, on the amount of investment abroad designated as a hedged item.

 

   09/30/2018 
   Carrying amount of the
hedged item (2)		   Variation in the amounts
used to calculate hedge		   Foreign currency 
Hedged item  Assets   Liabilities   ineffectiveness   convertion 
Foreign exchange risk                    
Hedge of net investment in foreign operations (1)   -    15,577    (9,135)   (9,135)
Total        15,577    (9,135)   (9,135)

(1)Hedge instruments include the overhedge rate of 44.65% regarding taxes.
(2)Amounts recorded in the Hedge of net investment in foreign operation.

 

   12/31/2017 
   Carrying amount of the
hedged item (2)		   Variation in the amounts
used to calculate hedge		   Foreign currency 
Hedged item  Assets   Liabilities   ineffectiveness   convertion 
Foreign exchange risk                    
Hedge of net investment in foreign operations (1)   -    13,074    (4,038)   (4,038)
Total   -    13,074    (4,038)   (4,038)

 

(1) Hedge instruments include the overhedge rate of 44.65% regarding taxes.

(2) Amounts recorded in the Hedge of net investment in foreign operation.

 

   09/30/2018 
   Notional   Carrying value (*)   Variations in fair
value used to
calculate hedge		   Variation in hedge
instrument value
recognized in Other		   Hedge
ineffectiveness
recognized in		   Amount reclassified
from foreign currency
convertion into		 
Hedge instruments  amount   Assets   Liabilities   ineffectiveness   comprehensive income   income   income 
Foreign exchange risk                                   
DDI futures   28,923         336    (12,443)   (12,484)   (41)   - 
Forward   (1,519)   1,311         608    647    38    - 
NDF   (13,605)   302         2,641    2,650    9    - 
Financial Assets   (745)   745         54    52    (2)   - 
Total   13,054    2,358    336    (9,140)   (9,135)   4    - 

(*)Amounts recorded in the Derivatives.

 

   12/31/2017 
   Notional   Carrying value (*)   Variations in fair
value used to
calculate hedge		   Variation in hedge
instrument value
recognized in Other		   Hedge
ineffectiveness
recognized in		   Amount reclassified
from foreign currency
convertion into		 
Hedge instruments  amount   Assets   Liabilities   ineffectiveness   comprehensive income   income   income 
Foreign exchange risk                                   
DDI futures   23,641    49    -    (7,564)   (7,605)   (41)   - 
Forward   (1,065)   1,050    -    585    623    38    - 
NDF   (11,474)   -    357    1,507    1,516    9    - 
Financial Assets   (541)   541    -    (39)   (41)   (2)   - 
Total   10,561    1,640    357    (5,511)   (5,507)   4    - 

(*)Amounts recorded in the Derivatives.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201861

 

 

c)Fair value hedge

 

The fair value hedge strategy of ITAÚ UNIBANCO HOLDING consists in hedging the exposure to variation in fair value, in the receipt and payment of interest related to recognized assets and liabilities.

 

ITAÚ UNIBANCO HOLDING has applied fair value hedge as follows:

 

Interest rate risk:

 

·To protect the risk of variation in the fair value of receipt and payment of interest resulting from variations in the fair value of variable rates involved, by contracting swaps and futures.

 

ITAÚ UNIBANCO HOLDING does not use the qualitative method to assess effectiveness and to measure ineffectiveness of these strategies.

 

To evaluate the effectiveness and to measure the ineffectiveness of such strategy, ITAÚ UNIBANCO HOLDING uses the percentage approach and dollar offset method:

 

·The percentage approach is based on the calculation of change in the fair value of the reviewed estimate for the hedged position (hedge item) attributable to the protected risk versus the change in the fair value of the hedged derivative instrument.

 

·The dollar offset method is calculated based on the difference between the variation of the fair value of the hedging instrument and the variation in the fair value of the hedged item attributed to changes in the interest rate.

 

Following we present gains (or losses) of the effective and ineffective portions of the strategies of fair value hedge.

 

   09/30/2018 
   Carryng amount of the
hedged item (*)		   Adjustment to fair value of
the hedge item		   Variation in the
amounts used to
calculate hedge		 
Hedged item  Assets   Liabilities   Assets   Liabilities   ineffectiveness 
Interest rate risk                         
Hedge of loan operations   7,385    -    7,421    -    37 
Hedge of funding   -    11,016    -    9,917    35 
Hedge of fair value through other comprehensive income   4,747    -    4,690    -    (57)
Total   12,132    11,016    12,111    9,917    15 
(*)Amounts recorded in the heading Deposits, Securities, Funds from Interbank Markets and Loan and Lease Operation.

 

   12/31/2017 
   Carryng amount of the
hedged item (*)		   Adjustment to fair value of
the hedge item		   Variation in the
amounts used to
calculate hedge		 
Hedged item  Assets   Liabilities   Assets   Liabilities   ineffectiveness 
Interest rate risk                         
Hedge of loan operations   5,977    -    5,978    -    52 
Hedge of funding   -    12,157    -    9,562    (114)
Hedge of syndicated loan   -    794    -    779    - 
Hedge of fair value through other comprehensive income   482    -    450    -    34 
Total   6,459    12,951    6,428    10,341    (28)

(*)Amounts recorded in the heading Deposits, Securities, Funds from Interbank Markets and Loan and Lease Operation.

 

For loan operations strategies, the entity reestablishes the coverage ratio, since both the hedged item and the instruments change over time. This occurs because they are portfolio strategies that reflect the risk management strategy guidelines approved in the proper authority level.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201862

 

 

   09/30/2018 
   Notional   Carrying value (*)   Variation in the amount
used to calculate hedge		   Hedge ineffectiveness 
Hedge Instruments  amount   Assets   Liabilities   ineffectiveness   recognized in income 
Interest rate risk                         
Interest rate Swap   23,150    27    43    (16)   (2)
Total   23,150    27    43    (16)   (2)

(*)Amounts recorded in the Derivatives.

 

   12/31/2017 
  Notional   Carrying value (*)   Variation in the amount
used to calculate hedge		   Hedge ineffectiveness 
Hedge Instruments  amount   Assets   Liabilities   ineffectiveness   recognized in income 
Interest rate risk                         
Interest rate Swap   19,410    86    114    (27)   (2)
Total   19,410    86    114    (27)   (2)

(*)Amounts recorded in the Derivatives.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201863

 

 

The tables below present, for each strategy, the notional amount and the fair value adjustments of hedge instruments and the carrying amount of the hedged item:

 

   09/30/2018   12/31/2017 
   Hedge instruments   Hedged item   Hedge instruments   Hedged item 
Strategies  Notional amount   Fair value
adjustments		   Carrying value   Notional
amount		   Fair value
adjustments		   Carrying value 
Hedge of deposits and repurchase agreements   27,026    57    27,026    62,667    (32)   62,667 
Hedge of highly probable forecast transactions   128    8    128    232    9    219 
Hedge of net investment in foreign operations (*)   13,054    2,022    15,577    10,561    1,283    13,074 
Hedge of loan operations (Market risk)   7,385    (38)   7,385    5,977    52    5,977 
Hedge of loan operations (Cash flow)   293    4    298    1,124    14    1,124 
Hedge of funding (Market risk)   11,016    (38)   11,016    12,157    (114)   12,157 
Hedge of funding (Cash flow)   3,327    (3)   3,317    6,444    (16)   6,444 
Hedge of syndicated loan (Market risk)   -    -    -    794    -    794 
Hedge of assets transactions   7,790    (4)   7,629    23,919    2    23,490 
Hedge of Asset-backed securities under repurchase agreements   36,961    (28)   36,209    31,855    11    31,099 
Hedge of assets denominated in UF   13,131    (66)   13,299    15,227    (28)   15,227 
Hedge of fair value through other comprehensive income   4,749    60    4,747    482    34    482 
Total        1,974              1,215      

(*)Hedge instruments include the overhedge rate of 44.65% regarding taxes.

 

The table below shows the breakdown by maturity of the hedging strategies:

 

   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 repurchase agreements   10,623    6,773    3,691    112    4,352    1,475    -    27,026 
Hedge of highly probable forecast transactions   128    -    -    -    -    -    -    128 
Hedge of net investment in foreign operations (*)   13,054    -    -    -    -    -    -    13,054 
Hedge of loan operations (Market risk)   151    1,397    1,714    1,714    414    788    1,207    7,385 
Hedge of loan operations (Cash flow)   -    30    61    171    31    -    -    293 
Hedge of funding (Market risk)   2,220    779    334    427    422    4,300    2,534    11,016 
Hedge of funding (Cash flow)   2,070    974    31    -    -    252    -    3,327 
Hedge of assets transactions   6,467    -    1,323    -    -    -    -    7,790 
Hedge of Asset-backed securities under repurchase agreements   26,537    5,704    1,424    -    3,296    -    -    36,961 
Hedge of assets denominated in UF   13,071    -    -    60    -    -    -    13,131 
Hedge of fair value through other comprehensive income   4,432    -    -    -    -    317    -    4,749 
Total   78,753    15,657    8,578    2,484    8,515    7,132    3,741    124,860 

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

 

   12/31/2017 
Strategies  0-1 year   1-2 years   2-3 years   3-4 years   4-5 years   5-10 years   over de 10 years   Total 
Hedge of deposits and repurchase agreements   31,471    11,205    6,210    12,125    -    1,656    -    62,667 
Hedge of highly probable forecast transactions   162    70    -    -    -    -    -    232 
Hedge of net investment in foreign operations (*)   10,561    -    -    -    -    -    -    10,561 
Hedge of syndicated loan (Market risk)   268    143    628    1,502    1,335    642    1,459    5,977 
Hedge of loan operations (Cash flow)   -    -    27    157    75    865    -    1,124 
Hedge of funding (Market risk)   2,399    3,669    799    218    348    2,099    2,625    12,157 
Hedge of funding (Cash flow)   1,646    749    1,026    884    525    1,614    -    6,444 
Hedge of syndicated loan (Market risk)   794    -    -    -    -    -    -    794 
Hedge of assets transactions   16,726    5,940    -    1,253    -    -    -    23,919 
Hedge of Asset-backed securities under repurchase agreements   251    25,209    3,956    1,349    -    1,090    -    31,855 
Hedge of assets denominated in UF   12,352    2,822    -    53    -    -    -    15,227 
Hedge of fair value through other comprehensive income   -    -    223    -    -    259    -    482 
Total   76,630    49,807    12,869    17,541    2,283    8,225    4,084    171,439 
(*)Classified as current, since instruments are frequently renewed.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201864

 

 

Note 8 – Financial Assets at Fair Value Through Other Comprehensive Income - Securities

 

The fair value and corresponding cost of Financial Assets at Fair Value Through Other Comprehensive Income - Securities assets are as follows:

 

   09/30/2018   12/31/2017 
   Cost   Fair value
adjustments (in
stockholders'
equity)		   Expected
loss		   Fair value   Cost   Fair value
adjustments (in
stockholders'
equity)		   Expected
loss		   Fair value 
Brazilian government securities (1a)   29,263    (301)   -    28,962    31,933    993    -    32,926 
Other   36    -    (36)   -    36    -    (36)   - 
Government securities – abroad (1b)   18,051    (75)   (2)   17,974    16,583    (41)   -    16,542 
Colombia   6,206    19    (2)   6,223    2,928    92    -    3,020 
Chile   7,156    (10)   -    7,146    9,554    (4)   -    9,550 
United States   2,249    (26)   -    2,223    1,568    (18)   -    1,550 
Paraguay   1,693    (54)   -    1,639    1,915    (115)   -    1,800 
Uruguay   747    (4)   -    743    618    4    -    622 
Corporate securities (1c)   1,917    (12)   (48)   1,857    2,656    73    (48)   2,681 
Shares   80    44    -    124    73    75    -    148 
Bank deposit certificates   287    -    -    287    685    -    -    685 
Debentures   44    -    (43)   1    44    -    (43)   1 
Eurobonds and others   1,503    (56)   (2)   1,445    1,851    (2)   (2)   1,847 
Other   3    -    (3)   -     3    -    (3)    -
Total   49,267    (388)   (86)   48,793    51,208    1,025    (84)   52,149 

(1)Financial assets at fair value through other comprehensive income - Securities pledged in guarantee of funding transactions of financial institutions and clients were: a) R$ 19,076 (R$ 26,953 at 12/31/2017), b) R$ 2,351 (R$ 37 at 12/31/2017) and c) R$ 521 (R$ 479 at 12/31/2017), totaling R$ 21,948 (R$ 27,469 at 12/31/2017);

 

The cost and financial assets at fair value through other comprehensive income - securities by maturity are as follows:

 

   09/30/2018   12/31/2017 
   Cost   Fair value   Cost   Fair value 
Current   8,168    8,146    9,546    9,666 
Non-stated maturity   80    124    73    148 
Up to one year   8,088    8,022    9,473    9,518 
Non-current   41,099    40,647    41,662    42,483 
From one to five years   25,905    25,812    23,138    23,415 
From five to ten years   10,512    10,224    11,368    11,680 
After ten years   4,682    4,611    7,156    7,388 
Total   49,267    48,793    51,208    52,149 

 

Equity instruments at fair value through other comprehensive income - securities are presented in the table below:

 

   09/30/2018 
   Costs   Adjustments to fair value
(in Stockholders' equity)		   Expected loss   Fair Value 
Negotiable shares  80   44   -   124 
Total   80    44    -    124 

 

   12/31/2017 
   Costs   Adjustments to fair value
(in Stockholders' equity)		   Expected loss   Fair Value 
Negotiable shares  73   75   -   148 
Total   73    75    -    148 

 

In the period there was no receipt of dividends and there was no reclassification in Stockholder's Equity.

 

ITAÚ UNIBANCO HOLDING adopted the option of designating equity instruments at fair value through other comprehensive income due to the particularities of a certain market.

 

   09/30/2018   12/31/2017 
   Costs   Fair Value   Costs   Fair Value 
Current   80    124    73    148 
Non-stated maturity   80    124    73    148 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201865

 

 

Reconciliation of expected loss for Financial assets at fair value through other comprehensive instrument - securities, segregated by stages:

 

    Expected                             Expected  
    loss     Gains /                 Transfer to     loss  
Stage 1   12/31/2017     (Losses)     Purchases     Settlements     stage 3     09/30/2018  
Financial assets at fair value through other comprehensive income     (84 )     1       (3 )     -        -       (86 )
Brazilian government securities     (36 )     -       -       -       -       (36 )
Other     (36 )     -       -       -       -       (36 )
Government securities - other countries - Chile     -       -       (2 )     -       -       (2 )
Corporate securities     (48 )     1       (1 )     -       -       (48 )
Debentures     (43 )     -       -       -       -       (43 )
Eurobonds and others     (2 )     1       (1 )     -       -       (2 )
Other     (3 )     -       -       -       -       (3 )

 

    Expected                             Expected  
    loss     Gains /                 Transfer to     loss  
Stage 1   01/01/2017     (Losses)     Purchases     Settlements     stage 3     12/31/2017  
Financial  assets  at  fair value through other comprehensive income     (93 )     -       (2 )     -       11       (84 )
Brazilian government securities     (36 )     -       -       -       -       (36 )
Other     (36 )     -       -       -       -       (36 )
Corporate securities     (57 )     -       (2 )     -       11       (48 )
Debentures     (43 )     -       -       -       -       (43 )
Eurobonds and others     (11 )     -       (2 )     -       11       (2 )
Other     (3 )     -       -       -       -       (3 )

 

Stage 3   Expected
loss
01/01/2017		     Settlements     Transfer to
stage 1		     Expected
loss
12/31/2017		  
Financial assets at fair value through other comprehensive income       -       10       (10 )        -  
Corporate securities     -       10       (10 )     -  
Eurobonds and others     -       10       (10 )     -  

 

Note 9 - Financial assets at amortized cost - Securities

 

The Financial assets at amortized cost - Securities is as follows:

 

   09/30/2018   12/31/2017 
   Amortized
cost		   Expected
loss		   Fair Value   Amortized
cost		   Expected
loss		   Fair Value 
Brazilian government securities (1a)   54,864    (60)   54,804    54,875    (66)   54,809 
Government securities – abroad (1c)   8,811    (3)   8,808    8,414    (3)   8,411 
Argentina   179    (1)   178    -    -    - 
Colombia   421    (2)   419    836    (3)   833 
Chile   277    -    277    154    -    154 
Korea   1,944    -    1,944    1,944    -    1,944 
Denmark   493    -    493    1,951    -    1,951 
Spain   3,080    -    3,080    2,937    -    2,937 
United States   20    -    20    16    -    16 
Mexico   2,382    -    2,382    559    -    559 
Paraguay   -    -    -    4    -    4 
Uruguay   15    -    15    13    -    13 
Corporate securities (1b)   47,416    (4,087)   43,329    48,135    (5,113)   43,022 
Rural product note   4,161    (144)   4,017    2,899    (160)   2,739 
Bank deposit certificates   141    -    141    130    -    130 
Securitized real estate loans   10,541    (302)   10,239    13,839    (2,056)   11,783 
Debentures   25,542    (3,614)   21,928    23,397    (2,857)   20,540 
Eurobonds and others   3,828    (2)   3,826    3,660    (3)   3,657 
Financial bills   -    -    -    60    -    60 
Promissory notes   1,553    (8)   1,545    3,246    (23)   3,223 
Other   1,650    (17)   1,633    904    (14)   890 
Total (2)   111,091    (4,150)   106,941    111,424    (5,182)   106,242 

(1)Financial Assets at Amortized Cost –Securities Pledged as Collateral of Funding Transactions of Financial Institutions and Clients were: a) R$ 25,658 (R$ 26,953 at 12/31/2017), b) (R$ 37 at 12/31/2017) and c) R$ 6,692 (R$ 479 at 12/31/2017), totaling R$ 32,350 (R$ 27,469 at 12/31/2017).

(2)In order to reflect the risk management to the current strategy considered in business models, in the period ended 06/30/2018, ITAÚ UNIBANCO HOLDING changed the classification of Brazilian Debt Securities from Fair Value Through Profit or Loss, in the amount of R$ 3,707, and Fair Value Through Other Comprehensive Income, in the amount of R$ 8,678 to amortized cost. The fair value of these instruments at 06/30/2018 was R$ 11,880. In the event these financial assets had not been reclassified, the adjustment to fair value that would have been recognized in Other Comprehensive Income would be of R$ (282), net of tax effects.

 

The interest income related to Financial assets at amortized cost - Securities assets was R$ 2,025.

 

The fair value of Financial assets at amortized cost - Securities assets is disclosed in Note 29.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201866

 

 

The amortized cost of Financial assets at amortized cost - Securities by maturity is as follows:

 

   09/30/2018   12/31/2017 
   Amortized cost   Fair Value   Amortized cost   Fair Value 
Current   15,718    14,418    26,057    25,652 
Up to one year   15,718    14,418    26,057    25,652 
Non-current   95,373    92,523    85,367    80,590 
From one to five years   53,630    52,934    53,303    50,650 
From five to ten years   28,633    27,322    19,883    18,571 
After ten years   13,110    12,267    12,181    11,369 
Total   111,091    106,941    111,424    106,242 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201867

 

Reconciliation of expected loss to financial assets at amortized cost - securities, segregated by stages:

 

Stage 1  Expected
loss
12/31/2017		   Gains /
(Losses)		   Purchases   Settlements   Transfer to
Stage 3		   Transfer to
Stage 2		   Expected
loss
09/30/2018		 
Financial assets at amortized cost   (76)   27    (20)   14    -    (1)   (56)
Government securities - other countries -   (3)   1    (1)   -    -    -    (3)
Colombia                                   
Corporate securities   (73)   26    (19)   14    -    (1)   (53)
Rural product note   (9)   4    (6)   5    -    -    (6)
Securitized real estate loans   (9)   3    -    2    -    -    (4)
Debentures   (52)   19    (12)   7    -    (1)   (39)
Eurobond and others   (2)   -    -    -    -    -    (2)
Promissory notes   (1)   -    (1)   -    -    -    (2)

 

Stage 1  Expected
loss
01/01/2017		   Gains /
(Losses)		   Purchases   Settlements   Transfer to
Stage 3		   Transfer to
Stage 2		   Expected
loss
12/31/2017		 
Financial assets at amortized cost   (82)   (24)   (44)   48    26    -    (76)
Government securities - other countries -   (3)   -    -    -    -    -    (3)
Colombia                                   
Corporate securities   (79)   (24)   (44)   48    26    -    (73)
Rural product note   (4)   (2)   (7)   4    -    -    (9)
Securitized real estate loans   (17)   (3)   -    -    11    -    (9)
Debentures   (50)   (20)   (35)   39    14    -    (52)
Eurobond and others   (5)   1    (1)   3    -    -    (2)
Promissory notes   (1)   -    (1)   1    -    -    (1)
Other   (2)   -    -    1    1    -    - 

 

Stage 2  Expected
loss
12/31/2017		   Gains /
(Losses)		   Purchases   Settlements   Transfer to
Stage 1		   Transfer to
Stage 3		   Transfer of
Stage 1		   Expected
loss
09/30/2018		 
Financial assets at amortized cost   (368)   (836)   (450)   6    4    15    (13)   (1,642)
Brazilian government securities   (65)   8    -    -    -    -    -    (57)
Corporate securities   (303)   (844)   (450)   6    4    15    (13)   (1,585)
Rural product note   -    3    (21)   -    -    -    -    (18)
Securitized real estate loans   (5)   -    (1)   -    1    -    -    (5)
Debentures   (284)   (847)   (428)   1    3    15    (8)   (1,548)
Eurobond and others   -    -    -    5    -    -    (5)   - 
Others   (14)   -    -    -    -            (14) 

 

Stage 2  Expected
loss
01/01/2017		   Gains /
(Losses)		   Purchases   Settlements   Transfer to
Stage 1		   Transfer to
Stage 3		   Transfer of
Stage 1		   Expected
loss
12/31/2017		 
Financial assets at amortized cost   (438)   (73)   (281)   314    -    176    (66)   (368)
Brazilian government securities   (72)   7    -    -    -    -    -    (65)
Corporate securities   (366)   (80)   (281)   314    -    176    (66)   (303)
Rural product note   (30)   (3)   -    33    -    -    -    - 
Securitized real estate loans   (50)   2    -    -    -    43    -    (5)
Debentures   (286)   (79)   (267)   281    -    133    (66)   (284)
Others   -    -    (14)   -    -    -       (14) 

 

Stage 3  Expected
loss
12/31/2017		   Gains /
(Losses)		   Purchases   Settlements   Transfer to
Stage 1		   Transfer to
Stage 2		   Expected
loss
09/30/2018		 
Financial assets at amortized cost   (4,738)   897    (590)   2,007    -    (28)   (2,452)
Corporate securities   (4,738)   897    (590)   2,007    -    (28)   (2,452)
Rural product note   (148)   (49)   (36)   107    -    -    (126)
Securitized real estate loans   (2,046)   528    -    1,222    -    -    (296)
Debentures   (2,522)   418    (554)   662    -    (28)   (2,024)
Promissory notes   (22)   -    -    16    -    -    (6)

 

Stage 3  Expected
loss
01/01/2017		   Gains /
(Losses)		   Purchases   Settlements   Transfer to
Stage 1		   Transfer to
Stage 2		   Expected
loss
12/31/2017		 
Financial assets at amortized cost   (3,298)   (528)   (1,276)   1,221    (115)   (742)   (4,738)
Corporate securities   (3,298)   (528)   (1,276)   1,221    (115)   (742)   (4,738)
Rural product note   (56)   (37)   (55)   -    -    -    (148)
Securitized real estate loans   (1,650)   (200)   -    125    (115)   (206)   (2,046)
Debentures   (1,469)   (294)   (1,199)   976    -    (536)   (2,522)
Eurobond and others   (101)   3    -    98    -    -    - 
Promissory notes   (22)   -    (22)   22    -    -    (22)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201868

 

 

Note 10 - Loan operations and lease operations portfolio

 

a)Composition of loan operations and lease operations

 

Below is the composition of the carrying amount of loan operations and lease operations by type, sector of debtor, maturity and concentration:

 

Loan operations and lease operations by type  09/30/2018   12/31/2017 
           
Individuals   201,270    193,385 
Credit card   69,456    67,413 
Personal loan   29,201    27,295 
Payroll loans   46,158    44,716 
Vehicles   15,259    14,165 
Mortgage loans   41,196    39,796 
           
Corporate   106,909    107,647 
           
Small and medium businesses   65,615    60,290 
           
Foreign loans - Latin America   160,578    136,397 
Total Loan Operations and Lease Operations (1)   534,372    497,719 
           
Expected Credit Loss (2)   (35,259)   (36,469)
           
Total loan operations and lease operations, net of allowance for Expected   499,113    461,250 

(1)In the composition of balance there are operations designated at Fair Value Through Profit or Loss, in the amount of R$ 660 (R$ 102 at 12/31/2017).
(2)Comprises Expected Loan Losses for Financial Guarantees Pledged R$ 1,324 (R$1,907 at 12/31/2017) and Commitments to be Released R$ 3,060 (R$ 3,015 at 12/31/2017).

 

By maturity  09/30/2018   12/31/2017 
Overdue as from 1 day   19,242    21,974 
Falling due up to 3 months   139,440    127,402 
Falling due more than 3 months but less than 1 year   120,054    116,089 
Falling due after 1 year   255,636    232,254 
Total loan operations and lease operations   534,372    497,719 

 

By concentration (*)  09/30/2018   12/31/2017 
Largest debtor   5,266    4,079 
10 largest debtors   30,406    28,958 
20 largest debtors   46,819    46,313 
50 largest debtors   73,864    74,772 
100 largest debtors   100,327    101,149 

(*)The amounts include Financial Guarantees Pledged

 

The breakdown of the Loan and lease operations portfolio by debtor’s industry is evidenced in Note 34, item 8 - Maximum exposure of Financial Assets segregated by business sector.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201869

 

  

b) Gross Carrying Amount

 

Reconciliation of gross portfolio of Loan Operations and Lease Operations, segregated by stages:

 

   Closing balance   Transfer to   Transfer to   Transfer of   Transfer of       Acquisition /   Closing balance at 
Stage 1  at 12/31/2017   Stage 2   Stage 3   the Stage 2   the Stage 3   Write Off   (Settlement)   09/30/2018 
Individuals   161,364     (11,160)     (1,408)     4,387    -    -    15,482     168,665 
Credit card   57,073    (4,479)   (341)   2,438    -    -    3,352    58,043 
Personal loans   12,290    (3,136)   (657)   580    -    -    5,622    14,699 
Payroll loans   42,115    (1,436)   (329)   449    -    -    2,679    43,478 
Vehicles   12,550    (1,084)   (74)   237    -    -    2,081    13,710 
Mortgage loans   37,336    (1,025)   (7)   683    -    -    1,748    38,735 
Corporate   91,442    (468)   (118)   567    113    -    814    92,350 
Small and medium businesses   47,132    (3,900)   (555)   2,083    9    -    8,528    53,297 
Foreign loans - Latin America   117,448    (9,187)   (997)   3,729    126    -    25,176    136,295 
Total   417,386    (24,715)   (3,078)   10,766    248    -    50,000    450,607 

 

   Closing balance   Transfer to   Transfer to   Transfer of   Transfer of       Acquisition /   Closing balance at 
Stage 2  at 12/31/2017   Stage 1   Stage 3   the Stage 1   the Stage 3   Write Off   (Settlement)   09/30/2018 
Individuals   13,032    (4,387)   (5,772)   11,160    769    -    115    14,917 
Credit card   6,027    (2,438)   (2,116)   4,479    48    -    1,043    7,043 
Personal loans   3,108    (580)   (2,158)   3,136    452    -    (285)   3,673 
Payroll loans   733    (449)   (816)   1,436    106    -    7    1,017 
Vehicles   987    (237)   (447)   1,084    50    -    (420)   1,017 
Mortgage loans   2,177    (683)   (235)   1,025    113    -    (230)   2,167 
Corporate   3,833    (567)   (444)   468    1,343    -    (176)   4,457 
Small and medium businesses   6,001    (2,083)   (1,206)   3,900    381    -    (792)   6,201 
Foreign loans - Latin America   13,028    (3,729)   (2,219)   9,187    790    -    876    17,933 
Total   35,894    (10,766)   (9,641)   24,715    3,283    -    23    43,508 

 

   Closing balance   Transfer to   Transfer to   Transfer of   Transfer of       Acquisition /   Closing balance at 
Stage 3  at 12/31/2017   Stage 1   Stage 2   the Stage 1   the Stage 2   Write Off   (Settlement)   09/30/2018 
Individuals   18,989    -    (769)   1,408    5,772    (8,833)   1,121    17,688 
Credit card   4,313    -    (48)   341    2,116    (3,124)   772    4,370 
Personal loans   11,897    -    (452)   657    2,158    (4,239)   808    10,829 
Payroll loans   1,868    -    (106)   329    816    (1,127)   (117)   1,663 
Vehicles   628    -    (50)   74    447    (310)   (257)   532 
Mortgage loans   283    -    (113)   7    235    (33)   (85)   294 
Corporate   12,372    (113)   (1,343)   118    444    (1,133)   (243)   10,102 
Small and medium businesses   7,157    (9)   (381)   555    1,206    (2,449)   38    6,117 
Foreign loans - Latin America   5,921    (126)   (790)   997    2,219    (1,498)   (373)   6,350 
Total   44,439    (248)   (3,283)   3,078    9,641    (13,913)   543    40,257 

 

   Closing balance at       Acquisition /   Closing balance at 
Consolidated 3 Stages (*)  12/31/2017   Write Off   (Settlement)   09/30/2018 
Individuals   193,385    (8,833)   16,718    201,270 
Credit card   67,413    (3,124)   5,167    69,456 
Personal loans   27,295    (4,239)   6,145    29,201 
Payroll loans   44,716    (1,127)   2,569    46,158 
Vehicles   14,165    (310)   1,404    15,259 
Mortgage loans   39,796    (33)   1,433    41,196 
Corporate   107,647    (1,133)   395    106,909 
Small and medium businesses   60,290    (2,449)   7,774    65,615 
Foreign loans - Latin America   136,397    (1,498)   25,679    160,578 
Total   497,719    (13,913)   50,566    534,372 

(*) In the composition of balance, there are operations designated at Fair Value Through Profit or Loss in the amount of R$ 660 (R$ 102 at 12/31/2017).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201870

 

 

Reconciliation of gross portfolio of Loan Operations and Lease Operations, segregated by stages:

 

   Beginning
Balance at		   Transfer to   Transfer to   Transfer of   Transfer of   Acquisition /
(Settlement)		   Closing balance at 
Stage 1  01/01/2017   Stage 2   Stage 3   the Stage 2   the Stage 3   Write Off   12/31/2017 
Individuals   151,645    (3,925)   (2,346)   2,747    72    13,171    161,364 
Credit card   48,772    (1,191)   (176)   1,513    10    8,145    57,073 
Personal loans   11,068    (621)   (907)   313    6    2,431    12,290 
Payroll loans   42,360    (412)   (866)   225    33    775    42,115 
Vehicles   13,482    (733)   (338)   211    9    (81)   12,550 
Mortgage loans   35,963    (968)   (59)   485    14    1,901    37,336 
Corporate   104,359    (884)   (731)   894    4    (12,200)   91,442 
Small and medium businesses   43,047    (1,599)   (701)   901    10    5,474    47,132 
Foreign loans - Latin America   113,441    (5,913)   (1,589)   1,501    74    9,934    117,448 
Total   412,492    (12,321)   (5,367)   6,043    160    16,379    417,386 

  

   Beginning
Balance at		   Transfer to   Transfer to   Transfer of   Transfer of   Acquisition /
(Settlement)		   Closing balance at 
Stage 2  01/01/2017   Stage 1   Stage 3   the Stage 1   the Stage 3   Write Off   12/31/2017 
Individuals   14,248    (2,747)   (2,282)   3,925    665    (777)   13,032 
Credit card   6,634    (1,513)   (722)   1,191    12    425    6,027 
Personal loans   3,534    (313)   (872)   621    515    (377)   3,108 
Payroll loans   771    (225)   (241)   412    44    (28)   733 
Vehicles   1,269    (211)   (297)   733    39    (546)   987 
Mortgage loans   2,040    (485)   (150)   968    55    (251)   2,177 
Corporate   5,877    (894)   (434)   884    90    (1,690)   3,833 
Small and medium businesses   7,815    (901)   (946)   1,599    428    (1,994)   6,001 
Foreign loans - Latin America   8,964    (1,501)   (1,246)   5,913    134    764    13,028 
Total   36,904    (6,043)   (4,908)   12,321    1,317    (3,697)   35,894 

 

 

   Beginning
Balance at		   Transfer to   Transfer to   Transfer of   Transfer of   Acquisition /
(Settlement)		   Closing balance at 
Stage 3  01/01/2017   Stage 1   Stage 2   the Stage 1   the Stage 2   Write Off   12/31/2017 
Individuals   20,574    (72)   (665)   2,346    2,282    (5,476)   18,989 
Credit card   4,457    (10)   (12)   176    722    (1,020)   4,313 
Personal loans   13,328    (6)   (515)   907    872    (2,689)   11,897 
Payroll loans   1,729    (33)   (44)   866    241    (891)   1,868 
Vehicles   815    (9)   (39)   338    297    (774)   628 
Mortgage loans   245    (14)   (55)   59    150    (102)   283 
Corporate   11,525    (4)   (90)   731    434    (224)   12,372 
Small and medium businesses   8,985    (10)   (428)   701    946    (3,037)   7,157 
Foreign loans - Latin America   4,371    (74)   (134)   1,589    1,246    (1,077)   5,921 
Total   45,455    (160)   (1,317)   5,367    4,908    (9,814)   44,439 

 

   Beginning   Acquisition /     
   balance at   (Settlement)   Closing balance at 
Consolidated 3 Stages (*)  01/01/2017   (Write off)   12/31/2017 
             
Individuals   186,467    6,918    193,385 
Credit card   59,863    7,550    67,413 
Personal loans   27,930    (635)   27,295 
Payroll loans   44,860    (144)   44,716 
Vehicles   15,566    (1,401)   14,165 
Mortgage loans   38,248    1,548    39,796 
Corporate   121,761    (14,114)   107,647 
Small and medium businesses   59,847    443    60,290 
Foreign loans - Latin America   126,776    9,621    136,397 
Total   494,851    2,868    497,719 

(*) In the composition of balance, there are operations designated at Fair Value Through Profit or Loss in the amount of R$ 102 (R$ 143 at 01/01/2017).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201871

 

 

c) Expected credit loss

 

Reconciliation of expected loan losses for Loan operations and lease operations, segregated by stages:

 

   Beginning                             
   Balance at   Transfer to   Transfer to   Transfer of the   Transfer of the       Net increase /   Closing balance at 
Stage 1  12/31/2017   Stage 2   Stage 3   Stage 2   Stage 3   Write Off   (Reversal)   09/30/2018 
Individuals   3,834    (515)   (233)   295    -    -    441    3,822 
Credit card   2,135    (233)   (53)   182    -    -    (5)   2,026 
Personal loans   759    (167)   (110)   33    -    -    373    888 
Payroll loans   805    (72)   (64)   62    -    -    34    765 
Vehicles   123    (41)   (6)   12    -    -    47    135 
Mortgage loans   12    (2)   -    6    -    -    (8)   8 
Corporate   451    (5)   (1)   142    85    -    (192)   480 
Small and medium businesses   1,149    (164)   (54)   127    2    -    269    1,329 
Foreign loans - Latin America   1,013    (112)   (14)   79    42    -    194    1,202 
Total   6,447    (796)   (302)   643    129    -    712    6,833 

 

   Beginning                             
   Balance at   Transfer to   Transfer to   Transfer of the   Transfer of the       Net increase /   Closing balance at 
Stage 2  12/31/2017   Stage 1   Stage 3   Stage 1   Stage 3   Write Off   (Reversal)   09/30/2018 
Individuals   2,209    (295)   (2,407)   515    108    -    2,363    2,493 
Credit card   1,261    (182)   (993)   233    20    -    1,013    1,352 
Personal loans   567    (33)   (867)   167    58    -    752    644 
Payroll loans   262    (62)   (452)   72    10    -    525    355 
Vehicles   108    (12)   (84)   41    13    -    48    114 
Mortgage loans   11    (6)   (11)   2    7    -    25    28 
Corporate   1,174    (142)   (77)   5    146    -    18    1,124 
Small and medium businesses   701    (127)   (330)   164    155    -    97    660 
Foreign loans - Latin America   1,223    (79)   (281)   112    309    -    232    1,516 
Total   5,307    (643)   (3,095)   796    718    -    2,710    5,793 

 

   Beginning                             
   Balance at   Transfer to   Transfer to   Transfer of the   Transfer of the       Net increase /   Closing balance at 
Stage 3  12/31/2017   Stage 1   Stage 2   Stage 1   Stage 2   Write Off   (Reversal)   09/30/2018 
Individuals   8,787    -    (108)   233    2,407    (6,368)   3,327    8,278 
Credit card   3,288    -    (20)   53    993    (2,386)   1,115    3,043 
Personal loans   3,812    -    (58)   110    867    (2,772)   1,696    3,655 
Payroll loans   1,301    -    (10)   64    452    (975)   402    1,234 
Vehicles   316    -    (13)   6    84    (217)   96    272 
Mortgage loans   70    -    (7)   -    11    (18)   18    74 
Corporate   9,827    (85)   (146)   1    77    (709)   (284)   8,681 
Small and medium businesses   3,554    (2)   (155)   54    330    (1,893)   1,121    3,009 
Foreign loans - Latin America   2,547    (42)   (309)   14    281    (1,126)   1,300    2,665 
Total   24,715    (129)   (718)   302    3,095    (10,096)   5,464    22,633 

 

               Closing 
   Closing balance       Net increase /   balance at 
Consolidated 3 Stages (*)  at 12/31/2017   (Write off)   (Reversal) (1)   09/30/2018 (2) 
Individuals   14,830    (6,368)   6,131    14,593 
Credit card   6,684    (2,386)   2,123    6,421 
Personal loans   5,138    (2,772)   2,821    5,187 
Payroll loans   2,368    (975)   961    2,354 
Vehicles   547    (217)   191    521 
Mortgage loans   93    (18)   35    110 
Corporate   11,452    (709)   (458)   10,285 
Small and medium businesses   5,404    (1,893)   1,487    4,998 
Foreign loans - Latin America   4,783    (1,126)   1,726    5,383 
Total   36,469    (10,096)   8,886    35,259 

(1)In the third quarter there is no change in macroeconomic scenarios used.

(2)Comprises Expected Loan Losses for Financial Guarantees Pledged R$ 1,324 (R$ 1,907 at 12/31/2017) and Commitments to be Released R$ 3,060 (R$ 3,015 at 12/31/2017).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201872

 

 

Reconciliation of expected loan losses for Loan operations and lease operations, segregated by stages:

 

   Beginning                   Net increase /   Closing 
   Balance at   Transfer to   Transfer to   Transfer of the   Transfer of the   (Reversal)   balance at 
Stage 1  01/01/2017   Stage 2   Stage 3   Stage 2   Stage 3   (Write off)   12/31/2017 
Individuals   3,352    (107)   (118)   220    22    465    3,834 
Credit card   1,685    (50)   (21)   135    6    380    2,135 
Personal loans   733    (29)   (56)   24    9    78    759 
Payroll loans   787    (12)   (33)   40    4    19    805 
Vehicles   135    (15)   (8)   16    2    (7)   123 
Mortgage loans   12    (1)   -    5    1    (5)   12 
Corporate   616    (7)   (6)   104    23    (279)   451 
Small and medium businesses   1,016    (51)   (29)   79    6    128    1,149 
Foreign loans - Latin America   702    (97)   (31)   66    50    323    1,013 
Total   5,686    (262)   (184)   469    101    637    6,447 

 

   Beginning                   Net increase /   Closing 
   Balance at   Transfer to   Transfer to   Transfer of the   Transfer of the   (Reversal)   balance at 
Stage 2  01/01/2017   Stage 1   Stage 3   Stage 1   Stage 3   Write Off   12/31/2017 
Individuals   2,232    (220)   (721)   107    112    699    2,209 
Credit card   1,145    (135)   (293)   50    5    489    1,261 
Personal loans   662    (24)   (261)   29    57    104    567 
Payroll loans   251    (40)   (121)   12    27    133    262 
Vehicles   147    (16)   (43)   15    14    (9)   108 
Mortgage loans   27    (5)   (3)   1    9    (18)   11 
Corporate   1,501    (104)   (89)   7    36    (177)   1,174 
Small and medium businesses   898    (79)   (182)   51    153    (140)   701 
Foreign loans - Latin America   471    (66)   (124)   97    55    790    1,223 
Total   5,102    (469)   (1,116)   262    356    1,172    5,307 

 

   Beginning                   Net increase /   Closing 
   Balance at   Transfer to   Transfer to   Transfer of the   Transfer of the   (Reversal)   balance at 
Stage 3  01/01/2017   Stage 1   Stage 2   Stage 1   Stage 2   Write Off   12/31/2017 
Individuals   9,206    (22)   (112)   118    721    (1,124)   8,787 
Credit card   2,863    (6)   (5)   21    293    122    3,288 
Personal loans   4,643    (9)   (57)   56    261    (1,082)   3,812 
Payroll loans   1,246    (4)   (27)   33    121    (68)   1,301 
Vehicles   393    (2)   (14)   8    43    (112)   316 
Mortgage loans   61    (1)   (9)   -    3    16    70 
Corporate   8,972    (23)   (36)   6    89    819    9,827 
Small and medium businesses   4,452    (6)   (153)   29    182    (950)   3,554 
Foreign loans - Latin America   1,107    (50)   (55)   31    124    1,390    2,547 
Total   23,737    (101)   (356)   184    1,116    135    24,715 

 

   Beginning   Net increase /   Closing 
   balance at   (Reversal) /   balance at 
Consolidated 3 Stages  01/01/2017   (Write off)   12/31/2017 (*) 
Individuals   14,790    40    14,830 
Credit card   5,693    991    6,684 
Personal loans   6,038    (900)   5,138 
Payroll loans   2,284    84    2,368 
Vehicles   675    (128)   547 
Mortgage loans   100    (7)   93 
Corporate   11,089    363    11,452 
Small and medium businesses   6,366    (962)   5,404 
Foreign loans - Latin America   2,280    2,503    4,783 
Total   34,525    1,944    36,469 

(*) Comprises Expected Loan Losses for Financial Guarantees Pledged R$ 1,907 (R$ 1,580 at 01/01/2017) and Commitments to be Released R$ 3,015 (R$ 2,691 at 01/01/2017).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201873

 

 

d)Present value of lease operations

 

Below is the analysis of the present value of the future minimum payments receivable from Finance Leases by maturity: The portfolio is composed of lease of vehicles, machines, equipment and real estate contracted in by individuals and legal entities in Brazil and abroad:

 

   09/30/2018 
   Minimum future   Future financial   Present 
   payments   income   value 
Current   2,224    (1,069)   1,155 
Up to 1 year   2,224    (1,069)   1,155 
Non-current   9,448    (2,313)   7,136 
From 1 to 5 years   5,113    (2,149)   2,964 
Over 5 years   4,335    (164)   4,172 
Total   11,672    (3,382)   8,291 

 

   12/31/2017 
   Minimum future   Future financial   Present 
   payments   income   value 
Current   3,292    (1,898)   1,394 
Up to 1 year   3,292    (1,898)   1,394 
Non-current   9,223    (2,859)   6,364 
From 1 to 5 years   5,334    (2,803)   2,531 
Over 5 years   3,889    (56)   3,833 
Total   12,515    (4,757)   7,758 

 

The allowance for loan and lease losses related to the lease portfolio amounts to: R$ 287 (R$ 322 at 12/31/2017).

 

e)Sale or transfer of financial assets

 

ITAÚ UNIBANCO HOLDING carried out operations related to the sale or transfer of financial assets in which there was the retention of credit risks of the financial assets transferred, through joint obligation clauses. Therefore, such operations remained recorded as loan operations and represent the following amounts:

 

   09/30/2018   12/31/2017 
   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 
Companies   –   working capital   2,193    2,193    2,160    2,160    2,651    2,651    2,570    2,570 
Companies - loan (2)   -    -    2    2    -    -    4    4 
Individuals - vehicles (2)   -    -    1    1    -    -    2    2 
Individuals   –   mortgage loan   2,064    1,979    2,056    1,966    2,460    2,405    2,453    2,390 
Total   4,257    4,172    4,219    4,129    5,111    5,056    5,029    4,966 

(1) Under Interbank Market Debt.

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201874

 

 

Note 11 - Investments in subsidiaries and jointly controlling entities

 

a) The following table shows the main investments of ITAÚ UNIBANCO HOLDING:

 

   09/30/2018 
       Equity in   Other comprehensive   Total comprehensive 
   Investment   earnings   income   results 
Associates (a)   11,683    517    (114)   403 
Joint-Controlled Entities (b)   215    (47)   -    (47)
Total   11,898    470    (114)   356 

 

   12/31/2017   09/30/2017 
       Equity in   Other comprehensive   Total comprehensive 
   Investment   earnings   income   results 
Associates (a)   4,851    432    43    473 
Joint-Controlled Entities (b)   204    (21)   -    (21)
Total   5,055    411    43    452 

(a)At 09/30/2018, includes interest in total capital and voting capital of the following companies: XP Investimentos S.A. (49.90% total capital and 30.06% voting capital); Porto Seguro Itaú Unibanco Participações S.A. (42.93% total and voting capital; 42.93% at 12/31/2017); BSF Holding S.A. (49% total and voting capital; 49% at 12/31/2017); IRB-Brasil Resseguros S.A. (11% total capital and 11.20% voting capital; 11% total capital and 11.20% voting capital at 12/31/2017); Gestora de Inteligência de Crédito S.A (20% total and voting capital; 20% at 12/31/2017), Compañia Uruguaya de Medios de Procesamiento S.A. (35.83% total and voting capital; 35.83% at 12/31/2017); Rias Redbanc S.A. (25% total and voting capital; 25% at 12/31/2017); Kinea Private Equity Investimentos S.A. (80% total capital and 49% voting capital; 80% total capital and 49% voting capital at 12/31/2017) and Tecnologia Bancária S.A. (28.95% total and voting capital; and 28.95% at 12/31/2017).
(b)At 09/30/2018, includes interest in total and voting capital of the following companies: Olimpia Promoção e Serviços S.A. (50% total and voting capital; 50% at 12/31/2017); ConectCar Soluções de Mobilidade Eletrônica S.A. (50% total and voting capital; 50% at 12/31/2017) and includes result not arising from controlled companies' net income.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201875

 

 

Note 12 –Lease commitments as lessee

 

a)Finance lease

 

ITAÚ UNIBANCO HOLDING is the lessee in finance lease contracts of data processing equipment, with the option of purchase or extension, without contingent rental payments or imposed restrictions. The net carrying amount of these assets is R$ 18 (R$ 4 at 12/31/2017).

 

The table below shows the total future minimum payments:

 

   09/30/2018   12/31/2017 
Current   7    4 
Up to 1 year   7    4 
Non-current   11    - 
From 1 to 5 years   11    - 
Total future minimum payments   18    4 
Present value   18    4 

 

b)Operating leases

 

ITAÚ UNIBANCO HOLDING leases many properties, for use in its operations, under standard real estate leases that normally can be cancelled at its option and include renewal options and escalations clauses. No lease agreement imposes any restriction on our ability to pay dividends, enter into further lease agreements or engage in debt or equity financing transactions, and there is no contingent payments related to the agreements.

 

The expenses related to operating lease agreements recognized under General and administrative expenses total R$ 1,050 from 01/01 to 09/30/2018 (R$ 992 from 01/01 to 09/30/2017).

 

ITAÚ UNIBANCO HOLDING has no relevant sublease contracts.

 

Minimum payments of initiated and remaining lease agreements with non-cancelable clauses are as follows:

 

   09/30/2018   12/31/2017 
Current   777    1,113 
Up to 1 year   777    1,113 
Non-current   4,802    4,310 
From 1 to 5 years   4,070    3,927 
Over 5 years   732    383 
Total future minimum payments   5,579    5,423 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201876

 

 

Note 13 - Fixed assets

 

       Real estate in use (2)   Other fixed assets (2)     
Fixed Assets (1)  Fixed assets
under
construction		   Land   Buildings   Improvements   Installations   Furniture and
equipment		   EDP systems (3)   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   367     1,044    3,107    2,204    1,955    1,152    8,679    1,148    19,656 
Acquisitions   296     -     -    24    6    39    461    109    935 
Disposal   -     (10)     (72)    (33)   (9)   (14)   (143)   (7)   (288)
Exchange variation   8    2    4    112    15    36    21    6    204 
Transfers   (190)   -    57    59    25    -    49    -    - 
Other (5)   8    46    41    114    (4)   22    66    1    294 
Balance at 09/30/2018   489    1,082    3,137    2,480    1,988    1,235    9,133    1,257    20,801 
                                              
Depreciation                                             
Balance at 12/31/2017   -    -    (1,893)   (1,375)   (1,151)   (715)   (6,411)   (752)   (12,297)
Accumulated depreciation   -    -    (61)   (140)   (116)   (70)   (688)   (90)   (1,165)
Disposal   -    -    21    22    3    10    126    5    187 
Exchange variation   -    -    11    (53)   3    (12)   (44)   (6)   (101)
Other (5)   -    -    3    (117)   (1)   (45)   (32)   (14)   (206)
Balance at 09/30/2018   -    -    (1,919)   (1,663)   (1,262)   (832)   (7,049)   (857)   (13,582)
                                              
Book value                                             
Balance at 09/30/2018 (4)   489    1,082    1,218    817    726    403    2,084    400    7,219 

(1)The contractual commitments for purchase of the fixed assets totaled R$ 69 achievable by 2019 (Note 34 - Off balance sheet).

(2)Includes the amount of R$ 3 related to attached real estate.

(3)Includes lease contracts, mainly related to data processing equipment, which are accounted for as lease operations. The asset and the liability are recognized in the Financial Statements.

(4)During de period, there was no impairment of assets recorded in Fixed assets.

(5)Includes the total amount of R$ 172 related to the hyperinflationary adjustment for Argentina.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201877

 

 

       Real estate in use (2)   Other fixed assets (2)     
Fixed Assets (1)  Fixed assets
under
construction		   Land   Buildings   Improvements   Installations   Furniture and
equipment		   EDP systems (3)   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 01/01/2017   387    1,047    3,099    1,857    1,901    1,205    8,543    1,075    19,114 
Acquisitions   302    -    -    147    7    111    294    82    943 
Disposal   -    (1)   (69)   (46)   (1)   (14)   (313)   (20)   (464)
Exchange variation   -    4    5    37    15    (12)   5    1    55 
Transfers   (320)   -    86    122    26    -    86    -    - 
Other   (2)   (6)   (14)   87    7    (138)   64    10    8 
Balance at 12/31/2017   367    1,044    3,107    2,204    1,955    1,152    8,679    1,148    19,656 
                                              
Depreciation                                             
Balance at 01/01/2017   -    -    (1,840)   (1,114)   (986)   (674)   (5,804)   (654)   (11,072)
Accumulated depreciation   -    -    (80)   (211)   (154)   (104)   (910)   (105)   (1,564)
Disposal   -    -    16    29    -    6    283    19    353 
Exchange variation   -    -    -    (12)   10    28    (16)   (4)   6 
Other   -    -    11    (67)   (21)   29    36    (8)   (20)
Balance at 12/31/2017   -    -    (1,893)   (1,375)   (1,151)   (715)   (6,411)   (752)   (12,297)
                                              
Book value                                             
Balance at 12/31/2017 (4)   367    1,044    1,214    829    804    437    2,268    396    7,359 

(1)The contractual commitments for purchase of the fixed assets totaled R$ 181 achievable by 2019 (Note 34 - Off balance sheet).

(2)Includes the amount of R$ 3 related to attached real estate.

(3)Includes lease contracts, mainly related to data processing equipment, which are accounted for as lease operations. The asset and the liability are recognized in the Financial Statements.

(4)During de period, there was no impairment of assets recorded in Fixed assets.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201878

 

 

Note 14 - Intangible assets

 

       Other intangible assets     
       Association for the                 
   Acquisition of   promotion and offer                 
   rights to credit   of financial products   Acquisition of   Development of   Other intangible     
Intangible assets (1)  payroll   and services   software   software   assets   Total 
Amortization rates p.a.   20%   8%   20%   20%   10 to 20%      
                               
Cost                              
Balance at 12/31/2017   1,060    2,452    4,571    4,353    1,525    13,961 
Acquisitions   278    1    501    222    -    1,002 
Terminated agreements/ write off   (147)   (24)   (310)   (2)   -    (483)
Exchange variation   -    145    397    -    928    1,470 
Other (4)   (5)   112    116    47    (887)   (617)
Balance at 09/30/2018   1,186    2,686    5,275    4,620    1,566    15,333 
                               
Amortization (2)                              
Balance at 12/31/2017   (471)   (647)   (1,998)   (1,267)   (514)   (4,897)
Amortization expense   (167)   (169)   (449)   (492)   (203)   (1,480)
Terminated agreements/ write off   147    24    310    -    -    481 
Exchange variation   -    (155)   (246)   -    (196)   (597)
Other (4)   3    93    (42)   (47)   364    371 
Balance at 09/30/2018   (488)   (854)   (2,425)   (1,806)   (549)   (6,122)
                               
Impairment (3)                              
Balance at 12/31/2017   -    -    (54)   (343)   -    (397)
Increase   -    -    (167)   -    -    (167)
Exchange variation   -    -    (12)   -    -    (12)
Balance at 09/30/2018   -    -    (233)   (343)   -    (576)
                               
Book value                              
Balance at 09/30/2018   698    1,832    2,617    2,471    1,017    8,635 

(1)The contractual commitments for the purchase of new intangible assets totaled R$ 728 achievable by 2020 (Note 34 - Off balance sheet).

(2)All intangible assets have a defined useful life.

(3)Note 2.4j.

(4)Includes the total amount of R$ 24 related to the hyperinflationary adjustment for Argentina.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201879

 

 

       Other intangible assets     
       Association for the                 
   Acquisition of   promotion and offer                 
   rights to credit   of financial products   Acquisition of   Development of   Other intangible     
Intangible assets (1)  payroll   and services (4)   software   software   assets   Total 
Amortization rates p.a.   20%   8%   20%   20%   10 to 20%      
                               
Cost                              
Balance at 01/01/2017   1,046    1,748    3,840    3,525    1,078    11,237 
Acquisitions   345    18    1,206    350    388    2,307 
Terminated agreements / write off   (329)   (16)   -    (1)   (22)   (368)
Exchange variation   -    25    (77)   -    685    633 
Other (4)   (2)   677    (398)   479    (604)   152 
Balance at 12/31/2017   1,060    2,452    4,571    4,353    1,525    13,961 
                               
Amortization (2)                              
Balance at 01/01/2017   (555)   (376)   (1,701)   (532)   (284)   (3,448)
Amortization expense   (215)   (273)   (495)   (446)   (176)   (1,605)
Terminated agreements / write off   310    16    -    (6)   22    342 
Exchange variation   -    (17)   79    -    (134)   (72)
Other (4)   (11)   3    119    (283)   58    (114)
Balance at 12/31/2017   (471)   (647)   (1,998)   (1,267)   (514)   (4,897)
                               
Impairment (3)                              
Balance at 01/01/2017   (19)   -    (54)   (335)   -    (408)
Incresase   -    -    -    (14)   -    (14)
Exchange variation   19    -    -    6    -    25 
Balance at 12/31/2017   -    -    (54)   (343)   -    (397)
                               
Book value                              
Balance at 12/31/2017   589    1,805    2,519    2,743    1,011    8,667 

(1)The contractual commitments for the purchase of new intangible assets totaled R$ 984 achievable by 2020 (Note 34 - Off balance sheet).

(2)All intangible assets have a defined useful life.

(3)Note 2.4j.

(4)Reclassifications were made in the balances at December 31, 2017 aiming at permitting the proper presentation of operation balances, in accordance with their respective accounting natures.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201880

 

 

Note 15 - Deposits

 

The table below shows the breakdown of deposits:

 

   09/30/2018   12/31/2017 
   Current   Non-current   Total   Current   Non-current   Total 
Interest-bearing deposits   226,314    153,418    379,732    204,363    129,599    333,962 
Time deposits   90,906    153,341    244,247    82,718    129,082    211,800 
Interbank deposits   3,034    77    3,111    1,665    517    2,182 
Savings deposits   132,374    -    132,374    119,980    -    119,980 
Non-interest bearing deposits   74,820    -    74,820    68,976    -    68,976 
Demand deposits   74,817    -    74,817    68,973    -    68,973 
Others Deposits   3    -    3    3    -    3 
Total   301,134    153,418    454,552    273,339    129,599    402,938 

 

Note 16 – Financial liabilities designated at fair value through profit or loss

 

Financial liabilities designated at fair value through profit or loss are presented in the following table:

 

   09/30/2018   12/31/2017 
Structured notes          
Shares   40    58 
Debt securities   167    407 
Total   207    465 

 

The effect of the changes in credit risk of these instruments is not significant at 09/30/2018 and 12/31/2017.

 

For shares, in view of the characteristics of the instrument, there is no definite value to be paid at the maturity date. For debt securities, the amount to be paid at maturity comprises several exchange rates and indices, and there is no contractual amount for settlement.

 

The fair value of financial liabilities designated at fair value through profit or loss by maturity is as follows:

 

   09/30/2018   12/31/2017 
   Cost / Fair value   Cost / Fair value 
Current - up to one year   33    55 
Non-current   174    410 
From one to five years   117    319 
From five to ten years   23    50 
After ten years   34    41 
Total   207    465 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201881

 

 

Note 17 – Securities sold under repurchase agreements and interbank and institutional market debts

 

a)Securities sold under repurchase agreements and interbank market debt

 

The table below shows the breakdown of funds:

 

   09/30/2018   12/31/2017 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Securities sold under repurchase agreements   240,846    61,935    302,781    240,808    71,826    312,634 
Transactions backed by own financial assets (*)   61,838    61,935    123,773    93,955    71,826    165,781 
Transactions backed by third party financial assets   179,008    -    179,008    146,853    -    146,853 
Interbank market debt   77,419    65,200    142,619    73,414    56,202    129,616 
Real estate credit bills   7,503    3,370    10,873    14,046    4,479    18,525 
Agribusiness credit bills   9,895    8,244    18,139    7,562    7,539    15,101 
Financial credit bills   13,737    28,508    42,245    13,234    14,457    27,691 
Import and export financing   38,421    9,705    48,126    30,548    8,541    39,089 
On-lending - domestic   7,824    11,193    19,017    7,991    16,190    24,181 
Liabilities from transactions related to credit assignments (Note 10d)   39    4,180    4,219    33    4,996    5,029 

(*)It includes R$ 29,472 (R$ 58,837 at 12/31/2017) related to Debentures of own issue.

 

Funding for import and export financing represents credit facilities available for financing of imports and exports of Brazilian companies, in general denominated in foreign currency. The interest rate for each one of the operations (p.a.) is presented in the table below:

 

   Brazil  Foreign
Securities sold under repurchase agreements(*)  35% of CDI to 16.93%  1.90% to 5.25%
Real estate credit bills  83% to 94% of CDI  -
Financial credit bills  IGPM to 113% of CDI  -
Agribusiness credit bills  77% to 100% of CDI  -
Import and export financing  1.4% to 6.0%  0.79% to 11.1%
On-lending - domestic  2.5% to 14.5%  -
Liabilities from transactions related to credit assignments  6.78% to 13.17%  -

(*)Note 2.4e presents the operations comprising Deposits received under securities repurchased agreements. Final repurchase dates are set until December 2055.

 

b)Institutional market debt

 

The table below presents the breakdown of funds obtained in Institutional markets:

 

   09/30/2018   12/31/2017 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Subordinated debt (1)   3,285    50,436    53,721    12,500    40,196    52,696 
Foreign borrowing through securities   6,804    37,287    44,091    11,764    29,636    41,400 
Structured Operations Certificates (2)   1,969    1,131    3,100    1,762    2,624    4,386 
Total   12,058    88,854    100,912    26,026    72,456    98,482 

(1)At 09/30/2018, the amount of R$ 38,870 (R$ 42,687 at 12/31/2017) is included in the Reference Equity, under the proportion defined by CMN Resolution No. 3,444, of February 28, 2007, as amended by CMN Resolution No. 3,532, of January 31, 2008.

(2)As at September 30, 2018, the market value of the funding from Structured Operations Certificates issued is R$ 3,203.

 

The interest rate for each one of the operations (p.a.) is presented in the table below.

 

   Brazil  Foreign
Subordinated debt  CDI + 1.1% to IGPM + 4.63%  2.8% to 10.79%
Foreign borrowing through securities  0.89% to 12.73%  2.23% to 30.35%
Structured Operations Certificates  IPCto to 15.82%  -

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201882

 

 

Note 18 - Other assets and liabilities

 

a)Other assets

 

   09/30/2018   12/31/2017 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Financial (1) (3)   56,325    12,587    68,912    46,718    12,850    59,568 
Receivables from credit card issuers   34,278    -    34,278    32,073    -    32,073 
Insurance and reinsurance operations   1,068    215    1,283    1,224    10    1,234 
Deposits in guarantee for contingent liabilities (Note 30)   1,608    12,008    13,616    1,520    11,892    13,412 
Deposits in guarantee for foreign borrowing program   981    -    981    639    -    639 
Negotiation and intermediation of securities   11,591    342    11,933    6,202    18    6,220 
Receivables from reimbursement of contingent liabilities (Note 30c)   1,006    -    1,006    244    821    1,065 
Receivables from services provided   2,911    11    2,922    2,842    1    2,843 
Amounts  receivable from FCVS  – Salary Variations Compensation Fund (2)   1    4    5    1    105    106 
Foreign exchange portfolio   11    -    11    -    -    - 
Operations without credit granting characteristics   2,870    7    2,877    1,973    3    1,976 
Non-financial   10,341    1,600    11,941    8,637    1,820    10,457 
Prepaid expenses   2,411    475    2,886    2,432    643    3,075 
Retirement plan assets (Notes 27c and d)   -    1,085    1,085    -    1,067    1,067 
Sundry domestic   2,384    5    2,389    2,642    -    2,642 
Premiums from loan operations   87    25    112    240    77    317 
Sundry foreign   3,738    10    3,748    1,847    29    1,876 
Other   1,721    -    1,721    1,476    4    1,480 

(1)There were no impairment losses for other financial assets in these periods.
(2)The Salary Variation Compensation Fund –FCVS was established through Resolution No. 25, of June 16, 1967, of the Board of the former BNH (National Housing Bank), and its purpose is to settle balances remaining after the end of real estate financing contracted up to March 1990, relating to agreements financed under the SFH (National Housing System), and provided that they are covered by FCVS.
(3)Loan and lease operations written off as loss until 06/30/2017; all collection procedures to recover these assets are ongoing.

 

b)Other liabilities

 

   09/30/2018   12/31/2017 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Financial   83,942    549    84,491    77,598    15    77,613 
Credit card operations   73,949    -    73,949    71,892    -    71,892 
Foreign exchange portfolio   -    -    -    197    -    197 
Negotiation and intermediation of securities   8,718    549    9,267    4,606    15    4,621 
Finance leases (Note 12a)   18    -    18    4    -    4 
Other   1,257    -    1,257    899    -    899 
Non-financial   33,569    1,174    34,743    24,382    1,980    26,362 
Collection and payment of taxes and contributions   5,812    -    5,812    325    -    325 
Sundry creditors - domestic   2,198    177    2,375    2,009    143    2,152 
Funds in transit   14,120    87    14,207    8,800    989    9,789 
Provision for sundry payments   1,630    79    1,709    1,721    135    1,856 
Social and statutory   2,587    229    2,816    4,931    137    5,068 
Liabilities for official agreements and rendering of payment services   905    -    905    985    -    985 
Provision for retirement plan benefits (Note 27c and e)   239    540    779    197    525    722 
Personnel provision   2,155    62    2,217    1,496    51    1,547 
Provision for health insurance   856    -    856    842    -    842 
Deferred income   2,550    -    2,550    2,326    -    2,326 
Other   517    -    517    750    -    750 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201883

 

 

Note 19 – 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:

 

   09/30/2018  
       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  
Residents abroad at 12/31/2017   20,877,606    2,114,271,985    2,135,149,591    31,666  
Shares of capital stock at 12/31/2017   3,319,951,112    3,230,563,326    6,550,514,438    97,148  
(-) Cancellation of Shares – Meeting of the Board of Directors 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  
Residents in Brazil at 09/30/2018   3,283,446,545    1,077,703,585    4,361,150,130    64,821  
Residents abroad at 09/30/2018   22,080,361    2,152,859,741    2,174,940,102    32,327  
Treasury shares at 12/31/2017 (1)   14,424,206    71,459,714    85,883,920    (2,743 )
Purchase of shares   -    13,100,000    13,100,000    (510 )
(-) Cancellation of Shares – Meeting of the Board of Directors February 22, 2018   (14,424,206)   -    (14,424,206)   534  
Result of delivery of treasury shares   -    (24,433,994)   (24,433,994)   756  
Treasury shares at 09/30/2018 (1)   -    60,125,720    60,125,720    (1,963 )
Outstanding shares at 09/30/2018   3,305,526,906    3,170,437,606    6,475,964,512       
Outstanding shares at 12/31/2017   3,305,526,906    3,159,103,612    6,464,630,518       

  

   12/31/2017  
       Number           
   Common   Preferred   Total    Amount  
Residents in Brazil at 01/01/2017   3,335,350,311    1,104,963,731    4,440,314,042    65,534  
Residents abroad at 01/01/2017   16,393,906    2,125,599,595    2,141,993,501    31,614  
Shares of capital stock at 01/01/2017   3,351,744,217    3,230,563,326    6,582,307,543    97,148  
(-) Cancellation of shares - Meeting of the Board of Directors December 15, 2017   (31,793,105)   -    (31,793,105)   -  
Shares of capital stock at 12/31/2017   3,319,951,112    3,230,563,326    6,550,514,438    97,148  
Residents in Brazil at 12/31/2017   3,299,073,506    1,116,291,341    4,415,364,847    65,482  
Residents abroad at 12/31/2017   20,877,606    2,114,271,985    2,135,149,591    31,666  
Treasury shares at 01/01/2017 (1)   3,074    69,604,462    69,607,536    (1,882 )
Purchase of shares   46,214,237    37,982,900    84,197,137    (3,089 )
(-) Cancellation of shares - Meeting of the Board of Directors December 15, 2017   (31,793,105)   -    (31,793,105)   1,178  
Result of delivery of treasury shares   -    (36,127,648)   (36,127,648)   1,050  
Treasury shares at 12/31/2017 (1)   14,424,206    71,459,714    85,883,920    (2,743 )
Outstanding shares at 12/31/2017   3,305,526,906    3,159,103,612    6,464,630,518       
Outstanding shares at 01/01/2017   3,351,741,143    3,160,958,864    6,512,700,007       

(1)Own shares, purchased based on authorization of the Board of Directors, to be held in Treasury for subsequent cancellation of replacement in the market.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201884

 

 

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 

 

   01/01 to 12/31/2017 
Cost / market value  Common   Preferred 
Minimum  37.06   33.48 
Weighted average   37.06    36.25 
Maximum   37.06    38.56 
Treasury shares          
Average cost   37.05    30.90 
Market value at 12/31/2017   37.69    42.58 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201885

 

 

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 the mandatory minimum dividend is based on the share position on the last day of the prior month, with payment being made on the first business day of the subsequent month, amounting to R$ 0.015 per share.

 

l - Calculation of dividends and interest on capital

 

   09/30/2018   09/30/2017 
Statutory net income   15,284    16,610 
Adjustments:          
(-) Legal reserve - 5%   (764)   (831)
Dividend calculation basis   14,520    15,779 
Mandatory minimum dividend - 25%   3,630    3,945 
Dividends and Interest on Capital Paid / Provided for / Identified   7,572    11,438 

 

ll - Stockholders' compensation

 

 

   09/30/2018 
   Gross value per             
   share (R$)   Gross   WHT   Net 
Paid / prepaid        5,629    (122)   5,507 
Dividends - 8 monthly installments from February to September 2018   0,0150    777    -    777 
Dividends - paid on 08/30/2018   0,6240    4,041    -    4,041 
Interest on capital - paid on 08/30/2018   0,1252    811    (122)   689 
                     
Declared until 09/30/2018 (Recorded in Other Liabilities)        97    -    97 
Dividends - 1 monthly installment paid on 10/01/2018   0,0150    97    -    97 
                     
Identified in Revenue Reserve In Stockholders’ Equity   0.3062    1,983    (15)   1,968 
Total from 01/01 to 09/30/2018        7,709    (137)   7,572 

 

   09/30/2017 
   Gross value per             
   share (R$)   Gross   WHT   Net 
Paid / prepaid        3,373    (389)   2,984 
Dividends - 8 monthly installments from February to September 2017   0,0150    781    -    781 
Interest on capital - paid on 08/25/2017   0,3990    2,592    (389)   2,203 
Declared until 09/30/2017 (Recorded in Other Liabilities)        1,101    (141)   960 
Dividends - 1 monthly installment paid on 10/02/2017   0,0150    97    -    97 
Dividends provision   0,0101    66    -    66 
Interest on capital   0,1442    938    (141)   797 
                     
Identified in Revenue Reserve In Stockholders’ Equity   1,1520    7,494    -    7,494 
Total from 01/01 to 09/30/2017        11,968    (530)   11,438 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201886

 

 

c)Capital reserves and revenue reserves

 

l - Additional paid-in capital

 

Additional paid-in capital corresponds to: (i) the difference between the proceeds from the sale of treasury shares and the average cost of such shares, and (ii) the compensation expenses recognized in accordance with the stock option plan and variable compensation.

 

ll - Appropriated reserves

 

   09/30/2018   12/31/2017 
Capital reserves   285    285 
Premium on subscription of shares   284    284 
Reserves from tax incentives, restatement of equity securities and other   1    1 
Revenue reserves   6,279    11,396 
Legal (1)   9,657    8,893 
Statutory (2)   8,833    586 
Corporate reorganizations (Note 2.4 a III)   (12,211)   (11,741)
Special revenue reserves (3)   -    13,658 
Total reserves at parent company   6,564    11,681 

(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.

(3)Refers to Dividends or Interest on Capital declared until 9/30/2018 and 9/30/2017.

 

lll - Unappropriated reserves

 

Refers to balance of profit remaining after the distribution of dividends and appropriations to statutory reserves in the statutory accounts of ITAÚ UNIBANCO HOLDING.

 

d)Non-controlling interests

 

   Stockholders’ equity   Net Income 
   09/30/2018   12/31/2017   01/01 to
09/30/2018		   01/01 to
09/30/2017		 
Itaú CorpBanca (Note 3)   12,873    11,144    401    254 
Itaú CorpBanca Colômbia S.A. (Note 3)   1,407    1,203    (6)   (10)
Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento   367    297    70    52 
Luizacred S.A. Soc. Cred. Financiamento Investimento   277    241    36    15 
Other   104    93    27    17 
Total   15,028    12,978    528    328 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201887

 

 

Note 20 – 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) (R$ (381) 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 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. and to Unibanco Holdings S.A., and to Redecard S.A. (“Rede”) 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201888

 

 

Summary of changes in the plan

 

   Simple options 
   Quantity   Weighted average
exercise price		   Weighted average
market value		 
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 
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		 
Balance at 01/01/2017   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 
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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201889

 

 

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 variations. 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 regulations.

 

The acquisition prices of own shares and Share-Based Instruments are established every six months and is 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 
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 01/01/2017   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 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201890

 

 

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 
Opening balance 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 
Opening balance 01/01/2017   24,539,406 
New   8,556,882 
Delivered   (12,048,631)
Cancelled   (216,336)
Balance at 09/30/2017   20,831,321 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201891

 

 

Note 21 - Interest and similar income and expense and net gain (loss) on investment securities and derivatives

 

a)Interest and similar income

 

   07/01 to   07/01 to   01/01 to   01/01 to 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Central Bank compulsory deposits   1,233    1,883    3,824    5,708 
Interbank deposits   243    240    908    600 
Securities purchased under agreements to resell   4,529    6,233    12,683    20,910 
Financial assets at fair value through profit or loss   5,434    6,681    15,777    18,867 
Financial assets at fair value through other comprehensive income   2,519    2,222    7,416    7,037 
Financial assets at amortized cost   900    716    2,025    2,185 
Loan and lease operations   19,448    17,522    56,616    56,572 
Other financial assets   162    147    415    576 
Total   34,468    35,644    99,664    112,455 

 

b)Interest and similar expense

 

   07/01 to   07/01 to   01/01 to   01/01 to 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Deposits   (5,325)   (3,927)   (13,746)   (10,637)
Securities sold under repurchase agreements   (4,718)   (8,293)   (13,131)   (27,876)
Interbank market debt   (2,577)   (890)   (11,471)   (6,620)
Institutional market debt   (1,821)   (1,410)   (5,301)   (5,146)
Financial expense from technical reserves for insurance and private pension plans   (3,029)   (4,694)   (7,103)   (12,539)
Other   (19)   11    (45)   (36)
Total   (17,489)   (19,203)   (50,797)   (62,854)

 

c)Adjustments to Fair Value of Financial Assets and Liabilities

 

   07/01 to   07/01 to   01/01 to   01/01 to 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Financial assets at fair value through profit or loss   (1,520)   1,483    (5,445)   2,877 
Derivatives (*)   1,204    886    (521)   2,738 
Financial assets designated at fair value through profit or loss   (45)   60    (385)   136 
Financial assets at fair value through other comprehensive income   (353)   16    (301)   (89)
Finacial liabilities designated at fair value   3    (59)   39    (58)
Total   (711)   2,386    (6,613)   5,604 

(*)Includes the ineffective derivatives portion related to hedge accounting.

 

During the period ended 09/30/2018, ITAÚ UNIBANCO HOLDING recognized R$ 1,030 as expenses for Expected Losses, with reversal of R$ (2) for Financial Assets – Fair Value through Other Comprehensive Income and loss of R$ 1,032 for Financial Assets – Amortized Cost.

 

Note 22 - Banking service fees

 

   07/01 to   07/01 to   01/01 to   01/01 to 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Current account services   2,622    2,588    8,013    7,613 
Asset management fees   1,283    1,054    3,669    3,020 
Collection commissions   378    348    1,127    1,019 
Fees from credit card services   3,714    3,417    10,753    10,264 
Fees for guarantees issued and credit lines   440    443    1,343    1,330 
Brokerage commission   115    183    395    407 
Other   636    558    1,868    1,649 
Total   9,188    8,591    27,168    25,302 

 

Note 23 - Other income

 

   07/01 to   07/01 to   01/01 to   01/01 to 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Gains on sale of assets held for sale, fixed assets and investments in associates and joint ventures   139    235    320    311 
Recovery of expenses   42    78    171    180 
Reversal of provisions   109    67    224    155 
Other   287    220    565    674 
Total   577    600    1,280    1,320 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201892

 

 

Note 24 - General and administrative expenses

 

   07/01 to   07/01 to   01/01 to   01/01 to 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Personnel expenses   (6,420)   (5,742)   (18,206)   (16,967)
Compensation   (2,605)   (2,255)   (7,536)   (6,823)
Payroll taxes   (747)   (687)   (2,237)   (2,085)
Welfare benefits   (973)   (832)   (2,786)   (2,486)
Retirement plans and post-employment benefits (Note 27)   (21)   (25)   (70)   (73)
Defined benefit   (19)   (23)   (62)   (67)
Defined contribution   (2)   (2)   (8)   (6)
Stock option plan (Note 20)   (60)   (48)   (168)   (148)
Training   (60)   (57)   (167)   (157)
Employee profit sharing   (1,160)   (940)   (3,239)   (2,672)
Dismissals   (92)   (79)   (306)   (315)
Provision for labor claims (Note 30)   (702)   (819)   (1,697)   (2,208)
Administrative expenses   (4,293)   (4,068)   (12,597)   (11,915)
Data processing and telecommunications   (1,060)   (1,027)   (3,123)   (3,039)
Third party services   (1,086)   (997)   (3,173)   (3,033)
Installations   (332)   (336)   (946)   (913)
Advertising, promotions and publications   (401)   (300)   (1,061)   (814)
Rent   (392)   (367)   (1,184)   (1,112)
Transportation   (89)   (87)   (256)   (254)
Materials   (83)   (95)   (250)   (251)
Financial services   (191)   (211)   (576)   (608)
Security   (185)   (178)   (565)   (542)
Utilities   (106)   (88)   (318)   (295)
Travel   (58)   (56)   (165)   (153)
Other   (310)   (326)   (980)   (901)
Depreciation   (392)   (388)   (1,165)   (1,172)
Amortization   (461)   (361)   (1,310)   (1,065)
Insurance acquisition expenses   (42)   (61)   (137)   (239)
Other expenses   (4,000)   (3,046)   (9,057)   (7,720)
Expenses related to credit cards   (1,159)   (912)   (3,101)   (2,819)
Losses with third party frauds   (188)   (150)   (489)   (435)
Loss on sale of assets held for sale, fixed assets and investments in associates and joint ventures   (171)   (138)   (396)   (426)
Provision for civil lawsuits (Note 30)   (141)   (567)   (338)   (1,238)
Provision for tax and social security lawsuits   (91)   (172)   (465)   (606)
Refund of interbank costs   (72)   (73)   (204)   (217)
Impairment - intangible asset   -    -    (167)   - 
Other   (2,178)   (1,034)   (3,897)   (1,979)
Total   (15,608)   (13,666)   (42,472)   (39,078)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201893

 

 

Note 25 – Income tax and social contribution

 

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 (*)   20.00%

(*)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%.

 

a)Expenses for taxes and contributions

 

Demonstration of Income tax and social contribution expense calculation:

 

   07/01 to   07/01 to   01/01 to   01/01 to 
Due on operations for the period  09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Income before income tax and social contribution   8,292    10,289    20,230    27,365 
Charges (income tax and social contribution) at the rates in effect   (3,731)   (4,630)   (9,104)   (12,314)
Increase / decrease in income tax and social contribution charges arising from:                    
Share of profit or (loss) of associates and joint ventures net   76    73    105    161 
Foreign exchange variation on investiments abroad   688    (1,136)   4,913    (737)
Interest on capital   919    954    2,737    2,859 
Corporate reorganizations (Note 2.4 a III)   157    157    471    471 
Dividends and interest on external debt bonds   114    77    376    297 
Other nondeductible expenses net of non taxable income (*)   1,200    2,949    (4,342)   4,732 
Income tax and social contribution expenses   (577)   (1,556)   (4,844)   (4,531)
Related to temporary differences                    
Increase (reversal) for the period   (597)   (2,636)   3,190    (4,070)
Increase (reversal) of prior periods   (787)   (37)   206    (49)
(Expenses) / Income related to deferred taxes   (1,384)   (2,673)   3,396    (4,119)
Total income tax and social contribution expenses   (1,961)   (4,229)   (1,448)   (8,650)

(*) Includes temporary (additions) and exclusions.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201894

 

 

b)Deferred taxes

 

I - The deferred tax asset balance and its changes, segregated based on its origin and disbursements, are represented by:

 

       Realization /         
   12/31/2017   (Reversal)   Increase   09/30/2018 
Reflected in income   48,810    (19,681)   12,997    42,126 
Provision for expected loss   24,686    (6,670)   2,987    21,003 
Related to income tax and social contribution tax carryforwards   7,595    (3,665)   2,117    6,047 
Provision for profit sharing   1,829    (1,829)   1,423    1,423 
Provision for devaluation of securities with permanent impairment   2,228    (1,301)   1,221    2,148 
Provision for contingent liabilities   5,194    (1,423)   1,082    4,853 
Civil lawsuits   1,974    (425)   160    1,709 
Labor claims   2,200    (890)   778    2,088 
Tax and social security   1,020    (108)   144    1,056 
Goodwill on purchase of investments   141    (141)   -    - 
Legal liabilities – tax and social security    488    (60)   116    544 
Adjustments of operations carried out on the futures settlement market   277    (277)   144    144 
Adjustment to fair value of financial assets designated at fair value through profit or loss and derivatives   429    (429)   746    746 
Provision related to health insurance operations   341    (1)   6    346 
Other   5,602    (3,885)   3,155    4,872 
                     
Reflected in stockholders’ equity   2,192    (555)   353    1,990 
Corporate reorganizations (Note 2.4 a III)   628    (471)   -    157 
Adjustment to fair value of financial assets at fair value through other comprehensive income   327    (2)   352    677 
Cash flow hedge   983    (82)   -    901 
Other   254    -    1    255 
Total (1)(2)   51,002    (20,236)   13,350    44,116 

(1)Deferred income tax and social contribution assets and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 38,265 and R$ 376.
(2)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 the subsidiaries, Itaú Unibanco S.A. and Banco Itaucard S.A., a petition has been sent to Central Bank of Brazil, in compliance with paragraph 7 of article 1st of Resolution No. 4,441/15 and pursuant to Circular 3,776/15.

 

   01/01/2017   Realization /
(Reversal)		   Increase   12/31/2017 
Reflected in income   49,841    (16,347)   15,316    48,810 
Provision for expected loss   27,510    (9,453)   6,629    24,686 
Related to income tax and social contribution tax carryforwards   6,981    (197)   811    7,595 
Provision for profit sharing   1,541    (1,541)   1,829    1,829 
Provision for devaluation of securities with permanent impairment   1,727    -    501    2,228 
Provision for contingent liabilities   5,704    (2,733)   2,223    5,194 
Civil lawsuits   1,955    (576)   595    1,974 
Labor claims   2,167    (1,233)   1,266    2,200 
Tax and social security   1,582    (924)   362    1,020 
Goodwill on purchase of investments   165    (758)   734    141 
Legal liabilities – tax and social security   387    (557)   658    488 
Adjustments of operations carried out in futures settlement market   485    (239)   31    277 
Adjustment to fair value of financial assets designated at fair value through profit or loss and derivatives   243    (243)   429    429 
Provision related to health insurance operations   300    -    41    341 
Other   4,798    (626)   1,430    5,602 
Reflected in stockholders’ equity   3,123    (1,072)   141    2,192 
Corporate reorganizations (Note 2.4 a III)   1,256    (628)   -    628 
Adjustment to fair value of financial assets at fair value through other comprehensive income   771    (444)   -    327 
Cash flow hedge   843    -    140    983 
Other   253    -    1    254 
Total (*)   52,964    (17,419)   15,457    51,002 

(*)Deferred income tax and social contribution assets and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 35,869 and R$ 391.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201895

 

 

II - The provision for deferred tax and contributions and respective changes are as follows:

 

       Realization /         
   12/31/2017   reversal   Increase   09/30/2018 
Reflected in income   14,569    (10,947)   1,961    5,583 
Depreciation in excess – finance lease   613    (280)   -    333 
Adjustment of escrow deposits and contingent liabilities   1,280    (9)   72    1,343 
Pension plans   304    (19)   14    299 
Adjustments of operations carried out on the futures settlement market   1,421    (1,421)   1,329    1,329 
Adjustment to fair value of financial assets designated at fair value through profit or loss and derivatives   7,592    (7,592)   525    525 
Taxation of results abroad – capital gains    1,973    (1,252)   -    721 
Other   1,386    (374)   21    1,033 
Reflected in stockholders’ equity accounts   955    (402)   91    644 
Adjustment to fair value of financial assets at fair value through other comprehensive income   767    (386)   75    456 
Cash flow hedge   166    (16)   -    150 
Provision for pension plan benefits   9    -    16    25 
Other   13    -    -    13 
Total (*)   15,524    (11,349)   2,052    6,227 
(*)Deferred income tax and social contribution asset and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 38,265 and R$ 376.

 

       Realization /         
   01/01/2017   reversal   Increase   12/31/2017 
Reflected in income   13,507    (8,716)   9,778    14,569 
Depreciation in excess – finance lease   936    (323)   -    613 
Adjustment of escrow deposits and contingent liabilities   1,193    (179)   266    1,280 
Pension plans   233    -    71    304 
Adjustments of operations carried out on the futures settlement market   1,095    -    326    1,421 
Adjustment to fair value of financial assets designated at fair value through profit or loss and derivatives   7,293    (7,293)   7,592    7,592 
Taxation of results abroad – capital gains   1,502    -    471    1,973 
Other   1,255    (921)   1,052    1,386 
Reflected in stockholders’ equity accounts   968    (129)   116    955 
Adjustment to fair value of financial assets at fair value through other comprehensive income   836    (82)   13    767 
Cash flow hedge   63    -    103    166 
Provision for pension plan benefits   35    (26)   -    9 
Other   34    (21)   -    13 
Total (*)   14,475    (8,845)   9,894    15,524 
(*)Deferred income tax and social contribution asset and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 35,869 and R$ 391.

 

III -The estimate of realization and present value of tax credits and from the Provision for Deferred Income Tax and Social Contribution existing at 09/30/2018, are:

 

   Deferred tax assets                 
   Temporary
differences		   %   Tax loss / social
contribution loss
carryforwards		   %   Total   %   Deferred tax
liabilities		   %   Net
deferred
taxes		   % 
2018   11,586    30%   41    1%   11,627    26%   (1,263)   20%   10,364    28%
2019   12,838    34%   352    6%   13,190    30%   (773)   12%   12,417    33%
2020   2,717    7%   2,400    39%   5,117    11%   (178)   3%   4,939    13%
2021   2,689    7%   2,122    35%   4,811    11%   (1,233)   20%   3,578    9%
2022   2,289    6%   1,091    18%   3,380    8%   (561)   9%   2,819    7%
After 2022   5,950    16%   41    1%   5,991    14%   (2,219)   36%   3,772    10%
Total   38,069    100%   6,047    100%   44,116    100%   (6,227)   100%   37,889    100%
Present value (*)   34,785         5,330         40,115         (5,284)        34,831      

 

(*)The average funding rate, net of tax effects, was used to determine the present value.

 

The projections of future taxable income include estimates related to macroeconomic variables, exchange rates, interest rates, volume of financial operations and services fees and others, which can vary in relation to actual data and amounts.

 

Net income in the financial statements is not directly related to the taxable income, due to differences between the accounting criteria and tax legislation, in addition to corporate aspects. Accordingly, it is recommended that the trends for the realization of deferred tax assets arising from temporary differences, and tax loss carry forwards should not be used as an indication of future net income.

 

Considering the temporary effects of Law 13,169/15, which increases the Social Contribution tax rate to 20% until December 31, 2018, tax credits were accounted for based on their expected realization. There are no unrecorded deferred tax assets at 09/30/2018 and 12/31/2017.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201896

 

 

Note 26 – Earnings per share

 

Basic and diluted earnings per share were computed as shown in the table below for the periods indicated. Basic earnings per share are computed by dividing the net income attributable to the stockholder of ITAÚ UNIBANCO HOLDING by the average number of shares for the period, and by excluding the number of shares purchased and held as treasury shares by the company. Diluted earnings per share are computed on a similar way, but with the adjustment made in the denominator when assuming the conversion of all shares that may be diluted.

 

Net income attributable to owners of the parent company – basic earnings per  07/01 to   07/01 to   01/01 to   01/01 to 
share  09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Net income   6,125    5,993    18,254    18,387 
Minimum non-cumulative dividend on preferred shares in accordance with our by laws   (70)   (69)   (70)   (69)
Subtotal   6,055    5,924    18,184    18,318 
Retained earnings to be distributed to common equity owners in an amount per share equal to the minimum dividend payable to preferred equity owners   (73)   (74)   (73)   (74)
Subtotal   5,982    5,850    18,111    18,244 
Retained earnings to be distributed to common and preferred equity owners on a pro-rata basis                    
To common equity owners   3,053    3,015    9,241    9,396 
To preferred equity owners   2,929    2,835    8,870    8,848 
Total net income available to common equity owners   3,126    3,089    9,314    9,470 
Total net income available to preferred equity owners   2,999    2,904    8,940    8,917 
Weighted average number of shares outstanding (Note 19a)                    
Common shares   3,305,526,906    3,351,741,143    3,305,526,906    3,351,741,143 
Preferred shares   3,170,314,227    3,148,333,412    3,173,157,067    3,155,392,878 
Earnings per share - basic – R$                    
Common shares   0.95    0.92    2.82    2.83 
Preferred shares   0.95    0.92    2.82    2.83 

 

Net income attributable to owners of the parent company – diluted earnings per  07/01 to   07/01 to   01/01 to   01/01 to 
share  09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Total net income available to preferred equity owners   2,999    2,904    8,940    8,917 
Dividend on preferred shares after dilution effects   23    25    49    57 
Net income available to preferred equity owners considering preferred shares after the dilution effect   3,022    2,929    8,989    8,974 
Total net income available to ordinary equity owners   3,126    3,089    9,314    9,470 
Dividend on preferred shares after dilution effects   (23)   (25)   (49)   (57)
Net income available to ordinary equity owners considering preferred shares after the dilution effect   3,103    3,064    9,265    9,413 
Adjusted weighted average of shares (Note 19a)                    
Common shares   3,305,526,906    3,351,741,143    3,305,526,906    3,351,741,143 
Preferred shares   3,218,309,547    3,201,020,557    3,207,330,578    3,194,672,190 
Preferred shares   3,170,314,227    3,148,333,412    3,173,157,067    3,155,392,878 
Incremental shares from stock options granted under our share-based payment   47,995,320    52,687,145    34,173,511    39,279,312 
Earnings per share - diluted – R$                    
Common shares   0.94    0.91    2.80    2.81 
Preferred shares   0.94    0.91    2.80    2.81 

 

Potential anti-dilution effects of shares under our share-based payment, which were excluded from the calculation of diluted earnings per share, totaled 915,723 preferred shares at 09/30/2017. In 2018 doesn't have this effect.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201897

 

 

Note 27 – Post-employment benefits

 

The accounting policies and procedures adopted by ITAÚ UNIBANCO HOLDING for employee benefits are summarized below:

 

The total amounts recognized in Income for the Period and Stockholders’ Equity – Other comprehensive income were as follows:

 

Total amounts recognized in Income for the period

 

   Defined benefit   Defined contribution (*)   Other benefits   Total 
   07/01 to   07/01 to   01/01 to   01/01 to   07/01 to   07/01 to   01/01 to   01/01 to   07/01 to   07/01 to   01/01 to   01/01 to   07/01 to   07/01 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   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   (18)   (16)   (52)   (50)   -    -    -    -    -    -    -    -    (18)   (16)   (52)   (50)
Net interest   (1)   (4)   (6)   (11)   17    19    51    57    (7)   (5)   (18)   (16)   9    10    27    30 
Contribution   -    -    -    -    (19)   (21)   (59)   (63)   -    -    -    -    (19)   (21)   (59)   (63)
Benefits paid   -    -    -    -    -    -    -    -    6    2    14    10    6    2    14    10 
Total Amounts Recognized   (19)   (20)   (58)   (61)   (2)   (2)   (8)   (6)   (1)   (3)   (4)   (6)   (22)   (25)   (70)   (73)
(*)In the period, contributions to the defined contributions plan, including PGBL, totaled R$ 174 (R$ 230 from 01/01 to 09/30/2017), of which R$ 59 (R$ 63 from 01/01 to 09/30/2017) arising from social security funds.

 

Total amounts recognized in Stockholders’ Equity – Other comprehensive income

 

   Defined benefit   Defined contribution   Other benefits   Total 
   09/30/2018   12/31/2017   09/30/2018   12/31/2017   09/30/2018   12/31/2017   09/30/2018   12/31/2017 
At the beginning of the period   40    (70)   (1,370)   (1,322)   (77)   (48)   (1,407)   (1,440)
Effects on asset ceiling   18    97    13    (386)   -    -    31    (289)
Remeasurements   (36)   11    (11)   339    -    (28)   (47)   322 
Acquisition Citibank portfolio   (1)   (1)   -    -    -    -    (1)   (1)
Total Amounts Recognized   21    37    (1,368)   (1,369)   (77)   (76)   (1,424)   (1,408)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201898

 

 

a)Retirement plans

 

ITAÚ UNIBANCO HOLDING and certain subsidiaries sponsor defined benefit plans, including variable contribution plans, whose basic purpose of which is to provide benefits that, in general, represent a life annuity benefit, and may be converted into survivorship annuities, according to the plan's regulations. They also sponsor defined contribution plans, the benefit of which is calculated based on the accumulated balance of individual accounts at the eligibility date, according to the plan’s regulations, which does not require actuarial calculation, except as described in Note 27c.

 

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 new employees hired after these dates, they have the option to voluntarily participate in a variable contribution plan (PGBL), managed by Itaú Vida e Previdência S.A.

 

Retirement plans are managed by closed-end private pension entities (EFPC), with independent legal structures, as detailed below:

 

Entity   Benefit plan
Fundação Itau 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 Defined Benefit Retirement 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 the benefit plans they manage are regulated in conformity with the related specific legislation. The EFPC are managed by the Executive Board, Advisory Council and Fiscal Council, with some members appointed by the sponsors and others appointed as representatives of active and other participants, pursuant to the respective Entity’s by laws. The main purpose of the EFPC is to pay benefits to eligible participants, pursuant to the Plan Regulations, maintaining the plans assets invested separately and independently from ITAÚ UNIBANCO HOLDING.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 201899

 

 

c)Defined benefit plans

 

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
Turnover (3)   Exp.Itaú 2008/2010   Exp.Itaú 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. At 12/31/2017 assumptions 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 active participants linked to ITAÚ UNIBANCO HOLDING, resulting in the average of 2.4 % p.a. based on the 2008/2010 experience.
(4)Using the Projected Unit Credit method, the mathematical reserve is determined based on the current projected benefit amount multiplied by the ratio between the length of service 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.

 

II- Risk Exposure - Through its defined benefit plans, ITAÚ UNIBANCO HOLDING is exposed to a number of risks, the most significant ones are:

 

- Volatility of Assets - The actuarial liability is calculated by adopting a discount rate defined on the income related to securities issued by the Brazilian treasury (government securities). If the actual income related to plan assets is lower than expected, this may give rise to a deficit. The plans have a significant percentage of fixed-income securities pegged to the plan commitments, 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 employee benefit plans are pegged to the inflation rates, and a higher inflation will lead to higher obligations. The effect will also be partially offset because a significant portion of the plan assets is pegged to government securities restated at the inflation rate.

 

- Life Expectancy - Most of the plan obligations are to provide life benefits, and therefore an increase in life expectancy will result in increased plan liabilities.

 

III - Management of defined benefit plan assets

 

The general purpose of managing EFPCs funds is to search for a long term balance between assets and obligations to pay 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018100

 

 

The allocation of plan assets and the allocation target by type of asset are as follows:

 

   Fair Value   % Allocation
Types  09/30/2018   12/31/2017   09/30/2018   12/31/2017   Target 2018
Fixed income securities   17,383    16,851    96.02%   95.81%  53% a 100%
Variable income securities   17    19    0.09%   0.11%  0% a 20%
Structured investments   43    24    0.24%   0.14%  0% a 10%
Real estate   579    615    3.20%   3.49%  0% a 7%
Loans to participants   82    79    0.45%   0.45%  0% a 5%
Total   18,104    17,588    100.00%   100.00%   

 

The defined benefit plan assets include shares of ITAÚ UNIBANCO HOLDING, its main parent company (ITAÚSA) and of subsidiaries of the latter, with a fair value of R$ 11 (R$ 12 at 12/31/2017), and real estate rented to Group companies, with a fair value of R$ 497 (R$ 531 at 12/31/2017).

 

Fair Value

 

The plan's 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 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 report date, in compliance with the respective agreements.

 

Fund Allocation Target

 

The fund allocation target is based on Investment Policies that are currently revised and approved by the Advisory Council of each EFPC, considering a five-year period, which establishes guidelines for investing funds guaranteeing Actuarial Liability and for classifying securities.

 

IV- Net amount recognized in the balance sheet

 

Following is the calculation of the net amount recognized in the balance sheet, corresponding to the defined benefit plan:

 

   09/30/2018   12/31/2017 
1 - Net assets of the plans   18,104    17,588 
2- Actuarial liabilities   (14,813)   (14,491)
3- Surplus (1-2)   3,291    3,097 
4- Asset ceiling (*)   (3,440)   (3,217)
5- Net amount recognized in the balance sheet (3-4)   (149)   (120)
Amount recognized in assets (Note 18a)   369    345 
Amount recognized in liabilities (Note 18b)   (518)   (465)
(*)Corresponds to the excess of the present value of the available economic benefit, in conformity with paragraph 58 of IAS 19.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018101

 

 

V- Changes in the net amount recognized in the balance sheet:

 

   09/30/2018 
   Plan net   Actuarial       Asset   Recognized 
   assets   liabilities   Surplus   ceiling   amount 
Value at the beginning of the period   17,588    (14,491)   3,097    (3,217)   (120)
Cost of current service   -    (52)   (52)   -    (52)
Net interest (1)   1,275    (1,040)   235    (241)   (6)
Benefits paid   (824)   824    -    -    - 
Contributions of sponsors   51    -    51    -    51 
Contributions of participants   8    -    8    -    8 
Effects on asset ceiling   -    -    -    18    18 
Exchange Variation   6    (10)   (4)   -    (4)
Remeasurements (2) (3)   -    (44)   (44)   -    (44)
Value end of the period   18,104    (14,813)   3,291    (3,440)   (149)

 

   12/31/2017 
   Plan net   Actuarial       Asset   Recognized 
   assets   liabilities   Surplus   ceiling   amount 
Value at the beginning of the period   16,520    (13,723)   2,797    (3,008)   (211)
Cost of current service   -    (69)   (69)   -    (69)
Net interest (1)   1,639    (1,347)   292    (307)   (15)
Benefits paid   (1,141)   1,141    -    -    - 
Contributions of sponsors   71    -    71    -    71 
Contributions of participants   12    -    12    -    12 
Effects on asset ceiling   -    -    -    97    97 
Exchange Variation   2    (6)   (4)   -    (4)
Remeasurements (2) (3)   485    (487)   (2)   1    (1)
Value end of the period   17,588    (14,491)   3,097    (3,217)   (120)

(1)Corresponds to the amount calculated on 01/01/2018 based on the beginning amount (Net Assets, Actuarial Liabilities and Asset ceiling), taking into account the estimated amount of payments/ receipts of benefits / contributions, multiplied by the discount rate of 9.98% p.a. (at 01/01/2017 used by the discount rate of 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 (R$ 2,124 at 12/31/2017).

 

During the period, the contributions made totaled R$ 51 (R$ 50 from 01/01 to 09/30/2017). The contribution rate increases based on the beneficiary’s salary.

 

In 2018, contribution to the retirement plans sponsored by ITAÚ UNIBANCO HOLDING is expected to amount to R$ 56.

 

The estimate for payment of benefits for the next 10 years is as follows:

 

Period  Payment 
2018   1,103 
2019   1,126 
2020   1,157 
2021   1,190 
2022   1,220 
2023 to 2027   6,563 

 

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 – Other Comprehensive Income of the sponsor (before taxes) would amount to:

 

  Effects on actuarial liabilities   Effect which would be 
Change in Assumption  Value   Percentage of   Value 
- Decrease by 0.5%   740    5.11%   (269)
- Increase by 0.5%   (677)   (4.67)%   153 
(*)Net of effects of asset ceiling

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018102

 

 

d)Defined contribution plans

 

The defined contribution plans have assets relating to sponsors’ contributions not yet included in the participant’s account balance due to loss of eligibility to a plan benefit, as well as resources from the migration from the defined benefit plans. The fund will be used for future contributions to the individual participants' accounts, according to the rules of the respective benefit plan regulation.

 

I - Change in the net amount recognized in the Balance sheet:

 

   09/30/2018   12/31/2017 
   Pension plan       Recognized   Pension plan       Recognized 
   fund   Asset ceiling   amount   fund   Asset ceiling   amount 
Value beginning of the period   1,634    (912)   722    1,287    (491)   796 
Net interest   118    (67)   51    126    (50)   76 
Contribution   (59)   -    (59)   (91)   -    (91)
Receivables – allocation of funds (*)   -    -    -   (12)   -   (12)
Effects on asset ceiling   -    13    13    (15)   (371)   (386)
Remeasurements   (11)   -    (11)   339    -    339 
Value end of the period (Note 18a)   1,682    (966)   716    1,634    (912)   722 

(*)Refers to the allocation of the surplus of Plano Itaubanco CD’s social security fund.

 

e)Other post-employment benefits

 

ITAÚ UNIBANCO HOLDING and its subsidiaries do not offer other post-employment benefits, except in those cases arising from obligations under acquisition agreements signed by ITAÚ UNIBANCO HOLDING, as well as in relation to the benefits granted due to a judicial sentence, in accordance with the terms and conditions established, in which health plans are totally or partially sponsored for specific groups of former workers and beneficiaries.

 

Based on the report prepared by an independent actuary, the changes in obligations for these other projected benefits and the amounts recognized in the balance sheet, under liabilities, of ITAÚ UNIBANCO HOLDING are as follows:

 

I- Change in the net amount recognized in the balance sheet:

 

   09/30/2018   12/31/2017 
At the beginning of the period   (257)   (221)
Interest cost   (18)   (22)
Benefits paid   14    14 
Remeasurements   -    (28)
At the end of the period (Note 18b)   (261)   (257)

 

The estimate for payment of benefits for the next 10 years is as follows:

 

Period  Payment estimate 
2018   15 
2019   16 
2020   17 
2021   18 
2022   19 
2023 to 2027   115 

 

II- Assumptions and sensitivity - medical care cost

 

For calculation of projected benefits obligations in addition to the assumptions used for the defined benefit plans (Note 27c I), an 8.16% p.a. increase in medical costs assumption is assumed.

 

Assumptions about medical care cost trends have a significant impact on the amounts recognized in income. A change of one percentage point in the medical care cost rates would have the following effects:

 

   Recognition  1% increase   1% decrease 
Service cost and interest cost  Income   3    (3)
Present value of obligation  Other comprehensive income   32    (26)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018103

 

 

Note 28 – Insurance contracts

 

a)Insurance contracts

 

ITAÚ UNIBANCO HOLDING, through its subsidiaries, offers to the market insurance and private pension products, with the purpose of assuming risks and restoring the economic balance of the assets of the policyholder if damaged. Products are offered through insurance brokers (third parties operating in the market and its own brokers), Itaú Unibanco branches and electronic channels, according to their characteristics and regulatory requirements.

 

b)Main products

 

I - Insurance

 

The contract entered into between the parties aims at guaranteeing the protection of the client's assets. Upon payment of a premium, the policyholder is protected through previously-agreed replacement or indemnification clauses for damages. ITAÚ UNIBANCO HOLDING insurance companies then recognize technical reserves administered by themselves, through specialized areas within the conglomerate, with the objective of indemnifying the policyholder's loss in the event of claims of insured risks.

 

The insurance risks sold by insurance companies of ITAÚ UNIBANCO HOLDING are divided into property and casualty, that covers losses, damages or liabilities for assets or persons, and life insurance that includes coverage for death and personal accidents.

 

   Loss ratio   Sales ratio 
   %   % 
   01/01 to   01/01 to   01/01 to   01/01 to 
Main insurance lines  09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Group accident insurance   8.2    7.6    34.1    38.9 
Individual accident   18.7    24.0    13.2    10.5 
Commercial multiple peril   41.4    35.2    21.1    21.1 
Internal credit   149.0    133.9    0.7    1.0 
Mandatory insurance for personal injury caused by motor vehicles (DPVAT)   -    85.3    -    1.2 
Serious or terminal diseases   21.0    20.7    14.1    10.7 
Extended warranty - assets   14.9    16.4    62.1    62.1 
Credit Life   19.1    17.6    19.7    18.4 
Income from Uncertain Events   20.1    18.0    19.4    15.5 
Multiple risks   51.8    25.4    48.4    59.4 
Home insurance in market policies – Credit Life   14.0    10.1    20.4    20.3 
Group life   33.9    34.7    13.7    11.9 

 

II - Private pension

 

Developed as a solution to ensure the maintenance of the quality of life of participants, as a supplement to the government plans, through long term investments, private pension products are divided into three major groups:

 

·PGBL - Plan Generator of Benefits: The main objective of this plan is the accumulation of financial resources, but it can be purchased with additional risk coverage. Recommended for clients that file the full version of income tax return, because they can deduct contributions paid for tax purposes up to 12% of the annual taxable gross income.

 

·VGBL - Redeemable Life Insurance: This is an insurance structured as a pension plan. Its taxation differs from the PGBL; in this case, the tax basis is the earned income.

 

·FGB - Fund Generator of Benefits: This is a pension plan with minimum income guarantee, and possibility of receiving earnings from asset performance. Once recognized the distribution of earnings at a certain percentage, as established by the FGB policy, it is not at management's discretion, but instead represents an obligation to ITAÚ UNIBANCO HOLDING. Although there are plans still in existence, they are no longer sold.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018104

 

 

III – Income related to insurance and private pension

 

The revenue from the main insurance and private pension products is as follows:

 

   Premiums and contributions issued   Reinsurance   Retained premiums and contributions 
   07/01 to   07/01 to   01/01 to   01/01 to   07/01 to   07/01 to   01/01 to   01/01 to   07/01 to   07/01 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   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Group accident insurance   198    167    507    503    -    -    (1)   (1)   198    167    506    502 
Individual accident   61    86    223    214    (1)   -    5    (1)   60    86    228    213 
Commercial multiple peril   15    16    41    42    -    -    -    -    15    16    41    42 
Internal Credit   23    17    58    46    -    -    -    -    23    17    58    46 
Mandatory insurance for personal injury caused by motor vehicles (DPVAT)   -    5    -    21    -    -    -    -    -    5    -    21 
Serious or terminal diseases   51    46    145    134    -    -    -    -    51    46    145    134 
Disability Savings Pension   71    80    223    242    (1)   (1)   (3)   (3)   70    79    220    239 
PGBL   431    438    1,353    1,313    -    -    -    -    431    438    1,353    1,313 
Credit Life   213    155    643    440    -    -    (2)   (2)   213    155    641    438 
Income from Uncertain Events   65    52    175    129    -    -    -    -    65    52    175    129 
Multiple risks   56    35    147    116    -    -    -    -    56    35    147    116 
Home Insurance in Market Policies – Credit Life   73    70    215    208    -    (1)   (6)   (5)   73    69    209    203 
Traditional   29    30    80    87    -    -    -    -    29    30    80    87 
VGBL   4,027    5,322    12,929    15,502    -    -    -    -    4,027    5,322    12,929    15,502 
Group life   252    241    723    802    (3)   (1)   2    (10)   249    240    725    792 
Other lines   132    121    385    342    (2)   -    (7)   (7)   130    121    378    335 
Total   5,697    6,881    17,847    20,141    (7)   (3)   (12)   (29)   5,690    6,878    17,835    20,112 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018105

 

 

c)Technical reserves for insurance and private pension

 

The technical provisions of insurance and pension plan are recognized according to the technical notes approved by SUSEP and criteria established by current legislation.

 

I - Insurance and private pension:

 

·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 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 (PPNG-RVNE).

 

·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.

 

·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 – it is recognized to ensure the amounts intended for distribution of financial surplus, if the event is stated in the agreement. Corresponds to the financial income exceeding the minimum return guaranteed in the product.

 

·Other technical provisions – it is recognized when insufficiency of premiums or contributions are identified related to payments of benefits and indemnities.

 

·Provision for redemptions and other amounts to regularize – it comprises the amounts related to redemptions to regularize, returns of premiums or funds, portability requested but, for any reason, not yet transferred to the insurance company or open private pension entity beneficiary, and premiums received but not quoted.

 

·Provision for related expenses - It is recognized for the coverage of expected amounts related to expenses with benefits and indemnities, due to events incurred and to be incurred.

 

II - Change in reserves for insurance and private pension

 

The details about the changes in balances of reserves for insurance and private pension operations are as follows:

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018106

 

 

II.I - Change in technical provisions

 

   09/30/2018   12/31/2017 
   Property,
individuals
and life
insurance		   Private
pension		   Life with
survivor
benefits		   Total   Property,
individuals
and life
insurance		   Private
 pension		   Life with
survivor
benefits		   Total 
Opening balance   3,464    43,888    133,880    181,232    3,926    37,679    112,471    154,076 
(+) Additions arising from premiums / contribution   3,256    1,657    12,929    17,842    4,059    2,536    20,318    26,913 
(-) Deferral of risk   (2,868)   (225)   -    (3,093)   (4,225)   (323)   -    (4,548)
(-) Payment of claims / benefits   (940)   (365)   (23)   (1,328)   (1,228)   (402)   (70)   (1,700)
(+) Reported claims   1,015    -    -    1,015    1,291    -    -    1,291 
(-) Redemptions   (1)   (1,507)   (9,969)   (11,477)   (2)   (1,687)   (10,847)   (12,536)
(+/-) Net portability   -    1,158    2,231    3,389    -    2,683    753    3,436 
(+) Adjustment of reserves and financial surplus   9    1,998    4,954    6,961    16    1,717    6,037    7,770 
(+) Corporate Reorganization   -    -    -    -    (282)   -    -    (282)
(+/-) Other (recognition / reversal)   (218)   167    (34)   (85)   (91)   1,685    5,218    6,812 
Reserves for insurance and private pension   3,717    46,771    143,968    194,456    3,464    43,888    133,880    181,232 

 

II.II - Technical provisions balances

 

   Insurance   Private pension   Total 
   09/30/2018   12/31/2017   09/30/2018   12/31/2017   09/30/2018   12/31/2017 
Unearned premiums   2,085    1,883    14    15    2,099    1,898 
Mathematical reserve for benefits to be granted and benefits granted   205    173    188,881    175,992    189,086    176,165 
Redemptions and Other Unsettled Amounts   12    11    280    264    292    275 
Financial surplus   2    2    590    604    592    606 
Unsettled claims (1)   548    560    46    34    594    594 
IBNR   349    401    26    27    375    428 
Administrative and Related Expenses   28    28    102    95    130    123 
Other   488    406    800    737    1,288    1,143 
Total (2)   3,717    3,464    190,739    177,768    194,456    181,232 

(1)The provision for unsettled claims is detailed in Note 28e.
(2)This table covers the amendments established by Susep Circular No. 517, of 07/30/2015, also for comparison purposes.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018107

 

 

d)Deferred selling expenses

 

Deferred acquisition costs of insurance are direct and indirect costs incurred to sell, underwrite and originate a new insurance contract.

 

Direct costs are basically commissions paid for brokerage services, agency and prospecting efforts and are deferred for amortization in proportion to the recognition of revenue from earned premiums, that is, over the coverage period, for the term of effectiveness of contracts, according to the calculation rules in force.

 

Balances are recorded under gross reinsurance assets and changes are shown in the table below:

 

Balance at 01/01/2018   253 
Increase   734 
Amortization   (608)
Balance at 09/30/2018   379 
Balance to be amortized in up to 12 months   314 
Balance to be amortized after 12 months   65 
      
Balance at 01/01/2017   429 
Increase   772 
Amortization   (948)
Balance at 12/31/2017   253 
Balance to be amortized in up to 12 months   209 
Balance to be amortized after 12 months   44 

 

The amounts of deferred selling expenses from reinsurance are stated in Note 28I.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018108

 

 

e)Table of loss development

 

Changes in the amount of obligations of the ITAÚ UNIBANCO HOLDING may occur at the end of each annual reporting period. The table below shows the development by the claims incurred method. The first part of the table shows how the final loss estimate changes through time. The second part of the table reconciles the amounts pending payment and the liability disclosed in the balance sheet.

 

The amounts shown in the tables express the position at 06/30/2018, since the actuarial calculations are made semi-annually:

 

I – Gross of reinsurance

 

Reserve for unsettled claims (*)   583 
(-) IBNER (claims incurred but not sufficiently reported)   177 
(-) Retrocession and other estimates   (28)
Liability claims presented in the development table (Ia + Ib)   434 

(*) Provision for unsettled claims stated in Note 28c II.II of 12/31/2017, gross of reinsurance.

 

Ia - Administratives claims - gross of reinsurance

 

Occurrence date  06/30/2014   06/30/2015   06/30/2016   06/30/2017   06/30/2018   Total 
At the end of reporting period   913    997    1,061    861    917      
After 1 year   922    1,028    1,075                
After 2 years   931    1,036                     
After 3 years   934                          
Current estimate   934    1,036    1,075    861    917      
Accumulated payments through base date   929    1,026    1,048    718    738    4,633 
Liabilities recognized in the balance sheet   5    10    27    143    180    240 
Liabilities in relation to prior years                            19 
Total administratives claims included in balance sheet                            259 

 

Ib - Judicial claims - gross of reinsurance

 

Occurrence date  06/30/2014   06/30/2015   06/30/2016   06/30/2017   06/30/2018   Total 
At the end of reporting period   36    32    38    38    14      
After 1 year   46    42    42                
After 2 years   54    45                     
After 3 years   57                          
Current estimate   57    45    42    38    14      
Accumulated payments through base date   43    32    31    30    7    163 
Liabilities recognized in the balance sheet   14    13    11    9    7    57 
Liabilities in relation to prior years                            118 
Total judicial claims included in balance sheet                            175 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018109

 

 

II - Net of reinsurance

 

Reserve for unsettled claims (1)   583 
(-) IBNER   177 
(-) Reinsurance (2)   22 
(-) Retrocession and other estimates   (28)
Liability claims presented in the development table (IIa + IIb)   412 

(1) Provision refers to provision for unsettled claims stated in Note 28c II.II of 06/30/2018.

(2) Reinsurance operations stated in Note 28l III of 06/30/2018.

 

IIa - Administratives claims - net of reinsurance

 

Occurrence date  06/30/2014   06/30/2015   06/30/2016   06/30/2017   06/30/2018   Total 
At the end of reporting period   896    972    1,054    848    906      
After 1 year   905    993    1,068                
After 2 years   911    1,001                     
After 3 years   913                          
Current estimate   913    1,001    1,068    848    906      
Accumulated payments through base date   908    991    1,040    706    727    4,536 
Liabilities recognized in the balance sheet   5    10    27    142    179    239 
Liabilities in relation to prior years                            10 
Total administratives claims included in balance sheet                            249 

 

IIb - Judicial claims - net of reinsurance

 

Occurrence date  06/30/2014   06/30/2015   06/30/2016   06/30/2017   06/30/2018   Total 
At the end of reporting period   36    32    38    35    14      
After 1 year   46    41    42                
After 2 years   54    45                     
After 3 years   57                          
Current estimate   57    45    42    35    14      
Accumulated payments through base date   43    32    31    27    7    159 
Liabilities recognized in the balance sheet   14    12    11    9    7    57 
Liabilities in relation to prior years                            106 
Total judicial claims included in balance sheet                            163 

 

The breakdown of the table development of claims between administrative and legal evidences the reallocation of claims up to a certain base date and that become legal ones afterwards, which may give the wrong impression of need for adjusting the provisions in each breakdown.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018110

 

 

f)Liability adequacy test

 

As established in IFRS 4 – “Insurance contracts”, an insurance company must carry out the Liability Adequacy Test, comparing the amount recognized for its technical reserves with the current estimate of cash flow of its future obligations. The estimate should consider all cash flows related to the business, which is the minimum requirement for carrying out the adequacy test.

 

The Liability Adequacy Test did not indicate insufficiency in the first half of 2018 nor in the periods ended 2017 and 2016.

 

The assumptions used in the test are periodically reviewed and are based on the best practices and the analysis of subsidiaries’ experience, therefore representing the best estimates for cash flow projections.

 

Methodology and test grouping

 

The methodology for testing all products is based on the projection of cash flows. Specifically for insurance products, cash flows were projected using the method known as run-off triangle of quarterly frequency. For social security products, cash flows for the deferral and assignment phases are tested on a separate basis.

 

The risk grouping criterion considers groups subject to similar risks that are jointly managed as a single portfolio.

 

Biometric tables

 

Biometric tables are instruments to measure the biometric risk represented by the probability of death, survival or disability of a participant.

 

For death and survival estimates, the Brazilian Market Insurer Experience (BR-EMS) tables in effect are used, adjusted according to life expectancy development of Scale G, and the Álvaro Vindas table is adopted to estimate benefit requests for disability.

 

Risk-free interest rate

 

The relevant risk-free forward interest-rate structure is an indicator of the pure time value of money used to price the set of projected cash flows.

 

The relevant structure of risk-free interest rate was obtained from the curve of securities deemed to be credit risk free, available in the Brazilian financial market and determined pursuant to an internal policy of ITAÚ UNIBANCO HOLDING, considering the addition of spread, which took into account the impact of the market result of Financial assets at amortized cost of the guarantee assets portfolio.

 

Income conversion rate

 

The income conversion rate represents the expected conversion of balances accumulated by participants in retirement benefits. The decision of conversion into income by participants is influenced by behavioral, economic and tax factors.

 

Other assumptions

 

Related expenses, cancellations and partial redemptions, future increases and contributions, among others, are assumptions that affect the estimate of projected cash flows since they represent expenses and income arising from insurance agreements assumed.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018111

 

 

g)Insurance risk – effect of changes on actuarial assumptions

 

Property insurance is a short-lived insurance, and the main actuarial assumptions involved in the management and pricing of the associated risks are claims frequency and severity. Volatility above the expected number of claims and/or amount of claim indemnities may result in unexpected losses.

 

Life insurance and pension plans are, in general, medium or long-lived products and the main risks involved in the business may be classified as biometric risk, financial risk and behavioral risk.

 

Biometric risk relates to: i) more than expected increase in life expectancies for products with survivorship coverage (mostly pension plans); ii) more than expected decrease in mortality rates for products with survivorship coverage (mostly life insurance).

 

Products offering financial guarantee predetermined under contract involve financial risk inherent in the underwriting risk, with such risk being considered insurance risk.

 

Behavioral risk relates to a more than expected increase in the rates of conversion into annuity income, resulting in increased payments of retirement benefits.

 

The estimated actuarial assumptions are based on the historical evaluation of ITAÚ UNIBANCO HOLDING, on benchmarks and the experience of the actuaries.

 

To measure the effects of changes in the key actuarial assumptions, sensitivity tests were conducted in the amounts of current estimates of future liability cash flows. The sensitivity analysis considers a vision of the impacts caused by changes in assumptions, which could affect the income for the period and stockholders’ equity at the balance sheet date. This type of analysis is usually conducted under the ceteris paribus condition, in which the sensitivity of a system is measured when one variable of interest is changed and all the others remain unchanged. The results obtained are shown in the table below:

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018112

 

 

The sensitivity analysis considers a vision of the impacts caused by changes in assumptions, which could affect the income for the period and stockholders’equity at the balance sheet date. Results were as follows:

 

   Impact in Results and Stockholders’ Equity (1) 
   30/09/2018 (2)    12/31/2017 
   Supplementary   Insurance   Supplementary   Insurance 
   Retirement Plans and   Gross of   Net of   Retirement Plans and   Gross of   Net of 
Sensitivity analysis  Life with Living Benefits   reinsurance   reinsurance   Life with Living Benefits   reinsurance   reinsurance 
5% increase in mortality rates   21    2    2    24    -    - 
5% decrease in mortality rates   (22)   (2)   (2)   (25)   (1)   (1)
                               
0.1% increase in risk-free interest rates   29    7    7    26    5    5 
0.1% decrease in risk-free interest rates   (29)   (7)   (7)   (27)   (5)   (5)
                               
5% increase in conversion in income rates   (11)   -    -    (13)   -    - 
5% decrease in conversion in income rates   11    -    -    13    -    - 
                               
5% increase in claims   -    (37)   (38)   -    (37)   (36)
5% decrease in claims   -    38    39    -    37    36 

(1) Amounts net of tax effects.

(2) The amounts shown in the tables express the position at 06/30/2018, since the actuarial calculations are made semi-annually.

 

h)Risks of insurance and private pension

 

ITAÚ UNIBANCO HOLDING has specific committees to define the management of funds from the technical reserves for insurance and private pension, issue guidelines for managing these funds with the objective of achieving long term return, and define evaluation models, risk limits and strategies on allocation of funds to defined financial assets. Such committees are comprised not only of executives and those directly responsible for the business management process, but also for an equal number of professionals that head up or coordinate the commercial and financial areas.

 

At September 30, 2017, the DPVAT production results from the participation that the insurance companies of ITAÚ UNIBANCO HOLDING have in the Seguradora Líder dos Consórcios de DPVAT.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018113

 

 

There is no product concentration in relation to insurance premiums, reducing the concentration risk of products and distribution channels.

 

   07/01 to 09/30/2018   07/01 to 09/30/2017   01/01 to 09/30/2018   01/01 to 09/30/2017 
   Insurance   Retained   Retention   Insurance   Retained   Retention   Insurance   Retained   Retention   Insurance   Retained   Retention 
   premiums   premium   (%)   premiums   premium   (%)   premiums   premium   (%)   premiums   premium   (%) 
Property and casualty                                                            
Mandatory personal injury caused by motor vehicle (DPVAT)   -    -    0.0    5    5    100.0    -    -    0.0    21    21    100.0 
Extended warranty   -    -    0.0    -    -    0.0    -    -    0.0    -    -    0.0 
                                                             
Individuals                                                            
Group accident insurance   198    109    100.0    167    167    99.4    507    506    99.8    503    502    99.8 
Individual accident   61    60    98.4    86    86    98.6    223    228    102.2    214    213    99.7 
Group life   252    249    98.8    241    240    97.6    723    725    100.3    802    792    98.8 

 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018114

 

 

i)Insurance, pension plan and capitalization management structure

 

The products that make up the portfolios of ITAÚ UNIBANCO HOLDING’s insurance companies are related to the life insurance and elementary, pension plan and capitalization lines. The main risks inherent in these products are described below and their definitions are presented in their respective chapters.

 

·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 in insurance operations.

 

j)Duties and responsibilities

 

In line with good national and international practices, ITAÚ UNIBANCO HOLDING has a risk management structure that ensures that the risks arising from insurance, pension plan and capitalization products are properly reported to the proper bodies.

 

The management process of insurance, pension plan and capitalization risks is independent and focused on the specifics of each risk.

 

Finally, ITAÚ UNIBANCO HOLDING is to ensure that assets backing long-term products, with guaranteed minimum returns, are managed according to the characteristics of the liabilities aiming at actuarial balance and long-term solvency.

 

k)Market, credit and liquidity risk

 

I)Market risk

 

Market risk is analyzed, in relation to insurance operations, based on the following metrics and sensitivity and loss control measures: Value at Risk (VaR), Losses in Stress Scenarios (Stress Test), Sensitivity (DV01- Delta Variation) and Concentration. For a detailed description of metrics, see Note 33 – Market risk. In the table, the sensitivity analysis (DV01 – Delta Variation) is presented in relation to insurance operations that demonstrate the impact on the cash flows market value when submitted to a 1 annual basis point increase in the current interest rates or index rate and 1 percentage point in the share price and currency.

 

   09/30/2018   12/31/2017 
Class  Account
balance		   DV01   Account
balance		   DV01 
Government securities                    
NTN-C   5,337    (2.86)   4,936    (2.87)
NTN-B   5,766    (7.09)   5,343    (6.78)
LTN             279    (0.09)
                     
Private securities                    
Indexed to IPCA   330    (0.07)   336    (0.10)
Indexed to PRE   10    -    31    - 
                     
Floating assets   4,937    -    5,132      
                     
Under agreements to resell   5,946    -    6,856      

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018115

 

 

II)Liquidity Risk

 

Liquidity risk is the risk that ITAÚ UNIBANCO HOLDING may have insufficient net funds available to honor its current obligations at a given moment. The liquidity risk is managed, for insurance operation, continuously based on the monitoring of payment flows related to its liabilities vis a vis the inflows generated by its operations and financial assets portfolio.

 

Financial assets are managed in order to optimize the risk-return ratio of investments, considering, on a careful basis, the characteristics of their liabilities. The risk integrated control considers the concentration limits by issuer and credit risk, sensitivities and market risk limits and control over asset liquidity risk. Thus, investments are concentrated in government and private securities with good credit quality in active and liquid markets, keeping a considerable amount invested in short-term assets, available on demand, to cover regular needs and any liquidity contingencies. Additionally, ITAÚ UNIBANCO HOLDING constantly monitors the solvency conditions of its insurance operations.

 

      09/30/2018   12/31/2017 
      Liabilities   Liabilities   Assets   Liabilities   Liabilities   Assets 
Liabilities  Assets  amounts (1)   DU (2)   DU (2)   amounts (1)   DU (2)   DU (2) 
Insurance operations  Backing asset                              
Unearned premiums  LFT, repurchase agreements, NTN-B, CDB, LF and debentures   2,085    55.7    13.0    1,882    24.7    12.0 
IBNR, PDR e PSL  LFT, repurchase agreements, NTN-B, CDB, LF and debentures   925    48.0    17.8    985    20.4    18.3 
Other provisions  LFT, repurchase agreements, NTN-B, CDB, LF and debentures   488    65.6    27.4    565    70.6    26.2 
Subtotal  Subtotal   3,498              3,432           
Pension plan, VGBL and individual life operations                                 
Related expenses  LFT, repurchase agreements, NTN-B, CDB, LF and debentures   102    119.7    74.9    95    116.8    78.9 
Unearned premiums  LFT, repurchase agreements, NTN-B, CDB and debentures   14    -    9.1    16    -    9.7 
Unsettled claims  LFT, repurchase agreements, NTN-B, CDB and debentures   46    -    9.3    37    -    9.8 
IBNR  LFT, repurchase agreements, NTN-B, CDB and debentures   26    15.8    9.1    28    17.0    9.7 
Redemptions and Other Unsettled Amounts  LFT, repurchase agreements, NTN-B, CDB and debentures   292    -    9.2    275    -    9.8 
Mathematical reserve for benefits granted  LFT, repurchase agreements, LTN, NTN-B, NTN-C, NTN-F, CDB, LF and debentures   2,818    111.8    70.1    2,404    116.8    79.1 
Mathematical reserve for benefits to be granted – PGBL/ VGBL  LFT, repurchase agreements, LTN, NTN-B, NTN-C, NTN-F, CDB, LF and debentures (3)   181,462    190.7    35.1    169,149    197.2    38.9 
Mathematical reserve for benefits to be granted – traditional  LFT, repurchase agreements, NTN-B, NTN-C, debentures   4,806    199.5    86.5    4,454    -    95.1 
Other provisions  LFT, repurchase agreements, NTN-B, NTN-C, CDB, LF and debentures   800    199.5    86.5    737    116.8    95.1 
Financial surplus  LFT, repurchase agreements, NTN-B, NTN-C, CDB, LF and debentures   592    199.2    86.3    605    116.8    95.0 
Subtotal  Subtotal   190,958              177,800           
Total technical reserves  Total backing assets   194,456              181,232           

(1) Gross amounts of Credit Rights, Escrow Deposits and Reinsurance.

(2) DU = Duration in months.

(3) Excluding PGBL / VGBL reserves allocated in variable income.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018116

 

 

 

III)Credit Risk

 

Reinsurers – Breakdown

 

We present below the division of risks granted by the ITAÚ UNIBANCO HOLDING’s insurance companies to reinsurance companies:

 

-Insurance Operations: reinsurance premiums operations are basically represented by: IRB Brasil Resseguros with 77.09% (45.07% at 12/31/2017) and Munich Re do Brasil with 5.33% (53.80% at 12/31/2017).

 

-Social Security Operations: social security operations related to reinsurance premiums are entirely represented by Munich Re do Brasil with 70% (70% at 12/31/2017) and General Reinsurance AG with 30% (30% at 12/31/2017).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018117

 

 

IV)Risk level of financial assets

 

The table below shows insurance financial assets, individually evaluated, classified by rating:

 

   09/30/2018 
Internal rating (*)  Financial instruments designated at fair
value through profit or loss		   Financial assets held for trading
and designated at fair value
through profit or loss		   Derivatives
assets		   Financial Assets at
Amortized Cost		   Total 
Lower risk   8,729    174,307    246    29,322    212,604 
Satisfactory   -    1    -    -    1 
Higher Risk   -    40    -    -    40 
Total   8,729    174,348    246    29,322    212,645 
%   4.1    82.0    0.1    13.8    100.0 

(*) Internal risk level ratings, with due associated probability of default, are detailed in Note 34.

 

   12/31/2017 
Internal rating (*)  Financial instruments designated at fair
value through profit or loss		   Financial assets held for trading
and designated at fair value
through profit or loss		   Derivatives
assets		   Financial Assets at
Amortized Cost		   Total 
Lower risk   7,558    167,812    194    27,719    203,283 
Satisfactory   -    4    -    -    4 
Higher Risk   -    25    -    -    25 
Total   7,558    167,841    194    27,719    203,312 
%   3.7    82.6    0.1    13.6    100.0 

 (*) Internal risk level ratings, with due associated probability of default, are detailed in Note 34.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018118

 

 

l)Reinsurance

 

Expenses and revenues from reinsurance premiums ceded are recognized in the period when they occur, according to the accrual basis, with no offset of assets and liabilities related to reinsurance except in the event there is a contractual provision for the offset of accounts between the parties. Analyses of reinsurance required are made to meet the current needs of ITAÚ UNIBANCO HOLDING, maintaining the necessary flexibility to comply with changes in management strategy in response to the various scenarios to which it may exposed.

 

Reinsurance assets

 

Reinsurance assets are valued according to consistent basis of risk assignment contracts, and in the event of losses effectively paid, as from December 2015, they are revalued after 180 days have elapsed in relation to the possibility of non-recovery. For previous periods, revaluation term is 365 days. This amendment was for compliance with the SUSEP Circular in force. In case of doubt, these assets are reduced based on the provision recognized for credit risk associated to reinsurance.

 

Reinsurance transferred

 

ITAÚ UNIBANCO HOLDING transfers, in the normal course of its businesses, reinsurance premiums to cover losses on underwriting risks to its policy holders and is in compliance with the operational limits established by the regulating authority. In addition to proportional contracts, non-proportional contracts are also entered into in order to transfer a portion of the responsibility to the reinsurance company for losses that exceed a certain level of losses in the portfolio.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018119

 

 

I- Changes in balances of transactions with reinsurance companies

 

   Credits   Debits 
   09/30/2018   12/31/2017   09/30/2018   12/31/2017 
Opening balance   27    46    49    74 
Issued contracts   -    -    4    30 
Recoverable claims   10    -    -    - 
Prepayments / payments to reinsurer   (2)   (10)   (19)   (55)
Other increase / reversal   (25)   (9)   (19)   - 
Closing balance   10    27    15    49 

 

II – Balances of technical reserves with reinsurance assets

 

   09/30/2018   12/31/2017 
Reinsurance claims   38    57 
Reinsurance premiums   7    10 
Closing balance   45    67 

 

III – Changes in balances of technical reserves for reinsurance claims

 

   09/30/2018   12/31/2017 
Opening balance   57    52 
Reported claims   8    21 
Paid claims   (21)   (22)
Other increase / reversal   (8)   2 
Monetary adjustment and interest of claims   2    4 
Closing balance (*)   38    57 

(*) Includes Reserve for unsettled claims, IBNER (Reserve for claims not sufficiently warned), IBNR (Reserve for claims incurred but not reported), not covered by the table of loss development net of reinsurance Note 28 eII.

 

IV – Changes in balances of technical reserves for reinsurance premiums

  

   09/30/2018   12/31/2017 
Opening balance   10    15 
Receipts   15    8 
Payments   (18)   (13)
Closing balance   7    10 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018120

 

 

m)Regulatory authorities

 

Insurance and private pension operations are regulated by the National Council of Private Insurance (CNSP) and the Superintendence of Private Insurance (SUSEP). These authorities are responsible for regulating the market and consequently for assisting in the mitigation of risks inherent in the business.

 

The CNSP is the regulatory authority of insurance activities in Brazil, created by Decree-Law N° 73, of November 21, 1966. The main attribution of CNSP, at the time of its creation, was to set out the guidelines and rules of government policy on private insurance segments, and with the enactment of Law N° 6,435, of July 15, 1977, its attributions included private pension of public companies.

 

The Superintendence of Private Insurance (SUSEP) is the authority responsible for controlling and overseeing the insurance, and reinsurance markets. An agency of the Ministry of Finance, it was created by the Decree-Law N° 73, of November 21, 1966, which also created the National System of Private Insurance, comprising the National Council of Private Insurance (CNSP), IRB Brasil Resseguros S.A. – IRB Brasil Re, the companies authorized to have plans and the open-ended private pension companies.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018121

 

 

Note 29 – Fair value of financial instruments

 

In cases where market prices are not available, fair values are based on estimates using discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions adopted, including the discount rate and estimate of future cash flows. The estimated fair value achieved through these techniques cannot be substantiated by comparison with independent markets and, in many cases, it cannot be realized in the immediate settlement of the instrument.

 

The following table summarizes the carrying and estimated fair values for financial instruments:

 

   09/30/2018   12/31/2017 
   Carrying value   Estimated
fair value		   Carrying value   Estimated fair
value		 
Cash deposits on demand   29,467    29,467    18,749    18,749 
Financial assets   1,396,078    1,401,516    1,330,251    1,337,921 
Central Bank compulsory deposits   85,957    85,957    98,837    98,837 
At Amortized Cost   1,001,990    1,007,428    905,729    913,399 
Interbank deposits   28,653    28,666    29,048    29,112 
Securities purchased under agreements to resell   293,994    293,994    244,707    244,707 
Securities   111,091    111,214    111,424    112,656 
Loan operations and lease operations portfolio (2)   534,372    539,674    497,719    504,093 
(-) Provision for Expected Loss   68,912    68,912    59,568    59,568 
Other financial assets   (35,032)   (35,032)   (36,737)   (36,737)
At Fair Value Through Other Comprehensive Income   48,793    48,793    52,149    52,149 
Securities (1)   48,793    48,793    52,149    52,149 
At Fair Value Through Profit or Loss   259,338    259,338    273,536    273,536 
Securities (1)   230,671    230,671    250,693    250,693 
Derivatives (1)   28,667    28,667    22,843    22,843 
Financial liabilities   1,125,214    1,125,064    1,056,717    1,054,981 
At Amortized Cost   1,088,737    1,088,587    1,024,584    1,022,848 
Deposits   454,552    454,536    402,938    402,911 
Securities sold under repurchase agreements   302,781    302,781    312,634    312,634 
Interbank market debt   142,619    142,537    129,616    129,286 
Institutional market debt   100,912    100,860    98,482    97,103 
Liabilities for capitalization plans   3,382    3,382    3,301    3,301 
Other financial liabilities   84,491    84,491    77,613    77,613 
At Fair Value Through Profit or Loss   32,093    32,093    27,211    27,211 
Derivatives (1)   31,886    31,886    26,746    26,746 
Others (1)   207    207    465    465 
Provision for Expected Loss   4,384    4,384    4,922    4,922 
Loan Commitments   3,060    3,060    3,015    3,015 
Financial Guarantees   1,324    1,324    1,907    1,907 

(1) These assets and liabilities are recorded in the balance sheet at their fair value.

(2) In the composition of balance there are operations designated at fair value through profit or loss, in the amount of R$ 660 (R$ 102 at 12/31/2017).

 

Financial instruments not included in the Balance Sheet (Note 34) are represented by Standby letters of credit and financial guarantees provided, which amount to R$ 81,245 (R$ 79,703 at 12/31/2017) with an estimated fair value of R$ 1,157 (R$ 935 at 12/31/2017).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018122

 

 

The methods and assumptions adopted to estimate the fair value are defined below:

 

a)Cash and deposits on demand, Central Bank compulsory deposits, Securities purchased under agreements to resell, Securities sold under repurchase agreements and liabilities for capitalization plans – The carrying amounts for these instruments approximate their fair values.

 

b)Interbank deposits, deposits, Interbank market debt and Institutional market debt – ITAÚ UNIBANCO HOLDING estimates the fair values by discounting the estimated cash flows and adopting the market interest rates.

 

c)Financial assets held for trading, including Derivatives (assets and liabilities), Fair value through other comprehensive income, Financial Assets at Amortized Cost and Financial liabilities held for trading – Under normal conditions, market prices are the best indicators of the fair values of financial instruments. However, not all instruments have liquidity or quoted market prices and, in such cases, the adoption of present value estimates and other pricing techniques are required. In the absence of quoted prices from National Association of Financial Market Institutions (ANBIMA), the fair values of bonds are calculated based on the interest rates provided by others on the market (brokers). The fair values of corporate debt securities are computed by adopting criteria similar to those applied to interbank deposits, as described above. The fair values of shares are computed based on their prices quoted in the market. The fair values of derivative financial instruments were determined as follows:

 

·Swaps: The cash flows are discounted to present value based on yield curves that reflect the appropriate risk factors. These yield curves may be drawn mainly based on the exchange price of derivatives at B3, of Brazilian government securities in the secondary market or derivatives and securities traded abroad. These yield curves may be used to obtain the fair value of currency swaps, interest rate swaps and swaps based on other risk factors (commodities, stock exchange indices, etc.).

 

·Futures and forwards: Quotations on exchanges or criteria identical to those applied to swaps.

 

·Options: The fair values are determined based on mathematical models (such as Black&Scholes) that are fed with implicit volatility data, interest rate yield curve and fair value of the underlying asset. Current market prices of options are used to compute the implicit volatilities. All these data are obtained from different sources (usually Bloomberg).

 

·Credit: Inversely related to the probability of default (PD) in a financial instrument subject to credit risk. The process of adjusting the market price of these spreads is based on the differences between the yield curves with no risk and the yield curves adjusted for credit risk.

 

d)Loan operations and lease operations – Fair value is estimated based on groups of loans with similar financial and risk characteristics, using valuation models. The fair value of fixed-rate loans was determined by discounting estimated cash flows, applying current interest rates for similar loans. For the majority of loans at floating rate, the carrying amount was considered close to their fair value. The fair value of loan and lease operations not overdue was calculated by discounting the expected payments of principal and interest through maturity, at the aforementioned rates. The fair value of overdue loan and lease transactions was based on the discount of estimated cash flows, using a rate proportional to the risk associated with the estimated cash flows, or on the underlying collateral. The assumptions related to cash flows and discount rates are determined using information available in the market and the borrower’s specific information of the debtor.

 

e)Deposits – The fair value of fixed-rate loans with maturity dates was determined by discounting estimated cash flows, applying current interest rates for similar funding operations. Cash deposits are not considered in the fair value estimate. The assumptions related to cash flows and discount rates are determined based on information available in the market and information specific for each operation.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018123

 

 

f)Other financial assets / liabilities – primarily composed of receivables from credit card issuers, deposits in guarantee for contingent liabilities and trading and intermediation of securities. The carrying amounts for these assets/liabilities substantially approximate their fair values, since they principally represent amounts to be received in the short term from credit card holders and to be paid to credit card acquirers, judicially required deposits (indexed to market rates) made by ITAÚ UNIBANCO HOLDING as guarantees for lawsuits or very short-term receivables (generally with a maturity of approximately 5 (five) business days). All of these items represent assets / liabilities without significant associated market, credit and liquidity risks.

 

In accordance with IFRS, ITAÚ UNIBANCO HOLDING classifies fair value measurements in a fair value hierarchy that reflects the significance of inputs adopted in the measurement process.

 

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is a market in which transactions for the asset or liability being measured occur often enough and with sufficient volume to provide pricing information on an ongoing basis.

 

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Level 2 generally includes: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or quoted prices vary substantially either over time or among market makers, or in which little information is released publicly; (iii) inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, etc.); (iv) inputs that are mainly derived from or corroborated by observable market data through correlation or by other means.

 

Level 3: Inputs are unobservable for the asset or liability. Unobservable information shall be used to measure fair value to the extent that observable information is not available, thus allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 

Financial assets at fair value through profit or loss and at fair value through other comprehensive income:

 

Level 1: Highly-liquid securities with prices available in an active market are classified in Level 1 of the fair value hierarchy. This classification level includes most of the Brazilian Government Securities, securities of foreign governments, shares and debentures traded on stock exchanges and other securities traded in an active market.

 

Level 2: When the pricing information is not available for a specific security, the assessment is usually based on prices quoted in the market for similar instruments, pricing information obtained for pricing services, such as Bloomberg, Reuters and brokers (only when the prices represent actual transactions) or discounted cash flows, which use information for assets actively traded in an active market. These securities are classified into Level 2 of the fair value hierarchy and are comprised of certain Brazilian government securities, debentures, some government securities quoted in a less-liquid market in relation to those classified into Level 1, and some share prices in investment funds. ITAÚ UNIBANCO HOLDING does not hold positions in alternative investment funds or private equity funds.

 

Level 3: When no pricing information in an active market, ITAÚ UNIBANCO HOLDING uses internally developed models, from curves generated according to the proprietary model. The Level 3 classification includes some Brazilian government and private securities falling due after 2025 and securities that are not usually traded in an active market.

 

Derivatives:

 

Level 1: Derivatives traded on stock exchanges are classified in Level 1 of the hierarchy.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018124

 

 

Level 2: For derivatives not traded on stock exchanges, ITAÚ UNIBANCO HOLDING estimates the fair value by adopting a variety of techniques, such as Black&Scholes, Garman & Kohlhagen, Monte Carlo or even the discounted cash flow models usually adopted in the financial market. Derivatives included in Level 2 are credit default swaps, cross currency swaps, interest rate swaps, plain vanilla options, certain forwards and generally all swaps. All models adopted by ITAÚ UNIBANCO HOLDING are widely accepted in the financial services industry and reflect all derivative contractual terms. Considering that many of these models do not require a high level of subjectivity, since the methodologies adopted in the models do not require major decisions and information for the model are readily observed in the actively quotation markets, these products were classified in Level 2 of the measurement hierarchy.

 

Level 3: The derivatives with fair values based on non-observable information in an active market were classified into Level 3 of the fair value hierarchy, and are comprised of non-standard options, certain swaps indexed to non-observable information, and swaps with other products, such as swap with option and USD Check, credit derivatives and futures of certain commodities. These operations have their pricing derived from a range of volatility using the basis of historical volatility.

 

All aforementioned valuation methodologies may result in a fair value that may not be indicative of the net realizable value or future fair values. However, ITAÚ UNIBANCO HOLDING believes that all methodologies used are appropriate and consistent with the other market participants. However, the adoption of other methodologies or assumptions different than those used to estimate fair value may result in different fair value estimates at the balance sheet date.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018125

 

 

 

Distribution by level

 

The following table presents the breakdown of risk levels at 09/30/2018.

 

   09/30/2018   12/31/2017 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
Financial assets at fair value through profit or loss   190,836    35,306    2,598    228,740    213,421    31,579    3,947    248,947 
Investment funds   1,233    2,326    -    3,559    1,738    1,775    -    3,513 
Brazilian government securities   182,937    3,312    1    186,250    205,027    2,816    1    207,844 
Government securities – other countries   989    567    -    1,556    1,643    2,306    -    3,949 
Argentina   538    -    -    538    1,466    -    -    1,466 
Chile   317    78    -    395    39    18    -    57 
Colombia   -    356    -    356    -    2,092    -    2,092 
United States   121    -    -    121    100    -    -    100 
Mexico   10    -    -    10    5    -    -    5 
Paraguay   -    1    -    1    -    3    -    3 
Uruguay   -    132    -    132    -    193    -    193 
Other   3    -    -    3    33    -    -    33 
Corporate securities   5,677    29,101    2,597    37,375    5,013    24,682    3,946    33,641 
Shares   4,459    1,403    1,064    6,926    3,875    65    2,019    5,959 
Bank deposit certificates   1    866    -    867    1    334    -    335 
Securitized real estate loans   -    -    1,477    1,477    -    -    1,795    1,795 
Debentures   476    4,063    30    4,569    486    2,608    122    3,216 
Eurobonds and others   741    120    3    864    651    37    -    688 
Financial credit bills   -    21,256    -    21,256    -    21,170    -    21,170 
Promissory notes   -    1,324    -    1,324    -    391    -    391 
Other   -    69    23    92    -    77    10    87 
Financial assets at fair value through other comprehensive income   31,625    17,168    -    48,793    35,234    16,915    -    52,149 
Brazilian government securities   28,141    821    -    28,962    32,218    708    -    32,926 
Government securities – other countries   2,223    15,751    -    17,974    1,550    14,992    -    16,542 
Chile   -    7,146    -    7,146    -    9,550    -    9,550 
Colombia   -    6,223    -    6,223    -    3,020    -    3,020 
United States   2,223    -    -    2,223    1,550    -    -    1,550 
Paraguay   -    1,639    -    1,639    -    1,800    -    1,800 
Uruguay   -    743    -    743    -    622    -    622 
Corporate securities   1,261    596    -    1,857    1,466    1,215    -    2,681 
Shares   124    -    -    124    148    -    -    148 
Bank deposit certificates   -    287    -    287    -    685    -    685 
Debentures   -    1    -    1    -    1    -    1 
Eurobonds and others   1,137    308    -    1,445    1,318    529    -    1,847 
Financial assets at fair value through profit or loss   1,931    -    -    1,931    1,746    -    -    1,746 
Brazilian government securities   1,931    -    -    1,931    1,746    -    -    1,746 
Financial liabilities designated at fair value through profit or loss   -    207    -    207    -    465    -    465 
Structured notes   -    207    -    207    -    465    -    465 

 

The following table presents the breakdown of risk levels at 09/30/2018 for our derivative assets and liabilities.

 

   09/30/2018   12/31/2017 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
Derivatives - assets   4    28,551    112    28,667    158    22,249    436    22,843 
Futures   -    -    -    -    158    -    -    158 
Swap – differential receivable   -    11,234    46    11,280    -    8,821    369    9,190 
Options   -    5,318    65    5,383    -    3,271    66    3,337 
Forwards (onshore)   -    6,271    -    6,271    -    6,911    -    6,911 
Credit derivatives   -    189    -    189    -    137    -    137 
Forwards (offshore)   -    4,493    -    4,493    -    2,950    -    2,950 
Check of swap   -    161    -    161    -    68    -    68 
Other derivatives   4    885    1    890    -    91    1    92 
Derivatives - liabilities   (9)   (31,823)   (54)   (31,886)   -    (26,643)   (103)   (26,746)
Swap – differential payable   -    (16,620)   (32)   (16,652)   -    (13,590)   (102)   (13,692)
Options   -    (4,904)   (22)   (4,926)   -    (2,792)   (1)   (2,793)
Forwards (onshore)   -    (4,643)   -    (4,643)   -    (6,272)   -    (6,272)
Credit derivatives   -    (150)   -    (150)   -    (58)   -    (58)
Forwards (offshore)   -    (5,267)   -    (5,267)   -    (3,745)   -    (3,745)
Check of swap   -    (178)   -    (178)   -    (122)   -    (122)
Other derivatives   (9)   (61)   -    (70)   -    (64)   -    (64)

 

There were no significant transfer between Level 1 and Level 2 during the period from September 30, 2018. Transfers to and from Level 3 are presented in movements of Level 3.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018126

 

 

Measurement of fair value Level 2 based on pricing services and brokers

 

When pricing information is not available for securities classified as Level 2, pricing services, such as Bloomberg or brokers, are used to value such instruments.

 

In all cases, to assure that the fair value of these instruments is properly classified as Level 2, internal analysis of the information received are conducted, so as to understand the nature of the input used in the establishment of such values by the service provider.

 

Prices provided by pricing services that meet the following requirements are considered Level 2: input is immediately available, regularly distributed, provided by sources actively involved in significant markets and it is not proprietary.

 

Of the total of R$ 52,474 in financial instruments classified as Level 2, at September 30, 2018, pricing service or brokers were used to evaluate securities at the fair value of R$ 20,810, substantially represented by:

 

·Debentures: When available, we use price information for transactions recorded in the Brazilian Debenture System (SND), an electronic platform operated by B3, which provides multiple services for transactions involving debentures in the secondary market. Alternatively, prices of debentures provided by ANBIMA are used. Its methodology includes obtaining, on a daily basis, illustration and non-binding prices from a group of market players deemed to be significant. Such information is subject to statistical filters established in the methodology, with the purpose of eliminating outliers.

 

·Global and corporate securities: The pricing process for these securities consists in capturing from 2 to 8 quotes from Bloomberg, depending on the asset. The methodology consists in comparing the highest purchase prices and the lowest sale prices of trades provided by Bloomberg for the last day of the month. Such prices are compared with information from purchase orders that the Institutional Treasury of ITAÚ UNIBANCO HOLDING provides for Bloomberg. Should the difference between them be lower than 0.5%, the average price of Bloomberg is used. Should it be higher than 0.5% or if the Institutional Treasury does not provide information on this specific security, the average price gathered directly from other banks is used. The price of the Institutional Treasury is used as a reference only and never in the computation of the final price.

 

Level 3 recurring fair value measurements

 

The departments in charge of defining and applying the pricing models are segregated from the business areas. The models are documented, submitted to validation by an independent area and approved by a specific committee. The daily process of price capture, calculation and disclosure are periodically checked according to formally defined testing and criteria and the information is stored in a single and corporate history data base.

 

The most recurring cases of assets classified as Level 3 are justified by the discount factors used. Factors such as the fixed interest curve in Brazilian Reais and the TR coupon curve –and, as a result, its related factors – have inputs with terms shorter than the maturities of these fixed-income assets. For swaps, the analysis is carried out by index for both parties. There are some cases in which the inputs periods are shorter than the maturity of the derivative.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018127

 

 

Level 3 recurring fair value changes

 

The tables below show the changes in balance sheet for financial instruments classified by ITAÚ UNIBANCO HOLDING in Level 3 of the fair value hierarchy. Derivative financial instruments classified in Level 3 correspond to other derivatives indexed to shares.

 

   Fair value at
12/31/2017		   Total gains or
losses (realized /
unrealized)		   Purchases   Settlements   Transfers in
and / or out of
Level 3		   Fair value
at
09/30/2018		   Total gains (losses)
related to assets and
liabilities still held at
09/30/2018		 
Financial assets designated at fair value   3,947    (554)   58    (299)   (554)   2,598    (680)
Brazilian government securities   1    -    -    -    -    1    - 
Corporate securities   3,946    (554)   58    (299)   (554)   2,597    (680)
Shares   2,019    (170)   -    (203)   (582)   1,064    (446)
Securitized real estate loans   1,795    (333)   53    (44)   6    1,477    (38)
Debentures   122    (41)   -    (51)   -    30    (196)
Eurobonds and others   -    3    -    2    (2)   3    - 
Other   10    (13)   5    (3)   24    23    - 
                                    
   Fair value at
12/31/2017		   Total gains or
losses (realized /
unrealized)		   Purchases   Settlements   Transfers in
and / or out of
Level 3		   Fair value
at
09/30/2018		   Total gains (losses)
related to assets and
liabilities still held at
09/30/2018		 
Derivatives – assets   436    (15)   137    (176)   (270)   112    12 
Swap – differential receivable   369    (20)   -    (31)   (272)   46    13 
Options   66    5    137    (145)   2    65    (1)
Other derivatives   1    -    -    -    -    1    - 
Derivatives – liabilities   (103)   (14)   (75)   117    21    (54)   13 
Swap – differential payable   (102)   (39)   -    88    21    (32)   (1)
Options   (1)   25    (75)   29    -    (22)   14 
                             
   Fair value at
01/01/2017		   Total gains or
losses (realized /
unrealized)		   Purchases   Settlements   Transfers in
and / or out of
Level 3		   Fair value
at
12/31/2017		   Total gains (losses)
related to assets and
liabilities still held at
12/31/2017		 
Financial assets designated at fair value through profit or loss   3,808    (232)   578    (146)   (61)   3,947    (412)
Brazilian government securities   1    -    -    -    -    1    (1)
Corporate securities   3,807    (232)   578    (146)   (61)   3,946    (411)
Shares   1,662    122    400    -    (165)   2,019    (274)
Securitized real estate loans   2,092    (355)   58    -    -    1,795    16 
Debentures   37    (1)   106    (124)   104    122    (153)
Eurobonds and others   -    -    9    (9)   -    -    - 
Other   16    2    5    (13)   -    10    - 
Financial assets designated at fair value through other comprehensive income   227    -    200    (427)   -    -    - 
Corporate securities   227    -    200    (427)   -    -    - 
Securitized real estate loans   6    -    -    (6)   -    -    - 
Eurobonds and others   221    -    200    (421)   -    -    - 
                                    
   Fair value at
01/01/2017		   Total gains or
losses (realized /
unrealized)		   Purchases   Settlements   Transfers in
and / or out of
Level 3		   Fair value
at
12/31/2017		   Total gains (losses)
related to assets and
liabilities still held at
12/31/2017		 
Derivatives – Assets   521    (33)   101    (244)   91    436    17 
Swaps - differential receivable   468    (41)   -    (100)   42    369    32 
Options   47    12    101    (143)   49    66    (14)
Other derivatives   6    (4)   -    (1)   -    1    (1)
Derivatives - Liabilities   (60)   (117)   (15)   111    (22)   (103)   (57)
Swaps - differential payable   (56)   (122)   -    97    (21)   (102)   (60)
Options   (4)   5    (15)   13    -    (1)   3 
Credit derivatives   -    -    -    1    (1)   -    - 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018128

 

 

Sensitivity analyses operations of Level 3

 

The fair value of financial instruments classified in Level 3 (in which prices negotiated are not easily noticeable in active markets) is measured through assessment techniques based on correlations and associated products traded in active markets, internal estimates and internal models.

 

Significant unverifiable inputs used for measurement of the fair value of instruments classified in Level 3 are: interest rates, underlying asset prices and volatility. Significant variations in any of these inputs separately may give rise to significant changes in the fair value.

 

The table below shows the sensitivity of these fair values in scenarios of changes of interest rates, asset prices, or in scenarios vary in prices with shocks and the volatility for non-linear assets:

 

Sensitivity – Level 3 Operations  09/30/2018 
      Impact 
          Stockholders' 
Risk factor groups  Scenarios  Result   Equity 
   I   (0.7)   (1.2)
Interest rates  II   (18.5)   (29.0)
   III   (37.1)   (57.1)
Currency, commodities and ratios   I   (53.2)   0.0 
   II   (106.4)   0.0 
Nonlinear  I   (19.9)   0.0 
   II   (35.2)   0.0 

 

The following scenarios are used to measure the sensitivity:

 

Interest rate

 

Shocks at 1, 25 and 50 basis points (scenarios I, II and III respectively) in the interest curves, both for increase and decrease, considering the largest losses resulting in each scenario.

 

Currencies, commodities and ratios

 

Shocks at 5 and 10 percentage points (scenarios I and II respectively) in prices of currencies, commodities and ratios, both for increase and decrease, considering the largest losses resulting in each scenario.

 

Non linear

 

Scenario I: Shocks at 5 percentage points in prices and 25 percentage points the level in volatility, both for increase and decrease, considering the largest losses resulting in each scenario.

 

Scenario II: Shocks at 10 percentage points in prices and 25 percentage points the level in volatility, both for increase and decrease, considering the largest losses resulting in each scenario.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018129

 

 

Note 30 – Provisions, contingencies and other commitments

 

Provision  09/30/2018   12/31/2017 
Civil   4,702    5,300 
Labor   6,937    7,283 
Tax and social security   6,935    7,003 
Other   397    150 
Total   18,971    19,736 
Current   4,876    4,974 
Non-current   14,095    14,762 

 

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’s 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 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 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018130

 

 

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 (R$ 3,494 at 12/31/2017), 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$ 156 (R$ 122 at 12/31/2017).

 

-Other risks

 

These are quantified and recorded as provisions mainly based on the evaluation of agribusiness credit transactions with joint obligation and FCVS (Salary Variations Compensation Fund) credits transferred to Banco Nacional.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018131

 

 

The table below shows the changes in the balances of provisions for civil, labor and other provision and the respective escrow deposit balances:

 

   01/01 to 09/30/2018 
   Civil   Labor   Other   Total 
Opening balance   5,300    7,283    150    12,733 
(-) Contingencies guaranteed by indemnity clause (Note 2.4.t)   (243)   (998)   -    (1,241)
Subtotal   5,057    6,285    150    11,492 
Interest (Note 24)   110    352    -    462 
Changes in the period reflected in results (Note 24)   228    1,345    247    1,820 
Increase (*)   581    1,480    247    2,308 
Reversal   (353)   (135)   -    (488)
Payment   (914)   (2,016)   -    (2,930)
Subtotal   4,481    5,966    397    10,844 
(+) Contingencies guaranteed by indemnity clause (Note 2.4.t)   221    971    -    1,192 
Closing balance   4,702    6,937    397    12,036 
Escrow deposits at 09/30/2018 (Note 17a)   1,543    2,332    -    3,875 

(*)Civil provisions include the provision for economic plans amounting to R$ (176).

 

   01/01 to 09/30/2017 
   Civil   Labor   Other   Total 
Opening balance   5,172    7,232    259    12,663 
Balance arising from the merger with Corpbanca (Note 3a)   (1)   -    -    (1)
(-) Contingencies guaranteed by indemnity clause (Note 2.4.t)   (256)   (1,066)   -    (1,322)
Subtotal   4,915    6,166    259    11,340 
Interest (Note 24)   73    466    -    539 
Changes in the period reflected in results (Note 24)   1,165    1,742    (17)   2,890 
Increase (*)   1,551    1,907    94    3,552 
Reversal   (386)   (165)   (111)   (662)
Payment   (1,048)   (2,162)   -    (3,210)
Subtotal   5,105    6,212    242    11,559 
(+) Contingencies guaranteed by indemnity clause (Note 2.4.t)   243    993    -    1,236 
Closing balance   5,348    7,205    242    12,795 
Escrow deposits at 09/30/2017 (Note 18a)   1,503    2,243    -    3,746 

(*)Civil provisions include the provision for economic plans amounting to R$ 184.

 

-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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018132

 

 

The table below shows the changes in the balances of provisions and respective balance of escrow deposits for tax and social security lawsuits:

 

   01/01 to   01/01 to 
Provision  09/30/2018   09/30/2017 
Opening balance   7,003    8,246 
(-) Contingencies guaranteed by indemnity clause   (66)   (69)
Subtotal   6,937    8,177 
Interest (*)   276    510 
Changes in the period reflected in results   (51)   94 
Increase (*)   308    307 
Reversal (*)   (359)   (213)
Payment   (295)   (47)
Subtotal   6,867    8,734 
(+) Contingencies guaranteed by indemnity clause   68    71 
Closing balance   6,935    8,805 

(*) The amounts are included in the headings Tax Expenses, General and Administrative Expenses and Current Income Tax and Social Contribution.

 

   01/01 to   01/01 to 
Escrow deposits  09/30/2018   09/30/2017 
Opening balance   5,170    4,847 
Appropriation of interest   139    261 
Changes in the period   (149)   (19)
Deposits made   113    194 
Withdrawals   (45)   (181)
Deposits released   (217)   (32)
Closing balance (Note 18a)   5,160    5,089 
Reclassification of assets pledged as collateral for contingencies (Note 30d)   (1)   (18)
Closing balance after reclassification   5,159    5,071 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018133

 

 

Main discussions related to the provisions recognized for Tax and Social Securities Lawsuits are described as follows:

 

·CSLL – Isonomy – R$ 1,329: discussing the lack of constitutional support for the increase, establishes 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$ 1,312;

 

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

 

·PIS and COFINS – Calculation basis – R$ 632: 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$ 608;

 

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$ 21,682, are described below:

 

·INSS – Non-compensatory amounts –R$ 5,171: 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: discussing the accounting and tax treatment granted to PIS and COFINS upon settlement of leasing operations;

 

·IRPJ and CSLL – Goodwill – Deduction – R$ 2,656: 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: cases in which the liquidity and the ability of offset credits are discussed;

 

·IRPJ and CSLL – Interest on capital – R$ 1,498: 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: 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 – 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 (R$ 1,065 at 12/31/2017) (Note 18a). This value is derived basically from the guarantee in the privatization process of the Banco Banerj S.A. which occurred 1997, where the State of Rio de Janeiro created a fund to guarantee civil, labor and tax contingencies.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018134

 

 

d)Assets pledged as collateral for 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   12/31/2017 
Financial assets - at fair value through profit or loss and at fair value through other comprehensive income (basically financial treasury bills)   748    962 
Escrow deposits (Note 18a)   4,581    4,585 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018135

 

 

Note 31 – Regulatory capital

 

ITAÚ UNIBANCO HOLDING is subject to regulation by the Central Bank of Brazil (BACEN), which issues rules and instructions regarding currency and credit policies for financial institutions operating in Brazil. BACEN also determines minimum capital requirements, procedures for verification of information for assessment of the global systemic importance of financial institutions, limits for fixed assets, limits for loans, accounting practices and requirements of compulsory deposits, requiring banks to comply with the regulation based on the Basel Accord on capital adequacy. Additionally, the National Council of Private Insurance (CNSP) and SUSEP issue regulations on capital requirement, which affect our insurance, pension plan and capitalization operations.

 

a)Capital Requirements in Place and In Progress

 

ITAÚ UNIBANCO HOLDING’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).

 

The Total Capital, Tier 1 Capital and Principal Capital ratios are calculated on a consolidated basis, applied to entities that are part of Prudential Conglomerate, which comprises not only financial institutions but also consortium administrators, payment institutions, companies that acquire operations or that directly or indirectly assume credit risk, and investment funds in which ITAÚ UNIBANCO HOLDING substantially retains risks and rewards.

 

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 uses the standardized approaches to calculate credit and operational risk-weighted asset amounts.

 

As from September 1, 2016, BACEN authorized ITAÚ UNIBANCO HOLDING 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 3,646.

 

For foreign units, the standardized approach is adopted. Therefore, the internal models are not used for Argentina, Chile, Itaú BBA International, Itaú BBA Colombia, Paraguay, and Uruguay units.

 

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.

 

In addition to minimum regulatory capital requirements, BACEN rules established the Additional Common Equity (ACP), corresponding to the sum of the portions of ACPConservation, ACPCountercyclical and ACPSystemic, which, in conjunction with the above-mentioned requirements, increase the need for capital over time. The amounts of each one of the portions, as established by CMN Resolution 4,193, are shown in the table below.

 

Basel III also reformulated the requirements for qualification of instruments eligible for Tier I and Tier II Capital, as regulated in Brazil by CMN Resolution 4,192. This reform includes a phase-out schedule for instruments already considered in capital, issued prior to the effectiveness of the rule, and that do not fully meet the new requirements.

 

The table below shows the schedule for implementation of Basel III rules in Brazil, as established by BACEN, and the figures refer to the percentage of ITAÚ UNIBANCO HOLDING’s risk-weighted assets.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018136

 

 

   From January 1, 
Basel III Implentation Calendar  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%
Conservation   1.25%   1.875%   2.5%
Countercyclical(1)   0%   0%   0%
Systemic   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 Adjustments Deductions   80%   100%   100%
(1)ACP Countercyclical is triggered during the credit cycle expansion phase, and, currently, according to BACEN Circular 3,769, the amount required for the countercyclical capital is zero. Furthermore, in the event of increase in ACP Countercyclical , the new percentage will be effective only twelve months after it is announced.

(2)Requirements in force as from January 1, 2019.

 

Additionally, in March 2015, Circular BACEN nº 3,751, of March 19, 2015 came into force, it provides for the calculation of the 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, “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 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).

 

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

 

The Leverage Ratio is defined as the ratio between the Tier I Capital and Total Exposure, calculated as prescribed by BACEN Circular 3,748. The objective of this ratio is to be a simple, risk-insensitive leverage measure. Therefore, it does not take into consideration risk-weighting or mitigation factors. In line with the instructions set out in BACEN Circular 3,706, since October 2015, ITAÚ UNIBANCO HOLDING has reported its Leverage Ratio to BACEN on a monthly basis. However, according to recommendations in Basel III Accord, a minimum Leverage Ratio should be required in 2018, which will be defined based on the period over which the ratio’s behavior was monitored, since its implementation in 2011 up to 2017.

 

More information on the composition of the Leverage Ratio, which are not part of its financial statements, is available at www.itau.com.br/investors-relations, “Reports” / Pillar 3 and Global Systemically Important Banks.

 

b)Capital Management

 

The Board of Directors is the main body in the management of ITAÚ UNIBANCO HOLDING’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’s capital.

 

At the executive level, corporate bodies are responsible for approving risk assessment and capital calculation methodologies, as well as revising, monitoring and recommending capital-related documents and topics to the Board of Directors.

 

In order to provide the Board of Directors with necessary information, management reports are prepared to inform on the institution’s capital adequacy, and the projections of capital levels under normal and stress situations. There is a structure that coordinates and consolidates related information and processes, all of them subject to verification by the independent validation, internal controls and audit areas.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018137

 

 

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, under Corporate Governance, Regulations and Policies.

 

c)Risk appetite

 

In 2016 ITAÚ UNIBANCO HOLDING revisited its risk appetite policy, established and approved by the Board of Directors, which guides its business strategy. The institute’s risk appetite is based on the following statement issued by the Board of Directors:

 

“We are a universal bank, operating mostly in Latin America. Supported by our risk culture, we operate within the highest ethical standards and regulatory compliance, seeking increasingly improved results, with low volatility, through an ongoing client relationship, accurate risk pricing, diversified funding and proper use of capital.”

 

Based on this statement, defined five dimensions, each composed of a series of metrics associated with the main risks involved, by combining supplementary manners of measurement and seeking to reach a comprehensive vision of our exposures:

 

·Capitalization: establishes that ITAÚ UNIBANCO HOLDING must have capital sufficient to face any serious recession period or a stress event without the need to adjust its capital structure under unfavorable circumstances. It is monitored through the follow-up of ITAÚ UNIBANCO HOLDING’S capital ratios, both in normal and stress scenarios, and of the ratings of the institution's debt issues.
·Liquidity: establishes that the institution’s liquidity must withstand long stress periods. It is monitored through the follow-up of liquidity ratios.
·Composition of results: defines that business will be focused primarily in Latin America, where ITAÚ UNIBANCO HOLDING has a diversified base of clients and products, with low appetite for volatility of results and high risks. This dimension comprises aspects related to business and profitability, and market and credit risks. By adopting exposure concentration limits, such as industry sectors, counterparty quality, countries and geographical regions and risk factors, these monitored metrics seek to ensure the proper composition of our portfolios, aimed at the low volatility of results and business sustainability.
·Operational risk: focuses on the control of operational risk events that may adversely impact the operation and business strategy, and is carried out by monitoring the main operational risk events and incurred losses.
·Reputation: addresses risks that may impact the institution’s brand value and reputation with clients, employees, regulatory bodies, investors and the general public. The risk monitoring in this dimension is carried out by the follow-up of client satisfaction and dissatisfaction and media exposure, in addition to monitoring the institution’s conduct.

 

The Board of Directors is responsible for approving risk appetite limits and guidelines, performing its duties with the support of the Risk and Capital Management Committee (CGRC) and the Chief Risk Officer (CRO).

 

These metrics are monitored from time to time and must respect the defined limits. Monitoring is reported to the risk committees and the Board of Directors, and guides preventive measures to ensure that any exposures are within the limits established and in line with our strategy.

 

d)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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018138

 

 

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 Referential Equity  09/30/2018   12/31/2017 
Stockholders’ equity Itaú  Unibanco  Holding  S.A.  (Consolidated)   125,035    126,924 
Non-controlling Interests   13,580    11,942 
Changes in Subsidiaries´ Interests in Capital Transactions   467    1,482 
Consolidated Stockholders’ Equity (BACEN)   139,082    140,348 
Common Equity Tier I Prudential Adjustments   (25,769)   (17,952)
Common Equity Tier I   113,313    122,396 
Instruments Eligible to Comprise Additional Tier I   7,985    - 
Additional Tier I Prudential Adjustments   88    57 
Additional Tier I Capital   8,073    57 
Tier I (Common Equity Tier I + Additional Tier I Capital)   121,386    122,453 
Instruments Eligible to Comprise Tier II   15,778    19,723 
Tier II Prudential Adjustments   88    76 
Tier II   15,866    19,799 
Referential Equity (Tier I + Tier II)   137,252    142,252 

 

Composition of Prudential Adjustments  09/30/2018   12/31/2017 
Goodwill paid on the acquisition of investments   8,354    8,123 
Intangible assets   7,895    5,456 
Tax credits   6,093    5,208 
Surplus of Common Equity Tier I Capital - Noncontrolling interests   343    286 
Adjustments relating to the fair value of derivatives used as cash flow hedge, for hedged items that do not have their mark-to-market adjustments accounted for   (1,309)   (1,399)
Prudential Adjustments subject to exemption limits (deferred tax assets from temporary differences, investments in insurance companies and investments in financial institutions not consolidated).   4,348    - 
Other   45    278 
Total   25,769    17,952 

 

During 2018, ITAÚ UNIBANCO HOLDING bought back shares in the amount of R$ 510 milion. These shares are recorded in line item “Treasury Shares”, which totaled R$ (1,963) milion as at September 30, 2018. Treasury shares reduce the institution´s Equity, causing its capital base to be decreased.

 

In this period, the amount of dividends and interest on capital paid / accrued that affected the base of the institution’s capital totaled R$ 19,396 milion. Dividends are deducted from the institution´s Equity, thus reducing the base of its capital. Whereas, interest on capital, which is accounted for as an expense directly in profit (loss), reduces the institution´s net income and, consequently, the base of its capital.

 

For details on capital requirements, which are not part of its financial statements, are available at www.itau.com.br/investors-relations, “Reports” / Pillar 3 and Global Systemically Important Banks.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018139

 

 

The funds obtained through the issuance of subordinated debt securities are considered Tier II capital for the purpose of capital to risk-weighted assets ratio, as follows. According to current legislation, the accounting balance of subordinated debt as of December 2012 was used for the calculation of reference equity as of September 2018, considering instruments approved after the closing date to compose Tier II, totaling R$ 51,134.

 

Name of security / currency  Principal amount
(original currency)		   Issue   Maturity   Return p.a.  Account
balance
09/30/2018		 
Subordinated financial bills - BRL                       
    1,395    2012    2018   108% to 113% of CDI   1,529 
    1,184             100% of CDI + 1.01% to 1.05%   1,222 
    2    2011    2019   109% to 109.7% of CDI   4 
    1    2012    2019   110% of CDI   2 
    12             11,96%   25 
    101             IPCA + 4.7% to 6.3%   183 
    1    2012    2020   111% of CDI   2 
    20             IPCA + 6% to 6.17%   44 
    6    2011    2021   109.25% to 110.5% of CDI   13 
    2,307    2012    2022   IPCA + 5.15% to 5.83%   4,504 
    20             IGPM + 4.63%   28 
    5,049             Total   7,556 
Subordinated euronotes - USD                       
    990    2010    2020   6,20%   4,070 
    1,000    2010    2021   5,75%   4,047 
    730    2011    2021   5,75% to 6,20%   2,999 
    550    2012    2021   6,20%   2,202 
    2,600    2012    2022   5,50% to 5,65%   10,452 
    1,851    2012    2023   5,13%   7,544 
    7,721             Total   31,314 
Total                     38,870 

 

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.

 

e)Risk-Weighted Assets (RWA)

 

According to CMN Resolution 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 nº 3,646 and 3,674;

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018140

 

 

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

 

   09/30/2018 (1)   12/31/2017 (1) 
Risk exposures          
Exposure Weighted by Credit Risk (RWACPAD)   713,435    660,516 
a) Per Weighting Factor (FPR):          
FPR at 2%   138    180 
FPR at 4%   299    - 
FPR at 10%   346    - 
FPR at 20%   8,720    7,717 
FPR at 35%   19,194    15,900 
FPR at 50%   45,085    44,741 
FPR at 75%   153,953    145,376 
FPR at 85%   69,672    76,033 
FPR at 100%   341,342    324,097 
FPR at 250%   42,492    34,053 
FPR at 300%   15,610    3,906 
FPR up to 1250%(2)   2,301    2,096 
Derivatives - Changes in the Counterparty Credit Quality   5,894    6,417 
Default funds (3)   4    - 
Securitization (4)   8,385    - 
b) Per Type:   713,435    660,516 
Securities   39,378    45,629 
Loan Operations - Retail   119,876    114,141 
Loan Operations - Non-Retail   258,853    240,816 
Joint Liabilities - Retail   161    172 
Joint Liabilities - Non-Retail   46,027    45,405 
Loan Commitments - Retail   33,875    31,058 
Loan Commitments - Non-Retail   10,544    9,017 
Derivatives – Future  potential gain (5)   4,739    5,457 
Agency Transition   3,292    - 
Other exposures   196,690    168,821 
(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 29th 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018141

 

 

We present below the breakdown of Risk-weighted of market risk as follows:

 

   09/30/2018 (1)   12/31/2017 (1) 
Market Risk Weighted Assets - Standard Aproach (RWAMPAD)   32,946    32,893 
Operations subject to interest rate variations   28,860    31,076 
Fixed rate denominated in Real   3,519    6,119 
Foreign currency coupon   19,130    17,153 
Price index coupon   6,211    7,804 
Operations subject to commodity price variation   643    361 
Operations subject to stock price variation   418    239 
Operations subject to risk exposures in gold, foreign currency and foreign exchange variation   3,025    1,217 
Minimum Market Risk Weighted Assets - Standard Aproach   26,356    26,314 
Market Risk Weighted Assets calculated based on internal methodology (b)   23,378    32,915 
Reduction of Market Risk Weighted Assets due to Internal Models Aproach   (6,589)   - 
Market Risk Weighted Assets (RWAMINT) - maximum of (a) and (b)   26,356    32,915 
(1)Market risk weighted-assets calculated based on internal models, with maximum saving possibility of 20% of the standard model.

 

At September 30, 2018, RWAMINT totaled R$ 26,356, which corresponds to 80% of RWAMPAD, higher than the capital calculated at internal models, which totaled R$ 23,378.

 

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

 

   09/30/2018   12/31/2017 
Risk-weighted assets of operational risk (RWAOPAD)   72,833    63,277 
Retail   12,822    11,870 
Commercial   26,214    24,857 
Corporate finance   2,697    2,663 
Negotiation and sales   11,736    7,434 
Payments and settlement   8,282    7,532 
Financial agent services   4,343    3,892 
Asset management   6,715    5,010 
Retail brokerage   24    18 

 

f)Capital Adequacy Assessment

 

Upon annually assessing its capital adequacy, ITAÚ UNIBANCO HOLDING adopts the following flow:

 

-Identification of risks to which the institution is exposed and analysis of their materiality;
-Evaluation of capital requirements for material risks;
-Development of methodologies for quantifying additional capital;
-Quantification and internal capital adequacy evaluation;
-Capital and Contingency Plan;
-Sending the capital adequacy report to BACEN.

 

Adopting a prospective attitude to manage its capital, ITAÚ UNIBANCO HOLDING implemented its capital management structure and ICAAP, thus complying with CMN Resolution 4,557, BACEN Circular 3,846 and BACEN Circular Letter 3,841.

 

The result of the last ICAAP – conducted as of December 2017 – indicated that, in addition to capital to face all material risks, ITAÚ UNIBANCO HOLDING has significant capital surplus, thus assuring the institution’s equity soundness.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018142

 

 

g)Capital Adequacy

 

ITAÚ UNIBANCO HOLDING, through the ICAAP, assesses the sufficiency of capital to face its risks, represented by regulatory capital for credit, market and operational risk and capital required to cover the other risks.

 

In order to ensure the soundness of ITAÚ UNIBANCO HOLDING and the availability of capital to support business growth, ITAÚ UNIBANCO HOLDING 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   12/31/2017 
Tier I   121,386    122,453 
Common Equity Tier I   113,313    122,396 
Additional Tier I Capital   8,073    57 
Tier II   15,866    19,799 
Referential Equity   137,252    142,252 
Minimum Referential Equity Required   70,089    69,995 
Surplus Capital in relation to the Minimum Referential Equity Required   67,163    72,257 
Additional Common Equity Tier I Required (ACPRequired)   19,300    11,351 
Referential equity calculated for covering the interest rate risk on operations not classified in the trading portfolio (RBAN)   1,949    2,470 

 

The table below shows the Basel and Fixed Asset Ratios:

 

   09/30/2018   12/31/2017 
Basel Ratio   16.9%   18.8%
Tier I   14.9%   16.2%
Common Equity Tier I   13.9%   16.2%
Additional Tier I Capital   1.0%   0.0%
Tier II   2.0%   2.6%
Fixed Asset Ratio   26.1%   23.9%
Surplus Capital in Relation to Fixed Assets   32,854    37,101 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018143

 

 

h)Stress testing

 

The stress test is a process of simulation of extreme economic and market conditions in the institution’s results and capital. The institution has conducted this test since 2010 aiming at assessing its solvency in plausible scenarios of a systemic crisis, as well as at identifying areas that are more susceptible to the impact of stress, and that can be subject to risk mitigation.

 

To perform the test, macroeconomic variables for each stress scenario are estimated by the economic research department. The scenarios are established considering their relevance to the bank’s result, and the probability of occurrence, and they are submitted to the approval of the Board of Directors on an annual basis.

 

Projections of macroeconomic variables (GDP, benchmark interest rate and inflation) and of the credit market (fundraising, loans, default rate, spread and fees) for these scenarios are generated based on exogenous shocks or by using models validated by an independent area.

 

These projections affect the budgeted result and balance sheet that then change the risk-weighted assets and capital and liquidity ratios.

 

The stress test is also an integral part of ICAAP, with the main purpose of assessing whether, even in severe adverse conditions, the institution would have appropriate capital levels, not impacting the development of its activities.

 

This information allows to identify potential factors of risks on businesses, supporting the Board of Directors’ strategic decisions, the budgetary process and discussions on credit granting policies, in addition to being used as input for risk appetite metrics.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018144

 

 

Note 32 – Segment Information

 

ITAÚ UNIBANCO HOLDING is a banking institution that offers its customers a wide range of financial products and services.

 

The current operational and reporting segments of ITAÚ UNIBANCO HOLDING are described below:

 

·Retail Banking

 

The result of the Retail Banking segment arises from the offer of banking products and services to a diversified client base of account holders and non-account holders, individuals and companies. The segment includes retail clients, high net worth clients (Itaú Uniclass and Personnalité), and the corporate segment (very small and small companies). This segment comprises financing and lending activities carried out in units other than the branch network, and offering of credit cards, in addition to operations with Itaú Consignado.

 

·Wholesale Banking

 

The result of the Wholesale Banking segment arises from the products and services offered to middle-market companies, private banking clients, from the activities of Latin America units, and the activities of Itaú BBA, the unit in charge of commercial operations with large companies and performing as an investment banking unit.

 

·Activities with the Market + Corporation

 

This segment records the result arising from capital surplus, subordinated debt surplus and the net balance of tax credits and debits. It also shows the financial margin with the market, the Treasury operating cost, the equity in earnings of companies not associated to each segment and the interest in Porto Seguro.

 

Basis of presentation of segment information

 

Segment information is prepared based on the reports used by top management (Executive Committee) to assess the performance and to make decisions regarding the allocation of funds for investment and other purposes.

 

The top management (Executive Committee) of ITAÚ UNIBANCO HOLDING uses a variety of information for such purposes including financial and non-financial information that is measured on different bases as well as information prepared based on accounting practices adopted in Brazil. The main index used to monitor the business performance is the Recurring Net Income and the Economic Capital allocated to each segment.

 

The segment information has been prepared following accounting practices adopted in Brazil modified for the adjustments described below:

 

·Allocated capital and income tax rate

 

Based on the managerial income statement, the segment information considers the application of the following criteria:

 

Allocated capital: The impacts associated to capital allocation are included in the financial information. Accordingly, adjustments were made to the financial statements, based on a proprietary model. The statements of each segment consider the capital allocation based on a proprietary model and consequent impacts on results arising from this allocation. This model comprises the following components: Credit risk (including expected loss), operational risk, market risk and insurance underwriting risk. Based on the portion of allocated capital tier I, we calculated the Return on Allocated Economic Capital, which corresponds to an operational performance indicator consistently adjusted to the capital required to support the risk associated to asset and liability positions assumed, in conformity with our risk appetite.

 

Income tax rate: We consider the total income tax rate, net of the tax effect from the payment of interest on capital, for the Retail Banking, Wholesale Bank and Activities with the Market segments. The difference between the income tax amount calculated by segment and the effective income tax amount, as stated in the consolidated financial statements, is allocated to the Activities with the Market + Corporation column.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018145

 

 

·Reclassification and application of managerial criteria

 

The managerial statement of income was used to prepare information per segment. These statements were obtained based on the statement of income adjusted by the impact of non-recurring events and the managerial reclassifications in income.

 

We describe below the main reclassifications between the accounting and managerial results:

 

Banking product: The banking product considers the opportunity cost for each operation. The financial statements were adjusted so that the stockholders' equity was replaced by funding at market price. Subsequently, the financial statements were adjusted to include revenues related to capital allocated to each segment. The cost of subordinated debt and the respective remuneration at market price were proportionally allocated to the segments, based on the economic allocated capital.

 

Hedge tax effects: The tax effects of the hedge of investments abroad were adjusted – these were originally recorded in the tax expenses (PIS and COFINS) and Income Tax and Social Contribution on net income lines – and are now reclassified to the margin. The strategy to manage the foreign exchange risk associated to the capital invested abroad aims at preventing the effects of the exchange rates variation on income. In order to achieve this objective, we used derivative instruments to hedge against such foreign currency risk, with investments remunerated in Brazilian Reais. The hedge strategy for foreign investments also considers the impact of all tax effects levied.

 

Insurance: Insurance business revenues and expenses were concentrated in Income related to Insurance, pension plan and capitalization operations. The main reclassifications of revenues refer to the financial margins obtained with the technical provisions of insurance, pension plan and capitalization, in addition to revenue from management of pension plan funds.

 

Other reclassifications: Other Income, Share of Income of Associates, Non-Operating Income, Profit Sharing of Management Members and Expenses for Credit Card Reward Program were reclassified to those lines representing the way the institution manages its business, enabling greater understanding for performance analysis. Accordingly, equity in earnings of investment in Banco CSF S.A. (“Banco Carrefour”) was reclassified to the financial margin line.

 

The adjustments and reclassifications column shows the effects of the differences between the accounting principles followed for the presentation of segment information, which are substantially in line with the accounting practices adopted for financial institutions in Brazil, except as described above, and the policies used in the preparation of these consolidated financial statements according to IFRS. Main adjustments are as follows:

 

·Requirements of impairment assessment under IFRS 9 are based on an expected credit loss model, replacing the incurred loss model under IAS 39;

 

·Adjustment to fair value due to reclassifications of financial assets between the categories of measurement at fair value and amortized cost due to the new concept of business models adopted for reclassification of financial assets, as set forth by IFRS 9;

 

·Changes refer to financial assets modified and not written-off, which balances were recalculated in accordance with the requirements of IFRS 9;

 

·Effective interest rates, financial assets and liabilities stated at amortized cost, are recognized by the effective interest rate method, allocating revenues and costs directly attributable to acquisition, issue or disposal for the transaction period of the operation, according to Brazilian standards, fee expenses and income are recognized as these transactions are engaged;

 

·Business combinations are accounted for under the acquisition method in IFRS (IFRS 3), in which the purchase price is allocated among assets and liabilities of the acquired company, and the amount not subject to allocation, if any, is recognized as goodwill. Such amount is not amortized, but is subject to an impairment test.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018146

 

 

 

ITAÚ UNIBANCO HOLDING S.A.

From July 1 to September 30, 2018

(In millions of Reais, except per share information)

 

Consolidated Statement of Income  Retail
Banking		   Wholesale
Banking		   Activities with
the Market +
Corporation		   ITAÚ
 UNIBANCO		   Adjustments   IFRS
consolidated		 
Banking product   18,042    7,386    2,471    27,899    (1,002)   26,897 
Net interest (1)   10,207    4,817    2,385    17,409    (1,439)   15,970 
Revenue from services   6,243    2,342    47    8,632    556    9,188 
before claim and selling expenses   1,592    227    39    1,858    (696)   1,162 
Other revenues   -    -    -    -    577    577 
Cost of Credit and Claims   (3,598)   16    -    (3,582)   2,059    (1,523)
Expenses for allowance for loan and lease losses   (3,688)   (216)   -    (3,904)   2,701    (1,203)
Impairment   6    (95)   -    (89)   89    - 
Discounts granted   (268)   (17)   -    (285)   285    - 
Recovery of credits written off as loss   653    362    -    1,015    (1,015)   - 
Expenses for claims / recovery of claims under reinsurance   (301)   (18)   -    (319)   (1)   (320)
Operating margin   14,444    7,402    2,471    24,317    1,057    25,374 
Other operating income (expenses)   (10,175)   (3,867)   (244)   (14,286)   (2,796)   (17,082)
Non-interest expenses (2)   (9,014)   (3,528)   (122)   (12,664)   (2,944)   (15,608)
Tax expenses for ISS, PIS and COFINS and other   (1,161)   (339)   (122)   (1,622)   (32)   (1,654)
Share of profit or (loss) in associates and joint ventures   -    -    -    -    180    180 
Net income before income tax and social contribution   4,269    3,535    2,227    10,031    (1,739)   8,292 
Income tax and social contribution   (1,632)   (1,017)   (773)   (3,422)   1,461    (1,961)
Non-controlling interest in subsidiaries   (39)   (108)   (8)   (155)   (51)   (206)
Net income   2,598    2,410    1,446    6,454    (329)   6,125 
(1)Includes interest and similar income and expenses of R$ 16,979 dividend income of R$ 102, net gains (loss) on investment securities and derivatives of R$ (711) and results from foreign exchange operations and exchange variation of transactions abroad of R$ (400).
(2)Refers to general and administrative expenses including depreciation expenses of R$ 392, amortization expenses of R$ 461 and insurance acquisition expenses of R$ 42.

 

Total assets (1) - 09/30/2018   1,019,125    653,737    127,872    1,613,162    (88,673)   1,524,489 
Total liabilities - 09/30/2018   982,661    590,175    89,201    1,474,465    (94,883)   1,379,582 
                               
(1) Includes:                              
Investments in associates and joint ventures   1,186    -    11,147    12,333    (435)   11,898 
Goodwill   1,284    7,554    -    8,838    2,803    11,641 
Fixed assets, net   5,429    872    -    6,301    918    7,219 
Intangible assets, net   6,041    1,202    -    7,243    1,392    8,635 

 

The Consolidated figures do not represent the sum of the parties because there are intercompany transactions that were eliminated only in the consolidated statements. Segments are assessed by top management, net of income and expenses between related parties.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018147

 

 

ITAÚ UNIBANCO HOLDING S.A.

From July 1 to September 30, 2017

(In millions of Reais, except per share information)

 

Consolidated Statement of Income  Retail
Banking		   Wholesale
Banking		   Activities with
the Market +
Corporation		   ITAÚ
 UNIBANCO		   Adjustments   IFRS
consolidated		 
Banking product   17,186    7,065    2,730    26,981    2,821    29,802 
Interest margin (1)   9,418    4,635    2,716    16,769    2,602    19,371 
Revenue from services   6,048    2,293    17    8,358    233    8,591 
Income related to insurance, private pension and capitalization                              
operations before claim and selling expenses   1,720    137    (3)   1,854    (614)   1,240 
Other revenues   -    -    -    -    600    600 
Cost of Credit and Claims   (3,062)   (1,248)   -    (4,310)   352    (3,958)
Expenses for allowance for loan and lease losses   (3,236)   (1,046)   -    (4,282)   643    (3,639)
Impairment   1    (263)   -    (262)   262    - 
Discounts granted   (184)   (39)   -    (223)   223    - 
Recovery of credits written off as loss   666    111    -    777    (777)   - 
Expenses for claims / recovery of claims under reinsurance   (309)   (11)   -    (320)   1    (319)
Operating margin   14,124    5,817    2,730    22,671    3,173    25,844 
Other operating income (expenses)   (9,438)   (3,537)   (530)   (13,505)   (2,050)   (15,555)
Non-interest expenses (2)   (8,363)   (3,216)   (286)   (11,865)   (1,801)   (13,666)
Tax expenses for ISS, PIS and COFINS and Other   (1,075)   (321)   (244)   (1,640)   (385)   (2,025)
Share of profit or (loss) in associates and joint ventures   -    -    -    -    136    136 
Net income before income tax and social contribution   4,686    2,280    2,200    9,166    1,123    10,289 
Income tax and social contribution   (1,801)   (741)   (426)   (2,968)   (1,261)   (4,229)
Non-controlling interest in subsidiaries   (29)   91    (6)   56    (123)   (67)
Net income   2,856    1,630    1,768    6,254    (261)   5,993 
(1)Includes interest and similar income and expenses of R$ 16,441 dividend income of R$ 3, net gains (loss) on investment securities and derivatives of R$ 2,386 and results from foreign exchange operations and exchange variation of transactions abroad of R$ 541.
(2)Refers to general and administrative expenses including depreciation expenses of R$ 388, amortization expenses of R$ 361 and insurance acquisition expenses of R$ 61.

 

Total assets (1) - 01/01/2017   909,779    585,088    116,401    1,427,084    (75,770)   1,351,314 
Total liabilities - 01/01/2017   877,792    525,390    80,810    1,299,869    (80,939)   1,218,930 
                               
(1) Includes:                              
Investments in associates and joint ventures   1,325    -    3,106    4,431    642    5,073 
Goodwill   1,398    6,171    -    7,569    2,106    9,675 
Fixed assets, net   5,635    1,177    -    6,812    1,230    8,042 
Intangible assets, net   6,559    1,105    -    7,664    (283)   7,381 

 

The Consolidated figures do not represent the sum of all parties because there are intercompany transactions that were eliminated only in the consolidated statements. Segments are assessed by top management, net of income and expenses between related parties.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018148

 

 

ITAÚ UNIBANCO HOLDING S.A.

From January 1, September 30, 2018

(In millions of Reais, except for share information)

 

Consolidated Statement of Income  Retail
Banking		   Wholesale
Banking		   Activities with
the Market +
Corporation		   ITAÚ
UNIBANCO		   Adjustments   IFRS
consolidated		 
Banking product   53,846    21,662    7,837    83,345    (7,863)   75,482 
Interest margin (1)   29,995    14,070    7,638    51,703    (8,104)   43,599 
Banking service fees   18,713    7,085    88    25,886    1,282    27,168 
Income related to insurance, private pension, and capitalization operations                              
before claim and selling expenses   5,138    507    111    5,756    (2,321)   3,435 
Other income   -    -    -    -    1,280    1,280 
Cost of Credit and Claims   (10,066)   (1,519)   -    (11,585)   2,921    (8,664)
Expected Loss with Loan Operations and Lease Operations   (10,335)   (1,952)   -    (12,287)   4,557    (7,730)
Impairment   6    (283)   -    (277)   277    - 
Discounts granted   (797)   (45)   -    (842)   842    - 
Recovery of loans written off as loss   1,938    817    -    2,755    (2,755)   - 
Expenses for claims / recovery of claims under reinsurance   (878)   (56)   -    (934)   -    (934)
Operating margin   43,780    20,143    7,837    71,760    (4,942)   66,818 
Other operating income (expenses)   (29,713)   (11,277)   (612)   (41,602)   (4,986)   (46,588)
Non-interest expenses (2)   (26,177)   (10,275)   (186)   (36,638)   (5,834)   (42,472)
Tax expenses for ISS, PIS and COFINS and Other   (3,536)   (1,002)   (426)   (4,964)   378    (4,586)
Share of profit or (loss) in associates and joint ventures   -    -    -    -    470    470 
Net income before income tax and social contribution   14,067    8,866    7,225    30,158    (9,928)   20,230 
Income tax and social contribution   (5,301)   (2,601)   (2,477)   (10,379)   8,931    (1,448)
Non-controlling interest in subsidiaries   (127)   (373)   (24)   (524)   (4)   (528)
Net income   8,639    5,892    4,724    19,255    (1,001)   18,254 
(1)Includes interest and similar income and expenses of R$ 48,867 dividend income of R$ 299, net gains (loss) on investment securities and derivatives of R$ (6,613) and results from foreign exchange operations and exchange variation of transactions abroad of R$ 1,046.
(2)Refers to general and administrative expenses including depreciation expenses of R$ 1,165 amortization expenses of R$ 1,310 and insurance acquisition expenses of R$ 137.

 

Total assets (1) - 09/30/2018   1,019,125    653,737    127,872    1,613,162    (88,673)   1,524,489 
Total liabilities - 09/30/2018   982,661    590,175    89,201    1,474,465    (94,883)   1,379,582 
                               
(1) Includes:                              
Investments in associates and joint ventures   1,186    -    11,147    12,333    (435)   11,898 
Goodwill   1,284    7,554    -    8,838    2,803    11,641 
Fixed assets, net   5,429    872    -    6,301    918    7,219 
Intangible assets, net   6,041    1,202    -    7,243    1,392    8,635 

 

The consolidated figures do not represent the sum of the segments because there are intercompany transactions that were eliminated only in the consolidated financial statements. Segments are assessed by top management, net of income and expenses between related parties.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018149

 

 

ITAÚ UNIBANCO HOLDING S.A.

From January 1 to September 30, 2017

(In millions of Reais except per share information)

 

Consolidated Statement of Income  Retail
Banking		   Wholesale
Banking		   Actitivities with
the Market +
Corporation		   ITAÚ
UNIBANCO		   Adjustments   IFRS
consolidated		 
Banking product   51,893    21,597    7,963    81,453    5,255    86,708 
Interest margin (1)   28,948    14,744    7,877    51,569    4,581    56,150 
Banking service fees   17,665    6,537    38    24,240    1,062    25,302 
Income related to insurance, private pension, and capitalization operations before claim and selling expenses   5,280    316    48    5,644    (1,708)   3,936 
Other income   -    -    -    -    1,320    1,320 
Cost of Credit and Claims   (9,915)   (4,729)   (2)   (14,646)   (556)   (15,202)
Expected Loss with Loan Operations and Lease Operations   (10,517)   (4,103)   (2)   (14,622)   321    (14,301)
Impairment   1    (813)   -    (812)   812    - 
Discounts granted   (593)   (177)   -    (770)   770    - 
Recovery of loans written off as loss   2,059    400    -    2,459    (2,459)   - 
Expenses for claims / recovery of claims under reinsurance   (865)   (36)   -    (901)   -    (901)
Operating margin   41,978    16,868    7,961    66,807    4,699    71,506 
Other operating income (expenses)   (27,582)   (10,525)   (1,310)   (39,417)   (4,724)   (44,141)
Non-interest expenses (2)   (24,345)   (9,575)   (647)   (34,567)   (4,511)   (39,078)
Tax expenses for ISS, PIS and COFINS and Other   (3,237)   (950)   (663)   (4,850)   (624)   (5,474)
Share of profit or (loss) in associates and joint ventures   -    -    -    -    411    411 
Net income before income tax and social contribution   14,396    6,343    6,651    27,390    (25)   27,365 
Income tax and social contribution   (5,379)   (1,815)   (1,434)   (8,628)   (22)   (8,650)
Non-controlling interest in subsidiaries   (125)   (23)   (15)   (163)   (165)   (328)
Net income   8,892    4,505    5,202    18,599    (212)   18,387 
(1)Includes interest and similar income and expenses of R$ 49,601 dividend income of R$ 178, net gains (loss) on investment securities and derivatives of R$ 5,604 and results from foreign exchange operations and exchange variation of transactions abroad of R$ 767.
(2)Refers to general and administrative expenses including depreciation expenses of R$ 1,172 amortization expenses of R$ 1,065 and insurance acquisition expenses of R$ 239.

 

Total assets (1) - 01/01/2017   909,779    585,088    116,401    1,427,084    (75,770)   1,351,314 
Total liabilities - 01/01/2017   877,792    525,390    80,810    1,299,869    (80,939)   1,218,930 
                               
(1) Includes:                              
Investments in associates and joint ventures   1,325    -    3,106    4,431    642    5,073 
Goodwill   1,398    6,171    -    7,569    2,106    9,675 
Fixed assets, net   5,635    1,177    -    6,812    1,230    8,042 
Intangible assets, net   6,559    1,105    -    7,664    (283)   7,381 

 

The Consolidated figures do not represent the sum of the segments because there are intercompany transactions that were eliminated only in the consolidated financial statements. Segments are assessed by top management, net of income and expenses between related parties.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018150

 

 

Information on the result of main services and products and noncurrent assets by geographic area are as follows:

 

   01/01 to 09/30/2018   01/01 to 09/30/2017 
   Brazil   Abroad   Total   Brazil   Abroad   Total 
Income related to financial operations (1) (2)   74,458    19,938    94,396    105,617    13,387    119,004 
Income related to insurance, private pension and capitalization operations before claim and selling expenses   3,318    117    3,435    3,835    101    3,936 
Banking service fees   24,518    2,650    27,168    23,055    2,247    25,302 
Non-current assets (3)   11,964    3,890    15,854    13,299    2,124    15,423 
(1)Includes interest and similar income, dividend income, net gain (loss) on investment securities and derivatives, foreign exchange results, and exchange variation on transactions.
(2)ITAÚ UNIBANCO HOLDING does not have clients representing 10% or higher of its revenues.
(3)The amounts for comparative purposes refer to the 01/01/2017.

 

Note 33 –Related parties

 

a)Transactions between related parties are carried out at amounts, terms and average rates in accordance with normal market practices during the period, as well as under reciprocal conditions.

 

Transactions between companies included in consolidation (Note 2.4a) were eliminated from the consolidated financial statements and the absence of risk is taken into consideration.

 

The unconsolidated related parties are as follows:

 

·Itaú Unibanco Participações S.A. (IUPAR), 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, especially: 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;

 

·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 HOLDING to act in their respective areas of interest; and

 

·Investments in Porto Seguro Itaú Unibanco Participações S.A., BSF Holding S.A. and XP Investiment S.A.

 

The transactions with these related parties are mainly as follows:

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018151

 

 

   ITAÚ UNIBANCO HOLDING
      Assets / (liabilities)       Revenue / (expenses) 
              07/01 to   07/01 to   01/01 to   01/01 to 
   Annual rate  09/30/2018   12/31/2017   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Loan operations      156    96    2    2    8    2 
Alpargatas S.A.      51    96    (4)   2    2    2 
Other      105    -    6    -    6    - 
Deposits and securities sold under repurchase agreements      (200)   (46)   -    (1)   (2)   (4)
Duratex S.A.  95.5% to 98% of CDI   (19)   (22)   -    (1)   (1)   (2)
Elekeiroz S.A.      -    (5)   -    -    -    - 
Olimpia Promoção e Serviços S.A.  100% Selic   (2)   (7)   -    -    (1)   (1)
Conectcar Soluções de Mobilidade Eletrônica S.A.      -    -    -    1    -    - 
Alpargatas S.A.  97.5% of CDI   (5)   -    -    -    -    - 
Other  50.01% to 100.15% of CDI   (174)   (12)   -    (1)   -    (1)
Amounts  receivable  from  (payable  to)  related  companies  / Banking service fees (expenses)      (104)   (108)   28    9    33    27 
Itaúsa Investimentos Itaú S.A.      -    -    1    4    3    6 
Itaúsa Empreendimentos S.A.      -    -    17    -    1    - 
Olimpia Promoção e Serviços S.A.      (2)   (2)   (6)   (5)   (18)   (17)
Fundação Itaú Unibanco - Previdência Complementar      (110)   (106)   12    12    37    35 
FUNBEP - Fundo de Pensão Multipatrocinado      -    -    2    2    5    5 
Other      8    -    2    (4)   5    (2)
Rental revenues (expenses)      -    -    (9)   (19)   (35)   (49)
Itaúsa Investimentos Itaú S.A.      -    -    (1)   -    (2)   (2)
Fundação Itaú Unibanco - Previdência Complementar      -    -    (6)   (14)   (27)   (38)
FUNBEP - Fundo de Pensão Multipatrocinado      -    -    (2)   (3)   (6)   (9)
Other      -    -    -    (2)   -    - 
Sponsorship expenses      -    -    (12)   -    (31)   (10)
Associação Cubo Coworking Itaú      -    -    (12)   -    (31)   (10)
Donation expenses      -    -    (30)   (45)   (94)   (94)
Instituto Itaú Cultural      -    -    (30)   (45)   (93)   (93)
Associação Itaú Viver Mais      -    -    -    -    (1)   (1)

 

Pursuant to the current rules, financial institutions cannot grant loans or advances to the following:

 

a) any individuals or companies that control the Institution or any entity under common control with the institution, or any executive officer, director, member of the fiscal council, or the immediate family members of these individuals;

b) any entity controlled by the institution; or

c) any entity in which the bank directly or indirectly holds more than 10% of the capital stock.

 

Therefore, no loans or advances were granted to any subsidiary, executive officer, director or family members.

 

b)Compensation of the key management personnel

 

Compensation for the period paid to Management Members and members of the Audit Committee of ITAÚ UNIBANCO HOLDING consist of:

 

   07/01 to   07/01 to   01/01 to   01/01 to 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Compensation   111    117    369    327 
Board of directors   9    20    30    40 
Executives   102    97    339    287 
Profit sharing   76    56    181    154 
Board of directors   1    1    4    2 
Executives   75    55    177    152 
Contributions to pension plans - Executives   2    2    7    8 
Stock  option  plan  –  Executives   56    46    158    137 
Total   245    221    715    626 

 

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Note 34 –Management risks

 

Credit risk

 

1.Credit risk measurement

 

ITAÚ UNIBANCO HOLDING understands credit risk is the possibility of losses arising from the breach by the borrower, issuer or counterparty of the respective agreed-upon financial obligations, the devaluation of loan agreement due to downgrading of the borrower’s, the issuer’s, the counterparty’s risk rating, the reduction in gains or compensation, the advantages given upon posterior renegotiation and the recovery costs.

 

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 to establishing processes and tools to measure, monitor and control the credit risk inherent in all products, portfolio concentrations and impacts of potential changes in the economic environment.

 

ITAÚ UNIBANCO HOLDING 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.

 

The continuous monitoring of ITAÚ UNIBANCO HOLDING’ portfolio concentration levels, assessing the economic industries and largest enables, allows to take preventive measures to avoid that the established limits are breached.

  

For individual, small and middle-market companies, credit rating is attributed based on application statistical models (in the early phases of relationship with the client) and behavior score (used for clients with which ITAÚ UNIBANCO HOLDING already has a relationship).

 

For large companies, the rating is based on information such as economic and financial condition of the counterparty, their cash-generating capability, the economic group to which they belong, and the current and prospective situation of the economic sector in which they operate. The credit proposals are analyzed on a case by case basis, through an approval-level mechanism.

 

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 Corporate Governance, Regulations and Policies.

 

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2.Credit risk management

 

ITAÚ UNIBANCO HOLDING strictly controls the credit exposure of clients and counterparties, taking action to address situations in which the actual exposure exceeds the desired one. For this purpose, contractually provided actions can be taken, such as early settlement or requirement of additional collateral.

 

3.Collateral and policies for mitigating credit risk

 

ITAÚ UNIBANCO HOLDING uses collateral to increase its recovery capacity in transactions subject to credit risk. Collateral used may be personal security, secured guarantee, legal structures with mitigation power and offset agreements.

 

For collateral to be considered instruments that mitigate credit risk, they must comply with the requirements and standards that regulate them, be them internal or external ones, be legally valid (effective), enforceable, and assessed on a regular basis.

 

ITAÚ UNIBANCO HOLDING also uses credit derivatives, to mitigate credit risk of its portfolios of loans and securities. These instruments are priced based on models that use the fair value of market inputs, such as credit spreads, recovery rates, correlations and interest rates.

 

4.Policy on the provision

 

The provisioning policy adopted by ITAÚ UNIBANCO HOLDING is in line with the IFRS guidelines. Thus, all provisions for expected losses are recognized considering the expected risk linked to contracts with similar characteristics and in anticipation of impairment signs, considering a loss horizon adequate to the remaining period of the contract termination. For contracts of products with no determined termination date, average results of impairment and default are used to determine the loss horizon.

 

The classification between stages is considered to determine any limitation to the loss horizon to be assessed.

 

Write-offs to loss occur in accordance with the expected recovery of each contract.

 

5.Classification of Stages of Credit Impairment

 

ITAÚ UNIBANCO HOLDING considers internal classification of clients to determine the credit status of portfolio contracts. In addition, statistics models, days of default and qualitative analyses are used for the trading portfolio.

 

Credit impairment is determined using internal ratings resulting from the aforementioned information, and rules to change the stage consider lower and higher rating limits (quantitative criteria), in addition the relative variation of ratings since the initial recognition. Additionally, days of delay are important factors for classification and are used on an absolute basis.

 

After determining the contract credit status, its classification is established in one of three credit impairment stages. Based on this classification, measurement rules for expected credit loss established for each stage are used, as described in Note 2.4e.

 

For Retail and Middle business portfolio, contracts overdue for over 30 days are classified in stage 2, except for the payroll loans for government bodies, which are recognized after 45 days of delay. This happens due to the product dynamics. For the Wholesale business portfolio, information on delay is considered in the rating assessment.

 

Default parameters considered are: (i) 90 days with no payment record(1); (ii) debt restructuring; (iii) adjudication of bankruptcy; (iv) loss; and (v) court-ordered reorganization.

 

(1)For mortgage loan portfolio, 180 days without payment record are considered.

 

6.Economic scenarios

 

ITAÚ UNIBANCO HOLDING uses internal and external in determine, through statistic models, the expected credit loss for the contract in a proper observation horizon, related to the number of months remaining to the contract termination and the state in which it is classified. Additionally, information on economic scenarios and public information with internally developed

 

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information are used to determine and affect the expected credit loss, adjusting loss levels to expected macroeconomic realities.

 

7.Credit risk exposure

 

   09/30/2018   12/31/2017 
   Brazil   Abroad   Total   Brazil   Abroad   Total 
Financial Assets   995,839    314,282    1,310,121    967,703    263,711    1,231,414 
At Amortized Cost   749,568    252,422    1,001,990    702,672    203,057    905,729 
Interbank deposits   5,702    22,951    28,653    6,367    22,681    29,048 
Securities purchased under agreements to resell   292,600    1,394    293,994    243,917    790    244,707 
(-) Provision for Expected Securities purchased under agreements to resell   (7)   -    (7)   (8)   -    (8)
Securities   89,849    21,242    111,091    101,365    10,059    111,424 
(-) Provision for Expected Securities   (4,148)   (2)   (4,150)   (5,176)   (6)   (5,182)
Loan operations and lease operations (*)   330,748    203,624    534,372    327,501    170,218    497,719 
(-) Provision for Expected Loss   (23,007)   (7,868)   (30,875)   (25,081)   (6,466)   (31,547)
Other financial assets   57,831    11,081    68,912    53,787    5,781    59,568 
At Fair Value Through Other Comprehensive Income   10,532    38,261    48,793    14,722    37,427    52,149 
Securities   10,613    38,266    48,879    14,805    37,428    52,233 
(-) Provision for Expected Loss   (81)   (5)   (86)   (83)   (1)   (84)
At Fair Value Through Profit or Loss   235,739    21,668    257,407    250,309    21,481    271,790 
Securities   222,182    6,558    228,740    238,200    10,747    248,947 
Derivatives   13,557    15,110    28,667    12,109    10,734    22,843 
At Fair Value Designated at Fair Value Through Profit or Loss   -    1,931    1,931    -    1,746    1,746 
Securities   -    1,931    1,931    -    1,746    1,746 
Off balance sheet   299,873    51,308    351,181    280,032    43,797    323,829 
Financial Guarantees Provided   55,974    13,611    69,585    60,062    10,427    70,489 
Letters of credit to be released   11,660    -    11,660    9,214    -    9,214 
Commitments to be released   232,239    37,697    269,936    210,756    33,370    244,126 
Mortgage loans   2,917    -    2,917    3,218    -    3,218 
Overdraft accounts   104,983    -    104,983    93,284    -    93,284 
Credit cards   122,090    3,062    125,152    109,196    2,679    111,875 
Other pre-approved limits   2,249    34,635    36,884    5,058    30,691    35,749 
Provision for Expected Loss of Financial Liabilities   3,944    440    4,384    4,513    409    4,922 
Loan Commitments   2,747    313    3,060    2,681    334    3,015 
Financial Guarantees   1,197    127    1,324    1,832    75    1,907 
Total   1,291,768    365,150    1,656,918    1,243,222    307,099    1,550,321 
(*)In the composition of balance there are operations designated at Fair Value Through Profit or Loss, in the amount of R$ 660 (R$ 102 at 12/31/2017).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018155

 

 

The table above presents the maximum exposure at September 30, 2018 and December 31, 2017, without considering any collateral received or other additional credit improvements.

 

For assets recognized in the balance sheet, the exposures presented are based on net carrying amounts. This analysis includes only financial assets subject to credit risk and excludes non-financial assets.

 

The contractual amounts of Financial Guarantees Provided and letters of credit represent the maximum potential of credit risk in the event the counterparty does not meet the terms of the agreement. The vast majority of commitments (real estate loans, overdraft accounts and other pre-approved limits) mature without being drawn, since they are renewed monthly and we have the power to cancel them at any time. As a result, the total contractual amount does not represent our effective future exposure to credit risk or the liquidity needs arising from such commitments.

 

As shown in the table, the most significant exposures correspond to Loan Operations, Financial Assets Held for Trading, and Securities Purchased Under Agreements to Resell, in addition to Financial Guarantees Provided and Other Commitments.

 

8.Maximum exposure of financial assets segregated by business sector

 

a)Loan operations and lease operations portfolio

 

   09/30/2018   %   12/31/2017   % 
Public sector   2,607    0.5    2,372    0.5 
Industry and commerce   116,206    21.7    107,201    21.5 
Services   120,695    22.6    114,332    23.0 
Natural resources   25,497    4.8    23,032    4.6 
Other sectors   4,184    0.8    3,643    0.7 
Individuals   265,183    49.6    247,139    49.7 
Total   534,372    100.0    497,719    100.0 

 

b)The credit risks of Off Balance items (Financial Guarantees Pledged, Letters of Credit and Commitments to Be Released) are neither categorized nor managed by business sector.

 

c)Other financial assets (*)

 

   09/30/2018   %   12/31/2017   % 
Natural resources   3,923    0.5    2,751    0.4 
Public sector   300,645    40.8    327,932    46.5 
Industry and commerce   11,303    1.5    11,212    1.6 
Services   89,492    12.1    84,191    11.9 
Other sectors   9,140    1.2    5,287    0.7 
Individuals   569    0.1    554    0.1 
Financial   322,640    43.8    273,747    38.8 
Total   737,712    100.0    705,674    100.0 
(*)Includes Financial Assets at Fair Value Through Profit or Loss, Derivatives, Assets Designated at Fair Value Through Profit or Loss, Financial Assets at Fair Value Through Other Comprehensive Income, Financial Assets at Amortized Cost, Interbank Deposits and Securities Purchased Under Agreements to Resell.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018156

 

 

8.1.Credit risk exposure

 

a)Maximum exposure of loan operations and lease operations

 

The table below presents the maximum exposure of financial assets segregated by type and classification of credit risk.

 

09/30/2018
   Stage 1   Stage 2   Stage 3   Total Consolidated of 3 stages 
   Loan   Commitments   Financial       Loan   Commitments to   Financial       Loan   Commitments   Financial       Loan   Commitments   Financial     
   Operations   to be released   Guarantees   Total   Operations   be released   Guarantees   Total   Operations   to be released   Guarantees   Total   Operations (*)   to be released   Guarantees   Total 
Individuals   168,665    175,498    1,023    345,186    14,917    5,988    -    20,905    17,688    747    -    18,435    201,270    182,233    1,023    384,526 
Credit card   58,043    113,201    -    171,244    7,043    4,881    -    11,924    4,370    660    -    5,030    69,456    118,742    -    188,198 
Personal loans   14,699    62,278    1,023    78,000    3,673    1,105    -    4,778    10,829    87    -    10,916    29,201    63,470    1,023    93,694 
Payroll loans   43,478    -    -    43,478    1,017    -    -    1,017    1,663    -    -    1,663    46,158    -    -    46,158 
Vehicles   13,710    -    -    13,710    1,017    -    -    1,017    532    -    -    532    15,259    -    -    15,259 
Mortgage loans   38,735    19    -    38,754    2,167    2    -    2,169    294    -    -    294    41,196    21    -    41,217 
Corporate   92,350    15,782    47,358    155,490    4,457    99    1,849    6,405    10,102    283    4,313    14,698    106,909    16,164    53,520    176,593 
Small and medium businesses   53,297    36,408    2,471    92,176    6,201    1,794    82    8,077    6,117    213    47    6,377    65,615    38,415    2,600    106,630 
Foreign loans - Latin America   136,295    29,206    11,891    177,392    17,933    3,855    519    22,307    6,350    63    32    6,445    160,578    33,124    12,442    206,144 
Total   450,607    256,894    62,743    770,244    43,508    11,736    2,450    57,694    40,257    1,306    4,392    45,955    534,372    269,936    69,585    873,893 
%   58.5%   33.4%   8.1%   100.0%   75.4%   20.3%   4.2%   100.0%   87.6%   2.8%   9.6%   100.0%   61.1%   30.9%   8.0%   100.0%

 

12/31/2017
   Stage 1   Stage 2   Stage 3   Total Consolidated of 3 stages 
   Loan   Commitments   Financial       Loan   Commitments to   Financial       Loan   Commitments   Financial       Loan   Commitments   Financial     
   Operations   to be released   Guarantees   Total   Operations   be released   Guarantees   Total   Operations   to be released   Guarantees   Total   Operations (*)   to be released   Guarantees   Total 
Individuals   161,364    159,533    1,016    321,913    13,032    4,420    -    17,452    18,989    776    -    19,765    193,385    164,729    1,016    359,130 
Credit card   57,073    102,180    -    159,253    6,027    3,353    -    9,380    4,313    697    -    5,010    67,413    106,230    -    173,643 
Personal loans   12,290    57,339    1,016    70,645    3,108    1,065    -    4,173    11,897    79    -    11,976    27,295    58,483    1,016    86,794 
Payroll loans   42,115    -    -    42,115    733    -    -    733    1,868    -    -    1,868    44,716    -    -    44,716 
Vehicles   12,550    -    -    12,550    987    -    -    987    628    -    -    628    14,165    -    -    14,165 
Mortgage loans   37,336    14    -    37,350    2,177    2    -    2,179    283    -    -    283    39,796    16    -    39,812 
Corporate   91,442    14,100    50,811    156,353    3,833    278    1,299    5,410    12,372    390    5,538    18,300    107,647    14,768    57,648    180,063 
Small and medium businesses   47,132    33,203    2,229    82,564    6,001    1,638    74    7,713    7,157    254    54    7,465    60,290    35,095    2,357    97,742 
Foreign loans - Latin America   117,448    25,867    9,069    152,384    13,028    3,527    371    16,926    5,921    140    28    6,089    136,397    29,534    9,468    175,399 
Total   417,386    232,703    63,125    713,214    35,894    9,863    1,744    47,501    44,439    1,560    5,620    51,619    497,719    244,126    70,489    812,334 
%   58.5%   32.6%   8.9%   100.0%   75.6%   20.8%   3.7%   100.0%   86.1%   3.0%   10.9%   100.0%   61.3%   30.1%   8.7%   100.0%

(*)In the composition of balance there are operations designated at Fair Value Through Profit or Loss, in the amount of R$ 660 (R$ 102 at 12/31/2017).

 

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b)Maximum Exposure of other financial assets

 

   09/30/2018 
       Stage 1   Stage 2   Stage 3 
   Fair Value   Cost   Fair Value   Cost   Fair Value   Cost   Fair Value 
Investment funds   3,559    3,506    3,356    -    -    949    203 
Brazilian government securities   236,019    236,320    235,839    240    180    -    - 
Brazilian external debt bonds   35,928    36,293    35,928    -    -    -    - 
Others stakeholders   -    36    -    -    -    -    - 
Government securities - other countries   28,338    28,394    28,338    -    -    -    - 
Argentina   716    693    716    -    -    -    - 
United States   2,364    2,390    2,364    -    -    -    - 
Mexico   2,392    2,392    2,392    -    -    -    - 
Denmark   493    493    493    -    -    -    - 
Spain   3,080    3,080    3,080    -    -    -    - 
Korea   1,944    1,944    1,944    -    -    -    - 
Chile   7,818    7,828    7,818    -    -    -    - 
Paraguay   1,640    1,694    1,640    -    -    -    - 
Uruguay   890    894    890    -    -    -    - 
Colombia   6,998    6,983    6,998    -    -    -    - 
Other   3    3    3    -    -    -    - 
Corporate securities   82,561    78,896    78,758    3,643    1,801    4,850    2,002 
Shares   7,050    6,739    6,793    515    255    198    2 
Rural product note   4,017    3,847    3,841    33    21    281    155 
Securitized real estate loans   11,716    11,161    11,120    107    103    788    493 
Bank deposit certificate   1,295    1,295    1,295    -    -    -    - 
Debentures   26,498    23,872    23,794    2,917    1,368    3,560    1,336 
Eurobonds and other   6,135    6,199    6,135    -    -    -    - 
Financial bills   21,256    21,256    21,256    -    -    -    - 
Promissory notes   2,869    2,839    2,838    15    15    23    16 
Others   1,725    1,688    1,686     56    39    -      
Total   386,405    383,445    382,219    3,883    1,981    5,799    2,205 

 

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   12/31/2017 
       Stage 1   Stage 2   Stage 3 
   Fair Value   Cost   Fair Value   Cost   Fair Value   Cost   Fair Value 
Investment funds   3,513    3,351    3,345    -    -    784    168 
Brazilian government securities   270,507    269,265    270,311    261    196    -    - 
Brazilian external debt bonds   26,818    26,370    26,818    -    -    -    - 
Others stakeholders   -    36    -    -    -    -    - 
Government securities - other countries   28,902    28,914    28,902    -    -    -    - 
Argentina   1,466    1,446    1,466    -    -    -    - 
United States   1,666    1,684    1,666    -    -    -    - 
Mexico   564    564    564    -    -    -    - 
Denmark   1,951    1,951    1,951    -    -    -    - 
Spain   2,937    2,937    2,937    -    -    -    - 
Korea   1,944    1,944    1,944    -    -    -    - 
Chile   9,761    9,765    9,761    -    -    -    - 
Paraguay   1,807    1,922    1,807    -    -    -    - 
Uruguay   828    824    828    -    -    -    - 
Colombia   5,945    5,844    5,945    -    -    -    - 
Other   33    33    33    -    -    -    - 
Corporate securities   79,344    75,240    75,486    1,510    1,109    7,857    2,749 
Shares   6,107    5,554    5,820    117    21    482    266 
Rural product note   2,739    2,518    2,511    -    -    381    228 
Securitized real estate loans   13,577    12,492    12,501    64    59    3,062    1,017 
Bank deposit certificate   1,150    1,150    1,150    -    -    -    - 
Debentures   23,758    21,584    21,569    1,255    969    3,892    1,220 
Eurobonds and other   6,192    6,195    6,192    -    -    -    - 
Financial bills   21,230    21,230    21,230    -    -    -    - 
Promissory notes   3,614    3,597    3,596    -    -    40    18 
Others   977    920    917    74     60    -      
Total   409,084    403,176    404,862    1,771    1,305    8,641    2,917 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018159

 

 

8.2. The table below shows other financial assets, individually evaluated, classified by rating:

 

09/30/2018
Internal rating  Interbank deposits and
securities purchased under
agreements to resell		   Financial assets at fair
value through profit or
loss		   Financial assets at fair value
through profit or loss
designated at fair value		   Derivatives
assets		   Financial Assets Fair Value
Through Other
Comprehensive Income		   Financial assets at
amortized cost		   Total 
Lower risk   322,640    228,683    1,931    28,131    48,793    104,005    734,183 
Satisfactory   -    16    -    254    -    1,447    1,717 
Higher risk   -    41    -    282    -    1,489    1,812 
Total   322,640    228,740    1,931    28,667    48,793    106,941    737,712 
%   43.7    31.0    0.3    3.9    6.6    14.5    100.0 
                                    
12/31/2017
Internal rating  Interbank deposits and
securities purchased under
agreements to resell		   Financial assets at fair
value through profit or
loss		   Financial assets at fair value
through profit or loss
designated at fair value		   Derivatives
assets		   Financial Assets Fair Value
Through Other
Comprehensive Income		   Financial assets at
amortized cost		   Total 
Lower risk   273,747    248,904    1,746    21,209    52,149    104,610    702,365 
Satisfactory   -    15    -    1,263    -    338    1,616 
Higher Risk   -    28    -    371    -    1,294    1,693 
Total   273,747    248,947    1,746    22,843    52,149    106,242    705,674 
%   38.8    35.3    0.2    3.2    7.4    15.1    100.0 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018160

 

 

8.3. Collateral held for loan and lease operations portfolio

 

   09/30/2018   12/31/2017 
   (l) Over-collateralized assets   (II) Under-collateralized
assets		   (l) Over-collateralized assets   (II) Under-collateralized assets 
Financial effect of collateral  Carrying
value of the
assets		   Fair value of
collateral		   Carrying
value of the
assets		   Fair value of
collateral		   Carrying
value of the
assets		   Fair value of
collateral		   Carrying
value of the
assets		   Fair value of
collateral		 
Individuals   55,815    142,786    1,127    1,074    52,608    132,007    1,079    1,028 
Personal   442    1,647    884    847    370    1,398    901    864 
Vehicles   14,343    34,274    240    225    13,618    34,368    177    163 
Mortgage loans   41,030    106,865    3    2    38,620    96,241    1    1 
                                         
Small, medium businesses and corporate   115,393    311,523    11,365    7,801    115,731    339,892    11,032    8,537 
                                         
Foreign loans - Latin America   123,006    212,186    12,083    4,397    105,425    175,476    10,262    3,598 
                                         
Total   294,214    666,495    24,575    13,272    273,764    647,375    22,373    13,163 

 

The difference between the total loan portfolio and collateralized loan portfolio is generated by non-collateralized loans amounting to R$ 215.583 (R$ 201,582 at 12/31/2017).

 

ITAÚ UNIBANCO HOLDING uses collateral to reduce the occurrence of losses in operations with credit risk and manages and regularly reviews its collateral with the objective that collateral held is sufficient, legally exercisable (effective) and feasible. Thus, collateral is used to maximize the recoverability potential of impaired loans and not to reduce the exposure value of customers and counterparties.

 

Individuals

Personal – This category of credit products usually requires collateral, focusing on financial guarantees provided.

Vehicles – For this type of operation, clients' assets serve as collateral, which are also the leased assets in leasing operations.

Mortgage loans – Regards buildings themselves given in guarantee.

 

Small, Medium Businesses and Corporate – For these operations, any collateral can be used within the credit policy of ITAÚ UNIBANCO HOLDING (chattel mortgage, assignment trust, surety / joint debtor, Mortgage and others).

 

Foreign loans – Latin America – For these operations, any collateral can be used within the credit policy of ITAÚ UNIBANCO HOLDING (chattel mortgage, assignment trust, surety/joint debtor, Mortgage and others).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018161

 

 

9.Repossessed assets

 

Repossessed assets are recognized as assets when possession is effectively obtained.

 

Assets received from the foreclosure of loans, including real estate, are initially recorded at the lower of: (i) the fair value of the asset less the estimated selling expenses, or (ii) the carrying amount of the loan.

 

Further impairment of assets is recorded as a provision, with a corresponding charge to income. The maintenance costs of these assets are expensed as incurred.

 

The policy for sales of these assets (assets not for use) includes periodic auctions that are announced in advance and considers that the assets cannot be held for more than one year as stipulated by the BACEN. This period may be extended at the discretion of BACEN.

 

The amounts below represent total assets repossessed in the period:

 

   07/01 to   07/01 to   01/01 to   01/01 to 
   09/30/2018   09/30/2017   09/30/2018   09/30/2017 
Real estate not for own use   55    9    102    102 
Residential properties - mortgage loans   45    124    167    230 
Vehicles - linked to loan operations   1    -    1    2 
Other (vehicles / furniture / equipments) - dation   20    66    70    192 
Total   121    199    340    526 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018162

 

 

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.

 

The institutional policy on market risk management is in line with CMN Resolution No. 3,464, as amended, comprising a set of principles that guide the strategy for control and management of market risks of the whole institution.

 

ITAÚ UNIBANCO HOLDING’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;
·Expertise within the group to support operations in specific markets.

 

The purpose of market risk control of ITAÚ UNIBANCO HOLDING structure is:

 

·Providing visibility and assurance to all executive levels that the assumption of market risks is in line with ITAÚ UNIBANCO HOLDING and the 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, (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 CMN has regulations that establish the segregation of exposure to market risk in risk factors, such as interest rate, exchange rate, shares and commodities. Brazilian inflation indexes are also treated as a group of risk factors and follow the same governance structure of limits.

 

The limit and warning structure is aligned with the Board of Directors’ structure, and it is reviewed and approved on an annual basis. This structure has specific limits that aim at improvement the monitoring process and understanding of risks, as well as avoid their 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.

 

Aiming at adjusting risks to the established limits, ITAÚ UNIBANCO HOLDING hedges transactions with clients and proprietary positions, including foreign investments. Derivatives are the instruments most frequently used to carry out these hedge activities, and they may be characterized as accounting or economic hedge, both governed by the internal policies at ITAÚ UNIBANCO HOLDING.

 

For a detailed vision of the accounting hedge topic, see Note 7 – Accounting Hedge.

 

Market risk management follows the segregation of operations in Trading Portfolio and Banking Portfolio, pursuant to the general criteria set forth in CMN Resolution No. 3,464, and BACEN Circular No. 3,354.

 

The trading portfolio consists of all transactions involving financial instruments and commodities, including derivatives, which are carried out for trading purposes. The banking portfolio is mainly characterized by the operations arising from banking activities and related to the management of the institutions’ balance sheet, conducted with no intent of trading and with a horizon of time of medium and long terms.

  

Market risk management is conducted based on the following metrics:

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018163

 

 

·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 uses proprietary systems to measure the consolidated market risk. The processing of these systems occur, 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.

 

The document that details the guidelines established by the internal policy on market risk management, that is not part of the financial statements, may be viewed on the website www.itau.com.br/investor-relations, in the section Corporate Governance/Rules and Policies / Public Access Report – Market Risk.

 

VaR - Consolidated ITAÚ UNIBANCO HOLDING

 

Consolidated VaR of ITAÚ UNIBANCO HOLDING is calculated by Historical Simulation, i.e., the expected distribution for profit and loss (P&L’s - Profit and loss statement) of a portfolio over a time horizon that can be estimated based on the historical behavior of returns of market risk factors of this portfolio. VaR is calculated at a confidence level of 99%, historical period of 4 years (1000 business days) and a holding period of one day. In addition, in a conservative approach, VaR is calculated daily, being or not volatility-weighted, and the final VaR is the most restrictive value between both methodologies.

 

From January 1 to September 30, 2018, the average total VaR in Historical Simulation was R$ 413,0 or 0.28% of total stockholders’ equity (throughout 2017 it was R$ 409.9 or 0.28% of total stockholders’ equity).

 

(Reais million)

   VaR Total - Historical Simulation 
   09/30/2018 (1)   12/31/2017 (1) 
   Average   Minimum   Maximum   Var Total   Average   Minimum   Maximum   Var Total 
Risk factor group                                        
Interest rates   856.2    720.0    1,042.9    720.0    721.0    583.6    1,311.9    764.7 
Currencies   22.2    12.7    45.2    32.3    20.4    6.5    50.2    11.9 
Shares   36.0    23.6    58.5    37.9    45.4    38.5    54.9    46.4 
Commodities   1.6    0.6    3.1    1.4    1.5    0.7    4.0    0.8 
Effect of diversification                  (496.9)                  (451.5)
Total risk   413.0    294.7    603.6    294.7    409.9    304.8    874.0    372.3 

(1) VaR by Group of Risk Factors considers information from foreign units.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018164

 

 

Interest rate

 

The table on the position of accounts subject to interest rate risk group them by products, book value of accounts distributed by maturity. This table is not used directly to manage interest rate risks; it is mostly used to enable the assessment of mismatching between accounts and products associated thereto and to identify possible risk concentration.

 

The following table sets forth our interest-earning assets and interest-bearing liabilities and therefore does not reflect interest rate gap positions that may exist as of any given date. In addition, variations in interest rate sensitivity may exist within the repricing periods presented due to differing repricing dates within the period.

 

Position of accounts subject to interest rate risk (1)

 

   09/30/2018   12/31/2017 
   0-30
days		   31-180
days		   181-365
days		   1-5
years		   Over 5
years		   Total   0-30
days		   31-180
days		   181-365
days		   1-5
years		   Over 5
years		   Total 
Interest-bearing assets   371,603    258,880    113,111    420,231    189,106    1,352,931    268,059    354,885    103,785    392,119    178,592    1,297,440 
Interbank deposits   20,923    4,494    2,468    762    -    28,647    21,644    3,510    2,880    1,011    3    29,048 
Securities purchased under agreements to resell   172,050    100,912    8,530    10,216    2,285    293,993    42,612    201,889    2    28    168    244,699 
Central Bank compulsory deposits   80,847    -    -    -    -    80,847    94,047    -    -    -    -    94,047 
Financial Assets at Fair Value Through Profit or Loss   12,952    5,479    17,679    146,650    45,980    228,740    16,554    15,855    17,103    147,805    51,630    248,947 
Financial Assets Designated at Fair Value   -    -    1,213    718    -    1,931    -    -    1,041    705    -    1,746 
Financial Assets at Fair Value Through Other Comprehensive   1,421    1,793    4,932    25,812    14,835    48,793    1,088    2,476    6,102    23,415    19,068    52,149 
Financial Assets At Amortized Cost   1,988    7,107    5,323    52,934    39,589    106,941    10,897    7,921    6,834    50,650    29,940    106,242 
Derivatives   7,603    6,374    3,146    7,882    3,662    28,667    7,978    3,003    2,360    6,681    2,821    22,843 
Loan and lease operations portfolio (2)   73,819    132,721    69,820    175,257    82,755    534,372    73,239    120,231    67,463    161,824    74,962    497,719 
Interest-bearing liabilities   413,342    85,875    75,438    324,415    62,449    961,519    376,492    93,736    87,850    290,677    56,451    905,206 
Savings deposits   132,374    -    -    -    -    132,374    119,980    -    -    -    -    119,980 
Time deposits   39,213    30,241    21,452    149,897    3,444    244,247    27,798    32,350    22,570    126,435    2,647    211,800 
Interbank deposits   681    1,770    583    48    29    3,111    88    908    669    451    66    2,182 
Deposits received under repurchase agreements   218,075    10,935    11,836    41,367    20,568    302,781    208,261    7,362    25,185    57,146    14,680    312,634 
Interbank market   13,500    32,322    31,597    57,154    8,046    142,619    8,570    34,108    30,736    48,005    8,197    129,616 
Institutional market   2,396    3,139    6,523    61,215    27,639    100,912    4,188    16,495    5,343    43,911    28,545    98,482 
Derivatives   7,103    7,462    3,420    11,235    2,666    31,886    7,596    2,491    3,325    11,109    2,225    26,746 
Financial liabilities held for trading   -    6    27    117    57    207    11    22    22    319    91    465 
Liabilities for capitalization plans   -    -    -    3,382    -    3,382    -    -    -    3,301    -    3,301 
Difference asset / liability (3)   (41,739)   173,005    37,673    95,816    126,657    391,412    (108,433)   261,149    15,935    101,442    122,141    392,234 
Cumulative difference   (41,739)   131,266    168,939    264,755    391,412         (108,433)   152,716    168,651    270,093    392,234      
Ratio of cumulative difference to total interest-bearing assets   (3.1%)   9.7%   12.5%   19.6%   28.9%        (8.4%)   11.8%   13.0%   20.8%   30.2%     
(1)Remaining contractual terms.
(2)In the composition of balance there are operations designated at Fair Value Through Profit or Loss, in the amount of R$ 660 (R$ 102 at 12/31/2017)
(3)The difference arises from the mismatch between the maturities of all remunerated assets and liabilities, at the respective period-end date, considering the contractually agreed terms.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018165

 

 

Position of accounts subject to currency risk

 

   09/30/2018 
Assets  Dollar   Chilean
Peso		   Other   Total 
Cash and deposits on demand   10,561    2,224    7,878    20,663 
Financial Assets   119,093    111,371    72,737    303,201 
At Amortized Cost   83,621    95,765    61,955    241,341 
Interbank deposits   9,293    2,132    11,526    22,951 
Securities purchased under agreements to resell   322    307    765    1,394 
Securities   20,816    -    426    21,242 
Loan operations and lease operations portfolio   56,331    96,044    51,249    203,624 
(-) Provision for Expected Loss   (3,141)   (2,718)   (2,011)   (7,870)
At Fair Value Through Other Comprehensive Income   20,733    8,344    9,184    38,261 
Securities   20,735    8,346    9,185    38,266 
(-) Provision for Expected Loss   (2)   (2)   (1)   (5)
At Fair Value Through Profit or Loss   12,808    7,262    1,598    21,668 
Securities   5,092    409    1,057    6,558 
Derivatives   7,716    6,853    541    15,110 
Financial assets designated at fair value through profit or loss   1,931    -    -    1,931 
Securities and Equity Instruments   1,931    -    -    1,931 
Total assets   129,654    113,595    80,615    323,864 

 

   09/30/2018 
Liabilities  Dollar   Chilean
Peso		   Other   Total 
Deposits   53,630    59,848    54,921    168,399 
Securities sold under repurchase agreements   25,312    1,336    2,558    29,206 
Financial liabilities designated at fair value through profit or loss   207    -    -    207 
Derivatives   8,626    5,829    512    14,967 
Interbank market debt   33,745    6,361    5,324    45,430 
Institutional market debt   48,695    32,868    3,520    85,083 
Total liabilities   170,215    106,242    66,835    343,292 
                     
Net position   (40,561)   7,353    13,780    (19,428)

 

Position of accounts subject to currency risk

 

   12/31/2017 
Assets  Dollar   Chilean
Peso		   Other   Total 
Cash and deposits on demand   4,958    2,527    2,990    10,475 
Financial Assets   92,768    98,027    67,135    257,930 
At Amortized Cost   60,143    80,785    56,348    197,276 
Interbank deposits   8,473    469    13,739    22,681 
Securities purchased under agreements to resell   196    -    594    790 
Securities   9,605    -    454    10,059 
Loan operations and lease operations portfolio   44,320    82,510    43,388    170,218 
(-) Provision for Expected Loss   (2,451)   (2,194)   (1,827)   (6,472)
At Fair Value Through Other Comprehensive Income   19,963    10,881    6,583    37,427 
Securities   19,963    10,881    6,583    37,427 
At Fair Value Through Profit or Loss   10,916    6,361    4,204    21,481 
Securities   6,869    158    3,720    10,747 
Derivatives   4,047    6,203    484    10,734 
Financial assets designated at fair value through profit or loss   1,746    -    -    1,746 
Securities and Equity Instruments   1,746    -    -    1,746 
Total assets   97,726    100,554    70,125    268,405 

 

   12/31/2017 
Liabilities  Dollar   Chilean
Peso		   Other   Total 
Deposits   42,890    52,393    47,358    142,641 
Securities sold under securities repurchase agreements   14,488    63    2,110    16,661 
Financial liabilities designated at fair value through profit or loss   465    -    -    465 
Derivatives   5,441    5,538    306    11,285 
Interbank market debt   19,446    5,836    4,072    29,354 
Institutional market debt   30,906    29,565    3,047    63,518 
Total liabilities   113,636    93,395    56,893    263,924 
                     
Net position   (15,910)   7,159    13,232    4,481 

 

The exposure to share price risk is disclosed in Note 9 related to financial assets - At Amortized Cost and Note 8, related to Financial Assets at Fair Value Through Other Comprehensive Income.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018166

 

 

Liquidity risk

 

Liquidity risk is defined as the possibility of the institution not being able to efficiently honor its expected and unexpected, current and future obligations, including those arising from guarantee binding, without affecting its daily operations and not incurring in significant losses.

 

Policies and procedures

 

Liquidity risk control is performed by an area independent of the business areas and is responsible for determining the composition of the reserve; proposing assumptions for the behavior of cash flow; identifying, assessing, monitoring, controlling and reporting, on a daily basis, the exposure to liquidity risk in different time horizons; proposing and monitoring liquidity risk limits cons possible mismatches; considering the liquidity risk individually in the countries where ITAÚ UNIBANCO HOLDING operates; simulating the behavior of cash flow under stress conditions; assessing and reporting in advance the risks inherent in new products and transactions, and reporting the information required regulatory bodies. All activities are subject to checking by validation, internal control and audit independent areas.

 

The measurement of liquidity risk covers all financial transactions of ITAÚ UNIBANCO HOLDING companies, as well as possible contingent or unexpected exposures, such as those arising from settlement services, provision of collaterals and guarantees, and credit facilities contracted and not used. This process is conducted by means of corporate systems and proprietary applications developed and managed in-house.

 

The liquidity management policies and respective limits are established based on prospective scenarios and top management’s guidelines. These scenarios are reviewed on a periodic basis, by analyzing the need for cash due to atypical market conditions or resulting from strategic decisions of ITAÚ UNIBANCO HOLDING.

 

The document that details the guidelines established by the internal policy on liquidity risk management, that is not part of the financial statements, may be viewed on the website www.itau.com.br/investor-relations, in the section Corporate Governance/Rules and Policies / Public Access Report – Liquidity Risk.

 

Itaú Unibanco conducts the control over and management of liquidity risk on a daily basis, through a governance approved in superior committees, which sets forth, among other activities, the adoption of liquidity minimum limits, sufficient to absorb possible cash losses in stress scenarios, measured through internal and regulatory methodologies.

 

Additionally, and in compliance with the requirements of CMN Resolution No. 4,090 of May 24, 2012 and BACEN Circular N° 3,749 of March 5, 2015 , the Statement of Liquidity Risk (DRL) is sent to BACEN on a monthly basis, and the following items for monitoring and supporting decisions are periodically prepared and submitted to top management:

 

·Different scenarios projected for changes in liquidity;
·Contingency plans for crisis situations;
·Reports and charts that describe the risk positions;
·Assessment of funding costs and alternative sources of funding;
·Monitoring of changes in funding through a constant control over sources of funding, considering the type of investor and maturities, among other factors.

 

In compliance with BACEN Circular Letter 3.775, of July 14, 2016, banks holding total assets over R$ 100 billion are required, since October 2015, to report a standardized Liquidity Coverage Ratio (LCR) ratio to the Central Bank of Brazil, which is reported on a consolidated basis for institutions that are part of the Prudential Conglomerate. 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 Corporate Governance / Capital and Risk Management - Pillar 3.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018167

 

 

  3rd quarter 2018 
Information on the Liquidity Coverage Ratio (LCR)  Total Adjusted Amount(1) 
Total high-quality liquid assets (2)   179,507 
Total potential cash outflows (3)   105,058 
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.

 

Primary sources of funding

 

ITAÚ UNIBANCO HOLDING has different sources of funding, of which a significant portion is from the retail segment. Total funding from clients reached R$ 656,4 billion (R$ 622.1 billion at 12/31/2017), particularly funding from time deposits. A considerable portion of these funds – 39,0% of total, or R$ 255,9 billion – is available on demand to the client. However, the historical behavior of the accumulated balance of the two largest items in this group – demand and savings deposits - is relatively consistent with the balances increasing over time and inflows exceeding outflows for monthly average amounts.

 

   09/30/2018   12/31/2017 
Funding from clients  0-30 days   Total   %   0-30 days   Total   % 
Deposits   247,088    454,552         216,842    402,938      
Demand deposits   74,817    74,817    11.4    68,973    68,973    11.1 
Savings deposits   132,374    132,374    20.2    119,980    119,980    19.3 
Time deposits   39,213    244,247    37.2    27,798    211,800    34.0 
Other   684    3,114    0.5    91    2,185    0.4 
Funds from acceptances and issuance of securities (1)   5,087    118,684    18.1    6,820    107,581    17.3 
Funds from own issue (2)   1,579    29,472    4.5    2,570    58,837    9.5 
Subordinated debt   2,210    53,721    8.2    1,315    52,696    8.5 
Total   255,964    656,429    100.0    227,547    622,052    100.0 

(1)Includes mortgage notes, real estate credit bills, agribusiness, financial and structured operations certificates recorded in interbank market and debts and liabilities for issuance of debentures and foreign borrowing and securities recorded in funds from institutional markets.
(2)Refer to deposits received under securities repurchase agreements with securities from own issue.

 

Control over liquidity

 

ITAÚ UNIBANCO HOLDING manages its liquidity reserves based on estimates of funds that will be available for investment, considering the continuity of business in normal conditions.

 

During the period of 2018, ITAÚ UNIBANCO HOLDING maintained appropriate levels of liquidity in Brazil and abroad. Liquid assets (cash and deposits on demand, securities purchased under agreements to resell - funded position and government securities – available, detailed in the table Undiscounted future flows – Financial assets) totaled R$ 172.2 billion and accounted for 67.3% of the short term redeemable obligations, 26.2% of total funding, and 17.4% of total assets.

 

The table below shows the indicators used by ITAÚ UNIBANCO HOLDING in the management of liquidity risk:

 

   09/30/2018   12/31/2017 
Liquidity indicators  %   % 
Net assets (1) / funds within 30 days (2)   67.3    72.2 
Net assets (1) / total funds (3)   26.2    26.4 
Net assets (1) / total financial assets (4)   17.4    17.6 

(1)Net assets: Cash and deposits on demand, Securities purchased under agreements to resell – Funded position and Government securities - available. Detailed in the table Undiscounted future flows – Financial assets.
(2)Table Funding from clients (Total Funding from clients 0-30 days).
(3)Table funding from clients (Total funding from clients).
(4)Detailed in the table Undiscounted future flows – Financial assets, total present value regards R$ 990,595 (R$ 933,686 at 12/31/2017).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018168

 

 

The following table presents assets and liabilities according to their remaining contractual maturities, considering their undiscounted flows.

 

Undiscounted future flows except for derivatives  09/30/2018   12/31/2017 
Financial assets (1)  0 - 30
days		   31 - 365
days		   366 - 720
days		   Over 720
days		   Total   0 - 30
days		   31 - 365
days		   366 - 720
days		   Over 720
days		   Total 
Cash and deposits on demand   29,467    -    -    -    29,467    18,749    -    -    -    18,749 
Interbank investments   210,361    105,376    440    438    316,615    93,218    173,663    673    508    268,062 
Securities purchased under agreements to resell – Funded position (2)   54,901    -    -    -    54,901    38,833    -    -    -    38,833 
Securities purchased under agreements to resell – Financed position   134,371    98,331    -    -    232,702    31,238    167,061    -    -    198,299 
Interbank deposits (4)   21,089    7,045    440    438    29,012    23,147    6,602    673    508    30,930 
Securities   91,619    10,655    16,430    65,895    184,599    110,667    24,960    16,717    76,923    229,267 
Government securities - available   83,827    199    306    6,201    90,533    103,447    152    232    5,052    108,883 
Government securities – subject to repurchase commitments   319    1,593    10,084    6,241    18,237    203    15,677    9,107    19,270    44,257 
Private securities - available   7,473    8,235    4,323    45,468    65,499    7,007    8,577    5,541    45,885    67,010 
Private securities – subject to repurchase commitments   -    628    1,717    7,985    10,330    10    554    1,837    6,716    9,117 
Derivative financial instruments   7,603    9,520    3,018    8,526    28,667    7,978    5,363    2,756    6,746    22,843 
Net position   7,603    9,520    3,018    8,526    28,667    7,978    5,363    2,756    6,746    22,843 
Swaps   85    1,752    2,066    7,377    11,280    189    1,258    1,661    6,082    9,190 
Option   539    3,754    599    491    5,383    430    1,748    865    294    3,337 
Forward (onshore)   5,232    1,038    1    -    6,271    6,529    382    -    -    6,911 
Other derivative financial instruments   1,747    2,976    352    658    5,733    830    1,975    230    370    3,405 
Loan and lease operations portfolio (3)   65,683    165,365    88,355    243,098    562,501    57,505    152,660    71,107    201,881    483,153 
Total financial assets   404,733    290,916    108,243    317,957    1,121,849    288,117    356,646    91,253    286,058    1,022,074 
(1)The assets portfolio does not take into consideration the balance of compulsory deposits in Central Bank, amounting to R$ 85,957 (R$ 98,837 at 12/31/2017), which release of funds is linked to the maturity of the liability portfolios. The amounts of PGBL and VGBL are not considered in the assets portfolio because they are covered in Note 28.
(2)Net of R$ 2,510 (R$ 3,664 at 12/31/2017) which securities are restricted to guarantee transactions at B3 S.A. and the Central Bank of Brazil.
(3)Net of payment to merchants of R$ 56,369 (R$ 53,687 at 12/31/2017) and the amount of liabilities from transactions related to credit assignments R$ 4,136 (R$ 4,931 at 12/31/2017).
(4)Includes R$ 16,460 (R$ 6,689 at 12/31/2017) related to Compulsory Deposits with Central Banks of other countries.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018169

 

 

Undiscounted future flows except for derivatives  09/30/2018   12/31/2017 
   0 – 30   31 – 365   366 – 720   Over 720       0 – 30   31 – 365   366 – 720   Over 720     
Financial liabilities  days   days   days   days   Total   days   days   days   days   Total 
Deposits   247,213    63,429    18,495    177,547    506,684    222,782    61,672    16,500    152,961    453,915 
Demand deposits   74,817    -    -    -    74,817    68,973    -    -    -    68,973 
Savings deposits   132,374    -    -    -    132,374    119,980    -    -    -    119,980 
Time deposit   39,278    61,061    18,486    177,527    296,352    33,114    60,272    16,445    152,903    262,734 
Interbank deposits   741    2,368    9    20    3,138    712    1,400    55    58    2,225 
Other deposits   3    -    -    -    3    3    -    -    -    3 
                                                   
Compulsory deposits   (37,760)   (13,791)   (3,833)   (30,573)   (85,957)   (40,538)   (18,197)   (4,644)   (35,458)   (98,837)
Demand deposits   (5,110)   -    -    -    (5,110)   (4,790)   -    -    -    (4,790)
Savings deposits   (23,697)   -    -    -    (23,697)   (26,008)   -    -    -    (26,008)
Time deposit   (8,953)   (13,791)   (3,833)   (30,573)   (57,150)   (9,740)   (18,197)   (4,644)   (35,458)   (68,039)
                                                   
Securities sold under repurchase agreements (1)   243,754    24,194    10,552    38,077    316,577    232,970    35,234    30,404    39,444    338,052 
Government securities   207,963    2,303    6,623    33,172    250,061    202,545    3,197    8,260    27,680    241,682 
Private securities   6,636    21,891    3,929    4,905    37,361    8,020    31,348    22,144    11,764    73,276 
Foreign   29,155    -    -    -    29,155    22,405    689    -    -    23,094 
                                                   
Funds from acceptances and issuance of securities (2)   5,790    36,768    44,126    52,388    139,072    7,093    43,463    21,325    52,837    124,718 
                                                   
Borrowing and onlending (3)   6,563    40,842    12,651    13,342    73,398    3,975    37,132    9,839    19,807    70,753 
                                                   
Subordinated debt (4)   2,227    3,413    6,514    55,361    67,515    1,061    13,402    2,054    49,454    65,971 
                                                   
Derivative financial instruments   7,103    10,882    5,684    8,217    31,886    7,596    5,816    4,877    8,457    26,746 
Net position   7,103    10,882    5,684    8,217    31,886    7,596    5,816    4,877    8,457    26,746 
Swaps   471    4,352    4,744    7,085    16,652    65    2,364    3,747    7,516    13,692 
Option   568    3,391    608    359    4,926    332    1,299    889    273    2,793 
Forward (onshore)   4,643    -    -    -    4,643    6,272    -    -    -    6,272 
Other derivative financial instruments   1,421    3,139    332    773    5,665    927    2,153    241    668    3,989 
                                                   
Total financial liabilities   474,890    165,737    94,189    314,359    1,049,175    434,939    178,522    80,355    287,502    981,318 

(1)Includes own and third parties’ portfolios.
(2)Includes mortgage notes, real estate credit bills, agribusiness, financial bills and structured operations certificates recorded in interbank market funds and liabilities for issuance of debentures and foreign securities recorded in funds from institutional markets.
(3)Recorded in funds from interbank markets.
(4)Recorded in funds from institutional markets.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018170

 

 

   09/30/2018   12/31/2017 
   0 – 30   31 – 365   366 – 720   Over 720       0 – 30   31 – 365   366 – 720   Over 720     
Off balance sheet  days   days   days   days   Total   days   days   days   days   Total 
Financial Guarantees Provided   2,256    17,959    5,523    43,847    69,585    1,749    17,563    5,451    45,726    70,489 
Commitments to be released   106,333    28,801    6,900    127,902    269,936    98,310    27,857    7,307    110,652    244,126 
Letters of credit to be released   11,660    -    -    -    11,660    9,214    -    -    -    9,214 
Contractual commitments - Fixed assets and Intangible (Notes 13 and 14)   -    91    433    273    797    -    432    460    273    1,165 
Total   120,249    46,851    12,856    172,022    351,978    109,273    45,852    13,218    156,651    324,994 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018171

 

 

Note 35 –Supplementary information

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – September 30, 2018172