|Item 17 ☐ Item 18 ☐|
|Item 1. Identity of Directors, Senior Management and Advisors|
|Item 2. Offer Statistics and Expected Timetable|
|Item 3. Key Information|
|Item 4. Information on The Company|
|Item 4A. Unresolved Staff Comments|
|Item 5. Operating and Financial Review and Prospects|
|Item 6. Directors, Senior Management and Employees|
|Item 7. Major Stockholders and Related Party Transactions|
|Item 8. Financial Information|
|Item 9. The Offer and Listing|
|Item 10. Additional Information|
|Item 11. Quantitative and Qualitative Disclosures About Market Risk|
|Item 12. Description of Securities Other Than Equity Securities|
|Item 13. Defaults, Dividend Arrearages and Delinquencies|
|Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds|
|Item 15. Controls and Procedures|
|Item 16. [Reserved]|
|Item 17. Financial Statements|
|Item 18. Financial Statements|
|Item 19. Exhibits|
|Note 1 - Overview|
|Note 2 - Significant Accounting Policies|
|Note 27 Provides A Detailed Description of All Products Classified As Insurance Contracts.|
|Note 3 - Business Development|
|Note 4 - Interbank Deposits and Securities Purchased Under Agreements To Resell|
|Note 5 - Financial Assets At Fair Value Through Profit or Loss and Designated At Fair Value Through Profit or Loss - Securities|
|Note 6 - Derivatives|
|Note 7 - Hedge Accounting|
|Note 8 - Financial Assets At Fair Value Through Other Comprehensive Income - Securities|
|Note 9 - Financial Assets At Amortized Cost - Securities|
|Note 10 - Loan and Lease Operations|
|Note 11 - Investments in Associates and Joint Ventures|
|Note 12 - Lease - Lessee|
|Note 13 - Fixed Assets|
|Note 14 - Goodwill and Intangible Assets|
|Note 15 - Deposits|
|Note 16 - Financial Liabilities Designated At Fair Value Through Profit or Loss|
|Note 17 - Securities Sold Under Repurchase Agreements and Interbank and Institutional Market Funds|
|Note 18 - Other Assets and Liabilities|
|Note 19 - Stockholders' Equity|
|Note 20 - Share - Based Payment|
|Note 21 - Interest and Similar Income and Expense and Net Gain (Loss)|
|Note 22 - Commissions and Banking Fees|
|Note 23 - General and Administrative Expenses|
|Note 24 - Taxes|
|Note 25 - Earnings per Share|
|Note 26 - Post - Employment Benefits|
|Note 27 - Insurance Contracts and Private Pension|
|Note 28 - Fair Value of Financial Instruments|
|Note 29 - Contingent Assets and Liabilities, Provisions and Legal Obligations|
|Note 30 - Segment Information|
|Note 31 - Related Parties|
|Note 32 - Risk and Capital Management|
|Note 33 - Supplementary Information|
|Note 34 - Subsequent Event|
|Balance Sheet||Income Statement||Cash Flow|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-15276
ITAÚ UNIBANCO HOLDING S.A.
(Exact Name of Registrant as Specified in its Charter)
ITAÚ UNIBANCO HOLDING S.A.
(Translation of Registrants name into English)
THE FEDERATIVE REPUBLIC OF BRAZIL
(Jurisdiction of incorporation or organization)
Praça Alfredo Egydio de Souza Aranha, 100
04344-902 São Paulo, SP, Brazil
(Address of principal executive offices)
Renato Lulia Jacob
Group Head of Investor Relations
Itaú Unibanco Holding S.A.
Praça Alfredo Egydio de Souza Aranha, 100
04344-902 São Paulo, SP, Brazil
+55 11 2794 3547
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
|Preferred Shares, without par value||ITUB||New York Stock Exchange*|
|American Depositary Shares (as evidenced by American Depositary Receipts), each representing one Preferred Share||New York Stock Exchange|
*Not for trading purposes, but only in connection with the listing on the New York Stock Exchange of American Depositary Shares representing those Preferred Shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the period covered by the annual report:
4,958,290,359 Common Shares, no par value per share
4,801,324,161 Preferred Shares, no par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
☒ Yes ☐ No
If this annual report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☐ Yes ☒ No
NoteChecking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of large accelerated filer, accelerated filer, and emerging growth company in Rule 12b-2 of the Exchange Act.
☒Large Accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
The term new or revised financial accounting standard refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its managements assessment
of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act
(15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐
International Financial Reporting Standards as issued by the
International Accounting Standards Board ☒
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
|Presentation of Financial and Other Information||2|
|Effect of Rounding||2|
|Market and Industry Data||2|
|About our Financial Information||2|
All references in this annual report to (i) Itaú Unibanco Holding, Itaú Unibanco Group, we, us or our are references to Itaú Unibanco Holding S.A. and its consolidated subsidiaries and affiliates, except where specified or differently required by the context; (ii) the Brazilian government are references to the federal government of the Federative Republic of Brazil, or Brazil; (iii) preferred shares are references to our authorized and outstanding preferred shares with no par value; and (iv) common shares are references to our authorized and outstanding common shares with no par value. All references to ADSs are to American Depositary Shares, each representing one preferred share, without par value. The ADSs are evidenced by American Depositary Receipts, or ADRs, issued by The Bank of New York Mellon, or BNY Mellon. All references herein to the real, reais or R$ are to the Brazilian real, the official currency of Brazil. All references to US$, dollars or U.S. dollars are to United States dollars.
Additionally, unless specified or the context indicates otherwise, the following definitions apply throughout this annual report:
Itaú Unibanco means Itaú Unibanco S.A., together with its consolidated subsidiaries;
Itaú BBA means Banco Itaú BBA S.A., together with its consolidated subsidiaries;
Central Bank means the Central Bank of Brazil;
CLP means the Chilean peso, the official currency of Chile;
CMN means the Brazilian National Monetary Council; and
CVM means the Securities and Exchange Commission of Brazil.
Additionally, acronyms used repeatedly, defined and technical terms, specific market expressions and the full names of our main subsidiaries and other entities referenced in this annual report are explained or detailed in the section entitled Glossary.
This annual report contains statements that are or may constitute forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or Exchange Act. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions including, among other risks:
The economic, financial and other effects of the outbreak of the 2019 novel strain of coronavirus, or COVID-19, particularly as such factors impact Brazil and the other markets in which we operate and continue to cause severe ongoing negative macroeconomic effects and disruptions to financial markets and the global economy, with a significant impact on the ability of businesses, including ours, to operate normally, thus heightening many of the other risks described in the Risk Factors section of this annual report;
General economic, political and business conditions both in Brazil and abroad, including, in Brazil, developments and the perception of risks in connection with ongoing corruption and other investigations and increasing fractious relations and infighting within the administration of President Bolsonaro, as well as policies and potential changes to address these matters or otherwise, including economic and fiscal reforms and in response to the ongoing effects of the COVID-19 pandemic, any of which may negatively affect growth prospects in the Brazilian economy as a whole;
Fluctuations in inflation, interest rates and exchange rates in Brazil and the other markets in which we operate, which have been particularly volatile as a result of the ongoing effects of the COVID-19 pandemic;
Our ability to implement, in a timely and efficient manner, any measure necessary to respond to, or reduce the impacts of, the COVID-19 pandemic on our business, operations, cash flow, prospects, liquidity and financial condition;
The duration and spread of the COVID-19 pandemic and the outbreak of diseases or similar public health threats;
General economic, political, and business conditions in Brazil and variations in inflation indexes, interest rates, foreign exchange rates, and the performance of financial markets;
General economic and political conditions, in particular in the countries where we operate;
Government regulations and tax laws and amendments to such regulations and laws;
Developments in high-profile investigations currently in progress and their impact on customers or on our tax exposures;
Disruptions and volatility in the global financial markets;
Increases in compulsory deposits and reserve requirements;
Regulation and liquidation of our business on a consolidated basis;
Obstacles for holders of our shares and ADSs to receive dividends;
Failure or hacking of our security and operational infrastructure or systems;
Our ability to protect personal data;
Strengthening of competition and industry consolidation;
Changes in our loan portfolio and changes in the value of our securities and derivatives;
Losses associated with counterparty exposure;
Our exposure to the Brazilian public debt;
Incorrect pricing methodologies for insurance, pension plan and premium bond products and inadequate reserves;
The effectiveness of our risk management policy;
Damage to our reputation;
The capacity of our controlling stockholder to conduct our business;
Difficulties during the integration of acquired or merged businesses;
Effects from socio-environmental issues; and
Other risk factors as set forth under Item 3D. Risk Factors.
The words believe, may, will, estimate, continue, anticipate, intend, expect and similar words are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in such forward-looking statements.
The information found in this annual report is accurate only as of the date of such information or as of the date of this annual report, as applicable. Our activities, our financial position and assets, the results of transactions and our prospects may have changed since that date.
Information contained in or accessible through our website or any other websites referenced herein does not form part of this annual report unless we specifically state that it is incorporated by reference and forms part of this annual report. All references in this annual report to websites are inactive textual references and are for information only.
Certain amounts and percentages included in this annual report, including in the section of this annual report entitled Item 5. Operating and Financial Review and Prospects have been rounded for ease of presentation. Percentage figures included in this annual report have not been calculated in all cases on the basis of the rounded figures but on the basis of the original amounts prior to rounding. For this reason, certain percentage amounts in this annual report may vary from those obtained by performing the same calculations using the figures in the audited consolidated financial statements. Certain other amounts that appear in this annual report may not sum due to rounding.
This annual report contains information, including statistical data, about certain markets and our competitive position. Except as otherwise indicated, this information is taken or derived from external sources. We indicate the name of the external source in each case where industry data is presented in this annual report. We cannot guarantee and we have not independently verified the accuracy of information taken from external sources, or that, in respect of internal estimates, a third party using different methods would obtain the same estimates as the estimates we present in this annual report.
The reference date for the quantitative information for balances found in this annual report is as of December 31, 2020 and the reference date for results is the year ended December 31, 2020, except where otherwise indicated.
Our fiscal year ends on December 31 and, in this annual report, any reference to any specific fiscal year is to the twelve-month period ended on December 31 of that year.
Our audited consolidated financial statements, included elsewhere in this annual report, are prepared in accordance with IFRS, as issued by the IASB. Unless otherwise stated all audited consolidated financial information related to the years ended December 31, 2020, 2019 and 2018 included in this annual report was prepared in accordance with IFRS, as issued by the IASB.
We use accounting practices adopted in Brazil applicable to institutions authorized to operate by the Central Bank, or Brazilian GAAP, for our reports to Brazilian stockholders, filings with the CVM, and calculation of payments of dividends and tax liabilities.
The CMN establishes that financial institutions meeting certain criteria, such as us, are required to present audited consolidated financial statements in accordance with IFRS as issued by the IASB, in addition to financial statements under Brazilian GAAP.
Please see Note 30 Segment Information to our audited consolidated financial statements for further details about the main differences between our management reporting systems and the audited consolidated financial statements prepared in accordance with IFRS.
Our audited consolidated financial statements as of December 31, 2020 and 2019 and for each of the years ended December 31, 2020, 2019 and 2018 were audited by PricewaterhouseCoopers Auditores Independentes, or PwC, independent auditors, as stated in its audit report contained in this Form 20-F.
Please see Note 2 Significant Accounting Policies to our audited consolidated financial statements for further details about the significant accounting policies applied in the preparation of our audited consolidated financial statements in accordance with IFRS, as issued by the IASB.
|ITEM 1.|| |
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|ITEM 2.|| |
OFFER STATISTICS AND EXPECTED TIMETABLE
|ITEM 3.|| |
Capitalization and Indebtedness
Reasons for the Offer and Use of Proceeds
This section addresses the risks we consider material to our business and an investment in our securities. Should any of the following risks actually occur, our business and financial condition, as well as the value of any investments made in our securities, will be adversely affected. Accordingly, investors should carefully assess the risk factors described below and the information disclosed in this annual report before making an investment decision. The risks described below are those that we currently believe may adversely affect us. Other risks that we do not presently consider material, emerging risks or risks not currently known to us may also adversely affect us.
Changes in economic conditions may adversely affect us.
Our operations are dependent upon the performance of the economies of the countries in which we do business, and Latin American countries in particular. Crises and volatility in the financial markets of countries other than Brazil may affect the global financial markets and the Brazilian economy and may have a negative impact on our operations.
The demand for credit and financial services, as well as our clients ability to repay, is directly impacted by macroeconomic variables, such as economic growth, income, unemployment rate, inflation, and fluctuations in interest and foreign exchange rates.
Disruptions and volatility in the global financial markets may have significant consequences in the countries in which we operate, such as volatility in the prices of securities, interest rates and foreign exchange rates. Higher uncertainty and volatility may result in a slowdown in the credit market and the economy, which, in turn, could lead to higher unemployment rates and a reduction in the purchasing power of consumers. In addition, such events may significantly impair our clients ability to perform their obligations and increase overdue or non-performing loans, resulting in an increase in the risk associated with our lending activity.
The economic and market conditions of other countries, including the United States, countries of the European Union, and emerging markets, may affect the credit availability and the volume of foreign investments in Brazil and in the countries in which we do business, to varying degrees. The spread of the COVID-19 pandemic remains a concern for the global economy, despite the decrease of infection rates in most developed countries and vaccines being distributed worldwide. The number of COVID-19 cases are falling across countries as winter (in the northern hemisphere) and holiday outbreaks dissipate. In the U.S., cases, hospitalizations and deaths are falling in nearly all states, allowing some easing of restrictions. In Europe, recent surges in the virus have been curbed, but some countries are taking new restrictive measures to avoid new waves. Vaccination campaigns are accelerating in several countries and the global vaccine supply is expected to keep increasing in the second and third quarters of 2021.
In our view, the worldwide distribution of vaccines in 2021 is the most important initiative for a full recovery of the global economy. A new surge of infections arising, for example from new strains of the virus and any event that might hinder
governments further controlling the spread of COVID-19, such as delays in the distribution of vaccines or inefficient vaccines themselves may lead to governments having to maintain restrictions on mobility to try to contain the further spread of the disease, thus leading to a suppression of economic activity. Although these risks have decreased mostly for developed markets, their materialization would affect global growth and may decrease investors interest in assets from Brazil and other countries in which we do business, which would adversely affect the market price of our securities, possibly making it more difficult for us to access capital markets and, as a result, to finance our operations in the future.
The rise in global interest rates reflects the economic recovery outlook and is less of a concern in the near term, as we expect the Fed to maintain its ample accommodative stance in 2021 and gradually withdraw stimulus in 2022. A faster withdrawal of monetary stimulus in developed economies can affect emerging economies and thus affect our operations.
We are exposed to certain risks that are particular to emerging and other markets
In conducting our business in Brazil, as well as other emerging markets, we are subject to political, economic, legal, operational and other risks that are inherent to operating in these countries. Banks that operate in countries considered to be emerging markets, including us, may be particularly susceptible to disruptions and reductions in the availability of credit or increases in financing costs, which may have a material adverse impact on our operations. In particular, the availability of credit to financial institutions operating in emerging markets is significantly influenced by an aversion to global risk. In addition, any factor impacting investor confidence, such as a downgrade in sovereign credit ratings (since the ratings of financial institutions, such as us, tends to be capped to the sovereigns rating) or an intervention by a government or monetary authority in one of such markets, may affect the price or availability of resources for financial institutions in any of these markets, which may affect us.
In Argentina, international reserves continue at low levels, despite controls on exchange rate purchases. The economy rebounded during the second half of 2020, as a result of the easing of social distancing measures, but GDP fell by 10% in 2020. For 2021, we expect GDP growth of 6.0%, aided by statistical carry-over and higher commodity prices. Loose macro-economic policies are likely to fuel inflation, potentially leading to more control on prices (including foreign exchange).
In Chile, protests led political actors to agree on a referendum process to decide on a new constitution. While uncertainty over the constitutional process and elections later in 2021 is negatively affect the economic activity in Chile, an efficient vaccination process and higher terms of trade are important offsetting factors.
Colombia´s fiscal accounts were pressured during the COVID-19 pandemic and the government recently signaled a postponement of fiscal adjustment (fiscal deficit this year would be even wider than in 2020). While a tax reform may help fiscal consolidation from 2022 onwards, it is unclear whether there is political appetite for unpopular tax hikes. At the same time, contrasting with other countries in the region, Colombia recorded a wide current account deficit in 2020, contributing to an increase in external indebtedness. In this context, Colombia´s sovereign investment grade is at risk.
Crises in these countries may decrease investors interest in Brazilian assets, which may materially and adversely affect the market price of our securities, making it more difficult for us to access capital markets and, as a result, to finance our operations in the future. Global financial crises, in addition to the Brazilian macroeconomic environment, may also affect in a material and adverse way the market price of securities of Brazilian issuers or lead to other negative effects in Brazil and in the countries in which we operate and have a material adverse effect on us.
Brazilian authorities exercise influence over the Brazilian economy. Changes in fiscal, monetary and foreign exchange policies as well as a deterioration of government fiscal accounts, may adversely affect us.
Our operations are highly dependent upon the performance of the Brazilian economy. The demand for credit and financial services, as well as our clients ability to make payments when due, is directly impacted by macroeconomic variables, such as economic growth, income, unemployment, inflation, and fluctuations in interest and foreign exchange rates. Brazilian GDP grew 1.4% in 2019, but decreased 4.1% in 2020, impacted by the COVID-19 outbreak. The number of new daily deaths rebounded in the first quarter of 2021 and has surpassed the levels registered during the first wave of
COVID-19 in 2020. Control of the COVID-19 pandemic is crucial for continued economic recovery. In the long term, growth may be limited by a number of factors, including structural factors, such as inadequate infrastructure, which entail risks of potential energy shortages and deficiencies in the transportation sector, among others, and a lack of qualified professionals, which can reduce the countrys productivity and efficiency levels. Low levels of national savings require relatively large financial flows from abroad, which may falter if political and fiscal instability is perceived by foreign investors. Depending on their intensity, these factors could lead to decreasing employment rates and to lower income and consumption levels, which could result in increased default rates on loans we grant for individuals and non-financial corporations and, therefore, have a material adverse effect on us.
Brazilian authorities intervene from time to time in the Brazilian economy, through changes in fiscal, monetary, foreign exchange policies, and in state-owned public companieswhich may adversely affect us. These changes may impact variables that are crucial for our growth strategy (such as foreign exchange and interest rates, liquidity in the currency market, tax burden, and economic growth), thus limiting our operations in certain markets, affecting our liquidity and our clients ability to pay, the risk appetite of foreign investors with respect to Brazil and, consequently, affecting our business, results of operations and financial condition.
The Brazilian primary public accounts have deteriorated since 2014. To address the structural fiscal imbalance, the Brazilian Congress approved a ceiling on government spending that will limit primary public expenditure growth to the prior years inflation for a period of at least ten years, effective as of 2017. Further, Congress approved a comprehensive social security reform and the government started an asset sale program, creating conditions for a cyclical decrease of the public debt, while the primary result gradually improves. In 2021, the Congress approved another round of temporary emergency expenditure to combat the economic effects of the COVID-19 pandemic, in exchange for measures to reinforce the fiscal adjustment framework that will help to limit mandatory expenditure growth and to keep the ceiling on public spending feasible in the years ahead. The government also has a comprehensive reform agenda, the main examples being the Administrative Reform and the Tax Reform. However, these discussions were temporarily put on hold due the COVID-19 pandemic. If the government fails to persist with the fiscal adjustment agenda, the local economy would be negatively impacted, with a depreciation of the Brazilian real, an increase in inflation and interest rates and a deceleration of economic growth, thus adversely affecting our business, results of operations and financial condition.
Sudden increases in prices and long periods of high inflation may cause, among other effects, loss of purchasing power and distortions in the allocation of resources in the economy. Measures to combat high inflation rates include a tightening of monetary policy, with an increase in the short-term interest rate (SELIC), resulting in restrictions on credit and short-term liquidity, which may have a material adverse effect on us. Changes in interest rates may have a material effect on our net margins, since they impact our costs of funding and granting credit. In addition, increases in the SELIC interest rate could reduce demand for credit and increase the costs of our reserves and the risk of default by our clients. Conversely, decreases in the SELIC interest rate could reduce our gains from interest-bearing assets, as well as our net margins.
The Central Banks Monetary Policy Committee (the COPOM) was created on June 20, 1996 and is responsible for setting the SELIC interest rate. The COPOM meets eight times a year, every 45 days. The aim in creating the COPOM was to enhance monetary policy transparency and confer adequate regularity to the monetary policy decision-making process. Currently, many central banks around the world follow similar procedures, facilitating the decision-making process, monetary policy transparency and communication with the public.
After reaching 14.25% per annum at the end of 2015, the Central Bank began to cut interest rates in October 2016. The SELIC rate reached 2.00% in August 2020 and remained at this level until February 2021. In March 2021, the Central Bank increased the SELIC rate by 0.75 percentage points to 2.75%. The widespread decline in inflation, due to the high level of idle capacity in the Brazilian economy, as well as anchored inflation expectations have resulted in the SELIC reaching historically low levels.
The COVID-19 pandemic and the resulting economic slowdown and volatility in the Brazilian and global financial
and capital markets had, and may in the future continue to have, a material adverse effect on our business, financial condition, liquidity and results of operations across our business units. To the extent the COVID-19 pandemic adversely affects our business, liquidity, results of operations and financial condition, it will also have the effect of materially heightening many of the other risks described in this Risk Factors section.
The COVID-19 pandemic and governmental responses thereto have had, and may continue to have, a severe impact on global and Brazilian macro-economic and financial conditions, including the disruption of supply chains and the closures or interruptions of many businesses, leading to losses of revenues, increased unemployment and economic stagnation and contraction.
The COVID-19 pandemic has also resulted in materially increased volatility in both Brazilian and international financial markets and economic indicators, including exchange rates, interest rates and credit spreads. For example, as a result of heightened volatility, the B3 Exchanges circuit breaker was triggered eight times in the month of March 2020 and the value of assets was negatively impacted. Any shocks or unexpected movements in these market factors could result in financial losses associated with our trading portfolio or financial assets, which could deteriorate our financial condition. Furthermore, market concerns could translate into liquidity constraints and reduced access to funding in both the local and the international markets, negatively affecting our business.
Measures taken by governmental authorities worldwide, including Brazil, to stabilize markets and support economic growth may not be sufficient to control high volatility or to prevent serious and prolonged reductions in economic activity. In addition, the social distancing measures imposed by governmental authorities to contain the spread of the COVID-19 pandemic resulted in a sharp drop or even a halt in the activities of companies in various sectors that we transact with and otherwise serve. While many of these restrictions have since been lifted, there is no way to predict whether new patterns of contagion, increasing disease severity or other factors related to the pandemic, including access to, or the efficiency of, a vaccine, may result in a renewed tightening of these policies or the imposition of new and different restrictions. These policies and measures have influenced the behavior of the consumer market and the population in general, the demand for services, products and credit.
In addition, there can be no assurance that the restrictive measures imposed by certain Brazilian states and municipalities will not worsen if Brazil faces new waves of COVID-19. For example, at the beginning of 2021, a novel strain of COVID-19 started circulating in Brazil, causing an increase in the number of deaths and hospitalizations. On March 11, 2021, Brazil was considered the epicenter of the COVID-19 pandemic in terms of number of confirmed cases and deaths. In March 2021, Brazil registered 321,515 deaths from COVID-19. As a result, public authorities in Brazil reinstated more severe restrictive measures, including social distancing, quarantine and lockdowns. Moreover, there can be no assurance that there will be no delays in COVID-19 vaccinations in Brazil, including as a result of supply shortages and delays on Brazilian regulatory approval of certain vaccines.
The weakened macroeconomic fundamentals coupled with the market downturn caused by the COVID-19 pandemic had, and may in the future have, a negative impact on our performance across all our business units. Impacts on our business could be widespread, and material impacts may be possible, including but not limited to the following:
Employees contracting COVID-19;
Reductions in our operating effectiveness as our employees work from home or disaster-recovery locations;
Unavailability of key personnel necessary to conduct our business activities, including a lack of qualified IT personnel to support remote working or combat any cyber risks;
Unprecedented volatility in global financial markets and exchange markets;
Reductions in revenue across our operating businesses and increased customer defaults;
Closure of our offices or the offices of our clients; and
Potential regulatory scrutiny of our ability to adequately supervise our activities in accordance with applicable regulatory requirements.
The extent of the impacts of the COVID-19 pandemic on our business, financial condition, liquidity and results will depend on future developments, which are highly uncertain, unpredictable and which depend on several factors that are beyond our control, including the possibility of additional outbreaks, further mutations of the virus and the intensity of the
economic downturn resulting from actions taken, or to be taken, by government authorities and the scientific community in response to the COVID-19 pandemic, including in relation to the availability and efficiency of vaccines and other treatments. Consumers affected by the COVID-19 pandemic may continue to show retraction behaviors, even after the end of the crisis, maintaining low levels of discretionary spending in the long term, which is why certain sectors we serve may take longer to recover (particularly sectors such as hotels, civil aviation, shopping centers and wholesale retailers).
To the extent the COVID-19 pandemic adversely affects our business, results of operations and financial condition, it would also have the effect of heightening many of the other risks described in this Risk Factors section of this Form 20-F, such as those relating to interest rate changes, economic, social and political developments in Brazil, the market volatility generated by distortions in the international financial markets, cybersecurity, etc.
Please see Item 5A. Operating Results Macroeconomic Context Brazilian Context for further details about the impact of the COVID-19 pandemic on our business.
Please also see Note 33 Supplementary Information to our audited consolidated financial statements.
Ongoing high profile anti-corruption investigations in Brazil may affect the perception of Brazil and domestic growth prospects.
Certain relevant Brazilian companies in the energy, infrastructure and oil and gas sectors are facing investigations by the CVM, the SEC, the U.S. Department of Justice (DOJ), the Brazilian Federal Police and other Brazilian public entities who are responsible for corruption and cartel investigations, in connection with corruption allegations (so called Lava Jato investigations) and, depending on the outcome of such investigations and the time it takes to conclude them, they may face (as some of them already faced) downgrades from credit rating agencies, experience (as some of them already experienced) funding restrictions and have (as some of them already had) a reduction in revenues, among other negative effects. Such negative effects may hinder the ability of those companies to timely honor their financial obligations bringing loses to us as a number of them are our clients. The companies involved in the Lava Jato investigations, a number of which are our clients, may also be (as some of them already have been) prosecuted by investors on the grounds that they were misled by the information released to them, including their financial statements. Moreover, the current corruption investigations have contributed to reduce the value of the securities of several companies. The investment banks (including Itau BBA Securities in NY) that acted as underwriters on public distributions of securities of such investigated companies, and Banco Itau International, our private banking vehicle in Miami, were in the recent past also parties to certain related lawsuits in the U.S., that were either settled or dismissed, and may become parties to other legal proceedings yet to be filed. We cannot predict how long the corruption investigations may continue, or how significant the effects of the corruption investigations may be for the Brazilian economy and for the financial sector that may be investigated for the commercial relationships it may have held with companies and persons involved in Lava Jato investigations. Another high profile investigation, besides Lava Jato, ongoing in Brazil is the so-called Zelotes operation. If the allegations of such investigations are confirmed they may also affect some of our clients and their credit trustworthiness. In March 2016, the Brazilian Internal Revenue Services, or Brazilian IRS, summoned us to account for certain tax proceedings related to BankBoston Brazil which came under investigation in relation to the Zelotes operations. We acquired BankBoston Brazils operation from Bank of America in 2006. On December 1, 2016, the Brazilian Federal Police conducted searches at Itaú Unibancos premises, to look for documents related to those proceedings, and documents related to payments made to lawyers and consultants that acted on those proceedings. We clarify that the agreement with Bank of America for the acquisition of BankBoston Brazils operations included a provision whereby the seller would remain liable and responsible for the conduct of BankBostons tax proceedings, including with regard to the retention of lawyers and consultants. Therefore, according to such agreement, any and all payments made by Itaú Unibanco to lawyers and consultants were made strictly on behalf of Bank of America. On July 2017, the Brazilian Federal Public Prosecutor indicted some lawyers and public agents regarding this case, based on their potential participation on the scheme. None of them was Itaus employees or executives. We remain fully available and will cooperate with the authorities should any further clarification be needed. After reviewing our control procedures and our monitoring systems, we believe we are in compliance with the existing standards, especially related to anti-money laundering standards; notwithstanding, due to the size and breadth of our operations and our commercial relationship with investigated companies or persons, and due to the several banks, both publicly and privately owned, that Itaú Unibanco acquired throughout the last fifteen years, we may also come within the scope of investigations, which may ultimately result in reputational damage, civil or criminal liability. Negative effects on a number of companies may also impact the level of investments in infrastructure in Brazil, which may also lead to lower economic growth.
Legal and Regulatory Risks
We are subject to regulation on a consolidated basis and may be subject to liquidation or intervention on a consolidated basis.
We operate in a number of credit and financial services related sectors through entities under our control. For purposes of regulation and supervision, the Central Bank treats us and our subsidiaries and affiliates as a single financial institution. While our consolidated capital base provides financial strength and flexibility to our subsidiaries and affiliates, their individual activities could indirectly put our capital base at risk. Any investigation or intervention by the Central Bank, particularly in the activities carried out by any of our subsidiaries and affiliates, could have a material adverse impact on our other subsidiaries and affiliates and, ultimately, on us. If we or any of our financial subsidiaries become insolvent, the Central Bank may carry out an intervention or liquidation process on a consolidated basis rather than conduct such procedures for each individual entity. In the event of an intervention or a liquidation process on a consolidated basis, our creditors would have claims on our assets and the assets of our consolidated financial subsidiaries. In this case, claims of creditors of the same nature held against us and our consolidated financial subsidiaries would rank equally in respect of payment. If the Central Bank carries out a liquidation or intervention process with respect to us or any of our financial subsidiaries on an individual basis, our creditors will not have a direct claim on the assets of such financial subsidiaries, and the creditors of such financial subsidiaries would have priority in relation to our creditors in connection with such financial subsidiaries assets. The Central Bank also has the authority to carry out other corporate reorganizations or transfers of control under an intervention or liquidation process.
Changes in applicable law or regulations may have a material adverse effect on our business.
Changes in the law or regulations applicable to financial institutions in Brazil may affect our ability to grant loans and collect debts in arrears, which may have an adverse effect on us. Our operations could also be adversely affected by other changes, including with respect to restrictions on remittances abroad and other exchange controls as well as by interpretations of the law by courts and agencies in a manner that differs from our legal advisors opinions.
In the context of economic or financial crises, the Brazilian government may also decide to implement changes to the legal framework applicable to the operation of Brazilian financial institutions. For example, in response to the global financial crisis which began in late 2007, Brazilian national and intergovernmental regulatory entities, such as the BCBS, proposed regulatory reforms aiming to prevent the recurrence of similar crises, which included a new requirement to increase the minimum regulatory capital (Basel III).
Please see Item 4B. Business OverviewSupervision and RegulationBasel III FrameworkImplementation of Basel III in Brazil for further details about regulatory capital requirements.
Moreover, the Brazilian Congress is considering enacting new legislation that, if signed into law as currently drafted, could have an adverse effect on our activities. In 2019, multiple bills sought to limit interest rates, particularly for credit cards facilities (rotativo do cartão) and overdrafts facilities (cheque especial) the latter, with limits that are more restrictive than those recently imposed by the Central Bank (which are described in more detail under Item 4B. Business Overview Supervision and RegulationRules for Overdraft Facilities in Checking Accounts). Further caps on interest rates may be adopted. Furthermore, a proposed law to amend the Brazilian consumer protection code would allow courts to modify terms and conditions of credit agreements in certain circumstances, imposing certain difficulties for the collection of amounts from final consumers. In 2021, the Brazilian Congress is expected to consider bills that increase the tax burden of the banking and financial services sectors and to put to vote a bill that will allow the execution of convictions after condemnation in the second instance court, both in the criminal and in the civil spheres, before the exhaustion of all available appeals. If signed into law, the bill may have an impact on the execution of tax debts proceedings of which the bank is part.
In addition, local or state legislatures may from time to time consider bills intending to impose security measures and standards for customer services, such as setting branch opening hours, requiring 24 hour armed guard personnel and
specifications on ATM functioning, among others, that, if signed into law, could affect our operations. More recently, certain bills have passed (and others were proposed) in certain Brazilian states or municipalities that affect our ability to evaluate credit risk and collect outstanding debts. For example, legislators often impose, or aim to impose, restrictions on the ability of creditors to include the information about insolvent debtors in the records of credit protection bureaus. These types of restrictions could also adversely affect our ability to collect outstanding credit.
We also have operations outside of Brazil, including, but not limited to, Argentina, the Bahamas, the Cayman Islands, Chile, Colombia, Paraguay, Portugal, Switzerland, the United Kingdom, the United States and Uruguay. Changes in the laws or regulations applicable to our business in the countries where we operate, or the adoption of new laws, and related regulations, may have an adverse effect on us.
Increases in compulsory deposit requirements may have a material adverse effect on us.
Compulsory deposits are reserves that financial institutions are required to maintain with the Central Bank. Compulsory deposits generally do not provide the same returns as other investments and deposits because a portion of these compulsory deposits does not bear interest. The Central Bank has periodically changed the minimum level of compulsory deposits reserves that financial institutions are required to maintain with the Central Bank.
Our insurance operations are subject to oversight by regulatory agencies, such as SUSEP and ANS. Therefore, we may be affected negatively by the penalties applied by such regulators.
Insurance companies are subject to SUSEP intervention and/or liquidation. In case of insufficient resources, technical reserves, or poor economic health with respect to a regulated entity, SUSEP may appoint an inspector to act within the relevant company. If such intervention does not remedy the issue, SUSEP will forward to CNSP a proposal to withdraw the applicable insurance license. In addition, insurance companies are subject to pecuniary penalties, warnings, suspension of authorization of activities and disqualification to engage in business activities as set in Law.
Health insurance companies are subject to ANS regulations. With respect to companies that are deemed to have financial imbalances or serious economic, financial or administrative irregularities, ANS may order the disposal of the applicable health insurance companys portfolio, or take other measures, such as fiscal or technical direction regime for a period not exceeding 365 days, or extrajudicial liquidation. The penalties established for violations committed by health insurance companies and their directors and officers are: (i) warnings; (ii) pecuniary penalties; (iii) suspension of companys activities; (iv) temporary disqualification for the exercise of management positions in health insurance companies; (v) permanent disqualification for the exercise of management positions in health insurance companies as well as in open private pension funds, insurance companies, insurance brokers and financial institutions; and (vi) the cancellation of the companys authorization to operate and sale of its portfolio.
Accordingly, our insurance operations may be affected negatively by any penalties applied by SUSEP or ANS, as described above.
Capital Market and Tax Regulations
Holders of our shares and ADSs may not receive any dividends.
Corporations in Brazil are legally required to pay their stockholders a minimum mandatory dividend at least on a yearly basis (except in specific cases provided for in applicable law). Our Bylaws determine that we must pay our stockholders at least 25% of our annual net income calculated and adjusted pursuant to Brazilian Corporate Law. Applicable Brazilian legislation also allows corporations to consider the amount of interest on shareholders equity distributed to their stockholders for purposes of calculating the minimum mandatory dividends. The calculation of net income pursuant to the Brazilian Corporate Law may significantly differ from our net income calculated under IFRS, as issued by the IASB.
Brazilian Corporate Law also allows the suspension of the payment of the mandatory dividends in any particular year if our Board of Directors informs our general stockholders meeting that such payment would be incompatible with our financial condition. To suspend the dividend payments, our Fiscal Council is required to furnish to the CVM an opinion on the matter along with a statement by our executives. Therefore, upon the occurrence of such event, the holders of our shares and ADSs may not receive any dividends. If this happens, the dividends that were not paid in the particular fiscal year shall be registered as a special reserve and, if not used to cover any losses of subsequent years, the amounts of unpaid dividends still available under such reserve shall be distributed when the financial condition of the corporation allows for such payment.
Furthermore, pursuant to its regulatory powers provided under Brazilian law and banking regulations, the Central Bank may at its sole discretion reduce the dividends or determine that no dividends will be paid by a financial institution if such restriction is necessary to mitigate relevant risks to the Brazilian financial system or the financial institution. Due to the COVID-19 pandemic, the CMN issued Resolution No. 4,820, amended by Resolution No. 4,885, establishing restrictions regarding the distribution by financial institutions of dividends and interest on capital.
Please see Item 8A. Consolidated Statements and Other Financial InformationStockholders Payment and Item 4B. Business OverviewSupervision and RegulationBasel III FrameworkImplementation of Basel III in Brazil. For further details about CMNs capital requirements and dividends and interest on capital see Note 2.4 Summary of Main Accounting Practices, q) Dividends and Interest on Capital and Note 19 Stockholders Equity to our audited consolidated financial statements.
Tax reforms may adversely affect our operations and profitability.
The Brazilian government regularly amends tax laws and regulations, including by creating new taxes, which can be temporary, and changing tax rates, the basis on which taxes are assessed or the way taxes are calculated, including in respect of tax rates applicable solely to the banking industry.
Currently, the Brazilian Congress is discussing a broad tax reform and there is no clarity as to when such reform may ultimately be enacted. If adopted, any such tax reform may affect our business by increasing our costs, limiting our profitability or having other impacts.
Risks Associated with our Business
The value of our securities and derivatives is subject to market fluctuations due to changes in Brazilian or international economic conditions and, as a result, may subject us to material losses.
Market risk is the risk of losses due to movements in financial market prices.
The securities and derivative financial instruments in our portfolio may cause us to record gains and losses, when sold or marked to market (in the case of trading securities), and may fluctuate considerably from period to period due to domestic and international economic conditions. In addition, we may incur losses from fluctuations in the market value of positions held, including risks associated with transactions subject to variations in foreign exchange rates, interest rates, price indexes, equity and commodity prices.
We cannot predict the amount of realized or unrealized gains or losses for any future period. Gains or losses on our investment portfolio may not contribute to our net revenue in the future or may cease to contribute to our net revenue at levels consistent with more recent periods. We may not successfully realize the appreciation or depreciation now existing in our consolidated investment portfolio or in any assets of such portfolio.
Past performance of our loan portfolio may not be indicative of future performance, changes in the profile of our business may adversely affect our loan portfolio. In addition, the value of any collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.
Our historical loan loss experience may not be indicative of our future loan losses. While the quality of our loan portfolio is associated with the default risk in the sectors in which we operate, changes in our business profile may occur due, among other factors, to our organic growth, merger and acquisition activity, changes in local economic and political conditions, a slowdown in customer demand, an increase in market competition, the outbreak of communicable diseases such as COVID-19, changes in regulation and in the tax regimes applicable to the sectors in which we operate and, to a lesser extent, other related changes in countries in which we operate and in the international economic environment. More recently, the ongoing COVID-19 pandemic may affect our ability to accurately assess the creditworthiness of borrowers, which would lead to a deterioration of risk profile and adversely affect our business financial condition and results of operations. In addition, the market value of any collateral related to our loan portfolio may fluctuate, from the time we evaluate it at the beginning of the trade to the time such collateral can be executed upon, due to the factors related to changes in economic, political or sectorial factors beyond our control.
For example, historically, when Brazilian banks increased their loan portfolio to consumers, particularly in the automotive sector, this increased demand for vehicle loans has been followed by a significant rise in the level of consumer indebtedness, leading to high nonperforming loan rates. As a result, many financial institutions recorded higher loan losses due to an increased volume of provisions and a decrease in loans for vehicle acquisition.
Any changes affecting any of the sectors to which we have significant lending exposure, and changes in the value of the collateral securing our loans, may result in a reduction in the value we realize from collateral and in our loan portfolio. Consequentially, it may have an adverse impact on our results of operations and financial condition and it could also adversely affect the growth rate and the mix of our loan portfolio.
In addition, if we are unable to recover sums owed to us under secured loans in default through extrajudicial measures such as restructurings, our last recourse with respect to such loans may be to enforce the collateral secured in our favor by the applicable borrower. Depending on the type of collateral granted, we either have to enforce such collateral through the courts or through extrajudicial measures. However, even where the enforcement mechanism is duly established by the law, Brazilian law allows borrowers to challenge the enforcement in the courts, even if such challenge is unfounded, which can delay the realization of value from the collateral. In addition, our secured claims under Brazilian law will in certain cases rank below those of preferred creditors such as employees and tax authorities. As a result, we may not be able to realize value from the collateral, or may only be able to do so to a limited extent or after a significant amount of time, thereby potentially adversely affecting our financial condition and results of operations.
We may incur losses associated with counterparty exposure risks, including the Brazilian federal government.
We routinely conduct transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients. Like most Brazilian banks, we also invest in debt securities issued by the Brazilian government. As of December 31, 2020, approximately 20.9% of all our assets and 67.5% of our securities portfolio were comprised of these public debt securities.
We may incur losses if any of our counterparties fail to meet their contractual obligations, due to bankruptcy, lack of liquidity, operational failure or other reasons that are exclusively attributable to our counterparties. As an example, an eventual
A downgrade of our ratings may adversely affect our funding cost, our access to capital and debt markets, our liquidity and, as a result, our competitive position.
Credit ratings represent the opinions of independent rating agencies regarding our ability to repay our indebtedness and affect the cost and other terms upon which we are able to obtain funding. Each of the rating agencies reviews its ratings and rating methodologies on a periodic basis and may decide on a grade change at any time, based on factors that affect our
financial strength, such as liquidity, capitalization, asset quality and profitability or due to a downgrade of the Brazilian sovereign rating.
Under the criteria utilized by the rating agencies, ratings assigned to Brazilian financial institutions, including Itaú Unibanco are constrained by the grades assigned to the Brazilian sovereign. Events that are not subject to our control, such as economic or political crises, may lead to a downgrade of the Brazilian sovereign rating and a corresponding downgrade of the ratings assigned to Itaú Unibanco.
Credit ratings are essential to our capability to raise capital and funding through the issuance of debt and to the cost of such financing. A downgrade or a potential downgrade in our credit ratings could have an adverse impact on our operations, income and risk weighting. This may affect net earnings, capital requirements and return on capital levels, causing a negative impact on our competitive position. Additionally, if our credit ratings were to be downgraded, rating trigger clauses that may be part of our financing agreements with other institutions could result in an immediate need to deliver additional collateral to counterparties or taking other actions under some of our derivative contracts, adversely affecting our interest margins and results of operations. Thus, a failure to maintain favorable ratings and outlooks can affect the cost and availability of our financing through the capital markets and other sources of financing, affecting our interest margins and capacity to operate.
Changes or uncertainty in base interest rates could adversely affect us.
A significant portion of our business is conducted in Brazil, where the Central Banks Monetary Policy Committee (Comitê de Política Monetária), or the COPOM, establishes the target base interest rate for the Brazilian economy (the SELIC Rate), and uses changes in this rate as an instrument of monetary policy. The SELIC Rate is the benchmark interest rate payable to holders of certain securities issued by the Brazilian government and traded on the SELIC System operated by the Central Bank. In recent years, the SELIC Rate, has fluctuated significantly reflecting the corresponding volatility in the macroeconomic scenario and inflationary environment. During 2015 and 2016, as a result of increased prospects of inflation and macroeconomic instability, the COPOM increased the SELIC Rate, reaching 14.25% and 13.75% as of December 31, 2015 and December 31, 2016, respectively. In the following years, as a result of the widespread decline in inflation, due to the high level of idle capacity in the Brazilian economy and anchored inflation expectations, the Central Bank started a monetary easing cycle and the COPOM has reduced the SELIC Rate. As of December 31, 2017, and December 31, 2018, the SELIC Rate was 7.00% and 6.50%, respectively. As of December 31, 2019, and December 31, 2020, the SELIC Rate was 4.5% and 2.0%, respectively, reflecting historical lows. As of the date of the filing of this form, the SELIC rate was 2.75%.
We may face challenges associated with IBOR transition.
A significant portion of our income, expenses and liabilities is directly tied to interest rates. Therefore, our results of operations and financial condition are significantly affected by inflation, interest rate fluctuations and related government monetary policies. In addition, various interbank offered rates which are deemed to be benchmarks (the IBORs, including LIBOR and EURIBOR) are the subject of recent international and other regulatory guidance and proposals for reform. Some of these reforms are already effective while others are still to be implemented, including the majority of the provisions of the EU Benchmark Regulation (Regulation (EU) 2016/1011) as it forms part of domestic law of the United Kingdom by virtue of the European Union (Withdrawal) Act 2018 (together, the Benchmarks Regulations).
In particular, the U.K. Financial Conduct Authority (FCA) announced that the FCA will no longer oblige banks to contribute to the calculation of LIBOR after the end of 2021. In addition, on March 5, 2021, the FCA confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings and immediately after June 30, 2023, in the case of the remaining US dollar settings. These announcements indicate that the continuation of LIBOR on the current basis (or at all) cannot and will not be guaranteed after 2021.
The cessation of LIBOR for various currencies at the end of 2021 (and in 2023 for certain tenors of U.S. Dollar LIBOR) will also result in replacement rates being used more widely, including in the instruments documenting certain of our financial obligations. For example, in the U.S., a group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, called the Alternative Reference Rate Committee (ARRC) and comprised of a diverse set of private sector entities, has identified the Secured Overnight Financing Rate (or SOFR) as its preferred alternative rate for the USD LIBOR and the Federal Reserve Bank of New York has begun publishing SOFR daily. Many banks in the U.S. have begun entering into transactions where interest is determined based on SOFR or plan to do so during the course of 2021, as recommended by
ARRC and certain regulators. Additionally, many financial contracts, including some which govern our financial obligations, include replacement alternatives for LIBOR upon the cessation of LIBOR. It is possible that some U.S. lenders will elect to use alternative rates other than SOFR. Central banks in several other jurisdictions have also announced plans for publishing alternative reference rates for other currencies.
In addition, on November 29, 2017, the Bank of England and the FCA announced that, as of January 2018, its working group on Sterling risk free rates has been mandated with implementing a broad-based transition to the Sterling Overnight Index Average (SONIA) over the next four years across sterling bond, loan and derivative markets so that SONIA is established as the primary sterling interest rate benchmark by the end of 2021.
On September 21, 2017, the European Central Bank announced that it would be part of a new working group tasked with the identification and adoption of a risk free overnight rate which can serve as a basis for an alternative to current benchmarks used in a variety of financial instruments and contracts in the euro area. On September 13, 2018, the working group on Euro risk-free rates recommended the new Euro short-term rate (STR) as the new risk-free rate for the euro area. The STR was published for the first time on October 2, 2019. Although EURIBOR has been reformed in order to comply with the terms of the Benchmark Regulation, it remains uncertain as to how long it will continue in its current form, or whether it will be further reformed or replaced with STR or an alternative benchmark.
This and other reforms may cause IBORs to perform differently than in the past, or to disappear entirely, or have other consequences, which cannot be fully anticipated, which introduce a number of risks for us including legal risks arising from potential changes required to documentation for new and existing transactions, financial risks arising from any changes in the valuation of financial instruments linked to benchmark rates and hedging mismatch, pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments, operational risks arising from the potential requirement to adapt information technology systems, trade reporting infrastructure and operational processes, and commercial risks arising from the potential impact of communication with customers and engagement during the transition period. Accordingly, the implementation of alternative benchmark rates may have a material adverse effect on our business, results of operations, financial condition and prospects.
Our approach to the replacement of the IBOR rates is described in more detail in LIBOR Transition in item 5A.
We face risks relating to liquidity of our capital resources.
Liquidity risk, as we understand it, is the risk that we will not have sufficient financial resources to meet our obligations by the respective maturity dates or that we will honor such obligations but at an excessive cost. This risk is inherent in the activities of any commercial or retail bank.
Our capacity and cost of funding may be impacted by a number of factors, such as changes in market conditions (e.g., in interest rates), credit supply, regulatory changes, systemic shocks in the banking sector, and changes in the markets perception of us, among others.
In scenarios where access to funding is scarce and/or becomes too expensive, and the access to capital markets is either not possible or is limited, we may find ourselves obliged to increase the return rate paid to deposits made to attract more clients and/or to settle assets not compromised and/or potentially devalued so that we will be able to meet our obligations. If the market liquidity is reduced, the demand pressure may have a negative impact on prices, since natural buyers may not be immediately available. Should this happen, we may have a significant negative goodwill on assets, which will impact the banks results and financial position. The persistence or worsening of such adverse market conditions or rises in basic interest rates may have a material adverse impact on our capacity to access capital markets and on our cost of funding.
We face risks related to market concentration.
Concentration risk is the risk associated with potentially high financial losses triggered by significant exposure to a particular component of risk, whether it be related to a particular counterparty, industry, geographic region, mitigating instruments, index or currency. Examples of such risks include significant exposure to a single counterparty, to counterparties operating in the same economic sector or geographical region, to businesses segments or credit products, or to financial instruments that depend on the same index or currency.
We believe that failure to diversify transactions with respect to a particular risk factor could generate material financial loss for us.
Our hedge strategy may not be able to prevent losses
We use diverse instruments and strategies to hedge our exposures to a number of risks associated with our business, but we may incur losses if such hedges are not effective.
We may not be able to hedge our positions, or do so only partially, or we may not have the desired effectiveness to mitigate our exposure to the diverse risks and market in which we are involved. Any of these scenarios may adversely affect our business and financial results.
We face risks relating to our operations.
Operational risks, which may arise from errors in the performance of our processes, the conduct of our employees, instability, malfunction or outage of our IT system and infrastructure, or loss of business continuity, or comparable issues with respect to our vendors, may disrupt our businesses and lead to material losses. We face operational risk arising from errors, accidental or premeditated, made in the execution, confirmation or settlement of transactions or from transactions not being properly recorded, evaluated or accounted for. The occurrence of any of these risks may adversely affect our business, financial results and reputations.
We are exposed to failures, deficiency or inadequacy of our internal processes, human error or misconduct and cyberattacks. Additionally, we rely on third-party services. All these factors may adversely affect us.
Due to the high volume of daily processing, we are dependent on technology and management of information, which exposes us to eventual unavailability of systems and infrastructure such as power outages, interruption of telecommunication services, and generalized system failures, as well as internal and external events that may affect third parties with which we do business or that are crucial to our business activities (including stock exchanges, clearing houses, financial dealers or service providers) and events resulting from wider political or social issues, such as cyberattacks or unauthorized disclosures of personal information in our possession. We manage and store certain proprietary information and sensitive or confidential data relating to our clients and to our operations. We may be subject to breaches of the information technology systems we use for these purposes, as well as the theft of technology and intellectual property. Additionally, we operate in many geographic locations and are frequently subject to the occurrence of events outside of our control. Despite the contingency plans we have in place, our ability to conduct business in any of these locations may be adversely impacted by a disruption to the infrastructure that supports our business. We are strongly dependent on technology and thus are vulnerable to viruses, worms and other malicious software, including bugs and other problems that could unexpectedly interfere with the operation of our systems and result in data leakage.
Operating failures, including those that result from human error or fraud, not only increase our costs and cause losses, but may also give rise to conflicts with our clients, lawsuits, regulatory fines, sanctions, interventions, reimbursements and other indemnity costs. Ethical misconduct and noncompliance ethical misconduct or breaches of applicable laws by our businesses or our employees could be damaging to our reputation too, and could result in litigation, regulatory action and penalties. All of which may have a material adverse effect on our business, reputation and results of operations. Operational risk also includes legal risk associated with inadequacy or deficiency in contracts signed by us, as
well as penalties due to noncompliance with laws and punitive damages to third parties arising from the activities undertaken by us. Additionally, we have essential other services for the proper functioning of our business and technology infrastructure, such as call centers, networks, internet and systems, among others, provided by external or outsourced companies. Impacts on the provision of these services, caused by these companies due to the lack of supply or the poor quality of the contracted services, can affect the conduct of our business as well as our clients. We also rely in certain limited capacities on third-party data management providers whose possible security problems and security vulnerabilities may have similar effects on us.
As a result of the COVID-19 pandemic, we have rapidly increased the number of employees working remotely. This may cause increases in the unavailability of our systems and infrastructure, interruption of telecommunication services, generalized system failures and heightened vulnerability to cyberattacks. Accordingly, our ability to conduct our business may be adversely impacted.
Failure to protect personal information could adversely affect us.
We manage and hold confidential personal information of clients in the ordinary course of our business. Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures or security breaches could subject us to legal action and administrative sanctions as well as damage that could materially and adversely affect our operating results, financial condition and prospects.
Further, our business is exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and reputational or financial harm.
In addition, we may be required to report events related to cybersecurity issues, events where client information may be compromised, unauthorized access and other security breaches, to the relevant regulatory authority. Any material disruption or slowdown of our systems could cause information, including data related to client requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us.
Failure to adequately protect ourselves against risks relating to cybersecurity could materially and adversely affect us.
We face various cybersecurity risks, including but not limited to: penetration of our information technology systems and platforms, by ill-intentioned third parties, infiltration of malware (such as computer viruses) into our systems, contamination (whether intentional or accidental) of our networks and systems by third parties with whom we exchange data, unauthorized access to confidential client and/or proprietary data by persons inside or outside of our organization, and cyberattacks causing systems degradation or service unavailability that may result in business losses.
Although we have procedures and controls to safeguard our information technology systems and platforms, we are subject to cybersecurity risks. We have seen in recent years computer systems of companies and organizations being targeted, not only by cyber criminals, but also by activists and rogue states. We define cyberattack as any type of offensive maneuver employed by states, nations, individuals, groups or organizations that targets computer information systems, infrastructure, networks and/or personal devices, using varied means, such as denial of service, malware and phishing, for the purpose of stealing, altering or destroying a specific target by hacking into a technological susceptible system. Cyberattacks can range from the installation of viruses on a personal computer to attempts to destroy the infrastructure of entire nations. We are exposed to this risk over the entire lifecycle of information, from the moment it is collected to its processing, transmission, storage, analysis and destruction.
A successful cyberattack may result in unavailability of our services, leak or compromise of the integrity of information and could give rise to the loss of significant amounts of client data and other sensitive information, as well as significant levels of liquid assets (including cash) as well as damage to our image, directly affecting our customers and partners. In addition, cyberattacks could give rise to the disabling of our information technology systems used to service our clients. As attempted attacks continue to evolve in scope and sophistication, we may incur significant costs in our attempt to modify or enhance our protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach.
If we fail to effectively manage our cybersecurity risk, for example, by failing to update our systems and processes in response to new threats, this could harm our reputation and adversely affect our operating results, financial condition and prospects through the payment of client compensation, regulatory penalties and fines and/or through the loss of assets. In addition, we may also be subject to cyber-attacks against critical infrastructures of Brazil or of the other countries where we operate. Our information technology systems are dependent on such critical infrastructure and any cyber-attack against such critical infrastructure could negatively affect our ability to service our clients.
In 2020, due to the COVID-19 pandemic, there was a significant increase in employees working from home, which led to a change in the tactics used by cyber criminals to perform attacks, mostly exploiting the fears of people to try to steal data or compromise the technological environment. Due to the new profile of risks, we reinforced our measures to block fraudulent e-mails and to takedown malicious websites, ensuring that workstations are protected by antimalware and only have connectivity to our VPN. We also help third parties to adapt their infrastructure to work securely from home. There are also requirements related to the information security process, such as the Brazilian General Personal Data Protect Act (LGPD), CVM Instruction No. 612/2019 and CMN Resolution No. 4,658 /2018, that we agree on their importance to keep cyber risks mitigated and the related controls are continuous monitored to ensure effectiveness as any failure to comply with these regulatory requirements could adversely affect us.
The loss of senior management, or our ability to attract and maintain key personnel, could have a material adverse effect on us.
Our ability to maintain our competitive position and implement our strategy depends on our senior management. The loss of some of the members of our senior management, or our inability to maintain and attract additional personnel, could have a material adverse effect on our operations and our ability to implement our strategy.
Our performance and success are largely dependent on the talents and efforts of highly skilled individuals. Talent attraction and retention is one of the key pillars for supporting the results of our organization, which is focused on client satisfaction and sustainable performance. Our ability to attract, develop, motivate and retain the right number of appropriately qualified people is critical to our performance and ability to thrive globally. Concurrently, we face the challenge to provide a new experience to employees, so that we are able to attract and retain highly-qualified professionals who value environments offering equal opportunities and who wish to build up their careers in dynamic, cooperative workplaces, which encourage diversity and meritocracy and are up to date with new work models. Also, our current business scenario demands not only a careful look at traditional careers, but also at new career paths that are indispensable for our future.
Our performance could be adversely affected if we are unable to attract, retain and motivate key talent. As we are highly dependent on the technical skills of our personnel, including successors to crucial leadership positions, as well as their relationships with clients, the loss of key components of our workforce (particularly to emerging competitors, such as start-ups and fintechs), could make it difficult to compete, grow and manage the business. A loss of such expertise could adversely affect our financial performance, future prospects and competitive position.
Misconduct of our employees or representatives may adversely affect us.
Our business is based on institutional principles (Our Way), among which are its only good for us if its good for the client and ethics are non-negotiable. However, part of the customer relationship depends on direct interaction with our employees or representatives. We cannot assure you that our individual employees will always comply with our internal policies and that our internal procedures will effectively monitor and identify misbehavior. Deviations in behavior such as inappropriate sales practices and improper use of information may occur. These risks can give rise to customer attrition, need of compensation or reimbursements, litigation and, according to its extension, may expose the institution to reputation risk, financial and credibility losses with the market and regulators.
We may not be able to prevent our officers, employees or third parties acting on our behalf from engaging in situations that qualify as corruption in Brazil or in any other jurisdiction, which could expose us to administrative and judicial sanctions, as well as have an adverse effect to us.
We are subject to Brazilian anticorruption legislation, and similarly-focused legislation of the other countries where we have branches and operations, as well as other anticorruption laws and regulatory regimes with a transnational scope. These laws require the adoption of integrity procedures to mitigate the risk that any person acting on our behalf may offer an improper advantage to a public agent in order to obtain benefits of any kind. Applicable transnational legislation, such as the U.S. Foreign Corrupt Practices Act and U.K. Bribery Act, as well as the applicable Brazilian legislation (mainly Brazilian Law No. 12,846/2013 Lei Anticorrupção Brasileira), require us, among other things, the maintenance of policies and procedures aimed at preventing any illegal or improper activities related to corruption involving government entities and officials in order to secure any business advantage, and require us to maintain accurate books and a system of internal controls to ensure the accuracy of our books and prevent illegal activities. We have policies and procedures designed to prevent bribery and other corrupt practices. See Item 4B. Business OverviewSupervision and Regulation for further details. Unauthorized actions by our officers, employees or third parties acting on our behalf in breach of our internal policies may qualify as corruption in Brazil or in other jurisdiction and we could be exposed to administrative and judicial sanctions, accounting errors or adjustments, monetary losses and reputational damages or other adverse effects. The perception or allegations that we, our employees, our affiliates or other persons or entities associated with us have engaged in any such improper conduct, even if unsubstantiated, may cause significant reputational harm and other adverse effects.
We operate in international markets which subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic risks and conditions specific to such markets, which could adversely affect us or our foreign units.
We operate in various jurisdictions outside of Brazil through branches, subsidiaries and affiliates, and we expect to continue to expand our international presence. We face, and expect to continue to face, additional risks in the case of our existing and future international operations, including:
political instability, adverse changes in diplomatic relations and unfavorable economic and business conditions in the markets in which we currently have international operations or into which we may expand;
more restrictive or inconsistent government regulation of financial services, which could result in increased compliance costs and/or otherwise restrict the manner in which we provide our services; and
difficulties in managing operations and adapting to cultural differences, including issues associated with (i) business practices and customs that are common in certain foreign countries but might be prohibited by Brazilian law and our internal policies and procedures and (ii) management and operational systems and infrastructures, including internal financial control and reporting systems and functions, staffing and managing of foreign operations, which we might not be able to do effectively or cost-efficiently.
As we expand into these and additional markets these risks could be more significant and have the potential to have an adverse impact on us.
Our business strategy may not provide us the results we expect.
Our strategy and challenges are determined by management based on related assumptions, such as the future economic environment, and the regulatory, political and social scenarios in the regions in which we operate. These assumptions are subject to inaccuracies and risks that might not be identified or anticipated.
Accordingly, the results and consequences arising from any possible inaccurate assumptions may compromise our capacity to fully or partially implement strategies, as well as to achieve the results and benefits expected therefrom, which might give rise to financial losses and reduce the value creation to our stockholders.
Additionally, factors beyond our control, such as, but not limited to, economic and market conditions, changes in laws and regulations, including regulations limiting fees or interest rates and fostering an increasingly competitive scenario, and other risk factors stated in this annual report may make it difficult or impossible to implement fully or partially our business model and also our achieving the results and benefits expected from our business plan.
Adverse changes to the political and economic scenario in Latin America may affect some of the challenges we have taken on, such as the internationalization of our business, since our strategy to strengthen our position in other countries is also dependent on the respective economic performance of these countries.
The integration of acquired or merged businesses involves certain risks that may have a material adverse effect on us.
As part of our growth strategy in the Brazilian and Latin American financial sector, we have engaged in a number of mergers, acquisitions and partnerships with other companies and financial institutions in the past and may pursue further such transactions in the future. Until we have signed a definitive agreement, we usually do not comment publicly on possible acquisitions. When we do announce, our stock price may fall depending on the size of the acquisition. Even though we review the companies we plan to acquire, it is generally not viable for these reviews to be complete in all respects. Any such transactions involve risks, such as the possible incurrence of unanticipated costs as a result of difficulties in integrating systems, finance, accounting and personnel platforms, failure in diligence or the occurrence of unanticipated contingencies, as well as the breach of the transaction agreements by counterparties. In addition, we may not achieve the operating and financial synergies and other benefits that we expected from such transactions in a timely manner, on a cost-effective basis or at all. There is also the risk that antitrust and other regulatory authorities may impose restrictions or limitations on the transactions or on the businesses that arise from certain combinations or impose fines or sanctions due to the interpretation by the authorities of irregularities with respect to a corporate merger, consolidation or acquisition.
If we are unable to take advantage of business growth opportunities, cost savings, operating efficiencies, revenue synergies and other benefits we anticipate from mergers and acquisitions, or if we incur greater integration costs than we have estimated, then we may be adversely affected.
Our controlling stockholder has the ability to direct our business.
As of December 31, 2020, IUPAR, our controlling stockholder, directly owned 51.71% of our common shares and 26.15% of our total share capital, giving it the power to appoint and remove our directors and officers and determine the outcome of any action requiring stockholder approval, including transactions with related parties, corporate reorganizations and the timing and of dividend payments.
In addition, IUPAR is jointly controlled by Itaúsa, which, in turn, is controlled by the Egydio de Souza Aranha family, and by Cia. E. Johnston, which in turn is controlled by the Moreira Salles family. The interests of IUPAR, Itaúsa and the Egydio de Souza Aranha and Moreira Salles families may be different from the interests of our other stockholders.
Certain of our directors are affiliated with IUPAR and circumstances may arise in which the interests of IUPAR and its affiliates conflict with the interests of our other stockholders. To the extent that these and other conflicting interests exist, our stockholders will depend on our directors duly exercising their fiduciary duties as members of our Board of Directors. Notwithstanding, according to Brazilian Corporation Law the controlling stockholders should always vote in the interest of the company. In addition, they are prohibited from voting in cases of conflict of interest in the matter to be decided.
Unfavorable court decisions involving material amounts for which we have no or partial provisions or in the event that the losses estimated turn out to be significantly higher than the provisions made, may adversely affect our results and financial condition.
As part of the ordinary course of our business, we are subject to, and party to various civil, tax and labor lawsuits, which involve financial risks. Our audited consolidated financial statements only include reserves for probable losses that can be reasonably estimated and eventual expenses that we incur in connection with litigation or administrative proceedings, or as otherwise required by Brazilian law. It is currently not possible to estimate the amount of all potential costs that we may incur or penalties that may be imposed on us other than those amounts for which we have reserves. In the event of unfavorable court decisions involving material amounts for which we have no or partial provisions, or in the event that the losses estimated turn out to be significantly higher than the provisions made, the aggregate cost of unfavorable decisions, may adversely affect our results and financial condition.
Decisions on lawsuits due to government monetary stabilization plans may have a material adverse effect on us.
We are a defendant in lawsuits for the collection of understated inflation adjustment for savings resulting from the economic plans implemented in the 1980s and 1990s by the Brazilian government as a measure to combat inflation.
Itaú Unibanco Holding is a defendant in lawsuits filed by individuals, as well as class actions filed by (i) consumer protection associations; and (ii) the public attorneys office (Ministério Público) on behalf of holders of savings accounts. In connection with these class actions, we established provisions upon service of the individual claim requiring the enforcement of a judgment handed down by the judiciary, using the same criteria used to determine the provisions of individual actions.
The STF has issued a number of decisions in favor of the holders of savings accounts but has not ruled regarding the constitutionality of economic plans and their applicability to savings accounts. Currently, the appeals on this issue are suspended by order of the STF, until there is a definitive decision by the STF regarding the constitutional issue.
In December 2017, under the mediation of the Advocacia-Geral da União (or AGU), the representative entities of banks and the representative entities of holders of savings accounts entered into an agreement with the objective of ending the litigation related to economic plans against the Brazilian banks. The agreement establishes the conditions for the voluntary adhesion of the holders of savings accounts for the receiving of amounts and closure of processes.
The agreement was ratified at a plenary session of the STF on March 1, 2018 and the holders of savings accounts were able to adhere to its terms for a period of 24 months.
As this period expired, the parties signed an addendum to the instrument to extend the adhesion period to include a greater number of saving account holders and, consequently, increase the termination of legal actions. In May 2020, the STF approved this addendum and granted a term of thirty months for new adhesions, which may be extended for another thirty months, conditioned to the number of account holders adhering throughout the first period.
As such, low adherence to the agreement and an eventual unfavorable judgment by the STF may result in Brazilian banks incurring relevant costs, which could have an adverse effect on our financial position. We are currently working with the courts to encourage adherence.
Tax assessments may adversely affect us.
As part of the normal course of business, we are subject to inspections by federal, municipal and state tax authorities. These inspections, arising from the divergence in the understanding of the application of tax laws may generate tax assessments which, depending on their results, may have an adverse effect on our financial results. Also due to such proceedings and for other reasons we may be thwarted by a court decision to pay dividends and other distributions to our shareholders.
Please see Item 8A. Consolidated Statements and Other Financial InformationLegal Proceedings for further details.
Management Risk Factor
Our policies, procedures and models related to risk control may be ineffective and our results may be adversely affected by unexpected losses.
Our risk management methods, procedures and policies, including our statistical models and tools for risk measurement, such as value at risk, or VaR, for market risk default probability estimation models for credit risk or customer unusual behavior models for fraud detection or money-laundering risk identification, may not be fully effective in mitigating our risk exposure in all economic environments or against all types of risks, including those that we fail to identify or anticipate. Some of our qualitative tools and metrics for managing risk are based on our observations of the historical market behavior. In addition, due to limitations on information available in Brazil, to assess clients creditworthiness, we rely largely
on credit information available from our own databases, on certain publicly available consumer credit information and other sources. We apply statistical and other tools to these observations and data to quantify our risk exposure. These tools and metrics may fail to predict all types of future risk exposures. These risk exposures, for example, could arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses, therefore, could be significantly greater than indicated by historical measures. In addition, our quantified modeling may not take all risks into account. Our qualitative approach to managing those risks could prove insufficient, exposing us to material unexpected losses.
Our results of operations and financial position depend on our ability to evaluate losses associated with risks to which we are exposed and on our ability to build these risks into our pricing policies. We recognize an allowance for loan losses aiming at ensuring an allowance level compatible with the expected loss, according to internal models credit risk measurement. The calculation also involves significant judgment on the part of our management. Those judgments may prove to be incorrect or change in the future depending on information as it becomes available. These factors may adversely affect us.
Financial Reporting Risks
We make estimates and assumptions in connection with the preparation of our financial statements, and any changes to those estimates and assumptions could have a material adverse effect on our operating results.
In connection with the preparation of our financial statements, we use certain estimates and assumptions based on historical experience and other factors. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, our reported operating results could be materially adversely affected.
As a result of the inherent limitations in our disclosure and accounting controls, misstatements due to error or fraud may occur and not be detected.
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file with or furnish to the SEC under the Exchange Act is accumulated and communicated to management, recorded, processed summarized and reported within the time periods specified in SEC rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, including related accounting controls, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls.
Any failure by us to maintain effective internal control over financial reporting may adversely affect investor confidence in our company and, as a result, the value of investments in our securities.
We are required under the Sarbanes-Oxley Act of 2002 to furnish a report by our management on the effectiveness of our internal control over financial reporting and to include a report by our independent auditors attesting to such effectiveness. Any failure by us to maintain effective internal control over financial reporting could adversely affect our ability to report accurately our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent auditors determine that we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market prices of our shares and ADSs could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies subject to SEC regulation, also could restrict our future access to the capital markets.
We adopt Brazilian accounting standards and managerial disclosures that differ from foreign standards, including from the U.S., with which U.S. stockholders are familiar.
For regulatory purposes, we prepare and make available consolidated financial statements under IFRS issued by IASB and under the Brazilian GAAP, which may differ from US GAAP in a number of ways. We use Brazilian GAAP for filing with the Brazilian Securities and Exchange Commission (CVM) and for calculation of payment of dividends and tax liabilities. Furthermore, we disclose quarterly reports on managerial financial information not required in other countries. U.S. investors may be unfamiliar with these different accounting standards and managerial disclosures adopted by us.
Inadequate pricing methodologies for insurance, pension plan and premium bond products may adversely affect us.
Our insurance and pension plan subsidiaries establish prices and calculations for our insurance and pension products based on actuarial or statistical estimates. The pricing of our insurance and pension plan products is based on models that include a number of assumptions and projections that may prove to be incorrect, since these assumptions and projections involve the exercise of judgment with respect to the levels and timing of receipt or payment of premiums, contributions, provisions, benefits, claims, expenses, interest, investment results, retirement, mortality, morbidity, and persistence. We could suffer losses due to events that are contrary to our expectations directly or indirectly based on incorrect biometric and economic assumptions or faulty actuarial bases used for contribution and provision calculations.
Although the pricing of our insurance and pension plan products and the adequacy of the associated reserves are reassessed on a yearly basis, we cannot accurately determine whether our assets supporting our policy liabilities, together with future premiums and contributions, will be sufficient for the payment of benefits, claims, and expenses. Accordingly, the occurrence of significant deviations from our pricing assumptions could have an adverse effect on the profitability of our insurance and pension products. In addition, if we conclude that our reserves and future premiums are insufficient to cover future policy benefits and claims, we will be required to increase our reserves and record these effects in our financial statements, which may have a material adverse effect on us.
We face risks associated with the increasingly competitive environment, and recent consolidations in the Brazilian banking industry, as well as competition based on technological alternatives to traditional banking services.
The Brazilian market for financial and banking services is highly competitive. We face significant competition from other Brazilian and international banks, in addition to other non-financial companies competing in certain segments of the banking industry in which we operate. These latter competitors may not be subject to the same regulatory and capital requirements that we are and, therefore, may be able to operate with less stringent regulatory requirements.
Competition has increased as a result of recent consolidations among financial institutions in Brazil and of regulations that (i) increase the ability of clients to switch business between financial institutions, (ii) with the clients permission, grant access to financial and personal information in such institutions, and (iii) establish rules for an instant payment arrangement. Furthermore, digital technologies are changing the ways customers access banking services and the competitive environment with respect to such services. The use of digital channels has risen steadily over the past few years. In this context, new competitors are seeking to disrupt existing business models through technological alternatives to traditional banking services. If we are not successfully able to compete with these disruptive business models and markets, we may lose market share and, consequently, lower our margins and profitability. Such increased competition may also adversely affect us by, among other things, limiting our ability to retain or increase our current client base and to expand our operations, or by impacting the fees and rates we adopt, which could reduce our profit margins on banking and other services and products we offer.
Please see Item 4B. Business OverviewSupervision and RegulationAntitrust Regulation for further details about the competition on the Brazilian markets.
We are subject to Brazilian antitrust legislation and that of other countries in which we operate or will possibly operate.
We are in a dominant position in certain Brazilian banking markets and, therefore, may be subject to the Brazilian antitrust laws including No. 12,529/11, which address, among other matters, violation of the economic order. Accordingly,
we may be subject to penalties from Brazilian antitrust authorities, especially administrative fines and divestiture of assets. Additionally, we are subject to the antitrust legislation in the jurisdictions where we operate, such as the antitrust laws of the U.S. (Sherman Act and Clayton Antitrust Act) and of the European Union (Articles 101 and 102 of the Treaty on the Functioning of the European Union). Consequently, we cannot assure that Brazilian and foreign antitrust regulations will not adversely affect our business in the future.
Damage to our reputation could harm our business and outlook.
We are highly dependent on our image and credibility to generate business. A number of factors may tarnish our reputation and generate a negative perception of the institution by our clients, counterparties, stockholders, investors, supervisors, commercial partners and other stakeholders, such as noncompliance with legal obligations, making irregular sales to clients, dealing with suppliers with questionable ethics, unauthorized disclosure of client data, inappropriate behavior by our employees, and third-party failures in risk management, among others. In addition, certain significant actions taken by third parties, such as competitors or other market participants, may indirectly damage our reputation with clients, investors and the market in general. If we are unable, or are perceived unable, to properly address these issues we may be subject to penalties, fines, class actions, and regulatory investigations, among others. Damages to our reputation among clients, investors and other stakeholders may have a material adverse effect on our business, financial performance and prospects.
Environmental and Social Risks
We may incur financial losses and damages to our reputation from environmental and social risks.
Environmental and social risk is considered a material issue for our business, since it can affect the creation of shared value in the short, medium and long terms, from the standpoint of our organization and our main stakeholders. Further, we understand environmental and social risk as the possibility of losses resulting from events of environmental and social origin related to our activities. For more information about our environmental and social risk management please see Item 11. Quantitative and Qualitative Disclosures about Market RiskEnvironmental and Social Risk.
CMN Resolution No. 4,327/2014 establishes requirements that must be observed in the establishment and implementation of the environmental and social responsibility policies applicable to financial institutions. Accordingly, we are required to assess environmental and social risks and evaluate data from environmental and social related financial losses. The Central Bank is responsible for supervising the implementation of such regulation.
Environmental and social issues may affect our daily activities and the revenue of our clients, causing defaults, especially in case of serious environmental and social incidents, including climate risk as climate change poses relevant risks for the whole financial system.
Climate risks encompass both physical risks, arising from changes in climate patterns such as rainfalls and rises in temperature and extreme weather events; and transition risks arising from economic shifts occurred as a consequence of climate action such as carbon pricing, climate regulation, market risks and reputation risks. Given its relevance, climate risk has become one of our main priorities: we support the Task Force on Climate-related Financial Disclosures (TCFD) since 2017 and we are committed to implement its recommendations by 2022. With this objective we are strengthening our climate risk governance and strategy and developing tools and methodologies to assess and manage climate risks.
These risks are more pronounced when we provide financial support for clients and projects, as we could be held indirectly liable for supporting such activity in case of environmental or social damage, which could also subject us to further reputational risks.
Climate change may have adverse effects on our business
The risks associated with climate change are gaining increasing social, regulatory, economic and political relevance, both nationally and internationally. New regulations related to climate change may affect our operations and business strategy, leading us to incorporate financial costs resulting from: (i) the physical risk of climate change and (ii) the risk of transition to a low carbon economy.
The physical risks of climate change are related to the gradual increase in the average temperature of the planet and to the increase in the intensity and frequency of extreme weather events. Despite the uncertainty component related to the intensity and location of these events, their impact on the economy is expected to be more acute in the future. The potential impact on the economy includes, but is not limited to, significant changes in asset prices and industry profitability. Damage to borrowers properties and operations may impair asset values and credit quality of customers, leading to higher nonperformance loans, write-offs and impairment charges in our portfolios. In addition, our facilities and resilience may also suffer physical damage due to weather events that result in increased costs for us.
As the economy transitions to a low-carbon economy, financial institutions may face significant and rapid developments in stakeholder expectations, policy, law and regulation which could impact the lending activities we undertake, as well as the risks associated with our lending portfolios, and the value of our financial assets. As concerns about climate change increase and societal preferences change, we may face greater scrutiny of the type of business we conduct, adverse media coverage and reputational damage, which may in turn impact customer demand for our products, returns on certain business activities and the value of certain assets and trading positions resulting in impairment charges. The impacts of climate change may also increase losses for those sensitive sectors, caused by the effects of both physical and transition risks, causing loss of profitability for companies exposed to these risks and impairing their ability to repay any loans. Possible carbon pricing can affect companies costs and compromise their ability to generate cash flows. Any subsequent increase in defaults and rising unemployment could create recessionary pressures, which may lead to an increased deterioration in the creditworthiness of our clients, higher expected credit loss, and increased charge-offs and defaults among wholesale and retail customers. If we do not adequately embed risks associated with climate change into our risk framework to appropriately measure, manage and disclose the various financial and operational risks we face as a result of climate change, or fail to adapt our strategy and business model to the changing regulatory requirements and market expectations on a timely basis, it may have a material and adverse impact on our business growth rate, competitiveness, profitability, capital requirements, cost of funding, and financial condition.
For further details on our approach to climate change, Item 11. Quantitative and Qualitative Disclosures about Market RiskEnvironmental and Social Risk.
Risk Factors for ADS Holders
The relative price volatility and limited liquidity of the Brazilian capital markets may significantly limit the ability of our investors to sell the preferred shares underlying our ADSs, at the price and time they desire
The investment in securities traded in emerging markets frequently involves a risk higher than an investment in securities of issuers from the U.S. or other developed countries, and these investments are generally considered more speculative. The Brazilian securities market is smaller, less liquid, more concentrated and can be more volatile than markets in the U.S. and other countries. Thus, an investors ability to sell preferred shares underlying ADSs at the price and time the investor desires may be substantially limited.
The preferred shares underlying our ADSs do not have voting rights, except in specific circumstances.
Pursuant to our Bylaws, the holders of preferred shares and therefore of our ADSs are not entitled to vote in our general stockholders meetings, except in specific circumstances. Even in such circumstances, ADS holders may be subject to practical restrictions on their ability to exercise their voting rights due to additional operational steps involved in communicating with these stockholders, as mentioned below.
According to the provisions of the ADSs deposit agreement, in the event of a general stockholders meeting, we will provide notice to the depositary bank, which will, to the extent practicable, send such notice to ADS holders and instructions on how such holders can participate in such general stockholders meeting, and ADS holders should instruct the depositary bank on how to vote in order to exercise their voting rights. This additional step of instructing the ADS depositary bank may make the process for exercising voting rights longer for ADS holders.
Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares
We may not be able to offer the U.S. holders of our ADSs preemptive rights granted to holders of our preferred shares in the event of an increase of our share capital by issuing preferred shares unless a registration statement relating to such preemptive rights and our preferred shares is effective or an exemption from such registration requirements of the Securities Act is available. As we are not obligated to file a registration statement relating to preemptive rights with respect to our preferred shares, we cannot assure that preemptive rights will be offered to you. In the event such registration statement is not filed (or in case filed, not declared effective) or if the exemption from registration is not available, the U.S. holders of our ADSs may not receive any value from the granting of such preemptive rights and have their interests in us diluted.
The surrender of ADSs may cause the loss of the ability to remit foreign currency abroad and of certain Brazilian tax advantages
While ADS holders benefit from the electronic certificate of foreign capital registration obtained in Brazil by the custodian for our preferred shares underlying the ADSs, which permits the depositary bank to convert dividends and other distributions with respect to the preferred shares underlying the ADSs into foreign currency and remit the proceeds abroad, the availability and requirements of such electronic certificate may be adversely affected by future legislative changes.
If an ADS holder surrenders the ADSs and, consequently, receives preferred shares underlying the ADSs, such holder will have to register its investment in the preferred shares with the Central Bank either as (i) a Foreign Direct Investment, subject to Law No. 4,131/62, which will require an electronic certificate of foreign capital registration, the Electronic Declaratory Registration of Foreign Direct Investment (RDE-IED), or (ii) as a Foreign Investment in Portfolio, subject to Resolution CMN No. 4,373/14, which among other requirements, requires the appointment of a financial institution in Brazil as the custodian of the preferred shares (except in case the foreign investor is a natural person) and legal representative of the foreign investor in the Electronic Declaratory Registration of Portfolio (RDE Portfolio). The failure to register the investment in the preferred shares as foreign investment under one of the regimes mentioned above (e.g. RDE IED or RDE Portfolio) will impact the ability of the holder non-resident in Brazil to dispose of the preferred shares and to receive dividends. Moreover, upon receipt of the preferred shares underlying the ADSs, Brazilian regulations require the investor to enter into corresponding exchange rate transactions and pay taxes on these exchange rate transactions, as applicable.
The tax treatment for the remittance of distributions on, and the proceeds from any sale of, our preferred shares may be less favorable in case a holder of preferred shares obtains the RDE-IED instead of the RDE-Portfolio. In addition, if a holder of preferred shares attempts to obtain an electronic certificate of foreign capital registration, such holder may incur expenses or suffer delays in the application process, which could impact the investors ability to receive dividends or distributions relating to our preferred shares or the return of capital on a timely manner.
The holders of ADSs have rights that differ from those of stockholders of companies organized under the laws of the U.S. or other countries
Our corporate affairs are governed by our Bylaws and Brazilian Corporate Law, which may have legal principles that differ from those that would apply if we were incorporated in the U.S. or in another country. Under Brazilian Corporate Law, the holders of ADSs and the holders of our preferred shares may have different rights with respect to the protection of investor interests, including remedies available to investors in relation to any actions taken by our Board of Directors or the holders of our common shares, which may be different from what is provided in U.S. law or the law of another country.
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INFORMATION ON THE COMPANY
History and Development of the Company
Our legal and commercial name is Itaú Unibanco Holding S.A. We were incorporated on September 27, 1924. We are organized as a publicly held corporation for an unlimited period of time under the laws of Brazil. Our head offices are located at Praça Alfredo Egydio de Souza Aranha, 100, 04344-902, São Paulo, SP, Brazil and our telephone number is +55-11-5019-1267.
Investor information can be found on our Investor Relations website at www.itau-unibanco.com/ir. Information contained on our website is not incorporated by reference in, and shall not be considered a part of, this annual report. Our agent for service of process in the United States is the general manager of our New York branch, which is located at 767 Fifth Avenue, 50th floor, New York, NY 10153.
In our history, Unibanco was incorporated in 1924. The Casa Moreira Salles, as it was called, was founded by João Moreira Salles and used to sell everything: from dishes, clothes, shoes, to beverages. Thereafter, it began to operate as a banking institution, acting as a banking correspondent for the leading banks in Minas Gerais state.
Two decades later, in 1943, Itaú was founded by Alfredo Egydio de Souza Aranha, as Banco Central de Crédito S.A., with its first branch in the city of São Paulo.
João Moreira Salles and Alfredo Egydio de Souza Aranha played a key role in our history. As did the second generation of our founders, Walther Moreira Salles and Olavo Setubal.
During this period, we grew, changed our name a few times, conducted mergers and acquisitions, experienced economic growth in Brazil, hyperinflation, the middle-class boom and certain world crisis. We have witnessed the progress of Brazil and the stories of countless employees and clients who have helped us grow and encouraged us to develop.
In 2008, we undertook the largest merger in Brazils history. The partnership between Itaú and Unibanco meant the union of complementary mentalities, two ground-breaking banks in the use of technology and leaders in the Brazilian financial sector, with shared histories. This merger resulted in the largest private financial conglomerate in the southern hemisphere and one of the 20 largest banks in the world as measured by assets.
Over the course of more than 90 years, Itaú Unibanco has traced its firm path with ceaseless commitment to the fostering of social transformation. Our history is marked by incentive of culture, education, sports and urban mobility through programs of the Fundação Itaú para a Educação e Cultura, Instituto Unibanco, and Espaço Itaú de Cinema. The concern we have always shown for social causes became even more evident in the difficult context of the greatest health crisis in history brought about by the COVID-19 pandemic. Faced with this challenge, we went far beyond our immediate business responsibilities and created the program Todos pela Saúde (All for Health) based on the largest philanthropic donation ever made by a private-sector entity in Brazil.
The resources donated through the Fundação Itaú para Educação e Cultura are managed by a group of specialists from the health sector under the leadership of Paulo Chapchap, which operates through actions aimed at informing and guiding the population, purchasing safety equipment, establishing preventative actions, purchasing equipment for hospitals and for testing the population, providing support for the construction of Centros de Acolhimento (Shelters), and supporting research into the epidemiology and treatment of COVID-19.
We believe that a financial institution should help people and companies to achieve their dreams and invest in big ideas. A bank encourages people to grow and companies to move forward. This is how we guide our business. The responsibility we assume for the countrys development is at the core of our activity and is a hallmark of our entire history.
On October 31, 2019, we entered into a Share Purchase Agreement with ZUP LLC, Bruno Cesar Pierobon, Gustavo Henrique Cunha Debs, Felipe Liguabue Almeida, Flavio Henrique Zago, among others, for the acquisition of 100% of the voting share capital of Zup I.T. Serviços em Tecnologia e Inovação Ltda (Zup) for R$575 million, subject to any contractual adjustments to the purchase price.
This acquisition will be implemented in three tranches over four years. In the first tranche, which closed on March 31, 2020, we acquired 52.96% of the total voting share capital of Zup for approximately R$293 million and resulted in us controlling Zup. On the third anniversary of the closing date, we will acquire an additional 19.6% of Zups stake, and on the fourth anniversary, we will acquire the remaining shareholding, leading to us holding 100% of the voting share capital by 2024.
This acquisition is linked to our digital transformation process. ZUP is a benchmark company in digital transformation, which has boosted the development of our IT systems. The operation and management of business affairs of Zup will continue to be entirely independent and self-governing in relation to us, preserving its current principles and values.
On May 11, 2017, we entered into a Share Purchase Agreement with XP Controle Participações S.A., G.A. Brasil IV Fundo de Investimento em Participações, and Dyna III Fundo de Investimento em Participações, among others, as sellers, to acquire 49.9% of the capital stock (corresponding to 30.1% of the common shares) of XP Investimentos S.A., a holding company that consolidates all the investments of the XP group, including XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A. In the first tranche, we contributed to a capital increase of R$600 million and acquired of XP Investimentos S.A.s shares from the Sellers for R$5.7 billion, provided that such amounts are subject to contractual adjustments. The value attributed to 100% of the total capital stock of XP Investimentos S.A. (before the first tranche) was approximately R$12 billion.
The first tranche was approved (i) in March 2018, by CADE, and (ii) in August 2018, by the Central Bank. As a condition, for such approvals, we entered into concentration control agreements (i) with CADE, whereby we undertook, among other obligations (a) if requested, to distribute proprietary investment products through open platforms competing with XP Investimentos S.A. platforms in a non-discriminatory manner; and (b) to not promote the targeting of its customers to XP Investimentos S.A. platforms; and (ii) with the Central Bank, whereby we undertook: (a) not to acquire control of XP Investimentos S.A. for 8 years counted from the execution of the concentration control agreement; and (b) to cancel our call options and XP Controles put options.
In August 2018, we closed the First Tranche and, together with some of the Sellers, entered into a shareholders agreement which contains, among others, provisions with respect to our rights as a minority shareholder, including our right to appoint two out of the seven members of the Board of Directors of XP Investimentos S.A.
On November 29, 2019, the shareholders of XP Investimentos S.A., including us, exchanged their shares of XP Investimentos S.A., incorporated in Brazil, for Class A common shares and Class B common shares of XP Inc., incorporated in the Cayman Islands. Each Class A common share entitles its holder to one vote and each Class B common share entitles its holder to ten votes in all shareholders resolutions of XP Inc.. As a result of the contribution mentioned above, XP Inc. issued to us 792,861,320 Class A common shares and 223,595,962 Class B common shares, which represent 49.9% of the total capital of XP Inc. and 30.06% of its voting rights. XP Inc. became the sole shareholder of XP Investimentos S.A., owning 100% of its total and voting capital.
Further, the shareholders of XP Inc. entered into a shareholders agreement substantially similar to the then existing shareholders agreement of XP Investimentos S.A.. XP Inc. has a board of directors comprised of thirteen members, out of which XP Controle Participações S.A. nominated seven, we nominated two, General Atlantic (XP) Bermuda, LP (successor of G.A. Brasil IV Fundo de Investimento em Participações) nominated one, and the remaining three members are independent directors. The independent directors are also members of the audit committee of XP Inc., which is comprised of three members nominated as follows: we nominated two members, and XP Controle Participações S.A. nominated one member of the audit committee.
Subsequently, on November 30, 2019, XP Inc. carried out a reverse stock split of one share for each four shares and, as a result, the number of shares held by us was adjusted to 198,215,329 Class A common shares and 55,898,991 Class B common shares.
In December 2019, XP Inc. completed its initial public offering and listing on Nasdaq. We did not sell any shares of XP Inc. in this offering and, as a result, our ownership interest decreased from 49.9% to 46.05%.
On November 26, 2020, we announced that our Board of Directors approved the partial spin-off of our investment in XP Inc. to a new company (XPart S.A.).
In December 2020, XP Inc. held a follow-on on Nasdaq, whereby we sold approximately 4.51% of our equity interests in XP Inc.s share capital. In that same offering, XP Inc. issued new shares, resulting in the dilution of our stake to 41% of its share capital.
At the Extraordinary General Stockholders Meeting held on January 31, 2021, our shareholders voted in favor of a corporate reorganization in order to transfer the business line related to our interest in XP Inc.s capital to a new company that will be named XPart S.A. XPart S.A. will be constituted by a portion of the investment currently held by us in XP Inc. and cash in the amount of R$10 million. The completion of this transaction is subject to regulatory approval to be obtained by our controlling shareholders.
The percentage of XP Inc.s capital to be held by XPart S.A. will be 40.52%, totaling R$9,371 million on the base date of December 31, 2020. Our stockholders will then hold an ownership interest in XPart S.A., following the completion of the transaction. After registration as a publicly held company and authorization to list securities issued by XPart S.A., the ownership interest in XPart S.A. will be distributed to our shareholders. The shares issued by XPart S.A. will be attributed to our stockholders in the same number, type and proportion of the shares previously held by them in Itaú Unibanco Holding.
Subject to the Central Banks approval, we expect to acquire an additional stake corresponding to approximately 11.38% of the share capital of XP Inc, in 2022.
The management and conduct of business of all companies within XP group, including XP Inc., remains independent, segregated and autonomous, preserving the same principles and values that are currently in force. XP Controles partners will maintain control of the XP group, and the current directors, officers and executives of XP Investimentos S.A. and other subsidiaries will remain at the forefront of their respective businesses, in order to ensure that XP Investimentos S.A. will continue to act as an open and independent platform, offering a diversified range of proprietary and third party products to its clients, competing freely with other brokers and capital market distributors, including those controlled by us, without any restrictions or barriers.
The purpose of the spin-off is to segregate this business line from the Itaú Unibanco Group into a new company (XPart SA), which is represented by a portion of Itaú Unibanco Groups investment in XP Inc., so that our stockholders will receive an equity interest in the same number and proportion of the shares they hold in Itaú Unibanco. Additionally, the transaction allows Itaú Unibanco and XPart S.A to operate independently, with well-defined business goals. Accordingly, the main benefit of the transaction is value creation for our stockholders.
We report the following segments: (i) Retail Banking, (ii) Wholesale Banking, and (iii) Activities with the Market and Corporation. Through these operational segments, we provide a broad range of banking services to a diverse client base that includes individuals and corporate clients, on an integrated basis as follows:
The Retail Banking segment offers services to a diversified base of account holders and non-account holders, individuals and companies in Brazil. The segment includes retail customers, mass affluent clients (Itaú Uniclass and Personnalité) and very small and small companies. Our offering of products and services in this segment includes: personal loans, credit cards, payroll loans, vehicle financing, mortgage loans, insurance, pension plan and premium bond products, and acquiring services, among others. The Retail Banking segment represents an important funding source for our operations and generates significant financial income and banking fees.
The Wholesale Banking segment is responsible for our private banking clients, the activities of our Latin America units, our middle-market banking business, asset management, capital market solutions, corporate and investment banking activities. Our wholesale banking management model is based on building close relationships with our clients by obtaining an in-depth understanding of our clients needs and offering customized solutions. Corporate activities include providing banking services to large corporations and investment banking activities include offering funding resources to the corporate sector, including fixed and variable income instruments.
The Activities with the Market and Corporation segment manages interest income associated with our capital surplus, subordinated debt surplus and the net balance of tax credits and debits. This segment also manages net interest income from the trading of financial instruments through proprietary positions, currency interest rate gaps and other risk factors, arbitrage opportunities in the foreign and Brazilian domestic markets, and mark-to-market of financial instruments. It also includes our interest in Porto Seguro S.A. For more information on our interest in Porto Seguro S.A., see Insurance.
We carry out a wide range of operations outside of Brazil with units strategically located in the Americas, Europe and Asia. Our international presence creates significant synergies in foreign trade finance, in the placement of Eurobonds and in the offering of more sophisticated financial transactions to our clients.
Please see Note 30 Segment Information to our audited consolidated financial statements for further details.
The diversification of our business is reflected in the changing composition of our loan portfolio over the last few years, focusing on origination in lower risk segments with enhanced guarantees. We continuously seek to implement and focus on offering new products and services that add value to our clients and diversify our income sources. This allows for the growth of our non-financial income arising mainly from banking service fees, income from bank charges and from insurance, pension plan and capitalization operations.
We have a large and diverse portfolio of products, such as credit and investments, and services to address our clients needs. Our retail banking business is segmented according to customer profiles, which allows us to connect with and
understand our customers needs, better enabling us to offer suitable products to meet their demands. Our main activities under the retail banking segment are the following:
Itaú Retail Banking (individuals)
Our core business is retail banking and through our retail operation we offer a dedicated service structure to consumer clients throughout Brazil. Our customer service structure is targeted to offering the best solutions for each client profile. We classify our retail clients as individuals with a monthly income of up to R$4,000.
Our Itaú Uniclass services are available at every branch for clients who earn more than R$4,000 and less than R$15,000 per month. We offer exclusive services to our Itaú Uniclass clients, including investment advisory services, exclusive cashiers and higher credit limits and a large team of dedicated relationship managers. For clients who prefer remote services, our Itaú Uniclass provides a digital bank platform where relationship managers service clients through telephone, e-mail, SMS, videoconference and chat from 9 a.m. to 6 p.m. on business days, at no additional cost.
Our focus on digital transformation led to an increase of the share of our digital operations, which are sales, account openings and accesses through the internet and mobile app. For instance, the online account opening process via mobile app, launched in 2016, already represents 49% of the individual accounts opened on a monthly basis (excluding salary accounts), as of December 31, 2020.
We also continue to focus on initiatives to improve customer satisfaction. The satisfaction ratings (Net Promoter Score, or NPS) of our retail bank improved by 11 percentage points between August 2018 and December 2020.
Itaú Personnalité (banking for high-income individuals)
We began providing customized services to high-income individuals in 1996 with the creation of the Itaú Personnalité segment, which currently serves individuals who earn more than R$15,000 per month or have investments in excess of R$250,000.
Itaú Personnalité is focused on providing (i) financial advisory services by managers who understand the specific needs of our higher-income clients, (ii) a large portfolio of exclusive products and services and (iii) special benefits based on the type and length of relationship with the client, including discounts on various products and services. Itaú Personnalité services its clients through a dedicated network of 232 branches, located in the main Brazilian cities. Itaú Personnalité clients also have access to our retail banking network of branches and ATMs throughout the country and can also access our internet, telephone and mobile banking.
For clients who prefer remote services, Itaú Personnalité provides a digital bank platform where relationship managers service clients through telephone, email, SMS and videoconference. We also developed apps for smartphones and tablets that enable our clients to make investments, buy products such as credit and insurance, make check deposits, transfers and payments, check account balances and find nearby branches and ATMs using GPS features.
The table below shows our market position and information about competitors for our retail banking (including Itaú Personnalité) business:
|Product/Service||Market Position||Additional Information and Main Competitors|
(Including Itaú Personnalité)
|In December 2020, we reached a market share of 11.4% based on total outstanding loan balance in reais, positioning us as the fourth largest bank in this segment in Brazil.|| |
Itaú Unibanco Holding has a leading position in many sectors of the Brazilian domestic financial market. Based on Central Bank data and publicly available financial information, our main competitors are Banco Bradesco, Banco Santander (Brazil), Banco do Brasil and Caixa Econômica Federal.
Source: Itaú Unibanco Holding and the Central Bank.
Itaú Empresas (very small and small companies)
To meet and fulfill the needs of our corporate customers, we specialize in offering customized solutions and detailed advice on all products and services for:
Microenterprises: customer base consisting of companies with annual revenues of up to R$ 1.2 million, served by 2,587 bank branches and 2,144 relationship managers as of December 31, 2020; and
Small businesses: customer base consisting of companies with annual revenues between R$1.2 million and R$30 million, served by 342 bank branches and 1,600 relationship managers as of December 31, 2020.
ANBIMA certifies all of our relationship managers, who are trained and skilled to offer the appropriate banking solutions for each client, guided by all the variables that can affect the companies that we serve and their owners.
Our customers rely on our main strategy of capturing market opportunities and meeting their needs, particularly regarding cash flow management, credit facilities, investments and banking services.
Since the beginning of the COVID-19 pandemic and the resulting economic crisis, we have sought to support our customers with complete and sustainable solutions. In mid-April 2020, we launched a more comprehensive program called Travessia. The range of customized solutions offered includes grace periods, extended loan terms and new interest rate conditions. We also provided new government sponsored credit facilities to support our clients.
The COVID-19 pandemic has accelerated the process of customer digitalization. To help our customers with this process, we developed new products, services and digital processes, as well as improving the tools used by our sales and relationship teams, aiming at greater efficiency in business generation and service.
We strive to maintain high levels of customer satisfaction by placing them at the heart of our business approach. To achieve this goal, using the NPS system we constantly monitor the NPS indicator and intensify customer journey mapping as a means to identify opportunities to excel at meeting the needs of our customers. Our NPS indicator for this segment increased 13 percentual points between August 2018 and December 2020.
Credit Cards and Commercial Agreements
We are the leader in the Brazilian credit card segment with a market share in terms of purchase volume of 32.4% in the fourth quarter of 2020, according to ABECS. Through our proprietary segments and partnerships with major retailers, telephone companies, automakers and airlines established in Brazil, we offer a wide range of credit and debit cards to account holders and non-account holders.
Our purpose is to provide the best customer experience and satisfaction. In order to achieve this, as one of our priorities, we established the Customer First. Our aim is to continuously grow our credit card portfolio increasing digitalization, profitability and the quality of our assets. Accordingly, our credit card division is dedicated to developing the best payment solutions for our clients,new products and new digital services while managing the credit quality of our portfolio.
Our global NPS, a measure of customer satisfaction, indicates that our score improved two basis points compared to 2018. In order to continue evolving our credit card portfolio, our strategic focus is based on three main business segmentations: Account Holders, Non-Account Holders and Retail Partnerships.
In 2020, the Account Holders businesses Itaú Agências, Itaú Uniclass e Personnalité launched fast growing sales products: Itaú Uniclass Visa Infinity, Itau Agências Click and the Itaú Personnalité Visa Signature card, in which we were pioneers in the Brazilian market. In a context of high demand for purchases through delivery services, Itaú Personnalité Visa Signature card offers 70% discount on the Rappi Prime subscription, possibility of payment via NFC technology (contactless) and travel benefits that include luggage loss, theft insurance and trip cancellation. Another highlight of 2020 was the launch of pontos que rendem on Itaus Loyalty program for Personnalité cardholders, which are investors. The program yields loyalty points along the year just like our clients investments.
In the Non-Account Holders segment our focus was on improving and expanding our co-branded program and the Credicard division transformation. In 2020, the airline cobranded cards, increased total accounts by 7.4% and purchase
volume by 3.8%. The Azul Itaucard was rebranded, and we launched the Azul infinite card, with a series of benefits such as: better score in the rewards program, free annual fee when the customer reaches a monthly spending goal, discount on airline tickets, access to VIP lounges and cabin upgrade. In the Credicard division, we made many changes to our way of doing business, such as the institution of a new purpose in 2019 To awaken in people the power of believing. In 2020, even amid the COVID-19 pandemic, we experienced significant improvement in our business. Based on our three pillars (Smart, connection and partnership), Credicard improved its retention rates and sales levels for the three-month period ended December 31, 2020 compared to the same period in 2019. In addition, in 2020 Credicard outperformed its 2019 Black Friday numbers, created a new robust cashback model and delivered some great systemic improvements alongside the launch of a new product Credicard On in co-creation with our clients.
Our Retail Partnerships business is one of our fastest growing businesses in the credit card division. We have partnerships with the main national retail brands, such as Magazine Luiza, Ponto Frio, Pão de Açúcar, Extra
Walmart operation in Brazil was re-branded to BIG (supermarket chain) and the credit card product was relaunched with a new platform of benefits and discounts. In the Sams Club partnership credit card, which is part of BIG group, all international credit cards were up-graded to the gold category, more compatible with our clients profile. For our partnership with Magazine Luiza, we continued to reinforce our strategy of growing purchase volume and new accounts, launching a new sales channel offering credit cards through Magazine Luizas app. In Passaí, we launched a new POS machine focusing on the small entrepreneur. It became available in all Assaí stores.
The table below shows our market position and information about competitors for our credit card business:
|Product/Service||Market Position||Additional Information and Main Competitors|
|Credit Cards||We are the leaders in terms of transaction purchase volume of cards in Brazil, with 32.2% market share in the period from January to December 2020.||Our traditional competitors in this business are Banco Bradesco, Banco Santander (Brazil), Banco do Brasil and Caixa Econômica Federal. However, in recent years an increasing number of small and new digital competitors has entered this market, among which we highlight Nubank, Banco Inter and Banco Original.|
Source: Itaú Unibanco Holding and ABECS.
Payroll Deducted Loans
In Brazil, a payroll deducted loan is a specific type of loan entered into by salaried employees or pensioners of the Brazilian social security system, as borrowers, and banks, as lenders, in which fixed monthly installments are deducted directly from the borrowers payroll or pension, as the case may be, for the payment of the amount owed to the lender.
Our strategy is directed mainly to the pensioners of the Brazilian social security system and employees of public and private companies.
We offer payroll deducted loans in Brazil mainly through two sales channels: (i) our branch network and our remote service channels, focusing on retail account holders, and (ii) the network of acquisition partners, focusing on non-account holders. This strategy allows us to expand our business activities with historically lower credit risk, achieving a competitive position in the offer, distribution and sale of payroll deducted loans in Brazil and improving the risk profile of our loans portfolio to individuals.
The table below shows our market position and information about competitors for the business listed below:
|Product/Service||Market Position||Additional Information and Main Competitors|
|Payroll Deducted Loans||In December 2020, we obtained a market share of 12.6% in terms of payroll deducted loans, positioning us as the fourth largest bank in this segment in Brazil.||Our main competitors in this business are Banco do Brasil, Caixa Econômica Federal, Banco Bradesco and Banco Santander (Brazil).|
Source: Itaú Unibanco Holding and the Central Bank.
We assist our clients with their financial development, as we help them with their personal assets. Mortgage financing products allow us to create long-lasting relationships with our clients, as mortgage financing products are of a long-term nature.
Since 2008, we have been the market leaders among Brazilian private banks in mortgage loans to individuals in terms of the total size of our portfolio. This is a result of our business focus, which is in line with our strategy to migrate to lower-risk portfolios.
We have several sales channels that are utilized for purposes of mortgage financing products: (i) branch network, (ii) construction and development companies, (iii) mortgage agencies, and (iv) partnerships with REMAX, a realtor company, and CrediPronto, a mortgage financing company.
We prioritize customer satisfaction by providing our clients with a specialized mortgage financing advisor to support them during the mortgage process. Our process is expeditious and efficient, and it takes us less than two hours to get back to the client for loans up to R$1 million. This financing process can be fully digital.
In line with our strategic focus on digital processes, our simulator is included on the websites of partner development companies and real estate agencies, placing our brand closer to clients when they are looking to acquire real property. Our services are customized for every moment of the clients digital journey, from internet banking services to social networks, providing us with increasing client exposure levels. In 2019 and 2018 we were awarded the Best Digital Mortgage Bank Brazil by Global Finance.
The number of mortgages we provided directly to individuals in 2020 was 58 thousand, for an aggregate value of R$18.9 billion during the year. In 2020, our portfolio had an average Loan to Value (LTV) of 40.0%, compared to 38.7% in 2019. In commercial loans, we financed 92 new real estate units during 2020, with an aggregate value of R$3.2 billion.
Another positive feature of the Brazilian market is the constant amortization system pursuant to which decreasing installments provide faster amortization of a contract, reducing our loan-to-value indicator at a faster rate than other amortization systems.
The table below shows our market position and information about competitors for the business listed below:
|Product/Service||Market Position||Additional Information and Main Competitors|
|Real Estate Financing and Mortgages||In the period from January to December 2020 we were the second in new loans to individuals among Brazilian banks, with 21.4% market share.||Our main competitors in this business are Caixa Econômica Federal, Banco Bradesco, Banco Santander (Brazil), and Banco do Brasil.|
Source: Itaú Unibanco Holding and ABECIP.
Rede is one of the leading companies in the electronic payment solutions industry in Brazil. It is a multi-brand merchant acquirer of credit, debit and benefit cards. Redes activities include merchant acquiring, capturing, transmission, processing and settlement of credit and debit card transactions, prepayment of receivables to merchants (resulting from credit card transactions), rental of point of sale (POS) terminals, e-commerce solutions, e-wallet and check verification through POS terminals.
In 2020, we continued to restructure our business model, focusing on the following priorities: 1) integration of our banking operations; 2) strengthening of direct sales channels; and 3) digital transformation.
We generated R$506.6 billion in transactions with respect to credit and debit cards during the year ended December 31, 2020 an increase of 4.5% compared to the same period in 2019. The following table sets forth the financial volume of credit and debit card transactions processed by us in 2020, 2019 and 2018:
(In billions of R$)
The table below shows our market position and information about competitors for the business listed below:
|Product/Service||Market Position||Additional Information and Main Competitors|
|Merchant Acquirer||In the period from January to December 2020 we reached a market share of 34.1% in terms of total transaction volume (credit and debit) generated by the acquiring services, positioning us as the second largest player in this segment in Brazil.|| |
Our traditional competitors in this business are Cielo and Santander GetNet.
In recent years, changes in legislation made by the Central Bank combined with the growing number of fintechs, contributed to an increase in competition in the segment. Among non-traditional players, we highlight PagSeguro and Stone.
Source: Itaú Unibanco Holding and ABECS.
Private Pension Plans
We offer private pension plans to our clients as an option for wealth, inheritance planning and income tax purposes (these products are tax-deferred). We provide our clients with a solution to ensure the maintenance of their quality of life through long-term investments, as a supplement to government general social security system plans.
Product innovation has been important for the sustainable growth of our private sector pension operations. For legal entities, we offer specialized advice and develop customized solutions for each company. We establish long-term partnerships with our corporate clients, maintaining a close relationship with their human resources departments and adopting a communication strategy focused on our employees financial education.
According to the National Federation of Private Pension and Life (Federação Nacional de Previdência Privada e Vida), or FENAPREVI, contributions to Itaú Private Pension Plans reached R$15.4 billion in the year ended December 31, 2020. The decrease compared to the contributions registered in December 2019 is mainly due to the COVID-19 pandemic.
|Product/Service||Market Position||Additional Information and Main Competitors|
|Private pension plans||In December 2020 our balance of provisions represented 21.2% of the market share for private pension plans, positioning us as the third largest pension provider in Brazil. Considering only Individuals plans, our market share reached 20.8%, positioning us as the second largest private bank.||Our main competitors in private pension plan products are controlled by large commercial banks, such as Banco Bradesco and Banco do Brasil, which, like us, take advantage of their branch network to gain access to the retail market.|
Source: FENAPREVI (Balance of provisionsPension Plans for Individuals and Companies).
We developed and launched a series of new products and services during 2020, some of which are:
Digital Retail the evolution in our digital retail platform had an important impact in our journey. We launched automotive e-commerce with digital assistant, integrating means of payment and financial services, in a 100% digital experience for the customer. Further, to ensure safety in our transactions and to optimize the client experience, we deployed a facial biometrics solution and electronic signature.
Programa Travessia we launched new solutions to support our clients during the COVID-19 pandemic. Accordingly, we offered grace periods of 60 and 120 days or loan reprofiling with an extension of the contract term, keeping the original contracted rate. These solutions benefited a significant amount of vehicle financing clients.
VEC we announced to the market our new service of electric vehicle shared, Vec Itaú, which will be available to customers in the second half of 2021. This new solution will allow users to unlock the cars at stations directly through the application and return them at the same place or at another charging station. These measured enable us to enhance our presence and position in the sustainable urban mobility sector.
iCarros products our solutions help dealers make their sales process more efficient. iCarros Lead Managers are now fully integrated with Linx Auto solution to help dealers on sales and billing process, ensuring a unique journey experience; Garagem do Conhecimento is an educational platform with distant education classes to prepare professionals of the automotive sector. iCarros is the first Brazilian automotive marketplace integrated with several banks, who offer personalized credit that match customers profiles; Check-up iCarros is a car management app for end consumers, focused on services to drivers and also supplying detailed data from clients cars to the service providers.Entrega Fácil is a new solution that allows sales to be delivered directly to the consumers home, whether it is for a test-drive or after the purchase has been made. The iCarros Club is a B2B trade-in platform, built to help our clients to increase sales in a safe and faster manner.
As of December 31, 2020, our individual and corporate vehicle financing portfolio (not considering FINAME) totaled R$35.7 billion, an 27% increase from the previous year. The average loan to value ratio of our individuals vehicle portfolio (the ratio of a loan to the value of an asset purchased) was 61.4% as of December 31, 2020, a 180 basis points increase compared to 2019. Since 2012, we have reduced our risk exposure in the sector and focused on clients with better risk profiles, which has allowed us to improve the credit quality of our vehicle loan portfolio.
The total amount of new contracts during the year ended December 31, 2020 reached R$22.5 billion, a 9% growth compared to 2019, for our individual and corporate vehicle financing operations. The average vehicle loan term was 44 months, with 33% of the transactions carried out with terms up to 36 months.
|Product/Service||Market Position||Additional Information and Main Competitors|
|Vehicles||In December 2020, we reached a market share of 10.6% in terms of loans to individuals among banks, positioning us as third in Brazil in this segment.||Our main bank competitors in this business are Banco Santander (Brazil), Banco do Brasil and Banco Bradesco.|
Source: Itaú Unibanco Holding and the Central Bank.
Our insurance business provides a wide range of life and personal accident products, automobile and property insurance, credit insurance and travel insurance. Our insurance core activities, which include our 30% stake in Porto Seguro S.A, consist of mass-market insurance products related to life, property and credit. These products are offered in synergy with retail channels our branch network, partnerships with retailers, credit card clients, real estate and vehicle financing, personal loans and the wholesale channel. These products have characteristics such as a low combined ratio, low volatility in results and less use of capital, making them strategic and increasingly relevant in the diversification of the Itaú Unibanco Groups revenues. Other insurance activities encompass extended warranty, health insurance, our 11.6% stake in IRB Brasil Resseguros S.A. and other operations.
Our insurance products have been receiving updates on coverage and assistance, bringing more value to these customers. In order to expand our insurance products portfolio, we are concentrating on our own existing distribution channels as well as expanding our insurance brokerage activities and providing third-party insurance policies from partner insurers to our clients through an open platform.
There was a reduction in the sales volume in 2020 due to the COVID-19 pandemic, although there was no reduction in the amount of insurance from our customer portfolio. There was also a substantial impact on death, unemployment and hospitalization coverage due to the COVID-19 pandemic.
|Product/Service||Market Position||Additional Information and Main Competitors|
|Insurance||Giving effect to our 30% ownership interest in Porto Seguro S.A., we reached 8.1% of market share based on earned premiums, excluding VGBL (Redeemable Life Insurance), from January to December 2020, positioning us as the fifth largest insurance provider in this segment in Brazil. Considering only our recurring insurance activities, our market share reached 10.4% in the same period.|| |
Our main competitors are controlled by or have partnerships with large commercial banks, such as Banco Bradesco, Banco Santander (Brazil) and Banco do Brasil which, like us, take advantage of their branch network to gain access to the retail market.
Despite the high concentration of Brazilian banks in the market, the growing number of Insurtechs (startup companies focused on insurance) has facilitated customer access to insurance companies, making this market even more competitive.
Source: SUSEP. Recurring insurance activities include: Personal Insurance (Life, Personal Accidents, Credit Insurance, Travel, Unemployment, Funeral Allowance, Serious Diseases, Random Events), Housing, Multiple Peril and Homeowners. Health Insurance and VGBL Redeemable Life Insurance products are not included.
Premium Bonds (títulos de capitalização, or capitalization plans)
Premium bonds are fixed deposit products pursuant to which a client makes a one-time deposit or monthly deposits of a fixed sum that will be returned at the end of a designated term. Ownership of premium bonds automatically qualifies a customer to participate in periodic raffles, each time with the opportunity to win a significant cash prize.
We currently market our premium bonds products portfolio through our branch network, electronic channels and ATMs, and we are currently developing new technologies for channel diversification. The net collection, taking into account the deduction of redemptions, from capitalization plans decreased 39.5% in the year ended December 31, 2020 when compared to the same period of 2019.
|Product/Service||Market Position||Additional Information and Main Competitors|
|Premium Bonds||In the period from January to December 2020 we had a market share of 11% in terms of revenues from sales of premium bonds, positioning us as the fourth largest provider of such products in this segment in Brazil.||Our main competitors in premium bonds are controlled by or have partnerships with large commercial banks, such as Banco Bradesco, Banco do Brasil and Banco Santander (Brazil) which, like us, take advantage of their branch network to gain access to the retail market.|
A consortium is a pool of people and/or legal persons in a group with the purpose of allowing their members, on an equal basis, to acquire assets, such as vehicles, properties, or services, through self-financing. The payments made by the group participants are applied to a common fund, used by one or more members of the consortium at a time, to acquire the assets elected by the members when the product was contracted. The participants receive the assets during the validity of the contract through the following methods: (i) random drawing; (ii) bid offer with own resources; (iii) part of the letter of credit; and (iv) FGTS tax (only for properties consortium), with the exception of the random drawing, the other options may be combined.
As consortia are regarded as a provision of services under Brazilian law, the management of consortia does not give rise to default risk or regulatory capital requirements for us.
Consortia do not charge interest rates and our revenues come mainly from the administration fee charged to clients.
Given these characteristics, this business is strategic to us, contributing to revenue diversification and to a more complete product portfolio offering to our clients. As of December 31, 2020, we achieved the following results:
Monthly average of R$1,154 million of sales in the three-month period ended December 31, 2020;
R$3.5 billion of sales recorded in the three-month period ended December 31, 2020, an increase of 10% compared to the same period of 2019 and an increase of 33% compared to the three-month period ended September 30, 2020;
New products implemented: trucks and motorcycles; and
New feature: in our app, customers can find a new feature to help them buying a consortium. They only have to fill a form and they will receive a call offering the best options for them.
|Product/Service||Market Position||Additional Information and Main Competitors|
|Consortia Services Fees||In the period from January to December 2020 we had a market share of 6.2% in total consortia services fees. Considering only banks, we are the third largest provider of such services in terms of fees in Brazil.||Considering only banks, our main competitors in the Brazilian consortia market are Bradesco Consortia and BB Consortia.|
Source: Central Bank.
Our microcredit unit offers to low-income, informal entrepreneurs access to credit to expand and develop their businesses. As a tool to stimulate entrepreneurship and part of the governments National Program for Oriented and Productive Microcredit (PNMPO), Itau Microcrédito is focused on entrepreneurs with up to R$360,000.00 in annual revenue. Loans are granted by specifically trained microcredit loan officers who discuss the clients financial situation and understand their businesss needs, as well as provide information to help them improve their financial management.
In 2020, our most important initiative was to help our clients navigate the significant impacts of the COVID-19 pandemic in the Brazilian economy. We postponed the due dates of all interested, compliant clients in 60 days during the second quarter of 2020 and offered a renegotiation campaign with special discounts for those who defaulted during the third quarter of 2020. Another important evolution was the start of the commercialization of microcredit in our retail branches and through online channels in November 2020.
Public Sector Group
The Public Sector Group is tasked with client coverage and business development efforts for Brazilian Federal, State and Municipal government branches as well as select State Owned Enterprises. Its value proposition entails coverage in key locations of clients in the Public Sector space by a team of seasoned professionals, offering a comprehensive array of Transaction Services, Asset Management, Foreign Exchange, Payroll Services, Payment Solutions and Credit Products for select clients.
During 2020 the Public Sector Group underwent a restructuring effort aimed at streamlining its operations and reinforcing its product portfolio with the goal of creating a more encompassing and Full Bank Experience for our clientele. As of December 31, 2020, the Public Sector Group was responsible for managing the relationships with 6,505 client accounts from its 13 offices across Brazil.
Wholesale Banking is the segment responsible for banking operations of middle-market, agribusiness, large and ultra-large companies (those with annual revenues from R$30 million) and investment banking services. The breakdown of revenue among these segments is set out in the section Item 4B. Business Overview Operations Overview above. Our Wholesale Banking segment offers a wide range of products and services to the largest economic groups of Brazil.
Our activities in this business range from typical operations of a commercial bank to capital markets operations and advisory services for mergers and acquisitions. These activities are fully integrated, which enables us to achieve a performance tailored to our clients needs.
One of the most important features of our strategy for our Wholesale Banking segment is the set of initiatives linked to improving efficiency in our operations. These ongoing actions, which are expected to continue to grow in the coming years, are designed to increase revenues, improve processes and reduce costs.
Our investment banking business carried out through Itaú BBA, assists companies raising capital through fixed income and equity instruments in public and private capital markets, and provides advisory services in mergers and acquisitions. We advise companies, private equity funds and investors in the structuring of variable income products and in mergers and acquisitions. We believe we offer a wide portfolio of investment banking services ranging from research to Brazilian and other Latin American companies.
Our fixed income department acts as bookrunner or manager in the issuance of debentures, promissory notes and securitization transactions at the investment banking segment.
|Product/Service||Market Position||Additional Information and Main Competitors|
|Investment Banking||At December 2020, Itaú BBA ranked first in mergers and acquisitions and equities markets deals(1). Itaú BBA also ranked first in origination and in distribution in debt capital markets transactions(2).||In investment banking, Itaú BBAs main competitors include Santander , Credit Suisse (Brazil) S.A., Merrill Lynch S.A. (Brazil), Morgan Stanley S.A. (Brazil), JP Morgan S.A. (Brazil), Bradesco BBI and BTG Pactual S.A.|
Source: (1) Dealogic. (2) ANBIMA ranking in terms of volume.
With more than 60 years of experience in investment management, as of December 31, 2020, Itaú Asset Management has R$ 752.7 billion in assets under management (including Itaú Unibanco and Intrag) according to ANBIMA (Ranking de Gestão December 2020) and recorded a 170 basis points decrease of assets under management in 2020 as compared to 2019. Itaú Asset Management ranked as the largest non-government owned asset manager in Brazil, with a 12.5% market share as of December 31, 2020, according to ANBIMA.
Kinea Investimentos LTDA., an alternative investments management company controlled by us, held R$56.3 billion in managed assets as of December 31, 2020, compared to R$68.5 billion as of December 31, 2019, according to ANBIMA.
The reduction in assets under management in 2020 was intensified due to the COVID-19 pandemic which led to an asset migration out of funds and into the Bank Deposit Certificates portfolio.
|Product/Service||Market Position||Additional Information and Main Competitors|
|Asset Management||In December 2020, we had a market share of 12.5% in terms of assets under management, positioning us as the second asset manager in Brazil.|| |
According to ANBIMA, the asset management industry in Brazil held assets totaling R$6,030 billion as of December 2020 and with 688 Financial Institutions and Assets Managers, among them, XP Investimentos.
The competition is concentrated among large and well-established retail banks. Our main competitors are Banco do Brasil, Banco Bradesco and Caixa Econômica Federal
Itaú Investment Services business units provide
local custody and fiduciary services,
international custody services, and
corporate solutions that act as transfer agent and stockholder servicer for Brazilian companies issuing equity, corporate bonds, promissory and bank credit notes. We also work as guarantor in transactions for project finance, escrow accounts and loan and financing contracts.
We provide the technological tools to perform daily activities of each service and rely on compliance and contingency procedures. Thus, our clients can direct the focus on their business management.
Pension funds, insurance companies, asset managers, international global custodians and equity and debt issuers are our primary clients in these businesses, representing approximately 1,000 groups of clients, that reached R$3.9 trillion of assets under service as of December 31, 2020, which includes investment funds, underwriting, pension funds, trustee and brokerage services.
In 2020, Global Finance named Itaú Investment Services as the best sub-custodian in Brazil, Uruguay and Paraguay. We are currently updating our technological platform regarding securities services and investing in new solutions for our clients, such as iServices, that includes custody, brokerage and clearing all integrated as a service.
The table below shows our market position and information about competitors for the businesses listed below:
|Product/Service||Market Position||Additional Information and Main Competitors|
|Local Custody||In December 2020, we had a market share of 23.0% based on total assets under local custody, positioning us as the second position Local Custodian.|| |
According to ANBIMA, the local custody in Brazil held assets totaling R$6,276 billion as of December 2020.
Our main competitors are Banco Bradesco S.A. and Banco do Brasil S.A.
|International Custody||Our market share in December 2020 was 7.0% in terms of total assets under international custody, positioning us as the fourth largest International Custodian.|| |
Based on ANBIMA, the international custody service in Brazil totaled R$2,122 billion of assets as of December 2020.
Our main competitors are Banco Citibank S.A., JP Morgans Securities Services and Banco Bradesco S.A.
|Corporate Solutions|| |
In December 2020, we had a leading position as agent and register provider to 204 companies listed on B3, which represents 59.1% of companies listed on that exchange.
Moreover, we were the second largest transfer agent with 338 debentures offerings in the Brazilian market, representing 27.5% of the debentures market in Brazil.
Our main competitors in the equities market are Banco Bradesco S.A. and Banco do Brasil S.A.
Our main competitor in debentures is Banco Bradesco S.A.
Source: Itaú Unibanco Holding, ANBIMA and B3.
Itaú Private Bank
With a full global wealth management platform, we are one of the private bank market leaders in Brazil and one of the main private bank players in Latin America. Our multidisciplinary team, which is supported by a team of investment advisers and product experts, provides comprehensive financial services to clients, understanding and addressing their needs from our eight offices in Brazil and in our offices located in Zurich, Miami, New York, Santiago and Nassau.
Our clients have access to a complete portfolio of products and services, ranging from investment management to wealth planning, as well as credit and banking solutions. In addition to our in-house customized products and services, we offer our clients access to an open architecture of alternative products from third-party providers.
Aligned with our vision to be the leading bank in sustainable performance and customer satisfaction, we decided to focus our strategic priorities on the following Itaú Private Bank initiatives:
Being the leading private bank in terms of client satisfaction;
Adding value to clients and stockholders with a complete offering of long-term proactive advisory services;
Continuing to invest in our international platforms to enhance Brazilian clients experience;
Improving our operational efficiency through continuous investments in technology; and
Maintaining a focus on risk management and regulatory considerations.
The table below shows our market position for the business:
|Product/Service||Market Position||Additional Information and Main Competitors|
|Itaú Private Bank||In December 2020, we had a market share of 27.3% in terms of Itaú Private Bank. Reduction of 340 basis points compared to December 2019, mostly explained by the entrance of new players in the monitoring of ANBIMA and the impact of the market volatility caused by COVID-19 pandemic.||Banco do Brasil S.A., Bradesco S.A., BTG Pactual S.A., Credit Suisse (Brasil) S.A. and Santander S.A..|
Itaú Corretora (Brokerage)
Itaú Corretora has been providing brokerage services since 1965. We provide retail brokerage services in Brazil to over 302 thousand clients with positions in the equity and fixed income markets, accounting for approximately R$133.5 billion in trading volume in 2020. The brokerage services are also provided to international clients through our broker-dealer in New York.
The following table shows our market position and information about competitors for the businesses listed below:
|Product/Service||Market Position||Additional Information and Main Competitors|
|Retail Brokerage Services (1)||Ranked third in Retail Brokerage Services by equity trading volume in the year ended December 31, 2020(2).||Main competitors: XP Investimentos, Ágora Corretora de Títulos e Valores Mobiliários S.A., Rico Corretora de Títulos e Valores Mobiliários S.A., Easynvest Título Corretora de Valores S.A., BTG Pactual Corretora de Títulos e Valores Mobiliários S.A., Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Santander Corretora de Câmbio e Valores Mobiliários S.A. and Safra Corretora de Titulos e Valores Mobiliários S.A.|
(1) Source: CBLCnet
(2) Includes clients from Itaú Private Bank segment.
We want to achieve, in the countries where we operate, the same management quality and level of results we have in Brazil. Through our internationalization strategy, we seek to understand different markets, business, products and services, identifying opportunities to integrate our units and to expand our operations to new countries.
The table below shows some of our operations in Latin America, excluding Brazil:
|Countries||Branches & CSBs||ATMs||Employees|
Includes employees in Panamá.
Does not include the 33 OCA points of service.
Latin America is a priority in our international expansion due to the geographic and cultural proximity to Brazil. Our goal is to be recognized as the Latin American Bank, becoming a reference in the region for all financial services provided to individuals and companies.
Over the past years, we consolidated our presence in Argentina, Chile, Paraguay and Uruguay. In these countries, we operate in the retail, companies, corporate and treasury segments, with commercial banking as our main focus. With the recent merger between Banco Itaú Chile and CorpBanca, which assured our presence in Colombia and Panama, we expanded our operations in the region even further. In Mexico, we are present through an office dedicated to equity research activities.
As of December 31, 2020, we had a network of 444 branches, including 8 digital branches, and client service branches in Latin America (excluding Brazil). In Paraguay, we had 60 non-bank correspondent locations, which are points of service with a simplified structure, strategically located in supermarkets to provide services to our clients in that country. As of December 31, 2020, we also had 33 points of service through OCA S.A., our credit card operator in Uruguay. Please see Distribution Channels, for further details about our distribution network in Latin America.
Banco Itaú Argentina
We have operated in Argentina since 1979, where we began with a focus on large companies with business ties to Brazil. In 1995, we began our retail operations in Buenos Aires. In 1998, we increased our presence through the acquisition of Buen Ayre Bank, subsequently renamed Banco Itaú Argentina.
Through Banco Itaú Argentina we offer products and services in corporate banking, small and middle-market companies and retail banking. Our corporate banking business focuses on large and institutional clients, providing lending, structured finance, investment and cash management services. Our small and middle-market operations provide credit for working capital and investments in production capacity increases. Our retail banking business focuses on middle and upper-income clients, and our services offerings include current and savings accounts, personal loans and credit cards. In 2019 Banco Itaú Argentina opened two digital branches enhancing its presence in Argentinas financial market.
|Product/Service||Market Position||Additional Information and Main Competitors|
Total Loan Portfolio
(includes privately-owned banks only)
|In November 2020, we had a market share of 2.8% in terms of total outstanding loan balance in Argentine pesos, positioning us as the tenth largest private bank in Argentina.||Our main competitors are Banco Santander Río, Banco de Galicia y Buenos Aires, BBVA Banco Argentina and Banco Macro.|
Source: Central Bank of Argentina.
In April 2016, we closed the merger of Banco Itaú Chile with and into CorpBanca and, as a result, acquired control of the resulting entity Itaú Corpbanca. On the same date, we entered into the Shareholders Agreement of Itaú Corpbanca, or Itaú Corpbancas Shareholders Agreement, which entitles us to appoint, together with the Corp Group, the former controlling shareholder of Corpbanca, the majority of the members of Itaú Corpbancas Board of Directors. In the following years, we increased our equity stakes to 39.22%, pursuant to the exercise of put options by Corp Group, as set out in Itaú Corpbanca´s Shareholder´s Agreement.
Itaú Corpbanca provides a broad range of wholesale and retail banking services to customers in Chile and Colombia. In addition, it provides financial advisory services, mutual fund management, insurance brokerage and securities brokerage services through subsidiaries, and banking services. It operates in two main geographic areas: Chile and Colombia. The Chile segment also includes operations carried out by Itaú Corpbanca New York Branch and the Colombia segment also includes the operations carried out by Itaú S.A. (Panama).
Business activities in Chile have been strategically aligned onto three areas directly related not only to our medium-term strategy but to customers needs: 1) Wholesale Banking (a. Corporate, b. Large Companies and c. Real Estate and Construction); 2) Retail Banking (a. Itaú Personal Bank, b. Itaú, c. Itaú Private Bank, d. Midsize Companies, e. SMEs and f. Banco Condell, a Consumer Finance Division); and 3) Treasury. Itaú Corpbanca Colombia provides a broad range of commercial and retail banking services to its customers in Colombia, operating principally in the cities of Bogotá, Medellín, Cali, Bucaramanga, Cartagena and Barranquilla.
|Product/Service||Market Position||Additional Information and Main Competitors|
Total Loan Portfolio
(includes privately-owned banks only)
|In December 2020, our market share was 11.2% based on total outstanding loan balance in Chilean pesos, positioning us as the fifth largest private bank in Chile.||Our main competitors are Banco Santander-Chile, Banco de Chile, Scotiabank Chile and Banco de Crédito e Inversiones.|
Source: Chilean Commission for the Financial Market (CMF).
Banco Itaú Paraguay
Our operations in Paraguay began in 1978 and comprise retail and wholesale banking, through Interbanco, which was acquired in 1995 by Unibanco. In 2010, the Itaú brand was introduced and our banks name was changed to Banco Itaú
Paraguay. Banco Itaú Paraguay distributes products and services to small and middle market companies, agribusiness, large companies, institutional clients and consumer clients. The retail segment also focuses on payroll clients. Under corporate banking, Banco Itaú Paraguay has a well-established presence in the agribusiness sector. Banco Itaú Paraguays qualification is based on its strong positioning, with leadership in several segments, reflecting high returns.
In 2019 Banco Itaú Paraguay opened its first digital branch enhancing its presence in Paraguays financial market.
The table below shows our market position and information about our competitors for the Banco Itaú Paraguay business:
|Product/Service||Market Position||Additional Information and Main Competitors|
Total Loan Portfolio
(includes privately-owned banks only)
|In December 2020, we had a market share of 13.5% in terms of total outstanding loan balance in guaranis, positioning us as the third largest private bank in Paraguay.||Our main competitors are Banco Continental, Banco Regional, Sudameris and BBVA Paraguay.|
Source: Central Bank of Paraguay.
Banco Itaú Uruguay
Our banking operations in Uruguay include Banco Itaú Uruguay, OCA (the largest credit card issuer in Uruguay, in accordance with data from Uruguays central bank) and the pension fund management company Unión Capital. Our strategy in Uruguay is to serve a broad range of clients through customized banking solutions.
Our retail banking business is focused on individuals and small business clients. Retail products and services focus on the middle and upper-income segments, and also include current and savings accounts, payroll payment, self-service areas and ATMs in all branches, and phone and internet banking. The wholesale banking division is focused on multinational companies, financial institutions, large and middle market companies and the public sector, providing lending, cash management, treasury, trade and investment services.
In 2019 Banco Itaú Uruguay opened its first digital branch enhancing its presence in Uruguays financial market.
The table below shows our market position and information about our competitors for the Banco Itaú Uruguay business:
|Product/Service||Market Position||Additional Information and Main Competitors|
Total Loan Portfolio
(includes privately-owned banks only)
|In December 2020, we had a market share of 23.3% based on total outstanding loan balance in Uruguayan pesos, positioning us as the second largest private bank in Uruguay.||Our main competitors are Banco Santander Uruguay, BBVA Uruguay and Scotiabank Uruguay.|
Source: Central Bank of Uruguay.
Itau BBA International
Our banking activities carried out under the corporate structure of Itau BBA International are mainly focused on two business lines:
Corporate and Investment Banking: through Itau BBA International, headquartered in the United Kingdom, and its subsidiary Itaú Europe, headquartered in Portugal, with business platforms in Madrid and Paris, this segment supports the financial needs of companies with international presence and operations, focusing on transactions related to financing and investment relationships between companies in Latin America and the Northern Hemisphere. The services offered include the origination of structured financing, hedging, trade financing and advisory to Latin American and U.S. companies undertaking business in the Northern Hemisphere and large economic groups investing into Latin America.
Private Banking: under the corporate structure of Itau BBA International, we manage private banking activities in Miami and Zurich, offering specialized financial and asset management services for Latin American clients with high net worth by providing a diversified and specialized basis of investment funds, trading and managing on their account securities and other financial instruments, as well as by managing trusts and investment companies on behalf of customers.
Other International Operations
Our other international operations have the following objectives:
Support our clients in cross-border financial transactions and services, our international units are active in providing our clients with a variety of financial products, such as trade financing, loans from multilateral credit agencies, off-shore loans, international cash management services, foreign exchange, letters of credit, guarantees required in international bidding processes, derivatives for hedging or proprietary trading purposes, structured transactions and international capital markets offerings. Our international units offer a variety of financial products through their branches.
Manage proprietary portfolios and raise funds through the issuance of securities in the international market. Fundraising through the issuance of securities, certificates of deposit, commercial paper and trade notes can be conducted by our branches located in the Cayman Islands, the Bahamas and New York, as well as through Itaú Bank Ltd., a banking subsidiary incorporated in the Cayman Islands. Our proprietary portfolios are mainly held by Itaú Bank and our Nassau and Cayman Islands branches. These offices also enhance our ability to manage our international liquidity.
Through our international operations, we establish and monitor trade-related lines of credit from foreign banks, maintain correspondent banking relationships with money centers and regional banks throughout the world and oversee our other foreign currency-raising activities.
Revenues from Operations in Brazil and Abroad
We conduct most of our business activities in Brazil, but we do not break down our revenues by geographic markets within Brazil. Our interest income from loans and leases, banking service fees and income from insurance, private pension plans and premium bonds transactions are divided between revenues earned in Brazil and outside of Brazil. The following information is presented in IFRS, as issued by the IASB, after eliminations on consolidation.
The following table sets forth the consolidated statement of income with respect to our revenues from operations in Brazil and abroad for the years ended December 31, 2020, 2019 and 2018:
|For the Year Ended||Variation|
|(In millions of R$, except percentages)|
Income related to financial operations (1) (2)
Revenues from banking services
Income from insurance and private pension operations before claim and selling expenses
Includes interest and similar income, dividend income, net gain (loss) on investment securities and derivatives, foreign exchange results, and exchange variation on transactions abroad.
ITAÚ UNIBANCO HOLDING does not have clients representing 10% or greater of its revenues.
The last several years have been characterized by increased competition and consolidation in the financial services industry in Brazil. According to the Central Bank, as of December 31, 2020, there were 139 conglomerates, commercial banks and multiple-service banks, development banks and Caixa Econômica Federal, among a total of 1,291 institutions in Brazil.
We, together with Banco Bradesco S.A. and Banco Santander Brasil S.A., are the leaders in the privately-owned multiple-services banking sector. As of December 31, 2020, these three banks accounted for 39.0% of the Brazilian banking sectors total assets, according to the Central Bank. We also face competition from state-owned banks. According to the Central Bank, as of December 31, 2020, Banco do Brasil S.A., Caixa Econômica Federal, and Banco Nacional de Desenvolvimento Econômico e Social (BNDES) accounted for 35.8% of the banking systems total assets.
The following table sets for the total assets of the 10 main banks in Brazil, classified according to their interest in the total assets of the Brazilian banking sector
(In billions of R$)
Banks by total assets(1)
|Control Type||As of December 31,|
|2020||% of Total|
|Itaú Unibanco Holding S.A.||privately-owned||1,941.9||17.5|
|Banco do Brasil S.A.(2)||state-owned||1,713.3||15.5|
|Caixa Econômica Federal||state-owned||1,448.9||13.1|
|Banco Bradesco S.A.||privately-owned||1,371.0||12.4|
|Banco Santander Brasil S.A.||privately-owned||1,004.0||9.1|
|Banco Nacional de Desenvolvimento Econômico e Social||state-owned||798.4||7.2|
|Banco BTG Pactual S.A.||privately-owned||266.3||2.4|
|Banco Safra S.A.||privately-owned||218.4||2.0|
|J.P. Morgan S.A||privately-owned||104.1||0.9|
|Banco Citibank S.A.||privately-owned||91.8||0.8|
Based on banking services, except insurance and pension funds.
Includes the consolidation of 50.0% do Banco Votorantim S.A. based on Banco do Brasils shareholding stake and excludes these 50.0% of National Financial System.
Excludes Payments Institutions
Source: Central Bank (IF.data).
Along with our traditional competitors, there are also new technology-driven financial institutions such as fintechs, Asset Management firms and Acquiring Services which are disrupting the Brazilian financial industry. In general, these competitors act in specific business lines such as Credit Cards (e.g. Nubank), Investment Services (e.g. XP Investimentos), Acquiring Services (e.g. StoneCo, PagSeguro), Banking Services (e.g. Banco Inter, BTG Digital) and others. Although many of our non-traditional competitors are still in early stages of development, they start to gradually increase the number of products and services offered. As
technology advances and clients preferences and expectations change, boosted by innovations introduced by the new competition, traditional competitors are also changing and redesigning their products, distribution and communication channels.
As a universal bank, we provide a wide range of financial services and products to our clients, from commercial banking to asset management and investment banking. Those products are distributed through two main channels: traditional and digital.
The traditional channels are composed of brick & mortar branches which could be either full-service branches or in-house corporate service centers and ATMs. The digital channels are operated remotely, via the internet or mobile phones.
Our network of 3,232 branches, which includes physical and digital branches, as of December 31, 2020, distributes all of products and services in Brazil.
ATMs, both our own proprietary network of machines and additional 23,798 via partnership with Tecban, (as of December 31, 2020) are a very convenient and efficient way of serving clients, due to its low operating costs, 24/7 availability and very complete services offering.
Clients who prefer to use digital channels, such as internet and mobile banking, are served remotely by our relationship managers based on one of our 196 digital branches in Brazil.
Chile and Uruguay
Total in Brazil and abroad
Digital Channels (internet and mobile banking)
In 2020, due to the COVID-19 pandemic, the world faced one of the greatest economic and social challenges, where technology and digitalization became even more necessary. Many habits and customs were adjusted to the new normal and digital channels have become a very safe way to continue interacting with other people and companies without leaving home.
We invested a substantial amount of effort to give our customers the best possible experience through digital channels. Improvements in the regulatory and competitive scenario reinforced that commitments we made to our customers and other stakeholders a couple of years ago were of utter importance and resulted in important achievements. Our year over year growth in 2020 in monthly active users was 13% and there was a 108% growth in accounts opened digitally for individuals, which represented almost 50% of the total accounts opened in 2020. We also had two records: the download of Itaú App was 1.3x higher than the daily average of 2020 and the download of Itaú Empresas App was 5x higher than the daily average of the same period.
Due to the COVID-19 pandemic, we encouraged our customers to use our digital channels, such as our apps and online banking website, and our digital products. Our website was reconfigured to give prominence to Digital Channels, including a step by step for those who have never used the Itaú App and how to use the main financial services tutorials (view transactions, transfer money and pay bills, credit card payment, virtual cards, unlocking credit and debit card passwords,
tracking card orders). We also communicated the services that can be done online on our social networks and sent e-mails and SMS to our customers.
We created the Services HUB, a feature in Itaú Apps, with a simple and pragmatic interface, which includes many forms where customers can make requests for operational services. Requests are automatically sent to back office teams, thus reducing the demand for branches and call centers, balancing the experience and practical benefits with efficiency and process optimization. We have more than 16 new forms available and have already processed more than 853 thousand transactions. Besides, we improved the interaction of customers with managers and specialists to purchase products and receiving recommendations, assuring contextualized and quality service. In addition, we are enhancing the connection between online and offline (o2o) channels to optimize the banks results.
At WhatsApp Itaú, our focus was to expand the number of services and customers served by the channel. We launched the contact number to serve business customers and the exclusive contact number to deal with renegotiation for retail customers, which now serves active and inactive bank accounts, from simulation to contracting. In addition, we provide a feature that allows non-digitized customers to interact with WhatsApp Itaú, becoming a highly relevant digitization tool. These solutions illustrate our commitment to an omnichannel experience, to always be the bank our clients want to partner with.
Also, in 2020, to help businesses during the COVID-19 crisis, we offered three types of loans in partnership with the government, with special conditions, all available through our digital channels. The first one was exclusive for the payment of salaries and financed 136 thousand payrolls, benefiting almost 50 thousand companies and over 1 million employees and R$2.9 billion in financings. We also offered a loan to support micro and small businesses, which resulted in more than 16 thousand contracts in the first 24 hours and an aggregate amount of R$4 billion borrowed. And the final loan, was a loan for small, medium and large businesses, which resulted in an aggregate amount of R$15 billion borrowed. The NPS in this segment increased by 5 points in 2020, which indicates that we were able to attend the needs of our customers with great quality.
Another important service that we launched was Pix, an online payment and transfer system from the Central Bank. We built Pix considering simple and intuitive interfaces that can offer the best solution to our customers. This product was built by a 300 people multidisciplinary team, working remotely. Within less than two months, the transfers and payments made by Pix represented, organically, 26% of all the bank transfers in our main individual app, showing its disruptive potential and also an excellent basis to build new products and services for our customers.
Our communications channel became more efficient every year, and as we are closer to our customers, we can understand the best direction to follow, not only in terms of service evolution, but also in more efficient ways to help people manage their financial life. Another important point is that everything that is developed in digital channels, is not only built for, but with our customers, taking into consideration their daily routine, pain points and needs. This is a great differential we have the knowledge and the tools to make our journeys simpler and more intuitive, considering each customer profile. We are also adapting our portfolio and products to serve a larger amount of customers. To mention some of these products, we have investment recommendations according to the clients objectives, online check deposit, buying foreign currency in the mobile app, iPhone pra Sempre (an online iPhone update program with credit card) and online renegotiation.
We are constantly recognized for being close to the customer and always delivering best-in-class innovation. As an example, we earned the Folha Top of Mind 2019 as the Best Banking Mobile App category, and in 2020 we earned a national award called Digital Transformation Bank Report, in the categories Credit innovation and Customer/User Experience. In addition, we won the Finances category in Datafolha research about companies and services which had a positive impact during the pandemic.
Our Brand and Marketing Channels
We strive to provide complete solutions in terms of products and services, through financial intelligence and an ecosystem of partnerships. This echoes in our continuous effort to fully attend the needs of each customer, from individuals and micro companies to large organizations, and provide the best experience both digitally and physically, which is reflected in our brand positioning.
Our brand is committed to encouraging people to have an easier and closer relationship with their finances in their daily lives. We are active in social media with constant publications about the economic environment and tutorials. In
December 2020, we reached over one billion views on our YouTube channel and over nine million followers on Facebook. In the same period, our Twitter and Instagram profiles had over 641 thousand and 521 thousand followers, respectively.
We continue to monitor all of our social media profiles 24 hours a day, seven days a week. We have 150 dedicated employees to interact with the public on all matters related to Itaú Unibanco Group in Brazil, including questions, suggestions, comments, and complaints. We received more than 2.9 million mentions on social media in 2020, according to Oliver, consulting agency that assist us in the analysis of social media data.
Social media is a pillar in engaging people in our role beyond banking. Itaú Unibanco invests in several projects, with a focus in education, culture, mobility, and sport. Our urban mobility platform has more than 1,400 bike stations and is present in seven cities in Brazil as well as in Santiago (Chile) and Buenos Aires (Argentina). According to the operator TemBici, in 2020 an average of more than 1 million trips were made each month using bikes from our urban mobility platform. This is due to the amount of bikes we offer people: there are over 7,000 laranjinhas (orange bikes) across Brazil.
In education, our programs are equally powerful: since the Leia para uma criança (Read to a child) program was created, more than 61 million printed books were distributed to people and 38 thousand braille books were offered to visually impaired children. Three million books have already been sent to public libraries, civil society organizations, and schools. This shows our commitment to mobilize clients and non-clients to make a difference in our country.
As a result, in 2020 we were ranked for the 17th consecutive year at the top of the Interbrand ranking of most valuable Brazilian brands with an estimated value of R$37,383 million. The analysis is based on our brands ability to generate financial results, influence the clients selection process, and ensure long-term demand.
Our Vision, Our Culture
Our culture supports us in attracting and retaining talent, directing our business path and, promoting a competitive advantage.
It is translated into the seven attitudes listed below, which we call Our Way, that keep us up-to-date with the context, demands and transformations of our business and organizational culture. Our Way directs how we intend to achieve our vision to be a leader in sustainable performance and in client satisfaction.
Its only good for us if its good for the client;
We are passionate about performance;
People mean everything to us;
The best argument is the only one that matters;
We think and act like owners; and
Ethics is not negotiable.
The following chart shows a simplified overview of our share ownership and our direct and indirect subsidiaries as of March 31, 2021:
Sustainability is embedded in our corporate strategy through a consolidated governance structure and it is integrated into our business, which allows us to incorporate environmental and social issues into daily activities and processes across the entire Itaú Unibanco Group. Long-term strategic decisions on sustainability are discussed on an annual basis by our Board of Directors and twice a year at the meetings of our Executive Committee.
In 2019, we disclosed our new sustainability strategy, which is targeted at the positive impact we seek to create through our businesses and in our actions. In 2019 we signed, the Principles for Responsible Banking, by the United Nations Environment Programme Finance Initiative (UNEP FI), which encourages the global financial sector to comply with the Sustainable Development Goals and the Paris Agreement.
Our sustainability strategy includes eight Positive Impact Commitments, which we announced at an event for investors at the beginning of September 2019, and published on our Sustainability website and in our 2019 Annual Report. With clear goals, KPIs and sponsors in the business and institutional areas, the commitments we made will make us incorporate best sustainability practices throughout the organization, and they are divided into three pillars:
Conduct and behavior, to foster the creation of a fair and ethical financial ecosystem; improve the employees experience and promote a diverse, inclusive and healthy workplace with a purpose; increase the environmental performance of our operations and promote sustainable practices in our supply chain.
Positive impact, to increase the financial inclusion of micro, small and medium entrepreneurs; increase the access to financial services and offer tools and content that support healthier financial decisions; foster the increase of financing for positive impact sectors and increase the inclusion of environmental, social and governance issues in investment decisions, and increase the offer of our products and services.
Accountability, to strengthen the transparency of our business in addition to our financial results, showing value to all of our stakeholders in a fair way and in line with best market practices.
The path of the Positive Impact Commitments was even more challenging in this year of so many changes. However, this only reiterated the importance of dealing with environmental and social issues in an immediate and meaningful way for everyone, and we try our best to adapt our projects impacted by the scenario, in order to guarantee the evolution of our goals. In 2020, we also reaffirmed our positive impact agenda by building other initiatives such as a private social investment commitment, Todos pela Saúde (All for Health) initiative and the Amazon Plan.
In 2020, with the relevance of private social investment in the scenario in which we live, we dedicated efforts to create a new specific commitment to the theme. The objective was to reaffirm Itaú Unibancos pact alongside our institutes and foundations with Brazilian society, strengthening bonds of trust amid uncertainty. This new commitment establishes guidelines and goals aimed at Private Social Investment with the objective of promoting access and expanding rights, improving the quality of life in cities and strengthening the power of transformation of people.
The Todos pela Saúde project aims at supporting and strengthening the coronavirus relief efforts in Brazil by reaching all tiers of society, as well as supporting public health sector initiatives, such as the Brazilian unified health system (SUS), in such a challenging time. Itaú has started this project with the largest philanthropic donation ever made by a Brazilian company: the bank has donated R$1 billion to make the project come true. Out of this amount, R$790 million has already been allocated to the novel coronavirus relief efforts. In addition to the initial donation, the initiative has already collected over R$18 million in donations from companies and individuals across Brazil.
The Amazon Plan has arisen from a joint plan between Itaú, Santander and Bradesco, three large banks with a common clear goal: promoting effective actions to ensure the sustainable development of the Amazon region. In addition to being a vital region for the health of the world climate, the Amazon Plan was developed in a particularly critical year for this territory. The National Institute for Space Research (INPE) has disclosed that deforestation in the Amazon region was up 34% between August 2019 and July 2020 from the same period in the prior twelve months. The Amazon Plan includes ten measures designed to meet three action fronts essential for the sustainable development of the region: environmental conservation and bio economic development, sustainable infrastructure investments, and basic rights guaranteed for the population of the Amazon region. These measures are essential for ensuring preservation and the sustainable development of the economy of the region and its population.
In 2020, we created a working group with the aim of integrating ESG criteria in our credit portfolio. As we deepen the work with the group, we felt the need to create a specific governance to conduct discussions about deliveries and the challenges that this agenda imposes on financial institutions in general. With this, an ESG business committee was established, composed of executives from the Wholesale bank, to monitor the evolution of projects, discuss trends in the local and international market, as well as the progress of the ESG agenda, assess ESG operations and connect strategic matters involving ESG in large companies. We have also established an ESG working group in the area of Fixed Income that aims to evaluate capital markets operations in addition to providing ESG advisory, specialized advice to clients regarding ESG criteria, when necessary.
Since 2018, we have been working on a multidisciplinary basis involving the Sustainability, Environmental and Social Risk, Finance, Asset Management and Investor Relations departments to develop a Climate Finance agenda. We participate in the main national and international forums and initiatives in order to anticipate trends and help us guide the way we do business in the short and long terms. Together with 36 other banks, we are part of a working group to address the TCFD of the United Nations Environment Programme Finance (UNEP-FI) for the purpose of developing indicators and tools to improve the assessment and disclosure of risks and opportunities related to climate change. In 2019, we undertook to implement the TCFD recommendations by 2022, with actions determined and periodically monitored to ensure the achievement of this target. Compliance with TCFDs recommendations at 79% in December 2020.
In August 2018, Itau and Natura launched the platform Commitment to Climate Program, whose main objective is to promote the carbon market and invite other organizations to participate in this initiative. Currently, this program has grown, and other companies are participating to offset their emissions, like B3, Lojas Renner, MRV, Raia Drogasil, Localiza and Mattos Filho, together with Natura and Itaú. Over the years of the Program, it has helped to protect more than 8,500 ha of forests, to generate more than 85,000 MWh of renewable electric energy and verified more than 1 million of emissions
reductions. In 2020, with the impacts of COVID-19 crisis, Itau selected to support only one project, which was a clean energy generation project, to offset Itaus emissions during 2019, which was more than 17,000 metric tons of CO2.
On January 8, 2021, we established a framework, or the Framework, to allow us to contribute to the development of sustainable financing solutions, with the objective of raising funds for new and existing projects with environmental or social benefits. We are committed to increasing (i) the financing for positive impact sectors; (ii) the inclusion of environmental, social and governance issues in investment decisions; (iii) the financial inclusion of micro, small and medium entrepreneurs; and (iv) the access to financial services and offer tools and content that support healthier financial decisions. The Eligibility Criteria (as defined in our Framework) have been developed in alignment with the four core components of the GBP, SBP and SBG administered by the International Capital Markets Association (ICMA) use of proceeds, process for project evaluation and selection, management of proceeds and reporting. The Framework has also been analyzed and recommended by a second party opinion provider, Sustainalytics, as part of a regular sustainability bond issue.
On the topic of human rights, in 2019, we launched a revised version of Itaús Human Rights Commitment, which aims to reinforce our commitment of respect for human rights with respect to employees, clients, suppliers, stockholders, partners and society. This commitment guides our actions related to critical topics, mitigation practices, remediation and monitoring measures and work with vulnerable groups (children, adolescents, indigenous people, women, migrants, black people, people with disabilities, LGBT+ and others). With this in mind, we conducted action plans to discuss case studies of human rights violations reported by clients through our channels and the training of service teams to address these cases. Further, we started a broad education process including the organization of diversity weeks focused on discussions about race, LGBT+ people, gender and people with disabilities. Additionally, in order to support knowledge about human rights and diversity, we launched a training on this topic for all our employees and we organized the Diversity Library, with a curatorship of content related to Diversity, Inclusion and Human Rights. In order to establish communications that are relevant to topics related to human rights in the organization, we also organized a mental health and financial education week, with lectures on those topics.
Our sustainable management contributed to our access to funding through development agencies and to our presence in sustainability indexes. We are the only Latin American bank to participate in the Dow Jones Sustainability Index since its inception in 1999, and we also participate in the Corporate Sustainability Index (ISE) and the Carbon Efficient Index (ICO2), both of B3.
Dependence on Patents, Licenses, Contracts and Processes
We own, in Brazil and abroad, a number of patents and patent applications related to methods for security code checking and for a method, user device and system to submit financial transaction information. We and our affiliates are not dependent on such patents to perform our activities.
Taking on and managing risks is one of our activities and, to this end, we must have well-established risk management objectives. In this context, risk appetite defines the nature and level of risks that are acceptable to us and the risk culture guides the attitudes necessary to manage them.
We invest in robust risk management processes that are the basis for our strategic decisions to ensure the sustainability of the business and to maximize the creation of shareholder value. These processes are aligned with the guidelines of the Board of Directors and the Executives who, through collegiate, define the global objectives, expressed in goals and limits for the risk management business units. The control and capital management units, in turn, support our management through risk and capital monitoring and analysis processes.
The principles that provide the foundations of risk management, the risk appetite, and the guidelines for how our employees act in their day-to-day decision-making are:
Sustainability and customer satisfaction: our vision is to be the leading bank in performance and customer satisfaction. Therefore we are concerned with generating shared value for employees, customers, shareholders and society, and ensuring the perpetuity of our business. We are concerned with doing business that is good for the client and for us.
Risk culture: our risk culture goes beyond policies, procedures and processes, strengthening the individual and collective responsibility of all employees to manage and mitigate risks in a conscious manner, respecting the way business is ethically done.
Risk pricing: we act and assume risks in businesses we know and understand, and avoid those we do not know or for which we have no competitive advantage, carefully evaluating the relation between risk and return.
Diversification: we have a low appetite for volatility in results and, for this reason, we operate in a diversified base of clients, products and businesses, seeking the diversification of risks, in addition to prioritizing lower risk business.
Operational excellence: we want to be an agile bank, with a robust and stable infrastructure, in order to offer a high quality service;
Ethics and respect for regulations: for us ethics is non-negotiable. For this reason, we promote an institutional environment of integrity, educating our employees to cultivate ethical relationships and businesses, as well as respecting the norms, and therefore looking our reputation.
The CMN Resolution 4,557/2017, which provides for the structure of risk and capital management framework, with which we must comply, highlights the implementation of a continuous and integrated risk management framework, the requirements for defining the Risk Appetite Statement (RAS), and the RAS (Risk Appetite Statement) and the stress test program, the constitution of a Risk Committee and the appointment, before BACEN, of the Risk Management Officer (CRO), with the attribution of roles responsibilities and independence requirements.
Our risk appetite establishes the types and levels of risk acceptable to us.
Governance and organizational structure
Our risk management organizational structure complies with Brazilian and applicable international regulations currently in place and is aligned with best market practices. There is a structure in place for coordination and consolidation of information and related processes, which are all subject to verification by independent validation, internal controls and audit areas. The following committees are part of our risk and capital management governance structure:
Risk & Capital Management Committee (CGRC): supports our Board of Directors in performing its duties related to our risk and capital management by meeting, at least, four times annually, and submitting reports and recommendations to assist the Board of Directors in its decision-making with respect to:
Decisions regarding our risk appetite, in terms of capital, liquidity, results, operational risk and reputation, ensuring these aspects are in alignment with our strategy, and including acceptable capital and liquidity levels and types of risks to which we may be exposed, as well as overall limits for each type of risk, tolerance for volatility of results and risk concentration, and general guidelines about tolerance for risks that may impact our brand (e.g., brand risk).
Supervision of our risk management and control activities in order to ensure their suitability to the risk levels assumed and to the complexity of the operations as well as compliance with regulatory requirements;
Review and approval of policies and strategies for capital management, to establish mechanisms and procedures aimed at keeping capital consistent with the risks we incur;
Establishing our minimum expected return on capital as a whole and for our lines of business, as well as monitoring performance;
Supervision of our incentive structures, including compensation, aimed at ensuring its alignment with risk control and value creation goals; and
Fostering improvement in our Risk Culture.
Superior Commission for Market Risk and Liquidity (CSRML): meets on a monthly basis and is responsible for setting guidelines and governance for investments and market and liquidity risks regarding our consolidated positions and business lines.
Superior Operational Risk Commission (CSRO): meets on a bimonthly basis and is responsible for understanding the risks of our processes and business, defining guidelines for operational risks management and assessing the results achieved by our Internal Controls and Compliance System. The CSRO is our main decision-making committee for all operational risk management matters. It is responsible for defining our operational risk framework and structure and related policies for identification, measurement, assessment, reporting and monitoring of operational risk.
Superior Products Commission (CSP): meets on a weekly basis and is responsible for evaluating products, operations, services and processes that are beyond the authority of our Products Committees that report to it or that involve image risk to us.
Superior Credit Commission (CSC): meets on a weekly basis and is responsible for analyzing and deciding on credit proposals that are beyond the authority of the credit committees that report to the CSC. It is also responsible for analyzing decisions which may have not been taken due to a lack of consensus at the committee immediately subordinate to it or cases where, due to the relevance or characteristics of the topic or other features, such Credit Committees decide to submit to the CSCs review.
Superior Retail Credit and Collection Commission (CSCCV): meets on a monthly basis and is responsible for approving credit policies and assessing the performance of Retail Credit and Collection portfolios and strategies.
Superior Wholesale Credit and Collection Commission (CSCCA): meets on a monthly basis and is responsible for approving credit policies and assessing the performance of Wholesale Credit and Collection portfolios and strategies.
Superior Committee on Prevention of Money Laundering (CSPLD): summoned on demand, the Committee aims to analyze and deliberate on claims involving the opening / maintenance of transfers and other services / operations (M&A, credit granting, KYC exchange validation, among others) to bidders with greater exposure to money laundering risk.
Superior Commission for Corporate Investment (CSIS): meeting on demand, its purpose is to evaluate temporary corporate investments of interest to the Investment Bank (DGA).
Additionally, we have sub-committees, chaired by our chief risk officer and CFO, which are also responsible for risk and capital management. Any such sub-committee may report directly to the Risk and Capital Management Committee or to the sub-committees mentioned above.
Standards Committee (CN): meets at least quarterly (may be via Fast Track) and aims to approve / validate standards with the scope of the Standards Committee, being the minimum scope for approval of policies. Higher-level policies must be approved by the Normative Committee before proceeding to other forums.
Technical Commission for Model Evaluation (CTAM):
CTAM - Market: meets bimonthly or on demand, for approval and assessment of market risk models and pricing, based on the independent opinion of the model validation area, as well as suggesting and monitoring action plans for the validated models. Its main responsibilities are: to approve models related to the calculation of market risk and pricing, to decide whether or not to use market risk and pricing models, to approve, recommend, suggest and monitor the proposed action plans for the validated models and monitor the performance of the market risk model over time, determining new developments, if necessary.
CTAM - Credit: recommend or veto the use of credit risk models based on an independent opinion from the model validation area, inform any risk points and monitor action plans. Its responsibilities are divided into Director Alçada (which meets monthly or on demand) and Superintendent Alçada.
Capital Committee (CCAP): meeting at least bimonthly, it aims to monitor the capital adequacy of the Holding and International Units, the capital projections in normal and adverse scenarios, in addition to reviewing the assessment of the materiality of the risks, the need for additional capital for material risks and the quantification methodologies for calculating capital for risks whose need has been completed for the purposes of the Internal Capital Adequacy Assessment Process.
International Units Risk Committee (CRUI): held on a quarterly basis, it aims to present and discuss the main risks of International Units and the corresponding strategies and action plans proposed to mitigate the identified risks. It monitors the risk indicators and risk appetite of International Units, as well as the measures for maintenance at acceptable levels, considering the particularities of each country or region. Deliberates on situations that require mobilization of Units and respective management areas in Brazil, including monitoring of risk events, notes from regulators, results of internal and external audits, risk maps and regulatory demands. Evaluates the evolution of maturity in the risk management of the Units and in the governance and supervision exercised by the ARF risk areas, ensuring alignment with our strategy. Promotes the Risk Culture Program in International Units and its dissemination.
To support this structure, we have the Risks & Finance Control and Management Area, structured with specialized departments and subordinated to our chief risk officer and CFO, intending to independently and in a centralized manner to ensure that the institutions risks and capital are managed in accordance with established policies and procedures.
Risk governance at foreign subsidiaries
Our foreign subsidiaries follow the risk management and governance model established by the holding in its policies and guidelines, keeping an effective flow of information on risk levels between headquarters and each subsidiary and alignment of strategies for maintaining such risks at an acceptable level.
To ensure the continuous improvement of the units in risk management and controls, a maturity program was established, comprising the definition and periodic assessment of best practices of risk management and controlling conducted in each location as also the supervision and governance activities performed by the holding.
The proximity in the monitoring of our units allows us to better understand the peculiarities of each country and region where we do business with and to quickly adapt to changes in different regulatory, social, and economic environments where we operate, even in stress scenarios as observed with COVID-19 pandemic.
In this regard, there was an increase of volume and frequency of information shared between units and holding when related to customers and employees safety and well-being preservation, the availability of banking channels, products and services, the regulatory changes instituted in different countries and their impacts in the units.
Finally, advances in actions to strengthen the Risk Culture on abroad subsidiaries have fostered individual and collective responsibilities of all our employees, empowering them to do the right thing, at the right time, and in the right way respecting the ethical and sustainable way of doing business.
Supervision and Regulation
We are subject to regulation by, and supervision of, several entities, in the countries and for the segments in which we operate. The supervisory activities of these entities are essential to the structure of our business, and they directly impact our growth strategies. Below we describe the main entities that regulate and supervise our activities in Brazil:
|CMN||the highest authority of the Brazilian National Financial System (SFN) responsible for the currency and credit policy in Brazil to guarantee stability and social and economic development. Its major purpose is to disclose the general rules for the operation of the entire financial market.|
|Central Bank||autonomous authority responsible for regulating and overseeing the entire National Financial System (SFN), ensuring the stability of the purchasing power of the currency and a solid and efficient financial system and for implementing the policies established by the CMN, authorizing the establishment of financial institutions and supervising them.|
|CVM||a government agency linked to the Ministry of the Economy with purpose of regulating, supervising and developing the securities market.|
|CNSP||responsible for establishing the guidelines and directives for insurance and premium bond companies and open private pension entities.|
|SUSEP||responsible for regulating and supervising the insurance, open private pension funds and capitalization markets in Brazil and their participants.|
|ANS||responsible for regulating and supervising the health insurance market in Brazil and its participants.|
Our main operations outside of Brazil are subject to oversight by local regulatory authorities in the following jurisdictions:
|Noteworthy regulatory requirements and restrictions on financial institutions:|| |
prohibition against operating in Brazil without prior approval of the Central Bank;
prohibition against acquiring real estate that is not for the financial institutions own use, except those received for settlement of loan losses or as expressly authorized by the Central Bank, pursuant to CMN regulation;
prohibition against acquiring interests in companies without prior approval of the Central Bank, except for ownership interest typical of investment portfolios held by investment banks;
prohibition against granting loans that represent more than 25% of the financial institutions regulatory capital to only one person or group;
restrictions on credit transactions to certain related individuals and legal entities;
obligation to deposit a portion of the deposits received from clients with the Central Bank (compulsory deposit);
obligation to maintain enough capital reserves to absorb unexpected losses, pursuant to the rules proposed by the Basel Committee and implemented by the Central Bank;
obligation to prepare and submit, by December 31, annual recovery plans that aim to re-establish adequate levels of capital and liquidity and to preserve the viability of the institution under stress scenarios;
obligation to create, in respect to financial guarantees, specific accounting procedures for the assessment and registration of passive provisions (provisão passiva);
prohibition against holding, on a consolidated basis, permanent assets, including investments in unconsolidated subsidiaries, real estate, equipment and intangible assets, exceeding 50.0% of the adjusted regulatory capital;
prohibition against granting loans or advances, and guarantees, including derivative transactions, underwriting or holding in their investment portfolio securities of any clients or group of affiliated clients that, in the aggregate, give rise to exposure to such client or group of affiliated clients that exceeds the threshold determined by the Central Bank.
Supplementary law establishing the independence of the Central Bank approved by the Brazilian Congress
On February 25, 2021, Supplementary Law No. 179 of February 24, 2021 (Supplementary Law No. 179) was published, establishing the purposes of the Central Bank and its autonomy, as well as regulating the appointment and removal of its president and directors.
Among other matters, Supplementary Law No. 179 sets forth that the Central Bank shall obtain the status of special autarchy characterized by the absence of ties to a Ministry, guardianship or hierarchical subordination, with technical, operational, administrative and financial autonomy. Additionally, the law also sets forth that, while the President of Brazil will still be responsible for appointing the president and the board of directors of the Central Bank (with the Brazilian Senates approval of their names), their terms of office will no longer coincide, which will further guarantee the independence of the Central Bank from political decisions. Supplementary Law No. 179 came into effect on the date of its publication.
Basel III Framework
On December 16, 2010, the Basel Committee issued its Basel III framework, which was revised and republished on June 1, 2011. The Basel III framework increases minimum capital requirements, creates new conservation and countercyclical buffers, changes risk-based capital measures, and introduces a new leverage limit and new liquidity standards in comparison to the former framework. The rules were phased in gradually and were fully implemented by January 1, 2019.
The Basel III framework requires banks to maintain minimum capital levels corresponding to the following percentages of risk-weighted assets: (i) a minimum common equity capital ratio of 4.5% composed of common shares; (ii) a minimum Tier 1 Capital ratio of 6.0%; and (iii) a minimum total capital ratio of 8.0%. In addition to the minimum capital requirements, Basel III requires a capital conservation buffer of 2.5% and each national regulator is given discretion to institute a countercyclical buffer if it perceives a greater system-wide risk to the banking system as the result of a build-up of excess credit growth in its jurisdiction. Further, Basel III introduces a new leverage ratio, defined as Tier 1 Capital divided by the banks total risk weighted exposure.
Basel III implemented a liquidity coverage ratio, or LCR, which requires affected banks to maintain sufficient high-quality liquid assets to cover the net cash outflows that could occur under a potential liquidity disruption scenario over a thirty-day period; and implemented a net stable funding ratio, or NSFR, which establishes a minimum amount of stable sources of funding that banks will be required to maintain based on the liquidity profile of the banks assets, as well as the potential for contingent liquidity needs arising from off-balance sheet commitments over a one-year period.
Additional requirements apply to non-common equity Tier 1 Capital or Tier 2 Capital instruments issued by internationally active banks. To be included in Additional Tier 1 Capital or Tier 2 Capital, an instrument must contain a provision that requires that, at the discretion of the relevant authority, such instrument be either written-off or converted into common shares upon a trigger event. A trigger event is the decision of a competent authority pursuant to which, for a bank to remain a feasible financial institution, it is necessary (i) to write-off an instrument, or (ii) to inject government funds, or equivalent support, into such bank, whichever occurs first. The requirements are applicable to all instruments issued after January 1, 2013 and those instruments qualified as capital issued before that date that do not comply with these requirements will be phased out of banks capital over a ten-year period, beginning on January 1, 2013.
Additional regulatory capital requirements apply to systemically important financial institutions, or G-SIFIs. The Basel Committees assessment methodology to determine which financial institutions are G-SIFIs is based on indicators that reflect the following aspects of G-SIFIs: (i) size; (ii) interconnectedness; (iii) lack of readily available substitute or financial institution infrastructure for the services provided; (iv) global or cross-jurisdictional activity; and (v) complexity. Each of these factors receives an equal weight of 20.0% in the assessment.
The Basel Committee has also issued a framework for the regulation of domestic systemically important banks, or D-SIBs, which supplements the G-SIFI framework by focusing on the impact that the distress or failure of systemically important banks would have on the domestic economy of each country.
Implementation of Basel III in Brazil
Financial institutions based in Brazil are subject to capital measurement and standards based on a weighted risk-asset ratio, according to CMN Resolutions No. 4,192/2013 and No. 4,193/2013. Brazilian banks minimum total capital ratio is calculated as the sum of two components: Regulatory Capital (Patrimônio de Referência); and Additional Core Capital (Adicional de Capital Principal), both aligned to the guidelines of the Basel III framework.
Brazilian banks Regulatory Capital is comprised of Tier 1 Capital and Tier 2 Capital. Tier 1 Capital is further divided into two elements: Common Equity Tier 1 Capital (common equity capital and profit reserves after adjustments, or Capital Principal) and Additional Tier 1 Capital (hybrid debt and equity instruments authorized by the Central Bank, or Capital Complementar).
In order to qualify as Additional Tier 1 Capital or Tier 2 Capital, according to CMN Resolution No. 4,192/13, all instruments issued after October 1, 2013 by a Brazilian bank must contain loss-absorbency provisions, including a requirement that such instruments be automatically written off or converted into equity upon a trigger event. A trigger event is the earlier of: (i) Common Equity Tier 1 Capital being less than 5.125% of the risk-weighted assets for Additional Tier 1 Capital instruments and 4.5% for Tier 2 Capital instruments; (ii) the execution of a firm irrevocable written agreement for the government to inject capital in the financial institution; (iii) the Central Bank declaring the beginning of a special administration regime (Regime de Administração Especial Temporária, or RAET) or intervention in the financial institution; or (iv) a decision by the Central Bank, according to criteria established by the CMN, that the write-off or conversion of the instrument is necessary to maintain the bank as a viable financial institution and to mitigate relevant risks to the Brazilian financial system. Specific procedures and criteria for the conversion of shares and the write-off of outstanding debt related to funding instruments eligible to qualify as regulatory capital are established by CMN regulation. The legal framework applicable to financial bills (letras financeiras) was adapted to allow Brazilian financial institutions to issue Basel III-compliant debt instruments in the Brazilian market.
Existing hybrid instruments and subordinated debt previously approved by the Central Bank as eligible capital instruments may continue to qualify as Additional Tier 1 Capital or Tier 2 Capital, as the case may be, provided that they comply with the above requirements and a new authorization from the Central Bank is obtained. Instruments that do not comply with these requirements will be phased out as eligible capital instruments by deducting 10.0% of their book value per year from the amount that qualifies as Additional Tier 1 Capital or Tier 2 Capital. The first deduction occurred on October 1, 2013, and subsequent deductions will take place annually starting January 1, 2014 until January 1, 2022.
The Additional Core Capital requirement is subdivided into three elements: the capital conservation buffer (Adicional de Conservação de Capital Principal), the countercyclical capital buffer (Adicional Contracíclico de Capital Principal) and the higher loss absorbency requirement for domestic systemically important banks (Adicional de Capital Principal Sistêmico). The capital conservation buffer is aimed at increasing the loss absorption ability of financial institutions.
The countercyclical capital buffer can be imposed within a range by the Central Bank if it judges that credit growth is increasing systematic risk. The higher loss absorbency requirement for domestic systemically important banks seeks to address the impact that the distress or failure of Brazilian banks may have on the local economy. In the event of non-compliance with the Additional Core Capital requirement, certain restrictions will apply, including the inability of the financial institution to: (i) pay officers and directors their share of variable compensation; (ii) distribute dividends and interest on equity to stockholders; and (iii) repurchase its own shares and effect reductions in its share capital. We are considered domestic systemically important financial institution, hence having to fulfill the 1% Additional Core Capital for higher loss absorbency (Adicional de Capital Principal Sistêmico). The Central Banks implementation of the capital adequacy requirements under Basel III was phased-in from 2013 to 2019. In 2020, in response to the economic crisis related to the COVID-19 pandemic, the CMN temporarily eased the capital conservation buffer, which will gradually return to the fully implemented level in April 2022.
Moreover, since October 1, 2018, a minimum LCR in a standardized liquidity stress scenario requirement applies to banks with total assets that are equal or superior to 10% of the Brazilian GDP or to banks with relevant international activity (in such case, regardless of total assets). The calculation of the LCR follows the methodology set forth by the Central Bank which is aligned with the international guidelines. During periods of increased need for liquidity, banks may report a lower LCR than the minimum required ratio, provided that they also report to the Central Bank the causes for not meeting the minimum requirement, the contingent sources of liquidity it has available, and the measures it plans to adopt to be in compliance with the LCR requirement. Since April 1, 2016, banks must also publicly disclose their LCR on a quarterly basis.
The following table sets forth the minimum capital ratios and liquidity coverage ratio requirements under Basel III implemented by the Central Bank, as applicable to Itaú Unibanco Holding on December 31, 2020. The figures presented below refer to the percentage of our risk-weighted assets:
Basel III Requirements
Common Equity Tier I
Additional Capital Buffers (ACP)
Common Equity Tier I + ACP
Total Capital + ACP
Prudential adjustments deductions
For purposes of calculating the Conservation capital buffer, BACEN Resolution 4,783 establishes, for defined periods, percentages to be applied to the RWA value with a gradual increase until April/22, when it reaches 2.5%.
The countercyclical capital buffer is fixed by the Financial Stability Committee (Comef) based on discussions about the pace of credit expansion, and currently is set zero (BECAN Communication No. 36,830/21). Should the requirement increase, the new percentage takes effect twelve months after the announcement.
Limit to be observed
Liquidity Coverage Ratio (LCR)
Mininum requirement valid from 1 January, 2019 onwards.
Since October 1, 2015, banks are required to prepare public disclosures of their leverage ratios (Razão de Alavancagem, or RA) on a quarterly basis. In November 2017, the CMN established the minimum limit for the Net Stable Funding Ratio (Índice de Liquidez de Longo Prazo, or NSFR) and the Leverage Ratio (Razão de Alavancagem, or RA) to be observed by certain Brazilian Financial institutions, including those classified as Segment 1 pursuant to CMN regulation (such as us please refer to item Segmentation for the proportional application of the prudential regulation for more information), and the terms for compliance with such requirements.
The NSFR corresponds to the ratio between the Available Stable Funds (Recursos Estáveis Disponíveis, or ASF) and the Required Stable Funds (Recursos Estáveis Requeridos, or RSF) of the financial institution. This new rule for NSFR, which came into effect on October 1, 2018, determines that the minimum limit for the NSFR for Segment 1 financial institutions is 100%. The RA, which calculation methodology was established by the Central Bank in 2015, consists of the ratio between the sum of the Common Equity Tier 1 Capital and the Additional Tier 1 Capital and the total exposure of the financial institution ascertained as established by the applicable regulation. The RA rule enacted in November 2017 came into effect on January 1, 2018 and determined the threshold of 3% as the minimum requirement for the RA for Segment 1 financial institutions (which is our case).
CMN regulation also defines the entities that compose the consolidated enterprise level (conglomerado prudencial) of Brazilian financial institutions and establishes the requirement that a financial institution prepare and file with the Central Bank monthly consolidated financial statements at the consolidated enterprise level (conglomerado prudencial) pursuant to the parameters defined therein. Such financial statements should also be audited by external auditors on a semi-annual basis. Since January 1, 2015, minimum capital and ratio requirements apply at the consolidated enterprise level (conglomerado prudencial).
Brazilian financial institutions are also required to implement a capital management structure compatible with the nature of their transactions, the complexity of the products and services it offers, as well as with the extent of its exposure to risks. In February 2017, the CMN enacted a rule that unified and expanded Brazilian regulation on risk and capital management. Such regulation provides that risk management must be conducted through an integrated effort by the relevant entity and sets out different structures for risk and capital management, which are applicable for different risk profiles.
According to such regulation, capital management is defined as a process that includes: (i) monitoring and controlling the financial institutions capital; (ii) assessing capital needs in light of the risks to which the financial institution is subject; and (iii) setting goals and conducting capital planning in order to meet capital needs due to changes in market conditions. Financial institutions should publish a report describing the structure of their capital management at least on an annual basis. Disclosure and reporting of risk management matters, risk-weighted asset calculation, and adequate compliance with regulatory capital requirements are regulated by the Central Bank and reflect the so-called Pillar 3 of regulatory capital recommended under Basel III, aimed at improving governance and disclosure.
Pillar 3 Report
Since January 1, 2020, the Central Bank requires certain financial institutions to furnish a Pillar 3 Report. We are required to publish this report on a consolidated basis covering the following topics:
prudential indicators and risk management;
comparison between accounting and prudential information;
leverage ratio (RA);
counterparty credit risk (CCR);
risk of interest rate fluctuation in instruments classified in the banking book (IRRBB); and
remuneration of administrators.
The Pillar 3 Report must be furnished on a quarterly, biannual or annual basis, according to the type of information being disclosed.
In addition to the rules issued in accordance with the criteria set forth in Basel III, in July, 2013, Law No. 12,838 was enacted, allowing the determination of deemed credit based on deferred tax assets arising from temporary differences resulting from allowances for loan losses, which, in practice, exempts financial institutions from deducting this type of credit from its core capital. The law also changes the rules for the issue of subordinated debt, requiring the inclusion of clauses for
the suspension of the stipulated compensation and the extinction of the credit right or its conversion into shares, and conditions stockholders remuneration to compliance with the prudential requirements established by the CMN.
Global Systemically Important Financial Institutions (G-SIFI) Assessment in Brazil
The Central Bank has adopted the same indicators set out by the Basel Committee to determine if Brazilian financial institutions qualify as G-SIFIs. Please see Basel III Framework, for further details. This assessment is required of banks with total exposure the denominator for the leverage ratio in excess of EUR 200 billion, individually. However, no additional loss absorbency requirements for Brazilian G-SIFIs have been established. We were not included on the latest list of G-SIFIs issued on November 11, 2020, by the Financial Stability Board. The next update is expected in November 2021.
Recovery Plans for Systematically Important Financial Institutions
On June 30, 2016, the CMN issued a rule providing stricter guidelines for recovery plans (Planos de Recuperação) for Brazils systemically important financial institutions. The rule which incorporated recommendations from the Financial Stability Board, requires financial institutions to prepare recovery plans that aim to re-establish adequate levels of capital and liquidity and to preserve the viability of such institutions under stress scenarios.
The guidelines require, among other things, that subject financial institutions must identify their critical functions for the National Financial System (Sistema Financeiro Nacional) and their core business lines, monitor indicators and their critical levels, adopt stress-testing scenarios, predict recovery strategies, assess possible risks and barriers related to the strategies and define clear and transparent governance procedures, as well as effective communication plans with key stakeholders. The rule provides for the submission of such recovery plans by December 31st, annually.
Segmentation for the Proportional Application of the Prudential Regulation
On January 30, 2017, the CMN issued a resolution establishing segmentation for financial institutions, financial institution groups and other institutions authorized to operate by the Central Bank for proportional application of the prudential regulation, considering the size, international activity and risk profile of members of each segment. According to such resolution, out of the five possible segments, we are classified as Segment 1, which is composed of universal banks, commercial banks, investment banks, foreign exchange banks and federal saving banks that (a) have a size equivalent or superior to 10% of the Brazilian GDP; or that (b) perform relevant international activities, independently from the magnitude of the institution.
Brazilian Covered Bond (Letra Imobiliária Garantida LIG)
Law No. 13,097/2015 created the Brazilian covered bond (Letra Imobiliária Garantida, or LIG), a debt instrument for funding Brazilian financial institutions that follows the covered bonds structure. Since the laws adoption, both the CMN and the Central Bank have regulated its provisions and established procedures relating to the issuance of Brazilian covered bonds.
Since then, Itaú Unibanco completed two bullet issuances of Brazilian covered bonds, the first on December 14, 2018 in the total amount of R$1.224 billion and the second on April 24, 2019, in the total amount of R$350 million.
On July 24, 2019, Itaú Unibanco established its first Brazilian covered bond program. The first issuance under the covered bond program took place on July 29, 2019, in the total amount of R$1 million. As of December 31, 2020, the accrued value of the outstanding Brazilian covered bonds issued by Itaú Unibanco, which includes the bullet issuances as well as the issuances under the program (as reflected in our financial statements), amounted to R$11,029 million.
Foreign Currency Transactions and Exposure
Transactions involving the sale and purchase of foreign currency in Brazil may only be conducted by institutions authorized to do so by the Central Bank. There are no limits for long or short positions in foreign currency for banks authorized to carry out transactions on the foreign exchange market. Currently there is no compulsory deposit requirement rate on the foreign currency short position held by financial institutions.
In accordance with CMN regulation, financial institutions in Brazil may raise funds abroad, either through direct loans or through the issuance of debt securities. Funds raised accordingly may be freely invested in Brazil, including but not limited to on-lending to Brazilian companies and financial institutions. Brazilian banks authorized to operate in foreign currency markets which hold regulatory capital higher than R$5 billion may also use these funds to grant loans abroad to Brazilian companies, their offshore subsidiaries and to foreign companies controlled by Brazilians or to acquire securities issued or guaranteed by such companies in the primary market. Cross-border loans, in which one party is in Brazil and the other party is abroad, require previous registration with the Central Bank, which may establish limits on the conditions of such foreign currency loan transactions. Please see Item 10E. Taxation for further details about tax on foreign exchange transactions.
Financial institutions may also grant loans in or indexed to a foreign currency to their clients trade-related activities, such as by granting advances on foreign exchange contracts (Adiantamento sobre Contrato de Câmbio), advances on delivered export register (Adiantamento sobre Cambiais Entregues) or export or import prepayment agreements (Pré-Pagamento de Exportação e Financiamento à Importação), all in accordance with Brazilian regulations on foreign exchange markets and international capital flows.
The Central Bank and the Brazilian government frequently change rules and regulations applicable to foreign currency borrowing and loans in accordance with the economic scenario and Brazilian monetary policy.
In addition, the legislation sets forth that the total exposure in gold and other assets and liabilities indexed or linked to the foreign exchange rate variation undertaken by financial institutions (including their offshore branches), and their direct and indirect subsidiaries, on a consolidated basis, may not exceed 30.0% of their regulatory capital.
New Foreign Exchange Bill Approved by the Brazilian House of Representatives
By initiative of the Central Bank, the President of Brazil has presented to the Congress a draft bill to reformulate the Brazilian foreign exchange market (New Foreign Exchange Bill). The draft also includes provisions regarding the Brazilian capital held abroad and foreign capital held in Brazil. The initiative intends to modernize, simplify and increase legal certainty associated with the current regulatory framework for Brazilian foreign exchange legislation.
The main aspects of the New Foreign Exchange Bill are: (i) the confirmation, at the legal level, that foreign exchange transactions may be carried out freely (provided that through entities authorized to operate in this market and subject to applicable rules); (ii) the granting of broad powers to the CMN and the Central Bank to regulate the foreign exchange market and its operations; (iii) the expansion of the international correspondence activity of Brazilian banks; (iv) the possibility of Brazilian banking institutions to invest and lend abroad funds raised in Brazil or abroad; (v) the exclusion of foreign currency purchase and sale operations of up to US$1,000 carried out between individuals on an occasional and non-professional basis, from its scope; and (vi) the granting of powers to the monetary authorities to establish situations in which the prohibition of private offsetting of credits between residents and nonresidents, as well as the payment in foreign currency in Brazil, would not apply.
On December 22, 2020, the Brazilian House of Representatives approved the draft of the New Foreign Exchange Bill. The House voted on many motions by representatives for amendment or redaction of specific sections of the New Foreign Exchange Bill on February 10, 2021 with no material alterations to the proposal. Considering the approval by the Brazilian House of Representatives, the bill will be sent to the Brazilian Senate for approval. As of this date, it is not possible to estimate if and when it will be approved by the Brazilian Senate, or which changes (if any) will be approved by the Senate.
Central Bank Launches Public Consultation to Improve Foreign Exchange Regulations
The Central Bank launched Public Consultation No. 079/2020, which contains a proposal to improve foreign exchange regulations in the context of technological innovations and new business models related to international payments and transfers.
The improvements considered recent developments related to international payments and transfers, advancing competition, financial inclusion and innovation in the sector within the possibilities allowed by the current legal framework. According to the Central Bank, the structural innovations in the Brazilian foreign exchange market can only be implemented after updating the legal framework of the foreign exchange market through the approval of the New Foreign Exchange Bill.
The proposal seeks to expand competition in the segment of remittances, provide better services and facilitate the execution of these transactions. It also aims to significantly improve the domestic payments market and foster the use by the public of payment accounts by bringing such alternatives to the foreign exchange market.
In this sense, the proposal includes the following measures: (i) allowing payment institutions authorized to operate by the Central Bank to require authorization to operate in the foreign exchange market for the intermediation of certain operations and limited to USD100 thousand per transaction; and (ii) regulating the use of prepaid payment accounts held by Brazilians residing, domiciled or headquartered abroad, to be maintained at an institution authorized to operate in the foreign exchange market.
The proposal also consolidates and modernizes the regulation of international payment or transfer services in the foreign exchange market, providing uniform treatment for the acquisition of goods and services carried out with the participation of issuers of payment instruments for international use, international payment facilitators and intermediaries and representatives in international purchases. The provider of such services would now be referred to in the exchange regulations by the term eFX.
Large Exposure Limits
We are legally prevented from granting loans or advances, and guarantees, including derivative transactions, underwriting or holding in our investment portfolio securities of any clients or group of affiliated clients that, in the aggregate, exceeds the threshold determined by the Central Bank. On July 31, 2018 the CMN released a resolution in order to comply with the Basel III reforms, introducing a new basis for calculating the exposure limits applicable to financial institutions classified as Segment 1 to their Tier 1 Regulatory Capital and increasing the scope of transactions that increase exposure to clients subject to the limit, including exposure from securities and derivatives held in our investment portfolio. The maximum exposure to any individual counterparty or group of connected counterparties of a Segment 1 financial institution is 25% of its Tier 1 Regulatory Capital, and to concentrated individual clients or group of connected clients of such Segment 1 financial institution is 600% of its Tier 1 Regulatory Capital (a concentrated individual client means, for the purpose of the rule, any one client to which exposure is equal to or higher than 10% of its Tier 1 Regulatory Capital).
Under this exposure limits, the following entities are considered to be different clients: (i) the Brazilian government, including the Central Bank; (ii) an entity which 50% or more of its voting capital is held directly by the Brazilian Government, jointly with its controlled entities; (iii) a State of the Federative Republic of Brazil or the Federal District, jointly with its controlled entities and with entities which are financially dependent on a State, the Federal District or their controlled entities; (iv) each Brazilian municipal district, jointly with its controlled entities and with entities which are financially dependent on a municipality or its controlled entities; (v) each central government of a foreign jurisdiction; (vi) each central bank of a foreign jurisdiction, if this entity is not included in the central government; (vii) each entity which 50% or more of its voting capital is held directly by a central government of a foreign jurisdiction, jointly with its controlled entities and with entities that are financially dependent on it; (viii) a governmental body of a foreign jurisdiction, jointly with its controlled entities and with entities that are financially dependent on it or its controlled entities; and (ix) any other entity, public or private, which share the credit risk calculated by the financial institution according to CMN regulations.
The rule provides that, for certain financial institutions (including those classified as Segment 1, which is our segment), individual exposures to the Brazilian Federal Union (including the Brazilian Central Bank) as well as to central governments or to central banks of foreign jurisdictions are not subject to the observance of the large exposure limits.
Banks must identify possible related counterparties, considering its economic interdependence in all cases where the sum of all exposures to one specific counterparty exceeds 5% of the eligible capital base. Two or more counterparties have an economic interdependence relationship whenever one experiences financial difficulties and the other, as a result, would also be likely to encounter financial difficulties, including those related to funding, payment of obligations and insolvency.
Counterparties identified as economically interdependent must be treated as a single counterparty that is subject to the aforementioned requirements.
Risk Weighted Asset Calculation
The calculation of risk exposure is based on several factors set forth by the Central Bank regulations and impacts the capital requirements. The components take into consideration the type of risk and include the parameters and procedures for calculation of the risk weighted asset, or RWA, to determine the capital requirements resulting from each risk exposure. The Central Bank has been frequently changing and updating the rules and regulations for the RWA calculation.
Financial Bills (Letras Financeiras)
According to Law No. 12,249 of June11, 2010, as amended, Brazilian financial institutions can issue financial bills (letras financeiras), a debt funding instrument for financial institution aimed at larger volumes and longer terms. The regulatory framework for financial bills permits financial institutions to issue such instruments with subordination clauses as Basel III-compliant. As per the CMN Resolutions Nos. 4,733 of 2019 and 4,192 of 2013, the main characteristics of Basel III-compliant financial bills are:
The possibility of issuance of financial bills convertible into equity. The conversion may not be requested by the investor or the issuer financial institution;
The suspension of interest payments in case of non-compliance with capital requirements. Additionally, in order to preserve the regular functioning of the Brazilian financial system, the Central Bank may determine that financial bills be converted into equity or be written-off. These determinations will not be considered as a default by financial institutions and will not accelerate the maturity of its other debts;
The possibility of issuance of perpetual financial bills, which will only mature in case of default on interest payments or at the time of the dissolution of the financial institution; and
The possibility of a broad authorization for the use of funds raised by the issuance of financial bills in the composition of the issuers Regulatory Capital (such authorization is pending Central Banks regulation).
In addition, CMN Resolution 4,733 of 2019 establishes important provisions for the issuance of financial bills such as:
Certain due diligence obligations to be observed by the issuer or any intermediary institutions involved in the distribution, placement and trading of the financial bills, in order to ensure the provision of information regarding the investment and its suitability to the investors profile; and
The flexibilization of the rates that can be used for the remuneration of financial bills, allowing the use of floating rates regardless of a combination with a fixed rate or any other rate (fixed or floating) that is publicly known and regularly calculated.
On September 24, 2019, the Central Bank issued Circular 3,963, a rule systematizing the requirements for the registration of financial bills in authorized central depositary entities, which were previously dispersed in different documents. The new rule establishes in its annexes the content of the subordination clauses that must be included in financial bills issued to compose the issuers Regulatory Capital.
Establishment of a Succession Policy
Financial institutions and other institutions authorized to operate by the Central Bank are required to maintain a succession policy for its management, which shall cover recruiting, promotion, election and retention processes, based on rules that regulate the identification, evaluation and training of senior management positions.
Our Board of Directors approved our Managers Succession Policy in accordance with CMNs resolution. Our succession policy aims to consolidate the internal procedures and practices of the Itaú Unibanco Group regarding the succession of our management team.
Code of Corporate Governance
The Brazilian Corporate Governance Code for publicly-held companies (Código Brasileiro de Governança Corporativa Companhias Abertas) sets forth corporate governance-related principles, guidelines and actions applicable to publicly-held companies and determines that companies adopt the apply or explain model in respect of its principles, guidelines and actions. Pursuant to this code, companies must furnish to CVM a report regarding their adherence to the Brazilian Corporate Governance Code within seven months of the closing date of the fiscal year. The implementation of the Corporate Governance Code was integrated in the local regulatory framework by means of the CVM Ruling No. 586/17.
In addition, the CMN has included the principles and criteria of corporate governance of financial institutions established by the Basel Committee into the Brazilian regulatory framework, through the Core Principles for Effective Banking Supervision.
CMN rules establish the terms for the remittance of information on the management of financial institutions to the Central Bank, controlling group and relevant shareholders, including the obligation to communicate to the regulator any information that may affect the reputation of any person classified in one of such categories. For this purpose, financial institutions must provide a communication channel which allows employees, contributors, clients, users, associates, or services providers to anonymously report situations indicating illegal acts of any nature related to the institution. The financial institutions must also determine the internal body responsible for receiving the information and complying with the reporting obligations.
The Brazilian anti-corruption law establishes that legal entities will have strict liability (regardless of fault or willful misconduct) if they are involved in any form of bribery. The law also encompasses other injurious acts contrary to the Brazilian or foreign public administration, including bid rigging and obstruction of justice. The law provides for heavy penalties, both through administrative and judicial proceedings including determination of dissolution of a company, prohibition against undertaking to finance with public entities and prohibition against participating in public biddings.
In addition, the law authorizes the public administrative authorities responsible for the investigation to enter into leniency agreements. The self-disclosure of violations and cooperation by legal entities may result in the reduction of fines and other sanctions.
The regulation also provides parameters for the application of the anti-corruption law, including with respect to penalties and compliance programs. Please refer:
Our Anti-corruption Corporate Policy is available on our Investor Relations website.
Our Corporate Conduct, Integrity and Ethics Policy is available on our Investor Relations website, from which you can electronically access further details about our Integrity and Ethics Program and guidelines for situations of conflicts of interests.
We also have a webpage dedicated to Integrity and Ethics in our Investor Relations website, from which you can access further details about our Integrity and Ethics Program.
Compensation of Directors and Officers of Financial Institutions
According to rules set forth by the CMN, Brazilian financial institutions are required to have a compensation policy. If variable compensation is to be paid to management, at least 50% of the total compensation should be paid in shares or share-based instruments and at least 40% of the total compensation should be deferred for future payment for at least three years. If the institution records a significant decrease in the realized recurring profit or a negative result during the deferral period, the deferred and unpaid portions of the compensation should be reversed proportionally to the decrease in result, in order to minimize the loss incurred by the financial institutions and their stockholders.
Our compensation policy, applicable to directors and officers in Brazil (constituting the major part of the management population of the Itaú Unibanco Group), complies with CMNs regulatory requirements. Our compensation
principles and practices worldwide comply with each local regulation and seek to increase alignment between the interests of our stockholders and our management.
For further information, see Item 6BCompensation.
The Brazilian Antitrust Law requires that transactions resulting in economic concentration should be submitted to CADE, the Brazilian antitrust authority, for prior approval in the event these transactions meet the following criteria: (i) the economic group of any of the parties to a transaction recorded, in the fiscal year prior to that of the transaction, minimum gross revenues of R$750 million; and (ii) at least one of the other economic groups involved in the transaction recorded, for the same time period, minimum gross revenues of R$75 million.
The closing of a transaction prior to CADEs approval subjects the parties to fines ranging from R$60,000 to R$60 million, the nullity of the relevant agreement, and potential administrative proceedings.
In addition to submitting such transactions to CADEs approval, financial institutions are required by Circular No. 3,590/2012 of the Central Bank (updated by Circular No. 3,800/2016) to submit to the Central Banks antitrust approval any concentration acts involving two or more financial institutions authorized to operate by the Central Bank in the following cases: (i) acquisition of corporate control, (ii) a merger, (iii) transfer of the business to another financial institution, and (iv) contracts or legal entities, aimed at cooperation in the financial sector; (v) acquisition of a minority stake of at least 5% of the voting shares of a financial institution.
It is worth mentioning that legislations in force in other jurisdictions may require that concentration acts be submitted to the relevant antitrust authority.
The Brazilian antitrust law provides for penalties in the event of violations of the economic order. Accordingly, an undertaking in a dominant position (as the law assumes of one holding over 20% interest) in a certain market in which it operates, which, irrespective thereof, carries out an illegal interaction with competitors, including through professional associations, may be subject to an administrative fine of 0.1% to 20% of the gross revenues of the group operating in the industry affected by such violation and to the divestiture of assets, among other penalties. Additionally, the antitrust legislation of other jurisdictions, such as the U.S. (Sherman Act and Clayton Antitrust Act) and the European (Articles 101 and 102 of the Treaty on the Functioning of the European Union), may also be applicable to companies whenever these carry out alleged anticompetitive practices with effects in the aforementioned jurisdictions.
Our Antitrust Corporate Policy is available on our Investors Relations website.
Treatment of Past Due Debts
Brazilian financial institutions are required to classify their credit transactions (including leasing transactions and other transactions characterized as credit advances) at different levels and recognize provisions according to the level attributed to each such transaction. The classification is based on the financial condition of the clients the terms and conditions of the transaction and the period of time during which the transaction is past due, if any. For purposes of Central Bank requirements, transactions are classified as level AA, A, B, C, D, E, F, G or H, with AA being the highest classification. Credit classifications must be reviewed on a monthly basis and, apart from additional provisions required by the Central Bank which are deemed necessary by the management of financial institutions, each level has a specific allowance percentage that is applied to it and which we use to calculate our allowance for loan losses, as specified in more detail in the table below:
Past due (in days)
|||||15 to 30||31 to 60||61 to 90||91 to 120||121 to 150||151 to 180||Over 180|
Our credit classification also takes into account the clients credit profile, which may negatively impact the past due classification.
Under IFRS, as issued by the IASB, the allowance for loan losses is based on our internally developed incurred loss models, which calculate the allowance for loan losses by multiplying the probability of default by the clients or counterparty, or PD, by the potential for recovery on defaulted credits (LGD) for each transaction, as described in Note 2.4(d) I Classification and Measurement of Financial Assets and Note 32 Risk and Capital Management, our audited consolidated financial statements. The risk levels are categorized as:
Lower risk: PD lower or equal than 4.44%
Satisfactory: PD from 4.44% up to 25.95%
Higher risk: PD higher than 25.95%
Credit-Impaired: loans classified in Stage 3
The insolvency of financial institutions is handled pursuant to applicable laws and regulations by the Central Bank, which initiates and monitors all applicable administrative proceedings. There are three types of special regimes that may be imposed to either privately-held financial institutions or state-owned (other than federal government-owned) financial institutions or similar institutions:
|(i) Temporary special administration regime or RAET:||a less severe special regime with limited duration which allows financial institutions to continue to operate the whole management loses its offices and is replaced by a steering committee appointed by the Central Bank with broad management powers, which will adopt of measures aimed at the resumption of the financial institutions regular activities. If resumption is not possible, this regime may be turned into an extrajudicial liquidation.|
|(ii) Intervention:||a time-limited regime in which the Central Bank appoints an intervenor that takes charge of the financial institutions management, suspending its regular activities and dismissing the financial institutions management, with the main purpose of preventing the continuation of certain irregularities and the aggravation of the financial situation of the financial institution, which can put assets at risk and harm the financial institutions creditors it suspends all actions related to payment obligations of the financial institution, prevents the early settlement or maturity of its obligations and freezes pre-existing deposits.|
|(iii) Extrajudicial liquidation:||process of dissolution of the company in cases of unrecoverable insolvency or severe violations of the rules that regulate a financial institutions activities. The extrajudicial liquidation aims at promoting the liquidation of the existing assets for the payment of creditors, with the return of any amounts left to stockholders. Controlling stockholders may be held responsible for remaining liabilities.|
In the course of the special regimes described above, the steering committee, the intervenor, and the liquidator may, when authorized by the Central Bank: (i) dispose of assets and rights of the financial institution to third parties and (ii) proceed with corporate restructuring processes in the financial institution or its subsidiaries, among other possible measures of similar effect.
Financial institutions may also be subject to the bankruptcy regime.
On December 24, 2020, the President of Brazil sanctioned Law 14,112 (Law 14,112), which overhauls the current Brazilian Bankruptcy and Reorganization Law (Law 11,101/05) in several material aspects. Law 14,112 will enter into effect on January 23, 2021. It is possible that certain changes will potentially affect material matters concerning enforcement and priority rankings, such as: (i) the possibility of creditors putting forward an alternative judicial reorganization plan; (ii) new rules on the approval of post-petition loans in judicial reorganization and on priority claims in case of conversion to bankruptcy liquidation; (iii) more flexible quorum and mechanics of the extrajudicial reorganization process; (iv) new rules to expedite the bankruptcy liquidation process; (v) new methods for restructuring of the debtors tax liabilities and installment payments, as well as new taxation schemes; and (vi) incorporation of rules on cross-border insolvency proceedings into the Brazilian framework.
Law 14,112 replicates, with some adjustments, the provisions of the UNCITRAL Model Law on Cross-Border Insolvency. As a result, Law 14,112 sets out some rules on access of foreign representatives to courts in Brazil, the method and requirements for recognition of foreign main and ancillary proceedings, authorization for the debtor and his representatives to act in other countries, methods of communication and cooperation between foreign authorities and representatives and the Brazilian jurisdiction, and the processing of concurrent proceedings.
Law 14,112 also sets forth, among other measures, (i) a protection for creditors that agree on the conversion of debt into equity against potential transfer of liability with regard to the debtors obligations; (ii) the stay period and constraints on the assets of the debtor under judicial reorganization; (iii) conciliation and mediation measures before and during judicial reorganization proceedings; and (iv) the rules on procedural and substantive consolidation. Law 14,112 also sets out that a bankruptcy decree does not reach beyond the bankrupt itself, save when the disregard doctrine is to apply.
In the event of intervention, extrajudicial liquidation or liquidation of a financial institution in a bankruptcy proceeding, the Credit Insurance Fund, or FGC, a deposit insurance system, guarantees the maximum amount of R$250,000 for certain deposits and credit instruments held by an individual, a company or another legal entity with a financial institution (or financial institutions of the same economic group). Such deposits and credit instruments contracted as of December 22, 2017, are subject to an additional limit: the total coverage of the referred guarantee is R$1,000,000 per investor regardless of the number of accounts held in different financial groups and such limit is valid for a period of four years. The resources of the FGC come primarily from mandatory contributions from all Brazilian financial institutions that receive deposits from clients, currently at a monthly rate of 0.01% of the amount of the balances of accounts corresponding to the financial instruments that are the subject matter of the ordinary guarantee, even if the related credits are not fully covered by FGC, and certain special contributions. Deposits and funds raised abroad are not guaranteed by the FGC. Credits of financial institutions and other institutions authorized to operate by the Central Bank, complementary welfare entities, insurance companies, capitalization companies, investment clubs and investment funds, as well as those representing any interest in or financial instrument held by such entities, are not protected by the ordinary guarantee of FGC.
Payment of Creditors in Liquidation
In the event of extrajudicial liquidation of a financial institution or liquidation of a financial institution in a bankruptcy proceeding, the salaries of employees and the related labor claims up to a certain amount, secured credits and tax charges have priority in any claims against the entity in liquidation. The payment of unsecured credits, including deposits from regular retail clients that are not guaranteed by the FGC, is subject to the prior payment of preferred credits. Additionally, upon the payment of the deposits guaranteed by the FGC, the FGC becomes an unsecured creditor of the estate in liquidation.
With governmental approval, insurance companies in Brazil may offer all types of insurance (except for workers compensation insurance) directly to clients or through qualified brokers.
Insurance companies must set aside reserves to be invested in specific types of securities. As a result, insurance companies are among the main investors in the Brazilian securities market and subject to CMN regulations regarding the investment of technical reserves.
In the event an insurance company is declared bankrupt, the insurance company will be subject to a special procedure administered by SUSEP or by ANS. If an insurance company is declared bankrupt and (i) its assets are not sufficient to guarantee at least half of the unsecured credits or (ii) procedures relating to acts that may be considered bankruptcy-related crimes are in place, the insurance company will be subject to ordinary bankruptcy procedures.
There is currently no restriction on foreign investments in insurance companies in Brazil.
Brazilian legislation establishes that insurance companies must buy reinsurance to the extent their liabilities exceed their technical limits under the rules of the regulatory bodies (CNSP and SUSEP), and reinsurance contracts may be entered into through a direct negotiation between the insurance and reinsurance companies or through a reinsurance broker authorized to operate in Brazil.
Anti-Money Laundering Regulation
The Brazilian anti-money laundering law (Law No. 9,613, as amended) establishes the basic framework to prevent and punish money laundering as a crime. It prohibits the concealment or dissimulation of origin, location, availability, handling or ownership of assets, rights or financial resources directly or indirectly originated from crimes, subjecting the agents of these illegal practices to imprisonment, temporary disqualification from managing enterprises for up to ten years and monetary fines.
The Brazilian anti-money laundering law also created the Council for Financial Activities Control (COAF), which is subordinated to the Central Bank and performs a key role in the Brazilian system of preventing and combating money laundering, financing of terrorism and the proliferation of weapons of mass destruction.
In compliance with the Brazilian anti-money laundering law and related regulations enacted by the Central Bank, including the rules applicable to procedures that must be adopted by financial institutions to prevent and combat money laundering and terrorism financing, as well as in response to the recommendation of Financial Action Task Force (FATF) and United Nations Security Council (UNSC), financial institutions in Brazil must establish internal control and procedures aiming at:
identifying and knowing their clients, which includes determining if they are PEPs, and also identifying Ultimate Beneficial Owners (UBOs). These records should be kept up-to-date;
checking the origin of funds of a client, as well as the compatibility between the movement of its funds and its economic and financial capacity;
carrying out a prior analysis of new products and services, including the use of new technologies, if applicable, under the perspective of money laundering prevention;
keeping records of all transactions carried out or financial services provided on behalf of a certain client or for that client;
reporting to COAF, within one business day, any transaction deemed to be suspicious by the financial institution, as well as all transactions in cash equivalent to or higher than R$50,000, without informing the involved person or any third party;
applying special attention to (i) unusual transactions or proposed transactions with no apparent economic or legal bases; (ii) transactions involving PEPs, (iii) indication of evading client identification and transaction registering procedures; (iv) clients and transactions for which the UBO cannot be identified; (v) transactions originated from or destined to countries that do not fully comply with the recommendations of the FATF; and (vi) situations in which it is not possible to keep the clients identification records duly updated;
determining criteria for hiring personnel and offering anti-money laundering training for employees;
establishing procedures to be complied with by all branches and subsidiaries of Brazilian financial institutions located abroad with respect to anti-money laundering;
establishing that any institutions authorized to operate in the Brazilian foreign exchange market with financial institutions located abroad, must verify whether the foreign financial institution is physically located in the jurisdiction where it was incorporated and licensed, and that it is subject to effective supervision;
monitoring transactions and situations which could be considered suspicious for anti-money laundering purposes;
reporting to COAF the occurrence of suspicious transactions, as required under applicable regulations, and also, at least once a year, whether or not suspicious transactions are verified, in order to certify the non-occurrence of transactions subject to reporting to COAF (negative report);
requiring clients to inform the financial institution, at least three business days in advance, of their intention to withdraw amounts equal to or exceeding R$50,000;
maintaining specific records of all operations carried out, products and services contracted by financial institutions, including deposit, contribution, withdrawal, payments, receipts and transfers of funds;
ensuring that policies, procedures and internal controls are commensurate with its size and volume of transactions; and
unavailability, without delay, of goods, values and rights of possession or ownership and all other rights, real or personal, owned, directly or indirectly, of natural or legal persons subject to sanctions by the resolutions of the UNSC.
Non-compliance with any of the obligations above subjects the financial institution and its officers to penalties ranging from: (i) formal notice, (ii) fines (from 1.0% to 200.0% of the amount of the transaction, 200.0% of the profit generated thereby, or a fine of up to R$20,000,000), (iii) rendering executive officers ineligible for holding any management position in financial institutions, to (iv) the cancellation of the financial institutions license to operate.
Central Bank Circular No. 3,978 of 2020, which came into force on October 1, 2020, also requires that financial institutions maintain Anti-Money Laundering Program (in compliance with regulatory standards) and conduct periodic Internal Risk Assessments.
Politically Exposed Persons (PEPs)
According to the Central Bank, PEPs are public agents who hold or have held a relevant public position, as well as their representatives, family members or other close associates, over the past five years, in Brazil or other countries, territories and foreign jurisdictions. It also includes their legal entities. Financial institutions must develop and implement internal procedures to identify PEPs and obtain higher level of approval than the person responsible for contracting, according to Risk-Based Approach, prior to establishing any relationship with those individuals. They should also adopt reinforced and continuous surveillance actions regarding transactions with PEPs and report all suspicious transactions to COAF.
Although leasing transactions are not classified as credit transactions under Brazilian legislation, the Central Bank regulates and oversees leasing transactions. The parties involved in a leasing transaction are the lessor (the bank) and lessee (our client). The leased asset, owned by the lessor, is delivered to be used by the lessee until the end of the contract, when the lessee may opt to either acquire it or return it to the lessor or renew the contract for a new period.
Brazilian legislation establishes a specific methodology to account for the profits or losses in leasing transactions and all information that should be included in a lease agreement. The guaranteed residual amount paid by a lessee should correspond to a minimum return required for the transaction to be viable for the lessor, whether the purchase option is exercised or not. The laws and regulations applicable to financial institutions, such as those related to reporting requirements, capital adequacy and leverage, assets composition limits and allowance for losses, are also generally applicable to leasing companies.
We may engage other entities to provide certain services to our clients, including customer service. These entities are generally called correspondents, and our relationship with correspondents is regulated by the Central Bank. Among other requirements, the Central Bank establishes that employees of all correspondent agents must hold a technical certification authorizing them to serve customers involved in credit and leasing operations.
Regulation of the Brazilian Securities Market
According to the Brazilian Corporate Law, a company is considered publicly-traded or closely-held depending on whether the securities issued by it are accepted for trading in the securities market or not. All publicly-held companies, such as our company, are registered with the CVM, are subject to specific regulations and are also subject to information disclosure and reporting requirements.
Under CVM rules, publicly-traded companies are subject to disclosure requirements and rules governing the use of material information. Any decision that may reasonably influence the price of the securities issued by a publicly-held company or the decision of investors to buy, sell, or hold these securities, is considered material.
The CVM improved the quality of the information that must be presented in periodic filings by securities issuers by requiring such issuers to file a Reference Form with the CVM. This form was modeled after IOSCOs shelf registration system in gathering all of the issuers information in a single document.
Since 2018, the publicly-held companies, like us, have to present a form about a Brazilian Corporate Governance Code in the apply or explain format.
Asset Management Regulation
The Brazilian asset management regulation requires a previous registration with the CVM to perform the services of portfolio management and fund administration.
Itaú Unibanco Group provides several services in the capital markets and, in particular, performs activities related to fund administration and portfolio management under CVM registration and in accordance with CVM regulation.
By providing these services, our entities engaged in the asset management business can be held civilly and administratively liable in certain circumstances for losses arising from either intentional acts or negligence in conducting their activities.
The CVM has regulatory powers to oversee these activities, including powers to impose fines and other sanctions on registered asset managers.
Investments of Foreign Investors
Individuals or legal entities domiciled outside Brazil may invest in companies or other assets in Brazilian financial and capital markets, subject to the restrictions and requirements set forth in the local regulation. All foreign investments in Brazil shall be registered with the Central Bank and/or CVM, depending on the type of the investment.
The foreign direct investment (RDE-IED) enables the non-resident investors to hold stock of companies in Brazil, whereas the portfolio investment (RDE Portfolio) entitles the investment in almost all financial assets and transactions available in the Brazilian financial and capital markets, being subject to some restrictions set forth in Brazilian regulation.
In order to invest in the Brazilian financial and capital markets, investors non-resident in Brazil must engage a financial institution authorized to act as legal representative and, unless the investor is a natural person, a custodian of their investments in Brazil. Such investments are regulated by Resolution CMN 4,373/14 and Resolution CVM 13/20. The transactions performed by foreign investors must be carried out in the markets organized by entities authorized by CVM (such as B3, for example) and securities must be held in custody with depositary and registration systems authorized by CVM and/or Central Bank (such as SELIC and CETIP). The rules establish certain exceptions which allow transactions outside of the organized markets such as subscription of securities in initial public offerings, tender offerings of securities and payment of dividends in kind.
Brazilian rules also allow the issuance abroad of depositary receipts based on (i) any security issued by Brazilian publicly owned companies, (ii) credit instruments issued by financial institutions and other types of publicly owned institutions authorized by the Central Bank of Brazil, and eligible to be included in the financial institutions regulatory capital (Patrimônio de Referência), and (iii) Letras Imobiliárias Garantidas, which are a type of real estate note issued in the Brazilian market.
On October 26, 2020, the CMN and the Central Bank of Brazil (BCB) published CMN Resolution No. 4,865/2020 and BCB Resolution No. 29/2020, both regarding Controlled Testing Environment for Financial Innovations (Sandbox), which is intended to allow businesses, including institutions that are not yet authorized to operate by the Central Bank, to test innovative projects related to matters under the supervision of the CMN or the Central Bank with real consumers. CMN Resolution 4,865/2020 and BCB Resolution 29/2020 came into effect on December 1, 2020.
The specific rules of the first cycle such as duration period and number of participants, necessary documentation, criteria for the classification of institutions and the schedule of the registration, selection and authorization processes of such entities were published on December 16, 2020 and is expected to start in the second half of 2021.
The Central Bank approved on December 15, 2020, through BCB Resolution No. 50 of December 16, 2020 (Resolution 50/20), the rules applicable to the first cycle of its Regulatory Sandbox, scheduled to begin in the first semester of 2021.
Resolution 50/20 sets forth that the participants of the first cycle must register between February 22 and March 19, 2021, and 10 to 15 projects will be selected from among those enrolled. The selection and authorization of registered participants will take place between March 22 and June 25, 2021, and may be extended by a maximum of 90 days, depending on the number of registrants.
The topics chosen by the Central Bank as priorities and which will be considered in the selection of projects include:
Solutions for the foreign exchange market;
Development of capital markets through synergy mechanisms with the credit market;
Stimulus of credit to microentrepreneurs and small businesses;
Open Banking Solutions;
Solutions for the rural credit market;
Solutions for increasing competition in National Financial System and Brazilian Payments System;
Financial and payment solutions with potential effects of stimulating financial inclusion; and
Fostering of sustainable finance.
The Brazilian Central Bank announced the initial guidelines for open banking regulation in Brazil through Notice No. 33,455 on April 25, 2019. Open Banking consists in the sharing of data and payment initiation services by financial institutions and other authorized entities, upon customers authorization and via integration of information systems. The Central Bank has looked at open banking as an important tool for innovation in the financial market, making the banking industry more efficient and competitive.
The Brazilian open banking model will comprise financial institutions, payment institutions and other Central Bank-licensed entities by making it possible to share, in a phased-in approach, data on products and services, customer record data and customer transaction data. Open banking will eventually cover the provision of initiation payment services.
On November 28, 2019, the Brazilian Central Bank launched Public Consultation No. 73/2019, which disclosed the draft resolution to implement open banking in Brazil to the public. Among other topics, the draft resolution sets forth in detail
the participating institutions (mandatory and voluntary), the data and services covered, the requirements for sharing, the responsibilities for sharing, the implementation schedule and the convention to be concluded between the participating institutions. The period for commenting the Public Consultation ended on January 31, 2020 and the Brazilian Central Bank received contributions form market agents.
On May, 4, 2020, a regulation was published by the Central Bank and CMN (Joint Resolution No. 1/2020) and enables the sharing of registration and transactional data from individuals or legal entities through a secure, prompt, accurate and convenient manner at the customers discretion, in the case of data and services that identifies the customer. It is an important step in the process of digitizing the financial system, creating an environment conducive to the emergence of new solutions for inclusive, competitive, safe and suitable provision of financial services.
The open banking in Brazil will be implemented gradually, from February 2021 to December 2021, pursuant to the new dates established by the Joint Resolution No. 1/2020 (as amended by Joint Resolution No. 2/2020):
Stage I as of February 2021: public access to information from participating institutions regarding their customer service channels and their products and services related to demand deposit or savings accounts, payment accounts or credit transactions;
Stage II up to July 15, 2021: sharing of customers or their representatives registry information, and the customers transactional data related to products and services listed in Stage I;
Stage III up to August 30, 2021: sharing of services of initiating payment transactions and forwarding loan proposals; and
Stage IV up to December 15, 2021: expansion of the scope of covered data, in order to include foreign exchange operations, investments, insurance, and open pension funds, among other financial products.
Regulation on Payment Agents and Payment Arrangements
A Brazilian law enacted in October 2013 establishes the legal framework for payment arrangements (i.e. the set of rules governing a payment scheme, such as a credit or debit card transaction), and payment agents (i.e., any agent that issues a payment instrument or acquires a merchant for payment acceptance), which became part of the Brazilian Payments System and subject to oversight by the Central Bank. Payment agents, in spite of being regulated by the Central Bank, are not deemed to be financial institutions and are prohibited from engaging in activities that are exclusive of financial institutions.
The CMN and the Central Bank published rules in November 2013 regulating payment arrangements and payment agents. This regulation establishes, among other matters: (i) consumer protection and anti-money laundering compliance and loss prevention rules that should be followed by all entities supervised by the Central Bank when acting as payment agents and payment arrangers; (ii) the procedures for the incorporation, organization, authorization and operation of payment agents, as well for the transfer of control, subject to the Central Banks prior approval; (iii) capital requirements; (iv) definition of arrangements excluded from the Brazilian Payments System; (v) payment accounts, which are divided into prepaid and post-paid accounts; and (vi) a liquidity requirement for prepaid accounts that demands the allocation of their balance to a special account at the Central Bank or to be invested in government bonds, starting at 20% in 2014 and rising gradually up to the totality of the total account balance in 2019.
In October 2015, a regulation was published by the Central Bank regulating limitations on closed payment arrangements, the concept of domicile institution, the obligation of centralized clearing and settlement for the payment arrangements, and transparency of interoperability rules within an arrangement and between arrangements.
On March 26, 2018, the Central Bank enacted Circular No. 3,887 establishing limitations to the interchange fee for debit transactions, which is the remuneration of the issuer paid by the merchant for each transaction. The average fee for the interchange is 0.5% and the maximum fee is 0.8%. These limitations are not applicable to non-face-to-face transactions and to corporate cards.
On November 28, 2018, the Central Bank enacted Circular No. 3,918, which modified Circular No. 3,691, regarding the international use of credit cards. Effective as of March 1, 2020, credit cards issuers offer customers the option to pay credit card invoices in reais, converting the amounts due on the date that such expenses was incurred. This option must be adopted for all credit cards issued, unless the customer waives converting foreign amounts on the day that the expense was incurred and chooses to have all amounts converted on the invoice due date.
On June 27, 2019, the CMN and the Central Bank published Resolution No. 4,734 and Circular No. 3,952, which will come into effect on June 7, 2021, and impose new regulations regarding (i) the discount and prepayment operations of receivables from credit and debit payment instruments issued under the Brazilian Payment System; (ii) credit operations guaranteed by such receivables; and (iii) the constitution of liens and encumbrances on these. With the new regulation, the Central Bank intends to provide greater efficiency and security to the discount, prepayment and credit operations linked to receivables from payment arrangements by merchants, increasing competition and thus reducing the cost of credit.
On October 22, 2020, the Central Bank published the Resolution No 24, which modified Circular No. 3.885, establishing the authorization process for payment institutions classified as a payment initiation service providers. The payment initiation service provider is characterized by being a payment institution that, without managing a payment account or holding at any time any part of the funds transfer, initiate a payment transaction. To operate as a payment initiation service provider is necessary a previously authorization by the Central Bank, institutions that already hold a financial institution authorization or a payment institution authorization have a simplified procedure. The Central Bank Resolution No. 24 also modified the authorization process for payments institutions that operate as prepaid issuers and start their operation after March 2021, requiring a previous authorization by the Central Bank.
On March 25, 2021, the Central Bank published Resolution No. 80 and Resolution No. 81, which repealed Circular No. 3,885 and altered the rules relating to the operation and authorization process for payment institutions. Among the main changes introduced by Resolution No. 80, are: (i) the requirement that payment institutions include the term Instituição de Pagamento in their corporate name; (ii) the requirement that payment institutions be managed by three or more statutory officers; and (iii) that securities broker dealers are no longer required to request prior authorization to offer some payment services. The main changes set forth in Resolution No. 81 include changes to the definition of qualified equity interest held in payment intuitions, as well as an obligation for payment institutions to maintain a business plan available to the Central Bank, which may be requested before or after the granting of the authorization to operate. Resolution No. 80 and Resolution No. 81 will come into effect on May 3, 2021. Similar to Resolution No. 24, Resolution No. 80 requires all payment institutions incorporated after its entry into effect to require previous authorization by the Central Bank to operate.
Central Bank approves regulation of its Instant Payment Arrangement (Pix System)
On August 13, 2020, the Central Bank issued Central Bank Resolution No. 1 (Central Bank Resolution 1/2020), establishing the Pix System payment arrangement and approving its regulation (the Pix Regulation). Central Bank Resolution 1/2020 came into effect on September 1, 2020. Pix System transactions will operate on a restricted basis through November 3, 2020 and will be fully operational after November 16, 2020.
Pursuant to Central Bank Resolution 1/2020, the participation in the Pix System is mandatory for financial institutions and payment agents authorized to operate by the Central Bank that have more than 500,000 active customer accounts, considering cash deposit accounts, savings deposit accounts and prepaid payment accounts. Participation in the PIX System is optional for financial institutions and payment agents that do not meet this threshold, as well as the National Treasury Secretariat.
The Pix Regulation applies to all participants in the Pix System. According to the Pix Regulation, there are three participation types: (i) transactional account provider, which is a financial institution or a payment institution that offers deposit accounts or payment accounts to end users; (ii) government entity, which is the National Treasury Secretariat, with the exclusive purpose of making collections and payments related to its activities; and (iii) special clearing houses, that are the financial institutions and payment agents that (a) within the scope of the Pix System have the exclusive purpose of providing settlement services to other participants, (b) meet the requirements to act as settlement participants in the Central Banks Instant Payments System (SPI), and (c) do not meet the criteria of mandatory participation in the Pix System.
Provision of Financial Services through Electronic Channels
CMN regulation establishes that financial institutions are not required to provide clients access to traditional banking services channels for collection and receipt services based on agreements that demand exclusively electronic channels.
Credit Performance Information
CMN regulates a database known as Credit Information System (Sistema de Informações de Crédito, or SCR), which comprises information regarding credit operations sent to the Central Bank. SCRs purpose is to provide information for the Central Bank to monitor and supervise credit in the financial system, and also to enable information exchange among financial institutions.
New rules applicable to Brazilian capital abroad and non-resident accounts in Brazil.
On July 30, 2020, the CMN enacted Resolution No. 4,841 and Resolution No. 4,844, which provide new rules related to the presentation of the Declaration of Brazilian Capital Abroad (DCBE), as well as the provision of information regarding non-resident accounts (conta de não-residente CNR) in Brazil, both of which provide for the modernization and cost reduction of the compliance and supervision process in the National Financial System. According to Resolution No. 4,841, only Brazilian residents who maintain capital abroad above US$ 1 million by December 31 of each year are required to submit the DCBE, a declaration of assets abroad, to the Central Bank. Nevertheless, the rules for the provision of information to the Brazilian Tax Authority (Receita Federal do Brasil or RFB) have been kept unchanged. In addition, Resolution No. 4,844 alters the minimum threshold for the mandatory registration of transactions in CNRs from R$10,000 to R$100,000, which has the purpose of simplifying the monitoring procedures by Brazilian financial institutions.
Consumer Protection Code
The Brazilian Consumer Protection Code, or CDC, which is applicable to financial institutions according to Brazilian higher courts, sets forth consumer defense and protection rules applicable to consumers relationships with suppliers of products or services.
|Basic consumer rights dealing with financial institutions:|| |
Reverse burden of proof in court;
Proper and clear information provided with respect to the products and services offered (e.g.; quantity, characteristics, composition, quality, price and risks such products pose);
Proportional reduction of interest charged in connection with personal credit and consumer directed credit transactions in case of early payment of debts;
In limited circumstances, amounts charged improperly may have to be returned in an amount equal to twice what was paid in excess of due amounts, except in cases of justifiable mistakes (e.g.; systemic failure or operational error);
Collection of credits cannot expose the client to embarrassment or be performed in a threatening manner;
Prohibition on the release of misleading or abusive publicity or information about contracts or services, as well as on the promoting of overbearing or disloyal commercial practices; and
Liability for any damages caused to consumers by misrepresentations in their publicity or information provided.
Late payment and default
CMN Resolution No. 4,882 provides that in case of delay or non-payment of credit operations, financial leasing and credit card and other post-paid payment instruments, the financial institutions may only charge customers the following: (i) the interest rate established in the agreement; (ii) default interest and late payment fines in accordance with the law.
Limitation to the fees and interest rates on overdraft-secured checks
On November 27, 2019, the CMN issued Resolution No. 4,765 (Resolution No. 4,765/2019), providing for new rules on the overdraft granted by financial institutions in checking accounts held by individuals and individual micro entrepreneurs (MEI).
The new rule limits the charging of fees on overdraft-secured checks to: (i) 0% for the opening credit facilities of up to R$ 500.00; and (ii) 0.25% for the opening of credit facilities larger than R$500.00, calculated with the amount of the facility that exceeds R$500.00.
Resolution No. 4,765/2019 also limits interest rates over the overdraft-secured check to up to 8% per month, to which must be added a discount of the overdraft fees already charged monthly by the financial institution. According to the new rule, if the interest is less than or equal to the overdraft fees, such interest rates must be equal to zero.
In addition, Resolution No. 4,765/2019 establishes that the overdraft-secured check must be compatible with the customers risk profile.
Resolution No. 4,765/2019 came into force on January 6, 2020, for agreements executed after the referred date, and came into force on June 1, 2020, for agreements executed prior to such date. Regarding the 8% limitation the rule applies to all contracts from 06 January 2020 regardless of the date of contracting.
The Brazilian General Data Protection Act, or the GDPA, came into effect in September 2020 (except for administrative sanctions, which will enter into effect on August 1, 2021, according to Law No. 14,010/2020). The GDPA brings a set of rules to be observed in activities such as collection, processing, storage, use, transfer, sharing and erasure of information concerning identified or identifiable natural persons. The application of the GDPA will apply irrespective of industry or business when dealing with personal data.
The GDPA also created the Brazilian National Data Protection Authority, or the ANPD, which will exercise the triple role of investigation, enforcement and education. More importantly, it will be able to issue norms and procedures, deliberate on the interpretation of the act, request information to controllers and processors and, in cases of noncompliance with the law, enforce the law through an administrative process. The ANPD has been assured technical independence, though it is subordinated to the Presidency of the Republic.
We comply with the requirements of GDPA, especially in relation to the security and protection of personal data, as well as CMN Resolution No. 4,658/2021 and of Central Bank Circular No. 3,909/2018, which require financial institutions to institute a Cybersecurity Policy, as well as regulates the outsourcing of relevant data processing and storage and cloud computing services. We also comply with CVM Ruling No. 612/2019, which amends, expands and repeals provisions to CVM Ruling No. 505, which sets forth the standards and procedures to be observed in security transactions carried out in regulated securities markets requiring the implementation of cybersecurity controls and data protection.
Automatic debit of banking accounts
On March 26, 2020, CMN issued Resolution No. 4,790, which sets forth new rules for the automatic debit payments from checking account and accounts designated for the payment of an individuals wages.
In order to foster the transparency on the relationship between the financial institutions and their clients, the new rule sets forth that financial institutions should only process automatic debit payments upon prior and express authorization of the client. Resolution No. 4,790 provides for the procedures for the authorization and cancellation of automatic debit payments.
The new rule will come into force on May 1st, 2021.
Regulation of Independent Auditors
In accordance with CMN regulations establishing the rules that govern external audit services provided to financial institutions, the financial statements and financial information of financial institutions must be audited by independent auditors who are (i) duly registered with the CVM; (ii) qualified as specialists in audit of banks by the CFC and the IBRACON; and (iii) meet the requirements that ensure auditor independence.
After issuing audit reports for five consecutive fiscal years, the responsible audit partner and audit team members with management responsibilities must rotate-off and cannot be part of the audit team of such institution for three consecutive fiscal years.
CMN regulations also prohibit the engagement and maintenance of independent auditors by financial institutions in the event that: (i) any of the circumstances of impediment or incompatibility for the provision of audit services provided for in the rules and regulations of the CVM, CFC or IBRACON arise; (ii) ownership of shares of or entering into financial
transactions (either asset or liability) with the audited financial institution by the audit firm or members of the audit team involved in the audit work of the fin