SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

For the month of August 2014

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 Registrant’s Name into English)

 

Praça Alfredo Egydio de Souza Aranha, 100-Torre Itaúsa

04344-902 São Paulo, SP, Brazil

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F: x Form 40-F: o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

 

Yes: o No: x

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

Yes: o No: x

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes: o No: x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):
82-___________________.

 

 

 

 

 

 
 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  Itaú Unibanco Holding S.A.  
    (Registrant)  
         
         
Date: August 7, 2014 By: /s/ Alfredo Egydio Setubal  
    Name: Alfredo Egydio Setubal  
    Title: Investor Relations Officer  
         

 

 

         
  By: /s/ Caio Ibrahim David  
    Name: Caio Ibrahim David  
    Title: Chief Financial Officer  
         

  

 
 

 

EXHIBIT INDEX

 

99.1 Announcement to the Market: Disclosure of results for the second quarter of 2014, according to International Financial porting Standards - IFRS

 

 

Exhibit 99.1

 

Independent auditor's report on the consolidated financial statement

 

To the Board of Directors and Stockholders of

Itaú Unibanco Holding S.A.

 

We have audited the accompanying consolidated financial statements of Itaú Unibanco Holding S.A. and its subsidiaries (the "Institution"), which comprise the consolidated balance sheet as at June 30, 2014 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the six-month period then ended and the consolidated statements of income, comprehensive income and cash flows for the quarter ended June 30, 2014, and a summary of significant accounting policies and other explanatory information.

 

Management's responsibility for the consolidated financial statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the International Accounting Standard (IAS) 34 - "Interim Financial Reporting" issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor's responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.

 

In making those risk assessments, the auditor considers internal control relevant to the Institution's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Institution's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Itaú Unibanco Holding S.A. and its subsidiaries as at June 30, 2014, and their financial performance and their cash flows for the six-month period and quarter then ended, in accordance with IAS 34 - "Interim Financial Reporting" issued by the International Accounting Standards Board (IASB).

 

São Paulo, August 4, 2014

 

PricewaterhouseCoopers

Auditores Independentes

CRC 2SP000160/O-5

 

Washington Luiz Pereira Cavalcanti

Contador CRC 1SP172940/O-6

 

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Balance Sheet

(In millions of Reais)

 

   Note  06/30/2014   12/31/2013 
Assets             
Cash and deposits on demand  4   20,605    16,576 
Central Bank compulsory deposits  5   80,043    77,010 
Interbank deposits  6   27,030    25,660 
Securities purchased under agreements to resell  6   140,732    138,455 
Financial assets held for trading  7a   148,308    148,860 
Pledged as collateral      19,782    25,743 
Other      128,526    123,117 
Financial assets designated at fair value through profit or loss  7b   494    371 
Derivatives  8 and 9   11,370    11,366 
Available-for-sale financial assets  10   72,149    96,626 
Pledged as collateral      16,729    18,851 
Other      55,420    77,775 
Held-to-maturity financial assets  11   29,468    10,116 
Pledged as collateral      4,941    5,095 
Other      24,527    5,021 
Loan operations and lease operations portfolio, net  12   393,836    389,467 
Loan operations and lease operations portfolio      415,267    411,702 
(-) Allowance for loan and lease losses      (21,431)   (22,235)
Other financial assets  20a   49,651    47,592 
Investments in associates and joint ventures  13   3,932    3,931 
Goodwill  3a and d   1,928    1,905 
Fixed assets, net  15   6,827    6,564 
Intangible assets, net  16   5,723    5,797 
Tax assets      34,007    34,742 
Income tax and social contribution - current      2,250    1,955 
Income tax and social contribution - deferred  27b   31,138    31,886 
Other      619    901 
Assets held for sale  36   132    117 
Other assets  20a   13,496    12,142 
Total assets      1,039,731    1,027,297 

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

 

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Balance Sheet

(In millions of Reais)

 

   Note  06/30/2014   12/31/2013 
Liabilities and stockholders' equity             
Deposits  17   277,347    274,383 
Securities sold under repurchase agreements  19a   266,340    266,682 
Financial liabilities held for trading  18   498    371 
Derivatives  8 and 9   11,890    11,405 
Interbank market debt  19a   110,857    111,376 
Institutional market debt  19b   67,643    72,055 
Other financial liabilities  20b   54,630    61,274 
Reserves for insurance and private pension  30c ll   105,443    99,023 
Liabilities for capitalization plans      3,007    3,032 
Provisions  32   19,914    18,862 
Tax liabilities      3,722    3,794 
Income tax and social contribution - current      2,113    1,655 
Income tax and social contribution - deferred  27b II   309    328 
Other      1,300    1,811 
Other liabilities  20b   29,109    20,848 
Total liabilities      950,400    943,105 
Capital  21a   75,000    60,000 
Treasury shares  21a   (1,545)   (1,854)
Additional paid-in capital  21c   1,013    984 
Appropriated reserves  21d   1,052    13,468 
Unappropriated reserves      13,918    12,138 
Cumulative other comprehensive income      (1,188)   (1,513)
Total stockholders’ equity attributed to the owners of the parent company      88,250    83,223 
Non-controlling interests      1,081    969 
Total stockholders’ equity      89,331    84,192 
Total liabilities and stockholders' equity      1,039,731    1,027,297 

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

 

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Income

Periods ended

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

 

   Note  04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Banking product      23,278    18,547    45,857    37,993 
Interest and similar income  23a   29,233    22,402    56,703    43,754 
Interest and similar expense  23b   (15,310)   (11,590)   (29,495)   (20,084)
Dividend income      100    33    112    97 
Net gain (loss) from investment securities and derivatives  23c   289    (2,647)   394    (3,588)
Foreign exchange results and exchange variation on transactions      660    3,011    1,761    3,394 
Banking service fees  24   6,474    5,514    12,675    10,771 
Income from insurance, private pension and capitalization operations before claim and selling expenses      1,732    1,659    3,392    3,337 
Income from insurance and private pension  30b III   6,223    6,180    11,264    13,057 
Premium reinsurance  30b III   (367)   (360)   (679)   (635)
Change in reserves for insurance and private pension      (4,261)   (4,293)   (7,461)   (9,334)
Revenue from capitalization plans      137    132    268    249 
Other income  25   100    165    315    312 
Losses on loans and claims      (4,356)   (4,085)   (8,361)   (8,427)
Expenses for allowance for loan and lease losses  12b   (5,111)   (4,833)   (9,717)   (9,694)
Recovery of loans written-off as loss      1,234    1,262    2,322    2,348 
Expenses for claims      (102)   (597)   (748)   (1,272)
Recovery of claims under reinsurance      (377)   83    (218)   191 
Banking product net of losses on loans and claims      18,922    14,462    37,496    29,566 
Other operating income (expenses)      (11,552)   (10,443)   (22,932)   (20,737)
General and administrative expenses  26   (10,334)   (9,507)   (20,421)   (18,671)
Tax expenses      (1,366)   (1,010)   (2,734)   (2,192)
Share of profit or (loss) in associates and joint ventures  13   148    74    223    126 
Income before income tax and social contribution  27   7,370    4,019    14,564    8,829 
Current income tax and social contribution      (2,319)   (2,185)   (5,368)   (4,053)
Deferred income tax and social contribution      (208)   1,933    248    2,481 
Net income      4,843    3,767    9,444    7,257 
Net income attributable to owners of the parent company  28   4,766    3,748    9,317    7,230 
Net income attributable to non-controlling interests      77    19    127    27 
Earnings per share - basic  28                    
Common      0.87    0.69    1.71    1.32 
Preferred      0.87    0.69    1.71    1.32 
Earnings per share - diluted  28                    
Common      0.87    0.68    1.70    1.32 
Preferred      0.87    0.68    1.70    1.32 
Weighted average number of shares outstanding - basic  28                    
Common      2,770,034,003    2,770,034,003    2,770,034,003    2,770,034,003 
Preferred      2,697,397,157    2,700,586,546    2,694,385,103    2,700,751,451 
Weighted average number of shares outstanding - diluted  28                    
Common      2,770,034,003    2,770,034,003    2,770,034,003    2,770,034,003 
Preferred      2,717,042,912    2,724,652,745    2,715,693,775    2,724,830,212 

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

 

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Comprehensive Income

Periods ended

(In millions of Reais)

 

   Note  04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Net income      4,843    3,767    9,444    7,257 
Available-for-sale financial assets      458    (1,353)   675    (2,320)
Change in fair value      719    (2,520)   1,002    (4,057)
Income tax effect      (285)   997    (392)   1,563 
(Gains) / losses transferred to income statement on disposal  23c   40    282    109    290 
Income tax effect      (16)   (112)   (44)   (116)
Hedge      (29)   (297)   352    (45)
Cash flow hedge  9   (212)   113    (176)   230 
Change in fair value      (396)   189    (328)   383 
Income tax effect      184    (76)   152    (153)
Hedge of net investment in foreign operation  9   183    (410)   528    (275)
Change in fair value      306    (686)   880    (460)
Income tax effect      (123)   276    (352)   185 
Remeasurements of liabilities for post-employment benefits (*)      11    7    28    8 
Remeasurements  29   17    11    48    13 
Income tax effect      (6)   (4)   (20)   (5)
Foreign exchange differences on foreign investments      (221)   405    (730)   343 
Total comprehensive income      5,062    2,529    9,769    5,243 
Comprehensive income attributable to non-controlling interests      77    19    127    27 
Comprehensive income attributable to the owners of the parent company      4,985    2,510    9,642    5,216 

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

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

 

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Changes in Stockholders’ Equity (Notes 21 and 22)

Periods ended June 30, 2014 and 2013

(In millions of Reais)

 

   Attributed to owners of the parent company   Total         
                           Other comprehensive income   stockholders’   Total     
   Capital   Treasury
shares		   Additional
paid-in
capital		   Appropriated
reserves		   Unappropriated
reserves		   Retained
earnings		   Available
for sale (1)		   Remeasurements of
liabilities of post-
employment benefits		   Cumulative
translation
adjustments
abroad		   Gains and
losses –
hedge (2)		   equity –
owners of the
parent
company		   stockholders’
equity – non-
controlling
interests		   Total 
Balance at 01/01/2013   45,000    (1,523)   888    22,423    7,379    -    2,004    -    648    (917)   75,902    96    75,998 
Transactions with owners   15,000    (93)   88    (14,862)   -    (1,792)   -    -    -    -    (1,659)   810    (849)
Capital increase - Statutory Reserve   15,000    -    -    (15,000)   -    -    -    -    -    -    -    -    - 
Treasury shares - granting of stock options – exercised options   -    (93)   88    -    -    -    -    -    -    -    (5)   -    (5)
Granting of stock options – exercised options   -    163    (20)   -    -    -    -    -    -    -    143    -    143 
Acquisition of treasury shares (Note 21a)   -    (256)   -    -    -    -    -    -    -    -    (256)   -    (256)
Granted options recognized   -    -    108    -    -    -    -    -    -    -    108    -    108 
(Increase) / Reduction of interest of controlling stockholders   -    -    -    -    -    -    -    -    -    -    -    815    815 
Dividends and interest on capital - Statutory Reserve (Note 21b)   -    -    -    452    -    (1,792)   -    -    -    -    (1,340)   (5)   (1,345)
Dividends/Interest on capital paid in 2013 - Year 2012 - Special profit reserve   -    -    -    (1,730)   -    -    -    -    -    -    (1,730)   -    (1,730)
Corporate reorganizations (Note 3b)   -    -    -    (314)   -    -    -    -    -    -    (314)   -    (314)
Other   -    -    -    -    7    -    -    -    -    -    7    -    7 
Total comprehensive income   -    -    -    -    -    7,230    (2,320)   8    343    (45)   5,216    27    5,243 
Net income   -    -    -    -    -    7,230    -    -    -    -    7,230    27    7,257 
Other comprehensive income for the period   -    -    -    -    -    -    (2,320)   8    343    (45)   (2,014)   -    (2,014)
Appropriations:                                                                 
Legal reserve   -    -    -    253    -    (253)   -    -    -    -    -    -    - 
Statutory reserve   -    -    -    3,013    2,172    (5,185)   -    -    -    -    -    -    - 
Balance at 06/30/2013   60,000    (1,616)   976    9,097    9,558    -    (316)   8    991    (962)   77,736    933    78,669 
Change in the period   15,000    (93)   88    (13,326)   2,179    -    (2,320)   8    343    (45)   1,834    837    2,671 
Balance at 01/01/2014   60,000    (1,854)   984    13,468    12,138    -    (1,183)   (379)   1,283    (1,234)   83,223    969    84,192 
Transactions with owners   15,000    309    29    (14,800)   -    (2,227)   -    -    -    -    (1,689)   (15)   (1,704)
Capital increase - Statutory Reserve   15,000    -    -    (15,000)   -    -    -    -    -    -    -    -    - 
Treasury shares - granting of stock options   -    309    29    -    -    -    -    -    -    -    338    -    338 
Granting of stock options – exercised options   -    309    (74)   -    -    -    -    -    -    -    235    -    235 
Granted options recognized   -    -    103    -    -    -    -    -    -    -    103    -    103 
(Increase) / Reduction of interest of controlling stockholders (Note 2.4a I and 3c)   -    -    -    -    -    -    -    -    -    -    -    (12)   (12)
Dividends / interest on capital – Special profit reserve (Note 21b)   -    -    -    200    -    (2,227)   -    -    -    -    (2,027)   (3)   (2,030)
Dividends / Interest on capital paid in 2014 - Year 2013 - Statutory Reserve   -    -    -    (2,597)   -    -    -    -    -    -    (2,597)   -    (2,597)
Corporate reorganizations (Note 3b)   -    -    -    (321)   -    -    -    -    -    -    (321)   -    (321)
Other   -    -    -    (8)   -    -    -    -    -    -    (8)   -    (8)
Total comprehensive income   -    -    -    -    -    9,317    675    28    (730)   352    9,642    127    9,769 
Net income   -    -    -    -    -    9,317    -    -    -    -    9,317    127    9,444 
Other comprehensive income for the period   -    -    -    -    -    -    675    28    (730)   352    325    -    325 
Appropriations:                                                                 
Legal reserve   -    -    -    377    -    (377)   -    -    -    -    -    -    - 
Statutory reserve   -    -    -    4,933    1,780    (6,713)   -    -    -    -    -    -    - 
Balance at 06/30/2014   75,000    (1,545)   1,013    1,052    13,918    -    (508)   (351)   553    (882)   88,250    1,081    89,331 
Change in the period   15,000    309    29    (12,416)   1,780    -    675    28    (730)   352    5,027    112    5,139 

 

(1) Includes Share of other comprehensive income in associates and joint ventures – Available-for-sale financial assets

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

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

 

 

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Cash Flows

(In millions of Reais)

 

   Note  04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Adjusted net income      18,757    10,420    41,328    24,917 
Net income      4,843    3,767    9,444    7,257 
Adjustments to net income:      13,914    6,653    31,884    17,660 
Granted options recognized  22d   51    55    103    108 
Effects of changes in exchange rates on cash and cash equivalents      2,202    (1,495)   3,489    (1,227)
Expenses for allowance for loan and lease losses  12b   5,111    4,833    9,717    9,694 
Interest and foreign exchange expense from operations with subordinated debt      597    2,737    8,992    3,461 
Interest expense from operations with debentures      -    11    -    31 
Change in reserves for insurance and private pension      4,261    4,293    7,461    9,334 
Revenue from capitalization plans      (137)   (132)   (268)   (249)
Depreciation and amortization  15 and 16   606    594    1,221    1,156 
Interest expense from provision for contingent and legal liabilities      248    211    505    438 
Provision for contingent and legal liabilities      895    933    1,845    1,737 
Interest income from escrow deposits      (101)   (59)   (202)   (114)
Deferred taxes      208    (1,933)   (248)   (2,481)
Share of profit or (loss) in associates and joint ventures      (148)   (74)   (223)   (126)
(Gain) loss from available-for-sale securities  23c   40    282    109    290 
Interest and foreign exchange income from available-for-sale financial assets      285    (3,562)   (382)   (4,267)
Interest and foreign exchange income from held-to-maturity financial assets      (268)   (119)   (374)   (206)
(Gain) loss from sale of assets held for sale  25 and 26   7    -    13    (7)
(Gain) loss from sale of investments  25 and 26   11    (2)   13    (5)
(Gain) loss from sale of fixed assets  25 and 26   19    2    27    7 
Other      25    79    86    87 
Change in assets and liabilities (*)      (25,184)   21,188    (8,574)   6,422 
(Increase) decrease in assets      (34,801)   13,516    (16,122)   8,414 
Interbank deposits      (317)   (83)   (1,084)   (764)
Securities purchased under agreements to resell      5,971    34,832    11,577    20,704 
Compulsory deposits with the Central Bank of Brazil      (887)   (3,785)   (3,569)   (1,833)
Financial assets held for trading      (24,726)   (506)   489    13,644 
Derivatives (assets / liabilities)      (717)   (611)   285    (964)
Financial assets designated at fair value      (170)   (126)   (145)   (130)
Loan operations      (13,140)   (12,855)   (18,643)   (20,460)
Financial assets      198    (4,148)   (2,367)   (2,862)
Other tax assets      141    1,339    932    2,141 
Other assets      (1,154)   (541)   (3,597)   (1,062)
(Decrease) increase in liabilities      9,617    7,673    7,548    (1,993)
Deposits      397    5,654    7,446    1,172 
Deposits received under securities repurchase agreements      7,515    (2,461)   (285)   (6,940)
Financial liabilities held for trading      77    (113)   161    (161)
Funds from interbank markets      1,100    5,031    (140)   7,297 
Other financial liabilities      (738)   3,395    (6,181)   220 
Technical reserve for insurance and private pension      (347)   (3,465)   (1,147)   (5,130)
Liabilities for capitalization plans      78    127    243    282 
Provisions      (427)   347    (591)   274 
Tax liabilities      2,149    (584)   4,895    330 
Other liabilities      1,330    668    7,968    4,659 
Payment of income tax and social contribution      (1,518)   (926)   (4,821)   (3,996)
Net cash from (used in) operating activities      (6,427)   31,608    32,754    31,339 
Interest on capital / dividends received from investments in associates and joint ventures      222    47    224    56 
Cash received from sale of available-for-sale financial assets      5,843    2,955    43,389    17,031 
Cash received from redemption of held-to-maturity financial assets      1,056    173    1,259    259 
Cash upon sale of assets held for sale      10    16    20    45 
Cash upon sale of investments in associates and joint ventures      (11)   2    (13)   5 
Cash and cash equivalents net assets and liabilities due from BMG Seguradora acquisition  3e   -    -    (88)   - 
Cash upon sale of fixed assets  15   5    16    12    19 
Cash received from termination of contracts of intangible assets  16   190    (0)   190    (0)
Purchase of available-for-sale financial assets      (1,351)   (14,200)   (29,171)   (19,481)
Purchase of held-to-maturity financial assets      (8,070)   (240)   (8,091)   (414)
Purchase of investments in associates and joint ventures  13   -    (3)   -    (3)
Purchase of fixed assets  15   (598)   (631)   (1,165)   (1,034)
Purchase of intangible assets  16   (305)   (280)   (562)   (555)
Net cash from (used in) investing activities      (3,009)   (12,145)   6,004    (4,072)
Funding from institutional markets      195    1,649    195    1,729 
Redemptions in institutional markets      (3,876)   (1,413)   (12,914)   (5,025)
(Acquisition)/Disposal of interest of non-controlling stockholders      -    (7)   (12)   295 
Granting of stock options – exercised options      25    24    235    143 
Purchase of treasury shares      -    (256)   -    (256)
Dividends and interest on capital paid to non-controlling interests      (2)   (1)   (3)   (5)
Dividends and interest on capital paid      (223)   (204)   (4,053)   (3,546)
Net cash from (used in) financing activities      (3,881)   (207)   (16,552)   (6,665)
                        
Net increase (decrease) in cash and cash equivalents  2.4c and 4   (13,318)   19,256    22,206    20,602 
                        
Cash and cash equivalents at the beginning of the period  4   90,027    46,854    55,790    45,775 
Effects of changes in exchange rates on cash and cash equivalents      (2,202)   1,495    (3,489)   1,227 
Cash and cash equivalents at the end of the period  4   74,507    67,604    74,507    67,604 
Additional information on cash flow                       
Interest received      25,449    20,348    56,192    41,668 
Interest paid      16,412    11,567    30,698    25,604 
Non-cash transactions                       
Loans transferred to assets held for sale      7    -    7    - 
Dividends and interest on capital declared and not yet paid      904    475    1,745    1,075 

(*) Includes the amounts of interest received and paid as shown above.

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

 

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

Notes to the Consolidated Financial Statements

At June 30, 2014 and December 31, 2013 for balance sheet accounts and

from April 1 to June 30, 2014 and 2013 and from January 1 to June 30, 2014 and 2013 for income statement accounts

(In millions of Reais, except information per share)

 

Note 1 - Overview

 

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

 

ITAÚ UNIBANCO HOLDING provides a wide range of financial products and services to individual and corporate clients in Brazil and abroad, as to whether these clients have Brazilian links or not throughits international branches, subsidiaries and affiliates. In Brazil we serve retail clients through the branch network of Itaú Unibanco S.A. (“Itaú Unibanco”) and to wholesale clients through Banco Itaú BBA S.A. (“Itaú BBA”), and overseas through branches in New York, Grand Cayman, Tokyo, and Nassau, and through subsidiaries mainly in Argentina, Chile, the US (New York and Miami), and Europe (Lisbon, London, Luxembourg and Switzerland), Cayman Islands, Paraguay, Uruguay and Colombia.

 

ITAÚ UNIBANCO HOLDING is a holding company controlled by Itaú Unibanco Participações S.A. (“IUPAR”), a holding company which owns 51.0% of our common shares, and which is jointly controlled by (i) Itaúsa Investimentos Itaú S.A., (“Itaúsa”), a holding company controlled by members of the Egydio de Souza Aranha family, and (ii) Companhia E. Johnston de Participações (“E. Johnston”), a holding company controlled by the Moreira Salles family. Itaúsa also directly holds 38.7% of ITAÚ UNIBANCO HOLDING common shares.

 

As described in Note 34, the operations of ITAÚ UNIBANCO HOLDING are divided into four operating and reportable segments: (1) Commercial Bank – Retail, which offers a wide range of banking services for retail individuals (under several areas specialized in distribution using several brands, such as Itaú, Uniclass and Personnalité) or high net worth clients (Private Bank) and for companies (very small and small companies), including services such as asset management, investor services, insurance, private pension plans, capitalization plans and credit cards issued to account holders; (2) Consumer Credit - Retail, which offers financial products and services to an universe beyond account holders such as vehicle financing, credit card transactions and consumer financing; (3) Wholesale Bank, which offers wholesale products and services to large and medium-sized companies, as well as investment bank activities, and (4) The Activities with the Market + Corporation segment basically manages the interest income associated with ITAÚ UNIBANCO HOLDING capital surplus, subordinated debt surplus and the net balance of tax credits and debits, as well as the net interest income from the trading of financial assets through proprietary positions (desks), management of currency gaps, interest rate gaps and other risk factors and arbitrage opportunities in the foreign and domestic markets.

 

These consolidated financial statements were approved by the Executive Board on August 04, 2014.

 

 
 

 

Note 2 – Significant accounting policies

 

The significant accounting policies applied in the preparation of these consolidated financial statements are set out below.

 

2.1.Basis of Preparation

 

These consolidated financial statements of ITAÚ UNIBANCO HOLDING were prepared taking into consideration that the National Monetary Council (CMN) Resolution No. 3,786 established that as of December 31, 2010, annual consolidated financial statements shall be prepared in accordance with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standard Board (IASB).

 

These consolidated financial statements have been presented following the accounting practices described in this note.

 

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

 

In the preparation of these consolidated financial statements, ITAÚ UNIBANCO HOLDING adopted the criteria for recognition, measurement, and disclosure established in the IFRS and the interpretations of the International Financial Reporting Interpretation Committee (IFRIC) described in this note. For this reason, these Consolidated Financial Statements are in full compliance with the standards issued by the IASB and the interpretations issued by the IFRIC.

 

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

 

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

 

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

 

a)Accounting standards applicable for period ended June 30, 2014

 

·IAS 32 – “Financial instruments: presentation” – this change was issued to clarify the offsetting requirements for financial instruments in the balance sheet. No material impacts arising from this change were identified for the consolidated financial statements of ITAÚ UNIBANCO HOLDING.

 

·Investment Entities - Amendments to IFRS 10 – “Consolidated financial statements”, IFRS 12 – “Disclosure of interests in other entities” and IAS 27 – “Separate financial statements” - It introduces an exception to the principle that all subsidiaries must be consolidated. The change requires that any controlling company that is an investment entity measures the fair value, based on the results, of its investments in certain entities, rather than consolidating them in its consolidated financial statements. No material impacts arising from this change were identified for the consolidated financial statements of ITAÚ UNIBANCO HOLDING.

 

·IAS 36 – Impairment of assets – This change introduces requirements for disclosure of measurement of the recoverable amounts of assets, due to the issuance of IFRS 13. Identified impacts are related to the disclosure of the recoverable amount and measurement methodology and have not given rise to significant impacts on the consolidated financial statements.

 

·IAS 39 – Financial instruments: recognition and measurement – This change permits continuity of hedge accounting, even if a derivative is novated (transferred) to a clearing house, adhering to certain conditions. No material impacts arising from this change were identified for the consolidated financial statements of ITAÚ UNIBANCO HOLDING.

 

 
 

  

b)Accounting standards recently issued and applicable in future periods

 

The following pronouncements will become applicable for periods after the date of these consolidated financial statements and were not early adopted:

 

·IFRS 9 – “Financial instruments” – the standard aimed at replacing IAS 39 - “Financial instruments: recognition and measurement”. In November 2009 IASB issued IFRS 9 introducing new requirements for classifying and measuring financial assets. In October 2010, IASB amended the standard and included the requirements for financial liabilities. In November 2013, IASB issue a new amendment, and included the requirements for hedge accounting. In February 2014, IASB announced the mandatory application of the standard for annual periods beginning on or after January 1, 2018, and early adoption is permitted. Any possible impacts arising from adopting these changes will be assessed up to the date this standard comes into force.

 

·IFRS 15 – Revenue from Contracts with Customers – requires that revenue is recognized so as to reflect the transfer of goods or services to the client for an amount that expresses the company’s expectation of having rights to these goods or services by way of consideration. IFRS 15 replaces IAS 18, IAS 11, and related interpretations (IFRICS 13, 15 and 18). It is effective for years beginning after January 1, 2017 and its early adoption is allowed by IASB. Any possible impacts arising from adopting these changes will be assessed up to the date this standard comes into force.

 

·IAS 19 (R1) – Employee Benefits – the entity should take into account the contributions by employees and third parties in the recording of defined benefit plans. It is effective for years beginning after July 1, 2014 and its early adoption is allowed by IASB. Any possible impacts arising from adopting this amendment will be assessed up to the date this standard comes into force.

 

2.3.Critical accounting estimates and judgments

 

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

 

2.3.1Critical accounting estimates

 

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

 

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

 

a)Allowance for loan and lease losses

 

ITAÚ UNIBANCO HOLDING periodically reviews its portfolio of loans and receivables to evaluate the existence of impairment.

 

In order to determine the amount of the allowance for loan and lease losses in the Consolidated Statements of Income with respect to certain receivables or group of receivables, ITAÚ UNIBANCO HOLDING exercises its judgment to determine whether objective evidence indicates that an event of loss has occurred. This evidence may include observable data that indicates that an adverse change has occurred in relation to the expected cash inflows from the counterparty or the existence of a change in local or international economic conditions that correlates with impairment. Management uses estimates based on the history of loss experience in loan operations with similar characteristics and with similar objective evidence of impairment. The methodology and assumptions used for estimating future cash flows are regularly reviewed by Management, considering the adequacy of models and sufficiency of provision volumes in view of the experience of incurred loss.

 

 
 

  

ITAÚ UNIBANCO HOLDING uses statistical models to calculate the Allowance for Loan and Lease Losses in the homogeneous loan portfolio. ITAÚ UNIBANCO HOLDING periodically carries out procedures to improve these estimates by aligning the required provisions to the levels of losses observed by the historical behavior (as described in Note 2.4g VIII). This alignment aims at ensuring that the volume of allowances reflects the current economic conditions, the composition of the loan portfolios, the quality of guarantees obtained and the profile of our clients. In 2013 and the period, there were no such improvements of model assumptions.

 

The allowance amounted to R$ 21,431 (R$ 22,235 at December 31, 2013).

 

If the present value of the estimated cash flows were to have a positive or negative variation of 1.0%, the Allowance for Loan and Lease Losses would be increased or decreased by approximately R$ 3,938 (R$ 3,895 at December 31, 2013).

 

The details on methodology and assumptions used by the Management are disclosed in note 2.4g VIII.

 

b)Deferred income tax and social contribution

 

As explained in item 2.4n, deferred tax assets are recognized only in relation to temporary differences and loss carry forwards to the extent that it is probable that ITAÚ UNIBANCO HOLDING will generate future taxable profit for their utilization. The expected realization of ITAÚ UNIBANCO HOLDING´s deferred tax asset is based on the projection of future income and other technical studies, as disclosed in Note 27. The carrying amount of deferred tax assets was R$ 37,762 (R$ 39,545 as of December 31, 2013).

 

c)Fair value of financial instruments, including derivatives

 

The fair value of financial instruments is measured on a recurring basis, in conformity with the requirements of IAS 39 – “Financial instruments: recognition and measurement. Financial instruments recorded at fair value are assets amounting to R$ 232,321 (R$ 257,223 at December 31, 2013) of which R$ 11,370 are derivatives (R$ 11,366 at December 31, 2013) and liabilities in the amount of R$ 12,388 (R$ 11,776 at December 31, 2013) of which R$ 11,890 are derivatives (R$ 11,405 at December 31, 2013). The fair value of financial instruments, including derivatives that are not traded in active markets, is calculated by using valuation techniques. This calculation is based on assumptions that take into consideration ITAÚ UNIBANCO HOLDING Management´s judgment about market information and conditions existing at the balance sheet date.

 

ITAÚ UNIBANCO HOLDING ranks the fair value measurements using a fair value hierarchy that reflects the significance of inputs adopted in the measurement process. There are three broad levels related to the fair value hierarchy, detailed in Note 31.

 

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

 

The methodologies used to estimate the fair value of certain financial instruments are described in Note 31.

 

d)Defined benefit pension plan

 

At June 30, 2014, an amount of R$ (366) (R$ (358) at December 31, 2013) was recognized as an asset related to pension plans. The current amount of the pension plan obligations is obtained from actuarial calculations that use a variety of assumptions. Among the assumptions used for estimating the net cost (income) of these plans is the discount rate. Any changes in these assumptions will affect the carrying amount of pension plan assets and liabilities.

 

 
 

  

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

 

Should the discount rate currently used be lowered by 0.5% than Management’s estimates, then the actuarial amount of the pension plan obligations would be increased by approximately R$ 672, with impact on the amount recognized with effect on Stockholder’s Equity – Other Comprehensive Income before taxes – of R$ 392, net of the effects of Asset Ceiling.

 

Other important assumptions for pension plan obligations are in part based on current market conditions. Additional information is disclosed in Note 29.

 

e)Contingent assets and liabilities

 

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

 

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

 

Contingent amounts are measured using appropriate models and criteria, despite the uncertainty surrounding the ultimate timing and amounts, as detailed in Note 32.

 

The carrying amount of these contingencies was R$ 19,914 (R$ 18,862 at December 31, 2013).

 

f)Technical provisions for insurance and pension plan

 

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

 

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

 

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

 

Additional information is described in Note 30.

 

2.3.2 Critical judgments in accounting policies

 

a) Goodwill

 

The impairment test for goodwill involves estimates and significant judgments, including the identification of cash generation units and the allocation of goodwill to such units based on the expectations of which ones will benefit from the acquisition. Determining the expected cash flows and a risk-adjusted interest rate for each unit requires that management exercises judgment and estimates. At June 30, 2014 and 2013, ITAÚ UNIBANCO HOLDING did not identify goodwill impairment losses.

 

 
 

  

2.4.Summary of main accounting practices

 

a)Consolidation

 

I.Subsidiaries

 

Before January 1, 2013, ITAÚ UNIBANCO HOLDING consolidated its subsidiaries in accordance with IAS 27 – “Consolidated and separate financial statements”, and its specific purpose entities, defined in accordance with the SIC 12 – “Consolidation – special purpose entities”, in its Consolidated Financial Statements. As of January 1, 2013, ITAÚ UNIBANCO HOLDING adopted IFRS 10 – “Consolidated financial statements”, which replaced IAS 27 and SIC 12.

 

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

 

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

 

On January 1, 2013 ITAÚ UNIBANCO HOLDING assessed its investments to determine whether the conclusions regarding the consolidation in accordance with IFRS 10 differ from those conclusions reached in accordance with IAS 27 and SIC 12.

 

No adjustment is required for those investments already consolidated in accordance with IAS 27 and SIC 12 and which remain consolidated in accordance with IFRS 10 on January 1, 2013 or for those investments not consolidated in accordance with IAS 27 and SIC 12 and which continue not being consolidated in accordance with IFRS 10.

 

The effects arising from adopting the IFRS 10, which gave rise to the change in the accounting policy, resulted in an increase of R$ 489 in the non-controlling stockholders’ equity. We present below the overall amounts related to our investments, previously not consolidated, which started to be consolidated on January 1, 2013:

 

   12/31/2012 
Loan and lease operations   3,089 
Total assets   1,275 
Total liabilities   1,275 
Non-controlling interests   520 
Net income / (loss) atributable to non-controlling interests   (53)

 

 
 

 

The following table shows the main consolidated subsidiaries and consolidated joint ventures, as well as the interests of ITAÚ UNIBANCO HOLDING in their voting capital at June 30, 2014, and December 31, 2013:

 

            Interest in voting
capital at		   Interest in total
capital at		 
      Incorporation country  Activity  06/30/2014   12/31/2013   06/30/2014   12/31/2013 
Banco Credicard S.A.  (1) (Note 3d)  Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Dibens S.A.     Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itaú Veículos S.A.     Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Investcred Unibanco S.A.     Brazil  Financial institution   50.00%   50.00%   50.00%   50.00%
Banco Itaú Argentina S.A.     Argentina  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itaú BBA S.A.     Brazil  Financial institution   99.99%   99.99%   99.99%   99.99%
Banco Itaú Chile     Chile  Financial institution   99.99%   99.99%   99.99%   99.99%
Banco Itaú BMG Consignado S.A  (Note 3c)  Brazil  Financial institution   70.00%   70.00%   70.00%   70.00%
Itaú Europa Luxembourg S.A.  (2)  Luxembourg  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itaú Paraguay S.A.     Paraguay  Financial institution   100.00%   99.99%   100.00%   99.99%
Banco Itaú Suisse S.A.     Switzerland  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itaú Uruguay S.A.     Uruguay  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itaucard S.A.     Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Banco Itauleasing S.A.     Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Cia. Itaú de Capitalização     Brazil  Capitalization   100.00%   100.00%   100.00%   100.00%
Credicard Promotora de Vendas Ltda.  (3) (Note 3d)  Brazil  Service   100.00%   100.00%   100.00%   100.00%
Dibens Leasing S.A. - Arrendamento Mercantil     Brazil  Leasing   100.00%   100.00%   100.00%   100.00%
Itaú Unibanco Veículos Administradora de Consórcios Ltda.     Brazil  Consortia administrator   100.00%   100.00%   100.00%   100.00%
Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento     Brazil  Consumer finance credit   50.00%   50.00%   50.00%   50.00%
Hipercard Banco Múltiplo S.A.     Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Itaú Administradora de Consórcios Ltda.     Brazil  Consortia administrator   100.00%   100.00%   100.00%   100.00%
Itaú Ásia Securities Ltd     Hong Kong  Broker   100.00%   100.00%   100.00%   100.00%
Itau Bank, Ltd.  (4)  Cayman Islands  Financial institution   100.00%   100.00%   100.00%   100.00%
Itau BBA Colombia S.A. Corporación Financiera     Colombia  Financial institution   100.00%   99.99%   100.00%   99.99%
Itaú BBA International PLC     United Kingdom  Financial institution   100.00%   100.00%   100.00%   100.00%
Itaú BBA USA Securities Inc.     United States  Broker   100.00%   100.00%   100.00%   100.00%
Itaú BMG Seguradora S.A.     Brazil  Insurance   70.00%   0.00%   70.00%   0.00%
Itaú Companhia Securitizadora de Créditos Financeiros     Brazil  Securitization   100.00%   100.00%   100.00%   99.98%
Itaú Corretora de Valores S.A.     Brazil  Broker   100.00%   100.00%   100.00%   100.00%
Itaú Distribuidora de Títulos e Valores Mobiliários S.A.     Brazil  Dealer   100.00%   100.00%   99.99%   99.99%
Itaú Japan Asset Management Limited     Japan  Asset management   100.00%   100.00%   100.00%   100.00%
Itaú Middle East Limited     Arab Emirates  Advisory   100.00%   100.00%   100.00%   100.00%
Itaú Seguros S.A.     Brazil  Insurance   100.00%   100.00%   100.00%   100.00%
Itaú Unibanco Financeira S.A. - Crédito, Financiamento e Investimento  (Note 3a)  Brazil  Consumer finance credit   100.00%   100.00%   100.00%   100.00%
Itaú Unibanco S.A.     Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Itaú Unibanco Serviços e Processamento de Informações Comerciais Ltda.     Brazil  Technology services   100.00%   100.00%   100.00%   100.00%
Itaú Vida e Previdência S.A.     Brazil  Pension plan   100.00%   100.00%   100.00%   100.00%
Luizacred S.A. Soc. Cred. Financiamento Investimento     Brazil  Consumer finance credit   50.00%   50.00%   50.00%   50.00%
Redecard S.A. - REDE     Brazil  Acquirer   100.00%   100.00%   100.00%   100.00%
Tarjetas Unisoluciones S. A. de Capital Variable     Mexico  Credit card administrator   100.00%   100.00%   100.00%   100.00%

(1) New company name of Banco Citicard S.A.

(2) New company name of Banco Itaú Europa Luxembourg S.A.

(3) New company name of CitiFinancial Promotora de Negócios e Cobrança S.A.

(4) Does not include Redeemable Preferred Shares.

 

ITAÚ UNIBANCO HOLDING is committed to maintaining the minimum capital required by all those joint ventures, for all entities FIC - Financeira Itaú CBD S.A Crédito, Financiamento e Investimento the minimum capital percentage is 25.0% higher than that required by the Central Bank of Brazil (Note 33).

 

 
 

 

II.Business combinations

 

Accounting for business combinations under IFRS 3 (R) is only applicable when a business is acquired. Under IFRS 3 (R), a business is defined as an integrated set of activities and assets that is conducted and managed for the purpose of providing a return to investors, or cost reduction or other economic benefits. In general, a business consists of inputs, processes applied to those inputs and outputs that are, or will be, used to generate income. If there is goodwill in a set of activities or transferred assets, this is presumed to be a business. For acquisitions that meet the definition of business, accounting under the purchase method is required.

 

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

 

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

 

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

 

III.Transactions with non-controlling stockholders

 

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

 

b)Foreign currency translation

 

I.Functional and presentation currency

 

The consolidated financial statements of ITAÚ UNIBANCO HOLDING are presented in reais, which is its functional and presentation currency. For each subsidiary and investment in associates and joint ventures, ITAÚ UNIBANCO HOLDING defined the functional currency, as set forth in IAS 21.

 

The assets and liabilities of subsidiaries with a functional currency other than the Brazilian real are translated as follows:

 

·assets and liabilities are translated at the closing rate at the balance sheet date;
·income and expenses are translated at monthly average exchange rates;
·exchange differences arising from currency translation are recorded in other comprehensive income.

 

 
 

  

II-Foreign currency transactions

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of income as part of foreign exchange operations and foreign exchange gains/losses and amount to R$ (1,756) for the period for the period January 1, to June 30, 2014 (R$ 1,562 for the period January 1 to June 30, 2013).

 

In the case of monetary assets classified as available-for-sale, the exchange differences resulting from a change in the amortized cost of the instrument are recognized in the income statement, while those resulting from other changes in the carrying amount, except impairment losses, are recognized in other comprehensive income until derecognition or impairment.

 

c)Cash and cash equivalents

 

ITAÚ UNIBANCO HOLDING defines cash and cash equivalents as cash and current accounts in banks (included in the heading cash and deposits on demand on the consolidated balance sheet), interbank deposits and securities purchased under agreements to resell that have original maturities of up to 90 days or less, as shown in Note 4.

 

d)CENTRAL BANK Compulsory deposits

 

The Central Banks of the countries in which ITAÚ UNIBANCO HOLDING operates currently impose a number of compulsory deposit requirements on financial institutions. Such requirements are applied to a wide range of banking activities and operations, such as demand, savings, and time deposits. In the case of Brazil, the acquisition and deposit of Brazilian federal government securities is also required.

 

Compulsory deposits are initially recognized at fair value and subsequently at amortized cost, using the effective interest rate method as detailed in Note 2.4g VI.

 

e)Interbank deposits

 

ITAÚ UNIBANCO HOLDING recognizes its interbank deposits in the balance sheet initially at fair value and subsequently at the amortized cost using the effective interest method as detailed in Note 2.4g VI.

 

f)Securities purchased under agreements to resell and sold under repurchase agreements

 

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

 

The amounts invested in resale agreement transactions and borrowed in repurchase agreement transactions are initially recognized in the balance sheet at the amount advanced or raised, and subsequently measured at amortized cost. The difference between the sale and repurchase prices is treated as interest and recognized over the life of the agreements using the effective interest rate method. Interest earned in resale agreement transactions and incurred in repurchase agreement transactions is recognized in Interest and similar income and Interest and similar expense, respectively.

 

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

 

 
 

  

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

 

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

 

g)Financial assets and liabilities

 

In accordance with IAS 39, all financial assets and liabilities, including derivative financial instruments, shall be recognized in the balance sheet and measured based on the category in which the instrument is classified.

 

Financial assets and liabilities can be classified into the following categories:

 

·Financial assets and liabilities at fair value through profit or loss – held for trading.
·Financial assets and liabilities at fair value through profit or loss – designated at fair value.
·Available-for-sale financial assets.
·Held-to-maturity financial assets.
·Loans and receivables.
·Financial liabilities at amortized cost.

 

The classification depends on the purpose for which financial assets were acquired or financial liabilities were assumed. Management determines the classification of financial instruments at initial recognition.

 

ITAÚ UNIBANCO HOLDING classifies financial instruments into classes that reflect the nature and characteristics of these financial instruments.

 

ITAÚ UNIBANCO HOLDING classifies as loans and receivables the following classes of balance sheet headings: Cash and deposits on demand, Central Bank compulsory deposits (Note 2.4d), Interbank deposits (Note 2.4e), Securities purchased under agreement to resell (Note 2.4f), Loan operations (Note 2.4g VI) and Other financial assets (Note 2.4g IX).

 

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

 

Financial assets are derecognized when the rights to receive cash flows from the assets have expired or when ITAÚ UNIBANCO HOLDING has substantially transferred all risks and rewards of ownership, and such transfer qualifies for derecognition, according to the requirements of IAS 39. Therefore, if the risks and rewards were not substantially transferred, ITAÚ UNIBANCO HOLDING evaluates the extent of control in order to determine whether the continuous involvement related to any retained control does not prevent derecognition. Financial liabilities are derecognized when discharged or extinguished.

 

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

 

I-Financial assets and liabilities at fair value through profit or loss - held for trading

 

These are financial assets and liabilities acquired or incurred principally for the purpose of selling them in the short term or when they are part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent history of short-term profit taking.

 

 
 

  

The financial assets and liabilities included in this category are initially and subsequently recognized at fair value. Transaction costs are directly recognized in the consolidated statement of income. Gains and losses arising from changes in fair value are directly included in the consolidated statement of income under Net gain (loss) from investment securities and derivatives. Interest income and expenses are recognized in Interest and similar income and Interest and similar expense, respectively.

 

II-Financial assets and liabilities at fair value through profit or loss – designated at fair value

 

These are assets and liabilities designated at fair value through profit or loss upon initial recognition (fair value option). This designation cannot be subsequently changed. In accordance with IAS 39, the fair value option can only be applied if it reduces or eliminates an accounting mismatch when the financial instruments are part of a portfolio for which risk is managed and reported to Management based on its fair value or when these instruments consist of hosts and embedded derivatives that shall otherwise be separated.

 

The financial assets and liabilities included in this category are initially and subsequently recognized at fair value. Transaction costs are directly recognized in the consolidated statement of income. Gains and losses arising from changes in fair value are directly included in the consolidated statement of income under Net gain (loss) from investment securities and derivatives - Financial assets designated at fair value through profit or loss. Interest income and expenses are recognized in Income and similar income and Interest and similar expense, respectively.

 

ITAÚ UNIBANCO HOLDING designated certain assets at fair value through profit or loss upon their initial recognition, because they are reported to Management and their performance is evaluated daily based on their fair value.

 

III-Derivatives

 

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. All derivatives are recognized as assets when the fair value is positive, and as liabilities when negative.

 

Certain derivatives embedded in other financial instruments are treated as separate derivatives, when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not recognized at fair value through profit or loss. These embedded derivatives are accounted for separately at fair value, with changes in fair value recognized in the consolidated statement of income in Net gain (loss) from investment securities and derivatives – Financial assets held for trading and derivatives - except when ITAÚ UNIBANCO HOLDING designates these hybrid contracts as a whole as fair value through profit or loss.

 

Derivatives can be designated as hedging instruments under hedge accounting and in the event they qualify, depending upon the nature of the hedged item, the method for recognizing gains or losses from changes in fair value will be different. These derivatives, which are used to hedge exposures to risk or modify the characteristics of financial assets and liabilities, and that meet IAS 39 criteria, are recognized as hedge accounting.

 

In accordance with IAS 39, to qualify for hedge accounting, all of the following conditions are met:

 

·at the inception of the hedge there is formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge.
·the hedge is expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk, consistent with the originally documented risk management strategy for that particular hedging relationship.

 

 
 

 

·for a cash flow hedge, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss.
·the effectiveness of the hedge can be reliably measured, i.e. the fair value or cash flows of the hedged item that are attributable to the hedged risk and the fair value of the hedging instrument can be reliably measured.

 

·the hedge is assessed on an ongoing basis and it is determined that the hedge has in fact been highly effective throughout the periods for which the hedge was designated.

 

IAS 39 presents three hedge accounting categories: fair value hedge, cash flow hedge, and hedge of net investments in a foreign operation.

 

ITAÚ UNIBANCO HOLDING uses derivatives as hedging instruments under cash flow hedge strategies, fair value hedge and hedge of net investments, as detailed in Note 9.

 

Fair value hedge

 

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

 

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

 

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

 

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

 

Cash flow hedge

 

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

 

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting and also when ITAU UNIBANCO HOLDING redesignates a hedge, any cumulative gain or loss existing in Other comprehensive income is frozen and is recognized in income when the hedged item is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss recognized in Other comprehensive income is immediately transferred to the statement of income.

 

Hedge of net investments in foreign operations

 

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

 

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

 

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

 

 
 

  

IV -Available-for-sale financial assets

 

In accordance with IAS 39, financial assets are classified as available-for-sale when in the Management’s judgment they can be sold in response to or in anticipation of changes in market conditions, and that were not classified into the categories of financial assets at fair value through profit or loss, loans and receivables or held to maturity.

 

Available-for-sale financial assets are initially and subsequently recognized in the consolidated balance sheet at fair value, plus transaction costs. Unrealized gains and losses (except losses for impairment, foreign exchange differences, dividends and interest income) are recognized, net of applicable taxes, in Other comprehensive income. Interest, including the amortization of premiums and discounts, is recognized in the consolidated statement of income under Interest and similar income. The average cost is used to determine the realized Gains and losses on Disposal of available-for-sale financial assets, which are recorded in the consolidated statement of income under Net gain (loss) from financial assets and liabilities – Available-for-sale financial assets. Dividends on available-for-sale assets are recognized in the consolidated statement of income as Dividend income when ITAÚ UNIBANCO HOLDING is entitled to receive such dividends and inflow of economic benefits is probable.

 

ITAÚ UNIBANCO HOLDING assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is evidence of impairment, resulting in the recognition of an impairment loss. If any impairment evidence exists for available-for-sale financial assets, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in income, is recognized in the consolidated statement of income as a reclassification adjustment from Other comprehensive income.

 

Impairment losses recognized in the consolidated statement of income on equity instruments are not reversed through the statement of income. However, if in a subsequent period the fair value of a debt instrument classified as an available-for-sale financial asset increases and such increase can be objectively related to an event that occurred after the loss recognition, such loss is reversed through the statement of income.

 

V-Held-to-maturity financial assets

 

In accordance with IAS 39, the financial assets classified into the held-to-maturity category are non-derivative financial assets for which ITAÚ UNIBANCO HOLDING has the positive intention and ability to hold to maturity.

 

These assets are initially recognized at fair value, plus transaction costs, and subsequently measured at amortized cost, using the effective interest rate method (as detailed in item VI below). Interest income, including the amortization of premiums and discounts, is recognized in the consolidated statement of income under Interest and similar income.

 

When held-to-maturity financial assets are impaired, the loss is recorded as a reduction in the carrying amount through the use of an allowance account and recognized in the consolidated statement of income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the loss was recognized, the previously recognized loss is reversed. The reversal amount is also recognized in the consolidated statement of income.

 

 
 

  

VI-Loan operations

 

Loan operations are initially recognized at fair value, plus transaction costs and are subsequently measured at amortized cost using the effective interest rate method.

 

The effective interest rate approach is a method of calculating the amortized cost of a financial asset or liability and of allocating the interest income or expense over the relevant period. The effective interest rate is the discount rate that is applied to future payments or receipts through the expected life of the financial instrument that results in an amount equal to the net carrying amount of the financial asset or liability. When calculating the effective interest rate, ITAÚ UNIBANCO HOLDING estimates cash flows considering all contractual terms of the financial instrument, but does not consider future credit losses. The calculation includes all commissions paid or received between parties to the contract, transaction costs, and all other premiums or discounts.

 

ITAÚ UNIBANCO HOLDING classifies a loan operation as on non-accrual status if the payment of the principal or interest has been in default for 60 days or more. When a loan is placed on non-accrual status, the accrual of interest of the loan is discontinued.

 

When a financial asset or group of similar financial assets is impaired and its carrying amount is reduced through an allowance for loan losses, the subsequent interest income is recognized on the reduced carrying amount using the interest rate used to discount the future cash flows for purposes of measuring the allowance for loan losses.

 

Our Individuals portfolio consists primarily of vehicle financing to individuals, credit card, personal loans (including mainly consumer finance and overdrafts) and residential mortgage loans. The Corporate portfolio includes loans made to large corporate clients. Our Small / Medium Business Portfolio corresponds to loans to a variety of customers from small to medium-sized companies. The Foreign Loans Latin America is substantially comprised of loans granted to individuals in Argentina, Chile, Paraguay, and Uruguay.

 

At a corporate level, there are two groups (independent from the business areas) the credit risk group and the finance group, which are responsible for defining the methodologies used to measure the allowance for loan losses and for performing the corresponding calculations on a recurring basis.

 

The credit risk group and the finance group, at the corporate level, monitor the trends observed in the allowance for loan losses at the portfolio segment level, in addition to establishing an initial understanding of the variables that may trigger changes in the allowance for loan losses, the probability of default or the loss given default.

 

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

 

VII - Lease operations (as lessor)

 

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

 

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

 

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

 

 
 

  

VIII-Allowance for loan and lease losses

 

General

 

ITAÚ UNIBANCO HOLDING periodically assesses whether there is any objective evidence that a receivable or group of receivables is impaired. A receivable or group of receivables is impaired and there is a need for recognizing an impairment loss if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event (or events) has an impact on the estimated future cash flows that can be reliably estimated.

 

The allowance for loan and lease losses is recognized as probable losses inherent in the portfolio at the balance sheet date. The determination of the level of the allowance rests upon various judgments and assumptions, including current economic conditions, loan portfolio composition, prior loan and lease loss experience and evaluation of credit risk related to individual loans. Our process for determining the allowance for loan and lease losses includes Management's judgment and the use of estimates. The adequacy of the allowance is regularly analyzed by Management.

 

The criteria adopted by ITAÚ UNIBANCO HOLDING for determining whether there is objective evidence of impairment include the following:

 

·default in principal or interest payment;
·financial difficulties of the debtor and other objective evidence that results in the deterioration of the financial position of the debtor (for example, debt-to-equity ratio, percentage of net sales or other indicators obtained through processes adopted to monitor credit, particularly for retail portfolios);
·breach of loan clauses or terms;
·entering into bankruptcy;
·loss of competitive position of the debtor.

 

The estimated period between the loss event and its identification is defined by Management for each portfolio of similar receivables. Considering the representativeness of several homogeneous groups, management chose to use a twelve month period as being the most representative. For portfolios of loans that are individually evaluated for impairment this period is at most 12 months, considering the review cycle for each loan operation.

 

Assessment

 

ITAÚ UNIBANCO HOLDING first assesses whether objective evidence of impairment exists for receivables that are individually significant, and individually or collectively for receivables that are not individually significant.

 

To determine the amount of the allowance for individually significant receivables with objective evidence of impairment, methodologies are used that consider both the quality of the client and the nature of the transaction, including its collateral, to estimate the cash flows expected from these loans.

 

If no objective evidence of impairment exists for an individually assessed receivable, whether significant or not, the asset is included in a group of receivables with similar credit risk characteristics and collectively assessed for impairment. Receivables that are individually assessed for impairment and for which an impairment loss is recognized are not included in the collective assessment. The amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate.

 

 
 

  

For collectively assessed loans, the calculation of the present value of the estimated future cash flows for which there is collateral reflects the historical performance of the foreclosure and recovery of fair value, considering the cash flows that may arise from foreclosure less costs for obtaining and selling that collateral.

 

For the purpose of a collective evaluation of impairment, receivables are grouped on the basis of similar credit risk characteristics. The characteristics are relevant to the estimation of future cash flows for such receivables by being indicative of the debtors’ ability to pay all amounts due, according to the contractual terms of the receivables being evaluated. Future cash flows in a group of receivables that are collectively evaluated for purposes of identifying the need for recognizing impairment are estimated on the basis of the contractual cash flows of the group of receivables and historical loss experience for receivables with similar credit risk characteristics. The historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.

 

For individually significant receivables with no objective evidence of impairment, ITAÚ UNIBANCO HOLDING classifies these loans into certain rating categories based on several qualitative and quantitative factors applied through internally developed models. Considering the size and the different risk characteristics of each contract, the rating category determined according to internal models can be reviewed and modified by our Corporate Credit Committee, the members of which are executives and officers in corporate credit risk. ITAÚ UNIBANCO HOLDING estimates inherent losses for each rating category considering an internally developed approach for low-default portfolios, that uses our historical experience for building internal models, that are used both to estimate the PD (probability of default) and to estimate the LGD (loss given default.)

 

To determine the amount of the allowance for individually insignificant items loans are segregated into classes considering the underlying risks and characteristics of each group. The allowance for loan and lease losses is determined for each of those classes through a process that considers historical delinquency and loan loss experience over the most recent years.

 

Measurement

 

The methodology used to measure the allowance for loan and lease losses was developed internally by the credit risk and finance areas at the corporate level. In those areas and considering the different characteristics of the portfolios, different areas are responsible for defining the methodology to measure the allowance for each: Corporate (including loan operations with objective evidence of impairment and individually significant loan operations but with no objective evidence of impairment), Individuals, Small and Medium Businesses, and Foreign Units Latin America. Each of the four portfolio areas responsible for defining the methodology to measure the allowance for loan and lease losses is further divided into groups, including groups that develop the methodology and groups that validate the methodology. A centralized group in the credit risk area is responsible for measuring the allowance on a recurring basis following the methodologies developed and approved for each of the four areas.

 

The methodology is based on two components to determine the amount of the allowance: The probability of default by the client or counterparty (PD), and the potential economic loss that may occur in the event of default, being the debt that cannot be recovered (LGD) which are applied to the outstanding balance of the loan. Measurement and assessment of these risk components is part of the process for granting credit and for managing the portfolio. The estimated amounts of PD and LGD are measured based on statistical models that consider a significant number of variables which are different for each class and include, among others, income, equity, past loan experiences, level of indebtedness, economic sectors that affect collectability and other attributes of each counterparty and of the economic environment. These models are regularly updated for changes in economic and business conditions.

 

 
 

  

A model updating process is started when the modeling area identifies that it is not capturing significant effects of the changes of economic conditions, in the performance of the portfolio or when a change is made in the methodology for calculating the allowance for loan and lease losses. When a change in the model is made, the model is validated through back-testing and statistical methods are used to measure its performance through detailed analysis of its documentation, by describing step-by-step how the process is carried out. The models are validated by an area independent from the one developing it, by issuing a technical report on the assumptions used (integrity, consistency, and replicability of the bases) and on the mathematical methodology used. The technical report is subsequently submitted to CTAM (Model assessment technical committee), which is the highest level of approval of model reviews.

 

Considering the different characteristics of the loans at each of the four portfolio areas (Corporate (with no objective evidence of impairment), Individuals, Small and Medium Businesses, and Foreign Units Latin America), different areas within the corporate credit risk area are responsible for developing and approving the methodologies for loans in each of those four portfolio areas. Management believes that the fact that different areas focus on each of the four portfolios results in increased knowledge, specialization and awareness of the teams as to the factors that are more relevant for each portfolio area in measuring the loan losses. Also considering such different characteristics and other factors, different inputs and information are used to estimate the PD and LGD as further detailed below:

 

·Corporate (with no evidence of impairment) - factors considered and inputs used are mainly the history of the customer relationship with us, the results of analysis of the customer’s accounting statements and the information obtained through frequent contacts with its officers, aiming at understanding the strategy and the quality of its management. Additionally, industry and macroeconomic factors are also included in the analysis. All those factors (which are quantitative and qualitative) are used as inputs to the internal model developed to determine the corresponding rating category. This approach is also applied to the corporate credit portfolio outside Brazil.

 

·Individuals – factors considered and inputs used are mainly the history of the customer relationship with us, and information available through credit bureaus (negative information).

 

·Small / Medium Businesses – factors considered and inputs used include, in addition to the history of the customer relationship and credit bureau information about the customer’s revenues, industry expertise, and information about its shareholders and officers, among others.

 

·Foreign Units – Latin America – considering the relative smaller size of this portfolio and its more recent nature, the models are simpler and use the past due status and an internal rating of the customer as main factors.

 

Reversal, write-off, and renegotiation

 

If, in a subsequent period, the amount of the impairment loss decreases and the decrease is objectively related to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment is reversed. The amount of reversal is recognized in the consolidated statement of Income under Expense for allowance for loan and lease losses.

 

When a loan is uncollectible, it is written-off in the balance sheet under allowance for loan and lease losses. Write-off as losses occur after 360 days of credits have matured or after 540 days for loans with maturities over 36 months.

 

 
 

  

In almost all cases for loan products, renegotiated loans require at least one payment to be made under the renegotiated terms in order for it to be removed from nonperforming and nonaccrual status. Renegotiated loans return to nonperforming and nonaccrual status when they reach 60 days past due under the renegotiated terms, which typically corresponds to the borrower missing two or more payments.

 

IX-Other financial assets

 

ITAÚ UNIBANCO HOLDING presents these assets, which composition is detailed in Note 20a, in the consolidated balance sheet initially at fair value and subsequently at amortized cost using the effective interest method.

 

Interest income is recognized in the consolidated statement of income under Interest and similar income.

 

X-Financial liabilities at amortized cost

 

The financial liabilities that are not classified as at fair value through profit or loss are classified into this category and initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method. Interest expenses are presented in consolidated statement of income under Interest and similar expense.

 

The following financial liabilities are presented in the consolidated balance sheet and recognized at amortized cost:

 

·Deposits (See Note 17).
·Securities sold under repurchase agreements (Note 2.4f).
·Funds from interbank markets (Note 19a).
·Funds from institutional markets (Note 19b).
·Liabilities for capitalization plans.
·Other financial liabilities (Note 20b).

 

 
 

 

h)Investments in associates and joint ventures

 

I – Associates

 

In accordance with IAS 28 – “Investments in associates and joint ventures”, associates are those companies in which the investor has significant influence, but does not have control. Significant influence is usually presumed to exist when an interest in voting capital is held from 20.0% to 50.0%. Investments in these companies are initially recognized at cost of acquisition and subsequently accounted for using the equity method. Investments in associates and joint ventures include the goodwill identified upon acquisition, net of any cumulative impairment loss.

 

II – Joint arrangements

 

Before January 1, 2013, ITAÚ UNIBANCO HOLDING consolidated proportionally its interest held in joint ventures, in conformity with the requirements of IAS 31 – “Interests in joint ventures”. As from that date, ITAÚ UNIBANCO HOLDING adopted IFRS 11 – “Joint arrangements”, thus changing its accounting policy from interest in joint business to the equity method.

 

In accordance with the IFRS 11, investments in joint business are classified as joint operations or joint ventures. The classification is dependent upon the contractual rights and obligations held by each investor, rather than the legal structure of the joint arrangements.

 

ITAÚ UNIBANCO HOLDING has assessed the nature of its joint arrangements and concluded that it has both joint operations and joint ventures. There was no change in the accounting treatment for joint operations. For joint ventures, ITAÚ UNIBANCO HOLDING adopted the new policy for interest in joint ventures, in accordance with the IFRS 11 transition provisions.

 

The effects arising from adopting IFRS 11, which gave rise to a change in the accounting policy, have not had significant impacts on the consolidated financial statements of ITAÚ UNIBANCO HOLDING. We present below the overall amounts related to our investments, previously proportionally consolidated, which started to be accounted for under the equity method on January 1, 2013:

 

   12/31/2013 
Total assets (*)   31 
Total liabilities (*)   7 

(*) Composed of companies Olímpia Promoção e Serviços S.A., Rosefield Finance Ltd., MCC Securities Inc. and MCC Corredora de Bolsa.

 

 
 

 

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

 

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

 

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

 

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

 

i)Lease commitments (as lessee)

 

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

 

ITAÚ UNIBANCO HOLDING leases certain fixed assets. Leases of fixed assets, in which ITAÚ UNIBANCO HOLDING substantially holds all risks and rewards incidental to the ownership are classified as finance leases. They are capitalized on the commencement date of the leases at the lower of the fair value of the asset and the present value of the lease future minimum payments.

 

Each lease installment is allocated partially to the liability and partially to financial charges, so that a constant rate is obtained for the outstanding debt balance. The corresponding obligations, net of future financial charges, are included in Other financial liabilities. The interest expense is recognized in the consolidated statement of income over the lease term, to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Fixed assets acquired through finance lease are depreciated over their useful lives.

 

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

 

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

 

j)Fixed assets

 

In accordance with IAS 16 – “Property, plant and equipment”, fixed assets are recognized at the cost of acquisition less accumulated depreciation, calculated using the straight-line method and rates based on the estimated useful lives of these assets. Such rates are presented in Note 15.

 

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

 

 
 

  

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

 

ITAÚ UNIBANCO HOLDING in the period ended June 30, 2014 and June 30, 2013, did not recognize any impairment losses related to fixed assets.

 

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

 

k)Goodwill

 

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

 

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

 

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

 

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

 

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

 

l)Intangible assets

 

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

 

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

 
 

  

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

 

In the period ended June 30, 2014 the ITAÚ UNIBANCO HOLDING recognized impairment losses in the amount of R$ 3 related to development of software (R$ 2 at June 30, 2013, related to the association for the promotion and offer of financial products and services), caused by results below expectations.

 

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

 

m)Assets held for sale

 

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

 

Subsequent reductions in the carrying value of such assets are recorded as a loss due to decreases in fair value less costs to sell, in the consolidated statement of income under General and administrative expenses. In the case of recovery of the fair value less cost to sell, the recognized losses can be reversed.

 

n)Income tax and social contribution

 

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

 

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

 

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

 

Income tax and social contribution expense is recognized in the consolidated statement of income under Income tax and social contribution, except when it refers to items directly recognized in Other comprehensive income, such as: deferred tax on fair value measurement of available-for-sale financial assets, and tax on cash flow hedges. Deferred taxes of such items are initially recognized in other comprehensive income and subsequently recognized in Income together with the recognition of the gain / loss originally deferred.

 

Changes in tax legislation and rates are recognized in the consolidated statement of income under Income tax and social contribution in the period in which they are enacted. Interest and fines are recognized in the consolidated statement of income under General and administrative expenses. Income tax and social contribution are calculated at the rates shown below, considering the respective taxable bases, based on the current legislation related to each tax, which in the case of the operations in Brazil are for all the reporting periods as follows:

 

 
 

  

   06/30/2014 
Income tax   15.00%
Additional income tax   10.00%
Social contribution (*)   15.00%

(*) For non-financial operations consolidated in the financial statements the social contribution rate regards 9.00%.

 

To determine the proper level of provisions for taxes to be maintained for uncertain tax positions, a two-phased approach was applied, according to which a tax benefit is recognized if it is more probable than not that a position can be sustained. The benefit amount is then measured to be the highest tax benefit which probability of realization is over 50.0%.

 

o)Insurance contracts and private pension

 

IFRS 4 – “Insurance contracts” defines insurance contracts as contracts under which the issuer accepts a significant insurance risk of the counterparty, by agreeing to compensate it if a specified uncertain future event adversely affects it.

 

ITAÚ UNIBANCO HOLDING, through its subsidiaries, issues contracts to clients that have insurance risks, financial risks or a combination of both. A contract under which ITAÚ UNIBANCO HOLDING accepts significant insurance risks from its clients and agrees to compensate them upon the occurrence of a specified uncertain future event is classified as an insurance contract. The insurance contract may also transfer a financial risk, but is accounted for as an insurance contract, should the insurance risk be significant.

 

As permitted by IFRS 1, upon adoption of IFRS for the first time, ITAÚ UNIBANCO HOLDING elected not to change its accounting policies for insurance contracts, which follow accounting practices adopted in Brazil (“BRGAAP”).

 

Investment contracts are those that transfer a significant financial risk. Financial risk is the risk of a future change in one or more variables, such as interest rate, price of financial assets, price of commodities, foreign exchange rate, index of prices or rates, credit risk rating, credit index or other variable.

 

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

 

Investment contracts with discretionary participation features are financial instruments, but they are treated as insurance contracts, as established by IFRS 4.

 

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

 

Note 30 presents a detailed description of all products classified as insurance contracts.

 

Private pension plans

 

In accordance with IFRS 4, an insurance contract is one that exposes its issuer to a significant insurance risk. An insurance risk is significant only if the insurance event could cause an issuer to pay significant additional benefits in any scenario, except for those that do not have commercial substance. Additional benefits refer to amounts that exceed those that would be payable if no insured event occurred.

 

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

 

 
 

  

The payment of additional benefits is considered significant in all scenarios with commercial substance, since survival of the beneficiary may exceed the survival estimates in the actuarial table used to define the benefit agreed in the contract. The option of conversion into a fixed amount to be paid for the life of the beneficiary is not available. All contracts give the right to the counterparty to choose a life annuity benefit.

 

Insurance premiums

 

Insurance premiums are recognized over the period of the contracts in proportion to the amount of the insurance coverage. Insurance premiums are recognized as income in the consolidated statement of income.

 

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

 

Reinsurance

 

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

 

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

 

Reinsurance assets are valued according to consistent basis of risk assignment contracts, and in the event of losses effectively paid are revalued after 365 days elapse in relation to the possibility of non-recovery of such losses. In the event of doubt, these assets are reduced based on the provision recognized for credit risk associated to reinsurance.

 

Acquisition costs

 

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

 

Liabilities

 

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

 

Embedded derivatives

 

ITAÚ UNIBANCO HOLDING analyzes all contracts in order to check for any embedded derivatives. In the cases where these derivatives meet the definition of insurance contracts on their own, we do not separate them. We have not identified any embedded derivatives in our insurance contracts, which may be separated or measured at fair value in accordance with IFRS 4 requirements.

 

Liability adequacy test

 

IFRS 4 requires that the insurance companies analyze the adequacy of their insurance liabilities in each reporting period through a minimum adequacy test. The liability adequacy test for IFRS was conducted by adopting the current actuarial assumptions for future cash flows of all insurance contracts in force on the balance sheet date.

 

 
 

  

As a result of this test, if the assessment shows that the carrying amount of the insurance liabilities (less related deferred acquisition costs of contracts and related intangible assets) is lower than the value of the estimated future cash flows, any identified deficiency will have to be recognized in income for the period. In order to perform the adequacy test, insurance contracts are grouped in portfolios that are broadly subject to similar risks and which risks are jointly managed as a single portfolio.

 

The assumptions used to conduct the liability adequacy test are detailed in Note 30.

 

p)Capitalization plans

 

ITAÚ UNIBANCO HOLDING sells capitalization certificates, in which clients deposit specific amounts, depending on the plan, which are redeemable at the original amount plus interest. Clients enter, during the term of the plan, into raffles of cash prizes.

 

While for regulatory purposes in Brazil they are regulated by the insurance regulator, these plans do not meet the definition of an insurance contract under IFRS 4, and therefore they are classified as a financial liability at amortized cost under IAS 39.

 

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

 

q)Post-employments benefits

 

ITAÚ UNIBANCO HOLDING is required to make contributions to government social security and labor indemnity plans, in Brazil and in other countries where it operates, which are expensed in the consolidated statement of income as an integral part of general and administrative expenses, when incurred. Those contributions totaled R$ 792 from January 1 to June 30, 2014 (R$ 742 from January 1 to June 30, 2013).

 

Additionally, ITAÚ UNIBANCO HOLDING also sponsors defined benefit plans and defined contribution plans, accounted for pursuant to IAS 19 – “Employee benefits” up to December 31, 2012 and in accordance with the IAS 19 (revised in June 2011) – “Employee benefits” as from January 1, 2013.

 

Pension plans - Defined benefit plans

 

The liability (or asset, as the case may be) recognized in the consolidated balance sheet with respect to the defined benefit plan corresponds to the present value of the defined benefit obligations on the balance sheet date less the fair value of the plan assets. The defined benefit obligation is annually calculated by an independent actuarial consulting company using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated amount of future cash flows of benefit payments based on the Brazilian treasury long term securities denominated in reais and with maturity periods similar to the term of the pension plan liabilities.

 

The following amounts are recognized in the consolidated statement of income:

 

·current service cost – defined as the increase in the present value of obligations resulting from employee service in the current period;
·interest on the net amount of assets (liabilities) of defined benefit plans is the change, during the period, in the net amount recognized in assets and liabilities, due to the time elapsed, which comprises the interest income on plan assets, interest expense on the obligations of the defined benefit plan and interest on the asset ceiling effects.

 

Actuarial gains and losses arise from the non-realization of the actuarial assumptions established in the latest actuarial evaluation as compared to those effectively carried out, as well as the effects from changes in such assumptions. Gains and losses are fully recognized in Other Comprehensive Income.

 

 
 

  

Pension plans - defined contribution

 

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

 

Other post-employment benefit obligations

 

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

 

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

 

r)Stock-based compensation

 

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

 

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

 

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

 

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

 

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

 

s)Financial guarantees

 

In accordance with IAS 39, the issuer of a financial guarantee contract has an obligation and should recognize it initially at its fair value. Subsequently, this obligation should be measured at: (i) the amount initially recognized less accumulated amortization and (ii) the amount determined pursuant to IAS 37 – “Provisions, contingent liabilities and contingent assets”, whichever is higher.

 

ITAÚ UNIBANCO HOLDING recognizes the fair value of the guarantees issued in the consolidated balance sheet under Other liabilities. Fair value is generally represented by the fee charged to client for issuing the guarantee. This amount at the issuance date is amortized over the life of the guarantee issued and recognized in the consolidated statement of income under Banking service fees.

 

After issuance, if based on the best estimate ITAÚ UNIBANCO HOLDING concludes that the occurrence of a loss regarding a guarantee issued is probable, and if the loss amount is higher than the initial fair value less cumulative amortization of the guarantee, a provision is recognized for such amount.

 

 
 

  

t)Provisions, contingent assets and contingent liabilities

 

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

 

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

 

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

 

These contingencies are evaluated based on the Management’s best estimates, taking into account the opinion of legal counsel when there is a likelihood that financial resources are required to settle the obligations and the amounts can be estimated with reasonable certainty.

 

Contingent losses are classified as:

 

·probable: in which liabilities are recognized in the consolidated balance sheet under Provisions;
·possible: in which case they are disclosed in the financial statements but no provision is recorded;
·remote: which require neither a provision nor disclosure.

 

Contingent liabilities recorded under Provisions and those disclosed as possible are measured using best estimates through the use of models and criteria which allow their appropriate measurement even if there is uncertainty as to their ultimate timing and amount, and the criteria are detailed in Note 32.

 

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

 

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

 

u)Capital

 

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

 

 
 

  

v)Treasury shares

 

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

 

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

 

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

 

w)Dividends and interest on capital

 

Pursuant to the Company's bylaws, stockholders are entitled to a mandatory minimum dividend of 25.0% of net income for the year, as determined in accordance with the corporate law. Minimum dividend amounts established in the bylaws are recorded as liabilities at the end of each year. Any other amount above the mandatory minimum dividend is accounted for as liabilities, when approved by the stockholders at a Stockholder´s Meeting. Since January 1, 1996, Brazilian companies have been permitted to attribute a tax-deductible nominal interest rate charge on net equity (called interest on capital.)

 

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

 

Dividends have been and continue to be calculated and paid based on the financial statements prepared under BRGAAP and not based on these consolidated financial statements prepared under IFRS.

 

x)Earnings per share

 

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

 

Earnings per share are presented based on the two types of shares issued by ITAÚ UNIBANCO HOLDING. Both types, common and preferred, participate in dividends on substantially the same basis, except that preferred shares are entitled to a priority non-cumulative minimum annual dividend of R$ 0.022 per share. Earnings per share are computed based on the distributed earnings (dividends and interest on capital) and undistributed earnings of ITAÚ UNIBANCO HOLDING after giving effect to the preference indicated above, without regard to whether the earnings will ultimately be fully distributed. Earnings per share amounts have been determined as if all earnings were distributed and computed following the requirements of IAS 33 – “Earnings per share”.

 

ITAÚ UNIBANCO HOLDING grants stock-based compensation whose dilutive effect is reflected in diluted earnings per share, with the application of the “treasury stock method“. Under the treasury stock method, earnings per share are calculated as if shares under stock-based compensation plans had been issued and as if the assumed proceeds (funds to be received upon exercise of the stock options and the amount of compensation cost attributed to future services and not yet recognized) were used to purchase shares of ITAÚ UNIBANCO HOLDING.

 

y)Revenue from services

 

ITAÚ UNIBANCO HOLDING provides a number of services to its clients, such as investment management, credit card, investment banking services and certain commercial banking services.

 

Services related to current accounts are offered to clients either in the format of packages or individually. These revenues are recognized when such services are provided.

 

 
 

  

Income from credit card commissions arises from the capture of these transactions and allocated to income on their capture and processing date.

 

Revenue from certain services such as fees from funds management, performance, collection for retail clients and custody, is recognized over the life of the related contracts on a straight-line basis.

 

The breakdown of the banking service fees is detailed in Note 24.

 

z)Segment information

 

IFRS 8 – “Operating segments” requires that operating segments are disclosed consistently with information provided to the chief operating decision maker, who is the person or group of persons that allocates resources to the segments and assesses their performance. ITAÚ UNIBANCO HOLDING considers that its Executive Board is the chief operating decision maker.

 

ITAÚ UNIBANCO HOLDING has four reportable segments: (i) Commercial Bank – Retail, (ii) Consumer Credit – Retail, (iii) Wholesale Bank, and (iv) Activities with the Market + Corporation.

 

Segment information is presented in Note 34.

 

 
 

 

Note 3 – Business development

 

a)BSF Holding S.A.

 

On April 14, 2011, ITAÚ UNIBANCO HOLDING entered into a sale and purchase agreement for the purchase and sale of shares with Carrefour Comércio e Indústria Ltda. (“Carrefour”) to acquire 49.0% of BSF Holding S.A. (“Banco Carrefour”), the entity responsible for the offer and distribution, on an exclusive basis, of financial, insurance and private pension products and services in the distribution channels of Carrefour Brazil operated under the “Carrefour” brand in Brazil. The completion of the operation was subject to the approval of the Central Bank of Brazil, which was obtained on April 23, 2012 and to the transfer of shares of BSF to ITAÚ UNIBANCO HOLDING., which was carried out on May 31, 2012.

 

Since May 31, 2012 ITAÚ UNIBANCO HOLDING have accounted for this interest in BSF under the equity method (Note 13) and as transactions with related parties (Note 35).

 

The allocation of the difference between the investment held in BSF and the interest in its net assets, at the acquisition date, is shown below:

 

Acquired identifiable assets and assumed liabilities     
Cash and deposits on demand   1 
Available-for-sale financial assets   131 
Loan operations, net   600 
Fixed assets, net   6 
Intangible assets, net   33 
Others assets (*)   1,881 
Total acquired assets   2,652 
Deposits   312 
Deposits received under securities repurchase agreements   94 
Provisions   27 
Others liabilities (*)   1,738 
Total assumed liabilities   2,171 
Net assets at fair value – 100.0%   481 
Interest acquired – 49.0%   236 
Consideration paid   816 
Goodwill   580 

(*) Basically represented by credit card operations.

 

Goodwill arising from the operation is reported as part of investment in the heading Investments in associates and joint ventures (Note 13a), and the impairment test is analyzed in relation to the total investment balance (including goodwill).

 

b)REDE

 

On September 24, 2012, ITAÚ UNIBANCO HOLDING completed the auction of the Tender Public Offer (OPA) to cancel REDE’s listed company register, pursuant to the OPA call notice published on August 23, 2012.

 

As a result of the auction, ITAÚ UNIBANCO HOLDING purchased, through its non-financial subsidiary Banestado Participações, Administração e Serviços Ltda., 298,989,237 common shares issued by REDE, representing 44.4% of its capital, and now it holds 635,474,593 common shares, representing 94.4% of its capital. The shares were purchased for the unit price of R$ 35.00, totaling R$ 10,469.

 

With the purpose of completing the purchase of the remaining minority interest, ITAÚ UNIBANCO HOLDING acquired, by way of its subsidiary Banestado Participações, Administração e Serviços Ltda., 36,423,856 common shares (24,207,582 shares in October 2012; 9,893,659 shares in November 2012; and 2,322,615 shares in December 2012) for the amount, offered at the OPA of September 24, 2012, of R$ 35.00, plus SELIC variation for the period, redeemed 999,884 common shares and canceled 72,372 treasury shares, thus increasing its interest in the capital, from 94.4% to 100.0%, totaling the amount of R$ 1,283 (including fees and brokerage).

 

 
 

  

On October 18, 2012, the Brazilian Securities and Exchange Commission (CVM) cancelled REDE’s registration as a publicly-held company.

 

Changes in stockholders’ equity of ITAÚ UNIBANCO HOLDING S.A., due to the purchase of shares from non-controlling stockholders of REDE, are shown below:

 

   2012 
     
Effect of change in interest   (11,151)
Recognition of deferred income tax on temporary difference (*)   3,791 
Decrease in stockholders’ equity due to the purchase of REDE’s shares   (7,360)

(*) For non-financial subsidiaries, tax rate of Income Tax and Social Contribution is 34.00%.

 

 
 

 

c)Association with Banco BMG S.A.

 

On July 9, 2012 ITAÚ UNIBANCO HOLDING entered into an Association Agreement with Banco BMG S.A. ("BMG"), aiming at the offering, distribution and commercialization of payroll debit loans through the incorporation of a financial institution, the Banco Itaú BMG Consignado S.A. (“Itaú BMG Consignado”). After obtaining the previous approval required for starting operations, issued by the Administrative Council for Economic Defense (CADE) on October 17, 2012, the final documents were signed on December 13, 2012 and Banco BMG has been a stockholder of Itaú BMG Consignado since January 7, 2013. The completion of the operation was subject to the approval of the Central Bank of Brazil, which was obtained on April 18, 2013.

 

As a result of this transaction stockholders’ equity attributed to non-controlling stockholders increased by R$ 303 at the base date of 2013.

 

On April 29, 2014, an agreement was entered into to establish the combination of payroll loan business of BMG and Itaú BMG Consignado, which will be concentrated in Itaú BMG Consignado. In reciprocity for this business combination, on July 25, 2014, a capital increase of Itaú BMG Consignado was carried out, fully subscribed and paid in by BMG in the amount of R$ 181. The possibility of this combination was already set forth in the investment agreement of December 13, 2012, which governs the association. After this capital increase, ITAÚ UNIBANCO HOLDING will hold a sixty per cent (60%) interest in the total and voting capital of Itaú BMG Consignado and BMG will hold the remaining forty per cent (40%).

 

Accordingly, as from July 25, 2014 and throughout the period of the Association, Itaú BMG Consignado will be the exclusive vehicle of BMG and its controlling shareholders for the offer, in the Brazilian territory, of payroll loans, provided that certain exceptions are observed for a maximum period of six (6) months counted from the date on which the capital of Itaú BMG Consignado is increased.

 

It is estimated that this transaction will not have significant accounting effects on the results of ITAÚ UNIBANCO HOLDING, which will continue to consolidate Itaú BMG Consignado in its financial statements.

 

d)Credicard

 

On May 14, 2013, ITAÚ UNIBANCO HOLDING, signed with Banco Citibank, a Share and Quotas Purchase Agreement for the acquisition of Banco Credicard and Credicard Promotora de Vendas, including “Credicard” brand, for the amount of R$ 2,948 million (monetarily restated). The completion of this transaction was pending approval by the Central Bank of Brazil, which was obtained on December 12, 2013 and settled on December 20, 2013. The final allocation of the difference between the amount paid by Credicard and the interest in its net assets at fair value will be concluded over 2014.

 

Banco Credicard and Credicard Promotora de Vendas are these entities responsible for the supply and distribution of financial products and services under “Credicard” brand, principally personal loans and credit cards.

 

In view of this transaction, ITAÚ UNIBANCO HOLDING now fully consolidates Banco Credicard and Credicard Promotora de Vendas in the consolidated financial statements as from December, 2013. The balances and results related to Credicard at December 31, 2013 are stated below:

 

 
 

  

Acquired identifiable assets and assumed liabilities     
Cash and deposits on demand   74 
Interbank deposits   183 
Available-for-sale financial assets   19 
Loan operations, net   6,465 
Fixed assets, net   18 
Intangible assets, net   317 
Others assets (1)   1,538 
Total acquired assets   8,614 
Deposits   1,942 
Others liabilities (2)   5,602 
Total assumed liabilities   7,544 
Net assets   1,070 
Consideration paid   2,948 
Goodwill   1,879 

(1) Basically represented by deferred tax asset balance.

(2) Basically represented by credit card operations.

  

 
 

 

 

e)BMG Seguradora S.A.

 

On June 25, 2013, ITAÚ UNIBANCO HOLDING, through Banco Itaú BMG Consignado S.A. (“JV”), which is an entity indirectly controlled by ITAÚ UNIBANCO HOLDING signed a Share Purchase Agreement with controlling shareholders of Banco BMG S.A. (“Sellers”) whereby JV agreed to acquire 99.996% of the shares issued by BMG Seguradora S.A.

 

BMG Seguradora generated R$ 62.6 million in retained premiums during 2012 and, from January to May 2013, a retained premiums’ volume of R$ 42.4 million, 77% higher than the volume generated during the same period of 2012.

 

BMG Seguradora signed exclusivity agreements with Banco BMG S.A and with the JV for the purpose of distributing insurance products to be offered jointly with the products distributed by these financial institutions.

 

The approval by the Central Bank of Brazil was obtained on December 19, 2013 and the transaction was settled on January 27, 2014 in the amount of R$ 88. This acquisition has not had any significant accounting impact on the results of ITAÚ UNIBANCO HOLDING, which has consolidated the transaction in its financial statements since January, 2014.

 

The final allocation of the difference between the amount paid and the interest in net assets at fair value (Purchase Price Allocation - PPA) will be completed during 2014.

 

f)Citibank N.A. Uruguay Branch

 

On June 28, 2013, Itau Unibanco Holding, whereby its subsidiary Banco Itaú Uruguay S.A. (“BIU”) executed On June 28, 2013, ITAU UNIBANCO HOLDING, through its subsidiary Banco Itaú Uruguay S.A. (“BIU”) executed a binding agreement with Citibank N.A. Uruguay Branch (“Citi”) establishing the rules for the acquisition by BIU of the retail business conducted by Citi in Uruguay.

 

As a result of this transaction, BIU will assume a portfolio of more than 15,000 clients in Uruguay related to the retail business (bank accounts, saving and term deposits). The acquired assets include mainly the credit card operations conducted by Citi in Uruguay under the Visa, Mastercard and Diners brand, which in 2012 represented slightly more than 6% of the Uruguayan market share.

 

The amount involved in the transaction is not material for ITAU UNIBANCO HOLDING and, therefore, will not cause any material accounting effect in its results.

 

The closing of the transaction was subject to the fulfillment of certain conditions precedent, including the approval by competent regulatory authorities, which was obtained on December 10, 2013.

 

The final allocation of the difference between the amount paid and the interest in net assets at fair value (Purchase Price Allocation - PPA) will be completed during 2014.

 

g)Partnership with Fiat

 

On August 20, 2013, ITAÚ UNIBANCO HOLDING announced that it renewed for another 10 years, by means of its subsidiary Itaú Unibanco S.A., the commercial cooperation agreement entered into with Fiat Group Automobiles S.p.A. and Fiat Automóveis S.A. (“Fiat”). This agreement sets forth: (i) exclusive financing offer in promotional campaigns held by car maker Fiat for the sale of new automobiles; and (ii) the exclusive use of Fiat brand in vehicle-financing related activities.

 

The amount involved in the transaction is not material for ITAÚ UNIBANCO HOLDING and, therefore, will not cause any material accounting effect in its results.

 

h)Itaú CorpBanca

 

On January 29, 2014, ITAÚ UNIBANCO HOLDING, together with its subsidiary Banco Itaú Chile S.A. (“BIC”) entered into an agreement (Transaction Agreement) with CorpBanca (“CorpBanca”) and its controlling stockholders (“Corp Group”) establishing the terms and conditions to merge the operations of BIC and CorpBanca Chile in Chile and in the other jurisdictions in which CorpBanca operates.

 

 
 

 

The operation will be realized by means of (i) capital increase of BIC in the amount of US$ 652 million to be carried out by ITAÚ UNIBANCO HOLDING or one of its subsidiaries, (ii) merger of BIC into CorpBanca, with the cancellation of BIC shares and the issuance of new shares, at the estimated rate of 85,420.07 shares of CorpBanca for each 1 share of BIC, to be approved at the stockholders' meeting of CorpBanca upon the affirmative vote of two thirds (2/3) of shares issued by CorpBanca, so that the interests in the bank resulting from the merger (to be named “Itaú CorpBanca”) are 33.58% for ITAÚ UNIBANCO HOLDING and 32.92% for Corp Group, and (iii) subsequent integration of Itaú BBA Colombia, S.A. into the operations of Itaú CorpBanca or its subsidiaries.

 

Itaú CorpBanca will be controlled by ITAÚ UNIBANCO HOLDING, which will enter into a stockholders’ agreement with Corp Group when the operation is concluded. This agreement will entitle ITAU UNIBANCO HOLDING and Corp Group to appoint members for the Board of Directors of Itaú CorpBanca in accordance to their interests in capital stock, and this group of stockholders will have the privilege of electing the majority of members of the Board of Directors, and ITAÚ UNIBANCO HOLDING will be entitled to elect the majority of these members. The chairmen of the Boards of Directors of Itaú CorpBanca and its subsidiaries will be appointed by Corp Group, and their vice-chairmen by ITAÚ UNIBANCO HOLDING. The executives of Itaú CorpBanca and its subsidiaries will be proposed by ITAÚ UNIBANCO HOLDING and ratified by the Board of Directors of Itaú CorpBanca. The stockholders’ agreement will also set forth that Corp Group will be entitled to approve, together with ITAÚ UNIBANCO HOLDING, certain strategic matters of Itaú CorpBanca, and it will include provisions on the transfer of shares between ITAU UNIBANCO HOLDING and Corp Group, and also to third parties.

 

It is estimated that this operation will not have significant accounting effects on the results of ITAÚ UNIBANCO HOLDING, which will consolidate Itaú CorpBanca in its financial statements.

 

The effectiveness of this operation is subject to the satisfaction of certain conditions precedent, including the aforementioned approval by the stockholders’ meeting of CorpBanca and regulatory approvals in Brazil, Chile and Colombia, as well as in other applicable jurisdictions in which CorpBanca carries out activities.

 

 
 

 

Note 4 - Cash and cash equivalents

 

For purposes of consolidated statements of cash flows, Cash and cash equivalents in this note comprises the following items:

 

   06/30/2014   12/31/2013 
Cash and deposits on demand   20,605    16,576 
Interbank deposits   19,396    18,599 
Securities purchased under agreements to resell   34,506    20,615 
Total   74,507    55,790 

  

Amounts related to interbank deposits and securities purchased under agreements to resell not included in cash equivalents are R$ 7,634 (R$ 7,061 at December 31, 2013) and R$ 106,226 (R$ 117,840 at December 31, 2013), respectively.

 

Note 5 - Central Bank compulsory deposits

 

   06/30/2014   12/31/2013 
Non-interest bearing deposits   4,516    5,133 
Interest-bearing deposits   75,527    71,877 
Total   80,043    77,010 

 

Note 6 - Interbank deposits and securities purchased under agreements to resell

 

   06/30/2014   12/31/2013 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Interbank deposits   26,336    694    27,030    25,024    636    25,660 
Securities purchased under agreements to resell (*)   140,378    354    140,732    138,260    195    138,455 
Total   166,714    1,048    167,762    163,284    831    164,115 

(*) The amounts of R$ 7,402 (R$ 3,333 at December 31, 2013) are pledged in guarantee of operations on BM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias e Futuros and Central Bank and the amounts of R$ 95,575 (R$ 96,262 at December 31, 2013) are pledged in guarantee of repurchase agreement transactions, in conformity with the policies described in Note 2.4f.

 

 
 

 

Note 7 – Financial assets held for trading and designated at fair value through profit or loss

 

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

 

   06/30/2014   12/31/2013 
   Cost   Accumulated
gain/(loss) reflected
 in income		   Fair value   Cost   Accumulated
gain/(loss) reflected
 in income		   Fair value 
Investment funds   1,099    16    1,115    1,062    -    1,062 
Brazilian government securities (1a)   102,731    177    102,908    112,008    (873)   111,135 
Brazilian external debt bonds (1b)   2,131    24    2,155    1,900    4    1,904 
Government securities – abroad (1c)   1,254    42    1,296    680    (1)   679 
Argentina   239    32    271    99    -    99 
Belgium   -    -    -    109    (2)   107 
Chile   134    -    134    6    -    6 
Colombia   214    (1)   213    225    1    226 
United States   439    4    443    12    6    18 
Mexico   108    8    116    187    (5)   182 
Paraguay   78    -    78    -    -    - 
Uruguay   42    (1)   41    42    (1)   41 
Corporate securities (1d)   40,775    59    40,834    34,021    59    34,080 
Shares   2,786    18    2,804    2,853    43    2,896 
Bank deposit certificates   3,757    -    3,757    3,006    -    3,006 
Securitized real estate loans   6    -    6    12    -    12 
Debentures   5,264    (2)   5,262    5,089    8    5,097 
Eurobonds and other   1,111    40    1,151    1,270    8    1,278 
Financial credit bills   27,222    8    27,230    21,566    -    21,566 
Promissory notes   341    -    341    27    -    27 
Other   288    (5)   283    198    -    198 
Total (2)   147,990    318    148,308    149,671    (811)   148,860 

(1) Assets held for trading pledged as collateral of funding transactions of financial institutions and clients were June 30, 2014: a) R$ 18,412 (R$ 24,870 at December 31, 2013), b) R$ 385 (R$ 429 at December 31, 2013), c) R$ 173 (R$ 18 at December 31, 2013) and d) R$ 812 (R$ 426 at December 31, 2013), totaling R$ 19,782 (R$ 25,743 at December 31, 2013).

(2) No reclassifications of held for trading to other categories of financial assets were carried out in the period.

  

 
 

 

The cost and fair value of financial assets held for trading by maturity are as follows:

 

   06/30/2014   12/31/2013 
   Cost   Fair value   Cost   Fair value 
Current   54,813    54,866    51,301    51,333 
Non-stated maturity   3,885    3,919    3,915    3,958 
Up to one year   50,928    50,947    47,386    47,375 
Non-current   93,177    93,442    98,370    97,527 
From one to five years   73,639    73,747    81,576    81,032 
From five to ten years   14,418    14,539    9,068    8,935 
After ten years   5,120    5,156    7,726    7,560 
Total   147,990    148,308    149,671    148,860 

 

Financial assets held for trading include assets with a fair value of R$ 88,805 (R$ 82,394 at December 31, 2013) that belong to investment funds wholly owned by Itaú Vida e Previdência S.A. The return of those assets (positive or negative) is fully transferred to customers of our PGBL and VGBL private pension plans whose premiums (less fees charged by us) are used by our subsidiary to purchase quotas of those investment funds.

 

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

 

   06/30/2014 
   Cost   Accumulated gain/(loss)
reflected in income		   Fair value 
Brazilian external debt bonds   217    18    235 
Government securities – abroad   260    (1)   259 
Total   477    17    494 

 

   12/31/2013 
   Cost   Accumulated gain/(loss)
reflected in income		   Fair value 
Brazilian external debt bonds   355    16    371 

 

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

 

   06/30/2014   12/31/2013 
   Cost   Fair value   Cost   Fair value 
Current   217    235    -    - 
Up to one year   217    235    -    - 
Non-current   260    259    355    371 
From one to five years   260    259    -    - 
After ten years   -    -    355    371 

  

 
 

 

Note 8 – Derivatives

 

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

 

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

 

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

 

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

 

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

 

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

 

The total value of margins pledged in guarantee by ITAÚ UNIBANCO HOLDING was R$ 2,700 (R$ 10,385 at 12/31/2013) and was basically comprised of government securities.

  

 
 

 

The following table shows the composition of derivatives by index: 

   Off-balance sheet
notional amount		   Amortized cost   Gains / (losses)   Fair value 
   06/30/2014   06/30/2014   06/30/2014   06/30/2014 
Futures contracts   430,168    60    152    212 
Purchase commitments   148,112    125    190    315 
Commodities   30    (1)   -    (1)
Indices   21,450    114    -    114 
Interbank market   111,862    (14)   -    (14)
Foreign currency   12,618    26    190    216 
Securities   2,152    -    -    - 
Commitments to sell   282,056    (65)   (38)   (103)
Commodities   485    -    -    - 
Indices   35,974    (92)   (1)   (93)
Interbank market   126,113    34    (2)   32 
Foreign currency   108,959    (8)   (35)   (43)
Fixed rate   74    -    -    - 
Securities   10,451    1    -    1 
Swap contracts        (2,988)   538    (2,450)
Asset position   347,680    2,907    1,494    4,401 
Indices   83,324    869    106    975 
Interbank market   71,207    746    452    1,198 
Foreign currency   11,882    410    243    653 
Floating rate   117,929    46    30    76 
Fixed rate   63,320    836    662    1,498 
Securities   13    -    1    1 
Other   5    -    -    - 
Liability position   350,668    (5,895)   (956)   (6,851)
Commodities   28    (1)   -    (1)
Indices   179,434    (2,676)   (12)   (2,688)
Interbank market   50,048    (25)   (428)   (453)
Foreign currency   21,924    (593)   (135)   (728)
Floating rate   5,156    (40)   (13)   (53)
Fixed rate   93,651    (2,492)   (386)   (2,878)
Securities   91    (66)   17    (49)
Other   336    (2)   1    (1)
Option contracts   811,769    (205)   99    (106)
Purchase commitments – long position   202,001    810    (203)   607 
Commodities   598    11    4    15 
Indices   154,555    129    (30)   99 
Interbank market   16,508    59    (35)   24 
Foreign currency   27,232    556    (314)   242 
Floating rate   48    1    (1)   - 
Securities   3,006    49    172    221 
Other   54    5    1    6 
Commitments to sell – long position   199,752    646    280    926 
Commodities   321    9    3    12 
Indices   157,720    70    (16)   54 
Interbank market   16,649    28    13    41 
Foreign currency   20,635    376    236    612 
Floating rate   8    -    -    - 
Fixed rate   283    1    -    1 
Securities   26    1    -    1 
Other   4,110    161    44    205 
Purchase commitments – short position   134,282    (969)   255    (714)
Commodities   293    (9)   (9)   (18)
Indices   93,345    (83)   (10)   (93)
Interbank market   9,579    (31)   21    (10)
Foreign currency   28,508    (810)   420    (390)
Floating rate   49    (5)   (1)   (6)
Securities   5    -    -    - 
Other   2,503    (31)   (166)   (197)
Commitments to sell – short position   275,734    (692)   (233)   (925)
Commodities   371    (10)   (1)   (11)
Indices   239,339    (115)   5    (110)
Interbank market   15,471    (27)   (27)   (54)
Foreign currency   17,425    (382)   (171)   (553)
Floating rate   8    -    -    - 
Securities   6    -    -    - 
Other   3,114    (158)   (39)   (197)

  

 
 

 

   Off-balance sheet 
notional amount		   Amortized cost   Gains / (losses)   Fair value 
   06/30/2014   06/30/2014   06/30/2014   06/30/2014 
Forward operations (onshore)   35,713    1,600    60    1,660 
Purchases receivable   1,682    643    47    690 
Commodities   154    18    (2)   16 
Foreign currency   921    18    47    65 
Floating rate   261    261    -    261 
Fixed rate   274    274    -    274 
Securities   72    72    2    74 
Purchases payable   9,699    (1,027)   92    (935)
Commodities   42    (4)   (1)   (5)
Foreign currency   9,657    (416)   93    (323)
Floating rate   -    (261)   -    (261)
Fixed rate   -    (274)   -    (274)
Securities   -    (72)   -    (72)
Sales receivable   22,650    3,276    (50)   3,226 
Commodities   148    5    6    11 
Indices   1    1    -    1 
Interbank market   8,761    1    2    3 
Foreign currency   11,406    503    (58)   445 
Floating rate   264    264    -    264 
Fixed rate   709    1,166    -    1,166 
Securities   1,361    1,336    -    1,336 
Sales deliverable   1,682    (1,292)   (29)   (1,321)
Commodities   31    (3)   -    (3)
Interbank market   553    -    -    - 
Foreign currency   1,100    (31)   (34)   (65)
Floating rate   -    (264)   -    (264)
Fixed rate   -    (715)   -    (715)
Securities   (2)   (279)   5    (274)
Credit derivatives   7,955    (30)   24    (6)
Asset position   3,631    85    47    132 
Fixed rate   2,720    85    30    115 
Securities   677    -    12    12 
Other   234    -    5    5 
Liability position   4,324    (115)   (23)   (138)
Fixed rate   3,090    (105)   (10)   (115)
Securities   1,213    (10)   (12)   (22)
Other   21    -    (1)   (1)
Forwards operations (offshore)   64,891    119    30    149 
Asset position   32,702    671    21    692 
Indices   30    -    -    - 
Foreign currency   32,651    670    21    691 
Securities   21    1    -    1 
Liability position   32,189    (552)   9    (543)
Foreign currency   32,188    (552)   9    (543)
Securities   1    -    -    - 
Swap with USD check   1,572    (54)   (43)   (97)
Asset position – interbank market   759    -    -    - 
Liability position   813    (54)   (43)   (97)
Interbank market   51    -    -    - 
Foreign currency   762    (54)   (43)   (97)
Check of swap – asset position - foreign currency   816    -    46    46 
Other derivative financial instruments   5,761    128    (56)   72 
Asset position   3,982    462    (24)   438 
Foreign currency   647    7    1    8 
Fixed rate   1,199    368    (7)   361 
Securities   2,110    87    (19)   68 
Other   26    -    1    1 
Liability position   1,779    (334)   (32)   (366)
Foreign currency   228    (7)   (12)   (19)
Fixed rate   -    (326)   -    (326)
Securities   1,325    (1)   (16)   (17)
Other   226    -    (4)   (4)
    Assets    9,560    1,810    11,370 
    Liabilities    (10,930)   (960)   (11,890)
    Total    (1,370)   850    (520)

 

Derivative contracts mature as follows (in days):

Off-balance sheet – notional amount  0 - 30   31 - 180   181 - 365   Over 365   06/30/2014 
Futures   124,772    97,579    63,804    144,013    430,168 
Swaps   4,844    44,227    64,766    230,936    344,773 
Options   490,699    98,789    211,487    10,794    811,769 
Forwards (onshore)   11,183    13,018    7,966    3,546    35,713 
Credit derivatives   241    1,699    1,094    4,921    7,955 
Forwards (offshore)   24,004    29,474    9,527    1,886    64,891 
Swaps with USD check   -    51    -    708    759 
Check of swap   -    63    -    753    816 
Other   80    1,221    875    3,585    5,761 

  

 
 

 

The following table shows the composition of derivatives by index: 

   Off-balance sheet
notional amount		   Amortized cost   Gains / (losses)   Fair value 
   12/31/2013   12/31/2013   12/31/2013   12/31/2013 
Futures contracts   427,507    (212)   179    (33)
Purchase commitments   94,038    74    221    295 
Commodities   164    -    -    - 
Indices   16,775    40    -    40 
Interbank market   65,934    7    (1)   6 
Foreign currency   6,248    27    222    249 
Securities   4,910    -    -    - 
Other   7    -    -    - 
Commitments to sell   333,469    (286)   (42)   (328)
Commodities   78    -    -    - 
Indices   42,746    (257)   (1)   (258)
Interbank market   177,323    (27)   1    (26)
Foreign currency   106,857    (2)   (43)   (45)
Fixed rate   84    -    1    1 
Securities   6,371    -    -    - 
Other   10    -    -    - 
Swap contracts        (2,249)   580    (1,669)
Asset position   297,381    2,434    2,008    4,442 
Commodities   3    -    -    - 
Indices   61,344    824    149    973 
Interbank market   60,465    44    823    867 
Foreign currency   12,209    917    306    1,223 
Floating rate   106,590    72    117    189 
Fixed rate   56,717    577    611    1,188 
Securities   50    -    -    - 
Other   3    -    2    2 
Liability position   299,630    (4,683)   (1,428)   (6,111)
Commodities   6    -    -    - 
Indices   160,534    (1,777)   (259)   (2,036)
Interbank market   43,773    49    (714)   (665)
Foreign currency   20,340    (1,440)   (208)   (1,648)
Floating rate   4,365    (68)   (85)   (153)
Fixed rate   70,318    (1,344)   (188)   (1,532)
Securities   143    (86)   23    (63)
Other   151    (17)   3    (14)
Option contracts   1,182,380    287    (491)   (204)
Purchase commitments – long position   234,552    1,216    107    1,323 
Commodities   367    5    3    8 
Indices   178,617    244    (47)   197 
Interbank market   30,075    166    (58)   108 
Foreign currency   22,409    765    57    822 
Floating rate   96    1    (1)   - 
Securities   2,943    31    155    186 
Other   45    4    (2)   2 
Commitments to sell – long position   393,502    651    (257)   394 
Commodities   261    5    2    7 
Indices   334,616    210    (170)   40 
Interbank market   34,199    32    (24)   8 
Foreign currency   18,079    205    (110)   95 
Floating rate   500    1    -    1 
Fixed rate   28    1    -    1 
Securities   5,808    196    45    241 
Other   11    1    -    1 
Purchase commitments – short position   170,271    (1,131)   (433)   (1,564)
Commodities   132    (3)   (1)   (4)
Indices   136,645    (161)   (103)   (264)
Interbank market   12,498    (37)   (31)   (68)
Foreign currency   18,717    (909)   (147)   (1,056)
Fixed rate   2    -    -    - 
Securities   2,237    (17)   (153)   (170)
Other   40    (4)   2    (2)
Commitments to sell – short position   384,055    (449)   92    (357)
Commodities   511    (5)   (1)   (6)
Indices   317,387    (73)   25    (48)
Interbank market   52,354    (21)   9    (12)
Foreign currency   10,582    (161)   109    (52)
Fixed rate   2    -    -    - 
Securities   3,208    (188)   (50)   (238)
Other   11    (1)   -    (1)

  

 
 

 

   Off-balance sheet 
notional amount		   Amortized cost   Gains / (losses)   Fair value 
   12/31/2013   12/31/2013   12/31/2013   12/31/2013 
Forwards operations (onshore)   58,960    1,416    37    1,453 
Purchases receivable   9,282    954    128    1,082 
Commodities   22    1    -    1 
Foreign currency   8,786    480    128    608 
Floating rate   346    345    -    345 
Fixed rate   128    128    -    128 
Purchases payable   1,611    (497)   5    (492)
Commodities   34    (2)   (1)   (3)
Foreign currency   1,577    (20)   6    (14)
Floating rate   -    (347)   -    (347)
Fixed rate   -    (128)   -    (128)
Sales receivable   27,664    2,243    (10)   2,233 
Commodities   27    5    -    5 
Interbank market   22,482    179    4    183 
Foreign currency   3,246    38    (14)   24 
Floating rate   149    149    -    149 
Fixed rate   725    861    -    861 
Securities   1,035    1,011    -    1,011 
Sales deliverable   20,403    (1,284)   (86)   (1,370)
Commodities   19    (4)   4    - 
Interbank market   11,842    -    (1)   (1)
Foreign currency   8,542    (400)   (89)   (489)
Floating rate   -    (149)   -    (149)
Fixed rate   -    (731)   -    (731)
Credit derivatives   25,300    151    144    295 
Asset position   13,852    604    82    686 
Fixed rate   12,973    604    63    667 
Securities   659    -    13    13 
Other   220    -    6    6 
Liability position   11,448    (453)   62    (391)
Foreign currency   2,544    (67)   (17)   (84)
Fixed rate   7,724    (386)   108    (278)
Securities   1,155    -    (28)   (28)
Other   25    -    (1)   (1)
Forwards operations (offshore)   50,737    (32)   27    (5)
Asset position   20,900    533    22    555 
Indices   27    2    -    2 
Foreign currency   20,775    530    22    552 
Floating rate   98    1    -    1 
Liability position   29,837    (565)   5    (560)
Indices   63    (1)   -    (1)
Foreign currency   29,774    (564)   5    (559)
Swap with USD check   1,647    (103)   (42)   (145)
Asset position – interbank market   772    -    -    - 
Liability position   875    (103)   (42)   (145)
Interbank market   65    -    (1)   (1)
Foreign currency   810    (103)   (41)   (144)
Check of swap – asset position - foreign currency   886    -    88    88 
Other derivative financial instruments   7,093    195    (14)   181 
Asset position   5,602    536    27    563 
Foreign currency   509    25    6    31 
Fixed rate   1,256    400    8    408 
Securities   3,824    111    13    124 
Other   13    -    -    - 
Liability position   1,491    (341)   (41)   (382)
Foreign currency   482    (13)   (22)   (35)
Fixed rate   -    (328)   (1)   (329)
Securities   777    -    (14)   (14)
Other   232    -    (4)   (4)
    Assets    9,171    2,195    11,366 
    Liabilities    (9,718)   (1,687)   (11,405)
    Total    (547)   508    (39)

 

Derivative contracts mature as follows (in days):

Off-balance sheet - notional amount  0 - 30   31 - 180   181 - 365   Over 365   12/31/2013 
Futures   98,979    111,667    54,054    162,807    427,507 
Forwards (onshore)   9,900    32,131    10,889    6,040    58,960 
Options   900,047    103,711    153,069    25,553    1,182,380 
Swaps   10,220    19,984    33,462    231,281    294,947 
Credit derivatives   257    1,648    613    22,782    25,300 
Forwards (offshore)   20,418    21,734    6,390    2,195    50,737 
Swaps with USD check   8    7    51    706    772 
Check of swap   9    9    67    801    886 
Other   23    1,027    1,417    4,626    7,093 

  

 
 

 

Derivative financial instruments

 

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

 

   06/30/2014 
   Fair value   %   0-30
days		   31-90
days		   91-180
days		   181-365
days		   366-720
days		   Over 720
days		 
Assets                                        
Futures contracts - BM&FBOVESPA   212    1.9    186    14    (5)   18    7    (8)
Swaps – difference receivable   4,401    38.7    126    237    212    833    452    2,541 
BM&FBOVESPA   254    2.2    3    9    7    34    23    178 
Companies   2,792    24.6    95    197    180    511    263    1,546 
Financial institutions   1,028    9.0    28    22    24    139    149    666 
Individuals   327    2.9    -    9    1    149    17    151 
Option premiums   1,533    13.5    273    261    248    404    153    194 
BM&FBOVESPA   395    3.5    157    50    80    107    1    - 
Companies   287    7.5    17    28    24    74    67    77 
Financial institutions   851    2.5    99    183    144    223    85    117 
Forwards (onshore)   3,916    34.4    2,493    673    443    143    34    130 
BM&FBOVESPA   1,063    9.3    180    522    320    41    -    - 
Companies   2,679    23.6    2,178    147    101    89    34    130 
Financial institutions   173    1.5    135    4    22    12    -    - 
Individuals   1    -    -    -    -    1    -    - 
Credit derivatives - financial Institutions   132    1.2    -    -    -    3    2    127 
Forwards (offshore)   692    6.1    107    194    94    185    74    38 
Companies   292    2.6    23    92    38    62    48    29 
Financial institutions   388    3.4    81    95    56    121    26    9 
Individuals   12    0.1    3    7    -    2    -    - 
Check of swap – companies   46    0.4    -    -    -    -    3    43 
Other   438    3.8    -    293    6    4    31    104 
Companies   426    3.7    -    293    6    3    28    96 
Financial institutions   12    0.1    -    -    -    1    3    8 
Total (*)   11,370    100.0    3,185    1,672    998    1,590    756    3,169 
% per maturity term             28.0    14.7    8.8    14.0    6.6    27.9 

(*) Of the total asset portfolio of Derivative Financial Instruments, R$ 7,445 refers to current and R$ 3,925 to non-current.

 

 
 

 

Derivative financial instruments

 

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

 

   12/31/2013 
   Fair value   %   0-30
days		   31-90
days		   91-180
days		   181-365
days		   366-720
days		   Over 720
days		 
Assets                                        
Swaps – difference receivable   4,442    39.1    396    242    168    335    865    2,436 
BM&FBOVESPA   350    3.1    2    46    63    19    41    179 
Companies   2,692    23.7    168    187    102    260    448    1,527 
Financial institutions   1,141    10.0    225    5    3    47    180    681 
Individuals   259    2.3    1    4    -    9    196    49 
Option premiums   1,717    15.1    423    130    149    698    187    130 
BM&FBOVESPA   1,052    9.3    336    40    16    536    124    - 
Companies   219    1.9    9    28    58    45    -    79 
Financial institutions   446    3.9    78    62    75    117    63    51 
Forwards (onshore)   3,315    29.1    2,018    455    361    232    184    65 
BM&FBOVESPA   1,195    10.5    424    381    273    117    -    - 
Companies   1,261    11.1    868    71    82    113    63    64 
Financial institutions   857    7.5    726    2    6    2    120    1 
Individuals   2    -    -    1    -    -    1    - 
Credit derivatives - financial institutions   686    6.0    -    658    1    1    4    22 
Forwards (offshore)   555    4.9    96    186    65    73    84    51 
Companies   126    1.1    16    37    34    19    14    6 
Financial institutions   427    3.8    80    149    31    52    70    45 
Individuals   2    -    -    -    -    2    -    - 
Check of swap – companies   88    0.8    -    -    -    1    7    80 
Other   563    5.0    -    -    4    335    79    145 
Companies   43    0.4    -    -    3    1    24    15 
Financial institutions   520    4.6    -    -    1    334    55    130 
Total (*)   11,366    100.0    2,933    1,671    748    1,675    1,410    2,929 
% per maturity term             25.8    14.7    6.6    14.7    12.4    25.8 

(*) Of the total asset portfolio of Derivative Financial Instruments, R$ 7,027 refers to current and R$ 4,339 to non-current.

 

 
 

 

   06/30/2014 
   Fair value   %   0 - 30 days   31 - 90
days		   91 - 180
days		   181 - 365
days		   366 - 720
days		   Over 720
days		 
Liabilities                                        
Swaps – Difference payable   (6,851)   57.7    (94)   (287)   (151)   (717)   (402)   (5,200)
BM&FBOVESPA   (449)   3.8    (9)   (48)   (19)   (160)   (12)   (201)
Companies   (2,461)   20.7    (77)   (227)   (94)   (272)   (203)   (1,588)
Financial institutions   (1,008)   8.5    (8)   (9)   (36)   (159)   (146)   (650)
Individuals   (2,933)   24.7    -    (3)   (2)   (126)   (41)   (2,761)
Option premiums   (1,639)   13.8    (248)   (167)   (276)   (545)   (170)   (233)
BM&FBOVESPA   (442)   3.7    (161)   (32)   (96)   (152)   (1)   - 
Companies   (295)   2.5    (11)   (27)   (29)   (55)   (64)   (109)
Financial institutions   (902)   7.6    (76)   (108)   (151)   (338)   (105)   (124)
Forwards (onshore)   (2,256)   19.0    (1,824)   (54)   (51)   (180)   (58)   (89)
Companies   (1,998)   16.8    (1,703)   (53)   (49)   (46)   (58)   (89)
Financial institutions   (258)   2.2    (121)   (1)   (2)   (134)   -    - 
Credit derivatives   (138)   1.2    -    -    (1)   (3)   (12)   (122)
Companies   (11)   0.1    -    -    -    -    (11)   - 
Financial institutions   (127)   1.1    -    -    (1)   (3)   (1)   (122)
Forwards (offshore)   (543)   4.5    (111)   (183)   (138)   (83)   (19)   (9)
Companies   (95)   0.8    (9)   (35)   (21)   (16)   (5)   (9)
Financial institutions   (448)   3.7    (102)   (148)   (117)   (67)   (14)   - 
Swaps with USD check - Companies   (97)   0.8    -    -    -    -    (14)   (83)
Other   (366)   3.0    -    (307)   (1)   (2)   (5)   (51)
Companies   (41)   0.3    -    -    (1)   (2)   (5)   (33)
Financial institutions   (325)   2.7    -    (307)   -    -    -    (18)
Total (*)   (11,890)   100.0    (2,277)   (998)   (618)   (1,530)   (680)   (5,787)
% per maturity term             19.2    8.4    5.2    12.9    5.7    48.6 

(*) Of the total liability portfolio of Derivative Financial Instruments, R$ (5,423) refers to current and R$ (6,467) to non-current.

 

 
 

 

   12/31/2013 
   Fair value   %   0 - 30 days   31 - 90
days		   91 - 180
days		   181 - 365
days		   366 - 720
days		   Over 720
days		 
Liabilities                                        
Futures - BM&FBOVESPA   (33)   0.3    -    -    -    -    -    (33)
Swaps – difference payable   (6,111)   53.6    (361)   (123)   (300)   (662)   (1,076)   (3,589)
BM&FBOVESPA   (514)   4.5    (81)   (1)   (10)   (74)   (150)   (198)
Financial institutions   (903)   7.9    (72)   (22)   (13)   (67)   (253)   (476)
Companies   (3,305)   29.0    (207)   (100)   (276)   (520)   (541)   (1,661)
Individuals   (1,389)   12.2    (1)   -    (1)   (1)   (132)   (1,254)
Option premiums   (1,921)   16.8    (406)   (124)   (201)   (733)   (316)   (141)
BM&FBOVESPA   (1,086)   9.5    (328)   (48)   (54)   (560)   (95)   (1)
Financial institutions   (640)   5.6    (76)   (55)   (107)   (136)   (176)   (90)
Companies   (195)   1.7    (2)   (21)   (40)   (37)   (45)   (50)
Forwards (onshore)   (1,862)   16.3    (1,482)   (94)   (72)   (63)   (116)   (35)
BM&FBOVESPA   (1)   -    -    (1)   -    -    -    - 
Financial institutions   (696)   6.1    (694)   -    (2)   -    -    - 
Companies   (1,165)   10.2    (788)   (93)   (70)   (63)   (116)   (35)
Credit derivatives - financial institutions   (391)   3.5    (6)   (253)   -    (3)   (24)   (105)
Financial institutions   (373)   3.3    (6)   (253)   -    (3)   (13)   (98)
Companies   (18)   0.2    -    -    -    -    (11)   (7)
Forwards (offshore)   (560)   4.9    (166)   (139)   (86)   (100)   (46)   (23)
Financial institutions   (339)   3.0    (125)   (100)   (44)   (52)   (18)   - 
Companies   (219)   1.9    (40)   (39)   (41)   (48)   (28)   (23)
Individuals   (2)   -    (1)   -    (1)   -    -    - 
Swaps with USD check – companies   (145)   1.3    -    -    -    (1)   (22)   (122)
Other   (382)   3.3    -    -    (1)   (330)   (7)   (44)
Financial institutions   (333)   2.9    -    -    -    (329)   (2)   (2)
Companies   (49)   0.4    -    -    (1)   (1)   (5)   (42)
Total (*)   (11,405)   100.0    (2,421)   (733)   (660)   (1,892)   (1,607)   (4,092)
% per maturity term             21.2    6.4    5.8    16.6    14.1    35.8 

(*) Of the total liability portfolio of Derivative Financial Instruments, R$ (5,706) refers to current and R$ (5,699) to non-current.

 

 
 

 

a) Information on credit derivatives

 

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

 

Credit Default Swaps – CDS

 

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

 

Total Return Swap – TRS

 

TRS is a transaction in which a party swaps the total return of a reference entity or of a basket of assets for regular cash flows, usually interest and a guarantee against capital loss. In a TRS contract, the parties do not transfer the ownership of the assets.

 

The table below presents the portfolio of credit derivatives in which ITAÚ UNIBANCO HOLDING sells protection to third parties, by maturity, and the maximum potential of future payments, gross of any guarantees, as well as its classification by instrument, risk and reference entity.

 

   06/30/2014 
   Maximum potential
of future
payments, gross		   Before 1 year   From 1 to 3
years		   From 3 to 5
years		   Over 5
years		 
By instrument                         
CDS   5,141    1,500    1,555    1,161    925 
TRS   1,385    1,374    11    -    - 
Total by instrument   6,526    2,874    1,566    1,161    925 
By risk rating                         
Investment grade   6,526    2,874    1,566    1,161    925 
Total by risk   6,526    2,874    1,566    1,161    925 
By reference entity                         
Private entities   6,526    2,874    1,566    1,161    925 
Total by entity   6,526    2,874    1,566    1,161    925 

 

   12/31/2013 
   Maximum potential
of future
payments, gross		   Before 1 year   From 1 to 3
years		   From 3 to 5
years		   Over 5
years		 
By instrument                         
CDS   12,249    1,012    2,375    8,463    399 
TRS   1,473    1,462    11    -    - 
Total by instrument   13,722    2,474    2,386    8,463    399 
By risk rating                         
Investment grade   13,722    2,474    2,386    8,463    399 
Total by risk   13,722    2,474    2,386    8,463    399 
By reference entity                         
Private entities   13,722    2,474    2,386    8,463    399 
Total by entity   13,722    2,474    2,386    8,463    399 

 

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

 

 
 

  

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

 

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

 

   06/30/2014 
   Notional amount of credit
protection sold		   Notional amount of credit protection
purchased with identical underlying
amount		   Net position 
CDS   (5,141)   1,429    (3,712)
TRS   (1,385)   -    (1,385)
Total   (6,526)   1,429    (5,097)

 

   12/31/2013 
   Notional amount of credit
protection sold		   Notional amount of credit protection
purchased with identical underlying
amount		   Net position 
CDS   (12,249)   11,578    (671)
TRS   (1,473)   -    (1,473)
Total   (13,722)   11,578    (2,144)

 

 

 
 

 

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

 

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

 

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

 

06/30/2014 
   Gross amount of
recognized financial		  Gross amount offset in the   Net amount of financial assets
presented in the statement of		   Related amoutns not offset in the statement of financial
position (2)		     
   assets (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral received   Net amount 
Securities purchased under agreements to resell   140,732    -    140,732    (465)   -    140,267 
Derivatives   12,102    (732)   11,370    (2,077)   (665)   8,628 

 

12/31/2013 
   Gross amount of
recognized financial		   Gross amount offset in the   Net amount of financial assets
presented in the statement of		   Related amoutns not offset in the statement of financial
position (2)		     
   assets (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral received   Net amount 
Securities purchased under agreements to resell   138,455    -    138,455    (957)   (3)   137,495 
Derivatives   12,149    (783)   11,366    (3,599)   (429)   7,338 

 

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

 

06/30/2014 
   Gross amount of
recognized financial		   Gross amount offset in the   Net amount of financial liabilities
presented in the statement of		   Related amoutns not offset in the statement of financial
position (2)		     
   liabilities (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral received   Net amount 
Securities sold under repurchase agreements   266,340    -    266,340    (10,475)   -    255,865 
Derivatives   11,890    -    11,890    (2,077)   -    9,813 

 

12/31/2013 
   Gross amount of
recognized financial		   Gross amount offset in the   Net amount of financial liabilities
presented in the statement of		   Related amoutns not offset in the statement of financial
position (2)		     
   liabilities (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral received   Net amount 
Securities sold under repurchase agreements   266,682    -    266,682    (12,707)   (35)   253,940 
Derivatives   11,405    -    11,405    (2,258)   (686)   8,461 

(1) Includes amounts of master offset agreements and other such agreements, both enforceable and unenforceable.

(2) Limited to amounts subject to enforceable master offset agreements and other such agreements.

(3) Includes amounts subject to enforceable master offset agreements and other such agreements, and guarantees in financial instruments.

 

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

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

 

 
 

 

Note 9 – Hedge accounting

 

Hedge accounting varies depending on the nature of the hedged item and of the transaction. Derivatives may qualify for hedging instrument for accounting purposes if they are designated as hedging instruments under fair value hedges, cash flow hedge or hedge of net investment in foreign operations.

 

Cash flow hedge

 

To hedge the variability of future cash flows of interest payments and in the foreign exchange rates ITAÚ UNIBANCO HOLDING uses DI Futures contracts exchange-traded at BM&FBOVESPA with respect to certain real-denominated variable-interest liabilities and interest rate swaps with respect to US dollar-denominated redeemable preferred shares issued by one of our subsidiaries and DI Futures contracts exchange-traded at BM&FBOVESPA, related to highly probable anticipated transactions, denominated in US dollars.

 

Under a DI Futures contract, a net payment (receipt) is made for the difference between a normal amount multiplied by the CDI rate and an amount computed and multiplied by a fixed rate. Under interest rate swap, a net payment (receipt) is made for the difference between an amount computed and multiplied by LIBOR and a notional amount computed and multiplied by a fixed rate. The gain (loss) from foreign exchange variation in Future DDI contracts is calculated by the difference between two periods of the market quotation between the US dollar and the Real.

 

ITAÚ UNIBANCO HOLDING cash flow hedge strategies consist of the hedge of the exposure to the variability in cash flows and in the foreign exchange on interest payments that are attributable to changes in interest rates with respect to recognized liabilities and changes in the foreign exchange rates of liabilities not recognized.

 

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

 

·Hedge of time deposits and repurchase agreements: hedge of the variability in cash flows of interest payments resulting from changes in the CDI interest rate;
·Hedge of redeemable preferred shares: hedge of the variability in cash flows of interest payments resulting from changes in the LIBOR interest rate;
·Hedge of subordinated certificates of deposit (CDB): hedge of the variability in the cash flows of interest payments resulting from changes in the CDI interest rate;
·Hedge of Highly probable anticipated transaction: Protecting the risk associated to variation in the amount of commitments, when measured in Reais (parent company’s functional currency) arising from variations in foreign exchange rates.

 

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

 

Hedge relationships were designated in 2008, 2009, 2010 and 2013, and related derivatives will mature between 2014 and 2018. Periods in which expected cash flows should be paid and affect the income statement are as follows:

·Hedge of time deposits and agreements to resell: interest paid/received daily;
·Hedge of redeemable preferred shares: interest paid/received every half year;
·Hedge of Highly probable anticipated transaction: foreign exchange amount paid/ received on future dates.

 

Hedge of net investment in foreign operations

 

ITAÚ UNIBANCO HOLDING strategies of net investments in foreign operations consist of a hedge of the exposure in foreign currency arising from the functional currency of the foreign operation, with respect to the functional currency of the head office.

 

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

 

 
 

  

In DDI Future contracts, the gain (loss) from exchange variation is computed as the difference between two periods of market quotation between the US dollar and Real. In the Forward or NDF contracts and Financial Assets, the gain (loss) from exchange variation is computed as the difference between two periods of market quotation between the functional currency and the US dollar.

 

ITAÚ UNIBANCO HOLDING applies the hedge of net investment in foreign operations as follows:

 

·To hedge the risk of variation in the investment amount, when measured in Brazilian Reais (the head office’s functional currency), arising from changes in exchange rates between the functional currency of the investment abroad and the Brazilian Real.

 

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

 

Hedge relationships were designated in 2011 and 2012 and the hedge instruments will mature on the sale of investments abroad, which will be in the period when the cash flows of exchange variation are expected to occur and affect the statement of income.

 

Fair value hedge

 

The fair value hedge strategy of ITAÚ UNIBANCO HOLDING consists of hedging the exposure to variation of the fair value, of interest receipts, which is attributable to changes in interest rates related to recognized assets and liabilities.

 

To hedge the variation in market risk in the receipt of interest, ITAÚ UNIBANCO HOLDING uses interest rate swap contracts related to fixed-rate assets and liabilities expressed in unidad de fomento (CLF) and expressed in euros and U.S. dólar, issued by subsidiaries in Chile and London, respectively.

 

Under an interest rate swap contract, net receipt (payment) is made for the difference between the amount computed and multiplied by variable rate and an amount computed and multiplied by a fixed rate.

 

ITAÚ UNIBANCO HOLDING has applied fair value hedge as follows:

 

·to protect the risk of variation in the fair value of receipt of interest resulting from variations in the fair value of variable rates involved.

 

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

 

·the percentage approach is based on the calculation of change in the fair value of the reviewed estimate for the hedged position (hedge item) attributable to the protected risk versus the change in the fair value of the hedged derivative instrument.
·the dollar offset method is calculated based on the difference between the variation of the fair value of the hedging instrument and the variation in the fair value of the hedged item attributed to changes in the interest rate.

 

Hedge relationships were designated in 2012, 2013 and 2014 and the respective swaps will mature between 2016 and 2029. Receipts (payments) of interest flows are expected to occur on a monthly basis, and they will affect the statement of income.

 

 
 

 

Following we present gains (or losses) of the effective and ineffective portions of the strategies of cash flow hedge, hedge of net investment in foreign operations and fair value hedge.

 

a) Cash flow hedge

 

   06/30/2014   12/31/2013 
Hedge instruments  Accumulated
effective portion		   Ineffective portion   Accumulated
effective portion		   Ineffective portion 
Interest rate futures   (136)   3    193    8 
Interest rate swap   37    -    22    - 
Foreign exchange rates futures   (14)   -    -    - 
Total   (113)   3    215    8 

 

The effective portion is recognized in the stockholders' equity, under other comprehensive income and the ineffective portion is recognized in the statement of income under net gain (loss) from investment securities and derivatives.

 

The amount of R$ 3 related to Foreign Exchange Rates Futures for the period was reclassified from Other Comprehensive Income and included in the initial cost of assets

 

At June 30, 2014, the gain (loss) related to the cash flow hedge expected to be reclassified from Comprehensive Income to Income in the following 12 months is R$ (75) (R$ (118) at 01/01 to 06/30/2013).

 

b) Hedge of a net investment in foreign operations

 

   06/30/2014   12/31/2013 
Hedge instrument  Accumulated
effective portion		   Ineffective portion   Accumulated
effective portion		   Ineffective portion 
DDI futures   (2,251)   25    (2,974)   19 
Forward   (15)   15    (15)   15 
NDF   920    5    751    5 
Financial assets   (22)   -    (10)   - 
Total   (1,368)   45    (2,248)   39 

 

The effective portion is recognized in the stockholders' equity, under other comprehensive income and the ineffective portion is recognized in the statement of income under net gain (loss) from investment securities and derivatives.

 

DDI Futures is a futures contract in which participants may trade a clean coupon for any period between the first maturity of the futures contract of foreign currency coupon (DDI) and a later maturity.

 

NDF (Non Deliverable Forward), or Forward Contract of Currency without Physical Delivery is a derivative traded on over-the-counter market, which has the foreign exchange rate of a given currency as its subject.

 

c) Fair value hedge

 

   06/30/2014   12/31/2013 
Hedge instrument used  Accumulated
effective portion		   Ineffective portion   Accumulated
effective portion		   Ineffective portion 
Interest rate swap   (57)   1    (15)   - 
Total   (57)   1    (15)   - 

 

The effective and ineffective portion are recognized in the statement of income under net gain (loss) from investment securities and derivatives.

 

 
 

 

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

 

   06/30/2014   12/31/2013 
   Hedge instruments   Hedged item   Hedge instruments   Hedged item 
Strategies  Notional amount   Fair value   Carrying value   Notional amount   Fair value   Carrying value 
Hedge of deposits and repurchase agreements    54,721    21    54,721    57,414    (12)   57,414 
Hedge of redeemable preferred shares   866    37    866    921    22    921 
Hedge of subordinated CDB   -    -    -    162    -    140 
Hedge of highly probable anticipated transaction   68    (14)   69    314    -    313 
Hedge of net investment in foreign operations (*)   12,404    (63)   7,442    11,438    (78)   6,863 
Hedge of fixed rate loan operations   1,910    (57)   1,910    1,683    (15)   1,683 
Hedge of structured funding   441    -    441    -    -    - 
Total   70,410    (76)   65,449    71,932    (83)   67,334 
 (*)Hedge instruments include the overhedge rate of 40.0% regarding taxes.

 

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

 

   Strategies     
Maturity  Hedge of deposits
and repurchase
agreements		   Hedge of
redeemable
preferred shares		   Hedge of highly
probable anticipated
transaction		  

Hedge of net

investment in foreign

operations (*)

   Hedge of fixed rate
loan operations		   Hedge of structured
funding		         Total       
2014   19,183    -    68    12,404    -    -    31,655 
2015   11,887    866    -    -    -    -    12,753 
2016   5,695    -    -    -    241    441    6,377 
2017   8,635    -    -    -    121    -    8,756 
2018   9,321    -    -    -    151    -    9,472 
2019   -    -    -    -    342    -    342 
2020   -    -    -    -    35    -    35 
2022   -    -    -    -    168    -    168 
2023   -    -    -    -    159    -    159 
2025   -    -    -    -    39    -    39 
2027   -    -    -    -    140    -    140 
2028   -    -    -    -    424    -    424 
2029   -    -    -    -    90    -    90 
Total   54,721    866    68    12,404    1,910    441    70,410 
 (*)Classified as current, since instruments are frequently renewed.

  

 
 

  

Note 10 – Available-for-sale financial assets

 

The fair value and corresponding cost of available-for-sale financial assets are as follows:

 

   06/30/2014   12/31/2013 
   Cost  

Accumulated

gain/(loss) reflected in

other comprehensive

income

   Fair value   Cost   Accumulated
gain/(loss) reflected in
other comprehensive
income		   Fair value 
                         
Investment funds   261    4    265    202    9    211 
Brazilian external debt bonds (1b)   9,060    (143)   8,917    12,545    (836)   11,709 
Brazilian government securities (1a)   14,504    (407)   14,097    28,751    (812)   27,939 
Government securities – abroad (1c)   10,306    (73)   10,233    8,737    (79)   8,658 
Belgium   47    -    47    51    -    51 
Chile   1,082    2    1,084    1,043    4    1,047 
Korea   2,910    -    2,910    2,455    -    2,455 
Denmark   3,409    -    3,409    2,631    -    2,631 
Spain   784    -    784    -    -    - 
United States   521    (3)   518    1,111    (10)   1,101 
France   124    1    125    88    -    88 
Netherlands   120    2    122    127    (1)   126 
Italy   102    -    102    94    -    94 
Paraguay   868    (66)   802    690    (52)   638 
Uruguay   333    (9)   324    440    (20)   420 
Other   6    -    6    7    -    7 
Corporate securities (1d)   38,280    357    38,637    48,208    (99)   48,109 
Shares   1,908    77    1,985    1,930    95    2,025 
Rural product note   1,073    (9)   1,064    647    (22)   625 
Bank deposit certificates   488    -    488    2,181    -    2,181 
Securitized real estate loans   2,752    32    2,784    12,663    (388)   12,275 
Debentures   18,145    172    18,317    15,404    103    15,507 
Eurobonds and others   5,066    98    5,164    4,768    128    4,896 
Financial bills   7,049    (7)   7,042    8,810    (6)   8,804 
Promissory notes   1,388    (2)   1,386    1,231    (4)   1,227 
Other   411    (4)   407    574    (5)   569 
Total (2)   72,411    (262)   72,149    98,443    (1,817)   96,626 

(1) Available-for-sale assets pledged as collateral of funding of financial institutions and Clients were: a) R$ 11,092 (R$ 9,291 at December 31, 2013), b) R$ 5,251 (R$ 7,259 at December 31, 2013), c) R$ 82 (R$ 586 at December 31, 2013) and d) R$ 304 (R$ 1,715 at December 31, 2013), totaling R$ 16,729 (R$ 18,851 at December 31, 2013).

(2) In the period, there were reclassifications from Available-for-Sale to Held-to-Maturity category in the amount of R$ 12,157 related to the Brazilian Debt Bonds held in Subsidiaries Abroad and Securitized Real Estate Loans, without effects on income, since the unrealized loss (impairment loss) of R$ 499 will be deferred over the maturity period of the instruments. This reclassification was determined as a result of the risk management strategy by which the Institution noted that it has the financial condition and the intention to hold these securities to maturity.

 

 
 

  

The cost and fair value of available-for-sale financial assets by maturity are as follows:

 

   06/30/2014   12/31/2013 
   Cost   Fair value   Cost   Fair value 
Current   24,208    24,318    38,219    38,267 
Non-stated maturity   2,165    2,246    2,129    2,231 
Up to one year   22,043    22,072    36,090    36,036 
Non-current   48,203    47,831    60,224    58,359 
From one to five years   22,197    22,331    26,089    26,430 
From five to ten years   12,598    12,524    15,525    14,792 
After ten years   13,408    12,976    18,610    17,137 
Total   72,411    72,149    98,443    96,626 

 

Note 11 - Held-to maturity financial assets

 

The amortized cost of held-to-maturity financial assets is as follows:

 

   06/30/2014   12/31/2013 
   Amortized cost   Amortized cost 
Corporate securities (1)   10,678    1 
Brazilian external debt bonds   8,645    6,314 
Brazilian government securities   10,124    3,778 
Government securities – abroad   21    23 
Total (2)   29,468    10,116 

(1) Held-to-maturity financial assets pledged as collateral of funding transactions of financial institutions and clients were 4,941 (R$ 5,095 at December 31, 2013).

(2) In the period, there were reclassifications from Available-for-Sale to Held-to-Maturity category, in the amount of R$ 12,157, related to the Brazilian Debt Bonds held in Subsidiaries Abroad, without effects on income, since the unrealized loss (impairment loss) of R$ 499 will be amortized over the maturity period of the instruments. This reclassification was determined as a result of the risk management strategy by which the Institution noted that it has the financial condition and the intention to hold these securities to maturity.

 

The interest income from held-to-maturity financial assets was R$ 870 (R$ 189 from 01/01 to 06/30/2013).

 

The fair value of held-to-maturity financial assets is disclosed in Note 31.

 

The amortized cost of Held-to-Maturity Financial Assets by maturity is as follows:

 

   06/30/2014   12/31/2013 
   Amortized cost   Amortized cost 
Current   1,009    99 
Up to one year   1,009    99 
Non-current   28,459    10,017 
From one to five years   11,727    158 
From five to ten years   9,823    5,498 
After ten years   6,909    4,361 
Total   29,468    10,116 

 

 
 

 

Note 12 - Loan operations and lease operations portfolio

 

a)Composition of loan operations and lease operations

 

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

 

Loan operations and lease operations by type  06/30/2014   12/31/2013 
Individuals   171,916    167,431 
Credit card   53,191    53,149 
Personal loan   28,069    26,635 
Payroll loans   29,886    22,571 
Vehicles   34,249    40,584 
Mortgage loans   26,521    24,492 
Corporate   129,955    126,413 
Small and medium businesses   78,899    81,601 
Foreign loans - Latin America   34,497    36,257 
Total loan operations and lease operations   415,267    411,702 
Allowance for loan and lease losses   (21,431)   (22,235)
Total loan operations and lease operations, net of allowance for loan and lease losses   393,836    389,467 

 

By maturity  06/30/2014   12/31/2013 
Overdue as from 1 day   12,144    12,239 
Falling due up to 3 months   110,363    111,254 
Falling due more than 3 months but less than 1 year   100,472    101,716 
Falling due after 1 year   192,288    186,493 
Total loan operations and lease operations   415,267    411,702 

 

By concentration  06/30/2014   12/31/2013 
Largest debtor   4,009    4,358 
10 largest debtors   21,404    19,778 
20 largest debtors   32,101    29,935 
50 largest debtors   51,980    50,131 
100 largest debtors   71,185    69,210 

 

The breakdown of the Loan and Lease Operations Portfolio by debtor’s industry is evidenced in Note 36 item 5.1. Maximum exposure of Financial Assets segregated by business sector.

 

The accretion of the net present value of impaired loan operations and lease operations and the respective allowance for loan and lease losses are not presented using their gross amounts in the statement of income but on a net basis within interest and similar income.  If they were presented at gross amounts, there would be an increase of R$ 711 and R$ 864 in interest and similar income as of June 30, 2014 and June 30, 2013, respectively, with the same impact on the allowance for loan and lease losses expenses.

 

 
 

  

b)Allowance for loan and lease losses

 

The changes in the allowance for loan and lease losses are shown in the table below:

 

Composition of the carrying
amount by class of assets		  Opening
balance
12/31/2013		   Balance
arising from
the aquisition
of companies
(Note 2.4a I)		   Write-offs
01/01 to
06/30/2014		   Net increase /
(Reversal)
01/01 to
06/30/2014		   Closing
balance
06/30/2014		 
Individuals   13,853    -    (7,043)   6,933    13,743 
Credit card   2,952    -    (2,081)   2,860    3,731 
Personal loans   6,488    -    (2,709)   2,945    6,724 
Payroll loans   1,133    -    (219)   (6)   908 
Vehicles   3,245    -    (2,009)   1,103    2,339 
Mortgage loans   35    -    (25)   31    41 
Corporate   1,783    -    (424)   482    1,841 
Small and medium businesses   6,085    -    (2,926)   2,173    5,332 
Foreign loans - Latin America   514    -    (128)   129    515 
Total   22,235    -    (10,521)   9,717    21,431 
                          
Composition of the carrying 
amount by class of assets		  Opening
balance
12/31/2012		   Balance
arising from
the aquisition
of companies
(Note 2.4a I)		   Write-offs
01/01 to
12/31/2013		   Net increase /
(Reversal)
01/01 to
12/31/2013		   Closing
balance
12/31/2013		 
Individuals   14,844    435    (13,541)   12,115    13,853 
Credit card   2,863    357    (3,513)   3,245    2,952 
Personal loans   6,841    78    (6,247)   5,816    6,488 
Payroll loans   867    -    (480)   746    1,133 
Vehicles   4,227    -    (3,263)   2,281    3,245 
Mortgage loans   46    -    (38)   27    35 
Corporate   1,362    -    (478)   899    1,783 
Small and medium businesses   9,091    -    (7,573)   4,567    6,085 
Foreign loans - Latin America   416    -    (177)   275    514 
Total   25,713    435    (21,769)   17,856    22,235 

 

The composition of the allowance for loan and lease losses by customers sector is shown in the following table:

 

   06/30/2014   12/31/2013 
Public sector   2    2 
Industry and commerce   4,050    4,630 
Services   2,851    3,012 
Natural resources   201    251 
Other sectors   11    12 
Individuals   14,316    14,328 
Total   21,431    22,235 

 

ITAÚ UNIBANCO HOLDING assesses the objective evidence of impairment for loan operations and lease operations on an individual basis for financial assets that are individually significant and, in aggregate, for financial assets that are not individually significant. (Note 2.4g VIII)

 

 
 

 

The composition of the allowance for loan and lease losses by type of assessment for objective evidence of impairment is shown in the following table:

 

   06/30/2014   12/31/2013 
   Impaired   Not impaired   Total   Impaired   Not impaired   Total 
   Loan   Allowance   Loan   Allowance   Loan   Allowance   Loan   Allowance   Loan   Allowance   Loan   Allowance 
I – Individually                                                            
evaluated                                                            
                                                             
Corporate (*)   1,991    914    127,964    927    129,955    1,841    1,584    1,019    124,829    764    126,413    1,783 
                                                             
II- Collectively                                                            
evaluated                                                            
                                                             
Individuals   10,227    5,829    161,689    7,914    171,916    13,743    10,371    6,289    157,060    7,564    167,431    13,853 
Credit card   3,038    1,632    50,153    2,099    53,191    3,731    2,520    1,493    50,629    1,459    53,149    2,952 
Personal loans   3,814    2,512    24,255    4,212    28,069    6,724    3,574    2,404    23,061    4,084    26,635    6,488 
Payroll loans   449    155    29,437    753    29,886    908    370    157    22,201    976    22,571    1,133 
Vehicles   2,670    1,510    31,579    829    34,249    2,339    3,701    2,219    36,883    1,026    40,584    3,245 
Mortgage loans   256    20    26,265    21    26,521    41    206    16    24,286    19    24,492    35 
                                                             
Small and medium businesses   3,496    2,588    75,403    2,744    78,899    5,332    4,165    3,165    77,436    2,920    81,601    6,085 
                                                             
Foreign loans - Latin America   193    98    34,304    417    34,497    515    185    95    36,072    420    36,257    514 
                                                             
Total   15,907    9,429    399,360    12,002    415,267    21,431    16,305    10,568    395,397    11,668    411,702    22,235 

(*) As detailed in Note 2.4.g.VIII, corporate loans are first evaluated on an individual basis.  In the event there is no objective indication of impairment, these are subsequently evaluated on an aggregate basis in accordance with the characteristics of the operation. As a result, an allowance for loan and lease losses for corporate loans is recognized, both in the individual and the aggregate evaluation.

 

 
 

  

c)Present value of lease operations

 

Below is the analysis of the present value of minimum future payments receivable from finance leases by maturity basically composed of individual operations - vehicles:

 

   06/30/2014 
   Minimum future   Future financial         Present       
   payments   income   value 
Current   5,093    (739)   4,354 
Up to 1 year   5,093    (739)   4,354 
Non-current   4,869    (1,247)   3,622 
From 1 to 5 years   4,709    (1,220)   3,489 
Over 5 years   160    (27)   133 
Total   9,962    (1,986)   7,976 
                
   12/31/2013 
   Minimum future   Future financial   Present 
   payments   income   value 
Current   6,587    (792)   5,795 
Up to 1 year   6,587    (792)   5,795 
Non-current   6,149    (1,597)   4,552 
From 1 to 5 years   5,950    (1,559)   4,391 
Over 5 years   199    (38)   161 
Total   12,736    (2,389)   10,347 

 

The allowance for loan and lease losses related to the lease portfolio amounts to: R$ 505 (R$ 816 at December 31, 2013).

 

d)Sale or transfer of financial assets

 

ITAÚ UNIBANCO HOLDING carried out operations related to the sale or transfer of financial assets in which there was the retention of credit risks of the financial assets transferred, through joint obligation clauses. Therefore, such operations remained recorded as loan operations and represent the following amounts at June 30, 2014 and December 31, 2013:

 

   06/30/2014   12/31/2013 
   Assets   Liabilities (*)   Assets   Liabilities (*) 
Nature of operation  Book
value		   Fair
value		   Book
value		   Fair
value		   Book
value		   Fair
value		   Book
value		   Fair
value		 
                                         
Individuals – mortgage loan   3,907    3,904    3,907    3,886    4,514    4,497    4,514    4,476 
(*)Under Interbank Market Debt

 

 
 

 

Note 13 - Investments in associates and joint ventures

 

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

 

   Interest %
at 06/30/2014		   06/30/2014 
   Total   Voting   Stockholders’
equity		   Other
Comprehensive
Income		   Net income   Investment   Equity in
earnings		   Market value 
                                 
Associates                                        
Porto Seguro Itaú Unibanco Participações S.A. (a) (b)   42.93    42.93    3,463    7    118    2,285    43    3,132 
BSF Holding S.A. (c)   49.00    49.00    1,006    -    187    1,076    91    - 
IRB-Brasil Resseguros S.A. (a) (d)   15.00    15.00    2,739    6    477    404    72    - 
Other (e)   -    -    -    -    -    81    17    - 
Joint Ventures                                        
MCC Securities Inc.(f)   50.00    50.00    17    -    4    70    2    - 
Other (g)   -    -    -    -    -    16    (2)   - 
Total   -    -    -    -    -    3,932    223    - 
                                         
   Interest %
at 12/31/2013		   12/31/2013   06/30/2013 
   Total   Voting   Stockholders’ 
equity		   Other
comprehensive
income		   Net income   Investment   Market value   Equity in 
earnings		 
                                 
Associates                                        
Porto Seguro Itaú Unibanco Participações S.A. (a) (b)   42.93    42.93    3,787    (2)   1,146    2,432    2,924    79 
BSF Holding S.A. (c)   49.00    49.00    819    -    212    984    -    40 
IRB-Brasil Resseguros S.A.(d)   15.00    15.00    2,432    (16)   102    358    -    - 
Other (e)   -    -    -    -    -    64    -    5 
Joint Ventures                                        
MCC Securities Inc.(f)   50.00    50.00    21    -    6    76    -    1 
Other (g)   -    -    -    -    -    17    -    1 
Total   -    -    -    -    -    3,931    -    126 

(a) For purpose of recording the participation in earnings, at 06/30/2014 the position at 05/31/2014 was used and at 12/31/2013 the position at 11/30/2013 was used, in accordance with IAS 27.

(b) For purposes of market value, the quoted share price of Porto Seguro S.A. was taken into account. The investment included the amounts of R$ 798 at 06/30/2014 and R$ 806 at 12/31/2013 that correspond to the difference between the interest in the net assets at fair value of Porto Seguro Itaú Unibanco Participações S.A. and the investment book value.

(c) In May 2012 Itaú Unibanco S.A. acquired 137,004,000 common shares of BSF Holding S.A. (parent company of Banco Carrefour) for R$ 816 which corresponds to 49% of interest in its capital. The investment amount includes R$ 583 at 06/30/2014, which correspond to goodwill.

(d) Previously accounted for as a financial instrument. As from the 4th quarter of 2013, after completing the privatization process, ITAÚ UNIBANCO HOLDING started to exercise a significant influence over IRB. Accordingly, as from this date, the investment has been accounted for under the equity method.

(e) At 06/30/2014, includes interest in total capital and voting capital of the following companies: Compañia Uruguaya de Medios de Procesamiento S.A. (38.39% total and coting capital and 31.84% total and voting capital at 12/31/2013), Latosol Empreendimentos e Participação Ltda (32.11% total and voting capital); Rias Redbanc S.A. (20.00% total and voting capital) and Tecnologia Bancária S.A. (24.81% total capital and voting capital).

(f) In 08/01/2011 BICSA Holdings Ltd. acquired 3,000,001 common shares of MCC Securities Inc. The investment amount includes R$ 62 at 06/30/2014, which correspond to goodwill.

(g) At 06/30/2014, includes interest in total capital and voting capital of the following companies: MCC Corredora de Bolsa S.A. (50.05% total and voting capital), Rosefild Finance Ltd. (50.00% total and voting capital); Olimpia Promoção e Serviços S.A. (50.00% total and voting capital) and includes income not arising from profit subsidiaries.

 

At June 30, 2014, ITAÚ UNIBANCO HOLDING received / recognized dividends and interest on capital of the unconsolidated companies being the main Porto Seguro Itaú Unibanco Participações S.A. in the amount of R$ 255 (R$ 175 at 12/31/2013) and IRB- Brasil Resseguros S.A. in the amount of R$ 25.

 

 
 

  

b)Other information

 

The table below shows the summary of the proportional interest in the aggregate financial information of the investees under the equity method of accounting.

 

   06/30/2014   12/31/2013   06/30/2013 
Total assets (*)   16,220    17,131    3,755 
Total liabilities (*)   8,997    10,072    10 
Total income (*)   3,352    3,860    314 
Total expenses (*)   (2,566)   (2,394)   (12)

(*) Represented by IRB-Brasil Resseguros S.A., in the amount of R$ 11,727 (R$ 12,503 at 12/31/2013) related to assets, R$ 8,988 (R$ 10,071 at 12/31/2013) related to liabilities, R$ 2,698 (R$ 2,455 at 12/31/2013) related to income and of R$ 2,221 (R$ 2,353 at 12/31/2013) related to expenses.

 

The investees do not have contingent liabilities to which ITAÚ UNIBANCO HOLDING is significantly exposed.

 

Note 14 – Lease commitments as lease

 

a)Finance lease

 

ITAÚ UNIBANCO HOLDING is the lessee in finance lease contracts of data processing equipment, with the option of purchase or extension, without contingent rental payments or imposed restrictions. The net carrying amount of these assets is R$ 346 (R$ 338 at 12/31/2013).

 

The table below shows the total future minimum payments:

 

   06/30/2014   12/31/2013 
Current   143    162 
Up to 1 year   143    162 
Non-current   203    176 
From 1 to 5 years   203    176 
Total future minimum payments   346    338 
(-) Future interest   -    - 
Present value   346    338 

  

b)Operating leases

 

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

 

The expenses related to operating lease agreements recognized under General and Administrative Expenses total R$ 510 from 01/01 to 06/30/2014 (R$ 448 from 01/01 to 06/30/2013).

 

ITAÚ UNIBANCO HOLDING has no relevant sublease contracts. 

 

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

 

   06/30/2014   12/31/2013 
Current   639    1,093 
Up to 1 year   639    1,093 
Non-current   4,281    3,638 
From 1 to 5 years   3,620    3,091 
Over 5 years   661    547 
Total future minimum payments   4,920    4,731 

 

 
 

  

Note 15 - Fixed assets

 

   Real estate in use (2)   Other fixed assets (2)     
Fixed Assets (1)  Land   Buildings   Improvements   Installations   Furniture and
equipment		   EDP systems (3)   Other
(communication,
security and
transportation)		   Total 
Annual depreciation rates        4%   10%   10 to 20%    10 to 20%    20 to 50%    10 to 20%      
                                         
Cost                                        
Balance at 12/31/2013   1,019    2,999    1,298    1,043    1,095    6,279    725    14,458 
Acquisitions   -    161    92    43    296    540    33    1,165 
Disposal   -    (2)   (76)   (1)   (7)   (423)   (4)   (513)
Exchange variation   (1)   (22)   (27)   (2)   (25)   (19)   (6)   (102)
Other   (5)   37    112    (25)   (144)   10    2    (13)
Balance at 06/30/2014   1,013    3,173    1,399    1,058    1,215    6,387    750    14,995 
                                         
Depreciation                                        
Balance at 12/31/2013   -    (1,651)   (667)   (439)   (487)   (4,230)   (411)   (7,885)
Accumulated depreciation   -    (32)   (115)   (41)   (36)   (550)   (37)   (811)
Disposal   -    -    76    1    4    391    2    474 
Exchange variation   -    4    13    3    22    14    3    59 
Other   -    6    (4)   1    (13)   13    1    4 
Balance at 06/30/2014   -    (1,673)   (697)   (475)   (510)   (4,362)   (442)   (8,159)
                                         
Impairment                                        
Balance at 12/31/2013   -    -    -    -    (9)   -    -    (9)
Additions/ assumptions   -    -    -    -    -    -    -    - 
Reversals   -    -    -    -    -    -    -    - 
Balance at 06/30/2014   -    -    -    -    (9)   -    -    (9)
                                         
Book value                                        
Balance at 06/30/2014   1,013    1,500    702    583    696    2,025    308    6,827 

(1) The contractual commitments for purchase of the fixed assets totaled R$ 630, achievable by 2016 (Note 36 - Off balance sheet).

(2) Includes the amount of R$ 3 related to attached real estate; fixed assets under construction in the amount of R$ 1,249, consisting of R$ 962 in real estate in use, R$ 13 in improvements, and R$ 274 in equipment.

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

 

 
 

 

   Real estate in use (2)   Other fixed assets (2) (3)     
Fixed assets (1)  Land   Buildings   Improvements   Installations   Furniture and
equipment		   EDP systems (3)   Other
(communication,
security and
transportation)		   Total 
Annual depreciation rates        4%   10%   10 to 20%    10 to 20%    20 to 50%    10 to 20%      
                                         
Cost                                        
Balance at 12/31/2012   1,029    2,472    1,253    872    931    5,480    606    12,643 
Acquisitions   -    554    207    183    210    1,262    118    2,534 
Disposal   (8)   (13)   (211)   (11)   (15)   (474)   (3)   (735)
Exchange variation   -    2    5    4    (8)   9    3    15 
Other   (2)   (16)   44    (5)   (23)   2    1    1 
Balance at 12/31/2013   1,019    2,999    1,298    1,043    1,095    6,279    725    14,458 
                                         
Depreciation                                        
Balance at 12/31/2012   -    (1,607)   (613)   (358)   (417)   (3,664)   (347)   (7,006)
Accumulated depreciation   -    (70)   (235)   (80)   (83)   (987)   (67)   (1,522)
Disposal   -    10    209    7    7    430    2    665 
Exchange variation   -    -    (2)   3    9    (11)   -    (1)
Other   -    16    (26)   (11)   (3)   2    1    (21)
Balance at 12/31/2013   -    (1,651)   (667)   (439)   (487)   (4,230)   (411)   (7,885)
                                         
Impairment                                        
Balance at 12/31/2012   -    -    -    -    (9)   -    -    (9)
Additions/ assumptions   -    -    -    -    -    -    -    - 
Reversals   -    -    -    -    -    -    -    - 
Balance at 12/31/2013   -    -    -    -    (9)   -    -    (9)
                                         
Book value                                        
Balance at 12/31/2013   1,019    1,348    631    604    599    2,049    314    6,564 

(1) The contractual commitments for purchase of the fixed assets totaled R$ 1,212, achievable by 2016 (Note 36 - Off balance sheet).

(2) Includes the amount of R$ 4 related to attached real estate; fixed assets under construction in the amount of R$ 949, consisting of R$ 763 in real estate in use, R$ 16 in improvements and R$ 170 in equipment;

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

 

 
 

  

Note 16 - Intangible assets

 

       Other intangible assets     
Intangible assets (1)  Acquisition of
rights to credit 
payroll		   Association for the
promotion and offer
of financial products
and services		   Acquisition of 
software		   Development of 
software		   Other intangible
assets		   Total 
Amortization rates p.a.   20%   8%   20%   20%   10 to 20%      
                               
Cost                              
Balance at 12/31/2013   1,165    1,688    1,839    2,195    1,019    7,906 
Acquisitions   50    -    189    323    -    562 
Terminated agreements/ write off   (87)   (24)   (86)   (9)   (300)   (506)
Exchange variation   -    (13)   (46)   -    (20)   (79)
Other   -    1    (41)   (10)   (2)   (52)
Balance at 06/30/2014   1,128    1,652    1,855    2,499    697    7,831 
                               
Amortization (2)                              
Balance at 12/31/2013   (535)   (256)   (868)   (47)   (352)   (2,058)
Amortization expense   (115)   (78)   (156)   (30)   (31)   (410)
Terminated agreements/ write off   87    24    86    -    119    316 
Exchange variation   -    3    24    -    17    44 
Other   -    -    50    5    (1)   54 
Balance at 06/30/2014   (563)   (307)   (864)   (72)   (248)   (2,054)
                               
Impairment (3)                              
Balance at 12/31/2013   (18)   (27)   -    (6)   -    (51)
Additions / assumptions   -    -    -    (3)   -    (3)
Write off   -    -    -    -    -    - 
Balance at 06/30/2014   (18)   (27)   -    (9)   -    (54)
                               
Book value                              
Balance at 06/30/2014   547    1,318    991    2,418    449    5,723 

(1) The contractual commitments for the purchase of new intangible assets totaled R$ 635, achievable by 2016 (Note 36 - Off balance seet).

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

(3) Note 2.4l.

 

 
 

  

       Other intangible assets     
Intangible assets (1)  Acquisition of
rights to credit
payroll		   Association for the
promotion and offer
of financial products
and services		   Acquisition of
software		   Development of 
software		   Other intangible
assets		   Total 
Amortization rates p.a.   20%   8%   20%   20%   10 to 20%      
                               
Cost                              
Balance at 12/31/2012   1,497    1,333    1,736    1,553    688    6,807 
Acquisitions (2)   195    340    382    820    298    2,035 
Terminated agreements / write off   (527)   (83)   (161)   (178)   (1)   (950)
Exchange variation   -    1    (10)   -    39    30 
Other   -    97    (108)   -    (5)   (16)
Balance at 12/31/2013   1,165    1,688    1,839    2,195    1,019    7,906 
                               
Amortization (3)                              
Balance at 12/31/2012   (781)   (178)   (881)   (11)   (264)   (2,115)
Amortization expense   (273)   (137)   (291)   (36)   (74)   (811)
Terminated agreements / write off   519    68    158    -    1    746 
Exchange variation   -    -    14    -    (25)   (11)
Other   -    (9)   132    -    10    133 
Balance at 12/31/2013   (535)   (256)   (868)   (47)   (352)   (2,058)
                               
Impairment (4)                              
Balance at 12/31/2012   (18)   (3)   -    -    -    (21)
Additions / assumptions   -    (27)   -    (6)   -    (33)
Reversals   -    3    -    -    -    3 
Balance at 12/31/2013   (18)   (27)   -    (6)   -    (51)
                               
Book value                              
Balance at 12/31/2013   612    1,405    971    2,142    667    5,797 

(1) The contractual commitments for the purchase of new intangible assets totaled R$ 760, achievable by 2016 (Note 36 - Off balance seet).

(2) Contemplates acquisition of Credicard (Note 3d).

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

(4) Note 2.4l.

 

 
 

  

Note 17 - Deposits

 

The table below shows the breakdown of deposits:

 

   06/30/2014   12/31/2013 
   Current   Non-current   Total   Current   Non-current   Total 
Interest-bearing deposits   173,897    58,603    232,500    165,646    65,845    231,491 
Time deposits   59,342    58,256    117,598    51,657    65,474    117,131 
Interbank deposits   3,715    347    4,062    7,823    371    8,194 
Savings deposits   110,840    -    110,840    106,166    -    106,166 
Non-interest bearing deposits   44,847    -    44,847    42,892    -    42,892 
Demand deposits   44,847    -    44,847    42,892    -    42,892 
Total   218,744    58,603    277,347    208,538    65,845    274,383 

 

Note 18 – Financial liabilities held for trading

 

Financial liabilities held for trading are presented in the following table:

 

   06/30/2014   12/31/2013 
Structured notes          
Shares   104    147 
Debt securities   394    224 
Total   498    371 

 

The effect of the changes in credit risk of these instruments is not significant at 06/30/2014 and 12/31/2013.

 

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

 

The fair value of financial liabilities held for trading by maturity is as follows:

 

   06/30/2014   12/31/2013 
   Cost / Fair value   Cost / Fair value 
Current - up to one year   262    87 
Non-current   236    284 
From one to five years   104    233 
From five to ten years   100    22 
After ten years   32    29 
Total   498    371 

 

 
 

 

Note 19 – Securities sold under repurchase agreements and interbank and institucional market debts

 

a)Securities sold under repurchase agreements and interbank market debt

 

The table below shows the breakdown of funds:

 

   06/30/2014   12/31/2013 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Securities sold under repurchase agreements   134,276    132,064    266,340    148,598    118,084    266,682 
Transactions backed by own financial assets (*)   70,435    132,064    202,499    80,319    118,084    198,403 
Transactions backed by third-party financial assets   63,841    -    63,841    68,279    -    68,279 
Interbank market debt   54,231    56,626    110,857    55,777    55,599    111,376 
Mortgage notes   33    115    148    39    142    181 
Real estate credit bills   7,402    1,268    8,670    6,634    2,285    8,919 
Agribusiness credit bills   4,216    3,018    7,234    4,176    3,097    7,273 
Financial credit bills   8,092    5,779    13,871    6,369    7,454    13,823 
Import and export financing   21,915    11,557    33,472    25,780    7,834    33,614 
On-lending - domestic   12,565    30,953    43,518    12,772    30,243    43,015 
Liabilities from transactions related to credit assignments (Note 12d)   4    3,903    3,907    3    4,511    4,514 
Other   4    33    37    4    33    37 

(*) It includes R$ 129,620 (R$ 123,922 at 12/312013) related to Debentures of own issue.

 

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

 

   Brazil  Foreign
Securities sold under repurchase agreements  75% of CDI  to 13.2%  0.18% to 3.6%
Mortgage notes  -  2.7% to 7.5%
Real estate credit bills  84% to 100% of CDI  -
Financial credit bills  IGPM to 13.44%  -
Agribusiness credit bills  84% to 97.5% of CDI  -
Import and export financing  0.5% to 6.75%  0.49% to 16%
On-lending - domestic  0.5% to 14.5%  -
Liabilities from transactions related to credit assignments  6.38% to 16.7%  -

 

In “Securities sold under repurchase agreements”, we present the liabilities in transactions in which ITAÚ UNIBANCO HOLDING sells to customers in exchange for cash debt securities issued by its consolidated subsidiaries previously held in treasury, and where it undertakes to repurchase them at any time after the sale up to a repurchase deadline, at which time they must be repurchased by ITAÚ UNIBANCO HOLDING. The repurchase price is computed as the price paid on the sale date plus interest at rates ranging from 75.0% CDI to 13.23%. The deadline for repurchase expires in January 2027.

 

b)Institutional market debt

 

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

 

   06/30/2014   12/31/2013 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Subordinated debt (1)   3,640    49,349    52,989    6,138    50,426    56,564 
Foreign borrowings through securities   2,793    10,381    13,174    5,358    10,133    15,491 
Structured Operations Certificates (2)   970    510    1,480    -    -    - 
Total   7,403    60,240    67,643    11,496    60,559    72,055 

(1) At June 30, 2014, the amount of R$ 51,498 (R$ 55,186 at 12/31/2013) is included in the Reference Equity, under the proportion defined by CMN Resolution No. 3,444, of February 28, 2007, as amended by CMN Resolution No. 3,532, of January 31, 2008.

(2) As at June 30, 2014, the market value of the funding from Structured Operations Certificates issued is R$ 1,480.

 

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

 

   Brazil  Foreign
Subordinated debt  CDI+ 0.35% to IGPM + 7.6%  5.1% a 6.2%
Foreign borrowings through securities  1.40% to 12.75%  0.03% to 24.54%
Structured Operations Certificates  60% of CDI to 12.67%  -

 

 
 

  

Note 20 - Other assets and liabilities

 

a)Other assets

 

   06/30/2014   12/31/2013 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Financial (1)   35,916    13,735    49,651    34,285    13,307    47,592 
Receivables from credit card issuers   19,695    -    19,695    22,138    -    22,138 
Insurance and reinsurance operations   4,682    -    4,682    5,192    -    5,192 
Deposits in guarantee for contingent liabilities (Note 32)   2,448    12,224    14,672    2,172    11,818    13,990 
Deposits in guarantee for foreign borrowing program   405    -    405    731    -    731 
Negotiation and intermediation of securities   2,623    42    2,665    2,144    72    2,216 
Receivables from reimbursement of contingent liabilities (Note 32c)   51    682    733    41    692    733 
Receivables from services provided   1,628    41    1,669    1,729    -    1,729 
Rights receivable from sales operations or transfer of financial assets   4,072    -    4,072    -    -    - 
Amounts receivable from FCVS – Salary Variations Compensation Fund (2)   -    746    746    -    725    725 
Operations without credit granting characteristics   312    -    312    138    -    138 
Non-financial   12,274    1,222    13,496    11,626    516    12,142 
Prepaid expenses   3,964    1,110    5,074    4,232    420    4,652 
Retirement plan assets (Notes 29c and d)   2,402    -    2,402    2,308    -    2,308 
Sundry domestic   3,544    -    3,544    3,099    -    3,099 
Sundry foreign   858    112    970    405    96    501 
Other   1,506    -    1,506    1,582    -    1,582 

(1) There were no impairment losses for other financial assets in these periods.

(2) The Salary Variation Compensation Fund – FCVS was established through Resolution No. 25, of June 16, 1967, of the Board of the former BNH (National Housing Bank), and its purpose is to settle balances remaining after the end of real estate financing contracted up to March 1990, relating to agreements financed under the SFH (National Housing System), and provided that they are covered by FCVS.

 

b)Other liabilities

 

   06/30/2014   12/31/2013 
   Current   Non-current   Total   Current   Non-current   Total 
Financial   53,201    1,429    54,630    60,582    692    61,274 
Credit card operations   48,158    -    48,158    54,263    -    54,263 
Foreign exchange portfolio   954    -    954    259    -    259 
Negotiation and intermediation of securities   3,336    1,226    4,562    5,230    516    5,746 
Finance leases (Note 14a)   143    203    346    162    176    338 
Funds from consortia participants   32    -    32    28    -    28 
Other   578    -    578    640    -    640 
Non-financial   28,570    539    29,109    20,173    675    20,848 
Collection and payment of taxes and contributions   5,127    -    5,127    205    -    205 
Sundry creditors - domestic   1,462    44    1,506    1,071    46    1,117 
Funds for clients in transit   10,558    271    10,829    8,132    -    8,132 
Provision for sundry payments   2,055    109    2,164    2,027    511    2,538 
Social and statutory   3,384    23    3,407    3,172    37    3,209 
Related to insurance operations   1,352    -    1,352    1,200    -    1,200 
Liabilities for official agreements and rendering of payment services   441    -    441    440    -    440 
Provision for retirement plan benefits (Note 29c and e)   726    42    768    699    27    726 
Personnel provision   1,510    50    1,560    1,251    54    1,305 
Provision for health insurance   668    -    668    655    -    655 
Deferred income   1,135    -    1,135    1,099    -    1,099 
Other   152    -    152    222    -    222 

 

 
 

  

Note 21 – Stockholders’ equity

 

a)Capital

 

The Extraordinary Stockholders’ Meeting held on April 23, 2014 approved the increase of subscribed and paid-up capital by R$ 15,000, with the capitalization of the amounts recorded in Revenue Reserve – Statutory Reserve, with a 10.0% bonus shares. Bonus shares started being traded on June 6, 2014 and the process was approved by the Central Bank on May 19, 2014. Accordingly, capital stock was increased by 502,802,971 shares.

 

Capital comprises 5,530,832,681 book-entry shares with no par value, of which 2,770,036,544 are common and 2,760,796,137 are preferred shares without voting rights; preferred shares have tag-along rights, in the event of a possible change in control, at a price equal to 80% of the amount per share paid for the controlling common shares. Capital stock amounts to R$ 75,000 (R$ 60,000 at December 31, 2013), of which R$ 51,389 (R$ 41,602 at December 31, 2013) refers to stockholders resident in Brazil and R$ 23,611 (R$ 18,398 at December 31, 2013) refers to stockholders resident abroad.

 

The table below shows the breakdown of and change in shares of paid-in capital and the reconciliation of balances at the beginning and end of the period:

 

   06/30/2014 
   Number     
   Common   Preferred   Total   Amount 
Residents in Brazil at 12/31/2013   2,502,311,972    983,934,784    3,486,246,756      
Residents abroad at 12/31/2013   15,903,068    1,525,879,886    1,541,782,954      
Shares of capital stock at 12/31/2013   2,518,215,040    2,509,814,670    5,028,029,710      
Bonus shares - Extraordinary Stockholders’ Meeting of April 23, 2014 – made effective on June 6, 2014   251,821,504    250,981,467    502,802,971      
Shares of capital stock at 06/30/2014   2,770,036,544    2,760,796,137    5,530,832,681      
Residents in Brazil at 06/30/2014   2,752,807,138    1,036,809,918    3,789,617,056      
Residents abroad at 06/30/2014   17,229,406    1,723,986,219    1,741,215,625      
Treasury shares at 12/31/2013 (1)   2,310    68,867,010    68,869,320    (1,854)
Exercised options – granting of stock options   -    (6,989,531)   (6,989,531)   111 
Disposals – Stock option plan   -    (4,525,952)   (4,525,952)   198 
Bonus shares - Extraordinary Stockholders’ Meeting of April 23, 2014 – made effective on June 06, 2014   231    5,763,327    5,763,558    - 
Treasury shares at 06/30/2014 (1)   2,541    63,114,854    63,117,395    (1,545)
Outstanding shares at 06/30/2014   2,770,034,003    2,697,681,283    5,467,715,286      
Outstanding shares at 12/31/2013 (2)   2,770,034,003    2,685,042,426    5,455,076,429      

 

   12/31/2013 
   Number     
   Common   Preferred   Total   Amount 
Residents in Brazil at 12/31/2012   2,508,440,062    973,114,385    3,481,554,447      
Residents abroad at 12/31/2012   9,774,978    1,536,700,285    1,546,475,263      
Shares of capital stock at 12/31/2012   2,518,215,040    2,509,814,670    5,028,029,710      
Bonus shares - Extraordinary Stockholders’ Meeting of April 19, 2013 – made effective on May 21, 2013   251,821,504    250,981,467    502,802,971      
Shares of capital stock at 12/31/2013   2,770,036,544    2,760,796,137    5,530,832,681      
Residents in Brazil at 12/31/2013   2,752,543,169    1,082,328,262    3,834,871,431      
Residents abroad at 12/31/2013   17,493,375    1,678,467,875    1,695,961,250      
Treasury shares at 12/31/2012 (1)   2,310    57,809,663    57,811,973    (1,523)
Purchase of shares   -    25,850,000    25,850,000    (662)
Exercised options - granting of stock options – Simple and Partners’ options   -    (8,158,717)   (8,158,717)   107 
Disposals – stock option plan   -    (4,924,833)   (4,924,833)   224 
Bonus shares - Extraordinary Stockholders’ Meeting of April 19, 2013 – made effective on May 21, 2013   231    5,177,598    5,177,829    - 
Treasury shares at 12/31/2013 (1)   2,541    75,753,711    75,756,252    (1,854)
Outstanding shares  at 12/31/2013 (2)   2,770,034,003    2,685,042,426    5,455,076,429      
Outstanding shares at 12/31/2012   2,770,034,003    2,697,205,508    5,467,239,511      

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

(2) For better comparability, outstanding shares were adjusted for the bonus of June 6, 2014.

 

 
 

 

See the detail below of the the average cost of treasury shares and their market price (in Brazilian reais per share):

 

   01/01 to 06/30/2014 
Cost / market value  Common   Preferred 
Treasury shares          
Average cost   7.97    24.48 
Market value at 06/30/2014   30.30    31.97 
           
   01/01 to 12/31/2013 
Cost / market value  Common   Preferred 
Minimum   -    26.36 
Weighted average   -    28.18 
Maximum   -    29.24 
Treasury shares          
Average cost   8.77    26.93 
Market value at 12/31/2013   29.45    31.35 

 

 
 

  

b)Dividends

 

Stockholders are entitled to an annual mandatory dividend of not less than 25.0% of adjusted profit, pursuant to the provisions of the Brazilian Corporate Law. Both common and preferred shares participate equally, after common shares have received dividends equal to the annual minimum priority dividend of R$ 0.022 per share non-cumulative to be paid to preferred shares.

 

The calculation of the monthly advance of the mandatory minimum dividend is based on the share position on the last day of the prior month, with payment being made on the first business day of the subsequent month, in the amount of R$ 0.015 per share.

 

Below is a statement from dividends and interest on equity and the calculation of the minimum mandatory dividend:

 

Calculation of dividends and interest on capital

 

   06/30/2014   06/30/2013 
Net income - Itaú Unibanco Holding Individual (BR GAAP)   7,537    5,058 
Adjustments:          
(-)  Legal reserve   (377)   (253)
Dividend calculation basis   7,160    4,805 
Mandatory dividend - 25.0%   1,790    1,201 
Additional dividend and interest on capital   170    384 
Dividends and interest on capital – paid / provisioned for   1,960    1,585 

  

Payments / provision for interest on capital and dividends

 

   06/30/2014 
   Gross   WHT   Net 
Paid / prepaid   372    -    372 
Dividends - 5 monthly installments of R$ 0.015 per share paid from February to June 2014   372    -    372 
                
Declared until 06/30/2014 (recorded in other liabilities)   1,655    (237)   1,418 
Dividends - 1 monthly installment of R$ 0.015 per share paid on 07/01/2014   75    -    75 
Interest on capital - R$ 0.2890 per share   1,580    (237)   1,343 
                
Declared after 06/30/2014 (Recorded in Revenue Reserves - Unrealized Profits Reserve)   200    (30)   170 
Interest on capital - R$ 0.0366 per share   200    (30)   170 
                
Total from 01/01 to 06/30/2014 - R$ 0.3667 net per share   2,227    (267)   1,960 

 

   06/30/2013 
   Gross   WHT   Net 
Paid / prepaid   339    -    339 
Dividends - 5 monthly installments of R$ 0.015 per share paid from February to June 2013   339    -    339 
                
Declared until 06/30/2013 (recorded in other liabilities)   1,001    (139)   862 
Dividends - 1 monthly installment of R$ 0.015 per share paid on 07/01/2013   75    -    75 
Interest on capital - R$ 0.1865  per share   926    (139)   787 
                
Declared after 06/30/2013 (Recorded in Revenue Reserves - Unrealized Profits Reserve)   452    (68)   384 
Interest on capital - R$ 0.0909  per share   452    (68)   384 
                
Total from 01/01 to 06/30/2013 - R$ 0.3258 net per share   1,792    (207)   1,585 

 

 
 

 

c)Additional paid-in capital

 

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

 

d)Appropriated reserves

 

   06/30/2014   12/31/2013 
Capital reserves (1)   285    285 
Premium on subscription of shares   284    284 
Reserves from tax incentives and restatement of equity securities and other   1    1 
Revenue reserves   767    13,183 
Legal (2)   5,348    4,971 
Statutory   3,539    13,615 
Dividends equalization (3)   762    3,901 
Working capital increase (4)   312    3,003 
Increase in capital of investees (5)   2,465    6,711 
Corporate reorganizations (Note 3b)   (8,320)   (7,999)
Unrealized profits (6)   200    2,596 
Total reserves at parent company   1,052    13,468 
(1)Refers to amounts received by Itaú Unibanco Holding that were not included in the statement of income, since they do not refer to compensation for the provision of goods or services.
(2)Legal reserve - may be used to increase capital or to absorb losses, but it cannot be distributed as dividends.
(3)Reserve for dividends equalization - its purpose is to reserve funds for the payment or advances of dividends, including interest on capital, to maintain the flow of the stockholders' compensation.
(4)Reserve for working capital - its purpose is to guarantee funds for operations.
(5)Reserve for increase in capital of investees - its purpose is to guarantee the preemptive right in the capital increases of investees.
(6)Refers to interest on capital declared after June 30, 2014 and December 31,2013.

 

e)Unappropriated reserves

 

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

 

 
 

 

Note 22 – Stock option plan

 

a)Purpose and guidelines of the plan

 

ITAÚ UNIBANCO HOLDING has a stock option plan for its executives. This program aims at involving the members of management in the medium and long-term corporate development process, by granting simple stock options or options which are partner options (these are personal, not pledgeable and nontransferable), entitling the holder to subscribe one authorized capital share or, at the discretion of the management, one treasury share which has been acquired for the purpose of reselling.

 

Such options may only be granted in years in which there are sufficient profits to enable the distribution of mandatory dividends to stockholders and at a quantity that does not exceed the limit of 0.5% of the total shares held by the stockholders at the base date of the year-end balance sheet. ITAÚ UNIBANCO HOLDING’s Personnel Committee is responsible for defining the quantity, the beneficiaries, the type of option, the life of the option under each series, which may vary between a minimum of 5 years and a maximum of 10 years, and the vesting and lockup periods for exercising the options. The executive officers and members of the Board of Directors of ITAÚ UNIBANCO HOLDING and of its subsidiaries, as well as employees may participate in this program, based on assessment of potential and performance.

 

ITAÚ UNIBANCO HOLDING settles the benefits under this plan solely by delivering its own shares, which are held in treasury until the effective exercise of the options by the beneficiaries.

 

b)Characteristics of the Programs

 

I – Simple Options

 

Prior programs

 

Before the merger, both Itaú and Unibanco each had Stock Option Plans (Prior Programs). The eligible beneficiaries of the program were granted simple options, depending upon the individual performance. The exercise price is calculated based on the average prices of preferred shares at the BM&FBOVESPA trading sessions over the period of at least one (1) and at the most three (3) months prior to the option issue date; the price is subject to a positive or negative adjustment of up to 20.0%, and restated until the last business day of the month prior to the option exercise date based either on the IGP-M or IPCA; in its absence, based on the index determined by the Committee. Options are no longer granted under this model.

 

Post-merger program

 

The eligible beneficiaries of the program are granted simple options, depending upon the individual employee performance. The exercise price is calculated based on the average prices of preferred shares at the BM&FBOVESPA in the last three months of the year prior to the granting date or alternatively subject to the positive or negative adjustments of up to 20.0% in the period. The exercise price is adjusted based on the IGPM or, in its absence, based on the index determined by the committee.

 

The vesting period is from one (1) to seven (7) years, counted from the issue date.

 

The ESM of April 19, 2013 approved the conversion of the Stock Option Plan of REDE by ITAÚ UNIBANCO HOLDING, with the exchange of RDCD3 shares to ITUB4 shares with no significant financial impacts.

 

II – Partner Plan

 

Executives selected to participate in the program may invest a percentage of their bonus to acquire shares or they have the right to receive shares (“Share-Based Instrument”). Title to the shares acquired, as well as the share-based instruments, should be held by the executives for a period from three (3) to five (5) years and they are subject to market fluctuation. At the times they acquire own shares and/or share-based instruments, partner options are granted in accordance with the classification of executives. Vesting periods of partner options or share-based instruments are from one (1) to seven (7) years. Share-based instruments and partner options are converted into shares of ITAÚ UNIBANCO HOLDING in the ratio of one preferred share for each instrument after the respective vesting period, with no payment of exercise price in cash.

 

 
 

 

The acquisition price of own shares and Share-Based Instruments is established every six months and is equivalent to the average preferred share quotation at the BM&FBOVESPA trading sessions in the 30 days prior to the determination of the acquisition price.

 

Title to the shares received after the vesting period of the Partner Options should be held, without any liens or encumbrances, for periods from five (5) to eight (8) years, as from the acquisition date of the shares.

 

The weighted average of the fair value of share-based instruments on the grant date was estimated for shares purchased in the fiscal year ended June 30, 2014 - R$ 31.43 per share (R$ 34.66 per share at June 30, 2013).

 

The fair value of Share-Based Instruments is the market price at the grant date for the preferred shares of ITAÚ UNIBANCO HOLDING, less the cash price paid by the beneficiaries. The amount received for the purchase of Share-Based Instruments was R$ 8 at June 30, 2014 (R$ 15 at June 30, 2013).

 

 
 

 

Summary of changes in the plan

 

   Simple options   Partner options     
   Quantity   Weighted average
Exercise price		   Weighted
average
Market value		   Quantity   Weighted
average
Market value		   Total 
Opening balance 12/31/2013   65,316,846    32.85         18,351,820         83,668,666 
Options exercisable at the end of the period   32,734,794    30.42         -         32,734,794 
Options outstanding not exercisable   32,582,052    36.25         18,351,820         50,933,872 
Options:                              
Granted (1)   -    -         7,467,437         7,467,437 
Canceled/Forfeited (2)   (118,505)   35.78         (693,874)        (812,379)
Exercised   (4,292,672)   15.43    18.90    (2,696,860)   25.83    (6,989,532)
Balance at 06/30/2014   60,905,669    35.14         22,428,523         83,334,192 
Options exercisable at the end of the period   28,714,096    32.22         -         28,714,096 
Options outstanding not exercisable   32,191,573    37.74         22,428,523         54,620,096 
Range of exercise prices                              
Granting 2006-2009        26.22 - 43.85                     
Granting 2010-2012        26.27 - 42.60                     
Weighted average of the remaining contractual life (in years)   3.05              2.45           

(1) It refers to the conversion of the REDE Plan.

(2) Refers to non-exercise due to the beneficiary’s option.

 

Summary of changes in the plan

 

   Simple options   Partner options     
   Quantity   Weighted
average
Exercise price		   Weighted
average
Market value		   Quantity   Weighted
average
Market value		   Total 
Opening balance 12/31/2012   71,677,920    31.30         17,274,588         88,952,508 
Options exercisable at the end of the period   23,610,501    31.67         40,503         23,651,004 
Options outstanding not exercisable   48,067,419    31.12         17,234,085         65,301,504 
Options:                              
Granted   -    -         5,715,609         5,715,609 
Canceled/Forfeited (*)   (1,237,075)   32.36         (371,176)        (1,608,251)
Exercised   (1,392,785)   24.95    31.35    (515,097)   27.73    (1,907,882)
Balance at 06/30/2013   69,048,060    34.92         22,103,924         91,151,984 
Options exercisable at the end of the period   21,989,519    32.17         -         21,989,519 
Options outstanding not exercisable   47,058,541    31.55         22,103,924         69,162,465 
Range of exercise prices                              
Granting 2006-2009        24.32 - 41.31                     
Granting 2010-2012        28.85 - 39.50                     
Weighted average of the remaining contractual life (in years)   3.91              2.19           

(*) Refers to non-exercise due to the beneficiary’s option.

 

Summary of changes in Share-Based Instruments (SBI)

 

   Quantity 
Opening balance 12/31/2013   2,183,769 
Instruments:     
New SBI's   286,466 
Converted into shares   (1,266,324)
Canceled   (326,362)
Balance at 06/30/2014   877,549 
Weighted average of the remaining contractual life (in years)   0.97 

 

   Quantity 
Opening balance 12/31/2012   3,384,440 
Instruments:     
New SBI's   533,763 
Converted into shares   (1,095,128)
Canceled   (1,586)
Balance at 06/30/2013   2,821,489 
Weighted average of the remaining contractual life (in years)   0.82 

 

 
 

 

c)Fair value and economic assumptions for cost recognition

 

ITAÚ UNIBANCO HOLDING recognizes, at the grant date, the fair value of options through the Binomial method for simple options and the Black & Scholes method for partner options. Economic assumptions used are as follows:

 

Exercise price: for the option exercise price, the exercise price previously agreed-upon at the time the option was issued Is adopted, adjusted by the IGP-M variation.

 

Price of the underlying asset: the share price of ITAÚ UNIBANCO HOLDING (ITUB4) used for calculation is the closing price at BM&FBOVESPA on the calculation base date.

 

Expected dividends: is the average annual return rate for the last three years, of the dividends, plus interest on capital of the ITUB4 share.

 

Risk-free interest rate: the risk-free rate used is the IGP-M coupon rate at the expiration date of the option plan.

 

Expected volatility: calculated based on the standard deviation from the history of the last 84 monthly returns of closing prices of the ITUB4 share, released by BM&FBOVESPA, adjusted by the IGP-M variation.

 

               Price of the                 
Granting  Vesting   Exercise   underlying       Expected   Risk-free   Expected 
No.  Date   period   period until   asset   Fair value   dividends   interest rate   volatility 
                                 
Partner options (*)
19th   02/27/2014    02/27/2017    -    31.43    28.43    3.35%   -    - 
19th   02/27/2014    02/27/2019    -    31.43    26.60    3.35%   -    - 

(*) The fair value of partner options is measured based on the fair value of ITAÚ UNIBANCO HOLDING share at the granting date.

 

d)Accounting effects arising from options

 

The exercise of stock options, pursuant to the plan’s regulation, resulted in the sale of preferred shares held in treasury. The accounting entries related to the plan are recorded during the vesting period, at the portion of the fair value of options granted with effect on income, and during the exercise of options, at the amount received from the option exercise price, reflected in stockholders’ equity.

 

The effect of Income for the period from January 1 to June 30, 2014 was R$ (95) (R$ (96) from January 1 to June 30, 2013) as a contra-entry to Capital Reserve – Granted Options Recognized – Law No. 11,638 (Note 21d).

 

In the stockholders’ equity, the effect was as follows:

 

   06/30/2014   06/30/2013 
Amount received for the sale of shares – exercised options   235    143 
(-) Cost of treasury shares sold   (309)   (163)
(+) Decoregnition of cost recognized of exercised options   107    46 
Effect of sale (*)   33    26 

(*) Recorded in Additional paid-in capital.

 

 
 

 

Note 23 - Interest and similar income and expense and net gain (loss) from investment securities and derivatives

 

a)Interest and similar income

 

   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Central Bank compulsory deposits   1,601    951    3,124    1,799 
Interbank deposits   203    186    367    341 
Securities purchased under agreements to resell   4,059    2,843    7,917    5,516 
Financial assets held for trading   4,306    1,944    7,597    4,327 
Available-for-sale financial assets   1,639    1,146    3,506    2,224 
Held-to-maturity financial assets   566    99    870    189 
Loan and lease operations   16,685    15,108    32,928    29,068 
Other financial assets   174    125    394    290 
Total   29,233    22,402    56,703    43,754 

 

b)Interest and similar expense

 

   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Deposits   (2,919)   (2,224)   (5,874)   (4,457)
Securities sold under repurchase agreements   (7,006)   (3,643)   (13,245)   (7,093)
Interbank market debt   (1,353)   (1,834)   (2,796)   (2,970)
Institutional market debt   (1,527)   (3,833)   (3,210)   (5,005)
Financial expense from technical reserves for insurance and private pension plans   (2,494)   (47)   (4,344)   (540)
Other   (11)   (9)   (26)   (19)
Total   (15,310)   (11,590)   (29,495)   (20,084)

 

c)Net gain (loss) from investment securities and derivatives

 

   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Financial assets held for trading   670    (1,301)   755    (2,326)
Derivatives (*)   (292)   (1,164)   (141)   (1,106)
Financial assets designated at fair value through profit or loss   8    1    18    3 
Available-for-sale financial assets   (40)   (282)   (109)   (290)
Finacial liabilities held for trading   (57)   99    (129)   131 
Total   289    (2,647)   394    (3,588)

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

 

During the period ended June 30, 2014, ITAÚ UNIBANCO HOLDING has recognized impairment losses in the amount of R$ 95 on available-for-sale financial assets (R$ - on June 30, 2013).

 

 
 

 

Note 24 - Banking service fees

 

   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Current account services   1,947    1,558    3,663    3,009 
Asset management fees   654    587    1,332    1,169 
Collection commissions   321    308    623    588 
Fees from credit card services   2,793    2,339    5,545    4,612 
Fees for guarantees issued and credit lines   333    297    652    582 
Brokerage commission   80    122    133    192 
Other   346    303    727    619 
Total   6,474    5,514    12,675    10,771 

 

Note 25 - Other income

 

   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Gains on sale of assets held for sale, fixed assets and investments in associates and joint ventures   6    18    9    39 
Recovery of expenses   35    22    60    40 
Reversal of provisions   34    24    156    59 
Other   25    101    90    174 
Total   100    165    315    312 

 

Note 26 - General and administrative expenses

 

   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Personnel expenses   (4,305)   (3,862)   (8,222)   (7,632)
Compensation   (1,723)   (1,560)   (3,367)   (3,092)
Payroll taxes   (567)   (528)   (1,124)   (1,056)
Welfare benefits   (532)   (496)   (1,037)   (955)
Retirement plans and post-employment benefits (Note 29)   (25)   5    (22)   (10)
Defined benefit   (45)   (12)   (54)   (32)
Defined contribution   20    17    32    22 
Stock option plan (Note 22d)   (49)   (49)   (95)   (96)
Training   (47)   (44)   (82)   (82)
Employee profit sharing   (842)   (693)   (1,573)   (1,332)
Dismissals   (96)   (96)   (182)   (194)
Provision for labor claims (Note 32)   (424)   (401)   (740)   (815)
Administrative expenses   (3,567)   (3,194)   (6,906)   (6,188)
Data processing and telecommunications   (962)   (893)   (1,878)   (1,760)
Third-party services   (1,074)   (809)   (2,007)   (1,567)
Installations   (247)   (237)   (461)   (449)
Advertising, promotions and publications   (280)   (271)   (473)   (471)
Rent   (305)   (262)   (587)   (515)
Transportation   (105)   (113)   (211)   (226)
Materials   (89)   (95)   (175)   (169)
Financial services   (126)   (133)   (270)   (251)
Security   (157)   (139)   (310)   (270)
Utilities   (70)   (59)   (144)   (132)
Travel   (52)   (47)   (94)   (88)
Other   (99)   (136)   (295)   (290)
Depreciation   (403)   (394)   (811)   (754)
Amortization   (203)   (200)   (410)   (402)
Insurance acquisition expenses   (220)   (291)   (556)   (571)
Other expenses   (1,636)   (1,566)   (3,516)   (3,124)
Expenses related to credit cards   (643)   (510)   (1,147)   (1,047)
Reimbursement related to acquisitions   2    (11)   (25)   (19)
Losses with third-party frauds   (124)   (144)   (259)   (292)
Loss on sale of assets held for sale, fixed assets and investments in associates and joint ventures   (43)   (19)   (62)   (34)
Provision for civil lawsuits (Note 32)   (375)   (475)   (871)   (916)
Provision for tax and social security lawsuits   (257)   (178)   (548)   (365)
Refund of interbank costs   (52)   (55)   (102)   (107)
Other   (144)   (174)   (502)   (344)
Total   (10,334)   (9,507)   (20,421)   (18,671)

 

 
 

 

Note 27 – Income tax and social contribution

 

ITAÚ UNIBANCO HOLDING and each of its subsidiaries file separate, for each fiscal year, corporate income tax returns and social contribution on net income.

 

a)Composition of income tax and social contribution expenses

 

I -Demonstration of Income tax and social contribution expense:

 

   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Income before income tax and social contribution   7,370    4,019    14,564    8,829 
Charges (income tax and social contribution) at the rates in effect (Note 2.4 n)   (2,948)   (1,608)   (5,826)   (3,532)
Increase / decrease to income tax and social contribution charges arising from:                    
Share of profit or (loss) of associates and joint ventures net   (92)   16    (63)   36 
Foreign exchange variation on assets and liabilities abroad   (289)   641    (702)   626 
Interest on capital   436    423    864    841 
Corporate reorganizations (Note 3b)   162    157    319    314 
Dividends, interest on external debt bonds and tax incentives   122    42    163    78 
Other nondeductible expenses net of non taxable income   82    77    125    65 
Total income tax and social contribution   (2,527)   (252)   (5,120)   (1,572)

 

b)Deferred taxes

 

I -The deferred tax asset balance and respective changes are as follows:

 

   12/31/2013   Realization /
reversal		   Effect of change in
consolidation		   Increase   06/30/2014 
Reflected in income   35,043    (7,243)   -    6,467    34,267 
Allowance for loan and lease losses   17,896    (2,586)   -    2,617    17,927 
Related to income tax and social contribution tax carryforwards   6,137    (608)   -    543    6,072 
Provision for contingent liabilities   3,973    (622)   -    2,051    5,402 
Civil lawsuits   1,706    (155)   -    230    1,781 
Labor claims   1,400    (128)   -    213    1,485 
Tax and social security   849    (339)   -    1,608    2,118 
Other   18    -    -    -    18 
Goodwill on purchase of investments   1,515    (433)   -    -    1,082 
Legal liabilities – tax and social security   1,479    (1,352)   -    204    331 
Adjustments of operations carried out in futures settlement market   653    (29)   -    1    625 
Adjustment to market value of financial assets held for trading and derivatives   439    (439)   -    57    57 
Provision related to health insurance operations   262    -    -    5    267 
Other   2,689    (1,174)   -    989    2,504 
                          
Reflected in stockholders’ equity   4,502    (1,068)   -    61    3,495 
Corporate reorganizations (Note 3b)   3,153    (321)   -    -    2,832 
Adjustment to market value of available-for-sale securities   814    (381)   -    -    433 
Cash flow hedge and hedge of net investment in foreign operation   426    (366)   -    -    60 
Other   109    -    -    61    170 
                          
Total (*)   39,545    (8,311)   -    6,528    37,762 

(*) Deferred income tax and social contribution assets and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 31,138 (R$ 31,886 at December 31, 2013) and R$ 309 ( R$ 328 at December 31, 2013).

 

   12/31/2012   Realization /
reversal		   Effect of change in
consolidation		   Increase   12/31/2013 
Reflected in income   31,060    (11,076)   1,062    13,997    35,043 
Related to income tax and social contribution tax carryforwards   3,955    (1,336)   59    3,459    6,137 
Allowance for loan and lease losses   16,275    (4,438)   479    5,580    17,896 
Adjustment to market value of financial assets held for trading and derivatives   229    (229)   -    439    439 
Goodwill on purchase of investments   2,761    (1,657)   31    380    1,515 
Legal liabilities – tax and social security   1,645    (665)   215    284    1,479 
Provision for contingent liabilities   3,487    (1,421)   167    1,740    3,973 
Civil lawsuits   1,422    (516)   43    757    1,706 
Labor claims   1,224    (565)   80    661    1,400 
Tax and social security   822    (339)   44    322    849 
Other   19    (1)   -    -    18 
Adjustments of operations carried out in futures settlement market   8    (13)   -    658    653 
Provision related to health insurance operations   254    -    -    8    262 
Other   2,446    (1,317)   111    1,449    2,689 
                          
Reflected in stockholders’ equity   3,943    (638)   1    1,196    4,502 
Corporate reorganizations (Note 3b)   3,791    (638)   -    -    3,153 
Adjustment to market value of available-for-sale securities   26    -    -    788    814 
Cash flow hedge and hedge of net investment in foreign operation   126    -    -    300    426 
Other   -    -    1    108    109 
                          
Total (*)   35,003    (11,714)   1,063    15,193    39,545 

(*) Deferred income tax and social contribution assets and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 31,886 and R$ 328.

 

 
 

 

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

 

   12/31/2013   Realization /
reversal		   Increase   06/30/2014 
Reflected in income   7,527    (1,675)   651    6,503 
Depreciation in excess – finance lease   4,165    (834)   -    3,331 
Restatement of escrow deposits and contingent liabilities   981    (66)   181    1,096 
Pension plans   355    -    6    361 
Adjustments of operations carried out in futures settlement market   392    (18)   -    374 
Adjustment to market value of financial assets held for trading and derivatives   157    (157)   339    339 
Taxation of results abroad – capital gains   267    -    114    381 
Other   1,210    (600)   11    621 
Reflected in stockholders’ equity accounts   460    (84)   54    430 
Adjustment to market value of available-for-sale securities   64    -    33    97 
Cash flow hedge and hedge of net investment in foreign operation   84    (84)   -    - 
Provision for pension plan benefits   311    -    21    332 
Other   1    -    -    1 
Total (*)   7,987    (1,759)   705    6,933 

(*) Deferred income tax and social contribution asset and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 31,138 (R$ 31,886 at December 31, 2013) and R$ 309 (R$ 328 at December 31, 2013).

 

   12/31/2012   Realization /
reversal		   Increase   12/31/2013 
Reflected in income   7,812    (2,959)   2,674    7,527 
Depreciation in excess – finance lease   5,453    (2,527)   1,239    4,165 
Restatement of escrow deposits and contingent liabilities   911    (130)   200    981 
Pension plans   355    -    -    355 
Adjustments of operations carried out in futures settlement market   117    -    275    392 
Adjustment to market value of financial assets held for trading and derivatives   234    (234)   157    157 
Taxation of results abroad – capital gains   167    -    100    267 
Other   575    (68)   703    1,210 
Reflected in stockholders’ equity accounts   1,848    (1,473)   85    460 
Adjustment to market value of available-for-sale securities   1,288    (1,224)   -    64 
Cash flow hedge and hedge of net investment in foreign operation   -    -    84    84 
Provision for pension plan benefits (1)   560    (249)   -    311 
Other   -    -    1    1 
Total (2)   9,660    (4,432)   2,759    7,987 

(1) On March 31, 2013 was reclassified to stockholders' equity, pursuant to IAS 19 (R1).

(2) Deferred income tax and social contribution asset and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 31,886 and R$ 328.

 

III -The estimate of realization and present value of deferred tax assets and from the Provision for Deferred Income Tax and Social Contribution existing at June 30, 2014, in accordance with the expected generation of future taxable income, based on the history of profitability and technical feasibility studies, are:

 

   Deferred tax assets                 
   Temporary
differences		   %   Tax loss / social
contribution loss
carryforwards		   %   Total   %   Deferred tax
liabilities		   %   Net
deferred
taxes		   % 
2014   9,499    30%   1,326    22%   10,825    29%   (2,377)   34%   8,448    27%
2015   6,367    20%   1,361    22%   7,728    20%   (1,784)   26%   5,944    19%
2016   4,872    15%   3,385    56%   8,257    22%   (983)   14%   7,274    24%
2017   2,379    7%   -    0%   2,379    6%   (339)   5%   2,040    7%
2018   3,651    12%   -    0%   3,651    10%   (299)   4%   3,352    11%
After 2018   4,922    16%   -    0%   4,922    13%   (1,151)   17%   3,771    12%
Total   31,690    100%   6,072    100%   37,762    100%   (6,933)   100%   30,829    100%
Present value (*)   27,970         5,602         33,572         (6,211)        27,361      

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

 

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

 

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

 

At 06/30/2014 and 12/31/2013 there are no deferred tax assets and liabilities which have not been recognized.

 

 
 

 

Note 28 – Earnings per share

 

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

 

Net income attributable to owners of the parent company – basic earnings per
share		  04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Net income   4,766    3,748    9,317    7,230 
Minimum non-cumulative dividend on preferred shares in accordance with our bylaws   (59)   (59)   (59)   (59)
Subtotal   4,707    3,689    9,258    7,171 
Retained earnings to be distributed to common equity owners in an amount per share equal to the minimum dividend payable to preferred equity owners   (61)   (61)   (61)   (61)
Subtotal   4,646    3,628    9,197    7,110 
                     
Retained earnings to be distributed to common and preferred equity owners on a pro-rata basis                    
To common equity owners   2,354    1,837    4,662    3,600 
To preferred equity owners   2,292    1,791    4,535    3,510 
                     
Total net income available to common equity owners   2,415    1,898    4,723    3,661 
Total net income available to preferred equity owners   2,351    1,850    4,594    3,569 
                     
Weighted average number of shares outstanding (Note 21a)                    
Common shares   2,770,034,003    2,770,034,003    2,770,034,003    2,770,034,003 
Preferred shares   2,697,397,157    2,700,586,546    2,694,385,103    2,700,751,451 
                     
Earnings per share - basic – R$                    
Common shares   0.87    0.69    1.71    1.32 
Preferred shares   0.87    0.69    1.71    1.32 

 

Net income attributable to owners of the parent company – diluted earnings per
share		  04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Total net income available to preferred equity owners   2,351    1,850    4,594    3,569 
Dividend on preferred shares after dilution effects   9    8    18    16 
Net income available to preferred equity owners considering preferred shares after the dilution effect   2,360    1,858    4,612    3,585 
                     
Total net income available to ordinary equity owners   2,415    1,898    4,723    3,661 
Dividend on preferred shares after dilution effects   (9)   (8)   (18)   (16)
Net income available to ordinary equity owners considering preferred shares after the dilution effect   2,406    1,890    4,705    3,645 
                     
Adjusted weighted average of shares (Note 21a)                    
Common shares   2,770,034,003    2,770,034,003    2,770,034,003    2,770,034,003 
Preferred shares   2,717,042,912    2,724,652,745    2,715,693,775    2,724,830,212 
Preferred shares   2,697,397,157    2,700,586,546    2,694,385,103    2,700,751,451 
Incremental shares from stock options granted under our Stock Option Plan   19,645,755    24,066,199    21,308,672    24,078,761 
                     
Earnings per share - diluted – R$                    
Common shares   0.87    0.68    1.70    1.32 
Preferred shares   0.87    0.68    1.70    1.32 

 

Potential anti-dilution effects of shares under our stock option plan, which were excluded from the calculation of diluted earnings per share, totaled 8,737,635 preferred shares at 06/30/2014 and 6,078,849 preferred shares at 06/30/2013.

 

 
 

 

Note 29 – Post-employment benefits

 

As prescribed in IAS 19 (R1), we present the policies of ITAÚ UNIBANCO HOLDING and its subsidiaries regarding employee benefits, as well as the accounting procedures adopted.

 

ITAÚ UNIBANCO HOLDING and some of its subsidiaries sponsor defined benefit plans, including variable contribution plans, whose basic purpose of which is to provide benefits that, in general, represent a life annuity benefit, and may be converted into survivorship annuities, according to the plan's regulation. They also sponsor defined contribution plans, the benefit of which is calculated based on the accumulated balance of individual accounts at the eligibility date, according to the plan’s regulation, which does not require actuarial calculation, except as described in Note 29c.

 

Employees hired up to July 31, 2002, whom came from Itaú, and up to February 27, 2009, whom came from Unibanco, are beneficiaries of the above-mentioned plans. As regards the new employees hired after these dates, they have the option to voluntarily participate in a variable contribution plan (PGBL), managed by Itaú Vida e Previdência S.A..

 

a)Description of the plans

 

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

 

Entity   Benefit plan
Fundação Itaubanco - Previdência Complementar   Supplementary retirement plan – PAC (1)
    Franprev benefit plan - PBF (1)
    002 benefit plan - PB002 (1)
    Itaulam basic plan - PBI (1)
    Itaulam Supplementary Plan - PSI (2)
    Itaubanco Defined Contribution Plan (3)
    Itaubank Retirement Plan (3)
    Itaú Defined Benefit Plan (1)
    Itaú Defined Contribution Plan (2)
    Unibanco Pension Plan (3)
    Prebeg benefit plan (1)
Fundação Bemgeprev   Supplementary Retirement Plan – Flexible Premium Annuity (ACMV) (1)
Funbep Fundo de Pensão Multipatrocinado   Funbep I Benefit Plan (1)
    Funbep II Benefit Plan (2)
Múltipla - Multiempresas de Previdência Complementar   REDECARD Basic Retirement Plan (1)
    REDECARD Supplementary Retirement Plan (2)
    REDECARD Supplementary Plan (3)
UBB-PREV - Previdência Complementar   UBB PREV Defined Benefit Plan (1)
Banorte Fundação Manoel Baptista da Silva de Seguridade Social   Benefit Plan II (1)
(1) Defined benefit plan;
(2) Variable contribution plan;
(3) Defined contribution plan.

 

b)Governance

 

The closed-end private pension entities (EFPC) and the benefit plans they manage are regulated in conformity with the related specific legislation. The EFPC are managed by the Executive Board, Advisory Council and Fiscal Council, with some members appointed by the sponsors and others appointed as representatives of active and other participants, pursuant to the respective Entity’s by laws. The main purpose of the EFPC is to pay benefits to eligible participants, pursuant to the Plan Regulation, maintaining the plans assets invested separately and independently from ITAÚ UNIBANCO HOLDING.

 

 
 

 

c)Defined benefit plans

 

I - Main assumptions used in actuarial valuation of retirement plans

 

   06/30/2014  06/30/2013  
Discount rate (1)  9.72% a.a.  8.16% a.a.  
Mortality table (2)  AT-2000  AT-2000  
Turnover (3)  Exp.Itaú 2008/2010  Exp.Itaú 2008/2010  
Future salary growth  7.12% a.a.  7.12% a.a.  
Growth of the pension fund and social security benefits  4.00% a.a.  4.00% a.a.  
Inflation  4.00% a.a.  4.00% a.a.  
Actuarial method (4)  Projected Unit Credit  Projected Unit Credit  

(1) The adoption of this assumption is based on a study that adopts the methodology of updating the interest rate of long-term securities issued by Brazilian Treasury, indexed to inflation rates, and on the analysis of changes in the interest curves up to the actuarial valuation base date. The Discount Rate assumption was changed in 2013 so as to be consistent with the economic scenario at the balance sheet date, considering the volatility of the interest markets and the models adopted.

(2) The mortality tables adopted correspond to those disclosed by SOA – Society of Actuaries, the North-American entity which corresponds to IBA – Brazilian Institute of Actuarial Science, which reflects a 10.0% increase in the probabilities of survival compared to the respective basic tables.The life expectancy in years per the AT-2000 mortality table for participants of 55 years of age is 27 and 31 years for men and women, respectively.

(3) The turnover assumption is based on the effective experience of active participants linked to ITAÚ UNIBANCO HOLDING, resulting in the average of 2.4 % p.a. based on the 2008/2010 experience.

(4) Using the Projected Unit Credit method, the mathematical reserve is calculated as the current projected benefit amount multiplied by the ratio between the length of service at the assessment date and the length of service that will be reached at the date when the benefit is granted. The cost is determined taking into account the current projected benefit amount distributed over the years that each participant is employed.

 

Actuarial assumptions adopted are consistent with the group of participants of each benefit plan, pursuant to the studies carried out by an independent external actuarial consulting company, for biometric/demographic assumptions.

 

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

 

- Volatility of Assets - The actuarial liability is calculated by adopting a discount rate defined on the income from securities issued by the Brazilian treasury (government securities). If the actual income from plan assets is lower than expected, this may give rise to a deficit. The plans have a significant percentage of fixed-income securities pegged to the plan commitments, aiming at minimizing volatility and the short and medium-term risk.

 

- Changes in Investment Income - A decrease in income from public securities will imply a decrease in discount rate and, therefore, will increase the actuarial liability. The effect will be partially offset by the recognition of these securities at market value.

 

- Inflation Risk - Most of the employee benefit plans are pegged to the inflation rates, and a higher inflation will lead to higher obligations. The effect will also be partially offset because a significant portion of the plan assets is pegged to government securities restated by the inflation rate.

 

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

 

III - Management of defined benefit plan assets

 

The general purpose of managing EFPCs funds is to search for a long-term balance between assets and obligations with payment of retirement benefits, by exceeding the actuarial targets (discount rate plus benefit adjustment index, established in the plan regulations).

 

Regarding the assets guaranteeing the actuarial liability reserves, management should ensure the payment capacity of retirement benefits in the long-term by avoiding the risk of mismatching assets and liabilities in each pension plan.

 

 
 

 

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

 

   Fair Value   % Allocation 
Types  06/30/2014   12/31/2013   06/30/2014   12/31/2013   2014 Target 
Fixed income securities   11,595    11,251    91.08%   89.92%   53% to 100% 
Variable income securities   586    709    4.60%   5.67%   0% to 20% 
Structured investments   23    18    0.18%   0.14%   0% to 10% 
Real estate   500    508    3.93%   4.06%   0% to 7% 
Loans to participants   27    26    0.21%   0.21%   0% to 5% 
Total   12,731    12,512    100.00%   100.00%     

 

The defined benefit plan assets include shares of ITAÚ UNIBANCO HOLDING, its main parent company (ITAÚSA) and of subsidiaries of the latter, with a fair value of R$ 505 (R$ 596 at 12/31/2013), and real estate rented to Group companies, with a fair value of R$ 466 (R$ 474 at 12/31/2013).

 

Fair Value

The fair value of the plan assets is adjusted up to the report date, as follows

 

Fixed-Income Securities and Structured Investments – accounted for at market value, considering the average trading price on the calculation date, net realizable value obtained upon the technical addition of pricing, considering, at least, the payment terms and maturity, credit risk and the indexing unit.

 

Variable income securities – accounted for at market value, being so understood the share average quotation at the last day of the month or at the closest date on the stock exchange on which the share has posted the highest liquidity rate.

 

Real Estate – stated at acquisition or construction cost, adjusted to market value upon reappraisals made in 2012, supported by technical appraisal reports. Depreciation is calculated under the straight line method, considering the useful life of the real estate.

 

Loans to participants – adjusted up to the report date, in compliance with the respective agreements.

 

Fund Allocation Target

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

 

IV- Net amount recognized in the balance sheet

 

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

 

   06/30/2014   12/31/2013 
1 - Net assets of the plans   12,731    12,512 
2- Actuarial liabilities   (11,775)   (11,577)
3- Surplus (1-2)   956    935 
4- Asset ceiling  (*)   (1,322)   (1,293)
5- Net amount recognized in the balance sheet (3-4)   (366)   (358)
Amount recognized in assets (Note 20a)   249    222 
Amount recognized in liabilities (Note 20b)   (615)   (580)

(*) Corresponds to the excess of the present value of the available economic benefit, in conformity with paragraph 58 of IAS 19.

 

 
 

 

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

 

   06/30/2014 
   Plan net
assets		   Defined benefit
obligation		   Surplus   Asset
ceiling		   Recognized
amount		 
Value beginning of the period   12,512    (11,577)   935    (1,293)   (358)
Cost of current service   -    (35)   (35)   -    (35)
Net interest (1)   589    (543)   46    (62)   (16)
Benefits paid   (379)   379    -    -    - 
Contributions of sponsors   32    -    32    -    32 
Contributions of participants   6    -    6    -    6 
Effects on asset ceiling   -    -    -    11    11 
Remeasurements (2) (3)   (29)   1    (28)   22    (6)
Value end of the period   12,731    (11,775)   956    (1,322)   (366)

 

   12/31/2013 
   Plan net
assets		   Defined benefit
obligation		   Surplus   Asset
ceiling		   Recognized
amount		 
Value beginning of the period   15,072    (12,906)   2,166    (2,137)   29 
Cost of current service   -    (103)   (103)   -    (103)
Net interest (1)   1,202    (1,025)   177    (175)   2 
Benefits paid   (739)   739    -    -    - 
Contributions of sponsors   68    -    68    -    68 
Contributions of participants   16    -    16    -    16 
Effects on asset ceiling   -    -    -    1,036    1,036 
Remeasurements (2) (3)   (3,107)   1,718    (1,389)   (17)   (1,406)
Value end of the period   12,512    (11,577)   935    (1,293)   (358)

(1) Corresponds to the amount calculated on 01/01/2014 based on the beginning amount (Net Assets, Actuarial Liabilities and Restriction of Assets), taking into account the estimated amount of payments/ receipts of benefits/ contributions, multiplied by the discount rate of 9.72% p.a.. (At 01/01/2013 used by the discount rate of 8.16% p.a.)

(2) Remeasurements recorded in net assets and asset ceiling correspond to the income earned above/below the expected return rate.

(3) The actual return on assets amounted to R$ 560 (R$ (1,905) at 12/31/2013).

 

 
 

 

VI- Total amounts recognized in Income for the Period and Stockholders’ Equity – Other Comprehensive Income (OCI)

 

   Income   Stockholders’ equity (OCI) 
   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		   06/30/2014   12/31/2013 
Value beginning of the period   -    -    -    -    (354)   - 
Cost of current service   (17)   (25)   (35)   (50)   -    - 
Net interest   (9)   -    (16)   1    -    - 
Effects on asset ceiling   -    -    -    -    11    1,036 
Remeasurements   -    -    -    -    (1)   (1,390)
Total amounts recognized   (26)   (25)   (51)   (49)   (344)   (354)

 

During the period, the contributions made totaled R$ 32 (R$ 19 from 01/01 to 06/30/2013). The contribution rate increases based on the beneficiary’s salary.

 

In 2014, contribution to the retirement plans sponsored by ITAÚ UNIBANCO HOLDING is expected to amount to R$ 57.

 

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

Period  Payment
estimate		 
2014   763 
2015   795 
2016   818 
2017   842 
2018   866 
2019 to 2023   4,727 

 

VII- Sensitivity of defined benefit obligation

 

The impact, due to the change in the assumption – discount rate by 0.5%, which would be recognized in Actuarial liabilities of the plans, as well as in Stockholders’ Equity – Other Comprehensive Income of the sponsor (before taxes) would amount to:

 

   Effect on actuarial liability   Effect which would be
recognized in
Stockholders’ Equity (*)		 
Change in Assumption  Value   Percentage of
actuarial
liabilities		   Value 
- Decrease by 0.5%   672    5.82%   (392)
- Increase by 0.5%   (609)   (5.57)%   316 

(*) Net of effects of asset ceiling

 

 
 

 

d)Defined contribution plans

 

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

 

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

 

   06/30/2014   12/31/2013 
   Pension plan
fund		   Asset
ceiling		   Recognized
amount		   Pension plan
fund		   Asset
ceiling		   Recognized
amount		 
Amount - beginning of the period   2,361    (275)   2,086    2,646    (318)   2,328 
Net interest   111    (13)   98    206    (26)   180 
Contribution   (66)   -    (66)   (136)   -    (136)
Effects on asset ceiling   -    7    7    -    43    43 
Remeasurements   27    1    28    (355)   26    (329)
Amount - end of the period  (Note 20a)   2,433    (280)   2,153    2,361    (275)   2,086 

 

II - Total amounts recognized in income for the period and Stockholders’ equity – Other Comprehensive Income (OCI):

 

   Income   Stockholders’ equity (OCI) 
   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		   06/30/2014   12/31/2013 
Amount - beginning of the period   -    -    -    -    (286)   - 
Contribution   (29)   (28)   (66)   (68)   -    - 
Net interest   49    45    98    90    -    - 
Remeasurements   -    -    -    -    28    (329)
Effects on asset ceiling   -    -    -    -    7    43 
Total amount recognized   20    17    32    22    (251)   (286)

 

During the period, the contributions to the defined contribution plans, including PGBL, totaled R$ 91 (R$ 89 from 01/01 at 06/30/2013), of which R$ 66 (R$ 68 from 01/01 at 06/30/2013) were pension funds.

 

 
 

 

e )Other post-employment benefits

 

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

 

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

 

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

 

   06/30/2014   12/31/2013 
At the beginning of the period   (146)   (148)
Interest cost   (7)   (12)
Credicard   (4)   - 
Benefits paid   4    7 
Remeasurements   -    7 
At the end of the period (Note 20b)   (153)   (146)

 

II- Total amounts recognized in Income for the Period and Stockholders’ equity – Other Comprehensive Income (OCI):

 

   Income   Stockholders’ equity (OCI) 
   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		   06/30/2014   12/31/2013 
At the beginning of the period   -    -    -    -    7    - 
Net interest   (4)   (3)   (7)   (6)   -    - 
Credicard   -    -    -    -    (1)   - 
Benefits paid   2    2    4    3    -    - 
Remeasurements   -    -    -    -    -    7 
Total recognized amounts   (2)   (1)   (3)   (3)   6    7 

 

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

 

Period  Payment
estimate		 
2014   7 
2015   8 
2016   9 
2017   9 
2018   10 
2019 to 2023   59 

 

III- Assumptions and sensitivity - medical care cost

 

For calculation of projected benefits obligations in addition to the assumptions used for the defined benefit plans (Note 29c I), an 9.72% p.a. increase in medical costs assumption is assumed.

 

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

 

   Recognition  1.0% increase   1.0% decrease 
Service cost and interest cost  Income   2    (2)
Present value of obligation  Other comprehensive income   19    (16)

 

 
 

 

Note 30 – Insurance contracts

 

a)Insurance contracts

 

ITAÚ UNIBANCO HOLDING, through its subsidiaries, offers to the market Insurance and private pension. Products are offered through insurance brokers (third parties operating in the market and its own brokers), Itaú Unibanco branches and electronic channels, according to their characteristics and regulatory requirements.

 

In all segments, a new product is created when new demands and opportunities arise in the market or from a specific negotiation.

 

The products developed are submitted to a committee, coordinated and controlled by the Governance of Products, in which all flows comprising the operational, commercial, legal, accounting, financial, internal control and technology aspects are analyzed, discussed and approved by the various areas involved.

 

The governance process of product evaluation is regulated by the Corporate Policy on Product and Operations Evaluation, and requires the integration of activities between product and evaluation areas, forming an organized group of activities that aims to add value to customers and to promote competitive differentials.

 

Internal rules provide for and support product evaluation and approval flows, attribution of responsibilities, provisions for carrying out processes, and also maximum and minimum balance limits, contribution, minimum premium and other, which aim at preserving the consistency of the process and product results.

 

There are also policies on underwriting risks in each segment, such as technical actuarial limits per insurance line and coverage, which are controlled systemically or operationally.

 

This product creation process involves the following steps:

 

·Development of the product by managers in order to meet a market demand.
·Submission of the detailed product characteristics to Governance.
·Parameterization of new products in IT systems with the concomitant evaluation of the need for developing new implementation.
·Launch of the product after authorization from the Product Governance Committee.

 

For private pension products, registration with the Brazilian Securities and Exchange Commission (CVM) and approval of actuarial technical notes and rules from SUSEP for sales is also required. It is also possible to custom minimum amounts, fund management and entry fees, actuarial table and interest upon negotiation with evaluation of an internal pricing model agreed in a specific contract.

 

There are policies on appropriate balances and minimum contributions to each negotiation. Risk benefits, considered ancillary coverage, follow their own and specific conditions, such as coverage limits, target audience and proof of good health, among others, according to each agreement. In addition, increased risks may exceed the loss coverage through reinsurance.

 

Each product has rules according to the channel and segment to which it will be sold. Pricing policies are determined according to internal models, in compliance with the corporate standard pricing model developed by the Risk and Financial Controls Area, in the context of the Governance of product evaluation.

 

The cost management of insurance and private pension products includes the groups of administrative, operating and selling expenses, where administrative expenses based on the recognition by cost centers, are allocated to products and sales channels according to the definition of the respective activities, following the corporate managerial model of the ITAÚ UNIBANCO HOLDING. Operating and selling expenses are based on the line for product identification and policy segmentation in order to define the sales channel.

 

 
 

 

b)Main products

 

I.Insurance

 

ITAÚ UNIBANCO HOLDING, through its insurance companies, supplies the market with insurance products with the purpose of assuming risks and restoring the economic balance of the assets of the policyholder if damaged.

 

In this segment, clients are mainly divided into the Individual (Retail, UniClass, Personnalité and Private) and Corporate (Companies, Corporate and Condominium) markets.

 

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

 

The insurance risks sold by insurance companies of ITAÚ UNIBANCO HOLDING are divided into property and casualty, and life insurance.

 

·Property and casualty insurance: covers losses, damages or liabilities for assets or persons, excluding from this classification life insurance lines.

 

·Life insurance: includes coverage for death and personal accidents.

 

   Loss ratio   Sales ratio 
   %   % 
Main insurance lines  01/01 to
06/30/2014		   01/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Mandatory insurance for personal injury caused by motor vehicles (DPVAT)   88.0    87.8    1.5    1.4 
Petroleum risks   75.2    21.9    13.5    4.9 
Group life   53.1    52.2    13.0    12.0 
Commercial multiple peril   46.8    55.2    16.5    15.4 
Extended warranty - assets   17.2    18.1    63.7    62.8 
Specified and all risks   17.2    42.4    5.3    5.6 
Individual accident   19.3    22.4    10.1    9.7 
Credit life   13.7    17.3    21.2    22.3 
Serious or terminal diseases   9.3    9.4    10.8    10.1 
Group accident insurance   6.5    8.3    37.9    35.1 
Multiple risks   3.5    5.6    55.7    49.5 

 

II.Private pension

 

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

 

·PGBL - Plan Generator of Benefits: The main objective of this plan is the accumulation of financial resources, but it can be purchased with additional risk coverage. Recommended for clients that file the full version of income tax return (rather than the simplified version), because they can deduct contributions paid for tax purposes up to 12.0% of the annual taxable gross income.

 

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

 

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

 

 
 

 

III – Income from insurance and private pension

 

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

 

   Premiums and contributions direct issued   Reinsurance   Retained premiums and contributions 
   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
VGBL   3,634    3,809    6,383    8,453    -    -    -    -    3,634    3,809    6,383    8,453 
Warranty extension - assets   461    345    841    676    -    -    -    -    461    345    841    676 
Group life   364    360    696    709    (11)   (5)   (17)   (13)   353    355    679    696 
PGBL   336    330    671    642    -    -    -    -    336    330    671    642 
Group accident insurance   198    174    379    337    -    -    (1)   (1)   198    174    378    336 
Credit life   188    177    378    329    -    (1)   -    (5)   188    176    378    324 
Specified and all risks   94    115    246    225    (65)   (83)   (191)   (162)   29    32    55    63 
Petroleum risks   151    93    231    173    (123)   (83)   (193)   (152)   28    10    38    21 
Multiple risks   115    89    158    129    (66)   (48)   (69)   (50)   49    41    89    79 
Mandatory insurance for personal injury caused by motor vehicles (DPVAT)   65    76    113    248    -    -    -    -    65    76    113    248 
Individual accident   54    43    96    75    (1)   -    (2)   (1)   53    43    94    74 
Pension, annuity and disability   46    34    89    65    (1)   (2)   (2)   (3)   45    32    87    62 
Serious or terminal diseases   46    40    80    68    -    -    -    -    46    40    80    68 
Commercial multiple peril   46    59    78    105    (8)   (12)   (15)   (23)   38    47    63    82 
Traditional   33    44    66    85    -    -    -    -    33    44    66    85 
Other lines   392    392    759    738    (92)   (126)   (189)   (225)   300    266    570    513 
Total   6,223    6,180    11,264    13,057    (367)   (360)   (679)   (635)   5,856    5,820    10,585    12,422 

 

 
 

 

c)Technical reserves for insurance and private pension

 

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

 

I.Insurance and private pension:

 

·Provision for unearned premiums – it is recognized for the coverage of amounts payable related to claims and expenses to be incurred, throughout the terms to be elapsed, in connection with the risks assumed at the calculation base date. The provision includes an estimate for effective and not issued risks (PPNG-RVNE).

 

·Provision for unsettled claims – it is recognized for the coverage of expected unsettled amounts related to single payments and income overdue, of claims reported up to the calculation base date, including accepted coinsurance operations, gross of reinsurance operations, and net of ceded coinsurance operations. The provision should include, whenever required, IBNER (claims incurred but not sufficiently reported) for the aggregate development of claims reported but not paid, which amounts may be changed throughout the process up to the final settlement.

 

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

 

·Mathematical provisions for benefits to be granted - it is recognized until the event triggering the benefit occurs, for coverage of the commitments assumed with the participants or insured, and it is calculated in accordance with methodologies approved in the technical actuarial note of the plan or product.

 

·Mathematical provisions for granted benefits - it is recognized after the event triggering the benefit occurs, for coverage of the commitments assumed with the participants or insured, and it is calculated in accordance with methodologies approved in the technical actuarial note of the plan or product.

 

·Reserve for financial surplus – it is recognized to ensure the amounts intended for distribution of financial surplus, in accordance with regulation in force, in the event it is stated in the agreement.

 

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

 

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

 

·Provision for related expenses - It is recognized for the coverage of expected amounts related to expenses with claims and benefits.

 

II.Change in reserves for insurance and private pension

 

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

 

 
 

  

II.I - Change in technical provisions

 

  

06/30/2014

  

12/31/2013

 
   Property,
individuals
and life
insurance		   Private
pension		   Life with
survivor
benefits		   Total   Property,
individuals
and life
insurance		   Private
pension		   Life with
survivor
benefits		   Total 
Opening balance  10,275   25,252   63,496   99,023   9,120   23,729   57,469   90,318 
(+) Additions arising from premiums / contribution   3,984    826    6,383    11,193    7,810    1,849    13,585    23,244 
(-) Deferral of risk   (3,685)   (88)   -    (3,773)   (7,226)   (147)   -    (7,373)
(-) Payment of claims / benefits   (1,207)   (72)   (5)   (1,284)   (2,341)   (141)   (13)   (2,495)
(+) Reported claims   575    -    -    575    2,523    -    -    2,523 
(-) Redemptions   (1)   (618)   (4,156)   (4,775)   (2)   (1,129)   (9,479)   (10,610)
(+/-) Net portability   -    159    160    319    -    (20)   (152)   (172)
(+) Adjustment of reserves and financial surplus   2    1,139    2,983    4,124    3    1,103    2,103    3,209 
(+) Corporate Reorganization   113    -    -    

113

    -    -    -    - 
(+/-) Other (recognition/reversal)   (27)   12    (57)   (72)   388    8    (17)   379 
Reserves for insurance and private pension   10,029    26,610    68,804    105,443    10,275    25,252    63,496    99,023 

 

II.II - Technical provisions balances

 

   Insurance   Private pension   Total 
   06/30/2014   12/31/2013   06/30/2014   12/31/2013   06/30/2014   12/31/2013 
Unearned premiums   5,637    5,274    10    10    5,647    5,284 
Mathematical reserve for benefits to be granted and benefits granted   19    19    93,863    87,239    93,882    87,258 
Redemptions and Other Unsettled Amounts   20    20    139    139    159    159 
Financial surplus   1    1    515    490    516    491 
Unsettled claims (1)   2,902    3,631    13    19    2,915    3,650 
IBNR   896    799    13    12    909    811 
Administrative and Related Expenses   185    188    48    46    233    234 
Other   369    343    813    793    1,182    1,136 
Total (2)       10,029    10,275    95,414    88,748    105,443    99,023 

(1) The provision for unsettled claims and IBNR is detailed in Note 30e.

(2) This table covers the amendments established by Susep Circular No. 462, of 03/01/2013, also for comparison purposes.

 

 
 

  

d)Deferred selling expenses

 

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

 

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

 

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

 

Balance at 01/01/2014   2,205 
Increase   241 
Amortization   (141)
Corporate reorganizations   31 
Balance at 06/30/2014   2,336 
Balance to be amortized in up to 12 months   1,114 
Balance to be amortized after 12 months   1,222 
      
Balance at 01/01/2013   2,231 
Increase   15 
Amortization   (37)
Impairment   (4)
Balance at 12/31/2013   2,205 
Balance to be amortized in up to 12 months   983 
Balance to be amortized after 12 months   1,222 

 

The amounts of deferred selling expenses from reinsurance are stated in Note 30I.

 

 
 

  

e)Table of loss development

 

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

 

I – Gross of reinsurance

 

Reserve for unsettled claims (*)   2,902 
(-) DPVAT operations   268 
(-) IBNER (claims incurred but not sufficiently reported)   155 
(-) Retrocession and other estimates   17 
Liability claims presented in the development table (Ia + Ib)   2,462 

(*) Provision for unsettled claims stated in Note 30c II.II of 06/30/2014.

 

Ia - Administratives claims - gross of reinsurance

 

Occurrence date  06/30/2010   06/30/2011   06/30/2012   06/30/2013   06/30/2014   Total 
At the end of reporting period   1,711    1,815    1,677    2,305    2,548    - 
After 1 year   1,674    1,856    1,665    2,237    -    - 
After 2 years   1,627    1,845    1,627    -    -    - 
After 3 years   1,704    1,830    -    -    -    - 
After 4 years   1,699    -    -    -    -    - 
                               
Current estimate   1,699    1,830    1,627    2,237    2,548    - 
Accumulated payments through base date   1,565    1,783    1,511    1,493    1,887    8,240 
Liabilities recognized in the balance sheet   134    47    116    744    661    1,701 
Liabilities in relation to prior years                            154 
Total administratives claims included in balance sheet                            1,856 

  

Ib - Judicial claims - gross of reinsurance

 

Occurrence date  06/30/2010   06/30/2011   06/30/2012   06/30/2013   06/30/2014   Total 
At the end of reporting period   40    27    63    37    29    - 
After 1 year   51    48    64    46    -    - 
After 2 years   87    54    69    -    -    - 
After 3 years   92    55    -    -    -    - 
After 4 years   134    -    -    -    -    - 
                               
Current estimate   134    55    69    46    29    - 
Accumulated payments through base date   14    17    35    24    17    107 
Liabilities recognized in the balance sheet   120    38    34    22    12    227 
Liabilities in relation to prior years                            379 
Total judicial claims included in balance sheet                            606 

 

 
 

  

II - Net of reinsurance

 

Reserve for unsettled claims (1)   2,902 
(-) DPVAT operations   268 
(-) IBNER   155 
(-) Reinsurance (2)   1,668 
(-) Retrocession and other estimates   17 
Liability claims presented in the development table (IIa + IIb)   794 

(1) Provision refers to provision for unsettled claims stated in Note 30c II.II of 06/30/2014.

(2) Reinsurance operations stated in Note 30l III of 06/30/2014.

 

IIa - Administratives claims - net of reinsurance

Occurrence date  06/30/2010   06/30/2011   06/30/2012   06/30/2013   06/30/2014   Total 
At the end of reporting period   1,068    1,184    1,219    1,423    1,483    - 
After 1 year   1,065    1,207    1,225    1,425    -    - 
After 2 years   1,062    1,203    1,227    -    -    - 
After 3 years   1,061    1,202    -    -    -    - 
After 4 years   1,060    -    -    -    -    - 
Current estimate   1,060    1,202    1,227    1,425    1,483    - 
Accumulated payments through base date   1,046    1,180    1,200    1,344    1,166    5,936 
Liabilities recognized in the balance sheet   13    22    28    81    318    461 
Liabilities in relation to prior years   -    -    -    -    -    20 
Total administratives claims included in balance sheet                            481 

 

IIb - Judicial claims - net of reinsurance

Occurrence date  06/30/2010   06/30/2011   06/30/2012   06/30/2013   06/30/2014   Total 
At the end of reporting period   38    26    58    37    29    - 
After 1 year   48    47    59    45    -    - 
After 2 years   61    51    63    -    -    - 
After 3 years   64    53    -    -    -    - 
After 4 years   67    -    -    -    -    - 
Current estimate   67    53    63    45    29    - 
Accumulated payments through base date   40    19    34    28    17    137 
Liabilities recognized in the balance sheet   27    34    29    18    12    120 
Liabilities in relation to prior years   -    -    -    -    -    193 
Total judicial claims included in balance sheet                            313 

 

Variations observed in the estimates of losses occurred in 2010 result mainly from atypical events, with gross amounts frequently higher than the average previously observed. However, as the percentages for reinsurance are high, the net analysis is not affected by this factor. In addition, in view of the high volatility inherent in the analysis of reinsurance gross data, particularly in all risks operations, the analysis of amounts net of reinsurance is recommended.

 

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

 

Additionally, it is important to emphasize that ITAU UNIBANCO HOLDING recognizes a provision for claims incurred by not enough reported (IBNER) with the purpose of covering the expected adjustment amount for claims (not on an individual basis) at the moment of recognizing the Provision for Unsettled Claims, particularly in lawsuits, in which the development of claims is very slow.

 

 
 

  

f)Liability adequacy test

 

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

 

The Liability adequacy test did not show any deficiency in this period.

 

The assumptions used in the test were as follows:

 

a)The risk grouping criteria are Insurance plans consider groups subject to similar risks jointly managed as a single portfolio.

 

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

 

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

 

d)Cancellations, partial redemptions, future contributions, conversions into annuity income and administrative expenses are periodically reviewed pursuant to the best practices and analysis of the experience in the subsidiaries. Accordingly, they represent the current best estimates for projections.

 

e)Mortality: biometric tables broken down by gender, adjusted according to life expectancy development (improvement).

 

g)Insurance risk – effect of changes on actuarial assumptions

 

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

 

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

 

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

 

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

 

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

 

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

 

 
 

  

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

 

   Impact in Results and Stockholders’ Equity (1)   Impact in Results and Stockholders’ Equity (1) 
   06/30/2014   12/31/2013 
   Supplementary   Insurance   Supplementary   Insurance 
Sensitivity analysis  Retirement Plans and
Life with Living Benefits		   Gross of
reinsurance		   Net of
reinsurance		   Retirement Plans and
Life with Living Benefits		   Gross of
reinsurance		   Net of
reinsurance		 
                         
5.0% increase in  mortality rates   1    (6)   (6)   2    (5)   (5)
5.0% decrease in  mortality rates   (1)   6    5    (2)   5    5 
                               
0.1% increase in risk-free interest rates   32    9    7    27    10    7 
0.1% decrease in risk-free interest rates   (32)   (9)   (7)   (27)   (10)   (7)
                               
5.0% increase in  conversion in income rates   (8)   -    -    (9)   -    - 
5.0% decrease in  conversion in income rates   8    -    -    9    -    - 
                               
5.0% increase in  claims   -    (152)   (76)   -    (180)   (88)
5.0% decrease in  claims   -    152    76    -    180    89 

(1) Amounts net of tax effects.

 

h)Risks of insurance and private pension

 

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

 

Large risks products are distributed by brokers. In the case of the extended warranty product, this is marketed by the retail company that sells the product to consumer. The DPVAT production results from the participation that the insurance companies of ITAÚ UNIBANCO HOLDING have in the Leading Insurance Company of the DPVAT consortium.

 

 
 

  

There is no product concentration in relation to insurance premiums, reducing the concentration risk of products and distribution channels. For large risks products, the strategy of lower retention is adopted, in accordance with certain lines shown below:

 

   04/01 to 06/30/2014   04/01 to 06/30/2013   01/01 to 06/30/2014   01/01 to 06/30/2013 
   Insurance
premiums		   Retained
premium		   Retention
(%)		   Insurance
premiums		   Retained
premium		   Retention
(%)		   Insurance
premiums		   Retained
premium		   Retention
(%)		   Insurance
premiums		   Retained
premium		   Retention
(%)		 
Property and casualty                                                            
Extended warranty   461    461    100.0    345    345    100.0    841    841    100.0    676    676    100.0 
Credit life   188    188    100.0    177    176    99.4    378    378    100.0    329    324    98.5 
Mandatory personal injury caused by motor vehicle (DPVAT)   65    65    100.0    76    76    100.0    113    113    100.0    248    248    100.0 
                                                             
Individuals                                                            
Group life   364    353    97.0    360    355    98.6    696    679    97.6    709    696    98.2 
Group accident insurance   198    198    100.0    174    174    100.0    379    378    99.7    337    336    99.7 
Individual accident   54    53    98.1    43    43    100.0    96    94    97.9    75    74    98.7 
                                                             
Large risks                                                            
Specified and operational risks   94    29    30.9    115    32    27.8    246    55    22.4    225    63    28.0 
Petroleum risks   151    28    18.5    93    10    10.8    231    38    16.5    173    21    12.1 
Engineering   18    3    16.7    21    2    9.5    38    5    13.2    59    9    15.3 

 

 
 

  

i)Insurance, pension plan and capitalization management structure

 

The products that make up the portfolios of ITAÚ UNIBANCO HOLDING’s insurance companies are related to the life, high risks, extended warranty, pension plan and capitalization lines. Therefore, the main risks these portfolios are subject to are underwriting, market, counterparty credit, life expectancy, and liquidity risks, among others.

 

The subscription risk is inherent in insurance, pension plan and capitalization products and it is the possibility of losses arising from transactions that go against the organization’s expectations, directly or indirectly associated with the technical and actuarial bases adopted to calculate premiums, contributions and provisions. Life expectancy risk is the possibility of pension plans paying pensions and annuities for periods longer than those initially expected.

 

j)Duties and responsibilities

 

In line with good national and international practices and to ensure that the risks arising from insurance, pension plan and capitalization products are properly identified, measured, assesses, reported and approved in proper bodies, o ITAÚ UNIBANCO HOLDING has a risk management structure which guidelines are established in an internal policy, approved by its Board of Directors, applicable to the companies and subsidiaries exposed to insurance, pension plan and capitalization risks in Brazil and abroad.

 

The process of managing insurance, pension plan and capitalization risks is based on responsibilities established and distributed between control and business areas, ensuring independence between them. The main duties of the area that controls insurance, pension plan and capitalization risks are:

 

·Establishing governance and preparing the internal policy on the management of insurance, pension plan and capitalization risks;
·Supporting the business area in the development of new products, bringing the perspective of risks;
·Supporting the business area in the development and implementation of price and risk models;
·Monitoring and reporting on a consolidated basis the risks arising from insurance, pension plan and capitalization risks to the proper authority levels.

 

Also, as part of the risk management process, there is a structure of panels where, in accordance with the level of risks involved, decisions may be escalated to superior committees, ensuring compliance with a number of internal and regulatory requirements, as well as balanced decisions regarding risks.

 

Management works together with the investment manager to ensure that assets backing long-term products, with guaranteed minimum returns, are managed according to the characteristics of liabilities aiming at actuarial balance and long-term solvency.

 

A detailed mapping of the liabilities of long-term products that result in payment flows of projected future benefits is performed annually. This mapping is prepared based on actuarial assumptions.

 

The investment manager, having this information, uses Asset Liability Management models to find the best asset portfolio composition that enables the outweighing of risks entailed in this type of product, considering its long-term economic and financial feasibility. The portfolio of backing assets is periodically rebalanced based on the fluctuations in market prices of assets, liquidity needs, and changes in characteristics of liabilities.

 

 
 

  

k)Market, credit and liquidity risk

 

Market risk

 

Market risk is analyzed, in relation to insurance operations, based on the following metrics and sensitivity and loss control measures (Note 36 – Market risk):

 

·Value at Risk (VaR): statistical metric that estimates the expected maximum potential economic loss under normal market conditions, taking into consideration a certain time horizon and confidence interval (Note 36);

 

·Losses in Stress Scenarios (Stress Test): simulation technique to assess the behavior of assets, liabilities and derivatives of a portfolio when various risk factors are subject to extreme market situations (based on prospective scenarios) in the portfolio;

 

·Sensitivity (DV01- Delta Variation Risk): in relation to insurance operations, impact on the cash flows market value when submitted to a 1 annual basis point increase in the current interest rates or index rate and 1 percentage point in the share price and currency;

 

·Concentration: cumulative exposure of a certain asset or risk factor calculated at market value (MtM – Mark to Market).

 

           (R$ million) 
   06/30/2014   12/31/2013 
Class  Account
balance		   DV01   Account
balance		   DV01 
                 
Government securities                    
NTN-C   4,242    (3.54)   4,114    (3.47)
NTN-B   1,870    (2.13)   1,719    (1.92)
NTN-F   -    -    7    - 
LTN   -    -    -    - 
                     
DI Future   -    -    -    - 
                     
Private securities                    
Indexed to IGPM   1    -    14    (0.00)
Indexed to IPCA   328    (0.23)   309    (0.22)
Indexed to PRE   -    -    14    (0.00)
                     
Shares   41    0.41    39    0.39 
                     
Floating assets   7,709    -    7,301    - 
                     
Under agreements to resell   6,141    -    7,567    - 

 

 
 

  

Liquidity Risk

 

Liquidity risk is the risk that ITAÚ UNIBANCO HOLDING may have insufficient net funds available to honor its current obligations at a given moment. The liquidity risk is managed continuously based on the monitoring of payment flows related to its liabilities vis-à-vis the inflows generated by its operations and financial assets portfolio. Additionally, ITAÚ UNIBANCO HOLDING has funds invested in short-term assets, available on demand, to cover its regular needs and any liquidity contingencies.

 

Liabilities  06/30/2014   12/31/2013   Assets  06/30/2014   12/31/2013 
Insurance operations  Amount   DU (1)   Amount   DU (1)   Backing asset  Amount   DU (1)   Amount   DU (1) 
Unearned premiums (2)   2,898    16.2    2,011    18.0   LFT, repurchase agreements, NTN-B, CDB, LF and debentures   2,898    15.6    2,011    2.4 
IBNR, PDR e PSL (3)   1,568    15.5    1,540    17.1   LFT, repurchase agreements, NTN-B, CDB, LF and debentures   1,568    15.9    1,540    7.2 
Other provisions   289    108.7    344    118.2   LFT, repurchase agreements, NTN-B, CDB, LF and debentures   289    17.7    344    25.0 
Subtotal   4,755         3,895        Subtotal   4,755         3,895      
Pension plan, VGBL and individual life operations                                           
Related expenses   48    102.9    46    95.6   LFT, repurchase agreements, NTN-B, CDB, LF and debentures   48    47.8    46    174.0 
Unearned premiums (2)   12    -    11        LFT, repurchase agreements, NTN-B, CDB and debentures   12    10.1    11    1.9 
Unsettled claims   15    -    21        LFT, repurchase agreements, NTN-B, CDB and debentures   15    10.5    21    1.9 
IBNR   14    10.8    13    9.8   LFT, repurchase agreements, NTN-B, CDB and debentures   14    10.1    13    1.9 
Redemptions and Other Unsettled Amounts   158    -    158        LFT, repurchase agreements, NTN-B, CDB and debentures   158    10.6    158    1.9 
Mathematical reserve for benefits granted   1,203    103.0    1,152    95.7   LFT, repurchase agreements, LTN, NTN-B, NTN-C, NTN-F, CDB, LF and debentures   1,203    47.9    1,152    174.8 
Mathematical reserve for benefits to be granted –
PGBL/ VGBL		   88,774    139.6    82,279    133.2   LFT, repurchase agreements, LTN, LTN-B, NTN-C, NTN-F, CDB, LF and debentures (4)   88,774    17.5    82,279    10.9 
Mathematical reserve for benefits to be granted – traditional   3,905    186.7    3,825    175.9   LFT, Repurchase Agreements, NTN-B, NTN-C, Debentures   3,905    87.1    3,825    83.5 
Other provisions   814    186.4    792    175.6   LFT, repurchase agreements, NTN-B, NTN-C, CDB, LF and debentures   814    86.9    792    83.3 
Financial surplus   516    186.4    492    175.6   LFT, repurchase agreements, NTN-B, NTN-C, CDB, LF and debentures   516    86.9    492    83.3 
Subtotal   95,459         88,789        Subtotal   95,459         88,789      
Total technical reserves   100,214         92,684        Total backing assets   100,214         92,684      

(1) DU – Duration in months

(2) Net amount of Credit Right.

(3) Net of escrow deposits and reserves retained IRB.

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

 

 
 

  

Credit Risk

 

I - Reinsurers – Breakdown

 

The division of risks assigned to reinsurance companies and their rating according the Standard & Poor’s is presented below:

 

-Insurance Operations: reinsurance premium operations are basically represented by: IRB Brasil Resseguros with 39,99% (38.55% at 12/31/2013), LLOYD'S (A+) with 17,30% (16.92% at 12/31/2013), American Home Assurance Company (A) with 6,31% (8.64% at 12/31/2013), Munich Re do Brasil with 5,57% (6.15% at 12/31/2013), and Everest Reinsurance Company (A1) with 3,09% (2.29% at 12/31/2013).

 

-Social Security Operations: social security operations related to reinsurance premiums are entirely represented by General Reinsurance AG with 50,00% (48.84% at 12/31/2013) and Munich Re do Brasil with 50,00% (51.16% at 12/31/2013). For insurance operations, transfers of reinsurance premiums are deployed between Munich Re do Brasil with 61,19% (49.60% at 12/31/2013) and IRB Brasil Resseguros with 38,81% (49.40% at 12/31/2013).

 

 
 

  

II - Risk level of financial assets

 

The table below shows insurance financial assets, individually evaluated, classified by rating:

 

   06/30/2014 
Internal rating (*)  Interbank deposits and
securities purchased under
agreements to resell		   Held-for-trading
financial assets		   Financial assets
designated at fair
value through profit
or loss		   Derivatives
assets		   Available-for-
sale financial
assets		   Held-to-
maturity
financial assets		   Total 
Lower risk   14,612    66,931    -    460    2,581    3,900    88,484 
Satisfactory   -    -    -    -    -    -    - 
Higher Risk   -    3    -    -    -    -    3 
Total   14,612    66,934    -    460    2,581    3,900    88,487 
%   16.5    75.6    -    0.5    3.0    4.4    100.0 

(*) Internal risk level ratings, with due associated probability of default, are detailed in Note 36.

 

   12/31/2013 
Internal rating (*)  Interbank deposits and
securities purchased under
agreements to resell		   Held-for-trading
financial assets		   Financial assets
designated at fair
value through profit
or loss		   Derivatives
assets		   Available-for-
sale financial
assets		   Held-to-
maturity
financial assets		   Total 
Lower risk   11,895    49,125    -    60    1,955    3,779    66,814 
Satisfactory   -    10,885    -    64    49    -    10,998 
Higher Risk   -    78    -    -    -    -    78 
Total   11,895    60,088    -    124    2,004    3,779    77,890 
%   15.2    77.1    -    0.2    2.6    4.9    100.0 

(*) Internal risk level ratings, with due associated probability of default, are detailed in Note 36.

 

 
 

  

l)Reinsurance

 

Expenses and revenues from reinsurance premiums ceded are recognized in the period when they occur, according to the accrual basis, with no offset of assets and liabilities related to reinsurance except in the event there is a contractual provision for the offset of accounts between the parties. Analyses of reinsurance required are made to meet the current needs of ITAÚ UNIBANCO HOLDING, maintaining the necessary flexibility to comply with changes in management strategy in response to the various scenarios to which it may exposed.

 

With the approval of the Supplementary Law No. 126 of January 15, 2007, the reinsurance market was opened with the creation of three categories of companies authorized to operate in Brazil: local, admitted and occasional (the last two being respectively reinsurance companies with or without representative office in Brazil). The transition to the new market was made progressively, maintaining the right of local reinsurance companies at 60.0% of premiums ceded by insurance companies until January 2010; after this period, this percentage may be reduced to 40.0%. From March 31, 2011, this percentage of 40.0% shall be obligatorily ceded to local reinsurance companies.

 

Reinsurance assets

 

Reinsurance assets represent the estimated amounts recoverable from reinsurers in connection with losses incurred. Such assets are evaluated based on risk assignment contracts, and for cases of losses effectively paid, they are reassessed after 365 days as to the possibility of impairment; in case of doubts, such assets are reduced by recognizing an allowance for losses on reinsurance.

 

Reinsurance transferred

 

ITAÚ UNIBANCO HOLDING transfers, in the normal course of its businesses, reinsurance premiums to cover losses on underwriting risks to its policyholders and is in compliance with the operational limits established by the regulating authority. In addition to proportional contracts, non-proportional contracts are also entered into in order to transfer a portion of the responsibility to the reinsurance company for losses that exceed a certain level of losses in the portfolio. Non-proportional reinsurance premiums are included in Other assets - prepaid expenses and amortized to Other operating expenses over the effectiveness period of the contract on a daily accrual basis.

 

 
 

  

I- Changes in balances of transactions with reinsurance companies

 

   Credits   Debits 
   06/30/2014   12/31/2013   06/30/2014   12/31/2013 
Opening balance   297    234    631    384 
Issued contracts   -    -    650    1,448 
Recoverable claims   4    86    -    - 
Prepayments / payments to reinsurer   -    (30)   (577)   (1,184)
Monetary adjustment and interest of claims   -    -    (26)   (17)
Other increase / reversal   -    7    -    - 
Closing balance   301    297    678    631 

 

II – Balances of technical reserves with reinsurance assets

 

   06/30/2014   12/31/2013 
Reinsurance claims   2,043    2,729 
Reinsurance premiums   979    979 
Reinsurance commission   (42)   (47)
Closing balance   2,980    3,661 

 

III – Changes in balances of technical reserves for reinsurance claims

 

   06/30/2014   12/31/2013 
Opening balance   2,729    2,098 
Reported claims   (215)   1,112 
Paid claims   (521)   (503)
Other increase/reversal   9    - 
Monetary adjustment and interest of claims   41    22 
Closing balance (*)   2,043    2,729 

(*) Includes Reserve for unsettled claims, IBNER (Reserve for claims not sufficiently warned), IBNR (Reserve for claims incurred but not reported), not covered by the table of loss development net of reinsurance Note 30 eII.

 

IV – Changes in balances of technical reserves for reinsurance premiums

 

   06/30/2014   12/31/2013 
Opening balance   979    700 
Receipts   610    1,353 
Payments   (610)   (1,074)
Closing balance   979    979 

 

V – Changes in balances of technical reserves for reinsurance commission

 

   06/30/2014   12/31/2013 
Opening balance   (47)   (45)
Receipts   27    67 
Payments   (22)   (69)
Closing balance   (42)   (47)

 

 
 

  

m)Regulatory authorities

 

Insurance and private pension operations are regulated by the National Council of Private Insurance (CNSP) and the Superintendence of Private Insurance (SUSEP). These authorities are responsible for regulating the market, and consequently for assisting in the mitigation of risks inherent in the business.

 

The CNSP is the regulatory authority of insurance activities in Brazil, created by Decree-Law N° 73, of November 21, 1966. The main attribution of CNSP, at the time of its creation, was to set out the guidelines and rules of government policy on private insurance segments, and with the enactment of Law N° 6,435, of July 15, 1977, its attributions included private pension of public companies.

 

The Superintendence of Private Insurance (SUSEP) is the authority responsible for controlling and overseeing the insurance, private pension, and reinsurance markets. An agency of the Ministry of Finance, it was created by the Decree-Law N° 73, of November 21, 1966, which also created the National System of Private Insurance, comprising the National Council of Private Insurance (CNSP), IRB Brasil Resseguros S.A. – IRB Brasil Re, the companies authorized to have private pension plans and the open-ended private pension companies.

 

n)Capital for insurance activity

 

CNSP – Conselho Nacional de Seguros Privados (National Council for Private Insurance) published on February 18, 2013 Rules No. 280 (revoked Rule No. 411 of December 22, 2010), , No. 283 and No. 284. As of December 23, 2013, CNSP modified capital requirements publishing Rule No. 302 (revoked Rule No. 282 of February 18, 2013 and changed Rules nº 228 e 280). These Rules establish general guidelines for the operation of insurance companies and capital requirements for underwriting and operational risk. In January 2011, CNSP Rule No. 228 of December 6, 2010 provided criteria for additional credit risk capital requirements for insurance companies.

 

 
 

  

Note 31 – Fair value of financial instruments

 

In cases where market prices are not available, fair values are based on estimates using discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions adopted, including the discount rate and estimate of future cash flows. The estimated fair value achieved through these techniques cannot be substantiated by comparison with independent markets and, in many cases, it cannot be realized in the immediate settlement of the instrument.

 

The following table summarizes the carrying and estimated fair values for financial instruments:

 

   06/30/2014   12/31/2013 
   Carrying value   Estimated fair
value		   Carrying value   Estimated
fair value		 
Financial assets                    
Cash and deposits on demand and Central Bank compulsory deposits   100,648    100,648    93,586    93,586 
Interbank deposits   27,030    27,032    25,660    25,663 
Securities purchased under agreements to resell   140,732    140,732    138,455    138,455 
Financial assets held for trading (*)   148,308    148,308    148,860    148,860 
Financial assets designated at fair value through profit or loss (*)   494    494    371    371 
Derivatives (*)   11,370    11,370    11,366    11,366 
Available-for-sale financial assets (*)   72,149    72,149    96,626    96,626 
Held-to-maturity financial assets   29,468    30,383    10,116    10,480 
Loan operations and lease operations   393,836    395,317    389,467    390,889 
Other financial assets   49,651    49,651    47,592    47,592 
Financial liabilities                    
Deposits   277,347    277,446    274,383    274,317 
Securities sold under repurchase agreements   266,340    266,340    266,682    266,682 
Financial liabilities held for trading (*)   498    498    371    371 
Derivatives (*)   11,890    11,890    11,405    11,405 
Interbank market debt   110,857    110,582    111,376    111,059 
Institutional market debt   67,643    66,739    72,055    72,496 
Liabilities for capitalization plans   3,007    3,007    3,032    3,032 
Other financial liabilities   54,630    54,630    61,274    61,274 

(*) These assets and liabilities are recorded in the balance sheet at their fair value.

 

Financial instruments not included in the Balance Sheet (Note 36) are represented by Standby letters of credit and guarantees provided, which amount to R$ 72,695 (R$ 71,162 at 12/31/2013) with an estimated fair value of R$ 901 (R$ 802 at 12/31/2013).

 

The methods and assumptions adopted to estimate the fair value are defined below:

 

a)Cash and deposits on demand, Central Bank compulsory deposits, Securities purchased under agreements to resell, Securities sold under repurchase agreements and liabilities for capitalization plans – The carrying amounts for these instruments approximate their fair values.

 

b)Interbank deposits, deposits, Interbank market debt and Institutional market debt – ITAÚ UNIBANCO HOLDING estimates the fair values by discounting the estimated cash flows and adopting the market interest rates.

 

c)Financial assets held for trading, including Derivatives (assets and liabilities), Financial assets designated at fair value through profit or loss, Available-for-sale financial assets, Held-to-maturity financial assets and Financial liabilities held for trading – Under normal conditions, market prices are the best indicators of the fair values of financial instruments. However, not all instruments have liquidity or quoted market prices and, in such cases, the adoption of present value estimates and other pricing techniques are required. In the absence of quoted prices from ANBIMA, the fair values ​​of bonds are calculated based on the interest rates provided by others on the market (brokers). The fair values of corporate debt securities are computed by adopting criteria similar to those applied to interbank deposits, as described above. The fair values of shares are computed based on their prices quoted in the market. The fair values of derivative financial instruments were determined as follows:

 

·Swaps: The cash flows are discounted to present value based on yield curves that reflect the appropriate risk factors. These yield curves may be drawn mainly based on the exchange price of derivatives at BM&FBOVESPA, of Brazilian government securities in the secondary market or derivatives and securities traded abroad. These yield curves may be used to obtain the fair value of currency swaps, interest rate swaps and swaps based on other risk factors (commodities, stock exchange indices, etc.).

 

·Futures and forwards: Quotations on exchanges or criteria identical to those applied to swaps.

 

 
 

  

·Options: The fair values are determined based on mathematical models (such as Black&Scholes) that are fed with implicit volatility data, interest rate yield curve and fair value of the underlying asset. Current market prices of options are used to compute the implicit volatilities. All these data are obtained from different sources (usually Bloomberg).

 

·Credit Risk: Inversely related to the probability of default (PD) in a financial instrument subject to credit risk. The process of adjusting the market price of these spreads is based on the differences between the yield curves with no risk and the yield curves adjusted for credit risk.

 

d)Loan operations and lease operations – The fair value is estimated based on groups of loans with similar financial and risk characteristics, using valuation models. The fair value of fixed-rate loans was determined by discounting estimated cash flows, applying interest rates close to ITAÚ UNIBANCO HOLDING current rates for similar loans. For the majority of loans at floating rate, the carrying amount was considered close to their fair value. The fair value of loan and lease operations not overdue was calculated by discounting the expected payments of principal and interest through maturity, at the aforementioned rates. The fair value of overdue loan and lease transactions was based on the discount of estimated cash flows, using a rate proportional to the risk associated with the estimated cash flows, or on the underlying collateral. The assumptions related to cash flows and discount rates are determined using information available in the market and the borrower’s specific information of the debtor.

 

e)Other financial assets / liabilities – primarily composed of receivables from credit card issuers, deposits in guarantee for contingent liabilities and trading and intermediation of securities. The carrying amounts for these assets/liabilities substantially approximate their fair values, since they principally represent amounts to be received in the short term from credit card holders and to be paid to credit card acquirers, judicially required deposits (indexed to market rates) made by ITAÚ UNIBANCO HOLDING as guarantees for lawsuits or very short-term receivables (generally with a maturity of approximately 5 (five) business days). All of these items represent assets / liabilities without significant associated market, credit and liquidity risks.

 

In accordance with IFRS, ITAÚ UNIBANCO HOLDING classifies fair value measurements in a fair value hierarchy that reflects the significance of inputs adopted in the measurement process.

 

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is a market in which transactions for the asset or liability being measured occur often enough and with sufficient volume to provide pricing information on an ongoing basis.

 

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Level 2 generally includes: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or quoted prices vary substantially either over time or among market makers, or in which little information is released publicly; (iii) inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, etc.); (iv) inputs that are mainly derived from or corroborated by observable market data through correlation or by other means.

 

Level 3: Inputs are unobservable for the asset or liability. Unobservable information shall be used to measure fair value to the extent that observable information is not available, thus allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 

Financial assets for trading, Available for sale, and Designated at fair value through profit or loss:

 

Level 1: Highly-liquid securities with prices available in an active market are classified in Level 1 of the fair value hierarchy. This classification level includes most of the Brazilian Government Securities (mainly LTN, LFT, NTN-B, NTN-C and NTN-F), securities of foreign governments, shares and debentures traded on stock exchanges and other securities traded in an active market.

 

Level 2: When the pricing information is not available for a specific security, the assessment is usually based on prices quoted in the market for similar instruments, pricing information obtained for pricing services, such as Bloomberg, Reuters and brokers (only when the prices represent actual transactions) or discounted cash flows, which use information for assets actively traded in an active market. These securities are classified into Level 2 of the fair value hierarchy and are comprised of certain Brazilian government securities, debentures and some government securities quoted in a less-liquid market in relation to those classified into Level 1, and some share prices in investment funds. ITAÚ UNIBANCO HOLDING does not hold positions in alternative investment funds or private equity funds.

 

 
 

 

Level 3: When no pricing information in an active market, ITAÚ UNIBANCO HOLDING uses internally developed models, from curves generated according to the proprietary model. The Level 3 classification includes some Brazilian government and private securities (mainly NTN-I, NTN-A1, NTN-A3, CRI, TDA and CCI falling due after 2025, CVS and promissory notes) and securities that are not usually traded in an active market.

 

Derivatives:

 

Level 1: Derivatives traded on stock exchanges are classified in Level 1 of the hierarchy.

 

Level 2: For derivatives not traded on stock exchanges, ITAÚ UNIBANCO HOLDING estimates the fair value by adopting a variety of techniques, such as Black&Scholes, Garman & Kohlhagen, Monte Carlo or even the discounted cash flow models usually adopted in the financial market. Derivatives included in Level 2 are credit default swaps, cross currency swaps, interest rate swaps, plain vanilla options, certain forwards and generally all swaps. All models adopted by ITAÚ UNIBANCO HOLDING are widely accepted in the financial services industry and reflect all derivative contractual terms. Considering that many of these models do not require a high level of subjectivity, since the methodologies adopted in the models do not require major decisions and information for the model are readily observed in the actively quotation markets, these products were classified in Level 2 of the measurement hierarchy.

 

Level 3: The derivatives with fair values based on non-observable information in an active market were classified into Level 3 of the fair value hierarchy, and are comprised of non-standard options, certain swaps indexed to non-observable information, and swaps with other products, such as swap with option and USD Check, credit derivatives and futures of certain commodities. These operations have their pricing derived from a range of volatility using the basis of historical volatility.

 

All aforementioned valuation methodologies may result in a fair value that may not be indicative of the net realizable value or future fair values. However, ITAÚ UNIBANCO HOLDING believes that all methodologies used are appropriate and consistent with the other market participants. However, the adoption of other methodologies or assumptions different than those used to estimate fair value may result in different fair value estimates at the balance sheet date.

 

 
 

  

Distribution by level

 

The following table presents the breakdown of risk levels at 06/30/2014 and 12/31/2013 for financial assets held for trading and available-for-sale financial assets.

 

   06/30/2014   12/31/2013 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
Financial assets held for trading   109,800    37,912    596    148,308    117,204    31,629    27    148,860 
Investment funds   7    1,108    -    1,115    8    1,054    -    1,062 
Brazilian government securities   101,094    1,814    -    102,908    109,037    2,098    -    111,135 
Brazilian external debt bonds   2,155    -    -    2,155    1,904    -    -    1,904 
Government securities – other countries   830    466    -    1,296    406    273    -    679 
Argentina   271    -    -    271    99    -    -    99 
Belgium   -    -    -    -    107    -    -    107 
Chile   -    134    -    134    -    6    -    6 
Colombia   -    213    -    213    -    226    -    226 
United States   443    -    -    443    18    -    -    18 
Mexico   116    -    -    116    182    -    -    182 
Paraguay   -    78    -    78    -    -    -    - 
Uruguay   -    41    -    41    -    41    -    41 
Corporate securities   5,714    34,524    596    40,834    5,849    28,204    27    34,080 
Shares   2,804    -    -    2,804    2,896    -    -    2,896 
Bank deposit certificates   -    3,757    -    3,757    -    3,006    -    3,006 
Securitized real estate loans   -    4    2    6    -    12    -    12 
Debentures   2,910    2,352    -    5,262    2,953    2,144    -    5,097 
Eurobonds and others   -    1,151    -    1,151    -    1,278    -    1,278 
Financial credit bills   -    27,230    -    27,230    -    21,566    -    21,566 
Promissory notes   -    21    320    341    -    -    27    27 
Other   -    9    274    283    -    198    -    198 
Available-for-sale financial assets   28,115    39,420    4,614    72,149    43,413    46,724    6,489    96,626 
Investment funds   -    265    -    265    -    211    -    211 
Brazilian government securities   13,359    481    257    14,097    27,197    484    258    27,939 
Brazilian external debt bonds   8,917    -    -    8,917    11,709    -    -    11,709 
Government securities – other countries   920    9,259    54    10,233    1,467    7,157    34    8,658 
Belgium   47    -    -    47    51    -    -    51 
Chile   -    1,030    54    1,084    -    1,013    34    1,047 
Korea   -    2,910    -    2,910    -    2,455    -    2,455 
Denmark   -    3,409    -    3,409    -    2,631    -    2,631 
Spain   -    784    -    784    -    -    -    - 
United States   518    -    -    518    1,101    -    -    1,101 
France   125    -    -    125    88    -    -    88 
Netherlands   122    -    -    122    126    -    -    126 
Italy   102    -    -    102    94    -    -    94 
Paraguay   -    802    -    802    -    638    -    638 
Uruguay   -    324    -    324    -    420    -    420 
Other   6    -    -    6    7    -    -    7 
Corporate securities   4,919    29,415    4,303    38,637    3,040    38,872    6,197    48,109 
Shares   1,944    41    -    1,985    1,986    39    -    2,025 
Rural Product Note   -    1,064    -    1,064    -    625    -    625 
Bank deposit certificates   -    444    44    488    -    2,148    33    2,181 
Securitized real estate loans   -    -    2,784    2,784    -    7,441    4,834    12,275 
Debentures   2,975    15,342    -    18,317    1,042    14,465    -    15,507 
Eurobonds and others   -    5,105    59    5,164    12    4,810    74    4,896 
Financial credit bills   -    7,042    -    7,042    -    8,804    -    8,804 
Promissory notes   -    -    1,386    1,386    -    -    1,227    1,227 
Other   -    377    30    407    -    540    29    569 
Financial assets designated at fair value through profit or loss   -    494    -    494    -    371    -    371 
Brazilian government securities   -    235    -    235    -    371    -    371 
Government securities – other countries   -    259    -    259    -    -    -    - 
Financial liabilities held for trading   -    498    -    498    -    371    -    371 
Structured notes   -    498    -    498    -    371    -    371 

 

The following table presents the breakdown of risk levels at 06/30/2014 and 12/31/2013 for our derivative assets and liabilities.

 

   06/30/2014   12/31/2013 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
Derivatives - assets   212    11,066    92    11,370    -    11,242    124    11,366 
Futures   212    -    -    212    -    -    -    - 
Swap – differential receivable   -    4,401    -    4,401    -    4,442    -    4,442 
Options   -    1,505    28    1,533    -    1,704    13    1,717 
Forwards   -    3,916    -    3,916    -    3,315    -    3,315 
Credit derivatives   -    132    -    132    -    686    -    686 
Forwards   -    692    -    692    -    555    -    555 
Check of swap   -    46    -    46    -    88    -    88 
Other derivatives   -    374    64    438    -    452    111    563 
Derivatives - liabilities   -    (11,885)   (5)   (11,890)   (33)   (11,367)   (5)   (11,405)
Futures   -    -    -    -    (33)   -    -    (33)
Swap – differential payable   -    (6,851)   -    (6,851)   -    (6,111)   -    (6,111)
Options   -    (1,634)   (5)   (1,639)   -    (1,916)   (5)   (1,921)
Forwards   -    (2,256)   -    (2,256)   -    (1,862)   -    (1,862)
Credit derivatives   -    (138)   -    (138)   -    (391)   -    (391)
Forwards   -    (543)   -    (543)   -    (560)   -    (560)
Swap with USD check   -    (97)   -    (97)   -    (145)   -    (145)
Other derivatives   -    (366)   -    (366)   -    (382)   -    (382)

 

There were no significant transfers between Level 1 and Level 2 during the periods ended 06/30/2014 and 12/31/2013. Transfers into and out of Level 3 are displayed on changes of Level 3.

 

 
 

 

Measurement of fair value Level 2 based on pricing services and brokers

 

When pricing information is not available for securities classified as Level 2, pricing services, such as Bloomberg or brokers, are used to value such instruments.

 

In all cases, to assure that the fair value of these instruments is properly classified as Level 2, internal analysis of the information received are conducted, so as to understand the nature of the input used in the establishment of such values by the service provider.

 

Prices provided by pricing services that meet the following requirements are considered Level 2: input is immediately available, regularly distributed, provided by sources actively involved in significant markets and it is not proprietary.

 

Of the total of R$ 80,571 million in financial instruments classified as Level 2, at June 30, 2014, pricing service or brokers were used to evaluate securities at the fair value of R$ 27,678 million, substantially represented by:

 

·Debentures: When available, we use price information for transactions recorded in the Brazilian Debenture System (SND), an electronic platform operated by CETIP, which provides multiple services for transactions involving debentures in the secondary market. Alternatively, prices of debentures provided by ANBIMA are used. Its methodology includes obtaining, on a daily basis, illustration and non-binding prices from a group of market players deemed to be significant. Such information is subject to statistical filters established in the methodology, with the purpose of eliminating outliers.

 

·Global and corporate securities: The pricing process for these securities consists in capturing from 2 to 8 quotes from Bloomberg, depending on the asset. The methodology consists in comparing the highest purchase prices and the lowest sale prices of trades provided by Bloomberg for the last day of the month. Such prices are compared with information from purchase orders that the Institutional Treasury of ITAÚ UNIBANCO HOLDING provides for Bloomberg. Should the difference between them be lower than 0.5%, the average price of Bloomberg is used. Should it be higher than 0.5% or if the Institutional Treasury does not provide information on this specific security, the average price gathered directly from other banks is used. The price of the Institutional Treasury is used as a reference only and never in the computation of the final price.

 

Level 3 recurring fair value measurements

 

The departments in charge of defining and applying the pricing models are segregated from the business areas. The models are documented, submitted to validation by an independent area and approved by a specific committee. The daily process of price capture, calculation and disclosure are periodically checked according to formally defined testing and criteria and the information is stored in a single and corporate history data base.

 

The most recurring cases of assets classified as Level 3 are justified by the discount factors used. Factors such as the fixed interest curve in reais and the TR coupon curve – and, as a result, its related factors – have inputs with terms shorter than the maturities of these fixed-income assets. For swaps, the analysis is carried out by index for both parties. There are some cases in which the inputs periods are shorter than the maturity of the derivative.

 

 
 

 

Level 3 recurring fair value changes

 

The tables below show the changes in balance sheet for financial instruments classified by ITAÚ UNIBANCO HOLDING in Level 3 of the fair value hierarchy. Derivative financial instruments classified in Level 3 mainly correspond to other derivatives – credit default swaps linked to shares.

 

   Fair value
at
12/31/2013		   Total gains or
losses (realized /
unrealized)		   Purchases   Settlements   Transfers
in and / or
out of Level
3		   Fair value
at
06/30/2014		   Total gains (losses)
related to assets and
liabilities still held at
reporting date		 
Financial assets held for trading   27    (982)   1,580    (29)   -    596    (5)
Corporate securities - promissory notes   27    (982)   1,580    (29)   -    596    (5)
Securitized real estate loans   -    (5)   7    -    -    2    - 
Promissory notes   27    (173)   493    (27)   -    320    - 
Outros   -    (804)   1,080    (2)   -    274    (5)
Available-for-sale financial assets   6,489    (20)   5,245    (5,977)   (1,123)   4,614    (6)
Brazilian government securities   258    (518)   774    (257)   -    257    (2)
Government securities – abroad - Chile   34    (89)   150    (41)   -    54    - 
Corporate securities   6,197    587    4,321    (5,679)   (1,123)   4,303    (4)
Bank deposit certificates   33    (109)   160    (40)   -    44    - 
CVS   4,834    1,572    1,339    (3,838)   (1,123)   2,784    - 
Eurobonds and others   74    (153)   267    (129)   -    59    3 
Promissory notes   1,227    (725)   2,526    (1,642)   -    1,386    (2)
Other   29    2    29    (30)   -    30    (5)

 

   Fair value
at
12/31/2013		   Total gains or
losses (realized /
unrealized)		   Purchases   Settlements   Transfers
in and/or out
of Level 3		   Fair value
at
06/30/2014		   Total gains (losses)
related to assets and
liabilities still held at
reporting date		 
Derivatives - assets   124    (51)   48    (33)   4    92    (22)
Swap – differential receivable   -    -    4    (8)   4    -    - 
Options   13    2    38    (25)   -    28    1 
Other derivatives   111    (53)   6    -    -    64    (23)
Derivatives - liabilities   (5)   11    (21)   23    (13)   (5)   5 
Swap – differential payable   -    -    -    13    (13)   -    - 
Options   (5)   11    (21)   10    -    (5)   5 

 

   Fair value
at
12/31/2012		   Total gains or
losses (realized /
unrealized)		   Purchases   Settlements   Transfers
in and/or out
of Level 3		   Fair value at
12/31/2013		   Total gains (losses)
related to assets and
liabilities still held at
reporting date		 
Financial assets held for trading   20    -    57    (50)   -    27    - 
Corporate securities - Promissory notes   20    -    57    (50)   -    27    - 
Available-for-sale financial assets   2,489    (867)   8,082    (3,215)   -    6,489    (140)
Brazilian government securities   306    (140)   92    -    -    258    (10)
Government securities – abroad - Chile   -    (5)   80    (41)   -    34    - 
Corporate securities   2,183    (722)   7,910    (3,174)   -    6,197    (130)
Bank deposit certificates   -    -    55    (22)   -    33    - 
Securitized real estate loans   1,368    (767)   4,714    (481)   -    4,834    (123)
Eurobonds and others   5    32    83    (46)   -    74    2 
Promissory notes   777    17    3,058    (2,625)   -    1,227    (4)
Other   33    (4)   -    -    -    29    (5)

 

   Fair value
at
12/31/2012		   Total gains or
losses (realized /
unrealized)		   Purchases   Settlements   Transfers
in and/or out
of Level 3		   Fair value at
12/31/2013		   Total gains (losses)
related to assets and
liabilities still held at
reporting date		 
Derivatives - Assets   313    38    55    (256)   (26)   124    - 
Swap – differential receivable   25    -    4    (3)   (26)   -    - 
Options   147    4    44    (182)   -    13    1 
Forwards   2    -    -    (2)   -    -    - 
Other derivatives   139    34    7    (69)   -    111    (1)
Derivatives - Liabilities   (169)   1    (14)   162    15    (5)   2 
Swap – differential payable   (15)   -    -    -    15    -    - 
Options   (149)   1    (13)   156    -    (5)   2 
Forwards   (2)   -    -    2    -    -    - 
Forward   (3)   -    (1)   4    -    -    - 

 

Available-for-sale financial assets: in 2014 ITAÚ UNIBANCO HOLDING transferred R$ 1,123 securitized real estate loans of Level 3, based on reclassification to category Held-to maturity financial assets.

Derivatives: in 2014 ITAÚ UNIBANCO HOLDING transferred R$ (9) in swaps out of Level 3 to Level 2, due to the availability of inputs verified for these derivatives.

 

 
 

 

Sensitivity analyses operations of Level 3

 

The fair value of financial instruments classified in Level 3 (in which prices negotiated are not easily noticeable in active markets) is measured through assessment techniques based on correlations and associated products traded in active markets.

 

Significant unverifiable inputs used for measurement of the fair value of instruments classified in Level 3 are: interest rates, underlying asset prices and volatility. Significant increases (decreases) in any of these inputs separately may give rise to significant decreases (increases) in the fair value.

 

The table below shows the sensitivity of these fair values in scenarios of changes of interest rates, asset prices, or in scenarios mixing shocks in prices with shocks in volatility for non-linear assets:

 

Sensitivity – Level 3 Operations  06/30/2014 
      Impact 
Risk factor groups  Scenarios  Result   Stockholders'
equity		 
Interest rates  I   (0.0)   (5.6)
   II   (0.3)   (115.6)
   III   (0.6)   (228.4)
Currency, commodities, and ratios  I   -    - 
   II   -    - 
Nonlinear  I   (10.9)   - 
   II   (19.6)   - 

 

The following scenarios are used to measure the sensitivity:

 

Interest rate

 

Shocks at 1, 25 and 50 basis points (scenarios I, II and III respectively) in the interest curves, both for increase and decrease, considering the largest losses resulting in each scenario.

 

Currencies, commodities and ratios

 

Shocks at 5 and 10 basis points (scenarios I and II respectively) in prices of currencies, commodities and ratios, both for increase and decrease, considering the largest losses resulting in each scenario.

 

Non linear

 

Scenario I: Combined shocks at 5 percentage points in prices and 25 percentage points in volatility, both for increase and decrease, considering the largest losses resulting in each scenario.

 

Scenario II: Combined shocks at 10 percentage points in prices and 25 percentage points in volatility, both for increase and decrease, considering the largest losses resulting in each scenario.

 

 
 

 

Note 32 – Provisions, contingencies and other commitments

 

Provision  06/30/2014   12/31/2013 
Civil   4,663    4,473 
Labor   5,342    5,192 
Tax and social security   9,678    8,974 
Other   231    223 
Total   19,914    18,862 
Current   4,085    4,295 
Non-current   15,829    14,567 

 

In the ordinary course of its businesses, ITAÚ UNIBANCO HOLDING is subject to contingencies that may be classified as follows:

 

a) Contingent assets: there are no contingent assets recorded.

 

b) Provisions and contingencies: the criteria to quantify contingencies are appropriate to the specific characteristics of civil, labor and tax litigation, as well as other risks.

 

-Civil lawsuits

 

Collective lawsuits (related to claims of a similar nature and with individual amounts not considered significant): contingencies are determined on a monthly basis and the expected amount of losses is accrued according to statistical references that take into account the type of lawsuit and the characteristics of the court (Small Claims Court or Regular Court).

 

Individual lawsuits (related to claims with unusual characteristics or involving significant amounts): determined periodically, based on the amount claimed and the likelihood of loss, which, in turn, is estimated according to the factual and legal characteristics related to such lawsuit. The amounts considered as probable losses are recorded as provisions.

 

Contingencies generally arise from revision of contracts and compensation for damages and pain and suffering; most of these lawsuits are filed in the Small Claims Court are therefore limited to 40 minimum monthly wages. ITAÚ UNIBANCO HOLDING is also party to specific lawsuits over alleged understated inflation adjustments to savings accounts in connection with economic plans implemented by the Brazilian government.

 

The case law at the Federal Supreme Court (STF) is favorable to banks in relation to economic phenomena similar to savings, as in the case of adjustment to time deposits and contracts in general. Additionally, the Superior Court of Justice (STJ) has decided that the term for filing public civil actions over understated inflation is five years. In view of such decision, some of the lawsuits may be dismissed because they were filed after the five-year period.

 

No amount is recorded as provision in relation to civil lawsuits which represent possible losses and which have a total estimated risk of R$ 1,853 (R$ 2,095 at 12/31/2013); these refer to claims for compensation or collection, the individual amounts of which are not significant and in this total there are no values resulting from interests in joint ventures.

 

 
 

 

-Labor claims:

 

Collective lawsuits (related to claims of a similar nature and with individual amounts not considered significant): the expected amount of loss is determined and accrued monthly based on the statistical share pricing model plus the average cost of legal fees. These are adjusted for the amounts deposited as guarantee for their execution when realized.

 

Individual lawsuits (related to claims with unusual characteristics or involving significant amounts): determined periodically, based on the amount claimed and the likelihood of loss, which, in turn, is estimated according to the factual and legal characteristics related to such lawsuit. The amounts considered as probable losses are recorded as provisions.

 

Contingencies are related to lawsuits in which alleged labor rights based on labor legislation, such as overtime, salary equalization, reinstatement, transfer allowance, pension plan supplement and other, are claimed.

 

No amount is recorded as provision in relation to labor claims which likelihood of loss is considered possible, and which total estimated risk is R$ 329.

 

-Other risks

 

These are quantified and recorded as provisions mainly based on the evaluation of agribusiness credit transactions with joint obligation and FCVS (Salary Variations Compensation Fund) credits transferred to Banco Nacional.

 

 
 

 

The table below shows the changes in the balances of provisions for civil, labor and other provision and the respective escrow deposits:

 

   01/01 to 06/30/2014 
   Civil   Labor   Other   Total 
Opening balance   4,473    5,192    223    9,888 
(-) Contingencies guaranteed by indemnity clause (Note 2.4.t)   (134)   (811)   -    (945)
Subtotal   4,339    4,381    223    8,943 
Interest (Note 26)   124    114    -    238 
Changes in the period reflected in results (Note 26)   747    626    8    1,381 
Increase (*)   974    856    9    1,839 
Reversal   (227)   (230)   (1)   (458)
Payment   (677)   (578)   -    (1,255)
Subtotal   4,533    4,543    231    9,307 
(+) Contingencies guaranteed by indemnity clause (Note 2.4.t)   130    799    -    929 
Closing balance   4,663    5,342    231    10,236 
Escrow deposits at 06/30/2014 (Note 20a)   2,081    2,441    -    4,522 

(*) Civil provisions include the provision for economic plans amounting to R$ 121.

 

   01/01 to 06/30/2013 
   Civil   Labor   Other   Total 
Opening balance   3,732    4,852    192    8,776 
Effect of change in consolidation criteria (Note 2.4a I)   13    14    -    27 
(-) Contingencies guaranteed by indemnity clause (Note 2.4.t)   (118)   (948)   -    (1,066)
Subtotal   3,627    3,918    192    7,737 
Interest (Note 26)   116    101    -    217 
Changes in the period reflected in results (Note 26)   800    714    17    1,531 
Increase (*)   1,099    804    18    1,921 
Reversal   (299)   (90)   (1)   (390)
Payment   (784)   (612)   -    (1,396)
Subtotal   3,759    4,121    209    8,089 
(+) Contingencies guaranteed by indemnity clause (Note 2.4.t)   148    845    -    993 
Closing balance   3,907    4,966    209    9,082 
Escrow deposits at 06/30/2013 (Note 20a)   2,123    2,345    -    4,468 

(*) Civil provisions include the provision for economic plans amounting to R$ 131.

 

-Tax and social security lawsuits

 

Contingencies are equivalent to the principal amount of taxes involved in administrative or judicial disputes, subject to tax assessment notices, plus interest and, when applicable, fines and charges. The amount is recorded as a provision when it involves a legal liability, regardless of the likelihood of loss, that is, a favorable outcome is dependent upon the recognition of the unconstitutionality of the applicable law in force. In other cases, a provision is set up whenever the loss is considered probable.

 

 
 

  

The table below shows the changes in the balances of provisions and respective escrow deposits for tax and social security lawsuits:

 

Provision  01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Opening balance   8,974    10,433 
Effect of change in consolidation criteria (Note 2.4a I)   -    9 
(-) Contingencies guaranteed by indemnity clause   (57)   (61)
Subtotal   8,917    10,381 
Interest (1)   266    220 
Changes in the period reflected in results   465    207 
Increase (1)   791    419 
Reversal (1)   (326)   (212)
Payment   (29)   (428)
Subtotal   9,619    10,380 
(+) Contingencies guaranteed by indemnity clause   59    57 
Closing balance (2)   9,678    10,437 

(1) The amounts are included in the headings Tax Expenses, General and Administrative Expenses and Current Income Tax and Social Contribution.

(2) Includes amounts arising from investments in joint ventures of R$ 24.

 

Escrow deposits  01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Opening balance   5,658    4,557 
Effect of change in consolidation criteria (Note 2.4a I)   -    8 
Appropriation of interest   202    114 
Changes in the period   107    788 
Deposits made   131    1,401 
Withdrawals   (2)   (10)
Deposits released   (22)   (603)
Closing balance (Note 20a)   5,967    5,467 
Reclassification of assets pledged as collateral for contingencies (Note 32d)   1    1 
Closing balance after reclassification   5,968    5,468 

  

 
 

 

The main discussions related to “Provisions” for tax are described as follows:

 

·CSLL – Isonomy – R$ 2,885: as the law increased the CSLL rate for financial and insurance companies to 15.0%, we argue that there is no constitutional support for this measure and, due to the principle of isonomy, we believe we should only pay the regular rate of 9.0%. The corresponding escrow deposit balance totals R$ 955;

 

·PIS and COFINS – Calculation basis – R$ 1,858: we are claiming that those contributions on revenue should be applied only to the revenue from sales of assets and services. The corresponding escrow deposit balance totals R$ 1,769;

 

·IRPJ and CSLL – Taxation of profits earned abroad – R$ 513: we are challenging the calculation basis for these taxes on profits earned abroad and argue that Regulatory Instruction SRF No. 213-02 is not applicable since it goes beyond the text of the law. The corresponding escrow deposit balance totals R$ 483;

 

·PIS – Principles of anteriority over 90 days and non-retroactivity – R$ 423: we request the rejection of Constitutional Amendments No. 10/96 and No. 17/97 in view of the principles of anteriority and non-retroactivity, seeking authorization to make payment based on Supplementary Law No. 07/70. The corresponding escrow deposit totals R$ 98.

 

Off-balance sheet contingencies - in the accounting books no amount is recognized in relation to tax and social security lawsuits with possible loss, which total estimated risk is R$ 12,453. The main discussions are as follows:

 

·INSS – Non-compensatory amounts – R$ 3,658: we defend the non-taxation of these amounts, mainly profit sharing, transportation vouchers and sole bonus.

 

·IRPJ, CSLL, PIS and COFINS – Request for offset dismissed - R$ 1,193: cases in which the liquidity and the offset of credits are discussed.

 

·IRPJ and CSLL - Interest on capital - R$ 1,168: we defend the deductibility of interest on capital declared to stockholders based on the Brazilian long-term interest rate applied to stockholders’ equity for the year and prior years.

 

·IRPJ and CSLL – Goodwill – Deductibility – R$ 1,021: deductibility of goodwill on acquisition of portfolio of clients and/or investments with future expected profitability.

 

·ISS – Banking Institutions – R$ 773: these are banking operations, the revenue from which cannot be interpreted as compensation for service rendered and/or arise from activities not listed in a Supplementary Law.

 

 
 

 

c)Receivables - Reimbursement of contingencies

 

The Receivables balance arising from reimbursements of contingencies totals R$ 733 (R$ 733 at 12/31/2013) (Note 20a), basically represented by the guarantee received in the Banco Banerj S.A. privatization process of 1997, whereby the State of Rio de Janeiro created a fund to guarantee the equity recomposition with respect to civil, labor and tax contingencies.

 

d)Assets pledged as collateral for contingencies

 

Assets pledged as collateral for lawsuits involving contingent liabilities are restricted or deposited as shown below:

 

   06/30/2014   06/30/2013 
Financial assets held for trading and Available-for-sale financial assets (basically financial treasury bills)   722    1,343 
Escrow deposits (Note 20a)   4,182    3,871 

 

Escrow deposits are generally required to be made with the court in connection with lawsuits in Brazil and they are held by the court until a decision is made by the relevant court. In case of a decision against ITAÚ UNIBANCO HOLDING, the deposited amount is released from escrow and transferred to the counterparty in the lawsuit. In case of a decision in favor of ITAÚ UNIBANCO HOLDING, the deposited amount is released at the full amount deposited adjusted.

 

In general, provisions related to lawsuits of ITAÚ UNIBANCO HOLDING are long term, considering the time required for the termination of these lawsuits in the Brazilian judicial system, reason why estimate for specific year in which these lawsuits will be terminated have not been disclosed.

 

In the opinion of the legal advisors, ITAÚ UNIBANCO HOLDING and its subsidiaries are not parties to any other administrative proceedings or legal lawsuits that could significantly impact the results of their operations.

  

 
 

 

Note 33 – Regulatory capital

 

ITAÚ UNIBANCO HOLDING is subject to regulation by the Central Bank of Brazil which issues rules and instructions regarding currency and credit policies for financial institutions operating in Brazil. The Central Bank also determines minimum capital requirements, fixed assets limits, lending limits, accounting practices and compulsory deposit requirements, and requires banks to comply with regulation based on the Basel Accord as regards to capital adequacy. Furthermore, the National Council of Private Insurance and SUSEP issue regulations on capital requirements which affect our insurance, private pension and capitalization operations.

 

The Basel Accord requires banks to have a ratio of regulatory capital to risk exposure assets of a minimum of 8.0%. The regulatory capital is basically composed of two tiers:

 

·Tier I: sum of Principal Capital, determined in general by capital, certain reserves and retained earnings, less deductions and prudential adjustments, and Supplementary Capital.

  

·Tier II: includes eligible instruments, primarily subordinated debt, subject to prudential limitations.

 

However, the Basel Accord allows the regulatory authorities of each country to establish their own parameters for regulatory capital composition and to determine the portions exposed to risk. Among the main differences arising from the adoption of own parameter pursuant to the Brazilian legislation are the following: (i) the requirement of a ratio of regulatory capital to risk-weighted assets at a minimum of 11.0%; with timeline to achieve 8.0% in 2019; (ii) certain risk-weighted factors attributed to certain assets and other exposures. In addition, in accordance with Central Bank rules, banks can calculate compliance with the minimum requirement based on the consolidation of all financial subsidiaries supervised by the Central Bank, including branches and investments abroad.

 

Management manages capital with the intention to meet the minimum capital required by the Central Bank of Brazil. During the period ITAÚ UNIBANCO HOLDING complied with all externally imposed capital requirements to which we are subject.

 

The following table summarizes the composition of regulatory capital, the minimum capital required and the Basel ratio computed in accordance with the Central Bank of Brazil, on a financial institution consolidation basis.

 

   06/30/2014   12/31/2013 
   Financial
institutions
(partial
consolidation)		   Financial
institutions
(partial
consolidation)		 
Regulatory Capital          
Tier I   86,478    87,409 
Common Equity Tier I   86,465    87,409 
Additional Tier I Capital   13    - 
Tier II   33,556    37,735 
Total   120,034    125,144 
Requirement for coverage of risk-weighted assets:          
Credit   687,126    694,039 
Market   25,718    24,555 
Operational   36,566    36,847 
Risk-weighted assets   749,409    755,441 
Minimum Required Regulatory Capital   82,435    83,099 
Excess capital in relation to Minimum Required Regulatory Capital   37,599    42,045 
Capital to risk-weighted assets ratio - %   16.0%   16.6%

  

 
 

 

The funds obtained through the issuance of subordinated debt securities are considered Tier II capital for the purpose of capital to risk-weighted assets ratio, as follows. According to current legislation, the accounting balance of subordinated debt as of December 2012 was used for the calculation of referential equity as of June, 2014, considering instruments approved after the closing date to compose Tier II, totaling R$ 53,921.

 

Name of security / currency  Principal amount
(original currency)		   Issue   Maturity   Return p.a.  Account balance 
Subordinated CDB – BRL                       
    60    2007    2014   100% of CDI + 0.35% to 0.6%   120 
    33             IGMP + 7.22%   82 
    1,000    2008    2014   112% of CDI   1,790 
    400    2008    2015   119.8% of CDI   764 
    50    2010    2015   113% of CDI   79 
    466    2006    2016   100% of CDI + 0.7% (*)   1,022 
    2,665    2010    2016   110% to 114% of CDI   4,214 
    123             IPCA + 7.21%   213 
    367    2010    2017   IPCA + 7.33%   642 
    5,164             Total   8,926 
                        
Subordinated financial bills - BRL                       
    365    2010    2016   100% of CDI + 1.35% to 1.36%   379 
    1,874             112% to 112.5% of CDI   1,946 
    30             IPCA + 7%   47 
    206    2010    2017   IPCA + 6.95% to 7.2%   281 
    3,224    2011    2017   108% to 112% of CDI   3,382 
    352             IPCA + 6.15% to 7.8%   474 
    138             IGPM + 6.55% to 7.6%   196 
    3,650             100% of CDI + 1.29% to 1.52%   3,750 
    500    2012    2017   100% of CDI + 1.12%   505 
    42    2011    2018   IGPM + 7%   53 
    30             IPCA + 7.53% to 7.7%   37 
    461    2012    2018   IPCA + 4.4% to 6.58%   576 
    3,782             100% of CDI + 1.01% to 1.32%   3,868 
    6,373             108% to 113% of CDI   6,719 
    112             9.95 a 11.95%   136 
    2    2011    2019   109% to 109.7% to CDI   3 
    12    2012    2019   11.96%   16 
    101             IPCA + 4.7% to 6.3%   123 
    1             110% of CDI   1 
    20    2012    2020   IPCA + 6% to 6.17%   26 
    1             111% to CDI   1 
    6    2011    2021   109.25% to 110.5% of CDI   8 
    2,307    2012    2022   IPCA + 5.15% to 5.83%   2,835 
    20             IGMP + 4.63%   23 
    23,609             Total   25,385 
                        
Subordinated euronotes - USD                       
    990    2010    2020   6.20%   2,203 
    1,000    2010    2021   5.75%   2,261 
    730    2011    2021   5.75% to 6.2%   1,624 
    550    2012    2021   6.20%   1,211 
    2,600    2012    2022   5.50% to 5.65%   5,783 
    1,851    2012    2023   5.13%   4,105 
    7,721             Total   17,187 
                        
Total                     51,498 

(*) Subordinated CDBs may be redeemed from November 2011.

 

 
 

 

Note 34 – Segment Information

 

ITAÚ UNIBANCO HOLDING is a banking institution that offers its customers a wide range of financial products and services.

 

From the first quarter of 2013, the way of presenting the segments was changed, so that it is better aligned with the follow-up of the change in results. The nomenclature was changed in order to adjust it to the reality of the current structure, as we now have the following segments: Commercial Bank – Retail, Consumer Credit – Retail, Wholesale Bank and Activities with the Market + Corporation. The results of medium businesses, previously allocated to the former Commercial Bank segment, are now to be reported in the Wholesale Bank, and this was the main change of this presentation.

 

The current operational and reporting segments of ITAÚ UNIBANCO HOLDING are described below:

 

·Commercial Bank – Retail

 

The result of the Commercial Bank – Retail segment arises from the offer of banking products and services to a diversified client base of individuals and companies. The segment includes retail clients, high net worth clients, Private Bank clients and the companies segment (small and medium businesses).

 

·Consumer Credit – Retail

 

The result of the Consumer Credit – Retail segment arises from financial products and services offered to non-account holders. This segment comprises vehicle financing provided by units other than the branch network, offering of credit cards and offering of credits to the low income population.

 

·Wholesale Bank

 

The result of the Wholesale Bank segment arises from the products and services offered to medium businesses and the activities of Itaú BBA, the unit in charge of commercial operations with large companies and the performance in investment banking.

 

·Activities with the Market + Corporation

 

This segment records the result arising from capital surplus, subordinated debt surplus and the net balance of tax credits and debits. It also shows the financial margin with the market, the Treasury operating cost, the equity in earnings of companies not associated to each segment and the interest in Porto Seguro.

 

Basis of presentation of segment information

 

Segment information is prepared based on the reports used by top management (Executive Committee) to assess the performance and to make decisions regarding the allocation of funds for investment and other purposes.

 

The top management (Executive Committee) of ITAÚ UNIBANCO HOLDING uses a variety of information for such purposes including financial and non-financial information that is measured on different bases as well as information prepared based on accounting practices adopted in Brazil. The main index used to monitor the business performance is the Recurring Net Income and the Economic Capital allocated to each segment.

 

The segment information has been prepared following accounting practices adopted in Brazil modified for the adjustments described below:

 

·Allocated capital and income tax rate

 

Based on the managerial income statement, the segment information considers the application of the following criteria:

 

 
 

  

Allocated capital: The impacts associated to capital allocation are included in the financial information. Accordingly, adjustments were made to the financial statements, based on a proprietary model. For the financial statements by segment we adopted the Economic Allocated Capital (EAC) model, which, in addition to allocated capital tier I, considers the allocated capital tier II (subordinated debt) and the effects of the calculation of expected credit losses, additional to that required by the Central Bank of Brazil CMN Circular N° 2,682/99. Accordingly, the Allocated Capital comprises the following components: Credit risk (including expected loss), operational risk, market risk and insurance underwriting risk.

 

Income tax rate: We consider the total income tax rate, net of the tax effect from the payment of interest on capital, for the Commercial Bank – Retail, Consumer Credit – Retail, Wholesale Bank and Activities with the Market segments. The difference between the income tax amount calculated by segment and the effective income tax amount, as stated in the consolidated financial statements, is allocated to the Activities with the Market + Corporation column.

 

·Reclassification and application of managerial criteria

 

The managerial statement of income was used to prepare information per segment. These statements were obtained based on the statement of income adjusted by the impact of non-recurring events and the managerial reclassifications in income.

 

From the first quarter of 2013 on, some changes were made in the consolidation criteria for managerial results presented in order to better reflect the way Management monitors the bank’s figures. These adjustments change the order of presentation of the lines only and, therefore, do not affect the net income disclosed. Through these reclassifications, ITAÚ UNIBANCO HOLDING seeks to align the way it presents its results and enables a better comparison and understanding of the bank’s performance assessment.

 

We describe below the main reclassifications between the accounting and managerial results:

 

Banking product: The banking product considers the opportunity cost for each operation. The financial statements were adjusted so that the stockholders' equity was replaced by funding at market price. Subsequently, the financial statements were adjusted to include revenues related to capital allocated to each segment. The cost of subordinated debt and the respective remuneration at market price were proportionally allocated to the segments, based on the economic allocated capital.

 

Hedge tax effects: The tax effects of the hedge of investments abroad were adjusted – these were originally recorded in the tax expenses (PIS and COFINS) and Income Tax and Social Contribution on net income lines – and are now reclassified to the margin. The strategy to manage the foreign exchange risk associated to the capital invested abroad aims at preventing the effects of the exchange rates variation on income. In order to achieve this objective, we used derivative instruments to hedge against such foreign currency risk, with investments remunerated in Reais. The hedge strategy for foreign investments also considers the impact of all tax effects levied.

 

Insurance: Insurance business revenues and expenses were concentrated in Income from Insurance, Pension Plan and Capitalization Operations. The main reclassifications of revenues refer to the financial margins obtained with the technical provisions of insurance, pension plan and capitalization, in addition to revenue from management of pension plan funds.

 

Other reclassifications: Other Income, Share of Income of Associates, Non-Operating Income, Profit Sharing of Management Members and Expenses for Credit Card Reward Program were reclassified to those lines representing the way the institution manages its business, enabling greater understanding for performance analysis. Accordingly, equity in earnings of investment in Banco CSF S.A. (“Banco Carrefour”) was reclassified to the financial margin line. Additionally, for better comparison with the new consolidation criteria, 100.0% of the results from partnerships were consolidated (they were previously proportionally consolidated), and expenses for provisions associated to securities and derivatives were reclassified (from Non-interest expenses income to Expenses for allowance for loan losses).

 

 
 

  

The adjustments and reclassifications column shows the effects of the differences between the accounting principles followed for the presentation of segment information, which are substantially in line with the accounting practices adopted for financial institutions in Brazil, except as described above, and the policies used in the preparation of these consolidated financial statements according to IFRS. Main adjustments are as follows:

 

·Allowance for Loan Losses, which, under IFRS (IAS 39), should be recognized upon objective evidence that loan operations are impaired (incurred loss), and the Expected Loss concept is adopted according to Brazilian accounting standards;

 

·Shares and units classified as permanent investments were stated at fair value under IFRS (IAS 39 and 32), and their gains and losses were directly recorded to Stockholders’ Equity, not passing through income for the period;

 

·Foreign exchange variation of unconsolidated subsidiaries and companies abroad, which has a functional currency (currency of the primary economic environment in which the entity operates) other than the Real, under IFRS (IAS 21) is directly recorded in Stockholders’ Equity, not passing through income for the period;

 

·Effective interest rates, financial assets and liabilities stated at amortized cost, are recognized by the effective interest rate method, allocating revenues and costs directly attributable to acquisition, issue or disposal for the transaction period of the operation; according to Brazilian standards, fee expenses and income are recognized as these transactions are engaged.

 

·Business combinations are accounted for under the acquisition method in IFRS (IFRS 3), in which the purchase price is allocated among assets and liabilities of the acquired company, and the amount not subject to allocation, if any, is recognized as goodwill. Such amount is not amortized, but is subject to an impairment test.

 

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

From April 1 to June 30, 2014

(In millions of Reais, except per share information)

 

Consolidated Statement of Income  Commercial
Bank Retail		   Consumer
Credit Retail		   Wholesale
Bank		   Activities with
the Market +
Corporation		   ITAÚ
UNIBANCO		   Adjustments   IFRS consolidated 
Banking product   12,738    4,582    3,620    1,178    22,118    1,160    23,278 
Net interest (1)   6,980    2,892    2,626    1,095    13,593    1,379    14,972 
Revenue from services   3,646    1,690    948    54    6,338    136    6,474 
Income from insurance, private pension and capitalization operations before claim and selling expenses   2,112    -    46    29    2,187    (455)   1,732 
Other revenues   -    -    -    -    -    100    100 
Losses on loans and claims   (2,045)   (1,154)   (497)   (15)   (3,711)   (645)   (4,356)
Expenses for allowance for loan and lease losses   (2,375)   (1,543)   (532)   (15)   (4,465)   (646)   (5,111)
Recovery of credits written off as loss   802    389    43    -    1,234    -    1,234 
Expenses for claims / recovery of claims under reinsurance   (472)   -    (8)   -    (480)   1    (479)
Banking product net of losses on loans and claims   10,693    3,428    3,123    1,163    18,407    515    18,922 
Other operating income (expenses)   (7,038)   (2,284)   (1,365)   (363)   (11,050)   (502)   (11,552)
Non-interest expenses (2)   (6,329)   (1,975)   (1,174)   (369)   (9,847)   (487)   (10,334)
Tax expenses for ISS, PIS and COFINS and other   (709)   (309)   (191)   6    (1,203)   (163)   (1,366)
Share of profit or (loss) in associates and joint ventures   -    -    -    -    -    148    148 
Net income before income tax and social contribution   3,655    1,144    1,758    800    7,357    13    7,370 
Income tax and social contribution   (1,317)   (334)   (581)   (74)   (2,306)   (221)   (2,527)
Non-controlling interest in subsidiaries   -    (77)   -    (1)   (78)   1    (77)
Net income   2,338    733    1,177    725    4,973    (207)   4,766 
(1) Includes interest and similar income and expenses of R$ 13,923, dividend income of R$ 100, net gains (loss) from investment securities and derivatives of R$ 289, and results from foreign exchange operations and exchange variation of transactions abroad o f R$ 660.
(2) Refers to general and administrative expenses including depreciation expenses of R$ 403 and amortization expenses of R$ 203.
                                    
Total assets (1)   704,305    92,610    310,788    83,089    1,111,932    (72,201)   1,039,731 
Total liabilities   678,812    79,306    287,358    57,354    1,023,970    (73,570)   950,400 
                                    
(1) Includes:                                   
Investments in associates and joint ventures   -    911    -    2,047    2,958    974    3,932 
Goodwill   49    1,792    -    -    1,841    87    1,928 
Fixed assets, net   5,799    488    484    -    6,771    56    6,827 
Intangible assets, net   3,794    1,462    387    -    5,643    80    5,723 

 

The Consolidated figures do not represent the sum of the parties because there are intercompany transactions that were eliminated only in the consolidated statements. Segments are assessed by top management, net of income and expenses between related parties.

  

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

From April 1 to June 30, 2013

(In millions of Reais, except per share information)

 

Consolidated Statement of Income  Commercial
Bank Retail		   Consumer
Credit Retail		   Wholesale
Bank		   Activities with the
Market +
Corporation		   ITAÚ
UNIBANCO		   Adjustments   IFRS consolidated 
Banking product   11,064    3,729    3,615    758    19,166    (619)   18,547 
Net interest (1)   5,844    2,380    2,664    685    11,573    (364)   11,209 
Revenue from services   3,122    1,349    874    54    5,399    115    5,514 
Income from insurance, private pension and capitalization operations before claim and selling expenses   2,098    -    77    19    2,194    (535)   1,659 
Other revenues   -    -    -    -    -    165    165 
Losses on loans and claims   (1,973)   (1,186)   (1,020)   16    (4,164)   79    (4,085)
Expenses for allowance for loan and lease losses   (2,356)   (1,466)   (1,106)   16    (4,912)   79    (4,833)
Recovery of credits written off as loss   882    280    101    -    1,262    -    1,262 
Expenses for claims / recovery of claims under reinsurance   (499)   -    (15)   -    (514)   -    (514)
Banking product net of losses on loans and claims   9,091    2,543    2,595    774    15,002    (540)   14,462 
Other operating income (expenses)   (6,465)   (1,822)   (1,510)   (169)   (9,964)   (479)   (10,443)
Non-interest expenses (2)   (5,846)   (1,555)   (1,289)   (186)   (8,874)   (633)   (9,507)
Tax expenses for ISS, PIS and COFINS and Other   (619)   (267)   (221)   17    (1,090)   80    (1,010)
Share of profit or (loss) in associates and joint ventures   -    -    -    -    -    74    74 
Net income before income tax and social contribution   2,626    721    1,085    605    5,038    (1,019)   4,019 
Income tax and social contribution   (935)   (218)   (311)   72    (1,392)   1,140    (252)
Non-controlling interest in subsidiaries   -    (18)   -    (6)   (24)   5    (19)
Net income   1,691    485    774    671    3,622    126    3,748 
(1) Includes interest and similar income and expenses of R$ 10,812, dividend income of R$ 33, net gains (loss) from investment securities and derivatives of R$ (2,647), and results from foreign exchange operations and exchange variation of transactions abroad of R$ 3,011.
(2) Refers to general and administrative expenses including depreciation expenses of R$ 394 and amortization of R$ 200.
                                    
Total assets - 12/31/2013 (1)   737,341    94,174    322,667    116,625    1,105,721    (78,424)   1,027,297 
Total liabilities - 12/31/2013   717,197    84,732    299,771    86,179    1,022,793    (79,688)   943,105 
                                    
(1) Includes:                                   
Investments in associates and joint ventures   -    859    7    2,124    2,990    941    3,931 
Goodwill   29    1,892    -    -    1,921    (16)   1,905 
Fixed assets, net   5,485    401    624    -    6,510    54    6,564 
Intangible assets, net   3,686    1,355    678    -    5,719    78    5,797 

 

The Consolidated figures do not represent the sum of all parties because there are intercompany transactions that were eliminated only in the consolidated statements. Segments are assessed by top management, net of income and expenses between related parties.

 

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

From January 1 to June 30, 2014

(In millions of reais, except for share information)

 

Consolidated Statement of Income  Commercial
Bank Retail		   Consumer
Credit Retail		   Wholesale
Bank		   Activities with
the Market +
Corporation		   ITAÚ
UNIBANCO		   Adjustments   IFRS consolidated 
Banking product   24,978    8,841    7,038    1,924    42,781    3,076    45,857 
Interest margin (1)   13,724    5,508    5,082    1,767    26,081    3,394    29,475 
Banking service fees   7,072    3,333    1,864    126    12,395    280    12,675 
Income from insurance, private pension, and capitalization operations before claim and selling expenses   4,182    -    92    31    4,305    (913)   3,392 
Other income   -    -    -    -    -    315    315 
Losses on loans and claims   (4,031)   (2,326)   (975)   (30)   (7,362)   (999)   (8,361)
Expenses for allowance for loan and lease losses   (4,625)   (3,026)   (1,035)   (30)   (8,716)   (1,001)   (9,717)
Recovery of loans written off as loss   1,547    700    74    -    2,321    1    2,322 
Expenses for claims / recovery of claims under reinsurance   (953)   -    (14)   -    (967)   1    (966)
Banking product net of losses on loans and claims   20,947    6,515    6,063    1,894    35,419    2,077    37,496 
Other operating income (expenses)   (13,713)   (4,396)   (2,749)   (656)   (21,514)   (1,418)   (22,932)
Non-interest expenses (2)   (12,339)   (3,795)   (2,378)   (640)   (19,152)   (1,269)   (20,421)
Tax expenses for ISS, PIS and COFINS and Other   (1,374)   (601)   (371)   (16)   (2,362)   (372)   (2,734)
Share of profit or (loss) in associates and joint ventures   -    -    -    -    -    223    223 
Net income before income tax and social contribution   7,234    2,119    3,314    1,238    13,905    659    14,564 
Income tax and social contribution   (2,591)   (609)   (1,081)   20    (4,261)   (859)   (5,120)
Non-controlling interest in subsidiaries   -    (137)   -    (5)   (142)   15    (127)
Net income   4,643    1,373    2,233    1,253    9,502    (185)   9,317 
(1) Includes net interest and similar income and expenses of R$ 27,208, dividend income of R$ 112 net gain (loss) from investment securities and derivatives of R$ 394, and results from foreign exchange results and exchange variation of transactions abroad of R$ 1,761.
(2) Refers to general and administrative expenses including depreciation expenses of R$ 811 and amortization expenses of R$ 410.
                                    
Total assets (1)   704,305    92,610    310,788    83,089    1,111,932    (72,201)   1,039,731 
Total liabilities   678,812    79,306    287,358    57,354    1,023,970    (73,570)   950,400 
                                    
(1) Includes:                                   
Investments in associates and joint ventures   -    911    -    2,047    2,958    974    3,932 
Goodwill   49    1,792    -    -    1,841    87    1,928 
Fixed assets, net   5,799    488    484    -    6,771    56    6,827 
Intangible assets, net   3,794    1,462    387    -    5,643    80    5,723 

 

The consolidated figures do not represent the sum of the segments because there are intercompany transactions that were eliminated only in the consolidated financial statements. Segments are assessed by top management, net of income and expenses between related parties.

 

 
 

 

ITAÚ UNIBANCO HOLDING S.A.

From January 1 to June 30, 2013

(In millions of reais except per share information)

 

Consolidated Statement of Income  Commercial
Bank Retail		   Consumer
Credit Retail		   Wholesale
Bank		   Actitivities with
the Market +
Corporation		   ITAÚ
UNIBANCO		   Adjustments   IFRS
consolidated		 
Banking product   21,688    7,358    7,187    1,749    37,983    10    37,993 
Interest margin (1)   11,531    4,636    5,332    1,599    23,099    474    23,573 
Banking service fees   5,990    2,722    1,707    102    10,521    250    10,771 
Income from insurance, private pension, and capitalization operations before claim and selling expenses   4,167    -    148    48    4,363    (1,026)   3,337 
Other income   -    -    -    -    -    312    312 
Losses on loans and claims   (4,401)   (2,393)   (1,753)   (38)   (8,584)   157    (8,427)
Expenses for allowance for loan and lease losses   (5,037)   (2,897)   (1,880)   (38)   (9,851)   157    (9,694)
Recovery of loans written off as loss   1,687    504    157    -    2,348    -    2,348 
Expenses for claims / recovery of claims under reinsurance   (1,051)   -    (30)   -    (1,081)   -    (1,081)
Banking product net of losses on loans and claims   17,287    4,965    5,434    1,711    29,399    167    29,566 
Other operating income (expenses)   (12,603)   (3,698)   (2,901)   (330)   (19,533)   (1,204)   (20,737)
Non-interest expenses (2)   (11,389)   (3,170)   (2,478)   (365)   (17,402)   (1,269)   (18,671)
Tax expenses for ISS, PIS and COFINS and Other   (1,214)   (528)   (423)   35    (2,131)   (61)   (2,192)
Share of profit or (loss) in associates and joint ventures   -    -    -    -    -    126    126 
Net income before income tax and social contribution   4,684    1,267    2,533    1,381    9,866    (1,037)   8,829 
Income tax and social contribution   (1,644)   (335)   (763)   54    (2,688)   1,116    (1,572)
Non-controlling interest in subsidiaries   -    (37)   -    (7)   (44)   17    (27)
Net income   3,040    895    1,771    1,428    7,134    96    7,230 
(1) Includes net interest and similar income and expenses of R$ 23,670, net income of R$ 97, net gain (loss) from investment securities and derivatives of R$ (3,588) and foreign exchange results and exchange variation on transactions of abroad R$ 3,394.
(2) Refers to general and administrative expenses including depreciation expenses R$ 754 and amortization R$ 402.
                                    
Total assets (1) -  12/31/2013   737,341    94,174    322,667    116,625    1,105,721    (78,424)   1,027,297 
Total liabilities - 12/31/2013   717,197    84,732    299,771    86,179    1,022,793    (79,688)   943,105 
                                    
(1) Includes:                                   
Investments in associates and joint ventures   -    859    7    2,124    2,990    941    3,931 
Goodwill   29    1,892    -    -    1,921    (16)   1,905 
Fixed assets, net   5,485    401    624    -    6,510    54    6,564 
Intangible assets, net   3,686    1,355    678    -    5,719    78    5,797 

 

The Consolidated figures do not represent the sum of the segments because there are intercompany transactions that were eliminated only in the consolidated financial statements. Segments are assessed by top management, net of income and expenses between related parties.

 

 
 

 

Information on income from financial operations by geographical area is as follows:

 

   04/01 to 06/30/2014   04/01 to 06/30/2013 
   Brazil   Foreign   Total   Brazil   Foreign   Total 
Income from financial operations (1)   27,972    2,310    30,282    21,019    1,780    22,799 
Non-current assets (2)   11,836    714    12,550    11,488    873    12,361 

(1) Includes interest and similar income, dividend income, net gain (loss) from investment securities and derivatives, foreign exchange results, and exchange variation on transactions.

(2) The amounts for comparative purposes refer to the 12/31/2012.

 

   01/01 to 06/30/2014   01/01 to 06/30/2013 
   Brazil   Foreign   Total   Brazil   Foreign   Total 
Income from financial operations (1) (2)   54,137    4,833    58,970    40,235    3,422    43,657 
Non-current assets   11,836    714    12,550    11,488    873    12,361 

(1) Includes interest and similar income, dividend income, net gain (loss) from investment securities and derivatives, foreign exchange results, and exchange variation on transactions.

(2) ITAÚ UNIBANCO HOLDING does not have clients representing 10.0% or higher of its revenues.

 

Note 35 – Related parties

 

a)Transactions between related parties are carried out at amounts, terms and average rates in accordance with normal market practices during the period, as well as under reciprocal conditions.

 

Transactions between companies included in consolidation (Note 2.4a) were eliminated from the consolidated financial statements and the absence of risk is taken into consideration.

 

The unconsolidated related parties are the following:

 

·Itaú Unibanco Participações S.A. (IUPAR) and ITAÚSA, parent companies of ITAÚ UNIBANCO HOLDING;

 

·The non-financial subsidiaries of ITAÚSA, especially: Itautec S.A., Duratex S.A., Elekeiroz S.A. and Itaúsa Empreendimentos S.A.;

 

·Fundação Itaú Unibanco - Previdência Complementar, FUNBEP – Fundo de Pensão Multipatrocinado, Fundação Bemgeprev, UBB Prev - Previdência Complementar, and Fundação Banorte Manuel Baptista da Silva de Seguridade Social, closed-end supplementary pension entities, that administer retirement plans sponsored by ITAÚ UNIBANCO HOLDING and / or its subsidiaries;

 

·Fundação Itaú Social, Instituto Itaú Cultural, Instituto Unibanco, Instituto Assistencial Pedro Di Perna, Instituto Unibanco de Cinema and Associação Clube “A”, entities sponsored by ITAÚ UNIBANCO HOLDING and subsidiaries to act in their respective areas of interest; and

 

·Investments in Porto Seguro Itaú Unibanco Participações S.A., BSF Holding S.A. and MCC Securities Inc.

 

The transactions with these related parties are mainly as follows:

  

 
 

 

   ITAÚ UNIBANCO HOLDING CONSOLIDATED
      Assets / (liabilities)   Revenue / (expenses) 
   Annual rate  06/30/2014   12/31/2013   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Deposits      -    (1)   -    -    -    - 
Duratex S.A.      -    (1)   -    -    -    - 
Securities sold under repurchase agreements      (190)   (286)   (3)   (5)   (7)   (6)
Itaúsa Empreendimentos S.A.  100% of SELIC   (69)   (66)   -    -    -    - 
Duratex S.A.  100% of SELIC   (95)   (180)   (3)   (4)   (6)   (5)
Elekeiroz S.A.  100% of SELIC   (14)   (36)   -    -    (1)   - 
Itautec S.A.  100% of SELIC   (4)   (4)   -    (1)   -    (1)
Olimpia Promoção e Serviços S.A.  100% of SELIC   (8)   -    -    -    -    - 
Amounts receivable from (payable to) related companies / Banking service fees (expenses)      (114)   (82)   1    10    -    20 
FUNBEP - Fundo de Pensão Multipatrocinado      -    -    1    2    2    3 
Fundação Itaú Unibanco - Previdência Complementar      (15)   (6)   9    8    17    16 
Fundação Banorte Manuel Baptista da Silva de Seguridade Social      (97)   (76)   -    -    -    - 
Other      (2)   -    (9)   -    (19)   1 
Rental revenues (expenses)      -    -    (12)   (11)   (25)   (26)
Itaúsa Investimentos S.A.      -    -    -    -    -    (1)
Fundação Itaú Unibanco - Previdência Complementar      -    -    (9)   (8)   (19)   (20)
FUNBEP - Fundo de Pensão Multipatrocinado      -    -    (4)   (3)   (7)   (5)
Other      -    -    1    -    1    - 
Donation expenses      -    -    (21)   (15)   (43)   (39)
Associação Clube "A"      -    -    (1)   -    (1)   (1)
Instituto Itaú Cultural      -    -    (21)   (15)   (42)   (38)
Data processing expenses      -    -    (68)   (61)   (130)   (132)
Itautec S.A.      -    -    (68)   (61)   (130)   (132)

 

In addition to the aforementioned operations, ITAÚ UNIBANCO HOLDING and non-consolidated related parties, as an integral part of ITAÚ UNIBANCO HOLDING Agreement for Apportionment of Common Costs, recorded in General and Administrative Expenses - Other, the amount of R$ 3 (R$ 1 from 01/01 to 06/30/2013) due to the use of the common structure.

 

Pursuant to the current rules, financial institutions cannot grant loans or advances to the following:

a) any individuals or companies that control the Institution or any entity under common control with the institution, or any executive officer, director, member of the fiscal council, or the immediate family members of these individuals;

b) any entity controlled by the institution; or

c) any entity in which the bank directly or indirectly holds more than 10.0% of the capital stock.

 

Therefore, no loans or advances were granted to any subsidiary, executive officer, director or family members.

 

 
 

 

b)Compensation of the key management personnel

 

Resolution n° 3,921, 11/25/2010 of the National Monetary Council, sets forth that the management’s variable compensation should be consistent with the institution’s risk management policies, and at least fifty percent (50.0%) should be mandatorily paid in shares and be deferred for payment in at least three (3) years.

 

To comply with the Resolution on compensation, ITAÚ UNIBANCO HOLDING was authorized by CVM to transfer, on a private basis, shares of its own issue held in treasury to its management members and the management members of its subsidiaries.

 

In the period from January 1 to June 30, 2014, the accounting effect of the compensation is recorded in Compensation of Key Management Members in Compensation and Profit Sharing, in compliance with statutory limits.

 

Compensation for the period paid to key management members of ITAÚ UNIBANCO HOLDING consisted of:

 

   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Compensation   85    51    182    110 
Board of directors   6    2    9    7 
Executives   79    49    173    103 
Profit sharing   77    57    138    122 
Board of directors   5    1    6    6 
Executives   72    56    132    116 
Contributions to pension plans   1    1    3    2 
Executives   1    1    3    2 
Stock option plan – executives   46    41    87    85 
Total   209    150    410    319 

 

 
 

 

 

 

Note 36 – Management of financial risks

 

Credit risk

 

1.Credit risk measurement

 

Credit risk is the possibility of losses arising from the breach by the borrower, issuer or counterparty of the respective agreed-upon financial obligations, the devaluation of loan agreement due to downgrading of the borrower’s, the issuer’s, the counterparty’s risk rating, the reduction in gains or compensation, the advantages given upon posterior renegotiation and the recovery costs.

 

The credit risk management of ITAÚ UNIBANCO HOLDING’s is the primary responsibility of all business units and aims to keep the quality of loan portfolios in levels consistent with the institution’s risk appetite for each market segment in which it operations.

 

ITAÚ UNIBANCO HOLDING establishes its credit policies based on internal factors, such as the client rating criteria, performance of and changes in portfolio, default levels, return rates, and the allocated economic capital; and external factors, related to the economic environment, market share, interest rates, market default indicators, inflation, changes in consumption.

 

ITAÚ UNIBANCO HOLDING has a structured process to keep a diversified portfolio deemed as adequate by the institution. The ongoing monitoring on the concentration level of portfolios, by assessing the economic activity sectors and major debtors, enables it to take preventive measures to prevent that defined limits be breached and ensure a properly diversified customer distribution.

 

The process for analyzing the policy and products enables ITAÚ UNIBANCO HOLDING to identify potential risks, so as to make sure that credit decisions make sense from an economic and risk perspective.

 

The centralized process for approval of credit policies and validation of models of ITAÚ UNIBANCO HOLDING assures the synchrony of credit actions.

 

The table below shows the correspondence between risk levels attributed by the group’s internal models (lower risk, satisfactory, higher risk and impaired) and the probability of default associated with each of these levels.

 

Internal rating   PD
Lower risk   Lower than 4.44%
Satisfactory   From 4.44% up to 25.95%
Higher risk   Higher than 25.95%
Impaired   Corporate operations with a PD higher than 31.84%
  Operations past due for over 90 days
  Renegotiated operations past due for over 60 days

 

The credit rating in corporate transactions is based on information such as economic and financial condition of the counterparty, its cash-generating capabilities, the economic group to which it belongs, the current and prospective situation of the economic sector in which it operates, the collateral offered and the use of proceeds. The credit proposals are analyzed on a case by case basis, through an approval-level mechanism subordinated to the Superior Credit Committee.

 

Regarding retail (individuals, small and middle-market companies), the rating is assigned based on application and behavior score statistical models. Decisions are made based on scoring models that are continuously followed up by an independent structure. Exceptionally, there may also be individualized analysis of specific cases where approval is subject to competent credit approval levels.

 

Government securities and other debt instruments are classified by ITAÚ UNIBANCO HOLDING according to their credit quality aiming at managing their exposures.

 

 
 

 

In line with the principles of CMN Resolution N° 3,721, of April 30, 2009, ITAÚ UNIBANCO HOLDING has structure and corporate guidelines on credit risk management, approved by its Board of Directors, applicable to companies and subsidiaries in Brazil and abroad.

 

2.Management risk limits

 

Centralized control of credit risk is conducted by independent executive area responsible for risk control, segregated from business trading units, as required by current regulations.

 

ITAÚ UNIBANCO HOLDING strictly controls the credit exposure of clients and counterparties, taking action to address situations in which the actual exposure exceeds the desired one. For that purpose, contractually provided actions can be taken, such as early payment or requirement of additional collateral.

 

3.Collateral and policies for mitigating credit risk

 

As a way to control the credit risk, ITAÚ UNIBANCO HOLDING has corporate guidelines that establish general rules and responsibilities for the use of guarantees; additionally, each business unit responsible for the credit risk management formalizes the use of such guarantees in its credit policies.

 

ITAÚ UNIBANCO HOLDING uses guarantees to increase its recovery capacity in transactions involving credit risk. The guarantees used may be personal guarantees, collateral, legal structures with mitigation power and offset agreements.

 

For the guarantees to be considered a risk mitigating instrument, requirements and guidelines of the standards that regulate them, either internal or external ones, must be complied with, and be legally enforceable (effective) and periodically reassessed.

 

ITAÚ UNIBANCO HOLDING also uses credit derivatives, such as single name CDS, to mitigate credit risk of its portfolios of loans and securities; these instruments are priced based on models that use the fair value of market inputs, such as credit spreads, recovery rates, correlations and interest rates.

 

The credit limits are continually monitored and changed according to customer behavior. Thus, the potential loss values represent a fraction of the amount available.

 

4.Policy on the provision

 

The policies on the provision adopted by ITAÚ UNIBANCO HOLDING are aligned with the guidelines of IFRS and the Basel Accord. As a result, an allowance for loan losses is recognized when there are indications of the impairment of the portfolio and takes into account a horizon of loss appropriate for each type of transaction. We consider as impaired loans overdue for more than 90 days, renegotiated loans overdue by more than 60 days and Corporate loans below a specific internal rating. Loans are written-down 360 days after such loans become past due or 540 days of being past due in the case of loans with original maturities over 36 months.

 

 
 

 

5.Credit risk exposure

 

   06/30/2014   12/31/2013 
   Brazil   Abroad   Total   Brazil   Abroad   Total 
Interbank deposits   9,372    17,658    27,030    5,564    20,096    25,660 
Securities purchased under agreements to resell   140,296    436    140,732    137,556    899    138,455 
Financial assets held for trading   140,938    7,370    148,308    141,343    7,517    148,860 
Financial assets designated at fair value through profit or loss   -    494    494    -    371    371 
Derivatives   7,810    3,560    11,370    6,400    4,966    11,366 
Available-for-sale financial assets   53,906    18,243    72,149    45,208    51,418    96,626 
Held-to-maturity financial assets   20,801    8,667    29,468    3,393    6,723    10,116 
Loan operations and lease operations   301,755    92,081    393,836    277,877    111,590    389,467 
Other financial assets   43,517    6,134    49,651    45,389    2,203    47,592 
Off balance sheet   282,170    20,399    302,569    273,766    21,286    295,052 
Endorsements and sureties   68,554    4,141    72,695    66,165    4,997    71,162 
Letters of credit   11,827    -    11,827    11,431    -    11,431 
Commitments to be released   201,789    16,258    218,047    196,170    16,289    212,459 
Mortgage loans   10,061    -    10,061    10,846    -    10,846 
Overdraft accounts   81,988    -    81,988    82,206    -    82,206 
Credit cards   100,004    721    100,725    94,453    847    95,300 
Other pre-approved limits   9,736    15,537    25,273    8,665    15,442    24,107 
Total   1,000,565    175,042    1,175,607    936,496    227,069    1,163,565 

  

 
 

 

The table above presents the maximum exposure at June 30, 2014 and December 31, 2013, without considering any collateral received or other additional credit improvements.

 

For assets recognized in the balance sheet, the exposures presented are based on net carrying amounts. This analysis includes only financial assets subject to credit risk and excludes non-financial assets.

 

The contractual amounts of endorsements and sureties and letters of credit represent the maximum potential of credit risk in the event the counterparty does not meet the terms of the agreement. The vast majority of commitments (real estate loans, overdraft accounts, credit card and other pre-approved limits) mature without being drawn, since they are renewed monthly and we have the power to cancel them at any time. As a result, the total contractual amount does not represent our effective future exposure to credit risk or the liquidity needs arising from such commitments.

 

As shown in the table, the most significant exposures correspond to loan operations, financial assets held for trading, and securities purchased under agreements to resell, in addition to sureties, endorsements and other commitments.

 

The maximum exposure to the quality of the financial assets presented highlights that:

 

·85.1% of loan operations and other financial assets exposure (Table 6.1 and 6.1.2) are categorized as low probability of default in accordance with our internal rating;

 

·only 4.4% of the total loans exposure (Table 6.1) is represented by overdue credits not impaired;

 

·3.8% of the total loans exposure (Table 6.1) corresponds to overdue loans impaired.

 

5.1 Maximum exposure of financial assets segregated by business sector

 

a)Loan operations and lease operations portfolio

 

   06/30/2014   %   12/31/2013   % 
Public sector   3,803    0.9    3,981    1.0 
Industry and commerce   112,069    27.0    115,025    27.8 
Services   89,341    21.5    87,103    21.2 
Natural resources   20,243    4.9    20,492    5.0 
Other sectors   1,473    0.4    1,553    0.4 
Individuals   188,338    45.3    183,548    44.6 
Total   415,267    100.0    411,702    100.0 

 

b)Other financial assets (*)

 

   06/30/2014   %   12/31/2013   % 
Natural resources   1,736    0.4    1,766    0.4 
Public sector   164,149    38.2    174,331    40.4 
Industry and commerce   12,478    2.9    11,665    2.7 
Services   82,093    19.1    76,650    17.8 
Other sectors   993    0.2    2,664    0.6 
Individuals   340    0.1    263    0.1 
Financial   167,762    39.1    164,115    38.0 
Total   429,551    100.0    431,454    100.0 

(*) Includes financial assets held for trading, derivatives, assets designated at fair value through profit or loss, available-for-sale financial assets, held-to-maturity financial assets, interbank deposits and securities purchased under agreements to resell.

 

c)The credit risks of off balance sheet items (endorsements and sureties, letters of credit and commitments to be released) are not categorized or managed by business sector.

  

 
 

 

6.Credit quality of financial assets

 

6.1 The following table shows the breakdown of loans operations and lease operations portfolio considering: loans not overdue and loans overdue either impaired or not impaired:

 

   06/30/2014   12/31/2013 
Internal rating  Loans not
overdue and
not impaired		   Loans
overdue
not
impaired		   Loans
overdue and
impaired		   Total loans   Loans not
overdue and
not impaired		   Loans
overdue and
not impaired		   Loans
overdue
and
impaired		   Total loans 
                                 
Lower risk   285,314    4,160    -    289,474    300,816    4,354    -    305,170 
Satisfactory   85,261    7,969    -    93,230    64,722    7,676    -    72,398 
Higher risk   10,660    5,996    -    16,656    11,273    6,556    -    17,829 
Impaired   -    -    15,907    15,907    -    -    16,305    16,305 
Total   381,235    18,125    15,907    415,267    376,811    18,586    16,305    411,702 
%   91.8%   4.4%   3.8%   100.0%   91.5%   4.5%   4.0%   100.0%

 

The following table shows the breakdown of loans operations and lease operations by portfolios of areas and classes, based on indicators of credit quality:

 

   06/30/2014   12/31/2013 
   Lower risk   Satisfactory   Higher risk   Impaired   Total   Lower risk   Satisfactory   Higher risk   Impaired   Total 
Individuals   96,512    53,880    11,297    10,227    171,916    96,904    48,833    11,323    10,371    167,431 
Credit cards   36,175    11,827    2,151    3,038    53,191    36,964    11,773    1,892    2,520    53,149 
Personal   8,646    8,337    7,272    3,814    28,069    7,760    8,158    7,143    3,574    26,635 
Payroll loans   6,255    22,813    369    449    29,886    5,676    16,147    378    370    22,571 
Vehicles   20,828    9,280    1,471    2,670    34,249    23,692    11,310    1,881    3,701    40,584 
Mortgage loans   24,608    1,623    34    256    26,521    22,812    1,445    29    206    24,492 
                                                   
Corporate   120,951    7,013    -    1,991    129,955    121,643    3,041    145    1,584    126,413 
                                                   
Small and medium businesses   55,198    15,071    5,134    3,496    78,899    55,210    16,430    5,796    4,165    81,601 
                                                   
Foreign loans - Latin America   16,813    17,266    225    193    34,497    31,413    4,094    565    185    36,257 
Total   289,474    93,230    16,656    15,907    415,267    305,170    72,398    17,829    16,305    411,702 
%   69.7%   22.5%   4.0%   3.8%   100.0%   74.1%   17.6%   4.3%   4.0%   100.0%

 

 
 

 

The table below shows the breakdown of loans operations and lease operations portfolio not overdue and not impaired, by portfolio of segments and classes, based on indicators of credit quality.

 

   06/30/2014   12/31/2013 
   Lower risk   Satisfactory   Higher risk   Total   Lower risk   Satisfactory   Higher risk   Total 
I – Individually evaluated                                        
Corporate                                        
                                         
Large companies   120,401    6,714    -    127,115    120,828    2,861    -    123,689 
                                         
II- Collectively-evaluated                                        
                                         
Individuals   93,854    47,810    6,810    148,474    94,586    42,896    6,708    144,190 
Credit card   35,377    10,850    1,327    47,554    36,764    11,129    1,266    49,159 
Personal   8,481    7,874    5,080    21,435    7,703    7,691    4,986    20,380 
Payroll loans   6,215    22,187    259    28,661    5,574    15,881    245    21,700 
Vehicles   19,594    6,082    132    25,808    22,206    7,454    206    29,866 
Mortgage loans   24,187    817    12    25,016    22,339    741    5    23,085 
                                         
Small and medium businesses   54,599    13,881    3,676    72,156    54,544    15,142    4,121    73,807 
                                         
Foreign loans and Latin America   16,459    16,857    174    33,490    30,858    3,823    444    35,125 
                                         
Total   285,313    85,262    10,660    381,235    300,816    64,722    11,273    376,811 

 

6.1.1 Loan operations and lease operations by portfolios of areas and classes, are classified by maturity as follows (loans overdue not impaired):

 

   06/30/2014   12/31/2013 
   Overdue by
up to 30 days		   Overdue from
31 to 60 days		   Overdue from
61 to 90 days		   Total   Overdue by
up to 30 days		   Overdue from
31 to 60 days		   Overdue from
61 to 90 days		   Total 
Individuals   8,271    3,276    1,668    13,215    8,103    3,273    1,494    12,870 
Credit card   1,766    410    423    2,599    833    323    314    1,470 
Personal   1,606    833    382    2,821    1,641    716    325    2,682 
Payroll loans   559    108    110    777    372    74    55    501 
Vehicles   3,583    1,570    617    5,770    4,460    1,872    685    7,017 
Mortgage loans   757    355    136    1,248    797    288    115    1,200 
                                         
Corporate   480    117    252    849    944    167    29    1,140 
                                         
Small and medium businesses   2,049    806    392    3,247    2,378    843    409    3,630 
                                         
Foreign loans - Latin America   622    129    63    814    774    117    55    946 
Total   11,422    4,328    2,375    18,125    12,199    4,400    1,987    18,586 

 

 
 

 

6.1.2 The table below shows other financial assets, individually evaluated, classified by rating:

 

06/30/2014 
Internal rating  Interbank deposits
and securities
purchased under
agreements to resell		   Held-for-trading
financial assets		   Financial assets
designated at fair
value through profit
or loss		   Derivatives
assets		   Available-for-
sale financial 
assets		   Held-to-
maturity
financial
assets		   Total 
                                    
Lower risk   167,762    148,291    494    11,060    72,037    29,468    429,112 
Satisfactory   -    14    -    79    67    -    160 
Higher risk   -    3    -    231    42    -    276 
Impairment   -    -    -    -    3    -    3 
Total   167,762    148,308    494    11,370    72,149    29,468    429,551 
%   39.1    34.5    0.1    2.6    16.8    6.9    100.0 

 

12/31/2013 
Internal rating  Interbank deposits
and securities
purchased under
agreements to resell		   Held-for-trading
financial assets		   Financial assets
designated at fair
value through profit
or loss		   Derivatives
assets		   Available-for-
sale financial 
assets		   Held-to-
maturity
financial
assets		   Total 
                                    
Lower risk   164,115    138,883    371    7,173    57,515    10,093    378,150 
Satisfactory   -    9,691    -    3,896    38,301    23    51,911 
Higher Risk   -    286    -    297    807    -    1,390 
Impairment   -    -    -    -    3    -    3 
Total   164,115    148,860    371    11,366    96,626    10,116    431,454 
%   38.0    34.5    0.1    2.6    22.5    2.3    100.0 

  

 
 

 

6.1.3 Collateral held for loan and lease operations portfolio

 

   06/30/2014   12/31/2013 
   (l) Over-collateralized assets   (II) Under-collateralized 
assets		   (l) Over-collateralized assets   (II) Under-collateralized assets 
Financial effect of collateral  Carrying
value of the
assets		   Fair value of
collateral		   Carrying
value of the
assets		   Fair value of
collateral		   Carrying 
value of the
assets		   Fair value of
collateral		   Carrying 
value of the
assets		   Fair value of
collateral		 
Individuals   59,433    141,264    1,185    973    61,723    156,230    2,738    2,290 
Personal   405    1,034    104    93    377    879    13    7 
Vehicles   32,842    75,628    967    827    37,010    71,736    2,620    2,235 
Mortgage loans   26,186    64,603    114    53    24,336    83,615    105    47 
                                         
Small, medium businesses and corporate   180,795    491,640    6,559    3,356    161,274    476,507    5,200    2,610 
                                         
Foreign loans - Latin America   33,785    47,599    500    2    11,457    17,169    24,660    22,084 
                                         
Total   274,014    680,504    8,244    4,330    234,454    649,906    32,597    26,983 

 

The difference between the total loan portfolio and collateralized loan portfolio is generated by non-collateralized loans amounting to R$ 133,009 (R$ 144,651 at December 31, 2013).

 

ITAÚ UNIBANCO HOLDING uses collateral to reduce the occurrence of losses in operations with credit risk and manages and regularly reviews its collateral with the objective that collateral held is sufficient, legally exercisable (effective) and feasible. Thus, collateral is used to maximize the recoverability potential of impaired loans and not to reduce the exposure value of customers and counterparties.

 

Individuals

Personal – This category of credit products usually requires collateral, focusing on endorsements and sureties.

Vehicles – For this type of operation, clients' assets serve as collateral, which are also the leased assets in leasing operations.

Mortgage loans – Regards buildings themselves given in guarantee.

 

Small, Medium Businesses and Corporate – For these operations, any collateral can be used within the credit policy of ITAÚ UNIBANCO HOLDING (chattel mortgage, assignment trust, surety / joint debtor, Mortgage and others).

 

Foreign loans - Latin America – For these operations, any collateral can be used within the credit policy of ITAÚ UNIBANCO HOLDING (chattel mortgage, assignment trust, surety/joint debtor, Mortgage and others).

 

 
 

 

7. Repossessed assets

 

Repossessed assets are recognized as assets when possession is effectively obtained.

 

Assets received from the foreclosure of loans, including real estate, are initially recorded at the lower of: (i) the fair value of the asset less the estimated selling expenses, and (ii) the carrying amount of the loan.

 

Further impairment of assets is recorded as a provision, with a corresponding charge to income. The maintenance costs of these assets are expensed as incurred.

 

The policy for sales of these assets (assets not for use) includes periodic auctions that are announced in advance and considers that the assets cannot be held for more than one year as stipulated by the BACEN. This period may be extended at the discretion of BACEN.

 

The amounts below represent total assets repossessed in the period:

 

   04/01 to
06/30/2014		   04/01 to
06/30/2013		   01/01 to
06/30/2014		   01/01 to
06/30/2013		 
Real estate not for own use   1    -    1    1 
Residential properties - mortgage loans   14    24    31    42 
Vehicles - linked to loan operations   1    -    1    1 
Other (Vehicles / Furniture / Equipments) - Dation   1    2    10    2 
Total   17    26    43    46 

  

 
 

 

Market risk

 

Market risk is the possibility of losses resulting from fluctuations in the market values of positions held by a financial institution, including transactions subject to variations in foreign exchange and interest rates, share, of prices indexes and commodity prices among other indexes on these risk factors.

 

Market risk management is the process through which the institution plans, monitors and controls the risks of variations in financial instruments market values due market changes, aimed at optimizing the risk-return ratio, by using an appropriate structure of Adequate management limits, models and tools.

 

The policy of risk management is in line with the principles of CMN Resolution No. 3,464, and posterior amendments, comprising a set of principles that drive the institution’s strategy of control and management of market risks in all business units and legal entities of ITAÚ UNIBANCO HOLDING.

 

The document set forth by the corporate guidelines on market risk management, which is not part of the financial statements, may be viewed on the website www.itau-unibanco.com.br/ri, in the section Corporate Governance/Rules and Policies/Public Access Report - Market Risk.

 

The risk management strategy of ITAÚ UNIBANCO HOLDING tries to achieving a balance between business objectives, considering among others:

 

·Political, economic and market context;

 

·Market risk portfolio of ITAÚ UNIBANCO HOLDING;

 

·Capacity to operate in specific markets.

 

The process for managing market risk of ITAÚ UNIBANCO HOLDING occurs within the governance and hierarchy of committees and limits approved specifically for this purpose, sensitizing different levels and classes of market risk. This framework limits that covers from the monitoring of aggregate indicators of risk (portfolio level) to the monitoring of granular limits (individual desks level), assuring effectiveness and coverage of control. These limits are dimensioned considering the projected results of the balance sheet, expected performance and risk appetite of the institution, the level of equity and the profile of risk of each organization unit, which are defined in terms of risk measures used by management. Limits are monitored and controlled daily and excesses are reported and discussed in the corresponding committees. Additionally, daily risk reports used by the business and control areas, are issued to the top management.

 

The limit structure and warnings follow the guidelines of the Board of Directors and is established and approved by the Superior Risk Committee (CSRisc) after discussions and resolutions of the Superior Institutional Treasury Committee (CSTI) on metrics and market risk limits. The review of this structure of limits is performed at least annually.

 

The purpose of this structure is:

 

·Providing more assurance to all executive levels that the assumption of market risks is in line with ITAÚ UNIBANCO HOLDING and the risk-return objective;

 

·Promoting disciplined and educated discussion on the global risk profile and its evolution over time;

 

·Increasing transparency on the way the business seeks to optimize results;

 

·Providing early warning mechanisms in order to make the effective risk management easier, without jeopardizing the business purposes; and

 

·Avoiding risk concentration.

 

The market risk control and management process is periodically reviewed with the purpose of keeping the process aligned with best market practices and complies with continuous improvement processes at ITAÚ UNIBANCO HOLDING.

 

The market risk is controlled by an area independent from the business units and is responsible for carrying out daily measurement, assessment, analysis and reporting activities to the areas and relevant people, in accordance with the governance established and following up the actions required for adjusting the position and/or risk level, when necessary. For that purpose, ITAÚ UNIBANCO HOLDING has a structured reporting and information flow with the objective of providing input for the follow-up by senior-level committees and complying with the requirements of Brazilian and foreign regulatory agents.

 

 
 

  

ITAÚ UNIBANCO HOLDING hedges transactions with clients and proprietary positions, including foreign investments, aiming at mitigating risks arising from fluctuations in significant market factors and adjusting the transactions into the current exposure limits. Derivatives are the most frequently used instruments for these hedges. When these transactions are designed for as hedge accounting, specific supporting documentation is prepared, including continuous review of the hedge effectiveness and other changes in the accounting process. Accounting and managerial hedge are governed by corporate guidelines of ITAÚ UNIBANCO HOLDING.

 

Hedge accounting is treated in detail in the financial statement notes.

 

The market risk framework categorizes transactions as part of either the banking portfolio or the trading portfolio, in accordance with general criteria established by the National Monetary Council (CMN) Resolution No. 3,464 and Central Bank of Brazil Circular No. 3,354.

 

The trading portfolio consists of all qualifying transactions (including derivatives) held with intent to trade or to hedge risk within this portfolio, and that have no restriction.

 

The banking portfolio is basically characterized by transactions from the banking business, such as funding and loans, and also includes derivatives with eligible clients and transactions related to the management of the balance sheet of the institution, including by way of derivatives. It has the no-intention of resale and medium- and long-term time horizons as general guidelines.

 

The exposures to market risks inherent in the various products, including derivatives, are broken down into a number of risk factors. Market factors are primary components of pricing. The main risk factors measured by ITAÚ UNIBANCO HOLDING are:

 

·Interest rates risk: risk of financial losses on operations subject to interest rates variations;

 

·Foreign exchange-linked: the risk of losses arising from positions in transactions which are subject to a foreign exchange-linked interest rate;

 

·Foreign exchange rates: risk of losses on positions in foreign currency in operations subject to foreign exchange variation;

 

·Price index-linked: risk of financial losses on operations subject to changes in price index coupon rates;

 

·Variable income: risk of losses in operations subject to variation in goods prices and commodities.

 

Market risk is analyzed based on the following metrics:

 

·Value at risk (VaR): statistical metric that estimates the expected maximum potential economic loss under normal market conditions, taking into consideration a certain time horizon and confidence level;

 

·Losses in stress scenarios (Stress test): simulation technique to assess the behavior of assets, liabilities and derivatives of a portfolio when several risk factors are taken to extreme market situations (based on prospective scenarios) in the portfolio;

 

·Stop loss: metrics which purpose is to review positions, should losses accumulated in a certain period reach a certain amount;

 

·Concentration: cumulative exposure of a certain asset or risk factor calculated at market value (“MtM – Mark to Market”);

 

·Stressed VaR: statistical metric resulting from the VaR calculation, with the purpose of capturing the highest risk in simulations for the current portfolio, considering the returns that can be observed in historic scenarios.

 

In addition to the risk measures, sensitivity and loss control measures are also analyzed. They comprise:

 

 
 

  

·Gap analysis: accumulated exposure, by risk factor, of cash flows expressed at market value, allocated at the maturity dates;

 

·Sensitivity (DV01 – Delta Variation): the impact on the cash flows market value when submitted to an one annual basis point increase in the current interest rates or index rate;

 

·Sensitivity to the Several Risk Factors (Greeks): partial derivatives of an options portfolio in relation to the underlying assets price, implicit volatility, interest rate and timing.

 

ITAÚ UNIBANCO HOLDING uses proprietary systems to measure the consolidated market risk. The processing of these systems principally takes place in São Paulo, in an access-controlled environment, being highly available, which has data safekeeping and recovery processes, and counts on such an infrastructure to ensure the continuity of business in contingency (disaster recovery) situations.

 

VaR - Consolidated ITAÚ UNIBANCO HOLDING

 

The internal VaR model (parametric) used by ITAÚ UNIBANCO HOLDING considers a one-day holding period and a 99% confidence level. Volatilities and correlations are estimated based on a volatility weighted methodology that gives greater weight to the most recent information.

 

The Consolidated Total VaR table provides an analysis of the exposure to market risk of ITAÚ UNIBANCO HOLDING portfolios, and to its foreign subsidiaries by showing where the largest concentrations of market risk are found. (foreign subsidiaries: Banco Itaú BBA International PLC, Banco Itaú Argentina S.A., Banco Itaú Chile S.A., Banco Itaú Uruguai S.A., Banco Itaú Paraguai S.A. and Itaú BBA Colômbia S.A. – Corporación Financiera).

 

ITAÚ UNIBANCO HOLDING maintaining its conservative management and portfolio diversification, continued with its policy of operating within low limits in relation to its capital in the period.

 

From January 1st to June 30, 2014, the average total VaR was R$ 91.7 million, or 0.10% of total stockholders’ equity (throughout 2013 it was R$ 224 million or 0.28%).

 

   (in R$ million) 
   VaR Total 
   Average   Minimum   Maximum   06/30/2014   Average   Minimum   Maximum   12/31/2013 
                 
Risk factor group                                        
Brazilian interest rate   65.4    37.0    108.1    44.3    172.4    65.6    416.9    69.1 
Other interest rate   33.5    21.1    55.8    37.5    26.2    8.6    76.7    45.2 
FX rate   21.6    3.6    52.9    9.9    34.5    4.4    70.2    10.4 
Brazilian inflation indexes   64.3    45.9    104.1    81.4    76.1    37.3    155.5    65.7 
Equities and commodities   17.8    10.4    28.3    17.8    29.6    14.0    60.1    20.4 
                                         
Foreign units (*)                                        
Itaú BBA International   1.4    0.4    2.3    0.4    2.4    1.6    4.1    1.9 
Itaú Argentina   6.1    1.7    18.8    3.0    4.0    2.2    7.4    5.7 
Itaú Chile   2.6    1.4    4.2    1.4    5.6    2.1    13.6    2.1 
Itaú Uruguay   1.5    0.8    2.5    1.3    2.8    1.5    8.9    1.7 
Itaú Paraguay   1.1    0.6    2.9    0.8    0.9    0.4    1.8    0.9 
Itaú BBA Colombia   0.5    0.1    0.8    0.5    0.4    0.0    1.3    0.2 
                                         
Effect of diversification                  (112.7)                  (113.0)
Total risk   91.7    59.0    139.8    85.6    224.5    97.9    443.4    110.4 

(*) Determined in local currency and converted into Brazilian reais at the closing price on the reporting date. 

 

 
 

 

Interest rate The table on the position of accounts subject to interest rate risk group them by products, book value of accounts distributed by maturity. This table is not used directly to manage interest rate risks; it is mostly used to enable the assessment of mismatching between accounts and products associated thereto and to identify possible risk concentration.

 

The following table sets forth our interest-earning assets and interest-bearing liabilities and therefore does not reflect interest rate gap positions that may exist as of any given date. In addition, variations in interest rate sensitivity may exist within the repricing periods presented due to differing repricing dates within the period.

 

Position of accounts subject to interest rate risk (1)

 

   06/30/2014   12/31/2013 
   0-30
days		   31-180
days		   181-365
days		   1-5
years		   Over 5
years		   Total   0-30
days		   31-180
days		   181-365
days		   1-5
years		   Over 5
years		   Total 
Interest-bearing assets   251,713    211,929    97,730    252,027    106,946    920,345    281,495    182,556    100,636    248,019    102,326    915,033 
Interbank deposits   20,231    3,567    2,538    694    -    27,030    19,341    2,126    3,557    636    -    25,660 
Securities purchased under agreements to resell   70,299    70,079    -    354    -    140,732    90,970    47,290    -    184    10    138,455 
Central Bank compulsory deposits   75,527    -    -    -    -    75,527    71,877    -    -    -    -    71,877 
Held-for-trading financial assets   8,167    22,826    23,873    73,747    19,695    148,308    16,807    12,269    22,257    81,032    16,495    148,860 
Financial assets held for trading and designated at fair value through profit or loss   494    -    -    -    -    494    371    -    -    -    -    371 
Available-for-sale financial assets   6,875    7,933    9,510    22,332    25,499    72,149    14,470    13,244    10,553    26,430    31,929    96,626 
Held-to-maturity financial assets   99    593    317    11,727    16,732    29,468    52    47    -    158    9,859    10,116 
Derivatives   3,185    2,670    1,590    2,783    1,142    11,370    2,933    2,419    1,675    3,377    962    11,366 
Loan and lease operations portfolio   66,836    104,261    59,902    140,390    43,878    415,267    64,674    105,161    62,594    136,202    43,071    411,702 
Interest-bearing liabilities   243,646    79,839    52,007    260,617    56,626    692,735    252,818    81,456    56,068    255,198    50,872    696,412 
Savings deposits   110,840    -    -    -    -    110,840    106,166    -    -    -    -    106,166 
Time deposits   15,891    32,745    10,706    51,526    6,730    117,598    12,260    29,436    9,961    61,551    3,923    117,131 
Interbank deposits   1,352    1,425    938    347    -    4,062    1,768    3,909    2,146    363    8    8,194 
Deposits received under repurchase agreements   107,227    13,122    13,927    115,938    16,126    266,340    119,745    13,663    15,190    104,547    13,537    266,682 
Interbank market   5,584    26,518    22,129    47,008    9,618    110,857    6,609    26,507    22,661    46,541    9,058    111,376 
Institutional market   474    4,371    2,558    37,149    23,091    67,643    811    6,529    4,156    36,887    23,672    72,055 
Derivatives   2,277    1,616    1,530    5,538    929    11,890    2,421    1,393    1,892    5,076    623    11,405 
Financial liabilities held for trading   1    42    219    104    132    498    6    19    62    233    51    371 
Liabilities for capitalization plans   -    -    -    3,007    -    3,007    3,032    -    -    -    -    3,032 
Difference asset/ liability (2)   8,067    132,090    45,723    (8,590)   50,320    227,610    28,677    101,100    44,568    (7,179)   51,454    218,621 
Cumulative difference   8,067    140,157    185,880    177,290    227,610         28,677    129,777    174,345    167,166    218,621      
Ratio of cumulative difference to total interest-bearing assets   0.9%   15.2%   20.2%   19.3%   24.7%        3.1%   14.2%   19.1%   18.3%   23.9%     

(1) Remaining contractual terms.

(2) The difference arises from the mismatch between the maturities of all remunerated assets and liabilities, at the respective period-end date, considering the contractually agreed terms.

 

 
 

 

Position of accounts subject to currency risk

 

  06/30/2014 
Assets  Dollar   Euro   Chilean
Peso		   Other   Total 
Cash and deposits on demand   6,751    217    472    2,532    9,972 
Central Bank compulsory deposits   220    -    392    3,264    3,876 
Interbank deposits   15,467    -    605    1,586    17,658 
Securities purchased under agreements to resell   388    -    -    48    436 
Financial assets held for trading   6,593    -    133    644    7,370 
Financial assets designated at fair value through profit or loss   494    -    -    -    494 
Derivatives   2,784    -    716    60    3,560 
Available-for-sale financial assets   15,260    -    1,636    1,347    18,243 
Held-to-maturity financial assets   8,667    -    -    -    8,667 
Loan operations and lease operations portfolio, net   56,815    -    22,797    12,469    92,081 
Total assets   113,439    217    26,751    21,950    162,357 

 

      06/30/2014 
Liabilities  Dollar   Euro   Chilean
Peso		   Other   Total 
Deposits   56,466    20    16,250    17,186    89,922 
Securities sold under repurchase agreements   11,503    -    273    189    11,965 
Financial liabilities held for trading   715    -    -    -    715 
Derivatives   2,658    -    745    29    3,432 
Interbank market debt   30,594    49    2,290    387    33,320 
Institutional market debt   26,401    -    3,745    244    30,390 
Total liabilities   128,337    69    23,303    18,035    169,744 
                          
Net position   (14,898)   148    3,448    3,915    (7,387)

 

The exposure to share price risk is disclosed in Note 7 related to financial assets held for trading and Note 10, related to available-for-sale financial assets.

 

Position of accounts subject to currency risk

 

  12/31/2013 
Assets  Dollar   Euro   Chilean
Peso		   Other   Total 
Cash and deposits on demand   7,672    194    409    2,560    10,835 
Central Bank compulsory deposits   -    -    365    3,723    4,088 
Interbank deposits   17,612    -    1,073    1,411    20,096 
Securities purchased under agreements to resell   880    -    19    -    899 
Financial assets held for trading   7,099    -    13    405    7,517 
Financial assets designated at fair value through profit or loss   371    -    -    -    371 
Derivatives   4,511    -    443    12    4,966 
Available-for-sale financial assets   46,830    -    3,308    1,280    51,418 
Held-to-maturity financial assets   6,723    -    -    -    6,723 
Loan operations and lease operations portfolio, net   67,557    1,776    23,657    18,600    111,590 
Total assets   159,255    1,970    29,287    27,991    218,503 

 

  12/31/2013 
Liabilities  Dollar   Euro   Chilean
Peso		   Other   Total 
Deposits   48,516    16    18,439    17,952    84,923 
Securities sold under securities repurchase agreements   15,324    -    248    19    15,591 
Financial liabilities held for trading   569    -    -    -    569 
Derivatives   3,027    -    424    87    3,538 
Interbank market debt   48,694    71    2,945    978    52,688 
Institutional market debt   59,155    -    3,141    333    62,629 
Total assets   175,285    87    25,197    19,369    219,938 
                          
Net position   (16,030)   1,883    4,090    8,622    (1,435)

 

The exposure to share price risk is disclosed in Note 7 related to financial assets held for trading and Note 10, related to available-for-sale financial assets. 

 

 
 

 

Liquidity risk

 

Liquidity risk is defined as the existence of imbalances between marketable assets and liabilities due – mismatching between payments and receipts - which may affect payment capacity of ITAÚ UNIBANCO HOLDING, taking into consideration the different currencies and payment terms and their respective rights and obligations.

 

Policies and procedures

 

The management of liquidity risks seeks to guarantee liquidity sufficient to support possible outflows in market stress situations, as well as the compatibility between funding and the terms and liquidity of assets.

 

ITAÚ UNIBANCO HOLDING has a structure dedicated to improve the monitoring, control and analysis, through models of projections of the variables that affect cash flows and the level of reserves in local and foreign currencies.

 

The document that details the guidelines established by the internal policy on liquidity risk management, that is not part of the financial statements, may be viewed on the website www.itau-unibanco.com.br/ri, in the section Corporate Governance/Rules and Policies / Public Access Report – Liquidity Risk.

 

The liquidity risk measurement process makes use of corporate and own in-house developed application systems. ITAÚ UNIBANCO HOLDING manages proprietary IT systems to support the liquidity risk measurement process.

 

Additionally, ITAÚ UNIBANCO HOLDING establishes guidelines and limits. Compliance with these guidelines and limits is periodically analyzed in technical committees, and their purpose is to provide an additional safety margin to the minimum projected needs. The liquidity management policies and the respective limits are established based on prospective scenarios periodically reviewed and on the definitions of the top management.

 

These scenarios may be reviewed in view of cash requirements resulting from atypical market situations or arising from strategic decisions of ITAÚ UNIBANCO HOLDING.

 

In compliance with the requirements of CMN Resolution No. 4,090 of May 24, 2012 and BACEN Circular N° 3,393 of June 3, 2008 , the Statement of Liquidity Risk (DRL) is sent to BACEN on a monthly basis, and the following items for monitoring and supporting decisions are periodically prepared and submitted to top management:

 

·Different scenarios projected for changes in liquidity;
·Contingency plans for crisis situations;
·Reports and charts that describe the risk positions;
·Assessment of funding costs and alternative sources of funding;
·Monitoring of changes in funding through a constant control over sources of funding, considering the type of investor and maturities, among other factors;

 

Primary sources of funding

 

ITAÚ UNIBANCO HOLDING has different sources of funding, of which a significant portion is from the retail segment. Total funding from clients reached R$ 505.2 billion (R$ 501.1 billion at 12/31/2013), particularly funding from time deposits. A considerable portion of these funds – 35.4% of total, or R$ 178.7 billion – is available on demand to the client. However, the historical behavior of the accumulated balance of the two largest items in this group – demand and savings deposits - is relatively consistent with the balances increasing over time and inflows exceeding outflows for monthly average amounts.

 

 
 

  

   06/30/2014   12/31/2013 
Funding from clients  0-30 days   Total   %   0-30 days   Total   % 
Deposits   172,929    277,347         163,086    274,383      
Demand deposits   44,847    44,847    8.9    42,892    42,892    8.6 
Savings deposits   110,840    110,840    21.9    106,166    106,166    21.2 
Time deposits   15,890    117,598    23.3    12,260    117,131    23.4 
Other   1,352    4,062    0.8    1,768    8,194    1.6 
Funds from acceptances and issuance of securities (1)   2,277    45,292    9.0    2,916    46,256    9.2 
Funds from own issue (2)   3,341    129,620    25.7    2,977    123,922    24.7 
Subordinated debt   139    52,989    10.5    146    56,564    11.3 
Total   178,686    505,248         169,125    501,125      

(1) Includes mortgage notes, real estate credit bills, agribusiness, financial and structured operations certificates recorded in interbank and institutional market debts and liabilities for issuance of debentures and foreign borrowings and securities recorded in funds from institutional markets.

(2) Refer to deposits received under securities repurchase agreements with securities from own issue.

 

Control over liquidity

 

ITAÚ UNIBANCO HOLDING manages its liquidity reserves based on estimates of funds that will be available for investment, considering the continuity of business in normal conditions.

 

During the first semester of 2014, ITAÚ UNIBANCO HOLDING maintained appropriate levels of liquidity in Brazil and abroad. Liquid assets (cash and deposits on demand, securities purchased under agreements to resell - funded position and free government securities) totaled R$ 95.9 billion and accounted for 53.7% of the short-term redeemable obligations, 19.0% of total funding, and 13.3% of total assets.

 

The table below shows the indicators used by ITAÚ UNIBANCO HOLDING in the management of liquidity risk:

 

Liquidity indicators  06/30/2014
%		   12/31/2013
%		 
Net assets (1) / funds within 30 days (2)   53.7    53.9 
Net assets (1) / total funds (3)   19.0    18.2 
Net assets (1) / total assets (4)   13.3    12.8 

(1) Net assets: Cash and deposits on demand, Securities purchased under agreements to resell – Funded position and Government securities - available. Detailed in the table Undiscounted future flows – Financial assets.

(2) Table Funding from clients (Total Funding from clients 0-30 days).

(3) Table funding from clients (Total funding from clients).

(4) Detailed in the table Undiscounted future flows – Financial assets, total present value regards R$ 720,821 (R$ 712,710 at 12/31/2013). 

 

 
 

 

The following table presents assets and liabilities according to their remaining contractual maturities, considering their undiscounted flows.

 

Undiscounted future flows except for derivatives  30/06/2014   31/12/2013 
Financial assets (1)  0 - 30
days		   31 - 365
days		   366 - 720
days		   Over 720
days		   Total   0 - 30
days		   31 - 365
days		   366 - 720
days		   Over 720
days		   Total 
Cash and deposits on demand   20,605    -    -    -    20,605    16,576    -    -    -    16,576 
                                                   
Interbank investments   84,396    72,138    731    83    157,348    110,510    45,993    614    145    157,262 
Securities purchased under agreements to resell – Funded position (2)   15,196    -    -    -    15,196    23,979    -    -    -    23,979 
Securities purchased under agreements to resell – Financed position   48,969    65,780    -    -    114,749    67,190    37,921    -    10    105,121 
Interbank deposits   20,231    6,358    731    83    27,403    19,341    8,072    614    135    28,162 
                                                   
Securities   67,937    18,148    12,370    138,487    236,942    58,892    30,197    16,773    83,168    189,030 
Government securities - available   60,117    -    -    -    60,117    50,573    -    -    -    50,573 
Government securities – subject to repurchase commitments   3,166    6,414    5,156    81,571    96,307    4,327    17,741    8,805    52,301    83,174 
Private securities - available   4,613    11,370    7,131    56,100    79,214    3,992    12,089    7,017    29,696    52,794 
Private securities – subject to repurchase commitments   41    364    83    816    1,304    -    367    951    1,171    2,489 
                                                   
Derivative financial instruments   3,185    3,967    756    3,151    11,059    2,933    3,781    1,410    2,929    11,053 
Net position   3,185    3,967    756    3,151    11,059    2,933    3,781    1,410    2,929    11,053 
Swaps   126    1,282    452    2,541    4,401    396    745    865    2,436    4,442 
Option   273    913    153    194    1,533    423    977    187    130    1,717 
Forward operations (onshore)   2,493    1,259    34    130    3,916    2,018    1,048    184    65    3,315 
Other derivative financial instruments   293    513    117    286    1,209    96    1,011    174    298    1,579 
Loan and lease operations portfolio (3)   61,542    156,681    87,062    146,048    451,333    56,021    160,056    92,526    131,721    440,324 
                                                   
Total financial assets   237,665    250,934    100,919    287,769    877,287    244,932    240,027    111,323    217,963    814,245 

(1) The assets portfolio does not take into consideration the balance of compulsory deposits in Central Bank, amounting to R$ 80,043 (R$ 77,010 at 12/31/2013), which release of funds is linked to the maturity of the liability portfolios. The amounts of PGBL and VGBL are not considered in the assets portfolio because they are covered in Note 30.

(2) Net of R$ 7,402 (R$ 3,333 at 12/31/2013) which securities are restricted to guarantee transactions at BM&FBOVESPA S.A. and the Central Bank of Brazil.

(3) Net of payment to merchants of R$ 31,301 (R$ 34,142 at 12/31/2013) and the amount of liabilities from transactions related to credit assignments R$ 3,667 (R$ 4,233 at 12/31/2013) .

 

 
 

 

Undiscounted future flows except for derivatives  06/30/2014   12/31/2013 
Financial liabilities  0 – 30
days		   31 – 365
days		   365 – 720
days		   Over 720
days		   Total   0 – 30
days		   31 – 365
days		   365 – 720
days		   Over 720
days		   Total 
                                         
Deposits   172,805    46,296    11,250    74,237    304,588    163,436    46,756    12,005    86,269    308,466 
Demand deposits   44,847    -    -    -    44,847    42,892    -    -    -    42,892 
Savings deposits   110,840    -    -    -    110,840    106,166    -    -    -    106,166 
Time deposit   15,635    43,991    11,056    73,990    144,672    12,609    40,590    11,833    85,968    151,000 
Interbank deposits   1,483    2,305    194    247    4,230    1,769    6,166    172    301    8,408 
                                                   
Compulsory deposits   (44,388)   (14,648)   (3,257)   (17,750)   (80,043)   (42,600)   (12,537)   (3,321)   (18,552)   (77,010)
Demand deposits   (7,759)   -    -    -    (7,759)   (8,821)   -    -    -    (8,821)
Savings deposits   (31,326)   -    -    -    (31,326)   (29,805)   -    -    -    (29,805)
Time deposit   (5,303)   (14,648)   (3,257)   (17,750)   (40,958)   (3,974)   (12,537)   (3,321)   (18,552)   (38,384)
                                                   
Securities sold under repurchase agreements (1)   126,371    28,556    45,214    128,076    328,217    132,394    33,508    43,464    118,067    327,432 
Government securities   119,282    3,213    1,218    30,838    154,550    127,639    360    2,004    25,810    155,813 
Private securities   3,381    25,017    43,996    88,541    160,936    3,052    29,659    41,460    80,136    154,307 
Foreign   3,708    326    -    8,697    12,731    1,702    3,489    -    12,121    17,313 
                                                   
Funds from acceptances and issuance of securities (2)   2,390    23,115    11,958    13,666    51,129    3,176    20,511    14,363    12,598    50,648 
                                                   
Borrowings and onlending (3)   4,066    30,764    13,963    31,379    80,172    5,127    34,659    12,696    28,647    81,129 
                                                   
Subordinated debt (4)   147    6,173    9,852    56,342    72,514    214    8,752    5,146    63,917    78,029 
                                                   
Derivative financial instruments   2,277    2,853    680    5,769    11,579    2,421    2,972    1,607    4,092    11,092 
Gross position   -    15    -    -    15    -    15    -    -    15 
Cross Currency Swap Deliverable - Asset position   -    (293)   -    (18)   (311)   -    (313)   -    -    (313)
Cross Currency Swap Deliverable - Liability position   -    308    -    18    326    -    329    -    -    329 
Net position   2,277    2,838    680    5,769    11,564    2,421    2,956    1,607    4,092    11,076 
Swaps   94    1,155    402    5,200    6,851    361    1,085    1,076    3,589    6,111 
Option   248    988    170    233    1,639    406    1,058    316    141    1,921 
Forward operations (onshore)   1,824    285    58    89    2,256    1,482    229    116    35    1,862 
Other derivative financial instruments   111    410    50    247    818    172    584    99    327    1,182 
                                                   
Total financial liabilities   263,668    123,109    89,660    291,719    768,156    264,168    134,620    85,961    295,037    779,786 

(1) Includes own and third parties’ portfolios.

(2) Includes mortgage notes, real estate credit bills, agribusiness, financial bills and structured operations certificates recorded in interbank and institutional market funds and liabilities for issuance of debentures and foreign securities recorded in funds from institutional markets.

(3) Recorded in funds from interbank markets.

(4) Recorded in funds from institutional markets.

 

 
 

 

   06/30/2014   12/31/2013 
Off balance sheet  0 – 30
Days		   31 – 365
days		   365 – 720
days		   Over 720
days		   Total   0 – 30
days		   31 – 365
days		   365 – 720
days		   Over 720
days		   Total 
Endorsements and sureties   1,581    14,002    4,266    52,846    72,695    1,257    14,886    4,620    50,399    71,162 
Commitments to be released   81,434    52,980    30,124    53,509    218,047    75,838    37,153    36,749    62,719    212,459 
Letters of credit to be released   11,827    -    -    -    11,827    11,431    -    -    -    11,431 
Contractual commitments - Fixed assets and Intangible (Note 15 and 16)   -    222    522    521    1,265    -    875    576    521    1,972 
Total   94,842    67,204    34,912    106,876    303,834    88,526    52,914    41,945    113,639    297,024 

  

 
 

 

NOTE 37 – SUPPLEMENTARY INFORMATION

 

Law No. 12.973: on May 14, 2014, Law No. 12.973 was published as a conversion of Provisional Measure No. 627 to amend the federal tax legislation on IRPJ, CSLL, PIS and COFINS. Law No. 12.973 provides for the following, among other matters:

 

·      revocation of the Transition Tax Regime - RTT, established by Law No. 11.941, of May 27, 2009;

·      taxation of legal entities domiciled in Brazil, regarding the equity increase arising from interest in income earned abroad by subsidiaries and affiliates, and income earned by individuals resident in Brazil by means of a legal entity controlled abroad.

 

ITAÚ UNIBANCO HOLDING estimates that said Law No. 12.973/14 does not have any significant accounting effect on the consolidated financial statements of ITAÚ UNIBANCO HOLDING.

 

NOTE 38 – SUBSEQUENT EVENT

 

Major Risk Insurance Operation

 

ITAÚ UNIBANCO HOLDING, , whereby its subsidiary Itaú Unibanco S.A., signed on July 4th, 2014 a “Share Purchase Agreement” with ACE Ina International Holdings, Ltd. (“ACE”) whereby ITAÚ UNIBANCO HOLDING and some of its subsidiaries undertake to sell their total stakes in Itaú Seguros Soluções Corporativas S.A. (“ISSC”).

 

ISSC will hold the ITAÚ UNIBANCO HOLDING’s major risk insurance operations following the finalization of the process of spinoff from Itaú Seguros S.A., the clients of which are middle market and large corporations with policies representing high insured values. The necessary measures for completion of spinoff process are already in progress.

 

Based on pro-forma data for December 31, 2013, the major risk insurance operation to be transferred to ISSC and subsequently sold off to ACE comprises the following: net equity value of R$ 364 million, assets of R$ 5.8 billion and technical reserves of R$ 4.6 billion.

 

ACE will pay R$ 1.515 billion in cash to ITAÚ UNIBANCO HOLDING and its subsidiaries which shall sell the shares of ISSC. The transfer of these shares and the financial settlement of the operation will take place after certain conditions established in the agreement are fulfilled and confirmation of the necessary regulatory authorizations is obtained.

 

It is estimated that the operation will have an accounting effect, before tax, of R$ 1.1 billion on ITAÚ UNIBANCO HOLDING 's results.

 

The sale of this operation reflects ITAÚ UNIBANCO HOLDING’s strategy of commercializing the mass-market insurance products typically related to retail banking.

 

Tecnologia Bancária S.A. (TECBAN) – New Shareholders’ Agreement

 

Certain subsidiaries of ITAÚ UNIBANCO HOLDING (Itaú Unibanco S.A., Unibanco Negócios Imobiliários S.A., Banco Itauleasing S.A., Banco Itaucard S.A. and Intrag – Part. Administração e Participações Ltda.), in conjunction with the Banco do Brasil Group (through Banco do Brasil and BB Banco de Investimentos S.A.), the Santander Group (through Santander S.A. – Serviços Técnicos, Administrativos e de Corretagem de Seguros), the Bradesco Group (through Banco Bradesco S.A., Banco Alvorada S.A. and Alvorada Cartões, Crédito, Financiamento e Investimentos S.A.), the HSBC Group (through HSBC Bank Brasil S.A. – Banco Múltiplo), the Caixa Group (through Caixa Participações S.A.) and the Citibank Group (through Citibank N.A. – Brazilian Branch and Banco Citibank S.A.) (together denominated “Parties”), with the intervention and agreement of Tecnologia Bancária S.A. (“TecBan”), Itaú Unibanco, Banco Santander (Brasil) S.A. and Caixa Econômica Federal, on July 17, 2014 signed a new Shareholders Agreement of TecBan (“Shareholders Agreement”), that will revoke and substitute the current shareholders agreement as soon as it comes into effect.

 

In addition to the usual provisions in shareholders agreements such as rules on governance and the transfer of shares, the Shareholders Agreement provides that within approximately 4 (four) years as from the date it comes into effect, the Parties shall have substituted part of their external network of Automatic Teller Machines (“ATM”) for Banco24Horas Network ATMs, which are and shall continue to being managed by TecBan. As a general rule, the external ATM network can be considered as those ATMs located outside the branch banking environment or where access is not restricted, exclusive or controlled such as for example such equipment installed in shopping centers, gasoline service stations, supermarkets etc.

 

 
 

  

In line with the worldwide tendency towards best practice in the industry, the Parties constituting Brazil’s leading retail banks will consolidate their external ATM networks on the Banco24Horas Network terminals, generating increased efficiency, greater quality and capillarity of customer service. It should also be pointed out that in addition to the Parties, approximately a further 40 (forty) banks are clients of TecBan. Consequently, this growth in the Banco24Horas Network will also significantly benefit these institutions and their respective customers.

 

The entry into effect of the Shareholders Agreement is subject to certain suspensive conditions, among which, approval by the appropriate regulatory authorities.