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 2015

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 Conceicao - CEP

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: ¨

 

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: ¨  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: ¨  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: ¨   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 6, 2015 By: /s/ Marcelo Kopel  
    Name: Marcelo Kopel  
    Title: Investor Relations Officer  
         

 

 

         
  By: /s/ Eduardo Mazzilli de Vassimon  
    Name: Eduardo Mazzilli de Vassimon  
    Title: Chief Financial Officer  
         

  

 
 

 

EXHIBIT INDEX

 

99.1

Announcement to the Market: Disclosure of results for the second quarter of 2015, according to International Financial Reporting 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, 2015 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 then ended June 30, 2015, 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, 2015, 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 IASB.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 20152
 

 

Other matters

 

Supplementary information - statement of value added

 

We also have audited the consolidated statement of value added for the quarter and the six-month period then ended June 30, 2015, which is the responsibility of the Company's management. The presentation of this statement is required by the Brazilian corporate legislation for listed companies, but it is considered supplementary information for International Financial Reporting Standards (“IFRS”). This statement was subject to the same audit procedures described above and, in our opinion, is fairly presented, in all material respects, in relation to the consolidated financial statements taken as a whole.

 

São Paulo, August 3, 2015

 

PricewaterhouseCoopers

Auditores Independentes

CRC 2SP000160/O-5

 

Washington Luiz Pereira Cavalcanti

Contador CRC 1SP172940/O-6

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 20153
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Balance Sheet

(In millions of Reais)

 

 

 

Assets  Note  06/30/2015   12/31/2014 
Cash and deposits on demand  4   18,005    17,527 
Central Bank compulsory deposits  5   60,157    63,106 
Interbank deposits  6   30,975    23,081 
Securities purchased under agreements to resell  6   164,084    208,918 
Financial assets held for trading  7a   166,638    132,944 
Pledged as collateral      54,206    37,366 
Other      112,432    95,578 
Financial assets designated at fair value through profit or loss  7b   720    733 
Derivatives  8 and 9   19,446    14,156 
Available-for-sale financial assets  10   81,274    78,360 
Pledged as collateral      10,195    22,250 
Other      71,079    56,110 
Held-to-maturity financial assets  11   39,078    34,434 
Pledged as collateral      5,397    6,102 
Other      33,681    28,332 
Loan operations and lease operations portfolio, net  12   433,906    430,039 
Loan operations and lease operations portfolio      458,003    452,431 
(-) Allowance for loan and lease losses      (24,097)   (22,392)
Other financial assets  20a   47,469    53,649 
Investments in associates and joint ventures  13   4,207    4,090 
Goodwill  3a and d   1,987    1,961 
Fixed assets, net  15   8,535    8,711 
Intangible assets, net  16   6,219    6,134 
Tax assets      38,231    35,243 
Income tax and social contribution - current      1,854    3,329 
Income tax and social contribution - deferred  27b   34,624    31,129 
Other      1,753    785 
Assets held for sale  36   371    196 
Other assets  20a   12,596    13,921 
Total assets      1,133,898    1,127,203 

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 20154
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Balance Sheet

(In millions of Reais)

 

 

 

Liabilities and stockholders' equity  Note  06/30/2015   12/31/2014 
Deposits  17   280,443    294,773 
Securities sold under repurchase agreements  19a   280,659    288,683 
Financial liabilities held for trading  18   369    520 
Derivatives  8 and 9   23,872    17,350 
Interbank market debt  19a   125,553    122,586 
Institutional market debt  19b   83,275    73,242 
Other financial liabilities  20b   60,441    71,492 
Reserves for insurance and private pension  30c ll   118,743    109,778 
Liabilities for capitalization plans      3,073    3,010 
Provisions  32   17,826    17,027 
Tax liabilities      3,654    4,465 
Income tax and social contribution - current      1,647    2,835 
Income tax and social contribution - deferred  27b II   305    201 
Other      1,702    1,429 
Other liabilities  20b   30,255    23,660 
Total liabilities      1,028,163    1,026,586 
Capital  21a   85,148    75,000 
Treasury shares  21a   (2,342)   (1,328)
Additional paid-in capital  21c   1,527    1,508 
Appropriated reserves  21d   2,564    8,210 
Unappropriated reserves  21e   17,163    16,301 
Cumulative other comprehensive income      (101)   (431)
Total stockholders’ equity attributed to the owners of the parent company      103,959    99,260 
Non-controlling interests      1,776    1,357 
Total stockholders’ equity      105,735    100,617 
Total liabilities and stockholders' equity      1,133,898    1,127,203 

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 20155
 

 

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
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Banking product      26,902    23,278    46,980    45,857 
Interest and similar income  23a   33,994    29,233    68,961    56,703 
Interest and similar expense  23b   (19,199)   (15,310)   (34,992)   (29,495)
Dividend income      13    100    15    112 
Net gain (loss) from investment securities and derivatives  23c   (336)   289    1,329    394 
Foreign exchange results and exchange variations on transactions      3,466    660    (6,373)   1,761 
Banking service fees  24   7,124    6,474    14,234    12,675 
Income from insurance, private pension and capitalization operations before claim and selling expenses      1,625    1,732    3,251    3,392 
Income from insurance and private pension  30b III   5,346    6,223    10,689    11,264 
Premium reinsurance  30b III   (18)   (367)   (37)   (679)
Change in reserves for insurance and private pension      (3,842)   (4,261)   (7,675)   (7,461)
Revenue from capitalization plans      139    137    274    268 
Other income  25   215    100    555    315 
Losses on loans and claims      (4,999)   (4,356)   (10,049)   (8,361)
Expenses for allowance for loan and lease losses  12b   (5,749)   (5,111)   (11,495)   (9,717)
Recovery of loans written-off as loss      1,135    1,234    2,199    2,322 
Expenses for claims      (392)   (102)   (763)   (748)
Recovery of claims under reinsurance      7    (377)   10    (218)
Banking product net of losses on loans and claims      21,903    18,922    36,931    37,496 
Other operating income (expenses)      (12,753)   (11,552)   (24,908)   (22,932)
General and administrative expenses  26   (11,226)   (10,334)   (22,226)   (20,421)
Tax expenses      (1,686)   (1,366)   (2,972)   (2,734)
Share of profit or (loss) in associates and joint ventures  13   159    148    290    223 
Income before income tax and social contribution  27   9,150    7,370    12,023    14,564 
Current income tax and social contribution      (734)   (2,319)   (4,941)   (5,368)
Deferred income tax and social contribution      (2,482)   (208)   4,635    248 
Net income      5,934    4,843    11,717    9,444 
Net income attributable to owners of the parent company  28   5,845    4,766    11,518    9,317 
Net income attributable to non-controlling interests      89    77    199    127 
Earnings per share - basic  28                    
Common      0.97    0.79    1.92    1.55 
Preferred      0.97    0.79    1.92    1.55 
Earnings per share - diluted  28                    
Common      0.97    0.79    1.91    1.54 
Preferred      0.97    0.79    1.91    1.54 
Weighted average number of shares outstanding - basic  28                    
Common      3,047,037,403    3,047,037,403    3,047,037,403    3,047,037,403 
Preferred      2,961,643,775    2,967,136,873    2,965,086,674    2,963,823,613 
Weighted average number of shares outstanding - diluted  28                    
Common      3,047,037,403    3,047,037,403    3,047,037,403    3,047,037,403 
Preferred      2,991,177,682    2,986,782,628    2,993,474,256    2,985,132,285 

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 20156
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Comprehensive Income

Periods ended

(In millions of Reais)

 

 

 

   Note  04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Net income      5,934    4,843    11,717    9,444 
Available-for-sale financial assets      260    458    2    675 
Change in fair value      280    719    (672)   1,002 
Income tax effect      (89)   (285)   224    (392)
(Gains) / losses transferred to income statement on disposal  23c   113    40    750    109 
Income tax effect      (44)   (16)   (300)   (44)
Hedge      313    (29)   (795)   352 
Cash flow hedge  9   19    (212)   129    (176)
Change in fair value      35    (396)   254    (328)
Income tax effect      (16)   184    (125)   152 
Hedge of net investment in foreign operation  9   294    183    (924)   528 
Change in fair value      655    306    (1,738)   880 
Income tax effect      (361)   (123)   814    (352)
Remeasurements of liabilities for post-employment benefits (*)      8    11    17    28 
Remeasurements  29   10    17    32    48 
Income tax effect      (2)   (6)   (15)   (20)
Foreign exchange differences on foreign investments      (679)   (221)   1,106    (730)
Total comprehensive income      5,836    5,062    12,047    9,769 
Comprehensive income attributable to non-controlling interests      89    77    199    127 
Comprehensive income attributable to the owners of the parent company      5,747    4,985    11,848    9,642 

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

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 20157
 

 

ITAÚ UNIBANCO HOLDING S.A.

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

Periods ended June 30, 2015 and 2014

(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 01/01/2014   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 – exercised 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   -    -    -    -    -    -    -    -    -    -    -    (12)   (12)
Dividends and interest on capital - Statutory Reserve (Note 21b)   -    -    -    200    -    (2,227)   -    -    -    -    (2,027)   (3)   (2,030)
Dividends / Interest on capital paid in 2014 - Year 2013 - Special profit 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 
Balance at 01/01/2015   75,000    (1,328)   1,508    8,210    16,301    -    (600)   (177)   1,723    (1,377)   99,260    1,357    100,617 
Transactions with owners   10,148    (1,014)   19    (10,148)   -    (2,883)   -    -    -    -    (3,878)   220    (3,658)
Capital increase - Statutory Reserve   10,148    -    -    (10,148)   -    -    -    -    -    -    -    -    - 
Treasury shares - granting of stock options   -    (1,014)   64    -    -    -    -    -    -    -    (950)   -    (950)
Granting of stock options – exercised options   -    233    43    -    -    -    -    -    -    -    276    -    276 
Acquisition of treasury shares (Note 21a)   -    (1,247)   -    -    -    -    -    -    -    -    (1,247)   -    (1,247)
Granted options recognized   -    -    21    -    -    -    -    -    -    -    21    -    21 
Share-based payment – variable compensation   -    -    (45)   -    -    -    -    -    -    -    (45)   -    (45)
(Increase) / Reduction of interest of controlling stockholders (Note 2.4a I and 3c)   -    -    -    -    -    -    -    -    -    -    -    276    276 
Dividends / interest on capital  – Special profit reserve (Note 21b)   -    -    -    -    -    (2,883)   -    -    -    -    (2,883)   (56)   (2,939)
Dividends / Interest on capital paid in 2015 - Year 2014 - Statutory Reserve   -    -    -    (2,936)   -    -    -    -    -    -    (2,936)   -    (2,936)
Corporate reorganizations (Note 3b)   -    -    -    (317)   -    -    -    -    -    -    (317)   -    (317)
Other   -    -    -    8    (26)   -    -    -    -    -    (18)   -    (18)
Total comprehensive income   -    -    -    -    -    11,518    2    17    1,106    (795)   11,848    199    12,047 
Net income   -    -    -    -    -    11,518    -    -    -    -    11,518    199    11,717 
Other comprehensive income for the period   -    -    -    -    -    -    2    17    1,106    (795)   330    -    330 
Appropriations:                                                                 
Legal reserve   -    -    -    532    -    (532)   -    -    -    -    -    -    - 
Statutory reserve   -    -    -    7,215    888    (8,103)   -    -    -    -    -    -    - 
Balance at 06/30/2015   85,148    (2,342)   1,527    2,564    17,163    -    (598)   (160)   2,829    (2,172)   103,959    1,776    105,735 
Change in the period   10,148    (1,014)   19    (5,646)   862    -    2    17    1,106    (795)   4,699    419    5,118 

(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. – Complete Financial Statements in IFRS – June 30, 20158
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Cash Flows

(In millions of Reais)

 

 

 

   Note  04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Adjusted net income      18,386    18,757    26,054    41,328 
Net income      5,934    4,843    11,717    9,444 
Adjustments to net income:      12,452    13,914    14,337    31,884 
Granted options recognized and share-based payment – variable compensation      114    51    (24)   103 
Effects of changes in exchange rates on cash and cash equivalents      1,158    2,202    (3,229)   3,489 
Expenses for allowance for loan and lease losses  12b   5,749    5,111    11,495    9,717 
Interest and foreign exchange expense from operations with subordinated debt      579    597    5,435    8,992 
Change in reserves for insurance and private pension      3,842    4,261    7,675    7,461 
Revenue from capitalization plans      (139)   (137)   (274)   (268)
Depreciation and amortization  15 and 16   714    606    1,381    1,221 
Interest expense from provision for contingent and legal liabilities      413    248    755    505 
Provision for contingent and legal liabilities      749    895    1,582    1,845 
Interest income from escrow deposits      -    (101)   (82)   (202)
Deferred taxes  27a   680    208    258    (248)
Share of profit or (loss) in associates and joint ventures      (159)   (148)   (290)   (223)
(Gain) loss from available-for-sale securities  23c   113    40    750    109 
Interest and foreign exchange income from available-for-sale financial assets      (847)   285    (7,477)   (382)
Interest and foreign exchange income from held-to-maturity financial assets      (590)   (268)   (3,575)   (374)
(Gain) loss from sale of assets held for sale  25 and 26   9    7    23    13 
(Gain) loss from sale of investments  25 and 26   (2)   11    2    13 
(Gain) loss from sale of fixed assets  25 and 26   11    19    14    27 
Other      58    25    (82)   86 
Change in assets and liabilities (*)      (30,850)   (25,184)   (76,870)   (8,574)
(Increase) decrease in assets      5,647    (34,801)   (42,922)   (16,122)
Interbank deposits      (1,473)   (317)   (468)   (1,084)
Securities purchased under agreements to resell      24,663    5,971    (10,197)   11,577 
Compulsory deposits with the Central Bank of Brazil      2,684    (887)   3,157    (3,569)
Financial assets held for trading      (28,476)   (24,726)   (33,517)   489 
Derivatives (assets / liabilities)      (2,121)   (717)   1,941    285 
Financial assets designated at fair value through profit or loss      (323)   (170)   136    (145)
Loan operations      1,522    (13,140)   (9,797)   (18,643)
Financial assets      6,615    198    7,091    (2,367)
Other tax assets      2,257    141    (3,246)   932 
Other assets      299    (1,154)   1,978    (3,597)
(Decrease) increase in liabilities      (36,497)   9,617    (33,948)   7,548 
Deposits      (15,547)   397    (19,984)   7,446 
Deposits received under securities repurchase agreements      (13,157)   7,515    (8,086)   (285)
Financial liabilities held for trading      37    77    (268)   161 
Funds from interbank markets      (5,291)   1,100    2,518    (140)
Other financial liabilities      (5,685)   (738)   (11,974)   (6,181)
Technical reserve for insurance and private pension      1,111    (347)   1,290    (1,147)
Liabilities for capitalization plans      135    78    337    243 
Provisions      (655)   (427)   (1,015)   (591)
Tax liabilities      1,206    2,149    3,184    4,895 
Other liabilities      2,273    1,330    4,112    7,968 
Payment of income tax and social contribution      (924)   (1,518)   (4,062)   (4,821)
Net cash from (used in) operating activities      (12,464)   (6,427)   (50,816)   32,754 
Interest on capital / dividends received from investments in associates and joint ventures      1    222    106    224 
Cash received from sale of available-for-sale financial assets      4,638    5,843    7,881    43,389 
Cash received from redemption of held-to-maturity financial assets      868    1,056    1,494    1,259 
Cash upon sale of assets held for sale      19    10    47    20 
Cash upon sale of investments  in  associates and joint ventures      2    (11)   (2)   (13)
Cash and cash equivalents net assets and liabilities due from BMG Seguradora acquisition  3e   -    -    -    (88)
Cash upon sale of fixed assets  15   (3)   5    11    12 
Cash upon sale of intangible assets  16   31    190    37    190 
Purchase of available-for-sale financial assets      (1,440)   (1,351)   (4,013)   (29,171)
Purchase of held-to-maturity financial assets      (1,654)   (8,070)   (2,563)   (8,091)
Purchase of fixed assets  15   (308)   (598)   (647)   (1,165)
Purchase of intangible assets  16   (299)   (305)   (546)   (562)
Net cash from (used in) investing activities      1,855    (3,009)   1,805    6,004 
Funding from institutional markets      4,297    195    4,934    195 
Redemptions in institutional markets      (878)   (3,876)   (1,824)   (12,914)
(Acquisition) / Disposal of interest of non-controlling stockholders      -    -    276    (12)
Granting of stock options – exercised options      5    25    276    235 
Purchase of treasury shares      (679)   -    (1,247)   - 
Dividends and interest on capital paid to non-controlling interests      (8)   (2)   (56)   (3)
Dividends and interest on capital paid      (246)   (223)   (4,703)   (4,053)
Net cash from (used in) financing activities      2,491    (3,881)   (2,344)   (16,552)
                        
Net increase (decrease) in cash and cash equivalents  2.4c and 4   (8,118)   (13,318)   (51,355)   22,206 
                        
Cash and cash equivalents at the beginning of the period  4   86,468    90,027    125,318    55,790 
Effects of changes in exchange rates on cash and cash equivalents      (1,158)   (2,202)   3,229    (3,489)
Cash and cash equivalents at the end of the period  4   77,192    74,507    77,192    74,507 
Additional information on cash flow                       
Interest received      32,996    25,449    61,037    56,192 
Interest paid      15,353    16,412    27,983    30,698 
Non-cash transactions                       
Loans transferred to assets held for sale      -    7    -    7 
Dividends and interest on capital declared and not yet paid      1,120    904    2,584    1,745 

(*) 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. – Complete Financial Statements in IFRS – June 30, 20159
 

 

ITAÚ UNIBANCO HOLDING S.A.

Consolidated Statement of Added Value

(In millions of Reais)

 

 

 

   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Income   41,487    34,711    72,676    67,957 
Interest, similar income and other   37,137    30,282    63,932    58,970 
Banking services   7,124    6,474    14,234    12,675 
Income from insurance, private pension and capitalization operations before claim and selling expenses   1,625    1,732    3,251    3,392 
Result of loan losses   (4,614)   (3,877)   (9,296)   (7,395)
Other   215    100    555    315 
Expenses   (21,738)   (17,627)   (40,000)   (34,301)
Interest, similar income and other   (19,199)   (15,310)   (34,992)   (29,495)
Other   (2,539)   (2,317)   (5,008)   (4,806)
Inputs purchased from third parties   (3,612)   (3,280)   (6,911)   (6,551)
Materials, energy and others   (225)   (159)   (405)   (319)
Third-party services   (1,049)   (1,074)   (1,932)   (2,007)
Other   (2,338)   (2,047)   (4,574)   (4,225)
Data processing and telecommunications   (1,003)   (962)   (1,926)   (1,878)
Advertising, promotions and publication   (269)   (280)   (487)   (473)
Installations   (258)   (247)   (485)   (461)
Transportation   (98)   (105)   (199)   (211)
Security   (166)   (157)   (331)   (310)
Travel expenses   (56)   (52)   (104)   (94)
Other   (488)   (244)   (1,042)   (798)
Gross added value   16,137    13,804    25,765    27,105 
Depreciation and amortization   (656)   (606)   (1,266)   (1,221)
Net added value produced by the company   15,481    13,198    24,499    25,884 
Added value received from transfer   159    148    290    223 
Total added value to be distributed   15,640    13,346    24,789    26,107 
Distribution of added value   15,640    13,346    24,789    26,107 
Personnel   4,060    3,875    8,225    7,374 
Compensation   3,214    3,098    6,575    5,894 
Benefits   657    604    1,269    1,141 
FGTS – government severance pay fund   189    173    381    339 
Taxes, fees and contributions   5,330    4,323    4,208    8,702 
Federal   5,061    4,074    3,680    8,228 
State   2    11    13    13 
Municipal   267    238    515    461 
Return on third parties’ assets - Rent   316    305    639    587 
Return on own assets   5,934    4,843    11,717    9,444 
Dividends and interest on capital   1,382    1,127    2,939    2,030 
Retained earnings (loss) for the period   4,463    3,639    8,579    7,287 
Minority interest in retained earnings   89    77    199    127 

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201510
 

 

ITAÚ UNIBANCO HOLDING S.A.

Notes to the Consolidated Financial Statements

At June 30, 2015 and December 31, 2014 for balance sheet accounts and

From April 1 to June 30, 2015 and 2014 and from January 1 to June 30, 2015 and 2014 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 through its international branches, subsidiaries and affiliates. In Brazil we serve retail clients through the branch network of Itaú Unibanco S.A. (“Itaú Unibanco”) and to wholesale clients through Banco Itaú BBA S.A. (“Itaú BBA”), and overseas through branches in New York, Grand Cayman, Tokyo, and Nassau, and through subsidiaries mainly in Argentina, Chile, the US (New York and Miami), and Europe (Lisbon, London, Luxembourg and Switzerland), Cayman Islands, Paraguay, Uruguay and Colombia.

 

ITAÚ UNIBANCO HOLDING is a holding company controlled by Itaú Unibanco Participações S.A. (“IUPAR”), a holding company which owns 51% of our common shares, and which is jointly controlled by (i) Itaúsa Investimentos Itaú S.A., (“Itaúsa”), a holding company controlled by members of the Egydio de Souza Aranha family, and (ii) Companhia E. Johnston de Participações (“E. Johnston”), a holding company controlled by the Moreira Salles family. Itaúsa also directly holds 38.7% of ITAÚ UNIBANCO HOLDING common shares.

 

As described in Note 34, the operations of ITAÚ UNIBANCO HOLDING are divided into three operating and reportable segments: (1) Retail Banking, which comprises the retail and high net worth clients (Itaú Uniclass and Personnalité) and the corporate segment (very small and small companies); (2) Wholesale Banking, which covers the wholesale products and services for middle-market and large companies, as well as the investment banking, in addition to the activities of the Latin America unit and (3) Activities with the Market + Corporation, which essentially manages the financial result associated with capital surplus, subordinated debt, and net debt of tax credits and debits of ITAÚ UNIBANCO HOLDING.

 

These consolidated financial statements were approved by the Executive Board on August 03, 2015.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201511
 

 

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 are 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, 2015

 

·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. There are no impacts from this change, since ITAÚ UNIBANCO HOLDING has already considered these procedures.

 

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 purpose of the pronouncement is to replace IAS 39 - “Financial instruments: recognition and measurement”. IFRS 9 includes: (a) a logical classification and measurement model; (b) a single impairment model for financial instruments, which offers a response to expected losses; (c) the removal of volatility in income arising from own credit risk; and (d) a new hedge accounting approach. Effective for annual periods beginning on January 1, 2018. Any possible impacts arising from adopting these changes are being assessed and will be completed up to the date this standard comes into force.

 

·IFRS 15 – Revenue from Contracts with Customers – The purpose of the pronouncement is to replace IAS 18 and IAS 11, as well as interpretations related thereto (IFRICs 13, 15 and 18). It requires that revenue is recognized in a way that shows the transfer of assets or services to the client for an amount that reflects the company’s expectation of having in consideration the rights to these assets or services. Effective for annual periods beginning on January 1, 2018. Possible impacts arising from this change are being analyzed and will be completed by the date the standard is in force.

 

·Amendment to IFRS 11 – Joint Arrangements – This amendment establishes criteria for the accounting of an acquisition of an interest in joint ventures and joint operations, when the operation constitutes a business, in accordance with the methodology established in IFRS 3 – Business Combinations. Effective for annual periods beginning on January 1, 2016, with early adoption permitted by IASB. The impact of this amendment will be due only in case of acquisition of joint control.

  

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201512
 

 

·Amendment to IAS 16 – Property, Plant and Equipment and IAS 38 Intangible Assets – The amendment clarifies the base principle for depreciation and amortization as being the expected standard of consumption of future economic benefits embodied in the asset. Effective for annual periods beginning on January 1, 2016, with early adoption permitted by IASB. No material impacts arising from this amendment were identified for the consolidated financial statements of ITAÚ UNIBANCO HOLDING.

 

·Amendment to IFRS 10 – Consolidated Financial Statements and IAS 28 – Investments in Associates and Joint Ventures - These amendments relate to an inconsistency between the requirements of IFRS 10 and IAS 28 when addressing the sale or contribution of assets between an investor and its affiliates or joint ventures. Effective for annual periods beginning on January 1, 2016. No material impacts arising from this amendment on the consolidated financial statements of ITAÚ UNIBANCO HOLDING were identified.

 

·IASB Annual Improvement Cycle (2012-2014) – Annually IASB makes minor amendments to a series of pronouncements to clarify the standards and avoid double interpretation. In this cycle IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations, IFRS 7 – Financial Instruments:Disclosures, IAS 19 – Employee Benefits, and IAS 34 – Interim Financial Reporting were reviewed.Effective for annual periods beginning on January 1, 2016. No material impacts arising from this change on the consolidated financial statements of ITAÚ UNIBANCO HOLDING were identified.

 

·Amendment to IAS 1 – Presentation of Financial Statements; This amendment is aimed at encouraging companies to identify which information is sufficiently material to be disclosed in the financial statements. It also clarifies that materiality is applicable to the full set of financial statements, including the notes to the financial statements, and it is applicable to any and all disclosure requirements in connection with the IFRS standards. It is effective for annual periods beginning on January 1, 2016. Possible impacts arising from the adoption of this amendment will be assessed up to the date this standard becomes effective.

 

·Amendments to IAS 28, IFRS 10 and IFRS 12: Applying the Consolidation Exception: This document comprises guidance for applying the Investment Entities concept. Effective for annual periods beginning on January 1, 2016.

 

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 S.A. – Complete Financial Statements in IFRS – June 30, 201513
 

 

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 2015 and in 2014, there were no such improvements of model assumptions.

 

The allowance amounted to R$ 24,097 (R$ 22,392 at December 31, 2014).

 

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$ 40,078 (R$ 36,619 as of December 31, 2014).

 

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$ 268,078 (R$ 226,193 at December 31, 2014) of which R$ 19,446 are derivatives (R$ 14,156 at December 31, 2014) and liabilities in the amount of R$ 24,241 (R$ 17,870 at December 31, 2014) of which R$ 23,872 are derivatives (R$ 17,350 at December 31, 2014). 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201514
 

 

d)Defined benefit pension plan

 

At June 30, 2015, an amount of R$ (89) (R$ (104) at December 31, 2014) 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$ 668, with impact on the amount recognized with effect on Stockholder’s Equity – Other Comprehensive Income before taxes – of R$ 315, 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)Provisions, contingencies and other commitments

 

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

 

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

 

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

 

The carrying amount of these contingencies was R$ 17,826 (R$ 17,027 at December 31, 2014).

 

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. Annually submitted to the impairment test and, at June 30, 2015 and 2014, ITAÚ UNIBANCO HOLDING did not identify goodwill impairment losses.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201515
 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201516
 

 

The following table shows the main consolidated companies, which together represent over 95.0% of total consolidated assets, as well as the interests of ITAÚ UNIBANCO HOLDING in their voting capital at June 30, 2015, and December 31, 2014:

 

      Incorporation     Interest in voting
capital at		   Interest in total
capital at		 
      country  Activity  06/30/2015   12/31/2014   06/30/2015   12/31/2014 
Banco Credicard S.A.  (1)  Brazil  Financial institution   -    -    -    - 
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     Brazil  Financial institution   60.00%   60.00%   60.00%   60.00%
Banco Itaú Paraguay S.A.     Paraguay  Financial institution   100.00%   100.00%   100.00%   100.00%
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%
Dibens Leasing S.A. - Arrendamento Mercantil     Brazil  Leasing   100.00%   100.00%   100.00%   100.00%
Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento     Brazil  Consumer finance credit   50.00%   50.00%   50.00%   50.00%
Hipercard Banco Múltiplo S.A.     Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Itau Bank, Ltd.     Cayman Islands  Financial institution   100.00%   100.00%   100.00%   100.00%
Itau BBA Colombia S.A. Corporación Financiera     Colombia  Financial institution   100.00%   100.00%   100.00%   100.00%
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   60.00%   60.00%   60.00%   60.00%
Itaú Corretora de Valores S.A.     Brazil  Broker   100.00%   100.00%   100.00%   100.00%
Itaú Seguros S.A.     Brazil  Insurance   100.00%   100.00%   100.00%   100.00%
Itaú Unibanco Financeira S.A. - Crédito, Financiamento e Investimento   (*)  Brazil  Consumer finance credit   -    100.00%   -    100.00%
Itaú Unibanco S.A.     Brazil  Financial institution   100.00%   100.00%   100.00%   100.00%
Itaú Vida e Previdência  S.A.     Brazil  Pension plan   100.00%   100.00%   100.00%   100.00%
Luizacred S.A. 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%

 (*) Company merged in 01/31/2015 by Itaú Unibanco S.A. and Itaú BBA Participações S.A

 

ITAÚ UNIBANCO HOLDING is committed to maintaining the minimum capital required by all these joint ventures, noteworthy is that for all 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).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201517
 

 

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 results and exchange variations on transactions and amount to R$ 6,773 for the period for the period January 1 to June 30, 2015 (R$ (1,756) for the period January 1 to June 30, 2014).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201518
 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201519
 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201520
 

 

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:

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201521
 

 

a)The gain or loss arising from the new measurement of the hedge instrument at fair value should be recognized in income; and
b)The gain or loss arising from the hedged item, attributable to the effective portion of the hedged risk, should adjust the book value of the hedged item and also be recognized in income.

 

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

 

Cash flow hedge

 

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

 

When 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 S.A. – Complete Financial Statements in IFRS – June 30, 201522
 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201523
 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201524
 

 

·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.)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201525
 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201526
 

 

·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 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).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201527
 

 

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% to 50%. 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.

 

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 S.A. – Complete Financial Statements in IFRS – June 30, 201528
 

 

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, 2015 and 2014 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201529
 

 

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, 2015 and 2014 the ITAÚ UNIBANCO HOLDING recognize impairment losses in the amount of R$ 4 and R$ 3 respectively, related to development of software, 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 related asset held for sale.

 

Subsequent reductions in the carrying value of such assets are recorded as a loss due to decreases in fair value less costs to sell, and are recognized 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201530
 

 

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 – 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:

 

   06/30/2015 
Income tax   15.00%
Additional income tax   10.00%
Social contribution (*)   15.00%

(*) For ITAÚ UNIBANCO HOLDING and its financial subsidiaries and equivalent companies, the tax rate corresponds to 15%. Provisional Measure No. 675, of May 21, 2015 ("PM"), increased the Social Contribution tax rate to 20%, effective as from September 1, 2015. The PM has not been enacted into Law, and that it is pending analysis and approval by the National Congress. Considering the existence of a number to supplementary amendments to the bill to be passed into Law reducing or increasing the tax rates to levels different from those proposed by the Executive Branch, no effect of that increase was recognized for tax credits at June 30, 2015. For the non-financial and private pension subsidiaries, the tax rate is 9%.

 

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%.

 

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”).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201531
 

 

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

 

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

 

Reinsurance

 

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

 

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

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201532
 

 

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$ 902 from January 1 to June 30, 2015 (R$ 792 from January 1 to June 30, 2014).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201533
 

 

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)Share-based payment

 

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

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201534
 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201535
 

 

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 share-based payment, are recorded as a reduction in treasury shares, measured at the average price of treasury stock held at such date.

 

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

 

w)Dividends and interest on capital

 

Pursuant to the Company's bylaws, stockholders are entitled to a mandatory minimum dividend of 25% of net income for the year, as determined in accordance with the corporate law. Minimum dividend amounts established in the bylaws are recorded as liabilities at the end of each year. Any other amount above the mandatory minimum dividend is accounted for as liabilities, when approved by the stockholders at a Stockholder´s Meeting. Since January 1, 1996, Brazilian companies have been permitted to attribute a tax-deductible nominal interest rate charge on net equity (called interest on capital.)

 

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

 

Dividends have been and continue to be calculated and paid based on the financial statements prepared under Brazilian accounting standards and regulations for financial institutions 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 S.A. – Complete Financial Statements in IFRS – June 30, 201536
 

 

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

 

Segment information is presented in Note 34.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201537
 

 

Note 3 – Business development

 

a)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 was 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 is 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.

 

This transaction had no significant accounting effects on the results of ITAÚ UNIBANCO HOLDING, which continued to consolidate Itaú BMG Consignado in its financial statements.

 

b) 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 adjusted). 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.

 

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 consolidated Banco Credicard and Credicard Promotora de Vendas in the consolidated financial statements as from December, 2013 to August 31, 2014. Banco Credicard merged with Banco Itaucard S.A. on August 31, 2014.

 

The allocation of the difference between the amount paid and the allocation of net assets at fair value led to the recognition of goodwill based on expected future profitability, in the amount of R$ 1,863 million, and other intangible assets.

 

c)BMG Seguradora S.A.

 

On June 25, 2013, ITAÚ UNIBANCO HOLDING, through Banco Itaú BMG Consignado S.A. (“Itaú BMG Consignado”), 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 Itaú BMG Consignado 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201538
 

 

BMG Seguradora signed exclusivity agreements with Banco BMG S.A and with the Itaú BMG Consignado 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$ 88.1 million. 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.

 

As a result of the study of Purchase Price Allocation - PPA, the allocation of difference between the amount paid and the share in net assets at fair value, resulted in the recognition of a goodwill due to expected future profitability in the amount of R$ 22.7 million.

 

d)Citibank N.A. Uruguay Branch

 

On June 28, 2013, Itau Unibanco Holding, whereby 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 assumed 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.

 

Approval was obtained from applicable regulatory authorities on December 10, 2013.

 

The allocation of the difference between the amount paid and the allocation of assets and liabilities related to the operation, net at fair value, led to the recognition of goodwill based on expected future profitability and other intangible assets.

 

e)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.

 

f) 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 33.13% 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 chairman of the Boards of Directors of Itaú CorpBanca and its subsidiaries will be appointed by Corp Group, and their vice-chairman 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201539
 

 

Based on the approval of the merger by the stockholders of CorpBanca and BIC, the transaction will now be analyzed by the proper regulatory authority in Chile, the Superintendence of Banks and Financial Institutions (“SBIF”). SBIF’s approval should be added to the other regulatory approvals required and already obtained before the proper regulatory authorities in Brazil, Colombia and Panamá.

 

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.

 

g) 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 and some of its subsidiaries have undertaken to sell their total stakes in Itaú Seguros Soluções Corporativas S.A. (“ISSC”).

 

ISSC had the ITAÚ UNIBANCO HOLDING’s major risk insurance operations, the clients of which were middle market and large corporations with policies representing high insured values. This operation was approved by the Administrative Council for Economic Defense (CADE) on September 15, 2014 and by SUSEP on October 09, 2014.

 

Based on pro-forma data for December 31, 2013, the major risk insurance operation comprises the following: net equity value of R$ 364 million, assets of R$ 5.8 billion and technical reserves of R$ 4.6 billion.

 

After certain conditions established in the agreement are fulfilled, ACE paid R$ 1.515 billion to ITAÚ UNIBANCO HOLDING and its subsidiaries. The transfer of these shares and the financial settlement of the operation were carried out on October 31, 2014, in which the amount paid by ACE is subject to price adjustment according to the difference in the positions of Stockholders’ Equity between the pro forma balance sheet date and the closing balance sheet date.

 

The operation produced an accounting effect, before tax, of R$ 1.1 billion on fourth quarter ITAÚ UNIBANCO HOLDING's results.

 

ITAÚ UNIBANCO HOLDING’s major risk insurance operations are classified within the "Retail Banking" segment in these Financial Statements.

 

The sale of this operation reflects ITAÚ UNIBANCO HOLDING’s strategy of commercializing the mass-market insurance products typically related to retail banking.

 

h) Tecnologia Bancária S.A. (TECBAN) – New Shareholders’ Agreement

 

The subsidiaries of ITAÚ UNIBANCO HOLDING, in conjunction with other financial institutions, on July 17, 2014 signed a new Shareholders Agreement of TecBan 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 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201540
 

 

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 40 (forty) other banks are clients of TecBan. Consequently, this growth in the Banco24Horas Network will also significantly benefit these institutions and their respective customers.

 

The operation was approved by the Administrative Council for Economic Defense (CADE) on October 22, 2014, with no restrictions. The effective date of sale and settlement was November 14, 2014.

 

This operation had no significant accounting effects on the results of ITAÚ UNIBANCO HOLDING.

 

i) Maxi Pago

 

In September 2014 ITAU UNIBANCO HOLDING, through its subsidiary Rede (Redecard S.A.), entered into a share purchase agreement with the controlling parties of MaxiPago Serviços de Internet S.A., a payments gateway company featuring network interconnection for mobile electronic payments.

 

Approval was obtained from the Central Bank on December 15, 2014, and preconditions were fulfilled on January 8, 2015. This agreement provides for the acquisition of 35,261 common shares of MaxiPago, which represents 75% of total stock and voting capital.

 

The allocation of the difference between the amount paid and the allocation of net assets at fair value resulted in the recognition of a goodwill due to expected future profitability in the amount of R$ 10,5 million.

 

This operation had no significant effects on the results of ITAU UNIBANCO HOLDING.

 

j) MCC Securities and MCC Corredora de Bolsa

 

In July 2011 ITAÚ UNIBANCO HOLDING, through its subsidiary in Chile, entered into a share purchase agreement with MCC Inversiones Globales (MCC Inversiones) and MCC Beneficial Owners (Chilean Individuals), by which it agreed to gradually acquire the total shares of MCC Securities.

 

In June 2012 ITAÚ UNIBANCO HOLDING, through its subsidiary in Chile, entered into a share purchase agreement with MCC Inversiones Globales (MCC Inversiones) and MCC Beneficial Owners (Chilean Individuals), by which it agreed to gradually acquire the total shares of MCC Corredora de Bolsa.

 

In August 2014, the aforementioned parties entered into a new agreement for acquiring in advance the remaining shares of MCC Securities and MCC Corredora de Bolsa for amounts US$ 32.7 million and US$ 6.7 million respectively.

 

Accordingly, with this operation ITAÚ UNIBANCO HOLDING validates its relevant share in the Chilean private banking market, as it now fully consolidates MCC Securities and MCC Corredora de Bolsa in its financial statements from August 2014 onwards.

 

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 2015.

 

k) Via Varejo

 

On October 1, 2014 ITAU UNIBANCO HOLDING informed that, in view of the early termination by Via Varejo of the operating agreements for the offer of extended warranty insurance in the “Ponto Frio” and “Casas Bahia” stores, its subsidiary Itaú Seguros S.A. received from Via Varejo the cash amount of R$ 584 million, mainly related to the refund of amounts disbursed pursuant to these agreements, duly restated.

 

This operation had no significant effects on the results of ITAU UNIBANCO HOLDING.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201541
 

 

l) MasterCard Brasil Soluções de Pagamento Ltda.

 

Itaú Unibanco S.A., entered into an agreement with MasterCard Brasil Soluções de Pagamento Ltda. (“MasterCard”) to create an alliance in the payment solutions market in Brazil (“Strategic Alliance”).

 

Itaú Unibanco’s purposes when creating the Strategic Alliance are (a) to focus on the expansion of its issue and acquisition business, particularly related to the new payment solutions network, (b) to have access to new payment solutions technologies, (c) to obtain significant scale and efficiency gains, and (d) to benefit from MasterCard’s expertise in the management of payment solution brands.

 

The effectiveness of the Strategic Alliance is subject to the satisfaction of certain conditions precedent and approval by proper regulatory authorities.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201542
 

 

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:

 

   06/30/2015   12/31/2014 
Cash and deposits on demand   18,005    17,527 
Interbank deposits   20,368    13,939 
Securities purchased under agreements to resell   38,819    93,852 
Total   77,192    125,318 

 

Amounts related to interbank deposits and securities purchased under agreements to resell not included in cash equivalents are R$ 10,607 (R$ 9,142 at December 31, 2014) and R$ 125,265 (R$ 115,066 at December 31, 2014), respectively.

 

Note 5 - Central Bank compulsory deposits

 

   06/30/2015   12/31/2014 
Non-interest bearing deposits   4,199    3,392 
Interest-bearing deposits   55,958    59,714 
Total   60,157    63,106 

 

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

 

   06/30/2015   12/31/2014 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
 Interbank deposits   29,959    1,016    30,975    22,135    946    23,081 
Securities purchased under agreements to resell (*)    164,084    -    164,084    208,918    -    208,918 
Total   194,043    1,016    195,059    231,053    946    231,999 

(*) The amounts of R$ 7,589 (R$ 5,945 at December 31, 2014) 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$ 77,146 (R$ 88,716 at December 31, 2014) are pledged in guarantee of repurchase agreement transactions, in conformity with the policies described in Note 2.4f.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201543
 

 

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:

 

   06/30/2015   12/31/2014 
   Cost   Accumulated gain /
(loss) reflected in
income		   Fair value   Cost   Accumulated gain /
(loss) reflected in
income		   Fair value 
Investment funds   897    (22)   875    870    -    870 
Brazilian government securities (1a)   118,501    (268)   118,233    86,796    (403)   86,393 
Brazilian external debt bonds (1b)   3,947    16    3,963    1,894    20    1,914 
Government securities – abroad (1c)   1,199    49    1,248    1,502    38    1,540 
Argentina   804    44    848    594    34    628 
Chile   1    -    1    132    -    132 
Colombia   64    5    69    85    3    88 
United States   68    -    68    447    1    448 
Mexico   8    -    8    3    -    3 
Paraguay   133    -    133    128    -    128 
Uruguay   58    -    58    41    -    41 
Other   63    -    63    72    -    72 
Corporate securities (1d)   42,242    77    42,319    42,207    20    42,227 
Shares   2,298    (13)   2,285    2,383    (32)   2,351 
Bank deposit certificates   2,747    -    2,747    3,281    -    3,281 
Securitized real estate loans   -    -    -    1    -    1 
Debentures   4,901    72    4,973    4,203    40    4,243 
Eurobonds and other   886    18    904    1,049    12    1,061 
Financial credit bills   31,409    -    31,409    30,711    -    30,711 
Promissory notes   -    -    -    577    -    577 
Other   1    -    1    2    -    2 
Total (2)   166,786    (148)   166,638    133,269    (325)   132,944 

(1) Assets held for trading pledged as collateral of funding transactions of financial institutions and clients were: a) R$ 50,448 (R$ 36,544 at December 31, 2014), b) R$ 3,008 (R$ 531 at December 31, 2014), c) R$ 137 (R$ 249 at December 31, 2014) and d) R$ 613 (R$ 42 at December 31, 2014), totaling R$ 54,206 (R$ 37,366 at December 31, 2014).

 

(2) In the period, there was no reclassification of held for trading financial assets to other categories of financial assets.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201544
 

 

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

 

   06/30/2015   12/31/2014 
   Cost   Fair value   Cost   Fair value 
Current   55,248    55,236    53,436    53,451 
Non-stated maturity   3,195    3,160    3,253    3,220 
Up to one year   52,053    52,076    50,183    50,231 
Non-current   111,538    111,402    79,833    79,493 
From one to five years   63,764    63,750    57,278    57,074 
From five to ten years   43,036    42,932    16,400    16,279 
After ten years   4,738    4,720    6,155    6,140 
Total   166,786    166,638    133,269    132,944 

 

Financial assets held for trading include assets with a fair value of R$ 106,432 (R$ 97,184 at December 31, 2014) 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:

 

   06/30/2015 
   Cost   Accumulated gain/(loss)
reflected in income		   Fair value 
Brazilian external debt bonds   587    22    609 
Government securities – abroad   115    (4)   111 
Total   702    18    720 

 

   12/31/2014 
   Cost   Accumulated gain/(loss)
reflected in income		   Fair value 
Brazilian external debt bonds   601    25    626 
Government securities – abroad   109    (2)   107 
Total   710    23    733 

 

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

 

   06/30/2015   12/31/2014 
   Cost   Fair value   Cost   Fair value 
Current   587    609    468    493 
Up to one year   587    609    468    493 
Non-current   115    111    242    240 
From one to five years   115    111    242    240 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201545
 

 

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$ 4,098 (R$ 3,826 at December 31, 2014) and was basically comprised of government securities.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201546
 

 

The following table shows the composition of derivatives by index:

 

   Off-balance sheet
notional amount		   Amortized cost   Gains / (losses)   Fair value 
   06/30/2015   06/30/2015   06/30/2015   06/30/2015 
Futures contracts   442,187    (109)   128    19 
Purchase commitments   124,736    (199)   161    (38)
Commodities   252    (2)   -    (2)
Indices   49,089    (163)   (1)   (164)
Interbank market   28,710    35    -    35 
Foreign currency   43,733    (70)   162    92 
Securities   2,952    1    -    1 
Commitments to sell   317,451    90    (33)   57 
Commodities   319    -    -    - 
Indices   69,453    181    -    181 
Interbank market   137,279    (104)   -    (104)
Foreign currency   106,808    13    (33)   (20)
Securities   3,589    -    -    - 
Other   3    -    -    - 
Swap contracts   537,916    (7,022)   466    (6,556)
Asset position   265,447    4,108    1,290    5,398 
Indices   114,851    497    220    717 
Interbank market   54,390    268    484    752 
Foreign currency   12,153    1,956    81    2,037 
Floating rate   4,792    223    105    328 
Fixed rate   79,232    1,164    400    1,564 
Securities   20    -    -    - 
Other   9    -    -    - 
Liability position   272,469    (11,130)   (824)   (11,954)
Commodities   24    -    -    - 
Indices   76,920    (2,932)   (37)   (2,969)
Interbank market   35,855    115    (647)   (532)
Foreign currency   26,452    (3,472)   (108)   (3,580)
Floating rate   8,513    (118)   (181)   (299)
Fixed rate   124,467    (4,673)   140    (4,533)
Securities   97    (50)   9    (41)
Other   141    -    -    - 
Option contracts   493,305    148    (317)   (169)
Purchase commitments – long position   115,779    1,979    433    2,412 
Commodities   612    27    (5)   22 
Indices   54,370    69    7    76 
Interbank market   7,361    16    3    19 
Foreign currency   48,543    1,763    50    1,813 
Floating rate   10    -    -    - 
Fixed rate   3    -    -    - 
Securities   4,801    98    374    472 
Other   79    6    4    10 
Commitments to sell – long position   138,689    1,393    119    1,512 
Commodities   393    12    10    22 
Indices   67,191    57    (16)   41 
Interbank market   13,657    11    (11)   - 
Foreign currency   50,358    1,061    (294)   767 
Fixed rate   139    5    -    5 
Securities   6,912    247    429    676 
Other   39    -    1    1 
Purchase commitments – short position   103,799    (1,668)   (795)   (2,463)
Commodities   433    (13)   (5)   (18)
Indices   53,308    (153)   (12)   (165)
Interbank market   4,651    (8)   (7)   (15)
Foreign currency   41,321    (1,443)   (457)   (1,900)
Fixed rate   89    -    -    - 
Securities   3,918    (45)   (310)   (355)
Other   79    (6)   (4)   (10)
Commitments to sell – short position   135,038    (1,556)   (74)   (1,630)
Commodities   409    (25)   (14)   (39)
Indices   75,367    (213)   (12)   (225)
Interbank market   7,013    (14)   13    (1)
Foreign currency   45,943    (1,059)   342    (717)
Fixed rate   14    -    -    - 
Securities   6,253    (245)   (402)   (647)
Other   39    -    (1)   (1)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201547
 

 

   Off-balance sheet
notional amount		   Amortized cost   Gains / (losses)   Fair value 
   06/30/2015   06/30/2015   06/30/2015   06/30/2015 
Forward operations (onshore)   20,240    1,796    (4)   1,792 
Purchases receivable   1,299    1,405    (2)   1,403 
Floating rate   1,233    1,224    (2)   1,222 
Fixed rate   66    181    -    181 
Purchases payable   -    (1,290)   -    (1,290)
Floating rate   -    (1,224)   -    (1,224)
Fixed rate   -    (66)   -    (66)
Sales receivable   2,997    2,677    1    2,678 
Interbank market   287    1    1    2 
Floating rate   575    584    -    584 
Fixed rate   386    392    -    392 
Securities   1,749    1,700    -    1,700 
Sales deliverable   15,944    (996)   (3)   (999)
Interbank market   15,944    -    (3)   (3)
Floating rate   -    (584)   1    (583)
Fixed rate   -    (412)   (1)   (413)
Credit derivatives   10,718    12    (50)   (38)
Asset position   3,945    256    97    353 
Foreign currency   2,471    205    53    258 
Fixed rate   441    51    3    54 
Securities   855    -    34    34 
Other   178    -    7    7 
Liability position   6,773    (244)   (147)   (391)
Foreign currency   2,557    (183)   (62)   (245)
Fixed rate   1,995    (46)   (8)   (54)
Securities   2,096    (15)   (73)   (88)
Other   125    -    (4)   (4)
Forwards operations (offshore)   124,808    644    53    697 
Asset position   69,712    2,533    80    2,613 
Commodities   183    28    (5)   23 
Indices   108    -    -    - 
Foreign currency   69,352    2,500    85    2,585 
Securities   69    5    -    5 
Liability position   55,096    (1,889)   (27)   (1,916)
Commodities   336    (35)   (5)   (40)
Indices   7    -    -    - 
Foreign currency   54,749    (1,854)   (22)   (1,876)
Securities   4    -    -    - 
Swap with USD check   1,784    (362)   (31)   (393)
Asset position – interbank market   711    -    -    - 
Liability position - foreign currency   1,073    (362)   (31)   (393)
Check of swap – asset position - foreign currency   1,060    19    165    184 
Other derivative financial instruments   12,870    (5)   43    38 
Asset position   11,636    2,323    551    2,874 
Foreign currency   7,350    2,234    454    2,688 
Fixed rate   777    35    3    38 
Securities   3,360    54    91    145 
Other   149    -    3    3 
Liability position   1,234    (2,328)   (508)   (2,836)
Foreign currency   253    (2,328)   (488)   (2,816)
Securities   830    -    (15)   (15)
Other   151    -    (5)   (5)
    Asset    16,584    2,862    19,446 
    Liability    (21,463)   (2,409)   (23,872)
    Total    (4,879)   453    (4,426)

 

Derivative contracts mature as follows (in days):

 

Off-balance sheet – notional amount  0 - 30   31 - 180   181 - 365   Over 365   06/30/2015 
Futures contracts   78,556    134,136    65,756    163,739    442,187 
Swaps contracts - difference payable   4,284    30,307    31,844    194,904    261,339 
Options   196,631    224,784    51,492    20,398    493,305 
Forwards (onshore)   2,986    4,450    9,451    3,353    20,240 
Credit derivatives   -    703    1,203    8,812    10,718 
Forwards (offshore)   37,967    58,797    21,112    6,932    124,808 
Swaps with USD check   -    117    5    589    711 
Check of swap   -    173    7    880    1,060 
Other derivative financial instruments   711    2,069    1,137    8,953    12,870 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201548
 

 

The following table shows the composition of derivatives by index:

 

   Off-balance sheet
notional amount		   Amortized cost   Gains / (losses)   Fair value 
   12/31/2014   12/31/2014   12/31/2014   12/31/2014 
Futures contracts   331,022    (375)   21    (354)
Purchase commitments   97,931    (694)   48    (646)
Commodities   157    -    -    - 
Indices   43,126    (624)   (9)   (633)
Interbank market   29,994    49    -    49 
Foreign currency   17,797    (119)   57    (62)
Fixed rate   41    -    -    - 
Securities   6,811    -    -    - 
Other   5    -    -    - 
Commitments to sell   233,091    319    (27)   292 
Commodities   341    -    -    - 
Indices   19,289    311    5    316 
Interbank market   82,595    (117)   1    (116)
Foreign currency   123,068    125    (33)   92 
Securities   7,798    -    -    - 
Swap contracts        (5,132)   414    (4,718)
Asset position   270,219    4,011    805    4,816 
Indices   103,921    588    137    725 
Interbank market   68,534    345    456    801 
Foreign currency   12,057    1,323    70    1,393 
Floating rate   3,763    115    77    192 
Fixed rate   81,917    1,640    65    1,705 
Securities   16    -    -    - 
Other   11    -    -    - 
Liability position   275,351    (9,143)   (391)   (9,534)
Commodities   25    -    -    - 
Indices   72,197    (2,510)   39    (2,471)
Interbank market   51,284    (71)   (601)   (672)
Foreign currency   24,796    (2,359)   155    (2,204)
Floating rate   5,665    (74)   (129)   (203)
Fixed rate   121,048    (4,065)   131    (3,934)
Securities   88    (41)   12    (29)
Other   248    (23)   2    (21)
Option contracts   503,836    (93)   (92)   (185)
Purchase commitments – long position   88,641    1,120    853    1,973 
Commodities   614    17    (2)   15 
Indices   35,438    102    (22)   80 
Interbank market   12,430    48    34    82 
Foreign currency   36,918    898    566    1,464 
Floating rate   8    -    -    - 
Fixed rate   2    -    -    - 
Securities   3,153    49    268    317 
Other   78    6    9    15 
Commitments to sell – long position   142,059    1,049    (150)   899 
Commodities   176    6    7    13 
Indices   77,500    163    (1)   162 
Interbank market   23,359    44    (42)   2 
Foreign currency   30,936    625    (419)   206 
Floating rate   163    1    (1)   - 
Fixed rate   114    5    -    5 
Securities   9,778    205    305    510 
Other   33    -    1    1 
Purchase commitments – short position   88,218    (1,136)   (910)   (2,046)
Commodities   433    (8)   (1)   (9)
Indices   38,388    (73)   (15)   (88)
Interbank market   7,380    (33)   (31)   (64)
Foreign currency   34,500    (990)   (579)   (1,569)
Fixed rate   68    -    -    - 
Securities   7,371    (26)   (275)   (301)
Other   78    (6)   (9)   (15)
Commitments to sell – short position   184,918    (1,126)   115    (1,011)
Commodities   328    (18)   (25)   (43)
Indices   123,694    (92)   (90)   (182)
Interbank market   20,849    (24)   23    (1)
Foreign currency   30,937    (801)   506    (295)
Fixed rate   3    -    -    - 
Securities   9,074    (191)   (298)   (489)
Other   33    -    (1)   (1)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201549
 

 

   Off-balance sheet
notional amount		   Amortized cost   Gains / (losses)   Fair value 
   12/31/2014   12/31/2014   12/31/2014   12/31/2014 
Forwards operations (onshore)   7,939    1,723    (11)   1,712 
Purchases receivable   162    163    1    164 
Floating rate   66    65    1    66 
Fixed rate   94    96    -    96 
Securities   2    2    -    2 
Purchases payable   -    (162)   -    (162)
Floating rate   -    (65)   -    (65)
Fixed rate   -    (95)   -    (95)
Securities   -    (2)   -    (2)
Sales receivable   2,201    2,231    (1)   2,230 
Floating rate   122    124    -    124 
Fixed rate   386    462    -    462 
Securities   1,693    1,645    (1)   1,644 
Sales deliverable   5,576    (509)   (11)   (520)
Interbank market   5,576    -    (8)   (8)
Floating rate   -    (124)   (2)   (126)
Fixed rate   -    (385)   (1)   (386)
Credit derivatives   11,161    25    (82)   (57)
Asset position   6,804    178    (56)   122 
Foreign currency   1,806    118    (68)   50 
Fixed rate   3,932    59    (28)   31 
Securities   826    1    34    35 
Other   240    -    6    6 
Liability position   4,357    (153)   (26)   (179)
Foreign currency   1,790    (110)   57    (53)
Fixed rate   563    (31)   19    (12)
Securities   1,935    (12)   (101)   (113)
Other   69    -    (1)   (1)
Forwards operations (offshore)   101,874    336    77    413 
Asset position   54,432    2,078    28    2,106 
Commodities   182    14    1    15 
Foreign currency   54,212    2,061    27    2,088 
Securities   38    3    -    3 
Liability position   47,442    (1,742)   49    (1,693)
Commodities   152    (24)   6    (18)
Foreign currency   47,290    (1,717)   43    (1,674)
Securities   -    (1)   -    (1)
Swap with USD check   1,629    (209)   (20)   (229)
Asset position – interbank market   710    -    -    - 
Liability position - foreign currency   919    (209)   (20)   (229)
Check of swap – asset position - foreign currency   908    -    93    93 
Other derivative financial instruments   11,276    109    22    131 
Asset position   6,817    1,504    249    1,753 
Foreign currency   2,647    1,399    183    1,582 
Fixed rate   628    42    (26)   16 
Securities   3,454    63    91    154 
Other   88    -    1    1 
Liability position   4,459    (1,395)   (227)   (1,622)
Foreign currency   3,474    (1,395)   (209)   (1,604)
Securities   766    -    (14)   (14)
Other   219    -    (4)   (4)
    Asset    12,334    1,822    14,156 
    Liability    (15,950)   (1,400)   (17,350)
    Total    (3,616)   422    (3,194)

 

Derivative contracts mature as follows (in days):

 

Off-balance sheet - notional amount  0 - 30   31 - 180   181 - 365   Over 365   12/31/2014 
Futures contracts   26,358    119,027    47,279    138,358    331,022 
Swaps contracts - difference payable   13,374    72,365    22,292    158,177    266,208 
Options   231,624    203,454    52,421    16,337    503,836 
Forwards (onshore)   2,325    4,455    838    321    7,939 
Credit derivatives   291    2,757    500    7,613    11,161 
Forwards (offshore)   36,297    42,057    16,510    7,010    101,874 
Swap with USD check   -    -    122    588    710 
Check of swap   -    -    155    753    908 
Other derivative financial instruments   171    868    1,785    8,452    11,276 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 201550
 

  

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.

 

   06/30/2015 
   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   19    0.2    160    (69)   (19)   26    (6)   (73)
Swaps – difference receivable   5,398    27.8    97    157    116    287    1,596    3,145 
BM&FBOVESPA   401    2.1    13    31    14    38    108    197 
Companies   3,528    18.1    73    73    68    179    987    2,148 
Financial institutions   1,278    6.6    3    39    25    106    397    708 
Individuals   191    1.0    8    14    9    (36)   104    92 
Option premiums   3,924    20.1    617    767    574    1,124    334    508 
BM&FBOVESPA   1,311    6.7    284    159    232    624    6    6 
Companies   876    4.5    64    97    70    151    166    328 
Financial institutions   1,737    8.9    269    511    272    349    162    174 
Forwards (onshore)   4,081    20.9    2,728    657    668    28    -    - 
BM&FBOVESPA   1,701    8.7    439    611    627    24    -    - 
Companies   1,602    8.2    1,511    46    41    4    -    - 
Financial institutions   778    4.0    778    -    -    -    -    - 
Credit derivatives - financial Institutions   353    1.8    -    -    3    2    10    338 
Forwards (offshore)   2,613    13.4    377    675    589    644    126    202 
Companies   1,189    6.1    162    222    338    209    102    156 
Financial institutions   1,423    7.3    215    452    251    435    24    46 
Individuals   1    0.0    -    1    -    -    -    - 
Check of swap – companies   184    1.0    -    18    -    1    65    100 
Other   2,874    14.8    694    3    1,063    41    60    1,013 
Companies   245    1.3    1    3    10    41    48    142 
Financial institutions   2,629    13.5    693    -    1,053    -    12    871 
Total (*)   19,446    100.0    4,673    2,208    2,994    2,153    2,185    5,233 
% per maturity term             24.0    11.4    15.4    11.1    11.2    26.9 

(*) Of the total asset portfolio of Derivative Financial Instruments, R$ 12,028 refers to current and R$ 7,418 to non-current.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 51
 

  

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.

 

   12/31/2014 
   Fair value   %   0-30
days		   31-90
days		   91-180
days		   181-365
days		   366-720
days		   Over 720
days		 
Assets                                        
Swaps – difference receivable   4,816    34.0    448    150    429    233    643    2,913 
BM&FBOVESPA   109    0.8    1    22    12    8    11    55 
Companies   2,961    20.8    278    62    186    125    461    1,849 
Financial institutions   1,354    9.6    165    53    38    75    128    895 
Individuals   392    2.8    4    13    193    25    43    114 
Option premiums   2,872    20.2    481    738    384    598    308    363 
BM&FBOVESPA   1,713    12.0    140    246    1,138    165    23    1 
Companies   (453)   (3.2)   37    45    (1,010)   143    140    192 
Financial institutions   1,611    11.4    304    447    255    290    145    170 
Individuals   1    0.0    -    -    1    -    -    - 
Forwards (onshore)   2,394    16.9    846    832    714    2    -    - 
BM&FBOVESPA   1,646    11.6    163    796    685    2    -    - 
Companies   406    2.9    341    36    29    -    -    - 
Financial institutions   342    2.4    342    -    -    -    -    - 
Credit derivatives - financial institutions   122    0.9    -    -    1    6    8    107 
Forwards (offshore)   2,106    14.9    631    519    287    406    149    114 
Companies   914    6.5    101    280    152    195    94    92 
Financial institutions   1,190    8.4    530    237    135    211    55    22 
Individuals   2    0.0    -    2    -    -    -    - 
Check of swap – companies   93    0.7    -    -    -    7    -    86 
Other   1,753    12.4    2    16    3    986    69    677 
Companies   211    1.5    1    3    3    10    59    135 
Financial institutions   1,542    10.9    1    13    -    976    10    542 
Total (*)   14,156    100.0    2,408    2,255    1,818    2,238    1,177    4,260 
% per maturity term             17.0    15.9    12.8    15.8    8.3    30.1 

(*) Of the total asset portfolio of Derivative Financial Instruments, R$ 8,719 refers to current and R$ 5,437 to non-current.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 52
 

  

   06/30/2015 
   Fair value   %   0 - 30 days   31 - 90
days		   91 - 180
days		   181 - 365
days		   366 - 720
days		   Over 720
days		 
Liabilities                                        
Swaps – Difference payable   (11,954)   50.1    (261)   (327)   (748)   (580)   (1,721)   (8,317)
BM&FBOVESPA   (1,089)   4.6    (3)   (76)   (15)   (42)   (387)   (566)
Companies   (3,896)   16.3    (245)   (180)   (587)   (317)   (708)   (1,859)
Financial institutions   (1,925)   8.1    (8)   (62)   (131)   (182)   (178)   (1,364)
Individuals   (5,044)   21.1    (5)   (9)   (15)   (39)   (448)   (4,528)
Option premiums   (4,093)   17.0    (506)   (882)   (820)   (963)   (401)   (521)
BM&FBOVESPA   (1,299)   5.4    (170)   (146)   (503)   (466)   (8)   (6)
Companies   (531)   2.2    (14)   (77)   (24)   (102)   (144)   (170)
Financial institutions   (2,261)   9.4    (322)   (659)   (293)   (393)   (249)   (345)
Individuals   (2)   0.0    -    -    -    (2)   -    - 
Forwards (onshore)   (2,289)   9.5    (2,286)   -    -    (2)   (1)   - 
BM&FBOVESPA   (3)   0.0    -    -    -    (2)   (1)   - 
Companies   (1,507)   6.3    (1,507)   -    -    -    -    - 
Financial institutions   (779)   3.2    (779)   -    -    -    -    - 
Credit derivatives   (391)   1.7    -    (17)   (2)   (19)   (5)   (348)
Companies   (15)   0.1    -    (15)   -    -    -    - 
Financial institutions   (376)   1.6    -    (2)   (2)   (19)   (5)   (348)
Forwards (offshore)   (1,916)   8.0    (356)   (538)   (414)   (381)   (140)   (87)
Companies   (1,193)   5.0    (181)   (272)   (283)   (277)   (120)   (60)
Financial institutions   (719)   3.0    (174)   (264)   (130)   (104)   (20)   (27)
Individuals   (4)   0.0    (1)   (2)   (1)   -    -    - 
Swaps with USD check - Companies   (393)   1.6    -    (59)   -    (3)   -    (331)
Other   (2,836)   12.1    (696)   (1)   (1,175)   (3)   (19)   (942)
Companies   (584)   2.7    -    (1)   (1)   (3)   (7)   (572)
Financial institutions   (2,252)   9.4    (696)   -    (1,174)   -    (12)   (370)
Total (*)   (23,872)   100.0    (4,105)   (1,824)   (3,159)   (1,951)   (2,287)   (10,546)
% per maturity term             17.2    7.6    13.2    8.2    9.6    44.1 

(*) Of the total liability portfolio of Derivative Financial Instruments, R$ (11,039) refers to current and R$ (12,833) to non-current.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 53
 

  

   12/31/2014 
   Fair value   %   0 - 30 days   31 - 90
days		   91 - 180
days		   181 - 365
days		   366 - 720
days		   Over 720
days		 
Liabilities                                        
Futures - BM&FBOVESPA   (354)   2.0    29    150    (192)   (207)   (63)   (71)
Swaps – difference payable   (9,534)   55.0    (241)   (335)   (706)   (720)   (778)   (6,754)
BM&FBOVESPA   (367)   2.1    (2)   (20)   (144)   (8)   (15)   (178)
Companies   (3,825)   22.1    (209)   (247)   (355)   (536)   (520)   (1,958)
Financial institutions   (1,552)   9.0    (27)   (40)   (47)   (161)   (155)   (1,122)
Individuals   (3,790)   21.8    (3)   (28)   (160)   (15)   (88)   (3,496)
Option premiums   (3,057)   17.6    (431)   (761)   (534)   (558)   (353)   (420)
BM&FBOVESPA   (545)   3.1    (121)   (194)   (127)   (60)   (43)   - 
Companies   (378)   2.2    (9)   (27)   (19)   (55)   (100)   (168)
Financial institutions   (2,133)   12.3    (300)   (540)   (388)   (443)   (210)   (252)
Individuals   (1)   0.0    (1)   -    -    -    -    - 
Forwards (onshore)   (682)   4.0    (681)   (1)   -    -    -    - 
BM&FBOVESPA   (8)   0.1    (7)   (1)   -    -    -    - 
Companies   (332)   1.9    (332)   -    -    -    -    - 
Financial institutions   (342)   2.0    (342)   -    -    -    -    - 
Credit derivatives   (179)   1.1    -    (1)   -    (14)   (39)   (125)
Companies   (13)   0.1    -    -    -    (13)   -    - 
Financial institutions   (166)   1.0    -    (1)   -    (1)   (39)   (125)
Forwards (offshore)   (1,693)   9.7    (404)   (472)   (352)   (343)   (78)   (44)
Companies   (867)   5.0    (146)   (272)   (139)   (214)   (62)   (34)
Financial institutions   (823)   4.7    (258)   (199)   (211)   (129)   (16)   (10)
Individuals   (3)   0.0    -    (1)   (2)   -    -    - 
Swaps with USD check – companies   (229)   1.3    -    -    -    (36)   -    (193)
Other   (1,622)   9.3    -    -    (1)   (1,002)   (17)   (602)
Companies   (278)   1.6    -    -    (1)   (2)   (7)   (268)
Financial institutions   (1,344)   7.7    -    -    -    (1,000)   (10)   (334)
Total (*)   (17,350)   100.0    (1,728)   (1,420)   (1,785)   (2,880)   (1,328)   (8,209)
% per maturity term             10.0    8.2    10.3    16.6    7.7    47.3 

(*) Of the total liability portfolio of Derivative Financial Instruments, R$ (7,813) refers to current and R$ (9,537) to non-current.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 54
 

  

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.

 

   06/30/2015 
   Maximum potential
of future
payments, gross		   Before 1 year   From 1 to 3
years		   From 3 to 5
years		   Over 5
years		 
By instrument                         
CDS   7,587    1,782    2,243    2,988    574 
TRS   15    15    -    -    - 
Total by instrument   7,602    1,797    2,243    2,988    574 
By risk rating                         
Investment grade   7,602    1,797    2,243    2,988    574 
Total by risk   7,602    1,797    2,243    2,988    574 
By reference entity                         
Private entities   7,602    1,797    2,243    2,988    574 
Total by entity   7,602    1,797    2,243    2,988    574 

 

   12/31/2014 
   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   6,829    1,578    2,341    2,644    266 
TRS   1,671    1,671    -    -    - 
Total by instrument   8,500    3,249    2,341    2,644    266 
By risk rating                         
Investment grade   8,500    3,249    2,341    2,644    266 
Total by risk   8,500    3,249    2,341    2,644    266 
By reference entity                         
Private entities   8,500    3,249    2,341    2,644    266 
Total by entity   8,500    3,249    2,341    2,644    266 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 55
 

  

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.

 

   06/30/2015 
   Notional amount of credit
protection sold		   Notional amount of credit protection
purchased with identical underlying
amount		   Net position 
CDS   (7,587)   3,116    (4,471)
TRS   (15)   -    (15)
Total   (7,602)   3,116    (4,486)

 

   12/31/2014 
   Notional amount of credit
protection sold		   Notional amount of credit protection
purchased with identical underlying
amount		   Net position 
CDS   (6,829)   2,661    (4,168)
TRS   (1,671)   -    (1,671)
Total   (8,500)   2,661    (5,839)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 56
 

  

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

 

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

 

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

 

   06/30/2015 
   Gross amount of
recognized financial		   Gross amount offset in the   Net amount of financial assets
presented in the statement of		   Related amounts not offset in the statement of financial
position (2)		     
   assets (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral received   Net amount 
Securities purchased under agreements to resell   164,084    -    164,084    (471)   -    163,613 
Derivatives   19,446    -    19,446    (6,197)   (223)   13,026 

 

   12/31/2014 
   Gross amount of
recognized financial		   Gross amount offset in the   Net amount of financial assets
presented in the statement of		   Related amounts not offset in the statement of financial
position (2)		     
   assets (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral received   Net amount 
Securities purchased under agreements to resell   208,918    -    208,918    -    -    208,918 
Derivatives   15,039    (883)   14,156    (4,059)   -    10,097 

 

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

 

   06/30/2015 
   Gross amount of
recognized financial		   Gross amount offset in the   Net amount of financial liabilities
presented in the statement of		   Related amounts not offset in the statement of financial
position (2)		     
   liabilities (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral pledged   Net amount 
Securities sold under repurchase agreements   280,659    -    280,659    (15,135)   -    265,524 
Derivatives   23,872    -    23,872    (6,197)   -    17,675 

 

   12/31/2014 
   Gross amount of
recognized financial		   Gross amount offset in the   Net amount of financial liabilities
presented in the statement of		   Related amounts not offset in the statement of financial
position (2)		     
   liabilities (1)   statement of financial position   financial position   Financial instruments (3)   Cash collateral pledged   Net amount 
Securities sold under repurchase agreements   288,683    -    288,683    (14,382)   -    274,301 
Derivatives   17,350    -    17,350    (4,059)   (55)   13,236 

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

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

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

 

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

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 57
 

  

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

 

In order to hedge the variability of future cash flows of interest payments and the exposure to future foreign exchange rate, ITAÚ UNIBANCO HOLDING uses Futures contracts, traded on BM&FBOVESPA and the Chicago Stock Exchange with respect to certain real - denominated variable-interest liabilities and US dollar - denominated variable-interest liabilities, Euro Dollar futures and interest rate swaps with respect to US dollar-denominated redeemable preferred shares issued by one of our subsidiaries, and DDI Future contracts traded on BM&FBOVESPA with respect to US dollar denominated highly probable expected transactions.

 

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 and and Euro Dollar futures, 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, NDF and Forward contracts is calculated by the difference between two periods of the market quotation between the US dollar and local currency.

 

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.
·Hedge of Syndicated Loan: hedge the variability in cash flow of interest payments resulting from changes in the LIBOR interest rate.

 

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

 

Hedge relationships were designated in 2008, 2009, 2010, 2013 and 2014, and related derivatives will mature between 2015 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 Syndicated Loan: interest paid/received daily.

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 58
 

  

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. dollars, 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 59
 

  

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

 

   06/30/2015   12/31/2014 
Hedge instruments  Accumulated
effective portion		   Ineffective portion   Accumulated
effective portion		   Ineffective portion 
Interest rate futures   1,113    39    793    45 
Interest rate swap   -    -    66    - 
Total   1,113    39    859    45 

 

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.

 

ITAÚ UNIBANCO HOLDING entered into Futures DDI contracts on BM&FBOVESPA maturing during 2014 to protect the future cash flows of highly probable anticipated transactions, arising from future contractual agreements in foreign currency against the exposure to future foreign exchange rates. During the second quarter of 2015, the cash flow of these contracts was realized, and, accordingly, these Asset Valuation Adjustments were reclassified and included in the initial cost of assets related to the Hedge of Highly Probable Anticipated Transaction.

 

At June 30, 2015, 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$ 456 (R$ (75) at June 30,2014).

 

b) Hedge of a net investment in foreign operations

 

   06/30/2015   12/31/2014 
Hedge instrument  Accumulated
effective portion		   Ineffective portion   Accumulated
effective portion		   Ineffective portion 
                     
DDI futures   (7,107)   15    (4,641)   25 
Forward   494    30    297    22 
NDF   1,790    11    1,280    5 
Financial assets   7    -    (14)   - 
Total   (4,816)   56    (3,078)   52 

 

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

 

   06/30/2015   12/31/2014 
Hedge instrument used  Accumulated
effective portion		   Ineffective portion   Accumulated
effective portion		   Ineffective portion 
                     
Interest rate swap   (63)   -    (60)   - 
Total   (63)   -    (60)   - 

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 60
 

  

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:

 

   06/30/2015   12/31/2014 
   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   51,431    (71)   51,431    53,198    (92)   53,198 
Hedge of redeemable preferred shares   -    -    -    1,044    66    1,044 
Hedge of syndicated loan   6,515    (73)   6,515    5,578    (15)   5,578 
Hedge of highly probable anticipated transaction   -    -    -    81    -    83 
Hedge of net investment in foreign operations (*)   18,405    95    10,529    14,764    296    8,858 
Hedge of fixed rate loan operations   3,416    66    3,416    2,612    40    2,612 
Hedge of structured funding   621    -    621    531    -    531 
Total   80,388    17    72,512    77,808    295    71,904 

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

 

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

 

    Strategies    
Maturity   Hedge of deposits and
repurchase agreements		   Hedge of net
investment in foreign
operations (*)		   Hedge of fixed rate
loan operations		   Hedge of
structured
funding		   Hedge of
syndicated
loan		   Total 
 2015    1,658    18,405    -    -    -    20,063 
 2016    7,868    -    276    621    -    8,765 
 2017    18,103    -    225    -    6,515    24,843 
 2018    21,209    -    428    -    -    21,637 
 2019    2,101    -    714    -    -    2,815 
 2020    174    -    75    -    -    249 
 2021    318    -    -    -    -    318 
 2022    -    -    186    -    -    186 
 2023    -    -    178    -    -    178 
 2025    -    -    45    -    -    45 
 2027    -    -    165    -    -    165 
 2028    -    -    502    -    -    502 
 2029    -    -    404    -    -    404 
 2030    -    -    218    -    -    218 
 Total    51,431    18,405    3,416    621    6,515    80,388 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 61
 

  

Note 10 – Available-for-sale financial assets

  

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

 

   06/30/2015   12/31/2014 
   Cost   Accumulated gain /
(loss) reflected in other
comprehensive income		   Fair value   Cost   Accumulated gain /
(loss) reflected in other
comprehensive income		   Fair value 
Investment funds   1,370    (35)   1,335    136    5    141 
Brazilian external debt bonds (1b)   13,137    (330)   12,807    11,247    (13)   11,234 
Brazilian government securities (1a)   12,457    (166)   12,291    14,791    (400)   14,391 
Government securities – abroad (1c)   9,154    (66)   9,088    8,692    (73)   8,619 
Argentina   1    -    1    -    -    - 
Belgium   -    -    -    57    -    57 
Chile   1,010    3    1,013    1,128    (9)   1,119 
Korea   1,625    -    1,625    1,782    -    1,782 
Denmark   3,029    -    3,029    2,699    -    2,699 
Spain   307    -    307    783    -    783 
United States   1,139    2    1,141    726    -    726 
France   191    2    193    131    2    133 
Netherlands   168    2    170    149    2    151 
Italy   -    -    -    70    -    70 
Paraguay   1,382    (72)   1,310    911    (62)   849 
Uruguay   294    (2)   292    249    (6)   243 
Other   8    (1)   7    7    -    7 
Corporate securities (1d)   45,505    248    45,753    43,917    58    43,975 
Shares   2,398    39    2,437    1,982    17    1,999 
Rural product note   1,330    (14)   1,316    1,431    (23)   1,408 
Bank deposit certificates   1,475    1    1,476    1,281    -    1,281 
Securitized real estate loans   2,321    32    2,353    2,489    33    2,522 
Debentures   20,544    136    20,680    20,187    58    20,245 
Eurobonds and others   8,396    44    8,440    6,672    35    6,707 
Financial bills   7,553    (57)   7,496    8,063    (58)   8,005 
Promissory notes   1,086    1    1,087    1,398    (1)   1,397 
Other   402    66    468    414    (3)   411 
Total (2)   81,623    (349)   81,274    78,783    (423)   78,360 

(1) Available-for-sale assets pledged as collateral of funding of financial institutions and Clients were: a) R$ 3,364 (R$ 10,321 at December 31, 2014), b) R$ 6,347 (R$ 2,081 at December 31, 2014), c) R$ 309 (R$ 8 at December 31, 2014) and d) R$ 175 (R$ 9,840 at December 31, 2014), totaling R$ 10,195 (R$ 22,250 at December 31, 2014).

(2) In the period, there was no reclassification of available-for-sale financial assets to other categories of financial assets.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 62
 

  

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

 

   06/30/2015   12/31/2014 
   Cost   Fair value   Cost   Fair value 
Current   20,486    20,526    22,176    22,220 
Non-stated maturity   3,767    3,771    2,118    2,141 
Up to one year   16,719    16,755    20,058    20,079 
Non-current   61,137    60,748    56,607    56,140 
From one to five years   33,792    33,873    29,853    29,743 
From five to ten years   15,093    14,861    12,779    12,650 
After ten years   12,252    12,014    13,975    13,747 
Total   81,623    81,274    78,783    78,360 

 

Note 11 - Held-to maturity financial assets

 

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

 

   06/30/2015   12/31/2014 
   Amortized cost    Amortized cost  
Corporate securities   16,107    13,549 
Brazilian external debt bonds (1)   11,893    10,304 
Brazilian government securities   11,066    10,555 
Government securities – abroad   12    26 
Total (2)   39,078    34,434 

 

(1) Held-to-maturity financial assets pledged as collateral of funding transactions of financial institutions and clients were R$ 5,397 (R$ 6,102 at December 31, 2014).

(2) In the period, there was no reclassification of held-to maturity financial assets to other categories of financial assets.

 

The interest income from held-to-maturity financial assets was R$ 1,750 (R$ 870 from 01/01 to 06/30/2014).

 

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:

 

   06/30/2015   12/31/2014 
   Amortized cost   Amortized cost 
Current   932    980 
Up to one year   932    980 
Non-current   38,146    33,454 
From one to five years   14,957    13,609 
From five to ten years   15,869    11,582 
After ten years   7,320    8,263 
Total   39,078    34,434 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 63
 

  

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  06/30/2015   12/31/2014 
         
Individuals   187,098    185,953 
Credit card   56,247    59,321 
Personal loan   29,532    27,953 
Payroll loans   45,513    40,525 
Vehicles   23,871    29,047 
Mortgage loans   31,935    29,107 
           
Corporate   145,141    144,910 
           
Small and medium businesses   79,243    79,912 
           
Foreign loans - Latin America   46,521    41,656 
Total loan operations and lease operations   458,003    452,431 
           
Allowance for loan and lease losses   (24,097)   (22,392)
           
Total loan operations and lease operations, net of allowance for loan and lease losses   433,906    430,039 

 

By maturity  06/30/2015   12/31/2014 
Overdue as from 1 day   18,172    13,074 
Falling due up to 3 months   121,232    128,365 
Falling due more than 3 months but less than 1 year   107,550    111,092 
Falling due after 1 year   211,049    199,900 
Total loan operations and lease operations   458,003    452,431 

 

By concentration  06/30/2015   12/31/2014 
Largest debtor   4,858    4,032 
10 largest debtors   24,922    23,646 
20 largest debtors   36,481    35,325 
50 largest debtors   57,608    58,180 
100 largest debtors   78,392    79,617 

 

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$ 870 and R$ 711 in interest and similar income as of June 30, 2015 and 2014, respectively, with the same impact on the allowance for loan and lease losses expenses.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 64
 

  

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
12/31/2014		   Write-offs   Net increase /
(Reversal)		   Closing
balance
06/30/2015		 
Individuals   13,385    (5,961)   6,188    13,612 
Credit card   3,740    (2,149)   2,103    3,694 
Personal loans   7,024    (2,708)   3,224    7,540 
Payroll loans   1,107    (278)   424    1,253 
Vehicles   1,469    (799)   406    1,076 
Mortgage loans   45    (27)   31    49 
Corporate   2,926    (1,421)   3,272    4,777 
Small and medium businesses   5,373    (2,167)   1,716    4,922 
Foreign loans - Latin America   708    (241)   319    786 
Total   22,392    (9,790)   11,495    24,097 

 

Composition of the carrying amount by class of assets  Opening
balance
12/31/2013		   Write-offs   Net increase /
 (Reversal)		   Closing
balance
12/31/2014		 
Individuals   13,853    (12,668)   12,200    13,385 
Credit card   2,952    (3,784)   4,572    3,740 
Personal loans   6,488    (5,150)   5,686    7,024 
Payroll loans   1,133    (429)   403    1,107 
Vehicles   3,245    (3,254)   1,478    1,469 
Mortgage loans   35    (51)   61    45 
Corporate   1,783    (672)   1,815    2,926 
Small and medium businesses   6,085    (4,992)   4,280    5,373 
Foreign loans - Latin America   514    (343)   537    708 
Total   22,235    (18,675)   18,832    22,392 

 

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

 

   06/30/2015   12/31/2014 
Public sector   2    6 
Industry and commerce   4,950    4,146 
Services   3,910    3,682 
Natural resources   727    391 
Other sectors   17    16 
Individuals   14,491    14,151 
Total   24,097    22,392 

 

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).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 65
 

  

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:

 

   06/30/2015   12/31/2014 
   Impaired   Not impaired   Total   Impaired   Not impaired   Total 
   Loan   Allowance   Loan   Allowance   Loan   Allowance   Loan   Allowance   Loan   Allowance   Loan   Allowance 
I – Individually evaluated                                                            
                                                             
Corporate (*)   10,034    4,173    135,107    604    145,141    4,777    3,749    1,731    141,161    1,195    144,910    2,926 
                                                             
II- Collectively                                                            
evaluated                                                            
                                                             
Individuals   9,773    5,516    177,325    8,096    187,098    13,612    9,727    5,641    176,226    7,744    185,953    13,385 
Credit card   3,314    1,945    52,933    1,749    56,247    3,694    3,332    1,944    55,989    1,796    59,321    3,740 
Personal loans   4,111    2,784    25,421    4,756    29,532    7,540    3,886    2,619    24,067    4,405    27,953    7,024 
Payroll loans   935    183    44,578    1,070    45,513    1,253    626    163    39,899    944    40,525    1,107 
Vehicles   1,100    585    22,771    491    23,871    1,076    1,633    897    27,414    572    29,047    1,469 
Mortgage loans   313    19    31,622    30    31,935    49    250    18    28,857    27    29,107    45 
                                                             
Small and medium businesses   2,959    2,149    76,284    2,773    79,243    4,922    3,225    2,640    76,687    2,733    79,912    5,373 
                                                             
Foreign loans - Latin America   559    303    45,962    483    46,521    786    505    267    41,151    441    41,656    708 
                                                             
Total   23,325    12,141    434,678    11,956    458,003    24,097    17,206    10,279    435,225    12,113    452,431    22,392 

(*) 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 66
 

  

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:

 

   06/30/2015 
   Minimum future   Future financial   Present 
   payments   income   value 
Current   3,473    (723)   2,750 
Up to 1 year   3,473    (723)   2,750 
Non-current   3,726    (1,034)   2,692 
From 1 to 5 years   3,494    (1,000)   2,494 
Over 5 years   232    (34)   198 
Total   7,199    (1,757)   5,442 

 

   12/31/2014 
   Minimum future   Future financial   Present 
   payments   income   value 
Current   4,109    (713)   3,396 
Up to 1 year   4,109    (713)   3,396 
Non-current   4,133    (1,089)   3,044 
From 1 to 5 years   3,947    (1,061)   2,886 
Over 5 years   186    (28)   158 
Total   8,242    (1,802)   6,440 

 

The allowance for loan and lease losses related to the lease portfolio amounts to: R$ 224 (R$ 302 at December 31, 2014).

 

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, 2015 and December 31, 2014:

 

   06/30/2015   12/31/2014 
   Assets   Liabilities (*)   Assets   Liabilities (*) 
Nature of operation  Book
value		   Fair
value		   Book
value		   Fair
value		   Book
value		   Fair
value		   Book
value		   Fair
value		 
Companies – working capital   2,821    2,821    2,821    2,821    1,106    1,106    1,106    1,106 
Individuals – mortgage loan   3,087    3,076    3,086    3,063    3,439    3,433    3,438    3,418 
Total   5,908    5,897    5,907    5,884    4,545    4,539    4,544    4,524 

(*) Under Interbank Market Debt.

  

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 67
 

  

Note 13 - Investments in associates and joint ventures

 

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

 

   Interest %
at 06/30/2015		   06/30/2015 
   Total   Voting   Stockholders’
equity		   Other
Comprehensive
Income		   Net income   Investment   Equity in
earnings		   Market value (h) 
                                 
Associates                                         
Porto Seguro Itaú Unibanco Participações S.A. (a) (b)   42.93    42.93    3,829    (15)   342    2,428    139    4,069 
BSF Holding S.A. (c)   49.00    49.00    1,353    -    239    1,246    117    - 
IRB-Brasil Resseguros S.A. (a) (d)   15.01    15.01    2,866    5    159    423    24    - 
Other (e)   -    -    -    -    -    105    11    - 
Joint Ventures - Other (f)   -    -    -    -    -    5    (1)   - 
Total   -    -    -    -    -    4,207    290    - 

 

   Interest %
at 12/31/2014		   12/31/2014   06/30/2014 
   Total   Voting   Stockholders’
equity		   Other
comprehensive
income		   Net income   Investment   Equity in
earnings		   Market value (h)   Equity in
earnings		 
                                     
Associates                                             
Porto Seguro Itaú Unibanco Participações S.A. (a) (b)   42.93    42.93    3,647    7    492    2,357    196    2,988    43 
BSF Holding S.A.(c)   49.00    49.00    1,232    -    413    1,187    202    -    91 
IRB-Brasil Resseguros S.A.(a) (d)   15.01    15.01    3,016    -    890    445    134    -    72 
Other (e)             -    -    -    97    36    -    17 
Joint Ventures                                             
MCC Securities Inc.(g)             -    -    -    -    -    -    2 
Other (f)   -    -    -    -    -    4    (3)   -    (2)
Total   -    -    -    -         4,090    565    -    223 

(a) For purpose of recording the participation in earnings, at 06/30/2015 the position at 05/31/2015 was used and at 12/31/2014 the position at 11/30/2014 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$ 784 at 06/30/2015 and R$ 791 at 12/31/2014 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 06/30/2015 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 06/30/2015, includes interest in total capital and voting capital of the following companies: Compañia Uruguaya de Medios de Procesamiento S.A. (38.39% total and voting capital ), Rias Redbanc S.A. (20% total and voting capital), Tecnologia Bancária S.A. (24.91% total capital and voting capital). Latosol Empreendimentos e Participação Ltda (32.11% total and voting capital) company settled in December 30, 2014.

(f) At 06/30/2015, includes interest in total capital and voting capital of the following companies: Olimpia Promoção e Serviços S.A. (50% total and voting capital) and includes income not arising from profit subsidiaries .

(g) The total investment was purchased in August 2014.

(h) Disclosed only for public companies.

 

At June 30, 2015, ITAÚ UNIBANCO HOLDING receive / recognize dividends and interest on capital of the unconsolidated companies being the main Porto Seguro Itaú Unibanco Participações S.A. in the amount of R$ 131 (R$ 336 at 12/31/2014); IRB - Brasil Resseguros S.A. in the amount of R$ 47 (R$ 46 at 12/31/2014) and BSF Holding S.A in the amount of R$ 58.

  

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 68
 

  

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.

 

   06/30/2015   12/31/2014   06/30/2014 
Total Assets (*)    18,842    17,812    16,220 
Total Liabilities (*)    10,794    9,917    8,997 
Total Income (*)    7,210    6,907    3,352 
Total Expenses (*)    (6,471)   (5,112)   (2,566)

(*) Represented by IRB-Brasil Resseguros S.A., in the amount of R$ 13,660 (R$ 12,933 at December 31, 2014) related to assets, R$ 10,793 (R$ 9,917 at December 31, 2014) related to liabilities, R$ 6,630 (R$ 5,852 at December 31, 2014) related to income and of R$ 6,471 (R$ 4,962 at December 31, 2014) related to expenses.

 

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

 

Note 14 – Lease commitments as lessee

 

a)Finance lease

 

ITAÚ UNIBANCO HOLDING is the lessee in finance lease contracts of data processing equipment, with the option of purchase or extension, without contingent rental payments or imposed restrictions. The net carrying amount of these assets is R$ 545 (R$ 804 at December 31, 2014).

 

The table below shows the total future minimum payments:

 

   06/30/2015   12/31/2014 
Current   258    394 
Up to 1 year   258    394 
Non-current   287    410 
From 1 to 5 years   287    410 
Total future minimum payments   545    804 
(-) Future interest   -    - 
Present value   545    804 

 

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$ 551 from 01/01 to 06/30/2015 (R$ 510 from 01/01 to 06/30/2014).

 

ITAÚ UNIBANCO HOLDING has no relevant sublease contracts.

 

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

 

   06/30/2015   12/31/2014 
Current   475    1,199 
Up to 1 year   475    1,199 
Non-current   5,028    4,213 
From 1 to 5 years   3,795    3,539 
Over 5 years   1,233    674 
Total future minimum payments   5,503    5,412 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 69
 

  

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 12/31/2014   1,011    3,578    1,512    1,116    1,791    7,419    773    17,200 
Acquisitions   -    33    120    59    111    296    28    647 
Disposal   -    (4)   (103)   (1)   (12)   (388)   (3)   (511)
Exchange variation   2    17    28    3    6    22    2    80 
Other   -    (414)   13    406    (243)   146    -    (92)
Balance at 06/30/2015   1,013    3,210    1,570    1,583    1,653    7,495    800    17,324 
                                         
Depreciation                                        
Balance at 12/31/2014   -    (1,695)   (754)   (519)   (504)   (4,538)   (479)   (8,489)
Accumulated depreciation   -    (36)   (137)   (60)   (44)   (515)   (38)   (830)
Disposal   -    4    103    1    10    366    2    486 
Exchange variation   -    (3)   (13)   -    2    (20)   (1)   (35)
Other   -    3    -    -    2    73    1    79 
Balance at 06/30/2015   -    (1,727)   (801)   (578)   (534)   (4,634)   (515)   (8,789)
                                         
Impairment                                        
Balance at 12/31/2014   -    -    -    -    -    -    -    - 
Additions/ assumptions   -    -    -    -    -    -    -    - 
Reversals   -    -    -    -    -    -    -    - 
Balance at 06/30/2015   -    -    -    -    -    -    -    - 
                                         
Book value                                        
Balance at 06/30/2015   1,013    1,483    769    1,005    1,119    2,861    285    8,535 

(1) The contractual commitments for purchase of the fixed assets totaled R$ 62, achievable by 2016 (Note 36 - Off balance sheet).

(2) Includes the amount of R$ 5 related to attached real estate; fixed assets under construction in the amount of R$ 932, consisting of R$ 198 in real estate in use, R$ 16 in improvements, and R$ 718 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 70
 

  

   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   3    563    230    117    946    2,045    62    3,966 
Disposal   (1)   (6)   (163)   (9)   (89)   (829)   (5)   (1,102)
Exchange variation   -    (7)   22    4    (12)   4    (11)   - 
Other   (10)   29    125    (39)   (149)   (80)   2    (122)
Balance at 12/31/2014   1,011    3,578    1,512    1,116    1,791    7,419    773    17,200 
                                         
Depreciation                                        
Balance at 12/31/2013   -    (1,651)   (667)   (439)   (487)   (4,230)   (411)   (7,885)
Accumulated depreciation   -    (58)   (247)   (85)   (79)   (1,098)   (74)   (1,641)
Disposal   -    3    162    2    60    768    4    999 
Exchange variation   -    -    1    2    12    (13)   -    2 
Other   -    11    (3)   1    (10)   35    2    36 
Balance at 12/31/2014   -    (1,695)   (754)   (519)   (504)   (4,538)   (479)   (8,489)
                                         
Impairment                                        
Balance at 12/31/2013   -    -    -    -    (9)   -    -    (9)
Additions/ assumptions   -    -    -    -    -    -    -    - 
Reversals   -    -    -    -    9    -    -    9 
Balance at 12/31/2014   -    -    -    -    -    -    -    - 
                                         
Book value                                        
Balance at 12/31/2014   1,011    1,883    758    597    1,287    2,881    294    8,711 

(1) The contractual commitments for purchase of the fixed assets totaled R$ 67, 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$ 2,277, consisting of R$ 1,358 in real estate in use, R$ 45 in improvements and R$ 874 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 71
 

  

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 12/31/2014   1,067    1,582    1,965    2,836    791    8,241 
Acquisitions   25    -    242    238    15    520 
Terminated agreements/ write off   (27)   (53)   (120)   (2)   (5)   (207)
Exchange variation   -    3    52    -    60    115 
Other   (5)   6    10    -    (15)   (4)
Balance at 06/30/2015   1,060    1,538    2,149    3,072    846    8,665 
                               
Amortization (2)                              
Balance at 12/31/2014   (556)   (337)   (918)   (113)   (149)   (2,073)
Amortization expense   (104)   (75)   (174)   (56)   (142)   (551)
Terminated agreements/ write off   27    23    120    -    -    170 
Exchange variation   -    (2)   (22)   -    (52)   (76)
Other   -    1    2    (1)   120    122 
Balance at 06/30/2015   (633)   (390)   (992)   (170)   (223)   (2,408)
                               
Impairment (3)                              
Balance at 12/31/2014   (18)   (2)   -    (14)   -    (34)
Additions / assumptions   -    -    -    (4)   -    (4)
Write off   -    -    -    -    -    - 
Balance at 06/30/2015   (18)   (2)   -    (18)   -    (38)
                               
Book value                              
Balance at 06/30/2015   409    1,146    1,157    2,884    623    6,219 

 

(1) The contractual commitments for the purchase of new intangible assets totaled R$ 380, achievable by 2016 (Note 36 - Off balance seet).

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

(3) Note 2.4l.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 72
 

  

       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   109    36    393    651    10    1,199 
Terminated agreements / write off   (214)   (104)   (201)   (10)   (300)   (829)
Exchange variation   -    (2)   (23)   -    43    18 
Other   7    (36)   (43)   -    19    (53)
Balance at 12/31/2014   1,067    1,582    1,965    2,836    791    8,241 
                               
Amortization (2)                              
Balance at 12/31/2013   (535)   (256)   (868)   (47)   (352)   (2,058)
Amortization expense   (225)   (157)   (324)   (66)   (131)   (903)
Terminated agreements / write off   204    81    201    -    119    605 
Exchange variation   -    -    10    -    (34)   (24)
Other   -    (5)   63    -    249    307 
Balance at 12/31/2014   (556)   (337)   (918)   (113)   (149)   (2,073)
                               
Impairment (3)                              
Balance at 12/31/2013   (18)   (27)   -    (6)   -    (51)
Additions / assumptions   -    -    -    (8)   -    (8)
Reversals   -    25    -    -    -    25 
Balance at 12/31/2014   (18)   (2)   -    (14)   -    (34)
                               
Book value                              
Balance at 12/31/2014   493    1,243    1,047    2,709    642    6,134 

(1) The contractual commitments for the purchase of new intangible assets totaled R$ 508, achievable by 2016 (Note 36 - Off balance seet).

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

(3) Note 2.4l.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 73
 

  

Note 17 - Deposits

 

The table below shows the breakdown of deposits:

 

   06/30/2015   12/31/2014 
   Current   Non-current   Total   Current   Non-current   Total 
Interest-bearing deposits   172,353    57,550    229,903    180,207    65,833    246,040 
Time deposits   31,955    56,960    88,915    43,136    65,330    108,466 
Interbank deposits   26,424    590    27,014    18,622    503    19,125 
Savings deposits   113,974    -    113,974    118,449    -    118,449 
Non-interest bearing deposits   50,540    -    50,540    48,733    -    48,733 
Demand deposits   50,540    -    50,540    48,733    -    48,733 
Total   222,893    57,550    280,443    228,940    65,833    294,773 

 

Note 18 – Financial liabilities held for trading

 

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

 

   06/30/2015   12/31/2014 
Structured notes          
Shares   56    73 
Debt securities   313    447 
Total   369    520 

 

The effect of the changes in credit risk of these instruments is not significant at 06/30/2015 and 12/31/2014.

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:

 

   06/30/2015   12/31/2014 
   Cost / Fair value   Cost / Fair value 
Current - up to one year   13    220 
Non-current   356    300 
From one to five years   307    122 
From five to ten years   16    149 
After ten years   33    29 
Total   369    520 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 74
 

  

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

 

a)Securities sold under repurchase agreements and interbank market debt

 

The table below shows the breakdown of funds:

 

   06/30/2015   12/31/2014 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Securities sold under repurchase agreements   148,407    132,252    280,659    152,093    136,590    288,683 
Transactions backed by own financial assets (*)   100,031    132,252    232,283    76,343    136,590    212,933 
Transactions backed by third-party financial assets   48,376    -    48,376    75,750    -    75,750 
Interbank market debt   67,851    57,702    125,553    68,818    53,768    122,586 
Mortgage notes   29    112    141    32    111    143 
Real estate credit bills   11,079    1,395    12,474    10,395    437    10,832 
Agribusiness credit bills   4,229    3,383    7,612    5,229    2,582    7,811 
Financial credit bills   4,995    2,389    7,384    6,284    4,361    10,645 
Import and export financing   33,598    15,817    49,415    27,916    15,465    43,381 
On-lending - domestic   13,912    28,708    42,620    18,942    26,288    45,230 
Liabilities from transactions related to credit assignments (Note 12d)   9    5,898    5,907    20    4,524    4,544 

(*) It includes R$ 134,932 (R$ 139,910 at December 31, 2014) 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   100% of CDI    - 
Import and export financing   2.5% to 6.75%    0.13% to 14% 
On-lending - domestic    0.83% to 14.5%     - 
Liabilities from transactions related to credit assignments    6.38% to 16.66%    1.86% to 12.73% 

 

In “Securities sold under repurchase agreements”, we present the liabilities in transactions in which ITAÚ UNIBANCO HOLDING sells to customers in exchange for cash debt securities issued by its consolidated subsidiaries previously held in treasury, and where it undertakes to repurchase them at any time after the sale up to a repurchase deadline, at which time they must be repurchased by ITAÚ UNIBANCO HOLDING. The repurchase price is computed as the price paid on the sale date plus interest at rates ranging from 75% CDI to 13.23%. The deadline for repurchase expires in January 2027.

 

b)Institutional market debt

 

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

 

   06/30/2015   12/31/2014 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Subordinated debt (1)   7,066    52,163    59,229    2,832    52,785    55,617 
Foreign borrowings through securities   5,410    15,229    20,639    3,142    12,250    15,392 
Structured Operations Certificates (2)   1,103    2,304    3,407    1,080    1,153    2,233 
Total   13,579    69,696    83,275    7,054    66,188    73,242 

(1) At June 30, 2015, the amount of R$ 58,439 (R$ 53,865 at December 31, 2014) 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, 2015, the market value of the funding from Structured Operations Certificates issued is R$ 3,774.

 

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% to 6.2%
Foreign borrowings through securities  0.89% to 12.75%  0.03% to 20%
Structured Operations Certificates  8.6% to 14.35%  -

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 75
 

 

 

Note 20 - Other assets and liabilities

 

a)Other assets

 

   06/30/2015   12/31/2014 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Financial (1)   34,720    12,749    47,469    40,984    12,665    53,649 
Receivables from credit card issuers   22,108    -    22,108    24,203    -    24,203 
Insurance and reinsurance operations   1,449    -    1,449    1,388    -    1,388 
Deposits in guarantee for contingent liabilities (Note 32)   2,144    11,669    13,813    2,128    11,478    13,606 
Deposits in guarantee for foreign borrowing program   460    -    460    624    -    624 
Negotiation and intermediation of securities   4,798    -    4,798    3,964    -    3,964 
Receivables from reimbursement of contingent liabilities (Note 32c)   285    473    758    53    623    676 
Receivables from services provided   2,157    109    2,266    2,394    81    2,475 
Rights receivable from sales operations or transfer of financial assets   784    -    784    5,894    -    5,894 
Amounts receivable from FCVS – Salary Variations Compensation Fund (2)   -    498    498    -    483    483 
Operations without credit granting characteristics   535    -    535    336    -    336 
Non-financial   7,077    5,519    12,596    10,906    3,015    13,921 
Prepaid expenses   2,021    1,481    3,502    3,594    434    4,028 
Retirement plan assets (Notes 29c and d)   -    2,530    2,530    -    2,456    2,456 
Sundry domestic   1,515    -    1,515    1,862    -    1,862 
Premiums from loan operations   814    1,316    2,130    2,371    -    2,371 
Sundry foreign   1,519    192    1,711    2,058    125    2,183 
Other   1,208    -    1,208    1,021    -    1,021 

(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

 

   06/30/2015   12/31/2014 
   Current   Non-
current		   Total   Current   Non-
current		   Total 
Financial   59,985    456    60,441    69,610    1,882    71,492 
Credit card operations   50,450    -    50,450    58,596    -    58,596 
Foreign exchange portfolio   554    -    554    784    -    784 
Negotiation and intermediation of securities   7,424    157    7,581    5,749    1,439    7,188 
Finance leases (Note 14a)   279    266    545    394    410    804 
Funds from consortia participants   41    -    41    30    -    30 
Liabilities from sales operations or transfer of financial assets   633    33    666    3,477    33    3,510 
Other   604    -    604    580    -    580 
Non-financial   29,248    1,007    30,255    23,128    532    23,660 
Collection and payment of taxes and contributions   4,440    -    4,440    226    -    226 
Sundry creditors - domestic   1,859    52    1,911    1,680    48    1,728 
Funds in transit   11,747    -    11,747    8,906    -    8,906 
Provision for sundry payments   1,884    386    2,270    2,161    378    2,539 
Social and statutory   4,424    -    4,424    4,678    41    4,719 
Related to insurance operations   202    -    202    260    -    260 
Liabilities for official agreements and rendering of payment services   1,065    -    1,065    933    -    933 
Provision for retirement plan benefits (Note 29c and e)   -    524    524    516    -    516 
Personnel provision   1,409    45    1,454    1,317    65    1,382 
Provision for health insurance   698    -    698    685    -    685 
Deferred income   1,439    -    1,439    1,386    -    1,386 
Other   81    -    81    380    -    380 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 76
 

  

Note 21 – Stockholders’ equity

 

a)Capital

 

The Extraordinary Stockholders’ Meeting held on April 29, 2015 approved the increase of subscribed and paid-up capital by R$ 10,148, with the capitalization of the amounts recorded in Revenue Reserve – Statutory Reserve, with a 10% bonus shares. Bonus shares started being traded on July 17, 2015 and the process was approved by the Central Bank on June 25, 2015. Accordingly, capital stock was increased by 553,083,268 shares.

 

Capital comprises 6,083,915,949 book-entry shares with no par value, of which 3,047,040,198 are common and 3,036,875,751 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$ 85,148 (R$ 75,000 at December 31, 2014), of which R$ 50,802 (R$ 51,563 at December 31, 2014) refers to stockholders resident in Brazil and R$ 24,198 (R$ 23,437 at December 31, 2014) refers to stockholders resident abroad and R$ 10,148 outstanding shares as from July 17, 2015.

 

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:

 

   06/30/2015 
   Number     
   Common   Preferred   Total   Amount 
Residents in Brazil at 12/31/2014   2,758,685,730    1,043,799,342    3,802,485,072      
Residents abroad at 12/31/2014   11,350,814    1,716,996,795    1,728,347,609      
Shares of capital stock at 12/31/2014   2,770,036,544    2,760,796,137    5,530,832,681      
Bonus Shares – ESM of 04/29/2015 – Carried out at 06/25/2015 – Outstanding as from 07/17/2015   277,003,654    276,079,614    553,083,268      
Shares of capital stock at 06/30/2015   3,047,040,198    3,036,875,751    6,083,915,949      
Residents in Brazil at 06/30/2015   3,034,225,086    1,086,787,450    4,121,012,536      
Residents abroad at 06/30/2015   12,815,112    1,950,088,301    1,962,903,413      
Treasury shares at 12/31/2014 (1)   2,541    53,828,551    53,831,092    (1,328)
Purchase of shares   -    36,586,600    36,586,600    (1,247)
Exercised options – granting of stock options   -    (2,214,731)   (2,214,731)   4 
Disposals – Stock option plan   -    (6,509,469)   (6,509,469)   229 
Bonus Shares – ESM of 04/29/2015 – In Treasury as from 07/17/2015   254    8,169,095    8,169,349    - 
Treasury shares at 06/30/2015 (1)   2,795    89,860,046    89,862,841    (2,342)
Outstanding shares at 06/30/2015 (2)   3,047,037,403    2,947,015,705    5,994,053,108      
Outstanding shares at 12/31/2014 (3)   3,047,037,403    2,977,664,345    6,024,701,748      

 

   12/31/2014 
   Number     
   Common   Preferred   Total   Amount 
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      
Shares of capital stock at 12/31/2013   2,770,036,544    2,760,796,137    5,530,832,681      
Bonus shares - ESM of 04/23/2014 – made effective on 06/06/2014   277,003,654    276,079,614    553,083,268      
Shares of capital stock at 12/31/2014   3,047,040,198    3,036,875,751    6,083,915,949      
Residents in Brazil at 12/31/2014   3,034,554,303    1,148,179,276    4,182,733,579      
Residents abroad at 12/31/2014   12,485,895    1,888,696,475    1,901,182,370      
Treasury shares at 12/31/2013 (1)   2,541    75,753,711    75,756,252    (1,854)
Purchase of shares   -    1,100,000    1,100,000    (35)
Exercised options - granting of stock options   -    (19,003,419)   (19,003,419)   413 
Disposals – stock option plan   -    (4,978,546)   (4,978,546)   148 
Bonus shares - ESM of 04/23/2014 – made effective on 06/06/2014   254    6,339,660    6,339,914    - 
Treasury shares at 12/31/2014 (1)   2,795    59,211,406    59,214,201    (1,328)
Outstanding shares  at 12/31/2014 (3)   3,047,037,403    2,977,664,345    6,024,701,748      
Outstanding shares at 12/31/2013 (3)   3,047,037,403    2,953,546,669    6,000,584,072      

(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) Outstanding shares 5,449,139,189 at 06/30/2015, not considering bonus shares.

(3) For better comparability, outstanding shares were adjusted for the bonus of June 25, 2015.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 77
 

  

We detail below of the cost of shares purchased in the period, as well the average cost of treasury shares and their market price (in Brazilian reais per share):

 

   01/01 to 06/30/2015 
Cost / market value  Common   Preferred 
Minimum   -    32.58 
Weighted average   -    34.09 
Maximum   -    35.05 
Treasury shares          
Average cost   7.97    28.67 
Market value at 06/30/2015   33.21    34.22 

 

   01/01 to 12/31/2014 
Cost / market value  Common   Preferred 
Minimum   -    34.13 
Weighted average   -    34.75 
Maximum   -    35.07 
Treasury shares          
Average cost   7.97    24.67 
Market value at 12/31/2014   32.30    34.60 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 78
 

  

b)Dividends

 

Stockholders are entitled to an annual mandatory dividend of not less than 25% of adjusted profit, pursuant to the provisions of the Brazilian Corporate Law. Both common and preferred shares participate equally, after common shares have received dividends equal to the annual minimum priority dividend of R$ 0.022 per share non-cumulative to be paid to preferred shares.

 

The calculation of the monthly advance of the mandatory minimum dividend is based on the share position on the last day of the prior month, with payment being made on the first business day of the subsequent month, in the amount of R$ 0.015 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
         
   06/30/2015   06/30/2014 
Statutory net income   10,630    7,537 
Adjustments:          
(-)  Legal reserve   (532)   (377)
Dividend calculation basis   10,098    7,160 
Mandatory dividend - 25%   2,525    1,790 
Additional dividend and interest on capital   -    170 
Dividends and interest on capital – paid / provisioned for   2,525    1,960 

 

Payments / provision for interest on capital and dividends

 

   06/30/2015 
   Gross   WHT   Net 
Paid / prepaid   410    -    410 
Dividends - 5 monthly installments of R$ 0.015 per share paid from February to June 2015   410    -    410 
                
Declared until 06/30/2015  (recorded in other liabilities)   2,473    (358)   2,115 
Dividends - 1 monthly installment of R$ 0.015 per share paid on 07/01/2015   82    -    82 
Interest on capital - R$ 0.3989 per share   2,391    (358)   2,033 
Interest on capital - R$ 0.3460 per share, to be paid in August 2015   2,074    (311)   1,763 
Interest on capital - R$ 0.0529 per share, to be declared   317    (47)   270 
                
Total from 01/01 to 06/30/2015 - R$ 0.4291 net per share   2,883    (358)   2,525 

 

   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 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 79
 

  

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 and variable compensation.

 

d)Appropriated reserves

 

   06/30/2015   12/31/2014 
Capital reserves (1)   285    285 
Premium on subscription of shares   284    284 
Reserves from tax incentives, restatement of equity securities and other   1    1 
Revenue reserves   2,279    7,925 
Legal (2)   6,373    5,841 
Statutory   4,861    7,775 
Dividends equalization (3)   2,402    2,885 
Working capital increase (4)   193    1,162 
Increase in capital of investees (5)   2,266    3,728 
Corporate reorganizations (Note 3b)   (8,955)   (8,638)
Unrealized profits (6)   -    2,947 
Total reserves at parent company   2,564    8,210 

(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 December 31, 2014.

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 80
 

 

 

Note 22 – Share-based payment

 

ITAÚ UNIBANCO HOLDING and its subsidiaries have share-based payment programs aimed at involving its management members and employees in the medium and long-term corporate development process.

 

These payments are only made in years in which there are sufficient profits to enable the distribution of mandatory dividends, in order to limit the maximum dilution to which stockholders are subject, and at a quantity that does not exceed the limit of 0.5% of the total shares held by the controlling and minority stockholders at the balance sheet date.

 

These programs are settled by the delivery of ITUB4 treasury shares to stockholders.

 

At the ESM of April 29, 2015 a capital increase with 10% share bonus was approved and ratified by BACEN on June 25, 2015. The new shares will be included in the share position on July 17, 2015. Therefore, the number of shares shown in this note as of June 30, 2015 is not of bonus shares.

 

From January 1 to June 30, 2015, the accounting effect of the share-based payment in income was R$ (456) (R$ (181) from January 1 to June 30, 2014).

 

I – Stock Option Plan (Simple Options)

 

ITAÚ UNIBANCO HOLDING has a Stock Option Plan (“Simple Options”) aimed at involving management members and employees in the medium and long-term corporate development program of ITAÚ UNIBANCO HOLDING and its subsidiaries, offering them the opportunity to take part in the appreciation that their work and dedication bring to the shares.

 

In addition to the grants provided under the Plan, ITAÚ UNIBANCO HOLDING also maintains control over the rights and obligations in connection with the options granted under the plans assumed at the Extraordinary Stockholders’ Meetings held on April 24, 2009 and April 19, 2013 related to the Unibanco – União de Bancos Brasileiros S.A. and to Unibanco Holdings S.A., and to Redecard S.A. (“Rede”) stock option plans, respectively. The exchange of shares for ITUB4 did not have relevant financial impact accordingly.

 

Simple options have the following characteristics:

 

a)Exercise price: calculated based on the average prices of shares in the three (3) months of the year prior to the grant date. The prices determined will be restated until the last business day of the month prior to the option exercise date based on IGP-M or, in its absence, on the index to be internally determined, and they should be paid within a period equal to that in force for settlement of operations on BM&FBOVESPA.

 

b)Vesting period: determined upon the issue, from one (1) to seven (7) years, counted from the grant date. The vesting period is normally determined at five (5) years.

 

c)Fair value and economic assumptions for cost recognition: the fair value of Simple Options is calculated on the grant date based on the Binominal model. Economic assumptions used are as follows:

 

(i)Exercise price: exercise price previously agreed upon the option issue, adjusted by the IGP-M variation;

 

(ii)Price of the underlying asset (ITUB4 shares): closing price on BM&FBOVESPA on the calculation base date.

 

(iii)Expected dividends: the average annual return rate for the last three (3) years of dividends paid plus interest on capital of the ITUB4 share;

 

(iv)Risk-free interest rate: IGP-M coupon rate at the expiration date of the Simple Option.

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 81
 

  

Summary of changes in the plan

 

   Simple options 
   Quantity    Weighted average
exercise price		    Weighted average
market value		 
Opening balance 12/31/2014   50,147,374    35.67      
Options exercisable at the end of the period   26,247,536    35.37      
Options outstanding not exercisable   23,899,838    36.00      
Options:               
Granted   -    -      
Canceled / Forfeited (*)   (366,501)   36.56      
Exercised   (136,415)   26.74    37.68 
Balance at 06/30/2015   49,644,458    36.67      
Options exercisable at the end of the period   26,067,261    36.57      
Options outstanding not exercisable   23,577,197    36.77      
Range of exercise prices               
Granting 2008-2009        27.30 - 41.75      
Granting 2010-2012        26.27 - 43.23      
Weighted average of the remaining contractual life (in years)   2.39           

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

 

   Simple options 
   Quantity    Weighted average
exercise price		    Weighted average
market value		 
Opening balance 12/31/2013   65,316,846    32.85      
Options exercisable at the end of the period   32,734,794    30.42      
Options outstanding not exercisable   32,582,052    36.25      
Options:               
Granted   -    -      
Canceled/Forfeited (*)   (118,505)   35.78      
Exercised   (4,292,672)   15.43    18.90 
Balance at 06/30/2014   60,905,669    35.14      
Options exercisable at the end of the period   28,714,096    32.22      
Options outstanding not exercisable   32,191,573    37.74      
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           

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 82
 

 

ll – Partner Plan

 

The employees and management members of ITAÚ UNIBANCO HOLDING and its subsidiaries may be selected to participate in the program that invests a percentage of their bonus to acquire ITUB4 shares and share-based instruments; accordingly, the ownership of these shares should be held by the beneficiaries for a period from three (3) to five (5) years, counted from the initial investment, and are thus subject to market price variation. After complying with the suspension conditions set forth in the program, beneficiaries will be entitled to receive ITUB4 as consideration, in accordance with the numbers of shares provided for in the program regulation.

 

The acquisition price of own shares and Share-Based Instruments is established every six months and is equivalent to the average of the ITUB4 quotation in the 30 days prior to the determination of the acquisition price.

 

The fair value of the ITUB4 as consideration is the market price at the grant date, less expected dividends.

 

The weighted average of the fair value of the ITUB4 as consideration was estimated at R$ 36.66 per share at June 30, 2015 (R$ 25.83 per share at June 30, 2014).

 

Law No. 12,973/14, which adjusted tax legislation to the international accounting standards and terminated the Transition Tax Regime (RTT), set up a new legal framework for payments made in shares. We made changes to the Partner Plan, and adjusted its tax effects, to conform with this new legislation.

 

Changes in the Partner Program

 

   Quantity 
Balance at 12/31/2014   24,304,025 
New granted   9,456,891 
Cancelled   (467,365)
Exercised   (2,078,316)
Balance at 06/30/2015   31,215,235 
Weighted average of remaining contractual life (years)   2.30 

 

   Quantity 
Balance at 12/31/2013   18,351,820 
New granted   7,467,437 
Cancelled   (693,874)
Exercised   (2,696,860)
Balance at 06/30/2014   22,428,523 
Weighted average of remaining contractual life (years)   2.45 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 83
 

  

III-Variable compensation

 

The policy established in compliance with CMN Resolution No. 3,921/10 sets forth that fifty percent (50%) of the management’s variable compensation should be paid in cash and fifty percent (50%) should be paid in shares for a period of three (3) years. Shares are delivered on a deferred basis, of which one-third (1/3) per year, subject to the executive’s remaining with the institution. The deferred unpaid portions may be reversed proportionally to the significant reduction of the recurring income realized or the negative income for the period.

 

The fair value of the ITUB4 share is the market price at its grant date.

 

The weighted average of the fair value of ITUB4 shares was estimated at R$ 34.36 per share at June 30, 2015 (R$ 27.86 per share at June 30, 2014).

 

Change in variable compensation in shares    
   Quantity 
Opening balance 12/31/2014   10,236,334 
New   7,075,019 
Delivered   (3,989,395)
Cancelled   (237,109)
Balance at 06/30/2015   13,084,849 

 

Change in variable compensation in shares    
   Quantity 
Opening balance 12/31/2013   5,022,421 
New   6,894,466 
Delivered   (1,764,116)
Cancelled   (65,768)
Balance at 06/30/2014   10,087,003 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 84
 

 

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
06/30/2015 		    04/01 to
06/30/2014 		    01/01 to
06/30/2015 		    01/01 to
06/30/2014 		 
Central Bank compulsory deposits   1,368    1,601    2,672    3,124 
Interbank deposits   589    203    923    367 
Securities purchased under agreements to resell   5,717    4,059    11,593    7,917 
Financial assets held for trading   4,351    4,306    8,648    7,597 
Available-for-sale financial assets   2,145    1,639    4,334    3,506 
Held-to-maturity financial assets   922    566    1,750    870 
Loan and lease operations   18,720    16,685    38,661    32,928 
Other financial assets   182    174    380    394 
Total   33,994    29,233    68,961    56,703 

 

b)Interest and similar expense

 

   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Deposits   (4,263)   (2,919)   (6,170)   (5,874)
Securities sold under repurchase agreements   (8,249)   (7,006)   (15,441)   (13,245)
Interbank market debt   (1,626)   (1,353)   (3,622)   (2,796)
Institutional market debt   (1,870)   (1,527)   (3,759)   (3,210)
Financial expense from technical reserves for insurance and private pension plans   (3,176)   (2,494)   (5,969)   (4,344)
Other   (15)   (11)   (31)   (26)
Total   (19,199)   (15,310)   (34,992)   (29,495)

 

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

 

   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Financial assets held for trading   (175)   670    (294)   755 
Derivatives (*)   (67)   (292)   2,301    (141)
Financial assets designated at fair value through profit or loss   15    8    25    18 
Available-for-sale financial assets   (113)   (40)   (750)   (109)
Finacial liabilities held for trading   4    (57)   47    (129)
Total   (336)   289    1,329    394 

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

 

During the periods ended June 30, 2015 and 2014, ITAÚ UNIBANCO HOLDING has not recognized any impairment losses on held-to-maturity financial assets.

 

During the period ended June 30, 2015, ITAÚ UNIBANCO HOLDING recognized impairment losses on available-for-sale financial assets in the amount of R$ 86 (R$ 95 on June 30, 2014).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 85
 

 

Note 24 - Banking service fees

 

   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Current account services   2,158    1,947    4,313    3,663 
Asset management fees   687    654    1,348    1,332 
Collection commissions   303    321    600    623 
Fees from credit card services   3,129    2,793    6,197    5,545 
Fees for guarantees issued and credit lines   352    333    761    652 
Brokerage commission   66    80    124    133 
Other   429    346    891    727 
Total   7,124    6,474    14,234    12,675 

 

Note 25 - Other income

 

   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Gains on sale of assets held for sale, fixed assets and investments in associates and joint ventures   23    6    28    9 
Recovery of expenses   37    35    75    60 
Reversal of provisions   88    34    257    156 
Program for Cash or Installment Payment of Federal Taxes (Note 32e)   24    -    121    - 
Other   43    25    74    90 
Total   215    100    555    315 

 

Note 26 - General and administrative expenses

 

   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Personnel expenses   (4,488)   (4,305)   (9,155)   (8,222)
Compensation   (1,772)   (1,723)   (3,724)   (3,367)
Payroll taxes   (563)   (567)   (1,234)   (1,124)
Welfare benefits   (594)   (532)   (1,185)   (1,037)
Retirement plans and post-employment benefits (Note 29)   (10)   (25)   3    (22)
Defined benefit   (34)   (45)   (37)   (54)
Defined contribution   24    20    40    32 
Stock option plan (Note 22d)   (48)   (49)   (117)   (95)
Training   (53)   (47)   (87)   (82)
Employee profit sharing   (880)   (842)   (1,698)   (1,573)
Dismissals   (94)   (96)   (159)   (182)
Provision for labor claims (Note 32)   (474)   (424)   (954)   (740)
Administrative expenses   (3,795)   (3,567)   (7,212)   (6,906)
Data processing and telecommunications   (1,003)   (962)   (1,926)   (1,878)
Third-party services   (1,049)   (1,074)   (1,932)   (2,007)
Installations   (258)   (247)   (485)   (461)
Advertising, promotions and publications   (269)   (280)   (487)   (473)
Rent   (316)   (305)   (639)   (587)
Transportation   (98)   (105)   (199)   (211)
Materials   (115)   (89)   (202)   (175)
Financial services   (152)   (126)   (296)   (270)
Security   (166)   (157)   (331)   (310)
Utilities   (110)   (70)   (203)   (144)
Travel   (56)   (52)   (104)   (94)
Other   (203)   (99)   (408)   (295)
Depreciation   (431)   (403)   (830)   (811)
Amortization   (225)   (203)   (436)   (410)
Insurance acquisition expenses   (288)   (220)   (569)   (556)
Other expenses   (1,999)   (1,636)   (4,024)   (3,516)
Expenses related to credit cards   (752)   (643)   (1,578)   (1,147)
Reimbursement related to acquisitions   7    2    6    (25)
Losses with third-party frauds   (138)   (124)   (239)   (259)
Loss on sale of assets held for sale, fixed assets and investments in associates and joint ventures   (41)   (43)   (67)   (62)
Provision for civil lawsuits (Note 32)   (541)   (375)   (1,059)   (871)
Provision for tax and social security lawsuits   (186)   (257)   (330)   (548)
Refund of interbank costs   (63)   (52)   (123)   (102)
Other   (285)   (144)   (634)   (502)
Total   (11,226)   (10,334)   (22,226)   (20,421)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 86
 

  

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 calculation:

 

Due on operations for the period  04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Income before income tax and social contribution   9,150    7,370    12,023    14,564 
Charges (income tax and social contribution) at the rates in effect (Note 2.4 n)   (3,660)   (2,948)   (4,809)   (5,826)
Increase / decrease to income tax and social contribution charges arising from:                    
Share of profit or (loss) of associates and joint ventures net   39    (92)   91    (63)
Foreign exchange variation on assets and liabilities abroad   (477)   (289)   2,710    (702)
Interest on capital   619    436    1,129    864 
Corporate reorganizations (Note 3b)   157    162    317    319 
Dividends and interest on external debt bonds   74    122    128    163 
Other nondeductible expenses net of non taxable income (*)   2,514    290    (4,507)   (123)
Income tax and social contribution expenses   (734)   (2,319)   (4,941)   (5,368)
Related to temporary differences                    
Increase (reversal) for the period   (2,082)   (13)   2,583    21 
Increase (reversal) of prior periods   (400)   (195)   2,052    227 
(Expenses)/Income from deferred taxes   (2,482)   (208)   4,635    248 
Total income tax and social contribution expenses   (3,216)   (2,527)   (306)   (5,120)

 (*) Includes temporary (additions) and exclusions.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 87
 

  

b)Deferred taxes

 

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

 

   12/31/2014   Realization /
reversal		   Increase   06/30/2015 
                 
Reflected in income  32,513   (4,357)   8,908   37,064 
Allowance for loan and lease losses   18,909    (1,552)   2,960    20,317 
Related to income tax and social contribution tax carryforwards   5,430    (85)   2,018    7,363 
Provision for contingent liabilities   4,298    (405)   680    4,573 
Civil lawsuits   1,818    (204)   359    1,973 
Labor claims   1,460    (165)   240    1,535 
Tax and social security   1,009    (36)   81    1,054 
Other   11    -    -    11 
Goodwill on purchase of investments   721    (398)   179    502 
Legal liabilities – tax and social security   394    (278)   311    427 
Adjustments of operations carried out in futures settlement market   3    -    399    402 
Adjustment to market value of financial assets held for trading and derivatives   109    (109)   -    - 
Provision related to health insurance operations   274    -    5    279 
Other   2,375    (1,530)   2,356    3,201 
                     
Reflected in stockholders’ equity   4,106    (1,116)   24    3,014 
Corporate reorganizations (Note 3b)   2,514    (317)   -    2,197 
Adjustment to market value of available-for-sale securities   539    (46)   -    493 
Cash flow hedge   50    -    18    68 
Other   1,003    (753)   6    256 
Total (*)   36,619    (5,473)   8,932    40,078 

(*) Deferred income tax and social contribution assets and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 34,624 and R$ 305.

 

   12/31/2013   Realization /
reversal		   Increase   12/31/2014 
Reflected in income   35,043    (12,477)   9,947    32,513 
Related to income tax and social contribution tax carryforwards   6,137    (714)   7    5,430 
Allowance for loan and lease losses   17,896    (4,889)   5,902    18,909 
Adjustment to market value of financial assets held for trading and derivatives   439    (439)   109    109 
Goodwill on purchase of investments   1,515    (794)   -    721 
Legal liabilities – tax and social security   1,479    (1,389)   304    394 
Provision for contingent liabilities   3,973    (1,515)   1,840    4,298 
Civil lawsuits   1,706    (435)   547    1,818 
Labor claims   1,400    (894)   954    1,460 
Tax and social security   849    (179)   339    1,009 
Other   18    (7)   -    11 
Adjustments of operations carried out in futures settlement market   653    (662)   12    3 
Provision related to health insurance operations   262    -    12    274 
Other   2,689    (2,075)   1,761    2,375 
                     
Reflected in stockholders’ equity   4,502    (1,291)   895    4,106 
Corporate reorganizations (Note 3b)   3,153    (639)   -    2,514 
Adjustment to market value of available-for-sale securities   814    (275)   -    539 
Cash flow hedge   426    (376)   -    50 
Other   109    (1)   895    1,003 
Total (*)   39,545    (13,768)   10,842    36,619 

(*) Deferred income tax and social contribution assets and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 31,129 and R$ 201.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 88
 

 

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

 

   12/31/2014   Realization /
reversal		   Increase   06/30/2015 
Reflected in income   4,735    (589)   505    4,651 
Depreciation in excess – finance lease   2,508    (494)   -    2,014 
Adjustment of escrow deposits and contingent liabilities   876    (88)   167    955 
Pension plans   336    -    46    382 
Adjustments of operations carried out in futures settlement market   4    -    31    35 
Adjustment to market value of financial assets held for trading and derivatives   6    (6)   16    16 
Taxation of results abroad – capital gains   563    -    71    634 
Other   442    (1)   174    615 
Reflected in stockholders’ equity accounts   956    (37)   189    1,108 
Adjustment to market value of available-for-sale securities   132    (37)   -    95 
Cash flow hedge   373    -    170    543 
Provision for pension plan benefits   442    -    15    457 
Other   9    -    4    13 
Total (*)   5,691    (626)   694    5,759 

(*) Deferred income tax and social contribution asset and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 34,624 and R$ 305.

 

   12/31/2013   Realization /
reversal		   Increase   12/31/2014 
Reflected in income   7,527    (3,289)   497    4,735 
Depreciation in excess – finance lease   4,165    (1,657)   -    2,508 
Adjustment of escrow deposits and contingent liabilities   981    (155)   50    876 
Pension plans   355    (118)   99    336 
Adjustments of operations carried out in futures settlement market   392    (388)   -    4 
Adjustment to market value of financial assets held for trading and derivatives   157    (157)   6    6 
Taxation of results abroad – capital gains   267    -    296    563 
Other   1,210    (814)   46    442 
Reflected in stockholders’ equity accounts   460    -    496    956 
Adjustment to market value of available-for-sale securities   64    -    68    132 
Cash flow hedge   84    -    289    373 
Provision for pension plan benefits   311    -    131    442 
Other   1    -    8    9 
Total (*)   7,987    (3,289)   993    5,691 

(*) Deferred income tax and social contribution asset and liabilities are recorded in the balance sheet offset by a taxable entity and total R$ 31,129 and R$ 201.

 

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, 2015, 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		   % 
 2015    7,845    24%   141    2%   7,986    20%   (1,581)   28%   6,405    18%
 2016    5,757    17%   1,258    17%   7,015    17%   (835)   15%   6,180    18%
 2017    4,470    14%   1,512    20%   5,982    15%   (1,178)   20%   4,804    14%
 2018    4,950    15%   1,513    21%   6,463    16%   (254)   4%   6,209    18%
 2019    2,180    7%   1,691    23%   3,871    10%   (246)   4%   3,625    11%
 After 2019    7,513    23%   1,248    17%   8,761    22%   (1,665)   29%   7,096    21%
 Total    32,715    100%   7,363    100%   40,078    100%   (5,759)   100%   34,319    100%
 Present value (*)    26,476         5,858         32,334         (4,660)        27,674      

(*) 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 06/30/2015 and 12/31/2014 there are no deferred tax assets and liabilities which have not been recognized.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 89
 

  

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
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Net income   5,845    4,766    11,518    9,317 
Minimum non-cumulative dividend on preferred shares in accordance with our bylaws        (65)   (65)   (65)
Subtotal   5,780    4,701    11,453    9,252 
Retained earnings to be distributed to common equity owners in an amount per share equal to the minimum dividend payable to preferred equity owners        (67)   (67)   (67)
Subtotal   5,713    4,634    11,386    9,185 
                     
Retained earnings to be distributed to common and preferred equity owners on a pro-rata basis                    
To common equity owners   2,897    2,348    5,771    4,656 
To preferred equity owners   2,816    2,286    5,615    4,529 
                     
Total net income available to common equity owners   2,964    2,415    5,837    4,723 
Total net income available to preferred equity owners   2,881    2,351    5,681    4,594 
                     
Weighted average number of shares outstanding (Note 21a)                    
Common shares   3,047,037,403    3,047,037,403    3,047,037,403    3,047,037,403 
Preferred shares   2,961,643,775    2,967,136,873    2,965,086,674    2,963,823,613 
                     
Earnings per share - basic – R$                    
Common shares   0.97    0.79    1.92    1.55 
Preferred shares   0.97    0.79    1.92    1.55 

 

Net income attributable to owners of the parent company – diluted earnings per
share		  04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Total net income available to preferred equity owners   2,881    2,351    5,681    4,594 
Dividend on preferred shares after dilution effects   13    9    27    18 
Net income available to preferred equity owners considering preferred shares after the dilution effect   2,894    2,360    5,708    4,612 
                     
Total net income available to ordinary equity owners   2,964    2,415    5,837    4,723 
Dividend on preferred shares after dilution effects   (13)   (9)   (27)   (18)
Net income available to ordinary equity owners considering preferred shares after the dilution effect   2,951    2,406    5,810    4,705 
                     
Adjusted weighted average of shares (Note 21a)                    
Common shares   3,047,037,403    3,047,037,403    3,047,037,403    3,047,037,403 
Preferred shares   2,991,177,682    2,986,782,628    2,993,474,256    2,985,132,285 
Preferred shares   2,961,643,775    2,967,136,873    2,965,086,674    2,963,823,613 
Incremental shares from stock options granted under our share-based payment   26,849,006    19,645,755    25,806,893    21,308,672 
Incremental bonus shares, included in the share base as from July 17, 2015   2,684,901    -    2,580,689    - 
                     
Earnings per share - diluted – R$ (*)                    
Common shares   0.97    0.79    1.91    1.54 
Preferred shares   0.97    0.79    1.91    1.54 

(*) For the period from January 1 to June 30, 2015, the amount per diluted share is R$ 1.91, with no bonus.

 

Potential anti-dilution effects of shares under our share-based payment, which were excluded from the calculation of diluted earnings per share, totaled 6,200,538 preferred shares at 06/30/2015 and 8,737,635 preferred shares at 06/30/2014.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 90
 

  

Note 29 – Post-employment benefits

 

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

 

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

 

Total amounts recognized in Income for the period

 

   Defined benefit   Defined contribution   Other benefits   Total 
   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Cost of current service   (18)   (17)   (33)   (35)   -    -    -    -    -    -    -    -    (18)   (17)   (33)   (35)
Net interest   (1)   (9)   (3)   (16)   55    49    110    98    (4)   (4)   (8)   (7)   50    36    99    75 
Contribution   -    -    -    -    (31)   (29)   (70)   (66)   -    -    -    -    -    -    (70)   (66)
Benefits paid   -    -    -    -    -    -    -    -    4    2    7    4    -    -    7    4 
Total Amounts Recognized   (19)   (26)   (36)   (51)   24    20    40    32    -    (2)   (1)   (3)   5    (8)   3    (22)

 

Total amounts recognized in Stockholders’ Equity – Other comprehensive income

 

   Defined benefit   Defined contribution   Other benefits   Total 
   06/30/2015   12/31/2014   06/30/2015   12/31/2014   06/30/2015   12/31/2014   06/30/2015   12/31/2014 
At the beginning of the period   (75)   (354)   (221)   (286)   (8)   7    (304)   (633)
Effects on asset ceiling   14    (453)   (10)   77    -    -    4    (376)
Remeasurements   6    732    22    (12)   -    (15)   28    705 
Total Amounts Recognized   (55)   (75)   (209)   (221)   (8)   (8)   (272)   (304)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 91
 

  

a)Retirement plans

 

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..

 

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

 

Entity   Benefit plan
Fundação Itau Unibanco - Previdência Complementar   Supplementary retirement plan – PAC (1)
    Franprev benefit plan - PBF (1)
    002 benefit plan - PB002 (1)
    Itaulam basic plan - PBI (1)
   

Itaulam Supplementary Plan - PSI (2)

Itaubanco Defined Contribution Plan (3)

 

 

  

Itaubank Retirement Plan (3)

Itaú Defined Benefit Plan (1)

Itaú Defined Contribution Plan (2)

Unibanco Pension Plan (3)

Prebeg benefit plan (1)

UBB PREV defined benefit plan (1)

Benefit plan II (1)

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 Pension Plan (3)

(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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 92
 

  

c) Defined benefit plans

 

I - Main assumptions used in actuarial valuation of retirement plans

 

   06/30/2015  06/30/2014
Discount rate (1)  10.24% p.a.  9.72% p.a.
Mortality table (2)  AT-2000  AT-2000
Turnover (3)  Exp.Itaú 2008/2010  Exp.Itaú 2008/2010
Future salary growth  7.12% p.a.  7.12% p.a.
Growth of the pension fund and social security benefits  4.00% p.a.  4.00% p.a.
Inflation  4.00% p.a.  4.00% p.a.
Actuarial method (4)  Projected Unit Credit  Projected Unit Credit

(1) The adoption of this assumption is based on interest rates obtained from the actual interest curve in IPCA, for medium-term liabilities of retirement plans sponsored by ITAÚ UNIBANCO HOLDING. At 12/31/2014 was adopted a consistent with the economic scenario at the balance sheet date rate, considering the volatility of the interest markets and the models adopted.

(2) The mortality tables adopted correspond to those disclosed by SOA – Society of Actuaries, the North-American entity which corresponds to IBA – Brazilian Institute of Actuarial Science, which reflects a 10% increase in the probabilities of survival 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.

 

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

 

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

 

- Volatility of Assets - The actuarial liability is calculated by adopting a discount rate defined on the income 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 93
 

  

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

 

   Fair Value   % Allocation
Types  06/30/2015   12/31/2014   06/30/2015   12/31/2014    2015 Target
Fixed income securities   12,528    12,250    91.15%   91.16%  53% to 100%
Variable income securities   655    641    4.77%   4.77%  0% to 20%
Structured investments   24    22    0.17%   0.16%  0% to 10%
Real estate   475    488    3.46%   3.63%  0% to 7%
Loans to participants   62    37    0.45%   0.28%  0% to 5%
Total   13,744    13,438    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$ 567 (R$ 554 at 12/31/2014), and real estate rented to Group companies, with a fair value of R$ 445 (R$ 455 at 12/31/2014).

 

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:

 

   06/30/2015   12/31/2014 
1 - Net assets of the plans   13,744    13,438 
2- Actuarial liabilities   (11,910)   (11,695)
3- Surplus (1-2)   1,834    1,743 
4- Asset ceiling  (*)   (1,923)   (1,847)
5- Net amount recognized in the balance sheet (3-4)   (89)   (104)
Amount recognized in assets (Note 20a)   264    242 
Amount recognized in liabilities (Note 20b)   (353)   (346)

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 94
 

  

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

 

   06/30/2015 
   Plan net
assets		   Actuarial
liabilities		   Surplus   Asset
ceiling		   Recognized
amount		 
Value beginning of the period   13,438    (11,695)   1,743    (1,847)   (104)
Cost of current service   -    (33)   (33)   -    (33)
Net interest (1)   667    (576)   91    (94)   (3)
Benefits paid   (404)   404    -    -    - 
Contributions of sponsors   32    -    32    -    32 
Contributions of participants   6    -    6    -    6 
Effects on asset ceiling   -    -    -    14    14 
Remeasurements (2) (3)   5    (10)   (5)   4    (1)
Value end of the period   13,744    (11,910)   1,834    (1,923)   (89)

 

   12/31/2014 
   Plan net
assets		   Actuarial
liabilities		   Surplus   Asset
ceiling		   Recognized
amount		 
Value beginning of the period   12,512    (11,577)   935    (1,293)   (358)
Cost of current service   -    (74)   (74)   -    (74)
Net interest (1)   1,178    (1,087)   91    (123)   (32)
Benefits paid   (780)   780    -    -    - 
Contributions of sponsors   81    -    81    -    81 
Contributions of participants   15    -    15    -    15 
Effects on asset ceiling   -    -    -    (453)   (453)
Remeasurements (2) (3)   432    263    695    22    717 
Value end of the period   13,438    (11,695)   1,743    (1,847)   (104)

(1) Corresponds to the amount calculated on 01/01/2015 based on the beginning amount (Net Assets, Actuarial Liabilities and Asset ceiling), taking into account the estimated amount of payments/ receipts of benefits/ contributions, multiplied by the discount rate of 10.24% p.a.. (At 01/01/2014 used by the discount rate of 9.72% 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$ 672 (R$ 1,611 at 12/31/2014).

 

During the period, the contributions made totaled R$ 32 (R$ 32 from 01/01 to 06/30/2014). The contribution rate increases based on the beneficiary’s salary.

 

In 2015, contribution to the retirement plans sponsored by ITAÚ UNIBANCO HOLDING is expected to amount to R$ 58.

 

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

 

Period  Payment
estimate		 
2015   845 
2016   867 
2017   889 
2018   915 
2019   942 
2020 to 2024   4,812 

 

VI- Sensitivity of defined benefit obligation

 

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

 

   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%   668    5.73%   (315)
- Increase by 0.5%   (578)   (5.22)%   331 

(*) Net of effects of asset ceiling

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 95
 

  

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:

 

   06/30/2015   12/31/2014 
   Pension plan
fund		   Asset ceiling   Recognized
amount		   Pension plan
fund		   Asset ceiling   Recognized
amount		 
Value beginning of the period   2,438    (224)   2,214    2,361    (275)   2,086 
Net interest   120    (10)   110    223    (27)   196 
Contribution   (70)   -    (70)   (133)   -    (133)
Effects on asset ceiling   -    (10)   (10)   -    77    77 
Remeasurements   10    12    22    (13)   1    (12)
Value end of the period  (Note 20a)   2,498    (232)   2,266    2,438    (224)   2,214 

 

During the period, the contributions to the defined contribution plans, including PGBL, totaled R$ 102 (R$ 91 from 01/01 to 06/30/2014), of which R$ 70 (R$ 66 from 01/01 to 06/30/2014) 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:

 

   06/30/2015   12/31/2014 
At the beginning of the period   (170)   (146)
Interest cost   (8)   (14)
Benefits paid   7    9 
Remeasurements   -    (19)
At the end of the period (Note 20b)   (171)   (170)

 

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

 

Period  Payment
estimate		 
2015   9 
2016   10 
2017   11 
2018   11 
2019   12 
2020 to 2024   73 

 

II-Assumptions and sensitivity - medical care cost

 

For calculation of projected benefits obligations in addition to the assumptions used for the defined benefit plans (Note 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   21    (18)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 96
 

 

Note 30 – Insurance contracts

 

a)Insurance contracts

 

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

 

b)Main products

 

I - Insurance

 

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

 

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

 

Main insurance lines  Loss ratio   Sales ratio 
   %   % 
   01/01 to
06/30/2015		   01/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Group accident insurance   4.7    6.5    41.4    37.9 
Individual accident   17.6    19.3    11.1    10.1 
Commercial multiple peril   45.1    46.8    21.0    16.5 
Mandatory insurance for personal injury caused by motor vehicles (DPVAT)   87.9    88.0    1.4    1.5 
Serious or terminal diseases   16.0    9.3    10.7    10.8 
Extended warranty - assets   17.2    17.2    64.6    63.7 
Credit Life   13.9    13.7    21.6    21.2 
Petroleum risks   -    75.2    -    13.5 
Multiple risks   6.5    3.5    62.0    55.7 
Specified and operational risks   -    17.2    -    5.3 
Education Insurance   63.0    (149.0)   32.9    23.1 
Home Insurance in Market Policies – Credit Life   18.0    11.8    (3.0)   (1.9)
Touristic   46.5    42.3    5.9    6.2 
Group life   42.2    53.1    13.1    13.0 
Individual life   21.0    9.0    -    - 

 

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% 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 97
 

  

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 98
 

  

III – Income from insurance and private pension

 

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

 

   Premiums and contributions issued   Reinsurance   Retained premiums and contributions 
   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Group accident insurance   224    198    441    379    (1)   -    (1)   (1)   223    198    440    378 
Individual accident   70    54    120    96    -    (1)   -    (2)   70    53    120    94 
Commercial multiple peril   16    46    29    78    (1)   (8)   (1)   (15)   15    38    28    63 
Internal Credit   31    19    60    37    -    -    -    -    31    19    60    37 
Mandatory insurance for personal injury caused by motor vehicles (DPVAT)   10    65    24    113    -    -    -    -    10    65    24    113 
Serious or terminal diseases   49    46    89    80    -    -    -    -    49    46    89    80 
Warranty extension - assets   72    461    142    841    -    -    -    -    72    461    142    841 
Disability Savings Pension   63    46    120    89    (2)   (1)   (4)   (2)   61    45    116    87 
PGBL   369    336    757    671    -    -    -    -    369    336    757    671 
Credit Life   185    188    391    378    (3)   -    (6)   -    182    188    385    378 
Income from Uncertain Events   41    34    74    61    -    (2)   -    (3)   41    32    74    58 
Petroleum risks   -    151    -    231    -    (123)   -    (193)   -    28    -    38 
Multiple risks   43    115    85    158    -    (66)   -    (69)   43    49    85    89 
Specified and all risks   -    94    -    246    -    (65)   -    (191)   -    29    -    55 
Home Insurance in Market Policies – Other Coverage   17    15    32    29    -    (3)   -    (7)   17    12    32    22 
Home Insurance in Market Policies – Credit Life   55    46    107    90    (5)   (5)   (12)   (11)   50    41    95    79 
Traditional   33    33    66    66    -    -    -    -    33    33    66    66 
Touristic   10    8    19    14    -    -    -    -    10    8    19    14 
VGBL   3,590    3,634    7,231    6,383    -    -    -    -    3,590    3,634    7,231    6,383 
Group life   387    364    755    696    (6)   (11)   (11)   (17)   381    353    744    679 
Individual life   4    4    7    8    -    -    -    -    4    4    7    8 
Other lines   77    266    140    520    -    (82)   (2)   (168)   77    184    138    352 
Total   5,346    6,223    10,689    11,264    (18)   (367)   (37)   (679)   5,328    5,856    10,652    10,585 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 99
 

  

c)Technical reserves for insurance and private pension

 

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

 

I - Insurance and private pension:

 

·Provision for unearned premiums – it is recognized, based on insurance premiums, 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 calculation is performed on the level of policies or endorsement of agreements in force, under the pro rata-die criterion.The provision includes an estimate for effective and not issued risks (PPNG-RVNE).

 

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

 

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

 

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

 

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

 

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

 

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

 

II - Change in reserves for insurance and private pension

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 100
 

  

II.I - Change in technical provisions

 

   06/30/2015   12/31/2014 
   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   5,872    28,228    75,678    109,778    10,275    25,252    63,496    99,023 
(+) Additions arising from premiums / contribution   2,489    943    7,231    10,663    7,267    2,034    13,541    22,842 
(-) Deferral of risk   (2,909)   (116)   -    (3,025)   (7,154)   (192)   -    (7,346)
(-) Payment of claims / benefits   (733)   (165)   (7)   (905)   (2,395)   (204)   (10)   (2,609)
(+) Reported claims   814    -    -    814    2,219    -    -    2,219 
(-) Redemptions   (1)   (751)   (4,085)   (4,837)   (1)   (1,249)   (7,929)   (9,179)
(+/-) Net portability   -    (471)   (157)   (628)   -    266    347    613 
(+) Adjustment of reserves and financial surplus   4    1,559    4,283    5,846    7    2,249    6,319    8,575 
(+/-) Business development (Notes 3e and i)   -    -    -    -    (4,402)   -    -    (4,402)
(+/-) Other (recognition/reversal)   (279)   1,040    276    1,037    56    72    (86)   42 
Reserves for insurance and private pension   5,257    30,267    83,219    118,743    5,872    28,228    75,678    109,778 

 

II.II - Technical provisions balances

 

   Insurance   Private pension   Total 
   06/30/2015   12/31/2014   06/30/2015   12/31/2014   06/30/2015   12/31/2014 
Unearned premiums   3,594    4,015    14    12    3,608    4,027 
Mathematical reserve for benefits to be granted and benefits granted   15    13    111,803    102,311    111,818    102,324 
Redemptions and Other Unsettled Amounts   22    21    182    168    204    189 
Financial surplus   1    1    536    519    537    520 
Unsettled claims (1)   695    760    17    15    712    775 
IBNR   475    635    20    19    495    654 
Administrative and Related Expenses   39    42    74    70    113    112 
Other   416    385    840    792    1,256    1,177 
Total (2)   5,257    5,872    113,486    103,906    118,743    109,778 

(1) The provision for unsettled claims 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 101
 

  

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 01/01/2015   1,647 
Increase   581 
Amortization   (942)
Balance at 06/30/2015   1,286 
Balance to be amortized in up to 12 months   854 
Balance to be amortized after 12 months   432 
      
Balance at 01/01/2014   2,205 
Increase   1,747 
Amortization   (2,263)
Corporate reorganizations   31 
Sale of Major Risk Portfolio   (73)
Balance at 12/31/2014   1,647 
Balance to be amortized in up to 12 months   972 
Balance to be amortized after 12 months   675 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 102
 

  

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 (*)   712 
(-) DPVAT operations   18 
(-) IBNER (claims incurred but not sufficiently reported)   161 
(-) Retrocession and other estimates   2 
Liability claims presented in the development table (Ia + Ib)   531 

(*) Provision for unsettled claims stated in Note 30c II.II of 06/30/2015, gross of reinsurance

 

Ia - Administratives claims - gross of reinsurance

Occurrence date  06/30/2011   06/30/2012   06/30/2013   06/30/2014   06/30/2015   Total 
At the end of reporting period   946    987    1,135    1,230    1,330      
After 1 year   956    992    1,146    1,248    -      
After 2 years   957    995    1,151    -    -      
After 3 years   959    996    -    -    -      
After 4 years   958    -    -    -    -      
Current estimate   958    996    1,151    1,248    1,330      
Accumulated payments through base date   951    992    1,140    1,217    1,116    5,416 
Liabilities recognized in the balance sheet   7    4    11    31    214    267 
Liabilities in relation to prior years                            14 
Total administratives claims included in balance sheet                            281 

 

Ib - Judicial claims - gross of reinsurance

Occurrence date  06/30/2011   06/30/2012   06/30/2013   06/30/2014   06/30/2015   Total 
At the end of reporting period   32    59    44    38    26      
After 1 year   52    64    58    45    -      
After 2 years   59    73    63    -    -      
After 3 years   63    75    -    -    -      
After 4 years   64    -    -    -    -      
Current estimate   64    75    63    45    26      
Accumulated payments through base date   37    49    46    28    17    177 
Liabilities recognized in the balance sheet   27    26    17    17    9    96 
Liabilities in relation to prior years                            154 
Total judicial claims included in balance sheet                            250 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 103
 

  

II - Net of reinsurance

 

Reserve for unsettled claims (1)   712 
(-) DPVAT operations   18 
(-) IBNER   161 
(-) Reinsurance (2)   37 
(-) Retrocession and other estimates   2 
Liability claims presented in the development table (IIa + IIb)   494 

(1) Provision refers to provision for unsettled claims stated in Note 30c II.II of 12/31/2014.

(2) Reinsurance operations stated in Note 30l III of 06/30/2015.

 

IIa - Administratives claims - net of reinsurance

Occurrence date  06/30/2011   06/30/2012   06/30/2013   06/30/2014   06/30/2015   Total 
At the end of reporting period   928    955    1,095    1,201    1,294     
After 1 year   939    962    1,106    1,220    -      
After 2 years   940    965    1,111    -    -      
After 3 years   942    966    -    -    -      
After 4 years   941    -    -    -    -      
Current estimate   941    966    1,111    1,220    1,294      
Accumulated payments through base date   937    962    1,100    1,189    1,102    5,290 
Liabilities recognized in the balance sheet   4    4    11    31    192    242 
Liabilities in relation to prior years                            15 
Total administratives claims included in balance sheet                            257 

 

IIb - Judicial claims - net of reinsurance

Occurrence date  06/30/2011   06/30/2012   06/30/2013   06/30/2014   06/30/2015   Total 
At the end of reporting period   32    58    44    38    26      
After 1 year   51    64    58    45    -      
After 2 years   58    72    63    -    -      
After 3 years   62    74    -    -    -      
After 4 years   63    -    -    -    -      
Current estimate   63    74    63    45    26      
Accumulated payments through base date   37    48    46    28    17    176 
Liabilities recognized in the balance sheet   26    26    17    17    9    95 
Liabilities in relation to prior years                            142 
Total judicial claims included in balance sheet                            237 

 

In the breakdown of the table on change of claims, historic claims were excluded from major risk insurance operations, as informed in Note 3i.

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 104
 

  

f)Liability adequacy test

 

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

 

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

 

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

 

Methodology and Test Grouping

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

 

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

 

Biometric Tables

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

 

For death and survival estimates biometric tables broken down by gender are used, adjusted according to life expectancy development (improvement), and the Álvaro Vindas table is adopted to estimate benefit requests for disability.

 

Risk-free Interest Rate

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

 

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

 

Income conversion rate

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

 

Other Assumptions

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 105
 

  

g)Insurance risk – effect of changes on actuarial assumptions

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 106
 

  

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) 
   06/30/2015   12/31/2014 
   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% increase in mortality rates   8    (4)   (4)   3    (5)   (5)
5% decrease in mortality rates   (7)   4    3    (3)   5    5 
                               
0.1% increase in risk-free interest rates   37    7    7    30    7    7 
0.1% decrease in risk-free interest rates   (38)   (8)   (8)   (31)   (7)   (7)
                               
5% increase in conversion in income rates   (13)   -    -    (11)   -    - 
5% decrease in conversion in income rates   13    -    -    11    -    - 
                               
5% increase in claims   -    (59)   (56)   -    (62)   (59)
5% decrease in claims   -    59    56    -    62    59 

(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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 107
 

 

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 was adopted, in accordance with certain lines shown below for the year 2014:

 

   04/01 to 06/30/2015   04/01 to 06/30/2014   01/01 to 06/30/2015   01/01 to 06/30/2014 
   Insurance
premiums		   Retained
premium		   Retention
(%)		   Insurance
premiums		   Retained
premium		   Retention
(%)		   Insurance
premiums		   Retained
premium		   Retention
(%)		   Insurance
premiums		   Retained
premium		   Retention
(%)		 
Property and casualty                                                            
Mandatory personal injury caused by motor vehicle (DPVAT)   10    10    100.0    65    65    100.0    24    24    100.0    113    113    100.0 
Extended warranty   72    72    100.0    461    461    100.0    142    142    100.0    841    841    100.0 
Credit life   185    182    98.4    188    188    100.0    391    385    98.5    378    378    100.0 
                                                             
Individuals                                                            
Group accident insurance   224    223    99.6    198    198    100.0    441    440    99.8    379    378    99.7 
Individual accident   70    70    100.0    54    53    98.1    120    120    100.0    96    94    97.9 
Group life   387    381    98.4    364    353    97.0    755    744    98.5    696    679    97.6 
Individual life   4    4    100.0    4    4    100.0    7    7    100.0    8    8    100.0 
                                                             
Large risks                                                            
Engineering   -    -    -    18    3    16.7    -    -    -    38    5    13.2 
Petroleum risks   -    -    -    151    28    18.5    -    -    -    231    38    16.5 
Specified and operational risks   -    -    -    94    29    30.9    -    -    -    246    55    22.4 

 

i)Insurance, pension plan and capitalization management structure

 

The products that make up the portfolios of ITAÚ UNIBANCO HOLDING’s insurance companies are related to the life insurance and elementary, pension plan and capitalization lines. Therefore, we understand that the major risks inherent in these products are as follows:

 

·Subscription risk is the possibility of losses arising from operations of insurance, pension plan and capitalization that go against the organization’s expectations, directly or indirectly associated with the technical and actuarial bases adopted to calculate premiums, contributions and provisions.

·Market risk is the possibility of incurring losses due to fluctuations in the market values of assets and liabilities comprising the actuarial technical reserves.

·Credit risk is the possibility of a certain debtor failing to meet any obligations in connection with the settlement of operations involving the trade of financial assets or reinsurance.

·Operational risk is the possibility of incurring losses arising from the failure, deficiency or inadequacy or internal processes, personnel and systems, or external events impacting the achievement of strategic, tactical or operational purposes of the insurance, pension plan and capitalization operations.

·Liquidity risk in insurance operations is the possibility of the institution’s failure to timely meet its obligations with insured and pension plan beneficiaries in view of lack of liquidity of the assets comprising the actuarial technical reserves.

 

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, the 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.

 

Also, as part of the risk management process, there is a structure of panels where, 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 108
 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 109
 

 

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: Value at Risk (VaR), Losses in Stress Scenarios (Stress Test), Sensitivity (DV01- Delta Variation) and Concentration. For a detailed description of metrics, see Note 36 – Market risk. In the table, the sensitivity analysis (DV01 – Delta Variation) is presented in relation to insurance operations that demonstrate the impact on the cash flows market value when submitted to a 1 annual basis point increase in the current interest rates or index rate and 1 percentage point in the share price and currency.

 

   (R$ million) 
   06/30/2015   12/31/2014 
Class  Account
balance		   DV01   Account
balance		   DV01 
                 
Government securities                    
NTN-C   4,485    (3.32)   4,299    (3.39)
NTN-B   2,168    (2.30)   1,950    (2.17)
LTN   543    (0.00)   0    (0.00)
                     
Private securities                    
Indexed to IPCA   342    (0.14)   337    (0.22)
Indexed to PRE   68    (0.01)   64    (0.01)
                     
Shares   1    0.01    2    0.02 
                     
Floating assets   7,771    -    8,177    - 
                     
Under agreements to resell   5,587    -    7,746    - 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 110
 

 

Liquidity Risk

 

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

 

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

 

Liabilities  Assets  06/30/2015   12/31/2014 
      Liabilities
amounts (1)		   Liabilities
DU (2)		   Assets
DU (2)		   Liabilities
amounts (1)		   Liabilities
DU (2)		   Assets
DU (2)		 
Insurance operations  Backing asset                        
Unearned premiums  LFT, repurchase agreements, NTN-B, CDB, LF and debentures   3,593    15.9    15.7    4,014    15.8    12.1 
IBNR, PDR e PSL  LFT, repurchase agreements, NTN-B, CDB, LF and debentures   1,208    15.5    19.5    1,435    15.8    14.9 
Other provisions  LFT, repurchase agreements, NTN-B, CDB, LF and debentures   416    100.5    26.2    388    108.7    21.8 
Subtotal  Subtotal   5,217              5,837           
Pension plan, VGBL and individual life operations                                 
Related expenses  LFT, repurchase agreements, NTN-B, CDB, LF and debentures   74    104.3    95.2    70    92.0    94.1 
Unearned premiums  LFT, repurchase agreements, NTN-B, CDB and debentures   15    -    16.2    14    -    12.2 
Unsettled claims  LFT, repurchase agreements, NTN-B, CDB and debentures   18    -    16.2    17    -    12.2 
IBNR  LFT, repurchase agreements, NTN-B, CDB and debentures   20    11.2    16.2    20    12.1    12.2 
Redemptions and Other Unsettled Amounts  LFT, repurchase agreements, NTN-B, CDB and debentures   204    -    16.1    188    -    12.2 
Mathematical reserve for benefits granted  LFT, repurchase agreements, LTN, NTN-B, NTN-C, NTN-F, CDB, LF and debentures   1,316    104.1    95.4    1,254    92.0    94.4 
Mathematical reserve for benefits to be granted – PGBL/ VGBL  LFT, repurchase agreements, LTN, NTN-B, NTN-C, NTN-F, CDB, LF and debentures (3)   106,420    189.6    25.6    97,141    169.6    14.8 
Mathematical reserve for benefits to be granted – traditional  LFT, repurchase agreements, NTN-B, NTN-C, Debentures   4,082    209.9    87.3    3,926    187.7    86.6 
Other provisions  LFT, repurchase agreements, NTN-B, NTN-C, CDB, LF and debentures   840    206.0    87.3    791    187.7    86.6 
Financial surplus  LFT, repurchase agreements, NTN-B, NTN-C, CDB, LF and debentures   537    209.6    87.2    520    187.4    86.4 
Subtotal  Subtotal   113,526              103,941           
Total technical reserves  Total backing assets   118,743              109,778           

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

(2) DU = Duration in months

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 111
 

 

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 77.96% (38.57% at 12/31/2014) and Munich Re do Brasil with 22.02% (5.34% at 12/31/2014). Only at 12/31/2014, Lloyd's (A+) with 17.48%, Mapfre Re, Cia de Reaseguros,S.A. (A) with 4.21% and American Home Assurance Company (A) with 4.01%.

 

-Social Security Operations: social security operations related to reinsurance premiums are entirely represented by General Reinsurance AG with 50% (50% at 12/31/2014) and Munich Re do Brasil with 50% (50% at 12/31/2014). For insurance operations, transfers of reinsurance premiums are deployed between Munich Re do Brasil with 59.36% (55.46% at 12/31/2014) and IRB Brasil Resseguros with 40.64% (44.54% at 12/31/2014).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 112
 

 

II - Risk level of financial assets

 

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

 

   06/30/2015 
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   8,180    87,660    -    129    2,578    4,082    102,629 
Satisfactory   -    9    -    -    -    -    9 
Higher Risk   -    -    -    -    -    -    - 
Total   8,180    87,669    -    129    2,578    4,082    102,638 
%   8.0    85.4    -    0.1    2.5    4.0    100.0 

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

 

   12/31/2014 
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   9,721    66,781    -    105    2,389    3,958    82,954 
Satisfactory   -    3    -    -    -    -    3 
Higher Risk   -    3    -    -    -    -    3 
Total   9,721    66,787    -    105    2,389    3,958    82,960 
%   11.7    80.5    -    0.1    2.9    4.8    100.0 

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

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 113
 

 

l)Reinsurance

 

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

 

Reinsurance assets

 

Reinsurance assets 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 policy holders and is in compliance with the operational limits established by the regulating authority. In addition to proportional contracts, non-proportional contracts are also entered into in order to transfer a portion of the responsibility to the reinsurance company for losses that exceed a certain level of losses in the portfolio. 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 114
 

 

I- Changes in balances of transactions with reinsurance companies

 

   Credits   Debits 
   06/30/2015   12/31/2014   06/30/2015   12/31/2014 
Opening balance   262    297    610    631 
Issued contracts   -    -    30    983 
Recoverable claims   9    (16)   -    1 
Prepayments / payments to reinsurer   10    -    (27)   (1,006)
Monetary adjustment and interest of claims   -    -    (1)   - 
Other increase / reversal   (250)   (19)   (546)   1 
Closing balance   31    262    66    610 

 

II – Balances of technical reserves with reinsurance assets

 

   6/30/2015   12/31/2014 
Reinsurance claims   53    2,456 
Reinsurance premiums   9    949 
Reinsurance commission   -    (37)
Closing balance   62    3,368 

 

III – Changes in balances of technical reserves for reinsurance claims

 

   6/30/2015   12/31/2014 
Opening balance   2,456    2,729 
Reported claims   22    340 
Paid claims   (16)   (737)
Other increase / reversal   (2,409)   30 
Monetary adjustment and interest of claims   -    94 
Closing balance (*)   53    2,456 

(*) 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

 

   6/30/2015   12/31/2014 
Opening balance   949    979 
Receipts   28    889 
Payments   (27)   (919)
Corporate reorganizations   (941)   - 
Closing balance   9    949 

 

V – Changes in balances of technical reserves for reinsurance commission

 

   6/30/2015   12/31/2014 
Opening balance   (37)   (47)
Receipts   3    44 
Payments   (3)   (34)
Other increase / reversal   37    - 
Closing balance   -    (37)

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 115
 

  

m)Regulatory authorities

 

Insurance and private pension operations are regulated by the National Council of Private Insurance (CNSP) and the Superintendence of Private Insurance (SUSEP). These authorities are responsible for regulating the market, and consequently for assisting in the mitigation of risks inherent in the business.

 

The CNSP is the regulatory authority of insurance activities in Brazil, created by Decree-Law N° 73, of November 21, 1966. The main attribution of CNSP, at the time of its creation, was to set out the guidelines and rules of government policy on private insurance segments, and with the enactment of Law N° 6,435, of July 15, 1977, its attributions included private pension of public companies.

 

The Superintendence of Private Insurance (SUSEP) is the authority responsible for controlling and overseeing the insurance, and reinsurance markets. An agency of the Ministry of Finance, it was created by the Decree-Law N° 73, of November 21, 1966, which also created the National System of Private Insurance, comprising the National Council of Private Insurance (CNSP), IRB Brasil Resseguros S.A. – IRB Brasil Re, the companies authorized to have plans and the open-ended private pension companies.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 116
 

 

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:

 

   06/30/2015   12/31/2014 
   Carrying value   Estimated
fair value		   Carrying value   Estimated
fair value		 
Financial assets                    
Cash and deposits on demand and Central Bank compulsory deposits   78,162    78,162    80,633    80,633 
Interbank deposits   30,975    30,975    23,081    23,081 
Securities purchased under agreements to resell   164,084    164,084    208,918    208,918 
Financial assets held for trading (*)   166,638    166,638    132,944    132,944 
Financial assets designated at fair value through profit or loss (*)   720    720    733    733 
Derivatives (*)   19,446    19,446    14,156    14,156 
Available-for-sale financial assets (*)   81,274    81,274    78,360    78,360 
Held-to-maturity financial assets   39,078    38,917    34,434    34,653 
Loan operations and lease operations   433,906    436,280    430,039    432,544 
Other financial assets   47,469    47,469    53,649    53,649 
Financial liabilities                    
Deposits   280,443    280,583    294,773    294,924 
Securities sold under repurchase agreements   280,659    280,659    288,683    288,683 
Financial liabilities held for trading (*)   369    369    520    520 
Derivatives (*)   23,872    23,872    17,350    17,350 
Interbank market debt   125,553    124,882    122,586    122,016 
Institutional market debt   83,275    82,319    73,242    72,391 
Liabilities for capitalization plans   3,073    3,073    3,010    3,010 
Other financial liabilities   60,441    60,441    71,492    71,492

(*) 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$ 74,243 (R$ 73,759 at 12/31/2014) with an estimated fair value of R$ 1,148 (R$ 1,140 at 12/31/2014).

 

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 National Association of Financial Market Institutions (ANBIMA), the fair values ​​of bonds are calculated based on the interest rates provided by others on the market (brokers). The fair values of corporate debt securities are computed by adopting criteria similar to those applied to interbank deposits, as described above. The fair values of shares are computed based on their prices quoted in the market. The fair values of derivative financial instruments were determined as follows:

 

·Swaps: The cash flows are discounted to present value based on yield curves that reflect the appropriate risk factors. These yield curves may be drawn mainly based on the exchange price of derivatives at 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.).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 117
 

 

·Futures and forwards: Quotations on exchanges or criteria identical to those applied to swaps.

 

·Options: The fair values are determined based on mathematical models (such as Black&Scholes) that are fed with implicit volatility data, interest rate yield curve and fair value of the underlying asset. Current market prices of options are used to compute the implicit volatilities. All these data are obtained from different sources (usually Bloomberg).

 

·Credit: Inversely related to the probability of default (PD) in a financial instrument subject to credit risk. The process of adjusting the market price of these spreads is based on the differences between the yield curves with no risk and the yield curves adjusted for credit risk.

 

d)Loan operations and lease operations – 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)Deposits – The fair value of fixed-rate deposits with maturity dates was calculated by using the estimated cash flow discounts based on interest rates close to the current rates ITAÚ UNIBANCO HOLDING adopts for similar funding. Demand deposits are not included for fair value calculation. The assumptions related to cash flows and discount rates are determined based on information available in the market and information specific for each operation.

 

f)Other financial assets / liabilities – primarily composed of receivables from credit card issuers, deposits in guarantee for contingent liabilities and trading and intermediation of securities. The carrying amounts for these assets/liabilities substantially approximate their fair values, since they principally represent amounts to be received in the short term from credit card holders and to be paid to credit card acquirers, judicially required deposits (indexed to market rates) made by ITAÚ UNIBANCO HOLDING as guarantees for lawsuits or very short-term receivables (generally with a maturity of approximately 5 (five) business days). All of these items represent assets / liabilities without significant associated market, credit and liquidity risks.

 

In accordance with IFRS, ITAÚ UNIBANCO HOLDING classifies fair value measurements in a fair value hierarchy that reflects the significance of inputs adopted in the measurement process.

 

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is a market in which transactions for the asset or liability being measured occur often enough and with sufficient volume to provide pricing information on an ongoing basis.

 

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Level 2 generally includes: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or quoted prices vary substantially either over time or among market makers, or in which little information is released publicly; (iii) inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, etc.); (iv) inputs that are mainly derived from or corroborated by observable market data through correlation or by other means.

 

Level 3: Inputs are unobservable for the asset or liability. Unobservable information shall be used to measure fair value to the extent that observable information is not available, thus allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 118
 

 

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, securities of foreign governments, shares and debentures traded on stock exchanges and other securities traded in an active market.

 

Level 2: When the pricing information is not available for a specific security, the assessment is usually based on prices quoted in the market for similar instruments, pricing information obtained for pricing services, such as Bloomberg, Reuters and brokers (only when the prices represent actual transactions) or discounted cash flows, which use information for assets actively traded in an active market. These securities are classified into Level 2 of the fair value hierarchy and are comprised of certain Brazilian government securities, debentures, some government securities quoted in a less-liquid market in relation to those classified into Level 1, and some share prices in investment funds. ITAÚ UNIBANCO HOLDING does not hold positions in alternative investment funds or private equity funds.

 

Level 3: When no pricing information in an active market, ITAÚ UNIBANCO HOLDING uses internally developed models, from curves generated according to the proprietary model. The Level 3 classification includes some Brazilian government and private securities falling due after 2025 and securities that are not usually traded in an active market.

 

Derivatives:

 

Level 1: Derivatives traded on stock exchanges are classified in Level 1 of the hierarchy.

 

Level 2: For derivatives not traded on stock exchanges, ITAÚ UNIBANCO HOLDING estimates the fair value by adopting a variety of techniques, such as Black&Scholes, Garman & Kohlhagen, Monte Carlo or even the discounted cash flow models usually adopted in the financial market. Derivatives included in Level 2 are credit default swaps, cross currency swaps, interest rate swaps, plain vanilla options, certain forwards and generally all swaps. All models adopted by ITAÚ UNIBANCO HOLDING are widely accepted in the financial services industry and reflect all derivative contractual terms. Considering that many of these models do not require a high level of subjectivity, since the methodologies adopted in the models do not require major decisions and information for the model are readily observed in the actively quotation markets, these products were classified in Level 2 of the measurement hierarchy.

 

Level 3: The derivatives with fair values based on non-observable information in an active market were classified into Level 3 of the fair value hierarchy, and are comprised of non-standard options, certain swaps indexed to non-observable information, and swaps with other products, such as swap with option and USD Check, credit derivatives and futures of certain commodities. These operations have their pricing derived from a range of volatility using the basis of historical volatility.

 

All aforementioned valuation methodologies may result in a fair value that may not be indicative of the net realizable value or future fair values. However, ITAÚ UNIBANCO HOLDING believes that all methodologies used are appropriate and consistent with the other market participants. However, the adoption of other methodologies or assumptions different than those used to estimate fair value may result in different fair value estimates at the balance sheet date.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 119
 

 

Distribution by level

 

The following table presents the breakdown of risk levels at 06/30/2015 and 12/31/2014 for financial assets held for trading and available-for-sale financial assets.

 

   06/30/2015   12/31/2014 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
Financial assets held for trading   123,453    42,965    220    166,638    91,024    41,130    790    132,944 
Investment funds   14    861    -    875    6    864    -    870 
Brazilian government securities   115,709    2,519    5    118,233    84,265    2,128    -    86,393 
Brazilian external debt bonds   3,963    -    -    3,963    1,914    -    -    1,914 
Government securities – other countries   987    261    -    1,248    1,151    389    -    1,540 
Argentina   848    -    -    848    628    -    -    628 
Chile   -    1    -    1    -    132    -    132 
Colombia   -    69    -    69    -    88    -    88 
United States   68    -    -    68    448    -    -    448 
Mexico   8    -    -    8    3    -    -    3 
Paraguay   -    133    -    133    -    128    -    128 
Uruguay   -    58    -    58    -    41    -    41 
Other   63    -    -    63    72    -    -    72 
Corporate securities   2,780    39,324    215    42,319    3,688    37,749    790    42,227 
Shares   2,285    -    -    2,285    2,351    -    -    2,351 
Bank deposit certificates   18    2,729    -    2,747    12    3,269    -    3,281 
Securitized real estate loans   -    -    -    -    -    -    1    1 
Debentures   475    4,284    214    4,973    1,313    2,720    210    4,243 
Eurobonds and others   1    902    1    904    10    1,049    2    1,061 
Financial credit bills   -    31,409    -    31,409    -    30,711    -    30,711 
Promissory notes   -    -    -    -    -    -    577    577 
Other   1    -    -    1    2    -    -    2 
Available-for-sale financial assets   29,177    45,796    6,301    81,274    30,787    42,169    5,404    78,360 
Investment funds   2    132    1,201    1,335    3    138    -    141 
Brazilian government securities   11,368    684    239    12,291    13,570    572    249    14,391 
Brazilian external debt bonds   12,807    -    -    12,807    11,234    -    -    11,234 
Government securities – other countries   1,512    7,568    8    9,088    1,153    7,453    13    8,619 
Argentina   1    -    -    1    -    -    -    - 
Belgium   -    -    -    -    57    -    -    57 
Chile   -    1,005    8    1,013    -    1,106    13    1,119 
Korea   -    1,625    -    1,625    -    1,782    -    1,782 
Denmark   -    3,029    -    3,029    -    2,699    -    2,699 
Spain   -    307    -    307    -    783    -    783 
United States   1,141    -    -    1,141    726    -    -    726 
France   193    -    -    193    133    -    -    133 
Netherlands   170    -    -    170    151    -    -    151 
Italy   -    -    -    -    70    -    -    70 
Paraguay        1,310    -    1,310    9    840    -    849 
Uruguay   -    292    -    292    -    243    -    243 
Other   7    -    -    7    7    -    -    7 
Corporate securities   3,488    37,412    4,853    45,753    4,827    34,006    5,142    43,975 
Shares   2,437    -    -    2,437    1,998    1    -    1,999 
Rural Product Note   -    1,243    73    1,316    -    1,357    51    1,408 
Bank deposit certificates   -    1,388    88    1,476    -    1,223    58    1,281 
Securitized real estate loans   -    -    2,353    2,353    -    -    2,522    2,522 
Debentures   214    19,732    734    20,680    2,732    16,807    706    20,245 
Eurobonds and others   837    7,560    43    8,440    97    6,557    53    6,707 
Financial credit bills   -    7,155    341    7,496    -    7,735    270    8,005 
Promissory notes   -    -    1,087    1,087    -    -    1,397    1,397 
Other   -    334    134    468    -    326    85    411 
Financial assets designated at fair value through profit or loss   720    -    -    720    733    -    -    733 
Brazilian government securities   609    -    -    609    626    -    -    626 
Government securities – other countries   111    -    -    111    107    -    -    107 
Financial liabilities held for trading   -    369    -    369    -    448    72    520 
Structured notes   -    369    -    369    -    448    72    520 

 

The following table presents the breakdown of risk levels at 06/30/2015 and 12/31/2014 for our derivative assets and liabilities.

 

   06/30/2015   12/31/2014 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
Derivatives - assets   (188)   19,374    260    19,446    (218)   14,253    121    14,156 
Futures   19    -    -    19    -    -    -    - 
Swap – differential receivable   -    5,274    124    5,398    -    4,783    33    4,816 
Options   -    3,877    47    3,924    -    2,856    16    2,872 
Forwards (onshore)   -    4,081    -    4,081    -    2,394    -    2,394 
Credit derivatives   -    353    -    353    -    122    -    122 
Forwards (offshore)   -    2,613    -    2,613    -    2,106    -    2,106 
Check of swap   -    184    -    184    -    93    -    93 
Other derivatives   (207)   2,992    89    2,874    (218)   1,899    72    1,753 
Derivatives - liabilities   59    (23,867)   (64)   (23,872)   (310)   (16,996)   (44)   (17,350)
Futures   -    -    -    -    (354)   -    -    (354)
Swap – differential payable   -    (11,904)   (50)   (11,954)   -    (9,496)   (38)   (9,534)
Options   -    (4,079)   (14)   (4,093)   -    (3,051)   (6)   (3,057)
Forwards (onshore)   -    (2,289)   -    (2,289)   -    (682)   -    (682)
Credit derivatives   -    (391)   -    (391)   -    (179)   -    (179)
Forwards (offshore)   -    (1,916)   -    (1,916)   -    (1,693)   -    (1,693)
Swap with USD check   -    (393)   -    (393)   -    (229)   -    (229)
Other derivatives   59    (2,895)   -    (2,836)   44    (1,666)   -    (1,622)

 

There were no significant transfer between Level 1 and Level 2 during the period from June 30, 2015 and December 31, 2014. Transfers to and from Level 3 are presented in movements of Level 3.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 120
 

  

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$ 42,965 million in financial instruments classified as Level 2, at June 30, 2015, pricing service or brokers were used to evaluate securities at the fair value of R$ 39,324 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 121
 

  

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 linked to shares.

 

   Fair value
at
12/31/2014		   Total gains or
losses (realized /
unrealized)		  
Purchases		  
Settlements		   Transfers in
and / or out of
Level 3		   Fair value
at
06/30/2015		   Total gains (losses)
related to assets and
liabilities still held at
reporting date		 
Financial assets held for trading   790    87    -    (657)   -    220    - 
Brazilian government securities   -    5    -    -    -    5    - 
Corporate securities   790    82    -    (657)   -    215    - 
Securitized real estate loans   1    -    -    (1)   -    -    - 
Debentures   210    4    -    -    -    214    - 
Promissory notes   577    78    -    (655)   -    -    - 
Eurobonds and others   2    -    -    (1)   -    1    - 
Available-for-sale financial assets   5,404    (80)   1,992    (1,015)   -    6,301    50 
Investment funds   -    -    1,201    -    -    1,201    - 
Brazilian government securities   249    (10)   -    -    -    239    (3)
Government securities – abroad - Chile   13    1    10    (16)   -    8    - 
Corporate securities   5,142    (71)   781    (999)   -    4,853    53 
Rural Product Note   51    13    9    -    -    73    5 
Bank deposit certificates   58    6    97    (73)   -    88    - 
Securitized real estate loans   2,522    (183)   49    (35)   -    2,353    32 
Debentures   706    28    -    -    -    734    11 
Eurobonds and others   53    (2)   26    (34)   -    43    5 
Financial credit bills   270    22    49    -    -    341    (3)
Promissory notes   1,397    44    456    (810)   -    1,087    1 
Other   85    1    95    (47)   -    134    2 

 

   Fair value
at
12/31/2014		   Total gains or
losses (realized /
unrealized)		   Purchases   Settlements   Transfers in
and / or out of
Level 3		   Fair value
at
06/30/2015		   Total gains (losses)
related to assets and
liabilities still held at
reporting date		 
Derivatives - assets   121    83    73    (17)   -    260    104 
Swap – differential receivable   33    75    17    (1)   -    124    63 
Options   16    1    46    (16)        47    34 
Other derivatives   72    7    10    -    -    89    7 
Derivatives - liabilities   (44)   (17)   (14)   11    -    (64)   (17)
Swap – differential payable   (38)   (16)   (1)   5    -    (50)   (25)
Options   (6)   (1)   (13)   6    -    (14)   8 

 

   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
12/31/2014		   Total gains (losses)
related to assets and
liabilities still held at
reporting date		 
Financial assets held for trading   27    724    935    (896)   -    790    - 
Corporate securities   27    724    935    (896)   -    790    - 
Securitized real estate loans   -    10    -    (9)   -    1    - 
Debêntures   -    29    705    (524)   -    210    - 
Promissory notes   27    562    230    (242)   -    577    - 
Eurobonds and others   -    123    -    (121)   -    2    - 
Available-for-sale financial assets   6,489    1,581    6,354    (9,020)   -    5,404    (5)
Brazilian government securities   258    (272)   267    (4)   -    249    - 
Government securities – abroad - Chile   34    (17)   40    (44)   -    13    - 
Corporate securities   6,197    1,870    6,047    (8,972)   -    5,142    (5)
Rural Product Note   -    -    51    -         51    - 
Bank deposit certificates   33    12    97    (84)   -    58    - 
Securitized real estate loans   4,834    1,538    14    (3,864)   -    2,522    (8)
Debêntures   -    313    706    (313)   -    706    - 
Eurobonds and others   74    23    -    (44)   -    53    3 
Financial credit bills   -    4    266    -    -    270    - 
Promissory notes   1,227    (22)   4,858    (4,666)   -    1,397    - 
Other   29    2    55    (1)   -    85    - 

 

   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
12/31/2014		   Total gains (losses)
related to assets and
liabilities still held at
reporting date		 
Derivatives - Assets   126    73    92    (174)   4    121    - 
Swaps - differential receivable   -    37    2    (10)   4    33    - 
Options   13    24    18    (39)   -    16    - 
Forwards (onshore)   2    -    -    (2)   -    -    - 
Other derivatives   111    12    72    (123)   -    72    - 
Derivatives - Liabilities   (5)   2    (10)   (18)   (13)   (44)   - 
Swaps - differential payable   -    (23)   1    (3)   (13)   (38)   - 
Options   (5)   25    (11)   (15)   -    (6)   - 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 122
 

 

Sensitivity analyses operations of Level 3

 

The fair value of financial instruments classified in Level 3 (in which prices negotiated are not easily noticeable in active markets) is measured through assessment techniques based on correlations and associated products traded in active markets, internal estimates and internal models.

 

Significant unverifiable inputs used for measurement of the fair value of instruments classified in Level 3 are: interest rates, underlying asset prices and volatility. Significant variations in any of these inputs separately may give rise to significant changes in the fair value.

 

The table below shows the sensitivity of these fair values in scenarios of changes of interest rates, asset prices, or in scenarios vary in prices with shocks and the volatility for non-linear assets:

 

Sensitivity – Level 3 Operations  06/30/2015 
      Impact 
Risk factor groups  Scenarios  Result   Stockholders'
equity		 
   I   (2.0)   (2.9)
Interest rates  II   (49.6)   (72.3)
   III   (99.4)   (142.1)
Currency, commodities, and ratios  I   (60.0)   - 
   II   (120.1)   - 
Nonlinear  I   (26.8)   - 
   II   (47.6)   - 

 

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 percentage points (scenarios I and II respectively) in prices of currencies, commodities and ratios, both for increase and decrease, considering the largest losses resulting in each scenario.

 

Non linear

 

Scenario I: Shocks at 5 percentage points in prices and 25 percentage points the level in volatility, both for increase and decrease, considering the largest losses resulting in each scenario.

 

Scenario II: Shocks at 10 percentage points in prices and 25 percentage points the level in volatility, both for increase and decrease, considering the largest losses resulting in each scenario.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 123
 

 

Note 32 – Provisions, contingencies and other commitments

 

Provision  06/30/2015   12/31/2014 
Civil   5,030    4,643 
Labor   5,817    5,598 
Tax and social security   6,812    6,627 
Other   167    159 
Total   17,826    17,027 
Current   3,509    3,268 
Non-current   14,317    13,759 

 

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): calculation is carried out on a periodical basis, as from the calculation of the claimed amount which, in turn, is estimated based on de jure or de facto characteristics related to that 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.

 

From 1986 to 1994, the Brazilian federal government implemented several consecutive monetary stabilization plans (MSP) to combat hyperinflation. In order to implement these plans, the Brazilian federal government enacted several laws based on its power to regulate the monetary and financial systems, as granted by the Brazilian federal constitution.

 

Savings account holders at the time these MSPs were implemented challenged the constitutionality of the laws in connection with such plans, claiming, from the banks in which they held savings accounts, additional interest amounts based on the inflation rates applied to the deposit accounts according to the MSPs.

 

We are defendants in numerous standardized lawsuits filed by individuals in respect of the MSP, and we record provisions for such claims upon service of process for a claim. In addition, we are defendants in class actions, similar to the lawsuits by individuals, filed by either (i) consumer protection associations or (ii) the Public Prosecution Office on behalf of savings account holders. Holders of savings accounts may claim any amount due based on such a decision. We record provisions when individual plaintiffs apply to enforce such decisions, using the same criteria adopted to determine provisions for individual lawsuits.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 124
 

 

The Federal Supreme Court (STF) has issued some decisions favorable to savings account holders, but has not issued a final ruling with respect to the constitutionality of the MSPs as applicable to savings accounts. In relation to a similar dispute with respect to the constitutionality of the MSPs as applicable to time deposits and other private agreements, the STF has decided that the bills were constitutional. As a response to this discrepancy, the National Confederation of the Financial System (CONSIF) an association of Brazilian financial institutions, filed a special proceeding with the STF (Action against the violation of a constitutional fundamental right - “ADPF” No. 165), in which the Central Bank filed an amicus brief, arguing that savings account holders did not incur actual damages and that the MSPs as applicable to savings accounts were in accordance with the federal constitution. Accordingly, the STF suspended the ruling of all appeals involving this matter until it pronounces a final decision. In addition, the Superior Court of Justice (STJ), responsible for decisions about federal legislation, should come forward with a position on several aspects that will directly determine the amount due, should the STF sentence be contrary to the constitutionality of MSPs. The most important rulings will address the following issues: (i) the accrual of compensatory interest on the amount due to the plaintiff, in filings that carry no specific claim to such interest; (ii) the initial date of default interest, in regard to class actions; and (iii) the possibility of compensating the negative difference arising in the month of the MSP implementation, between the interests actually paid on saving accounts and the inflation rate of the same period, with the positive difference arising in the months subsequent to the MSP implementation, between the interests actually paid on saving accounts and the inflation rate of the same period. The STJ also ruled that the term for filing class actions expired 5 years from the date of the MSP implementation. As a consequence, a number of class actions were dismissed by the Judiciary as a result of such ruling.

 

No amount is recorded as provision in relation to civil lawsuits which represent possible losses and which have a total estimated risk of R$ 2,350 (R$ 1,800 at 12/31/2014), 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 and is reassessed taking into account court rulings. 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$ 550 (R$ 416 12/31/2014).

 

-Other risks

 

These are quantified and recorded as provisions mainly based on the evaluation of agribusiness credit transactions with joint obligation and FCVS (Salary Variations Compensation Fund) credits transferred to Banco Nacional.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 125
 

 

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 06/30/2015 
   Civil   Labor   Other   Total 
Opening balance   4,643    5,598    159    10,400 
(-) Contingencies guaranteed by indemnity clause (Note 2.4.t)   (132)   (1,029)   -    (1,161)
Subtotal   4,511    4,569    159    9,239 
Interest (Note 26)   197    285    -    482 
Changes in the period reflected in results (Note 26)   862    669    8    1,539 
Increase (*)   1,121    749    9    1,879 
Reversal   (259)   (80)   (1)   (340)
Payment   (678)   (811)   -    (1,489)
Subtotal   4,892    4,712    167    9,771 
(+) Contingencies guaranteed by indemnity clause (Note 2.4.t)   138    1,105    -    1,243 
Closing balance   5,030    5,817    167    11,014 
Escrow deposits at 06/30/2015 (Note 20a)   2,039    2,498    -    4,537 

(*) Civil provisions include the provision for economic plans amounting to R$ 138.

 

   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.

 

-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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 126
 

 

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
06/30/2015		   01/01 to
06/30/2014		 
Opening balance   6,627    8,974 
(-) Contingencies guaranteed by indemnity clause   (61)   (57)
Subtotal   6,566    8,917 
Interest (*)   273    266 
Changes in the period reflected in results   43    465 
Increase (*)   96    791 
Reversal (*)   (53)   (326)
Payment   (132)   (29)
Subtotal   6,750    9,619 
(+) Contingencies guaranteed by indemnity clause   62    59 
Closing balance   6,812    9,678 

(*) The amounts are included in the headings Tax Expenses, General and Administrative Expenses and Current Income Tax and Social Contribution.

  

Escrow deposits  01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Opening balance   4,736    5,658 
Appropriation of interest   82    202 
Changes in the period   171    107 
Deposits made   301    131 
Withdrawals   (38)   (2)
Deposits released   (92)   (22)
Closing balance (Note 20a)   4,989    5,967 
Reclassification of assets pledged as collateral for contingencies (Note 32d)   -    1 
Closing balance after reclassification   4,989    5,968 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 127
 

  

Main discussions related to the provisions recognized for Tax and Social Securities Lawsuits are described as follows:

 

·CSLL – Isonomy – R$ 1,047: as the law increased the CSLL rate for financial and insurance companies to 15%, 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%. The corresponding escrow deposit balance totals R$ 1,030;

 

·INSS – Prevention Accident Factor (FAP) – R$ 776: it challenges the legality of FAP and inconsistent procedures applied by the INSS upon its calculation. The corresponding escrow deposit balance totals R$ 92;

 

·PIS and COFINS – Calculation basis – R$ 587: 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$ 509;

 

·IRPJ and CSLL – Taxation of profits earned abroad – R$ 539: 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$ 503.

 

Off-balance sheet contingencies - The amounts involved in the main tax and social security lawsuits with likelihood of loss possible, which total an estimated risk of R$ 14,861, are described below:

 

·INSS – Non-compensatory amounts – R$ 4,486: we defend the non-taxation of these amounts, mainly profit sharing, stock option plan, transportation vouchers and sole bonus;

 

·IRPJ and CSLL – Goodwill – Deductibility – R$ 2,481: deductibility of goodwill on acquisition of investments with future expected profitability, and R$ 584 of this amount is guaranteed in company purchase agreements;

 

·IRPJ, CSLL, PIS and COFINS – Request for offset dismissed - R$ 1,340: cases in which the liquidity and the offset of credits are discussed;

 

·IRPJ and CSLL - Interest on capital - R$ 1,248: 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;

 

·ISS – Banking Institutions – R$ 829: 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$ 758 (R$ 676 at 12/31/2014) (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:

 

   06/30/2015   06/30/2014 
Financial assets held for trading and Available-for-sale financial assets (basically financial treasury bills)   801    722 
Escrow deposits (Note 20a)   4,287    4,182 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 128
 

 

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.

 

e)Program for Cash or Installment Payment of Taxes

 

ITAÚ UNIBANCO HOLDING and its subsidiaries adhered to the Program for Cash or Installment Payment of Taxes, substantially related to the Federal area, established by Law No. 13,097, of January 19, 2015 and Law No. 13,043/2014. The program included debits managed by the Federal Reserve Service of Brazil and was established in accordance with the following main articles:

 

·Refis of Capital Gain Earned in the Merger of Shares from Nova Bolsa

Law 13,097/15 article 145 – Arising from capital gain earned until December 31, 2008 due to the sale of shares resulting from the conversion of equity securities from nonprofit associations.

 

The net effect of the program in the result was R$ 27, and it is reflected in Other Operating Income, Income Tax and Social Contribution.

 

f)Program for Cash Settlement or Installment Payment of Municipal Taxes

 

ITAÚ UNIBANCO HOLDING and its subsidiaries adhered to the Program for Cash or Installment Payment of Taxes, substantially related to the municipal area, established by Law No. 16,097 of December 29, 2014. This program included debits managed by the Finance and Economic Development Secretariat of the Municipality of São Paulo and was established in accordance with the main article as follows:

 

·Installment Payment Incentive Program (PPI) (Article 1) - it introduces the program intended to regularize the debts referred to in this act, arising from tax and non-tax credits, whether assessed or not, including those registered as overdue tax debts, whether filed or to be filed, in view of any taxable events occurred up to December 31, 2013.

 

The net effect of this program in income was R$ 14, and it is reflected in Other Operating Income, Income Tax and Social Contribution.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 129
 

 

Note 33 – Regulatory capital

 

ITAÚ UNIBANCO HOLDING is subject to regulation by the Central Bank of Brazil which issues rules and instructions regarding currency and credit policies for financial institutions operating in Brazil. The Central Bank also determines minimum capital requirements, fixed assets limits, lending limits, accounting practices and compulsory deposit requirements, and requires banks to comply with regulation based on the Basel Accord as regards to capital adequacy. Furthermore, the National Council of Private Insurance and SUSEP issue regulations on capital requirements which affect our insurance, private pension and capitalization operations.

 

The Basel Accord requires banks to have a ratio of regulatory capital to risk exposure assets of a minimum of 8%. The regulatory capital is basically composed of two tiers:

 

·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%; with timeline to achieve 8% 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.

 

   06/30/2015 
   Prudential
consolidation (*)		 
Regulatory Capital     
Tier I   97,008 
Common Equity Tier I   96,959 
Additional Tier I Capital   49 
Tier II   29,416 
Total   126,424 
Requirement for coverage of risk-weighted assets     
Credit   681,622 
Market   19,262 
Operational   35,509 
Risk-weighted assets   736,393 
Minimum Required Regulatory Capital   81,003 
Excess capital in relation to Minimum Required Regulatory Capital   45,421 
Capital to risk-weighted assets ratio - %   17.2%

(*) Consolidated financial statements including financial companies and the like: As from the base date January 2015, in accordance with Circular 4,278, this is the calculation consolidated basis.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 130
 

 

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, 2015, 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                       
    400    2008    2015   119.8% of CDI   873 
    50    2010    2015   113% of CDI   90 
    466    2006    2016   100% of CDI + 0.7% (*)   1,151 
    2,665    2010    2016   110% to 114% of CDI   4,780 
    123             IPCA + 7.21%   248 
    367    2010    2017   IPCA + 7.33%   748 
    4,071             Total   7,890 
                        
Subordinated financial bills - BRL                       
    365    2010    2016   100% of CDI + 1.35% to 1.36%   383 
    1,874             112% to 112.5% of CDI   1,962 
    30             IPCA + 7%   55 
    206    2010    2017   IPCA + 6.95% to 7.2%   308 
    3,224    2011    2017   108% to 112% of CDI   3,449 
    352             IPCA + 6.15% to 7.8%   537 
    138             IGPM + 6.55% to 7.6%   220 
    3,650             100% of CDI + 1.29% to 1.52%   3,776 
    500    2012    2017   100% of CDI + 1.12%   506 
    42    2011    2018   IGPM + 7%   55 
    30             IPCA + 7.53% to 7.7%   41 
    461    2012    2018   IPCA + 4.4% to 6.58%   643 
    3,782             100% of CDI + 1.01% to 1.32%   3,887 
    6,373             108% to 113% of CDI   6,904 
    112             9.95 to 11.95%   150 
    2    2011    2019   109% to 109.7% of CDI   3 
    12    2012    2019   11.96%   18 
    101             IPCA + 4.7% to 6.3%   138 
    1             110% of CDI   1 
    20    2012    2020   IPCA + 6% to 6.17%   30 
    1             111% of CDI   1 
    6    2011    2021   109.25% to 110.5% of CDI   9 
    2,307    2012    2022   IPCA + 5.15% to 5.83%   3,234 
    20             IGPM + 4.63%   24 
    23,609             Total   26,334 
                        
Subordinated euronotes - USD                       
    990    2010    2020   6.2%   3,105 
    1,000    2010    2021   5.75%   3,186 
    730    2011    2021   5.75% a 6.2%   2,286 
    550    2012    2021   6.20%   1,706 
    2,600    2012    2022   5.50% to 5.65%   8,149 
    1,851    2012    2023   5.13%   5,783 
    7,721             Total   24,215 
                        
Total                     58,439 

(*) Subordinated CDBs may be redeemed from November 2011.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 131
 

 

Note 34 – Segment Information

 

ITAÚ UNIBANCO HOLDING is a banking institution that offers its customers a wide range of financial products and services.

 

As from the first quarter of 2015 and the comparison with 2014, the way of presenting the segments was changed in order to adjust it to the bank’s current organizational structure. The following segments will be reported: Retail Banking, Wholesale Banking, and Activities with the Market + Corporation. The Retail Banking now covers the former segments Commercial Banking, – Retail and Consumer Credit – Retail, with the transfer of operations from Private Banking and Latam to the Wholesale Banking and these are the main changes of this presentation.

 

The current operational and reporting segments of ITAÚ UNIBANCO HOLDING are described below:

 

·Retail Banking

 

The result of the Retail Banking segment arises from the offer of banking products and services to a diversified client base of account holders and non-account holders, individuals and companies. The segment includes retail clients, high net worth clients (Itaú Uniclass and Personnalité), and the corporate segment (very small and small companies). This segment comprises financing and lending activities carried out in units other than the branch network, and offering of credit cards, in addition to operations with Itaú BMG Consignado.

 

·Wholesale Banking

 

The result of the Wholesale Banking segment arises from the products and services offered to middle-market companies, private banking clients, from the activities of Latin America units, and the activities of Itaú BBA, the unit in charge of commercial operations with large companies and performing as an investment banking unit.

 

·Activities with the Market + Corporation

 

This segment records the result arising from capital surplus, subordinated debt surplus and the net balance of tax credits and debits. It also shows the financial margin with the market, the Treasury operating cost, the equity in earnings of companies not associated to each segment and the interest in Porto Seguro.

 

Basis of presentation of segment information

 

Segment information is prepared based on the reports used by top management (Executive Committee) to assess the performance and to make decisions regarding the allocation of funds for investment and other purposes.

 

The top management (Executive Committee) of ITAÚ UNIBANCO HOLDING uses a variety of information for such purposes including financial and non-financial information that is measured on different bases as well as information prepared based on accounting practices adopted in Brazil. The main index used to monitor the business performance is the Recurring Net Income and the Economic Capital allocated to each segment.

 

The segment information has been prepared following accounting practices adopted in Brazil modified for the adjustments described below:

 

·Allocated capital and income tax rate

 

Based on the managerial income statement, the segment information considers the application of the following criteria:

 

Allocated capital: The impacts associated to capital allocation are included in the financial information. Accordingly, adjustments were made to the financial statements, based on a proprietary model. The Allocated Economic Capital (AEC) model was adopted for the financial statements by segments, and as from 2015, we changed the calculation methodology. The AEC considers, in addition to Tier l allocated capital, the effects of the calculation of expected loan losses, supplementary to the requirements of the Central Bank of Brazil, pursuant to CMN Circular No. 2.682/99. Accordingly, the Allocated Capital comprises the following components: Credit risk (including expected loss), operational risk, market risk and insurance underwriting risk. Based on the portion of allocated capital tier I, we calculated the Return on Economic Allocated Capital, which corresponds to an operational performance indicator consistently adjusted to the capital required to support the risk associated to asset and liability positions assumed, in conformity with our risk appetite.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 132
 

  

Income tax rate: We consider the total income tax rate, net of the tax effect from the payment of interest on capital, for the Retail Banking, Wholesale Bank and Activities with the Market segments. The difference between the income tax amount calculated by segment and the effective income tax amount, as stated in the consolidated financial statements, is allocated to the Activities with the Market + Corporation column.

 

·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% 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;

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 133
 

  

·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;

 

·Effective interest rates, financial assets and liabilities stated at amortized cost, are recognized by the effective interest rate method, allocating revenues and costs directly attributable to acquisition, issue or disposal for the transaction period of the operation; according to Brazilian standards, fee expenses and income are recognized as these transactions are engaged.

 

·Business combinations are accounted for under the acquisition method in IFRS (IFRS 3), in which the purchase price is allocated among assets and liabilities of the acquired company, and the amount not subject to allocation, if any, is recognized as goodwill. Such amount is not amortized, but is subject to an impairment test.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 134
 

  

ITAÚ UNIBANCO HOLDING S.A.

From April 1 to June 30, 2015

(In millions of Reais, except per share information)

 

Consolidated Statement of Income  Retail
Banking		   Wholesale
Banking		   Activities with
the Market +
Corporation		   ITAÚ
UNIBANCO		   Adjustments   IFRS consolidated 
Banking product   17,711    6,008    1,620    25,339    1,563    26,902 
Net interest (1)   10,544    4,116    1,575    16,235    1,703    17,938 
Revenue from services   5,107    1,786    13    6,906    218    7,124 
Income from insurance, private pension and capitalization operations before claim and selling expenses   2,060    106    32    2,198    (573)   1,625 
Other revenues   -    -    -    -    215    215 
Losses on loans and claims   (3,099)   (1,658)   (15)   (4,772)   (227)   (4,999)
Expenses for allowance for loan and lease losses   (3,732)   (1,773)   (15)   (5,520)   (229)   (5,749)
Recovery of credits written off as loss   1,005    128    -    1,133    2    1,135 
Expenses for claims / recovery of claims under reinsurance   (372)   (13)   -    (385)   -    (385)
Banking product net of losses on loans and claims   14,612    4,350    1,605    20,567    1,336    21,903 
Other operating income (expenses)   (8,640)   (2,608)   (444)   (11,692)   (1,061)   (12,753)
Non-interest expenses (2)   (7,576)   (2,315)   (356)   (10,247)   (979)   (11,226)
Tax expenses for ISS, PIS and COFINS and other   (1,064)   (293)   (88)   (1,445)   (241)   (1,686)
Share of profit or (loss) in associates and joint ventures   -    -    -    -    159    159 
Net income before income tax and social contribution   5,972    1,742    1,161    8,875    275    9,150 
Income tax and social contribution   (2,079)   (471)   (111)   (2,661)   (555)   (3,216)
Non-controlling interest in subsidiaries   (78)   -    (2)   (80)   (9)   (89)
Net income   3,815    1,271    1,048    6,134    (289)   5,845 

(1) Includes interest and similar income and expenses of R$ 14,795, dividend income of R$ 13, net gains (loss) from investment securities and derivatives of R$ (336), and results from foreign exchange operations and exchange variation of transactions abroad o f R$ 3,466.

(2) Refers to general and administrative expenses including depreciation expenses of R$ 431, amortization expenses of R$ 225 and insurance acquisition expenses of R$ 288.

 

Total assets (1) - 06/30/2015   786,660    487,143    120,744    1,230,510    (96,612)   1,133,898 
Total liabilities - 06/30/2015   749,430    448,914    93,722    1,128,029    (99,866)   1,028,163 
                               
(1) Includes:                              
Investments in associates and joint ventures   1,001    -    2,179    3,180    1,027    4,207 
Goodwill   213    -    -    213    1,774    1,987 
Fixed assets, net   6,449    930    -    7,379    1,156    8,535 
Intangible assets, net   7,811    807    -    8,618    (2,399)   6,219 

 

The Consolidated figures do not represent the sum of the parties because there are intercompany transactions that were eliminated only in the consolidated statements. Segments are assessed by top management, net of income and expenses between related parties.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 135
 

 

ITAÚ UNIBANCO HOLDING S.A.

From April 1 to June 30, 2014

(In millions of Reais, except per share information)

 

Consolidated Statement of Income  Retail
Banking		   Wholesale
Banking		   Activities with
the Market +
Corporation		   ITAÚ
UNIBANCO		   Adjustments   IFRS consolidated 
Banking product   16,259    4,886    973    22,118    1,160    23,278 
Net interest (1)   9,397    3,306    890    13,593    1,379    14,972 
Revenue from services   4,789    1,495    54    6,338    136    6,474 
Income from insurance, private pension and capitalization operations before claim and selling expenses   2,073    85    29    2,187    (455)   1,732 
Other revenues   -    -    -    -    100    100 
Losses on loans and claims   (3,124)   (572)   (15)   (3,711)   (645)   (4,356)
Expenses for allowance for loan and lease losses   (3,836)   (614)   (15)   (4,465)   (646)   (5,111)
Recovery of credits written off as loss   1,179    55    -    1,234    -    1,234 
Expenses for claims / recovery of claims under reinsurance   (467)   (13)   -    (480)   1    (479)
Banking product net of losses on loans and claims   13,135    4,314    958    18,407    515    18,922 
Other operating income (expenses)   (8,493)   (2,208)   (349)   (11,050)   (502)   (11,552)
Non-interest expenses (2)   (7,500)   (1,978)   (369)   (9,847)   (487)   (10,334)
Tax expenses for ISS, PIS and COFINS and Other   (993)   (230)   20    (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   4,642    2,106    609    7,357    13    7,370 
Income tax and social contribution   (1,592)   (685)   (29)   (2,306)   (221)   (2,527)
Non-controlling interest in subsidiaries   (77)   -    (1)   (78)   1    (77)
Net income   2,973    1,421    579    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 of R$ 660.

(2) Refers to general and administrative expenses including depreciation expenses of R$ 403, amortization expenses of R$ 203 and insurance acquisition expenses of R$ 220.

 

Total assets (1) - 12/31/2014   811,185    436,872    107,174    1,208,702    (81,499)   1,127,203 
Total liabilities - 12/31/2014   770,528    399,544    86,897    1,110,439    (83,853)   1,026,586 
                               
 (1) Includes:                              
Investments in associates and joint ventures   982    -    2,117    3,099    991    4,090 
Goodwill   204    -    -    204    1,757    1,961 
Fixed assets, net   6,693    868    -    7,561    1,150    8,711 
Intangible assets, net   7,841    791    -    8,632    (2,498)   6,134 

 

The Consolidated figures do not represent the sum of all parties because there are intercompany transactions that were eliminated only in the consolidated statements. Segments are assessed by top management, net of income and expenses between related parties.

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 136
 

 

ITAÚ UNIBANCO HOLDING S.A.

From January 1 to June 30, 2015

(In millions of reais, except for share information)

 

Consolidated Statement of Income  Retail
Banking		   Wholesale
Banking		   Activities with
the Market +
Corporation		   ITAÚ
UNIBANCO		   Adjustments   IFRS
consolidated		 
Banking product   34,908    11,806    3,571    50,285    (3,305)   46,980 
Interest margin (1)   20,642    8,071    3,485    32,198    (3,258)   28,940 
Banking service fees   10,213    3,522    38    13,773    461    14,234 
Income from insurance, private pension, and capitalization operations before claim and selling expenses   4,053    213    48    4,314    (1,063)   3,251 
Other income   -    -    -    -    555    555 
Losses on loans and claims   (5,977)   (3,642)   24    (9,595)   (454)   (10,049)
Expenses for allowance for loan and lease losses   (7,235)   (3,824)   24    (11,035)   (460)   (11,495)
Recovery of loans written off as loss   1,989    204    -    2,193    6    2,199 
Expenses for claims / recovery of claims under reinsurance   (731)   (22)   -    (753)   -    (753)
Operating margin   28,931    8,164    3,595    40,690    (3,759)   36,931 
Other operating income (expenses)   (17,105)   (5,257)   (933)   (23,295)   (1,613)   (24,908)
Non-interest expenses (2)   (15,011)   (4,691)   (693)   (20,395)   (1,831)   (22,226)
Tax expenses for ISS, PIS and COFINS and Other   (2,094)   (566)   (240)   (2,900)   (72)   (2,972)
Share of profit or (loss) in associates and joint ventures   -    -    -    -    290    290 
Net income before income tax and social contribution   11,826    2,907    2,662    17,395    (5,372)   12,023 
Income tax and social contribution   (4,130)   (727)   (411)   (5,268)   4,962    (306)
Non-controlling interest in subsidiaries   (182)   -    (3)   (185)   (14)   (199)
Net income   7,514    2,180    2,248    11,942    (424)   11,518 

(1) Includes net interest and similar income and expenses of R$ 33,969 dividend income of R$ 15, net gain (loss) from investment securities and derivatives of R$ 1,329 and results from foreign exchange results and exchange variation of transactions abroad of R$ (6,373).

(2) Refers to general and administrative expenses including depreciation expenses of R$ 830, amortization expenses of R$ 436 and insurance acquisition expenses of R$ 569.

 

Total assets (1) - 06/30/2015   786,660    487,143    120,744    1,230,510    (96,612)   1,133,898 
Total liabilities - 06/30/2015   749,430    448,914    93,722    1,128,029    (99,866)   1,028,163 
                               
(1) Includes:                              
Investments in associates and joint ventures   1,001    -    2,179    3,180    1,027    4,207 
Goodwill   213    -    -    213    1,774    1,987 
Fixed assets, net   6,449    930    -    7,379    1,156    8,535 
Intangible assets, net   7,811    807    -    8,618    (2,399)   6,219 

 

The consolidated figures do not represent the sum of the segments because there are intercompany transactions that were eliminated only in the consolidated financial statements. Segments are assessed by top management, net of income and expenses between related parties.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 137
 

 

ITAÚ UNIBANCO HOLDING S.A.

From January 1 to June 30, 2014

(In millions of reais except per share information)

 

Consolidated Statement of Income  Retail
Banking		   Wholesale
Banking		   Actitivities with
the Market +
Corporation		   ITAÚ
UNIBANCO		   Adjustments   IFRS
consolidated		 
Banking product   31,621    9,608    1,552    42,781    3,076    45,857 
Interest margin (1)   18,267    6,417    1,397    26,081    3,394    29,475 
Banking service fees   9,267    3,004    124    12,395    280    12,675 
Income from insurance, private pension, and capitalization operations before claim and selling expenses   4,087    187    31    4,305    (913)   3,392 
Other income   -    -    -    -    315    315 
Losses on loans and claims   (6,181)   (1,152)   (29)   (7,362)   (999)   (8,361)
Expenses for allowance for loan and lease losses   (7,470)   (1,217)   (29)   (8,716)   (1,001)   (9,717)
Recovery of loans written off as loss   2,230    91    -    2,321    1    2,322 
Expenses for claims / recovery of claims under reinsurance   (941)   (26)   -    (967)   1    (966)
Operating margin   25,440    8,456    1,523    35,419    2,077    37,496 
Other operating income (expenses)   (16,463)   (4,422)   (629)   (21,514)   (1,418)   (22,932)
Non-interest expenses (2)   (14,540)   (3,972)   (640)   (19,152)   (1,269)   (20,421)
Tax expenses for ISS, PIS and COFINS and Other   (1,923)   (450)   11    (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   8,977    4,034    894    13,905    659    14,564 
Income tax and social contribution   (3,067)   (1,301)   107    (4,261)   (859)   (5,120)
Non-controlling interest in subsidiaries   (136)   -    (6)   (142)   15    (127)
Net income   5,774    2,733    995    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 foreign exchange results and exchange variation on transactions of abroad R$ 1,761.

(2) Refers to general and administrative expenses including depreciation expenses of R$ 811, amortization expenses of R$ 410 and insurance acquisition expenses of R$ 556.

 

Total assets (1) - 12/31/2014   811,185    436,872    107,174    1,208,702    (81,499)   1,127,203 
Total liabilities - 12/31/2014   770,528    399,544    86,897    1,110,439    (83,853)   1,026,586 
                               
(1) Includes:                              
Investments in associates and joint ventures   982    -    2,117    3,099    991    4,090 
Goodwill   204    -    -    204    1,757    1,961 
Fixed assets, net   6,693    868    -    7,561    1,150    8,711 
Intangible assets, net   7,841    791    -    8,632    (2,498)   6,134 

 

The Consolidated figures do not represent the sum of the segments because there are intercompany transactions that were eliminated only in the consolidated financial statements. Segments are assessed by top management, net of income and expenses between related parties.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 138
 

 

Information on income from financial operations by geographical area is as follows:

 

   04/01 to 06/30/2015   04/01 to 06/30/2014 
   Brazil   Foreign   Total   Brazil   Foreign   Total 
Income from financial operations (1) (2)   32,101    5,036    37,137    27,972    2,310    30,282 
Non-current assets (2)   13,699    1,055    14,754    13,872    973    14,845 

 

   01/01 to 06/30/2015   01/01 to 06/30/2014 
   Brazil   Foreign   Total   Brazil   Foreign   Total 
Income from financial operations (1) (2)   56,840    7,092    63,932    54,137    4,833    58,970 
Non-current assets (3)   13,699    1,055    14,754    13,872    973    14,845 

(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.

(3) The amounts for comparative purposes refer to the 12/31/2014.

 

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), Companhia E. Johnston de Participações S.A. (shareholder of IUPAR) and ITAÚSA, direct and indirect shareholders of ITAÚ UNIBANCO HOLDING;

 

·The non-financial subsidiaries of ITAÚSA, especially: Itautec S.A., Duratex S.A., Elekeiroz S.A., ITH Zux Cayman Company Ltd 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 Itaú Viver Mais, 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. and BSF Holding S.A.

 

The transactions with these related parties are mainly as follows:

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 139
 

 

   ITAÚ UNIBANCO HOLDING CONSOLIDATED
     Assets / (liabilities)   Revenue / (expenses) 
   Annual rate  6/30/2015   12/31/2014   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Interbank deposits      -    -    (1)   -    -    - 
Itaú Unibanco S.A.      -    -    (1)   -    -    - 
Securities sold under repurchase agreements      (198)   (142)   (7)   (3)   (14)   (7)
Duratex S.A.  99% to 101.5% of CDI   (72)   (100)   (3)   (3)   (6)   (6)
Elekeiroz S.A.  99% to 100% of CDI   (5)   (6)   -    -    -    (1)
Itautec S.A.  100% of CDI   (2)   (2)   -    -    -    - 
Itaúsa Empreendimentos S.A.  99.5% to 100.5% of CDI   (96)   (26)   (3)   -    (6)   - 
Olimpia Promoção e Serviços S.A.  100% of SELIC   (10)   -    (1)   -    (1)   - 
Other      (13)   (8)   (1)   -    (1)   - 
Amounts receivable from (payable to) related companies / Banking service fees (expenses)      (118)   (109)   (26)   1    (10)   - 
Itaú Unibanco S.A.      -    -    (7)   -    -    - 
Itaúsa Investimentos Itaú S.A.      -    -    1    -    1    - 
Itaúsa Empreendimentos S.A.      -    -    -    -    (3)   - 
Olimpia Promoção e Serviços S.A.      (2)   -    (14)   -    (14)   - 
Fundação Itaú Unibanco - Previdência Complementar      (116)   (13)   (6)   9    2    17 
FUNBEP - Fundo de Pensão Multipatrocinado      -    -    2    1    3    2 
Fundação Banorte Manuel Baptista da Silva de Seguridade Social      -    (93)   -    -    -    - 
Other      -    (3)   (1)   (9)   1    (19)
Rental revenues (expenses)      -    -    (14)   (12)   (27)   (25)
Itaúsa Investimentos Itaú S.A.      -    -    (1)   -    (1)   - 
Fundação Itaú Unibanco - Previdência Complementar      -    -    (10)   (9)   (20)   (19)
FUNBEP - Fundo de Pensão Multipatrocinado      -    -    (3)   (4)   (6)   (7)
Other      -    -    -    1    -    1 
Donation expenses      -    -    (19)   (22)   (47)   (43)
Associação Itaú Viver Mais      -    -    (1)   (1)   (1)   (1)
Instituto Itaú Cultural      -    -    (19)   (21)   (46)   (42)
Data processing expenses      -    -    -    (68)   -    (130)
Itautec S.A.      -    -    -    (68)   -    (130)

 

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$ 2 (R$ 3 from 01/01 to 06/30/2014) due to the use of the common structure.

 

Pursuant to the current rules, financial institutions cannot grant loans or advances to the following:

a) any individuals or companies that control the Institution or any entity under common control with the institution, or any executive officer, director, member of the fiscal council, or the immediate family members of these individuals;

b) any entity controlled by the institution; or

c) any entity in which the bank directly or indirectly holds more than 10% of the capital stock.

 

Therefore, no loans or advances were granted to any subsidiary, executive officer, director or family members.

 

b)Compensation of the key management personnel

 

Compensation for the period paid to key management members of ITAÚ UNIBANCO HOLDING consisted of:

 

   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Compensation   77    85    233    182 
Board of directors   4    6    12    9 
Executives   73    79    221    173 
Profit sharing   72    77    107    138 
Board of directors   -    5    -    6 
Executives   72    72    107    132 
Contributions to pension plans   2    1    5    3 
Executives   2    1    5    3 
Stock option plan – executives   51    46    105    87 
Total   202    209    450    410 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 140
 

 

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 operates.

 

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, 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.

 

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 all segments of ITAÚ UNIBANCO HOLDING internal models (lower risk, satisfactory, higher risk and impaired) and the probability of default associated with each of these levels, and the risk levels assigned by the respective market models.

 

      External rating
Internal rating  PD  Moody's  S&P  Fitch
Lower risk  Lower or equal than 4.44%  Aaa to B2  AAA to B  AAA to B-
Satisfactory  From 4.44% up to 25.95%  B3 to Caa3  B- to CCC-  CCC+ to CCC-
Higher risk  Higher than 25.95%  Ca1 to D  CC+ to D  CC+ to D
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		  Ca1 to D  CC+ to D  CC+ to D

 

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 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 141
 

 

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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 142
 

 

5.Credit risk exposure

 

  

06/30/2015

  

12/31/2014

 
   Brazil   Abroad   Total   Brazil   Abroad   Total 
Interbank deposits   8,325    22,650    30,975    7,875    15,206    23,081 
Securities purchased under agreements to resell   163,080    1,004    164,084    208,751    167    208,918 
Financial assets held for trading   149,491    17,147    166,638    124,391    8,553    132,944 
Financial assets designated at fair value through profit or loss   -    720    720    -    733    733 
Derivatives   10,685    8,761    19,446    7,385    6,771    14,156 
Available-for-sale financial assets   53,114    28,160    81,274    55,686    22,674    78,360 
Held-to-maturity financial assets   27,161    11,917    39,078    24,102    10,332    34,434 
Loan operations and lease operations   331,293    102,613    433,906    324,021    106,018    430,039 
Other financial assets   41,976    5,493    47,469    44,072    9,577    53,649 
Off balance sheet   284,089    25,874    309,963    280,640    25,708    306,348 
Endorsements and sureties   68,915    5,328    74,243    68,416    5,343    73,759 
Letters of credit to be released   12,365    -    12,365    11,091    -    11,091 
Commitments to be released   202,809    20,546    223,355    201,133    20,365    221,498 
Mortgage loans   7,897    -    7,897    9,087    -    9,087 
Overdraft accounts   80,178    -    80,178    78,461    -    78,461 
Credit cards   107,408    912    108,320    103,092    873    103,965 
Other pre-approved limits   7,326    19,634    26,960    10,493    19,492    29,985 
Total   1,069,214    224,339    1,293,553    1,076,923    205,739    1,282,662 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 143
 

  

The table above presents the maximum exposure at June 30, 2015 and December 31, 2014, 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 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:

 

·86.3% 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 3.9% of the total loans exposure (Table 6.1) is represented by overdue credits not impaired;

 

·5.1% of the total loans exposure (Table 6.1) corresponds to overdue loans impaired.

 

5.1Maximum exposure of financial assets segregated by business sector

 

a)Loan operations and lease operations portfolio

 

   06/30/2015   %   12/31/2014   % 
Public sector   5,213    1.1    4,389    1.0 
Industry and commerce   118,663    25.8    116,506    25.7 
Services   98,802    21.6    99,855    22.1 
Natural resources   23,646    5.2    23,345    5.2 
Other sectors   2,069    0.5    2,242    0.5 
Individuals   209,610    45.8    206,094    45.5 
Total   458,003    100.0    452,431    100.0 

 

b)Other financial assets (*)

 

   06/30/2015   %   12/31/2014   % 
Natural resources   3,106    0.6    2,444    0.5 
Public sector   189,011    37.7    152,770    31.0 
Industry and commerce   14,091    2.8    12,722    2.6 
Services   86,093    17.1    90,630    18.4 
Other sectors   14,661    2.9    1,665    0.3 
Individuals   194    0.0    396    0.1 
Financial   195,059    38.9    231,999    47.1 
Total   502,215    100.0    492,626    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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 144
 

 

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:

 

   06/30/2015   12/31/2014 
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   324,683    3,870    -    328,553    324,908    4,042    -    328,950 
Satisfactory   79,585    7,136    -    86,721    81,994    6,989    -    88,983 
Higher risk   12,472    6,932    -    19,404    11,439    5,853    -    17,292 
Impaired   -    -    23,325    23,325    -    -    17,206    17,206 
Total   416,740    17,938    23,325    458,003    418,341    16,884    17,206    452,431 
%  91.0%  3.9%  5.1%  100.0%  92.5%  3.7%  3.8%  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:

 

   06/30/2015   12/31/2014 
   Lower risk   Satisfactory   Higher risk   Impaired   Total   Lower risk   Satisfactory   Higher risk   Impaired   Total 
Individuals   100,772    63,405    13,148    9,773    187,098    102,184    62,020    12,022    9,727    185,953 
Credit cards   37,534    12,833    2,566    3,314    56,247    39,417    14,234    2,338    3,332    59,321 
Personal   7,701    8,888    8,832    4,111    29,532    7,253    8,932    7,882    3,886    27,953 
Payroll loans   9,387    34,418    773    935    45,513    8,113    31,090    696    626    40,525 
Vehicles   16,947    4,898    926    1,100    23,871    20,570    5,791    1,053    1,633    29,047 
Mortgage loans   29,203    2,368    51    313    31,935    26,831    1,973    53    250    29,107 
                                                   
Corporate   129,196    5,911    -    10,034    145,141    132,866    8,295    -    3,749    144,910 
                                                   
Small and medium businesses   56,703    14,384    5,197    2,959    79,243    56,917    15,171    4,599    3,225    79,912 
                                                   
Foreign loans - Latin America   41,882    3,021    1,059    559    46,521    36,983    3,497    671    505    41,656 
Total   328,553    86,721    19,404    23,325    458,003    328,950    88,983    17,292    17,206    452,431 
%  71.8%  18.9%  4.2%  5.1%  100.0%  72.7%  19.7%  3.8%  3.8%  100.0%

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 145
 

 

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.

 

   06/30/2015   12/31/2014 
   Lower risk   Satisfactory   Higher risk   Total   Lower risk   Satisfactory   Higher risk   Total 
I – Individually evaluated                                        
Corporate                                        
                                         
Large companies   128,506    5,780    -    134,286    132,117    8,093    -    140,210 
                                         
II- Collectively-evaluated                                        
                                         
Individuals   98,981    58,193    8,169    165,343    100,252    56,890    7,746    164,888 
Credit card   37,042    11,681    1,592    50,315    39,097    13,385    1,632    54,114 
Personal   7,635    8,330    5,858    21,823    7,186    8,447    5,469    21,102 
Payroll loans   9,309    33,753    610    43,672    8,000    30,445    523    38,968 
Vehicles   16,245    3,088    89    19,422    19,616    3,509    104    23,229 
Mortgage loans   28,750    1,341    20    30,111    26,353    1,104    18    27,475 
                                         
Small and medium businesses   56,076    12,969    3,670    72,715    56,221    13,885    3,277    73,383 
                                         
Foreign loans and Latin America   41,120    2,643    633    44,396    36,318    3,126    416    39,860 
                                         
Total  324,683   79,585   12,472   416,740   324,908   81,994   11,439   418,341 

 

6.1.1 Loan operations and lease operations by portfolios of areas and classes, are classified by maturity as follows (loans overdue not impaired):

 

   06/30/2015   12/31/2014 
   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   7,057    3,137    1,786    11,980    7,105    2,818    1,414    11,337 
Credit card   1,453    556    609    2,618    990    461    423    1,874 
Personal   2,032    1,034    532    3,598    1,837    756    371    2,964 
Payroll loans   489    237    179    905    631    176    126    933 
Vehicles   2,178    864    307    3,349    2,781    1,051    353    4,185 
Mortgage loans   905    446    159    1,510    866    374    141    1,381 
                                         
Corporate   665    145    12    822    758    193    1    952 
                                         
Small and medium businesses   2,232    881    457    3,570    2,137    767    400    3,304 
                                         
Foreign loans - Latin America   1,230    210    126    1,566    974    221    96    1,291 
Total   11,184    4,373    2,381    17,938    10,974    3,999    1,911    16,884 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 146
 

 

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

 

06/30/2015
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   

195,059

    

166,626

    

720

    

19,396

    

79,420

    

39,078

    

500,299

 
Satisfactory   -    11    -    47    489    -   547 
Higher risk   -    1    -    3    1,348    -    1,352 
Impairment   -    -    -    -    17    -    17 
Total   195,059    166,638    720    19,446    81,274    39,078    502,215 
%   38.8    33.2    0.1    3.9    16.2    7.8    100.0 

 

12/31/2014
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   231,999    132,934    733    14,106    78,213    34,434    492,419 
Satisfactory   -    7    -    46    68    -    121 
Higher Risk   -    3    -    4    65    -    72 
Impairment   -    -    -    -    14    -    14 
Total   231,999    132,944    733    14,156    78,360    34,434    492,626 
%  47.1    27.0    0.1    2.9    15.9    7.0    100.0 

  

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 147
 

 

6.1.3 Collateral held for loan and lease operations portfolio

 

   06/30/2015   12/31/2014 
    (l) Over-collateralized assets    (II) Under-collateralized
assets  		    (l) Over-collateralized assets    (II) Under-collateralized assets   
Financial effect of collateral  Carrying
value of the
assets		   Fair value of
collateral		  

Carrying

value of the

assets

  

Fair value of

collateral

  

Carrying
value of the

assets

   Fair value of
collateral		  

Carrying
value of the

assets

  

Fair value of

collateral

 
Individuals   55,429    135,887    605    540    57,340    137,641    720    627 
Personal   548    1,246    349    312    561    1,160    214    182 
Vehicles   23,169    59,081    220    198    27,869    66,366    458    403 
Mortgage loans   31,712    75,560    36    30    28,910    70,115    48    42 
                                         
Small, medium businesses and corporate   169,582    446,341    9,238    4,983    175,357    454,709    6,416    3,035 
                                         
Foreign loans - Latin America   45,461    64,513    674    2    40,690    57,058    666    2 
                                         
Total         270,472     646,741    10,517    5,525    273,387    649,408    7,802    3,664 

  

The difference between the total loan portfolio and collateralized loan portfolio is generated by non-collateralized loans amounting to R$ 177,014 (R$ 171,242 at December 31, 2014).

 

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).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 148
 

 

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, or (ii) the carrying amount of the loan.

 

Further impairment of assets is recorded as a provision, with a corresponding charge to income. The maintenance costs of these assets are expensed as incurred.

 

The policy for sales of these assets (assets not for use) includes periodic auctions that are announced in advance and considers that the assets cannot be held for more than one year as stipulated by the BACEN. This period may be extended at the discretion of BACEN.

 

The amounts below represent total assets repossessed in the period:

 

   04/01 to
06/30/2015		   04/01 to
06/30/2014		   01/01 to
06/30/2015		   01/01 to
06/30/2014		 
Real estate not for own use   37    1    133    1 
Residential properties - mortgage loans   41    14    71    31 
Vehicles - linked to loan operations   5    1    10    1 
Other (Vehicles / Furniture / Equipments) - Dation   10    1    30    10 
Total   93    17    244    43 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 149
 

 

Market risk

 

Market risk is the possibility of losses resulting from fluctuations in the market values of positions held by a financial institution, including the risk of transactions subject to variations in foreign exchange and interest rates, share, of prices indexes and commodity prices among other indexes on these risk factors.

 

Market risk management is the process through which the ITAÚ UNIBANCO HOLDING 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 limits, alerts, models and adequate management tools.

 

The policy of risk management the ITAÚ UNIBANCO HOLDING is in line with the principles of CMN Resolution No. 3,464 of June 26, 2007, 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 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 achieve 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 panels and limits approved specifically for this purpose, sensitizing different levels and classes of market risk. This market risk framework includes limits that involve the monitoring of aggregate risk indicators (at the portfolio level) and extends its coverage to more granular levels (the individual desk level) with specific limits aiming to improve the process of risk monitoring and understanding and also to prevent risk concentration. These limits are dimensioned considering the projected results of the balance sheet, size of equity, liquidity, complexity and volatility of the market and risk appetite of the institution. Limits are monitored and controlled daily and excesses are reported and discussed in the corresponding panels. Additionally, daily risk reports used by the business and control areas, are issued to the executives. The process of setting these limits levels and breach reporting follows the governance approved by ITAÚ UNIBANCO HOLDING internal policies.

 

The structure of limits and alerts follows the Board of Directors' guidelines and is approved by panels. This structure of limits and alerts enhances effectiveness, and the control coverage is reviewed at least annually.

 

The purpose of market risk of ITAÚ UNIBANCO HOLDING structure is:

 

·Providing visibility and assurance to all executive levels that the assumption of market risks is in line with ITAÚ UNIBANCO HOLDING and the risk-return objective;

 

·Promoting 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

 

·Monitoring 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, monitoring of stress scenarios, limits and alerts, applying stress scenarios, analysis and testing, reporting risk results to those accountable for in the business units, in accordance with the governance established and monitoring the actions required adjust positions and/or risk level to make them feasible. In addition, the area provides support to launch new financial products.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 150
 

  

For that purpose, ITAÚ UNIBANCO HOLDING has a structured reporting and information flow with the objective of providing input for the follow-up by panels 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 market factors and maintaining the classification 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 (retrospective and prospective) 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 structure categorizes transactions as part of either the banking portfolio or the trading portfolio, in accordance with general criteria established by the National Monetary Council Resolution No. 3,464 and BACEN Circular No. 3,354.

 

The trading portfolio consists of all transactions involving financial instruments and goods, including derivatives, which are carried out with the intention of trading.

 

The banking portfolio is basically characterized by transactions from the banking business and transactions related to the management of the balance sheet of the institution. It has the no-intention of resale and medium- and long-term time horizons as general guidelines.

 

Exposures to market risks inherent in the many different financial instruments, including derivatives, are broken down into a number of risk factors, which are primary market components for 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 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.

 

CMN has specific rules establishing that the exposure to market risk must be segregated at the least into the following categories: Interest rates, foreign exchange rates, shares and commodities. Price indexes are treated as a risk factor group and are granted the same treatment given to other risk factors, such as interest rates, and foreign exchange rates, among others, and follow the same limit and risk governance structure adopted by ITAÚ UNIBANCO HOLDING for market risk management purposes.

 

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 and historical 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 financial instruments or risk factor calculated at market value (“MtM – Mark to Market”); and

 

·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 of extreme volatility.

 

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;

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 151
 

  

·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 Consolidated VaR of ITAÚ UNIBANCO HOLDING is mostly calculated by the Historical Simulation method. This methodology performs a full revaluation of all positions through the actual historical distribution of assets.

 

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: 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, 2015, the average total VaR in Historical Simulation was R$ 199.8 million, or 0.19% of total stockholders’ equity (throughout 2014 it was R$ 131.9 million or 0.13% of total stockholders’ equity).

 

   (in R$ million) 
   VaR Total  - Historical Simulation 
   06/30/2015   12/31/2014 
   Average   Minimum   Maximum   Var Total   Average   Minimum   Maximum   Var Total 
                                 
Risk factor group                                        
Brazilian interest rate   127.5    93.4    169.1    137.1    92.4    37.0    161.8    124.8 
Other interest rate   86.9    75.1    102.6    86.5    60.4    21.1    93.2    83.6 
FX rate   54.6    20.0    118.6    49.1    36.1    3.6    141.2    26.5 
Brazilian inflation indexes   123.4    103.9    145.6    145.6    99.1    45.9    162.9    115.7 
Equities and commodities   20.6    17.2    28.5    22.9    22.8    10.4    60.7    22.5 
                                         
Foreign units (1)                                        
Itaú BBA International (2)   2.0    1.0    4.3    1.9    1.1    0.4    2.3    1.6 
Itaú Argentina (3)   3.9    1.9    8.2    6.4    4.0    0.9    18.8    1.9 
Itaú Chile (3)   8.6    5.0    14.0    5.3    3.3    1.3    5.5    5.3 
Itaú Uruguai (2)   1.6    1.2    2.4    1.2    1.6    0.8    2.6    2.1 
Itaú Paraguai (2)   3.4    2.4    4.6    2.9    1.3    0.6    3.6    3.5 
Itaú BBA Colombia (3)   1.2    0.7    1.7    1.4    0.4    0.1    1.2    0.5 
                                         
Effect of diversification                  (235.5)                  (194.9)
Total risk   199.8    161.0    236.6    224.8    131.9    59.0    227.7    193.1 

(1) Determined in local currency and converted into reais at the daily quotation

(2) VaR calculated using the Parametric approach.

(3) VaR calculated using historical simulation as from the 1st quarter of 2015.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 152
 

  

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)

 

    06/30/2015   12/31/2014 
   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   245,831    243,031    97,346    276,952    153,016    1,016,176    305,708    226,073    97,686    257,420    117,884    1,004,771 
Interbank deposits   22,815    4,345    2,799    1,016    -    30,975    15,879    2,259    3,997    946    -    23,081 
Securities purchased under agreements to resell   75,889    84,311    3,884    -    -    164,084    146,898    62,020    -    -    -    208,918 
Central Bank compulsory deposits   55,958    -    -    -    -    55,958    59,714    -    -    -    -    59,714 
Held-for-trading financial assets   13,886    23,919    17,430    63,750    47,653    166,638    10,142    25,770    17,539    57,074    22,419    132,944 
Financial assets held for trading and designated at fair value through profit or loss   369    65    175    111    -    720    -    322    171    240    -    733 
Available-for-sale financial assets   5,927    8,281    6,318    33,874    26,874    81,274    5,251    9,679    7,290    29,743    26,397    78,360 
Held-to-maturity financial assets   67    651    214    14,957    23,189    39,078    44    264    672    13,609    19,845    34,434 
Derivatives   4,673    5,202    2,153    5,058    2,360    19,446    2,408    4,073    2,238    3,682    1,755    14,156 
Loan and lease operations portfolio   66,247    116,257    64,373    158,186    52,940    458,003    65,372    121,686    65,779    152,126    47,468    452,431 
Interest-bearing liabilities   258,141    87,377    67,725    270,045    63,417    746,704    270,976    85,050    60,179    277,952    57,274    751,431 
Savings deposits   113,974    -    -    -    -    113,974    118,449    -    -    -    -    118,449 
Time deposits   8,553    13,433    9,969    55,706    1,254    88,915    11,705    23,656    7,775    61,794    3,536    108,466 
Interbank deposits   3,620    21,250    1,554    580    10    27,014    4,687    13,173    762    503    -    19,125 
Deposits received under repurchase agreements   119,450    12,076    16,882    115,882    16,370    280,659    125,663    11,280    15,150    120,639    15,951    288,683 
Interbank market   7,837    31,422    28,592    45,505    12,197    125,553    8,043    31,076    29,699    44,367    9,401    122,586 
Institutional market   601    4,203    8,775    38,049    31,647    83,275    624    2,520    3,910    39,516    26,672    73,242 
Derivatives   4,105    4,983    1,951    10,943    1,890    23,872    1,728    3,205    2,880    8,001    1,536    17,350 
Financial liabilities held for trading   1    10    2    307    49    369    77    140    3    122    178    520 
Liabilities for capitalization plans   -    -    -    3,073    -    3,073    -    -    -    3,010    -    3,010 
Difference asset / liability (2)   (12,310)   155,654    29,621    6,907    89,599    269,472    34,732    141,023    37,507    (20,532)   60,610    253,340 
Cumulative difference   (12,310)   143,344    172,966    179,873    269,472         34,732    175,755    213,262    192,730    253,340      
Ratio of cumulative difference to total interest-bearing assets   (1.2%)   14.1%   17.0%   17.7%   26.5%        3.5%   17.5%   21.2%   19.2%   25.2%     

(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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 153
 

   

Position of accounts subject to currency risk

 

   06/30/2015 
   Dollar   Euro   Chilean
Peso		   Other   Total 
Assets                         
Cash and deposits on demand   5,257    -    905    3,689    9,851 
Central Bank compulsory deposits   217    -    235    4,620    5,072 
Interbank deposits   18,538    -    1,180    2,932    22,650 
Securities purchased under agreements to resell   916    -    1    87    1,004 
Financial assets held for trading   14,039    -    2,030    1,078    17,147 
Financial assets designated at fair value through profit or loss   720    -    -    -    720 
Derivatives   7,528    -    1,146    87    8,761 
Available-for-sale financial assets   23,755    -    2,546    1,859    28,160 
Held-to-maturity financial assets   11,917    -    -    -    11,917 
Loan operations and lease operations portfolio, net   55,026    -    30,279    17,308    102,613 
Total assets   137,913    -    38,322    31,660    207,895 

 

   06/30/2015 
   Dollar   Euro   Chilean
Peso		   Other   Total 
Liabilities                         
Deposits   54,280    -    21,284    34,262    109,826 
Securities sold under repurchase agreements   15,572    -    384    294    16,250 
Financial liabilities held for trading   369    -    -    -    369 
Derivatives   6,757    -    1,247    12    8,016 
Interbank market debt   43,568    -    2,492    604    46,664 
Institutional market debt   37,156    -    6,365    302    43,823 
Total liabilities   157,702    -    31,772    35,474    224,948 
                          
Net position   (19,789)   -    6,550    (3,814)   (17,053)

 

   12/31/2014 
   Dollar   Euro   Chilean
Peso		   Other   Total 
Assets                         
Cash and deposits on demand   6,607    -    656    2,872    10,135 
Central Bank compulsory deposits   292    -    303    4,035    4,630 
Interbank deposits   12,274    1    1,055    1,876    15,206 
Securities purchased under agreements to resell   166    -    1    -    167 
Financial assets held for trading   7,469    -    144    940    8,553 
Financial assets designated at fair value through profit or loss   733    -    -    -    733 
Derivatives   5,632    -    1,030    109    6,771 
Available-for-sale financial assets   18,897    -    2,435    1,342    22,674 
Held-to-maturity financial assets   10,332    -    -    -    10,332 
Loan operations and lease operations portfolio, net   63,371    -    26,490    16,157    106,018 
Total assets   125,773    1    32,114    27,331    185,219 

 

   12/31/2014 
   Dollar   Euro   Chilean
Peso		   Other   Total 
Liabilities                         
Deposits   57,875    -    19,929    28,813    106,617 
Securities sold under securities repurchase agreements   14,913    -    181    250    15,344 
Financial liabilities held for trading   520    -    -    -    520 
Derivatives   5,402    -    1,088    28    6,518 
Interbank market debt   39,935    -    2,823    540    43,298 
Institutional market debt   31,519    -    4,425    286    36,230 
Total liabilities   150,164    -    28,446    29,917    208,527 
                          
Net position   (24,391)   1    3,668    (2,586)   (23,308)

 

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.

  

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 154
 

  

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$ 526.8 billion (R$ 538.1 billion at 12/31/2014), particularly funding from time deposits. A considerable portion of these funds – 34.9% of total, or R$ 183.8 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.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 155
 

 

   06/30/2015   12/31/2014 
Funding from clients  0-30 days   Total   %   0-30 days   Total   % 
Deposits   176,686    280,443         183,574    294,773      
Demand deposits   50,540    50,540    9.6    48,733    48,733    9.1 
Savings deposits   113,974    113,974    21.6    118,449    118,449    22.0 
Time deposits   8,552    88,915    16.9    11,705    108,466    20.2 
Other   3,620    27,014    5.1    4,687    19,125    3.5 
Funds from acceptances and issuance of securities (1)   3,482    52,175    9.9    3,959    47,750    8.9 
Funds from own issue (2)   3,520    134,932    25.6    2,840    139,910    26.0 
Subordinated debt   176    59,229    11.3    174    55,617    10.3 
Total   183,864    526,779         190,547    538,050      

(1) Includes mortgage notes, real estate credit bills, agribusiness, financial and structured operations certificates recorded in interbank market and debts and liabilities for issuance of debentures and foreign 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 period of 2015, ITAÚ UNIBANCO HOLDING maintained appropriate levels of liquidity in Brazil and abroad. Liquid assets (cash and deposits on demand, securities purchased under agreements to resell - funded position and government securities – available, detailed in the table Undiscounted future flows – Financial assets) totaled R$ 115.9 billion and accounted for 63.1% of the short-term redeemable obligations, 22.0% of total funding, and 14.4% of total assets.

 

The table below shows the indicators used by ITAÚ UNIBANCO HOLDING in the management of liquidity risk:

 

Liquidity indicators  06/30/2015
%		   12/31/2014
%		 
Net assets (1) / funds within 30 days (2)   63.1    72.1 
Net assets (1) / total funds (3)   22.0    25.5 
Net assets (1) / total assets (4)   14.4    17.0 

(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$ 805,637 (R$ 809,448 at 12/31/2014).

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 156
 

 

The following table presents assets and liabilities according to their remaining contractual maturities, considering their undiscounted flows.

 

Undiscounted future flows except for derivatives  06/30/2015   12/31/2014 
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   18,005    -    -    -    18,005    17,527    -    -    -    17,527 
                                                   
Interbank investments   121,760    62,657    1,043    142    185,602    170,482    51,967    1,097    32    223,578 
Securities purchased under agreements to resell – Funded position (2)   51,437    -    -    -    51,437    74,275    -    -    -    74,275 
Securities purchased under agreements to resell – Financed position   47,281    55,436    -    -    102,717    80,085    45,512    -    -    125,597 
Interbank deposits   23,042    7,221    1,043    142    31,448    16,122    6,455    1,097    32    23,706 
                                                   
Securities   57,686    30,255    23,362    115,409    226,712    55,315    19,009    15,470    106,023    195,817 
Government securities - available   46,496    -    -    -    46,496    45,587    -    -    -    45,587 
Government securities – subject to repurchase commitments   3,995    18,352    9,319    52,379    84,045    3,440    5,491    5,473    41,548    55,952 
Private securities - available   7,155    11,761    13,637    62,734    95,287    6,102    10,520    8,750    57,179    82,551 
Private securities – subject to repurchase commitments   40    142    406    296    884    186    2,998    1,247    7,296    11,727 
                                                   
Derivative financial instruments   3,980    6,312    2,173    4,377    16,842    2,408    5,342    1,167    3,719    12,636 
Gross position   -    -    -    20    20    -    -    -    19    19 
Cross Currency Swap Deliverable - Asset position   -    -    -    824    824    -    -    -    560    560 
Cross Currency Swap Deliverable - Liability position   -    -    -    (804)   (804)   -    -    -    (541)   (541)
Net position   3,980    6,312    2,173    4,357    16,822    2,408    5,342    1,167    3,700    12,617 
Swaps   97    560    1,596    3,145    5,398    448    812    643    2,913    4,816 
Option   617    2,465    334    508    3,924    481    1,720    308    363    2,872 
Forward (onshore)   2,728    1,353    -    -    4,081    846    1,548    -    -    2,394 
Other derivative financial instruments   538    1,934    243    704    3,419    633    1,262    216    424    2,535 
Loan and lease operations portfolio (3)   60,578    163,370    85,148    196,506    505,602    56,652    169,230    90,854    180,050    496,786 
Total financial assets   262,009    262,594    111,726    316,434    952,763    302,384    245,548    108,588    289,824    946,344 

(1) The assets portfolio does not take into consideration the balance of compulsory deposits in Central Bank, amounting to R$ 60,157 (R$ 63,106 at 12/31/2014), 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$ 7,589 (R$ 5,945 at 12/31/2014) 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$ 34,747 (R$ 39,386 at 12/31/2014) and the amount of liabilities from transactions related to credit assignments R$ 5,725 (R$ 4,335 at 12/31/2014) .

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 157
 

  

Undiscounted future flows except for derivatives  06/30/2015   12/31/2014 
Financial liabilities  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 
                                                   
Deposits   178,357    47,184    10,766    67,103    303,410    182,849    47,531    14,851    58,881    304,112 
Demand deposits   50,540    -    -    -    50,540    48,733    -    -    -    48,733 
Savings deposits   113,974    -    -    -    113,974    118,449    -    -    -    118,449 
Time deposit   7,880    26,497    10,325    66,874    111,576    10,867    33,601    14,521    58,564    117,553 
Interbank deposits   5,963    20,687    441    229    27,320    4,800    13,930    330    317    19,376 
                                                   
Compulsory deposits   (41,538)   (5,713)   (2,070)   (10,836)   (60,157)   (42,811)   (6,455)   (2,190)   (11,650)   (63,106)
Demand deposits   (8,767)   -    -    -    (8,767)   (7,404)   -    -    -    (7,404)
Savings deposits   (31,046)   -    -    -    (31,046)   (33,084)   -    -    -    (33,084)
Time deposit   (1,725)   (5,713)   (2,070)   (10,836)   (20,344)   (2,323)   (6,455)   (2,190)   (11,650)   (22,618)
                                                   
Securities sold under repurchase agreements (1)   146,715    33,427    95,222    58,031    333,395    164,309    28,544    57,449    108,099    358,402 
Government securities   124,026    4,828    3,100    22,662    154,616    143,717    2,161    3,888    20,227    169,992 
Private securities   6,463    28,443    92,122    35,177    162,205    6,383    25,924    53,561    87,324    173,192 
Foreign   16,226    156    -    192    16,574    14,210    460    -    548    15,218 
                                                   
Funds from acceptances and issuance of securities (2)   3,642    25,147    10,267    19,546    58,602    4,054    24,017    10,777    14,319    53,167 
                                                   
Borrowings and onlending (3)   5,563    43,664    12,471    34,901    96,599    4,290    37,668    19,414    31,890    93,262 
                                                   
Subordinated debt (4)   199    11,628    13,642    53,042    78,511    191    6,537    12,979    56,349    76,056 
                                                   
Derivative financial instruments   3,412    5,891    2,275    9,690    21,268    1,728    5,116    1,318    7,668    15,830 
Gross position   3    131    -    1    135    -    31    -    -    31 
Cross Currency Swap Deliverable - Asset position   (693)   (1,043)   (12)   (52)   (1,800)   -    (969)   (10)   -    (979)
Cross Currency Swap Deliverable - Liability position   696    1,174    12    53    1,935    -    1,000    10         1,010 
Net position   3,409    5,760    2,275    9,689    21,133    1,728    5,085    1,318    7,668    15,799 
Swaps   261    1,655    1,721    8,317    11,954    241    1,761    778    6,754    9,534 
Option   506    2,665    401    521    4,093    431    1,853    353    420    3,057 
Forward (onshore)   2,286    2    1    -    2,289    681    1    -    -    682 
Other derivative financial instruments   356    1,438    152    851    2,797    375    1,470    187    494    2,526 
                                                   
Total financial liabilities   296,350    161,228    142,573    231,477    831,628    314,610    142,958    114,599    265,556    837,723 

(1) Includes own and third parties’ portfolios.

(2) Includes mortgage notes, real estate credit bills, agribusiness, financial bills and structured operations certificates recorded in interbank market funds and liabilities for issuance of debentures and foreign securities recorded in funds from institutional markets.

(3) Recorded in funds from interbank markets.

(4) Recorded in funds from institutional markets.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 158
 

 

   06/30/2015   12/31/2014 
Off balance sheet  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 
Endorsements and sureties   1,359    14,816    4,790    53,278    74,243    2,003    14,721    4,207    52,828    73,759 
Commitments to be released   77,343    44,145    21,682    80,185    223,355    73,356    60,785    17,980    69,377    221,498 
Letters of credit to be released   12,365    -    -    -    12,365    11,091    -    -    -    11,091 
Contractual commitments - Fixed assets and Intangible (Notes 15 and 16)   -    134    308    -    442    -    267    308    -    575 
Total   91,067    59,095    26,780    133,463    310,405    86,450    75,773    22,495    122,205    306,923 

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 159
 

  

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 of November 11, 2013 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 does not have any significant accounting effect on the consolidated financial statements of ITAÚ UNIBANCO HOLDING.

 

Note 38 – Subsequent Event

 

On July 17, 2015 the State of Delaware homologated the winding-up of subsidiary Itaú Chile Holdings (“ICH”). Accordingly, the investments held by ICH will be transferred to ITAÚ UNIBANCO HOLDING. Possible charges related to the operation are being evaluated by Management.

 

Itaú Unibanco Holding S.A. – Complete Financial Statements in IFRS – June 30, 2015 160