Note 32 – Risk and Capital Management

a)	Corporate Governance

ITAÚ UNIBANCO HOLDING invests in sound processes for risk and capital management that permeates the whole institution and are the basis of all strategic decisions to ensure business sustainability.

These processes are aligned with the guidelines of the Board of Directors and Executives that, through corporate bodies, define the global objectives that are measured as goals and limits to the risk management units. Control and capital management units, in turn, support the ITAÚ UNIBANCO HOLDING management by monitoring and analyzing risk and capital.

The Board of Directors is the main body responsible for establishing guidelines, policies, and approval levels for risk and capital management. The Capital and Risk Management Committee (CGRC), in turn, is responsible for supporting the Board of Directors in the performance of its assignments related to capital and risk management. In the executive level, collegiate bodies, presided over by the Chief Executive Officer (CEO) of ITAÚ UNIBANCO HOLDING, are responsible for capital and risk management and which decisions are monitored in the scope of CGRC.

Additionally, the institution has panels collegiate bodies, which exercise the responsibilities delegated in capital and risk management, presided over by the Executive Vice-President of the Risk and Finance Department (ARF). To support this structure, ARF has specialized executive boards to ensure, on an independent and centralized basis, that the institution’s risks and capital are managed in compliance with policies and procedures established.

b)	Risk Management

Risk Appetite

The risk appetite of ITAÚ UNIBANCO HOLDING is based on the Board of Director’s statement:

“We are a universal bank, operating mainly in Latin America. Supported by our risk culture, we act with strict ethical standard and regulatory compliance, in search for high and increasing results, with low volatility, through long-lasting relationship with the client, correct risk pricing, pulverized funding and proper use of capital.”

Based on this statement, five dimensions have been established, each dimension is made up of a set of metrics associated with the main risks involved, combining supplementary measurement methods, in search for a comprehensive vision of our exposures.

The Board of Directors is responsible for approving guidelines and limits for risk appetite, exercising its activities with the support of CGRC and CRO - Chief Risk Officer.

The limits for risk appetite are frequently monitored and reported to risk committees and to the Board of Directors, which will guide the preventive measures to be taken to ensure that exposures are aligned with the strategies of ITAÚ UNIBANCO HOLDING.

The five dimensions of risk appetite are:

•

Capitalization: establishes that ITAÚ UNIBANCO HOLDING must have capital sufficient to face any serious recession period or a stress event without the need to adjust its capital structure under unfavorable circumstances. It is monitored through the follow-up of ITAÚ UNIBANCO HOLDING’s capital ratios, both in normal and stress scenarios, and of the ratings of the institution’s debt issues.

•

Liquidity: establishes that the liquidity of ITAÚ UNIBANCO HOLDING must withstand long stress periods. It is monitored through the follow-up of liquidity ratios.

•

Composition of results: defines that business will be focused primarily in Latin America, where ITAÚ UNIBANCO HOLDING has a diversified base of clients and products, with low appetite for volatility of results and high risks. This dimension comprises aspects related to business and profitability, and market and credit risks. By adopting exposure concentration limits, such as industry sectors, counterparty quality, countries and geographical regions and risk factors, these monitored metrics seek to ensure the proper composition of portfolios, aimed at the low volatility of results and business sustainability.

•

Operational risk: focuses on the control of operational risk events that may adversely impact the operation and business strategy, and is carried out by monitoring the main operational risk events and incurred losses.

•

Reputation: addresses risks that may impact the institution’s brand value and reputation with clients, employees, regulatory bodies, investors and the general public. The risk monitoring in this dimension is carried out by the follow-up of client satisfaction and dissatisfaction and media exposure, in addition to monitoring the institution’s conduct.

Substantiation for risk appetite, risk management and guidelines for activities of employees of ITAÚ UNIBANCO HOLDING the day-to-day for decision-making purposes are as follows:

Sustainability and client satisfaction: ITAÚ UNIBANCO HOLDING vision is to be the leading bank in sustainable performance and client satisfaction and, therefore, it is committed to creating shared value to employees, clients, stockholders, and society, ensuring the continuity of business. ITAÚ UNIBANCO HOLDING is committed to do business that is good both for the client and the institution itself;

•

Risk Culture: ITAÚ UNIBANCO HOLDING’s risk culture goes beyond policies, procedures or processes, as it strengthens the individual and collective responsibility of all employees so they do the right thing at the right moment and on the proper way, by respecting the ethical way of doing business;

•

Risk pricing: ITAÚ UNIBANCO HOLDING’s acts and assumes risks in business it knows and understands, avoiding risks that are unknown to the institution or that do not have a competitive edge, therefore carefully assessing the risk-return ratio;

•

Diversification: ITAÚ UNIBANCO HOLDING has low appetite to volatility in results and, therefore, it operates with a diversified base of clients, products and business, seeking to diversify risks and giving priority to lower risk business.

•

Operational excellence: It is the wish of ITAÚ UNIBANCO HOLDING to be an agile bank, with a robust and stable infrastructure to offer top services;

•

Ethics and respect for regulation: for ITAÚ UNIBANCO HOLDING, ethics is non-negotiable, and, therefore, the institute promotes an institutional environment that has integrity, guiding employees to cultivate ethics in relationships and business, and the respect for rules, as it cultivates the care for the institution’s reputation;

ITAÚ UNIBANCO HOLDING adopts several initiatives to disseminate risk culture, based on four principles: conscious risk-taking, discussion of the risks the institution faces, the corresponding action taken, and the responsibility of everyone to manage risks.

These principles lay down the basis for ITAÚ UNIBANCO HOLDING guidelines by helping employees to consciously understand, identify, measure, manage and mitigate risks.

1.	Credit risk

Possibility of losses arising from the breach by the borrower, issuer or counterparty of the respective agreed-upon financial obligations, the devaluation of loan agreement due to downgrading of the borrower’s, the issuer’s, the counterparty’s risk rating, the reduction in gains or compensation, the advantages given upon posterior renegotiation and the recovery costs.

There is a credit risk control and management structure, centralized and independent from the business units, that provides for operational limits and risk mitigating mechanisms, in addition to establishing processes and tools to measure, monitor and control the credit risk inherent in all products, portfolio concentrations and impacts of potential changes in the economic environment.

The credit policy of ITAÚ UNIBANCO HOLDING is based on internal criteria such as: classification of clients, performance and portfolio evolution, default levels, return rate and economic capital allocated, among other external factors, such as interest rates, market default indicators, inflation, consumption variation, among others.

For individual, small and middle-market companies, credit rating is attributed based on application statistical models (in the early phases of relationship with the client) and behavior score (used for clients with which ITAÚ UNIBANCO HOLDING already has a relationship).

For large companies, the rating is based on information such as economic and financial condition of the counterparty, their cash-generating capability, the economic group to which they belong, and the current and prospective situation of the economic sector in which they operate. The credit proposals are analyzed on a case by case basis, through an approval-level mechanism.

In compliance with CMN Resolution 4,557, of February 23, 2017, the document “Public Access Report – Credit Risk“, which includes the guidelines established by the institutional credit risk control policy can be viewed at www.itau.com.br/investor-relations, under Corporate Governance, Regulations and Policies.

ITAÚ UNIBANCO HOLDING strictly controls the credit exposure of clients and counterparties, taking action to address situations in which the actual exposure exceeds the desired one. For this purpose, contractually provided actions can be taken, such as early settlement or requirement of additional collateral.

1.1

Collateral and policies for mitigating credit risk

ITAÚ UNIBANCO HOLDING uses guarantees to increase its capacity for recovery in operations exposed to credit risk. The guarantees may be personal, secured, legal structures with mitigating power and offset agreements.

For collateral to be considered instruments that mitigate credit risk, they must comply with the requirements and standards that regulate them, be them internal or external ones, be legally valid (effective), enforceable, and assessed on a regular basis.

ITAÚ UNIBANCO HOLDING also uses credit derivatives, to mitigate credit risk of its portfolios of loans and securities. These instruments are priced based on models that use the fair value of market inputs, such as credit spreads, recovery rates, correlations and interest rates.

1.2

Policy on the provision and Economic scenarios

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

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

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

The provisions for expected losses are recognized considering the expected risk linked to contracts with similar characteristics and in anticipation of impairment signs, considering a loss horizon adequate to the remaining period of the contract termination. For contracts of products with no determined termination date, average results of impairment and default are used to determine the loss horizon.

Additionally, information on economic scenarios and public information with internally developed information are used to determine and affect the expected credit loss, adjusting loss levels to expected macroeconomic realities.

1.3

Classification of Stages of Credit Impairment

ITAÚ UNIBANCO HOLDING considers clients’ internal information, statistic models, days of default, and quantitative analysis in order to determine the credit status of portfolio agreements.

Rules for change of stage consider lower and higher internal ratings (quantitative criteria), in addition to a relative variation of ratings since the initial recognition. Information on days of delay, used on an absolute basis, is an important factor for the classification of stages, and after a certain credit status of the agreement is determined, the classification in one of the three stages of credit deterioration is established. Based on this classification, rules for measurement of expected credit loss determined for each stage are used, as described in Note 2.4e.

For Retail and middle business portfolios, ITAÚ UNIBANCO HOLDING classifies loan agreements which are over 30 days overdue in stage 2, except payroll loans for public bodies, which recognition is carried out after 45 overdue, due to the payment dynamics for product onlending.

For the Wholesale business portfolio, information on delay is considered in the rating assessment.

Default parameters are: 90 days with no payment record^(*); debt restructuring; adjudication of bankruptcy; loss; and court-ordered reorganization.

(*)

For mortgage loan portfolio, 180 days without payment record are considered.

1.4 Maximum Exposure of Financial Assets to Credit Risk


	12/31/2018									12/31/2017
	Brazil			Abroad			Total			Brazil			Abroad			Total
Financial Assets		1,027,193			303,535			1,330,728			967,703			263,711			1,231,414
At Amortized Cost		756,993			237,766			994,759			702,672			203,057			905,729
Interbank deposits		6,239			20,181			26,420			6,367			22,681			29,048
Securities purchased under agreements to resell		279,353			783			280,136			243,917			790			244,707
Securities		90,234			20,161			110,395			101,365			10,059			111,424
Loan operations and lease operations^(*)		345,501			190,590			536,091			327,501			170,218			497,719
Other financial assets		61,875			13,215			75,090			53,787			5,781			59,568
(-) Provision for Expected Loss		(26,209	)		(7,164	)		(33,373	)		(30,265	)		(6,472	)		(36,737	)
At Fair Value Through Other Comprehensive Income		9,089			40,234			49,323			14,722			37,427			52,149
Securities		9,089			40,234			49,323			14,722			37,427			52,149
At Fair Value Through Profit or Loss		261,111			25,535			286,646			250,309			23,227			273,536
Securities		252,819			10,361			263,180			238,200			12,493			250,693
Derivatives		8,292			15,174			23,466			12,109			10,734			22,843
Financial liabilities - provision for expected loss		3,355			437			3,792			4,513			409			4,922
Loan Commitments		2,289			312			2,601			2,681			334			3,015
Financial Guarantees		1,066			125			1,191			1,832			75			1,907
Off balance sheet		300,522			49,173			349,695			280,032			43,797			323,829
Financial Guarantees		53,443			12,662			66,105			60,062			10,427			70,489
Letters of credit to be released		10,747			0			10,747			9,214			—			9,214
Loan commitments		236,332			36,511			272,843			210,756			33,370			244,126
Mortgage loans		3,403			0			3,403			3,218			—			3,218
Overdraft accounts		110,454			0			110,454			93,284			—			93,284
Credit cards		120,862			2,961			123,823			109,196			2,679			111,875
Other pre-approved limits		1,613			33,550			35,163			5,058			30,691			35,749

Total		1,324,360			352,271			1,676,631			1,243,222			307,099			1,550,321

(*)

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

Amounts exposed to credit risk presented are based on gross book value and do not consider any collateral received or other added credit improvements.

The contractual amounts of financial collaterals and credit cards represent the maximum potential of credit risk in the event the counterparty does not meet the terms of the agreement. The vast majority of loan commitments (mortgage loans, overdraft accounts and other pre-approved limits) mature without being drawn, since they are renewed monthly and they may be cancelled unilaterally.

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.

1.4.1.

By business sector

Loan Operations and Lease Operations


	12/31/2018		%		12/31/2017		%
Industry and commerce		115,225		21.5		107,201		21.5
Services		118,435		22.1		114,332		23.0
Other sectors		30,440		5.7		29,047		5.8
Individuals		271,991		50.7		247,139		49.7

Total		536,091		100.0		497,719		100.0

Other financial assets^(*)


	12/31/2018		%		12/31/2017		%
Public sector		330,730		43.9		327,932		46.5
Services		92,562		12.3		84,191		11.9
Other sectors		23,072		3.1		19,804		2.8
Financial		306,556		40.7		273,747		38.8

Total		752,920		100.0		705,674		100.0

(*)

Includes Financial Assets at Fair Value through Profit and Loss, Financial Assets at Fair Value through Other Comprehensive Income and Financial Assets at Amortized Cost, except for loan and finance lease operations.

The exposure of Off Balance financial instruments (Financial Collaterals and Loan Commitments) are neither categorized nor managed by business sector.

1.4.2

By type and classification of credit risk

Operations and lease operations


	12/31/2018
	Stage 1												Stage 2												Stage 3												Total Consolidated of 3 stages
	Loan Operations			Loan commitments			Financial Guarantees			Total			Loan Operations			Loan commitments			Financial Guarantees			Total			Loan Operations			Loan commitments			Financial Guarantees			Total			Loan *Operations ^()**			Loan commitments			Financial Guarantees			Total
Individuals		177,488			174,666			1,014			353,168			17,029			6,784			—			23,813			18,047			687			—			18,734			212,564			182,137			1,014			395,715
Credit card		65,227			110,435			—			175,662			8,489			5,719			—			14,208			4,539			594			—			5,133			78,255			116,748			—			195,003
Personal loans		14,125			64,201			1,014			79,340			4,427			1,064			—			5,491			10,991			93			—			11,084			29,543			65,358			1,014			95,915
Payroll loans		44,156			—			—			44,156			1,024			—			—			1,024			1,698			—			—			1,698			46,878			—			—			46,878
Vehicles		14,353			—			—			14,353			1,022			—			—			1,022			545			—			—			545			15,920			—			—			15,920
Mortgage loans		39,627			30			—			39,657			2,067			1			—			2,068			274			—			—			274			41,968			31			—			41,999
Corporate		90,716			16,054			45,361			152,131			2,222			83			1,681			3,986			9,705			143			4,148			13,996			102,643			16,280			51,190			170,113
Small and medium businesses		57,099			40,105			2,472			99,676			5,875			1,834			69			7,778			5,838			185			94			6,117			68,812			42,124			2,635			113,571
Foreign loans - Latin America		134,323			29,090			10,842			174,255			11,768			2,969			395			15,132			5,981			243			29			6,253			152,072			32,302			11,266			195,640

Total		459,626			259,915			59,689			779,230			36,894			11,670			2,145			50,709			39,571			1,258			4,271			45,100			536,091			272,843			66,105			875,039

%		59.0	%		33.3	%		7.7	%		100.0	%		72.8	%		23.0	%		4.2	%		100.0	%		87.7	%		2.8	%		9.5	%		100.0	%		61.3	%		31.1	%		7.6	%		100.0	%


	12/31/2017
	Stage 1												Stage 2												Stage 3												Total Consolidated of 3 stages
	Loan Operations			Loan commitments			Financial Guarantees			Total			Loan Operations			Loan commitments			Financial Guarantees			Total			Loan Operations			Loan commitments			Financial Guarantees			Total			Loan *Operations^()**			Loan commitments			Financial Guarantees			Total
Individuals		161,364			159,533			1,016			321,913			13,032			4,420			—			17,452			18,989			776			—			19,765			193,385			164,729			1,016			359,130
Credit card		57,073			102,180			—			159,253			6,027			3,353			—			9,380			4,313			697			—			5,010			67,413			106,230			—			173,643
Personal loans		12,290			57,339			1,016			70,645			3,108			1,065			—			4,173			11,897			79			—			11,976			27,295			58,483			1,016			86,794
Payroll loans		42,115			—			—			42,115			733			—			—			733			1,868			—			—			1,868			44,716			—			—			44,716
Vehicles		12,550			—			—			12,550			987			—			—			987			628			—			—			628			14,165			—			—			14,165
Mortgage loans		37,336			14			—			37,350			2,177			2			—			2,179			283			—			—			283			39,796			16			—			39,812
Corporate		91,442			14,100			50,811			156,353			3,833			278			1,299			5,410			12,372			390			5,538			18,300			107,647			14,768			57,648			180,063
Small and medium businesses		47,132			33,203			2,229			82,564			6,001			1,638			74			7,713			7,157			254			54			7,465			60,290			35,095			2,357			97,742
Foreign loans - Latin America		117,448			25,867			9,069			152,384			13,028			3,527			371			16,926			5,921			140			28			6,089			136,397			29,534			9,468			175,399

Total		417,386			232,703			63,125			713,214			35,894			9,863			1,744			47,501			44,439			1,560			5,620			51,619			497,719			244,126			70,489			812,334

%		58.5	%		32.6	%		8.9	%		100.0	%		75.5	%		20.8	%		3.7	%		100.0	%		86.1	%		3.0	%		10.9	%		100.0	%		61.2	%		30.1	%		8.7	%		100.0	%

(*)

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



	12/31/2018								12/31/2017
Internal Rating	Stage 1		Stage 2		Stage 3		Total loans		Stage 1		Stage 2		Stage 3		Total loans
Lower Risk		378,389		4,536		—		382,925		349,354		5,274		—		354,628
Satisfactory		72,921		19,723		—		92,644		60,707		17,798		—		78,505
Higher Risk		8,316		12,635		—		20,951		7,325		12,822		—		20,147
Credit-lmpaired		—		—		39,571		39,571		—		—		44,439		44,439

Total		459,626		36,894		39,571		536,091		417,386		35,894		44,439		497,719

%		85.7		6.9		7.4		100.0		83.9		7.2		8.9		100.0

Other financial assets


	12/31/2018
	Fair Value		Stage 1				Stage 2				Stage 3
	Fair Value		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Investment funds		4,326		4,335		4,129		0		0		918		197
Government securities		327,720		325,734		327,546		232		174		0		0
Brazilian government		300,172		298,084		299,998		232		174		0		0
Other Public		0		36		0		0		0		0		0
Other countries		27,548		27,614		27,548		0		0		0		0
Argentina		1,129		1,121		1,129		0		0		0		0
United States		2,754		2,770		2,754		0		0		0		0
Mexico		2,378		2,378		2,378		0		0		0		0
Italy		115		115		115		0		0		0		0
Spain		2,411		2,411		2,411		0		0		0		0
Korea		1,385		1,385		1,385		0		0		0		0
Chile		8,211		8,204		8,211		0		0		0		0
Paraguay		1,530		1,602		1,530		0		0		0		0
Uruguay		652		656		652		0		0		0		0
Colombia		6,065		6,054		6,065		0		0		0		0
France		891		891		891		0		0		0		0
Germany		22		22		22		0		0		0		0
Other		5		5		5		0		0		0		0
Corporate securities		87,206		82,438		82,301		3,908		2,937		4,957		1,968
Rural product note		4,003		3,855		3,848		0		0		326		155
Securitized real estate loans		10,926		10,419		10,436		55		55		793		435
Bank deposit certificate		2,145		2,145		2,145		0		0		0		0
Debentures		30,950		27,306		27,068		3,323		2,557		3,563		1,325
Eurobonds and other		6,895		6,950		6,895		0		0		0		0
Financial bills		19,724		19,724		19,724		0		0		0		0
Promissory notes		1,490		1,465		1,463		15		15		24		12
Others		11,073		10,574		10,722		515		310		251		41

Total		419,252		412,507		413,976		4,140		3,111		5,875		2,165


	12/31/2017
	Fair Value		Stage 1				Stage 2				Stage 3
	Fair Value		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Investment funds		3,513		3,351		3,345		—		—		784		168
Government securities		326,227		324,585		326,031		261		196		—		—
Brazilian government		297,325		295,671		297,129		261		196		—		—
Other countries		28,902		28,914		28,902		—		—		—		—
Argentina		1,466		1,446		1,466		—		—		—		—
United States		1,666		1,684		1,666		—		—		—		—
Mexico		564		564		564		—		—		—		—
Denmark		1,951		1,951		1,951		—		—		—		—
Spain		2,937		2,937		2,937		—		—		—		—
Korea		1,944		1,944		1,944		—		—		—		—
Chile		9,761		9,765		9,761		—		—		—		—
Paraguay		1,807		1,922		1,807		—		—		—		—
Uruguay		828		824		828		—		—		—		—
Colombia		5,945		5,844		5,945		—		—		—		—
Other		33		33		33		—		—		—		—
Corporate securities		79,344		75,240		75,486		1,510		1,109		7,857		2,749
Rural product note		2,739		2,518		2,511		—		—		381		228
Securitized real estate loans		13,577		12,492		12,501		64		59		3,062		1,017
Bank deposit certificate		1,150		1,150		1,150		—		—		—		—
Debentures		23,758		21,584		21,569		1,255		969		3,892		1,220
Eurobonds and other		6,192		6,195		6,192		—		—		—		—
Financial bills		21,230		21,230		21,230		—		—		—		—
Promissory notes		3,614		3,597		3,596		—		—		40		18
Others		7,084		6,474		6,737		191		81		482		266

Total		409,084		403,176		404,862		1,771		1,305		8,641		2,917

Other Financial Assets - Internal Classification by Level of Risk


	12/31/2018
	Financial Assets - At Amortized Cost
Internal rating	Interbank deposits and securities purchased under agreements to resell		Securities		Financial assets at fair value through profit or loss at fair *value ()**		Financial Assets Fair Value Through Other Comprehensive Income		Total
Lower risk		306,556		103,157		284,896		49,323		743,932
Satisfactory		0		3,645		1,340		0		4,985
Higher risk		0		3,593		410		0		4,003

Total		306,556		110,395		286,646		49,323		752,920

%		40.6		14.7		38.1		6.6		100.0

(*)

Includes Derivatives in the amount of R$ 23,466 at 12/31/2018.


	12/31/2017
	Financial Assets - At Amortized Cost
Internal rating	Interbank deposits and securities purchased under agreements to resell		Securities		Financial assets at fair value through profit or loss at fair *value ()**		Financial Assets Fair Value Through Other Comprehensive Income		Total
Lower risk		273,747		104,610		271,859		52,149		702,365
Satisfactory		—		338		1,278		—		1,616
Higher Risk		—		1,294		399		—		1,693

Total		273,747		106,242		273,536		52,149		705,674

%		38.7		15.1		38.8		7.4		100.0

(*)

Includes Derivatives in the amount of R$ 22,843 at 12/31/2017.

1.4.3

Collateral held for loan and lease operations portfolio

12/31/2018

12/31/2017

Over-collateralized assets

Under-collateralized assets

Over-collateralized assets

Under-collateralized assets

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

57,842

145,775

1,054

993

52,608

132,007

1,079

1,028

Personal (1)

643

1,949

753

711

370

1,398

901

864

Vehicles (2)

15,173

35,266

298

280

13,618

34,368

177

163

Mortgage loans (3)

42,026

108,560

38,620

96,241

Small, medium businesses and corporate (4)

112,508

293,724

13,870

10,267

115,731

339,892

11,032

8,537

Foreign loans - Latin America (4)

117,094

246,462

11,242

3,758

105,425

175,476

10,262

3,598

Total

287,444

685,961

26,166

15,018

273,764

647,375

22,373

13,163

(1)

In general requires financial collaterals.

(2)

Vehicles themselves are pledged as collateral, as well as assets leased in lease operations.

(3)

Properties themselves are pledged as collateral.

(4)

Any collateral set forth in the credit policy of ITAÚ UNIBANCO HOLDING (chattel mortgage, surety/joint debtor, mortgage and others).

Of total credit and finance lease operations, R$ 222,481 (R$ 201,582 at 12/31/2017) represented unsecured loans.

1.4.4 Repossessed assets

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.

Total assets repossessed in the period was R$ 657 (R$ 701 from 01/01 to 12/31/2017), mainly composed of real estate.

2. Market risk

Possibility of incurring financial losses arising from the changes in the market value of positions held by a financial institution, including the risks of transactions subject to foreign exchange variation, interest rates, share prices, price indexes and commodity prices.

ITAÚ UNIBANCO HOLDING’s market risk management strategy is aimed at balancing corporate business goals, taking into account, among other things: political, economic and market conditions; portfolio profile of ITAÚ UNIBANCO HOLDING and expertise within the group to support operations in specific markets.

The market risk is controlled by an area independent from the business areas, which is responsible for the daily activities of: (i) risk measurement and assessment, (ii) monitoring of stress scenarios, limits and warnings, (iii) application, analysis and tests of stress scenarios, (iv) risk reporting for individuals responsible within the business areas, in compliance with governance of ITAÚ UNIBANCO HOLDING, (v) monitoring of actions required for adjustment of positions and/or risk levels to make them feasible, and (vi) support to the launch of new financial products with security.

The National Monetary Council (CMN) has regulations that establish the segregation of exposure to market risk at least in the following categories: interest rate, exchange rate, shares and commodities. Brazilian inflation indexes are treated as a group of risk indicators and receive the same treatment given to other risk indicators.

The structure of limits and warnings is in line with the Board of Directors’ guidelines, and it is reviewed and approved on an annual basis. This structure has specific limits aiming at improving the risk monitoring and understanding process, and at avoiding concentration. These limits are quantified by assessing the forecasted results of the balance sheet, size of stockholders’ equity, liquidity, market complexity and volatility, as well as the institution’s appetite for risk of ITAÚ UNIBANCO HOLDING.

In order to set up operations within the defined limits, ITAÚ UNIBANCO HOLDING hedges transactions with clients and proprietary positions, including its foreign investments. Derivatives are commonly used for these hedging activities, and can be characterized as accounting or economic hedge, both governed by the institutional polices of ITAÚ UNIBANCO HOLDING.

The market risk structure categorizes transactions as part of either the banking portfolio or the trading portfolio, in accordance with general criteria established by CMN Resolution nº. 4,557, of February 2017, 23, and BACEN Circular nº. 3,354, of June 2007, 27. The trading portfolio consists of all transactions involving financial instruments and goods, including derivatives, which are carried out with the intention of trading. The banking portfolio is basically characterized by transactions from the banking business, and transactions related to the management of the balance sheet of the institution. It has the no-intention of resale and medium and long term time horizons as general guidelines.

Market risk management is conducted based on the following metrics:

•

Value at risk (VaR): statistical measure that estimates the expected maximum potential economic loss under normal market conditions, considering a certain time horizon and confidence level;

•

Losses in stress scenarios: simulation technique to assess the behavior of assets, liabilities and derivatives of a portfolio when several risk factors are taken to extreme market situations (based on prospective and historical scenarios);

•

Stop loss: metrics which purpose is to review positions, should losses accumulated in a certain period reach a certain amount;

•

Concentration: cumulative exposure of a certain financial instrument or risk factor, calculated at market value (“MtM – Mark to Market”); and

•

Stressed VaR: statistical metric arising from VaR calculation, which purpose is to capture higher risk in simulations for the trading portfolio, considering returns that can be seen in historical scenarios of extreme volatility.

Management of interest rate risk in the Banking Book (IRRBB) is performed based on the following metrics:

•

DEVE: difference between the present value of sum of repricing flows instruments subject to IRRBB in a base scenario and present value of sum of repricing flows of these instruments in a scenario of shock in interest rates;

•

DNII: difference between the result of financial intermediation of instruments subject to IRRBB in a base scenario and the result of financial intermediation of these instruments in a scenario of shock in interest rates.

In addition to the aforementioned risk measures, sensitivity and loss control measures are also analyzed. They comprise:

•

Mismatching analysis (GAPS): accumulated exposure by risk factor of cash flows expressed at market value, allocated at the maturity dates;

•

Sensitivity (DV01- Delta Variation): impact on the market value of cash flows, when submitted to an one annual basis point increase in the current interest rates or index rate;

•

Sensitivity to several risk factors (Greeks): partial derivatives of an option portfolio in relation to the prices of underlying assets, implied volatilities, interest rates and time.

ITAÚ UNIBANCO HOLDING uses proprietary systems to measure the consolidated market risk. The processing of these systems occur, in an access-controlled environment, being highly available, which has data safekeeping and recovery processes, and counts on such an infrastructure to ensure the continuity of business in contingency (disaster recovery) situations.

The document that details the guidelines established by the internal policy on market risk management, that is not part of the financial statements, may be viewed on the website www.itau.com.br/investor-relations, in the section Corporate Governance/Rules and Policies / Public Access Report – Market Risk. For a detailed view of Market Risk and Interest Rate Risk in the Banking Portfolio, see chapter Market Risk of the Publication on Risk and Capital Management - Pillar 3.

2.1 VaR - Consolidated ITAÚ UNIBANCO HOLDING

Is calculated by Historical Simulation, i.e., the expected distribution for profit and loss (P&L’s - Profit and loss statement) of a portfolio over a time horizon that can be estimated based on the historical behavior of returns of market risk factors of this portfolio. VaR is calculated at a confidence level of 99%, historical period of 4 years (1000 business days) and a holding period of one day. In addition, in a conservative approach, VaR is calculated daily, being or not volatility-weighted, and the final VaR is the most restrictive value between both methodologies.

From January 1 to December 31, 2018, the average total VaR in Historical Simulation was R$ 399.3 or 0.26% of total stockholders’ equity (R$ 409.9 or 0.28% of total stockholders’ equity 01/01 to 12/31/2017).


(Reais million)
	*VaR Total - Historical Simulation*
	12/31/2018 ⁽¹⁾									12/31/2017 ⁽¹⁾
	Average		Minimum		Maximum		Var Total			Average		Minimum		Maximum		Var Total
Risk factor group
Interest rates		851.4		720.0		1,042.9		898.4			721.0		583.6		1,311.9		764.7
Currencies		24.7		12.7		45.2		37.3			20.4		6.5		50.2		11.9
Shares		39.2		23.6		58.5		50.1			45.4		38.5		54.9		46.4
Commodities		1.6		0.6		3.1		1.0			1.5		0.7		4.0		0.8
Effect of diversification								(605.3	)								(451.5	)

Total risk		399.3		294.7		603.6		381.5			409.9		304.8		874.0		372.3

(1)

VaR by Group of Risk Factors considers information from foreign units.

2.1.1 Interest rate risk

The table below shows the accounting position of financial assets and liabilities exposed to interest rate risk, distributed by maturity (remaining contractual terms). This table is not used directly to manage interest rate risks; it is mostly used to permit the assessment of mismatching between accounts and products associated thereto and to identify possible risk concentration.


	12/31/2018																	12/31/2017
	0-30 days			31-180 days			181-365 days			1-5 years			Over 5 years			Total		0-30 days			31-180 days			181-365 days			1-5 years			Over 5 years			Total
Financial assets		188,616			394,168			100,598			399,075			202,898			1,285,355		268,059			354,885			103,785			392,119			178,592			1,297,440
Central Bank compulsory deposits		88,549			0			0			0			0			88,549		94,047			—			—			—			—			94,047
At amortized cost
Interbank deposits		19,181			4,815			1,730			688			0			26,414		21,644			3,510			2,880			1,011			3			29,048
Securities purchased under agreements to resell		64,677			215,352			0			12			91			280,132		42,612			201,889			2			28			168			244,699
Securities		1,007			7,320			5,792			50,969			41,661			106,749		10,897			7,921			6,834			50,650			29,940			106,242
Loan and lease operations⁽¹⁾		78,709			140,057			70,792			167,517			79,016			536,091		73,239			120,231			67,463			161,824			74,962			497,719
At fair value through other comprehensive income		1,915			4,743			4,026			21,649			16,990			49,323		1,088			2,476			6,102			23,415			19,068			52,149
At fair value through profit and loss
Securities		19,140			17,810			15,945			154,171			56,114			263,180		16,554			15,855			17,103			147,805			51,630			248,947
Derivatives		3,987			4,071			2,313			4,069			9,026			23,466		7,978			3,003			2,360			6,681			2,821			22,843
Financial liabilities		513,889			88,152			69,102			313,240			69,055			1,053,438		376,492			93,736			87,850			290,677			56,451			905,206
At amortized cost
Deposits		248,913			36,856			22,063			146,288			9,304			463,424		216,842			33,258			23,239			126,886			2,713			402,938
Securities sold under repurchase agreements		254,052			9,713			7,756			40,877			17,839			330,237		208,261			7,362			25,185			57,146			14,680			312,634
Interbank market debts		7,438			33,869			31,869			58,375			3,119			134,670		8,557			34,097			30,727			47,219			3,987			124,587
Institutional market debts		314			3,631			4,579			58,513			26,937			93,974		4,188			16,495			5,343			43,911			28,545			98,482
Capitalization plans		0			0			0			3,422			0			3,422		—			—			—			3,301			—			3,301
At fair value through profit and loss
Derivatives		3,168			4,070			2,815			5,672			11,794			27,519		7,596			2,491			3,325			11,109			2,225			26,746
Structured notes		4			13			20			93			62			192		11			22			22			319			91			465
Difference asset/ liability ⁽²⁾		(325,273	)		306,016			31,496			85,835			133,843			231,917		(108,433	)		261,149			15,935			101,442			122,141			392,234
Cumulative difference		(325,273	)		(19,257	)		12,239			98,074			231,917			0		(108,433	)		152,716			168,651			270,093			392,234
Ratio of cumulative difference to total interest-bearing assets		(25.3	%)		(1.5	%)		1.0	%		7.6	%		18.0	%		0		(8.4	%)		11.8	%		13.0	%		20.8	%		30.2	%

(1)

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

(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.

2.1.2 Currency risk

The table below shows the accounting exposure to currency risk of financial assets and liabilities and reflects ITAÚ UNIBANCO HOLDING’s currency risk management.

12/31/2018

Dollar

Chilean
Peso

Other

Total

Net exposure of financial instruments

(38,190

)

7,647

15,418

(15,125

)

12/31/2017

Dollar

Chilean
Peso

Other

Total

Net exposure of financial instruments

(15,910

)

7,159

13,232

4,481

2.1.3 Share Price Risk

The exposure to share price risk is disclosed in Note 5, related to Financial Assets Through Profit or Loss – Securities, and Note 8, related to Financial Assets at Fair Value Through Other Comprehensive Income – Securities.

3. Liquidity risk

The institution’s possibility of not being able to efficiently meet its expected and unexpected obligations, both current and future, including those arising from the pledged guarantees, without affecting its daily operations and without incurring significant losses.

The control over liquidity risk is carried out by an area independent from the business area and that is responsible for establishing the reserve composition, estimating the cash flow and exposure to liquidity risk in different horizons of time, and for monitoring the minimum limits to absorb losses in stress scenarios for each country where ITAÚ UNIBANCO HOLDING operates. All activities are subject to verification by the independent validation, internal control and audit areas.

The liquidity management policies and respective limits are established based on prospective scenarios and top management’s guidelines. These scenarios are reviewed on a periodic basis, by analyzing the need for cash due to atypical market conditions or resulting from strategic decisions of ITAÚ UNIBANCO HOLDING.

The document Public Access Report - Liquidity Risk, that expresses the guidelines set forth by the internal policy on liquidity risk, that is not part of the financial statements, may be viewed on the website www.itau.com.br/investor-relations, in the section Itaú Unibanco, Corporate Governance, Rules and Policies.

ITAÚ UNIBANCO HOLDING conducts the control over and management of liquidity risk on a daily basis, through a governance approved in superior committees, which sets forth, among other activities, the adoption of liquidity minimum limits, sufficient to absorb possible cash losses in stress scenarios, measured through internal and regulatory methodologies.

Additionally 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.

3.1 Primary sources of funding

ITAÚ UNIBANCO HOLDING has different sources of funding, of which a significant portion is from the retail segment. Of total clients’ funds, 39.2% or R$ 253.0 billion, are immediately available 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.


	12/31/2018						12/31/2017
Funding from clients	0-30 days		Total		%		0-30 days		Total		%
Deposits		248,913		463,424		0		216,842		402,938
Demand deposits		72,581		72,581		11.2		68,973		68,973		11.1
Savings deposits		136,865		136,865		21.2		119,980		119,980		19.3
Time deposits		37,784		251,300		38.9		27,798		211,800		34.0
Other		1,683		2,678		0.4		91		2,185		0.4
Funds from acceptances and issuance of securities ⁽¹⁾		2,285		111,566		17.3		6,820		107,581		17.3
Funds from own issue ⁽²⁾		1,831		21,417		3.3		2,570		58,837		9.5
Subordinated debt		2		49,313		7.6		1,315		52,696		8.5
Total		253,031		645,720		100.0		227,547		622,052		100.0

(1)

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

(2)

Refer to deposits received under securities repurchase agreements with securities from own issue.

3.2 Control over liquidity

ITAÚ UNIBANCO HOLDING manages its liquidity reserves based on estimates of funds that will be available for investment, considering the continuity of business in normal conditions.

During the period of 2018, ITAÚ UNIBANCO HOLDING maintained appropriate levels of liquidity in Brazil and abroad. Liquid assets (cash and deposits on demand, securities purchased under agreements to resell - funded position and government securities – available, detailed in the table Undiscounted future flows – Financial assets) totaled R$ 158.6 billion and accounted for 62.7% of the short term redeemable obligations, 24.6% of total funding, and 15.8% of total assets.

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


Liquidity indicators	12/31/2018 %		12/31/2017 %
Net assets⁽¹⁾ / funds within 30 days⁽²⁾		62.7		72.2
Net assets⁽¹⁾ / total funds ⁽³⁾		24.6		26.4
Net assets ⁽¹⁾ / total financial assets ⁽⁴⁾		15.8		17.6

(1)

Net assets: Cash and deposits on demand, Securities purchased under agreements to resell – Funded position and Government securities - available. Detailed in the table Undiscounted future flows – Financial assets.

(2)

Table Funding from clients (Total Funding from clients 0-30 days).

(3)

Table funding from clients (Total funding from clients).

(4)

Detailed in the table Undiscounted future flows – Financial assets, total present value regards R$ 1,001,240 (R$ 933,686 at 12/31/2017).

Assets and liabilities according to their remaining contractual maturities, considering their undiscounted flows, are presented below:


Undiscounted future flows, except for derivatives which are fair value	12/31/2018										12/31/2017
Financial assets⁽¹⁾	0 - 30 days		31 - 365 days		366 - 720 days		Over 720 days		Total		0 - 30 days		31 - 365 days		366 - 720 days		Over 720 days		Total
Cash and deposits on demand		37,159		0		0		0		37,159		18,749		—		—		—		18,749

Interbank investments		115,278		182,606		468		322		298,674		93,218		173,663		673		508		268,062
Securities purchased under agreements to resell – Funded position ⁽²⁾		45,335		0		0		0		45,335		38,833		—		—		—		38,833
Securities purchased under agreements to resell – Financed position		50,741		175,857		0		10		226,608		31,238		167,061		—		—		198,299
Interbank deposits⁽⁴⁾		19,202		6,749		468		312		26,731		23,147		6,602		673		508		30,930

Securities		82,144		17,255		17,853		98,531		215,783		110,667		24,960		16,717		76,923		229,267
Government securities - available		72,026		292		292		5,315		77,925		103,447		152		232		5,052		108,883
Government securities – subject to repurchase commitments		52		6,321		12,671		32,811		51,855		203		15,677		9,107		19,270		44,257
Private securities - available		10,066		9,406		4,185		49,003		72,660		7,007		8,577		5,541		45,885		67,010
Private securities – subject to repurchase commitments		0		1,236		705		11,402		13,343		10		554		1,837		6,716		9,117

Derivative financial instruments		3,987		6,384		4,069		9,026		23,466		7,978		5,363		2,756		6,746		22,843
Net position		3,987		6,384		4,069		9,026		23,466		7,978		5,363		2,756		6,746		22,843
Swaps		705		1,132		2,881		8,331		13,049		189		1,258		1,661		6,082		9,190
Option		1,167		1,890		975		183		4,215		430		1,748		865		294		3,337
Forward (onshore)		893		942		0		0		1,835		6,529		382		—		—		6,911
Other derivative financial instruments		1,222		2,420		213		512		4,367		830		1,975		230		370		3,405
Loan and lease operations portfolio ⁽³⁾		68,829		166,503		88,138		241,919		565,389		57,505		152,660		71,107		201,881		483,153

Total financial assets		307,397		372,748		110,528		349,798		1,140,471		288,117		356,646		91,253		286,058		1,022,074

(1)

The assets portfolio does not take into consideration the balance of compulsory deposits in Central Bank, amounting to R$ 94,148 (R$ 98,837 at 12/31/2017), which release of funds is linked to the maturity of the liability portfolios. The amounts of PGBL and VGBL are not considered in the assets portfolio because they are covered in Note 26.

(2)

Net of R$ 5,120 (R$ 3,664 at 12/31/2017) which securities are restricted to guarantee transactions at B3 S.A. - Brasil, Bolsa, Balcão and the BACEN.

(3)

Net of payment to merchants of R$ 60,504 (R$ 53,687 at 12/31/2017) and the amount of liabilities from transactions related to credit assignments R$ 3,993 (R$ 4,931 at 12/31/2017).

(4)

Includes R$ 15,886 (R$ 6,689 at 12/31/2017) related to Compulsory Deposits with Central Banks of other countries.


Undiscounted future flows, except for derivatives which are fair value	12/31/2018															12/31/2017
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		246,729			62,909			16,674			191,131			517,443			222,782			61,672			16,500			152,961			453,915
Demand deposits		72,581			0			0			0			72,581			68,973			—			—			—			68,973
Savings deposits		136,865			0			0			0			136,865			119,980			—			—			—			119,980
Time deposit		35,450			62,185			16,647			190,984			305,266			33,114			60,272			16,445			152,903			262,734
Interbank deposits		1,830			724			27			147			2,728			712			1,400			55			58			2,225
Other deposits		3			0			0			0			3			3			—			—			—			3

Compulsory deposits		(39,116	)		(15,228	)		(3,831	)		(35,973	)		(94,148	)		(40,538	)		(18,197	)		(4,644	)		(35,458	)		(98,837	)
Demand deposits		(5,600	)		0			0			0			(5,600	)		(4,790	)		—			—			—			(4,790	)
Savings deposits		(24,695	)		0			0			0			(24,695	)		(26,008	)		—			—			—			(26,008	)
Time deposit		(8,821	)		(15,228	)		(3,831	)		(35,973	)		(63,853	)		(9,740	)		(18,197	)		(4,644	)		(35,458	)		(68,039	)

Securities sold under repurchase agreements ⁽¹⁾		275,395			16,557			10,933			42,349			345,234			232,970			35,234			30,404			39,444			338,052
Government securities		232,776			2,856			7,353			38,752			281,737			202,545			3,197			8,260			27,680			241,682
Private securities		10,910			13,701			3,580			3,597			31,788			8,020			31,348			22,144			11,764			73,276
Foreign		31,709			0			0			0			31,709			22,405			689			—			—			23,094

Funds from acceptances and issuance of securities ⁽²⁾		2,189			32,950			39,077			53,626			127,842			7,093			43,463			21,325			52,837			124,718

Borrowing and onlending ⁽³⁾		6,304			45,668			11,541			11,840			75,353			3,975			37,132			9,839			19,807			70,753

Subordinated debt ⁽⁴⁾		154			2,658			6,264			52,453			61,529			1,061			13,402			2,054			49,454			65,971

Derivative financial instruments		3,168			6,885			5,672			11,794			27,519			7,596			5,816			4,877			8,457			26,746
Net position		3,168			6,885			5,672			11,794			27,519			7,596			5,816			4,877			8,457			26,746
Swaps		923			3,002			4,687			10,742			19,354			65			2,364			3,747			7,516			13,692
Option		883			1,935			823			288			3,929			332			1,299			889			273			2,793
Forward (onshore)		470			0			0			0			470			6,272			—			—			—			6,272
Other derivative financial instruments		892			1,948			162			764			3,766			927			2,153			241			668			3,989

Total financial liabilities		494,823			152,399			86,330			327,220			1,060,772			434,939			178,522			80,355			287,502			981,318

(1)

Includes own and third parties’ portfolios.

(2)

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

(3)

Recorded in funds from interbank markets.

(4)

Recorded in funds from institutional markets.


	12/31/2018										12/31/2017
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
Financial Guarantees		1,305		17,314		5,509		41,977		66,105		1,749		17,563		5,451		45,726		70,489
Commitments to be released		110,909		25,977		5,796		130,161		272,843		98,310		27,857		7,307		110,652		244,126
Letters of credit to be released		10,747		0		0		0		10,747		9,214		—		—		—		9,214
Contractual commitments - Fixed assets and Intangible (Notes 13 and 14)		0		405		273		0		678		—		432		460		273		1,165

Total		122,961		43,696		11,578		172,138		350,373		109,273		45,852		13,218		156,651		324,994

c)	Capital Management Governance

ITAÚ UNIBANCO HOLDING is subject to the requirements of BACEN, which determines minimum capital requirements, procedures to assess information on globally systemic important banks (G-SIB), fixed asset limits, loan limits, accounting practices and require banks to conform to the regulation based on the Basel Accord for capital adequacy purposes. Additionally, the CNSP and SUSEP issue regulations on capital requirements that impact our insurance operations, and private pension and capitalization plans.

The capital statements were prepared in accordance with BACEN’s regulatory requirements and with internationally accepted minimum requirements according to the Bank for International Settlements (BIS).

I -

Composition of capital

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

•

Common Equity Tier I: the sum of capital, reserves and retained earnings, less deductions and prudential adjustments.

•

Additional Tier I Capital: consists of instruments of a perpetual nature, which meet eligibility requirements. Together with Common Equity Tier I it makes up Tier I.

•

Tier II: consists of subordinated debt instruments with defined maturity dates that meet eligibility requirements.

Composition of Referential Equity


	12/31/2018			12/31/2017
Stockholders’ equity attributable to controlling interests		131,757			126,924
Non-controlling interests		12,276			11,942
Change in interest in subsidiaries in a capital transaction		98			1,482
Consolidated Stockholders’ Equity (BACEN)		144,131			140,348

Common Equity Tier I Prudential Adjustments		(20,773	)		(17,952	)
Common Equity Tier I		123,358			122,396

Instruments Eligible to Comprise Additional Tier I		7,701			—
Additional Tier I Prudential Adjustments		95			57
Additional Tier I Capital		7,796			57

Tier I (Common Equity Tier I + Additional Tier I Capital)		131,154			122,453

Instruments Eligible to Comprise Tier II		15,778			19,723
Tier II Prudential Adjustments		96			76
Tier II		15,874			19,799

Referential Equity (Tier I + Tier II)		147,028			142,252

The funds obtained through the issuance of subordinated debt securities are considered Tier II capital for the purpose of capital to risk-weighted assets ratio, as follows. According to current legislation, the accounting balance of subordinated debt as of December 2012 was used for the calculation of reference equity as of December 2018, considering instruments approved after the closing date to compose Tier II, totaling R$ 35,206.


Name of security / currency	Principal amount (original currency)		Issue		Maturity		Return p.a.	Account balance 12/31/2018
Subordinated financial bills - BRL
		2		2011		2019	109% to 109.7% of CDI		4
		1		2012		2019	110% of CDI		2
		12					11.96%		26
		101					IPCA + 4.7% to 6.3%		187
		1		2012		2020	111% of CDI		2
		20					IPCA + 6% to 6.17%		44
		6		2011		2021	109.25% to 110.5% of CDI		13
		2,307		2012		2022	IPCA + 5.15% to 5.83%		4,595
		20					IGPM + 4.63%		29
		2,470					Total		4,902

Subordinated euronotes - USD
		990		2010		2020	6.20%		3,881
		1,000		2010		2021	5.75%		3,987
		730		2011		2021	5.75% to 6.20%		2,839
		550		2012		2021	6.20%		2,131
		2,600		2012		2022	5.50% to 5.65%		10,256
		1,851		2012		2023	5.13%		7,209
		7,721					Total		30,303

Total									35,205

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

II -

Capital Requirements in Place and In Progress

ITAÚ UNIBANCO HOLDING’s minimum capital requirements are expressed as ratios obtained from the ratio between available capital and the Risk-Weighted Assets (RWA).

Schedule for Basel III implementation


	As From January 1,
	2017			2018			2019 ⁽¹⁾
Common Equity Tier I		4.5	%		4.5	%		4.5	%
Tier I		6.0	%		6.0	%		6.0	%
Total Capital		9.25	%		8.625	%		8.0	%
Additional Common Equity Tier I (ACP)		1.50	%		2.375	%		3.5	%
Conservation		1.25	%		1.875	%		2.5	%
Countercyclical⁽²⁾		0	%		0	%		0	%
Systemic⁽³⁾		0.25	%		0.5	%		1.0	%
Common Equity Tier I + ACP		6.0	%		6.875	%		8.0	%
Total Capital + ACP		10.75	%		11.0	%		11.5	%
Prudential Adjustments Deductions		80	%		100	%		100	%

(1)

Requirements in force as from January 1, 2019.

(2)

ACP _{Countercyclical} is triggered during the credit cycle expansion phase. Additionally, in the event of increase of countercyclical additional, the new percentage will be in effect only twelve months after it is announced.

(3)

The calculation of ACP _Systemic associates the systemic importance, represented by the institution’s total exposure, to Gross Domestic Product (GDP).

III -

Risk-Weighted Assets (RWA)

For assessing the minimum capital requirements, the RWA must be calculated by adding the following risk exposures:

RWA = RWA_CPAD + RWA_MINT + RWA_OPAD


	12/31/2018		12/31/2017
Credit risk (RWA_CPAD)⁽¹⁾		714,969		660,516
Market risk (RWA_MINT)⁽²⁾		30,270		32,915
Operacional risk (RWAP_OPAD)⁽³⁾		72,833		63,277

Total risk-weighted assets		818,072		756,708

(1)

Portion related to exposures to credit risk, calculated using the standardized approach;

(2)

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

(3)

Portion related to capital required for operational risk, calculated based on the standardized approach.

The tables below present the breakdown of credit, market and operational risk weighted assets, respectively.

a)	Credit Risk

Exposure Weighted by Credit Risk (RWA_CPAD)


	12/31/2018		12/31/2017
Exposure Weighted by Credit Risk (RWA_CPAD)		714,969		660,516

Marketable securities		40,276		45,629
Loan Operations - Retail		124,356		114,141
Loan Operations - Non-Retail		256,958		240,816
Joint Liabilities - Retail		140		172
Joint Liabilities - Non-Retail		43,288		45,405
Loan Commitments - Retail		33,871		31,058
Loan Commitments - Non-Retail		10,673		9,017
Derivatives – Future potential gain		4,193		5,457
Agency Transition		3,330		—
Other exposures		197,884		168,821

b)	Market Risk


	12/31/2018 ⁽¹⁾			12/31/2017
Market Risk Weighted Assets - Standard Aproach (RWA_MPAD)		37,838			32,893
Operations subject to interest rate variations		30,286			31,076
Fixed rate denominated in reais		2,026			6,119
Foreign exchange coupons		19,633			17,153
Price index coupon		8,627			7,804
Operations subject to commodity price variation		389			361
Operations subject to stock price variation		362			239
Operations subject to risk exposures in gold, foreign currency and foreign exchange variation		6,801			1,217
Minimum Market Risk Weighted Assets - Standard Aproach (RWA_MPAD) ⁽¹⁾ (a)		30,270			26,314
Market Risk Weighted Assets calculated based on internal methodology (b)		22,871			32,915
Reduction of Market Risk Weighted Assets due to Internal Models Aproach		(7,568	)		—
Market Risk Weighted Assets (RWA_MINT) - maximum of (a) and (b)		30,270			32,915

(1)

Calculated based on internal models, with maximum saving possibility of 20% of the standard model.

At December 31, 2018, RWAMINT totaled R$ 30,270, which corresponds to 80% of RWAMPAD, higher than the capital calculated at internal models, which totaled R$ 22,871.

c)	Operational Risk


	12/31/2018		12/31/2017
Operational Risk-Weighted Assets (RWA_OPAD)		72,833		63,277

Retail		12,822		11,870
Commercial		26,214		24,857
Corporate finance		2,697		2,663
Negotiation and sales		11,736		7,434
Payments and settlement		8,282		7,532
Financial agent services		4,343		3,893
Asset management		6,715		5,010
Retail brokerage		24		18

IV -

Capital Adequacy

The Board of Directors is the body responsible for approving the capital management institutional policy and guidelines for the capitalization level of ITAÚ UNIBANCO HOLDING. The Board is also responsible for the full approval of the ICAAP (Internal Capital Adequacy Assessment Process) report, which purpose is to assess the capital adequacy of ITAÚ UNIBANCO HOLDING.

The result of the last ICAAP – conducted for the base date December 2017 – indicated that ITAÚ UNIBANCO HOLDING has, in addition to capital to face all material risks, a significant capital surplus, thus assuring the institution’s equity soundness.

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

The Basel Ratio reached 18% on December 31, 2018, with a reduction of 0.8 percentage points in relation to December 31, 2017, mainly due to the payment of additional dividends related to the 2017 net income.

Additionally, ITAÚ UNIBANCO HOLDING has a surplus in relation to the minimum Referential Equity required in the amount of R$ 76,469 million, higher than the ACP of R$ 19,429 million, widely covered by the available capital.


	12/31/2018										12/31/2017
	Amount				Ratio						Amount				Ratio
	Required		Current		Required			Current			Required		Current		Required			Current
Common Equity Tier I		36,813		123,358		4.5	%		15.1	%		34,052		122,396		4.5	%		16.2	%
Additional Tier I Capital		0		7,796		0			0			—		57		—			—
Tier I (Common Equity Tier I + Additional Tier I Capital)		49,084		131,154		6.0	%		16.0	%		45,402		122,453		6.0	%		16.2	%
Tier II		0		15,874		0			0			—		19,799		—			—
Referential Equity (Tier I + Tier II)		70,559		147,028		8.625	%		18.0	%		69,995		142,252		9.25	%		18.8	%

Amount Required for Additional Common Equity Tier I (ACP)		19,429				2.375%						11,351				1.5%

The fixed assets ratio shows the commitment percentage of adjusted Referential Equity with adjusted permanent assets. ITAÚ UNIBANCO HOLDING falls within the maximum limit of 50% of adjusted RE, established by BACEN. At 12/31/2018 , fixed assets ratio reached 25.9%, showing a surplus of R$ 35,447 million.

Further details on Risk and Capital Management of ITAÚ UNIBANCO HOLDING and indicators of the Global Systemic Importance Index, which are not included in the financial statements, may be viewed on www.itau.com.br/relacoes-com-investidores “Reports”/ Pillar 3 and Global Systemically Important Banks.

V -

Stress testing

The stress test is a process of simulation of extreme economic and market conditions in the institution’s results and capital. The institution has conducted this test since 2010 aiming at assessing its solvency in plausible scenarios of a systemic crisis, as well as at identifying areas that are more susceptible to the impact of stress, and that can be subject to risk mitigation.

To perform the test, macroeconomic variables for each stress scenario are estimated by the economic research department. The scenarios are established considering their relevance to the bank’s result, and the probability of occurrence, and they are submitted to the approval of the Board of Directors on an annual basis.

Projections of macroeconomic variables (GDP, benchmark interest rate and inflation) and of the credit market (fundraising, loans, default rate, spread and fees) for these scenarios are generated based on exogenous shocks or by using models validated by an independent area.

These projections affect the budgeted result and balance sheet that then change the risk-weighted assets and capital and liquidity ratios.

The stress test is also an integral part of ICAAP, with the main purpose of assessing whether, even in severe adverse conditions, the institution would have appropriate capital levels, not impacting the development of its activities.

This information allows to identify potential factors of risks on businesses, supporting the Board of Directors’ strategic decisions, the budgetary process and discussions on credit granting policies, in addition to being used as input for risk appetite metrics.

Further details on Risk and Capital Management of ITAÚ UNIBANCO HOLDING and indicators of the Global Systemic Importance Index, which are not included in the financial statements, may be viewed on www.itau.com.br/investor-relations, section “Reports”/ Pillar 3 and Global Systemically Important Banks.

VI –

Leverage Ratio

The Leverage Ratio is defined as the rate between Capital Tier I and Total Exposure, calculated pursuant to BACEN Circular 3,748, of February 27, 2015. The purpose of this ratio is to be a simple measure of leverage not sensitive to risk, thus it does not consider weighting or mitigation factors. According to instructions provided by BACEN Circular Letter 3,706, of May 5, 2015, since October 2015, ITAÚ UNIBANCO HOLDING has sent the Leverage Ratio to BACEN, in accordance with Basel recommendations, and the basis was established as the ratio behavior observation period since its implementation in 2011 until 2017.

More information on the composition of the Leverage Ratio, which are not part of its financial statements, is available at www.itau.com.br/investors-relations, “Reports” / Pillar 3 and Global Systemically Important Banks.

d)	Management Risks of insurance and private pension

I – Management Structure, roles and responsibilities

In line with good national and international practices, ITAÚ UNIBANCO HOLDING has a risk management structure that ensures that the risks arising from insurance, pension plan and capitalization products are properly reported to the proper bodies. The management process of insurance, pension plan and capitalization risks is independent and focused on the specifics of each risk.

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.

II – Risks of Insurance and Private Pension

ITAÚ UNIBANCO HOLDING offers its products to clients through bancassurance or direct distribution. Life, accident, credit life and multiple peril insurance products are mainly distributed by bancassurance operation.

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 and behaviorall.

•

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

•

Financial risk: is inherent in the underwriting risk of products that offer a financial guarantee pre-established in an agreement, and this risk is 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.

a)	Effect of changes on actuarial assumptions

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:


Sensitivity analysis	Impact in Results and Stockholders’ Equity ⁽¹⁾
	12/31/2018 ⁽²⁾						12/31/2017
	Private Pension			Insurance			Private Pension			Insurance
	Private Pension			Insurance			Private Pension			Insurance
Mortality Rates
5% increase		15			(1	)		24			—
5% decrease		(16	)		(1	)		(25	)		(1	)

Risk-free Interest Rates
0.1% increase		30			8			26			5
0.1% decrease		(44	)		(8	)		(27	)		(5	)

Conversion in Income Rates
5% increase		(14	)		0			(13	)		—
5% decrease		14			0			13			—

Claims
5% increase		0			(37	)		—			(36	)
5% decrease		0			37			—			36

(1)

Amounts net of tax effects.

(2)

The amounts shown in the tables express the position at 12/31/2018, since the actuarial calculations are made semi-annually.

b)	Risk concentration

For ITAÚ UNIBANCO HOLDING, there is no product concentration in relation to insurance premiums, reducing the risk of product concentration and distribution channels.

At December 31, 2017, the production of DPVAT arises from interests that ITAÚ UNIBANCO HOLDING’s insurance companies hold in Seguradora Líder dos Consórcios de DPVAT.


	01/01 to 12/31/2018						01/01 to 12/31/2017						01/01 to 12/31/2016
	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)		0		0		0.0		24		24		100.0		37		37		100.0
Extended warranty		0		0		0.0		—		—		0.0		112		112		100.0

Individuals
Group accident insurance		690		689		99.9		667		666		99.8		780		776		99.5
Individual accident		275		280		101.8		290		289		99.8		224		212		94.8
Credit life		881		879		99.8		623		621		99.7		570		570		100.0
Group life		934		937		100.3		1,001		990		98.9		1,278		1,234		96.5

III)

Market, credit and liquidity risk

a)	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. 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.


	12/31/2018					12/31/2017
Class	Account balance		DV01			Account balance		DV01
Government securities
NTN-C		5,096		(2.70	)		4,936		(2.87	)
NTN-B		6,091		(7.17	)		5,343		(6.78	)
LTN		0		0			279		(0.09	)

Private securities
Indexed to IPCA		259		(0.06	)		336		(0.10	)
Indexed to PRE		10		0			31		—

Floating assets		4,085		0			5,132

Under agreements to resell		5,575		0			6,856

b)	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	12/31/2018						12/31/2017
		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		2,111		56.7		12.6		1,882		24.7		12.0
IBNR, PDR e PSL	LFT, repurchase agreements, NTN-B, CDB, LF and debentures		927		48.0		18.5		985		20.4		18.3
Other provisions	LFT, repurchase agreements, NTN-B, CDB, LF and debentures		562		99.2		32.3		565		70.6		26.2
Subtotal	Subtotal		3,600						3,432
Pension plan, VGBL and individual life operations
Related expenses	LFT, repurchase agreements, NTN-B, CDB, LF and debentures		98		128.4		75.9		95		116.8		78.9
Unearned premiums	LFT, repurchase agreements, NTN-B, CDB and debentures		13		0		11.0		16		—		9.7
Unsettled claims	LFT, repurchase agreements, NTN-B, CDB and debentures		43		0		11.0		37		—		9.8
IBNR	LFT, repurchase agreements, NTN-B, CDB and debentures		25		15.4		11.0		28		17.0		9.7
Redemptions and Other Unsettled Amounts	LFT, repurchase agreements, NTN-B, CDB and debentures		310		0		11.0		275		—		9.8
Mathematical reserve for benefits granted	LFT, repurchase agreements, LTN, NTN-B, NTN-C, NTN-F, CDB, LF and debentures		2,820		120.4		71.4		2,404		116.8		79.1
Mathematical reserve for benefits to be granted – PGBL/ VGBL	LFT, repurchase agreements, LTN, NTN-B, NTN-C, NTN-F, CDB, LF and debentures ⁽³⁾		187,908		182.0		28.2		169,149		197.2		38.9
Mathematical reserve for benefits to be granted – traditional	LFT, repurchase agreements, NTN-B, NTN-C, debentures		4,815		209.0		91.7		4,454		—		95.1
Other provisions	LFT, repurchase agreements, NTN-B, NTN-C, CDB, LF and debentures		948		165.5		91.7		737		116.8		95.1
Financial surplus	LFT, repurchase agreements, NTN-B, NTN-C, CDB, LF and debentures		607		208.8		91.5		605		116.8		95.0
Subtotal	Subtotal		197,587						177,800
Total technical reserves	Total backing assets		201,187						181,232

(1)

Gross amounts of Credit Rights, Escrow Deposits and Reinsurance.

(2)

DU = Duration in months.

(3)

Excluding PGBL / VGBL reserves allocated in variable income.

c)	Credit Risk

I -

Reinsurers

Reinsurance operations are controlled through an internal policy, in compliance with the provisions of regulatory authority of reinsurers with which ITAÚ UNIBANCO HOLDING operates.

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

–

Insurance Operations: reinsurance premiums operations are basically represented by: IRB Brasil Resseguros with 78.13% (45.07% at 12/31/2017) and Munich Re do Brasil with 5.08% (53.80% at 12/31/2017).

–

Social Security Operations: related to reinsurance premiums are entirely represented by Austral with 40%, General Reinsurance 30% and IRB Brasil Resseguros with 30%. At 12/31/2017 reinsurance premiums were entirely represented by Munich Re do Brasil with 70% and General Reinsurance AG with 30%.

II –

Premiums Receivable

ITAÚ UNIBANCO HOLDING considers the credit risk arising from past-due premiums immaterial, since cases with coverage payment in default may be canceled, pursuant to Brazilian regulation.

III –

Risk level of financial assets

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

12/31/2018

Financial Assets at Amortized Cost

Internal rating

Interbank deposits
and securities
purchased under
agreements to resell

Securities

Financial assets at
fair value through
profit or loss ^(*)

Total

Lower risk

8,247

28,969

179,771

216,987

Satisfactory

Higher Risk

Total

8,247

28,969

179,773

216,989

3.8

13.3

82.9

100.0

(*)

Includes Derivatives in the amount of R$ 449 million.

12/31/2017

Financial Assets at Amortized Cost

Internal rating

Interbank deposits
and securities
purchased under
agreements to resell

Securities

Financial assets at
fair value through
profit or loss ^(*)

Total

Lower risk

7,558

27,719

168,006

203,283

Satisfactory

—

Higher Risk

—

Total

7,558

27,719

168,035

203,312

3.5

13.9

82.6

100.0

(*)

Includes Derivatives in the amount of R$ 194 million.