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Hedge accounting

12 Months Ended

Dec. 31, 2019

Note 7 – Hedge accounting

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

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

•

Interest Rate: Risk of loss in transactions subject to interest rate variations;

•

Currency: Risk of loss in transactions subject to foreign exchange variation.

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

The structures designed for interest rate and exchange rate categories take into account total risk when there are compatible hedging instruments. In certain cases management may decide to hedge a risk for the risk factor term and limit of the hedging instrument.

The other risk factors hedged by the institution are shown in Note 32.

To protect cash flows and fair value of instruments designated as hedged items, ITAÚ UNIBANCO HOLDING uses derivative financial instruments and financial assets. Currently, Futures Contracts, Options, NDF

(non-deliverable

forwards), Forwards, Swaps and Financial Assets are used.

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

The designated coverage ratio is always 100% of the risk factor eligible for coverage. Sources of ineffectiveness are in general related to the counterparty’s credit risk and possible mismatches of terms between the hedging instrument and the hedged item.

a) Cash flow hedge

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

ITAÚ UNIBANCO HOLDING applies cash flow hedge strategies as follows:

Interest rate risks

•

Hedge of time deposits and repurchase agreements: to hedge fluctuations in cash flows from interest payments resulting from changes in the DI interest rate, through futures contracts;

•

Hedge of asset transactions: to hedge fluctuations in cash flows from interest receipts resulting from changes in the DI rate, through futures contracts;

•

Hedge of assets denominated in UF*: to hedge fluctuations in cash flows of interest receipts resulting from changes in the UF*, through swap contracts;

•

Hedge of Funding: to hedge fluctuations in cash flows of interest payments resulting from changes in the TPM* rate and foreign exchange, through swap contracts;

•

Hedge of loan operations: to hedge fluctuations in cash flows of interest receipts resulting from changes in the TPM* rate

through swap contracts;

•

Hedge of repurchase agreements: to hedge fluctuactions in cash flows from interest received on changes in Selic (benchmark interest rate), through futures contracts;

•

Hedging of expected highly probable transactions: hedging the risk of variation in the amount of the commitments assumed when resulting from variation in the exchange rates.

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

ITAÚ UNIBANCO HOLDING does not use the qualitative method to evaluate the effectiveness or to measure the ineffectiveness of such strategies.

For cash flow hedge strategies, ITAÚ UNIBANCO HOLDING uses the hypothetical derivative method. This 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 is considered a proxy of the present value of the cumulative change in the future cash flow expected for the hedged liability.


		12/31/2019
		Hedged item										Hedge instrument
		Book Value				Variation in value recognized in Other			Cash flow hedge			Nominal		Variation in fair value used to calculate hedge
Strategies	Heading	Assets		Liabilities		comprehensive income			reserve			Value		ineffectiveness
Interest rate risk
Hedge of deposits and repurchase agreements	Securities purchased under agreements to resell		—		24,543		(2,808	)		(3,310	)		24,543		(2,814	)
Hedge of assets transactions	Loans and lease operations and Securities		5,564		—		91			91			5,656		91
Hedge of Asset-backed securities under repurchase agreements	Securities purchased under agreements to resell		30,896		—		520			520			32,130		523
Hedge of loan operations	Loans and lease operations		269		—		12			12			257		14
Hedge of funding	Deposits		—		4,617		(27	)		(22	)		4,590		(27	)
Hedge of assets denominated in UF	Securities		12,588		—		6			6			12,582		5
Foreign exchange risk
Hedge of highly probable forecast transactions			294		—		(11	)		179			294		(11	)

Total			49,611		29,160		(2,217	)		(2,524	)		80,052		(2,219	)


		12/31/2018
		Hedged item										Hedge instrument
		Book Value				Variation in value recognized in Other			Cash flow hedge			Nominal		Variation in fair value used to calculate hedge
Strategies	Heading	Assets		Liabilities		comprehensive income			reserve			Value		ineffectiveness
Interest rate risk
Hedge of deposits and repurchase agreements	Securities purchased under agreements to resell		—		29,727		(1,682	)		(2,946	)		29,727		(1,800	)
Hedge of assets transactions	Loans and lease operations and Securities		7,866		—		136			136			8,003		136
Hedge of Asset-backed securities under repurchase agreements	Securities purchased under agreements to resell		36,668		—		353			353			38,013		359
Hedge of loan operations	Loans and lease operations		274		—		6			6			268		7
Hedge of funding	Deposits		—		3,200		78			86			3,105		82
Hedge of assets denominated in UF	Securities		13,247		—		26			26			13,221		23
Foreign exchange risk
Hedge of highly probable forecast transactions			71		—		6			6			71		6

Total			58,126		32,927		(1,077	)		(2,333	)		92,408		(1,187	)

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

The amount of R$ (1,211) in Reserve of Cash Flow Hedge will be recognized in result for the maturity term of the hedged item. In the period ended December 31, 2019, the amount of R$ (762) was recognized in Result related to this deferral.


	12/31/2019
	Notional		Book Value (*)				Variations in fair value used to calculate hedge			Variation in value recognized in Other comprehensive			Hedge ineffectiveness recognized in			Amount reclassified from Cash flow hedge
Hedge Instruments	amount		Assets		Liabilities		ineffectiveness			income			income			reserve to income
Interest rate risk
Futures		62,329		—		14		(2,200	)		(2,197	)		(3	)		—
Swap		17,429		4,617		12,858		(8	)		(9	)		1			—
Foreign exchange risk
Futures		294		—		156		(11	)		(11	)		—			—

Total		80,052		4,617		13,028		(2,219	)		(2,217	)		(2	)		—


	12/31/2018
	Notional		Book Value (*)				Variations in fair value used to calculate hedge			Variation in value recognized in Other comprehensive			Hedge ineffectiveness recognized in			Amount reclassified from Cash flow hedge
Hedge Instruments	amount		Assets		Liabilities		ineffectiveness			income			income			reserve to income
Interest rate risk
Futures		75,743		256		21		(1,305	)		(1,193	)		(112	)		—
Swap		16,594		3,023		13,519		112			110			2			—
Foreign exchange risk
Futures		6		5		—		1			1			—			—
Option		65		9		—		5			5			—			—

Total		92,408		3,293		13,540		(1,187	)		(1,077	)		(110	)		—

(*)	Amounts recorded under heading Derivatives.

b)	Hedge of net investment in foreign operations

ITAÚ UNIBANCO HOLDING’s strategies for net investments in foreign operations consist of hedging the exposure in the functional currency of the foreign operation against the functional currency of head office, by contracting DDI futures, NDF and financial assets.

The risk hedged in this type of strategy is the currency risk.

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

Instead, ITAÚ UNIBANCO HOLDING uses the Dollar Offset Method, which is based on a comparison of the change in fair value (cash flow) of the hedging instrument, attributable to changes in the exchange rate and the gain (loss) arising from variations in exchange rates on the amount of investment abroad designated as the object of the hedge.


	12/31/2019
	Hedged item										Hedge instrument
	Book Value (2)				Variation in value recognized in Other			Foreign currency			Notional		Variation in fair value used to calculate hedge
Strategies	Assets		Liabilities		comprehensive income			convertion reserve			amount		ineffectiveness
Foreign exchange risk
Hedge of net investment in foreign operations (1)		—		14,396		(7,217	)		(7,217	)		16,947		(7,220	)

Total		—		14,396		(7,217	)		(7,217	)		16,947		(7,220	)


	12/31/2018
	Hedged item										Hedge instrument
	Book Value (2)				Variation in value recognized in Other			Foreign currency			Notional		Variation in fair value used to calculate hedge
Strategies	Assets		Liabilities		comprehensive income			convertion reserve			amount		ineffectiveness
Foreign exchange risk
Hedge of net investment in foreign operations (1)		—		14,820		(7,300	)		(7,300	)		12,550		(7,296	)

Total		—		14,820		(7,300	)		(7,300	)		12,550		(7,296	)

(1)	Hedge instruments consider the gross tax position;

(2)	Amounts recorded under heading Derivatives - Hedge of investments in foreign operation.


	12/31/2019
								Variations in fair			Variation in the value			Hedge			Amount reclassified
								value used to			recognized in Other			ineffectiveness			from foreign currency
	Notional			Book Value (*)				calculate hedge			comprehensive			recognized in			convertion reserve
Hedge instruments	amount			Assets		Liabilities		ineffectiveness			income			income			into income
Foreign exchange risk
DDI futures		32,966			228		—		(12,329	)		(12,292	)		(37	)		—
Forward		(2,990	)		2,977		—		408			381			27			—
NDF		(11,525	)		260		—		4,443			4,434			9			—
Financial Assets		(1,504	)		1,523		—		258			260			(2	)		—

Total		16,947			4,988		—		(7,220	)		(7,217	)		(3	)		—


	12/31/2018
								Variations in fair			Variation in the value			Hedge			Amount reclassified
								value used to			recognized in Other			ineffectiveness			from foreign currency
	Notional			Book Value (*)				calculate hedge			comprehensive			recognized in			convertion reserve
Hedge instruments	amount			Assets		Liabilities		ineffectiveness			income			income			into income
Foreign exchange risk
DDI futures		27,990			—		113		(11,394	)		(11,353	)		(41	)		—
Forward		(1,470	)		1,059		—		764			726			38			—
NDF		(13,167	)		255		—		3,198			3,189			9			—
Financial Assets		(803	)		803		—		136			138			(2	)		—

Total		12,550			2,117		113		(7,296	)		(7,300	)		4			—

(*)	Amounts recorded under heading Derivatives Financial Instruments.

c)	Fair value hedge

The fair value hedging strategy of ITAÚ UNIBANCO HOLDING consists of hedging the exposure to variations in fair value on the receipt and payment of interest on recognized assets and liabilities.

ITAÚ UNIBANCO HOLDING applies fair value hedges as follows:

Interest rate risk:

•

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

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

Instead, 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 revised estimate for the hedged position (hedged item) attributable to the protected risk versus the change in the fair value of the derivative hedging instrument.

•

The dollar offset method is based on the difference between the variation in 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.

The effects of hedge accounting on the financial position and performance of ITAÚ UNIBANCO HOLDING are presented below:


	12/31/2019
	Hedged Item											Hedge Instruments
														Variation in fair
									Variation in fair value					value used to
	Book Value (*)				Fair value				recognized in			Notional		calculate hedge
Strategies	Assets		Liabilities		Assets		Liabilities		income			amount		ineffectiveness
Interest rate risk
Hedge of loan operations		7,386		—		7,642		—		256			7,386		(264	)
Hedge of funding		—		7,436		—		8,195		(759	)		7,436		775
Hedge of securities at fair value through other comprehensive income		4,482		—		4,574		—		92			4,609		(85	)

Total		11,868		7,436		12,216		8,195		(411	)		19,431		426


	12/31/2018
	Hedged Item											Hedge Instruments
														Variation in fair
									Variation in fair value					value used to
	Book Value (*)				Fair value				recognized in			Notional		calculate hedge
Strategies	Assets		Liabilities		Assets		Liabilities		income			amount		ineffectiveness
Interest rate risk
Hedge of loan operations		7,066		—		7,119		—		53			7,066		(54	)
Hedge of funding		—		9,124		—		9,167		(43	)		9,124		43
Hedge of securities at fair value through other comprehensive income		5,391		—		5,483		—		93			5,401		(82	)

Total		12,457		9,124		12,602		9,167		103			21,591		(93	)

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

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


	12/31/2019
	Notional		Book value (1)				Variation in fair value used to calculate hedge		Hedge ineffectiveness
Hedge Instruments	amount		Assets		Liabilities		ineffectiveness		recognized in income
Interest rate risk
Swap (2)		19,431		766		4,636		426		15

Total		19,431		766		4,636		426		15


	12/31/2018
	Notional		Book value (1)				Variation in fair value used to calculate hedge			Hedge ineffectiveness
Hedge Instruments	amount		Assets		Liabilities		ineffectiveness			recognized in income
Interest rate risk
Swap		21,591		86		1,078		(93	)		10

Total		21,591		86		1,078		(93	)		10

(1)	Amounts recorded under heading Derivatives financial instruments;

(2)	In the period, the amount of R$ 408 is no longer qualified as hedge, with effect on result of R$ (15).

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


	12/31/2019							12/31/2018
	Hedge instruments					Hedged item		Hedge instruments					Hedged item
Strategies	Notional amount		Fair value adjustments			Book Value		Notional amount		Fair value adjustments			Book Value
Hedge of deposits and repurchase agreements		24,543		(37	)		24,543		29,727		(21	)		29,727
Hedge of highly probable forecast transactions		294		(11	)		294		71		6			71
Hedge of net investment in foreign operations		16,947		4,988			14,396		12,550		2,230			14,820
Hedge of loan operations (Fair value)		7,386		(264	)		7,386		7,066		(54	)		7,066
Hedge of loan operations (Cash flow)		257		14			269		268		7			274
Hedge of funding (Fair value)		7,436		775			7,436		9,124		43			9,124
Hedge of funding (Cash flow)		4,590		(27	)		4,617		3,105		82			3,200
Hedge of assets transactions		5,656		91			5,564		8,003		136			7,866
Hedge of Asset-backed securities under repurchase agreements		32,130		20			30,896		38,013		8			36,668
Hedge of assets denominated in UF		12,582		5			12,588		13,221		23			13,247
Hedge of securities at fair value through other comprehensive income		4,609		(85	)		4,482		5,401		(82	)		5,391

Total				5,469							2,378

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


	12/31/2019
Strategies	0-1 year		1-2 years		2-3 years		3-4 years		4-5 years		5-10 years		over 10 years		Total
Hedge of deposits and repurchase agreements		5,533		4,409		1,627		8,464		—		4,510		—		24,543
Hedge of highly probable forecast transactions		294		—		—		—		—		—		—		294
Hedge of net investment in foreign operations (*)		16,947		—		—		—		—		—		—		16,947
Hedge of loan operations (Fair value)		381		2,490		1,248		993		623		1,111		540		7,386
Hedge of loan operations (Cash flow)		27		156		74		—		—		—		—		257
Hedge of funding (Fair value)		299		152		375		423		129		4,220		1,838		7,436
Hedge of funding (Cash flow)		2,562		—		—		1,646		161		221		—		4,590
Hedge of assets transactions		—		3,671		1,985		—		—		—		—		5,656
Hedge of Asset-backed securities under repurchase agreements		6,225		18,739		812		5,621		—		733		—		32,130
Hedge of assets denominated in UF		9,628		2,954		—		—		—		—		—		12,582
Hedge of securities at fair value through other comprehensive income		4,230		—		28		—		—		351		—		4,609

Total		46,126		32,571		6,149		17,147		913		11,146		2,378		116,430


	12/31/2018
Strategies	0-1 year		1-2 years		2-3 years		3-4 years		4-5 years		5-10 years		over 10 years		Total
Hedge of deposits and repurchase agreements		11,925		4,729		3,519		—		5,737		3,817		—		29,727
Hedge of highly probable forecast transactions		71		—		—		—		—		—		—		71
Hedge of net investment in foreign operations (*)		12,550		—		—		—		—		—		—		12,550
Hedge of loan operations (Fair value)		293		1,416		1,793		1,379		375		822		988		7,066
Hedge of loan operations (Cash flow)		—		28		162		78		—		—		—		268
Hedge of funding (Fair value)		1,590		297		154		391		377		3,972		2,343		9,124
Hedge of funding (Cash flow)		2,874		—		—		—		—		231		—		3,105
Hedge of assets transactions		6,346		—		1,657		—		—		—		—		8,003
Hedge of Asset-backed securities under repurchase agreements		26,943		5,838		1,517		—		3,715		—		—		38,013
Hedge of assets denominated in UF		12,241		924		56		—		—		—		—		13,221
Hedge of securities at fair value through other comprehensive income		4,223		—		—		—		—		1,178		—		5,401

Total		79,056		13,232		8,858		1,848		10,204		10,020		3,331		126,549

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