Teleconference Transcript 3Q09 Results Banco do Brasil (BBAS3 BZ) November 13 th, Operator:

Transcription

1 Operator: Good morning, ladies and gentleman. Thank you for standing by. We will now begin Banco do Brasil s 3Q09 results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will be given at that time. If you should require any kind of assistance during the call, please press *0. As a reminder, this conference is being recorded and broadcast with a slide presentation on the Bank s Investor Relations site, from where questions may be sent through. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco do Brasil s management and on information currently available to the Company. Forward-looking statements are not guarantee of performance. They involve risk, uncertainties, and assumptions because they are related to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Banco do Brasil and could cause results to defer materially from those expressed in forward-looking statements. With us today, Mr. Ivan de Souza Monteiro, CFO, Mr. Eduardo Cesar Pasa, General Accountant, and Mr. Marco Geovanne Tobias da Silva, Head of IR. First, Mr. Ivan will comment the Company s 3Q09 big figures. Afterwards, Mr. Geovanne will present more details of the results. After that, the executives will be available for a question and answer session. Mr. Ivan, you may now begin. Good morning to you all. Welcome to our 3Q09 results conference call. Before passing the floor to Geovanne, who will give us more details about the R$6 billion results in the 9M09, I would like to drag your attention to some important points. The 3Q results show us that the strategic decisions that we have made toward the opportunities presented in 2009 have seemed correct. We have included our market share and consolidate our leadership in important segments of the banking industry, despite the positioning of our peers. As a consequence in the credit market, we have grabbed more than 20% market share, surpassing R$300 billion credit granted supported by an impressive growth in our funding base. Banco do Brasil has widened its leadership in the banking industry, with total assets amounting R$685 billion. During 2009, in addition to the winning strategy of organic growth, we have made important movements towards acquisition and strategic alliances. The acquisition of Banco Nossa Caixa has already presented results to be highlighted. We initially closed the deal in March 2009; its loan portfolio came from R$13.8 billion to R$19.3 billion as of September. Just considering payroll loans, Nossa Caixa has grown 66% since the end of the 1Q, reaching R$10.6 billion. 1

2 In September, we conclude this strategic alliance with Banco Votorantim, through which Banco do Brasil becomes an important player in car financing. Besides the achievement in the banking segment, we have challenges to guarantee a sustainable generation of non-financial revenues. Geovanne will show us that we have continued to present an impressive increase in car and insurance businesses, not forgetting to mention the increase in revenue in capital markets operations. Regarding the insurance business, we have recently announced we intend to reinforce that business, restructuring our Company. Along with devoting our efforts to important business fronts, we have been always trying to identify opportunities to increase our productivity gains. We have been able to extend operational revenues and to keep administrative expenses under control. Following the trends of earlier years, Banco do Brasil s cost to income ratio has accounted an improvement. Banco do Brasil s performance mostly confirms the guidance we have for the market. We are confident that we will reach our goals on the back of the good prospects of the Brazilian economy and banking industry. We will also like to highlight, as announced to the market, that the SEC granted Banco do Brasil registration of its level I ADR program. It is an important step to increase our access to investors interested in our Company. It is a measure that will increase our liquidity, including the local market. Well, now I will hand over the word to Geovanne. At the end, I will work on any questions you would like to pose. Thank you. Thank you, Ivan. I wish you all a good day. Moving forward to slide number three of the presentation. We bring you some macroeconomic information about the Brazilian economy. You can see in the top left graph that the price index measured by the twelve-month IPCA achieved 4.3% below the rest of the 2008 and below the inflation target of 4.5%, established by the Monetary Authority for Therefore, the Central Bank was able to maintain the reduction in the Selic rate, a reduction of around 500 b.p. In September 2009, the Selic reached its lowest level ever registered at 8.75%. On the bottom left graph, we can see the Brazilian payroll index, which is a good reference for the economic recovery in Brazil, one it has a direct relation to the purchase power of families, which affects economic activity. It is important to observe as well, the unemployment index in Brazil, shown on the bottom right graph. As we can see it did not have a strong variation during the crisis. In the post-crisis world, despite the turbulence, Brazil was able to prove it deserves the world s confidence. Having said that, I would like to go to slide number four, where we have a picture of credit in Brasil, reflecting the direct consequences of the international crisis. As shown in the top left graph, loan to GDP ratio reached 45.7% as of September 2009, when the total loan portfolio on the banking industry reached R$1.3 trillion, with an increase of public banking market share in the total balance of credit from 33% in the 2Q09 to 38% in the 3Q. 2

3 Credit disbursement also confirms that the activity rhythm has maintained its pace. As we can observe on the top right graph, the disbursement of credit to individuals and businesses has been increasing steadily for the past years. With regards to individuals, on the bottom left graph, we see the evolution of the main three lines of credit with an impressive increase in mortgage loans in the 9M09. It is also important to observe on the bottom right graph that despite the increased volume of deposit loans, banks have reinforced the provision coverage. Moving to slide number five, we see that Banco do Brasil s countercyclical behavior proves to be correct. In the 9M09, led by the expansion of 27% loan, especially in consumer finance, which grew 75.6%, Banco do Brasil s total assets grew 31.5% and achieved a total volume of R$685.7 billion, and this increase in total assets was the same by the growth in our deposits pace, a growth around 20%. I will remind you that Nossa Caixa is being consolidated since the 2Q09 and from this quarter on we also have the consolidated balance sheet of Banco Votorantim on a proportional basis. And information of Banco do Brasil s standalone will be highlighted during the call. On slide number six, we can see that despite the challenges brought by the crisis, Banco do Brasil kept an ROE above 20% and also maintained efficiency gains. From January to September, Banco do Brasil s recurring net income amounted to R$5 billion corresponded to an annualized return on equity of 21.6% in the same period. Net interest income reached R$23.8 billion and the global spread remained at 6.8%. Fee income amounted R$R9.9 billion and the tax control on that administrative expenses, which totaled R$13.7 billion, led to efficiency gains that stayed at 43% in the period. Moving to slide number seven, we can confirm that the success of the strategies adopted by Banco do Brasil was supported by its distribution network and its technology infrastructure. At the end of the 3Q09, Banco do Brasil had more than 104,000 employees, more than 17,000 points of service, almost 44,000 ATM, and 92.2% of customer s transactions were done through automated channels. Definitely, the step forward taken by Banco do Brasil, anticipating the recovery of our economy, opened new business opportunities, at the same time it consolidated Banco do Brasil s market share. On the slide number eight, we can observe that Banco do Brasil s main leadership are basically in total assets, in total funds including total deposits, demand deposits, savings account, time deposits, assets under management. But I would also like to highlight the amazing performance of Banco do Brasil in the credit market. For the first time in our history we have achieved more than 20% market share in the domestic loan market. Regarding this point, I would also like to highlight that the maintenance of the leadership in the credit market was supported by the expansion in the consumer finance book, which also registered a historic market share of 22.3% as a result of Banco do Brasil s strategic decision of focusing on this segment, that started back in 2005 and was boosted during On slide number nine, we can see the evolution of Banco do Brasil s net income and return on equity. For the 9M of this year net income amounted almost to R$6 billion, 3

4 corresponding to an annualized return on equity of 25.9%. If we do not consider the one-off, the recurring net income reached R$5 billion and the recurring return on equity was 21.6% annualized, close to the higher range of our 2009 guidance. In the quarter, net income reached R$2 billion and the recurring net income was R$1.764 billion. The recurring results in the quarter corresponded to an annualized return on equity of 23.1%. Now, talking about the recurring results on slide number ten, we can observe the evolution of the net interest income, which grew 36% in the 9M comparison, lead by the expansion in loan book. It is important to notice that in the 3Q09, net interest income kept the level achieved in the previous quarter, totaling R$8.3 billion, comparing to the 2Q09 it decreased 2%. However, compared to the 3Q08 it increased 38%. We can also see that in the 3Q we saw some relative stability of our financial expenses and an increase in volume of credit loan revenues. This expansion in loan revenues was supported by the increase in the average volume of operation, which compensated the behavior of spreads, due to the reduction on the Selic rate. Loan revenues grew 4.7% in the quarter and 18% in one year. Moving to slide number 11, we see that the expansion of the net interest income was followed by the evolution in Banco do Brasil s total funding. Here we can also observe the behavior of the funding cost over Selic. While we see an increase of 52.5% in Banco do Brasil s total funding balance in 12 months and 16.5% in the quarter, we can also observe that the total funding cost when compared to the Selic rate grew 420 b.p. in the annual comparison and 280 b.p. in the quarterly comparison. This behavior was [unintelligible] by the reduction of 500 b.p. in the Selic rate, which impacted mainly the time deposit side. On the one hand, time deposits helped a smooth increase in the cost of funding over the benchmark interest rates. However, due to the consolidation of Nossa Caixa, which added significant volumes of judicial deposits to the total funding, there was an increase in the fixed rate cost on the funding side. Besides that the relative cost of savings deposits also increased, since its duration is also fixed at 6% plus TR. Anyway even with the changes in this scenario, Banco do Brasil still has a very competitive funding cost due to the stability of growing these liabilities in a higher pace than the banking industry. Moving to slide number 12, we can observe that in the yearly and in the quarterly comparisons, the behavior of the global spread in each portfolio, we can also see that the focus in consumer finance is guaranteeing more resilience to Banco do Brasil spread besides the reduction in the Selic rate. Global spread is keeping its downward trend. Business portfolio spread reached 7.2% in 9M due to a higher share of working capital line in that portfolio. Regarding the spread in the individual loan book, which reached 19.8% in the year and 20.6% in the 3Q09, we see a steady decrease due to the concentration of loans with lower risk and a lower margin, such as payroll and auto loans. The reduction in the agribusiness spread, which came from 5.1% to 4.9% in the quarter, is explained mainly by the changes in the portfolio mix with the reduction in the relative share of operations of individuals and with equalized resources, which have better margins. On the right hand side of the slide, we can see the behavior of Banco do Brasil s global spread calculated by the net interest income over earning assets, which came from 4

5 7.3% in the 2Q09 to 6.7% in the 3Q09. In the 9M comparison, this global spread reached 6.8%, and if we look to Banco do Brasil standalone, it would have been 6.6%. Another way to analyze the global spread is to compare it with the Selic rate. You can see that Banco do Brasil is increasing its financial intermediation revenues in relation to the accumulated benchmark interest rate. While in 2008, when the annualized Selic rate was at 12.5%, the ratio of global spread over accumulated Selic was 56.9%. In the 9M09 this ratio went up to 65.2% and the trend is to be maintained at a higher level as long as the Selic rate remains stable and as along as Banco do Brasil continues to grow faster its individual loan book. Once again, it is important to remind you that Banco do Brasil has been very successful in compensating the drop in the Selic rate by the changes in the mix of the portfolio and by the growth in the volume of loans. There is also a difference between the timing of funding and credit generation. The increase on funding is faster than on credits, which drives the excess funding to operations with lower margin, such as securities and repos. Going to slide number 13, we bring you a breakdown of our loan book. The balance of R$285.5 billion of loans in Banco do Brasil represents a 41.2% growth for the past 12 months and 13.1% increase in the quarter. As I mentioned on slide eight, this performance allows Banco do Brasil to surpass 20% market share and this is a very outstanding mark. We are still growing more than the banking industry, and the highlight here obviously as this expansion is definitely in the individuals loan book, which grew more than 97% over the 3Q08 and 24% in the quarter. What I wanted to say here is that as we have anticipated, individual loan book is gaining relative share in Banco do Brasil s total loan portfolio, especially over the agribusiness book. This individual loan book came from 21.5% in September 2008 to 30% in this quarter, as a percentage of the whole loan book. Now moving to slide 14, we bring you a breakdown of our loan book segregating what is Banco do Brasil standalone and the loans generated by Nossa Caixa and Banco Votorantim. Looking at Banco do Brasil standalone, Banco do Brasil had an organic growth of 21.5% in 12 month, above the 16.9% achieved by the banking industry, and a growth of 4.4% in the quarter, below by 100 b.p. roughly the industry growth. However, it is important to remind you that our growth was impacted negatively by the relative stability of the Agribusiness portfolio that remains flat in the quarter. Regarding acquisitions, it is worth to mention that the quarterly increase of 13.2% seen in Nossa Caixa s portfolio already reflects Banco do Brasil s synergy expectations with this acquisition. Regarding the partnership with Votorantim, the volume of R$20.5 billion of credit that was added to Banco do Brasil s portfolio coming from Votorantim also confirms our expectations with regard to this deal. Going to slide 15, we have the breakdown of our consumer finance operation, which grew 97% in 12 months, allowing Banco do Brasil to achieve a 22.3% market share. This performance was boosted by the extension on payroll and auto loans. In 12 months we increased the payroll loan portfolio by more than 130%, and the performance in the quarter was quite impressive as well, around 15%. Banco do Brasil, Nossa Caixa, and Banco Votorantim together have R$34 billion in payroll loans, more than 30% market share. The auto loans business was also boosted by the partnership with Votorantim, increasing more than 135% the volumes in the quarter and 242% in one year. 5

6 On slide 16, we have the business loan portfolio that reached R$117 billion, with highlight here to the medium and large-sized companies, which even with the exchange rate variation grew 42.2% in one year and 18.8% in the quarter, showing the confidence of Banco do Brasil in the production sector in our Country. Operations with SMEs increased 28.5% in the last 12 months and 4.2% in the quarter. We must say here that we took advantage of our relationship with business clients in order to supply their credit needs in the crisis. And this strategy is guaranteeing, besides the growth in volume, the improvement in profitability with those clients, as we saw on slide 12. Moving on to slide 17, we can observe that loans granted to SMEs through the socalled Fundo Garantidor de Operações, the acronym is FGO, which is a private collateral fund with sources from its partners, comprised by the National Treasury and public and private financial agents. This fund aims at guaranteeing part of the credit risk contributing to the SME s access to credit. FGO is a strategic tool for Banco do Brasil to increase even further credit supply to companies with annual turnover up to R$15 million. Nowadays, at Banco do Brasil, the lines in which the FGO can be used are those for working capital line, and the maximum amounts guarantees is in range between 60% to 80% of the total volume of the credit, depending on the kind of guarantee, limited to a maximum guarantee of around R$150 thousand per loan, depending on the operation. The coverage is for the whole maturity of the loan, and the Company pays to FGO a guarantee granting fee. This fee is attached to the kind of operation and it is proportional to the maturity and the amount of the loan granted. In more than two months, Banco do Brasil has achieved more than 37,000 SME clients through the FGO. From the R$1.1 billion granted for use in this fund, R$795.8 million are granted by the funds. On slide 18, we have the balance of the foreign trade and FX operations, which portfolio reached R$24.3 billion in September 2009, an increase of 19.3% in 12 months. Here I would like to highlight that the exchange rate variation that impacts directly the balance of those operations, we can see that the balance of this growth remains actually flat. However, if we look at the USD-denominated balance, you will realize that the USD balance had an increase of 28% in 12 months and 14.2% in the quarter. Banco do Brasil is the leader in imports and exports financing with market shares in the FX markets of more than 31% and 23% respectively, and disbursements of more than US$3 billion and US$2.8 billion respectively as well. On slide 19, we can see that Banco do Brasil is still the largest lender to the Brazilian agribusiness, with a balance of R$68 billion in the portfolio, a 12.4% growth in 12 months. And that corresponds to a 60% market share in the total rural credits in the Country. In the crops, Banco do Brasil expect to disburse R$39.5 billion to this segment. It is important to highlight that we have already disbursed R$15 billion in the crop. On slide 20, we bring some information that allows us to be very confident about the quality of the agribusiness book. On the left side of the slide, we have the working capital loans contracted with insurance for the crop. From the R$R5.6 billion already disbursed in working capital loans to the sector, 66.7% were insured, higher than the 61.6% insured during the previous crop. And from this amount insured, 6

7 it is worth to mention that 90% is being reinsured by the insurance companies, as can be seen in the table on the bottom left hand side of the slide. On the right hand side of the slide, we have a geographic distribution of the rural insurance per region. Southern and Mid-West regions have the highest insured coverage, while the Southeastern part of Brasil has the smallest coverage due to some kind of crops that are planted in that area that do not allow insurance, such as the sugarcane. On slide 21, we see in the left graph that provision expenses decreased 4.9%, the ratio between those expenses over average growth is already at 4.7%. Past due loans over 90 days shown in the yellow line in the left hand side of the graph came from 3.3% to 3.6%. However, this delinquency ratio continues to be even better than the average industry, which is about 4.4%. Moving on to slide 22, we can see that over the last years Banco do Brasil s delinquency has been substantially below the average industry. In the last quarter, while past due loans over 90 days in the individual portfolio in the banking industry had an increase of 40 b.p., coming from 8.6% to 8.2%, Banco do Brasil had a decrease of 50 b.p., dropping from 5.7% to 5.2%. Reflecting years of growth in payroll loans mainly, it is important to highlight the gap between the delinquency number in the individual loan book and the average delinquency for the whole industry. And we could use that delinquency for both individuals and business portfolio has already picked. And going specifically to analyze the business portfolio, you can see that the quality of this book is better than the average industry, past due loans more than 90 days in the business book in Banco do Brasil nowadays is at 3.1%. It has reduced when compared to the previous quarter, while in the industry the delinquency kept on increasing, going up to 4%. On the slide 23, we bring you some vintage information from our individual loan book. I believe that Banco do Brasil is the only bank that is disclosing this information. And what we can picture out of this slide is that the newest vintages have very much better rates, much lower delinquency. These gray boxes here show all the credit sale that we did and that is why you see this huge drop here in the curve. I believe that the important message here is that newest vintages like 2008 and 2009 are in a much better risk situation and these vintages do not show huge deterioration. Now moving to slide 24, we would like to highlight some information about Banco Votorantim. Although the impact of the crisis over the credit quality are well known in the industry, it is worth to highlight that the credit quality of Banco Votorantim is without any doubt much better than the quality from its peers. Votorantim s expertise in this segment is clear when you see the delinquency ratio of 3.4% in a portfolio that is comprised more than 83% by used cars. And Banco do Brasil expects to benefit from this partnership improving even further the quality of its auto loan book, which delinquency nowadays is close to the 5% collateral. Going to slide number 25, we bring you some information about our fee base businesses. Fee income has amounted to R$9.9 billion from January to September, an increase of 13.1%. If we look Banco do Brasil on a standalone basis this increase was around 6%, totally in line with our guidance and it was between 5% and 8%. I would like to remind you that in the 2Q09, although we had a growth in our fee income base quite below the average guidance range, we decided to maintain our estimates 7

8 because we believe we would be able to recover our fee income, and the capital market business was very important for this recovery. But I would also like to highlight the performance of our credit card business, whose total turnover increased by more than 34% and that is an important fee income to our base. I would like also to mention the performance of our insurance business. Insurance business, as you can see in the right bottom part of the slide, has increased its share in the total Banco do Brasil s net income from 10.8% as of September 2008 to 15% for the 9M09. Our long-term goal is to make this year of insurance business as a percentage of the total net income to increase to 20% for the next four years. Going to slide number 26, I would like to talk now about the performance of our administrative expenses; administrative expenses grew in line with the business growth and also with the acquisitions. The reason why our administrative expenses for the 9M09 grew by 24% was mainly impacted by the consolidation of Nossa Caixa s number. But I would like to call you attention to the 3Q numbers, as you can see here our total administrative expenses remained practically flat. I would like to call the attention to the increase in personnel expenses as a consequence of the salary raise granted for all bank [unintelligible] in Brasil. The due date for salary renegotiation was September and it has already impacted partially our 3Q numbers. However, the management of Banco do Brasil took a very strong decision to reduce cost, and we can see the performance of this decision in other administrative expenses that in the quarterly comparison was decreased due to this decision, and other administrative expenses dropped by 3.3%. And on slide 27, we tried to figure out what would be Banco do Brasil s administrative expense performance excluding Nossa Caixa. As you can see here in this slide, excluding one-off expenses and Nossa Caixa expenses, our administrative expenses would have grown around 11%, totally in line with our guidance, which is between 9% to 12% growth for the full year of On slide 28, it is important to highlight that the performance of our BIS ratio already reflects our business growth and acquisitions. We ended the quarter with a BIS ratio of 13%, already consolidating here Banco Votorantim s balance sheet on a proportional basis, as we had already stated, but I would like to mention that Banco do Brasil has recently issued a perpetual bond of US$1.5 billion in October and a subordinated debt of R$1 billion in November, and once these two debt operations are approved by the Central Bank, Banco do Brasil will be allowed to add them to our Tier I and Tier II respectively, and on a pro-forma basis our BIS ratio would be increased to 13.9%. Definitely this business growth strategy was very important to allow Banco do Brasil to recover its assets leadership, and we have recovered this leadership since the last quarter and we have maintained and even increased the gap between us and the runner up. Banco do Brasil has increased its size 3x over the past seven years, roughly. And I would like to highlight that for the past 12 months, due to this organic growth and acquisition strategy, Banco do Brasil was able to grow its asset base by almost 50%. To wrap up, finally I would like to mention our guidance. The performance we have posted for the 9M009 has confirmed almost all of our guidance and we are maintaining 8

9 them for the full year of 2009 and then making no adjustments, and this guidance considers only Banco do Brasil on a standalone basis. And finally, I cannot forget to mention that this consistent performance of Banco do Brasil has been priced by the markets, Banco do Brasil has outperformed the benchmark in Brasil and also its peers in the Bovespa, with more than 100% appreciation of our shares. However, we are still being traded at a discount when compared to our private peers, despite the consistent performance of Banco do Brasil. Well, these are the major points I would like to highlight during this call. And before opening the floor to the Q&A session, I cannot forget to mention that Banco do Brasil will host its first Banco do Brasil Day in our head office in Brasilia. We will start this Banco do Brasil Day on Monday, November 23 rd with a dinner hosted by our CEO, and we will spend the whole Tuesday, November 24 th with meetings between investors and the Board of Officers and all the remaining Directors of Banco do Brasil to discuss our strategies and what the perspectives of Banco do Brasil are for the upcoming year. So, I would like to invite all of our investor base, domestic investors or foreign investors, we will also make this Banco do Brasil Day available in our website, we will webcast this in Portuguese and make the translation to English as well. I forgot to mention that in our Portuguese conference call, but I would like to highlight and invite everybody to participate. And for further information, please contact the IR department. So, now we can go for the Q&A session. Thank you very much for your attention. Jason Mollin, Goldman Sachs: Hello, everyone. My question is related to your capital base, even after incorporating the subordinated debt and perpetual bond your BIS ratio under Brazilian guidelines is 13.9%, well below the levels of your private sector peers. May be you can highlight how you feel about that, particularly given the rapid rate of asset growth that you have been showing. And secondly we saw in the quarter a significant increase in the operational risk, and I believe this already incorporates the acquisitions of Nossa Caixa and Banco Votorantim. But if you can confirm that and give us a sense if that should change significantly going forward in more than double, I think, the R$2.5 billion. Thank you, Jason, for your question. I would like Ivan to address your first question about the capital base and the growth perspective, and ask our Risk Director, Mr. René Sanda, to address your second question about operational risk, please. Well, thank you. About the BIS ratio, we are comfortable that we can increase, we do not have any constraints to improve our credit portfolio, and we continue focusing on our acquisition strategy because, as we disclosed, we forecast our BIS ratio, and when it is close to 13% we start some actions just to put in place and return to a level that is over the minimum that the regulator in Brasil requires, which is 11%. 9

10 But now we are focused just to put in place these ADR programs. We believe that the ADR will start to increase the liquidity of our share, and we are focused on paying attention on this. And I believe that during 2010, if we are still running the bank in the same pace, we believe that the competition is going to increase and we do not believe in continuously increasing our credit portfolio at the same pace that we did in 2009, but we are focused and we pay attention on this. If we believe we have got to take the measures necessary to increase the capital structure, to reinforce the capital structure of the Bank. René Sanda: Hi, Jason. Regarding your question of operational risk requirement, the main reason is the change of the percentage ratio from Central Bank of Brasil. We calculate an increase of R$1.3 billion because the requirement changed the percentage, if I am not mistaken, from 50% to 80%. So, the ratio is a basic approach to operational risks is the same for all marks in Brasil. The increase regarding Banco Votorantim and Nossa Caixa is minimal in this regard. The main reason was the increase in the percentage. Jason Mollin: That was circular, I think it was 33.83, went from 50% to 80%, so the impact from the acquisitions was small? René Sanda: That is right. Jason Mollin: OK. Thank you very much. Marcelo Telles, Credit Suisse: Good morning, everyone, congratulations on the results. I have one question regarding the insurance business. I mean, in terms of your strategy going forward, do you have an expectation of how much you expect the insurance to represent of your earnings in the future, and what are the areas that you would be focusing on in terms of growth? And also on the Banco Votorantim acquisition, what is the expectation in terms of revenue synergies for Banco Votorantim for next year? Thank you. I would like to ask Ivan to answer your second question, and I will address your first question, helping our regional manager, who is responsible for the insurance business. As we mentioned during the Portuguese conference call, our long-term goal is to make the insurance business represent roughly between 20% and 22% of Banco do Brasil s net income; and we believe there are tremendous opportunities, not only in the life insurance business and in the car insurance business, but also in the P&C insurance. We have acceleration development program of Brasil that are opening very good opportunities in the P&C insurance business. We expect that the World Cup will also increase opportunities in this business, and also the Olympics. 10

11 So, we know that this market tends to increase considerably in the upcoming years, and this is a very strategic part of our business we intend to focus on. I would like to pass to Ivan to make additional comments, if he wants, and to answer your second question regarding synergies with Banco Votorantim. Thank you. Thank you, Geovanne, thank you, Marcelo. I believe that the JV with Banco Votorantim was focused on to increase the participation of Banco do Brasil in car financing industry. That was a very good decision, and you can see the numbers that we disclosed that are improving a lot in this area. Another synergy we can capture is in the payroll loan. The payroll loan we are the leader, but I believe that we will increase this participation because of this JV with Banco Votorantim. Another important thing that you need to see is that we create with this partnership an important stability in the funding basis of Banco Votorantim. Therefore, we have a lot to increase the generation of the new assets in Banco Votorantim, especially in the car financing. That is why it is the main reason that adding to the car finance, the payroll and I believe in customer markets, we are able to capture some synergies. Marcelo Telles: Excellent. Thank you very much. George Freeman, Merrill Lynch: Thank you, everybody. Good morning. So, I would like to make two questions, the first one related to your ADR programs. I have seen a migration onto similar stocks with ADRs after the implementation of IOF taxes onto international capital inflows. How much do we expect to add in terms of ADTV with your ADR level 1, recently approved? And for when do you plan to have ADR levels 2 and 3? And my second question is related to margins. We noted a significant compression on net interest margin this quarter. And as a matter of fact, you are below your guidance on global spreads. Despite growing faster onto retail, you also mentioned that higher contribution of lower [unintelligible] retail portfolios have harmed overall margins. Would those lower [unintelligible] retail products have lower spreads than corporate loans? And would you point out in which products, aside auto and payroll, you have observed the most significant spread compression? Thank you. Thank you, George. I would like to ask Ivan to address your first question about ADR, and I will address your second question after that. Well, thank you. We are focused on the Level 1. The decision was to increase the liquidity of the share. We do not forecast any specific numbers. And we did not make any decision about levels 2 or 3. We are now focused on putting in place the ADR 11

12 Level 1 as soon as possible, and we believe that in our opinion, we increased the liquidity of our share, but we do not have any specific number for ADTV, and it is the same for the decision about levels 2 or 3. And with regard to margins, George, it is important to mention that despite the fact that in the quarterly number margin came slightly below the guidance, which we will be able to meet the [unintelligible] George Friedman: I do not know, but it seems that my line was broken also here, I did not hear what Geovanne told me. I would just like to understand what you expect aside auto and payroll landing, other net interest margins behavior going forward, and in which products we have been observing the most significant margin compression? I believe that the competition, especially coming from the capital markets, will put a lot of pressure on margins, especially on corporate, but we did not see this behavior for the retail. We have the payroll loans that you know that the margin is small, but it is a very good margin because of the NPL is so small. And we did not see the compression on the middle markets, and I believe that the competition came from our peers, came from the capital markets. We put a lot of pressure on the margins especially for the large corporate. But we are pretty confident that we are going to continuously increase the participation of the retail and the total credit, and that would prevent Banco do Brasil to keep our profitability especially for ROE above 20%. George Friedman: OK. Thank you. Jorge Kuri, Morgan Stanley: Good morning, everyone. I have a few questions, if I may. The first one is what would have been the impact on your net income if you have consolidated Votorantim in the income statement this quarter? Second, can you give us an update on cost synergies for Nossa Caixa? What is the current estimate of what cost savings may be and the timing to extract those? And finally, if you can share with us your preliminary views on 2010, what do you think volume growth is going to be, and expenses fees, and kind of like the key line items? Thanks. We are forecasting that the competition is going to increase in Brasil, but we believe that the forecast of the GDP, now is a kind of consensus, will create a lot of opportunities not only for Banco do Brasil, for the other banks. With the acquisition of Nossa Caixa, with the acquisition of Banco Votorantim we are not focused only to 12

13 increase; you can see on the numbers that we disclosed, the participation on the car finance and the participation on the payroll business. Nossa Caixa will capture the synergy, we disclosed on our website a report talking about the synergies, and we believe that the majority of this is going happen in But we keep what we forecast on our website. Talking about the competition again, we believe that that will create a lot of opportunities because of this forecast, the increasing of the GDP. We did not see any possibility, at this moment, to increase the inflation in Brasil. The inflation is under control. The benchmark rate is still kept below 10%, and the conditions for increase, especially the internal markets in Brasil, the consumer in Brasil, I believe that it is too late for Christmas, what is going to happen with the revenues, but I would like that in average we are pretty confident about the performance of the Brazilian economy. That is very good for us. That helps us to reduce the NPL and to reduce the provisions that, if this behavior continues, we are going to do. I am sorry, I did not get your first question. Can you repeat, please? Jorge Kuri: Yeah, sure. The first question is what would have been the impact on your net income if you have consolidated Votorantim in the P&L statement this quarter? Gilberto Lourenço da Aparecida: Ivan, if I may add. Jorge, we have a specific table in our MD&A related to P&L of Banco Votorantim; probably we can check in table 151. The net income of Votorantim in the 3Q was R$93 million, and 9M was R$493 million. So, please, check table 151, our MD&A. We have an income statement with reallocation. Jorge Kuri: Great, thanks a lot. And so regarding my third question, on your preliminary outlook for 2010, what today is the thinking of loan growth on a Banco do Brasil-only basis? You are growing credit at around 20% consolidated for all of the different businesses that you have bought; you have grown around 40%. Where do think loan growth can be in 2010 for the total bank, and how do you think fees will perform in 2010? What are your expectation on margins and taxes? Thank you. Thank you. Talking about the fees, we believe that you can see some stability. Talking about the loan growth, we believe that it is less than what we are facing in But it is difficult to forecast. We believe that the environment is going to be very good in Brasil because of the forecast, and now there is a kind of consensus about 4% and 5% GDP growth, which is very good for us. And again, Banco Votorantim and Banco Nossa Caixa, especially Banco Votorantim, with this JV with Banco do Brasil, they create a stability on the funding base and they are very good to generate assets, especially on the car finance and the payroll loan. That creates a good stability in our ROE, because we are continuously increasing our participation on consumer under total credit of Banco do Brasil. We believe that if you 13

14 add all of these and summarize the stability of the fees, we do not believe that we keep the same path in growth, the loan book in 2010, and we continue focusing to get all the synergies with Banco Nossa Caixa and to continue increasing the assets in Banco Votorantim. Jorge Kuri: All right. I am sorry, if you could try to put some numbers to that, less growth than 2009, does that mean less growth in the Banco do Brasil basis, less than 20$, or is it less than 40%? Stability of fees means flat fees? Same growth as 2009? I am just trying to get a little bit of a magnitude sense? OK. If I may add, I was disconnected from the room. Jorge, we are still working for what would be our 2010 guidance. But roughly, in terms of numbers, considering a 4% to 5% GDP growth, fee income we believe that 5% to 8% increase could be feasible. Loan growth between 20% and 25%, overall loan growth is also feasible. But once again, we are still working on 2010 guidance; and once we disclose the 4Q numbers, we will announce formally what our expectation is with regard to Banco do Brasil s performance for 2010, and probably we will be disclosing a guidance including all of our acquisitions, Nossa Caixa and Votorantim, that as Ivan mentioned are very good asset generators, and we are very confident on that. Jorge Kuri: All right. Thank you, Geovanne. Thanks a lot. Boris Molina, Santander: Good morning, thank you. I have a question on asset quality, in the quarter we saw a decline in the D to H loans risk ratings, which is a driver of non-performing loan provisions. However, we still see an increase in trends in terms of NPLs on 15, 30, and 90 days. So, the question here is, what explains this divergence in terms of the evolution of these asset quality indicators, and where we could see a sustainability in the decline of D to H risk ratings and lower operations going forward, or is this a one-off that probably would not be repeated going forward? And the second question that I have is, again, regarding your capital ratios. You have a total balance on your balance sheet of around R$4.5 billion in goodwill, intangibles, and deferred assets. And my question is in the transition to Basel II, is there any indication when we could expect the Central Bank to start deducting these assets from your Tier 1 capital base, or your core capital? They represent approximately 200 b.p. So, just to get an idea what the Central Bank has indicated to you, when we could expect the capital ratio calculations in Brazil to become a little bit more consistent with international standards? 14

15 Thank you, Boris, for you question. It has been [unintelligible] your question here, but I will ask René, our Risk Managing Director, to address your second question, and after that I will answer your first question. René, please, proceed. René Sanda: There is [unintelligible] Central Bank of Brasil that we are going to follow the Basel rules regarding the intangibles. But if we consider the deduction in our acquired capital, your calculation is right. The capital ratio will decrease by more or less 150 b.p. Boris Molina: Thank you. And with regard to your question about credit quality, I would like to highlight here that if you look to our chapter 7.5 in our MD&A, we bring you the breakdown of our loan portfolios per category. And you will realize that the increase in D to H rate was really focused in the commercial portfolio. So, basically, we have here the impact of some companies. And we believe with [unintelligible] fund that was created by the Government, we will be able to start improving the risks. As long as the quality of these commercial books starts to improve, we tend to change this ratio here. Boris Molina: OK, thank you. Fabio Bagadi, Barclays Capital: Good morning, everyone. Can you, please, give us an update on what the individual BIS ratios are of Banco do Brasil, Nossa Caixa, and Votorantim on a standalone basis? My understanding is that Votorantim s capitalization ratio is a bit more stretched than Banco do Brasil s. So, if I am correct, what are your alternatives there to address this, having in mind that you guys have an aggressive loan growth plan there? Thanks. Gilberto, unfortunately I can barely hear the questions. Could you, please, continue managing the questions for me, please? Gilberto Lourenço da Aparecida: René will answer the question for Fabio. Fabio, could you repeat the question? Because we could barely hear you. 15

16 Fabio Bagadi: Absolutely, sorry. My question was a follow-up on BIS ratio. I just wonder if you could tell us what the BIS ratio was at Votorantim on a standalone basis, because my thoughts are that the BIS ratio there is a bit more stretched than Banco do Brasil. And then maybe if you could tell us what your alternatives are there, having in mind that you have an aggressive loan growth plan at Votorantim? Thanks. René Sanda: Thank you. The impact of Banco Votorantim capital ratio was a deduction of 107 b.p. This is related to an increase in the capital required of more or less R$3.7 billion and an increase in their extra requirement of R$600 million. The increase in the capital required was related to subordinated assets that Votorantim issued. And when we consolidated the requirement, Banco do Brasil received 60% of this amount. The impact in terms of capital ratio is that the leverage of Banco Votorantim is more or less the same as Banco do Brasil. So, we are not using this capital or vice-versa. We have guidelines that Banco Votorantim has to have a capital requirement minimum of 13%, and this is the same as Banco do Brasil. So, we do not believe in any big change regarding the strategy of both banks. Fabio Bagadi: Let me clarify this. So, you are saying that Votorantim had a BIS of 13% by the end of 3Q09? René Sanda: More or less, this is the ratio. I think Marcelo can highlight this question. Marcelo Parente Vives: Yes. Actually, we ended up in September 2009 with a capital ratio of 12.4%. But it is important to consider that we have already issued subordinated debt that had been recently approved by the Central Bank. So, we also expect a second part of the equity that, depending on the equity that we have brought by Banco do Brasil, for the beginning of next year. It is an amount of R$450 million. So, this is going to raise the capital ratio of Banco Votorantim to 13.1%. Just to finalize, I will consider that in our strategic planning we keep forecasting the increments in our loan portfolio, and in this sense we have been seeing that we are quite able to keep our capital rate of 13% along the years. Fabio Bagadi: Great. Thanks a lot. Victor Galliano, HSBC: Hi. Yes, just looking on the asset quality question, in particular the agribusiness portfolio, we saw a very big increase in the NPL ratio, in particular for the extended 16

17 portfolio, which doubled on the quarter. And I just wanted to ask and see what is going on there, given that the dynamics in agribusiness and agriculture generally have been quite strong, and fertilizer costs have been coming down, so margin should have been good and yet we have seen that very big increase in over 90 days NPLs. Coverage is also down to 200%. It is still very big, but it is down on a 3Q basis from 1,000%. Do you expect this ratio to get worse going forward, especially in the extended portfolio? And if so, at what point do you think you will need to start bolstering up provisions or are you comfortable with this level of provisions? Thank you. OK. Thank you, Victor. With regard to the agribusiness portfolio, I would like to highlight here that, first of all, the impact in the delinquency ratio was an effect of the loans that were restructured. A part of those loans, the 42, a specific authorization from the monetary authority, we were not downgrading them because they were being renegotiated. And this authorization went through, and once this authorization ended the loans that were not restructured, how can I say, they had their risk increased. And that is why when we look to the delinquency ratio of the agribook, it went up. It is important to mention that those loans were already being ranked in those higher risk categories. So, the volume of provisions we had to account was small, was not relevant. However, it ended up harming the delinquency ratio because of the grace period that they were experiencing during the renegotiation period. And this renegotiation period ended in the 3Q. So, that is why we saw this pickup in delinquency, but this is related basically to those old assets that were restructured and we will try to renegotiate them. And with regard to coverage ratio in the overall book, Banco do Brasil is confident that we will maintain a high level of coverage. There was a drop definitely, but we believe that we will maintain that coverage at that level. We do not plan to start writing that provision. Definitely once the risk profile of the book starts to improve, instead of writing that provision we will be reinforcing our additional provisions, and this is according to our credit policy. And this is important because decreasing additional provision will just reinforce our capital base, according to the Central Bank legislation. Victor Galliano: OK. Thanks. Just a quick follow-up on write-offs: I mean, again we saw the write-offs increase overall for the agribusiness book, almost doubled quarter on quarter and the highest of the history series that you put in here in the MD&A. Do you expect that to maintain at this high level, Geovanne? Or do you think this could start coming down into the 4Q and into 2010? I know it is hard to tell, but any guidance would be helpful. We would like to look at the net loss. Net loss ratio went up about 100 b.p. and I think it tends to stabilize at that level. Definitely the volume of write-offs increased but we are increasing also the volume of recovery, and we recently nominated a new recovery director to help us to step forward. So, I do not think you should be concerned about the write-offs. Look at the net loss and I think that is the best ratio you could get in your estimate. 17

18 Victor Galliano: OK. Thanks. Saul Martinez, JPMorgan: Good morning. Thanks for taking my call. I am going to keep René Sanda very busy and ask another question about capital. In your response to an earlier question, you said that during 2010, especially in light of your ADR, you would be monitoring the situation and take appropriate actions. Should we interpret that as meaning you are seriously considering raising common equity? And the reason I ask that is that currently your BIS ratio, even if that give you credit for the perpetual preferreds in the subordinated debt, is 13.9%, and notwithstanding any questions about the quality of the capital, which is a separate issue, based on your guidance your risk weighted asset growth is growing much faster than your equity, than your capital, at your current profitability level. So, it would seem to me that your BIS ratio is going to turn right back down towards 13% very soon. So, just want to get a sense for whether you feel and when do you feel like you are going to have raise to additional Tier I in common equity specifically. René, Saul wants you to give him some [unintelligible]. Could you answer this, please? René Sanda: I think Ivan already told a little bit about the strategy of ADR and the capital level one. May I pass to you, Ivan? Yes, we continue with our decision, as we did not create any constraint for the growth of Banco do Brasil. And we believe this subordinated debt we did is perpetual, and we are following what is happening in our credit book and our acquisition strategy of the Bank. And we will continue monitoring the BIS ratio, that is what I can tell you now. And if I to add, Saul, I am here with my controlling Director and he is explaining to me that that performance of the BIS ratio takes into consideration not only the subordinated debt and the perpetual bond but also the expectation of asset growth and funding growth, as well. So, it is a performance that considers not only the raise in Tier I and Tier II with these debts, but also volume growth. Saul Martinez: Right. But where I am wrong, then? If you are guiding towards 20% to 25% loan growth, defending your share, you risk-weighted asset growth should grow faster than your capital base, if you have a 40% payout and an ROE of 12%. So, and if you think that a 13% BIS is part of the floor, it seems on the surface of it like you are going to get right back down to that number pretty soon, unless something is wrong with my math? 18

19 OK. Well, I do not know if your math is wrong or not. Ours points out to this level of BIS ratio, not necessarily, and if by any chance we need to boost our BIS ratio, we have shown a very good performance in raising really rapidly perpetual bonds and to coordinate effects. Saul Martinez: OK, fair enough. Thank you. Operator: This concludes today s question and answer session. Mr. Ivan, at this time you may proceed with your closing statements. Thank you all. If you need further information about Banco do Brasil, please contact our IR team or visit our website. Have a nice weekend. Thank you. Operator: That thus concludes our Banco do Brasil s conference for today. As a reminder, the material used in this conference call is available on the Bank s Investor Relations website. Thank you very much for your participation. You may now disconnect. This document is a transcript produced by MZ. MZ uses its best efforts to guarantee the quality (current, accurate and complete) of the transcript. However, it is not responsible for possible flaws, as outputs depend on the quality of the audio and on the clarity of speech of participants. Therefore, MZ is not responsible or liable, contingent or otherwise, for any injury or damages, arising in connection with the use, access, security, maintenance, distribution or transmission of this transcript. This document is a simple transcript and does not reflect any investment opinion of MZ. The entire content of this document is sole and total responsibility of the company hosting this event, which was transcribed by MZ. Please, refer to the company s investor relations (and/or institutional) website for further specific and important terms and conditions related to the usage of this transcript. 19