Conference Call Transcript 4Q07 Results March 14 th, 2008

Transcription

1 Operator: Good morning ladies and gentleman and thank you for waiting. At this time, we would like to welcome everyone to Banco Cruzeiro do Sul s 4Q07 earnings conference call. We would like to inform you that this call and the slides are being broadcast in the Internet at the Company s website and that a presentation is available to download at the investor relation section: Also, this event is being recorded and all participants will be in listen-only mode during the Company s presentation. After the Company s remarks are completed, there will be a question and answer session. At that time further instructions will be given. Should any participant need assistance during this call, please press *0 to reach the operator. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Cruzeiro do Sul management, and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate 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 Cruzeiro do Sul and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Luis Octavio da Costa. Mr. da Costa, you may begin your conference. Luis Octavio da Costa: Dear shareholders, investors and analysts. We would like to introduce Banco Cruzeiro do Sul financial results regarding the 4Q and full year of The year of 2007 was very significant for Banco Cruzeiro do Sul. At the end of the 1H07 we concluded our IPO adding on top of the existing capital basis additional R$430 million. The Bank adopted the highest corporate governance best practices and adhered the Level 1 of Bovespa corporate governance. Brazil introduced, in 2007, an above the average growth compared to the last five years and the banking credit represented 35% of the GDP with and important contribution for our payroll deductible loan lending. Following the Country and its credit market base growth, the Bank introduced a major growth on its credit related assets origination. The payroll of deductible lending origination to public servants and beneficiaries of the Brazilian public retirement system, INSS, grew 103% compared to With a seasonal origination peak on the 2Q and a monthly average origination of R$273 million per month, the payroll deductible credit card, which is being offered by the Bank since 2005, achieved 604,000 issued cards; and the financials amount growth of 80% compared to the 4Q06. We believe that after the recently introduced rules - 1 -

2 concerning the payroll of deductible credit cards, usage by INSS beneficiaries, the credit card will introduce an expressive growth in The credit portfolio of small and medium enterprises introduced a growth above 122%, when compared to the 4Q06. The Bank recently adopted new strategic measures target to fully increase such business segment in 2008, and diversifying its credit portfolio. We would like to highlight our credit portfolio currency having 96.2% rated between AA and C. As a result, the Bank s full year net profit reached R$236 million, 471.6% higher than in 2006, with a return on the average equity of 34.9%. Such profitability was impacted by non-recurrent earnings, on expenses such as IPO expenses, market to market adjustments of securities bonds, total and partial sell down of the interest in the capital stocks of BM&F and Bovespa, respectively. The Bank has the intention to continue to grow its credit portfolio and therefore increasing its profitability. In this sense, we believe that the new capital structure obtained after the IPO and the maintenance of securities as a funding will allow us to accelerate our sustainable growth. To finalize, I would like to thank for all the achievements reached across the year and also for the support and confidence of our clients and shareholders, and the dedication of the human resource. Thank you. Gentlemen, we will start with our presentation. We would like to start with the slide number two, where we post the highlights of the 4Q07. As a highlight of the 4Q07 I would like to underline our net profit of R$141 million and a full year net profit of R$236 million delivered in a return on average equity of 34.9%; in line with Banco Cruzeiro do Sul s post-ipo strategic plans, our funding raised through time deposits grew 21.3% and 79% if compared to the 3Q07 and to the 2Q07, respectively. Our credit portfolio posted a growth of 160% when compared to the full year 2006, reaching R$3.2 billion. The 4Q07 origination payroll deductible loans amounted to R$838 million; a growth of 53% compared to the same period of 2006 with an average monthly origination amount of R$279 million. On slide number three, as previously mentioned, we had a net profit of R$141 million on the 4Q07, posting a growth of 771% when compared to the 4Q06 and 3.4x higher than full year profitability of The full year profitability of 2007 was R$236.1 million, 471% higher than full year 2006 and representing a return on average equity of 34.9%. On the 4Q07 profitability was mainly impacted by non-recurring earnings and profits from IPO s; market-to-market adjustments of government bonds and Bovespa stock and the sale of BM&F stock. So, I would like to explain to you what I think is really important is to see our figures and understand about our recurrent profits. In numbers, if you see our net profit of R$141 million in the 4Q and if you see non-recurring earnings of R$122 million when we sold the BM&F and the Bovespa and the MTM of Bovespa R$85 million

3 Adding that, given that we posted non-recurring expenses, the MTM provision for the government bonds R$43 million and R$2 million as expenses from the IPO. If you included the profitability from a finance that we have not done, the number is R$50 million. So, actually our results, if you see that in the current profit, is R$29 million in the 4Q and R$142 million in the year. We believe that a different income during the lack of the contract is more consistent than a punctual income. Besides, that was the reason of our IPO; to have a solid capital basis which allowed the Bank to book more assets on the balance sheet. We are anticipating ourselves for a change in accounting rules, which will be mandatory in January of And we are considering the movement as a growth management practice. So, actually we are trying to stop because we know that the government is changing the rules and we have to be ready in January The Bank management cannot be focused on a quarter, but in the long-term sustainability of future results. However, it is important to mention that all guidance provided by Banco Cruzeiro do Sul have been over accomplished. Profitability is fundamental for the Company s growth. Shareholders equity and dividends pay out. The Bank paid R$0.40 per share for dividends in Therefore, it is laudable that a bank, which had exceptional nonrecurrent earnings, anticipated itself for a future mandatory accounting procedure change. I believe that the previously detailed on this accounting reconciliation, we made ourselves clear that there was not a reduction of earnings in our 4Q; but it is an accounting procedure change with a difference in the profitability of the length of the credit contracts. So, actually if you sell your assets, the receivables are already launched up front. If you keep in the balance sheet you are going to defer your revenues; that is what we are trying to do. We are trying to keep more assets on the balance sheet to receive the revenues in the time of the contract. That is it, I think. Thank you. Banco Cruzeiro do Sul 2: Continuing our presentation on slide number four, we will see the dividends pay out on the year of 2007, which amounts R$0.44 per share, being R$0.25 to interest on equity and R$0.19 per share to dividends. The remuneration was the same to common and ordinary shares. On slide number five, we have our net worth and shareholder equity which grew 12.5% compared to the 3Q07 and 311% when compared to the 4Q06, reaching R$1.47 billion. The other shareholder equity was R$670.8 million and the BIS ratio, 30%; an improvement compared to the 27.7% of the 3Q and the 16.7% of the 4Q06. And below the BIS ratio capacity to sustain future growth as the minimum BIS ratio for Brazilian banks according to the Brazilian Central Bank rules is 11%. On slide number six, you see that Banco Cruzeiro do Sul kept its focus on the payroll deductible lending business. Our payroll deductible lending operation is explicited in three different areas: the civil servants, beneficiaries of the Brazilian public pension fund system and the INSS and the credit card. This business represents approximately - 3 -

4 92% of the total credit portfolio and 68% of the total assets, posting a growth of 73.7% comparing to the 4Q06. The small and medium enterprise segment represents 8% of the total credit portfolio and 8.3% of the total assets, posting 122.4% growth comparing to the 4Q06. The Bank is taking the necessary steps to increase the amount of the SMEs related business, targeting to diversify its credit portfolio. We would like that somewhere in time the SME origination would represent 20% of the Bank s total credit portfolio origination. On slide number seven, you have the Bank s total on-balance credit portfolio, which amounted R$3.3 billion, posting a growth of 146.6% when compared to the 4Q06 and 17.1% compared to the 3Q07. If, on top of the balance credit is added to the assets assigned with and without recourse to other financial institution, the total credit portfolio would amount to R$4.4 billion; the total assigned amount represented 25.6% of the total credit portfolio, in line with our post-ipo strategic plan, which implies to reduce the amount of credit assignments to other financial institutions, enjoying the whole profitability of the originated assets. The with recourse of assigned amount reduced 53.7% comparing to the 4Q06. On slide number eight, the Bank presented the numbers monthly origination of payroll deductible loans of R$273 million; on the 4Q07, the origination of R$838 million per month and across the year amounted to R$3.3 billion. We would like to emphasize that the Bank kept its internal policy to not exceed 25% of its INSS-related credit origination, being the 4Q % of the total and, during 2007, 18.7% of the total. The origination behavior was impacted by regular seasonability and of the products during the year. Having the 1Q and the 4Q been impacted by holidays and civil servants vacation. On slide number nine, Banco Cruzeiro do Sul offers to its customer base the payroll loan linked credit card since We believe that the card is an important portrait to and consequently simplifies the loan contract process. Currently, the Bank has 604,000 issued cards, posting a growth of 80% when compared to the 4Q06 and a growth of 79% in the financed amount in the same period. We believe that the payroll-linked credit card will post a significant growth after the new rule placed by the INSS in January 2008, which splits the available the consigned amount into 20% to direct loan and 10% exclusively to the credit card. On slide number ten, the Small and Medium Enterprise loan is growing consistently; from 2004 up to 2007 the total loan outstanding grew 388%; comparing with the 3Q07 the segment posted a growth of 20% and 122% when compared to the 4Q06. In 2007, Banco Cruzeiro do Sul implemented a new strategic plan to the SME segment targeting further boost; among the measures taken, we increased the geographic coverage to other cities besides Rio and São Paulo to improve market penetration and we hired new relationship managers targeted to improve market share. On slide number 11, our source of funding remains diversified and distributed among credit assignment, 24.7% of the total; short-term notes and medium-term notes, 21.1%; time deposits, 30.8%; and the FIDC, 17.7%. We would like to highlight the time deposits growth of 21.3% and 133% if compared to the 3Q07 and the 4Q06, - 4 -

5 respectively, reaching an amount of R$1.3 billion. In the total, the Bank reached an amount of R$3.8 billion of funding, posting a growth of 8% comparing to the 3Q07 and 26% if compared to the 4Q06. On slide number 12, Cruzeiro do Sul has 300 operation agreements, which covers an access of 2,400 government entities on the three government levels. On 2007, we added 52 new agreements on top of the previous existing ones in Our business evolution is made through third-party agents that amounts, on the 4Q07, to 297 correspondents distributed all over the Country, being 58 of them on an exclusive basis. The Bank has a team of relationship managers, which is on a daily basis in contact with the agency network, keeping a closer monitoring targeting the good business development. Meanwhile, the sales agents could hire on its region other smaller companies or individuals to help them out to have their sales region properly covered. Therefore, we estimate that the Bank is represented by a sales team of an extend of 10,000 people. Such agreements allied to our distribution network is responsible for the origination and relationship of 996,000 active clients, split into the INSS, 442,000; civil servants, 366,000; and credit cards, 290,000. A growth of 25% compared to the 4Q06. On slides 13 and 14, we have our financial highlights, where we emphasize our return on average assets of 7.4%; the return on average equity of 34.9%; our net profit of R$141.1 million; our shareholder s equity of R$1.47 billion; our efficiency ratio of 29.8%; the BIS ratio of 30%; and other net interest margin in 11.3% in this 4Q and 21% in a year basis. On page 15, we would like to point out that in the year 2007 the Bank achieved its main goals, and for 2008 we are forecasting to continue to increase our credit portfolio and improve our profitability. We highlight the 2008 growth target to the SME and credit card segments around 100% compared to the full year of 2007; besides the profitability, which we are forecasting about R$250 million; a return on average equity of 25.5% and a total shareholder equity of R$1.3 billion. On page 16, you have, for your guidance, our ratings, our current ratings. That is what we have for the moment. I would like to thank you for the attention and we are at your disposal for any further questions you may have. Thank you. Victor Galliano, HSBC: Hi, good morning. I was wondering if you could give me a bit more detail on your financial intermediation income. If you could give me a breakdown there of what has come from on balance sheet loans, what part of that income has come from on balance sheet loans, what part has come from the assignments to other banks, and what part has come from assignments to FIDCs for 4Q and for full year 2007, please

6 We do not have these figures now; I would need to check on a more accurate basis, if you do not mind. Sure. OK, let me follow up If you do not mind, this information is posted on page 30 of our financial results and I would be more than glad to detail it and send you a response. OK. I saw the full year numbers in the financial statements. I do have the 4Q as well, but I do not have it with me right now. I will be more than glad to send you an with the detailing. OK. Can we just recap on what you said on the earlier part of the conference call, which is the most interesting bit for me, which was regarding the reconciliation of the numbers for the 4Q earnings, whereas opposed to 4Q net earnings is R$141 million, and then you need to deduct from that I think it was R$122 million from non-recurrent Let me go: it is R$122 million regarding the sales of shares of BM&F and Bovespa. And R$13 million from Bovespa. That is a gross amount and the R$122 million is net amount. Then, you have the market to market of the Bovespa s shares of R$85 million. Then, you need to add the market to market provisions for government bonds of R$43 million, and also the IPO expenses of BM&F in R$2 million. On top of that, we assumed that we did not do the regular amount of assignments that we used to do. Right

7 Because we prefer to have it on the balance sheet and defer this profitability on time and find the whole profitability of the assets by the time the new accounting rules are coming by. But if we did these assignments the way we used to do before, we would have on top of the extra R$60 million in profitability. Therefore, at the end of the day, the recurrence profitability of the quarter would be R$29 million. Sorry. Let us just recap. R$122 million is a net extraordinary gain from the sell of BM&F? Yes. That is for the sale of BM&F and 10% of Bovespa. And the 10% of Bovespa. Then there was R$30 million in there? Then you have R$85 million market to market of the remaining Bovespa share. It is about 5.6 million shares which were done in the balance sheet at R$23 which was the price of the IPO. Right. OK. Then we had the R$43 million regarding provisions made in the market to market of our government bonds portfolio, which although are on the hold to maturity basis, we preferred to do the provisions in order to show more transparency to our customers and shareholders. On top of that, we had expenses of the BM&F IPO of R$2 million. And after that, we have what had been explained before that we could not do the amount of assignments that we used to and if we did, we would have an extra profitability of R$60 million. OK. But you said in your press release that what you were not going to do as much assigning - 7 -

8 No, we will not. What we are trying to show is that we preferred to defer this profitability, this R$50 million, over the time of the contract instead of recognize this profitability in advanced terms due to the new accounting procedures that will be in place by January 29 that will not allow anymore to recognize profitability in advance. Every single bank in Brazil, who assigns assets will need to recognize profitability deferring profitability over the time of the contract instead of recognizing the profitability upfront. Therefore, what the Bank is doing is anticipating this movement as the Bank has enough non-recurring profitability to do so and still deliver the profitability promised on our guidance. So, you are implementing that directive earlier, is that what you are saying? Yes. We are implementing these new procedures earlier. And we will do it step by step during 2008 as well as much as our profitability allows us to do so. OK. Thank you. Natalia Corfield, Dresdner: Good afternoon, and thank you for the very good presentation. I have basically two questions. The first question is with regards to the loans on balance sheet. I have seen that a significant portion of it is kept as FIDC-subordinated quotas, and I would like to know the reason for that and also if the changes in the regulation for 2009 are also going to affect the FIDCs. The last question is about the deposits. I have seen that you have been able to increase the deposit days of Cruzeiro do Sul, which is very positive, and I would like to know what the percentage of institutional investors is. Natalia, thank you for your questions. Let us start with the deposit days. Banco Cruzeiro do Sul has an internal policy to not exceed deposits from institutional investors in over 35% of the total. So, we will always be below this figure. At this very moment we are more or less closer to this figure. We have 33% and something on institutional investor deposits

9 Regarding the FIDCs, we believe that the junior quotas of FIDC are a much more liquid asset by the time it is at least AA rated, sometimes it is Triple A rated. There is a huge demand in the market for this kind of junior quotas. Therefore, if the Bank needs to sell down some of these quotas, it is much easier to be done, it could be made at a much better price than a regular payroll-linked asset. That is the reason why we prefer to keep FIDC quotas instead of the real assets. And concerning the new accounting procedures, yes, it would be valid for the FIDC quotas as well. We will need to bring these FIDC quotas to the credit portfolio as a regular credit operation and defer its profitability over time. That is why we are preferring to concentrate much of the profitability on the FIDC quotas in order to have a much sustainable amount of assets by January 2009 whenever we need to bring all these assets back to the credit portfolio and defer the profitability over time. So, the profitability of these assets will be much improved reducing the amount of assignments the way we used to do before. That is why we, little by little, will reduce the amount of assignments and will concentrate to have a stronger profitability on the balance sheet. Natalia Corfield: Right. So, just to see if I understood correctly: the quotas of the FIDC will have to be brought back to the balance sheet in 2009? Yes, that is correct. Natalia Corfield: OK. For new assignments, not for the old ones. The old ones will remain as it is. Natalia Corfield: OK. Just one thing, then: the 21.3%, which is the capitalization for the end of 2009 that you estimate, that already includes the new accounting rules? Yes, it does. Natalia Corfield: OK, great. Thank you. Victor Galliano, HSBC: - 9 -

10 Just on the FIDCs, do you disclose what the amount was of loans assigned to FIDCs in the quarter? Yes. You have a note in the balance sheet as well. I will send you the 4Q balance sheet, because it is only on our website. But I will send you as well. If you have our amount of assignments to FIDC, in September that is the profitability it was R$177 million, against R$98 million in December. Sorry, that is the number that was the value of assignments in the quarter? No, that is the profitability we had on the assignments. That is in order to show you that we are, instead of anticipating the profitability, we are taking the profitability on the balance sheet and deferring this profitability over the time of the contracts. If you go to the amount of assignments, the total assignments, we assigned in September R$1.2 billion, and we assigned in December R$1.1 billion. So, the difference in the assignment amount was not a big one. What we did was to reduce the amount of the assignments earnings upfront, and we kept the remaining portion of earnings in the balance sheet, deferring it over time. OK. So, this R$1.1 billion was for FIDCs only or total? No, that is all the assignments. One last follow-up question: if you were to strip out assignments to FIDCs and to other banks from your net financial margin, which is disclosed on page 14, can you give us some idea what that would look like? I still do not have this exercise, but of course the net interest margin will be reduced, because we have some upfront earnings on that

11 I get a number of about 7%. Maybe you are right; I do not have this figure, sorry. OK, thank you. Operator: There appear to be no questions at this time. We would like to turn the floor back over to Mr. da Costa for any closing remarks. Luis Octavio da Costa: Thank you very much you all, I appreciate your time. In case you have any further question or something, please, do not hesitate to get in touch with us at our Investor Relations area of the Bank. My colleagues and I will be at your entire disposal for any further information you may need. Thank you very much. Operator: Thank you. This concludes today s presentation. You may disconnect your lines at this time, and have a wonderful day