Conference Call Transcript 2Q10 Results Banco do Brasil (BBAS3 BZ) August 17 th, Operator:

Transcription

1 Operator: Good morning, ladies and gentlemen. Thank you for standing by. We will now begin Banco do Brasil s 2Q10 results conference call. At this time, all participants are in 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 a live broadcast with a slide presentation is on the Bank s website at the Investor Relations site, from where questions may be sent. Before proceeding, let me mention that this presentation may include references and statements, and synergies, increasing estimates, projections and results and future strategy for Banco do Brasil, its associated and affiliate companies and subsidiaries. These expectations are highly dependent on market conditions, on Brazil s economics and banking system performances, as well as on international market one. Banco do Brasil is not responsible for bringing up to date any estimate in this presentation. With us today Mr. Gilberto Lourenço da Aparecida, Head of IR, Mr. Eduardo Cesar Pasa, General Accountant, and Mr. Renato Donatello Ribeiro, Director of Controlling. First, Mr. Gilberto will detail the results. At the end of the presentation, the Executives will answer the questions for the participants. Mr. Gilberto you may now begin. Thank you very much. Good morning to you all. Before I begin here, I would like to say that we have with us today Mr. Denilson Molina, Credit Card Director, Mr. Marco Tulio Mendonça, M&A Unit, Mr. Gueitiro Matsuo Genso, Director from Consumer Finance, Mr. José Carlos Vaz, Director from Agribusiness, Mr. Paulo Roberto Evangelista de Lima, Risk Director, Mr. Walter Malieni Júnior, Credit Director, and Mr. Clenio Severio, Director for SMEs. The performance in the quarter confirmed the success of the strategy adopted by the management, ratified by the achievement of the most part of the estimates in our guidance. We are pretty confident that Banco do Brasil will achieve its goals due to the good prospects of the Brazilian economy and the banking industry. Beginning by the slide number three, where we bring some information about the dynamics of our economy, showing the growth potential of our Country and the improvement occurred in the economic fundamentals in recent years. The movement among the social classes observed during the last six years allows credit access to more Brazilians, benefiting the bank industry, especially financial institutions focused on retail. Moving to slide number four, the numbers presented here confirm the information from the previous slides, showing that the credit volume in the Brazilian economy is increasing with a stable risk level. The highlight of this slide is the right bottom graph, which shows the evolution of loan/gdp ratio, which increased from 30.2% to 45.7% between 2006 and June

2 On slide number five, we have our market shares in some segments. We are leaders in everything that matters in the banking industry. Once again, the highlight is our leadership in total assets, with a 21.5% market share. Moving to next slide, slide number six, we have Banco do Brasil results. We ended the 1H10 with a net income of R$5.76 billion and a recurring net income of R$4.383 billion, an increase of 34.9% when compared to the 1H09, confirming that the strategy adopted by Banco do Brasil in the past years are guaranteeing consistent results. Moving to slide number seven, now talking about the financial results. Net interest income, we can observe the evolution of those revenues, which grew in comparison to the 1H09, led by a strong growth in revenues from loan operations. Once again, the expansion of loan operation revenues was driven by the increase in the average volumes of credit transactions, compensating the behavior of the spreads, as we will see on the next slide. Slide number eight. We have the behavior of the spread in each portfolio and also the net interest margin compared to accumulated Selic rates. The contraction of spreads in the individual and business portfolios is mainly due to the concentration in those operations with less risk, and which also bring lower margins, such as payroll loans and car financing, to individuals and working capital and investment lines to medium and large companies. On the 2Q, we introduced a new metric to analyze Banco do Brasil s net interest margin. It is the net interest margin adjusted by the risk. As can be seen in the right graph, although there is a reduction in net interest margin, when it is adjusted by the risk the behavior is quite different. It proves that the strategy of choosing products with lower margins, but with better risk profile, is making sense. Since, last year, the net interest margin adjusted by the risk is stable around 4.5%, despite the drop of 80 b.p. in the net interest margin in comparison with the 2Q that is measured, as said, before the risk. Slide number nine. On slide number nine, we can see that our funding costs are improving, mainly due to the higher growth of core deposits than the total deposits. Our foreign borrowing is stable, as you can see in the bottom part of this slide, and our market share of assets under management is close to 23% of the Brazilian market. Moving to slide number ten. We can see Banco do Brasil is gaining share in the loan market, expanding its leadership with 20.1% market share in June 2010, amounting at the end of that month, R$326.5 billion. Here we are highlights in the share of individuals portfolio is the total portfolio. In June 2009, this portfolio represented 27.1% of the total book. In June 2010, its share reached 31%, surpassing R$100 billion. We will talk briefly about the main segments of our book. Moving to next slide, number 11, we have the breakdown of our consumer finance operations, credit to individuals, which grew 47.7% in 12 months. As we can see, the payroll and auto loans are responsible for 52.5% of the total credit to individuals, which explained the drop in the spread since those operations have lower risk and lower margins. To continue to grow our payroll loan book, we will focus on increasing our share in social security retirees and pensioners segment, and increase on the term of 2

3 loans related to municipalities agreement and our partnership with Banco Votorantim, complementing the origination ability outside of the range. Regarding auto loans, we will keep our strategy of acquiring portfolio from other financial institutions and we will launch new products in order to meet our clients needs in terms of convenience. We cannot forget to mention that at the end of June, we surpassed R$2 billion in mortgage operations. In this business, our strategy has been the origination of individual loans through the finance of real estate projects, the Government project, Minha Casa, Minha Vida, and of course the use of our distribution network to originate the operations. Slide number 12, we show the evolution on the balance of business operations, which in 12 months grew 31%; please, observe that the strongest growth was in the operations with mid and large companies, which explains the spread reduction from those operations, but bring risk improvement. On the next slide, we will have further details on that book. Slide number 13, we have the breakdown of our business portfolio, credit granted to companies, with highlight to working capital lines and investment lines, that together represent more than 76% of the total book for companies, and raised in the 2Q around 10%, surpassing 40% when compared to June last year. Next slide, slide number 14, we have the evolution in the balance of working capital operation to SMEs, especially those guaranteed by FGO. The balance from those operations increased 47.1% from the 1Q to the 2Q10, ending the quarter with R$5.1 billion. The delinquency ratios in SMEs portfolio, after the raise seen in the 1H09 due to the financial crisis, is having consistent improvements due to the refinement in conditions for new operations with the use of mitigators as FGO and the prioritization of transactions backed by receivables. Slide number 15, the information in this slide is confirming Banco do Brasil s position as the largest partner to the Brazilian agribusiness, with a 60.5% market share. Indeed, the highlight from the 2Q was the growth of marketing operation, up 37% from March due to seasonal reasons. Through the rest of the year, is expected with the beginning of the next crop a growth more concentrating in working capital line to finance crop inputs. Slide number 16 complements the information from the slide 15. We observe the increasing use of rural insurance, 61% from the cost operations from crop were contracted with rural insurance, while crop only 50% were insured. On the bottom of this slide, we have for the first time a chart with the amounts and the percentile of risk mitigators to main Brazilian cultures, I mean grain cultures, with highlight to cost operation of wheat and soybean, which had respectively 88.6% and 83.3% of the operation insured. On the slide 17, we have the comparison between the levels of risks from Banco do Brasil and the banking industry. And as we can see, the percentage of operation with AA to C risk from Banco do Brasil increased in the past 12 months, ending June

4 in 92.5%. Besides that the concentration of the operations from AA to C risk is higher than in the bank industry. Slide number 18, the graph on this slide shows that the strategy adopted by Banco do Brasil in focusing its operation to lower risk lines is being successful. The delinquency ratios to individuals and business have a declined trend for the past 12 months in lower levels than the banking industry. On the slide 19, we highlight the delinquency ratios to the agribusiness portfolio, with a breakdown to rolled over and non-rolled over operations. It is worth to highlight that despite of being rolled over or non-rolled over operations, the delinquency ratios are in better levels than in the 1H09. Thus, out of the delinquency of the total agribook had an improvement ending the 1H10 with a ratio below the presented in the 1H09. I would draw your attention to the coverage level of past due loans over 90 days in provisions 456% of coverage to rolled-over operation that are delinquent more than 90 days. The slide number 20, ending the information related to credit risk, we can observe that although our delinquency is in lower levels than the banking industry, our percentage of write-offs in comparison to average portfolios lower than the average of our peers and our recover of write-offs ratio is higher. We kept our coverage ratio of past due loans over 90 days above the banking industry. In the quarter, three events led the reduction on the balance on the outstanding additional loans for loan losses. Due to the improvement in the quality of the agribusiness portfolio, an amount of R$332 million and was reversed. This reversal is being considered as a one-off item in the quarter, so it is not considered in our recurring net income. The other events are related to additional allowance balance reclassifications to required allowance of loans from Banco Nossa Caixa and retail loans amounting less than R$50 thousand. These events did not impact the result of the peers. Prove that this movement is only a reclassification is the fact that in the comparison between June and March, a rise can be seen in the coverage of loans past due over 90 days as well as the coverage of loans classified as risk D to H, which required provision. In slide number 21, we can see the contribution of non-interest bearing businesses, fees and insurance to the results that increased share in 160 b.p. in the 2Q over the previous quarter, being almost a third part of the total commercial revenues. Slide number 22, we have the administrative expenses with the 1Q09 adjusted with expenses from Banco Nossa Caixa and Banco Votorantim. So, it is pro forma. Considering the half yearly comparison, the admin expenses grew 9.1% below the guidance in line with our business growth, reaffirming the rigor of Banco do Brasil in expenses management. On slide number 23, we can see that the increased admin expenses below the project debt brought improvements to the productive ratio, especially regarding fee income to personnel expenses ratios. 4

5 Moving to the next slide number 24, we can observe that Banco do Brasil had a consistent growth in the cards market, credit card and debit card, keeping its market share above 20% in terms of turnover. Looking for synergy gains between common business, Banco do Brasil, Bradesco are working in establishment of a holding to the launching of Elo brand, which focus will be the lower income customers, which still represent a low share in the credit card markets, with low penetration. Aiming at increasing the credit card use among those clients, recently Banco do Brasil, Bradesco, and Caixa Econômica Federal signed an MOU in order to include Caixa Econômica Federal in the Elo operation, and we will increase the distribution ability and the access of new customers through the deal. The slide number 25 brings us the share of the insurance business in Brazil, of Banco do Brasil. It is worth to remind you that recently we restructured our insurance area, including the reorganization in all of our affiliated companies, aiming at increasing our market share to allow the selling of insurance companies products in alternative channels with automated solutions and launching products through specific niches. The reorganization increased Banco do Brasil s shares of the insurance companies, which standalone add results to Banco do Brasil. Slide number 26, we have a before and after comparison for Banco Nossa Caixa acquisition. The acquisition of Banco Nossa Caixa, besides the information that we have in this slide, improved the businesses of the Bank, the reduced the electronic fraud in 98%, mainly in credit card business, and increased the use of ATM in 114%. Besides that, 100% of the branches are fully integrated, allowing Banco do Brasil to have the largest distribution network in the state of São Paulo, 1,391 branches. Slide number 27 brings us some information on Banco Votorantim, with highlight to the fact that the volume of its operation increased as the partnerships signed with Banco do Brasil in September last year, especially the growth of its market share in auto loans originations. Another highlight is the fact that even with the growth of the origination, the delinquency of Banco Votorantim had, the total credit portfolio I mean, had a declining trend since the beginning of the partnership with Banco Votorantim. Slide 28, we have the summary of the offering of shares, ending June 2010, which amounted R$9.8 billion raise. At the end of the offering, Banco do Brasil free float came to 30.4%, surpassing the new requirement by Novo Mercado rules, a special segment in Bovespa. Besides that our shareholders base increased 22% in the number of shareholders, totaling 420,000 outstanding shareholders base. Actually, we increased our shareholders base in more than 78,000 new shareholders. The slide number 29, in addition to the increase in the number of shareholders and the adequacy of the free float to Novo Mercado rules, the offer ended in June also improved our BIS ratio, as shown slide 29, raising our growth strategy. Actually, we have a pro forma number here; after the offering, our BIS ratio in July would be at 14.3%; 10.3% Tier 1, 4.1% Tier 2. Slide number 30, you have our guidance to conclude our presentation. As you can see here, initially we have reviewed our estimates to allow for loan losses over the total portfolio in average, due to the improvement in the quality of our loan book. 5

6 Previously, it was at 4.4% to 4.8%. Now we have 4% to 4.4%. Regarding spreads, our expectation is a recovery in 2H10 motivated by the gain of share in individuals operation that will be that is our assumption within the guidance 27% to 32% growth for individuals book. The total deposits were below our estimates due to seasonal reasons, but the expectation is a large liquidity in economy in the 2H10, which will allow us a better growth in the deposit base. Well, those were the subjects that we would like to highlight. We can now move to Q&A session. Thank you very much. Carlos Macedo, Goldman Sachs: Hi. Good morning, Gilberto. Good morning, all. I have one question with two parts; it basically comes to margin and your recent you just said that you expect margins to go up as you go through the year. And I just go back to the loan portfolio for you guys, if you take away the loan purchases that you made, your quarter-on-quarter growth in loans to individuals was only 3.7%, which was weaker than other banks. And on the other hand, there was a very strong increase in loans to companies in agro loans, particularly agroloans to Company that grew 30% quarter on quarter. I just want to understand, if could give us some a little bit of more color on I know you have the guidance on whether you expect to continue loan purchases on the individual book and how do you expect this corporate book to continue to behave going forward. Is the strong growth that we saw in the 2Q something that you expect to be sustained in the 2H, particularly in the agrobook, because you really had not grown 30% quarteron-quarter to companies in agrobooks since 2008? Thank you, Macedo. Actually the growth that we had in this quarter was more concentrated in credit to companies and agribusiness. In agribusiness, actually it is a seasonal effect, because we have concentration of marketing seasons in that period. That is why if you take the breakdown of credit portfolio of the agribusiness, you can see that those loans went to marketing that grew the most, 37%. There is no working capital line related to [unintelligible] financing, because the new crops contract will be in place in the 3Q and also in the 4Q. So, in the second part of the year, in agribusiness, we have more individuals operation because of the new crops, of course with higher margin also because in individuals we can have more equalization and so on. But we do have equalization this quarter also in agribusiness, and you have recovery in the margins, but as you can see our margin in agribusiness is below the average. So, as long as you have growth in that portfolio, it puts negative pressure in our margin. It is the same case of companies, because, as you can see, we have a drop in margins to companies, because the growth that we got in Company s business was more concentrated in medium and large companies, working capital lines, and investment. And why? Because companies prepared for demand that we were going to have in the second part of the year because of the increase in consumption. So, that is why our assumptions to see more growth for individuals [unintelligible] expect to see those season of Christmas, Children s Day, and so on; more consumption and more use for credit in individuals, that is why we are going to keep our guidance for 6

7 individuals. And because of this, on the back of this we are going to see a recovery in margin in Banco do Brasil, because the net interest margin in credit to individuals is quite above the average spread, 17.4%, and the spread of Banco do Brasil, 6.4% at the end of this year. Of course, we still have room to increase the penetration in our asset side, because the average spread for credit portfolio as a whole is 9.7%, and other earning assets around 3.3%. So, as long as we increase even more credit portfolio in assets side, we can too increase productive in assets and maintain and defend our spread. Of course, as Walter is reminding me, we take part in some M&A in granting bridge loans that bring some pressure in our margins. And Macedo, bear in mind that at the end of the day, if you analyze our net interest margin after provision, it brings us very good numbers, because that is a provision we got recovered, because the reduction that we had in the provision charge. Carlos Macedo: OK. Just so I get an idea, back to the loans to individuals: R$2.5 billion in purchases in the 2Q, two questions in that. Are you going to continue that, and is the spread that you get on those loans similar to the remainder of your portfolio of loans to individuals? Of course not, because you have to share revenues with the banks that we are buying the portfolio from. And the answer is yes, we are going to continue to buy portfolio mainly in car financing business, but also in payroll loans business. But if you compare to the total book, the outstanding balance was R$3.5 billion for payroll loans and R$3 billion for car financing compared to the total book that you have in credit to individuals more than R$100 billion. It is a lower level, but again we are going to continue to buy portfolio from smaller banks. But I do not know if it is enough to affect our margin, what affected the most it is the fact that you are going to have change in mix in the total book towards those lower operations, like payroll loans that is originated within Banco do Brasil, car financing in Banco Votorantim, and also a gradual increase in mortgage business. Carlos Macedo: OK, perfect. Thank you, Gilberto. Daniel Abut, Citi: Good morning, Gilberto. My question is on capital. If you go to page 29 of your presentation, you provided us with the pro forma capital ratios, given the fact of the recent offerings, and you are now at 10.3% Tier 1 ratio, 14.3% all includes the BIS ratio. If I recall correctly, you have guided, prior to the offering, you were trying to get these ratios up to about 11% level for Tier 1 and 15% level for BIS ratio. I think that was during the time where you can still count your excess reserve for additional capital, which you no longer can, given the change in regulation. So, with the current capital 7

8 and the current rules, how long can you go in terms of organic growth and your potential acquisition without needing to come to the market again for more capital? Taking there that you have a leverage potential of R$143 billion, your loan portfolio is about R$350 billion, so that would indicate that you can do a couple of years of +20% type of loans. But you also have the acquisitions and you recently announced something, in Africa, you have a venture in Argentina and potential other things. So, is it fair to think that within a two years timeframe, probably less, you are going to need to come back to the market again for more capital? We have those numbers pro forma, Daniel. Of course, 14.2% we would better have more than 15%, but we still have growth in the 2Q, more concentrated in that demand, 100% in risk-weighted terms. So that caused some harm in our capital base. If you concentrate your growth in companies, then you have to weigh your assets in 100% while in the retail business, the weigh is about 75%. That is one point that you bear in mind. So, considering the fact that the intention is to grow more in retail in this year, probably we are going to have less pressure in capital moving forward in 2010 compared to that we had in the 2Q10. So, secondly the fact that we raised our Tier 1 capital from 8.8% to 10.3% will allow Banco do Brasil to raise also Tier 2 capital. So, the level of Tier 2 capital Banco do Brasil, and my assumption here is considering the current regulation that we have in Brazil, we have only 12.1%. So we can reach 100% of the Tier 1 and Tier 2, split in subordinate debt and hybrid instrument. So, I made here a simulation if by any chance we had fully use Tier 2 capital, the BIS ratio of Banco do Brasil, considering current regulations that we have in Brazil, would go to 18.77%. And at the end of December 2012, considering the expectation that we have for credit growth until then, and considering the stress for market risk, the BIS ratio of Banco do Brasil would go to 15.2%. So, before I think about going again in the market and raise capital through a primary offering, we can have other instruments to face our needs of capital, to face our needs of growth because of this strategy that we intend to put in place, in growing organically, and the acquisition that is not a big deal. There is no big acquisition compared that we had last year in Nossa Caixa and Banco Votorantim. Those acquisitions that we announced in Argentina and the problem, the marketing move that we intended to do in Africa, small operation, so no pressure at all in terms of capital. But considering all facts together, we are pretty confident because there are other alternatives that we have to face our capital needs. Daniel Abut: Thank you, Gilberto. That was useful. If I can make sure I understood you correctly, given the potential additional use of Tier 2 under the acquisitions that you had to do outside Brazil, relatively small, what you are saying is that you do not foresee any need for any additional primary offering, at least for the next three years or so. Is that correct? 8

9 Yes. Doing the math, of course we can take advantage from opportunity. But doing the math, considering the number that you have and the regulation that we have in Brazil, we can have an increase in our Tier 2 capital that would allow Banco do Brasil to reach over 15% at the end of Daniel Abut: As a quick follow-up, Gilberto, maybe early day for you to give us a specific range, but can you give us any range in terms of the possible size that this investments in Africa could imply from the point of view of capital consumption? The capital consumption, I am talking about less than R$1 billion in property investment; less than that, R$600 million maximum. So, no significant around 10 b.p. impact in our capital base. Daniel Abut: So, you do not intend to invest more than R$1 billion or so? Yes, 10 b.p. in our BIS ratio reduction. Daniel Abut: Thank you, Gilberto. Marcelo Telles, Credit Suisse: Hi. Good afternoon, gentlemen. My question is a follow-up on Daniel s question on the BIS ratio. You still have about R$9 billion in surplus at Previ yet to be recognized in the results. Would you consider maybe accelerating the recognition of that R$9 billion because this would probably help your Tier 1 capital base going forward? And if so, what is the timeframe for you to recognize those R$9 billion? Thank you. No, it is so very volatile. The only the revenue that we can consider are those related to update that grant to Banco do Brasil this year, only this year we are considering the simulation. For , there are no revenues considered in those calculation, the simulation that you have made regarding BIS ratio. I mean, the revenues related to Previ. Because the big part of Previ is more related to reassessment of assets that is very volatile. There is no sense to consider in our projection. Marcelo Telles: But for this year, I mean, what is the amount that you are considering, let us say, in your budget in terms of recognizing the amortization of the surplus? I am not talking about the accrual of the surplus, just the amortization. 9

10 The amortization of the asset that we have in our balance? Marcelo Telles: Yes. The amortization of the surplus that you have at Previ that, for instance, in the 1H was R$390 million. And how much you are considering for the 2H of the year? Could we expect some extra gains on that? That probably depends on the whole year. So, you had R$1.8 billion accounted. So, we are probably going to have again R$1.8 billion. A small part in the 3Q, probably close to R$600 million before taxes. In the 4Q, a little bit more because we have the reassessment of the total assets. So, for the whole year, something close R$3 billion something in revenues before taxes come from Previ. Marcelo Telles: And just a follow-up: I mean, now you are revaluating the Previ portfolio on a semiannual basis. In case there is an upward revision in the surplus at the end of the year, would you consider increasing to recognize higher proportion of a higher surplus, or you think that you are going to stick to that number despite a potential increase in the surplus at Previ? It is imposed on us; we have to recognize the amount that is considered for We have to divide by the tariff of the surplus, in average seven years, six years. So, you have to divide and you have to recognize the revenues related to So, it depends on the amount of the surplus at the end of the year. Marcelo Telles: OK. Just to give you an idea, we have a reduction close to R$9.5 billion, from December to June, of those gains that are out of balance sheet. From June 30 th until August 16 th, we have a recovery of R$6.5 billion, considering the stock price that we have in the market. So, when we get December, we have to revaluate, we have to reassess the assets and to account the revenues because of this reassessment. So because of these revenue after taxes and after dividend, we are going to have those revenues accounted in our shareholders equity and increase in our capital base. That is the point. Marcelo Telles: OK, great. Thank you very much. 10

11 Saul Martinez, JPMorgan: Hi. How are you guys? A follow-up again on capital. In the past, you have talked about not feeling comfortable if your Tier 1 capital falls below 9%. Is that still the case, that 9% is sort of a line in the sand where you would not want your tier-1 capital to fall below? And secondly, all of these assumptions we are making are based on the assumption that capital rules in Brazil do not change. Do you guys feel that there are any changes in the capital rules that could happen, say, in the next 12 to 24 months that could either help or hurt your capitalization ratio? Hold on a second. I got Mr. Alexandre from the Risk department that is going to help us in response to your question, OK? Saul Martinez: Great. Alexandre Abreu: Hi, Mr. Martinez. I would like to make some comments about Basel III. I suppose that your concern is about this. The first point is that prudential regulation is an ongoing discussion; it is not totally closed. It is one important topic that we have to consider. The topics under discussion will reach all the banks in the market, so the fact is that the new regulation affects all the banks. The other point that is important, and you mentioned it, Central Bank is in a discussion process with the industry about how they are going to introduce these rules in Brazil. So, what I say to you is that here in Banco do Brasil we have a very consistent capital planning process that considers and takes into account these kinds of changes. So in our point of view, this new regulation, and you are correct about your concerns, will affect the whole market, especially considering that Banco do Brasil and the other banks that compound our peers have assets that we will deduct. One point that is important to say, considering the new regulation, is related to preferred shares that Banco do Brasil does not have, and the other banks and our peers have. It should be a point that will support Banco do Brasil to sustain our strategy. So, we had made some early simulations to consider these impacts, but in our point of view it is early to define the real impact of these changes in our BIS ratio. If I may add, we have to face the regulation that is in course in Brazil nowadays. Saul Martinez: Sure. 11

12 We do have 14.3% as pro forma number in BIS ratio, but, again, room to increase Tier 2 capital. I am not saying that we are going to go to market and raise any kind of debt to reinforce our capital base. What I am trying to say is that we have alternatives to face our capital needs for 2010, 2011, 2012, considering the fact that we increased with offer the Tier 1 capital. That will allow Banco do Brasil to increase Tier 2 also. Saul Martinez: Sure. I understand. But a couple of follow-ups. One is, do you still feel comfortable if you have to fall in below 9% Tier 1? And secondly, just a follow-up to the earlier comment, are you concerned at all that there could be any changes coming that would not allow you to include goodwill and intangibles in your capital? Yes. We are comfortable with the level of capital that we have after the offering, Tier 1 and Tier 2. Now we have got 10.3% and we had 9.5% with 13.7%. But as we tried to explain, if by any chance we increase the Tier 2 capital we are going to see reduction proportionally in the Tier 1, in terms of the compounding of the BIS ratios. So, in Brazil, we can have 50:50. Of course within the Tier 2 capital, 50% of subordinated debt and 50% of hybrid instruments. So, at the end of the day, I am not telling that we are going to have it, but we can have 5.5% and 5.5%, 5.5% Tier 1 and 5.5% Tier 2. Half of those 5.5% in Tier 2 subordinated debt, and another half hybrid instrument. So, of course, the guidance that we have to the market in terms of BIS ratio is considered as a whole, and the guidance is to have a minimum of 13%. That is the minimum we are considering for Banco do Brasil, considering Tier 1 and Tier 2, considering the fact that we have those alternatives to increase even more Tier 2. And about the potential deduction of goodwill, Alexandre can comment on it. Alexandre, please. Alexandre Abreu: OK. Mr. Martinez, this is the topic of Basel III discussion. Is it not? Saul Martinez: Yes. Alexandre Abreu: OK. So, as I said before, we have established consistent capital planning process. When we take into account in our stimulations, the new topics of the recent regulation, it is not totally closed, even by BIS. They have issued some papers, [unintelligible] papers, and what we are doing now is making some simulations to have a clear position how it does impact BB. You are correct in your concern about this, but it is one impact that will affect all the banks, not only Banco do Brasil. 12

13 Saul Martinez: OK. That is fair enough. Thank you very much. Mario Pierry, Deutsche Bank: Hi. Let me ask you two questions, then. One is a follow-up to the question on Previ. As you stated, you think these Previ gains can total about R$3 billion this year. What are your expectations for next year? And then my second question is related to your excess reserves or the reserves above the minimum required by the Central Bank. I understand quite correctly that they fell by about R$500 million due to a reclassification of loans in Nossa Caixa. Can you tell us if you expect any more reclassifications in Nossa Caixa? Also about the R$300 million drop in your excess reserves was related to this reversal in allowances for the agricultural portfolio. So, now you have about R$1.8 billion in excess reserves. Should we also expect a further reversal of provisions, or do you feel comfortable with the R$1.8 billion, you are comfortable maintaining this level of excess reserves on your balance sheet? Thank you. Thank you, Mario. I am going to answer the Previ issue and then we are going pass to Mr. Walter Malieni, the Credit Director. So Mario, the expectation for 2010, the 1H10 we had per quarter R$720 million per quarter. Considering the fact that we got a reduction in the surplus from R$57 billion to R$47 billion, the revenues that come from activating will be reduced the expectations to see those revenues reducing to R$600 million. So, in the 3Q instead of having R$700 million, we are going to have something close to R$600 million in the 3Q. In the 4Q, we are going to have other R$600 million, but then 4Q is the time that we have to reassess considering the commitment that we have, to reassess the assets and the liability annually. So in the 4Q, considering the number that we have nowadays, today, we would have accounted instead of accounting close to R$300 million that we accounted at the end of June, because of reassessment, we would have accounted at that time, considering the price nowadays, R$1.2 million or R$1.3 million. So, we accounted R$800 million more. So in the 4Q probably, we are going to have again reassessment bringing in revenues for Banco do Brasil. I am talking about pre-tax revenues. So, if I can give you an expectation in terms of our revenue, probably we are going to have again R$1.8 billion for the whole semester. We had R$1.8 billion in the 1H10, and again probably we are going to have R$1.8 billion, close to R$2 billion in the second part of the year. Mario Pierry: OK. But for ? Less in the 3Q and more in the 4Q. 13

14 Mario Pierry: OK. But for 2011, what are your expectations? Also when you say reassess the value of the assets and liabilities, are you marking to market all of your holdings? Because my understanding was, I think some of your Vale ownership was not marked to market, is that correct? No. Now we are marked to market all the holdings that we has not. CVRD, Banco do Brasil, Banco Itaú, the holdings that Previ has in its assets. Petrobras, which was very depressed price because of the overhang of the offerings. So, what we are trying to tell you, we have a drop of R$9.5 billion from December to June From June 2010 to August 16 th, we had an increase of R$6.5 billion. So, the accounting that we made in June 2010 considered the drop of R$9.5 billion in asset value of Previ. So, we are going to have a recovery, but again that is the market approach that is very hard to anticipate. It is easier for you to anticipate than us. But the fact is at the end of the year we have to reassess, and if by any chance we got recovered that there is a very good possibility to do so we are going to have again revenues because of reassessments. Mario Pierry: OK. That is clear. Is that clear? Mario Pierry: And then the question on the reserves? OK. The reserves. Mr. Walter Malieni. OK, he is saying in Portuguese and I will try to translate, Mario. Mario Pierry: OK. That is perfect. Walter Malieni Júnior: [Speaking in foreign language] Mario, just for the sake of letting it clear, the value that impacted the results of the Bank was the reversal related to agribusiness, R$332 million. The other reversion, R$500 million, was related to migration from additional provision to required provision. So, we 14

15 have improvement even in the coverage of the required provision over 90 days overdue. So no changes from those R$500 million, there is nothing passing our P&L. As Walter Malieni said, there are no expectations to see any other reversal from the additional provision because of the change in methodology or because of integration of credit portfolio of Nossa Caixa. That is because the bulk of it is all integrated. And in other reason reduce additional provision. So, the idea is to maintain the level of additional provision at R$1.7 billion, R$1.8 billion, to face stress and credit risk because of prices. Mario Pierry: OK, so just to be clear then, you do not expect any more reclassifications on loans from Nossa Caixa, and also you do not expect to reverse anymore excess reserve? Because of it, no. We expect to maintain the level of additional provision; that is the point. Mario Pierry: OK, Gilberto. Thank you very much. Jorg Friedemann, Merrill Lynch: Thank you. Good morning. I just have two questions. The first one is related to the agribook. I noticed that the equalization revenues reached a record amount this quarter, above R$600 million. Also I know that Banco do Brasil usually negotiates with treasury, the terms of equalization contracts for the upcoming 12 months. So, could you give us some color about the evolution of these negotiations and the expected recurring level of equalization for the coming four quarters? And the second question, I noticed that the cost behavior in this quarter was affected by the reversal of provisions for civil claims at Nossa Caixa. I also noticed that you did not include labor and civil claims in your guidance for expenses, and your guidance is about 10% to 12% in terms of growth year on year in the operating expenses. So, if you add those claims, would it be reasonable to expect this growth to surpass this 12% level? Thank you. Thank you, Jorg. Beginning by the end, regarding the civil claims provision, it is hard to project, even for us. If you take widen figures, you are going to see that what we see the most is to see the level of both labor claims and civil claims around R$250 million per quarter. That is the number that we use in our projections. This quarter we got R$239 million for civil claims and labor claims. Regarding those claims related to those economic plans, the expectation is to see per quarter R$60 million to R$80 million. So, if you add all kind of civil, labor claims, considering our economic plans also, we are going to surpass a little bit R$300 million per quarter. That is the regular numbers than we expect to have in our P&L. 15

16 Sometimes you got higher, sometimes you got less level of those expenses. But again, it is hard to project. But if you take wider figures, we are going to see that R$250 million something is very frequent in quarters over time. Talking about the equalization revenues, we do have more revenues in this quarter because we have more loans in equalization using equalizable resource for marketing and for cost also. So, if you take a look at the table number 48 that we have been our MD&A, those loans relate to equalizable resource, those loans had a growth of 9% on March and 23.8% on June last year. More concentrated in marketing those loans relates to marketing season, they have a growth of 38%, more than 200% over June last year. So that grants Banco do Brasil the level of revenue that we got in the 2Q10. For next crop, we expect to see again the level that we are seeing in the previous crop, around R$400 million, R$500 million per quarter. Jorg Friedemann: OK. So we can expect about R$1.8 billion to R$2 billion in the next 12 months coming from equalization revenues? Is that reasonable? Yes, that is reasonable. Jorg Friedemann: OK. Thank you for the clarification, Gilberto. Considering also the value that we consider, what is the number of fator de ponderação, Jorg? Jorg Friedemann: Yeah, yeah. Weighting factor. Weighting factor, yes. The weighting factor, we have of course lower levels, but we are talking about R$400 million to R$500 million considering the cash revenues and the weighting factors. Jorg Friedemann: OK. Just a follow-up, if you allow me, Gilberto. In terms of how the contracts are settled, I understand that every year you take into consideration the prior 12 months to have an idea about the assumptions that will reflect the negotiation of the equalization revenues in the upcoming 12 months. So, given the evolution of asset quality in the agribusiness book, which was pretty good last year, would you attribute any risk for those estimates that you just gave me in case 16

17 agribusiness faces a little bit more volatility, or are you comfortable also with regard to the insurance linked to the agribusiness book at this point? Yes, the guidance that we are trying to give you in terms of equalization revenue, bear in mind that before the crisis crop, even crop, the levels equalization revenue, of course I am talking about the lower level credit portfolio, used to be R$500 million per year crop. And after the crisis it increased to R$1.5 billion, R$1.8 billion, R$2 billion per year crop. So that has been affected by the risk deterioration that we got since then, since the crisis, since the drop that we had in crop and also the price problem and the FX problem that we had in 2007 crop. So, it is affected by that in terms of risk, and we are taking into consideration the losses that we had in the past, because the loss that we consider in calculation of equalization revenues is considering four to five years in the past. So, considering the fact that we are in four to five years we have rolled over operation with higher risk, it is affecting the calculation that we have. But we are seeing gradual improvement in the risk demand in terms of expenses for provision. And of course, as the consequence we are going to see improvement in profitability of the agribusiness portfolio, considering the fact you have to maintain our equalization revenue with improvement of credit risk. So, that is the mismatching time that we have in this sector, Jorg, because we increase the equalization revenue to compensate the problem that we have in the past. So, we have a kind of compensation over time. So, taking a look in three to four years we can have all kinds of expenses that we have in terms of provision and with revenues and recoveries that we see matching, because of the matching time that we have. Jorg Friedemann: That is perfect. Just to understand, how safe you were in terms of these projections, and it seems that it is very secure to assume that you are going to have about R$2 billion in terms of equalization revenue in the next year or so now? Yes, because we already have set the agreement with the Government, with the new crops. So, it is already established the price, those R$400 million to R$500 million are established. Jorg Friedemann: Perfect. Thank you very much. Victor Galliano, HSBC: Hi. My questions have been pretty much answered, but if can follow up. Firstly on the capital side of things, I remember in the past in conversations not with you, Gilberto, but with other members of the team, talking about capital calculation and how you currently assess credit risk on a Basel I basis. And how this is likely to shift to Basel II 17

18 by yearend 2010, which will be a kind of apples-to-apples comparison with the private sector banks. Now is this still something that is likely to happen, and what are the potential implications for your capital ratio on that basis? As I understood before it was suggested to me that this could lead to a little bit of a liberalization of capital, given that you have some relatively low-risk weighting assets within that and some of the credits within the loan portfolio like, for example, the consignado portfolio. So, firstly your comments on that, and then I will ask a question on credit quality. OK. Thank you, Galliano. Wait, I am going to ask Mr. Alexandre to help me answering this question. Could you hold on a second, Victor? Victor Galliano: Sure. Alexandre Abreu: Hi, Victor. Nowadays, we have in course in Brazil Basel II, but in the first stat. And we do not consider its regulation due to differentiations about the risk. So I have, for example, to [unintelligible], I would say in fact all of them consider one risk weighted assets, 75%. And Basel II approaches, considering the IRB approach, using own methodologies, certainly we are able to consider in a best way the risk that we have related to the counterparty and the exposure that we have. You mentioned payrolls and consignado, certainly we have different capital charges for this exposure. But on the other hand, we had to think about all movements that it incurs related to other regulations. It is likely that we have a revision of the standard approach for all the markets. BIS is discussing this; in the first step it discussed to the market risk and created an increase capital for the standard approach And how do we view this situation? Probably in IRB invest approach, we have more capital than we have today in terms of charge of capital, but less that we will have when the standard approach we revised it. Is it clear? Victor Galliano: I think so, but maybe we need to take this offline later on. We probably need to have a conversation. I think that is probably the best thing, but what I think you are getting at is you are not on a comparable apples-to-apples basis with the other private banks right now, but the rules will change, and so on that basis, it is kind of you are trying to hit a moving target effectively. Victor, first of all, we are following the rules that all banks in Brazil have to follow. So, the change that we had in the past regarding credit risk was the change in weighting, for those loans up to R$200 thousand that are considered retail loans that demand 75% weighting. 18

19 That was the change that we had in So, that is for all banks; there is no difference in the way Banco do Brasil evaluates its assets for BIS purposes when compared to other banks criteria. It is the same case. Only from 2012 on that we are going to have some changes in that regard by using internal modeled approach. But for now what we have in Brazil is the basic approach not only for credit risk, but also for operational risk and market risk. In the case of market risk, the news was the stress [unintelligible] for 2012, the 1H12, that is going to the demand R$1.5 billion capital from Banco do Brasil. That is only change that we have, for all banks. But again, we can set a meeting with you if you want to go deep in that issue. Victor Galliano: OK. Well, yes, we will talk offline on this thing. OK. Victor Galliano: Just quickly on agribusiness credit quality, I mean, just a comment from you in terms of the farm economics outlook. How do you perceive the farm economics outlook? Do you see it as positive at this point? What are the potential risks here on credit quality in farm economics insurance aside? OK. In terms of weather, that is quite good. There is no setback in terms of weather. Actually we are going to see an increase in production crop, compared to last year of 7%. The increase in crop in production in Brazil. They are facing hard times in terms of price, but on the other hand they have a very good momentum in terms of cost of input. They are in a lower level. If you take soybeans, the average margin, the average EBITDA for soybean is about 30%, and corn is around 25%. So, if you compare to previous crop, it is worse, but they can face that time, because the production size of the inputs. For next year, the expectation is good. For next year crop, we are going to have drought, because of the La Niña phenomenon. But again drought is not a big deal for Banco do Brasil, because, as we saw, we have more than 80% insured that will be the case next year in terms of soybean next crop, in terms of soybean, in terms of corn, in terms of wheat. So, for those non-permanent crops, we still demand insurance. So, drought, we are going to get the only positive effect from drought that is the affect in price. Victor Galliano: OK. All right. Thank you for that. You are welcome. Be in touch. 19