Banco do Brasil. Análise do Desempenho

Transcription

1 Banco do Brasil Análise do Desempenho 2 nd Quarter 2004

2 Summary Index of Tables... 4 Index of Figures... 6 Introduction Economic Environment BB Securities Shares Warrants Performance of the Shares Corporate Governance Other Information Summarized Financial Statements Summarized Balance Sheet Summarized Corporate Law Income Statement Income Statement with Reallocations Details of Reallocations Balance Sheet Analysis Breakdown Analysis of Assets Analysis of Liquidity Securities Portfolio Loan Portfolio Retail Loan Portfolio Commercial Loan Portfolio Agribusiness Loan Portfolio Foreign Trade Portfolio Concentration of the Portfolio Tax Credits Intangible Assets Analysis of Liabilities Deposits and Money Market Borrowing Foreign Borrowing Shareholders Equity Basel Ratio Fixed Asset Ratio Risk Management Analysis of Results Gross Financial Margin Analysis of Uses Analysis of Fundings Analysis of the Spread Analytical Spread Management Analysis of the Spread Net Financial Margin...80

3 7.2.1 Retail Loan Portfolio Commercial Loan Portfolio Agribusiness Loan Portfolio Foreign Trade Loan Portfolio Foreign Loan Portfolio Contribution Margin Revenues from Customer Relationship Fees Asset Management Credit Cards Collections Commercial Income Personnel Expenses Other Administrative Expenses Distribution Network Automated Channels Productivity Coverage Ratios Operating Income Net Income Net Value Added Gross Value Added Insurance, Pension Plans and Capitalization Income Statement by Line of Business Combined Ratio Brasilseg Brasilsaúde Aliança do Brasil Brasilcap Brasilprev BB Previdência Financial Statements Summarized Balance Sheet Summarized Corporate Law Income Statement Income Statement with Reallocations Analytical Spread Complete Financial Statements

4 Index of Tables Table 1. Main Macroeconomic Indicators...13 Table 2. Shareholding Breakdown...15 Table 3. Shareholders by Range of Shares Owned...15 Table 4. Free Float by Range of Shares Owned...15 Table 5. Tax Residence of the Investors...16 Table 6. Breakdown of the Warrants Holders...17 Table 7. B and C Warrants Series...17 Table 8. Rating Global...22 Table 9. Other Information...23 Table 10. Summarized Balance Sheet - Assets...25 Table 11. Summarized Balance Sheet Liabilities...26 Table 12. Summarized Corporate Law Income Statement...27 Table 13. Income Statement with Reallocations...28 Table 14. Reallocations Other Operating Income / Expenses...29 Table 15. Breakdown of Assets...32 Table 16. Liquidity Balance...33 Table 17. Securities Portfolio by Category...34 Table 18. Securities Portfolio by Maturities...34 Table 19. Loan Portfolio by Segment...36 Table 20. Loan Portfolio by Pillar...37 Table 21. Retail Loan Portfolio...38 Table 22. MSB Credit Products...39 Table 23. Commercial Loan Portfolio...41 Table 24. Main Receivables Business Customers...41 Table 25. Exports...43 Table 26. Agribusiness Loan Portfolio by Purpose...44 Table 27. Agribusiness Loan Portfolio by Product...45 Table 28. Agribusiness Loan Portfolio by Item Financed...46 Table 29. Funds Released for the 03/04 Crop by Segment...46 Table 30. Variables Associates to Technical Risk System for Agribusiness RTA...48 Table 31. Foreign Trade Loan Portfolio...49 Table 32. ACC/ACE Average Volume per Contract...49 Table 33. Concentration of the Loan Portfolio on the 100 Largest Borrowers...50 Table 34. Concentration of the Loan Portfolio by Macro-sector...50 Table 35. Liabilities...53 Table 36. Foreign Borrowing...57 Table 37. Shareholders Equity...58 Table 38. BIS Ratio...59 Table 39. Fixed Asset Ratio...61 Table 40. Balance Sheet of Foreign Exchange Assets and Liabilities...62 Table 41. Balance Sheet by Currencies - Assets...63 Table 42. Balance Sheet by Currencies - Liabilities...63 Table 43. Portfolios Indexed to Fixed Interest Rates...66 Table 44. Domestic Trading Portfolio...66 Table 45. International Trading Portfolio...66 Table 46. Gross Financial Margin...68 Table 47. Analysis of Volume and Spread...68 Table 48. Investment Rate...70 Table 49. Investment Rate on Available Funds in Foreign Currency...70 Table 50. Investment Rate on Securities and Interbank Investments...70 Table 51. Securities Income...71

5 Table 52. Investment Rate on Loans and Leasing...71 Table 53. FX Gain (Loss) and Other FX Operations...72 Table 54. Funding Cost...73 Table 55. Cost of Foreign Borrowing...73 Table 56. Cost of Deposits and Money Market Borrowing...74 Table 57. Investment Rate, Funding Cost, and Spread...75 Table 58. Analytical Spread Investment Rates...76 Table 59. Analytical Spread Funding Costs...76 Table 60. Reconciliation with the Gross Financial Margin...77 Table 61. Main Components of the Spread...77 Table 62. Investment Rates and Funding Costs...77 Table 63. Nominal Spread per Transaction...78 Table 64. Composition of the Transactions...79 Table 65. Weighted Spread per Transaction...79 Table 66. Net Financial Margin...80 Table 67. Expenses with Allowance for Loan Losses over Portfolio...80 Table 68. Loan Portfolio by Level of Risk...81 Table 69. Delinquency Ratio...83 Table 70. Retail Loan Portfolio by Level Risk...84 Table 71. Changes in the Allowance - Retail...84 Table 72. Commercial Loan Portfolio by Level Risk...85 Table 73. Changes in the Allowance Commercial...85 Table 74. Agribusiness Loan Portfolio by Level Risk...86 Table 75. Changes in the Allowance Agribusiness...86 Table 76. Foreign Trade Loan Portfolio by Level Risk...87 Table 77. Changes in the Allowance Foreign Trade...87 Table 78. Loan Portfolio Abroad...88 Table 79. Contribution Margin...89 Table 80. Service Revenues...90 Table 81. Investment Funds and Managed Portfolios by Customer...93 Table 82. Commercial Income...97 Table 83. Personnel Expenses...98 Table 84. Other Administrative Expenses...99 Table 85. Distribution Network Table 86. Wholesale Pillar Branches Table 87. Coverage Ratios Table 88. Operating Income Table 89. Efficiency Ratio Table 90. Net Income Table 91. Return on Shareholders Equity Table 92. Net Value Added Table 93. Gross Value Added Table 94. Insurance, Pension Plan and Capitalization Companies Table 95. Income Statement by Line of Business Table 96. Brasilseg Data Table 97. Brasilsaúde Data Table 98. Aliança do Brasil Data Table 99. Brasilcap Data Table 100. Brasilprev Data Table 101. BB Previdência Data Table 102. Balance Sheet - Assets Table 103. Balance Sheet Liabilities Table 104. Summarized Corporate Law Income Statement Table 105. Income Statement with Reallocations Table 106. Analytical Spread

6 Index of Figures Figure 1. Total Distributionof the Free Float...16 Figure 2. Free FloatDistribution at the CBLC...16 Figure 3. BB Shares vs. Ibovespa...18 Figure 4. BBAS3 Share in Ibovespa...19 Figure 5. Financial Volume and Quantity Traded of BBAS Figure 6. Market Indices...20 Figure 7. Remunerated Assets vs. Remunerated Liabilities...31 Figure 8. Breakdown of Assets...32 Figure 9. Liquidity...33 Figure 10. Securities Portfolio...35 Figure 11. Securities Portfolio with Maturities between 1 and 5 years...35 Figure 12. Breakdown of the Loan Portfolio...36 Figure 13. Main Retail Loan Portfolio Products...38 Figure 14. Main Products for Micro and Small Businesses...39 Figure 15. Main Commercial Portfolio Products...42 Figure 16. Trade Balance (FOB)...43 Figure 17. Production vs. Planted Area...44 Figura 18. Main Products of the Agribusiness Loan Portfolio...45 Figure 19. Agribusiness Loan Portfolio by Funding Sources...47 Figure 20. Equalization Revenues...47 Figure 21. Main Products of the Foreign Trade Loan Portfolio...49 Figure 22. Breakdown of Tax Credits...51 Figure 23. Allocation of Capital for Operational Risk...52 Figure 24. Changes in the Liabilities...54 Figure 25. Deposits and Market Borrowing...55 Figure 26. Market Share of BB Funding...56 Figure 27. Brazilian Sovereign Risk (points) vs. Marking to Market ()...58 Figure 28. BIS Ratio...59 Figure 29. Changes in FX Exposure...62 Figure 30. Balance Sheet by Index...64 Figure 31. Mismatch Gaps by index...65 Figure 32. Availability of Free Funds...67 Figure 33. Analysis of Volume and Quartely Spread...69 Figure 34. Analysis of Volume and Half-yearly Spread...69 Figure 35. Securities Portfolio by Index...71 Figure 36. Spread by Loan Portfolio...72 Figure 37. FX Gain (Loss) and Other FX Operations...72 Figure 38. Changes in the Spread...75 Figure 39. Expenses with Allowance for Loan Losses over Portfolio...80 Figure 40. Breakdown of Allowance...81 Figure 41. BB CLP/CT BB vs. NFS...82 Figure 42. Delinquency Ratio...83 Figure 43. Growth in Service Revenues...89 Figure 44. Changes in the Composition of Service Revenues...91 Figure 45. Revenues from Relationship Fees and the Customer Base...92 Figure 46. Customer Base...92 Figure 47. Asset Management...93 Figure 48. Investment Funds and Managed Portfolios...94 Figure 49. Investment Funds...94 Figure 50. Managed Portfolios and Investment Clubs...94

7 Figure 51. Credit Cards...95 Figure 52. Credit Card Sales by Brand...95 Figure 53. BB Collection Volume...96 Figure 54. Changes in Commercial Income...97 Figure 55. Changes in the Workforce...98 Figure 56. Total Distribution Network Figure 57. Distribution Network - Wholesale Figure 58. Distribution Network -Government Figure 59. Automated Teller Machines Figure 60. Share of Automated Transactions / Total Transactions Figure 61. Customer Access Options Figure 62. Coverage Ratios Figure 63. Efficiency Ratio Figure 64. Changes in Net Income Figure 65. Changes in ROE Figure 66. Changes in Earnings before Taxes Figure 67. Combined Ratio

8 Presentation The Performance Analysis is a report published quarterly and intended for market analysts, investors and others who need a deeper understanding of the economic and financial situation of Banco do Brasil (BB). The report starts with an overview of the economic environment, which is followed by an analysis of the performance of BB paper and of the main practices of corporate governance adopted by the institution. Continuing the report, there are separate analyses of the capital structure and the results. The reader will also find tables with historical series, from 8 periods, of the summarized balance sheet, the summarized corporate law income statement, the income statement with reallocations, the analytic spread, and other information about profitability, productivity, quality of the loan portfolio, capital structure, capital market, and structural data. The Balance Sheet Analysis brings a more detailed study of the main components of the balance sheet, such as the securities portfolio, the loan portfolio, tax credits, market borrowings, and shareholders equity, amongst others. The analysis of results shows, step by step, the items of the reallocated statement of income. The corporation s income statement is submitted to these reallocations with the intention of favoring a better understanding of the results, making the historical series more concise and facilitating accurate forecasts from this data. Finally, the financial statements and explanatory notes for the quarter under analysis are presented. On-line Access The Performance Analysis report can also be read through Banco do Brasil s Investor Relations website. Further information is also made available about the Bank, such as: corporate governance, tools like interactive balance sheets and fundamentalist indicators, news items, frequently asked questions, and the Download Center, containing versions of this report for the Adobe Reader software and the historical series in Excel, presentations to the market, Annual Report and Report on Socioenvironmental Responsibility, the Social Balance Sheet, audio of the teleconferences on results, and others. Links of Interest Banco do Brasil Investor Relations Download Center (RI) Shareholder s Room (also serves Shareholders of other companies with custody in BB) Banco do Brasil Performance Analysis 2º Quater/2004

9 Introduction BB showed net income of R$1,421 million in the 1 st half of 2004, exceeding by 31.7% the result of the 1 st half of 2003 (R$1,079 million). This result represents an annualized return on average shareholders' equity of 23.9% and an income per share of R$1.94, compared to R$1.47 in the first half of 2003 (thousand share lot). The result made possible the distribution to shareholders of R$450 million, in the form of interest on own capital, an amount 39.8% higher than that paid in the 1 st half of Banco do Brasil s loan portfolio grew R$14.5 billion, expanding 21.1% in relation to June BB maintained its unchallenged leadership for granting credit in Brazil, with a balance of R$83.1 billion. The agribusiness portfolio showed a balance of R$25.6 billion in June 2004, growing 18.8% (R$4.1 billion) in relation to the same period in For the 2003/2004 crop, the funds for family farming added up to R$3.9 billion and 1,014 thousand families were served to, 258 thousand families more than in the previous crop. The commercial portfolio showed a balance of R$17.0 billion in June 2004, growing 13.3% in relation to June Credit based on receivables, the main modality of these portfolio, grew 18.9%, to a total of R$8.4 billion in the half year. The retail loan portfolio grew 33.7% in relation to June 2003, closing the 1 st half of 2004 with a balance of R$19.1 billion. The foreign trade finance portfolio has as its main products transactions involving advances on exchange agreements contracts (ACC) and advancements on delivered exchange securities (ACE), which reached US$4.7 billion in transactions carried out in the period, a growth of 31.8% compared to the 1 st half of The foreign trade portfolio ended the period with a balance of R$8.8 billion. Credit taken by the over 22 thousand wholesale customers added up to R$20 billion. Working capital and investment transactions are the main lines available for this segment. Working capital based on foreign borrowing and investment transactions presented a R$1.6 billion balance, while the overdraft accounts amounted to R$1.9 billion a growth of 138.1% and fall of 7.4% compared with June 2003, respectively. Worthy of mention is the credit based on receivables short term transactions that accounted for the lending of R$28.4 billion, of which 44.1% for the wholesale market. The main credit products based on receivables offered by BB are BB Vendor, post-dated checks discounted, and trade bills discounted. The balance of loan transactions intended for investment added up to R$2.8 billion. The main loan lines for investment use funding from BNDES and Finame, which showed a decrease of 1.0% and an increase of 6.8%, respectively. Credit made available for micro and small businesses ended June 2004 with a volume of R$15.3 billion, growing 45% in relation to the same period of The balance of credit used by this segment added up to R$11.3 billion at the end of the 1 st half year, growing 35%. BB Giro Rápido, the main working credit line intended for this segment, showed a balance of R$3.2 billion, growing 52.8% (Jun/03 to Jun/04). This line alone serves over 600 thousand companies. Launched at the beginning of 2004, BB Giro Automático, a credit line exclusively for companies with turnover of up to R$500 thousand. In the period, this line served about 35 thousand companies, making available over R$100 million. 9 - Banco do Brasil Performance Analysis 2º Quater/2004

10 Loan lines for individual customers ended June 2004 with a R$13.5 billion volume, growing 24% in relation to June The consumer credit (CDC) transactions, the main product intended for this segment, ended June 2004 with a R$9.3 billion balance 48.5% of retail loan portfolio and over 4.9 million transactions. BB reached 20 million customers 18.8 million individuals and 1.2 million businesses. The increase in the customer base confirms the synergy between the markets (Retail, Wholesale and Public Sector) gratly supported by payroll agreements. Shareholders equity grew 18.3% Shareholders equity reached R$12.9 billion and total assets added up to R$227.4 billion, growing 18.3% and 10.5%, respectively, in relation to that recorded in the 1st half of The growing profits and the consequent increase in shareholders equity made it possible for the BIS Ratio to remain above the 11% required by the Brazilian Central Bank. In June 2004, this ratio reached 14.5%, which allows BB the leverage of R$39.7 billion in assets risk weighted at 100%. The increase in revenues and the costs control made possible an improvement in the productivity coverage ratio and in the efficiency ratio. In the first half of 2004, the efficiency ratio (administrative expenses over operational revenues) was 56.6%, compared to 55.4% of the same period of The lower the ratio is, the higher is the efficiency level presented. The coverage ratio (service revenues over personnel expenses) was 98.3% in the first half of 2004, compared to 85.7% in the same period of Broadening this concept to include the capacity of covering all administrative expenses, this ratio was 54.8% in the first half of 2004, compared to 49.5% in the same period of the previous year. Service revenues reached R$3.2 billion in the half year, an increase of 24.8% in comparison with the same period of Customer relationship fees accounted for 31.0% of these revenues. Administrative expenses, comprising personnel expenses and other administrative expenses, totaled R$5.8 billion in the 1 st half of 2004, an increase of 12.6% in relation to the same period of the previous year. Other highlights BB DTVM ended June 2004 with assets under management in the order of R$116.9 billion, growing 40.6% in relation to the position in June This result represents a market share of 19.9% and consolidates BB DTVM s leadership in Latin America. Banco Popular do Brasil (a BB subsidiary that works with microentrepreneurs and the informal sector) opened up, in the half year, 521 outlets in 22 states of the country. These outlets commercial establishments such as pharmacies, markets and building material stores were responsible for the opening of 2,255 simplified current accounts. The target is to reach 4,500 outlets by the end of the year. Created with the purpose of facilitating access to durable and consumer goods, BB Consórcio began, in April, a pilot project exclusively for BB members of staff. At the end of the half year, over 1,500 members of staff were already taking part in groups for the acquisition of automobiles, motorcycles, and electrical and electronic goods, totaling R$15 million in volume of business. Overdraft accounts ended the period with a balance of R$2.6 billion, growing 11.4% (Jun/03 to Jun/04) Banco do Brasil Performance Analysis 2º Quater/2004

11 The Bank ended the period with an increase of 25.1% in the quantity of cards, in relation to the same period of the previous year. Credit card transactions grew 13.0% (Jun/03 to Jun/04), ending the period with a balance of R$1.7 billion. The integrated risk management of the loan portfolio resulted in an improvement of its quality. At the end of the first half, loans rated as AA, A and B accounted for 79.1% of the total portfolio, compared to 85.3% in June Banco do Brasil continues to show superior quality in its loan transactions than the National Financial System, which presented loans rated as AA, A and B of 78.7%. The balance of the securities portfolio totaled R$69.9 billion, a negative variation of 4.0%, in comparison with same period of This slight reduction is due to the reduction in transactions with securities available for trading and to the expansion in credit. The portfolio showed the following distribution: 17.2% in securities available for trading; 44.4% in securities available for sale; 36.0% in securities held to maturity, and 2.4% in financial derivatives. The Bank kept its leadership in total funding, which totaled R$152.9 billion, growing 8.2% in relation to June 2003 (R$29.4 billion in demand deposits; R$49.7 billion in time deposits; R$28.9 billion in savings deposits; R$7.7 billion in interbank deposits and R$37.1 billion in money market borrowing). Insurance, Pension Plans and Capitalization With a single brand BB Insurance Banco do Brasil achieved premiums of R$244.4 million and R$442.7 million in its automobile and life insurance portfolios respectively, growing 16.0% and 39.1% over the same period of the previous year. In June 2004, BB reached 1,309 thousand participants in the open supplementary pension funds segment, which accounted for R$6.7 billion of the managed portfolio. In the segment of closed supplementary pensions funds, by means of multisponsored funds, BB Previdência reached 35 thousand participants and R$515 million in assets under management. In capitalization bonds, BB expanded its sales by 24.7%, maintaining its leadership in the market with a 27% share. Sales totaled R$792.2 million. Distribution channels and technology In Brazil, Banco do Brasil reached 13,908 points of service in 2,957 municipalities. Of the total of points of service, 3,618 are branches, segmented as follows: 3,503 branches catering to the retail market, 38 to the public sector market, and 77 to the wholesale market. BB distribution network abroad counted on 39 points of service, distributed over 21 countries, and responsible for business all over the world. The automated channels Automated Teller Machines, Internet, Cash Management, Telephone/Fax, Cell Phone, POS and banking agents accounted, in June 2004, for 86.9% of the total of transactions carried out by customers, compared to 85% in June BB s Automated Teller Machines, the largest network in Latin America, added up to 38,153, compared to 34,164 in June 2003, growing 11.7%. In the first half of 2004, these machines accounted for 51.2% of the total of transactions carried out by customers. On the Internet, the number of registered customers reached 6.5 million, an increase of 1.2 million customers in relation to the same period of the previous year. The cash management for business customers reached 755 thousand companies registered, responsible for 305 million transactions in the period Banco do Brasil Performance Analysis 2º Quater/2004

12 BB s Highlights Balance Sheet (in ) Jun/03 Mar/04 Jun/04 Chg. on Jun/03 - % Chg. on Mar/04 - % Total Assets 205, , , (1.6) Securities 72,746 67,875 69,855 (4.0) 2.9 Securities Available for Trading 2,104 12,338 11, (2.8) Securities Available for Sale 42,515 30,266 31,008 (27.1) 2.5 Securities Held to Maturity 27,640 24,959 25,146 (9.0) 0.7 Financial Derivatives , Loans 56,654 66,451 69, Permanent Assets 4,048 4,439 4, Deposits 99, , , Demand Deposits 21,170 30,306 29, (2.9) Savings Deposits 26,427 27,590 28, Interbank Deposits 5,437 6,219 7, Time Deposits 46,847 46,104 49, Money Market Borrowing 41,468 40,343 37,132 (10.5) (8.0) Shareholder s Equity 10,872 12,686 12, Income (in ) 2Q03 1Q04 2Q04 Chg. on Chg. on 2Q03 - % 1Q04 - % 1H03 1H04 Chg. On 1H03 - % Gross Income from Financial Intermediation 1,606 2,414 2, ,974 4, Allowance for Loan Losses (948) (1,359) (1,201) 26.8 (11.6) (1,654) (2,560) 54.8 Service Revenues 1,343 1,553 1, ,561 3, Personnel Expenses (1,481) (1,574) (1,952) (2,990) (3,527) 18.0 Other Administrative Expenses (955) (1,126) (1,381) (2,125) (2,507) 18.0 Operating Income 1,016 1,012 1, ,151 2, Recurring Income (15.4) 1,079 1, Net Income ,079 1, Leadership - 1 st in assets - R$227.4 billion; - 1 st in total deposits - R$115.8 billion; - Largest loan portfolio - R$83.1 billion. - Leader in the export foreign exchange segment 27.3% of the market; - Leader in asset management in Latin America - R$116.9 billion; - Largest customer base 20.1 million customers; - Leader in the Internet 6.5 million customers registred; - Largest own service network in the country, with 13,908 outlets; - Largest automated teller machine network in Latin America: 38, Banco do Brasil Performance Analysis 2º Quater/2004

13 1 Economic Environment In the first half of 2004, the foreign environment was marked by the confirmation of the economic recovery of the United States and Japan. In spite of the expectations as to the reaction of the US Federal Reserve Board (FED) to the rise in the level of prices in the United States, which caused repercussions on the allocation of portfolios at the world level, there was a 25 basis point increase in the American interest rate, confirming the scenario of a gradual tightening up of monetary policy in the US economy. In relation to Japan, doubts still remain whether it will manage to come out of the deflationary spiral, which could affect the maintenance of the growth rates to be seen in the first quarter. In the Euro zone, in spite of some economies having shown growth, reliance on economic reforms (labor market, pensions, etc.) are preventing greater dynamism in this region. In the domestic environment, the positive tone was set by the confirmation of the recovery of economic activity, with the annualized value of the GDP of 1Q04 pointing to growth of 6.8% and the market expecting economic growth in the order of 4.0% for In spite of the fact that the external sector of the economy continues to dictate the pace of recovery, the domestic components of demand, such as consumption and investments, collaborated towards the growth to be seen in the period. The indicators for sales in commerce and production in industrial and agriculture are pointing to a continued resumption in the second half of the half year. Furthermore, the latest unemployment figures show that the recovery of the economy is consistent and is in line with the positive forecasts for growth expected for the year. On the monetary side, the trend of a fall in the Brazilian sovereign risk premium was reversed in the course of the half year, due to the instability in the international scenario caused by doubt as to the course of American interest rates and the geopolitical deterioration in the Middle East. The positive scenario for monetary policy at the beginning of the year turned around, the repercussions of which were seen in future expectations for inflation, bringing as a consequence an interruption in the succession of falls in the Selic interest rate. Counterbalancing this, the balance of trade continued to break export and import records, with growing balances. On the fiscal side, compliance with the targets for the primary surplus established by the International Monetary Fund became more probable, after the federal government s performance in the half year ended June Table 1. Main Macroeconomic Indicators Change % 2Q03 1Q04 2Q04 1H03 1H04 12 months Ptax Dollar Sale (14.3) (18.7) Accumulated IGP-DI FGV (1.0) Accumulated IGP-M FGV (0.3) Accumulated Selic Accumulated TR (formerly BTN) Ptax Dollar Sale * * Closing Rate Source: Economática Notwithstanding the volatility of the American currency, there are no relevant effects to be seen in BB s results, in view of the risk management policy of working with almost zero foreign exchange exposure. This strategy can be visualized in the statement of income with reallocations, where we find that the balances of the items affected by the dollar annul the effects of the foreign exchange variation, leaving the gross financial margin unchanged. The average Selic interest rate showed lower variation in 2Q04, 3.7%, compared with 5.8% in 2Q03. This behavior is reflected mainly in results from operations with securities, in the expenses with remunerating time deposits and money market borrowing Banco do Brasil Performance Analysis 2º Quater/2004

14 Savings and judicial deposits and part of the securities portfolio are influenced by the variation of the TR referential rate, which also showed a lower variation in the period, 0.5%% in 2Q04, compared to 1.4% in 2Q03. The IGP-DI and the IGP-M showed a positive variation in 2Q04, compared with the same period of the previous year. These indices, which measure the variation in prices, influence the expenses with the updating of pension liabilities Banco do Brasil Performance Analysis 2º Quater/2004

15 2 BB Securities 2.1 Shares In June 2004, Banco do Brasil s capital stock was made up of 743,275,506 ordinary shares, represented in dematerialized form and without any nominal value. The largest shareholder is the National Treasury, with 71.8% of the capital, followed by Caixa de Previdência dos Funcionários do Banco do Brasil (Previ) with 13.8%, and BNDESPar the equity investment company of Banco Nacional de Desenvolvimento Econômico e Social which has 5.8% of the capital. Without taking into consideration the shares that are held in treasury, the other shares 7.1% - are well spread in the market. Table 2. Shareholding Breakdown Shareholders % ON National Treasury 71.8 Previ 13.8 BNDESPar 5.8 Free Float 7.1 Private Individuals 3.2 Corporate Bodies 0.9 Pension Funds 0.5 Foreign Capital 2.5 Subtotal 98.5 Shares in Treasury 1.5 Total BB s shareholder base is characterized by the great concentration of shareholders with a small share in the capital, even after the grouping operation at the beginning of this year, the objectives of which were to rationalize the shareholder base, to potentialize the volume of the Bank s paper traded on the stock exchange, to reduce operational costs, and to improve service to shareholders. As can be seen from the table below, 273,034 shareholders (98.7%) account for 1.0% of the capital, while 3,598 shareholders (1.3%) hold 99.0% of the total of shares. Table 3. Shareholders by Range of Shares Owned Range of shares owned Nº shareholders % Shareholders Qty. Shares % Qty. Shares 1 to 10 shares 183, , to 50 shares 62, ,396, to 100 shares 11, , to 1000 shares 16, ,738, Over 1000 shares 3, ,636, Total 276, ,275, Table 4. Free Float by Range of Shares Owned Range of shares owned Nº shareholders % Shareholders Qty. Shares % Qty. Shares 1 to 10 shares 183, , to 50 shares 62, ,396, to 100 shares 11, , to 1000 shares 16, ,738, Over 1000 shares 3, ,349, Total 277, ,988, Banco do Brasil Performance Analysis 2º Quater/2004

16 With regard to the tax residence of the investors, it is to be noted that that quantity of shareholders resident in Brazil is 276,493 (99.95%), who hold 97.5% of the total of the shares, while the quantity of foreign shareholders is 139 (0.05%), who hold 2.5% of the shares. Table 5. Tax Residence of the Investors Tax Residence Nº shareholders % Shareholders Qty. Shares % Qty. Shares Brazil 276, ,765, Abroad ,509, Total 276, ,275, With regard to the total of the Bank s shares that are well spread out in the market (7.1%), that is, the free float, a predominance of Private Individuals is to be seen, who hold 45.6% (24.1 million shares) of the total. Total Distribution of the Free Float 34.9% 45.6% 19.5% Figure 1. Total Distributionof the Free Float Private Individuals Corporate Bodies Foreign Capital The major part of the free float, 66.7% (35.3 million shares), is under the custody of the Brazilian Clearing and Depository Corporation (CBLC), distributed according to the graph below. It is to be noted that, of the total of shares available for trading at the CBLC, 52.3% is to be found in the possession of foreign investors. It is important to point out that the foreign investors share in BB s capital is 2.5%, and is limited by law to a maximum of 5.6%. Free Float Distribution at the CBLC 24.0% 52.3% 23.7% Figure 2. Free FloatDistribution at the CBLC Private Individuals Corporate Bodies Foreign Capital 16 - Banco do Brasil Performance Analysis 2º Quater/2004

17 2.2 Warrants In 1996, on the occasion of BB s capital increase, three series of warrants were issued: A, B, and C, maturing in 2001, 2006, and 2011, respectively. The exercise price for these warrants was established at R$8.50, with readjustment by the IGP-DI. On , the updated price corresponds to R$ The breakdown of the warrants holders is as shown in the following table. Table 6. Breakdown of the Warrants Holders % BNB % BNC National Treasury Previ BNDESPar Free Float Private Individuals Corporate Bodies Foreign Capital Total The warrants in circulation, B and C, show the following characteristics on : Table 7. B and C Warrants Series Series Code Quantity Exercise Price R$ Quotation in R$ B Warrants BBAS ,591, C Warrants BBAS ,986, Studies carried out with the market indicated that the subscription warrants, conditioned to a preestablished price, had a negative influence on the value of the shares, which could create a theoretical ceiling that does not reflect, in a fairer manner, the Bank s economic fundamentals. Accordingly, in February 2004, the Bank s Board of Directors approved a proposal that authorized the Management Council to implement a Public Offer of Acquisition (OPA) of the B" and "C" warrants and a Private Issue of Ordinary Shares, with the objective of acquiring the warrants referred to, existing on the market, for later cancellation, according to the notices published in On , the Bank released to the market that the minimum percentage of 90% of acceptances had been reached, guaranteeing that the operations wold be carried outin the period previously stated in the notices ( ) Banco do Brasil Performance Analysis 2º Quater/2004

18 2.3 Performance of the Shares The stock market closed the first half of the year with the Bovespa index, its main indicator, showing a nominal devaluation of 4.8%. At the beginning of the year, the expectations with regard to the stock market were positive, reflecting the optimism of the market agents in relation to the evolution of the economy in the year that was starting. At the end of January, however, there was a reversal in this scenario, mainly due to Copom s decision to maintain the basic interest rate at 16.5% p.a., because of a possible deterioration in the picture for inflation. At the end of May, the publication of Copom s minutes, explaining that the uncertain external scenario was decisive for the maintenance of the basic interest rate, was well received by the market. Added to this, the announcement of 2.7% growth in GDP in the first quarter of 2004, compared to the same period of 2003, the good results achieved in the Brazilian balance of trade, and the downturn in oil prices, led Ibovespa show appreciation of 8.2% in June, braking the index s downward movement in the year. Comparing the appreciation of BB shares with Ibovespa in the first half of this year with the same period of the previous year, it can be seen that the Bank s shares enjoyed an appreciation of 77.0%, while Ibovespa rose 63.0% BB Shares vs. Ibovespa Basis 100 = % 63.0% Jun/03 Jul/03 Aug/03 Sep/03 Oct/03 Nov/03 Dec/03 Jan/04 Feb/04 Mar/04 Apr/04 May/04 Jun/04 Daily Volume BBAS3 - R$ million BBAS3 Ibovespa Source: Economática Figure 3. BB Shares vs. Ibovespa 18 - Banco do Brasil Performance Analysis 2º Quater/2004

19 With regard to the relative share of Banco do Brasil shares in Ibovespa, calculated on a four-monthly basis, a reduction is to be seen in their share in the theoretical portfolio for the last 5 four-month periods, as shown below: BBAS3 Share in Ibovespa - % Jan/03 - Apr/03 May/03 - Aug/03 Sep/03 - Dec/03 Jan/04 - Apr/04 May/04 - Aug/04 Source: Economática Figure 4. BBAS3 Share in Ibovespa The reduction in the participation of BB s shares in Ibovespa can be explained by the graphs below. As can be observed, the financial volume and the quantity of deals in Ibovespa enjoyed growth of 196.4% and 142.7%, respectively, while BBAS3 grew 147.6% and 102.2%, in the period from June 2003 to June These indicators go into the Tradability Index, which determines the participation of shares in the index. Financial Volume and Quantity Traded of BBAS3 Basis 100 = Financial Volume Traded Quantity Traded % 147.6% Jun/03 Aug/03 Oct/03 Dec/03 Feb/04 Apr/04 Jun/ % 102.2% Jun/03 Aug/03 Oct/03 Dec/03 Feb/04 Apr/04 Jun/04 Ibovespa BBAS3 Ibovespa BBAS3 Source: Economática Figure 5. Financial Volume and Quantity Traded of BBAS Banco do Brasil Performance Analysis 2º Quater/2004

20 Market capitalization reached R$16,470 million at the end of June 2004, compared to R$9,582 million in the same period of the previous year, an increase of 71.9%. The price/book value ratio reached 1.28x, compared to 0.88x, and net income per share reached R$1.10, compared to R$0.82. Market Indices Net Income - R$ million Net Income per Share - R$ 823 1,205 1,079 1,302 1, S02 2S02 1S03 2S03 1S04 Price / Book Value 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Book Value of Share - R$ , , Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Market Capitalization - R$ million Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Free Float Capitalization - R$ million 17,568 17,041 16,470 1,272 1,234 1,192 5,856 7,174 7,708 9,582 11, Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Price / Earnings 12 months Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Dividends or Interest on Own Capital Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Dividend Yield - % 1S02 2S02 1S03 2S03 1S04 Payout Rate - % S02 2S02 1S03 2S03 1S04 Figure 6. Market Indices 1S02 2S02 1S03 2S03 1S Banco do Brasil Performance Analysis 2º Quater/2004

21 3 Corporate Governance Banco do Brasil is strengthening its commitment to the capital market by adopting practices of corporate governance that conform to the requirements of Bovespa s New Market. This voluntary initiative characterizes the Bank s willingness to offer greater transparency, and to improve the relationship between shareholders, board of directors, executive board, audit committee, audit board, and external audit. At the Ordinary General Meeting of April 27, 2004, members were elected to the Board of Directors and the Audit Board for a unified one-year mandate, in accordance with the Bank s Bylaws. On the same date, at an Extraordinary General Meeting, the shareholders elected the members of the Audit Committee, created in November This Committee is made up of three members, of which two indicated by the majority shareholder and one by the minority shareholders. The Audit Committee reports to the Board of Directors, and its prerogatives include supervising the activities and assessing the work of Internal and External Audit and advising the Board of Directors, as far as the exercise of its internal audit and supervisory functions are concerned. To expand the coverage of the statutory responsibility of BB s executives, the Board of Directors approved, in May, the creation of three new positions of Statutory Director for the areas of Staff Relations and Socioenvironmental Responsibility, Internal Controls, and Operational Asset Restructuring. In order to allow the Bank greater efficiency in complying with its mission of generating results for customers and shareholders and of contributing towards the economic and social development of the country, directorate were also created for Micro and Small Businesses and for Foreign Trade. This measure has the objective of expanding and consolidating BB s position of market leader in two segments that are fundamental for the growth of the country With these changes, BB s management now has 20 Directorates, besides the Management Council, made up of the President and seven Vice-Presidents. Also, at the end of the half year, the process of integrating market, liquidity, operational, and credit risks was concluded, strengthening the overall management of risks of the BB Conglomerate and aiming at conformity with the principles of the New Basel Accord. Amongst the main advantages of the integration of risks, it is worth pointing out the increases in synergy in the management processes and in the technical specialization of the integrated areas, resulting in greater precision in measuring risks and efficiency in the allocation of capital. Now to be found at the development stage is a proprietary model for calculating operational risk, which is already demonstrating the value at risk of the institution s main categories of operational losses. The focus of the Bank s strategy on best market practices led the risk rating company FitchRatings to raise Banco do Brasil s individual rating from D to C/D, and the long term local currency rating from B+ to BB- in the first half of Banco do Brasil Performance Analysis 2º Quater/2004

22 In its assessment, FitchRatings took into consideration that the increase in the Bank s market share, its control of costs, and the growing profitability achieved by BB in the last three years justify this rise. Table 8. Rating Global Global Rating Classification FitchRatings Individual D/E D C/D Long Term in Local Currency B+ B+ BB- BB s relationship with its shareholders and the investor market is handled by Investor Relations Management, which in April launched a new website. This reformulation brought new contents, an improvement in navigability and format, and included interactive tools, such as balance sheets and economic indicators. The new website also has an unprecedented Shareholder s Room, exclusively for attending to BB shareholders, including non current account holders, via access to a safe environment, which makes it possible to consult balances and statements of shares, a statement of share movement, and a statement of Income Tax, amongst others. Also in the first half of 2004, the Bank held five meetings with capital market analysts four at the regional offices of the Capital Market Investment Analysts and Professionals Association (Apimec) and one at the Brazilian Capital Market Analysts Association (Abamec); 36 meetings with investors and capital market analysts in Brazil and abroad; four institutional presentations and meetings with executives from other companies; four conferences with analysts; four results teleconferences (two in Portuguese and two in English) Banco do Brasil Performance Analysis 2º Quater/2004

23 4 Other Information Table 9. Other Information Profitability 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Net Income per Share - R$ ROE Annualized % ROE Accumulated and Annualized % ROA Annualized % GFM / (Assets - Permanent) Annualized % GFM / Remunerated Assets Annualized % , Productivity Efficiency Ratio - % Service Fees / Personnel Expenses - % Service Fees / Administrative Expenses - % Personnel Expenses per Workforce - R$ 15,963 17,057 16,737 16,408 18,571 21,456 17,049 18,085 Workforce / (Branches + PAA + PAB) Credit Portfolio Quality Allowance / Credit Portfolio - % Allowance / (E + F + G + H) - % Portfolio Net of Provions / Total Portfolio - % Capital Structure Leverage x , BIS Ratio - % , Total Quantity of Shares thousand 743, , , , , , , ,276 Quantityof Tresaury Shares thousand 11,258 11,258 11,258 11,258 11,258 11,258 11,258 11,258 Capital Markets Price / Earings 12 months Price / Book Value Market Capitalization - 5,856 7,174 7,708 9,582 11,712 17,568 17,041 16,470 Book Value per Share - R$ Price of Share Structural Information Distribution Network 12,175 12,333 12,545 12,755 12,930 13,220 13,549 13,908 Branches 3,134 3,164 3,183 3,209 3,218 3,241 3,564 3,618 PAA PAB 1,601 1,595 1,606 1,598 1,576 1,562 1,541 1,520 PAE 7,007 7,135 7,315 7,507 7,693 7,961 8,245 8,565 PAP Accounts thousand 14,976 15,391 15,911 16,718 17,049 18,751 19,275 20,055 Individual thousand 14,001 14,399 14,905 15,645 15,937 17,534 18,047 18,781 Business thousand ,005 1,073 1,112 1,217 1,228 1,274 Saving Accounts mil 9,608 9,985 10,231 10,433 10,911 11,463 11,704 12,023 Individual thousand - 9,916 10,151 10,352 10,823 11,366 11,605 11,914 Business thousand Workforce 88,309 88,159 90,161 90,255 90,531 90,821 92,347 92,606 Employees 78,033 78,619 79,527 79,474 79,710 80,640 81,795 81,936 Interns 10,276 9,540 10,634 10,781 10,821 10,181 10,552 10, Banco do Brasil Performance Analysis 2º Quater/2004

24 Compulsory Deposits/ Compulsory Investments Demand Deposits 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Rate 45% 45% 60% 60% 45% 45% 45% 45% Adittional 0% 8% 8% 8% 8% 8% 8% 8% Compulsory Investments* 25% 25% 25% 25% 25% 25% 25% 25% Free 30% 22% 7% 7% 22% 22% 22% 22% Savings Rate 15% 20% 20% 20% 20% 20% 20% 20% Adittional 0% 10% 10% 10% 10% 10% 10% 10% Compulsory Investments* 20% 30% 30% 30% 40% 40% 40% 40% Free 65% 40% 40% 40% 30% 30% 30% 30% Time Deposits Rate 10% 15% 15% 15% 15% 15% 15% 15% Adittional 0% 8% 8% 8% 8% 8% 8% 8% Free 90% 77% 77% 77% 77% 77% 77% 77% Judicial Deposits Rate 60% 60% 60% 60% 60% 60% 15% 0% Free 40% 40% 40% 40% 40% 40% 85% 100% * Compulsory Investments at BB are invested in Agrinusiness operations 24 - Banco do Brasil Performance Analysis 2º Quater/2004

25 5 Summarized Financial Statements 5.1 Summarized Balance Sheet Table 10. Summarized Balance Sheet - Assets Balances Chg. % Jun/03 Mar/04 Jun/04 on Jun/03 on Mar/04 ASSETS 205, , , (1.6) Current and Long-term Assets 201, , , (1.7) Available Funds 6,683 15,279 15, Short-term Interbank Investments 12,348 28,333 14, (48.9) Securities 72,746 67,875 69,855 (4.0) 2.9 Securities Available for Trading 2,104 12,338 11, (2.8) Securities Available for Sale 42,515 30,266 31,008 (27.1) 2.5 Securities Held to Maturity 27,640 24,959 25,146 (9.0) 0.7 Financial Derivatives , Interbank Accounts 22,110 19,409 20,959 (5.2) 8.0 Deposits with the Central Bank 18,911 17,099 18,781 (0.7) 9.8 Compulsory Deposits on Demand Deposits and Float 8,327 5,950 7,118 (14.5) 19.6 Compulsory Deposits on Savings Deposits 10,584 11,148 11, Other 3,199 2,311 2,178 (31.9) (5.7) Intrabank Accounts (95.7) (66.0) Loans 56,654 66,451 69, Public Sector 4,437 4,461 4, Private Sector 55,715 66,475 69, ( Allowance for Loan Losses) (3,498) (4,485) (4,877) Leasing (81.9) (43.3) Leasing and Subleasing Receivables (Unearned Lease Income) (303) (327) (385) (Allowance for Lease Losses) (14) (20) (20) 47.1 (1.5) Other Receivables 30,600 28,983 32, Receivable on Guarantees Honored (41.0) 3.7 Foreign Exchange Portfolio 12,075 10,196 11,508 (4.7) 12.9 Income Receivable Trading and Brokerage of Securities Specific Credits Specific Operations (0.0) 0.0 Tax Credits 10,433 9,116 8,971 (14.0) (1.6) Other Credits 8,595 10,230 12, (Provision or Doubtful Receivables) (1,323) (1,425) (1,587) (With Loan Characteristics) (311) (187) (205) (34.3) 9.3 (Without Loan Characteristics) (1,012) (1,238) (1,383) Other Assets (5.8) Interest in Companies Other Assets (1.2) (5.5) (Provision for Possible Losses) (198) (202) (201) 1.6 (0.4) Prepaid Expenses Permanent Assets 4,048 4,439 4, Investments (8.9) 4.7 Property and Equipment 2,404 2,844 2, (4.0) Leasing Assets Deferred Charges Banco do Brasil Performance Analysis 2º Quater/2004

26 Table 11. Summarized Balance Sheet Liabilities Balances Chg. % Jun/03 Mar/04 Jun/04 on Jun/03 on Mar/04 LIABILITIES AND SHAREHOLDER S EQUITY 205, , , (1.6) Current and Long-term Liabilities 194, , , (1.8) Deposits 99, , , Demand Deposits 21,170 30,306 29, (2.9) Savings Deposits 26,427 27,590 28, Interbank Deposits 5,437 6,219 7, Time Deposits 46,847 46,104 49, Money Market Borrowing 41,468 40,343 37,132 (10.5) (8.0) Funds from Acceptances and Securities Placed 1,071 1,340 1, Foreign Securities 1,071 1,340 1, Interbank Accounts 2,676 1,445 1,945 (27.3) 34.6 Intrabank Accounts 813 1,172 1, Borrowing 8,714 10,707 13, Foreign Borrowing 8,714 10,707 13, Domestic Onlending Official Institutions 6,134 8,003 8, National Treasury 1,184 1,878 1, BNDES 2,737 3,081 3, Finame 1,699 2,510 2, Other Institutions (9.5) (12.6) Foreign Onlending (21.5) (13.8) Financial Derivatives , Other Accounts Payable 33,333 44,590 32,599 (2.2) (26.9) Collection of Taxes and Contributions 1,613 2,221 2, (2.4) Foreign Exchange Portfolio 9,771 19,406 5,480 (43.9) (71.8) Shareholder and Statutory Distributions Taxes and Social Security Trading and Brokerage of Securities 3,369 4,009 4, Financial and Development Funds 1,777 1,768 1, Special Operations (0.3) FCO (Subordinated Debt) 4,607 5,380 5, Other Liabilities 6,864 8,268 11, Actuarial Liabilities 4,141 2,551 1,985 (52.1) (22.2) Unearned Income Shareholders Equity 10,872 12,686 12, Capital 8,366 8,366 8, Capital Reserves Revaluation Reserves (1.7) (0.2) Revenue Reserves 2,796 3,674 4, Mark-to-Market Securities and Derivatives (194) 127 (51) (73.6) (140.5) Retained Earnings (Accumulated losses) (100.0) (Treasury Shares) (126) (126) (126) - - Income Accounts (100.0) 26 - Banco do Brasil Performance Analysis 2º Quater/2004

27 5.2 Summarized Corporate Law Income Statement Table 12. Summarized Corporate Law Income Statement Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 on 1Q04 1H03 1H04 on 1H03 Financial Intermediation Income 7,951 7,565 8, ,476 15,725 (4.6) Loans 3,894 4,198 4, ,654 8, Leasing (8.8) Securities 3,508 2,826 2,930 (16.5) 3.7 8,098 5,755 (28.9) Financial Derivatives 73 (37) (194) (364.8) (216) (231) 7.1 Foreign Exchange Portfolio Compulsory Investments (31.3) (30.8) Financial Intermediation Expenses (6,344) (5,152) (5,739) (9.5) 11.4 (12,502) (10,890) (12.9) Money Market Funds (4,554) (3,047) (3,070) (32.6) 0.8 (9,093) (6,118) (32.7) Borrowing, Assignments and Onlending (329) (745) (1,467) (652) (2,212) Foreign Exchange Portfolio (514) - - (100.0) - (1,103) - (100.0) Allowance for Loan Losses (948) (1,359) (1,201) 26.8 (11.6) (1,654) (2,560) 54.8 Gross Income from Financial Intermediation 1,606 2,414 2, ,974 4, Other Operating Income (Expenses) (590) (1,402) (1,276) (9.0) (1,823) (2,678) 46.9 Service Revenues 1,343 1,553 1, ,561 3, Personnel Expenses (1,481) (1,574) (1,952) (2,990) (3,527) 18.0 Other Administrative Expenses (955) (1,126) (1,381) (2,125) (2,507) 18.0 Taxes (272) (319) (360) (534) (679) 27.2 Equity Int. in the Results of Subs. and Affil. (710) (148.8) (1,036) 463 (144.7) Other Operating Revenues 3, (71.0) ,908 1,500 (69.4) Other Operating Expenses (1,898) (570) (555) (70.8) (2.7) (2,608) (1,125) (56.9) Operating Income 1,016 1,012 1, ,151 2, Non-operating Income (5.0) (40.5) Income Before Taxes 1,058 1,027 1, ,243 2,211 (1.4) Income and Social Contribution Taxes (409) (370) (239) (41.6) (35.6) (1,096) (609) (44.4) Statutory Profit Sharing (49) (41) (140) (68) (181) Net Income ,079 1, Banco do Brasil Performance Analysis 2º Quater/2004

28 5.3 Income Statement with Reallocations Table 13. Income Statement with Reallocations Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 on 1Q04 1H03 1H04 on 1H03 Financial Intermediation Income 8,407 7,622 8, ,186 16,084 (6.4) Loans 3,894 4,198 4, ,654 8, Leasing (8.8) Securities 3,508 2,826 2,930 (16.5) 3.7 8,098 5,755 (28.9) Financial Derivatives 73 (37) (194) (364.8) (216) (231) 7.1 Foreign Exchange Portfolio (514) (241.9) (1,103) 981 (188.9) Compulsory Investments (31.3) (30.8) FX Gain (Loss) on Foreign Investments (1) (729) (136.7) (986) 286 (129.0) Other Op. Inc. of a Fin. Intermed. Nature (2) 1, (97.9) (8.6) 2, (97.4) Financial Intermediation Expenses (4,883) (3,793) (4,537) (7.1) 19.6 (9,745) (8,330) (14.5) Money Market Funds (4,554) (3,047) (3,070) (32.6) 0.8 (9,093) (6,118) (32.7) Borrowing, Assignments and Onlending (329) (745) (1,467) (652) (2,212) Gross Financial Margin 3,524 3,829 3, ,441 7, Allowance for Loan Losses (3) (5) (863) (901) (903) (1,499) (1,804) 20.4 Net Financial Margin 2,661 2,929 3, ,942 5, Service Revenues 1,343 1,553 1, ,561 3, Taxes on Revenues (4) (241) (284) (323) (473) (607) 28.3 Contribution Margin 3,763 4,197 4, ,030 8, Administrative Expenses (2,466) (2,735) (3,093) (5,175) (5,828) 12.6 Personnel Expenses (9) (1,481) (1,574) (1,675) (2,990) (3,249) 8.7 Other Administrative Expenses (955) (1,126) (1,381) (2,125) (2,507) 18.0 Other Tax Expenses (4) (30) (34) (37) (61) (72) 18.6 Commercial Income 1,297 1,462 1,248 (3.8) (14.6) 2,855 2,710 (5.1) Other Operating Income (Expenses) (280) (235) (245) (12.7) 4.0 (594) (480) (19.2) Equity Interest in Results of Subs. and Affil. (1) (6) (19.6) Other Operating Income (2) (7) (8) (24.6) (11.4) (4.6) Other Operating Expenses (2) (3) (808) (766) (707) (12.5) (7.7) (1,508) (1,472) (2.3) Operating Income 1,016 1,227 1,003 (1.3) (18.2) 2,261 2,230 (1.4) Non-operating Income (5.0) (40.5) Income Before Taxes 1,058 1,242 1,043 (1.4) (16.1) 2,353 2,285 (2.9) Income and Social Contribution Taxes (10) (11) (519) (370) (200) (61.5) (46.1) (1,205) (570) (52.7) Statutory Profit Sharing (49) (41) (140) (68) (181) Recurring Income (15.4) 1,079 1, Extraordinary Items 109 (215) 102 (6.7) (147.4) (0) (113) 26,075.2 Extraordinary Provision for Credit Risks (5) - (262) (146) - (44.4) - (408) - Provision for Losses on Maxblue (6) (110) - (100.0) Provision for Voluntary Retirement Plan (7) (100.0) Recovery of Undue Taxes (8) Provision for Retirement Incentive Plan (9) - - (277) (277) - Provision for Non-recurring IR and CS (10) - - (192) (192) - JCP Tax Benefit (11) Net Income ,079 1, Banco do Brasil Performance Analysis 2º Quater/2004

29 5.3.1 Details of Reallocations The adjustments made in the statement of income to arrive at the reallocated statement of income are detailed below. These adjustments did not change the final result, since they were only intended to arrange more coherently revenue and expense items, considering the performance dynamics of a financial institution. Basically, these adjustments were intended to: a) allow the financial margin to reflect accurately the return on all profitable assets, in order to inform the market the spread obtained by dividing the margin by the asset, excluding permanent assets. To accomplish this we were required to: Include in the financial margin income recorded in other operating income that had intermediation characteristics and which was derived from remunerated assets recorded in the balance sheet under other assets; Identify the foreign exchange gain/(loss) on financial assets and liabilities abroad in the quarter in a specific financial margin item (financial equity); Retain as financial margin amounts related to negative foreign exchange adjustments that were recorded in other operating income and expenses to avoid inverting the balance of accounts of a financial intermediation nature; b) segregate the impacts of extraordinary events in order to demonstrate recurring income of the Bank in the period. Reallocations in the Gross Financial Margin (1) The Foreign Exchange Gain (Loss) on Foreign Financial Equity is reallocated from Equity Interest in the Results of Subsidiaries and Affiliates for inclusion in the financial margin. This adjustment is required to maintain the equilibrium and coherence of analyses of the spread, since assets and liabilities previously included in permanent assets are included in other balance sheet items after consolidation. The spread would be improperly reduced without reallocation. (2) The reallocations of other operating income / expenses to other operating income of a financial intermediation nature are detailed below: Table 14. Reallocations Other Operating Income / Expenses Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 on 1Q04 1H03 1H04 on 1H03 Income from Special Operations (20.4) (1.8) (19.1) Income from Specific Credits (17.9) (17.7) FX Readjustment 1,653 2 (2) (100.1) (200.2) 2,709 (0) (100.0) FX Readjustment Income 2,829 2 (2) (100.1) (200.0) 3,963 0 (100.0) FX Readjustment Expense (1,175) (0) 0 (100.0) (198.4) (1,255) (0) (100.0) Total 1, (97.9) (8.6) 2, (97.4) Reallocations in the Net Financial Margin (3) The expense with the allowance for loan losses includes credits without characteristics of financial intermediation, so that this part of the allowance is reallocated to other operating expenses Banco do Brasil Performance Analysis 2º Quater/2004

30 Reallocations in the Contribution Margin (4) Considering the model used for the income statement, tax expenses revenues were reallocated and included in the contribution margin. Extraordinary Items (5) In 1Q04, there were changes in the risk rating criteria for transactions below R$ that generated a reinforcement to the allowance for loan losses of R$262 million in the period, because of the adoption of a more conservative methodology. Then in 2Q04 there was an increase arising from the perfecting of the methodology for risk rating of abroad credit operations of Brazilian business groups, which generated a total reinforcement to the allowance for loan losses of R$146 million. (6) The Bank set up a R$110 million provision for losses on foreign investments in the first quarter of 2003 This amount related to the premium paid for the company, MaxBlue. A total of R$175 million that had been recorded in a provision for losses on the investment in MaxBlue Holdings and MaxBlue DTVM was reversed in the fourth quarter of the year. (7) The lower adhesion to the Voluntary Retirement Plan PAI 50 generated a reversal of R$47,1 million in 1Q04. PAI 50 was developed with the aim of making a renovation in the workforce of the Bank viable, coupling economic results with the socially responsible departure of employees of an age of over 50. In setting it up, R$152 million was provisioned in 4Q03, an amount that is regarded as non-recurring. (8) Between September 1989 and March 1992, the Bank overpaid contributions to the Social Investment Fund, in view of the fact that the Federal Supreme Court recognized the unconstitutionality of the increase in tax rates applied over the period mentioned. The updated amount of the undue tax recognized in the results was R$565 million, which will be reimbursed to the Bank monthly, by means of the non-disbursement of PASEP and COFINS expenses, until reaching the amount mentioned. The estimated term for total compensation is roughly 7 months, as from May/2004. (9) In 2Q04, the Retirement Incentive Plan PEA was created, having as its target public effective position staff, executive cashiers, and career support staff with an age equal to 50 years or more and a contribution time to PREVI equal to 15 years or more. To do so, R$277 million was provisioned, about 72% of the maximum forecast disbursement, based on the estimate of adhesion. (10) As the undue tax, extraordinary item nº 8, enters into the basis for calculating income and social contribution taxes, the IR/CS deriving from this event was reallocated, at the rate of 34% (25% of income tax and 9% of social contribution). This measure aims at determining properly the Recurring Income. (11) Considering that the distribution of profits via dividends or JCP Interest on Own Capital is decided half-yearly in accordance with the interests of the organization, the tax benefit arising from the payment of JCP is being treated as non-recurrent income. This reallocation was carried out with the same intent as extraordinary item nº Banco do Brasil Performance Analysis 2º Quater/2004

31 6 Balance Sheet Analysis 6.1 Breakdown Banco do Brasil is the largest financial institution in Brazil, with total assets of R$227,374 million. In the last 12 months, BB increased its assets by 10.5%. The improvement in the composition of assets can be seen in the graph below. There has been an increase in the share of remunerated assets and a decrease in the share of remunerated liabilities, in relation to June As of June 2004, remunerated assets were stable in relation to same period last year, but these assets decreased in relation to previous quarters as a result of the decrease in liabilities from foreign exchange sales, which balanced position is obtained through the acquisition of investments in international capital markets, booked in short term interbank investments. On the liabilities side, a reduction was to be seen in the relative share of remunerated liabilities, from 69.2% to 68.0%. This reduction is explained by the increase of 39.0% in the volume of demand deposits, which accounted for 12.9% of total liabilities, compared to 10.3% in the same period of the previous year. Remunerated Assets 1 Vs. Remunerated Liabilities 2 - % , , Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Remunerated Assets Remunerated Liabilities Other Assets Other Liabilities Figure 7. Remunerated Assets vs. Remunerated Liabilities 1 Available Funds Denominated in a Foreign Currency, Securities, Financial Investments, Loans, Leasing, Remunerated Compulsory Deposits and Other Remunerated Assets. 2 Savings, Interbank Deposits, Time Deposits, Money Market Borrowing, Foreign Borrowing, Onlending, Financial and Development Funds, Subordinated Debt, and Liabilities with Foreign Securities Banco do Brasil Performance Analysis 2º Quater/2004

32 6.2 Analysis of Assets The share of Securities in total assets have decreased from 35.4% to 30.7% (June/2003 June 2004), mainly due to the increase in credit operations, which increased from 27.5% to 30.5% in the same period. The growth of liquidity assets was due, basically, to the R$9,158 million increase in available funds. Breakdown of Assets - % Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 8. Breakdown of Assets With regard to loan assets, it was to be seen that their share in June 2004 was 30.5%, compared to 27.5% in the previous year, with special mention of the retail loan portfolio, which grew 33.7%. Furthermore, tax credits showed a balance of R$8,971 million in June 2004, a fall of 16.0% (Jun/03 Jun/04), decreasing from 5.1% to 3.9% of total assets. Table 15. Breakdown of Assets Other Assets Tax Credits Loans and Leasing Securities Liquidity Assets except Securities Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Total Assets 213, , , , , , , ,374 Liquidity Assets except Securities 27,816 29,043 23,251 18,648 29,340 44,197 43,612 30,316 Securities 75,770 70,943 75,631 72,746 74,055 69,590 67,875 69,855 Loans and Leasing 51,330 51,470 53,475 56,686 60,442 65,604 66,461 69,247 Tax Credits 12,461 11,847 10,927 10,433 9,897 9,406 9,116 8,971 Other Assets 46,035 41,292 45,956 47,249 41,400 41,347 44,044 48, Banco do Brasil Performance Analysis 2º Quater/2004

33 6.3 Analysis of Liquidity One way of measuring the liquidity of a financial institution consists of determining the difference between liquidity assets and liquid liabilities. An analysis of the graph below shows a comfortable situation with this indicator. The Bank s liquidity has remained above the R$32 billion level since September Liquidity Assets (-) Liquidity Liabilities 39,156 38,140 33,566 32,477 38,712 17,000 38,100 46,233 12,000 52,963 32,500 Figure 9. Liquidity Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 In 2003, Banco do Brasil carried out advances to major customers on their sales of foreign exchange. To annul the exposure in dollar liabilities generated by these transactions, the Bank increased its shortterm interbank deposits. These transactions, however, were settled in April 2004, and the liquidity balance closed the half year at R$52,963 million. This reduction was mitigated by the extinction of the compulsory deposit on judicial deposits (Bacen Circular 3223/04), begging in January 2004 and ending in May 2004, which caused an increase of R$9 billion in liquidity. Table 16. Liquidity Balance Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Liquidity Assets (A) 94,377 90,343 88,366 79,381 91, , ,795 97,779 Available Funds 10,622 11,279 7,569 6,300 6,083 10,789 15,279 15,841 Interbank Investments 17,194 17,764 15,682 12,348 23,257 33,407 28,333 14,475 Securities (except those linked to Bacen) 66,560 61,300 65,114 60,733 62,287 58,242 61,182 67,463 Liquidity Liabilities (B) 55,221 52,203 54,800 46,904 52,915 47,339 46,562 44,816 Interbank Deposits 5,571 3,876 5,230 5,437 6,438 7,275 6,219 7,684 Money Market Borrowing 49,650 48,327 49,570 41,468 46,478 40,063 40,343 37,132 Liquidity Balance (A - B) 39,156 38,140 33,566 32,477 38,712 55,100 58,233 52, Banco do Brasil Performance Analysis 2º Quater/2004

34 6.4 Securities Portfolio The securities portfolio showed a decrease of 4..0% in relation to the same period of the previous year. This downturn was due to the reduction in the volume of subject to Open Market Funds (10.5%) and to the growth in loans. In relation to 1Q04, the securities portfolio increased 2.9%, which is basically explained by the rise in funding from deposits and foreign loans. It should be pointed out that there has been an alteration to the profile of the portfolio, which now has 17.2% in securities available for trading and 44.4% in securities available for sale, compared to 2.9% and 58.4% in the same period of last year, respectively. Table 17. Securities Portfolio by Category Balances Share % Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Jun/03 Jun/04 Securities 75,770 70,943 75,631 72,746 74,055 69,590 67,875 69, Available for Trading 3,710 3,585 5,137 2,104 5,393 16,095 12,338 11, Available for Sale 45,991 41,303 43,352 42,515 43,158 28,307 30,266 31, Held to Maturity 25,670 25,763 26,846 27,640 25,109 24,821 24,959 25, Financial Derivatives , In the following table, it can be seen that there has been a stability of securities with a maturity of between 1 and 5 years recently, with their share in the total of the portfolio going up from 64.1% in June 2003 to 67.3% in June Table 18. Securities Portfolio by Maturities Up to 1 year 1 to 5 years 5 to 10 years Over 10 years Balance Share % Balance Share % Saldo Share % Saldo Share % Total Sep/ , , , , Dec/ , , , , Mar/ , , , , Jun/ , , , , Sep/ , , , , Dec/ , , , , Mar/ , , , , Jun/ , , , , Banco do Brasil Performance Analysis 2º Quater/2004

35 Jun/03 4.1% Securities Portfolio by Maturities In days 7.9% 9.6% Mar/04 2.7% 5.6% 11.2% Jun/04 3.1% 5.1% 13.2% 78.4% 80.5% 78.6% Figure 10. Securities Portfolio Up to 30 days 31 to 180 days 181 to 360 days Over 360 days The portfolio of securities with maturities between 1 and 5 years accounted for 67.3% of the total of the portfolio in June 2004, compared to 64.1% in the same period of the previous year. With the objective of demonstrating better this distribution, this share was opened up into from 1 to 3 years and from 3 to 5 years in the securities portfolio of the multiple bank, which in June 2004 accounted for 99.1% of the consolidated securities portfolio. In June 2004, there was an 860 basis point increase in the share of securities with a maturity of from 1 to 3 years, in relation to June Securities Portfolio with Maturities between 1 and 5 years Multiple Bank Jun/03 Jun/ % 29.9% 61.5% 70.1% 1-3 years 3-5 years Figure 11. Securities Portfolio with Maturities between 1 and 5 years 35 - Banco do Brasil Performance Analysis 2º Quater/2004

36 6.5 Loan Portfolio Banco do Brasil has maintained its unchallenged leadership in lending in Brazil, with an 18.8% share in the financial system 3. BB s loan portfolio reached the amount of R$83,131 million in June 2004, representing an increase of 21.1% in a 12 month period. The major growth in total loan portfolio occurred in the retail book, which grew 33.7%, changing from 20.8% of the total portfolio to 23.0% of it. During the 1H04, the growth of the retail portfolio reached 7.1%, mainly supported by the 22.3% expansion of retail operations. Jun/03 Breakdown of the Loan Portfolio Mar/04 Jun/ % 2.8% 20.8% 12.6% 2.0% 22.3% 13.3% 1.9% 23.0% 11.0% 10.3% 10.6% 21.8% 20.2% 20.4% 31.3% 32.5% 30.8% Figure 12. Breakdown of the Loan Portfolio Retail Commercial Agribusiness Foreign Trade Abroad Other Table 19. Loan Portfolio by Segment Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Total Portfolio 62,930 62,900 65,715 68,662 72,601 77,636 79,647 83,131 Retail 12,401 12,569 13,340 14,275 14,982 15,602 17,797 19,085 Commercial 13,830 14,012 14,595 14,965 14,817 16,450 16,110 16,957 Agribusiness 13,801 16,803 18,342 21,519 24,766 26,766 25,907 25,573 Foreign Trade 7,924 7,602 8,088 7,563 7,543 7,315 8,217 8,810 Abroad 12,810 10,315 9,546 8,432 8,952 9,481 10,037 11,088 Other 2,163 1,598 1,804 1,909 1,540 2,022 1,579 1,619 3 Source: Central Bank 36 - Banco do Brasil Performance Analysis 2º Quater/2004

37 Another way of analyzing the Total Loan Portfolio is break it down accordingly to the Bank s business pillars (Retail, Wholesale, Public Sector, and Others). In the table below we can see that, in June 2004, the Retail Pillar was responsible for 54.9% of Total Portfolio and the Wholsale Pillar responded for 24.3% of it. Table 20. Loan Portfolio by Pillar Business Pillars Retail Wholesale Government Others Total Brazil Abroad Loan Portfolio Retail 18, ,085-19,085 Commercial 6,922 9, ,957-16,957 Agribusiness 22,282 2,129-1,162 25,573-25,573 Foreign Trade 710 8, ,810-8,810 Others ,619 11,088 12,707 Total 49,367 20, ,346 72,043 11,088 83, Banco do Brasil Performance Analysis 2º Quater/2004

38 6.5.1 Retail Loan Portfolio Loans to retail operations reached R$19,085 million at the end of June 2004, which represented an increase of 33.7% in relation to the same period of the previous year, and 22.3% in relation to December Retail transactions are intended for private individuals and micro and small businesses, a category that includes companies with annual sales of up to R$10 million. Table 21. Retail Loan Portfolio Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Direct consumer credit (CDC) 6,797 6,736 6,885 7,165 7,297 7,803 8,534 9,251 Overdraft accounts 2,058 1,920 2,192 2,339 2,455 2,215 2,559 2,605 BB Giro Rápido (WCL) 1,479 1,539 1,789 2,076 2,405 2,732 2,984 3,173 Credit Cards 1,134 1,361 1,402 1,541 1,451 1,634 1,650 1,742 Others 933 1,013 1,071 1,153 1,368 1,574 2,071 2,313 Total 12,401 12,569 13,340 14,275 14,976 15,958 17,797 19,085 Loans to Individuals - Banco do Brasil meets the credit needs of individuals through mass distributed products. BB s credit scoring system calculates pre-approved limits for direct consumer credit (CDC), overdraft banking, and credit cards based on a series of customer information. CDC transactions showed 29.1% growth, in relation to June 2003, to reach a balance of R$9,251 million, with an average value per transaction of R$1, at the end of June The increase to be seen was basically due to the growth of the CDC Electronic Loan and CDC Salary transactions, of 89.8% and 72.4% (Jun/03 Jun/04), respectively. CDC can be contracted via the Internet, self-service terminals, and in the branch network. Furthermore, it combines a low operational cost with credit well spread out, with an investment rate of 57.4% in 2Q04, compared to 66.9% in 2Q03. In June 2004, 66.1% of the individual customers had accounts with a credit limit. Overdraft accounts ended June 2004 with a balance of R$2,605 million (a 13.7% share in retail transactions), an increase of 11.4% (Jun/03 Jun/04). The investment rate for overdraft accounts was 106.4% in 2Q04, compared to 136.0% in 2Q03. The balance of credit card transactions showed an increase of 13.0% (Jun/03 Jun/04), with a balance of R$1,742 million at the end of June 2004, while the quantity of cards created rose 25.1%, going up from 4,854 thousand to 6,071 thousand. The investment rate for credit card transactions was 34.6% in 2Q04, compared to 51.8% in 2Q03. Main Retail Loan Portfolio Products CDC 6,898 6,797 6,736 6,885 7,165 7,297 7,803 8,534 9, ,134 Credit Cards 1,361 1,402 1,541 1,451 1,634 1,650 1,742 Jun/02 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03Dec/03 Mar/04 Jun/04 Figure 13. Main Retail Loan Portfolio Products Jun/02 Sep/02Dec/02 Mar/03 Jun/03 Sep/03Dec/03 Mar/04 Jun/ Banco do Brasil Performance Analysis 2º Quater/2004

39 Credit for Micro and Small Businesses In May 2004, Banco do Brasil created the Micro and Small Business Directorate, with a view to increasing the market share, by means of customer loyalty strategies, and to improving the relationship with the segment. In conjunction with the far-reaching service network and the specific training of the workforce, its products and services give BB unique conditions for attending to the needs of these customers. Transactions with micro and small business now accounted for 25.1% of the retail portfolio in June 2004, compared to 18.9% in the previous year. The balance of these transactions was R$4,787 million, a 77.3% increase in relation to June Table 22. MSB Credit Products Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 BB Giro Rápido 1,479 1,539 1,789 2,076 2,405 2,732 2,984 3,173 Proger Urbano Emp ,009 1,201 Others Total 1,954 2,055 2,343 2,700 3,137 3,680 4,382 4,787 The main credit product intended for this segment, BB Giro Rápido offers financing for working capital without red tape and without requiring tangible collateral. The transaction is divided into a part with an overdraft account and another for working capital, paid in installments over 12 months. At the end of June 2004, this line of credit reached a balance of R$3,173 million, a 52.8% increase (Jun/03 Jun/04). The 599 thousand or so contracts showed an average value of R$5, The investment rate for this product was 47.0% in 2Q04, compared to 58.6% in 2Q03. The Proger Urbano Empresarial transactions use funding from the Worker s Support Fund (FAT) to finance projects or investment with the respective working capital, which provides for the generation of employment and income in urban areas. These transactions showed an increase of 95.6% (Jun/03 Jun/04), ending the year with a balance of R$1,201 million. The quantity of contracts was about 51 thousand, with an average value of R$23, Main Products for Micro and Small Businesses BB Giro Rápido Proger Urbano Emp, 1,433 1,479 1,539 1,789 2,076 2,405 2,732 2,984 3, ,009 1,201 Jun/02 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Jun/02 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 14. Main Products for Micro and Small Businesses 39 - Banco do Brasil Performance Analysis 2º Quater/2004

40 Loans for the lower income population With the Federal Government s decision to expand the financial services industry to the population with a lower income and to microentrepreneurs, Law was passed, which makes provisions about the channeling of resources equivalent to 2% of demand deposits taken by financial institutions towards microcredit transactions, at an interest rate of 2% a month. To maintain coherence with its corporate strategy, Banco do Brasil adopted as an institutional solution the creation of a separate structure from the multiple bank, so as to guarantee the transparency of the process, besides adapting the products, processes, credit policy and operational costs, aiming at the current business practice of attending to the these specific customer groups in a differentiated and personalized manner. Banco Popular do Brasil was created as a full subsidiary of Banco do Brasil through Law of September 17, 2003, in the form of a multiple bank with commercial, credit, financing and investment portfolios. The business plan was designed for the bank to work with high efficiency and low costs. At a meeting on , Banco do Brasil s Board of Directors approved a revision of the business plan for the Banco Popular do Brasil S.A., which generated the need for R$157,571 thousand in capital, additional to the R$24,500 thousand subscribed in 2003, of which R$92,050 thousand in 2004, already paid up, and R$65,521 thousand in According to the business plan, the breakeven point will be met in Banco Popular do Brasil has constructed an innovative and unprecedented technological model. The solution was designed to work with any communication technology, through data capture applications, which work with portable POS (point of sale) and PC equipment, with a low configuration requirement Banco do Brasil Performance Analysis 2º Quater/2004

41 6.5.2 Commercial Loan Portfolio The commercial loan portfolio encompasses the products intended mainly for medium and large sized companies and for their corporate customers. Banco do Brasil has adopted a segmentation model that has the objective of perfecting the management of this customer base, dividing them into the sectors of Industry, Commerce, and Services, and into the medium, large, and corporate segments. The model favors a better knowledge of the specific needs of each company and seeks to develop, diversify and achieve a return from the business. In June 2004, the portfolio reached a balance of R$16,957 million, a 13.3 increase (Jun/03 Jun/04). Table 23. Commercial Loan Portfolio Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Receivables 6,021 6,428 6,737 7,028 7,500 8,133 8,316 8,359 Investment finance 2,659 2,707 2,703 2,711 2,695 2,754 2,798 2,833 Overdraft accounts 1,883 1,895 2,010 2,072 1,946 2,051 1,791 1,919 Working capital others 2,016 1,697 1,747 1,751 1,420 1,928 1,923 2,355 Others 1,252 1,286 1,396 1,404 1,257 1,326 1,283 1,492 Total 13,830 14,012 14,593 14,965 14,819 16,192 16,110 16,957 The products that stand out most in this portfolio are the receivables, with a 49.3% share in June The balance of these transactions in June 2004 was R$8,359 million, which represents an increase of 18.9% (Jun/03 Jun/04). The transactions with receivables are short term and show a low credit risk for the Bank. For the companies, they mean an excellent alternative to working capital financing, and an opportunity for boosting their sales. The main credit products based on receivables are checks discounted, trade bills discounted and BB Vendor, which showed an average investment rate of 29.1% in 2Q04, compared to 38.7% in 2Q03. Table 24. Main Receivables Business Customers Checks Discounted Trade Bills Discounted BB Vendor Balance at ,757 2,815 2,119 Change over Jun/03 - % Change over Mar/04 - % (16.3) Average term of the transactions in days Average monthly disbursements 2Q04 1,822 2, The BB overdraft account offers a revolving credit line with a term for repayment of up to 12 months. At the end of June 2004, the balance of these transactions amounted to R$1,919 million, a 7.4% reduction in relation to the same period of last year Banco do Brasil Performance Analysis 2º Quater/2004

42 Main Commercial Portfolio Products 5,837 Receivables 6,021 6,428 6,737 7,028 7,500 8,133 8,316 8,359 Overdraft Accounts 1,997 1,883 1,895 2,010 2,072 1,946 2,051 1,791 1,919 Jun/02 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 15. Main Commercial Portfolio Products Jun/02 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 The investment transactions comprise lines of credit intended mainly for the expansion or modernization of production via the acquisition of machines and equipment, including freight vehicles. The balance of these transactions increased 4.5% (Jun/03 Jun/04), to reach R$2,833 million in June Banco do Brasil Performance Analysis 2º Quater/2004

43 6.5.3 Agribusiness Loan Portfolio Agribusiness is one of the main sectors of the Brazilian economy, of fundamental importance to the growth of the country. In its role as an agent of public policies, Banco do Brasil represents a link between the government and the rural producer, and knows better than anyone the needs of those who dedicate themselves to farming, in all the stages of the productive chain. The Brazilian trade balance has increased due to the positive contribution from agribusiness. The trade balance of this sector generated a US$16.1billion surplus in 1H04, accounting for 42.7% of all export transactions in the period. Trade Balance (FOB) US$billion (1.2) (0.7) S04 Agribusiness Brazil Source: MAPA Ministry of Agriculture, Animal Husbandry and Supply Figure 16. Trade Balance (FOB) The table below shows exports broken down into the main products. Table 25. Exports US$million H04 Soybeans and related products 5,297 6,009 8,125 5,460 Meat 2,553 2,751 3,641 2,501 Leather, hides and shoes 2,339 2,341 2,465 1,367 Sugar and alcohol 2,371 2,263 2,298 1,197 Timber and wood products 1,878 2,214 2,620 1,702 Pulp and paper 2,190 2,056 2,831 1,439 Coffee, mate and spices 1,340 1,331 1, Fruit juice 926 1,134 1, Tobacco 944 1,008 1, Other products 4,025 3,732 4,852 2,952 Total 23,863 24,839 30,639 18,496 Souce: MAPA Ministry of Agriculture, Animal Husbandry and Supply The sector s extremely positive performance is due to the permanent quest for new technologies and for valuing the services provided by the professionals from the area, always aiming at profitability and continuity in the enterprises. In the figure that follows, the increased productivity per area planted, a result of the gain in productivity, can be visualized Banco do Brasil Performance Analysis 2º Quater/2004

44 Production vs. Planted Area /91 91/9292/93 93/9494/95 95/9696/97 97/9898/99 99/0000/01 01/0202/03 03/ Production (million ton.) Area (million ha) Productivity (ton./ha) - % Figure 17. Production vs. Planted Area Rural credit finances the costs of production and marketing of agricultural products, stimulates rural investments, including storage, processing and industrial transformation of agricultural products. Furthermore, it encourages the introduction of rational methods into the system of production. The growth in the volume of BB s Agribusiness Loan Portfolio was 18.8% (Jun/03 Jun/04), closing June 2004 with a balance of R$25,573 million. Investment transactions, intended for the modernization of the productive process, accounted for 47.0% of this portfolio and have an average term of 4 years. Lending to cover costs and marketing, intended to finance the goods and services needed for the production of crops and livestock, accounted for 50.2% of the agribusiness portfolio and showed an average term of about 1 year. Table 26. Agribusiness Loan Portfolio by Purpose Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Costs 7,525 7,999 9,295 10,525 12,468 12,286 11,827 Investment 8,208 8,777 9,379 9,807 10,642 11,386 12,016 Marketing ,079 1,306 1, ,000 Other ,766 3,128 2,400 1, Total 16,803 18,342 21,519 24,766 26,766 25,907 25,573 The funds made available by the Bank are obtained from savings deposits (MCR 6-4), demand deposits (MCR 6-2), the Rural Area Employment and Income Generation Program (Proger Rural), the National Family Farming Strengthening Program, of the Ministry for Agrarian Development (Pronaf), the Center- West Development Constitutional Fund (FCO), the National bank for Economic and Social Development (BNDES), amongst others Banco do Brasil Performance Analysis 2º Quater/2004

45 Table 27. Agribusiness Loan Portfolio by Product Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Agricultural and livestock costs 5,254 5,620 6,803 8,171 9,203 8,934 8,329 Pronaf/Proger Rural 3,728 3,889 4,110 4,046 5,351 5,665 6,099 FCO Rural 2,244 2,505 2,608 2,712 2,763 2,862 2,908 BNDES/Finame Rural 1,683 1,776 1,848 2,000 2,208 2,486 2,774 Others 3,894 4,552 6,150 7,841 7,630 5,961 5,463 Total 16,803 18,342 21,519 24,770 27,155 25,907 25,573 Proger Rural is a product that offers fixed credit for crop and livestock costs, as well as financial support for fixed and semi-fixed investments, and the National Family Farming Strengthening Program Pronaf aims at financing the costs of the farming business. These two products totaled R$6,099 million at the end of June 2004, growing 48.4% in relation to the same period of the previous year. FCO Rural offers a financial supplement for working capital and costs for the rural producer of the Center-West region. Transactions in the product grew 11.5% in the last 12 months, to a total of R$2,908 million. The BNDES / Finame Rural products have the objective of financing investments in the modernization of machines and equipment intended for rural production. Transactions with these totaled R$2,774 million at the end of June 2004, growing 50.1% in relation to June Main Products of the Agribusiness Loan Portfolio Pronaf/Proger Rural 3,728 3,889 4,110 4,046 5,351 5,665 6,099 BNDES/Finame Rural 2,208 2,000 1,683 1,776 1,848 2,486 2,774 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figura 18. Main Products of the Agribusiness Loan Portfolio The following table shows the balance of the rural credit operations by product Banco do Brasil Performance Analysis 2º Quater/2004

46 Table 28. Agribusiness Loan Portfolio by Item Financed Items Financed Mar/04 Share % Jun/04 Share % Chg. % Soybeans 3, , (23.3) Bovinocultura 2, , (43.3) Corn 2, , Machinery and Equipment 2, , Improvement of Prodictivity for Livestock Production 1, , Improvement of Productivity for Farm Production 1, , Cotton Rice Coffee Fertilizers (7.1) Wheat Tobacco (75.8) Sugar Cane Manioc Poultry (21.5) Cocoa Beans (4.6) Orange Beans Pork Others 6, , Total 25, , (1.3) In its work of financing Brazilian agribusiness, Banco do Brasil reaches all the segments, from the small producer to the large agroindustrial companies. The table below reveals this work, showing that while financing mini and small producers accounts for 79.3% of the total of contracts, the transactions with the other agents show a 78.9% share of the amount financed. Table 29. Funds Released for the 03/04 Crop by Segment Qty. Contracts Qty. Contracts - % Amount Contracted Amount Contracted - % Mini 751, , Small 290, , Others 271, , Cooperatives Total 1,314, , Banco do Brasil Performance Analysis 2º Quater/2004

47 Agribusiness Loan Portfolio by Funding Sources Demand Deposits Savings FAT FCO BNDES/Finame Others Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 19. Agribusiness Loan Portfolio by Funding Sources From June 2003 to June 2004, the Funds available from MCR 6.2, demand deposits, reduced from R$5,286 million to R$3,636 million, a balance 31.2% lower. Saving deposits, the main source of funding for the portfolio, increased 64.9%, reaching a total of R$8,827 million in June The substantial increase in 2003 is primarily attributable to the increase in the required rate of destination set by Banco Central from 20% to 30% on September 2002 and to 40% on September Farm loans using FCO funding provide supplementary working capital and crop financing to farmers in the Central Western Region. These transactions grew 12.2% over the past twelve months to R$3,456 million. Banco do Brasil works through BNDES/FINAME programs to increase farm productivity, especially through the financing of machinery and equipment. These transactions totaled R$3,142 million as of June 2004, growing 45.6% in relation to June The Bank uses funds from Ouro savings accounts and the FAT (Worker s Support Fund) in rural financings at reduced interest rates. To make this kind of intermediation viable, the National Treasury pays the Bank, in the form of equalization, the difference between the funding, administrative and tax costs and the amount charged to the taker of the loans. The graph that follows shows a history of the receipt of revenues by way of interest rate equalization. Equalization Revenues Figure 20. Equalization Revenues 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q Banco do Brasil Performance Analysis 2º Quater/2004

48 A reduction can be seen in the installments paid to the Bank by way of equalization. This reduction is due to the decrease in the volume of transaction subject to equalization, the fruit of the increase in the weighting factor applied to these transactions in calculating whether requirements are met, which became more apparent in the first quarter of Another contribution to the reduction of revenues in 1H04 was the reduction in the TR, the most significant interest rate of those that come into the calculation. Besides the mechanisms for risk management applicable to all the Bank s loan portfolios, the Bank applies, in the management of the agribusiness portfolio, specific methods for identifying risks and minimizing losses. To define the maximum level of exposure with each customer, the Bank has developed a credit limit system specific for the rural producer - ANC Rural Producer that takes into account behavioral data and the technical risk of the business. Table 30. Variables Associates to Technical Risk System for Agribusiness RTA Productivity Cost Price Soil Climate Roads Warehouse Technology Distance Market For measuring the technical risk of the business of each customer, BB s system is unique, made up of a microregional database including historical series of product prices, productivities observed in the crops, and modal production costs. There are 85 thousand production spreadsheets that represent the various kinds of productive system that there are in the country. Besides improving the quality of the assets, this database makes it viable to automate the credit process. A system like this, associated with the observance of the parameters of the Federal Government s Agricultural Zoning, has also created the conditions for implementing a new system for rural insurance, the Farm Gold Insurance. Launched in September 2000, this instrument protects the farmer compared to losses from climatic hazards Banco do Brasil Performance Analysis 2º Quater/2004

49 6.5.4 Foreign Trade Portfolio The balance of Banco do Brasil s foreign trade portfolio went up from R$7,563 million to R$8,810 million (Mar/03 - Mar/04), a 16.5% increase. Banco do Brasil has available several instruments for supporting foreign trade, such as training courses, consultancies that accompany step by step all the stages of an international transaction, the Foreign Trade Counter, a virtual environment for trade between Brazilian companies and the global market, and others. The portfolio s main product is ACC/ACE, which reached a balance of R$7,117 million at the end of June 2004, a 4.7% increase, in relation to June This amount corresponds to 80.8% of the balance of the foreign trade finance portfolio. Table 31. Foreign Trade Loan Portfolio Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 ACC/ACE 6,276 6,377 7,049 6,800 6,733 6,231 6,937 7,117 Import finance 1,538 1, BNDES Exim Others Total 7,924 7,602 8,088 7,563 7,546 7,408 8,217 8,810 Preliminary data. Source: Brazilian Central Bank Main Products of the Foreign Trade Loan Portfolio ACC - FX Advances Import Financing Jun/02 Sep /02 Dec/02 Mar/03 Jun/03 Sep /03 Dec/03 Mar/04 Jun/04 Jun/02 Sep /02Dec/02 Mar/03 Jun/03 Sep /03 Dec/03 Mar/04 Jun/04 Figure 21. Main Products of the Foreign Trade Loan Portfolio The table below shows the details of the ACC/ACE transactions: Table 32. ACC/ACE Average Volume per Contract ACC/ACE 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Volume contracted (US$million) 1,359 1,253 1,680 1,857 2,062 2,038 2,381 2,284 Quantity of contracts 6,188 5,672 6,005 6,785 7,538 7,427 7,263 7,809 Average volume per contract (US$000s) Market share - % Banco do Brasil Performance Analysis 2º Quater/2004

50 6.5.5 Concentration of the Portfolio BB s business loan portfolio in Brazil showed a concentration of 33.9% in the transactions with the 100 largest borrowers at June 2004, compared to 32.6% in December This distribution is similar to that of the main Brazilian retail banks. Table 33. Concentration of the Loan Portfolio on the 100 Largest Borrowers Period 1 st Customer 2 nd to 20 th 21 st to 100 th 100 largest Dec/ Mar/ Jun/ % The table below shows the distribution of the business loan portfolio in Brazil by macro-sector of the economy. Table 34. Concentration of the Loan Portfolio by Macro-sector Macro-sector Mar/04 Share % Jun/04 Share % Chg. % Services 6, , Foodstuffs of Vegetable Origin 4, , Metalworking and Steel 4, , Automotive 2, , Foodstuffs of Animal Origin 2, , Oil 2, , (12.2) Retail Trade 1, , Textiles and Garments 1, , Electrical and Electronic Goods 1, , Pulp and Paper 2, , (13.4) Agricultural Consumables 1, , (3.5) Building 1, , Timber and Furniture , Telecommunications 1, , Chemicals 1, , (0.9) Electricity 1, , (0.9) Transport , Leather and Shoes Wholesale Trade and Sundry Industries (14.4) Beverages Other Activities 1, , Total 42, , Banco do Brasil Performance Analysis 2º Quater/2004

51 6.6 Tax Credits In the first half of 2004, there was a consumption of R$435 million of the stock of Tax Credits, representing a 4.6% reduction in relation to December In relation to the same period of the previous year, this consumption was R$1,462 million, representing a reduction of 14.0%. It is worth pointing out that 51% of the active Tax Credits derive from temporary differences, arising from the tax legislation not permitting the inclusion of given revenues and expenses in the basis for calculation at the moment they occur (accrual basis), but at the moment they are settled financially (cash basis). If we disregard these Tax Credits, the consumption in the period came to 9.3% in relation to December 2003 and 23.7% in relation to June 2003, representing 52.3% e 33.8% of shareholders equity in June 2003 and June 2004, respectively. The exchange rate depreciation 1S04, when compared with the appreciation occurred in 1S03, brought about a lower consumption of Tax Credits than the levels seen in the same period of the previous year, which can be noted from the lower ratio of IR/CS over pretax income in the period, shown in the graph below. Considering that tax credit require an allocation of capital three times higher than the majority of assets a risk weighting factor of 300% - for the purposes of determining the Basel ratio, the reduction to be seen in 1S04 released capital that allows the leverage of up to R$1,305 million in 100% risk weighted assets. In the last 12 months this effect would be of R$4,386 million. Breakdown of Tax Credits ,461 11,847 10,927 10, ,733 3,485 3,269 3, ,897 9,406 9, , ,014 2,884 2,810 2,765 3,406 3,223 2,751 2,543 2,196 1,903 1,696 1,577 4,522 4,571 4,571 4,571 4,573 4,573 4,567 4,571 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Non-Temporal Diferences Social Contribution to be Compensed Income Tax/ Inc.Bef.Income Tax - % Fiscal Loss and Negative Base Mark to Market Figure 22. Breakdown of Tax Credits According to the latest technical study on the consumption of tax credits, the timetable for usage for the next few periods provides for a consumption of R$1,079 million in 2004, R$1,865 million in 2005, R$1,965 million in 2006, R$2,455 million in 2007, R$920 million in 2008, and a remaining balance of R$1,062 million after The balance remaining after 5 years is subject to the allocation of capital required by CMN Resolution 3059/02, a subject addressed in the chapter dedicated to an analysis of the Basel Ratio Banco do Brasil Performance Analysis 2º Quater/2004

52 6.7 Intangible Assets In this issue of the report, the chapter dedicated to Banco do Brasil s intangible assets - which is in line with the importance of highlighting the value created by the resources not reflected in the traditional accounting systems presents the Bank s risk management, more specifically the advances achieved in the management of operational risk. Risk Management The requirements of the regulatory bodies as to risk management, coupled with its corporate strategies and actions, have led Banco do Brasil to develop and to implement an efficient global risk management program. The integrated management of the market, liquidity, credit, and operational risks of the BB Conglomerate allows greater specialization of management and synergy between the processes, besides segregating functions, and this results in a better allocation of capital, obeying the New Basel Accord. The integrated vision of the Bank s risks in the responsibility of the Global Risk Committee, which defines models for measuring risks, contingency plans, and exposure limits. The management of market and liquidity risks, oriented towards the taking of decisions in accordance with the scenarios presented, keep risks compatible with the swings in business and adequate for stress situations. Credit risk management is responsible for managing and accompanying the loan portfolio, besides gauging expected loss and value at risk in credit. For the management of operational risk, which, following the New Basel Accord, will now come into the calculation of the required regulatory capital, under development in BB is a proprietary model of advanced measurement, which has the objective of optimizing the internal processes, identifying the situations of exposure to risks, classifying and measuring operational losses, assessing the existing controls, and encouraging discussion about operational risk in all of the institution. By the New Basel Accord, financial institutions may calculate the capital needed to meet operational risks using three methodologies the basic indicator approach, the standardized approach, and the advanced approach. BB has already taken some important steps in this direction, becoming one of the pioneers in operational risk management in Brazil. The current stage of BB s proprietary model now makes it possible to attend fully to the standardized approach proposed by the New Basel Accord. For the purposes of comparison, taking as a basis the basic indicator approach, should the standardized approach, now consolidated by BB, be adopted, we would achieve a 12% reduction in the total of capital allocated, while if the advanced approach were adopted, this reduction would reach 79%. This development indicates tha BB is prepared to advanced approach, which implies in a lower capital allocated, contibuting to the Esse desenvolvimento sinaliza que o BB estará totalmente preparado para a Abordagem Avançada, que implica em menor alocação de capital, contribuindo para manutenção do ritmo de crescimento da carteira de crédito. Allocation of Capital for Operational Risk 100% 88% 21% Basic Approach Stardardized Approach Figure 23. Allocation of Capital for Operational Risk Advanced Approach 52 - Banco do Brasil Performance Analysis 2º Quater/2004

53 6.8 Analysis of Liabilities Banco do Brasil has succeeded in maintaining its position of leadership in the Brazilian banking system by means of a strategy for organic growth, without carrying out mergers or acquisitions. The Bank has been working on the expansion of the customer base, improving relationships, strengthening ties, and expanding business. The funding obtained by the Bank by means of deposits (demand deposits, savings deposits and time deposits) has grown 14.5% over the balance of June Demand deposits increased 39%, to reach R$29,425 million, savings deposits grew 9,5%, to a total of R$28,939 million, and time deposits rose 6.2%, to reach R$49,747 million in June In relation to March 2004, other liabilities showed a decrease of 15.7%, which was due mainly to the reduction in foreign currency sale transactions for future delivery, as explained in the Analysis of Liquidity, which had a direct effect on the foreign exchange portfolio. Table 35. Liabilities Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Demand Deposits Savings Deposits Time Deposits Money Market Borrowing Foreign Borrowing Domestic Onlending Other Liabilities Shareholders Equity Total Liabilities The figure on the following page shows the changes in the percentage share of the main liabilities in such a way as to facilitate an understanding of the composition of the sources of financing Banco do Brasil Performance Analysis 2º Quater/2004

54 Changes in the Share of the Main Liabilities - % Demand Deposits Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Savings Deposits Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Time Deposits Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Money Market Borrowing Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Foreign Borrowing Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Domestic Onlending Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Other Liabilities Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Shareholders Equity Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 24. Changes in the Liabilities 54 - Banco do Brasil Performance Analysis 2º Quater/2004

55 6.9 Deposits and Money Market Borrowing Banco do Brasil s deposits and money market borrowing amounted to R$152,927 million in June 2004, a 8.2% increase in relation to June In absolute numbers, the main items of funding were time deposits, totaling R$49,747 million, and money market borrowing, amounting to R$37,132 million. Deposits and Market Borrowing R$billion Demand Deposits Savings Deposits Interbank Deposits Time Deposits Money Market Borrowing Total Jun/03 Mar/04 Jun/04 Figure 25. Deposits and Market Borrowing BB s position of leadership in deposits and money market borrowing shows the trust that Brazilians have in the institution, which, in March 2004, accounted for 21.6% of the funding of the Brazilian banking system. At the end of March 2004, the Bank was the leader in demand deposits, with a market share of 36.7%, and in time deposits, with 17%, besides a prominent position in savings deposits, with a 19.2% share Banco do Brasil Performance Analysis 2º Quater/2004

56 Market Share 4 of BB Funding ,391 24,342 21,049 21,170 20,498 27,140 30,306 29,425 26,279 26,918 26,804 26,427 26,578 27,425 27,590 28,939 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Demand Deposits Market Share - % Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Savings Deposits Market Share - % ,997 42,117 45,046 46,847 49,558 48, ,104 49, , , , , , , , ,927 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Time Deposits Market Share - % Figure 26. Market Share of BB Funding Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Funding Market Share - % 4 The information on shares in the banking system come from the Central Bank s website, with the 50 largest banks. The latest position in this system, up to the publication of this reports, dates from Mar/ Banco do Brasil Performance Analysis 2º Quater/2004

57 6.9.1 Foreign Borrowing Its foreign borrowing demonstrates that Banco do Brasil s credibility goes beyond the national frontiers, making BB a very attractive investment option for international investors. Using innovative forms of funding, such as the securitization of the flow of financial remittances from Brazilian workers in Japan (dekasseguis) and the securitization of the flow of receivables on Visanet credit cards, BB has sought to reduce costs and lengthen the terms of funding in the capital market, besides expanding the base of purchasers of its paper, attracting foreign institutional investors. Currently, the balance of foreign borrow, or, the funding plus the accrual of interests less the amortization of it, is R$ 6,231 million. Table 36. Foreign Borrowing Issue Date Volume in US$million Term in years Coupon (%) Interest Interval Issue price Return for the Investor (%) Premium over Treasury Current Rating Program Half-yearly Ba3 GMTN Quarterly BBB Dekasseguis Quarterly BBB/Baa1 MT L3M+0.60 Quarterly **266 AAA/Aaa MT Quarterly BBB/Baa1 MT Quarterly BBB/Baa1 MT Half-yearly B+ GMTN * Half-yearly Ba3 GMTN Quarterly BBB+/Baa1 Visanet Quarterly BBB+/Baa1 Visanet Quarterly BBB/Baa1 MT 100 * equivalent to 150,0 million ** 492 basis points over Libor 57 - Banco do Brasil Performance Analysis 2º Quater/2004

58 6.10 Shareholders Equity Banco do Brasil ended June 2004 with R$12,864 million in shareholders equity, an amount 18.3% higher than in June of the previous year. The factors that contributed towards the increase in shareholders equity were the income set aside for reserves and the marking to market of securities and derivatives. An analysis of the graph below shows the inversely perfect relation between Brazilian sovereign risk and the impact of marking to market on shareholders equity, indicating that the discount on the securities has been reducing because of the greater confidence of the investors in the Brazilian market. Brazilian Sovereign Risk (points) vs. Marking to Market () 2,000 1,500 1, (500) (1,000) (1,500) (2,000) ρ = -1.0 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Brazilian Sovereign Risk Mark-to- Market Figure 27. Brazilian Sovereign Risk (points) vs. Marking to Market () Table 37. Shareholders Equity Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Shareholders Equity 8,411 9,197 10,164 10,872 11,687 12,172 12,686 12,864 Capital 7,436 7,436 7,436 8,366 8,366 8,366 8,366 8,366 Reserves 2,220 2,998 2,998 2,826 2,826 3,704 3,704 4,674 MtM - Securities and Derivatives (1,724) (1,111) (623) (194) (43) (51) (Treasury shares) (126) (126) (126) (126) (126) (126) (126) (126) Income accounts Banco do Brasil Performance Analysis 2º Quater/2004

59 6.11 Basel Ratio Banco do Brasil ended 1S04 with total regulatory capital amounting to R$18,299 million, 6.6% higher than was seen in 2S03 and 18.2% higher than in the same period of the previous year. Shareholders equity increased 18.3% in relation to June 2003 because of the generation and incorporation of results. This led to an improvement in the capital adequacy from 13.8% to 14.5% in the last 12 months. This ratio is higher than the 11% required by the Central Bank and allows BB leverage of R$39,733 million in loan assets (47.8% of the loan portfolio). Table 38. BIS Ratio Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 APR Risk Weight Assets 95, , , , , , , ,966 Required Shareholders Equity 12,472 12,024 11,941 12,350 12,705 13,772 13,646 13,929 APR Requirement 11,858 11,424 11,445 11,657 12,003 13,307 13,166 13,196 Swap Requirement FX Exposure Requirement Interest Rate Exposure Requirement Referential Shareholders Equity 12,389 13,377 14,545 15,479 16,520 17,162 17,740 18,299 Tier I 8,375 9,172 10,139 10,847 11,663 12,147 12,336 12,702 Capital 7,436 7,436 7,436 8,366 8,366 8,366 8,366 8,366 Retained Earnings (Accumulated Losses) Capital Reserves Revenue Reserves 2,180 2,969 2,969 2,796 2,796 3,674 3,674 4,645 Mark-to-Market Securities and Derivatives (1,724) (1,111) (623) (194) (43) (51) Treasury Shares (126) (126) (126) (126) (126) (126) (126) (126) Income Accounts % Tax Credits Realized After 5 years (326) (137) Tier II 4,014 4,205 4,406 4,632 4,858 5,015 5,405 5,597 Subordinated Debt 3,979 4,180 4,382 4,607 4,833 4,991 5,380 5,573 Revaluation Reserves Shareholders Equity Surplus / Deficit (82) 1,353 2,604 3,128 3,815 3,391 4,094 4,371 Leverage Surplus / Deficit (749) 12,302 23,673 28,439 34,680 30,825 37,220 39,733 K Coefficient % BIS Ratio - % % Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 28. BIS Ratio Tier I Tier II 59 - Banco do Brasil Performance Analysis 2º Quater/2004

60 CMN Resolution 3059 of 2002 determines that, as from , there will be additional allocation of capital for the stock of tax credits that exceed a 5 year consumption period from the date of the balance sheet. According to the instruction, 20% of the remaining balance will be deducted from Tier I in 2004, 40% in 2005, 60% in 2006, and so on, until it arrives at 100% in In accordance with technical studies of tax credit consumption, as mentioned in the notes to the financial statements (note 18), at , the amount that exceeds 5 years was R$1,677 million. Accordingly, the effect on tier I capital at was a reduction of R$137 million Banco do Brasil Performance Analysis 2º Quater/2004

61 6.12 Fixed Asset Ratio The constant increase in regulatory capital via retained earnings and an increase in subordinated debt (FCO funding) has allowed the Bank to reduce its fixed asset ratio. At the end of June 2004, the ratio was 22,1%, compared to 23.3% at June This level still permits an increase in fixed assets of R$5,100 million before it fails to comply with the maximum limit of 50% of regulatory capital. Table 39. Fixed Asset Ratio Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Shareholder s Equity 8,410 9,197 10,164 10,872 11,687 12,172 12,686 12,864 Stock Exchange and Cetip Clearing (1) (2) (2) (2) (2) (2) (2) (2) Subordinated Debt Qualifying as Capital 3,979 4,180 4,382 4,607 4,833 4,991 5,380 5,573 20% Tax Credits Realized After 5 years (326) (137) Referential Shareholders Equity (A) 12,388 13,375 14,543 15,476 16,518 17,160 17,738 18,297 Permanent Assets 4,546 4,350 4,141 4,048 4,047 4,513 4,439 4,517 Stock Exchange and Cetip Clearing (1) (2) (2) (2) (2) (2) (2) (2) Leasing Assets (582) (542) (493) (438) (406) (385) (405) (456) Losses with Leasing to be Amortized (5) (5) (5) (5) (5) (7) (8) (10) Total Fixed Assets (B) 3,959 3,800 3,641 3,603 3,634 4,118 4,023 4,049 Fixed Asset Ratio (B/A) - % Margin (Surplus) - % Banco do Brasil Performance Analysis 2º Quater/2004

62 6.13 Risk Management In the first half of 2004, Banco do Brasil integrated the management of the conglomerate s market, liquidity, operational, and credit risks. This integration is going to bring about greater precision in the measurement of risks and a better allocation of capital. In its market risk management, BB uses methodologies like Value at Risk (VaR), stress and sensitivity analysis, amongst others. On the basis of its policy for not generating exposure in foreign currency requiring the allocation of capital to cover it, and remaining within the limits established by CMN Resolution 2891/01, and to improve its foreign currency exposure, the Bank now uses a basket of pre-established currencies, in accordance with Bacen Circular 3229/04. Accordingly, it now takes into consideration the methodology that incorporates the effect of the diversification of its exposures in Euro, US dollar, Swiss franc, Yen, Pound Sterling and Gold. Foreign Exchange Risk The balance sheet of foreign currency assets and liabilities below referenced to the US dollar showed an exposed asset of US$103 million Table 40. Balance Sheet of Foreign Exchange Assets and Liabilities Multiple Bank - US$million ASSETS LIABILITIES Trade Bills 1,083 Currency Swap 686 U.S. Dollar Spot 33 U.S. Dollar Future 6 DDI 471 Res, ,013 FX Commodities 0 Debt Assumption 224 Foreign Investiment 1,423 Other FX Assets 11 Total 3,026 Total 2,923 FX Exposure 103 The graph that follows shows the behavior of Banco do Brasil s foreign exchange exposure in the course of the half year ended June 2004, with an exposure of 2,4% in relation to Regulatory Capital, an increase of 120 basis points when compared with March Changes in FX Exposure - % Jan/04 Feb/04 Mar/04 Apr/04 May/04 Jun/04 Exposure in US$ - % Exposure in Other Currencies - % Figure 29. Changes in FX Exposure 62 - Banco do Brasil Performance Analysis 2º Quater/2004

63 The balance sheet by currencies has the objective of showing the volume of foreign currency assets and liabilities in Brazil and abroad. Table 41. Balance Sheet by Currencies - Assets Domestic Currency Brazil Foreign Currency Abroad Consolidated Assets 172,864 14, ,117 40, ,374 Current and Long-term Assets 168,599 14, ,822 40, ,858 Available Funds 2,099 8,802 10,901 4,939 15,841 Short-term Interbank Investments 3, ,674 9,801 14,475 Securities 62,663 3,376 66,039 3,816 69,855 Interbank Accounts 20, , ,959 Intrabank Accounts Loans and Leasing 57, ,510 10,737 69,247 Other Assets 21, ,728 10,739 32,468 Permanent Assets 4, , ,517 Investments Property and Equipment 2,538-2, ,730 Leasing Assets Deferred Charges Table 42. Balance Sheet by Currencies - Liabilities Domestic Currency Brazil Foreign Currency Total Abroad Consolidated Liabilities and Shareholder s Equity 186,660 14, ,297 26, ,374 Current and Long-term Liabilities 173,659 14, ,296 26, ,373 Deposits 102,516 1, ,595 12, ,795 Demand Deposits 27,094 1,078 28,172 1,253 29,425 Savings Deposits 28,939-28,939-28,939 Interbank Deposits 7,684-7,684-7,684 Time Deposits 38, ,800 10,947 49,747 Money Market Borrowing 35,806-35,806 1,326 37,132 Funds from Acceptances and Securities Placed ,397 1,397 Interbank Accounts 1,937-1, ,945 Intrabank Accounts ,189-1,189 Onlending 8,448 9,198 17,646 4,675 22,321 Financial Derivatives 1,996-1,996-1,996 Other Liabilities 22,763 3,364 26,127 6,472 32,599 Unearned Income Shareholders s Equity 12,864-12,864-12,864 Total 63 - Banco do Brasil Performance Analysis 2º Quater/2004

64 Market Risk With the intention of managing exposures and analyzing the possible impacts in various scenarios, Banco do Brasil accompanies the composition of assets and liabilities, detailed by index. Balance Sheet by Index 5 Assets R$billion Liabilities Fixed Fixed 51.5 CDI/TMS CDI/TMS IRP/TBF/TR IRP/TBF/TR IGP TJLP IGP TJLP US$ US$ w/o Index w/o Index Assets: Tax Credits; Permanent Liabilities: Shareholders. Equity Administrative Prove; Float Figure 30. Balance Sheet by Index Total = R$ 217 billion The graph below shows Banco do Brasil s net mismatch by index (multiple bank view). It can be seen that BB s main asset exposure is in CDI/TMS, R$20.3 billion, while the main liability exposure is in IRP/TBF/TR, R$19.2 billion. Mismatch Gaps by Index 5 R$billion (7.3) (12.5) (19.2) CDI/TMS Fixed IGP TJLP US$ w/o Index Others IRP/TBF/TR 5 Multiple Bank view 64 - Banco do Brasil Performance Analysis 2º Quater/2004

65 Figure 31. Mismatch Gaps by index 65 - Banco do Brasil Performance Analysis 2º Quater/2004

66 The Brazilian Central Bank, through its Circular 2972/00, stipulated the use of the VaR (Value at Risk) methodology in order to measure the risk of maximum expected loss to the preset portfolios, risk that must be considered to capital allocation accordingly to the rules of the present Basel Accord. Thus, a calculation methodology which separates the exposure of preset operations in 10 levels named vertices accordingly to maturity periods. The present value of the portfolio is verified accordingly to the market interests curves and, after that, the probability of the maximum expected loss is calculated with a 90% of confidence. The Bank established a VaR limit for its Marked to Market - MtM preset portfolios (except for the Dealer and Trading portfolio positions) and for the Adjusted Cost, for which is adopted the methodology above mentioned. The table below presents the sum of the present value of the standard vertices and the VaR of these two portfolios. MtM portfolios comprise fixed rate securities in categories I (available for trading) and II (available for sale). Operations booked by adjusted acquisition cost comprise fixed rate securities booked in category III (held to maturity) and, most of all, fixed rate credit operations. Table 43. Portfolios Indexed to Fixed Interest Rates R$thousand Fixed Interest Rate Σ PV Vertices VaR Marked-to-Market MtM Portfolio 996,068 63,732 Cost Adjusted Portfolio 18,249, ,363 For the purposes of management, Banco do Brasil segregates the trading transactions from the others, establishing specific strategies and limits. In the following table, the VaR is shown for the Trading portfolio by risk factor. Table 44. Domestic Trading Portfolio Domestic Trading R$thousand Risk Factor MtM Amount VaR US Dollar (3,131) 43 Fixed Rate 18,854 3 Floating rate 1, Commodities (80) 1 Diversification effect - (9) Total 16, Table 45. International Trading Portfolio International Trading US$thousandl Risk Factor MtM Amount VaR Swiss Franc Euro 8, Sterling Pound 1, US Dollar 26, Diversification effect - (157) Total 36, Banco do Brasil Performance Analysis 2º Quater/2004

67 Liquidity Risk In the management of liquidity risk, constant monitoring of the cash flow is carried out, bearing in mind the maintenance of a minimum limit compatible with the degree of exposure to risk arising from the Bank s capital structure and from the analysis of market conditions. In order to accomplish that, the Bank s Global Risk Committee (CRG) established and approved, in November 2003, an indicator for helping this monitoring. This indicator was named as Availability of Free Funds (DRL). The DRL is an indicator able to show the surplus of free funds after the applying of these funds, which is made as strategic decision and not as a principle decision. The minimum limit established by the CGR for the DRL in 2004 was 25% of free fund, a percentage that presents enough structural liquidity to support the development of operations within stress of the treasury in short time funding to finance the Bank s loan portfolio. In the figure below, the DRL seen in the first half of 2004 is shown. It s worthy to point out that its gradual reduction, that culminated with the extinction of the compulsory deposit on judicial deposits in May 2004, allowed an expressive enlargement of the structural liquidity, permitting the Bank to fulfill the credit demand in a balance and comfortable way. Availability of Free Funds DRL % % Figure 32. Availability of Free Funds Jan/04 Feb/04 Mar/04 Apr/04 May/04 Jun/ Banco do Brasil Performance Analysis 2º Quater/2004

68 7 Analysis of Results 7.1 Gross Financial Margin Table 46. Gross Financial Margin Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 on 1Q04 1H03 1H04 on 1H03 Financial Intermediation Income 8,407 7,622 8, ,186 16,084 (6.4) Loans 3,894 4,198 4, ,654 8, Leasing (8.8) Securities 3,508 2,826 2,930 (16.5) 3.7 8,098 5,755 (28.9) Financial Derivatives 73 (37) (194) (364.8) (216) (231) 7.1 Foreign Exchange Portfolio (514) (241.9) (1,103) 981 (188.9) Compulsory Investments (31.3) (30.8) FX Gain (Loss) on Foreign Investments (729) (136.7) (986) 286 (129.0) Other Op. Inc. of a Fin. Intermed. Nature 1, (97.9) (8.6) 2, (97.4) Financial Intermediation Expenses (4,883) (3,793) (4,537) (7.1) 19.6 (9,745) (8,330) (14.5) Money Market Funds (4,554) (3,047) (3,070) (32.6) 0.8 (9,093) (6,118) (32.7) Borrowing, Assignments and Onlending (329) (745) (1,467) (652) (2,212) Gross Financial Margin 3,524 3,829 3, ,441 7, The gross financial margin represents the result from financial intermediation business, before provisions for credit risks. In the first half of 2004, there was an increase of 4.2%, reaching R$7,754 million in the period, compared to R$7,441 million in the same period of the previous year. This movement was caused, basically, by the expansion of businesses volume, highlighting loan operations, which compansated the Nargin reduction caused by the reduction in the spread. The table below demonstrates the formation of the gross financial margin from the changes in the spread and from the growth in the volume of investments (assets permanent assets). Table 47. Analysis of Volume and Spread 2Q03 2Q04 Abs. Chg. Comp. % 1H03 1H04 Abs. Chg. Comp. % Volume: Assets Permanent Assets * 198, ,318 21, , ,132 22,960 Gross Financial Margin 3,524 3, ,441 7, Spread - % ** (0.2391) Gain/(loss) with volume 3, , Gain/(loss) with spread 3, ,960 (481) (153.5) Gain/(loss) with volume and spread (55) (17.5) * Average Balances ** Gross Financial Margin / (Assets Permanent Assets) The gross financial margin showed an increase of R$401 million in 2Q04, in relation to the same period of the previous year, basically because of the growth in the volume of transactions, since the spread showed minimal growth. The reduction in Selic in the period was offset by the improvement in the mix of loan transactions, which made possible a stable spread Banco do Brasil Performance Analysis 2º Quater/2004

69 Analysis of Volume and Quarterly Spread Spread - % 2T T , T04-219,318 2T03-198,267 Gain/(Loss) in Spread Gain/(Loss) in Volume and Spread Gain/(Loss) in Volume Figure 33. Analysis of Volume and Quartely Spread A contrary behavior is seen in an analyzes of the spread in semester basis. Even so there was an increase of R$313 million in the gross financial margin, in relation to the same period of the previous year, this growth was essentially caused by the increase in the volume of transactions, responsible for an expansion of R$849 million in the margin. This growth was attenuated by the reduction in the bank spread, which caused a downturn of R$481 million in the margin and a reduction of R$55 million as a result of the combined effect of volume and rate. The reduction in the spread was basically as result of the sharp fall in the average Selic rate TMS, which indexes the greater part of the securities portfolio. In addition, the loan portfolio showed a greater share of rural credit than in the same period of the previous year, and these transactions have a lower spread. Analisys of Volume and Half-yearly Spread Spread - % Volume - R$ million 1S S (481) (55) 7, Gain/(Loss) in Spread Gain/(Loss) in Volume and Spread Gain/(Loss) in Volume Figure 34. Analysis of Volume and Half-yearly Spread Volume - R$ million 1S04-224,132 1S03-201, Banco do Brasil Performance Analysis 2º Quater/2004

70 7.1.1 Analysis of Uses The spread for financial intermediation revenue in relation to remunerated assets decreased from 8.5% to 7.2% between 1S03 and 1S04, equivalent to annualized rates of 17.8% and 14.9%, respectively. The decrease in the spread was due chiefly to the lower Selic rate seen in the period and to the reduction in the rates in loan transactions. The improvement in the composition of the loan portfolio and the growth in volume minimized this effect. The effect of the reduction in the Selic rate is to be seen in the result from securities, which fell 28.9% in the first half of 2004 alone. Table 48. Investment Rate Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Assets Permanent Assets 198, , , , ,132 Financial Intermediation Income (Reallocated Income Statement) 8,407 7,622 8,462 17,186 16,084 Fin. Intermed. Income / (Assets Permanent Assets) Fin. Intermed. Income / (Assets Permanent assets) - annualized The balance of available funds in foreign currency increased between June 2003 and June 2004, due to the appreciation of the US dollar compared to the real, the effect of which was reflected in income from available funds in foreign currency. As a result of this movement, an increase in the spread from 0.7% 13.1% was to be seen (Jun/03 Jun/04). Table 49. Investment Rate on Available Funds in Foreign Currency Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Available Funds in Foreign Currency 4,124 6,103 7,813 5,417 6,958 Income from Available Funds in Foreign Currency (7) Annualized Rate - % (0.7) The result from securities in 1S04 totaled R$5,755 million, an amount 28.9% lower than that recorded in 1S03. This fall reflected the significant reduction in the TMS in the period. Table 50. Investment Rate on Securities and Interbank Investments Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Securities + Interbank Investments 73,970 98,569 83,162 77,362 90,865 Securities Income excluding Hedges 3,508 2,826 2,930 8,098 5,755 Annualized Rate - % Banco do Brasil Performance Analysis 2º Quater/2004

71 The table below shows the sources of revenues from securities. In 1S04, the accrual of revenues from the portfolio showed a fall of 27.3% (R$1,906 million) in relation to the same period of the previous year, basically because of the reduction in the average Selic rate, which varied 7.6% in 1S04, compared to 11.8% in the same period of the previous year. In addition, the result of marking-to-market MTM produced a negative effect of R$123 million in 1S04, compared to the positive effect of R$285 million in 1S03, generating a total negative effect of R$408 million. This movement refers to the slight worsening in Brazilian sovereign risk in 1S04, compared with the previous year. Table 51. Securities Income Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 on 1Q04 1H03 1H04 on 1H03 Securities Income 3,508 2,826 2,930 (16.5) 3.7 8,098 5,755 (28.9) Fixed Income Securities 3,286 2,492 2,537 (22.8) 1.8 7,316 5,029 (31.3) Revaluation Curve 3,221 2,491 2,586 (19.7) 3.8 6,983 5,077 (27.3) Income from Trading Marking to Market 42 (27) (97) (328.0) (123) (143.2) Others (7.2) The graph below presents the main indices in BB s securities portfolio. Securities Portfolio by Index 5.7% 5.3% 5.0% 4.6% Multiple Bank % Dollar Fixed TR TMS IGP/Others Figure 35. Securities Portfolio by Index Up to 1Q04, revenues from loans and leasing reached R$8,061 million, an increase of 10.1% in relation to the same period of the previous year. The rates observed went down from 27.3% to 23.7% in the period. The decrease in profitability was due to the greater share of rural credit transactions in the loan portfolio that occurred up to the first half of Table 52. Investment Rate on Loans and Leasing Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Loans + Leasing 58,368 70,443 73,086 57,147 71,764 Loans + Leasing Income 3,708 3,994 4,067 7,323 8,061 Annualized Rate - % Banco do Brasil Performance Analysis 2º Quater/2004

72 The graph below shows the changes in the spread on credit by portfolio. A greater reduction is to be seen in the spread on the retail portfolio in 2Q04. Spread by Loan Portfolio - % Q03 2Q03 3Q03 4Q03 1Q04 2Q Agribusiness Commercial Retail Source: Management data. Includes: financial revenues, opportunity cost and taxes. Figure 36. Spread by Loan Portfolio The behavior of the dollar explains the changes in the items below. The relationship of these accounts with exchange rate variation is show in the following graph. Table 53. FX Gain (Loss) and Other FX Operations Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 FX Gain (Loss) on Foreign Investments (729) (986) 286 Other FX Operations (506) (1.121) 541 FX Gain (Loss) and Other FX Operations 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 FX Gain/Loss on Foreign Exchange Other FX Operations Changer Dollar - % Figure 37. FX Gain (Loss) and Other FX Operations 72 - Banco do Brasil Performance Analysis 2º Quater/2004

73 7.1.2 Analysis of Fundings The fall in the Selic rate and in the TR in the period brought about a reduction in financial intermediation expenses, a reduction that was slightly attenuated by the increase in the exchange rate. In the period, the Bank s total cost of borrowing (intermediation expenses / assets permanent assets) decreased from 9.9% in 1S03 to 7.6% in 1S04. An analysis of 2Q04 in relation to 2Q03 shows a similar movement. Table 54. Funding Cost Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Assets Permanent Assets 198, , , , ,132 Financial Intermediation Expenses (4,883) (3,793) (4,537) (9,745) (8,330) Finan. Intermed. Expenses / (Assets Permanent Assets) Finan. Intermed. Expenses / (Assets Permanent Assets) Ann The increase in the cost of foreign borrowing can be seen in the table below. The depreciation of the Brazilian currency observed in 1S04 caused an increase in these expenses in the period, in relation to the same period of the previous year, when there was a downturn in exchange rates. The improve in the mix allowed the increase in the wheighted spreads of credit operations, even with a reduction in average spreads. The narrowing of the spread between the TR and TMS has reduced the weighted spreads of fundings. This movement is natural in moments of interest rates reductions. The same movement is not observed when there is an increase in the basic interest rate of the Brazilian economy increases, since the TR indexes a large part of rural lending and house financing operations. Table 55. Cost of Foreign Borrowing Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Foreign Borrowing 9,164 10,403 12,531 10,795 11,467 Expenses with Borrowing, Onlending, and Foreign Banks (55) (358) (1,200) (131) (1,558) Annualized Rate - % A downturn of 33.9% in expenses with deposits and money market borrowing was to be seen in 1S04, in relation to 1S03, and of 34.3% in 2Q04 in relation to the same period of the previous year. This movement is explained basically by the lower variation of the average Selic rate, which fell from 11.8% in 1S03 to 7.6% in 1S04. In addition, the referential rate (TR) decreased from 2.8% to 0.9% in the same period of comparison Banco do Brasil Performance Analysis 2º Quater/2004

74 Table 56. Cost of Deposits and Money Market Borrowing Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Deposits and Money Market Borrowing 141, , , , ,891 Expenses with Deposits and Money Market Borrowing 6 (4,524) (2,996) (2,972) (9,029) (5,968) Annualized Rate - % Savings Deposits 26,534 27,618 28,392 26,750 28,005 Expenses with Savings Deposits (761) (525) (561) (1,511) (1,086) Annualized Rate - % Interbank Deposits 5,116 6,730 7,580 5,074 7,155 Expenses with Interbank Deposits (60) (50) (52) (115) (102) Annualized Rate - % Time Deposits 46,931 48,117 48,928 45,547 48,522 Expenses with Time Deposits (1,440) (1,049) (1,124) (2,709) (2,173) Annualized Rate - % Money Market Borrowing 42,795 39,571 36,973 44,879 38,272 Expenses with Money Market Borrowing (2,264) (1,373) (1,235) (4,695) (2,608) Annualized Rate - % Demand Deposits 20,296 27,838 30,037 20,747 28,938 6 Expenses with Deposits and Money Market Borrowing except Expenses with Foreign Securities, Expenses with FGC on Demand Deposits, and Expenses with Debt Assumption Contracts Banco do Brasil Performance Analysis 2º Quater/2004

75 7.1.3 Analysis of the Spread The increase in the share of rural transactions, the significant reduction in the TMS, which indexes the greater part of the securities portfolio, coupled with the tightening of the spread between TMS and TR, have been causing a reduction in the overall spread of BB s financial intermediation. The increase to be seen in 2Q04 in relation to the immediately previous period reflects the improvement in the composition of loan transactions, which benefited from the increase in the share of retail loans in the portfolio. Changes in the Spread - % Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Figure 38. Changes in the Spread Table 57. Investment Rate, Funding Cost, and Spread Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Finan. Intermed. Income / (Assets Permanent Assets) Finan. Intermed. Income / (Assets Permanent Assets) Ann Finan. Intermed. Expenses / (Assets Permanent Assets) Finan. Intermed. Expenses / (Assets - Permanent Assets) Ann GFM / (Assets Permanent Assets) GFM / (Assets Permanent Assets) Annualized Banco do Brasil Performance Analysis 2º Quater/2004

76 7.1.4 Analytical Spread Table 58. Analytical Spread Investment Rates Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Remunerated Assets 158, , , , ,285 Available Funds in Foreign Currency 4,124 6,103 7,813 5,417 6,958 Income from Available Funds in Foreign Currency (7) Annualized Rate - % (0.7) Securities + Interbank Investments 73,970 98,569 83,162 77,362 90,865 Securities Income excluding Hedges 3,508 2,826 2,930 8,098 5,755 Annualized Rate - % Loans + Leasing 58,368 70,443 73,086 57,147 71,764 Loans + Leasing Income 3,708 3,994 4,067 7,323 8,061 Annualized Rate - % Remunerated Compulsory Deposit 21,983 10,708 11,614 21,770 11,161 Income from Compulsory Deposits Annualized Rate - % Other Remunerated Assets Other Income with Financial Intermediation Characteristics Annualized Rate - % Tax Credits 10,404 9,223 8,913 10,825 9,068 Other Assets 28,923 33,369 34,189 28,161 33,779 Permanent Assets 4,058 4,423 4,471 4,151 4,447 TOTAL ASSETS 202, , , , ,579 Table 59. Analytical Spread Funding Costs Average Balances in 2T03 1T04 2T04 1H03 1H04 Remunerated Liabilities 143, , , , ,006 Savings Deposits 26,534 27,618 28,392 26,750 28,005 Expenses with Savings Deposits (761) (525) (561) (1,511) (1,086) Annualized Rate - % Interbank Deposits 5,116 6,730 7,580 5,074 7,155 Expenses with Interbank Deposits (60) (50) (52) (115) (102) Annualized Rate - % Time Deposits 46,931 48,117 48,928 45,547 48,522 Expenses with Time Deposits (1,440) (1,049) (1,124) (2,709) (2,173) Annualized Rate - % Money Market Borrowing 42,795 39,571 36,973 44,879 38,272 Expenses with Money Market Borrowing (2,264) (1,373) (1,235) (4,695) (2,608) Annualized Rate - % Foreign Borrowing 9,164 10,403 12,531 10,795 11,467 Expenses with Foreign Borrowing, Onlending and Banks (55) (358) (1,200) (131) (1,558) Annualized Rate - % Onlending 6,068 7,840 8,266 6,023 8,053 Expenses with Onlending (123) (146) (159) (269) (304) Annualized Rate - % Financial and Development Funds + Subordinated Debt 6,291 7,022 7,306 6,156 7,164 Expenses with Financial and Development Funds (151) (241) (108) (252) (350) Annualized Rate - % Foreign Securities 1,055 1,348 1,388 1,008 1,368 Expenses with Foreign Securities (17) (26) (24) (39) (50) Annualized Rate - % Other Liabilities 47,637 72,238 58,544 48,751 65,391 Demand Deposits 20,296 27,838 30,037 20,747 28,938 Other Liabilities 27,341 44,400 28,507 28,004 36,453 Shareholders Equity + Income Accounts 10,734 12,483 13,882 10,342 13,183 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 202, , , , , Banco do Brasil Performance Analysis 2º Quater/2004

77 Table 60. Reconciliation with the Gross Financial Margin Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Financial Intermediation Income (Reallocated Income Statement) 8,407 7,622 8,462 17,186 16,084 Income from Remunerated Assets 7,709 7,174 7,776 16,425 14,950 Income from Financial Derivatives 73 (37) (194) (216) (231) FX Gain (Loss) on Foreign Investments (729) (986) 286 Other FX Operations (506) (1,121) 541 Other Operating Income 1,653 2 (2) 2,709 (0) Recovery of Write-offs Financial Intermediation Expenses (4,883) (3,793) (4,537) (9,745) (8,330) Expenses with Remunerated Liabilities (4,871) (3,767) (4,463) (9,721) (8,230) Expenses with FGC on Demand Deposits (12) (16) (17) (24) (33) Expenses with Debt Assumption Contracts - (10) (58) - (67) Other Expenses (0) - - (0) - Table 61. Main Components of the Spread Average Balances in 2Q03 1Q04 2Q04 1H03 1H04 Gross Financial Margin 3,524 3,829 3,925 7,441 7,754 Assets Permanent Assets 198, , , , ,132 Remunerated Assets 158, , , , ,285 Table 62. Investment Rates and Funding Costs Average Balances in 2T03 1T04 2T04 1H03 1H04 Finan. Intermed. Income / (Assets Permanent Assets) Finan. Intermed. Income / (Assets Permanent Assets) Ann Finan. Intermed. Expenses / (Assets Permanent Assets) Finan. Intermed. Expenses / (Assets Permanent Assets) Ann GFM / (Assets Permanent Assets) GFM / (Assets Permanent Assets) Annualized Finan. Intermed. Income / (Remunerated Assets) Finan. Intermed. Income / (Remunerated Assets) Annualized Finan. Intermed. Expenses / (Remunerated Assets) Finan. Intermed. Expenses / (Remunerated Assets) Annualized GFM / (Remunerated Assets) GFM / (Remunerated Assets) Annualized Banco do Brasil Performance Analysis 2º Quater/2004

78 7.1.5 Management Analysis of the Spread For this period, we carried out a management assessment of the spread in financial intermediation, by means of a reconciliation of the management information on the loan portfolio and on deposits and money market borrowing with the accounting information. The spread was assessed by comparing the gross financial margin of each investment and borrowing product with their respective volume. The gross financial margin is determined by taking into consideration the opportunity cost of each product. In the case of an investment in credit, for example, the gross financial margin is made up of the financial revenues from the product after deduction of the opportunity costs. In the case of a borrowing, the margin is determined by comparing the financial expenses with the respective opportunity revenue. The opportunity costs and revenues of each product are determined in accordance with its characteristics. As a general rule, the average Selic rate is adopted as a point of reference for the opportunity cost for the greater part of the products of financial intermediation. There are, however, exceptions like, for example, funding with savings, where the opportunity revenue is hybrid, that is, it is remunerated by the TMS on the free portion, by the rural CDI in the case of the portion invested in rural credit, and by TR+6% a year, in the case of the portion intended for the compulsory deposit. Accordingly, the gross spread of each product is determined by assessing its actual contribution to the formation of the result. Accordingly, the composition of the average semi-annual spread is shown below, while it should be observed that the spread on transactions with individuals where the risk vs. return ratio is better have been showing a systematic reduction, because of the downturn in the interest rates, which has been accompanied by the agroindustrial transactions. In addition, borrowings have also been showing a constant downturn, because of the decrease in the TMS, the basic index for calculating the opportunity revenues on borrowings. Table 63. Nominal Spread per Transaction % 1H03 2S03 1H04 Nominal Spread Loans Individuals Businesses Agribusiness Other Transactions (0.6) (0.7) 1.2 Fundings Other The systematic reduction in average spreads, in the case of the loan portfolio, has been offset by the improvement in the mix, in which transactions with individuals have been increasing their share. This movement can be perceived from the behavior of the weighted average spread, which demonstrates the alterations in the mix and in the nominal spreads, as shown in the following tables Banco do Brasil Performance Analysis 2º Quater/2004

79 Table 64. Composition of the Transactions % 1H03 2S03 1H04 Composition (Mix) Loans Individuals Businesses Agribusiness Other transactions Fundings Other The improvement in the mix brings an increase in the weighted spread of loan transactions, even with the reduction in the average spreads. The tightening of the spread between TR and TMS has been bringing about a systematic reduction in the weighted spread on borrowings. This movement is relatively natural at times of decreasing interest rates, since when there is an increase in the base rate of the economy, the TR does not usually accompany this movement, basically for indexing a significant portion of rural and property finance. Table 65. Weighted Spread per Transaction % 1H03 2S03 1H04 Weighted Spread Loans Individuals Businesses Agribusiness Other transactions Fundings Other Banco do Brasil Performance Analysis 2º Quater/2004

80 7.2 Net Financial Margin Table 66. Net Financial Margin Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 on 1Q04 1H03 1H04 on 1H03 Gross Financial Margin 3,524 3,829 3, ,441 7, Allowance for Loan Losses (863) (901) (903) (1,499) (1,804) 20.4 Net Financial Margin 2,661 2,929 3, ,942 5, The net financial margin is arrived at by deducting expenses with allowances for loan losses (PCLD) from the gross financial margin. The 20.4% increase in recurring PCLD in 1S04 in relation to the same period of the previous year has accompanied the growth of the loan portfolio (21.1%). The expenses with PCLD have represented around 1% of the average loan portfolio in each quarter. When we use the accumulated expense with PCLD in 12 months over the average loan portfolio in the same period, we arrive at a figure of 4.4% in 2Q04, compared to 5.0% in 2Q03, which reflects stability in the setting up of provisions in relation to the total of the portfolio. Table 67. Expenses with Allowance for Loan Losses over Portfolio 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 (A) Allowance for Loan Losses - Quarterly (834) (855) (636) (863) (747) (827) (901) (903) (B) Allowance for Loan Losses - 12 Months (2,515) (2,873) (2,916) (3,188) (3,101) (3,072) (3,337) (3,378) (C) Allowance for Loan Losses - 12 Months* (2,648) (3,005) (3,048) (3,188) (3,101) (3,072) (3,600) (3,786) (D) Loan Potfolio 62,930 62,900 65,715 68,662 72,601 77,636 79,647 83,131 (E) Average Portfolio 3 Months 60,123 62,391 64,650 67,125 70,484 76,550 78,823 82,283 (F) Average Portfolio 12 Months 55,155 57,425 60,622 63,572 66,163 69,702 73,245 77,035 Expenses over Portfolio (A/E) - % Expenses over Portfolio (B/F) - % Expenses over Portfolio (C/F) - % * With Extraordinary Items Expenses with Allowance for Loan Losses over Portfolio Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 (A) Allowance for Loan Losses - Quarterly (R$ million) Expenses over Portfolio (A/E) - % Expenses over Portfolio (B/F) - % Expenses over Portfolio (C/F) - % Figure 39. Expenses with Allowance for Loan Losses over Portfolio 80 - Banco do Brasil Performance Analysis 2º Quater/2004

81 The graph below breaks down allowances between the minimum required under CMN Resolution 2682 and provision amounts that exceed this minimum. Breakdown of Allowance 4,693 5,102 3, ,506 3, , , , ,852 3,142 3,124 3,374 3,549 3,637 3,915 4,128 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 40. Breakdown of Allowance Allowance Required Aditional Allowance Total Allowance Banco do Brasil s loan portfolio increased R$14,469 million (Jun03 - Jun04) and showed a different exposure to risk than in June The increase in transactions ranked as B and C was due chiefly to the revision of the methodology previously applied in transactions of an amount lower than R$50 thousand in the retail portfolio, as has been detailed in the 1Q04 s MD&A. At the end of June 2004, loans ranked as AA, A and B accounted for 79.1% of the total of the portfolio, compared to 85.3% in June Banco do Brasil continues to show a loan quality that is better than that of the National Financial System (NFS). Table 68. Loan Portfolio by Level of Risk Jun/03 Mar/04 Jun/04 Balance Allowance Comp. % Balance Allowance Comp. % Balance Allowance Comp. % *NFS AA 14, , , A 29, , , B 14, , , C 4, , , D 2, , , E F G H 2,160 2, ,376 2, ,508 2, Total 68,662 3, ,647 3, ,131 4, AA-B 58, , , C-D 6, , , E-H 3,436 2, ,706 3, ,958 3, * Preliminary data for June/ Banco do Brasil Performance Analysis 2º Quater/2004

82 The ratio of the portfolio net of allowances (CLP) over the total portfolio (CT) - (CLP/CT) demonstrates the overall assessment of the weighted portfolio, in accordance with CMN Resolution The following graph shows that Banco do Brasil has maintained a better quality in its loan portfolio than the National Financial System. BB CLP/CT vs. NFS - % Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dez/03 Mar/04 Jun/04 BB NFS Figure 41. BB CLP/CT BB vs. NFS 82 - Banco do Brasil Performance Analysis 2º Quater/2004

83 In June 2004, past due loans accounted for 5.1% of the total of the loan portfolio, while the allowance for loan losses amounted to 6.1% of the portfolio. This shows that the PCLD covers the total balance of the past due loans. Should only the loans past due over 60 days be taken into consideration, the PCLD would cover 193.3% of these transactions, compared to 171.6% in June Table 69. Delinquency Ratio 2Q03 1Q04 2Q04 1H03 1H04 Loan Portfolio 68,662 79,647 83,131 68,662 83,131 Past Due Loans 3,610 4,144 4,256 3,610 4,256 Past Due Loans/Loan Portfolio - % Past Due Loans + 15 days 3,497 4,026 4,128 3,497 4,128 Past Due Loans + 15 days/loan Portfolio - % Past Due Loans + 60 days 2,228 2,557 2,639 2,228 2,639 Past Due Loans + 60 days/loan Portfolio - % Write-off ,087 1,327 Recovery of Write-offs (207) (224) (315) (376) (539) Net Loss Net Loss/Loan Portfolio - % annualized Allowance 3,823 4,693 5,102 3,823 5,102 Allowance/Loan Portfolio - % Allowance/Past Due Loans + 15 dias - % Allowance/Past Due Loans + 60 dias - % The figure below shows stability in the levels of delinquency in the loan portfolio. Delinquency Ratio - % Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Past Due Loans / Loan Portfolio Past Due Loans + 15 days / Loan Portfolio Past Due Loans + 60 days / Loan Portfolio Figure 42. Delinquency Ratio 83 - Banco do Brasil Performance Analysis 2º Quater/2004

84 7.2.1 Retail Loan Portfolio The retail loan portfolio has shown a fall in quality in June Loans ranked at risk levels B and C grew, going up from 12.6% to 77.6% (Jun03 - Jun04). These loans increased their share from March 2004 due to the revision in the methodology for rating risk in loans of under R$50 thousand. Should loans ranked from AA to C be taken into consideration, it can be seen that the composition of the risk has been maintained, totaling 86.5% in June 2004 and 85.9% in June Table 70. Retail Loan Portfolio by Level Risk Jun/03 Mar/04 Jun/04 Balance Allowance Comp. % Balance Allowance Comp. % Balance Allowance Comp. % AA A 10, , , B 1, , , C , , D E F G H ,211 1, , Total 14,275 1, ,797 1, , AA-B 11, , , C-D , , E-H 1,583 1, ,959 1, , The following table details the movement in allowances for loan losses in the retail portfolio. Retail PCLD increased mainly because of the reinforcement brought about by the revision mentioned above, that is, there was a worsening of risk. Table 71. Changes in the Allowance - Retail 2Q03 1Q04 2Q04 1H03 1H04 Retail Loan Portfolio 14,275 17,797 19,085 14,275 19,085 Initial Allowance 1,255 1,599 1,858 1,188 1, Risk Migration ,020 a) Risk Deterioration ,045 1,421 b) Risk Improvement (223) (242) (159) (384) (401) 2 New Transactions Write-offs (303) (363) (414) (594) (778) Total ( ): Other Impacts* (22) (74) (54) (46) (128) Final Allowance 1,366 1,858 2,014 1,366 2,014 Allowance Required by CMN Resolution ,358 1,858 2,014 1,358 2,014 *Amortization, settlement, installments, and charges 84 - Banco do Brasil Performance Analysis 2º Quater/2004

85 7.2.2 Commercial Loan Portfolio The 13.3% growth of the commercial portfolio was accompanied by an improvement in risk (Jun03 - Jun04). The levels of risk AA, A and B now comprised 89.5% of the total of the portfolio at the end of June 2004, compared to 88.2% at the end of June Credits rated C and D decreased from 9.0% to 8.0% in the same period. Table 72. Commercial Loan Portfolio by Level Risk Jun/03 Mar/04 Jun/04 Balance Allowance Comp. % Balance Allowance Comp. % Balance Allowance Comp. % AA 3, , , A 5, , , B 3, , , C D E F G H Total 14, , , AA-B 13, , , C-D 1, , , E-H The table of movement in PCLD shows that the risk deterioration movement was practically offset by risk improvement, so that the increase in the allowance is explained by new transactions contracted. Table 73. Changes in the Allowance Commercial 2Q03 1Q04 2Q04 1H03 1H04 Commercial Loan Portfolio 14,965 16,110 16,957 14,965 16,957 Initial Allowance Risk Migration a) Risk Deterioration b) Risk Improvement (137) (191) (121) (265) (312) 2 New Transactions Write-offs (92) (82) (85) (166) (167) Total ( ): Other Impacts* (19) (73) (30) (45) (103) Final Allowance Allowance Required by CMN Resolution *Amortization, settlement, installments, and charges 85 - Banco do Brasil Performance Analysis 2º Quater/2004

86 7.2.3 Agribusiness Loan Portfolio The quality of the agribusiness loan portfolio shows in practice the efficiency of the specialized mechanisms for granting credit and BB s expertise in managing rural credit. The 18.8% growth (Jun03 - Jun04) in this portfolio was accompanied by the maintenance of the ranking of the transactions at levels of risk AA to C, which comprised 95.8% of the total of the portfolio in June 2004, compared to 96.7% in June Table 74. Agribusiness Loan Portfolio by Level Risk Jun/03 Mar/04 Jun/04 Balance Allowance Comp. % Balance Allowance Comp. % Balance Allowance Comp. % AA 3, , , A 8, , , B 6, , , C 1, , , D E F G H Total 21, , , AA-B 18, , , C-D 2, , , E-H An analysis of the following table shows that the reinforcement in the allowance for rural loans was due to setting up an allowance for risk deterioration, due to the change in the methodology for rating retail loans below R$50 thousand, which had the effect of dragging down agribusiness loans. Risk deterioration was, however, partly offset by the movement of risk improvement in the portfolio. Table 75. Changes in the Allowance Agribusiness 2Q03 1Q04 2Q04 1H03 1H04 Agribusiness Loan Portfolio 21,519 25,907 25,573 21,519 25,573 Initial Allowance Risk Migration (3) 156 (32) (18) 124 a) Risk Deterioration b) Risk Improvement (155) (166) (277) (314) (443) 2 New Transactions Write-offs (59) (34) (46) (101) (80) Total ( ): Other Impacts* (5) (103) (11) (5) (114) Final Allowance Allowance Required by CMN Resolution *Amortization, settlement, installments, and charges 86 - Banco do Brasil Performance Analysis 2º Quater/2004

87 7.2.4 Foreign Trade Loan Portfolio The foreign trade portfolio recorded an increase of 16.5% (Jun03 - Jun04) accompanied by an improvement in the quality of the loans in this portfolio. Loans rated at levels of risk AA, A and B increased their share from 81.5% in June 2004 to 83.1% in June Loans rated C and D also increased their share, which went up from 14.7% to 16.4% in the same period. The loans rated between E and H reduced their share, going down from 3.8% to 0.5%. Table 76. Foreign Trade Loan Portfolio by Level Risk Jun/03 Mar/04 Jun/04 Balance Allowance Comp. % Balance Allowance Comp. % Balance Allowance Comp. % AA 1, , , A 2, , , B 2, , , C , , D E F G H Total 7, , , AA-B 6, , , C-D 1, , , E-H The table below shows that the risk management of the already contracted loans of the foreign trade finance portfolio was sufficient to cover the movement of risk deterioration recorded in the portfolio and even to partly offset the new allowances for credit risk. Table 77. Changes in the Allowance Foreign Trade 2T03 1T04 2T04 1H03 1H04 Carteira de Crédito para o Comércio Exterior 7,563 8,217 8,810 7,563 8,810 Initial Allowance Risk Migration (51) (50) (48) (117) (99) a) Risk Deterioration b) Risk Improvement (132) (66) (69) (250) (136) 2 New Transactions Write-offs (37) (43) (10) (84) (53) Total ( ): 94 (7) Other Impacts* (62) (12) (11) (45) (23) Final Allowance Allowance Required by CMN Resolution *Amortization, settlement, installments, and charges 87 - Banco do Brasil Performance Analysis 2º Quater/2004

88 7.2.5 Foreign Loan Portfolio The table below shows the risk profile of BB s international loan portfolio. In June 2004, loans ranked at levels of risk between AA and B had a 90.2% share of the total, while in June 2003 these levels of risk showed an even greater concentration, amounting to 93.6% of this portfolio. Table 78. Loan Portfolio Abroad Jun/03 Mar/04 Jun/04 Balance Allowance Comp. % Balance Allowance Comp. % Balance Allowance Comp. % AA 5, , , A 1, , , B , , C D E F G H Total 8, , , AA-B 7, , , C-D E-H Banco do Brasil Performance Analysis 2º Quater/2004

89 7.3 Contribution Margin Table 79. Contribution Margin Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 on 1Q04 1H03 1H04 on 1H03 Net Financial Margin 2,661 2,929 3, ,942 5, Service Revenues 1,343 1,553 1, ,561 3, Taxes on Revenues (241) (284) (323) (473) (607) 28.3 Contribution Margin 3,763 4,197 4, ,030 8, The contribution margin comprises the results from the Bank s financial activity (net financial margin), after adding on service revenues (RPS), and deducting taxes on revenues (Pasep, Cofins and ISSQN). The 22.3% growth in service revenues and 13.5% growth in the net financial margin allowed the contribution margin to increase 15.4% between 2Q03 and 2Q04, to reach R$4,341 million. The graph below shows the percentage growth of service revenues of one quarter in relation to the same period of the previous year, showing that since the beginning of 2003 Banco do Brasil has been achieving an average growth of 23.8% in these revenues. Growth in Service Revenues - X t /X t-4 % Figure 43. Growth in Service Revenues 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q Banco do Brasil Performance Analysis 2º Quater/2004

90 The table below shows further details of the service revenues. The largest revenues in this group are the customer relationship fees and those coming from asset management. Table 80. Service Revenues Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 on 1Q04 1H03 1H04 on 1H03 Service Revenues 1,343 1,553 1, ,561 3, Customer Relationship Fees Investment Fund Management Fees Loan Fees Collections Services Provided to Related Companies (0.3) Funds Transfers (1.8) Credit Cards Others Banco do Brasil Performance Analysis 2º Quater/2004

91 Changes in the Composition of Service Revenues - % Customer Relationship Fees Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Investment Fund Management Fees Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Loan Fees Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Collections Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Services Provided to Related Companies Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Funds Transfers Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Credit Cards Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Others Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Figure 44. Changes in the Composition of Service Revenues 91 - Banco do Brasil Performance Analysis 2º Quater/2004

92 7.3.1 Revenues from Customer Relationship Fees Revenues from customer relationship fees totaled R$510 million in 2Q04, an increase of 26.7% in relation to 2Q03. These revenues have maintained their share in the total of service revenues at around 30%. The graph below shows that the revenues from customer relationship fees have grown more than the customer base, which shows that the Bank has been succeeding in strengthening its business ties with its customers. Revenues from Relationship Fees and the Customer Base 56.2% 33.9% 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Revenues from Customer Relationship Fees (base 100) Customer (base 100) Figure 45. Revenues from Relationship Fees and the Customer Base At the end of June 2004, BB reached the historic mark of 20 million customers, having grown 20% in relation to the same period of the previous year, and bringing forward by six months meeting its target for the end of Customer Base in thousand 14,001 14,399 14,905 15,645 15,937 17,534 18,047 18, ,005 1,073 1,112 1,217 1,228 1,274 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Individuals Businesses Figure 46. Customer Base 92 - Banco do Brasil Performance Analysis 2º Quater/2004

93 7.3.2 Asset Management In 2Q04, the Bank received R$242 million in fund management fees, an amount 32.2% higher than the figure for 2Q03. The share of fund management fees in the total of RPS went up from 13.6% in 2Q03 to 14.7% in 2Q04. BB Administração de Ativos Distribuidora de Títulos e Valores Mobiliários (BB DTVM), a full subsidiary of the Bank, showed 40.5% growth in the volume of assets under management in the last 12 months, which totaled R$116.9 billion (a 19.9% share in the Brazilian market) at the end of 2Q04. This volume of managed assets confirms BB s leadership as the largest asset manager in Latin America. Asset Management R$billion Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 47. Asset Management Asset Management Market Share - % The assets managed by BB DTVM have funds for different kinds of customer. Table 81. Investment Funds and Managed Portfolios by Customer Chg. % Jun/03 Share % Mar/04 Share % Jun/04 Share % on Jun/03 on Mar/04 Individuals 22, , , Businesses 9, , , (13.4) Government 11, , , (1.8) 8.4 Institutional investors 38, , , Foreign investors , , Others (16.4) 14.5 Total 83, , , Banco do Brasil Performance Analysis 2º Quater/2004

94 Investment Funds and Managed Portfolios R$billion Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 48. Investment Funds and Managed Portfolios BB Bradesco Itaú CEF Investment Funds R$billion Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 49. Investment Funds BB Bradesco Itaú CEF Managed Portfolios and Investment Clubs R$billion Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 50. Managed Portfolios and Investment Clubs Bradesco Itaú Unibanco BB 94 - Banco do Brasil Performance Analysis 2º Quater/2004

95 7.3.3 Credit Cards The share of revenues from credit cards in the total of RPS amounted to 8.6% in 2Q04. These revenues totaled R$141 million in the quarter, growing 23.1% in relation to the same period of the previous year. Between May 2003 and May 2004, Banco do Brasil expanded its credit card base by 24.2%, ending the month of June with 6.1 million cards, while the market showed 14.0% growth in the same period. Credit Cards in millions Figure 51. Credit Cards Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Credit Card Sales by Brand Jan/04 Feb/04 Mar/04 Apr/04 May/04 Jun/04 Visa Mastercard Figure 52. Credit Card Sales by Brand 95 - Banco do Brasil Performance Analysis 2º Quater/2004

96 7.3.4 Collections Revenues from collections increased 30.8% in the course of one year, to reach R$157 million. In June 2004, BB had over 327 thousand active collection agreements. BB Collection Volume 41,664 48,507 50,645 55,831 59,106 66,385 66,107 71,949 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Figure 53. BB Collection Volume 96 - Banco do Brasil Performance Analysis 2º Quater/2004

97 7.4 Commercial Income Table 82. Commercial Income Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 on 1Q04 1H03 1H04 on 1H03 Contribution Margin 3,763 4,197 4, ,030 8, Administrative Expenses (2,466) (2,735) (3,093) (5,175) (5,828) 12.6 Personnel Expenses (1,481) (1,574) (1,675) (2,990) (3,249) 8.7 Other Administrative Expenses (955) (1,126) (1,381) (2,125) (2,507) 18.0 Other Tax Expenses (30) (34) (37) (61) (72) 18.6 Commercial Income 1,297 1,462 1,248 (3.8) (14.6) 2,855 2,710 (5.1) Commercial income represents the Bank s business earnings after the deduction of the expenses necessary for carrying on the business. In 2Q04, BB earned R$1,248 million under this heading, a reduction of 3.8% in relation to 2Q03 and of 14.6% compared with 1Q04. This is explained mainly by the increase in provisions for civil lawsuits, booked under other administrative expenses. Changes in Commercial Income 3T02 4T02 1T03 2T03 3T03 4T03 1T04 2T04 Margem Financeira Líquida Margem de Contribuição Resultado Comercial Figure 54. Changes in Commercial Income 97 - Banco do Brasil Performance Analysis 2º Quater/2004

98 7.4.1 Personnel Expenses Personnel expenses went up from R$1,481 million in 2Q03 to R$1,675 million in 2Q04, an increase of 13.1%. Expenses directly related to remuneration showed an increase of R$201 million (15.0%), explained by the 2003/2004 Collective Salary Agreement, which guaranteed BB staff a 12.6% salary increase. As to the other items, it is worth pointing out the 33.5% reduction in the volume of expenses with labor lawsuits in 1S04. Table 83. Personnel Expenses Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 on 1Q04 1H03 1H04 on 1H03 Personnel Expenses (1,481) (1,574) (1,675) (2,990) (3,249) 8.7 Salaries (764) (721) (831) (1,402) (1,552) 10.7 Benefits (170) (182) (191) (328) (374) 13.9 Social Charges (293) (269) (312) (532) (581) 9.1 Training (8) (6) (11) (13) (17) 31.7 Remuneration for Counselors and Directors (1) (1) (2) (3) (3) 19.6 Administrative Personnel Provisions (111) (273) (206) 84.9 (24.7) (345) (479) 38.6 Labor Lawsuits (133) (121) (122) (8.2) 1.2 (366) (243) (33.5) Provisions for Labor Lawsuits (73) (60) (49) (33.1) (18.0) (265) (109) (58.9) Losses in Labor Lawsuits (60) (61) (73) (101) (134) 32.9 Banco do Brasil ended the period with 92,606 collaborators, a workforce 2.6% higher than recorded in 2Q03. However the ratio colaborates (Branch + Advanced Service Post and Banking Service Post) has benn in an average of 17. Changes in the Workforce 10,276 9,540 10,634 10,781 10,821 10,181 10,552 10,670 88,309 78,033 88,159 78,619 79,527 90,161 90,255 79,474 79,710 90,531 80,640 90,821 81,795 92,347 92,606 81,936 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Figure 55. Changes in the Workforce Total Employees Interns 98 - Banco do Brasil Performance Analysis 2º Quater/2004

99 7.4.2 Other Administrative Expenses Other administrative expenses in 2Q04 totaled R$1,381 million, an increase of 44.7% in relation to 2Q03. Table 84. Other Administrative Expenses Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q03 1Q04 2Q04 on 2Q03 On 1Q04 1H03 1H04 on 1H03 Other Administrative Expenses (955) (1,126) (1,381) (2,125) (2,507) 18.0 Telecommunications and Data Processing (272) (302) (316) (535) (618) 15.5 Amortization and Depreciation (119) (115) (138) (238) (253) 6.1 Security, Guard and Transport Services (155) (170) (171) (312) (341) 9.1 Expenses with Premises and Equipment (129) (151) (154) (258) (305) 18.4 Marketing and Public Relations (59) (55) (104) (104) (159) 52.1 Expenses with Outsourced Services (83) (103) (121) (166) (225) 35.5 Other Administrative Expenses (139) (229) (377) (511) (607) 18.8 The items most directly related to the running of the business (telecommunications and data processing, security, guard and transport services, property and equipment, and outsourced services) added up to R$762 million, showed growth of 19.2% in relation to 2Q03, which is explained by the following factors: % increase in the IGP DI (2Q03-2Q04) items like telephony, postage, outsourced services, rents and others are adjusted for inflation; - 9% expansion in the service network opening new points of service has a direct implication for an increase in the greater part of the items making up administrative expenses; - 20% increase in the customer base the increase in the quantity of customers, besides the increase in the points of service, has an influence on the quantity of correspondence sent, data processing, use of the self-service channels, etc. Under the heading of Marketing and Public Relations, the increase of 77.9%, corresponding to R$45 million was largely due to the launch of Banco do Brasil s Institutional Campaign for 2004 (Values Campaign). The increase of R$238 million in other administrative expenses to be seen in 2Q04 is explained in great measure by the increase in the volume of provision for civil lawsuits Banco do Brasil Performance Analysis 2º Quater/2004

100 7.4.3 Distribution Network Banco do Brasil is present in 2,957 municipalities all over the Brazilian territory. At the end of June 2004, the Bank s service network comprised 13,908 services points (growing 9% in relation to June 2003), classified as follows: Table 85. Distribution Network Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Branches 3,134 3,164 3,183 3,209 3,218 3,241 3,564 3,618 PAA PAB 1,601 1,595 1,606 1,598 1,576 1,562 1,541 1,520 PAE 7,007 7,135 7,315 7,507 7,693 7,961 8,245 8,565 PAP Total 12,175 12,333 12,545 12,755 12,930 13,220 13,549 13,908 The Bank s distribution network is divided into 4 types of points of service, besides the branches: PAA Advanced Service Post: these are points of service intended for towns without a bank. They have a small staff and automated teller machines; PAB Banking Service Post: this type of unit is located inside the premises of companies or government offices. This service requires one employee and automated teller machines; PAE Electronic Service Point: Services are available through a automated teller machine; and PAP Payment and collection post: located mainly in government offices (town halls) for carrying out receipts and payments. Employees and automated teller machines provide the service. Total Distribution Network North Branches 214 Others 768 Total 982 BB 7.1% BB 11.4% BB 24.8% Northeast Branches 921 Others 2,525 Total 3,446 Midwest Branches 353 Others 1,239 Total 1,592 South Figure 56. Total Distribution Network Branches 751 Other 1,999 Total 2,750 BB 36.9% BB 19.8% Southeast Branches 1,379 Others 3,759 Total 5,138 Besides its own network, BB has a network of banking correspondents (Aqui tem BB), which at the end of the 2Q04 included 2,188 points of service and 14,067 cashiers for receiving payment books, taxes and bank bills. This network was responsible for over 31 million transactions that totaled R$5,371 million in the period Banco do Brasil Performance Analysis 2º Quater/2004