Economic Environment

Transcription

1 Economic Environment In the first half of the year, investor confidence, which had already been weakened by slow growth in the world s developed economies, deteriorated even further as a result of news involving accounting irregularities in the financial statements of large U.S. corporations. As the general appetite for risk decreased, stock markets around the world responded creating downward momentum; the devaluation of the U.S. dollar in relation to the Euro and the Japanese Yen accelerated; and the prices of securities linked to developing economies and traded on international markets came under pressure. In addition to these factors, the close proximity of elections in Brazil and expectations with respect to changes in economic and fiscal policies after these same elections also contributed to perceptions that resulted in an increase in sovereign risk, which ended the first half of the year at 1,527 points, or 665 basis points above the level reported at the beginning of January Despite these adverse conditions, foreign borrowing by Brazilian financial institutions, including a US$ 300 million transaction involving the Banco do Brasil, classified AAA (maximum security) by the international rating agencies, Moody s and Standard & Poor s, was not contaminated by the increase in sovereign risk. The exchange rate of the Brazilian real in relation to the U.S. dollar reached R$ 2.84, compared to R$ 2.32 in December 2001 (nominal variation of 22.4%). The devaluation of the currency placed upward pressure on inflation. Accumulated inflation over the past twelve months, as measured by the IPCA index, reached 7.7% in June, primarily because of increases in controlled prices. Consequently, the Brazilian Central Bank interrupted the trend toward a more liberal monetary policy, holding the basic market (SELIC) interest rate at 18.5% p.a. as of April. As a result of this slow-growth scenario, the reduction in real income, and high interest rates and volatility, the cost of lending increased, requiring greater vigilance on the part of banks with respect to the management of their assets and liabilities. % 2 nd Qtr01 1 st Qtr02 2 nd Qtr02 1 st Half01 1 st Half02 Variation in avg. US$/R$ exchange rate (Ptax sell) Change in IGP-DI index Change in IGP-M index Accumulated change in the basic market interest rate (Selic) Accumulated change in the referential rate (TR)

2 Financial Statements Consolidated Balance Sheet Brazilian Corporate Law Assets June/01 March/02 June/02 In relation to In relation to June/01 March/02 Current and long-term assets 142, , , Available funds 3,339 7,157 7, Short-term interbank investments 5,966 9,562 4, Marketable securities 49,885 64,925 68, Securities for trading 0 0 3, Securities available for sale , Securities held to maturity , Derivatives Interbank accounts 8,947 11,298 11, Intrabank accounts Loans 36,394 42,802 46, Public sector 4,014 4,239 4, Private sector 34,444 41,025 44, (Allowance for loan losses) -2,064-2,462-2, Leasing Leasing and subleasing receivables (Unearned lease income) (Allowance for leasing transactions) Other receivables 37,327 27,832 26, Receivable on guarantees honored Foreign exchange portfolio 7,866 7,047 8, Income receivable Trading and brokerage of securities Specific credits 8,762 2, Special operations Tax credits 12,354 11,906 11, Other assets 8,269 5,672 5, Provision for Other Receivables ,5-33,8 Other assets Other assets (Provision for possible losses) ,9 1,0 Prepaid expenses Permanent assets 4,355 4,460 4, Investments 1,190 1,333 1, Property and equipment 2,194 2,226 2, Leased assets Deferred charges Total assets 146, , ,

3 Financial Statements Consolidated balance sheet Brazilian Corporate Law Liabilities and Stockholders Equity June/01 March/02 June/02 In relation to June/01 In relation to March/02 Current and long-term liabilities 138, , , Deposits 71,264 78,627 79, Demand deposits 15,060 17,237 18, Savings deposits 20,609 21,614 22, Interbank deposits 4,249 4,454 5, Time deposits 31,345 35,322 33, Money market borrowing 29,520 39,341 37, Funds from acceptances and issue of securities 1,194 1, Foreign securities 1,194 1, Interbank accounts 2,195 2,882 2, Intrabank accounts Borrowing 6,608 8,931 10, Foreign borrowing 6,608 8,931 10, Local onlending Official institutions 5,274 4,763 4, Federal Treasury National Development Bank (BNDES) 1,847 2,259 2, Federal Savings and Loan Bank (CEF) Federal Capital Goods Financing Program (FINAME) 1,459 1,716 1, Other institutions 1, Foreign onlending Derivatives Other liabilities 21,107 22,938 23, Collection of taxes and contributions 729 1,059 1, Foreign exchange portfolio 4,295 2,699 2, Stockholders and statutory ,400.0 Taxes and social security Trading and brokerage of securities 516 2,164 2, Financial and development funds 1,736 1,773 1, Special operations Sundry payables 10,039 10,788 14, Actuarial liabilities 5,658 4,980 5, Subordinated Debt 2,977 3,583 3, Other 1,404 2,226 5, Deferred income Stockholders equity 8,192 8,749 7, Capital 5,587 7,436 7, Capital Reserves Revaluation Reserves Profit Reserves 2,567 1,274 2, Mark to market - securities and derivatives -1, Income accounts Total liabilities and stockholders equity 146, , ,

4 Statement of Income Brazilian Corporate Law In the quarter Percentag e change First half of the year 2 nd Qtr01 1 st Qtr02 2 nd Qtr02 In relation In relation 1 st Half01 1 st Half02 Percentage to 2 nd to 1 st change Qtr01 Qtr02 Revenue from financial intermediation 4,827 5,715 9, ,822 15, Loans 2,653 2,810 3, ,097 6, Leasing Securities 1,201 2,372 3, ,127 5, Derivatives Foreign exchange portfolio , ,099 2, Compulsory investments Expenses with financial intermediation -3,197-3,839-8, ,780-11, Money market funds -2,191-2,798-2, ,241-5, Borrowing, assignments, and -1, , ,003-4, onlending Provision for non-accrual loans , Gross result from financial 1,629 1,876 1, ,041 3, intermediation Other operating income/expenses -1,431-1, ,681-1, Service revenues 919 1,029 1, ,797 2, Personnel expenses -1,316-1,296-1, ,610-2, Other administrative expenses ,788-1, Taxes Equity interest in the results of , , , affiliated and subsidiary companies Other operating income , Other operating expenses -1, , Operating income , Non-operating income Income before taxes , Income and social contribution taxes Statutory profit sharing Net income Banco do Brasil reported net income of R$ 474 million at the end of the second quarter of 2002; this amount was 183.8% higher than the same period in the prior year. Stockholders equity totaled R$ 7,894 million and the annualized return on the average equity was 24.1%. Net income for the first six months of the year reached the record amount of R$ 823 million. Based on this performance, the Banco do Brasil allocated R$ 307 million in dividends for payment to its stockholders. 4

5 Since the final implementation of the Program to Strengthen Federal Financial Institutions in June 2001, Banco do Brasil has presented a sequence of favorable and consistent results. Balanced expansion of the loan portfolio, consistent growth in the number of customers, rigorous control of expenses, and reduction of the Conglomerate s exposure to risk have been fundamental to guarantee sustained growth in income for the Institution. Banco do Brasil (BB) continues in its position as the leading lender in Brazil. In June 2002, BB s loan portfolio totaled R$ 57 billion, growth of 18.4% over June, BB is also ranked first among banks in Brazil in total assets, R$ 170 billion, 15.8% increase over June, 2001, in funding, R$ 117 billion, 16.3% increase over June, 2001, and in Asset Management, R$ 63.6 billion, 17.2% share of the Brazilian market. By concentrating on its fundamental business segments Retail, Wholesale, and Government the Bank has been able to create ever-stronger relationships with its customers. As a result of this structure, the Banco do Brasil has more closely aligned itself with best market practices, allowing more autonomy for the business and administrative areas responsible for these segments and integrating product management, customers, and distribution channels. BB ended the first half consolidating its position as the largest retail bank in Brazil. Its 14.5 million customers have access to approximately nine thousand points of service. Products and services of Banco do Brasil are available through the largest automated teller network in Latin America. There are 33 thousand ATM s distributed among over 2,700 cities in Brazil. Loan revenue totaled R$ 3,603 million in the second quarter of 2002, increasing 35.8% in relation to the same period in the prior year. Business development was focused in the Middle Market and Wholesale segments. As of June 2001, total loans represented 51,1% of Brazil s total volume of credit; this portfolio grew to a total share of 54,5% in June The new configuration of the Bank s securities portfolio, the performance of the Selic interest and the exchange rate resulted in growth of 166.1% in securities income in the second quarter of 2002, compared to the same period in the prior year. In the second quarter of 2002, service revenues rose 23.8% in relation to the second quarter of 2001, permitting the coverage ratio (Service revenue/personnel expenses) to shift from 67,9% to 86,0%. Growth in fees from investment fund management and customer services contributed to this level of performance. The Bank has also demonstrated progress with respect to expenses. Expenses with personnel remained stable in the second quarter of 2002, compared to the same period in the prior year. Even after considering the expansion in the service network, other administrative expenses rose only 5.9% in the quarter, compared to the same period in The result of stronger growth in revenues in relation to expenses is evident in the efficiency ratio, which weighed in at 60.7% in the second quarter of this year, compared to 69.7%, in the second quarter of last year. 5

6 Statement of Income Including reallocations In the quarter Percentage change In the first half of the year 2 nd Qtr 1 st Qtr/02 2 nd Qtr In relation to /01 /02 2 nd Qtr01 In relation to 1 st Qtr02 1 st Half/01 1 st Half/02 Percentage change A) Income from financial intermediation 5,711 6,068 10, ,880 16, Loans 2,516 2,810 3, ,960 6, Leasing Securities 1,201 2,487 3, ,127 5, Derivatives Foreign exchange portfolio , ,099 2, Compulsory investments Foreign exchange gain (loss) on foreign investments , Other operating income/expenses B) Financial intermediation expenses -3,334-3,246-7, ,244-10, Money market borrowings -2,191-2,798-2, ,241-5, Borrowing, assignments, and onlending -1, , ,003-4, C) Gross financial margin 2,377 2,822 2, ,637 5, Allowance for non-performing loans ,260-1, D) Net financial margin 1,791 2,229 2, ,377 4, Service revenues 919 1,029 1, ,797 2, Taxes on sales E) Contribution margin 2,578 3,091 3, ,928 6, F) Administrative expenses -2,262-2,211-2, ,462-4, Personnel expenses -1,354-1,296-1, ,610-2, Other administrative expenses ,788-1, Other taxes G) Commercial income , H) Other operating income ,610.0 Other operating income Other operating expenses Equity interest in the results of affiliated and subsidiary companies I) Operating income , Non-operating income J) Income before profit sharing, income taxes, and extraordinary items , Statutory profit sharing Income and social contribution taxes K) Income before extraordinary items L) Extraordinary items Extraordinary reversal of provision for credit risk Extraordinary provision for credit risk Foreign exchange gains Adjustments to loan income Supplementary contribution of 50% to Previ Other provisions Mark to market - securities M) Net income

7 Analysis of reallocated results Below, we demonstrate and explain adjustments made to the Statement of Income to obtain reallocated results. We point out that these adjustments do not change the final result, since their purpose is simply to more clearly and objectively present expense and income items, taking into consideration the workings of a financial institution. In essence, these adjustments seek to: a) Allow the financial margin reported in the period to accurately reflect income from all remunerated 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 income recorded in other operating income that had intermediation characteristics and which was derived from profitable assets recorded in the balance sheet under other assets in the financial margin; Identify the foreign exchange gain/(loss) on foreign assets and liabilities in the quarter in a specific financial margin item (Financial Equity); Retain 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. Income from financial intermediation (1) In order to maintain consistency and comparability, the provision for loss on securities in the amount of R$ 114 million was reallocated. This amount was provisioned in the first quarter of 2002 following the criteria in force before the implementation of BACEN Circular Since this procedure was reversed in the next quarter, this reallocation returned the expense to securities income in the first quarter of 2002 and excluded the income attributable to the reversal from securities income for the second quarter of The respective counter entries were recorded in extraordinary items; (2) Other operating income of a financial intermediation nature (Second quarter of 2001 R$ 420 million; First quarter of 2002 R$ 247 million; Second quarter of 2002 R$ (42) million; First half of 2001 R$ 813 million; First half of 2002 R$ 205 million) was reallocated to the account, other operating income, included in the gross financial margin; In the quarter In the first half of the year 2 nd Qtr01 1 st Qtr02 2 nd Qtr02 1 st Half01 1 st Half02 Adjustment to social security ( INSS) debt Income from specific credits Income from other operations Total The INSS debt was settled in December Beginning in January 2002, this account will no longer receive credits. 7

8 (3) A total of R$ 41 million in the first quarter of 2002 and R$ (41) million in the second quarter recorded in other operating income were reallocated to the gross financial margin. Reallocation of R$ 140 thousand in the first quarter of 2002 and R$ (140) thousand in the first quarter of the same year recorded in other operating expenses to the gross financial margin. These amounts relate to negative foreign exchange adjustments for financial assets and liabilities that were not recorded in the respective financial intermediation income and expense accounts, in order to avoid inverting the balance of accounts, in accordance with rules of the Brazilian Central Bank; Tax expenses (4) The amounts of R$ 133 million in the second quarter of 2001, R$ 166 million in the first quarter of 2002, R$ 152 million in the second quarter of 2002, R$ 246 million in the first half of 2001, and R$ 318 million in the first half of 2002 which related to taxes (Pasep, Cofins, and Service Tax) levied directly on sales revenues of the Bank were reallocated to arrive at the contribution margin; Results of equity interest in affiliated and subsidiary companies (5) The foreign exchange gain on financial equity (foreign financial assets [-] foreign financial liabilities) was reallocated to arrive at the financial margin. This amount was originally recorded in the account, equity interest in the results of affiliated and subsidiary companies (Second quarter of 2001 R$ 602 million; First quarter of 2002 R$ (50) million; second quarter of 2002 R$ 977 million; First half of 2001 R$ 1,383 million; First half of 2002 R$ 927 million). The adjustment is necessary because assets and liabilities are no longer recorded in permanent assets after consolidation, but under the respective current asset and liability and or long-term asset and liability items instead. If they are not reallocated, the spread obtained using assets less permanent assets is mistakenly reduced; Extraordinary items (6) As a consequence of the review of the loan portfolio, provisions for credit risks were increased by R$ 244 million and R$ 132 million in the second quarter of 2001 and the second quarter of 2002, respectively; (7) The amount of R$ 137 million that had originally been recorded under loans and which related to income from loans included in the Program to Strengthen Federal Financial Institutions was transferred to extraordinary items in the second quarter of (8) Other operating income in the amount of R$ 6 million and R$ 38 million in personnel expenses relating to provisions recorded from December 2000 to March 2001 was reallocated to extraordinary items in the second quarter of This provision had been established as set forth in item three of the significant event dated December 19, 2000, which related to the sponsor s contribution of 50% that began to be made to Previ after implementation of parity as of December 16, The Bank decided to reverse the provision in June 2001, because it understood that the decision made by the Tax Director on April 6, eliminated the reason for keeping it. 8

9 (9) Other extraordinary provisions originally recorded in other operating expenses in the second quarter of 2001 were included in extraordinary items (R$ 111 million relating to revised pension liabilities, R$ 203 million related to an adjustment to tax contingencies, and R$ 637 million relating to an adjustment in the securities portfolio). 9

10 I. GROSS FINANCIAL MARGIN In the quarter Percentage change In the first half of the year 2 nd Qtr/01 1 st Qtr/02 2 nd Qtr/02 In relation to 2 nd Qtr01 In relation to 1 st Qtr02 1 st Half/01 1 st Half/02 Percentage change A) Revenue from financial intermediation 5,711 6,068 10, ,880 16, Loans 2,516 2,810 3, ,960 6, Leasing Securities 1,201 2,487 3, ,127 5, Derivatives Foreign exchange portfolio , ,099 2, Compulsory investments Foreign exchange gain (loss) on financial equity , abroad Other operating income B) Expenses with financial intermediation -3,334-3,246-7, ,244-10, Money market borrowing -2,191-2,798-2, ,241-5, Borrowing, assignments, and onlending -1, , ,003-4, C) Gross financial margin 2,377 2,822 2, ,637 5, Expansion of remunerated assets The Gross financial margin totaled R$ 2,876 million in the second quarter of 2002, 21.0% higher than the amount reported in the same quarter of the prior year. This result was attributable to the improvement in the composition of the balance sheet in relation to the second quarter of The participation of average remunerated assets in relation to total average assets rose from 75.7% to 77.6%. This development was driven by growth in the loan portfolio, the volume of securities, and the reduction in the participation of the average tax credit, which decreased from 8.5% in the second quarter of 2001 to 7.1% in the second quarter of On the funding side, average remunerated liabilities remained stable in relation to total average liabilities. Development of Balance Sheet Composition - % , Qtr01 2Qtr01 3Qtr01 4Qtr01 1Qtr02 2Qtr02 Remunerated assets Other assets* Remunerated liabilities Other liabilities ** 10

11 Analysis of volume and spread The analysis below presents a breakdown of the contribution of changes in volume of assets (-) permanent assets and spread to the formation of the gross financial margin. Analysis of Volume and Spread 2 nd Qtr/01 2 nd Qtr/02 Absolute change Percentage Assets (-) permanent assets 141, ,072 21,842 Spread* % % % 2Qtr02 volume with 2Qtr01 spread 2, Qtr01 volume with 2Qtr02 spread 2, Intersection of volume and spread Gross financial margin 2,377 2, * Gross financial margin/ Assets (-) permanent assets If the spread from the same quarter in the prior year were applied to the average volume of assets (-) permanent assets for the second quarter of 2002, the Bank would add R$ 368 million to its gross financial margin. On the other hand, if the spread from the most recent quarter were applied to the average volume of assets (-) permanent assets for the second quarter of 2001, R$ 114 million would be added to the margin. The combined growth in spread and volume generated a contribution of R$ 18 million. The analysis demonstrates that the R$ 499 million increase in the financial margin was mainly due to the expansion in volume. Analysis of Volume and Spread Gain from growth in spread Gain from combined growth in spread and volume 2Q02 2Q Gain from growth in volume , ,072 2Q01 2Q02 11

12 Increase in liquidity The study of the graph below reveals a significant increase in liquidity. In June 2001, the difference between liquid assets and liquid liabilities amounted to R$ 20,144 million; this difference rose to R$ 29,572 million in June Liquid Assets (-) Liquid Liabilities* 21,076 20,144 18,250 26,391 29,644 29,572 Mar/01 Jun/01 Sep/01 Dec/01 Mar/02 Jun/02 *Liquid Assets = Cash and Equivalents + Interbank Accounts + Securities Securities Deposited with the Central Bank Liquid Liabilities = Interbank Deposits + Open Market Funds Even after the increase of 34,0% in liquid assets attributable to the securities received as a result of the Program for Securitization and the social security (INSS) debt, the participation of loans in relation to total assets was not negatively affected. Loan assets represented 24.9% of total assets in June 2001, while this same figure totaled 27.5% in June Analysis of Liquid Assets Balances at the end of the period in June/01 Percentage of total March/02 Percentage of total June/02 Percentage of total Liquid assets 53, , , Loans 36, , , Other assets 56, , , Total assets 146, , ,

13 Increase in return on assets The performance of ratios related to the bank s liquid assets, especially Selic and U.S. dollar, in conjunction with the focus on more profitable lending resulted in an increase in return for average assets (-) permanent assets of BB from 17.2% in the second quarter of 2001 to 27.4% in the second quarter of 2002 Rate of return - % 2 nd Qtr01 1 st Qtr02 2 nd Qtr02 1 st Half01 2 nd Half01 Assets Permanent assets 141, , , , ,414 Financial intermediation income 5,711 6,068 10,191 10,880 16,259 Financial intermediation income/(assets Permanent assets) Financial intermediation income /(Assets Permanent assets) annualized Liquid assets available funds in a foreign currency The average volume of available funds denominated in a foreign currency grew from R$ 2,306 million in the second quarter of 2001 to R$ 5,228 million in the second quarter of This change, together with the 22.4% appreciation of the U.S. dollar in relation to the Brazilian real in the quarter, resulted in an increase of R$ 697 million in income from these assets. Average balances in 2 nd Qtr01 1 st Qtr02 2 nd Qtr02 1 st Half01 2 nd Half01 Available funds denominated in a foreign currency 2,306 4,926 5,228 2,062 5,077 Income from available funds denominated in a foreign , ,192 currency Annualized return Liquid assets Interbank investments and securities Securities income grew by a nominal amount of R$ 1,638 million. Significant growth in the average volume of securities and interbank investments and the rate of return on these assets contributed to this outcome. The growth in the average volume of the securities portfolio in the second quarter of 2002 in relation to the same period in the prior year was stimulated by R$ 4.6 billion in securities that were received by the Bank from the social security administration (INSS) to settle a debt (December 2001) and R$ 4 billion relating to the last tranche of securities received from the program for securitization of rural debt. Average balances in 2 nd Qtr01 1 st Qtr02 2 nd Qtr02 1 st Half01 2 nd Half01 Securities and Interbank Accounts 49,711 66,899 65,189 48,456 66,044 Securities income without hedge 1,444 2,487 3,082 2,853 5,568 Annualized return

14 The return on Securities and Interbank Investments rose from 12.1% in the second quarter of 2001 to 20.3% in the second quarter of This change is due to the upward trend for the Selic rate, the main reference for indexation of the Bank s liquid assets and the new profile for profitability achieved by the securities portfolio after the implementation of the Program to Strengthen Federal Financial Institutions in June The change in this index for readjustment reached 4.3% in the second quarter of 2002, compared to 3.8% in the same period. In addition, approximately 5% of the Bank s security portfolio is made up of NTN-Ds and NBC-Es, which are government securities indexed in U.S. dollars. Security Portfolio Adjustment Indices June/ % 2.7% 4.7% 9.7% 67.4% TMS IGP-M Dollar TR Others Loans The focus of Banco do Brasil s lending operations on Business and Retail credit has contributed to improvement in the rate of return for loans. These transactions amounted to 51.1% of domestic lending, while agribusiness operations accounted for 29.8% of the total portfolio in June One year later, Business and Retail Credit accounted for 54.5% of total domestic lending, compared to 27.6% for agribusiness transactions. The present make up of the portfolio permitted an increase in the rate of return from 24.6% in the second quarter of 2001 to 32.2% in the second quarter of 2002, which signified nominal growth of R$ 1,110 million for loan revenues. Average balances in 2 nd Qtr01 1 st Qtr02 2 nd Qtr02 1 st Half01 2 nd Half01 Loans + Leasing 41,571 44,561 47,873 41,081 41,255 Loan+ Leasing income 2,349 2,651 3,459 4,639 6,110 Annualized return - %

15 The Bank s loan portfolio has presented a more competitive profile since the implementation of measures within the ambit of Program to Strengthen Federal Financial Institutions. The participation of agribusiness transactions has fallen and the strategic direction of the bank has become more evident with respect to the predominance of Business and Retail operations. Breakdown of Lending June/01 March/02 June/ Retail Business Agrobusiness Foreign Others Loans retail At the beginning of this year, loans were reclassified in accordance with the new parameters for the Bank s business. Among these changes, we highlight the transfer of BB Giro Rápido transactions from the Business to the Retail portfolio. At the end of June 2002, retail loans totaled R$ 12,182 million, accounting for 25.7% of total domestic lending. The main product of the retail area, Direct Consumer Credit (CDC), ended June 2002 with a balance of R$ 6.9 billion, representing growth of 15% in relation to June of last year. This product line is one of the market s best examples of automated mass-market credit. Individual customers of the Bank that have credit are given pre-approved limits for borrowing. Loans can even be drawn down using the Internet or ATM s. The average amount of a CDC loan is R$ 1.1 thousand. Another positive aspect of this product (CDC) is the synergy generated between our Wholesale and Retail business pillars. One of the focuses of the Wholesale area is to expand payroll deposits, which results in growth in the number of customers who receive their salaries through the Bank. The Banco do Brasil has CDC products that are specifically designed for these customers. Since payments are deducted directly from the salaries deposited, credit risks are lower. As of June 2002, this type of transaction represented 36.9% of all CDC loans Retail lending R$ billion CDC Special Check BB Giro Rápido Cards Others June/01 March/02 June/02 15

16 The BB Giro Rápido product ended the period with a total balance outstanding of R$ 1.4 billion, growing 27.3% in relation to June This line of credit is part of the Programa Brasil Empreendedor ; the maximum limit for this product is R$ 50 thousand and maturities are limited to 12 months. Renewals can be automatic and successive. This product is a mass-market solution for providing credit to small businesses. The graph below, demonstrates the stability of the rate of return for the retail portfolio. Annualized Return for Retail - % Q01 2Q01 3Q01 4Q01 1Q02 2Q02 Loans business Business loans outstanding totaled R$ 13,650 million at the end of June Business Lending R$ billion Receivables financing Overdraft banking Investment Working capital - Others Others Jun/01 Mar/02 Jun/02 This portfolio s main product comprises receivables financing, which demonstrated growth of 56.8% in relation to June This strong growth, even under a tight credit scenario, did not affect the quality of the Bank s portfolio, because these transactions are short-term and self-liquidating. 16

17 Among the products based on receivables, we highlight the prepayment of post-dated checks and BB Vendor. Prepayment of post-dated checks accounts for 39.5% of total receivables financing. This product also brings in additional revenue from the related custody fees for holding the checks and credit risks are diluted due to the small amounts and high turnover of the checks. BB Vendor accounts for 27.4% of total receivables financing. This product is mainly directed toward the Wholesale area. Under the Vendor program, a company receives immediate payment for its installment sales and the Banco do Brasil collects from the buyer in accordance with the terms and rate agreed to with the selling company. Some advantages for the Bank s customers include the possibility of boosting sales through longer maturities and immediate availability of funds from sales. The Bank, on the other hand, is able to strengthen its relationship with the customer and further extend its business over the production chain. The purpose of overdraft banking is to supplement the working capital needs of middle-market and large companies. Improvements in the analysis of customers and the operating procedures related to the product resulted in growth of 122.2% for this type of business. The graph below illustrates the evolution of rates of return for the business portfolio. Annualized Return for Business Loans - % Q01 2Q01 3Q01 4Q01 1Q02 2Q02 Loans - agribusiness Banco do Brasil is the primary channel for the financing of Brazilian agribusiness and each harvest brings an increase in the volume of funds destined for this sector. As of June 2002, Agribusiness lending reached R$ 13,074 million, representing growth of 11.7% for the first half of the year. The main product in this portfolio is crop financing, which accounted for 39.8% of the total as of the above-cited date Agribusiness Lending R$ billion Financing Investment Pronaf FCO - Fund FCO - BB FCO - Comparti. Others Dec/01 Mar/02 Jun/02 17

18 In addition to the social importance attached to the fact that BB manages government funds and programs, the Bank is adequately compensated for the operational costs and risks assumed, thus guaranteeing the return on stockholders equity stipulated by the Board of Directors. The graph below demonstrates past receipts relating to compensation for subsidized rates. Compensation for Subsidized Rates Q01 2Q01 3Q01 4Q01 1Q02 2Q02 Foreign exchange Gain on foreign financial equity and other operations The foreign exchange gain on foreign financial equity in the second quarter of 2002 totaled R$ 977 million, or 62.3% more than in the same period in the prior year. The performance of this item is strongly related to foreign exchange fluctuations. In the second quarter of 2001, the U.S. dollar appreciated 6.6%. The gain of R$ 602 million reported for this period was generated by a financial equity structure that differed from its present form. At the end of June 2001, the Bank held approximately US$ 3 billion in Brady Bonds that were accounted for in foreign subsidiaries. 2 Income from other foreign exchange operations presented outright growth of R$ 1,380 million. The significant increase in this account is explained by the foreign exchange variation on foreign exchange contracts involving advances against future exports and foreign exchange bills (ACC/ACE). 2Q01 1Q02 2Q02 1H01 1H02 Foreign exchange gain on financial equity abroad , Other foreign exchange operations , ,745 2 At the end of June 2002, the Brady Bonds were exchanged for LTF and NTN-D securities which were recorded in the Bank as part of the Program to Strengthen Federal Financial Institutions. 18

19 Funding The increase seen in the rate of remuneration for funding is related to the composition of money market funding and the behavior of adjustment indices. Rate of return - % 2Q01 1Q02 2Q02 1Q01 2H02 Assets - Permanent Assets 141, , , , ,414 Financial intermediation expense 3,334 3,246 7,315 6,244 10,561 Financial intermediation expense/(assets Permanent Assets) Financial intermediation expenses/(assets Permanent Assets) annualized Funding in the market The widespread presence of BB throughout Brazil, the soundness of the Institution, and the strength of the Banco do Brasil name has allowed the Bank to continue as the leader in volume of market funding. Funding in the market achieved a volume of R$ 117 million in the second quarter of 2002, rising 17.3% in relation to the same period in the prior year. Market Funding Evolution Interbank Deposits Demand Deposits Savings Term Deposits Open Market Funds Total jun/01 mar/02 jun/02 Average balances in 2Q01 1Q02 2Q02 1H01 1H02 Savings deposits 20,529 21,566 21,963 20,387 21,764 Expenses with savings deposits Annualized rate Interbank investments 4,032 4,487 4,776 3,739 4,631 Expenses with interbank investments Annualized rate Time deposits 31,902 33,591 34,491 31,103 34,041 Expenses with time deposits ,636 1,786 Annualized rate , Money market borrowing 27,562 39,600 36,444 26,843 38,022 Expenses with money market borrowing 823 1,452 1,404 1,615 2,856 Annualized rate By analyzing the breakdown of market funding, we can see the stability of low cost funding, interbank deposits, which mainly comprise foreign resources, sight deposits, and savings deposits. Time deposits lost ground to money market borrowing, for which participation rose from 27.9% in the second quarter of 2001 to 31.5% in the second quarter of This product is focused toward large customers and is strongly correlated with TMS; its cost increased from 12.5% in the second quarter of 2001 to 16.3% in the most recent quarter. 19

20 Composition of Borrowing in the Market June/01 March/02 June/ % 14.7% 15.7% 27.9% 4.1% 34.0% 3.9% 31.5% 4.1% 20.8% 18.5% 19.0% 32.3% 28.9% 29.8% Sight Deposits Interbank deposits Savings deposits Time Deposits Money Market Borrowings Funding foreign loans Foreign loans also standout among remunerated liabilities. The average volume for this item amounted to R$ 9,834 million at the end of this past quarter, rising 58.8% in relation to the average balance in the second quarter of In addition to this increase, which is justified by the performance of the exchange rate, the increase in the cost of borrowing also contributed to the growth of R$ 3 billion in these expenses. Average balance in 2Q01 1Q02 2Q02 1H01 1H02 Foreign borrowing 6,194 9,148 9,834 5,646 9,491 Expenses with loans, onlending, and Banks abroad ,938 1,590 4,196 Annualized rate Stable spread Comparing rates of the second quarter of 2001 to those of this last quarter, we can see an increase in funding costs from 9.8% to 19.2%. The increase in the cost of borrowing was more than compensated by the improvement in the rate of return, justifying the increase in the spread which reached 7.2% in the second quarter of 2002, compared to 6.9% for the same period last year. Spread 2Q01 1Q02 2Q02 1H01 1H02 Assets Permanent Assets 141, , , , ,414 Revenue from Financial Intermediation 5,711 6,068 10,191 10,880 16,259 Expenses with Financial Intermediation 3,334 3,246 7,315 6,244 10,561 Gross Financial Margin 2,377 2,822 2,876 4,637 5,698 Rev. Fin. Intermediation / (Assets Permanent Assets) Rev. Fin. Intermediation / (Assets Permanent Assets) annualized Exp. Fin. Intermediation / (Assets Permanent Assets) Exp. Fin. Intermediation / (Assets Permanent Assets) annualized Gross financial margin/(assets Permanent Assets) Gross financial margin/(assets Permanent assets) annualized

21 Table for Analysis of the Spread Average balances in 2Q01 1Q02 2Q02 1H01 1H02 (A) Remunerated assets - (a+b+c+d+e) 110, , , , ,260 Available funds in a foreign currency (a) 2,306 4,926 5,228 2,062 5,077 Income from funds in a foreign currency I , ,192 Annualized rate Securities (b) 49,711 66,899 65,189 48,456 66,044 Securities income without Hedge II 1,444 2,487 3,082 2,853 5,568 Annualized rate Loans + Leasing (c) 41,571 44,561 47,873 41,081 41,255 Loan + Leasing income III 2,349 2,651 3,459 4,639 6,110 Annualized rate - % Remunerated compulsory deposits (d) 6,692 10,534 11,046 6,500 10,790 Income from compulsory investments IV Annualized rate Other remunerated assets (e) 9,967 4, ,213 2,413 Other income from operations of a financial intermediation nature V Annualized rate (B) Tax credits 12,349 12,001 11,843 12,337 11,922 (C) Other assets 18,635 20,910 21,215 19,628 18,902 (D) Permanent assets 4,378 4,421 4,492 4,357 4,457 TOTAL ASSETS (A+B+C+D) 145, , , , ,871 (E) Remunerated liabilities (f+g+h+i+l+m+n) 102, , ,959 99, ,289 Savings deposits (f) 20,529 21,566 21,963 20,387 21,764 Expense with saving deposits VI Annualized rate Interbank investments (g) 4,032 4,487 4,776 3,739 4,631 Expenses with interbank investments VII Annualized rate Time deposits (h) 31,902 33,591 34,491 31,103 34,041 Expenses with time deposits VIII ,636 1,786 Annualized rate Money market borrowing (i) 27,562 39,600 36,444 26,843 38,022 Expenses with money market borrowing IX 823 1,452 1,404 1,615 2,856 Annualized rate Foreign borrowing (j) 6,194 9,148 9,834 5,646 9,491 Expenses with borrowing, onlending, and Banks abroad ,938 1,590 4,196 X Annualized rate Onlending (l) 6,042 4,720 4,819 6,127 4,769 Expenses with onlending XI Annualized rate Economic Development Funds (m) 4,643 5,345 5,532 4,543 5,439 Expenses with economic development funds - XII Annualized rate Foreign securities (n) 1,200 1,162 1,100 1,107 1,131 Expenses with foreign securities XIII Annualized rate (F) Other liabilities 35,325 39,789 39,885 36,001 20,725 Sight deposits 14,741 17,150 18,196 14,881 17,673 Other liabilities 20,584 22,639 21,689 21,121 3,053 (G) Stockholders equity + Income accounts 8,179 8,991 8,721 8,137 8,856 Other expenses XIV TOTAL LIABILITIES (E+F+G) 145, , , , ,871 21

22 Table for Analysis of the Spread Average balances in 2Q01 1Q02 2Q02 1H01 1H02 Income from financial intermediation 5,711 6,068 10,191 10,880 16,259 Income from remunerated assets (I+II+III+IV+V) 4,937 5,747 8,099 9,511 13,845 Foreign exchange gain on foreign financial equity , Income from derivatives Other foreign exchange , ,745 Effects of hedges Other operating income/expense Derivatives Recovery of write-offs Expenses with financial intermediation (VI+VII+VIII+IX+X+XI+XII+XIII) 3,334 3,246 7,315 6,244 10,561 Permanent Assets 141, , , , ,414 Remunerated assets 110, , , , ,260 Gross Financial Margin 2,377 2,822 2,876 4,637 5,698 SPREAD (%) Financial intermediation income/(assets Permanent Assets) Financial intermediation income/(assets Permanent Assets) annualized. Expenses with financial intermediation/(assets Permanent Assets) Expenses with financial intermediation/(assets Permanent Assets) annualized Gross financial margin/(assets Permanent assets) Gross financial margin/(assets Permanent assets) annualized Financial intermediation income/remunerated assets Financial intermediation income/remunerated assets annualized Financial intermediation expense/remunerated assets Financial intermediation expense/remunerated assets annualized Gross financial margin/remunerated assets Gross financial margin/remunerated assets annualized

23 II. NET FINANCIAL MARGIN In the Quarter Percentage change In the first half of the year 2Q01 1Q02 2Q02 In relation In relation 1H01 1H02 Percentage change to 2 nd Qtr01 to 1 st Qtr02 C) Gross financial margin 2,377 2,822 2, ,637 5, Allowance for doubtful loans ,260-1, D) Net financial margin 1,791 2,229 2, ,377 4, Risk management The net financial margin comprises financial intermediation income less credit risk provisions. This item totaled R$ 2,285 million at the end of the second quarter of 2002, increasing 27.6% in relation to the same period in the prior year. This performance was preserved as a consequence of improvement in credit risk management. Expenses with credit risk provisions totaled R$ 591 million in the second quarter of 2002, 32.2% higher than credits written off as losses in the period and 113.4% higher than net losses (write-offs (-) recoveries in the period). Loans past due more than one day represented 5.6% of total loans in June 2002, compared to 6.8% in March If only those loans that are more than sixty days past due are considered, the proportion falls to 3.5% in June 2002, which represents a 70 basis point reduction in relation to March Delinquency Ratios 1Q02 2Q02 Total loan portfolio 52,831 57,031 Past due loans 3,583 3,202 Past due loans/total loan portfolio - % Loans past due + 15 days 3,501 3,126 Loans past due + 15 days/total loan portfolio - % Loans past due + 60 days 2,240 1,973 Loans past due + 60 days/total loan portfolio - % Write-offs Recoveries Total losses Total losses/total loan portfolio - % Provision/Total loan portfolio - % Provision/Loans past due + 15 days - % Provision/Loans past due + 60 days - % The consolidated loan portfolio of the Bank (loans, leasing, export advances [ACC/ACE], and other receivables) totaled R$ 57,031 million at the end of June, 23

24 growing 7.9% in relation to the first quarter of the year. Banco do Brasil continued to have the largest loan portfolio among financial institutions in Brazil. Breakdown of the Loan Portfolio Total Percentage change March/02 June/02 In relation to March/02 Loan portfolio 52,831 57, Retail 11,804 12, Wholesale 12,706 13, Agribusiness 12,408 13, International 6,819 7, Abroad 7,804 9, Other 1,289 1, BB s model for management of credit risk is an integral part of the Institution s overall program for the consolidated management of its business risks, in accordance with the changes foreseen in the New Basel Agreement. Credit risk management at BB is currently the responsibility of the Global Risk Committee, which evaluates proposals presented by the Credit Risk Commission. The Commission consists of eight permanent voting members who act as a group under the coordination of the Director of the Credit Area. The continuous improvement of proprietary models for credit risk management at BB has permitted a reduction in the risk of these operations. Observing the performance of delinquency ratios, one can see the improvement in the quality of the loan portfolio. Development of Delinquency Ratios Jun/01 Sep/01 Dec/01 Mar/02 Jun/02 Past due loans/portfolio Loans past due + 60 days/portfolio 24

25 Analyzing the total portfolio in the months of March and June 2002, we can see the stability of the proportion of loans classified AA, A, and B. The 86.8% share of these loan ranked above the average of 78.8% for the National Financial System in June Loan transactions classified in the high risk categories, E, F, G, and H, lost ground to those loans ranked in categories C and D, which represented 8.1% of the portfolio in June 2002, compared to 7.6% in March 2002 Loan Portfolio by Level of Risk March/02 June/02 Percentage of total Amount Provision Amount Provision BB NFS AA 13, , A 23, , B 8, , C 2, , D 1, , E F G H 1,841 1,841 1,700 1, Total 52,831 2,712 57,031 2, Quality of retail loans An analysis of the retail portfolio shows that the quality of the portfolio has been maintained. The distribution of the levels of risk remained practically unchanged for this portfolio. Loans classified as AA, A, and B represented 83.9% of the total in June 2002, compared to 84% in March of this year. Retail Loan Portfolio by Level of Risk March/02 June/02 Amount Provision Percentage Amount Provision Percentage of total of total AA 27, , A 8,974,589 44, ,291,810 46, B 913,269 9, ,259 9, C 443,649 13, ,038 14, D 219,651 21, ,672 20, E 164,399 49, ,830 60, F 132,714 66, ,347 74, G 117,159 82, ,472 98, H 811, , , , Total 11,804,463 1,098, ,182,355 1,099,