Banco Safra S.A. and its Subsidiaries Condensed Consolidated Financial Statements for the Years Ended December 31, 2003 and 2002 and Report of

Transcription

1 Banco Safra S.A. and its Subsidiaries Condensed Consolidated Financial Statements for the Years Ended December 31, 2003 and 2002 and Report of Independent Auditors

2 2

3 Banco Safra S.A. and subsidiaries 3

4 Condensed Consolidated Balance Sheet for the Years Ended December 31 Assets Cash and due from banks (Note 2) 4,220,519 2,495,388 Interest-bearing deposits in banks 517, ,290 Federal and private securities purchased under resale agreements (Note 7) 4,008,496 5,693,197 Securities (Notes 2 and 3) 7,362,123 2,980,892 Derivative financial instruments (Notes 3 and 14) 166, ,562 Loans and lease finance receivables (Note 4) 14,888,319 12,056,661 Less: allowance for credit losses (Note 5) (564,074) (457,314) Net loans and lease finance receivables (Note 4) 14,324,245 11,599,347 Property and equipment and deferred charges, net 301, ,109 Other assets (Note 9) 3,292,297 1,617,885 Total assets 34,193,229 25,851,670 Liabilities Deposits: Non interest-bearing deposits 1,328, ,075 Interest-bearing deposits 7,338,537 6,635,958 Total deposits (Note 6) 8,666,717 7,452,033 Federal and private securities sold under repurchase agreements (Note 7) 7,619,111 4,063,697 Other borrowed funds (Note 8) 7,202,103 5,515,444 Derivative financial instruments (Note 14) 3,013,807 3,821,817 Other liabilities (Note 9) 4,633,514 2,700,846 Total liabilities 31,135,252 23,553,837 Minority interest Stockholders' equity (Note 10) Capital stock 1,411,900 1,101,900 Capital stock subscriptions receivables - (143) Capital reserves 31,288 28,192 Unrealized gain (losses) on securities available for sale 1,938 (124,551) Retained earnings 1,612,822 1,292,416 Total stockholders' equity 3,057,948 2,297,814 Total liabilities and stockholders' equity 34,193,229 25,851,670 The accompanying notes are an integral part of the condensed consolidated financial statements. 4

5 Condensed Consolidated Statements of Income for the Years Ended December Interest income Loans 2,109,864 2,877,918 Investment securities and deposits in banks 1,903,872 2,884,846 4,013,736 5,762,764 Interest expense Derivative financial instruments (428,883) (1,334,761) Deposits, funds purchased and securities sold under repurchase agreements (1,672,461) (1,860,564) Other borrowed funds (463,442) (1,970,610) (2,564,786) (5,165,935) Net interest income 1,448, ,829 Allowance for loan losses and recoveries of loan losses (132,399) (165,919) Net interest income after provision for loan losses and recoveries of loan losses 1,316, ,910 Other operating income (Note 12) 939,824 1,129,481 Administrative expenses (Note 11) (843,914) (756,121) Other operating expenses (Note 12) (530,537) (164,431) Income before income taxes and minority interest 881, ,839 Income tax and social contribution (Note 13) (264,917) (175,278) Income before minority interest 617, ,561 Minority interest (1) (1) Net income for the year 617, ,560 Earning per share - in reais The accompanying notes are an integral part of the condensed consolidated financial statements. 5

6 Condensed Consolidated Statement of changes in Stockholders Equity for the Years Ended December Capital stock Balance, beginning of year 1,101, ,799 Capital stock increase 310, ,958 Balance, end of period 1,411,900 1,101,757 Capital stock reserve Balance, beginning of year 28,192 25,928 Capital stock reserve increase 3,096 2,264 Balance, end of year 31,288 28,192 Unrealized gains (losses) on securities available for sale Balance, beginning of year (124,551) - Prior year adjustments (Note 1(c)) - 19,820 Unrealized gains (losses) 126,489 (144,371) Balance, end of year 1,938 (124,551) Retained earnings Balance, beginning of year 1,292, ,309 Prior year adjustments (Note 1(c) and (h)) - 73,107 Net income for the year 617, ,560 Dividends/Interest on stockholders' equity (296,600) (185,560) Balance, end of year 1,612,822 1,292,416 Total stockholders' equity Balance, beginning of year 2,297,814 1,790,036 Prior year adjustments (Note 1(c) and 1(h)) - 92,927 Capital stock increase 310, ,958 Capital stock reserve increase 3,096 2,264 Unrealized gains (losses) on securities available for sale 126,489 (144,371) Net income for the year 617, ,560 Dividends/Interest on stockholders' equity (296,600) (185,560) Balance, end of year 3,057,948 2,297,814 The accompanying notes are an integral part of the condensed consolidated financial statements. 6

7 Condensed Consolidated Statement of Changes in Financial Position for the Years Ended December Financial resources were Provided by (used in) Operations Net income 617, ,560 Noncash charges credit Equity (21,216) (22,683) Provision for losses in other assets 4, Depreciation and amortization 36,623 37,623 Unrealized gains (losses) on securities available for sale 126,489 (144,371) Allowance for loan losses (excluding recoveries) 134, ,679 Financial resources provided by operations 898, ,832 Minority interest 10 2 Capital stock increase 310, ,958 Capital stock reserve increase 3,096 2,264 Prior year adjustments - 92,927 Dividends/Interest on stockholders' equity (296,600) (185,560) Net financial resources provided by operations 914, ,423 Deposits and other financing activities Noninterest-bearing deposits 512, ,789 Interest-bearing deposits 702, ,368 Federal and private securities sold under repurchase agreements 3,555,414 (3,910,840) Other borrowed funds 1,686,659 (1,613,084) Derivatives financial instruments (808,010) 4,147 Total financial resources used in deposits and other financing activities 5,648,747 (4,674,620) Other activities Cash and due from banks (1,725,131) 241,752 Other liabilities 1,932, ,940 Other assets (1,680,777) 206,902 Other, net (87,959) (27,432) Total financial resources applied to other activities (1,561,199) 587,162 Increase (decrease) in financial resources invested in income earning assets 5,002,354 (3,431,929) 7

8 Condensed Consolidated Statement of Changes in Financial Position for the Years Ended December 31 (continued) Increase (decrease) in income earning assets Interest-bearing deposits in banks 9,700 (1,403,188) Federal and private securities purchased under resale agreements (1,684,701) 5,263,048 Securities and derivatives financial instruments 3,845,697 (9,960,690) Loans and lease finance receivables 2,831,658 2,668,901 5,002,354 (3,431,929) The accompanying notes are an integral part of the condensed consolidated financial statements. 8

9 1. Presentation of Financial Statements and Summary of Significant Accounting Practices The principal accounting practices adopted for recording operations and preparing the condensed consolidated financial statements of Banco Safra S.A. and its subsidiaries (the Bank ) comply with the accounting practices adopted in Brazil and the instructions of the Brazilian Central Bank (BACEN). These policies vary in certain significant respects from generally accepted accounting principles in the United States and other countries including format and presentation of financial statements, foreign currency translation, methods of accounting and levels of disclosures for loans, marketable securities and other banking and financial activities also including, but not limited to, related party transactions, derivative financial instruments, off-balance sheet financing and concentrations of risk. The accompanying condensed consolidated financial statements do not purport to be prepared or to account for the effects of such differences. However, certain reclassifications have been made and notes have been deleted from and added to the statutory consolidated financial statements originally reported in Brazil in accordance with BACEN regulations, in order to facilitate the understanding by foreign users. Furthermore, these condensed consolidated financial statements do not segregate the balances of assets and liabilities between current and long term which is also required by Brazilian Corporate Law. According to the original statutory consolidated financial statements, the current assets and liabilities balances at December 31, 2003 are R$ 28,871,139 (2002 R$ 20,790,265) and R$ 25,646,251 (2002 R$ 17,600,711), respectively. (a) Basis of presentation The condensed consolidated financial statements include the accounts of the Banco Safra S.A. and its subsidiaries, which are listed below. All material intercompany transactions have been eliminated. 9

10 Ownership - % Subsidiary Activity Banco Safra (Cayman Islands) Ltd. Banking Safra Leasing S.A. Arrendamento Mercantil Leasing Safra Comércio e Serviços Ltda. Services Safra Distribuidora de Títulos e Valores Mobiliários Ltda. Securities dealer Safra Corretora de Valores e Câmbio Ltda. Brokerage Safra Administradora de Cartões Credit card de Crédito Ltda. (i) - administrator 99.9 Safra Seguros S.A. Insurance Elong Administração e Representações Ltda. Services Aratu Segurança e Vigilância S/C Ltda. Security Taquari Representações e Participações Ltda Services Stone Fountain Investiments Inc. Services (ii) Services ,9 Kiama S.A. (iii) Services 99,9 - (i) Merged on November 2002 by Elong Administração e Representações Ltda. (ii) Created on September (iii) Created on November (b) Foreign currency transactions All foreign currency denominated assets and liabilities are translated into reais at period-end exchange rates. Foreign exchange trading positions, including spot and forward exchange contracts, are valued monthly at estimated current market rates and the result is included in other income and other expenses. 10

11 (c) Securities Pursuant to BACEN Circular 3068/01 and supplementary regulations, as from June 30, 2002, securities are classified according to management s intended use thereof, in one of the following three categories: trading securities, available for sale or securities held to maturity. (i) Securities classified in the trading category are recorded at market value and the realized and unrealized gains and losses are recognized in the statement of income. (ii) Securities classified as available-for-sale are recorded at market value and related income is recognized in the statement of income, except that gains and losses arising from the variation in market value, not yet realized, are recognized in a specific account in stockholders equity, net of the corresponding tax effects. (iii) Securities held to maturity are recorded at purchase cost plus accrued income. As of June 30, 2002, securities were recorded at cost plus accrued income and adjusted by a provision for loss, where applicable. As a result of the implementation of the new policies determined by Circular 3068 and subsequent regulations, the adjustment arising from the application of the new classification policies of the securities was recorded based on market value at December 31, 2001, net of corresponding tax effects, as follows: Trading securities (1) 8,233 Available-for-sale securities (2) 19,820 Total 28,053 (1) Recorded against retained earnings. (2) Recorded against reserve for unrealized losses on securities. As a consequence the opening stockholders equity balance was increased by R$ 92,927, including the effects of derivative financial instruments (Note 1h). (d) Loans and lease finance receivables Loans are reported at the principal amount outstanding, net of unearned income and the allowance for credit losses. Unearned discount is recognized as income over the terms of each 11

12 loan. Interest is accrued on the daily balance of the principal amount standing. Direct finance leases, which include residual values of leased equipment, are carried net of unearned income. Income from these leases is recognized using the effective interest rate method. (e) Allowance for loan and leasing losses The allowance for credit losses is established through a provision for credit losses charged to expense. Loans and leases are charged against the allowance for credit losses according to an established delinquency schedule or when management believes that the collectibility of the principal is unlikely. The allowance was provided at an amount that management believes will be adequate to absorb losses inherent in existing loans and leases, based on evaluations of the collectibility, prior loss experience and requirements of the National Monetary Council, which determines the use of percentages that vary from 0.5% to 100% on each credit operation, classified in accordance with progressive risk levels. (f) Property and equipment and deferred charges Property and equipment and deferred charges are stated at cost plus monetary correction, which was recorded through December 31, 1995, less accumulated depreciation/amortization which is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the terms of the related leases. (g) Contingencies Provisions for contingencies are recorded as liabilities and are periodically reassessed by management, based on the status of each matter and the opinion of the Bank s legal advisors, and are considered sufficient to cover any probable losses. (h) Derivative financial instruments In accordance with Circular 3082/02 and amendments, as from June 30, 2002, derivative financial instruments are classified, at the date of acquisition, at management discretion for purposes of hedging or not, effective as from January 1, Financial instrument-based transactions, carried out at clients requests, for one s own account, or which do not comply with hedging criteria (mainly derivatives used to manage the exposure to Global risks), are stated at market value, including realized and unrealized gains and losses, which are recorded directly in the statement of income. 12

13 The derivatives used for protection against risk exposure or to modify the characteristics of assets and liabilities which might be (i) highly correlated to changes in market value in relation to the market value of the item being protected, both at the beginning or throughout the duration of the contract, and (ii) which are deemed to significantly reduce the risk-related exposure being protected, are classified as a hedge, in accordance with their nature: i) Hedge against market risk Assets and liabilities, as well as their related financial instruments, are accounted for at their market value plus realized and unrealized gains and losses, which are recorded directly in the statement of income. ii) Hedge against cash flows The actual hedged amount of assets and liabilities, as well as their related financial instruments, are accounted for at their market value plus realized and unrealized gains and losses, less tax effects, when applicable, which are recorded in specific account in stockholders equity. The non-hedged amount is recorded directly in the statement of income. As result of new regulations introduced by Circular 3082 and amendments, the initial adjustment resulting from the application of the new policy to classify securities and derivative financial instruments was carried out based on their market value at December 31, Accordingly, the adjustment was recorded, directly as a positive adjustment in opening stockholders s equity balances at January 1, 2002 in the amount of R$ 64,874, net of tax effects, under the heading Retained earnings. (i) Pricing methodology The method applied to determine the market values (probable realizable values) of securities and financial derivative instruments takes into account the economic scenario and uses pricing models developed by the Bank s management, which includes obtaining average prices practiced in the market, data released by various associations in the sector, the stock exchange and the futures and commodities exchange, at the balance sheet date. Accordingly, the results of these transactions may vary on their liquidation. (j) Comparatives Certain comparative amounts have been reclassified to conform to the current period classification. 13

14 2. Cash and due from banks and restricted cash Cash and due from banks includes reciprocal balances in foreign currencies representing "due from" and "due to" accounts with other financial institutions in the amount of R$ 591,842 (2002 R$ 350,253). Aggregate reserves, in the form of deposits with the Central Bank and other institutions, of R$ 2,597,230 (2002 R$ 2,583,283) were maintained to satisfy regulatory requirements and guarantees at December 31, 2003, which are restricted as to use by the Bank. They relate to deposits in cash amounting to R$ 1,292,984 (2002 R$ 1,152,599) recorded in cash and due from banks and are subject to interest, and deposits in securities amounting to R$ 1,304,246 (2002 R$ 1,430,684) recorded in securities at December 31, Securities At December 31, 2003, the securities portfolio is as follows: Market value by maturity Carrying amount Less than 90 days 91 to 180 days 181 to 360 days Over 360 days Total Market value adjustment TRADING SECURITIES (*) Brazilian Treasury Bonds 5,400,758 5,405, ,405,351 4,593 AVAILABLE-FOR-SALE Brazilian Treasury Bonds 1,309, ,970 1, , ,538 1,436, ,481 Central Bank Bonds 200, ,021 3,503 39,313 10, ,372 10,652 Private sector 308, , , , ,818, ,670 4, ,996 _ 669,271 1,956, ,327 7,219,203 6,168,021 4, , ,271 7,362, ,920 DERIVATIVE FINANCIAL INSTRUMENTS (ASSETS) Swap receivable 146,507 60,722 18,718 61,884 16, ,218 11,711 Option contracts premium 8,873 1, ,399 (7,474) Forward contracts - NDF 6, , , ,791 62,830 19,774 66,425 16, ,028 4,237 7,559,045 6,230,851 24, , ,270 7,528, ,157 14

15 At December 31, 2002, the securities and derivative financial instruments portfolio are as follows: Market value by maturity Carrying amount Less than 90 days 91 to 180 days 181 to 360 days Over 360 days Total Market value adjustment TRADING SECURITIES (*) Brazilian Treasury Bonds 266,767 _266, ,142 (625) AVAILABLE-FOR-SALE (**) Brazilian Treasury Bonds 1,532, , ,716 1,033,946 1,503,242 (28,799) Central Bank Bonds 737,212 3, ,706 40, , ,077 (6,135) Private sector 482, ,584 51,026 _ 1, , ,431 (1,961) 2,751,645 _258, , ,270 1,552,373 2,714,750 (36,895) 3,018,412 _524, , ,270 1,552,373 2,980,892 (37,520) DERIVATIVE FINANCIAL INSTRUMENTS (ASSETS) Swap receivable 819, , ,229 76, , ,124 (175,990) Option contracts premium 2,612 6, ,327 3,715 Forward contracts 52,111 52, , , , ,256 _ 76, , ,562 (172,275) 3,892, , , ,993 1,670,791 3,682,454 (209,795) (*) Maturity considers the maximum term expected by management to trade the securities. (**) At December 31, 2002, securities in amount of R$ 1,364,957 were allocated as fair value hedges. During the year ended December 31, 2003, the Bank, pursuant to BACEN Circular 3.082/02 and amendments, designated, on a monthly basis, derivative financial instruments to hedge part of its available-for-sale securities against market risk, taking into consideration hedge policies adopted by management. Consequently, during the months where the hedge was effective, according to BACEN rules, the Bank reclassified from stockholders equity to the statement of income the amount of R$ 18,408 (2002 R$ 152,215) related to the unrealized gains of market value of items being hedged. 15

16 4. Loans and Lease Finance Receivables (a) By economic sector Domestic operations Commercial and industrial 10,982,254 8,914,548 Lease operations (*) 1,549,019 1,249,951 Real estate 28,790 35,012 Consumer installments 900, ,023 Banks and other financial institutions 180, ,735 13,641,168 11,155,269 Foreign operations Commercial and industrial 1,011, Banks and other financial institutions 235,650 1,247, ,392 14,888,319 12,056,661 Allowance for credit losses (564,074) (457,314) Net loans and lease finance Receivables 14,324,245 11,599,347 (*) Includes, in 2003, operations with public companies in the amount of R$ 19,375 and operational leasing in the amount of R$ 12,338 (2002 R$ 9,733). (b) By maturity Past Dues: Less than 14 days 397, ,543 Over 15 days 241, , , ,830 To mature: Less than 90 days 6,944,522 6,182, days to 360 days 4,475,111 3,069,912 Over 360 days 2,829,424 2,224,674 14,249,057 11,476,831 Total 14,888,319 12,056,661

17 (c) By rating The allowance for credit losses is provided at an amount that management believes is adequate to absorb losses inherent in existing loans and leases, based on evaluation of collectibility and prior loss experience. Management recorded an allowance in excess of the minimum amount required by the National Monetary Council (Resolution 2682/99). At December 31, the break down of loan and leasing portfolio by rating was as follows: Total credit outstanding Allowance for loan losses Rating AA 10,587,726 8,229, A 2,507,258 1,988,152 12,536 9,941 B 739, ,942 7,392 6,079 C 318, ,132 9,556 14,764 D 248, ,534 24,846 29,053 E 155, ,720 46,695 53,316 F 119, ,935 59,515 74,468 G 38,936 8,461 27,255 5,923 H 160,039 97, ,039 97,615 14,874,818 12,040, , ,159 Additional allowance for loan losses 216, , , ,314 The above portfolio excludes transactions made by the non-financial subsidiary entities, in the amount of R$ 1,163 ( R$ 6,285), other operational leasing and leasing contracts in process in the amount R$ 12,338 ( R$ 9,733). In 2003, Banco Safra assigned and transferred certain credits in the aggregate amount of R$ 335,615. The price for the assigned and transferred credits was R$ 145,588. This transaction fulfilled all requirements established by Resolution n.º of the BACEN. 17

18 5. Allowance for Loan Losses Balance, beginning of period 457, ,082 Provision charged to operations (excluding recoveries) 134, ,679 Loans and leases charged off (27,582) (17,447) Balance, end of period 564, ,314 Recoveries of written-off credits during the period 1,943 1, Deposits by maturity Less than 90 days 5,077,446 2,903, to 360 days 2,212,664 2,808,386 Over than 360 days 1,376,607 1,739,981 8,666,717 7,452, Federal and private securities sold under repurchase agreements - by maturity Less than 11 days 4,421,930 4,048, to 360 days 3,197,181 15,341 Over than 360 days - - 7,619,111 4,063,697 Securities and securities purchased under resale agreements in the aggregate amount of R$ 3,635,339 (2002 R$ 15,872), were pledged as collateral for securities sold under repurchase agreements. 18

19 8. Other Borrowed Funds This figure is composed mainly of the on-lendings and securities issued abroad, as follows: (a) By operation Foreign Loans 2,952,321 1,702,482 On Lending ( local institutions ) 2,046,346 1,238,312 Securities Issued Abroad 2,203,436 2,574,650 7,202,103 5,515,444 Foreign loans include lines of credit with average terms of 3 years and interest equivalent to LIBOR plus spreads up to 4%. Securities issued abroad include Euronotes with maturities through 2006 and average annual interest rates of 8% (2002 9%). In 2003, the Bank issued Euronotes in the amount of US$ 725,000 thousand with maturities until (b) By maturity Less than 90 days 1,494,003 1,022, to 360 days 3,520,657 1,540,983 Over than 360 days 2,187,443 2,951, Other Assets and Liabilities 7,202,103 5,515,444 Other assets include substantially foreign exchange transactions of R$ 2,858,157 (2002 R$ 1,257,879), tax credits of R$ 16,867 (2002 R$ 66,421), income tax recoverable of R$ 154,050 (2002 R$ 81,735) and accounts receivable from parent company of R$ 23,329 ( ,663). Other liabilities include substantially foreign exchange transactions of R$ 2,884,252 (

20 R$ 1,649,852), income tax, social contribution and social security taxes payable of R$ 573,076 (2002 R$ 343,142), provision for contingencies of R$ 266,417 (2002 R$ 156,312), insurance technical provisions of R$ 220,854 (2002 R$ 147,706), and deferred income tax of R$ 271,077 (2002 R$ 189,554). 10. Stockholders' Equity Capital stock consists of 464,772,872 ( ,523,683) common and 463,982,327 ( ,827,113) preferred, no par value, authorized, issued and outstanding shares. At the Extraordinary General Meeting held on December 28, 2002, a capital increase of R$ 100,000 was approved through the issuance of 37,955,319 shares, of which 18,993,813 are common and 18,961,506 are preferred shares. Of this amount, R$ 99,857 was paid on subscription by the controlling shareholder, and R$ 143 was paid during At the Extraordinary General Meeting held on January 28, 2003, a capital increase of R$ 310,000 was approved through the issuance of 110,404,403 shares, of which 55,249,189 are common and 55,155,214 are preferred shares. The articles of incorporation provide that as of December 31 of each year, 5% of net income after deductions and legal provisions is to be allocated to the legal reserve account. Such allocation will no longer be required when the reserve balance reaches 20% of the share capital amount. Dividend rates are fixed at 1% and 2% of the outstanding common and preferred capital stock, respectively, per annum. Capital stock reserve is available for issuance of capital stock in the form of stock dividends. Interest on stockholders' equity is charged to retained earnings, in the statement of stockholders' equity, similar to proposed dividends. During the year ended December 31, 2003, the Bank paid interest in the amount of R$ 296,600, such interest is deductible for tax purposes, and reduced the income tax and social contribution of the period by approximately R$ 100, Administrative expenses Administrative expenses include substantially labor expenses of R$ 366,240 (2002 R$ 342,104), taxes and contributions of R$ 106,016 (2002 R$ 106,494), service expenses of R$161,173 (2002 R$ 132,588) and depreciation and amortization of R$ 36,623 (2002 R$ 37,623). 20

21 12. Other operating income and other operating expenses Other operating income includes substantially fees from asset management of R$ 204,072 (2002 R$ 153,348), trade financing income of R$ 220,447 (2002 R$ 390,500), other commissions from clients of R$ 97,821 (2002 R$ 81,332), insurance operations income of R$ 41,172 (2002 R$ 33,702), fees and reimbursement of costs of R$ 34,208 (2002 R$ 35,044), equity results of R$ 21,216 (2002 R$ 22,683), foreign exchange adjustments taken by the company in respect of certain U.S. dollar-linked assets R$ 269,310 in Other operating expenses include substantially tax expenses of R$ 11,875 (2002- R$ 40,893), other commission to clients of R$ 54,329 (2002 R$ 93,729), provisions for contingencies of R$ 38,394 (2002 R$ (70,309) of reversal of provision), expenses with renegotiations of credits of R$ 18,466 (2002 R$ 10,272), insurance operations expenses of R$ 15,255 (2002 R$ 49,753) and foreign exchange adjustments taken by the company in respect of certain U.S. dollar-linked assets of R$ 197, Income Tax and Social Contribution The current income tax and social contribution expenses have been calculated at statutory rates (income tax 25%, social contribution 9%) on adjusted taxable income in accordance with specific legislation. The pre-tax income was adjusted by the exchange rate variation on investments in foreign subsidiaries, interest on stockholders' equity, net of the amounts received and temporarily non-deductible provisions. These items give rise to tax timing differences, and in accordance with accounting practices adopted in Brazil generate deferred tax assets and/or liabilities. The Bank has recorded tax credits and tax liability in the amount of R$ 16,867 (2002 R$ 66,421) and R$ 271,077 (2002 R$ 189,554), respectively, relating to tax timing differences and tax loss carry forward and has unrecorded tax credits which correspond to an off-book deferred income tax asset of approximately R$ 191,158 (2002 R$ 189,971). The offbook asset is recorded when recoverability is considered to be probable. 21

22 14. Derivative financial instruments The derivative financial instruments portfolio at December 31, 2003, is shown as follows: (a) Swap Notional Amount Carrying Amount Less than 90 days Market value by maturity 91 to Over 360 days 360 days Total Interest Rate Assets 3,826,990 4,157,535 1,825,942 2,087, ,194 4,159,153 Liabilities (2,532,067) (2,873,549) ( 958,993) (1,838,841) (78,700) (2,876,534) 1,294,923 1,283, , , ,494 1,282,619 Foreign Currency Assets 346, ,008 87, ,994 74, ,594 Liabilities (1,641,328) (1,794,914) (900,436) (694,464) (234,438) (1,829,338) (1,294,923) (1,193,906) (813,359) (223,470) (159,915) (1,196,744) Values to receive - 146,507 60,722 80,602 16, ,218 Values to pay - (56,427) (7,132) (55,896) (9,315) (72,343) (b) Options Notional Amount Premium Less than 90 days Market value by maturity 91 to Over 360 days 360 days Total Interest Rate Buying Put option 124, , , , , ,390 Foreign Currency Buying Put option 1, , Selling: Put option (14,096,088) (1,921,384) (747,523) (1,187,293) (63,003) (1,999,819) Call option (17,046,954) (908,218) (521,493) (405,063) (14,324) (940,880) (31,143,042) (2,829,062) (1,269,016) (1,592,356) (79,327) (2,940,699) (c) Non Deliverable Forward - NDF Notional Amount Less than 90 days Market value by maturity 91 to Over 360 days 360 days tal Buying commitment 24,803 11,393 3,249 10,956 25,598 Selling commitment (81,427) (12,438) (71,951) (1,361) (85,750) (56,624) (1,045) (68,702) 9,595 (60,152) Assets , ,411 Liabilities - (444) (214) (107) (765) ,312 (2) 5,646 22

23 (d) Futures Notional Amount Less than 90 days Market value by maturity 91 to Over 360 days 360 days Total Buying commitment Foreign coupon DDI 1,614, ,961-1,169,594 1,545,555 Interest Rate DI1 908, , , ,929 2,522, , ,334 1,620,189 2,342,484 Selling commitment Foreign coupon DDI 5,047,721 1,392,972 1,345,622 2,176,287 4,914,881 Interest Rate DI1 7,593,500 4,660,259 1,991, ,584 7,237,698 Future commercial dollar DOL 330, , ,658 12,972,034 6,389,889 3,337,477 2,761,871 12,489,237 (e) Foreign Currency Swaps Tabela 1 Notional Amount Less than 90 days Market value by maturity 91 to Over 360 days 360 days Total Buying commitment Swap SCC 4,300,430 1,180, ,374 2,538,244 4,159,650 Swap SC3 301,531 30, ,483 11, ,603 4,601,961 1,210, ,857 2,549,927 4,460,253 Selling commitment Swap SCC 541, ,669 12, , , ,669 12, ,090 The derivative financial instruments portfolio at December 31, 2002, is shown as follows: 23

24 (a) Swap Notiona Amount Carrying Amount Less than 90 days Market value by maturity 91 to 360 days Over 360 days Total Interest Rate Assets 6,306,748 6,981,106 1,559,910 4,747, ,641 6,960,004 Liabilities (3,111,683) (3,787,150) (1,712,060) (1,561,435) (500,109) (3,773,604) 3,195,065 3,193,956 (152,150) 3,186, ,532 3,186,400 Foreing Currency Assets 1,280,772 2,389,981 1,049, , ,448 2,236,825 Liabilities (*) (4,475,837) (5,458,778) (655,409) (3,904,360) (732,252) (5,292,021) (3,195,065) (3,068,797) ( 394,332) (3,279,724) (169,804) (3,055,196) Values to receive - 819, , , , ,124 Values to pay - (693,955) (81,572) (294,658) (135,690) (511,920) (b) Forward Notional Amount Less than 90 days Market value by maturity 91 to 360 days Over 360 days Total Carrying Amount Selling Brazilian Treasury Bonds 52,111 52,111 52, ,111 (c) Options Notional Amount Carrying Amount Less than 90 days Market value by maturity 91 to 360 days Over 360 days Total Interest Rate Selling Call option (11,736,581) (1,527,510) (620,056) (978,949) (3,099) (1,602,104) Put option (15,023,528) (1,589,591) (738,853) (914,215) (659) (1,653,727) (26,760,109) (3,117,101) (1,358,909) (1,893,164) (3,758) (3,255,831) Foreign Currency Buying Call option 21,387 1,768 3,625 1,721-5,346 Put option 24, ,128 1,866 3,834 1,748-5,582 Selling Call option (141,832) (3,180) (6,034) (29) - (6,063) Put option (12,926) (47) (82) - - (82) (154,758) (3,227) (6,116) (29) - (6,145) 24

25 (d) Futures Market value by maturity Notional Less than 91 to Over ' Amount 90 days 360 days 360 days Total Buying commitment Foreign coupon - DDI 2,663,578 1,449, ,966 2,282,073 Interest rate DI1 1,741, , ,539 47,832 1,587,947 Future commercial dollar - DOL 86,566 86, ,411 4,491,644 2,097, , ,798 3,956,431 Selling commitment Foreign coupon - DDI (4,289,250) (1,282,568) (1,430,908) (912,083) (3,625,559) Interest rate DI1 (1,094,000) (616,675) (440,122) (2,587) (1,059,384) Future commercial dollar - DOL (1,110,340) (827,676) (283,412) - (1,111,088) (6,493,590) (2,726,919) (2,154,442) (914,670) (5,796,031) (e) Foreign Currency Swaps Notional Amount Less than 90 days Market value by maturity 91 to Over 360 days 360 days Total Buying commitment Swap - SCC 2,762, ,147 1,278, ,713 2,348,377 Swap SC3 1,463, , , ,237 1,285,995 4,225, ,972 2,021, ,950 3,634,372 Selling commitment Swap - SCC (1,051,157) (225,098) (157,739) (450,499) (833,336) (1,051,157) (225,098) (157,739) (450,499) (833,336) (*) Notional amount value of R$ 1,350,000 and market value of R$ 1,365,052 were designated as fair value hedges for securities classified as available-for-sale (Note 3). 15. Management of Investment Funds Banco Safra S.A. is responsible for the management of several investment funds, with net assets, amounting to R$ 18,912,665 (2002 R$ 12,562,008) as at December 31, 2003, of which R$ 5,509,719 (2002 R$ ) are fund of funds and R$ 13,402,946 (2002 R$ ) are investment funds, which are recorded in off-balance sheet memorandum accounts of the Bank Performance and administration fees during the year totaled R$ (2002 R$ ) and were presented as other operating income. 25

26 16. Commitments Commitments in respect of securities, guarantee bonds and other guarantees issued by the Bank in the normal course of its business amount, at December 31, 2003, to R$ (2002 R$ ) and are recorded in off-balance sheet memorandum accounts of the Bank. Management does not anticipate any material loss as a result of these transactions. * * * 26