Performance Analysis 2Q08

Transcription

1 Performance Analysis 2Q08

2 Summary Index of Tables...4 Index of Figures...7 Presentation...9 Summary of Results 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 the Reallocations Balance Sheet Analysis Breakdown Analysis of Assets Liquidity Analysis Securities Portfolio Loan Portfolio Retail Loan Portfolio Wholesale Loan Portfolio Agribusiness Loan Portfolio Foreign Trade Loan Portfolio Tax Credits Analysis of Liabilities Deposits and Money Market Funding Foreign Borrowing Analysis of Results Net Interest Income Analysis of Investments Analysis of Funding Analysis of Volume and Spread Provision for Credit Risk Retail Loan Portfolio Commercial Portfolio Agribusiness Portfolio Foreign Trade Loan Portfolio Foreign Loan Portfolio and Others Income Fee Revenues from Checking Account Fees Asset Management Cards...91

3 7.6.4 Collections Administrative Expenses Personnel Expenses Other Administrative Expenses Distribution Network Automated Channels Productivity Coverage Ratios Net Value Added Risk Management Risk Management Market Risks Liquidity Risk Credit Risk Operating Risk Capital Structure Shareholders Equity Basel I Basel II Analysis of Consolidated Information Summary Financial Statements Balance Sheet Law Income Statement Statement with Reallocation Productivity Ratios Basel Insurance, Pension Plans and Capitalization Income Statement by Line of Business Combined Ratio Brasilveículos Brasilsaúde Aliança do Brasil Brasilcap Brasilprev BB Previdência Financial Statements Summarized Balance Sheet Summarized Corporate Law Income Statement Income Statement with Reallocations...142

4 Index of Tables Table 1. Main Macroeconomic Indicators...21 Table 2. Shareholding Breakdown...23 Table 3. Distribution of Dividends/Interest on Own Capital...23 Table 4. Shareholders by Range of Shares Owned...24 Table 5. Free Float by Range of Shares Owned...24 Table 6. Breakdown of the Series C Warrant Holders...26 Table 7. Series C Warrants...26 Table 8. Expected Dilution of Capital...26 Table 9. Other Information...32 Table 10. Summarized Balance Sheet Assets...34 Table 11. Summarized Balance Sheet - Liabilities...35 Table 12. Summarized Corporate Law Income Statement...36 Table 13. Income Statement with Reallocations...37 Table 14. Reallocations Other Operating Income/Expenses...38 Table 15. Breakdown of Assets...42 Table 16. Liquidity Balance...43 Table 17. Securities Portfolio by Category...44 Table 18. Securities Portfolio by Maturity - Market Value...44 Table 19. Loan Portfolio...45 Table 20. Loan Portfolio by Segment...46 Table 21. Retail Loan Portfolio...47 Table 22. SME Loan Products...48 Table 23. BPB Highlights...49 Table 24. Wholesale Loan Portfolio...50 Table 25. Exports...51 Table 26. Agribusiness Loan Portfolio by Region...52 Table 27. Agribusiness Loan Portfolio by Purpose...53 Table 28. Agribusiness Loan Portfolio by Product...53 Table 29. Agribusiness Loan Portfolio by Financed Items...54 Table 30. Funds Released for the 07/08 Crop by Segment...54 Table 31. Foreign Trade Loan Portfolio...57 Table 32. ACC/ACE Average Volume per Contract...57 Table 33. Breakdown of Tax Credit...58 Table 34. Liabilities...60 Table 35. Foreign Borrowing...63 Table 36. Net Interest Income...64 Table 37. Revenues from Loans Net of Exchange Impact (Res. 2,770)...64 Table 38. Analysis of Volume (Earning Assets) and Quarterly Spread 1Q08 and 2Q Table 39. Margin, Net of Interest and Profit Margin...66 Table 40. Revenues from Loans Net of Exchange Impact (Res. 2,770)...67 Table 41. Securities Income...68 Table 42. Avg Balance of the BS accounts and info. on interest rates - Earning assets (quarterly)...69 Table 43. Avg Balance of the Bal. Sheet accounts and Info. on Int. rates Earning assets (semestral).69 Table 44. Avg Balances of the BS accounts and info. on int rates Int.Bearing Liabilities (quarterly)...70 Table 45. Avg Balances of the BS accounts and info. on interest rates Int. Bearing Liab. (semestral).71 Table 46. Int. increase and decrease (Inc. and Exp.) due to changes in Volume and Rates (quarterly).72 Table 47. Net Financial Margin...73 Table 48. Expenses with Allowance for Loan Losses over Portfolio...73 Table 49. Loan Portfolio by Level of Risk...74 Table 50. Deliquency Ratio - %...76 Table 51. Average Portfolio Risk...77 Table 52. Retail Loan Portfolio by Level Risk...78

5 Table 53. Changes in the Allowance - Retail...79 Table 54. Commercial Loan Portfolio by Level Risk...80 Table 55. Changes in the Allowance - Commercial...80 Table 56. Agribusiness Loan by Portfolio...81 Table 57. Changes in the Allowance - Agribusiness...81 Table 58. Portfolio With and Without Roll Over Agribusiness...82 Table 59. Foreign Trade Loan Porfolio by Level Risk...84 Table 60. Changes in Allowance Foreign Trade...84 Table 61. Foreign Loan Portfolio by Level Risk...85 Table 62. Other Transactions Portfolio...85 Table 63. Services Revenues...86 Table 64. Services Fees...87 Table 65. Investment Funds and Managed Portfolios by Costumer...89 Table 66. Investment Funds and Managed Portfolios by Type...90 Table 67. Services Revenues from Cards...92 Table 68. Commercial Income...94 Table 69. Personnel Expenses...95 Table 70. Main Changes in Personnel Expenses...95 Table 71. Other Administrative Expenses...99 Table 72. Main Changes in Other Administrative Expenses...99 Table 73. Distribution Network Table 74. Wholesale Pillar Branches Table 75. Distribution Network Abroad Table 76. Coverage Ratios Table 77. Net Value Added Table 78. Consolidated BB VaR Table 79. Foreign Network's VaR Table 80.Fixed Interest Rate Portfolio's VaR Table 81. VaR for the International Trading Table 82. VaR for the DomesticTrading Table 83. Sensitivity to Interest Rate Table 84. Distribution of Economic Capital in the Loan Portfolio Table 85. Concentration of the Loan Portfolio on the 100 Largest Borrowers Table 86. Concentration of the Loan Portfolio on the 100 Largest Borrowers Table 87. Concentration of the Loan Portfolio by Macro-sector Table 88. Monitoring of Operational Loss Table 89. Monitoring of Operational Loss Table 90. Shareholders Equity Table 91. BIS Ratio - % Table 92. Changes in Composition of BIS Ratio Table 93. Fixed Asset Ratio Table 94. Regulatory Capital Table 95. Economic Capital Table 96. Interest in the capital of companies Table 97. Summarized Balance Sheet Table 98. Summarized Corporate Law Income Statement Table 99. Summarized Income Statement with Reallocations Table 100. Eficiency Ratio % Table 101. Coverage Ratio Table 102. BIS Ratio Table 103. Insurance, Pension Plans and Capitalization Table 104. Income Statement by Line of Business Table 105. Brasilveículos Data Table 106. Brasilsaúde Data Table 107. Aliança do Brasil Data...137

6 Table 108. Brasilcap Data Table 109. Brasilprev Data Table 110. Balance Sheet - Assets Table 111. Balance Sheet - Liabilities Table 112. Summarized Corporate Law Income Statement Table 113. Income Statement with Reallocations...142

7 Index of Figures Figure 1. Total distribution of the Free Float...24 Figure 2. Equity Held by Foreign Investors...25 Figure 3. BB Shares and Series "C" Warrants vs. Ibovespa...27 Figure 4. BBAS3 in Ibovespa...28 Figure 5. Average amount traded in BBAS Figure 6. Average financial volume BBAS Figure 7. Market Ratios...30 Figure 8. Earning Assets vs. Interest Bearing Liabilities...41 Figure 9. Breakdown of Assets...42 Figure 10. Liquidity Balance...43 Figure 11. Securities Portfolio with Maturities between 0 and 5 years and after 5 years...44 Figure 12. Trade Balance (FOB)...51 Figure 13. Production vs. Planted Area...52 Figure 14. Agribusiness Loan Portfolio by Customer...54 Figure 15. Agribusiness Loan Portfolio by Funding Sources...55 Figure 16. Equalization Revenues and Weighting Factors...55 Figure 17. Agricultural Insurance and Proagro...56 Figure 18. Breakdown of Tax Credit...59 Figure 19. Funding...61 Figure 20. Market Share of BB Funding...62 Figure 21. NIM Analysis...66 Figure 22. NIM by Loan Portfolio...67 Figure 23. Securities Portfolio by Index (Multiple Bank)...68 Figure 24. Expenses with Allowance for Loan Losses over Portfolio...73 Figure 25. Breakdown of Allowances...74 Figure 26. CLP/CT BB vs. SFN...75 Figure 27. PCLD requerida/op. Vencidas 90 dias BB x SFN...76 Figure 28. Breakdown of Agribusiness Portfolio...83 Figure 29. Customer Base...88 Figure 30. Asset Management...89 Figure 31. Credit and Debit Cards...91 Figure 32. Card Sales...91 Figure 33. BB Billings Volume...93 Figure 34. Changes in Commercial Income...94 Figure 35. Changes in Workforce...96 Figure 36. Employees Age...96 Figure 37. Aged Bracked...97 Figure 38. Level of Education...97 Figure 39. Productivity Ratios...98 Figure 40. Total Distribution Network Figure 41. Automated Teller Machines Figure 42. Share of Automated Transactions / Total Transactions Figure 43. Costumer Access Options Figure 44. Coverage Ratios Figure 45. Productivity Ratios Figure 46. Business vs. Expenses Figure 47. Balance in foreign currencies Figure 48. Changes in Foreign Exchange Exposure Figure 49. Composition of Banco do Brasil's assets and liabilities in the country Figure 50. Net Position Figure 51. Financial Consolidated BB VaR Figure 52. Consolidated Abroad Network's VaR...111

8 Figure 53. Fixed Interest Rate Portfolio's VaR Figure 54. VaR for the International Trading portfolio Figure 55. VaR for thedomestic Trading portfolio Figure 56. Liquidity Reserve - Domestic Treasury Figure 57. DRL Indicator Figure 58. Liquidity Reserve - International Treasury Figure 59. BIS Ratio - % Figure 60. Combined Ratio...136

9 Presentation The Performance Analysis report presents the economic/financial situation of Banco do Brasil (BB). Geared toward market analysts, stockholders and investors, with quarterly periodicity, this report addresses topics such as the economic environment, performance of BB shares and corporate governance practices adopted by the Institution. Besides, there are separate analyses of the capital structure and the results. The reader will also find table s 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 comprises a more detailed study of the main components of the balance sheet such as the securities portfolio, the loan portfolio, tax credits, money market borrowings, amongst others. The Analysis of Results shows, step by step, the items of the reallocated income statement. The corporation s income statement is submitted to these reallocations with the intention of allowing a better understanding of the results, making the historical series more comparable and facilitating accurate forecasts from this data. Moreover, aiming at a more dymanic, flexible and objective reading, some table s were reallocated within the chapter and the internal sections have been renamed. The proportionate consolidation of Banco do Brasil stake in 12 financial and non-financial companies is detailed in the "Analysis of Consolidated" chapter. In addition to the main lines of the Consolidated Income Statement and of the Balance Sheet, the section also features the detailing of the business performance in Insurance, Pension and Capitalization. The report also contains an exclusive chapter about Risk Management. The risk management process at BB and the Company's capital structure are presented in summarized form in this section, emphasizing initiatives in progress for adaptation to the demands of Basel II. The information relating to the structure and further details about the risk management process at BB were migrated to the Investor Relations site of Banco do Brasil. For comparability purposes of the financial statements, according to CVM regulation nº 506, balance sheet reclassifications from 2Q07 (including 2Q07, 3Q07, 4Q07 and 1Q08) were carried out. These reclassifications are related to Judicial Deposits from legal request for the full offset of previous year Income Tax and Social Contribution on net income losses against taxable income (Note 20.c). The procedure were carried out in order to adjust to the accounting procedures/classifications adopted in 2Q08, which resulted from the application of Resolution CMN 3535 of January 31, The procedure results in a balance increase in Debtors for Escrows (Note 7.b) and in Other Tax and Social Security Liabilities (Note 29c) in the amount of R$ 9,081,671 thousand (2Q07), R$ 9,253,112 thousand (3Q07), R$ 9,460,032 thousand (4Q07) and R$ 9,608,928 thousand (1Q08). Finally, the financial statements and the explanatory notes for the quarter under analysis can be found. 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, news items, frequently asked questions, and the Download Center, containing versions of this report for the Adobe Reader software. General information, balance sheet analysis, and complete financial statements; the historical series in Excel: presentations to the market; Social and Environment Responsibility Report and Annual Report; Social Balance Sheet; teleconferences on results, and others. 9 - Banco do Brasil MDA 2Q08

10 LINKS OF INTEREST Banco do Brasil S.A. Investor Relations bb.com.br bb.com.br/ri 10 - Banco do Brasil MDA 2Q08

11 Summary of Results BB profits R$ 1.6 billion in the 2 nd quarter of 2008 Banco do Brasil s net income grew 53.9% on the prior year and totaled R$ 1.6 billion in the 2 nd quarter of 2008 (2Q08). Disregarding one-off items, the 2Q08 earnings amounted to R$ 1,463 million, 1.2% below the amount recorded in the 2Q07. Among the extraordinary items (+ R$ 181 million), it is worth to emphase the income from Telemar Participações stake sale (+ R$ 142 million); provision for civil claims resulting from economic plans (- R$ 54 million); expenses as a result of the substitution of the credit card base (-R$ 54 million); and tax efficiency gains with the periodic review of expenses subject to deductibility (+ R$ 110 million). The table below details the one-off items that were recognised in the second quarter of 2008: Income Statemente with Reallocations - R$ million 2Q07 1Q08 2Q08 Recurring Income 1,481 1,559 1,463 Loans Debt Assignment 67 Personnel Expenses Previ 76 PAA - Early Retirement Plan (676) Other Administrative Expenses Change of Cards Basis (54) Legal Risk (Legal Claims) Economic Plans (26) (82) (54) Eq, Interest in Resul, Subs, and Affil Visa International Share Sale 305 Divestiture (Telemar) 142 Reavaluation of Consolidated Shares 241 Income and Social Contribution Taxes Non-recurring IR and SC 213 (45) 37 Tax Efficiency Net Income 1,068 2,347 1, Banco do Brasil MDA 2Q08

12 Earning per share was R$ 0.65 for the quarter BB recorded net income per share of R$ 0.65, an amount 49.9% higher than that recorded in 2Q07, but 30% lower than that recorded in the previous quarter. Earnings per Share - R$ Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Return on stockholders' equity reached 27.9% The result for the quarter corresponded to an annualized Return on Stockholders' Equity (ROE) of 27.9%, as compared to 43.5% in 1Q08 and 20.9% in the same period of It is worth noting that in 1Q08, BB recorded R$ 789 million of extraordinary items, accounting for the significant return recorded in that quarter. Excluding the extraordinary effects, the recurring ROE was 24.6% for the period, as compared to 27.6% in 1Q Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Recurring ROE - % ROE - % Distributed R$ 658 million to the shareholders as dividends and interest on own capital Out of the quarterly net income, BB has earmarked R$ 658 million for shareholders, equivalent to 40% of payout. Of this total, R$ million was distributed as interest on own capital (JCP) and R$ million as dividends. Dividends and Interest on Own Capital R$ million 1, ,032 1,597 1H06 2H06 1H07 2H07 1H Banco do Brasil MDA 2Q08

13 Analysis of Results In order to promote comparability of the Bank performance, the analysis presented here is based on the numbers of the financial group (branches in the country and abroad and financial subsidiaries). A section at the end of the summary addresses the impacts of the recently introduced economic and financial consolidation, which incorporates, proportionately, the accounting information of the associated companies not included in the financial group. In addition, the reallocated income statement is presented to permit a better understanding of the Bank's performance across the different business lines. The breakdown of reallocations is in Chapter 5.3. of the Performance Analysis report. Income Statement with Reallocation - R$ million Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 in 2Q07 in 1Q08 1H07 1H08 in 1H07 Financial Intermediation Income 10,016 10,975 10, (0.2) 19,666 21, Financial Intermediation Expenses (4,809) (5,482) (5,213) 8.4 (4.9) (9,473) (10,696) 12.9 Net Interest Income 5,208 5,492 5, ,194 11, Allowance for Loan Losses (1,236) (1,534) (1,687) (2,667) (3,221) 20.8 Fee Income 2,437 2,568 2, ,814 5, Administrative Expenses (3,232) (3,358) (3,569) (6,305) (6,926) 9.9 Personnel Expenses (1,713) (1,768) (1,933) (3,385) (3,700) 9.3 Other Administratives Expenses (1,519) (1,590) (1,636) (2,920) (3,226) 10.5 Legal Claims (102) 6 (74) - - (157) (68) - Labor Lawsuits (201) (132) (141) (29.7) 6.9 (311) (273) (12.4) Other Income/Expenses (512) (612) (722) (991) (1,335) 34.7 Income Before Taxes 2,362 2,431 2,182 (7.6) (10.2) 4,577 4, Income and Social Contribution Taxes (743) (572) (507) (31.7) (11.3) (1,312) (1,079) (17.7) Statutory Profit Sharing (137) (300) (212) 54.2 (29.5) (317) (512) 61.2 Recurring Income 1,481 1,559 1,463 (1.2) (6.1) 2,948 3, Non-Recurring Items (413) (471) Net Income 1,068 2,347 1, (30.0) 2,477 3, Ratios - % 2Q07 1Q08 2Q08 1H07 1H08 NIM Allowance/Loan Portfolio - 12 months Efficiency Ratio Recurring ROE Tax Rate Net Interest Income grew 10.3% in relation to 2Q07 and 4.6% in relation to 1Q08. The loan portfolio vigorous growth was once again vital to the Net Interest Income expansion. Besides benefiting the margin, the loan portfolio growth also allowed a change in the earning assets mix. In 2Q08 loan and leasing operations began to account for more than 50% of BB's earning assets. The table below shows the Bank's financial margin breakdown based on management information that calculates the financial income from the Bank's loan portfolio, split into its main business lines, computing interest income and the opportunity cost levied on those operations fund. In addition, it segregates the amounts corresponded to income from written-off recovery, originally accounted for as income from loans, and the income from earning compulsory deposits. The other income is comprised mainly of income from treasury, resulting from transactions with securities, derivatives and foreign exchange and is shown to give a complete analysis of the components of the Net Interest Income Banco do Brasil MDA 2Q08

14 Quarterly Flow Chg.% R$ million 2Q07 1Q08 2Q08 2Q07 1Q08 Net Interest Income 5,208 5,492 5, Loans 3,396 3,615 3, Individuals 1,681 1,875 1, Companies 946 1,081 1, Agribusinesses (6.8) 8.9 Others 1,811 1,878 1, Earning Compulsory Deposits Written-off Recovery Others 1,024 1, (2.9) (3.3) The financial income from loan operations represented 67.1% of the Net Interest Income, with a significant contribution from individuals loans (35% of the margin). However, it is important to emphasize that the business loan income has been growing at a faster pace than that from individuals loans, both in the quarterly comparison and in the annual comparison. In addition, the income originating from agribusiness loans decreased in the annual comparison on account of the reduced equalization revenues volume. There was growth of 8.9% in the quarterly comparison, in line with the expansion of these operations volume. On the other side, there was reduction in the contribution of the other results to the Net Interest Income. This is a result of the Bank s management focus on expanding the loan portfolio. Annualized NIM - % 2Q07 1Q08 2Q08 Loan Operations Individuals Companies Agribusinesses Others Global NIM When analyzing the different operations NIM that comprise the Net Interest Income, it can be observed that the loan portfolio NIM has diminished over the quarters as a result the changes at that portfolio composition. The emphasis on payroll loans and vehicle loans, together with a reduction in the interest rates charged and a more fierce competition in the financial sector, led to a reduction in the individual loan portfolio average NIM of 536 base points (from 28.79% to 23.43%). The loan portfolio NIM was reduced by only 144 base points, falling from 10.82% in 2Q07 to 9.38% in 2Q08. The fall was cushioned by the operations geared toward companies and agribusiness, on which the NIM did not decrease so markedly in the period. Despite this, notwithstanding the increase in interest rates observed in 2Q08, BB kept its global NIM relative stable, which ended the period at 7.3%. This stability is explained by BB's assets mix which give it a significant exposure to fixed rate loan portfolio for legal entities and agribusiness and to floating-rate security portfolio. Assets of the Bank surpass R$ 400 billion Using extended concept, where guarantees granted and private securities are included, BB's loan operations reached R$ billion, growth of 34% in 12 months. This strong expansion was sufficient to propel the Bank beyond R$ 400 billion in assets, 21.2% growth in 1 year. Similarly, funding continued to grow. Deposits totaled R$ billion, 18.8% growth in 12 months and 2.8% in the quarter. Savings and time deposits, which grew 20.2% and 18.8% respectively, deserve special mention Banco do Brasil MDA 2Q08

15 Balance Sheet - R$ million Chg. % on Jun-07 Mar-08 Jun-08 Jun-07 Mar-08 Total Assets 342, , , Loan Portfolio 145, , , Securities 72,071 70,091 70,461 (2.2) 0.5 Short-term Interbank Investments 51,614 72,651 54, (25.3) Deposits 164, , , Demand Deposits 36,841 44,172 43, (1.2) Saving Deposits 40,831 48,112 49, Interbank Deposits 5,146 6,247 5, (10.7) Time Deposits 81,427 91,261 96, Money Market Borrowing 74,719 99,914 93, (6.6) Shareholders' Equity 22,305 25,407 26, With a focus on individual clients, the Loan Portfolio grew above the industry rate The loan portfolio reached R$ billion, an expansion of 30.9% LTM and of 10% q-o-q. The domestic loan portfolio grew 35.6% LTM and 11.2% q-o-q, surpassing the 7.5% growth seen in the banking industry. Individual loan portfolio grew 45.1% in relation to the same prior-year and 10.6% in the quarterly comparison totaling R$ 40.5 billion. With this performance the individual loan portfolio represents 21.3% of the total portfolio, as opposed to a share of 19.2% in 2Q07. The main highlight in this segment was vehicle loans, which grew 173.5% in 12 months and 32.9% in the quarter. Another highlight was Consumer Finance backed by Direct Deposit, a product designed to BB account holders whom receive their earnings in this account, which grew 10.8% in the quarter and 50.9% in 12 months. Payroll loans still being the best selling product of this portfolio, with a R$ 14.0 billion balance and 37.9% growth LTM and 9.8% in the quarter. Loans to companies totaled R$ 78.3 billion, an expansion of 38.9% in relation to 2Q07 and of 13.2% in relation to 1Q08. Working capital lines performed particularly well, reaching R$ 37.1 billion, which represents growth of 79.4% in 12 months and of 24.4% in the quarter. Although agribusiness credit recorded growth below that of the other segments, it expanded 9%. Agroindustrial loans, which grew 80.9% in 12 months and 16.4% in the quarter, also deserves special mention. Loan Portfolio - R$ million Chg. % on Mar-07 Jun-07 Mar-08 Jun-08 Jun-07 Mar-08 Loan Portfolio 140, , , , Brazil 128, , , , Individuals 26,130 27,904 36,620 40, Payroll Loan 9,343 10,173 12,781 14, Consumer Finance backed by Direct Deposit 1,659 2,260 2, Vehicle 1,287 1,722 3,544 4, Credit Cards 3,198 3,450 6,425 7, Overdraft Accounts 2,660 2,647 2,839 2, Companies 56,345 69,118 78, SME 19,448 21,390 25,675 29, Medium and Large Enterprises 35,718 34,955 43,443 49, Agribusiness 46,774 48,769 56,524 61, Individuals 37,756 38,577 40,684 43, Companies 9,018 10,192 15,839 18, Foreign 12,318 12,214 10,499 9,717 (20.4) (7.4) 15 - Banco do Brasil MDA 2Q08

16 Credit Risk in line with the loan portfolio Credit Risks Provisioning expenses, which amounted to R$ 1.7 billion in 2Q08, increased with the loan portfolio growth, and at the end of 2Q08, represented 3.6% of the average portfolio, which reflects the good quality of the Bank's portfolio. When compared with the loan portfolio, the provision outstanding balance, which was R$ 11,165 million, dropped from 6.2%, in 1Q08, to 5.9% of the portfolio in 2Q08. The average risk (provisions required over the loan portfolio) also improved, ending the period at 5.42%, against 5.56% in the prior quarter. Ratios - % 2Q07 1Q08 2Q08 Past Due Loans/Loan Portfolio Allowance/Loan Portfolio Past Due Loans + 60 days/loan Portfolio Past Due Loans + 90 days/loan Portfolio Allowance/Past Due Loans + 60 days Allowance/Past Due Loans + 90 days Average Risk Service Revenues increase in spite of the new regulations Fee income totaled R$ 2,633 million, growth of 8.0% in 12 months and of 2.5% in relation to the previous quarter. The effects of Resolution CMN 3,518/07, which regulates the banking fees collection for individuals, were seen most strongly in the fees originating from loans, with a fall of 2.2% in the annual comparison and of 13.1% in the quarterly comparison. In relation to account fees, the end of the fee exemption period granted to the beneficiaries of the payrolls of the State of Bahia and of Minas Gerais, the growth of the customer base and the increase in the volume of transactions carried out by our account holders mitigated the impact of that regulation. This performance is most visible in the account fees that recorded growth bigger than the total fee income. Additionally, the growth of credit and debit cards, AUM and billings, which increased their share in the total fee income, contributed toward the increase and helped to offset the reduction resulting from the new regulation. Fee Income Quarterly Flow Half-yearly Flow Chg. % on R$ million 2Q07 1Q08 2Q08 1H07 1H08 2Q07 1Q08 1H07 Account Fees ,420 1, Loan Fees (2.2) (13.1) 5.5 Credit Card Fees Investment Fund Management Fees Billings Interbank (27.8) (24.6) (14.9) Collection (6.2) 5.2 Services Rendered to Affiliated (6.1) 6.8 (3.9) Official Services Fees (55.7) 0.6 (74.5) Other Services Total 2,437 2,568 2,633 4,814 5, Highlights 2Q07 1Q08 2Q08 Accounts - thousands 26,295 27,855 28,828 Points of Service 15,161 15,324 15,353 Assets under Management - R$ million 208, , ,883 Credit Cards - million Banco do Brasil MDA 2Q08

17 Organic growth produces increase of 10.4% in Administrative Expenses The administrative expenses, which comprise personnel expenses and other administrative expenses, totaled R$ 3.6 billion, growth of 10.4% in relation to the second quarter of 2007 and 6.3% in relation to the prior quarter. In the Other Administrative Expenses, the sum of R$ 54.1 million, which relates to the expenses incurred in the substitution of the credit card base with new cards with chips, was treated as an one-off expense. This measure will ensure greater security in transactions with cards, reducing fraud losses. Out of the total credit cards, 21 million credit cards with chip are being hold by our customers. Once this adjustment is made, the growth in Other Administrative Expenses was 2.9% over the previous quarter and 7.7% over the same prior-year period, in line with the organic growth of the business and inflation in the period. Growth over the first quarter is basically explained by expenses in Marketing and Public Relations, on account of the seasonality of the previous quarter, which generally requires lower expenditure in this area. Quarterly Flow Chg. % Half-yealy Flow R$ million Chg. % 2Q07 1Q08 2Q08 2Q07 1Q08 1H07 1H08 1H07 Others Administrative Expenses (1,519) (1,590) (1,636) (2,920) (3,226) 10.5 Telecommunications and Data Processing (391) (427) (420) (760) (848) 11.5 Amortization and Depreciation (182) (191) (193) (362) (384) 5.9 Security, Guard and Transport Services (231) (250) (251) (450) (501) 11.4 Expenses with Premises and Equipment (202) (210) (215) (401) (425) 5.9 Marketing and Public Relations (115) (64) (104) (9.3) 61.7 (178) (168) (5.6) Expenses with Outsourced Services (157) (210) (225) (295) (435) 47.1 Other Administrative Expenses (242) (236) (229) 5.5 (3.2) (472) (465) (1.5) Personnel Expenses grew 12.8% over 2Q07 and 9.3% over the previous quarter. The variation in the last twelve months is explained by: the increase in the headcount average number by 2.8 thousand employees; the 6% salary increase granted from the base date of September 2007; the increase of the Occupational Accident Insurance rate from 1% to 3%; and the expense of R$ 84 million to update the outstanding provisions related to fringe benefits already granted to the employees (remunerated leave, vacation and others). This final effect also explains the personnel expenses growth over the first quarter of The movements shown in the table below include a reduction of R$ 44 million, which relates to the reduction in expenses generated by the gradual headcount replacement because of the Early Retirement Plan - PAA, implemented at the end of the first half of Personnel Expenses R$ million 2Q07 1Q08 Personnel Expenses Main Changes Occupational Accident Insurance 18 (2) Salary Raise 2007/ Workforce Increase 58 (23) Update of Finge Benefit Provision Other Effects (44) 106 Personnel Expenses - 2Q Increase in CSLL does not affect the effective tax rate of BB Due to a lawsuit filed by the Brazilian Federation of Banks - FEBRABAN, Banco do Brasil made the decision to recognise tax credits in the amount corresponding to the increase in the Social Contribution on Net Income (CSLL), caused by the increase in the rate from 9% to 15%. The net result of this decision is that the Bank's income is not altered by the increase in the tax rate, and no future impacts are expected, regardless of the courts decision in relation to the plea entered by FEBRABAN. Already adjusted for this measure, Income Tax and Social Contribution over pre-tax income came to 25.7%, a more favorable percentage than that recorded in the same period of the prior year and in line with that of the previous quarter Banco do Brasil MDA 2Q08

18 Estimates The performance in 2Q08, as compared to 2Q07, confirms the validity of most of the estimates reported during the 4Q07 conference call and reassessed in 1Q08. The comments under the 2008 guidance are as follows: Assumptions utilized for establishing estimates Continuity of the recent monetary tightening seen in Brazil due to the threat of inflation. In this scenario, it is expected that the nominal interest rate (Selic) will end the year between 14.50% and 15.75%. Inflation will remain above the inflationary target, with signs of a cool-down from It is expected that IPCA will close between 5.9% and 7.3% in The average exchange rate will be relatively stable with the potential for a devaluation, ending the year between R$ 1.59 and R$ 1.77 (R$/US$). Notwithstanding the more volatile scenario predicted for 2008, it is expected that the economy will have a strong performance, with growth in the GDP of between 3.5% and 5.3%. Credit Provision Charges, Admin Expenses and ROE (Maintened) Expenses with Allowance for Loan Losses over Total Portfolio: remained at the threshold recorded in the previous quarter and below the range projected for 2008 (from 3.7% to 4% of the average portfolio), which demonstrates the good quality of the Bank's loans and the improvement of agricultural loans, confirming the guidance. Administrative Expenses: grew 10.4%, slightly above the range projected for the year 2008 (between 7 and 10%). However, due to the control of expenses implemented by the Bank and the exceptionality of some expenses incurred in 2Q08, we will maintain the guidance. Recurrent Return on Equity: ended 2Q08 slightly below the previous quarter, yet in line with the projections given (between 23% and 27% annualized), confirming the guidance. Loan Portfolio, Average NIM, Total Deposits, Fee Income and Effective Tax Rate (Reviewed) Domestic Loan Portfolio: grew 35.6% in 2Q08, in relation to the same prior-year period. We believe that the loan portfolio should grow between 25% and 30% in 2008, with the segment rates: Growth of individuals loans - between 35% and 40%; Loans to companies should grow between 30% and 35%; and The performance of agribusiness will allow for growth of 20% on this portfolio, maintaining the guidance. The review of these projections reflects the Bank's focus on individuals loans and the expectation of continued growth, at current rates, in the credit levels in the Brazilian banking industry up to the end of this year, in spite of the monetary tightening and the unfavorable international scenario. Average NIM: recorded a slight recovery in 2Q08, in relation to 1Q08, attaining 7.3%. However, due to the increase of fundraising costs and the reduction of loans NIM, we believe that the uptrend observed this quarter is not sufficient to reverse the trend started in the previous quarter. Furthermore, in spite of the strong growth observed in loan operations with higher spreads, such as individuals loans, the margin of these portfolios has been dropping, which compresses the total NIM. Additionally, we are projecting further increases in the basic interest rate up to the year end. Therefore we believe that the NIM for the end of 2008 should remain within the range from 7.0% to 7.5% annualized. Total Deposits: the Bank is seeking to increase fund raise to back the loan portfolio growth as projected. Thus, we are revising our estimates to a growth between 18% and 22% Banco do Brasil MDA 2Q08

19 Fee Income: despite the quarterly growth reaching the guidance, even with the impact brought by the Resolution CMN 3.518/07 in the income from account and loan operations, we decided to change the guidance, taking into consideration the constraints from the environment to increase this kind of revenue. Thus, we believe in fee income growing between 5% and 8%. Effective Tax Rate: Due to the management actions taken by the Bank to improve the tax efficiency and the recording of the tax credit generated by the increase in the rate of Social Contribution, we believe that the effective tax rate will end 2008 between 26% and 28% of the Pre-tax income deducted from expenses with Profit Sharing. Estimates 2008 x Performance 2Q08 Observed Estimate 2T08* 2008 Sustained Allowance for Loan Losses 3.6% 3.7% - 4% Carteira Média Administrative Expenses 10.4% 7% - 10% ROE 24.8% 23% - 27% Credit Cards 23.7 milhões 25 milhões Revised NIM 7.3% 7% - 7.5% Fee Income 8.0% 5% - 8% Loan Portfolio - Brazil 35.6% 25% - 30% Individuals 45.1% 35% - 40% Companies 38.9% 30% - 35% Agribusinesses 26.3% 20% Deposits 18.8% 18% - 22% Tax Rate 25.7% 26% - 28% (*) Annual Growth Rate 19 - Banco do Brasil MDA 2Q08

20 Consolidation of non-financial companies In the first quarter of 2008, Banco do Brasil started publishing the consolidated statements for the financial conglomerate and for the economic and financial conglomerate. The main differences among these two Conglomerates are described in a specific chapter of the Management and Discussion Report for 2Q/08. Financial Statements Financial Consolidated Financial and Non-Financial Consolidated R$ million Mar-08 Jun-08 Mar-08 Jun-08 Assets 402, , , ,503 Available Funds 4,668 5,633 4,790 5,754 Short-term Interbank Investments 72,651 54,272 72,689 54,283 Securities 70,091 70,461 81,490 82,301 Loan Portfolio 172, , , ,082 Other Assets 82,025 83,021 82,753 84,082 Liabilities 402, , , ,503 Deposits 190, , , ,216 Money Market Borrowing 99,914 93,335 99,716 93,097 Other Liabilities 86,771 88,288 99, ,819 Shareholders' Equity 25,407 26,371 25,407 26,371 Income Statement with Reallocations Financial Consolidated Financial and Non-Financial Consolidated R$ million 1Q08 2Q08 1Q08 2Q08 Financial Intermediation Income 10,975 10,956 11,172 11,247 Financial Intermediation Expenses (5,482) (5,213) (5,604) (5,415) Net Interest Income 5,492 5,743 5,568 5,833 Allowance for Loan Losses (1,534) (1,687) (1,534) (1,687) Fee Income 2,568 2,633 2,915 2,905 Administrative Expenses (3,358) (3,569) (3,535) (3,662) Personnel Expenses (1,768) (1,933) (1,801) (1,989) Other Administrative Expenses (1,590) (1,636) (1,734) (1,672) Legal Claims 6 (74) 6 (74) Labor Lawsuits (132) (141) (132) (141) Other Income/Expenses (612) (722) (760) (907) Income Before Taxes 2,431 2,182 2,529 2,267 Income and Social Contribution Taxes (572) (507) (669) (592) Statutory Profit Sharing (300) (212) (301) (212) Recurring Income 1,559 1,463 1,559 1,463 Non-Recurring Items Net Income 2,347 1,644 2,347 1,644 We present below the main differences in the Banks s P&L with Reallocations Financial Intermediation Income - Financial Income of Insurance Operations: + R$ million Income from Financial Intermediation - Financial Expenses of Technical Provisions for Insurance, Pension Plan and Capitalization: - R$ million Service Revenue - Addition of R$ 272 million Other Operating Income / Expenses - Results from Insurance, Pension Plan and Capitalization Operations: + R$ million - Holdings in Subsidiaries and Affiliates - R$ 206 million 20 - Banco do Brasil MDA 2Q08

21 1 Economic Environment In the first semester of 2008, the international environment was marked by the maintenance of uncertainties in financial markets, especially the American one, and of the devaluation of the dollar against the main currencies. Prices of commodities continued to climb, giving rise to an increase of inflationary pressure at global level. In this context, the monetary policy continued to be relaxed in the United States and remained stable in Japan and in the Area of the Euro, despite the high inflation rates. In the domestic environment, the improvement of macroeconomic foundations, such as reduction of foreign vulnerability, control of inflation, fiscal discipline and outlook of sustainable economic growth on the medium term, were essential for the country to be upgraded to the Investment Grade category by the agencies Standard & Poor's and Fitch Ratings. The trade balance continued to slide, accumulating US$ 30.8 billion in the last twelve months ended June, as opposed to a balance of US$ 40.0 billion in This behavior was decisive in the application of the balance in checking account, which began to exhibit a deficit. However, the admission of direct foreign investment has been sufficient to suppress the outflow of foreign funds, contributing toward the valuation trend of the exchange rate. In the fiscal sphere, the generation of primary surpluses at levels above the government target has been maintaining its contribution to the gradual downslide of the net debt of the public sector. The evolution of the level of activity is being leveraged mainly by the expansion of the domestic demand, which grows at a faster pace than that of the supply, which has caused deterioration both of the variation of the current IPCA and of expectations for next year, both above the central target of 4.5%. Hence in April Copom started a cycle of raising the basic interest rate, which climbed from 11.25% p.a. to 12.25% p.a. at the end of the semester. The total volume of credit of the Financial System expanded 33.4% in the last 12 months, reaching R$ billion in June, which corresponds to 36.5% of the GDP. The demand for credit, both by companies and individuals, remained heated over the quarter, with growth of 41.3% and 32.4%, respectively, in relation to 2Q07. Of the total volume of loans granted with free resources, loans to individuals attained 47.3% against 48.9% in 2Q07, while credit to companies raised 51.1% in 2Q07 to 52.7% in 2Q08. Table 1. Main Macroeconomic Indicators 2Q07 1Q08 2Q08 12 months GDP Change %* International Reserves** Country Risk*** Ptax Dollar Sale (6.1) (1.3) (9.0) (17.4) Accumulated IGP-DI FGV Accumulated IGP-M FGV Accumulated IPCA IBGE Selic (end of period - %) Accumulated Selic Accumulated TR (exbtn) TJLP IBGE Ptax Dollar Sale *** * Deseasonalized variance (quarter over previous quarter) ** Amount accumulated in the year up to the end of the period (in US$ billion) *** Closing Rate Source: Economática In the foreign exchange market, the US dollar closed the first semester of 2008 quoted at R$ , as compared to R$ in the first quarter of In view of Banco do Brasil's risk management policy of keeping a low foreign exchange exposure, the volatility of the foreign exchange rate only brings about residual effects in the Bank s results. In relation to the indexes that measure inflation, in the last Banco do Brasil MDA 2Q08

22 months, IGP-DI recorded an accumulated increase of 14.0% and IGP-M had positive variation of 13.4%. IPCA, the official inflation index, recorded an uptrend of 6.1%, higher than the goal established by CMN Banco do Brasil MDA 2Q08

23 2 BB Securities 2.1 Shares At the end of the first half of 2008, Banco do Brasil s capital stock was R$ 13,211,644, made up of 2,542,181,530 ordinary shares, represented in dematerialized form and without any nominal value. The largest shareholder is the National Treasury, with 65.3% of the capital, followed by Caixa de Previdência dos Funcionários do Banco do Brasil (Previ) with 10.5%, and BNDESPar the equity investment company of National Bank for Economic and Social Development which has 2.5% of the capital. The others shares, 21.7%, are spread out in the market. Table 2. Shareholding Breakdown % Shareholders 2Q07 1Q08 2Q08 National Treasury Previ BNDESPar Free Float Individuals Companies Foreign Capital Total The Board of Directors, in a meeting held on , approved the setting, for the year 2008, the payout rate equivalent to the minimum percentage of 40% of the net income, fulfilling the policy for payment of dividends and/or interest on own capital on a quarterly basis, according to Art. 43 of the Bank s By-Laws. In this manner, in the first half of 2008, the Bank distributed to its shareholders the sum of R$ 1,597 million, being R$ million as interest on own capital and R$ million as dividends, which represents R$ per share in the period. Table 3. Distribution of Dividends/Interest on Own Capital R$ million 2Q07 1Q08 2Q08 National Treasury PREVI BNDES Individuals Companies Foreign Capital Total Banco do Brasil MDA 2Q08

24 BB s shareholder base is characterized by the great number of shareholders with a small share in the capital. As can be seen from the table below, 336,291 shareholders (94.2%) account for 1.5% of the capital, while 20,652 shareholders (5.8%) hold 98.5% of the total of the shares. Table 4. Shareholders by Range of Shares Owned Range of shares owned N. Shareholders % Shareholders Qty. Shares % Qty. Shares 1 to 10 shares 107, , to 50 shares 91, ,357, to 100 shares 38, ,842, to 1,000 shares 97, ,849, Over 1,000 shares 20, ,503,555, Total 356, ,542,181, Table 5. Free Float by Range of Shares Owned Range of shares owned N. Shareholders % Shareholders Qty. Shares % Qty. Shares 1 to 10 shares 107, , to 50 shares 91, ,357, to 100 shares 38, ,842, to 1,000 shares 97, ,849, Over 1,000 shares 20, ,673, Total 356, ,300, With regard to the total of the Bank s shares that are well spread out in the market (21.7%), that is, the free float, the predominance of foreign capital can be seen (55.0%), followed by Individuals (26.5%) and Companies (18.5%). Jun/07 Mar/08 Jun/ % 27.0% 26.5% 47.1% 51.4% 55.0% 25.9% 21.6% 18.5% Individuals Companies Foreign Investors Figure 1. Total Distribution of the Free Float 24 - Banco do Brasil MDA 2Q08

25 Equity Held by Foreign Investors In an ordinary meeting held on 06/30/2008, the National Monetary Council (CMN) approved, to be forwarded to the President of the Republic, a proposal authorizing foreign participation increase in Banco do Brasil S.A.'s capital stock, from 12.5% to 25%. From 2002 onwards, a noteworthy increase has been noted in the participating interest of foreigners in the Bank's capital. With the Bank's Public Stock Offerings held in 2006 and 2007 and the "B" and "C" Bonds Subscription, the share held by foreign parties significantly increased, from 3.4% in 2005 to 9.9% at the end of 2007, and reaching 11.9% at the end of 2Q08, representing 55.0% of the free float Q08 Figure 2. Equity Held by Foreign Investors 25 - Banco do Brasil MDA 2Q08

26 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 pro rata temporis. The breakdown of the Series "C" Warrant in June 2008 is shown in the following table : Table 6. Breakdown of the Series C Warrant Holders % 2Q07 2Q08 Individuals Companies Foreign Capital Total Series "C" Warrants showed the following characteristics in June 30 th 2008: Table 7. Series C Warrants Warrant Code Exercise Date Number Exercise Price R$ Quotation in R$ Series C BBAS to ,880, In a simulation, considering the total of 2,542.2 million shares, the potential dilution in the Bank's capital is 0.7%, going from the assumption that until 2011 there will be no additional capital increases and that all the Series C Warrants will be exercised by or before maturity (03.31 to ). Conversion: 1 Warrant = shares Total of Shares= 2,542,181,530 Table 8. Expected Dilution of Capital Warrants Qty. Warrants Qty. Shares Dilution of Capital - % Series C 5,880,431 18,416, Banco do Brasil MDA 2Q08

27 2.3 Performance of the Shares Market Turbulence in the global economic environment with a slowdown of growth, and increasing inflationary pressures, combined with risks of stagnation of the North American economy, provoked a negative impact on financial markets in general. In the United States of America, risks originating from the real estate market still persisted in the last quarter, entailing devaluation of 17.5% in the NYSE Composite Index. Moreover, the increase in prices of commodities, especially of oil, which has been reaching record levels in recent months, increase the fear of investors in relation to the future of the economy. Internally, The Brazilian Central Bank adopted a more stringent monetary policy, raising the SELIC interest rate to 12.75% in the beginning of June and for 13% in the meeting in July. The inflation measured by IPCA ended 1H08 with an accumulated uptrend of 3.63% and of 5.9% in the last twelve months, above the center of the stipulated target of 4.5%. The positive highlight was Brazil's rise to investment grade by risk rating agencies Standard & Poor's and Fitch. Therefore Ibovespa ended the first semester at 65,071 points, modest valuation of 1.02% in relation to the closing of The total volume traded was R$ 758 billion, corresponding to the daily average of R$ 6.2 billion with the volume of trade attaining 218 thousand, indicating an increase of liquidity of the market. In the banking sector, the high volatility and devaluation of the shares of the segment continued, with investors fearful that other financial institutions could be affected by the crisis of the North American financial sector. BB shares BB's shares ended the second quarter quoted at R$ In the YTD in 12 months shares and "C" bonds recorded devaluation of 2.9% and 15.0%, respectively, while Ibovespa climbed 19.5%, according to the following graph. 19.5% (2.9)% Jun07 Jul07 Aug07 Sep07 Oct07 Nov07 Dec07 Jan08 Feb08 Mar08 Apr08 May08 Jun08 BB Ibovespa Source: Economática Figure 3. BB Shares and Series "C" Warrants vs. Ibovespa 27 - Banco do Brasil MDA 2Q08

28 Participation in Ibovespa The Bovespa Index (Ibovespa) is an index that represents the Brazilian stock market, made up of shares that were traded in at least 80% of the trading sessions carried out. From this, the Tradability Index is worked out, made up by the financial volume and by the quantity traded of each share transacted, which determines the ranking of the share in the market. Out of the total of share, the 80% with the highest Tradability index are determined, to represent the Ibovespa index. The growth of the Bank's share in the theoretical portfolio of Ibovespa can be verified in the following chart. In the theoretical portfolio of Ibovespa in force for the next four months (Sept/08 - Dec/08), the Bank occupies the 11 th place, as opposed to 12 th place in the portfolio of May/08 - Aug/08. The Public Offering carried out in 2006 and 2007 and the split of shares, in the proportion of 1:3, favored the increase of the share s liquidity in the market, permitting access by small investors to the Bank's shares May/06 - Aug/06 Sep/06 - Dec/06 Jan/07 - Apr/07 May/07 - Aug/07 Sep/07 - Dec/07 Jan/08 - Apr/08 May/08 - Aug/08 Sep/08 - Dec/08 BBAS3 Banking Industry Source: Bovespa Figure 4. BBAS3 in Ibovespa The Bank s quantity of trades and the financial volume traded were higher in 2Q08 than the same period of the previous year. The increase observed in the last 12 months was fundamentally due to the splitting of Banco do Brasil shares and the increasing of BB s free float after the Public Oferring carried out in the 4Q07. With the lower price and the higher liquidity, the appeal of the share grew, allowing small investors to also be part of the traded volume. The daily average of the quantity of deals envolving BB s shares recorded an increase of 210.7% in 2Q08, inrelation to the 2Q08, and attained 3,688 deals, 17.0% in relation to 1Q08. The decrease observed in June, when compared to May, was due, primarily, to the worsening of global economic environment which penalized Banco do Brasil shares, among others Banco do Brasil MDA 2Q08

29 Unit 4,650 4,150 3,650 3,150 2,650 2,150 1,650 1, Jun/06 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Source: Economática Figure 5. Average amount traded in BBAS3 In relation to the average daily amount traded, the Bank totaled R$ million in 2Q08. This value represents the increase of 121.9% against 2Q07, and stability in relation to the previous quarter. Such as the quantity, there was a decrease in the average daily amount traded in June, followed by the other banks and the share market in general. R$ 142,000, ,000, ,000,000 82,000,000 62,000,000 42,000,000 22,000,000 2,000,000 Jun/06 Aug/06 Oct/06 Dec/06 Feb/07 Apr/07 Jun/07 Ago/07 Oct/07 Dec/07 Feb/08 Apr/08 Jun/08 Source: Economática Figure 6. Average financial volume BBAS3 Market Ratios The P/L ratio, which indicates a time estimate, in years, for investors to recover the capital invested in the purchase of shares, assuming the full distribution of company profits, attained 10.11x in June 2008, as opposed to 14.91x in June The net income per share reached R$ 1.57 in 1H08, against R$ 1.00 in 1H07. The Price/Book Value per share (PBV) ratio of 2.52 in June 2008 denotes that the Bank's shares are traded more than two times the PBV, i.e., the Bank is worth 252% of the amount of Shareholders Equity at Bovespa. Market capitalization reached R$ 66,478 million at the end of June 2008 against R$ 69,054 million in the same period of the previous year, decreasing 3.7%. The capitalization of the free float recorded R$ 14,416 million, 40.6% more than the R$ 10,251 million in June In the first half of 2008, the Bank distributed to the shareholders the sum of R$ million, with R$ million as interest on own capital and R$ million as dividends, which represents R$ per share in the period. The Dividend Yield of the 1H08, determined with a basis on the division of the dividend distributed in the quarter by the market capitalization of the Bank, attained 1.6%. The following chart shows the behavior of the main multiples of the Bank over the last quarters Banco do Brasil MDA 2Q08

30 Price / Earnings 12 months ** Earnings per Share - R$ ** Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Price / Book Value** Book Value per Share - R$ ** Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Market Capitalization - R$ million Free Float Capitalization - R$ million 39,203 52,820 55,040 69,054 76,482 75,269 58,750 66,478 5,820 7,841 8,171 10,251 11,354 14,753 12,742 14,416 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Net Income - R$ million Dividends and Interest on Own Equity - R$ million 2, ,248 1,409 1,068 1,364 1,217 1,644 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 1,555 1, ,032 1H06 2H06 1H07 2H07 1H08 Dividend Yield - % Payout - % H06 2H06 1H07 2H07 1H08 1H06 2H06 1H07 2H07 1H08 ** Adjusted series considering the stock split (1:3) occcured in the second quarter of Figure 7. Market Ratios 30 - Banco do Brasil MDA 2Q08

31 3 Corporate Governance Banco do Brasil was the first government company to adhere to the Bovespa's "Novo Mercado", a segment comprising those institutions with the strictest corporate governance practices. To this effect, the Corporate Governance Code and the internal regulations of BB establish practices that guarantee the equilibrium of rights among shareholders, the sustainability of business, transparency, accountability to shareholders and to society, and ethics in the relationship with its audiences. BB's management bodies are the Board of Directors, advised by the Audit Committee, and the Executive Board, made up of the Board of Officers (president and nine vice-presidents) and by 27 statutory directors. The Bank also has a permanent Fiscal Council. Decisions are taken collectively at all levels of the Company. With the purpose of involving all the executives in the definition of strategies and approval of proposals for BB s different businesses, the Management uses committees, subcommittees and commissions at a strategic level, which guarantee agility and security for the decision taking. Highlights of the Period Apr May Jun Upgrading of the rating of Banco do Brasil to investment grade (BBB-) by the Standard & Poor's agency. Creation of the Lower Income Directorship, with the intention of expanding the strategic focus on customers with income of up to one minimum wage. The new management absorbed the operations of Banco Popular do Brasil, centralized the management of the Bank Correspondents and the actions relating to Sustainable Regional Development. BB proposed to, and the State Government of São Paulo accepted, start dealings without any binding effect, aiming at the takeover of Banco Nossa Caixa S.A. Start of validity of the resolutions of the National Monetary Council that alter the collection of tariffs in the National Financial System. Start of validity of the new rate of Contribution on Net Income. Bacen granted authorization for Banco do Brasil to operate in housing loans with savings deposits, in compliance with the rules of the Housing Financing System (SFH) Banco do Brasil MDA 2Q08

32 4 Other Information Table 9. Other Information 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Profitability Net Income per Share - R$ ** ROE Annualized % Recurring ROE Annualized % ROE Accumulated and Annualized % ROA - Annualized % NII / Earning Assets Annualized Productivity Efficiency - % Service Revenues / Personnel Expenses - % Service Revenues / Adm. Expenses - % Personnel Expenses per Collaborator - R$ 19,435 19,933 20,076 28,204 27,358 25,758 20,466 22,125 Collaborators / (Branches + PAA + PAB) Customers per Collaborator Assets per Collaborator R$ thousand 3,034 3,200 3,477 3,737 3,825 3,932 4,230 4,304 Loan Portfolio / Points of Service R$ million Quality of the Loan Portfolio Allowance / Loan Portfolio - % Allowance / (E + F + G + H) - % Portfolio Net of Allowance / Total Portfolio - % Capital Structure Leverage (times) BIS Ratio- % Total Quantity of Shares thousand , , , , Quantity of Shares in Treasury thousand Capital Market Price / Earnings 12 months ** Price / Book Value ** Market Capitalization - R$ million 39,203 52,820 55,040 69,054 76,482 75,269 58,750 66,478 Book Value per Share - R$ ** Price of Share - R$ ** Structural Information Total of Points of Service 15,042 15,113 15,133 15,161 15,212 15,297 15,324 15,353 Branches 3,960 3,969 3,974 3,977 3,984 4,008 4,024 4,052 PAA PAB 1,250 1,236 1,226 1,209 1,208 1,247 1,251 1,249 PAE 5,814 5,875 5,895 5,906 5,949 5,948 5,935 5,911 SAA 3,824 3,841 3,847 3,879 3,884 3,906 3,925 3,951 PAP Total of Customers thousand 25,405 25,710 25,935 26,295 26,636 27,414 27,855 28,828 Individuals thousand 23,879 24,150 24,353 24,676 24,999 25,746 26,157 27,054 Businesses thousand 1,526 1,559 1,581 1,618 1,636 1,667 1,698 1,775 Total of Savings Accounts thousand 15,001 15,360 15,759 16,266 16,425 16,651 17,091 17,710 Individuals thousand 14,884 15,238 15,640 16,144 16,300 16,526 16,961 17,409 Businesses thousand Collaborators 92,827 92,619 92,580 89,108 89,514 90,974 92,801 93,733 Employees * 82,622 82,672 82,468 79,310 80,048 81,855 83,417 84,258 Interns 10,205 9,947 10,112 9,798 9,466 9,119 9,384 9,475 * Adjusted Concept: See Chapter ** Adjusted series considering the stock split (1:3) occurred in the second quarter of Banco do Brasil MDA 2Q08

33 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Global Ratings Fitch Ratings Individual C/D C/D C/D C/D C/D C/D C/D C/D Short-Term - Local Currency B B B F3 F3 F3 F3 F3 Long-Term - Local Currency BB+ BB+ BB+ BBB- BBB- BBB- BBB- BBB- Short-Term - Foreign Currency B B B F3 F3 F3 F3 F3 Long-Term - Foreign Currency BB+ BB+ BB+ BBB- BBB- BBB- BBB- BBB- Moody's Financial Strength D D C C C C C C Short-Term - Local Currency P-1 P-1 P-1 P-1 P-1 P-1 P-1 P-1 Short-Term - Foreign Currency NP NP NP NP NP NP NP NP Long-Term Debt- Foreign Currency Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 Long-Term Deposits - Local Currency A1 A1 A1 A1 A1 A1 A1 A1 Long-Term Deposits - Foreign Currency Ba3 Ba3 Ba3 Ba3 Ba3 Ba2 Ba2 Ba2 Standard & Poor's Long-Term - Local Currency BB BB BB BB+ BB+ BB+ BBB- BBB- Long-Term - Foreign Currency BB BB BB BB+ BB+ BB+ BBB- BBB- National Ratings Fitch Ratings Short-Term F1+(bra) F1+(bra) F1+(bra) F1+(bra) F1+(bra) F1+(bra) F1+(bra) F1+(bra) Long-Term AA(bra) AA(bra) AA(bra) AA+(bra) AA+(bra) AA+(bra) AA+(bra) AA+(bra) Moody's Short-Term BR-1 BR-1 BR-1 BR-1 BR-1 BR-1 BR-1 BR-1 Long-Term Aaa.Br Aaa.Br Aaa.br Aaa.br Aaa.br Aaa.br Aaa.br Aaa.br Compulsory Investments Demand Deposits Rate(1) 45% 45% 45% 45% 45% 45% 45% 45% Additional(2) 8% 8% 8% 8% 8% 8% 8% 8% Compulsory Investments* 25% 25% 25% 25% 25% 25% 25% 25% Compulsory Investments (micro finance) 2% 2% 2% 2% 2% 2% 2% 2% Free 20% 20% 20% 20% 20% 20% 20% 20% Savings Deposits Rate(3) 20% 20% 20% 20% 20% 20% 20% 20% Additional(2) 10% 10% 10% 10% 10% 10% 10% 10% Compulsory Investments* 60% 60% 60% 60% 65% 65% 65% 65% Free 10% 10% 10% 10% 5% 5% 5% 5% Time Deposits Rate(4) 15% 15% 15% 15% 15% 15% 15% 15% Additional(2) 8% 8% 8% 8% 8% 8% 8% 8% Free 77% 77% 77% 77% 77% 77% 77% 77% Judicial Deposits Rate 0% 0% 0% 0% 0% 0% 0% 0% Free 100% 100% 100% 100% 100% 100% 100% 100% * In BB, the compulsory investments are applied in Rural Credit. (1) Paid over in cash without remuneration (2) Paid over in cash at Selic rate. (3) Paid over in cash at TR + interest of 6.17% p.a. (4) Linked to securities 33 - Banco do Brasil MDA 2Q08

34 5 Summarized Financial Statements 5.1 Summarized Balance Sheet Table 10. Summarized Balance Sheet Assets R$ million Balance Chg. % Jun/07 Mar/08 Jun/08 on Jun/07 on Mar/08 ASSETS 342, , , Current and Long-term Assets 336, , , Available Funds 4,724 4,668 5, Short-term Interbank Investments 51,614 72,651 54, (25.3) Securities 72,071 70,091 70,461 (2.2) 0.5 Securities Available for Trading 10,856 18,033 18, Securities Available for Sale 39,379 34,787 35,088 (10.9) 0.9 Securities Held to Maturity 20,589 16,371 15,654 (24.0) (4.4) Financial Derivatives 1, ,216 (2.5) 35.2 Interbank Accounts 30,759 36,340 38, Deposits with the Central Bank 28,711 31,102 33, Compulsory Deposits on Demand Deposits and Float 11,714 11,127 12, Compulsory Deposits on Savings Deposits 16,996 19,975 20, Other 2,048 5,238 4, (12.3) Intrabank Accounts Loans 125, , , Public Sector 4,631 6,286 14, Private Sector 129, , , ( Allowance for Loan Losses) (9,104) (10,322) (10,773) Leasing (42.7) (57.3) Leasing and Subleasing Receivables 1,068 1,150 1, (Unearned Lease Income) (1,024) (1,095) (1,320) (Allowance for Lease Losses) (22) (25) (36) Other Receivables 50,344 57,546 56, (1.0) Receivable on Guarantees Honored (1.6) (11.9) Foreign Exchange Portfolio 9,892 12,608 10, (20.2) Income Receivable (0.3) Trading and Brokerage of Securities (45.8) Specific Credits Specific Operations (95.2) (95.2) Tax Credits 13,746 13,904 14, Actuarial Assets 2,460 2,180 2,092 (15.0) (4.1) Warrants Deposits Receivable 14,710 15,734 15, Other Credits 9,166 12,622 14, (Provision or Doubtful Receivables) (856) (1,003) (1,069) (With Loan Characteristics) (315) (347) (357) (Without Loan Characteristics) (541) (656) (713) Other Assets 1,079 3,785 4, Interest in Companies (17.0) (24.3) Other Assets (6.2) (0.3) (Provision for Possible Losses) (148) (150) (147) (0.7) (1.8) Prepaid Expenses 955 3,680 3, Permanent Assets 5,903 7,464 8, Investments 1,262 2,427 2, (0.7) Property and Equipment 2,715 2,793 2, (0.9) Leasing Assets 1,362 1,668 2, Deferred Charges *Adjusted series since June 2007, according to CMN Rule nº 3.535, of For further information, see Presentation Banco do Brasil MDA 2Q08

35 Table 11. Summarized Balance Sheet - Liabilities R$ million Balance Chg. % Jun/07 Mar/08 Jun/08 on Jun/07 on Mar/08 LIABILITIES AND SHAREHOLDER S EQUITY 342, , , Current and Long-term Liabilities 319, , , Deposits 164, , , Demand Deposits 36,841 44,172 43, (1.2) Savings Deposits 40,831 48,112 49, Interbank Deposits 5,146 6,247 5, (10.7) Time Deposits 81,427 91,261 96, Investment Deposits Money Market Borrowing 74,719 99,914 93, (6.6) Funds from Acceptances and Securities Placed 1, , Foreign Securities 1, , Interbank Accounts 1,697 3,049 3, Intrabank Accounts 1,318 1,369 1,185 (10.1) (13.5) Borrowing 3,354 3,058 3,085 (8.0) 0.9 Foreign Borrowing 3,354 3,058 3,085 (8.0) 0.9 Domestic Onlending Official Institutions 15,240 18,250 19, National Treasury 3,141 3,184 3, BNDES 4,843 9,198 9, Finame 6,759 5,194 5,802 (14.2) 11.7 Other Institutions (3.2) Foreign Onlending (88.8) - Financial Derivatives 2,052 1,876 1,955 (4.7) 4.2 Other Accounts Payable 55,227 58,542 57, (2.3) Collection of Taxes and Contributions 1,851 2,430 2, Foreign Exchange Portfolio 14,166 10,860 7,880 (44.4) (27.4) Shareholder and Statutory Distributions 763 1,262 1, (5.4) Taxes and Social Security 11,509 11,410 12, Trading and Brokerage of Securities 168 1, (9.4) (87.9) Financial and Development Funds 2,006 2,125 2, Perpetual Securities (17.4) (9.0) Special Operations (1.0) 0.4 FCO (Subordinated Debt) 9,574 10,405 10, Actuarial Liabilities 3,562 4,111 4, Other Liabilities 10,648 13,789 15, Unearned Income Shareholders Equity 22,305 25,407 26, Capital 12,711 13,212 13, (0.0) (Unpaid Capital) Capital Reserves ,273.7 Revaluation Reserves (9.9) (1.2) Revenue Reserves 9,145 10,125 13, Mark-to-Market Securities and Derivatives (86.9) (32.1) Retained Earnings (Accumulated losses) (Treasury Shares) Income Accounts - 1, *Adjusted series since June 2007, according to CMN Rule nº 3.535, of For further information, see Presentation Banco do Brasil MDA 2Q08

36 5.2 Summarized Corporate Law Income Statement Table 12. Summarized Corporate Law Income Statement R$ million Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 on 1Q07 on 4Q07 1H07 1H08 on 1H07 Financial Intermediation Income 10,125 10,901 10, (2.0) 19,833 21, Loans 6,069 7,001 6, (1.3) 12,171 13, Leasing Securities 3,167 3,749 3,052 (3.6) (18.6) 6,210 6, Financial Derivatives 318 (449) 303 (4.9) (146) - Foreign Exchange Portfolio (111) (94.6) Compulsory Investments Financial Intermediation Expenses (6,105) (7,237) (6,958) 14.0 (3.9) (12,523) (14,195) 13.3 Money Market Funds (4,416) (4,914) (5,125) (8,804) (10,039) 14.0 Borrowing, Assignments and Onlending (393) (720) (88) (77.6) (87.8) (803) (808) 0.6 Allowance for Loan Losses (1,296) (1,603) (1,744) (2,917) (3,347) 14.8 Gross Income from Financial Intermediation 4,020 3,663 3,726 (7.3) 1.7 7,310 7, Other Operating Income (Expenses) (2,297) (739) (1,569) (31.7) (3,489) (2,308) (33.8) Fee Income 2,437 2,568 1,986 (18.5) (22.7) 4,814 4,554 (5.4) Banking Fees Income Personnel Expenses (2,513) (1,899) (2,074) (17.5) 9.2 (4,372) (3,973) (9.1) Other Administrative Expenses (1,647) (1,665) (1,819) (3,114) (3,483) 11.9 Taxes (525) (509) (524) (0.1) 3.0 (1,014) (1,033) 1.9 Equity Int, in the Results of Subs, and Affil, (56) (88.1) (20) Other Operating Revenues 1,568 1,263 1, ,692 3, Other Operating Expenses (1,561) (1,144) (1,784) (2,476) (2,928) 18.3 Operating Income 1,724 2,924 2, (26.2) 3,821 5, Non-operating Income Income Before Taxes 1,736 2,956 2, (25.0) 3,864 5, Income and Social Contribution Taxes (530) (309) (361) (32.0) 16.7 (1,070) (669) (37.4) Statutory Profit Sharing (137) (300) (212) 54.2 (29.5) (317) (512) 61.2 Net Income 1,068 2,347 1, (30.0) 2,477 3, Banco do Brasil MDA 2Q08

37 5.3 Income Statement with Reallocations Table 13. Income Statement with Reallocations Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 on 2Q07 on 1Q08 1H07 1H08 on 1H07 Financial Intermediation Income 10,016 10,975 10, (0.2) 19,666 21, Loan operations (4) (14) 6,069 7,208 7, (0.1) 12,171 14, Lease operations Securities (11) 3,167 3,553 3,052 (3.6) (14.1) 6,210 6, Financial Derivatives 318 (449) 303 (4.9) (146) - Foreign Exchange Portfolio (111) (94.6) Compulsory Investments FX Gain (Loss) on Foreign Investments (1) (223) 27 (294) (377) (267) (29.3) Other Op. Inc. of a Fin. Intermed. Nature (2) Financial Intermediation Expenses (4,809) (5,482) (5,213) 8.4 (4.9) (9,473) (10,696) 12.9 Money Market Funds (3) (4,416) (4,762) (5,125) (8,670) (9,888) 14.0 Borrowing, Assignments and Onlending (393) (720) (88) (77.6) (87.8) (803) (808) 0.6 Net Interest Margin 5,208 5,492 5, ,194 11, Allowance for Loan Losses (5) (1,236) (1,534) (1,687) (2,667) (3,221) 20.8 Net Financial Margin 3,971 3,958 4, ,527 8, Fee Income 2,437 2,568 2, ,814 5, Services Income 2,437 2,568 1,986 (18.5) (22.7) 4,814 4,554 (5.4) Banking Fee Income Taxes on Revenues (6) (11) (489) (488) (511) (940) (999) 6.3 Contribution Margin 5,919 6,038 6, ,401 12, Administrative Expenses (3,268) (3,372) (3,582) (6,378) (6,954) 9.0 Personnel Expenses (7) (9) (10) (1,713) (1,768) (1,933) (3,385) (3,700) 9.3 Other Administrative Expenses (8) (17) (1,519) (1,590) (1,636) (2,920) (3,226) 10.5 Other Tax Expenses (6) (36) (14) (13) (62.5) (6.4) (73) (28) (62.1) Commercial Income 2,652 2,666 2,595 (2.1) (2.7) 5,023 5, Legal Risk (303) (125) (215) (28.9) 71.9 (468) (341) (27.2) Legal Claims (8) (13) (102) 6 (74) (27.3) - (157) (68) (56.8) Labor Lawsuits (7) (201) (132) (141) (29.7) 7.2 (311) (273) (12.4) Other Operating Income (Expenses) 0 (143) (257) (20) (400) Eq Interest in Results of Subs. and Affil. (1) (11) (12) (16) (14.8) FX Other Operating Income/Expenses (160) (412) (486) (371) (898) Other operating income (2) (3) (4) (11.0) (13.7) 1,349 1, Other operating expenses (2) (5) (887) (1,162) (1,133) 27.8 (2.4) (1,720) (2,295) 33.5 Operating Income 2,349 2,398 2,123 (9.6) (11.5) 4,534 4,521 (0.3) Non-Operating Income Income Before Taxes 2,362 2,431 2,182 (7.6) (10.2) 4,577 4, Income and Social Contrib Taxes (9) (10) (11) (13) (15) (743) (572) (507) (31.7) (11.3) (1,312) (1,079) (17.7) Interest on Own Capital Tax Benefit (1.6) Statutory Profit Sharing (137) (300) (212) 54.2 (29.5) (317) (512) 61.2 Recurring Income 1,481 1,559 1,463 (1.2) (6.1) 2,948 3, Extraordinary Items (413) (77.1) (471) Previ Suspension of contributions Plan I (9) Previ Provision for Non-recurring IR and CS (9) (26) PAA Prov, for Retirement Incentive Plan (10) (676) (676) - - PAA Provision for Non-recurring IR and CS (10) Sale of share in VISA Internacional (11) Sale of the share in VISA Int - IT/SC/Pasep/Cofins (11) - (73) (73) - Disposal of Investments (Telemar) (16) Revaluation of Consolidated Shares (12) Economic Plans (15) (26) (82) (54) (33.9) (37) (136) Economic Plans - IR/CS (15) (33.9) Debt Assignment (14) Tax Efficiency (15) (63.6) Change of Credit Card Basis (17) - - (54) (54) - Chg of Cred Card Prov. for non-recur IR & CS (17) Net Income 1,068 2,347 1, (30.0) 2,477 3, Banco do Brasil MDA 2Q08

38 5.3.1 Details of the Reallocations The adjustments made in the statement of income to get the Reallocated Statement of Income are detailed below. The adjustments do not change the final result, since they only intend 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 recorded in the period to reflect, effectively, the gain from all the remunerated assets, seeking to inform the market what was the spread achieved from the division of this margin by the assets, except the permanent assets. For this, it was necessary to: Include in the financial margin the income recorded in Other Operating Income that had financial intermediation characteristics and which was derived from earning assets recorded in the Balance Sheet Under Other Receivables; Identify the foreign exchange gain/(loss) on financial assets and liabilities abroad in the period in a specific financial margin item (financial equity); To keep in 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 Net Interest Income (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 the analysis of the NIM, since assets and liabilities previously included in permanent assets are included in other balance sheet items after consolidation. The NIM would be improperly reduced without reallocation. In 2Q08, this reallocation summed R$ 594 million. (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 R$ million Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 on 1Q07 on 4Q07 1H07 1H08 on 1H07 Income from Special Operations (15.5) (8.5) Income from Specific Credits FX Readjustment , FX Readjustment Income , ,153 1,012 (12.2) FX Readjustment Expense (734) (52) (708) (3.5) 1,274.5 (1,006) (759) (24.5) Total (3) Reallocation of Other Operating Income to Funding Operations in the Market. Refers to the reversal of charges with the restatement of savings deposits recorded upon the closing of the semesters. In the months after the closing of the Balance Sheets, this reallocation is necessary in order to correctly evidence the Net Interest Income. In this manner, this reallocation is only performed in the first and third quarters of the year. In 1Q08 the charges were R$ million. (4) Reallocation of Other Operating Income to Loan Operations corresponding to the equalization revenues of charges on loan operations. As of January/2008 these revenues began to be accounted 38 - Banco do Brasil MDA 2Q08

39 for in Other Operating Income, and had to be reallocated to the group of Loan Operations for purposes of comparability. In 2Q08 equalization revenues amounted to R$ 287 million. Reallocations in the Net Financial Margin (5) The expense with the Allowance for Loan Losses includes credits without characteristics of financial intermediation, so this part of the allowance is reallocated to Other Operating Expenses. In 2Q08 this reallocation was for R$ 57 million. Reallocations in the Contribution Margin (6) Considering the model used for the Income Statement, tax expenses on revenues were reallocated and included in the contribution margin for the amount of R$ 511 million. Reallocations in the Operational Result (7) and (8) The expenses with Legal Claims (R$ 128 million) and Labor Lawsuits (R$ 141 million) were separated in the Income Statement with Reallocations, into a group called Legal Risk. It aims to provide a better analysis of the administrative expenses and giving more transparency to this kind of risk. Extraordinary Items (9) Contributions to Previ - Benefit Plan nº 1, made in the first quarter of 2007, and returned to the Bank in the second quarter of 2007, as part of an agreement executed between BB and entities representing the employees on the use of the surplus referring to Benefit Plan nº 1, which establishes the suspension of contributions to Previ, to be reviewed every twelve months. For purposes of comparability, the amount of contributions of 1Q07 in the sum of R$ 50.2 million, net of taxes, was excluded from recurring income and treated as an extraordinary item. (10) Early Resignation Plan (PAA) for employees over 50 years of age and with 15 years of contribution to Previ, which implied the extraordinary accounting of R$ 65 million in 4Q07, net of taxes. PAA was the subject matter of a Significant Event divulged on July 3, (11) Partial sale of investments, corresponding to 56.1% of the shares of the BB group (Multiple Bank, Visanet and VisaVale) in the company Visa Inc., generating positive extraordinary result of R$ million in 1Q08. The subject was included in a notice to the market on March 31, (12) As of the first quarter of 2008 the Bank started to proportionately consolidate its holdings in several companies. Extraordinary revenues of R$ 241 million were determined in 1Q08 due to the valuation by the Equity Method of Accounting of interests in companies that were not valued in this manner. The consolidation of the holdings was the subject matter of a Significant Event divulged on April 29, (13) Civil claims of Economic Plans on savings deposits, generating extraordinary expenses in 2Q08 in the amount of R$ 54 million. For purposes of comparison the quarterly sums of these claims in the year 2007 were determined and treated as extraordinary items. To wit: 1Q07 of R$ 11.2 million, 2Q07 of R$ 26 million, 3Q07 of R$ 91.1 million, 4Q07 of R$ 71 million, and 1Q08 of R$ 82 million. (14) Assignment of credits written off to Ativos SA, generating extraordinary revenues in 67.3Q67.3 in the amount of R$ 67.3 million. (15) Tax efficiency generated by the Bank in a periodic review as to the treatment of the deductibility of tax expenses used until then. In view of this review, it was feasible to obtain tax efficiency in 1Q08 in the amount of approximately R$ 302 million and R$ 110 million. (16) Sale of shares of Telemar Participações, belonging to Alutrens Participações, controlled by Brasilcap Capitalização S.A. and by Brasilveículos Companhia de Seguros S.A., associated companies of BB 39 - Banco do Brasil MDA 2Q08

40 Banco de Investimentos, wholly-owned subsidiary of Banco do Brasil, generating positive extraordinary result of R$ 142 million in 2Q08. (17) Expense of R$ 54 million originating from the substitution of the base of credit cards with a magnetic stripe by cards with a chip. At the end of 2Q08 cards with a chip represent 95.5% of the credit card base Banco do Brasil MDA 2Q08

41 6 - Balance Sheet Analysis 6.1 Breakdown Banco do Brasil is the largest financial institution in Brazil, with total assets of R$ 403,468 million, a 18.0% expansion in 12 months. Earning Assets had a growth of 23.2% in 12 months. The figure below shows an increase in relative share of earning assets in the Bank s total assets, which went up from 80.8% in Jun/07 to 84.4% in Jun/08. The growth of loan operations, 31.9% in relation to June 2007 and 10.7% in relation to March 2008 contributed significantly toward the advance of earning assets. As regards Liabilities, a reduction of the relative share of Interest Bearing Liabilities can be observed in relation to Total Liabilities, both in the quarterly comparison and in the annual comparison. This movement is largely due to the decrease in Money Market Borrowings, specially those from repurchase agreements. Earning Assets 1 vs. Interest Bearing Liabilities 2 - % Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Earning Assets Interest Bearing Liabilities Other Assets Other Liabilities Figure 8. Earning Assets vs. Interest Bearing Liabilities 1 Cash and cash equivalents in foreign currency, marketable securities, financial investments, loan operations, Leasing, Remunerated Compulsory Deposit and other Earning Assets vs. Interest-bearing Liabilities 2 Savings Accounts, Interbank Deposits, Time Deposits, Money Market Borrowings, Foreign Borrowings, Onlendings, Financial and Development Funds, Subordinated Debts, Hybrid Capital and Debt Instruments, and Foreign Securities Issued Abroad Banco do Brasil MDA 2Q08

42 6.2 Analysis of Assets Loans, the item with the highest relative share in relation to total assets, recorded growth higher than the other assets and attained the highest relative share in the historical series, 41.0% of the total assets, which corresponds to a net balance of provisions of R$ 165,570 million. In contra Account, the relative share of Liquidity Assets (excepting securities) recorded a downslide of 450 base points in the quarter and 170 base points in 12 months. The downslide of this item reflects the reduction of money market repurchase commitments. The share of Securities recorded a slight decrease in the quarter, from 17.4% in 1Q08 to 17.5% in 2Q08. The relative share recorded a more expressive slide in the year of 360 base points, reflecting the strong growth of loans Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Other Assets Tax Credits Loans and Leasings Securities Liquidity Assets except Securities 41.0 Figure 9. Breakdown of Assets Table 15. Breakdown of Assets R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Total Assets 281, , , , , , , ,468 Liquidity Assets except Securities 34,051 33,837 46,695 56,051 55,785 55,476 77,319 59,332 Securities 73,766 73,108 73,350 72,071 74,126 75,201 70,091 70,461 Loans and Leasing 99, , , , , , , ,570 Tax Credits 9,311 8,604 8,642 13,746 13,881 13,826 13,904 14,218 Other Assets 64,982 66,939 73,147 74,658 78,347 83,859 91,344 93, Banco do Brasil MDA 2Q08

43 6.3 Liquidity Analysis One way of measuring the liquidity of a financial institution consists in determining the difference between Liquidity Assets and Liquid Liabilities. Accordingly, the Bank's liquidity is R$ 25.1 billion. R$ million 54,150 48,910 43,256 44,107 45,019 48,312 36,361 25,124 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Figure 10. Liquidity Balance The liquidity balance exhibited a reduction of 43.0% in relation to June 2007 and of 30.9% in relation to March 2008, with migration of the destination of investments due to the reduction of interbank investments and the strong growth of the loan portfolio. Furthermore, in the annual comparison the liquidity assets only 0.1% while liquidity liabilities grew 23.9% in the same period. In the quarterly comparison, both liquidity assets and liabilities recorded a decrease. Table 16. Liquidity Balance R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Liquidity Assets (A) 104, , , , , , , ,037 Available Funds 4,559 4,749 5,511 4,437 4,366 4,352 4,668 5,060 Interbank Investments 29,492 29,088 41,185 51,614 51,419 51,124 72,651 54,272 Securities (except linked to Bacen) 69,986 69,235 69,226 67,921 69,683 70,250 65,203 64,706 Liquidity Liabilities (B) 49,888 54,162 72,665 79,865 80,448 77, ,161 98,913 Interbank Deposits 5,579 4,878 5,026 5,146 5,603 5,144 6,247 5,578 Money Market Borrowing 44,309 49,283 67,639 74,719 74,845 72,270 99,914 93,335 Liquidity Balance (A - B) 54,150 48,910 43,256 44,107 45,019 48,312 36,361 25, Banco do Brasil MDA 2Q08

44 6.4 Securities Portfolio The securities portfolio showed a decrease of 2.2% in relation to 2Q07 and increase of 0.5% in relation to 1Q08, respectively. It is important to emphasize the change in the mix of the Securities Portfolio, with growth of the share of securities marked as available for trading in the total portfolio and reduction of the share of securities available for sale and of those held to maturity. Table 17. Securities Portfolio by Category R$ million Balances Share % Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Jun/07 Jun/08 Securities 73,766 73,108 73,350 72,071 74,126 75,201 70,091 70, Available for Trading 5,205 7,494 7,361 10,856 14,046 19,112 18,033 18, Available for Sale 43,180 40,641 40,711 39,379 38,466 38,109 34,787 35, Held to Maturity 24,934 24,409 24,263 20,589 20,029 16,830 16,371 15, Financial Derivatives ,016 1,247 1,585 1, , In the following table, the concentration in securities with a maturity of between 0 and 5 years can be seen. However, it is observed that this concentration recorded an expressive slide in the quarterly and in the annual comparison. In June 2008, these securities accounted for 69.6% in the total amount, which was lower than the 90.5% share for the same period of the prior year and than the 82.8% observed in the previous quarter. The mix change in the maturity of the security portfolio reflects BB s strategy to reduce the exposition in fixed income securities. Table 18. Securities Portfolio by Maturity - Market Value R$ million Up to 1 year 1 to 5 years 5 to 10 years Over 10 years Balance Share % Balance Share % Balance Share % Balance Share % Total Sep/06 22, , , ,197 Dec/06 24, , , , ,476 Mar/07 22, , , , ,309 Jun/07 26, , , , ,801 Sep/07 27, , , , ,542 Dec/07 30, , , , ,073 Mar/08* 29, , , , ,619 Jun/08 23, , , , ,270 *The value on Mar/08 refers to the Economic-Finance Consolidated. In the chart below we note an increase in securities maturing after 5 years as compared to March 2008, and a decrease in securities maturing up to 1 year. Mar/07 Mar/08 Jun/08 9.5% 17.2% 19.0% 37.7% 36.0% 33.7% 52.8% 46.8% 47.3% 0 a 1 year 1 a 5 year After 5 year Figure 11. Securities Portfolio with Maturities between 0 and 5 years and after 5 years 44 - Banco do Brasil MDA 2Q08

45 6.5 Loan Portfolio Banco do Brasil has maintained its unchallenged leadership in lending in Brazil, with a 16.9% market share in the Financial System. 1, against 16.6% in June, The evolution in loans from the Brazilian Financial System (SFN) was 33.4% in the last 12 months, accounting for 36.5% of the GDP in June 2008, against 32% in the same period of Loan operations in the financial system reached R$ 1,067 billion in June, The Bank's total loan portfolio in Brazil increased 35.6% in relation to 2Q07. In relation to the previous quarter, growth in BB reached 11.2%. Considering the Bank's Total portfolio (domestic and foreign), growth in 12 months was 30.9%. In SFN, loans granted with free funds, corresponding to 71.5% of the total financial system, amounted to R$ billion in June, an increase of 37% in twelve months. This result was determined by the annual increase of 41.3% in loans to businesses, a balance of R$ billion. Loans to individuals attained R$360.9 billion, growth of 32.4% in twelve months. At BB loans to individuals exhibited expansion of 10.6% in relation to the last quarter. These operations grew 45.1% in 12 months. Emphasis is placed on payroll loans, vehicle financing and credit card in this segment. The balance of agribusiness transactions grew 26.3% in relation to June 2007 and 9.0% in relation to March The corporate segment contributed significantly toward the increase of the agribusiness portfolio, presenting an increase of 80.9% in relation to June 2007 and 16.4% in relation to the last quarter. Table 19. Loan Portfolio Chg. % R$ million Jun/07 Mar/08 Jun/08 on Jun/07 on Mar/08 Brazil 133, , , Individuals 27,904 36,620 40, Businesses 56,345 69,118 78, MSE 21,390 25,675 29, Other 34,955 43,443 48, Agribusiness 48,769 56,524 61, Individual 38,577 40,684 43, Companies 10,192 15,839 18, Foreign 12,214 10,499 9,717 (20.4) (7.4) Total 145, , , ¹ Adjustment performed in relation to that of 1Q08 disclosed as R$ 38,541 resulting from double counting of the purchase operations divided into installments by the storeowners. Of the total of loan transactions, 34.2% are loans to the retail segment, including individuals and SMEs, 21.3% to the wholesale segment, 32.4% to agribusiness and 5.7% to the foreign trade segment. The portfolio abroad, represents 5.1% of the total. 1 Source: Bacen Press Release (Jun/08) Banco do Brasil MDA 2Q08

46 Table 20. Loan Portfolio by Segment R$ million Balance Chg. % on Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Jun/07 Jun/08 Total Portfolio 118, , , , , , , , Retail 37,504 40,435 43,378 45,809 48,576 53,407 58,654 64, Wholesale 16,649 21,735 24,087 24,878 26,034 29,613 33,473 40, Agribusiness 40,320 45,064 46,774 48,769 48,446 51,883 56,524 61, Foreign Trade 10,532 11,000 11,190 11,004 12,073 11,911 11,019 10, Abroad 10,427 12,181 12,318 12,214 12,558 11,373 10,499 9, Other 2,917 2,741 2,642 2,559 2,497 2,552 2,591 2, Banco do Brasil MDA 2Q08

47 6.5.1 Retail Loan Portfolio The Retail Loan Portfolio comprises the products intended, mainly, for Individuals and Micro and Small Businesses. In June 2008, the portfolio reached a balance of R$ 64,978 million, which represents an increase of 41.8% in relation to the same period of the previous year and 10.8% in relation to March Table 21. Retail Loan Portfolio R$ million Chg. % Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 on Jun/07 on Mar/08 Direct Consumer Credit (CDC) 18,595 20,275 21,771 23,880 25,871 28, Payroll Loan 9,343 10,173 11,022 11,888 12,781 14, Vehicle Loan¹ 1,287 1,722 2,228 2,929 3,544 4, Consumer Loan by backed Direct Deposits 1,605 1,659 1,685 1,992 2,260 2, Mortigage Receivables 7,539 7,755 7,836 8,062 7,887 8, BB Giro Rápido (WCL) 4,560 4,760 4,864 4,954 5,195 5, Turnover 2,850 2,809 3,589 4,835 5,372 6, Credit Cards 3,198 3,450 3,647 4,297 6,425 7, Overdraft Accounts 2,660 2,647 2,593 2,404 2,839 2, Others 3,976 4,114 4,276 4,977 5,065 5, Total 43,378 45,809 48,576 53,407 58,654 64, ¹ Contains balance of Leasing operations and Finame Pro-Caminhoneiro PF, R$ 426 million and R$ 85 million respectively. Loans to individual customers Direct Consumer Finance(CDC) transactions showed a 41.9% growth in relation to June 2007, and 11.2% in relation to March 2008, reaching a balance of R$ 28,766 million. CDC has the highest relative share in the Retail portfolio, with 44.3% in June 2008, as opposed to 44.1% in March The observed increase was basically due to the growth of Vehicle Loan and Payroll Loans. Payroll Loans which went up from R$ 10,173 million in June 2007 to R$ 14,028 million in June 2008, growing 37.9% in the period. In June 2008, the operations exhibited an average term of 34.4 months and average rate of 2.41% per month. BB's vehicle loan portfolio, restructured in 2006, went from R$ 1,722 million in June 2007 to R$ 4,709 million in June 2008, a growth of 173.5%. In relation to March 2008, growth was 32.9%. Of the portfolio of vehicle loans in June/2008, R$ 1,149 million originated from the partnerships, representing 24.4% of the total. The average term of the portfolio is 42.3 months and the average rate is 1.7% per month. An agreement was signed with FirstRand Limited in July/2008 for the organization of a multiple bank, with loan, financing and leasing portfolios; and investment portfolio to operate in the Brazilian market of financing and leasing of vehicles. In June 2008, 51.6% of the individual customers had accounts with a credit limit. Overdraft account transactions ended Jun/2008 with a balance of R$ 2,813 million, a 7.4% increase in relation to the same prior-year period, and a 0.1% increase in relation to March/2008. The balance of Credit Card showed an increase of 104.9% in relation to June/2007, with a balance of R$ 7,069 million in the quarter. This increase is mainly due to the inclusion in the loan portfolio of the installment purchases made with credit cards and financed by retailers. Banco do Brasil expanded its credit card base by 51.1% in the last 12 months, growing from 15.7 million in Jun/07 to 23.7 million in Jun/ Banco do Brasil MDA 2Q08

48 Loans to SMEs - In the delivery of services to micro and small companies, Banco do Brasil continued to act as principal partner of the segment. At the end of the second quarter of 2008, BB had 1.73 million micro and small companies as clients of the institution. Out of this total, around thousand companies received differentiated service rendered by specialized relationship managers. BB has also been building up its share of the cooperativist credit segment, delivering products and services tailored to the requirements of this market. The products include the Compe/SPB Integration Service, whereby credit cooperatives have access to the System for the Clearing of Checks and Other Instruments and to the Payment Settlement and Transfer System (SPB). This service allowed lines of credit and other bank products to be made available to around thousand cooperative members, associated with 308 credit cooperatives that are partners of BB, considering its integration. In June 2008, BB was participating in 151 Local Productive Arrangements (APL), delivering services to more than 12 thousand companies, to which loans in the amount of R$ million were extended for working capital and to finance investments. The amount of R$ 71 million was set aside for the companies from the APLs in the first semester in funds for foreign trade, with R$ 153 million earmarked for operations geared toward agribusiness. In July 2008, the Bank will launch BB Giro APL, a line of credit for working capital intended exclusively for companies that take part in local productive arrangements (APL) supported by BB. The product has advantages in terms and rates, aiming to promote the sustainable development of the regions where the supported companies are located. The balance of operations for SMEs was R$ 29,234 million, up 36.7% over June 2007, with an emphasis on working capital operations. Table 22. SME Loan Products R$ million Chg. % Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 on Jun/07 on Mar/08 Working Capital 13,759 14,868 15,553 16,932 17,752 20, Investiment 5,262 5,813 5,852 6,387 6,709 7, Foreign Trade ,303 1,213 1, Total 19,448 21,390 22,340 24,622 25,675 29, BB set aside R$ 20,069 billion for working capital, that represented growth of 35.0% in relation to the same period of 2007 and 13.1% in relation to March Among the credit facilities, the following should be highlighted: a) BB Giro Rápido aims to satisfy the need for working capital of the segment of micro and small businesses, without requiring tangible collateral. In 2Q08, this line of credit reached a balance of R$ 5.35 million, representing 26% of the working capital block; b) the "BB Giro Empresa Flex", whose purpose is supplying working capital and financing for acquisition of goods and services. In this credit line, the customer can determine the form of loan repayment in accordance with the company's cash flow. Launched in June 2007, this credit line has reached the balance of R$3.96 billion, which represents growth of 137.5% in The investment amount in 2Q08 was R$ 7.17 billion, representing growth of 37.9% in comparison to the same period in These also deserve highlighting: a) The "Proger Urbano Empresarial", the main credit line for investments, which had a R$4.52 billion balance in 2Q08, an increase of 31.1% over the 2Q07 balance; b) the BNDES Card, a product in which BB is the leader, with 64% of the cards issued, and which reached R$ 488 million in volume of transactions in June/2008; c) "Finame Empresarial", which presented a balance of R$ million, an increase of 168% in relation to 2Q Banco do Brasil MDA 2Q08

49 Loans for the Lower Income Population - Banco Popular, created in 2004 to respond to the needs of the Lower Income segment and Microentrepreneurs, ended the half with a network of correspondents of 2,795 points of service and present in 1,378 municipalities, with R$ 11.1 million in loans granted in the period, which corresponds to, approximately, 56 thousand loans, in an average amount of R$ 198 and portfolio balance of R$ 25.1 million. Since its creation, BPB have already granted more than R$ million in credit. In Partnerships with the Federal and State Governments, with Civil Society Organizations of Public Interest (OSCIPs), NGOs, Cooperatives, Microfinance Institutions (IMFs) and International Humanitarian Organizations, Banco Popular performed a total 1,680 operations of stimulus to entrepreneurship and to generation of income in the sphere of the National Program of Targeted Productive Microcredit (PNMPO). Aiming to expand the strategic focus on the Microcredit segment, as well as greater synergy in the implementation of the strategies defined for Lower Income, in May/08, Banco do Brasil S.A. approved the creation of Lower Income Management - Diren, which assembled, as of June, in a single structure, attention to clients with an income of up to 1 Minimum Salary. The new Management added Banco Popular do Brasil, the Sustainable Regional Development Management, the BB correspondents and the portfolios of Banco do Brasil comprised of clients from this segment. Table 23. BPB Highlights R$ million Chg. % Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 on Jun/07 on Mar/08 Assets - R$ thousand 161, , , , , , Deposits - R$ thousand 105, , , ,373 95,220 94,768 (10.7) (0.5) Loan Portfolio - R$ thousand 62,079 43,393 36,752 30,470 27,290 25,119 (42.1) (8.0) 49 - Banco do Brasil MDA 2Q08

50 6.5.2 Wholesale Loan Portfolio The Wholesale Loan Portfolio covers the products intended mainly for medium and large-sized companies and 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 helps to attain a better knowledge of the specific needs of each company and seeks to develop, diversify and achieve a return from the business. In June 2008, the portfolio reached a balance of R$ 40,456 million, an increase of 62.6% in 12 months and 20.9% in relation to March Table 24. Wholesale Loan Portfolio R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Working Capital Others 6,927 11,062 13,148 13,139 13,918 16,062 19,283 25,033 Investment Finance 4,060 4,778 5,017 5,716 6,200 7,095 7,652 8,426 Receivables 3,015 3,239 3,093 2,959 2,691 3,389 3,252 3,133 Overdraft Accounts 1,642 1,503 1,524 1,662 1,725 1,680 1,837 2,205 Others 1,005 1,154 1,305 1,402 1,500 1,387 1,450 1,659 Total 16,649 21,735 24,087 24,878 26,034 29,613 33,473 40,456 The line with the highest share in this portfolio, of 61.9%, is "Working Capital - Others". This line ended the half with a balance of R$ 25,033 million, up 90.5% over the same period in the prior year. 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 operations reached R$ 8,426 million, a growth of 47.4% over Jun/07 and 10.1% over Mar/08. Receivable operations closed June 2008 with a balance of R$ 3,133 million, a 5.9% increase in relation to the same period of previous year Banco do Brasil MDA 2Q08

51 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, acting as the largest financier of Brazilian agribusiness in all its segments and in all stages of the productive chain, from the small farmer to the large agroindustrial companies. The Brazilian Trade Balance has increased as a result of the positive contribution from agribusiness. The trade balance of this sector generated a US$ 11.4 billion surplus in the first semester of US$ billion H08 Agribusiness Brazil Source: MAPA Ministério da Agricultura, Pecuária e Abastecimento (Ministry of Agriculture, Cattle and Suply) Figure 12. Trade Balance (FOB) The table below shows exports broken down into the main products. Table 25. Exports US$ million Q08 Soybeans and Related Products 9,922 9,477 9,308 11,381 9,030 Meat 6,060 8,066 8,641 11,295 6,968 Leather, Hides and Shoes 2,672 3,069 3,471 3,554 1,747 Sugar 3,137 4,684 7,772 6,578 2,968 Forest Products 5,852 7,197 7,881 8,819 4,670 Coffee, Mate and Spices 1,860 2,669 3,535 4,093 3,094 Fruit Juice 1,103 1,245 1,570 2,374 1,057 Tobacco 1,406 1,707 1,752 2,262 1,085 Other Products 2,122 3,961 5,495 8,059 3,165 Total 34,134 42,075 49,424 58,416 33,784 Source: MAPA Ministério da Agricultura, Pecuária e Abastecimento (Ministry of Agriculture, Cattle and Suply) The sector s performance in the last few years is due to the permanent quest for new technologies and for valuing the services provided by the professionals from this area, always aiming at improving profitability and continuity in the enterprises. In the following chart, the increased productivity per planted area, as a result of gains in productivity, can be visualized Banco do Brasil MDA 2Q08

52 Production (million ton) /94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07* 07/08* Productivity (ton/ha)-% Production (million ton.) Area (million ha) Productivity(ton/ha)-% * Forecast Figure 13. Production vs. Planted Area Regarding the distribution of agribusiness transactions by region of the Country in June 2008, it can be seen a higher concentration in the South region. Table 26. Agribusiness Loan Portfolio by Region Region Share - % North 3.0 Northeast 5.6 Midwest 22.8 Southeast 34.1 South 34.5 Rural credit finances the costs of producing and marketing of agricultural products, stimulates rural investments, including warehousing, processing and the industrial transformation of agricultural products. Furthermore, it encourages the introduction of rational methods in the productive system. The rural portfolio of SFN attained R$ 98.3 billion injun/08, an increase of 20.2% in twelve months. At BB, the balance amounted to R$ 61,611 million, growth of 9% in the last quarter and 26.3% in relation to Jun/07. In Jun/08, the rural portfolio represents 34.2% of the domestic portfolio as opposed to 34.8% in Mar/08. Loans for financing costs and marketing, intended to finance the goods and services needed for the production of crops and livestock production, account for 62.5% of the Agribusiness Portfolio. Loans for investments, intended for the modernization of the productive activity, accounted for 37.5% of this portfolio Banco do Brasil MDA 2Q08

53 Table 27. Agribusiness Loan Portfolio by Purpose R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Costs 15,380 18,705 19,179 19,254 17,856 19,918 19,999 21,396 Investment 17,505 18,582 19,196 19,686 19,731 20,111 20,656 22,140 Marketing 5,832 7,375 8,181 9,688 9,899 10,884 14,915 17,094 Other 1, Total 40,320 45,063 46,774 48,769 48,446 51,883 56,524 61,611 The funds made available by the Bank are obtained mainly from savings deposits (MCR 6-4), demand deposits (MCR 6-2), the Program for Generating Employment and Income in the Rural Area (Proger Rural), the National Program for Strengthening Family Farming, of the Ministry of Agrarian Development (Pronaf), the Constitutional Fund for Developing the Central-West (FCO) and the National Bank for Economic and Social Development (BNDES). Table 28. Agribusiness Loan Portfolio by Product R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Agricultural and Livestock Costs 11,957 14,309 14,739 14,800 13,847 15,336 15,384 16,695 Pronaf/Proger Rural 9,844 11,119 11,597 12,036 11,903 12,890 13,348 14,233 BNDES/Finame Rural 4,215 4,363 4,395 4,238 4,267 4,087 4,091 4,165 FCO Rural 3,591 3,730 3,796 3,894 4,069 4,055 4,196 4,354 Loans to Companies 4,787 6,491 7,444 8,757 9,100 10,177 13,705 15,587 Others 5,926 5,051 4,803 5,044 5,261 5,338 5,800 6,577 Total 40,320 45,063 46,774 48,769 48,446 51,883 56,524 61,611 Proger Rural is a product that offers fixed loans for agricultural and cattle breeding funding, besides financial support for fixed and semi-fixed investments; And the National Family Agriculture Empowerment Program - Pronaf is aimed at the financing of agricultural activity funding. These two products added up to R$ 14,233 million in June 2008, growing 18.3% in relation to the same period of the previous year, and showing a decrease of 6.6% in relation to the previous quarter. FCO Rural offers a financial supplement for working capital and costs for the rural producer of the Brazil Midwest. Transactions in the product grew 11.8% in the past 12 months, totaling R$ 4,354 million in June 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 products totaled R$ 4,165 million in June The following table shows the balance of the loan transactions intended for agribusiness by item financed Banco do Brasil MDA 2Q08

54 Table 29. Agribusiness Loan Portfolio by Financed Items R$ million Chg. % Items Financed Jun/07 Share % Mar/08 Share % Jun/08 Share % on Jun/07 on Mar/08 Livestock 5, , , Soybeans 2, , , Corn 3, , , Sugar Cane 1, , , Machinery and Equipment 1, , , Coffee 1, , , Rice 1, , Poultry , , Fertilizers (4.7) 1.4 Cotton Manioc Pork (4.5) (0.9) Others 30, , , Total 48, , , In its work of financing Brazilian agribusiness, Banco do Brasil reaches all the segments, from the small producer to the large agro-industrial companies. The table below reveals this work, showing that while financing mini and small producers accounts for 85.8% of the total of contracts, the transactions with the other agents show a 78.6% share of the amount financed. Table 30. Funds Released for the 07/08 Crop by Segment R$ million Qty. Contracts Qty. Contracts - % Amount Contracted Amount Contracted - % Mini 516, , Small 521, , Medium and Large Sized 170, , Cooperatives , Total 1,208, , In the figure below we present the distribution of the balance of the Agribusiness Loan Portfolio by type of client. It is worth emphasizing the performance of the agroindustrial segment (corporate), the growth of which came to 80.9% in twelve months, attaining the volume of R$ 18,442 million: US$ million H03 1H04 1H05 1H06 1H07 1H08 Individuals Companies Figure 14. Agribusiness Loan Portfolio by Customer 54 - Banco do Brasil MDA 2Q08

55 Next, the Agribusiness Loan Portfolio by Funding Sources is shown. R$ million 6,357 7,353 9,233 9,015 11,385 17,957 16,854 18,671 24,141 25,375 9,381 9,112 8,834 8,550 8,955 5,292 5,489 5,421 5,623 5,876 4,463 4,519 4,350 4,338 4,467 5,321 5,119 5,375 4,857 5,553 Demand Deposits Saving Deposits FAT FCO BNDES/Finame Others Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Figure 15. Agribusiness Loan Portfolio by Funding Sources Agri loans funded by saving deposits, the main funding line of the loan portfolio, grew 41.3% in the last 12 months, reaching R$ 25,375 million balance as of June The Bank uses funding from savings deposits and FAT (Worker s Support Fund) in rural financings with subsidized interest rates. To make it possible, the National Treasury compensates the Bank, in the form of equalization, covering the difference between the funding cost, credit risk, administrative and tax costs and the amount charged to the borrower. Moreover, weighting factors are set for financing obtained with funds from demand and saving deposits. The weighting factor is a multiplier that helps to fulfill liabilities and raise revenues upon the release of funds in the Bank's treasury for free investments. The following figure shows the received revenue and the weighting factor track record R$ million Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Equalization Revenues Weighting Factors Figure 16. Equalization Revenues and Weighting Factors We can observe a R$ 154 million decrease in the equalization revenue in 2Q08 in relation to 2Q07 and an increase of R$ 12 million in relation to the last quarter. The revenue from the weighting factor in the 2Q08 was bigger R$ 15 million and R$ 19 million in relation to 2Q07 and 1Q08, respectively. Besides the risk management mechanisms applicable to all the loan portfolios, the Bank applies, in the management of the agribusiness portfolio, specific methods for identifying risks and minimizing losses Banco do Brasil MDA 2Q08

56 The Bank has mechanisms for mitigating risks from agriculture loan portfolio. In the 2007/2008 harvest, up to June/2008, 50% of the loan transactions were carried out with Agriculture Insurance or Proagro (government insurance) and amounted to R$ 5,786 billion. The following chart shows the increase in percentage in the use of Agriculture Insurance and Proagro. Contracts Crop07/08 5.8% CROP 07/08 CROP 06/ % 38.1% 50.0% 50.0% 42.0% 58.0% 58.0% 13.2% 9.1% Agricultural Costs with mitigation Agricultural Costs without mitigation AGRICULTURAL COSTS WORKING CAPITAL INVESTMENT AGROINDUSTRIAL CREDIT MARKETING Figure 17. Agricultural Insurance and Proagro 56 - Banco do Brasil MDA 2Q08

57 6.5.4 Foreign Trade Loan Portfolio In June, the export foreign exchange market traded in the country amounted US$ billion, in line with the total recorded in the same month of The US$ 53,391 billion accumulated from April to June is 3.4% higher than the US$ 51,624 billion recorded in the same prior-year period. At the Bank, the US$ 5,077 billion of export foreign exchange summed in June exhibited an increase of 16.5% in relation to the amount obtained in June In the 2Q08, it amounted to US$ 14,820 billion, 6.4% above the US$ 13,932 billion recorded in the same periods of In June 2008, the import foreign exchange traded in the country amounted to US$ 13,039 billion, up 60.6% over June From April to June, it attained R$ billion, up 54.2% in relation to the same period of At BB, the import foreign exchange traded in June 2008 came to US$ billion, up 70.3% over the sum of US$ billion traded in June In the 2Q08, it attained US$ 8,388 billion. These results brought the Bank a market share of 24.6% in June 2008 and of 23.3% in the quarter, shares which are in line with those realized in the same periods of The balance of Banco do Brasil s foreign trade loan portfolio ended 2Q08 with R$ 10,826 million, a decrease of 1.6% in relation to June Banco do Brasil offers several tools to support foreign trade, such as training, 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, amongst others. This portfolio s main product is ACC/ACE, which accounts for 59.2% of the total. In June 2008, this modality reached a balance of R$ 6,410 million, a decrease of 9.1% in relation to the same period of previous year. The volume contracted from ACC/ACE reached US$ 3.4 billion in the second quarter of 2008, decrease of 18.6% in relation to the third quarter of The ACC/ACE volume decrease is due to the crisis in the North American and European financial system and the reduction of the foreign banks operations in Brazil, because of their liquidity and solvency crisis. This scenario made the loan lines more expensive and with lower terms. Table 31. Foreign Trade Loan Portfolio R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 ACC/ACE 7,319 7,502 8,068 7,049 7,647 7,610 6,567 6,410 BNDES Exim 2,304 2,718 2,285 3,061 3,449 3,299 3,379 3,342 Import Finance ,042 1,055 Others Total 10,532 11,000 11,190 11,004 12,073 11,911 11,019 10,826 The table below shows details of the ACC/ACE transactions: Table 32. ACC/ACE Average Volume per Contract ACC/ACE 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Volume Contractad (US$ million) 3,286 3,064 3,226 4,175 3,880 3,800 2,219 3,400 Quantity of Contracts 7,386 6,932 6,646 7,382 6,871 6,279 5,373 5,322 Average Volume per Contract (US$ thousand) Banco do Brasil MDA 2Q08

58 6.6 Tax Credits The Tax Credits TC balance reached R$ 14.3 billion, 3.1% higher than March/2008. If relation to the same period of the previous year, there was a 4.3% increase in the inventory of TC. In 1998, BB went to court with an application for the full carryforward of accumulated tax loss of IT and of negative bases of CS. Since then, the Bank has offset these tax losses in full against income tax and social contribution taxable income and has made judicial deposits of the taxes otherwise due (on 70% of the amount offset). In May 2007, the tax credits that had been written off since the beginning of the lawsuit were reactivated, in the sum of R$ 4,913.2 million, in contra account to the re-formation of provision relating to the portion of 70% of IT and CS, for which judicial deposits were formed. At the end of the 2Q08, the activated tax credits are comprised of 61.9% of intertemporal differences. These differences stem from the tax legislation that does not permit the inclusion of certain expenses in the calculation basis as soon as they occur (accrual basis), but rather when they are financially settled (cash basis). Table 33. Breakdown of Tax Credit R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Non-temporal Differences 7,701 7,050 7,300 7,707 7,959 7,995 8,253 8,872 Social Contribution to be Compensated 1,460 1,411 1,229 1, Income Tax and Social Contribution Judicial Claim ,913 4,893 4,868 4,846 4,895 Others* Total Tax Credit 9,311 8,604 8,642 13,746 13,877 13,826 13,904 14,337 Income Tax / Income before Income Tax - % * Includes Tax Losses and Negative Bases and Mark-to-Market, Tax Credits Abroad and Pasep and Cofins 58 - Banco do Brasil MDA 2Q08

59 The figure below shows the composition of tax credit at the level of Inter-temporal Differences, of Social Contribution recoverable and IR/CS Judicial Proceeding. The IT/LAIR ratio in March 2008 is in line with that observed in December 2007 and March In 2Q07, the calculation basis of the tax was affected by permanent additions resulting from exchange variations verified in that period Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Non-temporal Differences Social Contribution to be Compensated Income Tax and Social Contribution - Judicial Claim Income Tax / Income before Income Tax - % Figure 18. Breakdown of Tax Credit During the 1Q08, it was observed the realization of tax credits in the Multiple Bank in the amount of R$ 709,522 thousand, corresponding to 23.5% of the consumption forecast of technical study carried out in (R$ 3,020,000 thousand). According to the last technical study on the consumption of tax credits at the Multiple Bank, position on , the expectation of realization of nominal amounts of activated tax credits, considering the recomposition of those written off over the course of the lawsuit (70%), is projected for 5 years Banco do Brasil MDA 2Q08

60 6.7 Analysis of Liabilities The funding obtained by deposits grew 18.8% over the 2Q07 balance. Demand deposits showed an increase of 18.4%, reaching R$ 43,628 million; saving deposits increased 20.2%, reaching R$ 49,096 million; and time deposits showed an increase of 18.8%, reaching R$ 96,729 million in June The 24.9% increase of Money Market Borrowing over June 2007 was a result of the intensification of repurchase agreements (third party portfolio). Table 34. Liabilities R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Deposits 144, , , , , , , ,475 Demand Deposits 32,448 40,059 35,588 36,841 38,712 51,311 44,172 43,628 Savings Deposits 34,447 36,714 38,942 40,831 43,831 45,839 48,112 49,096 Interbank Deposits 5,579 4,878 5,026 5,146 5,603 5,144 6,247 5,578 Time Deposits 72,271 76,900 80,860 81,427 83,640 85,520 91,261 96,729 Investment Deposits Money Market Funding 44,309 49,283 67,639 74,719 74,845 72,270 99,914 93,335 Foreign Borrowing 6,800 6,041 6,673 4,841 4,597 4,131 3,555 4,942 Domestic Onlending 13,348 14,335 13,950 15,240 16,528 17,487 18,250 19,255 Other Liabilities 52,059 47,098 51,334 60,399 60,436 60,778 64,965 64,090 Shareholders Equity 20,197 20,758 21,638 22,305 23,065 24,262 25,407 26,371 Total Liabilities 281, , , , , , , , Banco do Brasil MDA 2Q08

61 6.8 Deposits and Money Market Funding Banco do Brasil's funding reached R$ billion in June 2008, a 0.4% decrease in relation to March 2008 and an increase of 20.7% in relation to the same period of previous year. The quarterly retraction is basically due to the decrease in Money Market Borrowing, that went down from R$ 99.9 billion to R$ 93.3 billion, influenced by the third-party portfolio (comprised basically by LTN and LFT government securities), that decreased R$ 15.4 billion in relation to the 1Q08. Main funding are Money Market Borrowing (R$ 93,3 billion) and Time Deposits (R$ 96.7 billion). These two lines together represent 65.8% of the total funded by BB. R$ billion Demand Deposits Saving Deposits Interbanking Deposits Time and Investment Deposits Money Market Borrowing Total Jun/07 Mar/08 Jun/08 Figure 19. Funding 61 - Banco do Brasil MDA 2Q08

62 Accounting for 21.2% of the total fundings of the National Financial System 2, BB maintained the leadership in Market Funding demonstrating the confidence of Brazilians in the Institution. R$ million ,448 40,059 35,588 36,841 38,712 51,311 44,172 43,628 34,447 36,714 38,942 40,831 43,831 45,839 48,112 49,096 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Demand Deposits Market Share - % Saving Deposits Market Share - % ,271 76,900 80,860 81,427 83,640 85,520 91,261 96, , , , , , , , ,810 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Time Deposits Market Share - % Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Money Market Funding Market Share - % Figure 20. Market Share of BB Funding 2 Information about participation in the Financial System comes from the top 50 banks of the Central Bank site. The latest available position at the time of publishing this report was in Dec/ Banco do Brasil MDA 2Q08

63 6.8.1 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. The following table shows the issues in circulation. Table 35. Foreign Borrowing Issue Date Volume in US$ million Term in years Cupom (%) Interest Interval Issue price Return for the Investor (%) Premium over Treasury Rating Program Quarterly BBB/Baa1 MT L3M+0.60 Quarterly *266 AAA/Aaa MT Quarterly BBB/Baa1 MT Quarterly BBB/Baa1 MT Quarterly BBB+/Baa1 Visanet Quarterly BBB+/Baa1 Visanet Quarterly BBB/Baa1 MT Half-Yearly A2 Subord. Debt Perpetual 7.95 Quarterly Ba1 Perpetual Securities Half-Yearly Baa3 GMTN L3M+0,55 Quarterly L3M+0,55 AAA/Aaa MT ,25 Quarterly A-/A1 MT 100 * 492 basis points over Libor 63 - Banco do Brasil MDA 2Q08

64 7 Analysis of Results 7.1 Net Interest Income Table 36. Net Interest Income R$ million Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 on 2Q07 on 1Q08 1H07 1H08 on 1H07 Financial Intermediation Income 10,016 10,975 10, (0.2) 19,666 21, Loans 6,069 7,208 7, (0.1) 12,171 14, Leasing Securities 3,167 3,553 3,052 (3.6) (14.1) 6,210 6, Financial Derivatives 318 (449) 303 (4.9) (146) - Foreign Exchange Portfolio (111) (94.6) Compulsory Investments FX Gain (Loss) on Foreign Investments (223) 27 (294) (377) (267) (29.3) Other Op, Inc, of a Fin, Intermed, Nature Financial Intermediation Expenses (4,809) (5,482) (5,213) 8.4 (4.9) (9,473) (10,696) 12.9 Money Market Funds (4,416) (4,762) (5,125) (8,670) (9,888) 14.0 Borrowing, Assignments and Onlending (393) (720) (88) (77.6) (87.8) (803) (808) 0.6 Net Interest Income 5,208 5,492 5, ,194 11, The net interest income (NII) represents the result from financial intermediation business before provisions for credit risks. In 2Q08, this margin was R$ 5,743 million, growing 10.3% in relation to the same period of In the comparison with 1Q08, the margin grew 4.6%. In the group of Financial Intermediation Income we emphasize loan operation revenues with 18.6% growth in the annual comparison and decrease of 0.1% in the quarter. It is important to emphasize that revenues from loans suffer effects of exchange due to loans involving other currencies. If we set aside the exchange impact resulting from operations in accordance with Resolution CMN 2,770, revenues from loans would grow 18.4% in the year and 10.8% in the quarter, as shown in the table below. It is important to stress that amounts arising from transactions carried out under Resolution CMN 2,770 is balanced in other net income components such as Expenses from Loans, Assignments and Onlendings and Income from Financial Derivatives. Table 37. Revenues from Loans Net of Exchange Impact (Res. 2,770) R$ million Quarterly Flow Chg. % 2Q07 1Q08 2Q08 on 2Q07 on 1Q08 Loans and Leasing Revenues* 6,114 7,257 7, FX Impact in Loan Portfolio (Res. 2,770) (383) 316 (433) Loans and Leasing Revenues before FX Impact (Res. 2,770) 6,498 6,941 7, * It considers recovery of write-offs. As regards Expenses from Financial Intermediation, it is observed that these grow at a slower pace than that of Financial Intermediation Income, both in the annual comparison and in the quarterly comparison. It is important to emphasize that the impact of loans involving other currencies, observed in Financial Intermediation Income, is also reflected in this group and does not alter the Net Interest Income Banco do Brasil MDA 2Q08

65 The increase of time deposit funding, the reduction of funds obtained by money market borrowing and the exchange variance observed in loans involving foreign currencies contributed toward the reduction of the fundraising cost (Financial Intermediation Expenses / Interest Bearing Liabilities), which went from 8.3% in 1Q08 to 7.6% in this quarter, and contributed to the increase of the NIM over earning assets from 1.75% in 1Q08 to 1.77% in 2Q08. Moreover, the loan portfolio strong growth, especially in lines designed for individuals, favored Income from Financial Intermediation. The following table demonstrates the Net Interest Income formation from the NIM evolution and the investments volume growth in the quarterly flow. Table 38. Analysis of Volume (Earning Assets) and Quarterly Spread 1Q08 and 2Q08 R$ million 1T08 2T08 Var. Abs. Volume: Assets Earning Assets * 314, ,903 9,835 Net Interest Income 5,492 5, Spread - % ** Gain/(loss) with volume 5, Gain/(loss) with spread 5, Gain/(loss) with volume and spread 2 * Average Balances ** Net Interest Income / (Earning Assets) 65 - Banco do Brasil MDA 2Q08

66 Spread After recording a downtrend over the last few quarters, the annualized global NIM recorded slight recovery in 2Q08 on account of the Financial Intermediation Income growth at a faster pace than that of Expenses from Financial Intermediation, an equation represented by the Net Interest Income. The performance of Financial Intermediation Income reflects the growth of loans in lines with greater NIMs, such as those designed for individuals. In loans for individuals, special emphasis is placed on vehicle loans and credit card, which recorded growth of 173.5% and 104.9%, respectively, in the annual comparison. In spite of the NIM recovery, it is worth keeping in mind that in the annual comparison, repurchase agreements remain at a high level, which contributes to keep the global NIM at low levels Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 NII / (Earning Assets ) - Ann Figure 21. NIM Analysis Table 39. Margin, Net of Interest and Profit Margin R$ million 2Q07 2Q08 1H07 1H08 Average Earning Assets (AEA) 269, , , ,985 Average Interest Bearing Liabilities (AIBL) 228, , , ,934 Net Interest Gain (1) 4,528 5,225 9,029 10,611 Interest Income 9,295 10,390 18,550 21,209 Interest Expense (4,766) (5,165) (9,521) (10,598) Net Interest Income Other Items (2) , NII 5,208 5,743 10,060 11,235 AIBL / AEA % Interest Rate on AEA (3) - % Interest Rate on AIBL (4) - % Net Interest Rate (5) - % Adjusted NIM (6) - % NIM % (1) Defined as interest income less interest expenses. (2) Contains derivatives, debt assumption contracts, foreign exchange portfolio, recovery of write-offs, gold loans, credit guarantor fund, foreign exchange gain/loss abroad and other income of a financial intermediation nature (3) Total interest income divided by the average balance of assets generating income. (4) Total interest expenses divided by the average balance of liabilities generating expenses. (5) Difference between interest rate on AEA and interest rate on AIBL. (6) Net interst gain divided by the average earning assets Banco do Brasil MDA 2Q08

67 7.2 Analysis of Investments Loan and Lease Operation Income, disconsidering recovery of write-offs, reached R$ 6,833 million in 2Q08, a growth of 19.3% in the year and stable in the quarterly comparison. It is worth emphasizing that these incomes suffer the effects of exchange variance relating to loans involving other currencies. Considering the exchange variation, the annualized investment rate went down from 18.8% in 1Q08 to 16.9% in 2Q08. Separating the exchange impact, it is verified that the investment rate in loans and leasing records a slight increase in relation to the previous quarter and suffers a reduction in the comparison with the same prior-year period, as shown in the table below. The exchange variance, however, does not affect the NIM, as evidenced below. Table 40. Revenues from Loans Net of Exchange Impact (Res. 2,770) R$ million 2Q07 1Q08 2Q08 Loans and Leasing Revenues Average Balance * 132, , ,741 Loans and Leasing Revenues 5,728 6,835 6,833 FX Impact in Loan Portfolio (Res. 2,770) (383) 316 (433) Loans and Leasing Revenues before FX Impact (Res. 2,770) 6,112 6,519 7,267 Annualized Interest Rate *It does not consider recovery of write-offs Spread by Portfolio The figure below shows the NIM evolution on loans by portfolio. The chart shows us that the NIMs of all the portfolios recorded a reduction. However, the individual loan portfolio strong growth contributed to the recovery of the global NIM, which went from 7.2% in 1Q08 to 7.3% in 2Q08. The individual loan portfolio continues the most appealing loan portfolio line due to the resulting NIM. However, with the lower risk and lower rates operations growth, such as payroll loans and vehicles loans, the portfolio records a interest rates and NIM downtrend. In relation to the Agribusiness portfolio NIM, equalization volume growth at a threshold lower than the agribusiness loan portfolio growth and lower interest rates loan portfolio growth, especially those designed for agroindustries, explain the movement. 31.4% 31.8% 28.9% 28.8% 27.7% 26.6% 24.1% 23.4% 8.5% 8.0% 7.3% 7.0% 7.2% 6.9% 6.9% 6.5% 5.2% 6.4% 7.0% 6.6% 6.6% 5.8% 5.0% 4.9% 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Individuals Companies Agribusiness Figure 22. NIM by Loan Portfolio 67 - Banco do Brasil MDA 2Q08

68 Securities income in 2Q08 totaled R$ 3,052 million, an amount 3.6% lower than that recorded in the same period of previous year and 14.1% lower than the last quarter. The oscillation was mainly due to the exchange variation recorded in transactions that involve foreign currencies. The following table shows the origin of the securities portfolio revenues. We emphasize the result originating from interbank investments, which remained at the level observed in the previous quarter and grew 31.6% in 12 months, despite the reduction of 25.3% in the corresponding portfolio balance. Table 41. Securities Income R$ million Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 in 2Q07 in 1Q08 1H07 1H08 in 1H07 Securities Income 3,167 3,553 3,052 (3.6) (14.1) 6,210 6, Fixed Income Securities 3,144 3,327 3, (1.6) 6,186 6, Revaluation Curve 1,948 1,870 1,913 (1.8) 2.3 4,082 3,783 (7.3) Income/Loss from Negotiation 57 (13) (63) (76) - Mark to Market 5 (11) (69) (2) (80) Interbank Accounts 1,135 1,480 1, ,038 2, Others (223) (85.7) The figure below shows the main indexes in BB s securities portfolio. Due to the rising interest rate scenario, as part of the monetary policy, BB has reduced the exposure to fixed income securities and increased the exposure to floating income securities. Hence, in relation to the previous quarter, it can be noted that there was an expressive increase of the portfolio indexed to CDI/TMS and reduction of the exposure of the portfolio indexed to IGP-M at inexpressive levels. 1Q08 2Q08 0.1% 3.6% 5.7% 0.1% 0.0% 5.4% 29.4% 27.3% 61.1% 67.2% Floating Fixed TR and Others Dollar IGP-M IPCA Figure 23. Securities Portfolio by Index (Multiple Bank) Separating the exchange impacts, we would observe an increase of the earning assets rate in 2Q08 to 15.0%, against 14.5% in 1Q08. This movement is reflect of the global NIM recovery and of the loan portfolio strong growth, with earning assets mix changes, as presented in the table s below Banco do Brasil MDA 2Q08

69 Table 42. Avg Balance of the BS accounts and info. on interest rates - Earning assets (quarterly) R$ million 1Q08 2Q08 Average Balance Interest Annualized Rate (%) Average Balance Interest Annualized Rate (%) Earning Assets Available Funds in Foreign Currency 1, Securities + Interbank Investments on Hedge 137,804 3, ,294 3, Loans + Leasing 155,418 6, ,741 6, Remunerated Compulsory Deposits 19, , Total 314,068 10, ,903 10, Non Earning Assets Tax Credits 13,859 14,106 Other Assets 43,518 48,704 Permanent Assets 6,725 7,832 Total 64,101 70,641 TOTAL ASSETS 378, ,544 Table 43. Avg Balance of the Bal. Sheet accounts and Info. on Int. rates Earning assets (semestral) R$ million 1H07 1H08 Average Balance Interest Annualized Rate (%) Average Balance Interest Annualized Rate (%) Earning Assets Available Funds in Foreign Currency 1, Securities + Interbank Investments on Hedge 114,452 6, ,549 6, Loans + Leasing 129,622 11, ,580 13, Remunerated Compulsory Deposits 16, , Total 261,805 18, ,985 21, Non Earning Assets Tax Credits 10,293 13,982 Other Assets 41,201 46,111 Permanent Assets 5,819 7,278 Total 57,312 67,371 TOTAL ASSETS 319, , Banco do Brasil MDA 2Q08

70 7.3 Analysis of Funding In 2Q08, Interest Bearing Liabilities reached the average balance of R$ 282,290 million, growing 3.9% in relation to 1Q08 and 23.6% in relation to 2Q07. The annualized funding rate of Financial Intermediation Expenses over Interest Bearing Liabilities was 7.5% in 2Q08, against 8.2% in 1Q08. It is worth emphasizing that as far as funding are concerned, the Foreign Borrowings and Time Deposits record the effects of exchange variance due to transactions involving other currencies. Separating the quarterly impact of exchange variance, the Interest Bearing Liabilities rate in this quarter would grow 40 base point, attaining 8.9%. This variation results from the Money Market Borrowing cost increase, which has the largest share in Interest Bearing Liabilities, and from Time Deposit. For Time Deposits, there is a R$ million impact related to the quarter exchange variance. Excluding this effect, it is verified that the time deposit cost rate attains 8.4%, as opposed to 7.7% in the previous quarter. Furthermore, the Money Market Borrowing average balance grew 3.9% in the quarter and 36.4% in the year, with an emphasis on repurchase agreements. Table 44. Avg Balances of the BS accounts and info. on int rates Int.Bearing Liabilities (quarterly) R$ million 1Q08 2Q08 Average Balance Interest Annualized Rate (%) Average Balance Interest Annualized Rate (%) Interest Bearing Liabilities Saving Deposits 47,736 (787) ,762 (837) 7.0 Interbank Deposits 5,635 (82) 6.0 5,863 (118) 8.3 Time Deposits 89,688 (1,681) ,180 (1,656) 7.2 Money Market Borrowing 93,104 (2,136) ,757 (2,439) 10.5 Foreign Borrowing 3,546 (331) , (32.9) Onlending 17,892 (268) ,934 (234) 5.0 Financial and Development Funds + Subordinated Debt 12,366 (121) ,814 (121) 3.8 Foreign Securities Borrowing 1,611 (27) 6.8 2,165 (27) 5.1 Total 271,578 (5,433) ,290 (5,165) 7.5 Other Liabilities Demand Deposits 42,265 43,358 Other Liabilities 39,332 42,666 Shareholder s Equity 24,994 26,230 Total 106, ,254 TOTAL LIABILITIES 378, , Banco do Brasil MDA 2Q08

71 Table 45. Avg Balances of the BS accounts and info. on interest rates Int. Bearing Liab. (semestral) R$ million 1H07 1H08 Average Balance Interest Annualized Rate (%) Average Balance Interest Annualized Rate (%) Interest Bearing Liabilities Saving Deposits 39,230 (1,519) ,249 (1,623) 6.8 Interbank Deposits 4,981 (413) ,749 (200) 7.1 Time Deposits 80,158 (3,147) ,934 (3,337) 7.4 Money Market Borrowing 66,726 (3,426) ,931 (4,575) 9.9 Foreign Borrowing 3,631 (89) 5.0 3,180 (64) 4.0 Onlending 14,347 (479) ,413 (502) 5.5 Financial and Development Funds + Subordinated Debt 11,281 (234) ,590 (243) 3.9 Foreign Securities Borrowing 2,285 (79) 7.1 1,888 (54) 5.8 Total 222,639 (9,387) ,934 (10,598) 7.8 Other Liabilities Demand Deposits 35,885 42,812 Other Liabilities 38,700 40,999 Shareholder s Equity 21,893 25,612 Total 96, ,423 TOTAL LIABILITIES 319, , Banco do Brasil MDA 2Q08

72 7.4 Analysis of Volume and Spread The table below shows the appropriation of changes in interest income and expenses due to the change in the earning assets average volume and interest bearing liabilities and the change in the average interest rate on such assets and liabilities, in the quarters under analysis. The changes in volume and interest rate were calculated based on changes in average balances in the period and the changes in the average interest rates on earning assets and interest bearing liabilities. The interest rate change was calculated by the interest rate change in the period multiplied by the average earning assets and the average interest bearing liabilities in the first period. The volume change was recorded as the difference between the interest volume in the most recent period and the one in the prior period. Among Earning Assets, it is observed that in relation to 2Q07, loans and leasing contributed positively to the development of these assets. The positive variation resulted from the loan portfolio growth and the earning assets were negatively impacted by loan interest rates reduction in a amount of R$ 445 million. In relation to Interest Bearing Liabilities, an increase of R$ 399 million in expenses can be observed in the annual comparison. Money Market Borrowing, which contributed with R$ 649 million to the increase of expenses with onerous funding, due to the higher volume obtained by means of this line, deserve special emphasis in this item. Table 46. Int. increase and decrease (Inc. and Exp.) due to changes in Volume and Rates (quarterly) R$ million 2 nd Quarter 2008/ nd Quarter 2008/1 st Quarter 2008 Average Volume (1) Average Rate (2) Net Change (3) Average Volume (1) Average Rate (2) Net Change (3) Earning Assets 1,760 (665) 1, (744) (429) Available Funds in Foreign Currency (76) (56) Securities + Interbank Investments on Hedge 304 (419) (115) (151) (349) (500) Loans + Leasing 1,550 (445) 1, (651) (2) Remunerated Compulsory Deposits 84 (17) Interest Bearing Liabilities (988) 589 (399) (196) Saving Deposits (148) 79 (69) (18) (33) (50) Interbank Deposits (18) (5) (31) (35) Time Deposits (233) 131 (102) (79) Money Market Borrowing (650) 2 (649) (92) (211) (303) Foreign Borrowing (44) (70) Onlending (54) 53 (1) (13) Financial and Development Funds + Subordinated Debt (13) 11 (2) (4) 4 0 Foreign Securities Borrowing (1) 9 8 (7) 7 (0) (1) Net Change - Average Rate (2) ((Interest Current Period / Balance Current Period) x Balance Previous Period) - (Interest Previous Period) (3) Current Interest - Interest for Previous Period 72 - Banco do Brasil MDA 2Q08

73 7.5 Provision for Credit Risk Table 47. Net Financial Margin R$ million Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 on 2Q07 on 1Q08 1H07 1H08 on 1H07 Net Interest Income 5,208 5,492 5, ,194 11, Allowance for Loan Losses (1,236) (1,534) (1,687) (2,667) (3,221) 20.8 Net Financial Margin 3,971 3,958 4, ,527 8, In the quarterly flow, PCLD recorded an increase of 36.5% in relation to the same period of last year. This growth is in line with the increased of loan portfolio. The ratio between expenses of provisions and the average total portfolio - both accumulated in 12 months - went from 4.1% in 2Q07 to 3.6% in 2Q08. In 2Q08, the ratio between the quarterly provision expenses and the average of the loan portfolio in the period was lower in relation to the same period of previous year, in 0.9%. Table 48. Expenses with Allowance for Loan Losses over Portfolio R$ million 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 (A) Allowance for Loan Losses - Quarterly (1,385) (1,257) (1,431) (1,236) (1,216) (1,497) (1,534) (1,687) (B) Allowance for Loan Losses - 12 Months (5,984) (5,743) (5,830) (5,309) (5,139) (5,380) (5,483) (5,934) (C) Loan Portfolio 118, , , , , , , ,082 (D) Average Portfolio 3 Months 116, , , , , , , ,059 (E) Average Portfolio 12 Months 106, , , , , , , ,928 Expenses over Portfolio (A/D) - % Expenses over Portfolio (B/E) - % Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 (A) Allowance for Loan Losses - Quaterly Expenses Over Portfolio (B/E) - % Expenses Over Portfolio (A/D) - % Figure 24. Expenses with Allowance for Loan Losses over Portfolio 73 - Banco do Brasil MDA 2Q08

74 The graph below details the allowance for loan losses, segregating the minimum provisions required by CMN Resolution 2,682 from the total booked. An increase can be observed in the volume of provisions required, which climbed from R$ 9,604 million in March 2008 to R$ 10,308 million in June 2008, an increase of 7.3%, below the growth of the loan portfolio, which grew 10.0% in the period. The Total Provision (Additional plus Required) presents 4.4% of growth in 2Q08 in relation to the previous quarter, lower than the growth of the portfolio. This fact is explained by the use of part of the Additional Provision allocated to the Loan Portfolio. R$ million 8, ,635 9,133 9,441 9,663 1,397 1,582 1,655 1,580 10,313 1,586 10,694 1,090 11, ,209 7,238 7,551 7,786 8,084 8,727 9,604 10,308 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Provision Required Additional Provision Total Provision Figure 25. Breakdown of Allowances Events occurred during the second quarter of 2008 that resulted in the allocation of additional provision to the rural portfolio and corporate portfolio: a) reclassification in accordance with the periods of delinquency provided in CMN Resolution 2,682/99 of unrenegotiated operations backed by the above mentioned resolutions, maintained in a normal situation until 2/15/2008. The Allowance For Loan Losses generated on account of this adjustment was R$ 82 million. b) In the corporate portfolio adjusts in the methodology risks classification occurred, that generated on accounted of R$ 139 million. Operations classified at risk levels AA-C increased from 90.3%, in March 2008, to 90.4%, in June Table 49. Loan Portfolio by Level of Risk R$ million Jun/07 Mar/08 Jun/08 Balance Allowance Comp. % Balance Allowance Comp. % Balance Allowance Comp. % SFN* AA 39, , , A 29, , , B 46, , , C 16, , , D 5, , , E 1, , , F , G , , H 4,476 4, ,605 5, ,997 5, Total 145,233 7, ,760 9, ,082 10, AA-C 131,861 1, ,037 1, ,896 1, D-H 13,372 6, ,721 8, ,186 8, * Previous data of June/ Banco do Brasil MDA 2Q08

75 The ratio of Portfolio Net of Allowances (CLP) over the Total Portfolio (CT) expresses the overall evaluation of the weighted portfolio, in accordance with CMN Resolution 2,682. The following chart shows that Banco do Brasil has maintained a quality in its loan portfolio in line with the Brazilian banking industry (SFN) Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 BB SFN Figure 26. CLP/CT BB vs. SFN The table below shows the drop in past-due loans in the Loan Portfolio when compared to March The volume overdue for 15 days of the domestic/internal portfolio amounted to R$ 6,899 million, reaching 3.6% in 2Q08, lower than the 4.4% recorded in March The volume overdue above 60 days reached 2.8%, in line with that observed in March The volume overdue above 90 days reached 2.5%, higher than the 2.4% that observed in March The average risk of the portfolio was 5.9% in June 2008, lower thatn the 6.2% recorded in March The increase of the average risk is partially explained by the increase of 7.5% in the loan portfolio contracted with lower risk levels, combined with higher efficiency in collection of defaulted loans originated from new technological solutions and new retail collection process by retaining specialized judicial collection firms Banco do Brasil MDA 2Q08

76 Table 50. Deliquency Ratio - % R$ million 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Loan Portfolio 118, , , , , , , ,082 Loans overdue 6,319 5,500 6,008 6,915 7,525 7,248 7,574 7,089 Past Due Loans/Loan Portfolio Past Due Loans + 15 days 6,120 5,466 5,962 5,930 7,125 7,222 7,521 6,899 Past Due Loans + 15 days/loan Portfolio Past Due Loans + 60 days 4,455 3,863 3,930 4,111 5,157 5,259 4,907 5,323 Past Due Loans + 60 days/loan Portfolio Past Due Loans + 90 days 3,838 3,382 3,391 3,508 3,986 4,268 4,164 4,689 Past Due Loans + 90 days/loan Portfolio Write-off 1,043 1, ,164 1,316 Recovery of Write-offs (272) (425) (346) (386) (302) (414) (422) (425) Net Loss Net Loss/Loan Portfolio - % annualized Provision 8,757 8,635 9,133 9,441 9,663 10,313 10,694 11,165 Allowance/Loan Portfolio Allowance/Past Due Loans + 15 days - % Allowance/Past Due Loans + 60 days - % Allowance/Past Due Loans + 90 days - % The graph below shows the ratio between the provision required to the provision for transactions overdue for more than 90 days of the Bank and of SFN (National Financial System). In comparison with SFN, it can be observed that the Bank has a level of provision that is more than sufficient to cover transactions overdue for more than 90 days Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 90 Days BB 90 Days BI Figure 27. Allowance/Past Due Loans +90 days BB x SFN 76 - Banco do Brasil MDA 2Q08

77 The decrease of the average risk of the portfolio (Provision required/portfolio) in comparison to the last quarter is explained by the increase of the loan portfolio contracted with lower risk levels. The average risk of the portfolio went from 5.56% in March 2008 to 5.42%, pursuant to the following table: Table 51. Average Portfolio Risk Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Average Risk BB Average Risk SFN Banco do Brasil MDA 2Q08

78 7.5.1 Retail Loan Portfolio The Retail Loan Portfolio grew 41.8% in relation to the same prior-year period and 10.8% in relation to March Part of this growth is explained by the increase in the Payrolls Loans product portfolios in the Jun-07/Jun-08 period of 37,9%, and in Working Capital (product used by micro and small companies), with increase of 35.0%. Besides that, Banco do Brasil took a series of coordinate measures to reduce the delinquency in its loan operations. The process of collections and credit recovery was improved, to optimize the return of borrowed capitals and maintain the customer base. Amongst the measures taken are: automatic renegotiation of the credit through the automatic teller machines and internet; the employees training to recovering of loans; and the changes in collecting focus, from product to customer, with strategies definition directed to each customer profile and its historical relationship with BB. Table 52. Retail Loan Portfolio by Level Risk R$ million Jun/07 Mar/08 Jun/08 Balance Provision Comp. % Balance Provision Comp. % Balance Provision Comp. % AA 3, , , A 7, , , B 21, , , C 9, , , D 1, , , E F G H 1,583 1, ,995 1, ,098 2, Total 45,809 2, ,654 3, ,978 3, AA-C 41, , , D-H 4,205 2, ,293 2, ,636 3, Banco do Brasil MDA 2Q08

79 The quality of the portfolio remained close to that recorded in the previous quarter. The movement of PCLD (Allowance for Loan Losses) of the retail portfolio is detailed in the table below: Table 53. Changes in the Allowance - Retail R$ million 2Q07 3Q07 4Q07 1Q08 2Q08 Retail Loan Portfolio 45,809 48,576 53,407 58,654 64,978 Initial Allowance 2,682 2,839 3,016 3,305 3, Risk Migration a) Risk Deterioration ,083 1,039 1,255 b) Risk Improvement (381) (377) (471) (464) (626) 2 New Transactions Write-offs (532) (630) (599) (671) (760) Total ( ): Other Impacts* (97) (103) (48) (65) (36) Final Allowance 2,839 3,016 3,305 3,511 3,951 Allowance Required by CMN Resolution 2,682 2,839 3,016 3,305 3,511 3,951 Provision Flow - R$ million ,200 a) Added Provision*** b) Provision Expenses ,061 Provision / Portfolio - % Provision Flow / Portfolio - % * Amortization, settlement, release of installments and debit from charges **Purchases in installments payable by credit card included in 1Q08: R$ 32 million *** Additional provision included in Retail Portfolio Banco do Brasil MDA 2Q08

80 7.5.2 Commercial Portfolio The corporate portfolio grew, of 20.9%, over the last three months. This performance was due mainly to the increase in transactions with large corporate groups. The businesses portfolio is strongly influenced by the contracting and settlement of transactions involving expressive amounts with large clients. Even with this increase, the Corporate Portfolio has been showing successive improvements in the risk profile. By the end of June 2008 the AA - C risk levels totaled 98.1% of the Portfolio, above the 97.3% witnessed in June There was also a change in the D-H level loans, which moved from 2.7% in 2Q07 to 1.9% in 2Q08. Table 54. Commercial Loan Portfolio by Level Risk Jun/07 Mar/08 Jun/08 R$ million Balance Provision Comp. % Balance Provision Comp. % Balance Provision Comp. % AA 12, , , A 5, , , B 5, , , C D E F G H Total 24, , , AA-C 24, , , D-H Table 55. Changes in the Allowance - Commercial R$ million 2Q07 3Q07 4Q07 1Q08 2Q08 Commercial Loan Portfolio 24,878 26,034 29,613 33,473 40,456 Initial Allowance Risk Migration (38) (2) a) Risk Deterioration b) Risk Improvement (68) (68) (115) (127) (101) 2 New Transactions Write-offs (76) (47) (23) (29) (30) Total ( ): (27) Other Impacts* (16) (18) (56) (13) (5) Final Allowance Allowance Required by CMN Resolution 2, Changes in the Provision - in R$ million Provision / Portfolio - % Changes in the Provision - % of Portfolio * Amortization, settlement, release of installments and debit from charges 80 - Banco do Brasil MDA 2Q08

81 7.5.3 Agribusiness Portfolio The agribusiness portfolio increased by 26.3% (June/07-June/08) and by 9.0% as compared to the previous quarter. In June 2008 the loans ranked at risk levels AA-C accounted for 85.5% of the portfolio, higher than 84.4% in March The ratio between the allowances required (Resolution 2,682) and the stock of loans decrease from 7.9% in 1Q08 to 7.6% in 2Q08. The changes in the provision in 2Q08 was 14.3% lower than that observed in 1Q08, considering the changes in the provision adjusted by the use of additional provision. Table 56. Agribusiness Loan by Portfolio Jun/07 Mar/08 Jun/08 R$ million Balance Provision Comp. Balance Provision Comp. Balance Provision Comp. AA 8, , , A 12, , , B 15, , , C 5, , , D 2, , , E 1, , , F G H 1,749 1, ,552 2, ,809 2, Total 48,777 3, ,524 4, ,611 4, AA-C 42, , , D-H 6,500 2, ,844 3, ,936 4, The following table details the changes in bad debt provisions for the Portfolio Agribusiness. Table 57. Changes in the Allowance - Agribusiness R$ million 2Q07 3Q07 4Q07 1Q08 2Q08 Agribusiness Loan Portfolio 48,769 48,446 51,883 56,524 61,611 Initial Allowance 3,104 3,244 3,286 3,659 4, Risk Migration (164) (275) (62) 288 (589) a) Risk Deterioration , b) Risk Improvement (589) (670) (731) (723) (1,139) 2 New Transactions ,078 3 Write-offs (147) (156) (92) (140) (235) Total ( ): Other Impacts* (47) 10 (24) 3 (29) Final Allowance 3,244 3,286 3,659 4,440 4,665 Allowance Required by CMN Resolution 2,682 3,244 3,286 3,659 4,440 4,665 Changes in the Provision - in R$ million a) Additional Provision** b) Provision Expense Provision / Portfolio - % Changes in the Provision - % of Portfolio *Amortization, liquidação, liberação de parcelas e débito de encargos ** Additional Provision allocated to the agribusiness loan portfolio 81 - Banco do Brasil MDA 2Q08

82 The use of Additional Provision in 2Q08 refers to the initial operating risk classification of third-party risk operations in accordance with the periods of delinquency provided in CMN Resolution 2,682, combined with delinquency originating from unrenegotiated operations, maintained in a normal situation until 2/15/2008. The average risk of the portfolio is strongly influenced by the operations of the harvests of 2005 to 2007 extended with total balance of R$ 16,492 million. In the following table, the Agribusiness Loan Portfolio in divided in extended and unextended operations. Table 58. Portfolio With and Without Roll Over Agribusiness Risk Balance Portfolio Without Roll Over Allowance for Loan Losses Past Due_90 Past Due 90/ Balance Balance Portfolio with Roll Over Allowance for Loan Losses Past Due_90 AA 11, , A 14, , B 11, , C 4, , D 1, , E F G H 1,054 1, ,755 1, Past Due 90/ Ballance Total 45,119 2, % 16,492 2, % According to the table above, transactions overdue for more than 90 days represent 1.6% of the total unextended portfolio. If we compare this indicator to the extended operations, there is a gap of only 120 base points. On the other hand, the average risk of extended operations is higher than the unextended portfolio, 15.9% against 4.5%. The increase of the average risk of the agribusiness portfolio resulted from a regulatory issue as CMN Resolution 2,682 establishes the maintenance of the risk of the renegotiated operation at the level of risk observed at the time of the renegotiation. In spite of the publication of CMN Resolutions 3,460, 3,479, 3,495, 3,496, 3,500 and 3,523 that postpone the payment schedules of the renegotiated installments, the operations were classified at higher levels of risk due to the mismatching that occurred between the beginning of the default of operations, the disclosure of the resolutions and the formalization of the renegotiations. Simulation carried out removing the drag effect provoked by the extended operations over the other unextended operations of the client presents a reduction of the average risk from 4.5% to 2.6%. Disregarding the operations with third-party risk, the average risck changes from 4.5% to 4.8% and 2.6% to 2.75% respectively. Part of the operations that comprise the agribusiness portfolio has third-party risk, representing a total of R$ 4.1 billion. Disregarding these operations, the average portfolio risk of extended operations goes from 15.9% to 17.3% Banco do Brasil MDA 2Q08

83 In the following graph, the agribusiness portfolio is divided in operations with and without roll over: 2Q08* 26.4% Costs 54.5% Investiment 33.4% Refinancing 12.1% With Roll Over: R$ 15.2 billion Average Risk: 17.3% 73.6% Costs 62.2% Investiment 32.0% Without Roll Over: R$ 42.3 bilhões Portfolio with Roll Over Portfolio Without Roll Over Marketing 5.8% Average Risk: 4.8% Without Roll Over Effect: 2.75% * Abribusiness Portfolio without third party risk Figure 28. Breakdown of Agribusiness Portfolio 83 - Banco do Brasil MDA 2Q08

84 7.5.4 Foreign Trade Loan Portfolio The foreign trade finance portfolio recorded a decrease of 1.6% (Jun/07 Jun/08). Loans rated at tiers of risk AA to C went up from 98.9% in June 2008 to 98.5% in June 2008 and those rated as D-H came down 1.1% to 1.5% in the same period. Table 59. Foreign Trade Loan Porfolio by Level Risk Jun/07 Mar/08 Jun/08 R$ million Balance Provision Comp. Balance Provision Comp. Balance Provision Comp. AA 5, , , A 2, , , B 2, , , C D E F G H Total 11, , , AA-C 10, , , D-H The table below shows the effects of the global risk of the Foreign Trade Loan Portfolio on provisions, the provision vs. portfolio ratio of which increased from 1.0% in 2Q07 to 1.2% in 2Q08. Table 60. Changes in Allowance Foreign Trade R$ million 2Q07 3Q07 4Q07 1Q08 2Q08 Foreign Trade Loan Portfolio 11,004 12,073 11,911 11,019 10,826 Initial Allowance Risk Migration (24) 38 (22) (28) (21) a) Risk Deterioration b) Risk Improvement (51) (46) (54) (45) (45) 2 New Transactions Write-offs (23) (15) (14) (23) (48) Total ( ): (4) (11) (34) Other Impacts* (5) (6) (11) (6) 7 Final Allowance Allowance Required by CMN Resolution 2, Changes in the Provision - in R$ million Provision / Portfolio - % Changes in the Provision - % of Portfolio * Amortization, settlement, release of installments and debit from charges 84 - Banco do Brasil MDA 2Q08

85 7.5.5 Foreign Loan Portfolio and Others Table 61. Foreign Loan Portfolio by Level Risk R$ million Jun/07 Mar/08 Jun/08 Balance Provision Comp. Balance Provision Comp. Balance Provision Comp. AA 8, , , A 2, , , B 1, , , C D E F G H Total 12, , , AA-C 12, , , D-H Table 62. Other Transactions Portfolio R$ million Jun/07 Mar/08 Jun/08 Balance Provision Comp. Balance Provision Comp. Balance Provision Comp. AA A B C D E F G H Total 2,559 1, ,591 1, ,495 1, AA-C , D-H 1,726 1, , ,577 1, Banco do Brasil MDA 2Q08

86 7.6 Income Fee Table 63. Services Revenues R$ million Quarterly Flow Chg. % Half-yearly Chg. % 2Q07 1Q08 2Q08 on 2Q07 on 1Q08 1H07 1H08 on 1H07 Services Revenues 2,437 2,568 2, ,814 5, Account Fees ,420 1, Loan Fees (2.2) (13.1) Credit Card Fees Investiment Fund Management Fees Billings Interbank (27.8) (24.6) (14.9) Collection (6.2) Services Rendered to Affiliated (6.1) (3.9) Official Services Fees (55.7) (74.5) Others The change in the regulations regarding collection of bank fees by the Central Bank, in December 2007, determined the creation of specific accounting subheadings to account for the Bank fee income, detailed in Circular Letter 3,371, segregating it from the other service revenues. Bank fee income, characterized as such by the Central Bank, totaled R$ 646 million in 2Q08. However, for purposes of comparability, and aiming to facilitate the reading and understanding of the figures, the segregation determined bye the Central Bank was not adopted in the above table, that maintained the overview of the main products and services that comprise the Bank Service Revenue. Service Revenue totaled R$ 2,633 million in 2Q08, recording growth of 8.0% in relation to 2Q07, and 2.5% in relation to 1Q08. As detailed in the next chapters, the business expansion of the Bank in the last quarters notably of the growth of the customer base, assets under management and card base surpassed the effects of the regulation concerning collection of individual tariffs of the Central Bank In this sense, it is worth mentioning the increase of the share of revenues from Fund and Credit Cards in the Total of Service Revenues, with stagnation and reduction of the share of Revenues from Checking Account Tariffs and Loan Operations. Income from cards, that represented 8.4% of the total in 2Q07, increased its share to 10.4% in 2Q08. In the same comparison, the share of Fund Management Income went up from 17.4% to 19.8% Banco do Brasil MDA 2Q08

87 7.6.1 Revenues from Checking Account Fees The new regulation of the Central Bank that governs the collection of individual tariffs came into force in the second quarter. Provisions of the Central Bank directly affected the fee income with Loan Operations and Checking Accounts. The prohibition of Credit Opening Fee (TAC) collection was reflected in the decrease of 13.1% in the fee income with Loan Operations in 2Q08, in relation to the same period of previous year. The decrease of these revenues was 2.2% in relation to 1Q08. Moreover, the new regulations of the Central Bank impacted the Brazilian Financial System (SFN) regarding the obligation to inform the Total Effective Cost CET in loan operations contracted by individuals. Explanations regarding the main changes that occurred and simulators can be found on BB s site, where is possible to compare of the conditions offered by BB to the conditions offered by other Banks. Regarding checking account fees, among other effects, the regulation abolished inactive checking account maintenance tariffs and fees for processing checks. However, the regulation impact was minimized by the strong growth of the customer base, the end of the period of fee exemption granted to the beneficiaries of the payrolls of the States of Bahia and Minas Gerais, and the average 6% increase in the current fees. In 2Q08, Revenues from Checking Account Fees totaled R$ 775 million, a 8.2% expansion in relation to 2Q07, and a 5.9% increase in relation to 1Q08. We present below the table of Banco do Brasil priority services, aligned with the Central Bank regulation. Table 64. Services Fees Fee - R$ Products and Services / Timely Costumer Record - Customer Record registration Free - Updating Customer Record semi-annually Current Account Card - Second Debit Card Second Saving Deposit Card 8.00 Current Account Check - Bounced Check Bureau withdrawing Issued Ckeck Cancellation Check Supply Bankers Check 1.50 Current Account Withdraw - Current and Saving Accounts withdraw 2.00 Current Account Deposits - Identified Deposits 2.70 Current Account Statement - Monthly Current and Savings Account Statement Current and Savings Account Statement for an specific period Microfilm and similars supply 6.00 Fund Transfer - Interbank Fund Transfer Intra-bank Fund Tranfer Payment Order Loans - Overbalance Current Account Financing BB ended 2Q08 with a base of 46 million customers. At the end of June, BB had 28.8 million checking accounts (27 million of individuals and 1.8 million of corporate entities), an increase of 9.6% in relation to the same period of previous year. Of the non-checking account holder clients, 7.7 million are savings 87 - Banco do Brasil MDA 2Q08

88 account clients, 2.5 million are beneficiaries of INSS (National Institute of Social Security) and 4.5 million consumers of other products and services. As a result of the strategy of offering products and services by means of partnerships, there was a growth in the base of non-checking account holder clients, reaching 4.5 million in this quarter. This number represents an increase of 11.6% in relation to 1Q08 and 115.4% in the YTD. in thousand 23,879 24,150 24,353 24,676 24,999 25,746 26,157 27,054 1,526 1,559 1,581 1,618 1,636 1,667 1,698 1,775 Sep/06 Dez/06 Mar/07 Jun/07 Sep/07 Dez/07 Mar/08 Jun/08 Figure 29. Customer Base Individuals Companies 88 - Banco do Brasil MDA 2Q08

89 7.6.2 Asset Management In the second quarter of 2008, Banco do Brasil accumulated R$ 521 million in Investment Fund Management Fees, a growth of 22.6% in relation to the same period of Fund management and managed portfolio income has been increasing its share in the total Fee Income, reaching 19.8% in 2Q08, versus 17.4% in 2Q07. BB Administração de Ativos Distribuidora de Títulos e Valores Mobiliários (BB DTVM), a wholly-owned subsidiary of Banco do Brasil, showed growth of 17.7% in the volume of assets under management in the last 12 months, totaling R$ billion distributed between R$ billion in investment funds and R$ 11.4 billion in managed portfolios. With this volume, BB increased its leadership in third-party fund management, with a 19.4% market share, according to the ranking maintained by the Brazilian Association of Investment Banks (Anbid), compared to 19.3% in the previous quarter. R$ billion Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Asset Management Market Share - % Figure 30. Asset Management In accordance with the following table, Investment Funds and Managed Portfolios aimed at Institutional Investors have the largest share in the total registered in June 2008, with 41.5%, followed by Individuals and Government, which hold 26.8% and 17.7% respectively. Table 65. Investment Funds and Managed Portfolios by Costumer R$ million Chg. % Jun/07 Share % Mar/08 Share % Jun/08 Share % on Jun/07 on Mar/08 Institutional Investors 80, , , Individuals 60, , , Government 40, , , (1.6) Businesses 19, , , Foreign Investors 7, , , (7.7) Total 208, , , Banco do Brasil MDA 2Q08

90 The table below shows the concentration of 55.4% of assets under management in Fixed Income. Nevertheless, it is possible to observe the growth in the Variable Income portfolios, that increased its share in the total under management from 20.5% in 1Q08 to 21.2% at the end of 2Q08. Table 66. Investment Funds and Managed Portfolios by Type R$ million Chg. % Jun/07 Share % Mar/08 Share % Jun/08 Share % on Jun/07 on Mar/08 Investment Fund 200, , , Fixed 119, , , Variable 28, , , Multimarket 31, , , Others 20, , , Managed Portfolios 8, , , Fixed 4, , , Variable 4, , , TOTAL 208, , , Banco do Brasil MDA 2Q08

91 7.6.3 Cards Banco do Brasil closed the semester with 75 million cards, an increase of 8.2% as compared to 1Q08 and 26.8% in relation to the same period of previous year. The credit card base attained 23.7 million units, growth of 51.1% in 12 months, and that of debit cards, 51.2 million, up 18.0% over the same prior-year period. in million 11.4 Credit Cards Debit Cards Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Figure 31. Credit and Debit Cards Throughout the semester, strategies have been adopted to expand the user base, and improve the activation and retention rates, and the average consumption of cards. These initiatives include the launching of new card types, the adoption of commercial and marketing actions, and the increase of business with non-checking account holder clients, with an emphasis on the partnerships with other market companies. The card base of partnering companies reached 1.4 million in June 2008, with total revenues of R$ million, representing growth of 444.9% in relation to the same period in the previous year. Until the end of the quarter, BB had 21 partnerships with several segments for issuing cards. The total revenue with cards in the second quarter was R$ 14.8 billion, a growth of 28% in relation to the same prior-year period, while the average industry growth was 24.5%, according to information disclosed by the Brazilian Association of Credit Cards and Services Companies (Abecs). Revenues from credit cards totaled R$ 8.2 billion in 2Q08, with an increase of 27.3% as compared to the same period in 2007, and with debit cards with R$ 6.6 billion, an evolution of 28.8% in a year. The business expansion was reflected in the market share. In terms of total revenues, market share went up from 15.9% in the second quarter of 2007 to 16.4% in the second quarter of 2008, according to information disclosed by the Brazilian Association of Credit Cards and Services Companies (Abecs). R$ billion Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Credit Cards Debit Cards Figure 32. Card Sales 91 - Banco do Brasil MDA 2Q08

92 With this performance, Banco do Brasil keeps its leading positions in the Brazilian market in relation to card revenues with the VISA brand, and revenues with debit cards. Total cards fees reached R$ 892 billion, a 54.0% growth in relation to the same period in the previous year. Fee income of card services also deserve to be highlighted, with R$ 274 million in the quarter, a 34.6% growth when compared to the ones obtained in the same period of The share by these earnings in total Fee Income rose to 10.0% during the quarter, 200 base points higher than the percentage recorded in 2Q07. Table 67. Services Revenues from Cards R$ million Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 on 2Q07 on 1Q08 1H07 1H08 on 1H07 Service Revenues - Cards Financing Income Equity Income - Visanet Other Income and Other Services (18.2) Total Revenues ,104 1, In the quarter, it is worth mentioning BB initiative, unprecedented in Latin America, of substitution of its credit card base by new cards with a chip, a technology that offers security in the transactions and offers a broad range of functionalities to BB cardholders. As detailed in "Other Administrative Expenses", this initiative meant additional expenses of R$ 54.1 million to produce, customize and ship the cards to the cardholders, in comparison to the previous quarter. Of the total credit card base, 21 million plastic cards with chips are already with the users. In relation to the Visa Vale cards, BB ended the quarter with 1.5 million units in its base, up 52.7% over the same prior-year period. The turnover attained R$ 596 million, 25.2% higher in 12 months Banco do Brasil MDA 2Q08

93 7.6.4 Collections Revenues from collections reached R$ 257 million in 2Q08, an increase of 10.3% in 12 months and 3.5% in relation to 1Q08. In the semestral comparison, there was an increase of 10.7%. The share by these earnings in total Fee Income reached 9.8% during the quarter, and 9.7 in the semester. Regarding the total collection income, of R$ billion, there was an increase of 27.6% in relation to 2Q07. The wholesale pillar (corporate and commercial) is responsible for approximately 72.5% of the total amount collected. In June of 2008, BB had 471,616 thousand agreements in effect, growth of 2,1% in relation to 1Q07 and a positive balance of 9,524 agreements. A total 146,953 payment slips were settled, of which 36,395 thousand were BB securities. R$ million 86,390 92,067 91,844 98, , , , ,183 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Figure 33. BB Billings Volume 93 - Banco do Brasil MDA 2Q08

94 7.7 Administrative Expenses Table 68. Commercial Income R$ million Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 on 2Q07 on 2Q08 1H07 1H08 on 1H07 Contribution Margin 5,919 6,038 6, ,401 12, Administrative Expenses (3,268) (3,372) (3,582) (6,378) (6,954) 9.0 Personnel Expenses (1,713) (1,768) (1,933) (3,385) (3,700) 9.3 Other Administrative Expenses (1,519) (1,590) (1,636) (2,920) (3,226) 10.5 Other Tax Expenses (36) (14) (13) (62.5) (6.4) (73) (28) (62.1) Commercial Income 2,652 2,666 2,595 (2.1) (2.7) 5,023 5, Commercial income represents the Bank s business earnings after the deduction of the expenses necessary for carrying on the business. In 2Q08, the Bank recorded R$ 2,595 million in Commercial Income, against R$ 2,652 million in 2Q07. The 2.1% reduction in this period is due to the administrative expense increase, in line with the Guidance, and the growth of 36.5% in PCLD, following the loan portfolio expansion. The Administrative Expenses reached R$ 3,582 million in 2Q08, an increase of 9.6% in relation to 2Q07. The variation presented is in line with the growth strategy of the Bank, that has been investing in new projects that involve the acquisition of other financial institutions, establishment of partnerships and structural reorganization. There was an increase in the Personnel Expenses and Other Administrative Expenses in the quarter. Fluctuations presented in these expenses refer basically to the expense regarding the adjustment of provisions for benefits granted to the employees, and the increase in the marketing and public relations expenses. Such expenses are further detailed in the following chapters. Basis 3Q % 28.8% 24.3% 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Net Financial Income Contribution Margin Commercial Income Figure 34. Changes in Commercial Income 94 - Banco do Brasil MDA 2Q08

95 7.7.1 Personnel Expenses Personnel Expenses reached R$ 1,933 million in 2Q08, an increase of 12.8% in the year and 9.3% in relation to the previous quarter. It is worth mentioning that, in the second quarter, the Bank incurred expenses of R$ 84 million regarding the adjustment of provisions for benefits granted to the employees. Disregarding this adjustment in the provisions, Personnel Expenses reached R$ 1,849 million, representing an increase of 7.9% in the year. Table 69. Personnel Expenses R$ million Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 in 2Q07 in 1Q08 1H07 1H08 in 1H07 Personnel Expenses (1,713) (1,768) (1,933) (3,385) (3,700) 9.3 Salaries (954) (834) (1,028) (1,734) (1,862) 7.4 Benefits (294) (257) (261) (11.0) 1.9 (438) (518) 18.2 Social Charges (261) (320) (362) (626) (682) 8.9 Training (17) (10) (15) (11.2) 47.7 (27) (25) (8.5) Remuneration for Counselors and Directors (3) (4) (4) (7) (8) 20.6 Administrative Personnel Provisions (185) (344) (261) 41.3 (24.0) (553) (606) 9.5 Besides the adjustment of the provision on employees benefits, the following contributed to the increase of Personnel Expenses: the increase of the rate of Occupational Accident Insurance from 1% to 3%, the 6% salary adjustment granted in the bank workers' agreement of September 2007, and the gradual recomposition of workforce after the Early Retirement Plan. The table below details the participation of each one of these factors in the Personnel Expenses growth. Table 70. Main Changes in Personnel Expenses 2Q07 R$ million 1Q08 Personnel Expenses 1,713 1,768 Occupational Accident Insurance 18 (2) Salary raise 2007/ Workforce Increase 58 (23) Update of Finge Benefit Provision Other Effects (44) 106 Personnel Expenses 2Q08 1,933 1,933 Banco do Brasil closed 2Q08 with 93,733 collaborators, a workforce 5.2% higher than that recorded in June 2007 and 1.0% higher than recorded in March Banco do Brasil MDA 2Q08

96 The staff member statement does not include employees who are in situations of leaves, absences and licenses, and those lent to other companies. The goal is to demonstrate the Bank s real workforce, that is to say, the employees that generate expenses and are contributing towards generating results. 10,205 9,947 10,112 9,798 9,466 9,119 9,384 9,475 92,827 82,622 92,619 82,672 92,580 82,468 89,108 79,310 89,514 80,048 90,974 81,855 92,801 83,417 93,733 84,258 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Total Employees Interns Figure 35. Changes in Workforce Staff distribution by age remained stable in 2Q08 in relation to the previous quarter, recording a small increase of employees between 26 and 35 years of age and over 45 years of age. On the other hand, there was a slight reduction in the other age brackets. In relation to the same period of 2007, a significant decrease can be observed in employees aged 45 and up, and an increase in the number of employees aged up to 35, an effect of the personnel renewal after the Early Retirement Plan (PAA). 2Q07 1Q08 2Q % 7.9% 25.0% 9.4% 25.4% 9.3% 30.9% 33.7% 33.8% 32.6% 31.9% 31.5% Up to 25 years 26 to 35 years 36 to 45 years Over 45 years Figure 36. Employees Age 96 - Banco do Brasil MDA 2Q08

97 In connection with the staff member composition according to years worked in the Bank, it is worth mentioning that 41.6% have been with the institution for up to 5 years. The brackets comprising employee with up to 5 years, and those between 6 to 10 years of service at the Bank, grew 5.5% and 3.2%, respectively, in the last 12 months. 2Q07 1Q08 2Q08 13% 11% 12% 16% 35% 13% 42% 14% 42% 14% 6% 16% 10% 5% 19% 8% 5% 19% Up to 5 years 6 to 10 years de 11 to 15 years 16 to 20 years 21 to 25 years Over 25 years Figure 37. Aged Bracked The graph below shows the evolution of the degree of education of the Bank employees. As a result of the Bank's investments in education and training, the number of employees with undergraduate courses, specialization courses, and master or doctorate courses keep an uptrend in relation to prior quarters. 2Q07 1Q08 2Q % 0.8% 18.9% 0.6% 19.4% 0.6% 35.6% 34.6% 34.1% 46.3% 45.9% 45.9% Elementary School Holders of Bachelor s Degree High School Specialization. Master s or Doctor s Degrees Figure 38. Level of Education 97 - Banco do Brasil MDA 2Q08

98 Some BB productivity are shown below. Assets per Employees R$ thousand Customers per Employees Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Employees / (Branch + PAA + PAB) 17,2 17,2 17,2 16,6 16,6 16,7 17,0 17,1 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Figure 39. Productivity Ratios 98 - Banco do Brasil MDA 2Q08

99 7.7.2 Other Administrative Expenses Other administrative expenses reached R$ 1,636 million in the second quarter, a 2.9% increase in relation to 1Q08 and a 7.7% increase in relation to 2Q07. Table 71. Other Administrative Expenses R$ million Quarterly Flow Chg. % Half-yearly Chg. % 2Q07 1Q08 2Q08 on 2Q07 on 1Q08 1H07 1H08 on 1H07 Other Administrative Expenses (1,519) (1,590) (1,636) (2,920) (3,226) 10.5 Telecommunications and Data Processing (391) (427) (420) 7.6 (1.6) (760) (848) 11.5 Amortization and Depreciation (182) (191) (193) (362) (384) 5.9 Security. Guard and Transport Services (231) (250) (251) (450) (501) 11.4 Expenses with Premises and Equipment (202) (210) (215) (401) (425) 5.9 Marketing and Public Relations (115) (64) (104) (9.3) 61.7 (178) (168) (5.6) Expenses with Outsourced Services (157) (210) (225) (295) (435) 47.1 Other Administrative Expenses (242) (236) (229) (5.5) (3.2) (472) (465) (1.5) In 2Q08, expenses with marketing and public relations amounted to R$ 104 million, a 61.7% increase in relation to 1Q08. This increase is due to the new campaigns launched by the Bank in the second quarter, besides the fact that the marketing and public relation initiatives do not occur in a linear manner throughout the year. However, the amount recorded in 2Q08 is 9.3% lower than total the recorded in 2Q07. Table 72. Main Changes in Other Administrative Expenses 2Q07 R$ million 1Q08 Other Administrative Expenses (1,519) (1,590) Expenses with Marketing and Public Relations (11) 40 Expansion of Eletronic Process of Envelopes 15 2 Other Effects (121) (88) Other Administrative Expenses 2Q08 (1,636) (1,636) Compared to the same period of previous year, Banco do Brasil incurred in an additional expense of R$ 14.7 million in the second quarter of 2008, regarding the expansion of electronic processing of envelopes by third-party providers. This process aims to reduce expenses and boost the branch focus on businesses, and is aligned with the increase of support services absorption by the Operating Service Support Centers. Moreover, the substitution of the credit cards base with a magnetic stripe by cards with a chip, started in 2008, reached its acme in the second quarter, which reflects in the increase of R$ 54.1 million in the expenses with production, customization and shipping of cards to cardholders, in relation to the previous quarter. Considering the exceptionality of the event, and the fact that 21 million cards were already issued with a chip, these expenses were relocated from "Other Administrative Expenses" to "Extraordinary Items" Banco do Brasil MDA 2Q08

100 7.7.3 Distribution Network With national coverage and present in 3,274 Brazilian municipalities, besides branches located in 23 countries, Banco do Brasil has the largest branches network in Brazil. At the end of 2Q07, Banco do Brasil s own service network in Brazil comprised 15,353 points (3% growth in relation to 2Q07) and is classified in the chart below: Table 73. Distribution Network Set/06 Dez/06 Mar/07 Jun/07 Set/07 Dez/07 Mar/08 Jun/08 Branches 3,960 3,969 3,974 3,977 3,984 4,008 4,024 4,052 PAA PAB 1,250 1,236 1,226 1,209 1,208 1,247 1,251 1,249 PAE 5,814 5,588 5,895 5,906 5,949 5,948 5,935 5,911 SAA 3,824 3,841 3,847 3,879 3,884 3,906 3,925 3,951 PAP Total 15,042 15,113 15,133 15,161 15,212 15,297 15,324 15,353 The Bank s distribution network is divided into 5 types of points of service, besides the branches: PAA Advanced Service Post: these are points of service intended for towns lacking banking services. They have a small staff and electronic services; PAB Banking Service Post: this type of unit is located inside the premises of companies or government offices. This service structure requires one employee and electronic services; PAE Electronic Service Post: the structure of services is exclusively electronic; SAA Self-Service Room: exclusively electronic structure of services, installed in the main areas of the branches; 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: North Retail Wholesale Govern High Income 1 Midwest Retail Wholesale Govern High Income 5 South Retail Wholesale Govern BB 6,0% High Income 6 BB 9,9% BB 38,7% BB 20,6% BB 24,8% Northeast Retail Wholesale Govern Southeast High Income 7 Retail Wholesale Govern 1, High Income 34 Figure 40. Total Distribution Network To offer an excellent service and improve the satisfaction clients level, Banco do Brasil segments its customer base according to each profile and relationship, developing strategies for the specific segments Banco do Brasil MDA 2Q08

101 In relation to the Wholesale market, the service network is comprised by 84 branches, of which 15 are Corporate and 68 Business branches, serving 34,871 customers. Most of the network is located in the Southeart (57%) and South (26%) regions of Brazil, regions with the highest concentration of large companies. The services are segmented considering the annual sales volumes in accordance with the following table: Table 74. Wholesale Pillar Branches Industry Commerce Services Corporate Over R$ 90 million Over R$ 150 million Over R$ 150 million Business From R$ 10 to R$ 90 million From R$ 10 to R$ 150 million From R$ 10 to R$ 150 million On the other hand, the Government Market, comprised by direct management bodies, federal entities, foundations and public companies, was surved by 39 agencies, whose business focus is the relationship with the Federal Government and the State and Municipal spheres, encompassing the Executive, Legislative, and Judicial Authorities. The strategy of working in this market has ensured appropriate solutions for the specific aspects of each one of the niches of its segment, acting to generate value through solutions with new products and freeing processes from red tape, with the exclusive electronic bidding service. The Banco do Brasil overseas network numbers 42 points of service (15 branch offices, 10 sub-branches, 12 representation offices and 5 subsidiaries) in 23 countries. Complementing this structure, BB keeps a relationship with other financial institutions abroad, and, at the end of July, had 1,426 bank correspondents active in 151 countries Table 75. Distribution Network Abroad Branches Sub-Branches Business Units and Representative Offices Subsidiaries Assunción Cascais Caracas Banco do Brasil AG Buenos Aires Gifu Mexico City Banco do Brasil Securities LLC Ciudad del Este Gunma Dubai BB Leasing Company Ltd. Frankfurt Hamamatsu Hong Kong BB Securities Ltd. Grand Cayman Ibaraki Lima BAMB Brazilian American Merchant Bank La Paz Nagano Montevideo(*) Lisbon Nagóia Luanda London Parque das Nações Panamá Madrid Porto Rome Miami Santa Cruz de La Sierra Seul(*) Milan Washington New York Shanghai Paris Santiago Tokyo (*) Unit process of installation Banco do Brasil MDA 2Q08

102 7.7.4 Automated Channels Banco do Brasil s self-service network represents a strategic differential, offering various services to BB clients, besides supporting the cost control strategy of the Institution. In June of 2008, BB had a network of 38,766 automated teller machines (ATMs) in Brazil and abroad, the largest network of self-service terminals in Latin America 42,591 39,661 39,765 39,952 39,417 39,279 38,692 38,766 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Figure 41. Automated Teller Machines million transactions were carried out over the ATM network, which corresponds to 42.7%, the total of transactions carried out in the period. The importance of this channel in BB s transactions can be seen from the figures below, which show the percentage of banking transactions carried out through the ATMs in the quarter: % of the drafts; % of delivered check books; % of deposits; and % of the receipts of bills and contractual payments. The share of automated transactions in the total transactions performed by BB customers attained 90.5% in June 2008 as opposed to 89.9% in the same prior-year period Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Figure 42. Share of Automated Transactions / Total Transactions Besides the cashiers at the branches and the ATMs, Banco do Brasil offers several other options for access to banking services, such as: the Internet, its Financial Manager (an Internet banking tool for businesses), POS equipment (credit and debit card machines at the commercial establishments), telephone, fax, and WAP. At the end of the period, BB had 8.4 million customers able to use the Internet and Cell Phone channels, and continued with the position of Internet leader Banco do Brasil MDA 2Q08

103 The chart below shows the service channel distribution of BB Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 ATA Internet Internet Cash POS COBAN and Others Individuals Companies Figure 43. Costumer Access Options Banking correspondents has been in evidence and growing at higher rates in comparison with the other service forms, 14.2% in relation to 2Q07. It is worth mentioning that in this type service the own infrastructure is not used, which represents a higher cost reduction. Another innovation organized by BB in 2Q08 for cost cutting, particularly with the filing and transportation of physical material, was the possibility of access to images of cleared checks in self-service via the internet. 7.5 thousand documents were viewed daily on average. Other benefit is the increase in the operating efficiency. Over the 2nd semester, the bank also intends to provide the images of and the digitalization of checks under custody Banco do Brasil MDA 2Q08

104 7.7.5 Productivity Coverage Ratios The coverage ratios show the capacity for covering fixed costs using only fee income. The rate of coverage of personnel expenses attained 135.2% in 1Q08, as opposed to 133.4% in 1Q07, due to the increase of service revenue at a faster pace than the growth of personnel expenses. The rate of coverage of administrative expenses went from 62.7% in 1Q07 to 73.4% in 1Q08. In the quarter comparison, as the following graph shows, coverage ratio of service revenues over Personnel Expenses went up from 120.2% in 4Q07 to 135.2% in 1Q08. In relation to the capacity for coverage of all the administrative expenses, there was an increase from 64.5% in 4Q07 to 73.4% in 1Q08. The maintenance of higher ratios of coverage stems from strong control over administrative costs as well as the increase of service revenues. Service Revenues / Personnel Expenses Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Service Revenues / Administrative Expenses Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Figure 44. Coverage Ratios It is worth mentioning that were excluded the one-off items in the calculation of the coverage ratio. In the second quarter, in the other administrative expenses were deducted R$ 54 million related to economic plans legal litigations and R$ 54 million related to credit card expenses, as mentioned at chapter. Referring to revenues, R$ 646 million related to banking fee income (change according to Central Bank new regulation) were added to Banking Income, summing the amount below. In relation to the other items there were no other changes. Table 76. Coverage Ratios R$ million 3T06 4T06 1T07 2T07*** 3T07 4T07 1T08 2T08 Service Revenues 2, ,437 2,498 2,590 2,568 2,633 Administrative Expenses 4,804 3,614 3,249 3,535 3,953 4,231 3,483 3,784 Personnel Expenses 3,306 2,050 1,783 1,914 2,308 2,343 1,899 2,074 Service Revenues / Personnel Exp.* Service Revenues / Administ. Exp.** * In the calculation of this ratio Labor Lawsuits are included, ** In the calculation of this ratio Legal Risk is included (Legal Claims and Labor Lawsuts), *** The amounts referring to the Suspension of Previ Contributions - Plan I and PAA were included in the calculation of Personnel Expenses of 2Q Banco do Brasil MDA 2Q08

105 Despite the expansion of the service network, necessary to meet the constant increase in the customer base, BB has kept its cost structure compatible with its generation of business, as seen in the graphs below: Loan Portfolio / Points of Service Service Revenues / Points of Service Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Points of Service Loan Portfolio / Points of Service R$ million Points of Service Serv. Rev./ Points of Service - R$ thousand Personnel Expenses per Employee - R$ thousand Customers / (Branch + PAA + PAB) ,463 4,519 4,561 4,636 4,693 4,779 4,841 4,994 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Figure 45. Productivity Ratios R$ million CAGR 13.6% 8.0 % 20, % 18,107 16,709 15,327 15,464 11,298 11,524 12,398 13,020 13,449 11,235 8,888 9,902 7,648 6,954 5,491 6,607 5, S08 Service Revenues Net Interest Margin Administrative Expenses * Annualized Figure 46. Business vs. Expenses Banco do Brasil MDA 2Q08

106 7.8 Net Value Added The table Net Value Added shows how Banco do Brasil s income is made up of the of the generation of value from each of the Bank s businesses, and then shows a breakdown of the distribution of these proceeds. The point of view used is the gross financial margin, which includes financial intermediation income and expenses, without allowances for loan losses. Table 77. Net Value Added R$ million Quarterly Flow Chg. % Half-yearly Flow Chg. % 2Q07 1Q08 2Q08 on 1Q07 on 4Q07 1H07 1H08 on 1H07 Net interest income 5,208 5,492 5, ,194 11, Income from Non-Financial Products 1,948 2,116 2, ,848 4, Account Fees ,458 1, Investment Fund Management Fees Loans (2.2) (13.1) Billings Collections (6.2) Credit Cards Fees Insurance Others 1,389 1,503 1,374 (1.0) (8.6) 2,709 2, Insurance Brokerage Insurance Results Others Service Revenues (15.4) (6.9) (10.3) Equity Interest in Results of Subs.and Affil. (3) 135 (128) (82.6) Other Operational Revenues (11.0) (13.7) 1,349 1, Non Operation Income Value Added 8,544 9,112 9, ,750 18, Distribution of Value Added (7,476) (6,764) (7,667) (14,273) (14,432) 1.1 Operational Revenues (2,123) (2,696) (2,820) (4,387) (5,516) 25.8 Provision for Credit Risk (1,236) (1,534) (1,687) (2,667) (3,221) 20.8 Other Operational Income (887) (1,162) (1,133) 27.8 (2.4) (1,720) (2,295) 33.5 Personnel Expenses (2,051) (2,199) (2,285) (4,014) (4,485) 11.7 Personnel Expenses (1,914) (1,899) (2,074) (3,696) (3,973) 7.5 Statutory Profits Sharing (137) (300) (212) 54.2 (29.5) (317) (512) 61.2 Administrative Expenses (1,621) (1,583) (1,710) (3,076) (3,294) 7.1 Tax Expenses (1,268) (1,075) (1,032) (18.6) (4.0) (2,326) (2,107) (9.4) Taxes on Sale (489) (488) (511) (940) (999) 6.3 Other Tax Expenses (36) (14) (13) (62.5) (6.4) (73) (28) (62.1) Income and Social Contribution Taxes (743) (572) (507) (31.7) (11.3) (1,312) (1,079) (17.7) Extraordinary Items (413) (77.1) (471) Value Added to Shareholders 1,068 2,347 1, (30.0) 2,477 3, Banco do Brasil MDA 2Q08

107 8 Risk Management 8.1 Risk Management Market Risks Introduction BB uses statistical and simulation methodologies to measure the market and liquidity risks of its positions. The main ones are: Value at Risk (VaR); Sensitivity (parallel shift and curvature of risk factors); Stress test. The Value at Risk (VaR) is a measure of maximum expected loss in monetary values, under normal market conditions, in a determined line period, given a chosen confidence interval. At BB, the VaR is measured by historical simulation methodology, with confidence interval of 95%, for a period of 1 (one) day. The Historical Simulation methodology makes use of fluctuation interest rates, market indices, exchange rates, shares, and commodities. This methodology undergoes a process backtesting, which consists in the comparison of comparing the distribution of calculated values with the actual financial results. In order to determinate the sensitivity of the Bank s capital to the impacts of extreme market movements, stress scenario tests are carried out. These scenarios are created from market shocks, which are based on significant historical moments or forecast economic-financial scenarios. Creating the scenarios is the responsibility of the Scenarios Commission, under the coordination of the economic department of the Bank. Policies The Policy on Market and Liquidity Risk and the Policy on the Use of Derivative Financial Instruments approved by the Board of Directors, are part of the strategic documentation regarding the institution's market and liquidity risk management. These documents are intended to establish guidelines to be complied with in the company's business decisions involving market and liquidity risk, dealing with quantitative aspects as well as the metrics used and the interest rate risk reference parameter, and also qualitative aspects such as the hedging policy, scope of management, and segregation of functions. Structure In accordance with CMN Resolution 3,464, of , financial institutions should implement a structure for the management of market risk segregated from the business units and from the unit executing the internal audit activity, and compatible with the nature of transactions, the complexity of products and the dimension of exposure to market risk of the institution. The Bank has a market risk management structure represented by the Risk Management Directorate (DIRIS), compatible with the Bank's nature of transactions, and totally segregated from the business units and the Internal Audit unit. Among the responsibilities of DIRIS in market risk management the proposition of policies, guidelines, methodologies and market risk limits, as well as the identification, assessment, monitoring and control of the market and liquidity risk of the Financial Conglomerate, the identification and tracking of the market Banco do Brasil MDA 2Q08

108 and liquidity risk of the other companies from the Economic and Financial Consolidation shold be highligted. Foreign Exchange Exposure Banco do Brasil adopts the policy of foreign currency exposure so as not to generate capital requirement for its coverage. However, recent regulations published by the Central Bank may imply in the use of capital related to such exposure without any existing exchange mismatch in the company's consolidated balance sheet. Below, we present the management statement of foreign currency assets and liabilities referenced to the American dollar, on 30/06/2008: Foreign Currency Balance R$ Mil R$ Mil ASSETS LIABILITIES Current and Long-Term Assets Current and Long-Term Liabilities Avaiable Funds Deposits Short-Term Interbank Investments Demand Deposits Securities Saving Deposits - Interbank Accounts - Interbank Deposits Intrabank Accounts - Time Deposits Loans/Leasing Money Market Borrowing Other Assets Funds from Acceptance and Securities Placed Permanent Interbank Accounts - Investments Intrabank Accounts Property and Equipaments Borrowing/Onlending Leasing Assets - Financial Derivatives Deferred Other Accounts Payable Unearned Income Shareholder's Equity - OTHER ASSETS AND LIABILITIES Off Balance - Off Balance TOTAL ASSETS TOTAL LIABILITIES NET Figure 47. Balance in Foreign Currencies Banco do Brasil MDA 2Q08

109 Brasil s foreign exchange exposure calculated according to Bacen Circular 3,367, of September 12, 2007, was R$ 1,599 million on June 30th, The chart that follows shows the quarterly behavior of Banco do Brasil s foreign exchange exposure since March/2007: Foreign Exposure Exchange - % PR 5,00% 4,00% 3,00% 0,26% 0,22% 0,33% 3,30% 2,00% 1,00% 0,19% 1,77% 2,37% 3,41% 2,83% 1,04% 0,34% 0,28% 1,26% 1,23% 0,00% mar/07 Jun/07 Set/07 Dez/07 Mar/08 Jun/08 Exposure % Currency Basket Exposure % Other Currencies "G" Portion Figure 48. Changes in Foreign Exchange Exposure Balance Sheet by Index Banco do Brasil manages its expositions in a consolidated manner, analyzing the impacts of several scenarios and stress tests. We present below the composition of assets and liabilities of Banco do Brasil in the country, detailed by index: R$ billion Assets Liabilities Fixed CDI/TMS/FACP IRP/TBF/TR Inflation TJLP US$/Gold W/O Index Asset: Tax Credit; Permanent; Liabilities: Equity; Adm. Pro. Float; 172,9 105,6 36,4 10,2 25,8 27,8 29,6 20,1 106,3 90,8 83,8 4,3 24,9 29,4 27,3 61,6 Figure 49. Composition of Banco do Brasil's assets and liabilities in the country Banco do Brasil MDA 2Q08

110 The chart below shows Banco do Brasil s net mismatches, by index in Brazil % R$ billion % % % % % CDI/TMS/ FIXED IGP NOT FIXED TJLP US$ / FACP others -9.68% PL/others % IRP/TBF/ TR Figure 50. Net Position Portfolios BB Consolidated The consolidated portfolio of Banco do Brasil is formed by asset and liability positions, comprised of commercial and treasury operations, including derivative financial instruments, recorded in the consolidated balance sheet of the BB Group. The illustration below shows a Box-Plot analysis of the Consolidated BB Value at Risk (VaR) since the third quarter of , , , , , ,000 50, Q Q Q Q Q Q Q Q 2008 Figure 51. Financial Consolidated BB VaR Banco do Brasil MDA 2Q08

111 The following table describes the BB Consolidated minimum, average, and maximum VaR for the following periods: Table 78. Consolidated BB VaR BB Foreign Network R$ Thousand Period Minimum Average Maximum Jul to Dec / Jan to Dec / Jan to Jun / The consolidated portfolio of the Abroad Network is made up of the positions of assets and liabilities, comprising commercial, financial, derivative and securities transactions, recorded in the balance sheets of Banco do Brasil s units located abroad. The illustration below shows a Box-Plot analysis of the Consolidated Abroad Network's VaR since the third quarter of ,000 40,000 35,000 30,000 US 25,000 $ mil 20,000 15,000 10,000 5, Q Q Q Q Q Q Q Q 2008 Figure 52. Consolidated Abroad Network's VaR The following table describes the Abroad Network's minimum, average, and maximum VaR for the following periods: Table 79. Foreign Network's VaR R$ Thousand Period Minimum Average Maximum Jul to Dec / Jan to Dec / Jan to Jun / Banco do Brasil MDA 2Q08

112 BB Fixed Interest Rate Portfolio The risk management strategy for the set of Real-denominated operations and remunerated at pre-fixed interest rates establishes the VaR limit definition for corrected cost portfolio, which is composed by products accounted for by the corrected cost value. The products accounted for by the market value are managed by means of Domestic Treasury specific-portfolio limits. The VaR methodology used in managing and accompanying the limits of these portfolios is the same as defined by the Brazilian Central Bank, through Circular 2,972 of , that is, a 99% confidence level for the period of 10 days and the allocation of the marked-to-market values by standard vertices. The illustration below shows a Box-Plot analysis of the BB Consolidated fixed interest rate portfolio's VaR since the third quarter of , , ,000 R$ Qhousand 500, , , , , Q Q Q Q Q Q Q Q 2008 Figure 53. Fixed Interest Rate Portfolio's VaR The following table s describe the Fixed Interest Rate Portfolio's minimum, average, and maximum VaR for the following periods: Table 80.Fixed Interest Rate Portfolio's VaR R$ Thousand Period Minimum Average Maximum Jul to Dec / Jan to Dec / Jan to Jun / Banco do Brasil MDA 2Q08

113 BB International Trading For the purposes of management, Banco do Brasil segregates the trading transactions from the others, establishing specific strategies and limits. The diversification effect shows the risk reduction of the portfolio which stems from the correlations between the assets which comprise it. The illustration below shows a Box-Plot analysis of the International Trading portfolio's VaR since the third quarter of ,200 1,000 US$ thousand Q Q Q Q Q Q Q Q 2008 Figure 54. VaR for the International Trading portfolio The following table s describe the International Trading portfolio's minimum, average, and maximum VaR for the periods shown: Table 81. VaR for the International Trading R$ Thousand Period Minimum Average Maximum Jul to Dec / Jan to Dec / Jan to Jun / Banco do Brasil MDA 2Q08

114 BB Domestic Trading The illustration below shows a Box-Plot analysis of the Domestic Trading portfolio's VaR since the third quarter of ,800 1,600 1,400 R$ Qhousand 1,200 1, Q Q Q Q Q Q Q Q 2008 Figure 55. VaR for thedomestic Trading portfolio The following table s describe the Domestic Trading portfolio's minimum, average, and maximum VaR in the following periods: Table 82. VaR for the DomesticTrading R$ Thousand Period Minimum Average Maximum Jul to Dec / Jan to Dec / Jan to Jun / Banco do Brasil MDA 2Q08

115 Sensitivity to Interest Rate We present below a table containing the "Sensitivity to Interest Rate" analysis of Banco do Brasil Conglomerated: Table 83. Sensitivity to Interest Rate Assets Liabilities R$ Million < 1 Mo 1 > 3 Mo 3 > 6 Mo 6 > 12 Mo 1 > 3 Year > 3 Year Total Rated CDI/TMS Inflation TR/IRP TJLP US$/ME Total Rated (41.869) (19.593) (7.321) (9.408) (18.400) (9.728) ( ) CDI/TMS (90.782) (90.782) Inflation 0 (4.283) (4.283) TR/IRP 0 (83.780) (83.780) TJLP (1.515) (23.418) (24.933) US$/ME (8.876) (4.214) (4.171) (5.355) (6.000) (864) (29.480) Total ( ) ( ) (11.491) (14.763) (24.400) (10.592) ( ) Mismatch (32.094) Mismatch Ac (12.351) Mismatch (% Assets) 0 (0) Banco do Brasil MDA 2Q08

116 8.1.2 Liquidity Risk Banco do Brasil maintains levels of liquidity that are adequate for the institution's commitments assumed in Brazil and abroad, which is the result of its broad and diversified depositor base and the quality of its assets, the capillarity of its network of overseas branches and of access to the international capital market. Complete control of liquidity risk is in accordance with the Market and Liquidity Risk Policy established for the Conglomerate, fulfilling the requirements of national banking supervision and of the other countries where the Bank operates. Management instruments adopted in the Conglomerate are: Short, Medium and Long Term Liquidity Forecasts. Risk limits. Liquidity Contingency Plan. Short, Medium and Long-term Liquidity Forecasts allow for the evaluation of the mismatching effect between funding and investments, with the objective of identifying situations that could compromise the institution's liquidity. They take into consideration the budget planning of the institution, as well as market conditions. The Liquidity Reserve, monitored daily, is the limit of risk utilized in short term liquidity management of the domestic and international areas. It is the minimum level of assets of high liquidity to be maintained by the Bank, compatible with the exposure to risk resulting from the characteristic of its operations and from the market conditions. This Reserve is utilized as a parameter for the identification of a possible liquidity crisis and potential engagement of the Liquidity Contingency Plan. jul/07 ago/07 set/07 out/07 nov/07 dez/07 jan/08 fev/08 mar/08 abr/08 mai/08 jun/08 AverageLiquidity Liquidity Reserve Figure 56. Liquidity Reserve - Domestic Treasury Banco do Brasil MDA 2Q08

117 A minimum limit for the Indicator of Availability of Free Funds (DRL) is defined annually for management of the liquidity structure from the domestic area. This indicator, utilized in the planning and in the execution of the institution's budget, aims to guarantee a balance between funding and application of resources from the commercial portfolio and to ensure the financing of liquidity with structural resources. The DRL limit, monitored monthly, guides budget preparation according to funding and commercial investment goals and the liquidity management established by the Board of Directors. jul/07 ago/07 set/07 out/07 nov/07 dez/07 jan/08 fev/08 mar/08 abr/08 mai/08 jun/08 Figure 57. DRL Indicator Monthly DRL Annual Limit The occurrence of departure from the limit of DRL in the second quarter, resulting from the asset growth strategy adopted by the company with the objective of seeking greater profitability of the surplus liquidity with targeting of funds at commercial operations, is being managed in such a way as to reestablish the level of desired structural liquidity without compromising the planning of the business and the liquidity risk of the institution, as shown in the monitoring of the Liquidity Reserve. jul/07 ago/07 set/07 out/07 nov/07 dez/07 jan/08 fev/08 mar/08 abr/08 mai/08 jun/08 Average Liquidity Limit Figure 58. Liquidity Reserve - International Treasury The actions and steps to be taken in a liquidity crisis are defined in the Liquidity Contingency Plan. This Plan will be activated when the sum shown or the Liquidity projection points to levels below the Liquidity Reserve's pre-defined limit Banco do Brasil MDA 2Q08

118 8.1.3 Credit Risk Credit Risk Management With the intention of fulfilling the demands of Basel II and in accordance with best risk management practices, the Bank developed its own methodology for the determination of risk components: Expected Default Frequency (FEI), Loss Given Default (LGD), exposure to credit risk, which are inputs for the measurement of the Economic Capital (EC) and of the Expected Loss (EL). The internal model for measuring the VaR of credit has its theoretical grounds based on the actuarial approach, which is widespread nowadays in the banking industry. The VaR of the loan portfolio is associated with a distribution of added loss for a given level of confidence. The mean value of this distribution is the Expected Loss, which represents how much the Bank expects to lose on average in a given period of time, the protection of which is performed by means of provision. Now the Economic Capital, which is associated with Unexpected Loss, is determined by the difference between VaR and EL. For this portion the Bank protects itself by allocating capital for risk coverage. The distribution of aggregate loss is generated utilizing the following risk components as data input: EDF, LGD and exposure subject to credit risk. In relation to these risk components, the Bank has been working on the optimization of its modeling. The measurement of the VaR of Credit provides subsidies for the appraisal of risk and return of the Bank's loan portfolio, and for the process of establishment of limits for the loan portfolio. Its evaluation has helped in the decision-making process of the Bank, bringing historical information and permitting an analysis of the risk behavior trend. Furthermore, its use has proved extremely valuable in the dissemination of the credit risk management culture at the Bank. As regards the evaluation of the return, the values of EL and EC serve as inputs for the calculation of the Risk-Adjusted Return on Capital (RAROC). The use of RAROC is intended to subsidize important decision-making processes at the Bank. Its tracking in the historical perspective for the portfolios analyzed has allowed the assessment of risk and return to be present in the decisions of the Institution. The Bank developed a credit risk concentration control method, analyzing the interrelation among the various economic sectors that comprise the business loan portfolio. This model evaluates the concentration with a basis on the credit risk of the borrowers -Herfindhal Index. Besides the use of techniques for identification and quantification of concentration, BB monitors and controls the concentration of credit risk in terms of risk/exposure as an important tool to subsidize decisions regarding the definition of risk exposure limits. The distribution of the Economic Capital of the loan portfolio in percentages is shown in the table below. It is observed that the corporate portfolio is accountable for the largest portion of risk in terms of EC. Besides the use of techniques for identification and quantification of concentration, BB monitors and controls the concentration of credit risk in terms of risk/exposure as an important tool to subsidize decisions regarding the definition of risk exposure limits. The distribution of the Economic Capital of the loan portfolio in percentages is shown in the table below. It is observed that the individual client portfolio is accountable for the largest portion of risk in terms of EC Banco do Brasil MDA 2Q08

119 Table 84. Distribution of Economic Capital in the Loan Portfolio R$ million jun/07 % jun/08 % INDIVIDUALS ,5% ,6% COMPANIES - - Agribusiness of Animal Origin 67,63 1,6% 79,05 1,8% Agribusiness of Vegetable Origin 192,67 4,7% 243,76 5,5% Automotive 59,51 1,4% 97,07 2,2% Beverages 8,49 0,2% 12,27 0,3% Wholesale Trade 24,08 0,6% 30,01 0,7% Retail Trade 58,58 1,4% 76,44 1,7% Building 63,44 1,5% 77,29 1,7% Leather and Shoes 23,93 0,6% 29,25 0,7% Other Activities 365,98 8,9% 58,56 1,3% Electrical and Eletronic Goods 44,19 1,1% 54,34 1,2% Electricity 56,48 1,4% 50,06 1,1% Agricultural Consumables 50,77 1,2% 39,34 0,9% Timber and Furniture 42,02 1,0% 41,81 0,9% Metalworking and Steel 93,25 2,3% 61,81 1,4% Pulp and Paper 36,26 0,9% 33,85 0,8% Oil 46,75 1,1% 61,10 1,4% Chemicals 32,26 0,8% 44,18 1,0% Services 142,54 3,5% 192,01 4,3% Telecomunications 7,74 0,2% 20,81 0,5% Textiles and Garments 59,03 1,4% 75,33 1,7% Transport 26,65 0,6% 57,71 1,3% TOTAL ,0% ,0% BB has management tools of credit risk appraisal, with an emphasis on: VaR and RAROC - utilized in the evaluation of the Corporate segment, in the view of sectors of the economy, as a subsidy to the decision of definition of macrosectoral limits. QIP - Quality Index of the Portfolio - qualitative and quantitative indicator of the portfolio. The default concept follows the precepts defined by CMN Resolution 2,682/99. - correspond to the division of the balance overdue for more than 15 and 90 days, respectively, by the balance of the portfolio. Budget of credit risk - corresponds to the projection of PCLD to form the annual budget of BB. Credit risk management reports - systematic monitoring and projections for the loan portfolio from different views Banco do Brasil MDA 2Q08

120 Concentration BB's amplified Loan Portfolio, formed by the portfolio of loans in the country and abroad, guarantees granted and Private Securities totalized R$ 200,629 million in June In this portfolio, 23.3% of the transactions are within the top 100 borrowers in June 2008 as opposed to 21.2% in March 2008, according to the table below: Table 85. Concentration of the Loan Portfolio on the 100 Largest Borrowers Period 1 st Costumer Balance 2 nd to 20 th Balance 21 st to 100 th Balance 100 th Largest R$ million Balance Jun/07 1.4% 2, % 11, % 15, % 29,413 Mar/08 2.3% 4, % 15, % 18, % 38,118 Jun/08 2.3% 4, % 21, % 20, % 46,844 Period Portfolio Garanties Securities Total Jun/07 145,233 3, ,426 Mar/08 172,760 5,864 1, ,055 Jun/08 190,082 6,582 3, ,629 The relation between the largest exposure and the Referential Equity Account - RE ended June 2008 in 14,0%, as the table below: Table 86. Concentration of the Loan Portfolio on the 100 Largest Borrowers R$ million Period 1 st Costumer Balance 2 nd to 20 th Balance 21 st to 100 th Balance 100 th Largest Balance Jun/07 6.7% 2, % 11, % 15, % 29,413 Mar/ % 4, % 15, % 18, % 38,118 Jun/ % 4, % 21, % 20, % 46, Banco do Brasil MDA 2Q08

121 Analyzing the Business Group, in June /2008 the greatest concentration is in transactions contracted with companies from the Oil macro sector that corresponds to 10.5% of the amplified business portfolio, growth of 131.9% in the last 12 months. The distribution of the Loan Portfolio Economic Macro Sectors is shown in the table below: Table 87. Concentration of the Loan Portfolio by Macro-sector Macro-sector Jun/07 Share % Mar/08 Share % Jun/08 Share % R$ million Change % On Jun/07 On Jun/08 Oil 5, , , Foodstuffs of Vegetable Origin 8, , , Metalworking and Steel 9, , , (1.2) Services 9, , , Electricity 5, , , Automotive 5, , , Telecommunications 1, , , Foodstuffs of Animal Origin 3, , , Building 3, , , Textiles and Garments 3, , , Transport 3, , , Retail Trade 2, , , Electrical and Electronic Goods 3, , , Pulp and Paper 3, , , (2.5) Agricultural Consumables 2, , , (0.7) Chemicals 2, , , Beverages 1, , , Other Activities 4, , , Timber and Furniture 1, , , Wholesale Trade and Sundry Ind. 1, , , Leather and Shoes 1, , , Internal Loan Portfolio 66, , , Abroad Loan Portfolio 12, , , (7.6) Garantees 3, , , Securities 3, , , Total 85, , , Banco do Brasil MDA 2Q08

122 8.1.4 Operating Risk Introduction A number of rules have been published by the Central Bank (BACEN) in order to regulate Basel II in Brazil. On June 29, 2006 it published CMN Resolution no. 3380, which provides for implementation of the Operating Risk Management structure, and later Communiqué 16,137 on September 27, 2007, specifying a schedule for implementing Basel II, and it is expected that the approval process for the use of internal models should begin in 2011, for implementation in It should be emphasized that BB put into practice a number of actions intended to ensure compliance with its operating risk management structure with the provisions of CMN Resolution 3380, and since publication of Basel II it has put into practice actions to create an actual internal management model which would also meet the regulator's specifications. More detailed information about Management Structure and Operating Risk Management Process can be found on the Investor Relations site of Banco do Brasil ( Key Risk Indicators (KRI's) KRI's provide numerical data on the frequency or seriousness of relevant causes, associated with risk factors and sub-factors in connection with loss events. They have a close relation with exposure to risk, i.e.: rising indicators signal increased risks. Aforementioned indicators are being utilized as tools to assist in the management of operating risk in the internal processes of BB. Operating Loss Exposure Limits In order to ensure an effective management of operating risks, Banco do Brasil employs Operating Loss Exposure Limits, which are intended to establish the limits acceptable to the Bank for operating losses, which are remitted for examination every month by the Operating Risk Sub-Committee and Global Risk Committee (GRC), in order to put in place mitigating actions and to reduce exposure levels. In this respect, the GRC created the Operating Loss Global Limit in order to allow operating loss management based on statistically pre-established tolerance levels, and to allow the detection of weaknesses associated with processes likely to cause significant losses. The following illustration depicts the progress of BB's operating losses, according to loss event classes and in percentages. Table 88. Monitoring of Operational Loss Loss Event Category 1Q08 2Q08 Labor Issues 41,9% 44,4% External Fraud and Theft 17,3% 16,5% Process Failures 14,1% 18,4% Business Failures 21,4% 15,6% Physical Assets Damage 5,2% 5,0% Internal Frauds 0,1% 0,1% Systems Failures 0,1% 0,0% Banco do Brasil MDA 2Q08

123 Specific limits were also defined for operating loss exposure in self-service channels based on their respective financial volumes, with the purpose of encouraging mitigating actions. The following channels have limits which are regularly defined and reviewed: TAA, POS, Internet for Individuals, Withdrawals Abroad, CABB, Cellular, Lottery Ticket Sales Outlets, 24hr Bank, TAA (CEF) and Financial Manager 3. The limits of exposure to loss in these channels were reviewed in the second semester, with the purpose of inducing, for future months, the electronic fraud mitigation behavior. Allocation of Capital A methodology was defined for the calculation of the portion of Referential Equity Amount (RE) referring to the operating risk (Popr) as established by CMN Resolution 3,490, of BB opted for the implementation of the Alternative Standardized Approach due: to the distribution capacity of the transactions of the Institution to the business lines, which represent different profiles of exposure to operating risk; configure a prerequisite for the implementation of advanced measurement approaches; represent the least impact on the capital structure of the institution. Accordingly there was approval of a manual of procedures that permits the association of the Result of BB with the business lines, according to the table below: Table 89. Monitoring of Operational Loss Business Line Popr Retail Banking 0,12 11,8% Commercial Banking 0,15 23,3% Corporate Finance 0,18 0,3% Trading and Sales 0,18 40,7% Payment and Settlement 0,18 17,5% Agency Services 0,15 2,4% Asset Management 0,12 3,9% Retail Brokerage 0,12 0,2% β 3 TAA: Self-Service Terminals; POS: Storeowner debit terminal; CABB: Call Center Banco do Brasil; Lottery Ticket Sales Outlets: withdrawals performed at lottery ticket sales outlets; TAA (CEF): Terminals of CEF shared with BB Banco do Brasil MDA 2Q08

124 8.2 Capital Structure Shareholders Equity Banco do Brasil closed the second quarter of 2008 with Shareholders Equity 18.2% higher than that seen in June 2007, and 3.8% lower than March 2008, reaching R$ 28,371 million. Table 90. Shareholders Equity R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Patrimônio Líquido 20,197 20,758 21,638 22,305 23,065 24,262 25,407 26,371 Capital 11,913 11,913 11,913 12,711 12,711 13,212 13,212 13,212 Reserves 7,166 8,463 8,220 9,152 8,939 10,701 10,131 13,101 MTM Securities and Derivatives P&L Accounts 907-1,088-1,031-1, Banco do Brasil MDA 2Q08

125 8.2.2 Basel I Banco do Brasil closed the second quarter of 2008 with referential shareholders equity 17.4% higher than that seen in June 2007, and 7% lower than March 2008, reaching R$ 33,852 million. K Coefficient went down from 15.9% to 13.1% in the last 12 months. This ratio is higher than the 11% required by the Central Bank and allows BB leverage of up to R$ 48,865 million in loan assets. Table 91. BIS Ratio - % R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 APR Risk Weight Assets 162, , , , , , , ,118 Required Shareholders Equity 18,554 19,569 20,384 21,858 22,698 24,605 26,196 28,477 APR Requirement 17,825 18,797 19,652 20,997 21,494 23,457 25,050 27,183 Swap Requirement FX Exposure Requirement Interest Rate Exposure Requirement Referential Shareholders Equity 29,919 30,756 31,852 31,534 32,469 34,900 36,387 33,852 Level I 20,155 20,729 21,580 21,007 21,732 23,951 25,243 22,470 Capital 11,913 11,913 11,913 12,711 12,711 12,711 13,212 13,212 Capital Increase Retained earnings (accumulated losses) Capital reserves Revenue reserves 6,787 8,101 7,858 9,145 8,933 10,695 10,125 13,090 Mark-to-Market Securities and Derivatives Treasury stock Income accounts 907-1,088-1,031-1,978 - CTax Credit excluding RE's Tier I Res.3059 (19) (23) (33) (1,199) (1,199) (18) (22) (3,743) Deferred Assets (15) (70) (113) (200) (239) (287) Mark-to-market (4) (23) (14) (88) Tier II 9,765 10,027 10,272 10,527 10,737 10,949 11,144 11,382 Subordinated debt 8,660 8,957 9,241 9,540 9,813 9,986 10,385 10,745 Hybrid Capital and Debt Instruments 1,081 1,063 1, Inst of Cap. Issued by IF with FPR of 100% (11) (11) (13) (14) Revaluation reserves Mark-to-market (104) (134) Shareholders Equity Surplus / Deficit 11,366 11,187 11,468 9,676 9,771 10,295 10,191 5,375 Leverage Surplus / Deficit 103, , ,250 87,965 88,828 93,590 92,643 48,865 K Coefficient % Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Tier I Tier II Figure 59. BIS Ratio - % Banco do Brasil MDA 2Q08

126 CMN Resolution 3,059/02 determined, as from , an 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, 40% of the remaining balance will be deducted from Tier I capital in 2005, 60% in 2006, and so on, until it arrives at 100% in Table 92. Changes in Composition of BIS Ratio Referential Shareholders Equity Required Shareholders Equity Effect in Basel Ratio R$ million Effect in Leverage Net Income deducted of Interest on Own Capital 1, ,134 Increase of Subordinated Debt ,273 Other Changes in Referential Shareholders Equity (1,079) - (0.4) (9,812) CTax Credit excluding RE's Tier I Res.3059 (3,720) - (1.4) (33,819) Hybrid Capital and Debt Instruments (90) - (0.0) (821) Increase of Refer. Shareholders Eq. Requir. on Int. Rate Exp 139 (0.1) (1,265) Increase of Refer. Shareholders Equity Requir. on Swap 9 (0.0) (82) FX Exposure Requirement Increase of Refer. Shareholders Eq. Requir on Risk Weight Assets 2,133 (1.2) (19,386) Changes in the quarter (2,535) 2,281 (2.2) (43,778) Balance at Mar/08 36,387 26, ,643 Balance at Jun/08 33,852 28, ,865 Quarterly net variation (2,535) 2,281 (2.2) (43,778) In the table above, it is possible to see the determinant factors for the decrease of 220 base points in k coefficient ratio in the quarter, and reduction in surplus leverage to R$ 43,778 million. The main impact on referential shareholders' equity (PR) in the second quarter resulted from the tax credits that surpassed the limit of 40% of PR level I (R$ 3,720 thousand), in conformity with the restriction contained in art. 4 of CMN Resolution 3,059/2002, which were excluded from PR and from risk weighted assets for Basel Ratio calculation purposes. Fixed Asset Ratio In the last quarter, the Fixed Asset Ratio grew from 15.3% to 16.3% by increase of Permanent Assets. With the current fixed asset level, BB was able to increase its fixed assets by R$ 11,415 million, without leading to be out of the maximum 50% limit of the Referential Shareholders Equity. Table 93. Fixed Asset Ratio R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Stockholders' equity 20,197 20,758 21,638 22,305 23,065 24,262 25,407 26,371 Subordinated debts eligible as Capital 8,660 8,957 9,241 9,540 9,813 9,986 10,385 10,745 Hybrid Capital and Debt Instruments 1,081 1,063 1, Other (22) (25) (48) (1,272) (1,325) (230) (275) (4,044) Adj. Reference Shareholders Equity (A) 29,919 30,753 31,852 31,531 32,467 34,899 36,387 33,852 Permanent Assets 5,542 5,794 5,835 5,903 5,912 6,304 7,464 8,089 Variable Income Securities Stock Exchange and Cetip Clearing (2) (2) (6) (2) (2) (0) (0) (0) Leased assets (1,110) (1,198) (1,272) (1,320) (1,385) (1,455) (1,613) (2,271) Losses with Leasing to be Amortized (29) (30) (33) (41) (45) (52) (55) (58) Deferred Assets (Resolution CMN 3.444) (70) (113) (200) (239) (287) Total Fixed Assets (B) 4,400 4,564 4,527 4,468 4,367 4,597 5,557 5,511 Fixed Asset Ratio (B/A) - % Margin (Surplus) - % 10,558 10,813 11,399 11,298 11,867 12,853 12,637 11, Banco do Brasil MDA 2Q08

127 8.2.3 Basel II Regulatory Capital Banco do Brasil utilizes the concept of economic capital in its internal processes of risk management. The table s below exhibit the capital requirement in accordance with the current criteria (Regulatory Capital Basel I) and the consumption of capital based on internal models: Table 94. Regulatory Capital Required Shareholders Equity 4Q07 3Q07 2Q Risk Weight Assets Requirement Loan Portfolio (*) Others (**) Market Risk Requirement Operational Risk Requirement TOTAL (*) Loan operations and warrants operations 2Q08 Basel I 1Q08 (**) Tax credit income Tax, CDI-Finantial institutions not related, Exchange portfolio and others. R$ million Table 95. Economic Capital R$ million Economic Capital Internal Model 2Q08 1Q08 4Q07 3Q07 2Q07 Credit Risk Requirement Market Risk Requirement (*) Operational Risk Requirement (**) TOTAL (*) Trading book (**) bootstrap methodology measure Banco do Brasil MDA 2Q08

128 9 - Analysis of Consolidated 9.1 Information From 1Q08, the non-financial companies of the insurance, pension plan and capitalization segment and other activities started to be included in the consolidated statements of Banco do Brasil. Table 96. Interest in the capital of companies Total Share Activity Financial Activity Country BB Administração de Ativos Distribuidora de Títulos e Valores Mobiliários S.A. Asset Management 100% BB Banco de Investimento S.A. Investment Bank 100% BB Banco Popular do Brasil S.A. Banking 100% BB Leasing S.A. Arrendamento Mercantil Leasing 100% Financial - Foreign Banco do Brasil Ag. Viena Banking 100% BB Leasing Company Ltd. Leasing 100% BB Securities LLc. Asset Management 100% BB Securities Ltd. Asset Management 100% Brasilian American Merchant Bank BAMB Banking 100% Insurance, Pension and Capitalization Seguradora Brasileira de Crédito à Exportação SBCE Insurance Company 12,09% Brasilsaúde Companhia de Seguros Insurance Company 49,92% Brasilcap Capitalizações S.A. Capitalization 49,99% Brasilprev Seguros e Previdência S.A. Insurance Company/Pension 49,99% Brasilveículos Companhia de Seguros Insurance Company/Health 70,00% Cia. de Seguros Aliança do Brasil Insurance Company 70,00% Other Activities Ativos S.A. Credit Aquisition 100% BB Administradora de Cartões de Crédito S.A. Service Rendering 100% BB Administradora de Consórcios S.A. Consortiums 100% BB Corretora de Seguros e Administradora de Bens S.A. Broker 100% BB Tur Viagens e Turismo Ltda. Tourism 100% BB Money Transfers, Inc Service Rendering 100% BB USA Holding Company, Inc Holding 100% Cobra Tecnologia S.A. IT 99,35% Cia. Brasileira de Soluções e Serviços CBSS Visavale Service Rendering 40,35% Cia. Brasileira de Meios de Pagamento CBMP Visanet Service Rendering 31,63% Kepler Weber Industry 17,70% Neoernegia S.A. Energy 11,99% Companhia Brasileira de Securitização Cibrasec Credit Acquistion 9,09% Tecnologia Bancária S.A. Tecban Service Rendering 8,96% BB Money Transfers, Inc Service Rendering 100% BB USA Holding Company, Inc Holding 100% Dollar Diversifield Payment Rights Finance Company Credit Acquistion Banco do Brasil MDA 2Q08

129 9.2 Summary Financial Statements Balance Sheet There was a 0.5% increase of Total Assets in the economic/financial group of this quarter, going from R$ 414,481 million to R$ 416,503 million. Table 97. Summarized Balance Sheet R$ thousand Financial Non-Financial Consolidated Consolidated Var. % Jun/08 Jun/08 Jun/08 Jun/07 Current Assets and Long-Term Receivables 395,378,974 14,764, ,461, ,196, Cash and cash equivalents 5,632, ,973 5,753,969 4,789, Short-term interbank investments 54,271,773 53,928 54,283,384 72,688,803 (25.3) Securities and derivative financial instruments 70,460,632 12,273,015 82,301,284 81,489, Other receivables 265,013,587 2,291, ,122, ,228, Permanent Assets 8,089,418 1,301,614 7,041,733 6,284, Investments 2,410,719 1,128,968 1,190,388 1,055, Property and equipment 5,098, ,575 5,229,087 4,586, Deferred charges 580,186 42, , ,191 (3.1) Total Assets 403,468,392 16,066, ,502, ,480, Current and Long-Term Liabilities 376,967,775 13,682, ,968, ,844, Borrowing and onlendings 22,341, ,042 22,500,079 21,501, Other liabilities 354,626,686 13,455, ,468, ,343,394 (0.8) Deferred income 129,625 34, , ,143 (28.6) Stockholders' equity 26,370,992 2,349,299 26,370,992 25,406, Total Liabilities 403,468,392 16,066, ,502, ,480, Banco do Brasil MDA 2Q08

130 9.2.2 Law Income Statement Table 98. Summarized Corporate Law Income Statement Financial Non- Financial R$ thousand Consolidated Consolidated Chg. % 2Q08 2Q08 2Q08 2Q07 Operating Income 31,017,548 1,991,386 32,096,604 29,144, Operating expenses (25,936,678) (1,272,866) (26,987,502) (25,148,812) 7.3 Operating Income 5,080, ,520 5,109,102 3,996, Non-operating Income 91, , , , Income Before Taxes 5,172, ,335 5,411,772 4,103, Interest on Own Capital Tax Benefit (669,484) (237,841) (907,326) (1,250,404) (27.4) Profit Sharing (511,663) (1,206) (512,869) (318,165) 61.2 Net Income 3,991, ,288 3,991,577 2,534, Banco do Brasil MDA 2Q08

131 9.2.3 Statement with Reallocation Table 99. Summarized Income Statement with Reallocations Financial Consolidated Economic-Financial Consolidated R$ million Chg. % Financial Intermediation Income 10,956 11, Financial Income on Insurance Financial Intermediation Expenses (5,213) (5,415) 3.9 Technical Allowance for Insurance - (205) - Net Financial Income 5,743 5, Allowance for Loan Losses (1,687) (1,687) - Fee Income 2,633 2, Administrative Expenses (3,569) (3,662) 2.6 Personnel Expenses (1,933) (1,989) 2.9 Other Administrative Expenses (1,636) (1,672) 2.2 Other Income and Expenses (938) (1,122) 19.6 Operating Income from Insurance Income Before Taxes 2,182 2, Income and Social Contribution Taxes (507) (592) 16.8 Interest on Own Capital Tax Benefit (212) (212) - Recurring Income 1,463 1,463 - Extraordinary Items Net Income 1,644 1,644-2Q08 2Q Banco do Brasil MDA 2Q08

132 9.2.4 Productivity Ratios Table 100. Eficiency Ratio % R$ million Consolidated Financial Economic-Financial Consolidated 2Q08 2Q08 A) Administrative Expenses (3,582) (3,756) Personnel Expenses (1,933) (1,989) Other Administrative Expenses (1,636) (1,672) Other Tax Expenses (13) (95) B) Legal Risk (215) (215) Legal Claims (74) (74) Labor Lawsuits (141) (141) C) Operating Income 6,835 8,114 Net Interest Income 5,743 5,833 Fee Income 2,633 2,905 Other operating income Other operating expenses (1,133) (1,324) Efficiency Ratio ((A+B)/C) - % The efficiency ratio, represented by Administrative Expenses plus Legal Risk divided by Operating Income, was driven by the consolidation, increasing to 55.6%. Table 101. Coverage Ratio R$ million Economic- Consolidated Financial Financial Consolidated 2Q08 2Q08 Chg. % Fee Income 2,633 2, % Administrative Expenses (3,582) (3,756) 4.9% Personnel Expenses (1,933) (1,989) 2.9% Legal Risk (215) (215) - Legal Claims (74) (74) - Labor Lawsuits (141) (141) - Fee Income/Personnel Exp. - % 126.9% 136.4% - Fee Income/Administr. Expenses - % 70.7% 74.5% - The coverage ratio shows the capacity for covering fixed costs using fee income. This ratio is obtained by dividing the Fee Income by the Administrative Expenses. The coverage ratio of personal expenses grew 126.9% in consolidated financial and 136.4% in economic financial consolidated (Financial and Non-financial). In relation to administrative expenses, the rate improved from 70.7% to 74.5%. This improvement in rates is mainly explained by the growth of Fee Income by 10.3% in view of the increase in personnel expenses by 4.9%, both in the consolidated Banco do Brasil MDA 2Q08

133 9.2.5 Basel With the consolidation, the K coefficient changed from 15.3% to 14.7% Table 102. BIS Ratio Financial Consolidated Economic- Financial Consolidated R$ million Change % Jun/08 Jun/08 APR Risk Weight Assets 247,117, ,006, Required Shareholders Equity 28,476,752 29,234, APR Requirement 27,182,927 27,940, Swap Requirement 428, , FX Exposure Requirement Interest Rate Exposure Requirement 865, , Referential Equity Amount 33,851,935 33,229,741 (1.8) Tier I 22,469,502 22,454,041 (0.1) Capital 13,211,644 13,211, Capital Increase Retained earnings (accumulated losses) Capital reserves 5,189 5, Revenue reserves 13,090,409 13,090, Mark-to-Market Securities and Derivatives 57,990 57, Treasury stock Income accounts Tax Credit excluding RE's Tier I Res.3059 (3,742,574) (3,742,574) 0.0 Deferred Assets (287,354) (302,815) 5.4 Mark-to-market 134, , Tier II 11,382,433 10,775,700 (5.3) Subordinated debt 10,744,956 10,744, Hybrid Capital and Debt Instruments 779, , Inst of Cap. Issued by IF with FPR of 100% (13,724) (620,457) Revaluation reserves 5,760 5, Mark-to-market (134,198) (134,198) 0.0 Shareholders Equity Surplus / Deficit 5,375,183 3,995,168 (25.7) Leverage Surplus / Deficit 48,865,305 36,319,710 (25.7) K Coefficient % (4.4) Banco do Brasil MDA 2Q08

134 9.3 Insurance, Pension Plans and Capitalization Banco do Brasil maintains, by means of the wholly-owned subsidiary BB Banco de Investimentos, interest in companies in the lines of insurance, pension and capitalization, which allows it to provide its clients with a comprehensive portfolio of non-banking products. The table below details the interest held and the branch of activity of each one of these companies. Table 103. Insurance, Pension Plans and Capitalization Company Share % Business Partnership BrasilVeículos Cia de Seguros Auto Sul América Seguros Cia. De Seguros Aliança do Brasil S.A Life & Property/Casualty Aliança da Bahia Brasilprev Pension Plans Principal Financial Group e Sebrae Brasilcap Capitalization Icatu Hartford, Sul América e Aliança da Bahia Brasilsaúde Health Sul América Seguros To facilitate the understanding and improve the transparency of the insurance, pension and capitalization business, we present in this chapter the Statement of Income by Branch of Activity referring to 2Q08. As regards the results presented in the period, it is worth informing that as disclosed to the market on 4/28/2008, in the second quarter of 2008 Banco do Brasil recorded revenues of R$ 140 million, net of taxes, relating to the sale of shares of Telemar Participações, belonging to Alutrens Participações, controlled by Brasilcap Capitalização S.A and by Brasilveículos Companhia de Seguros S.A Banco do Brasil MDA 2Q08

135 9.3.1 Income Statement by Line of Business Table 104. Income Statement by Line of Business 2Q08 Auto Insurance Life and Health Other Total Pension Plans R$ thousand Capitalization Consolidated Rev. from Insurance Pension Plans and Capitalization 465,684 71, ,679 1,200,683 1,776,109 1,048,920 4,025,711 Retained Insurance Premiums 465,684 71, ,679 1,200, ,200,683 Revenues from Pension Plans ,776,109-1,776,109 Revenues from Capitalization ,048,920 1,048,920 Changes in Technical Provisions (20,998) (974) 6,676 (15,296) (1,624,339) (943,760) (2,583,396) Insurance (20,998) (974) 6,676 (15,296) - - (15,296) Pension Plans (1,624,339) - (1,624,339) Capitalization (943,760) (943,760) Benefits and Redemption Expenses (157,723) - (157,723) Earned Premiums 444,685 70, ,355 1,185, ,185,387 Retained Claims (295,334) (51,624) (219,202) (566,160) - - (566,160) Marketing Expenses (52,979) (4,103) (217,981) (275,062) (28,438) (63,364) (366,864) Insurances (52,979) (4,103) (217,981) (275,062) - - (275,062) Pension Plans (28,438) - (28,438) Capitalization (63,364) (63,364) Other Operating Income (Expenses) (32,406) (3,554) (52,128) (88,087) 87,542 (10,257) (10,802) Administrative Expenses (50,911) (7,709) (45,254) (103,875) (84,074) (25,105) (213,054) Tax Expenses (11,598) (352) (27,349) (39,299) (1,503) (5,055) (45,857) Financial Income 37,450 3,245 28,780 69, ,602 41, ,559 Financial Revenues 41,437 3,706 71, ,801 1,059, ,300 1,326,815 Financial Expenses (3,987) (461) (42,878) (47,326) (896,112) (108,818) (1,052,256) Operating Income 38,908 6, , , ,176 42, ,415 Equity Account Adjust 128,444-1, , , ,269 Non-operating Income (0) 0 - (0) 36 (60) (24) Income before Taxes 167,352 6, , , , , ,660 Income and Social Contribution Taxes (12,684) (1,597) (38,866) (53,147) (43,263) (13,786) (110,196) Profit Sharing (3,276) (1,213) (4,954) (9,443) (1,863) (2,810) (14,117) Net Income (Loss) 151,392 3,440 95, ,054 86, , ,347 1H08 Auto Health Insurance Life and Other Total Pension Plans Capitalization Consolidated Equity Income Result 105,352 1,717 59, ,284 43,034 79, ,569 Service Revenues Commission 55,946 3, , ,261 10,651 14, ,956 Service Revenues BB Fees ,548 97,548 29,826 46, ,300 Service Revenues Assets Management 2, ,573 6,996 44,170 13,568 64,734 Insurance Value Added 163,421 5, , , , , , Banco do Brasil MDA 2Q08

136 9.3.2 Combined Ratio The combined ratio shows the percentage of earned premiums used up by operating expenses in the insurance business (retained claims, expenses with marketing and administrative expenses). The consolidated combined ratio closed the quarter at 91.9% in 2Q08, against 92.0% in 2Q07. Consolidated Auto Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Health 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Life and Others Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Administrative Expenses / Earned Premius - % Expenses for Marketing / Earned Premius - % Retained Claims - Earned Premius - % Figure 60. Combined Ratio Banco do Brasil MDA 2Q08

137 9.3.3 Brasilveículos The automobile insurance portfolio of Brasilveículos attained R$ million in premiums issued in 2Q08. The insured fleet grew 1.0% in the quarter and 5.6% in 12 months, surpassing 750 thousand vehicles. The market share attained 6.3%, 7th place in the ranking of Susep. Table 105. Brasilveículos Data R$ thousand Chg. % Jun/07 Mar/08 Jun/08 in Jun/07 in Mar/08 Fleet thousand ,6 1,1 Volume of the Managed Portfolio ,6 44, Brasilsaúde Brasilsaúde Companhia de Seguros, founded in December 1995, is the result of an association between Banco do Brasil and Sul América Seguros. Brasilsaúde sells health insurance in the following modalities: Corporate, Professional, Individual and Dental. As of 2007 Brasilsaúde altered its insurance trading strategy, forming a partnership with a network of brokers that prospects business with clients presented by the chain of branches of Banco do Brasil. As a result of this new strategy, the Company closed the period with a portfolio of 98 thousand Life insurance policies and R$ 36.8 million in earned premiums. Table 106. Brasilsaúde Data R$ thousand Chg. %. Jun/07 Mar/08 Jun/08 in Jun/07 in Mar/08 Lives Insured Volume of the Managed Portfolio 48,900 54,594 57, Aliança do Brasil In June2008, Aliança had million in active lives. With a market share of 30.9% in rural insurance, it is the first in the ranking of this segment. In relation to the same prior-year period, Aliança do Brasil exhibited growth of 13.9% in retained premiums and reduction of 4.0% in retained claims. In addition, it is worth emphasizing that BB sent a release to the market on July 4 of this year, informing the signing of the purchase proposal of all the shares held by Companhia de Participações Aliança da Bahia in Companhia de Seguros Aliança do Brasil by BB Banco de Investimento. Aliança da Bahia currently holds 30% of the total capital. The consummation of the transaction is contingent upon authorization from the Superintendency of Private Insurance - Susep. Table 107. Aliança do Brasil Data Chg. % R$ thousand Jun/07 Mar/08 Jun/08 in Jun/07 in Mar/08 Life Insurance Policies - thousand 1,824 1,594 1,614 (11.5) 1.2 Volume of the Managed Portfolio 826, , , Banco do Brasil MDA 2Q08

138 9.3.6 Brasilcap In the first quarter of 2008, revenues from capitalization attained R$ million, a sum that represents growth of 20.3% in relation to the same period of This performance allowed Brasilcap to maintain the leadership of the capitalization market, with a market share of 25.7% in terms of collection, and 22.1% in terms of reserves. Table 108. Brasilcap Data Chg. % R$ thousand Jun/07 Mar/08 Jun/08 in Jun/07 in Mar/08 Quantity of Bonds thousand 2,768 2,754 2, Volume of the Managed Portfolio 2,727,391 2,778,734 2,887, Brasilprev Brasilprev is a pension plan company of Banco do Brasil, in association with the Principal Financial Group and Sebrae. These include the Traditional, PGBL and VGBL plans, and the company is currently ranked third in the pension plan market. In the second quarter of 2008 revenues from pension plans totaled R$ million, up 16.7% over the same period of The market share attained 13.20%, as opposed to 11.45% in 2Q08. There was also a significant advance in the quantity of participants, which totaled 2,291, up 20.4% over 1Q08, and up 7.3% over the previous quarter. Table 109. Brasilprev Data R$ thousand Chg. % Jun/07 Mar/08 Jun/08 in Jun/07 in Mar/08 Active participants thousand 1,903 2,135 2, Volume of the Managed Portfolio 14,061,370 17,011,015 18,358, BB Previdência BB Previdência is a multisponsored pension fund created in 1994, with the objective of instituting and managing private pension plans (annuity or income) offering benefits to public and private sector companies, trade associations, other associations and trade unions operating in Brazilian territory. Its main competitive advantages are: - lower management fees, as the institution has its own workforce which is shared with various plans; and - better investment rates for the assets under management, given the volumes that are invested. BB also provides, through BB Previdência - Fundo de Pensão Banco do Brasil - close-ended supplementary pension plans for companies Banco do Brasil MDA 2Q08

139 10 Financial Statements 10.1 Summarized Balance Sheet Table 110. Balance Sheet - Assets R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 ASSETS 281, , , , , , , ,468 Current and long-term assets 276, , , , , , , ,379 Available funds 4,559 4,749 5,511 4,724 4,366 4,352 4,668 5,633 Short-term interbank investments 29,492 29,088 41,185 51,614 51,419 51,124 72,651 54,272 Open market investments 12,814 17,490 30,512 39,961 42,938 43,391 57,925 44,053 Interbank deposits 16,678 11,598 10,673 11,653 8,481 7,733 14,725 10,219 Marketable securities 73,766 73,108 73,350 72,071 74,126 75,201 70,091 70,461 Securities for trading 5,205 7,494 7,361 10,856 14,046 19,112 18,033 18,503 Securities available for sale 43,180 40,641 40,711 39,379 38,466 38,109 34,787 35,088 Securities held to maturity 24,934 24,409 24,263 20,589 20,029 16,830 16,371 15,654 Financial derivatives ,016 1,247 1,585 1, ,216 Interbank accounts 26,655 28,180 29,844 30,759 31,503 33,445 36,340 38,260 Central Bank deposits 24,494 26,967 26,998 28,711 29,199 32,278 31,102 33,666 Compuls. dep, on demand, Dep & float 9,703 11,209 10,507 11,714 10,768 10,768 11,127 12,952 Compulsory dep, on savings dep, 14,792 15,758 16,492 16,996 18,430 21,510 19,975 20,714 Others 2,161 1,213 2,846 2,048 2,304 1,167 5,238 4,594 Interdepartmental accounts Loans 99, , , , , , , ,558 Public sector 3,951 4,384 4,782 4,631 4,643 2,472 6,286 14,670 Private sector 103, , , , , , , ,661 (Allowance for loan losses) (8,331) (8,366) (8,868) (9,104) (9,341) (9,980) (10,322) (10,773) Leasing Leasing and sub-leasing receivables 993 1,018 1,079 1,068 1,095 1,109 1,150 1,369 Public sector Private sector ,002 1,028 1,081 1,311 (Unearned lease income) (933) (979) (1,011) (1,024) (1,047) (1,054) (1,095) (1,320) (Allowance for lease losses) (29) (28) (23) (22) (23) (23) (25) (36) Other receivables 41,258 40,482 45,022 50,344 53,245 54,883 57,546 56,962 Receivable on guarantees honored Foreign exchange portfolio 10,433 9,456 15,116 9,892 11,538 9,023 12,608 10,060 Income receivable Trading and brokerage of securities Specific credits Special operations Tax credits 9,311 8,604 8,642 13,746 13,881 13,826 13,904 14,218 Atuarial Assets 2,744 2,652 2,556 2,460 2,364 2,268 2,180 2,092 Warrants Deposits Receivable 13,213 13,699 14,129 14,710 15,110 15,409 15,734 15,975 Other credits 8,128 8,657 7,284 9,166 9,915 13,816 12,622 14,328 (Provision or doubtful receivables) (3,672) (3,713) (3,904) (856) (856) (896) (1,003) (1,069) (With loan characteristics) (397) (240) (242) (315) (300) (311) (347) (357) (Without loan characteristics) (3,275) (3,472) (3,662) (541) (556) (585) (656) (713) Other assets ,055 1,079 1,495 2,865 3,785 4,096 Statutory profit sharing Others (Provision for possible losses) (171) (162) (153) (148) (152) (152) (150) (147) Prepaid expenses ,393 2,755 3,680 3,988 Permanent assets 5,542 5,794 5,835 5,903 5,912 6,304 7,464 8,089 Investments 998 1,109 1,176 1,262 1,276 1,368 2,427 2,411 Investm, in assoc. and subsidiary co, 950 1,057 1,121 1,207 1,233 1,316 2,380 2,369 Other investments (Provision for losses) (80) (77) (73) (71) (65) (64) (57) (52) Property and equipment 2,825 2,862 2,782 2,715 2,657 2,844 2,793 2,769 Land and buildings in use 2,267 2,286 2,314 2,328 2,337 2,349 2,376 2,403 Other property and equipment in use 4,298 4,253 4,240 4,257 4,305 4,594 4,628 4,688 (Accumulated depreciation) (3,739) (3,677) (3,772) (3,870) (3,985) (4,100) (4,210) (4,321) Leased assets 1,139 1,228 1,305 1,362 1,430 1,507 1,668 2,329 Leases assets 1,413 1,541 1,664 1,748 1,845 1,937 2,124 2,794 (Accumulated depreciation) (274) (313) (358) (387) (415) (430) (456) (465) Deferred charges Organization and expansion costs 1,238 1,302 1,325 1,365 1,402 1,490 1,534 1,585 (Accumulated amortization) (658) (708) (754) (802) (852) (904) (959) (1,004) Banco do Brasil MDA 2Q08

140 Table 111. Balance Sheet - Liabilities R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 LIABILITIES AND SHAREHOLDERS' EQUITY 281, , , , , , , ,468 Current and long-term assets 261, , , , , , , ,968 Deposits 144, , , , , , , ,475 Demand deposits 32,448 40,059 35,588 36,841 38,712 51,311 44,172 43,628 Savings deposits 34,447 36,714 38,942 40,831 43,831 45,839 48,112 49,096 Interbank deposits 5,579 4,878 5,026 5,146 5,603 5,144 6,247 5,578 Time deposits 72,271 76,900 80,860 81,427 83,640 85,520 91,261 96,729 Investment deposits Money market borrowing 44,309 49,283 67,639 74,719 74,845 72,270 99,914 93,335 Own portfolio 31,038 31,916 31,985 41,880 29,537 28,126 37,743 46,237 Third-party portfolio 12,871 16,867 31,354 32,539 40,859 44,144 61,771 46,418 Others , , Funds from acceptances and securities placed 2,467 2,304 2,099 1,487 1,616 1, ,857 Foreign securities 2,467 2,304 2,099 1,487 1,616 1, ,857 Interbank accounts 1,644 1,166 2,038 1,697 1, ,049 3,611 Receipts and payments pending settlement 1,643 1,163 2,036 1,695 1, ,036 3,598 Correspondent banks Interdepartmental accounts 1,618 2,397 1,913 1,318 1,497 2,428 1,369 1,185 Third-party funds in transit 1,599 2,281 1,896 1,293 1,470 2,311 1,273 1,160 Internal transfers of funds Borrowing 4,332 3,737 4,574 3,354 2,981 2,833 3,058 3,085 Foreign borrowing 4,332 3,737 4,574 3,354 2,981 2,833 3,058 3,085 Domestic onlending official institutions 13,348 14,335 13,950 15,240 16,528 17,487 18,250 19,255 Federal Treasury 3,035 2,989 3,077 3,141 3,132 3,185 3,184 3,246 National Development Bank (BNDES) 4,308 4,658 4,716 4,843 5,121 8,713 9,198 9,555 Fed. Prog. for Cap. Equip. Finan. (FINAME) 5,364 6,004 5,748 6,759 7,516 4,866 5,194 5,802 Other institutions Foreign onlending Financial derivatives 3,432 3,511 1,969 2,052 2,475 1,947 1,876 1,955 Other accounts payable 45,242 39,895 45,301 55,227 54,428 56,268 58,542 57,209 Collection of taxes and contributions 1, ,109 1,851 1, ,430 2,489 Foreign exchange portfolio 14,859 10,013 14,946 14,166 11,600 6,609 10,860 7,880 Stockholders and statutory distributions 639 1, , ,262 1,194 Taxes and social security 3,107 2,672 1,656 11,509 12,081 12,725 11,410 12,467 Trading and brokerage of securities , Financial and development funds 1,821 1,902 1,946 2,006 1,847 2,117 2,125 2,251 Special operations 1,103 1,085 1, Perpetual Securities Subordinated Debt 8,685 8,995 9,265 9,574 9,829 10,012 10,405 10,774 Actuarial liabilities 3,326 3,485 3,530 3,562 3,932 4,051 4,111 4,166 Other liabilities 9,670 10,255 9,802 10,648 11,037 18,533 13,789 15,026 Deferred income Shareholders equity 20,197 20,758 21,638 22,305 23,065 24,262 25,407 26,371 Capital 11,913 11,913 11,913 12,711 12,711 13,212 13,212 13,212 (Unpaid Capital) Capital reserves Revaluation reserves Revenue reserves 6,787 8,101 7,858 9,145 8,933 10,695 10,125 13,090 Mark-to-market securities and derivatives Retained earnings (accumulated losses) (Treasury shares) Income accounts 907-1,088-1,031-1, Banco do Brasil MDA 2Q08

141 10.2 Summarized Corporate Law Income Statement Table 112. Summarized Corporate Law Income Statement R$ million Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Financial Intermediation Income 8,954 9,404 9,708 10,125 10,333 10,172 10,901 10,683 Loans 5,361 5,816 6,101 6,069 6,517 6,610 7,001 6,912 Leasing Securities 3,405 3,274 3,043 3,167 3,355 3,088 3,749 3,052 Financial Derivatives (199) (118) (149) (10) (449) 303 Foreign Exchange Portfolio (64) (5) (111) Compulsory Investments Financial Intermediation Expenses (6,453) (6,085) (6,418) (6,105) (6,483) (6,160) (7,237) (6,958) Money Market Funds (4,402) (4,237) (4,388) (4,416) (4,753) (4,281) (4,914) (5,125) Borrowing. Assignments and Onlending (421) (395) (410) (393) (498) (351) (720) (88) Allowance for Loan Losses (1,630) (1,454) (1,621) (1,296) (1,232) (1,528) (1,603) (1,744) Gross Income from Financial Intermediation 2,501 3,319 3,290 4,020 3,850 4,012 3,663 3,726 Other Operating Income (Expenses) (972) (1,719) (1,192) (2,297) (2,062) (2,350) (739) (1,569) Service Revenues 2,252 2,287 2,377 2,437 2,498 2,590 2,568 1,986 Banking Fees Revenues Personnel Expenses (1,945) (2,050) (1,859) (2,513) (2,449) (2,343) (1,899) (2,074) Other Administrative Expenses (1,498) (1,564) (1,467) (1,647) (1,736) (1,888) (1,665) (1,819) Taxes (463) (471) (489) (525) (513) (537) (509) (524) Equity Int. in the Results of Subs. and Affil (63) Other Operating Revenues 1, ,124 1,575 1, ,264 1,922 Other Operating Expenses (643) (821) (915) (1,561) (1,274) (1,261) (1,144) (1,784) Operating Income 1,528 1,600 2,098 1,724 1,789 1,663 2,924 2,157 Non-operating Income Income Before Taxes 1,551 1,646 2,128 1,736 1,831 1,859 2,956 2,216 Income and Social Contribution Taxes (527) (235) (539) (530) (293) (485) (309) (361) Statutory Profit Sharing (117) (164) (180) (137) (175) (157) (300) (212) Net Income 907 1,248 1,409 1,068 1,364 1,217 2,347 1, Banco do Brasil MDA 2Q08

142 10.3 Income Statement with Reallocations Table 113. Income Statement with Reallocations R$ million 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Financial Intermediation Income 9,096 9,487 9,650 10,016 10,267 10,110 10, Loans 5,361 5,816 6,101 6,069 6,517 6,610 7, Leasing Securities 3,405 3,274 3,043 3,167 3,355 3,088 3, Financial Derivatives (199) (118) (149) (10) (449) 303 Foreign Exchange Portfolio (64) (5) (111) Compulsory Investments FX Gain(Loss)on Foreign Investments 11 (27) (154) (223) (100) (94) 27 (294) Other Op. Inc. of a Fin. Intermed. Nature Financial Intermediation Expenses (4,693) (4,631) (4,664) (4,809) (5,111) (4,632) (5,482) (5.213) Money Market Funds (4,272) (4,237) (4,254) (4,416) (4,613) (4,281) (4,762) (5.125) Borrowing.Assignments and Onlending (421) (395) (410) (393) (498) (351) (720) (88) Net Interest Income 4,403 4,855 4,986 5,208 5,156 5,478 5, Allowance for Loan Losses (1,385) (1,257) (1,431) (1,236) (1,216) (1,497) (1,534) (1.687) Net Financial Margin 3,018 3,598 3,555 3,971 3,940 3,981 3, Fee Income 2,252 2,287 2,377 2,437 2,498 2,590 2, Service Revenues Banking Fee Income Taxes on Revenues (429) (438) (451) (489) (476) (495) (488) (511) Contribution Margin 4,841 5,448 5,481 5,919 5,963 6,076 6, Administrative Expenses (3,216) (3,396) (3,110) (3,268) (3,368) (3,708) (3,372) (3.582) Personnel Expenses (1,804) (1,846) (1,672) (1,713) (1,759) (1,936) (1,768) (1.933) Other Administrative Expenses (1,378) (1,516) (1,401) (1,519) (1,572) (1,729) (1,590) (1.636) Other Tax Expenses (34) (33) (37) (36) (37) (42) (14) (13) Commercial Income 1,625 2,052 2,371 2,652 2,595 2,368 2, Legal Risk (192) (251) (165) (303) (219) (306) (125) (215) Legal Claims (51) (48) (55) (102) (73) (87) 6 (74) Labor Lawsuits (141) (204) (111) (201) (146) (219) (132) (141) Other Operating Income(Expenses) (20) (201) (21) 0 48 (140) (143) (257) Eq.Interest in Resul. Subs. and Affil FX Other Operating Income/Expenses (172) (316) (211) (160) (100) (344) (411) (486) Other Operating Income Other Operating Expenses (888) (1,018) (833) (887) (805) (1,054) (1,162) (1.133) Operating Income 1,414 1,600 2,185 2,349 2,424 1,922 2, Non-Operating Income Income Before Taxes 1,436 1,646 2,216 2,362 2,467 1,969 2, Income and Social Contribution Taxes (488) (235) (569) (743) (650) (522) (572) (507) Interest on Own Capital Tax Benefit Statutory Profit Sharing (117) (164) (180) (137) (175) (157) (300) (212) Recurring Income 832 1,248 1,466 1,481 1,642 1,290 1, Non-Recurring Items 76 - (58) (413) (278) (73) Recovery of Undue Taxes Provision of Non-recurring IR and CS (39) Previ Suspension of contributions - Plan I - - (76) Previ Provision for Non-recurring IR and CS (26) Cassi - Assistance Plan (403) (90) - - Cassi - Provision for Non-recurring IR and CS PAA Prov, for Retirement Incentive Plan (676) (141) (98) - - PAA Provision for Non-recurring IR and CS Permanent Exclusions Tax Benefit Disposal of investments (Bov. Hold. & BM&F) Disp. of invest. Prov. for non-recurring IR & CS (51) - - Sale of Interest in VISA Internacional Sale of the Interest in VISA Intern - Income Tax/Social Cont. /Pasep/Cofins (73) - Disposal of investments (Telemar) Revaluation of Consolidated Interest Economic Plans - - (11) (26) (91) (71) (82) (54) Economic Plans IR/CS Credit assignment Tax Efficiency Cards Replacement (54) Cards Replacement Provision for IR and CS Net Income 907 1,248 1,409 1,068 1,364 1,217 2,347 1, Banco do Brasil MDA 2Q08

143 Vice-Presidency of Finance, Capital Markets and Investor Relations Vice-President Aldo Luiz Mendes Investor Relations Manager Marco Geovanne Tobias da Silva Executive Manager Gilberto Lourenço da Aparecida Divisional Managers Eduardo Amaral Pilenghi Gisele Campana Rodrigues Analysts Ananias Pereira da Silva Neto Bruno Santos Garcia Carla Sarkis Teixeira Domingos Pereira dos Santos Neto Glauco Ribeiro Barbirato Tavares Karen de Rezende Machado Kimie Fueta Pellizzaro Joabel Martins de Oliveira Joaquim Camilo de Castro Leonardo Resende Nader Marcone Edson de Vasconcelos F.Filho Mariana Reschke da Cunha Marcelo de Campos e Silva Banco do Brasil MDA 2Q08

144 Financial Statements 2Q08 Performance Analysis 2Q Banco do Brasil MDA 2Q08

145 EXPLANATORY NOTES 2 nd QUARTER 2008 RESULTS BANCO DO BRASIL S.A.

146 INDEX MANAGEMENT REPORT FINANCIAL STATEMENTS Balance Sheet 01 Income Statement 05 Statement of Changes in Stockholders Equity 06 Statement of Changes in Financial Position 07 EXPLANATORY NOTES NOTE 1 The Bank and its Operations 02 NOTE 2 Presentation of the Financial Statements 02 NOTE 3 Accounting Practices 04 NOTE 4 Interbank Investments 10 NOTE 5 Securities and Derivatives Financial Instruments 11 NOTE 6 Loan and Lease Operations 17 NOTE 7 Other Receivables 22 NOTE 8 Foreign Exchange Portfolio 22 NOTE 9 Other Assets 23 NOTE 10 Property and Equipment and Leased Assets 24 NOTE 11 Deposits 25 NOTE 12 Money Market Borrowing 26 NOTE 13 Borrowings - Foreign Borrowings 27 NOTE 14 Domestic Onlending Official Institutions 27 NOTE 15 Funds Obtained in Foreign Capital Markets (in R$/US$ million) 28 NOTE 16 Other liabilities 29 NOTE 17 Insurance, Pension Plans and Capitalization 31 NOTE 18 Analysis of Income Statement Items 33 NOTE 19 Stockholders' Equity 36 NOTE 20 Income Tax and Social Contribution on Net Income 38 NOTE 21 Tax Credits 40 NOTE 22 Equity in the Earnings (Loss) of Subsidiary and Associated Companies 43 NOTE 23 Related-Party Transactions 44 NOTE 24 Operational Limits Basel Accord 46 NOTE 25 Profit Sharing 47 NOTE 26 Retirement and Pension and Health Plans - Post-Employment Benefits 48 NOTE 27 Compensation Paid to Employees and Management 53 NOTE 28 Assignment of Employees to External Organizations 53 NOTE 29 Commitments, Responsibilities and Contingencies 54 NOTE 30 Financial Instruments 56 NOTE 31 Statement of Cash Flow 58 NOTE 32 Statement of Added Value 59

147 NOTE 33 Other Information 60 INDEPENDENT AUDITORS REPORT 65 EXECUTIVE BOARD

148 Management Report Dear Shareholders, We present the Management Report and the Financial Statements of Banco do Brasil (BB) for the first of 2008, in conformity with the requirements of the Brazilian Corporate Law, the National Monetary Council (CMN), the Brazilian Central Bank, the Brazilian Securities and Exchange Commission (CVM) and BB's By-laws. Macroeconomic Environment The international environment in the first half of the year was marked by the continuity of uncertainties in the financial markets, especially in the US, and by the devaluation of the dollar against the main currencies. Commodities prices continued to climb, giving rise to an increase of inflationary pressure at global level. In this context, the monetary policy continued being relaxed in the United States and remained stable in Japan and in the Eurozone. Domestically, the improvement in the macroeconomic foundations, such as foreign vulnerability reduction, inflation control, tax discipline and the prospects of sustainable economic growth in the mid term were essential for the country to be upgraded to the Investment Grade category by the rating agencies Standard & Poor's. As it happened in other countries, the Brazilian inflation rate also raised, and the Amplified Consumer Price Index (IPCA) reached 6.06% in the past 12 months. Because of the inflation raise and the huge demand increase, the Monetary Policy Committee (Copom) started a cycle of raising the basic interest rate, which climbed from 11.25% p.a., at the end of 2007, to 12.25% p.a. at the end of the half. Highlights of the period In this scenario, the Bank recorded net income of R$ 4 billion in the first half (1H08), with an annualized return on shareholders' equity of 34%, maintaining the profitability trend observed in past few years. R$ 1.6 billion was destined on a remuneration basis to the shareholders as - R$ million as interest on own capital and R$ million as dividends. The loan portfolio grew by 30.9% in 12 months, surpassing R$ 190 billion. With this result, BB recorded 16.9% of share in the Financial System Market. The expansion of 45.1% in loans to individuals and of 38.9% in loans to legal entities deserves special attention. The growth in the portfolio was accompanied by the reduction in default (loans overdue for more than 60 days/total portfolio), which dropped from 3.3% in June 2007 to 2.8% in June With a total turnover of R$ 28.9 billion in during the period, a 28.3% growth in relation to 1H07, BB advanced its market share (Brazilian Credit Card Companies Association - Abecs data) from 15.9% in 1H07 to 16.4% in 1H08. Banco do Brasil reached R$ billion in assets under management, growth of 17.7% in 12 months. With this result, BB maintained its leadership as the largest asset manager in the country, with a 19.4% market share. The business expansion was accomplished through stringent control of expenses. As a result, there was a significant improvement in the efficiency ratio, which measures the relation between administrative expenses, including personnel expenses, and operating revenues, which went from 49.1% in the first half of 2007 to 44.5% in this period. During the period, operating revenues increased 11.8%, while administrative expenses increased 3.2%. Banco do Brasil decided to expand the incorporation of support services by the Operating Support Service Centers for the whole branch network. With the implementation of the centers, BB hopes to reduce expenses and to reinforce the branches focus on business. As one of the main agents of social justice promotion, BB maintained its investments in culture initiatives (R$ 12.1 million), sports marketing (R$ 22.2 million) and in educational and job and income generation programs of Fundação Banco do Brasil (R$ 26.5 million) in the half. 1

149 Management Report In this perspective, the expansion of the business strategy of Sustainable Regional Development (DRS) also deserves being highlighted. At the end of the half there were 3.9 thousand business plans under implementation, involving thousand families in 4.7 thousand Brazilian municipalities. As a consequence of BB s economic and financial results observed in the recent periods and its strict corporate governance practices, Standard&Poor s raised BB s rating to investment grade (BBB-) during the half. Fitch and Moody s already classified BB as investment grade. Outlook Heading towards its 200th anniversary, BB strives to keep alive the tradition and pioneering values that have made the Company the country's largest bank. The most important strategies for the next half are: expansion in the offering of real estate loans; expansion in the operations with the public sector and its servants; growth in the business with non-account holders by means of partnerships with large companies; enhancement of the relationship with account holders; advances in the customer base management tools customer base; expansion of BB's presence and operations in the local and foreign markets; maintenance of the leadership in innovative self-service solutions; and, consolidation of the Company's social and environmental commitment. ECONOMIC-FINANCIAL PERFORMANCE BB recorded net income of R$ 4 billion in the first half of 2008, 61.1% higher than the one recorded in the same period of The result was extraordinarily affected in approximately R$ 970 million by the sale of Visa International s interest, the sale of Telemar Participações s shares, the revaluation of equity interest, the economic plans and the expense of cards base substitution, among others. Highlights Income 1H07 1H08 (%) Net Income 2,477 3, Income (without extraordinary impacts) 2,948 3, Gross Income from Financial Interm. 7,310 7, Administrative Expenses 7,486 7,727 3,2 Equity Jun/200 Jun/200 (%) Assets 342, ,503 21,8 Loan Portfolio 145, , Funding 239, , Assets under Management 208, , R$ million The shareholders' equity increased by 18.2% in the 12 months, amounting to R$ 26.4 billion in June. Annualized return on shareholders' equity reached 34%, as opposed to 24.3% reached in the same period of In the half, BB sustained its leadership in assets, with R$ billion (economic and financial consolidation), in operations with loan characteristics, with a portfolio of R$ billion, in funding with R$ billion and in third-party asset management, with R$ billion. 2

150 Management Report Main Leaderships Third-party asset management: R$ billion, 19.4% of market share; Total assets: R$ billion; Customer base: 46 million; Export and import foreign exchange: 27% and 23.9% of the market, respectively; Capitalization: 25.7% of the market (collection); Loans Total portfolio: R$ billion; Consigned: R$ 14 billion, 19.3% of the market; Agribusiness Credit: 62.6% of the National Farm Credit System; Business loan: R$ 78.3 billion; Total funding: R$ billion; Revenue with debit cards: R$ 12.9 billion; Internet and Mobile Banking: 8.4 million clients enabled; Payment of civil servants: 5.1 million officials; Payment of retirement and INSS beneficiaries: 39.6 million payments during the half; Network of ATMs: 38,766 machines; Own customer service network: 15,353 points. Income from loan operations totaled R$ 13.9 billion, an increase of 14.3% in relation to the same period in the prior-year, which was in line with the increase in the loan portfolio. Service revenues (SR), including banking income fees, reached R$ 5.8 billion, an increase of 20.9% in relation to June 2007, which was a reflection of the increased volume of assets under management and the increased base of account holders and cards. The performance of revenues was negatively affected by CMN Resolution 3518/07, which published new regulations for the collection of bank tariffs from individuals. The administrative expenses, which comprise personnel expenses and other administrative expenses, totaled R$ 7.7 billion, which represents growth of 3.2% in 12 months. Productivity Ratios (%) Efficiency SR/Personnel Expenses SR/Administrative Expenses 1H07 1H08 The efficacy in the process of loan grant, collection and recovery and the renegotiation of debts in the rural sector enabled the control of default. These loan losses provisions reached the amount of R$ 3.3 billion in the half, growth of 14.8% in 12 months accounting for 1.7% of the loan portfolio. The Basel ratio reached 13.1%, in comparison with the 15.9% obtained in the previous year. As a result, the excess capital rose to R$ 5.4 billion, providing leverage of R$ 48.9 billion in new loan operations. 3

151 Management Report During the half, BB s investments amounted R$ million, a growth of 63.6% in relation to the same period of It is worth to highlight the investments of R$ million in properties (constructions and reforms), of R$ 51.1 million in equipments and of R$ 53.6 million in information technology (IT). See further information about the economic-financial performance of BB in the Performance Analysis Report at BB's Portal ( SHARE PERFORMANCE Banco do Brasil's shares (BBAS3) closed the half at R$ 26.15, a devaluation of 2.9% in 12 months. This performance, in line with the other banks, reflects that instability that capital markets are facing due to foreign turbulence, especially the financial sector, with the outlook of increase in tax burden, restrictive environment for tariffs and increase of the basic interest rate. The Ibovespa index increased by 19.5% during the same period. BBAS3 and Ibovespa 19,5% (2,9)% Jun07 Jul07 Ago07 Set07 Out07 Out07 Nov07 Dez07 Jan08 Fev08 Mar08 Abr08 Mai08 Mai08 Jun08 BB Ibovespa BBAS3 was traded in all Bovespa s sessions, in the daily mid amount of R$ billion in the second quarter, and continued to be listed in the theoretical portfolios of the major São Paulo Stock Exchange indexes: Ibovespa, Ibrx50, Ibrx, IGC, ISE and Itag. At Ibovespa, it was ranked as 13 th in the January/April 2008 portfolio and it has been ranked 12 th in the current portfolio. BB's market capitalization reached R$ 66.5 billion, a decrease of 3.7% in relation to the same period in the previous year. The price/book value ratio reached Net income per share was R$ 1.57 in the half. In the half, BB sustained the policy of 40% payout quarterly distributed. The amount of R$ 1.6 billion was allocated as earnings to stockholders in the half: R$ million as dividends and R$ million as interest on own capital, which correspond to 40% of the net income for the period (payout). The remained 60% of the net income are used as legal and by-laws reserves and invested in business expansion. Customer Base BUSINESS PERFORMANCE BB closed the half with a customer base of 46 million customers. BB closed June with 28.8 check accounts (27 million individuals accounts and 1.8 legal entities accounts), increase of 9.6% in relation to the same 4

152 Management Report period of Of the non-account holders, 7.7 million are savings account customers, 2.5 million are beneficiaries of the National Institute of Social Security (INSS) and 4.5 million are other product and services consumers. In the Retail market the expansion in the customer base of individual account holders was 10.1% in 12 months and its main strategy consisted of the acquisition of payrolls associated to the development of customer retention actions. In relation to these actions, the development of innovative technological solutions for the management of customer relations and the bank s strategy of approaching clients by markets (Retail, Wholesale, Government and High Income) has provided the bank with the adequacy in the offering of products and services, the generation of new business and the constant enhancement of customer relations. Service Network BB closed June with 15.6 thousand domestic points of service, the largest banking network in Brazil, and 4.3 thousand bank correspondents of the "Aqui tem BB" network. Furthermore, BB's clients could count on 38.8 thousand Automated Teller Machines including alternative channels, such as the Customer Service Center, BB s Portal and Mobile banking, and Caixa Econômica Federal, BNB and Besc s terminals shared with BB. BB's network overseas was composed of 42 points of service in 23 countries and a supplementary network composed of 1,426 correspondents in 151 countries. Alternative Channels The self-service channels were used in 90.5% of operations carried out by BB's clients in the half, contributing to improve the level of satisfaction of clients and increase businesses. The ATM network, which corresponded to 42.7% of the total self-service operations, should be highlighted. There was an increase of 130 base points in the use of the Internet for self-service transactions in the half. At the end of the period, 8.4 million customers had been registered to use the channel and mobile banking, which currently features 21.2 transactions. The Financial Manager, self-service channel on the Internet for legal entities, recorded 556 million transactions carried out by 1 million users in the period. Moreover, Banco do Brasil has been developing a pilot project for banking services via digital TV. BB also makes available the e-bidding (Licitações-e) system, one of the main electronic purchasing systems used by the public sector thousand tender processes were carried out in the Portal in the first half of 2008, totaling R$ 5.1 billion traded, up 65% over 1H07. Credit BB's loan portflio (domestic and overseas) reached R$ billion, an increase of 30.9% if compared to the same period of the previous year. Loan Portfolio Jun/07 Jun/08 (%) Brazil 133, , Individuals 27,904 40, Businesses 56,345 78, MSE 21,390 29, Other 34,955 48, Agribusiness 48,769 61, Abroad 12,214 9,717 (20.4) Total 145, , R$ million The domestic loan portfolio grew by 35.6% in 12 months, in comparison with the 33.4% growth in the country's Financial System (SFN), consolidating BB's leadership in operations involving loan grant in Brazil. 5

153 Management Report The default decreased. The average loan portfolio risk remained at 5.4%. The rate for 90-day-past due items reached 2.5%, compared to 2.4% recorded in the same period of the prior year. Loans rated at risk levels AA, A, B and C accounted for 90% of BB's portfolio, lower than the 92.2% verified in the Financial System (SFN). BB developed and deployed a statistical template for collection scoring for definition of the chances for the regularization of individual customer s loan payments. With a basis on the customer profile, the tool enables a more effective steering of collection strategies. During the half, BB recovered R$ million in written-off transactions, an increase of 15.8% compared to 1H07. Consumption The new regulations of the Brazilian Central Bank (Bacen) for the collection of individual tariffs produced impacts on the National Financial System. Explanations can be found on the BB site about the main modifications that occurred, particularly in relation to the creation of the Total Effective Cost (CET). At this site customers can also compare the terms offered by BB with those offered by other banks. With a focus on loans to individuals, the vehicle financing portfolio reached the amount of R$ 4.7 billion, which represented growth of 60.7% in one year. The strategy of partnerships through which financing is offered at one-brand and multi-brand car dealers accounted for 33.5% of the total contracted in 1H08, or 25.3% of the total vehicle financing portfolio. The portfolio of payroll loans totaled R$ 14 billion at the end of the first half of 2008, an increase of 37.9% (R$ 3.9 billion) in relation to 1H07. The Bank disbursed R$ 12.5 billion in payroll loans, corresponding to 1.5 million of executed contracts in the period, reaching a market share of 19.3% in this market. Civil servants, main target niche of the Bank in the market payroll loans, accounted for 82.2% of the volume of the portfolio: INSS s retirees and pensioners accounted for 7.5% while workers from private enterprise accounted for 10.3%. The microcredit portfolio of Banco do Brasil reached R$ 574 million approximately in the half, benefiting customers from the lower income audience. Disbursements in this form of loan totaled over R$ million, showing the adherence of the Bank's guidelines to the Federal Government Policies. Working Capital and Receivables The balance of the operations with working capital lines for micro and small enterprises, including receivablesbacked operations, reached R$ 20 billion, an increase of 34.9% as compared to 1H07. Highlights of the first half are BB Giro Rápido, flagship in this segment, whose balance reached R$ 5.3 billion and BB Giro Empresa Flex, which attained a volume of R$ 3.7 billion. Regarding operations with working capital lines for mid-size and large companies, and corporate clients, including operations backed by receivables, they attained R$ 34.6 billion, up 81.5% over 1H07. Financing of Investments The portfolio of investment financing operations for micro and small enterprises accumulated a balance of R$ 7.5 billion in 1H08. Highlights of the period are Proger Urbano Empresarial, which uses funds from the Fund for Workers' Assistance (FAT), involving R$ 4.6 billion, growth of 30% in 12 months, and Finame Empresarial, which presented growth of 122.7% in relation to June 2007 and a balance of R$ 603 million. By the end of the half, BB reached R$ 7.4 billion inloans for investments to mid-size and large companies, and corporate clients, growth of 38.6% in relation to the previous half. The 1H08 operations which deserve being highlighted are the ones involving on lending from BNDES and Finame, which attained a balance of R$ 5.2 billion, as opposed to the R$ 3.4 billion obtained in 1H07. Foreign Trade 6

154 Management Report In 1H08 BB sustained its position as the leader in the foreign trade financing. The loan portfolio in this segment closed the half with a balance of R$ 10.8 billion, a decreased of 1.6% in relation to 1H07. As a repeat of the performance recorded at the end of the previous year, Banco do Brasil maintained its leadership in the export and import foreign exchange market, with shares of 27% and 23.9%, respectively. The volumes of operations attained US$ 26.7 billion in exports and US$ 15.9 billion in imports. Worth mentioning are the Advance on Foreign Exchange Contracts (ACC) and the Advances on Export Contracts (ACE), which accounted for 59.2% of the portfolio. The volume contracted of ACC/ACE reached US$ 5.6 million. The leadership in the ranking of financial agents in foreign trade operations of BNDES was also maintained, with disbursements of US$ 612,4 billion in BNDES-Exim operations. As the exclusive financial agent of the Union s Export Financing Program (Proex), which offers credit terms compatible with those practiced in the international market for Brazilian exporters, the Bank disbursed US$ million in the Financing category, and US$ 81.5 million in the Equalization category. Agribusiness BB is the number one in the Agribusiness Loan Portfolio in the ranking of the financial institutions comprising the domestic Rural Credit System, with a 62.6% market share. At the end of the half, BB's agribusiness portfolio accounted for 32.4% of the total portfolio, with a balance of R$ 61.6 billion. The portfolio was composed of 34.7% in planting transactions, 27.8% in commercialization, 35.9% in loans for investments, and 1.5% in agro industrial credit. The Bank has mechanisms for mitigating the risks arising from the planting transactions portfolio. In the 2007/2008 harvest, ended in June 2008, 50% of the planting transactions were contracted including Agriculture Insurance or Proagro (government insurance), which amounted to R$ 5.8 billion. The Bank will expand the use of Agricultural Insurance in the harvest of 2008/2009, offering protection for the following crops: soybean, maize, cotton and irrigated rice in the main producing states and sugarcane in SP. In August 2007 the Bank launched Ourocard Platinum Agronegócio card, with over 120 thousand cards issued. In April 2008 there was the rollout of the investment functionality that enables rural producers who are card holders to perform purchases of goods and products associated with their activity, through a agribusiness loan operation pre-approved at the Bank. Onlending of the Government s Funds As the main financier of Agribusiness in Brazil, BB is also responsible for carrying out the government s programs for this segment. The funds made available are raised through savings and demand deposits, through the Program for Employment and Income Generation in the Rural Area (Proger Rural), the National Program for Family Farming Strengthening (Pronaf), the Constitutional Fund for the Central-Western Region Development (FCO), the National Bank for Economic and Social Development (BNDES), and others. For financing transactions at controlled rates, with the funds funded through savings account deposits and through the Fund for Workers Assistance (FAT), BB received from the National Treasury, in the form of equalization, the difference between the funding costs, risks, administrative and tax costs and the amount charged from the taker of the loan in order to make this intermediation viable. On an equalization basis, the Bank received R$ 562 million in 1H08. Funding Funding and Services BB ended 1H08 with R$ million funded, a 20.5% growth over 1H07. Funding Jun/07 Jun/08 (%) R$ million 7

155 Management Report Demand deposits 36,841 43, Savings deposits 40,831 49, Time deposits 81,427 96, Money Market Funding 74,719 93, Other 5,445 6, Total 239, , In the time deposits segment, the funding from judicial deposits highlights, they reached R$ 31.3 billion, and presented an increase of 18.3% if compared to 1H07. Among money market funding it is worth to mention the repurchase agreements, which grew by 42.7% in 12 months and reached a balance of R$ 46.4 billion in 1H08. Funding abroad amounted to US$ 14 billion, an increase of 30% in relation to 1H07. Emphasis should be given to corporate funding, which began to account for 23% of this amount. Fund management and funding and governmental programs BB contracted 25.8 thousand operations with funds from the Constitutional Fund for the Central-West Development (FCO), which totaled R$ 1 billion. With R$ 1.4 billion, which accounted for 35.7% of funds passed on to official banks, BB has kept the leadership in terms of market share of special deposits of the Fund for Workers Assistance (FAT). BB's total portfolio totaled R$ 16.1 billion. These funds back a number of BB's loan lines, such as: the National Program for Family Farming Strengthening (Pronaf); the Program for Employment and Income Generation (Proger), in the Urban and Rural forms; BB Fast Working Capital (BB Giro Rápido); Low-income entrepreneur (Empreendedor Popular); connected PC (PC Conectado); FAT Integrar, etc. The equity of the Fund Guarantor of the PPPs - Public-Private Partnerships, managed by BB, closed the year at the amount of R$ 6.1 billion. Cards The card business added R$ 1.6 billion to the Bank, amount which is split into equity pick up, revenues from services and financing, representing an increase of 46.1% in comparison with 1H07. BB closed the first half with 75 million cards, an increase of 26.8% in comparison to 1H07. The credit card base grew by 51.1% in 12 months, reaching 23.7 million units, and the debit card base grew by 18%, reaching 51.2 million units. Due to revenue, the leadership in debit cards was maintained with R$ 12.9 billion in 1H08, growth of 26,8% over 1H07. The Revenue from credit cards totaled R$ 16 billion, representing an increase 29,5% in the period. As a result, BB increased its market share (Abecs data), from 15.9% in 1H07 to 16.4% in 1H08, still remaining the leader in the Brazilian market in terms of revenue among Visa brand cards. It is worth to mention the 1.6 million cards of business partnerships with 24 companies from various segments. The revenue from these cards was R$ 1 billion in the 1H08. Another highlight in the half was the move performed by BB, which was unprecedented in whole Latin America, of issuing 21 million cards with chip, whose technology adds security to transactions and offers a complete set of functionalities to BB Card holders. Purchasing Pools BB Purchasing Pools (BB Consórcios) closed the half among the three largest market administrators in the automobile segment, with 76.6 thousand active participants. In June, the total basis of participants in all segments reached thousand. Services 8

156 Management Report In 1H08, BB maintained the leadership in tax collection, accounting for 23% of all taxes collected at federal level and 31% at state level, corresponding to R$ 71 billion and R$ 42.6 billion, respectively. In the same period, R$ 4.3 billion were collected at municipal level. Last June, BB was responsible for the processing of 44,4 thousand payrolls, considering legal entities and public sector. BB provided these services to a total of 9.1 million people, involving civil servants and employees from private enterprises, and kept the leadership in this market segment. In 1H08, BB, who concentrates the Income Tax Refund, amounted R$ 2.3 billion in 1.8 million of credits to citizens. During the half, BB sustained its leadership in the number of pensioners and beneficiaries of INSS payments with 39.6 million payments, amounting R$ 19.4 billion. Insurance, Private Pension Fund, and Capitalization The insurance, private pension fund and capitalization business added R$ million to the Bank, considering equity pick-up and revenues from services, which represented an increase of 21.2% if compared to 1H07. Aliança do Brasil recorded net income of R$ 95.2 million for the period, which resulted in profitability on average net shareholders' equity of 24.9%. The Company collected R$ million in premiums written, and recorded 2.5 million insured customers in its portfolio. Brasilveículos recorded net income of R$ million in 1H % higher in relation to the same period in 2007, representing a profitability on average shareholders' equity of 39.8%. The current retention index of the portfolio is 75.6%, demonstrating the excellent degree of loyalty of the insureds. Brasilsaúde recorded net income of R$ 3.4 million in the half, with a profitability on average shareholders' equity of 6.7%. The Company closed the period with a portfolio of 98 thousand Life insurance policies and R$ 71.3 million in earned premiums. Brasilprev recorded net income of R$ 86.1 million and return on average shareholders' equity of 22%. The company's total tax payment was R$ 1.9 billion and the assets under its management surpassed the milestone of R$ 18.3 million. The rate of Brasilprev s redemptions in 1H08 continued the lowest in the whole market: 8.8%. BB Previdência (closed supplementary pension fund) ended the half with R$ 6.6 billion in assets, and 1.1 thousand participants. Brasilcap exhibited growth in the collection of 18.5% in relation to the same period in the prior year and maintained its leadership in technical reserves (22.1% of share) and awards (25.7% of share), distributing R$ 27.9 million in prizes to 21.5 thousand capitalization security holders in the period. Another highlight of the half was the lump-sum Ourocap 200 Anos, whose success led to the development and offer of the monthly-paid-benefit Ourocap 200 Anos capitalization security. Third-party Asset Management BB DTVM ended the half with R$ billion in assets under its management and market share of 19.4%, consolidating the position of top asset manager in the country, according to the National Association of Investment Banks (ANBID), which presented growth in the volume of funds under management of approximately 17.7% in 12 months. The securities dealer holds the leadership in Retail, Wholesale, Government and Institutional Investors, providing services to 1.7 million quotaholders, through 384 investment funds and 33 managed portfolios, distributed in a number of segments. In relation to business aspects, we highlight the segmented approach in the development and management of products, the monitoring of the market and of the competition s products and the enhancement of management practices. Capital Market and Treasury 9

157 Management Report Banco do Brasil operates in the domestic capital market through BB Banco de Investimento S.A. (BB-BI). In Brazilian shares custody market, BB is the 2 nd in Anbid s ranking, with a 24.6% market share. BB-BI operated in variable income as leading coordinator of Copasa's Public Secondary Offering of Common Shares, which involved the amount of R$ 460 million. In the retail segment, just considering debentures and shares, BB took part in the distribution of several offerings in the domestic market. BB made available to customers operating in the stock market the option of placing their purchase and sale orders directly from their cellular phones, and to receive information about their transactions via SMS messages. For the half, BB-BI took part in nine fixed-income operations involving a volume of R$ 3.3 billion. In the international capital market, BB, by means of an external brokerage house, BB Securities Ltd, led two issues, totaling US$ 180 million, besides acting as co-manager in the first issue held by the Federative Republic of Brazil in 2008 in the amount of US$ 525 million and in the operation of BNDES as well, in the amount of US$ 1 billion. CORPORATE GOVERNANCE BB's management bodies are the Board of Directors, advised by the Audit Committee, and the Executive Board, made up of the Board of Officers (president and nine vice-presidents) and by 27 statutory directors. The Bank also has a permanent Fiscal Council. Decisions are taken collectively at all levels of the Company. With the purpose of involving all the executives in the definition of strategies and approval of proposals for BB s different businesses, the Management uses committees, subcommittees and commissions at a strategic level, which ensure the agility and security for the decision taking. Banco do Brasil, which has been in the "Novo Mercado" of Bovespa since May 2006, is committed to the transparency, accountability, equity and social and environmental responsibility, by aligning the organization's management to the shareholders' and the society's interests. Market relations The Bank held 17 meetings with analysts from the capital market at the Apimec regional offices during the half. Furthermore, other 45 meetings were held with domestic investors and analysts, as well as two road shows, one event in the United States, one in Mexico, and four teleconferences were performed presenting results. Shareholders and analysts count on updated information in the Investor Relations website (bb.com.br/ri). Highlights of the half The table below highlights several events that occurred in BB's business throughout the first halfhalf of 2008: Jan Feb - Completion of the Secondary Public Offer of Shares of BB. It was the public offering with the greatest allocation of papers to the Retail segment. - Authorization from the Central Bank of Brazil to establish a bank retail operation in the United States by means of the incorporation of a remittance company, a retail bank and a service center. The enterprises are pending approval by the North American regulatory agencies. - Approval by the Central Bank of Brazil of the capital increase of R$ 500 million deriving from the advance of the exercise of the "C" Subscription Bonds, performed in the previous year. With these measures, Banco do Brasil s free float attained 21.7%. 10

158 Management Report Jun May Apr Mar l - Approval by the National Monetary Council (CMN) of a resolution allowing financial institutions fund obtainers of rural savings deposits, including Banco do Brasil, to obtain funds up to 10% of the total balance of savings deposits within the sphere of the Brazilian Savings and Loans System (SBPE), whose funds are directed to real estate loans. - Grant of shares of Visa Inc. to Banco do Brasil, to Visanet and to Visavale, as part of the global restructuring of Visa International. In the same month, in the public offering of Visa Inc. s shares, the abovementioned companies put up for sale 56.1% of their shares. - Proportionate consolidation of the interests in 12 companies, increasing its assets in approximately R$ 12 billion. - Upgrading of the rating of Banco do Brasil to investment grade (BBB-) by the rating agency Standard & Poor's. - Creation of the Lower Income Segment Department, aiming at extending the strategic focus on customers with earnings up to the minimum wage, which corresponds to approximately 8.3 million BB s account holders, 1.4 million Banco Popular do Brasil s account holders and 15 million nonaccount holder customers that maintain some kind of relationship with BB. The new department absorbed the operations of Banco Popular do Brasil, centralized the administration of the Bank Correspondents and the actions relating to Sustainable Regional Development. - BB proposed to, and the State Government of São Paulo accepted, starting dealings without any binding effect, aiming at the takeover of Banco Nossa Caixa S.A. - Beginning of the effectiveness of the resolutions of the National Monetary Council that alter the collection of tariffs in the National Financial System. - Beginning of the effectiveness of the new rate of social contribution on net income. - Bacen granted authorization for Banco do Brasil to operate in real estate loans with savings deposits, in compliance with the rules of the National Housing System (SFH). Legal Information In compliance with CVM instruction 381, Banco do Brasil informs that KPMG Auditores Independentes did not render services other than those related to external auditing in 1H 08. The companies for which the external audit services were performed consist of Banco do Brasil S.A. and its subsidiaries. In the engagement of services not related to external audits, Banco do Brasil adopts procedures based on the applicable legislation and on internationally accepted principles that preserve the independence of the auditor. These principles consist of: the auditor should not audit his own work, the auditor should not act managerially before his client nor promote the interests of his client. In compliance with article 8 of Bacen Circular 3068/0, Banco do Brasil confirms that it has the intention and financial capacity to hold until maturity the securities classified in the Securities Held to Maturity category. The financial capacity is backed by a cash flow forecast that does not consider the possibility of selling these securities. In compliance with Article 243 of Law 6404/76, BB reports that investments in subsidiary and associated companies totaled R$ 1.4 billion as of June 30, 2008, recording an increase of 19.4% if compared to the same period of previous year. There was no change in the company's ownership during the year. Investments in subsidiary and associated companies Jun/07 Jun/08 (%) Subsidiaries 113, , R$ million 11

159 Management Report Associated Companies 926,172 1,316, In accordance with the companies classification criteria defined by the Brazilian Statute of Micro and Small Businesses (General Law of Micro and Small Businesses), 94.3% of BB's legal entity clients are classified as micro and small enterprises. The volume of funds used by micro enterprises as working capital totaled R$ 2.9 billion, whereas that used by small enterprises totaled R$ 12.5 billion. The balance of investment operations contracted by micro enterprises totaled R$ 1.5 billion, whereas that of the small enterprises totaled R$ 4.6 million. INTERNAL PROCESSES Risk Management In conformity with the best practices adopted in the world market and the recommendations issued by Basel Committee, the market, liquidity, credit and operating risks are managed by Banco do Brasil in a consolidated manner. Management is carried out on an independent basis, segregated from the business units, being the duty of the Global Risk Committee (CRG) -a forum composed of the Board of Officers, directors and executivesthe definition of the management strategies of the Financial Conglomerate. All decisions are made collectively, through a formally established decision-making process. Basel II Banco do Brasil works towards the adjustment of its processes to Basel II, with the ultimate purpose of adopting the advanced approach for allocation of capital. Credit Risk Among the main activities developed in the first quarter of 2008, some that should be highlighted are the Bank's preparation actions for the implemention of the New Accord, as well as adjustments to procedures for the adjustments to CMN Resolution 3490, of 8/29/07 and Bacen Circular 3360, of 9/12/07, the calculation of the required portion of capital for credit risk and other exposures weighted by risk factor. Operational Risk - Among the main actions developed for the refinement of the management of the operational risk, in compliance with CMN Resolution 3,380, the definition of the performance dynamics at companies that form the Economic/Financial Consolidated deserves special mention. In compliance with Bacen Circular 3,383, which refers to the form of calculation of the portion of Referential Shareholders' Equity Required for operational risk, addressed by CMN Resolution 3,490, Banco do Brasil adopted the alternative standardized approach, taking advantage of the segregation of the gross income by lines of business and using the average amount of loan volumes for the retail and commercial lines of business. Market and Liquidity Risks - The Global Risk Committee (CRG) formally defines the classification criteria of the Bank s positions in the Trading Portfolio - Trading Book and Non-Trading Portfolio - Banking Book, in order to meet the new requirements for the implementation of the market risks management structure, in accordance with CMN Resolution 3464, of 6/26/07. With respect to the other requirements of this Regulatory Instruction, the Bank is capable of meeting the defined deadline. In its internal risk management processes, Banco do Brasil uses the concept of capital based on internal models. The table below exhibits the capital requirement in accordance with the current criteria (Regulatory Capital) and the consumption of capital based on internal models: Shareholders Equity Required R$ million Basel I 1H08 2H07 1H Liabilities on APR 27,611 28,369 23,821 21,323 12

160 Management Report Loan Portfolio¹ 19,322 19,852 15,758 13,884 Other² 8,289 8,517 8,064 7,439 Liabilities on Market Risc Liabilities on Operational Risk TOTAL 28,477 29,235 24,605 21,858 ¹ Loan operations and offering of guarantees ² Income Tax and Union Contribution Tax Credits, Non-related Financial Institutions (CDI), Foreign Exchange Portfolio and other assets Capital R$ million Internal Model 1H08 2H07 1H07 Liabilities on Loan Risk 4,434 4,022 4,117 Liabilities on Market Risk¹ 752 1,236 1,908 Liabilities on Operational Risk² 1,147 1,085 1,140 Total 6,333 6,343 7,165 ¹ Trading book ² Calculated through the bookstrap methodology In accordance with Cornerstone II of Basel II agreement, Banco do Brasil considers the underwriting risk generated by its companies from the line of Insurance in the evaluation process of the needs for the allocation of capital to cover risks underlying its business. Internal Controls The Action Plan was implemented over 1H08 with a focus on the management of operational risk and compliance structured on the cornerstones of the drivers of the Committee of Sponsoring Organizations of the Treadway Commission (Coso) and of the Control Objectives for Information and Related Technology (Cobit) and adherent to the demands of the regulatory and supervisory agencies in Brazil and abroad. Control and monitoring actions including segregated evaluations for the mitigation of risks with the Strategic Units that managed the business and operating processes, and with the domestic branch network were intensified. The action with the Group s Companies were carried out by means of the structure of corporate governance of the respective companies in compliance with the legislation in force. The automated control solutions continue being incorporated into the operational routine of all the Bank s processes, enabling the performance of tests, the electronic monitoring, the production of evidence and the communication of weak points that require mitigation actions and continuous improvement of the Bank's products. Prevention and Avoidance of Money Laundering For Banco do Brasil, preventing and fighting money laundering is more than just a legal obligation, it means social responsibility and a commitment to the Country. The training of employees and the mechanisms intended to avoid the use of the Bank s products and services for money laundering, as well as to monitor and detect its signs, are subject to constant enhancement. In the first halfhalf of 2008, the employee training actions deserve special highlight. Three BB s events - Workshop on Analysis of Signs of Money Laundering, Seminar on Prevention and Avoidance of Money Laundering and Basic Internal Certification of Knowledge of Prevention and Avoidance of Money Laundering - were certified with the ENCCLA Seal - National Strategy for Avoidance of Corruption and Money Laundering. The Seal is a certification granted by the Department of Justice to courses on the avoidance of money laundering and the financing of terrorism, the content of which fulfills the requirements defined by the National Program of Education and Training for the Avoidance of Money Laundering. PEOPLE BB closed the half with 84.3 thousand employees, 6.2% higher than the same period in the previous year. 13

161 Management Report Jun/07 Dec/07 Jun/08 Employees 79,310 81,855 84,258 Temporary labor ¹ 4,168 8,866 3,687 ¹ Hired from companies specialized in providing temporary labor The employees presented the following profile at the end of the period: Gender Age 25% 9% 38% Male Female % 34% Over 45 32% Education Lengh of Service 19% 1% 34% Elementary School 26% 41% 46% High School Higher Education Specialization, 14% Master's or Doctorate 19% up to 5 years 6-10 years years over 20 years The remuneration and the benefits granted to the employees were distributed according to the table below: R$ million 1H07 1H08 (%) Salaries¹ 4, , Pension Plan - Previ² Health Plan Cassi³ Profit Sharing Training (3) ¹ Expenses with salaries, benefits, social charges and personnel provisions. ² BB s contributions to Previ during the half. In 1H07, the contribution to Plano I was suspended, due to its superavit. ³ BB s contributions to Cassi during the half. It includes extraordinary contribution of R$ 57.5 thousand. 14

162 Management Report SUSTAINABILITY Banco do Brasil seeks the balance between economic performance and social and environmental responsibility in its business, by meeting its shareholders needs, fostering the economy and promoting the development of the Country. What guides us BB s mission statement is To be the solution in financial services and intermediation, to meet the clients' and shareholders' expectations, to strengthen the commitment between employees and the Company, and to contribute for the development of the Country. To comply with this mission, BB makes clear the concept of sustainability in the administrative and business practices of Banco do Brasil, in the public commitments assumed, and in the Company's relations with its target audiences. Main commitments relating to sustainability Green Protocol UN's Global Agreement Agreement for the fight against slavery work Ecuador s Principles Information Report on Carbone Dioxide Emissions Bovespa s Novo Mercado Global Reporting Initiative (GRI) BB s Agenda 21 BB s Corporate Governance Code Brazilian Program of GHG Protocol Whom we relate with Ethics as a commitment and respect as an attitude are the assumptions that guide the Company's relations with its target audiences. Banco do Brasil's Code of Ethics sets forth that the scope of organizational purposes should consider the respect for people, the environment and institutions. The Code defines acceptable and improper behaviors in the organization and in the relationship with its stakeholders, as well as management mechanisms that support the dissemination and incorporation of the principles established in the organization s daily routine. We present below the main socioenvironmental initiatives in the relations of BB with its audiences, as well as the actions focused on environmental preservation. Audience Principles Main initiatives 15