Banco Itaú S.A. (Incorporated in the Federative Republic of Brazil with limited liability)

Transcription

1 Offering Circular Banco Itaú S.A. (Incorporated in the Federative Republic of Brazil with limited liability) acting through its Grand Cayman Branch Japanese 30,000,000, % Subordinated Notes due 2011 The issue price of the Japanese 30,000,000, % Subordinated Notes due 2011 (the Notes ) is 100% of their principal amount. The Issuer is simultaneously issuing U.S.$100,000, % Subordinated Notes due The Notes will be redeemed at their principal amount on August 15, 2011, unless the maturity of the Notes is extended as a result of certain currency exchange control events being in effect on that date, in which case the maturity of the Notes will be no later than February 15, See Terms and Conditions of the Notes Redemption. Interest on the Notes is payable semi-annually in arrears on February 15 and on August 15 in each year, commencing on February 15, Payments on the Notes will be made without deduction for or on account of taxes of the Cayman Islands or the Federative Republic of Brazil. The Issuer will, subject to certain exceptions, pay additional amounts as will result in the receipt by holders of the Notes ( Noteholders ) of such amounts as would have been received by them were no such withholding required. See Terms and Conditions of the Notes Taxation. The rights of Noteholders against the Issuer will be subordinated to the rights of Prior Ranking Creditors (as defined) of the Issuer. See Terms and Conditions of the Notes The Notes. The Trustee on behalf of the Noteholders will have the benefit of a political risk insurance policy (the PRI Policy ) provided by Sovereign Risk Insurance Ltd., as agent on behalf of ACE Bermuda Insurance, Ltd. (in such capacity, the PRI Provider ). Subject to certain limitations, the PRI Policy will provide limited insurance to the Trustee (in an amount equal to eighteen months interest on the Notes, plus certain premium payments due under the PRI Policy) against the inability of the Issuer under certain circumstances to convert Brazilian reais into Japanese yen (or with respect to such premium payments, U.S. dollars) or transfer such Japanese yen (or with respect to such premium payments, U.S. dollars) to the Trustee in order to make payments under the Notes. See The PRI Provider and the PRI Policy. Investing in the Notes involves risks that are described in Risk Factors beginning on page 15. Application has been made to list the Notes on the Luxembourg Stock Exchange. The Notes will be in registered form, without coupons. The Notes will be sold in transactions offshore the United States in reliance on Regulation S under the U.S. Securities Act of 1933, as amended (the Securities Act ), and will be represented by interests in a global registered Note (the Global Note ), deposited with and registered in the name of a common nominee of Clearstream Banking, société anonyme ( Clearstream, Luxembourg ) and Euroclear S.A./N.V., as operator of the Euroclear System ( Euroclear ), on or about August 13, 2001 (the Issue Date ). Individual definitive Notes representing the Notes in amounts of Japanese 100,000,000 or higher integral multiples thereof will only be available in certain limited circumstances as described herein. Merrill Lynch International The date of this Offering Circular is August 3, 2001.

2 Banco Itaú S.A. (the Bank, Banco Itaú or, acting through its Grand Cayman Branch in the context of the issue of the Notes, the Issuer ) confirms that this Offering Circular (the Offering Circular ) contains all information with respect to the Issuer, the Issuer and its subsidiaries and affiliates taken as a whole (the Group ), the Brazilian financial system and the Notes which is material in the context of the issue and offering of the Notes, there are no untrue statements of material fact contained in it in relation to the Issuer, the Group, the Brazilian financial system or the Notes, there is no omission to state a material fact which is necessary in order to make the statements made in relation to the Issuer, the Group, the Brazilian financial system or the Notes in the light of the circumstances under which they were made not misleading, the opinions and intentions expressed in this Offering Circular with regard to the Issuer and the Group are honestly held, have been reached after considering all relevant circumstances and are based on reasonable assumptions, and all reasonable inquiries have been made by the Issuer to ascertain such facts and to verify the accuracy of all such information and statements. The Issuer accepts responsibility accordingly. This Offering Circular does not constitute an offer of, or an invitation by or on behalf of the Issuer or the Initial Purchaser (as defined under Plan of Distribution ) to subscribe or purchase, any of the Notes. The distribution of this Offering Circular and the offering of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Offering Circular comes are required by the Issuer and the Initial Purchaser to inform themselves about and to observe any such restrictions. For a description of certain further restrictions on offers and sales of Notes and distribution of this Offering Circular, see Plan of Distribution. No person is authorized to give any information or to make any representation not contained in this Offering Circular and any information or representation not so contained must not be relied upon as having been authorized by or on behalf of the Issuer or the Initial Purchaser. The delivery of this Offering Circular at any time does not imply that the information contained in it is correct as at any time subsequent to its date. THE NOTES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED WITH THE BRAZILIAN SECURITIES COMMISSION (THE COMISSÃO DE VALORES MOBILIÁRIOS OR THE CVM ). THE NOTES MAY NOT BE OFFERED OR SOLD IN BRAZIL, EXCEPT IN CIRCUMSTANCES WHICH DO NOT CONSTITUTE A PUBLIC OFFERING OR DISTRIBUTION UNDER BRAZILIAN LAWS AND REGULATIONS. THE NOTES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT. THE NOTES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT ( REGULATION S )) EXCEPT IN CERTAIN TRANSACTIONS EXEMPT FROM OR NOT SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. FOR A DESCRIPTION OF THESE AND CERTAIN FURTHER RESTRICTIONS ON OFFERS AND SALES OF THE NOTES AND DISTRIBUTION OF THIS OFFERING CIRCULAR, SEE PLAN OF DISTRIBUTION. THE NOTES ARE OFFERED BY THE INITIAL PURCHASER, AS SPECIFIED HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY IT AND SUBJECT TO ITS RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT THE NOTES WILL BE READY FOR DELIVERY THROUGH THE FACILITIES OF EUROCLEAR AND CLEARSTREAM, LUXEMBOURG ON OR ABOUT AUGUST 13, 2001 AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS. IN CONNECTION WITH THIS ISSUE, MERRILL LYNCH INTERNATIONAL MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL WHICH MIGHT NOT OTHERWISE PREVAIL. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN 2

3 ADDITION, THE INITIAL PURCHASER MAY SELL NOTES TO ANY PERSON AT A NET PRICE WHICH MAY BE FIXED BY HIM. Unless otherwise specified or the context requires, references to we, to us and to our are references to Banco Itaú; references to you are to investors or prospective investors in the Notes; references to Japanese yen and Japanese are to the lawful currency of Japan; references to U.S. dollars, U.S.$ and $ are to the lawful currency of the United States; references to R$, real and reais are to the lawful currency of Brazil. The operations of the Issuer are based primarily in Brazil and the Issuer s financial statements are prepared in accordance with accounting practices determined by Brazilian corporate law. See Presentation of Financial Information and Summary of Principal Differences between Accounting Principles Determined by Brazilian Corporate Law and U.S. GAAP. The commercial bank selling rate of reais for Japanese yen at close of business on August 2, 2001 was R$2.00 = Japanese 100. See Foreign Exchange Rates and Exchange Controls. Certain amounts (including percentages) included in this Offering Circular have been subject to rounding adjustments; accordingly numbers shown as totals in certain tables may not add up. 3

4 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Offering Circular that are not historical facts are forward-looking statements based on management s beliefs as well as assumptions made by and information currently available to management. Because such statements are based on assumptions as to future economic performance and are not statements of fact, actual results may differ materially from those projected. Important factors that could cause future results to differ include (i) legislative and regulatory changes, (ii) changes in the economy, (iii) fluctuations in interest rates, (iv) the financial conditions of the Bank s borrowers, (v) availability of funding and (vi) Brazilian political and social developments. When used in this document, the words anticipate, estimate, expect, intend or similar words are intended to identify forward-looking statements. The following sections of this Offering Circular contain forward-looking statements: Risk Factors, Recent Developments, Management s Discussion and Analysis of Financial Condition and Results of Operations for the three month periods ended March 31, 2001 and 2000, Management s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2000 and 1999, Management s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 1999 and 1998 and Business. 4

5 TABLE OF CONTENTS Banco Itaú... Summary of the Offering... Risk Factors... Use of Proceeds... Capitalization of Banco Itaú S.A.... Presentation of Financial Information... Selected Financial and Statistical Information for the six month periods ended June 30, 2001 and Recent Developments... Selected Financial and Statistical Information for the three month periods ended March 31, 2001 and Management s Discussion and Analysis of Financial Condition and Results of Operations for the three month periods ended March 31, 2001 and Selected Financial and Statistical Information for the years ended December 31, 2000, 1999 and Management s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2000 and Management s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 1999 and Page Business... Management and Employees... Litigation... Principal Shareholders and Dividends... Corporate Organization Chart... Brazilian Financial Institutions Accounting Methodology... Selected Statistical Information... The Brazilian Financial System... Summary of Principal Differences between Accounting Principles Determined by Brazilian Corporate Law and U.S. GAAP... Terms and Conditions of the Notes... Clearing and Settlement... The PRI Provider and the PRI Policy... Foreign Exchange Rates and Exchange Controls... Taxation... Plan of Distribution... Legal Matters... Independent Accountants... General Information... Index of Defined Terms... Financial Statements... Page F-1 5

6 BANCO ITAÚ General We are a sociedade anônima (limited liability corporation) organized and existing under the laws of Brazil. We operate as a multiple bank. Our head office is located at Rua Boa Vista, 176, São Paulo, SP. We are a leading Brazilian financial institution providing, directly or through our subsidiaries, a wide range of credit and other financial services to a diverse customer base of individuals and corporations. We offer such services in Brazil through the 2,997 combined branch network of Itaú, Bemge, Banerj and Banestado. We serve our overseas customers through our branches in New York and Grand Cayman and through our subsidiaries in the Cayman Islands, Argentina and Europe. At March 31, 2001, we ranked second largest among the private sector banks in Brazil in terms of assets (R$74.6 billion) and consolidated stockholders equity (R$6.8 billion). As of the same date, based on the price of our publicly traded shares, we had the highest market capitalization among all banks in Latin America of R$19.3 billion. Our net income for the three months ended March 31, 2001 was R$625 million, resulting in an annualized return on average equity of 42.1% and an annualized return on average assets of 3.4%, while for the year ended December 31, 2000 our net income was R$1.8 billion, resulting in a return on average equity of 27.7% and a return on average assets of 2.6%. As at or for the three months ended March 31, 2001, we had a leading position among Brazilian private sector banks. The following is the highlight of our statistics as at the same date: Branches and customer site branches... 2,997 Active customers... 7,600,000 (1) Deposits... R$27,159 million Number of credit cards... 3,521,000 Assets under management... R$44,366 million Credit portfolio... R$29,931 million Note: (1) Including Itaú, Banerj, Bemge and Banestado. In addition, we were the fourth largest insurer in Brazil based on premiums written in the year ended December 31, 1999 (R$1,300 million) and the largest custody agent in Brazil in terms of the value of securities held on behalf of customers at March 31, We are a member of the Itaúsa group of companies. Itaúsa group is one of the largest private business groups in Brazil in terms of assets. It has large financial, insurance, industrial and real property holdings. As at March 31, 2001, the Itaúsa group comprised more than 100 companies, including: Itaúsa-Investimentos Itaú S.A. (our holding company); and Itaúsa s subsidiaries. At March 31, 2001, the Itaúsa group reported net income of R$0.5 billion, consolidated assets of R$77.5 billion and stockholders equity of R$4.5 billion. Net income for the year ended December 31, 2000 amounted to R$1.8 billion. Pursuant to Brazilian banking regulations, we are not permitted to lend money to other members of the Itaúsa group. Our business and operations are described in this Offering Circular on a consolidated basis. References to the Bank mean Itaú and our consolidated subsidiaries. 6

7 History We were established in 1944 in São Paulo under the name of Banco Federal de Crédito S.A. In the early 1960s and 1970s, we developed into a national retail bank through a series of mergers and acquisitions. Those mergers and acquisitions increased our asset base by several times and created one of the largest private sector banks in Brazil. In 1973, we adopted the name Banco Itaú. In 1985, we again significantly increased our size through the acquisition of the assets of Banco Pinto de Magalhães S.A. Until September 1988, Brazilian banks were required by law to conduct activities such as consumer finance, housing finance, investment banking and leasing through separately incorporated subsidiaries. Following changes to banking regulation, the CMN permitted banks to engage in a full range of banking and financial services. As a result, four significant subsidiaries were merged into the Bank in December This left Itaú Corretora de Valores S.A. ( Itaucor ) and Itauleasing as our principal financial subsidiaries in Brazil. In 1994, we commenced retail banking operations in Argentina establishing the domestic branch network of Itaú Argentina. In 1995, we acquired Banco Francês e Brasileiro S.A. ( BFB ), increasing our presence and expertise in the corporate, upper middle-market and high income individual sectors. Itauseg was a member of the Itaúsa group of companies principally carrying on operations as an insurance company and one of our principal shareholders. In 1997, we acquired control of Itauseg as a part of the reorganization of the Itaúsa group of companies. We purchased Banerj in 1997, Bemge in 1998 and Banestado in These purchases increased the presence of our domestic retail operations in the States of Rio de Janeiro, Minas Gerais and Paraná. Also in 1998, we purchased Banco del Buen Ayre in Argentina and significantly increased the size of our retail operations already carried on through Itaú Argentina. Strategy We seek to consolidate our position as a leading Brazilian financial institution. We provide our retail customers with a broad range of high quality, competitively priced and convenient products and services. We provide our corporate, middle market and higher net worth individual customers with a more sophisticated range of products and services to suit specific customer requirements. We believe that our ability to provide this type of service already has its base in our infrastructure, including: expansive retail network; specialized market segmentation model and delivery platforms; advanced electronic direct banking services; and other automated systems. We seek to grow our business organically, particularly through the sale of additional financial services to our existing customer base, and through strategic acquisitions, as opportunities arise in a consolidating Brazilian market. We also seek to maintain and improve profitability by carefully managing credit, market and liquidity, and operational risks. Specific elements of our strategy include: Market Segmentation and Product Differentiation We have over the last few years sought to achieve a stronger and more focused organization for the delivery of services to our customers. We have developed specialized delivery structures for different classifications of customer within our well defined segmentation model. Some of these structures operate largely outside the branch structure. We tailor our products for the needs of the different categories of customer. In some categories, we tailor our products for the specific needs of the customer. We classify retail customers based on customer profile, financial potential and relationship scores. Standardized products and services are offered to each of the various retail customer segments within the 7

8 branch network structure. We operate an automated credit approval process. Most types of retail credit are automatically approved provided they fall within a pre-approved credit limit (which we establish and continually monitor) based on advanced credit and behavior scoring models. We provide higher income individual customers with fairly standard products on a more personalized banking service through Itaú Personnalité. High net worth individual customers receive specifically tailored service through Itaú Private Bank. Itaucorp is our corporate banking unit. It operates from designated corporate banking centers and provides banking services to corporate clients with annual sales of more than R$100 million. Itaú Empresas is a platform operating within the branches to serve middle-market corporate customers with annual sales of between R$4 million and R$100 million. In addition to standard banking services, we have also developed specialized products and credit systems for each of these two market segments and assigned an account officer to each customer. Growth of Core Retail Banking Operations Our core business is our retail banking operations. We view retail banking operations as an area of continued growth. Already the operator of the second largest private branch banking network in Brazil, we have sought to expand our retail banking operations both domestically and internationally in recent years both organically and through acquisitions. We purchased Banerj in 1997, Bemge in 1998 and Banestado in Through those purchases we have increased the presence of our domestic retail operations in the States of Rio de Janeiro, Minas Gerais and Paraná. In 1998 we purchased Banco del Buen Ayre in Argentina and complemented our existing international retail operations through the domestic branch network of Itaú Argentina. Banco del Buen Ayre and Itaú Argentina merged during the course of 1999 and now operate under the name Banco Itaú Buen Ayre. As a consequence of organic growth and acquisition, our retail customer base has more than doubled since We expect other opportunities for acquisitions may arise during the on-going consolidation of the Brazilian financial system. We are interested in continuing to grow our customer base organically. We are also interested in acquiring other financial institutions and in investigating such other opportunities for acquisitions which may arise. Efficiency through Advanced Information Technology and Direct Banking Systems Since the late 1970s we have been investing in our information technology and electronic banking infrastructure with a view to increasing the convenience of our services and maximizing our efficiency. We have sought to achieve these goals by re-engineering internal communications, eliminating back-office functions and enabling customers to operate a high volume of transactions using high technology applied to direct banking systems. All of our branches and direct banking systems allow for connection from and to our customers through our proprietary telecommunications network. The network provides real time, reliable access to a rich variety of information regarding products, services and account status. Changes in the organizational structure included the relocation of remaining back-office functions from the branches to regional operation centers. This has led to an increase in back-office productivity and also allowed branches and other business units to focus on the delivery of services. Other important areas being addressed include the integration of our business operations; Itaú Argentina and Banco del Buen Ayre merged in 1999 and now operate as Banco Itaú Buen Ayre. Bemge s operations were fully integrated during 1999 and Banestado s operations are currently in the process of being integrated. The clients of all of these banks now have access to the technology currently available to our customers. We have also invested significantly in the technology applied to direct banking systems and are recognized as market leader in this segment, processing more than 100 million self service transactions per month. This represents approximately 71% of our monthly customer transactions. We operate one of the largest self-service networks in Brazil. Customers can access our service through home computing, automated telephone services and other electronic banking systems. See Business Banking Direct Banking Systems. Emphasizing direct service and reducing back-office operations related to customer transactions, we can now carry out a high volume of transactions at a low transaction cost. We are constantly 8

9 researching new uses of technology to apply to our business operations and direct banking systems to improve service and efficiency. On June 27, 2001 we agreed to transfer our telecommunications network to Telefonica (initially to a joint venture established between Telefonica and Banco Itaú). The transfer is intended to enhance and optimize all of Banco Itaú s communication services by having Telefonica control and run the network and ensure Banco Itaú has access to the latest developments in telecommunications technology. See Recent Developments Major Transactions Telefonica. Cross-selling Products and Services Over the past several years, we have significantly increased the average number of utilized products among our active customer base. Through the cross-selling of existing products and services and the introduction of new products and services, we seek to further deepen our customer relationships and increase revenues per customer. In particular, we believe there is significant growth potential for the investments, insurance and pension plan businesses. Pension plan businesses are relatively smaller and less developed in Brazil than in many other countries. Our existing customer base and expansive retail network provide us with excellent opportunities to participate in this expected growth. Management of Market and Liquidity, Credit, and Operational Risks Our management believes that careful identification, measurement and management of market and liquidity, credit, and operational risks is key to the maintenance of our strong financial condition and to the continued improvement of our profitability. Our management committees are responsible for the development and implementation of systems. They provide for the identification, measurement and management of risk. See Business Risk Management. In the uncertain economic environment Brazil experienced in late 1998 and 1999, we sought to maintain high levels of liquidity and carefully limit mismatches of maturities, interest and foreign exchange rates. At the same time, our policy has been to grant credit selectively so as to minimize credit losses and progressively improve the quality of our credit portfolio. Nevertheless, as conditions have improved since late 1999, we have identified and taken advantage of opportunities to increase our credit portfolio in accordance with our stringent credit criteria. Exclusive Focus on Financial Services Our strategy is to focus exclusively on the delivery of financial services within Brazil and internationally. We have only limited holdings, and do not seek to pursue business opportunities outside of the financial sector. At the same time, the Itaúsa group of companies has sought to group all of its financial assets and activities within the Bank. In 1997, the control of Itauseg was transferred to Itaú as a part of the reorganization of the Itaúsa group. Itauseg was previously a member of the Itaúsa group of companies principally carrying on operations as an insurance company and one of our principal shareholders. By conducting all of our financial activities through the Bank, the Itaúsa group and Banco Itaú are able to take advantage of various synergies in the sale and delivery of financial services 9

10 CORPORATE ORGANIZATION CHART The diagram below sets out the corporate organization of the Bank: Chairman of the Board Olavo Egydio Setubal President and and Chief Chief Executive Executive Officer Officer Roberto Egydio Setubal Client Areas / Channels Product Areas Retail Banking Operations João Jacó Jacó Hazarabedian Financial Rodolfo Olavo Franco Henrique Bueno Fischer Jr. Corporate Banking Operations Sergio Silva de Freitas International Alberto Dias de Mattos Barretto Middle Market Banking Operations Ronald Anton de Jongh Capital Investments Markets Alfredo Alfredo Egydio Egydio Setubal Setubal Personnalité Personnalité Ruy Villela Moraes Abreu Abreu Products Milton Luís Ubach Monteiro Executive Banking Committee Executive Finance Committee Operational Committee Credit Committee Investment Committee Process and Costs Committee (CRPC) Community-Oriented Program Executive Committee (CEAC) Human Resources Executive Committee Audit Committee Commission of Management of Financial Assets (CAAF) Real Estate Credit Committee Platform Development Committee Itaú Empresas (Middle Market) Support Areas Accounting & Control & Control Henri Penchas Banco Itaú Itaú Argentina Rodolfo Corvi Audit Pinotti & Credit Humberto Humberto Fábio F. Fischer Fischer Pinotti Marketing Marketing Antonio J. Matias Antonio Jacinto Matias Electronic Data Data Processing. & & Back Office Renato Roberto Cuoco Legal Consultant LucianodaSilvaAmaro Human Resources & & Administration Luiz Cristiano de Lima Alves Costs Legal and Consultant Budgets Luciano Silvio A. da de Silva Carvalho Amaro 10

11 SUMMARY OF THE OFFERING This summary highlights selected information from this Offering Circular and does not contain all of the information that may be important to you. You should read this entire Offering Circular, including the information set forth in Risk Factors, before deciding to invest in the Notes. Issuer:... Banco Itaú S.A., acting through its Grand Cayman Branch (the Issuer ). The Notes:... Japanese 30,000,000,000 aggregate principal amount of 4.25% subordinated Notes due Issue Price: % of the principal amount. Maturity Date:... August 15, 2011 (the Stated Maturity Date ), unless extended for a period of up to eighteen months from the Stated Maturity Date (the Extended Maturity Date ) as a result of the occurrence and continuation on the Stated Maturity Date of certain events preventing the ability of the Issuer to convert reais to Japanese yen and/or transfer Japanese yen outside Brazil to the Trustee and the Issuer not otherwise redeeming the Notes on such date, or unless otherwise deferred in order for the Bank to comply with certain Tier 2 Capital requirements. See Terms and Conditions of the Notes Redemption. Issue Date:... August 13, Indenture:... The Notes will be issued under the Indenture between Banco Itaú S.A., acting through its Grand Cayman Branch, as the Issuer, and The Bank of New York, as Trustee. Interest:... The Notes will bear interest from August 13, 2001 at the rate of 4.25% per annum, payable semi-annually in arrears on each Payment Date, unless otherwise deferred in order for the Bank to comply with certain Tier 2 Capital requirements. See Terms and Conditions of the Notes Interest. Payment Dates:... February 15 and August 15 of each year (each a Payment Date ), commencing February 15, Ranking:... The rights of Noteholders against the Issuer will be subordinated to the rights of the Prior Ranking Creditors (as defined herein) of the Issuer. See Terms and Conditions of the Notes The Notes. Use of Proceeds:... The proceeds of the issuance of the Notes, will be used by the Issuer for the general corporate purposes of the Bank. See Use of Proceeds. 11

12 PRI Policy:... The Trustee, on behalf of the Noteholders, will have the benefit of a political risk insurance policy provided by Sovereign Risk Insurance Ltd., as agent on behalf of ACE Bermuda Insurance, Ltd., covering the inability of the Issuer to convert reais into Japanese yen (or with respect to premium payments, U.S. dollars) and/or transfer to the Trustee Japanese yen (or with respect to premium payments, U.S. dollars) in satisfaction of amounts to be paid by the Issuer under the Notes. The PRI Provider s obligation to pay claims under the PRI Policy to the Trustee is limited to 18 months interest on the Notes plus certain premium payments due under the PRI Policy and is subject to certain conditions, limitations and exclusions that may affect the ability of the Noteholders to receive payments on the Notes. See The PRI Provider and the PRI Policy. Redemption:... The Notes will not be redeemable prior to maturity. Covenants:... The terms of the Indenture will require the Issuer, among other things, to: pay all amounts owed by it under the Indenture and the Notes when such amounts are due and perform each of the Issuer s other obligations under the various transaction documents entered into by it in connection with the issuance of the Notes; comply with all applicable laws; subject as provided herein, preserve all necessary licenses, qualifications or approvals in relation to the Indenture and the Notes; pay all stamp, issue, registration, documentary or similar taxes; preserve its existence; ensure that the Notes rank at least pari passu among themselves; use proceeds from the issuance of the Notes for the purposes specified in Use of Proceeds ; give notice to the Trustee of any default or event of default under the Indenture; replace the Trustee upon any resignation or removal thereof; and maintain a Registrar and Transfer Agent in New York City and, for so long as the Luxembourg Stock Exchange so requires, a Paying Agent and a Transfer Agent in Luxembourg. 12

13 Events of Default:... The Indenture will contain certain events of default, consisting of the following: failure to pay principal or interest on the due date therefore (other than to comply with Tier 2 Capital requirements) in which case any holder may proceed to cause the winding up, dissolution or liquidation of the Issuer to the extent permitted by Brazilian law, so long as such payment default continues for a period of 90 days; winding up, dissolution or liquidation of the Issuer, in which case the Notes become immediately due and payable. See Terms and Conditions of the Notes Events of Default. Clearance and Settlement:... The Notes will be issued in book-entry form through the facilities of Clearstream, Luxembourg and Euroclear, for the accounts of their respective participants. Beneficial interests in Notes held in book-entry form will not be entitled to receive physical delivery of individual definitive Notes except in certain limited circumstances. For a description of certain factors relating to clearing and settlement, see Clearing and Settlement. Withholding Taxes; Additional Amounts:... Any and all payments of principal, premium, if any, and interest in respect of the Notes will be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments, levies, imposts or charges whatsoever imposed, levied, collected, withheld or assessed by the Cayman Islands or Brazil, or any political subdivision or any taxing authority thereof or therein, unless such withholding or deduction is required by law or as provided in Terms and Conditions of Notes Additional Amounts. In that event, the Issuer shall pay such additional amounts necessary to ensure that the Noteholders receive the same amount as the Noteholders would have received without such withholding or deduction, subject to certain exceptions. See Terms and Conditions of the Notes Additional Amounts. Listing:... Application has been made to list the Notes on the Luxembourg Stock Exchange. Governing Law:... The Indenture, the Notes, the PRI Policy and related documents will be governed by, and construed in accordance with, the laws of the State of New York, except for certain limited circumstances set forth in the PRI Policy, in which case, the internal laws of England and Wales will apply. 13

14 Form and Denomination:... Notes will be represented by interests in the Global Note. Individual definitive Notes representing the Notes in amounts of Japanese 100,000,000 and in higher integral multiples thereof, will only be available in certain limited circumstances as described herein. Rating of the Notes:... It is a condition to the issuance of the Notes that they be rated at least A3 by Moody s Investor Service, Inc. The rating addresses the likelihood of payment of principal on August 15, 2011, unless the maturity of the Notes is extended as a result of certain currency control events being in effect on that date, in which case the maturity of the Notes will be no later than February 15, The rating also addresses the timely payment of interest on each Payment Date. The rating of the Notes is not a recommendation to purchase, hold or sell the Notes, in as much as such rating does not comment on market price or suitability for a particular investor. See Risk Factors Considerations Relating to the Notes. 14

15 RISK FACTORS The following section does not describe all the risks of an investment in the Notes. Prospective purchasers of Notes should carefully read this Offering Circular in its entirety. Purchasers should consider, among other things, the risk factors with respect to the Bank, to Brazilian financial institutions and to Brazil not normally associated with investments in securities of other similar issuers, including those risk factors set out below. Risk Factors Relating to the Bank and the Banking Industry Acquisition of Bemge, Banerj and Banestado; other Possible Acquisitions On June 26, 1997, the Bank acquired 99.97% of the shares of Banerj previously owned by the state government of Rio de Janeiro. On September 14, 1998, the Bank acquired 90.74% of the shares of Bemge previously owned by the state government of Minas Gerais. The acquisition of these institutions provided the Bank with a greatly increased presence and customer base within two of Brazil s most economically important and populous states. On October 17, 2000, the Bank was the winning bidder in the auction for the acquisition of 88.04% of the shares of Banestado previously owned by the state government of Paraná. This acquisition increased the Bank s presence in Paraná, another of the richest states of Brazil. These acquisitions fall within the Bank s retail banking strategy. They significantly enhance the Bank s business and profile in the areas serviced by the acquired banks. The Bank is encouraged with the development and operations of each of these institutions and with their contributions to the Bank s business and profitability since they were acquired. No assurance can be given that such operations will be as profitable over the long term as the Bank s other operations have historically been. The Bank has indicated an interest in investigating opportunities for acquisitions of other state-owned financial institutions and in acquiring them when they are available for sale. No assurance can be given, however, that we will pursue the purchase of all or any such institutions or that we will be successful in any bidding or negotiating process. Furthermore, no assurance can be given that if acquired, the operations of such institutions will be as profitable over the long term as the Bank s other operations have historically been. The Real Plan and the Fiscal Stability Program The reduction in the Brazilian inflation rate since July 1994 profoundly affected the economic environment in which the Bank operates. During periods of high inflation in Brazil, the Bank had derived float income arising from the Bank s ability to generate returns on liabilities. Examples of such liabilities include demand deposits, government tax and customer collections, and other amounts held pending settlement in respect of which we pay no interest. Float income was a significant source of revenue for the Bank during periods of high inflation in Brazil due to the generally high real interest rates prevailing during such periods. However, in the Government s efforts to limit credit and control inflation in Brazil there was a significant increase in the level of non-remunerated compulsory reserve deposits the Bank is required to place with the Central Bank. Consequently, the amount of the Bank s float income has declined since the introduction of the Real Plan. At times, these policies have also limited opportunities for further growth of the Bank s loan portfolio in desirable sectors, such as the consumer sector. In October 1998, the Government proposed the Fiscal Stability Program designed to reduce the ratio of debt to GDP through government spending cuts, increases in government revenues and social security reforms. As part of the implementation of the Fiscal Stability Program, financial institutions became subject to the social contribution program called Contribuição para Financiamento da Seguridade Social (the COFINS ), at the rate of 3%. In addition, the tax basis of the COFINS and the tax basis of the Programa de Integração Social ( PIS - Social Integration Program) contribution were extended to any revenue obtained by financial institutions (including financial revenues, which were previously exempt). The rate of the PIS contribution applicable to financial institutions was reduced from 0.75% to 0.65%. The rate of Contribuição Social sobre o Lucro ( CSLL ) tax payable (a tax on profits), was reduced by Provisional Measure 2158/34 from 12% to 9% in relation to taxable events which occur between February 1, 2000 and December 31, 15

16 2002. This Provisional Measure also established that, as of January 1, 2000, financial institutions are no longer permitted to offset 1% of COFINS contributions paid against CSLL owed in the same period. The Government implemented these measures to put downward pressure on interest rates. Interest rates rose dramatically in response to the 1998 Russian currency crisis and remained high through the end of 2000 due to the devaluation of the real. The rapid changes in the Brazilian political and economic environment will require continued emphasis on assessing the risks associated with the Bank s activities and adjusting its business and operating strategy. No assurance can be given that the Bank will be successful in implementing such changes in its business and operating strategy in such a way as to ensure continued profitability. Furthermore, it is uncertain whether the Bank s business, operations or prospects will be adversely affected by the Real Plan or the Fiscal Stability Program in the future. Changes in Regulations Affecting Banks The Government has historically implemented or changed regulations affecting banks in an effort to effect economic policy. These regulations are used by the Government on a regular basis to control the availability of credit and to reduce or increase consumption. Some of these controls are temporary in nature and are reversed in line with the Government s credit policies. Other controls have been introduced and have either remained in place or have been gradually relaxed. Regulations that tighten the availability of credit and that increase the levels of real interest rates have created a difficult operating environment for many of the Bank s customers. It is uncertain whether future regulations enacted by the Brazilian Monetary Council (the CMN or Conselho Monetário Nacional ) would affect the Bank s liquidity, the creditworthiness of its clients, alter its funding strategy or constrain its lending growth. In addition, the Central Bank has historically varied the amount of reserves that banks in Brazil are required to maintain with the Central Bank in relation to incremental amounts of demand, savings and time deposits and certain credit transactions. The Bank s holdings of government securities are required to be applied towards some of these reserve requirements. Some of the cash deposited with the Central Bank in satisfaction of reserve requirements is not remunerated. For a description of the reserve and reserve related requirements of the Central Bank, see The Brazilian Financial System Reserve and Reserve Related Requirements. It is uncertain whether the Central Bank will increase reserve requirements or impose new reserve or compulsory deposit requirements. These requirements could negatively affect the Bank s liquidity, funding strategy, lending growth and profitability. Changes in Taxes and Other Fiscal Assessments To maintain its fiscal policies, the Brazilian Government regularly enacts reforms to the tax and other assessment regimes. These reforms include the enactment of new taxes or assessments, changes in the bases of calculation or rates of assessment and occasional enactment of temporary taxes for designated governmental purposes. The effects of these changes and any other changes that could result from enactment of additional tax reforms cannot be quantified. These changes, however, may operate to reduce the Bank s volume of operations, increase its costs or limit its profitability. It is uncertain whether these changes will occur in the future, or whether they will adversely affect the Bank s operations or its financial condition if they do occur. A recent example of a change in the rates of assessment is the Imposto sobre Operações Financeiras (financial transactions tax or IOF ) which has had varying rates for the inflow of foreign funds and includes certain domestic transactions. Constitutional Limitations on Interest Rates On March 9, 1995 the Brazilian Senate approved a bill regulating the provisions of Article 192(3) of the Brazilian 1988 Constitution. Article 192(3) provides for a 12% per annum ceiling on real rates of interest on credit extended by financial institutions in Brazil. The bill establishes that the maximum real interest rate to be charged by financial institutions in Brazil (including fees and commissions) in connection with credit transactions shall not exceed 12% per annum. According to the bill, the real interest rate is the difference between the nominal rate of interest and the annualized increase in the Brazilian consumer price index. The bill also limits the interest on rural credit transactions and on credits extended to the infrastructure projects to 16

17 a maximum real interest rate of 6% per annum. Pursuant to the bill, the charging of interest in excess of the maximum admissible rates is a criminal offense carrying a one to two year prison sentence and a fine of up to two times the amount of the extended credit. The bill is pending approval from the Chamber of Representatives. If approved by the lower house, it must be subsequently sanctioned by the President of Brazil in order to become effective. It is uncertain whether this legislation, if adopted, will have a material effect on the financial condition, results of operations or prospects of Brazilian banks, including us. Restructuring of Banks in Brazil Since the second half of 1994, the Brazilian banking system has been under considerable pressure. The Real Plan, the high reserve requirements on both deposits and loans, limitations on the provisions of credit, tight money supply and high real interest rates have adversely affected the operations and profitability of some Brazilian banks. In addition, Brazilian financial institutions have suffered high levels of nonperforming loans and have had to make loss provisions accordingly. Since late 1994, the Central Bank has intervened and placed some financial institutions under temporary special administration. A significant number of institutions have changed control, been combined with other institutions or ceased operations. For a more detailed description of the consolidation of the Brazilian banking industry between 1994 and 2000, see The Brazilian Financial System Restructuring of Financial Institutions. It is likely that the Brazilian financial system will continue to experience consolidation over the next few years. In view of these bank failures and in an attempt to restructure the Brazilian financial system, the Government has adopted a number of measures, including: establishing rules designed to facilitate corporate reorganizations among financial institutions; creating a special credit facility known as PROER (a program for the improvement and enhancement of Brazil s financial system) to assist in such efforts; and organizing the Fundo Garantidor de Créditos (the FGC ) to guarantee customer deposits with financial institutions in case of intervention or liquidation of such financial institutions. No assurance can be given that these measures will be successful in stabilizing the Brazilian financial system. See The Brazilian Financial System Restructuring of Financial Institutions. On June 22, 2001, the Government announced its intention to recapitalize four federal banks by taking over nonperforming loans, purchasing assets in exchange for domestic debt securities and increasing the capital of such institutions. The banks to be recapitalized are Banco do Brasil, CEF, Banco da Amazônia and Banco do Nordeste do Brasil. The Government estimates that the recapitalization will increase Brazil s public sector debt by approximately U.S.$5.4 billion, although the ultimate cost of the recapitalization will depend on recoveries in respect of the nonperforming loans. Competition The markets for financial and banking services in Brazil are highly competitive. There is a significant degree of consolidation underway in the Brazilian banking sector resulting in increased concentration in the Brazilian banking industry. This consolidation is occurring through merger and acquisition transactions as well as the privatization of state-owned institutions. The Bank s share of the large and middle corporate markets for loans may come under pressure from banks shifting their activities away from interest rate arbitrage to lending in response to the Real Plan. Competition to provide fee-based services to customers has also increased following implementation of the Real Plan. As a result of the competitive environment, the Bank s profitability could be adversely affected. Risk Factors Relating to Brazil Risk of Significant Governmental Actions Affecting Brazilian Markets and Economy Over the past 15 years, the Brazilian Government has intervened on many occasions to change monetary, credit, tariff and other policies in order to influence the course of Brazil s economy. Examples of such interventions include: 17

18 controlling wages and prices; freezing bank accounts; imposing capital controls; and inhibiting exports from Brazil. The Brazilian Government has in the recent past taken actions to slow or halt economic growth in order to control inflation and to reduce the budget deficits. It may take further similar actions in the future. On July 1, 1994 the Brazilian Government implemented an economic stabilization plan known as the Real Plan to reduce the size of Brazil s federal budget deficit, lower inflation and introduce a new, stable currency, the real. In the Real Plan, the government intended to reduce certain public expenditures, collect liabilities owed to the Government and increase tax revenues. Following implementation of the Real Plan the rate of inflation in Brazil, as measured by the Índice Geral de Preços Disponibilidade Interna (the general price index internal availability or IGP-DI ) fell from 1,093.8% for 1994 to 1.71% for The IGP-DI increased to 19.98% in 1999 following the devaluation of the real in January After that, the IGP-DI decreased, reaching 9.81% in 2000 and 10.9% (annualized) for the five months ended May 30, The Real Plan does not contain any wage or price controls. The Real Plan was adopted when President Fernando Henrique Cardoso was serving as Finance Minister. Since his election as the President, President Cardoso s government has supported the Real Plan. In October 1998, President Cardoso was re-elected for an additional four year term, expiring in January Following re-election his government proposed a Fiscal Stability Program. The Program includes cuts in discretionary governmental spending, increases in government revenues and savings through social security reforms. Through this Program, the Government intends to stabilize the ratio of debt to gross domestic product ( GDP ) and thus create a more favorable economic environment. Implementing certain measures under the Fiscal Stability Program has proved to be more difficult than others, because considerable legislative action is necessary. Elections Brazil held local elections on October 1, In those elections, the ten political parties constituting Presidente Cardoso's coalition won 4,699 mayoral races, while opposition party candidates won 769. Certain other mayoral races were decided in runoff elections held on October 29, 2000, when opposition party candidates won 21 out of the 31 mayoral races at issue, including the City of São Paulo. The next round of national elections is scheduled to occur in October 2002, at which time Brazil's voters will elect, among others, a new President to succeed President Cardoso. It is uncertain whether the new President will share the same economic and political views of President Cardoso. There is no assurance, for instance, that the new President will support the Fiscal Stability Program or will pursue the existing or proposed fiscal, social security and other reforms of President Cardoso and his allies. Foreign Exchange Risks The exchange rate between the real and the U.S. dollar, the relative rates of real devaluation and the prevailing rates of inflation have affected the Bank s historical financial results and may continue to do so in the future. After its introduction on July 1, 1994, the real initially appreciated against the U.S. dollar. Concerns arose about the overvaluation of the real relative to the U.S. dollar. To address such concerns and to avoid a rapid devaluation of the real, in March 1995 the Brazilian Government established a trading band for the real against the U.S. dollar with a view to a gradual devaluation of the real. As a result of economic instability in Brazil in late 1998 and early 1999 the trading band was abandoned. This has resulted in a significant devaluation of the real against the U.S. dollar. Since January 1, 1999, the real/u.s. dollar exchange rate has fluctuated significantly. On December 31, 2000, the rate was R$1.96 per U.S.$