BANCO DO ESTADO DO RIO GRANDE DO SUL S.A. - BANRISUL RATING FUNDAMENTALS

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1 Analytic Report Rating A The bank shows good intrinsic financial strength. These are institutions having safe and valued business, good current and historic financial condition. The business and sector environments may vary, without, however, affecting the bank s operation conditions. The risk is very low. Date: May 22,2007 About the Rating Outlook: Stable Remark: - Validity: May 22,2008 History: Dec/04: Affirmation:A (stable) Jun/05: Affirmation: A (stable) Dec/05: Affirmation:A (stable) Jun/06: Affirmation:A (stable) Dec/06:Affirmation: A (stable) Last Review: May/07 Next Review: Nov/07 Validity: May/08 Analysts: Rodrigo Indiani Phone: rodrigo.indiani@austin.com.br Luis Miguel Santacreu Phone: luis.santacreu@austin.com.br Austin Rating Serviços Financeiros Rua Leopoldo Couto Magalhães, 110 conj. 73 São Paulo SP CEP Tel.: Fax: RATING FUNDAMENTALS The Austin Rating Risk Committee at a meeting held on May 31, 2007 confirmed the rating A and stable outlook for Banco do Estado do Rio Grande do Sul S.A.(Banrisul). The rating assigned is based on the position held by the Bank, the distribution of assets and liabilities, the diversification of revenue sources, quality of credit assets and proper levels of liquidity, profitability and capitalization. The outlook remains stable, in order for us to monitor the continuity of Bank s performance recorded over the past years, as well as the evolution of strategy focused on the growth of credit portfolio, which is reinforced by the plan of conducting a preferred share public offering. Partially, the proceeds obtained from the public offering will be used to increase the Bank s equity base and keeping on the growth of credit portfolio and partially to expand the services network by means of opening of branches. For another year, the Bank recorded high level of profitability over shareholders equity, 27.9% in 2006 (30.8% in 2005 and 29.6% in 2004) and net income of R$361.7 million (R$351.9 million in 2005 and R$303 million in 2004). The highlights of this result were income from lending operations, especially the expansion of individuals portfolio, income from services rendered and other operating income, in which under this item, were recorded in the year R$137.5 million referring to the monetary restatement of FCVS (salary variation compensation fund) credits. Shareholders equity increased 13.3% when compared to 2005, ending 2006 with R$1,295 million. Basel s ratio reached 20.2%. Even if under the control of the state government of Rio Grande do Sul, the Bank has been operating independently, showing high level of profitability over shareholders equity and reduced fluctuation. Banrisul is a specific purpose state public bank, created with the purpose of being a commercial, development and social bank. In view of the origin and purpose of its organization, the Bank has the advantage of its proximity to the public sector, solidly present in the south region of Brazil, specifically in the state of Rio Grande do Sul. The Bank expanded its operations and reduced the correlation between its performance and of the economy of the state of Rio Grande do Sul. The Bank increased its participation in individuals operations and adopted as its strategy the expansion to neighboring states, Santa Catarina and Paraná. Despite the diversity of commercial portfolio products, the Bank remained focused on the growth of previously approved credit modes in the individuals segment, mainly the payroll-deductible loan for civil servants. Concerning the corporate segment, the Bank continued seeking a more diluted portfolio, pursuing to operate with small and medium-sized companies, thus, reducing the exposure in large clients. In addition to commercial portfolio, the Bank maintains development, real estate and rural portfolios, which were maintained in minimum levels in order to comply with legal requirements. Despite this, it maintained investments in technology, pointing out new services/tools on Internet Banking and Banrisul Internet card and a diversified offering of products and services.

2 The year of 2006 was the last year of the previous management, which comprised the periods between 2003 and The next management faces the challenge of maintaining the good financial performance, showing profitability and efficiency ratios, varying within an interval compatible with its objectives, which must be predominantly maintained from its operational activity. Banrisul also acts as an instrument of execution of the economic-financial policy of the state of Rio Grande do Sul, in conformity with plans and programs of the state government. The Austin Rating Committee deemed as positive the bank s performance for the four-year period between 2003 and 2006, which has been successfully managing to become a profitable public bank. Since 1999 the Bank has been maintaining itself profitable and as of 2002 it has been recording good profitability ratios over shareholders equity. It is also worth mentioning that contrary to most of state banks which were privatized, liquidated or which underwent intervention, Banrisul has been maintaining itself as a government-controlled financial institution. The growth strategy is viable with the existence of potential revenue to be explored together with the Bank s clients base. Positive Factors History of high profitability over shareholders equity; Solid presence in the state of Rio Grande do Sul, with a broad services network; Good scale of clients (2.9 million at the end of 2006); Distribution of assets and liabilities structure; Diversified funding structure and low funding cost; The raising of new funds by means of the share public offering is an important step to increase the equity base and expand the credit portfolio projected for the upcoming years; Banrisul represents the main financial institution in collection of taxes, charges and others of the state; Differently from most of state Banks which were privatized, or which underwent intervention, Banrisul has been maintaining itself as a government-controlled financial institution, showing good financial strength and high profitability over shareholders equity; Professionalization of the organizational culture, despite change in the management and shift of the Board of Executive Officers every four years. Watching Factors Higher competition and reduction of spreads; Growth strategy mostly focused on the south region of Brazil, which despite adding growth potential in the short term, it may be restrictive in the long-term; In the medium and long-terms, the Bank faces the challenge of still being competitive, maintaining good levels of profitability and efficiency by improving the quality of credit portfolio, not neglecting its role as a bank concerned with economic development; Higher competition from large banks in its region of performance rises the need of changing the employees compensation policy, aiming at rewarding them by result;

3 BANCO DO ESTADO DO RIO GRANDE DO SUL S.A. BANRISUL Its challenge is to maintain growth ratios and under the same profitability levels obtained by current Management, taking into account that a new board of executive officers is elected every four years; SHARE CONTROL The state government of Rio Grande do Sul is the majority shareholder, holding 99.40% of the Company s common shares. The remaining common shares are divided among Fundação Banrisul de Seguridade Social (0.18%), Instituto de Previdência do Estado do Rio Grande do Sul (0.06%) and other minority shareholders (0.36%). In May 2007, Banrisul filed at CVM (Brazilian Securities and Exchange Commission) a request of public offering of its preferred shares, confirming its decision of conducting a primary offering of 8.5 billion shares, with capital increase, and the disposal by the state of Rio Grande do Sul of 12.8 billion shares. The offering did not include the issue or sale of common shares, thus, the state government s interest remained unaltered at 99.4%. PROFILE Banco do Estado do Rio Grande do Sul was founded on September 12,1928. The Bank s nature since its inception was to stimulate production sectors and promote the economic development of the state of Rio Grande do Sul. At that time, Banrisul s main role was to meet the credit needs of cattle farmers of Rio Grande do Sul. As an official bank, it started collecting all taxes on behalf of the state, until then received by Banco Pelotense, merged in In subsequent years, other institutions were also acquired: Banco Real de Pernambuco (1969), Banco Sul do Brasil (1970), Banco de Desenvolvimento do Estado do Rio Grande do Sul - Badesul and Distribuidora de Títulos e Valores Mobiliários do Estado do Rio Grande do Sul - Divergs (1992). Since 1990, Banrisul has been operating as a multiple-service bank, offering commercial, mortgage loan, financing and investment portfolios. In 1997, the state law 10,959 authorized the transformation of Caixa Econômica Estadual into Caixa Estadual S.A. Agência de Fomento, by absorbing Banrisul s development portfolio operations and other state funds, and Banrisul absorbing Caixa s clients portfolio and business operations. Banrisul is a regional bank that operates as a commercial bank, development bank and social bank. Over the past two years, the Company entered into partnership with the state government, including Rio Grande do Sul economy development programs and assistance to the needs of recovery of economic sectors during phases of crisis or growth. The Bank s retail profile is characterized by the number of its clients (2.9 million) and services network, composed of 415 bank branches, 286 service centers and 361 ATMs. Out of total of branches, 386 of them are located in the state of Rio Grande do Sul, 14 in Santa Catarina, 13 in other Brazilian states and 2 branches overseas. In December 2006, the Bank had 8,967 employees. Banrisul present in 78% of the cities of Rio Grande do Sul, it serves 97% of the state population. Keeping on its expansion plan in the south region of Brazil, in 2006, 16 new branches were opened in the state of Rio Grande do Sul, besides 10 minor branches and corporate branches.

4 In terms of credit, Banrisul offers conventional banking products through modes, such as overdraft account, working capital, BNDES/FINAME onlending, trade finance, personal loan and consumer sales financing CDC, in addition to rural credit, development, leasing, mortgage loan and exchange portfolios. It also acts as an instrument of execution of the economicfinancial policy of Rio Grande do Sul, in conformity with the plans and programs of the state government. Banrisul s activities are mainly financed by means of time deposits, savings deposits and money market funding through financing of federal government bonds, via repurchase commitments. In view of the significant volume of deposits raised directly at the network, the Bank does not employ greater aggressiveness in CDB funding, not holding significant portfolio of institutional investors. ECONOMIC GROUP Banco do Estado do Rio Grande do Sul holds interest in the following companies: Banrisul Armazéns Gerais S.A. (99.498%), Banrisul S.A. Corretora de Valores Mobiliários e Câmbio (98.693%), Banrisul Administradora de Consórcios (99.569%) and Banrisul Serviços Ltda. (99.785%). Banrisul Administradora de Consórcios The company was created in December 2003 and started to operate its purchasing pool plans in January Clients and non-clients of Banrisul may join a purchasing pool for the acquisition of new and used (almost new) automobiles, tractors, residential properties, commercial, rural and leisure properties, with flexible terms and different amounts of credit portfolio. On December 31, 2006, the Bank recorded shareholders equity of R$98.1 million and income of R$ 9.14 million. Banrisul Armazéns Gerais Created to operate in the segment of handling and storage of goods in general, Banrisul Armazéns Gerais operates in the city of Canoas and Uruguaiana as inland Customs Station, providing import and export services, in the modes of Bonded Warehouse, Public Customs Warehouse (DAP) and Certified Customs Warehouse (DAC). On December 31, 2006 it recorded shareholders equity of R$20.5 million and income of R$678 thousand.

5 BANCO DO ESTADO DO RIO GRANDE DO SUL S.A. BANRISUL Banrisul Corretora de Valores Mobiliários e Câmbio Banrisul Corretora de Valores e Câmbios has been operating in the capital markets since 1971, acting as securities dealer on the stock exchanges. It manages third-party s funds in individual or collective portfolios, including development funds and investment clubs. On December 31, 2006 it recorded shareholders equity of R$34.3 million and income of R$ 4.6 million. Banrisul Serviços Ltda. The company manages the Refeisul ticket and two credit cards, Visa and MasterCard. There are three types of tickets: food ticket, meal ticket and food basket. In addition to Banrisul, Banrisul Serviços maintains agreements with companies which provide tickets for its employees and has approximately five thousand authorized stores in the states of Rio Grande do Sul and Santa Catarina. On December 31, 2006 it recorded shareholders equity of R$58.6 million and income of R$11.6 million. MANAGEMENT Banrisul s management is performed by the Board of Directors composed of eight members and by the Board of Executive Officers elected every 4 years. The Bank has been pursuing to comply with the precepts of Corporate Governance, and all decisions are taken jointly, by means of structured Committees in view of main processes. The Fiscal Council and the Audit Council act as inspection bodies. The Board of Executive Officers is composed of six members: Chief Executive Officer, Vice-Chief Executive Officer and four Officers - Administrative, Third-Party Funds Management, Information Management and Financial. The Board of Executive Officers assumed the management of Banrisul on March 27, 2003, which remained until March 2007, when new management took office. Despite changes in a few members, Mr. Fernando Guerreiro Lemos remained as chief executive officer. With the primary and secondary public offering of preferred shares, which must be concluded by the end of June or early July, the Board of Directors will be increased from eight to nine members. The new member will represent the new minority shareholders. Out of current members, seven of them represent the state government and one of them represents Fundação Banrisul de Seguridade Social. The Board of Executive Officers will be not altered.

6 OPERATING STRUCTURE AND BUSINESS AREAS POLICY In order to serve its 2.90 million clients, the services network is composed of 1,062 service branches, 415 bank branches, 286 service centers, 361 Banrisul ATMs and 1 agency office in Buenos Aires. Out of total branches, 386 of them are located in the state of Rio Grande do Sul, 14 in the state of Santa Catarina, 13 in other Brazilian states and 2 overseas. In 2006, 16 new branches were opened in the state of Rio Grande do Sul, in addition to 10 minor branches and 9 corporate branches. At the end of 2006, staff recorded 8,967 employees. Concerning performance policy for individuals loan products, the Bank employs statistical models and Credit Scoring systems. Investments were made in safer processes automation, maintenance of database, easy to update them via the Internet, simplification of credit internal phases, data modeling and utilization of statistical tools for new products targeted at individuals and legal entities and implementation of behavioral scoring. Referring to corporate operations, the decision-making process is the exclusive responsibility of the Credit Committees, which may occur at the Branches or at the General Management. In the former, the sphere of authority is defined by category and class of the branch, and the maximum limit differs according to the category of the branch. The sphere of authority means the decision maximum limit of the Credit Committees, and may vary in view of the type of guarantee. The operations of the Mortgage Loan, Rural and Development credit areas analyzed by the Credit Committees are previously examined by technicians of respective areas, who provide an opinion as to the feasibility, ability to pay and possibility of return of investment, in addition to consult the credit protection agencies. The performance of the credit portfolio of branches is reviewed periodically, and reduction may occur, even the elimination of the decision-making sphere of authority, should business be conducted in disagreement with institutional parameters. The sphere of authority only will be fully used, within the decision-making scope of branches in operations which can be self-liquidated with receivables guarantee (trade bills/checks). The General Management Credit Committees are divided into: Credit Committee and Risk Analysis Board of the General Management, Board of Executive Officers and Board of Directors. In the former there are two decision-making spheres of authority: for operations above the limit of the branch up to R$ 700 thousand, the operations are authorized by the Decision-Making Group II, which is composed of Credit Managers. Should the operation have amount between R$700 thousand and R$1 million, the operation is decided by the Decision- Making Group I composed of Units Superintendents: Risk Policy and Analysis (coordinator), International Businesses, Operations, Commercial and Credit Recovery. The operations above R$1 million up to 3% of shareholders equity are decided by the Committee composed of the Board of Executive Officers and the operation with amount above 3% of shareholders equity are decided by the Board of Directors. Pursuant to the Resolution 2,682 of the Brazilian Central Bank, the credit operations are classified into nine risk levels (AA up to H). This rating observes the following process:

7 After establishing the client risk according to the aforementioned criteria, the guarantees offered in the operation are assessed. According to the guarantee offered, the risk of operation may be lower than the client risk level. For instance, a level C client, the operation of which is guaranteed by receivables, may have the operation rated until level B. On average, the net guarantee reduces the risk between one and two levels. Banrisul adopts a conservative standing at treasury, carrying out conventional operations with the purpose of hedging its assets and liabilities against prices variation, as well as neutralize the mismatching in its operations. The potential loss in view of its positions in government bonds is deemed as low, in relation to the size of the Bank. The treasury is responsible for international onlending, derivatives and swaps operations previously mentioned. STRATEGY Banrisul operates with traditional products of a commercial bank and as financial arm of the state government of Rio Grande do Sul, holding specific development, rural and mortgage loan portfolios. The strategy for 2007 is to be aligned with its performance in 2006, i.e., the plan is to focus a higher growth in the commercial credit portfolio targeting individuals, mainly in the payroll-deductible loan mode and credit to medium-sized companies with good guarantees, reducing the average ticket per operation. In other portfolios, the purpose is to maintain them under the level of compliance with requirements. The growth of commercial portfolio is based on the exploration of its client base by means of cross selling, offering previously approved credit to its clients, individuals and legal entities and by means of the expansion of its services network, opening new branches and PABs (corporate branches) in the south region, including the states of Santa Catarina and Paraná. In view of the difficulty to expand the equity base deriving from capital contributions of the parent company (state government of Rio Grande do Sul), this year, Banrisul will issue shares. The proceeds obtained from this operation aim at obtaining funds to leverage the Bank s growth. In addition to the relief in the Basel ratio to expand the credit portfolio (the target is to achieve in 2010 a portfolio of approximately R$12 billion), the funds will be used to increase the number of branches in the states of Santa Catarina and Paraná, where currently it has one branch in Curitiba and another one in Cascavel. In 2006, 16 branches were opened in the state of Rio Grande do Sul, in addition to 9 corporate branches (PAB) and 10 minor branches (PAA). In addition to the geographic expansion, Banco SIM was created to increase its regional share, especially with the population not having access to the bank system, which adds a set of basic products and services. After its opening during 2006, the Bank monitored the implementation of operational processes and commercialization of the project, specifically the granting of loan, improvements and increase of products to be distributed at Banrisul Correspondent, main service platform of Banco SIM s client.

8 In terms of management, Banrisul fulfilled improvement and modernization measures related to management models and operation of loan products (mainly retail), including requests of improvement in the management of client service by the branches network. The program also implemented new control tools focused on economic results, composing the decision-making and execution procedures of various levels of the organization. ECONOMIC-FINANCIAL ANALYSIS Balance Sheet Banrisul ended 2006 with total assets of R$15,648.2 million, recording an increase of 11.1% when compared to the R$14,089 million recorded in the previous year. The increase is mainly due to higher volume of interbank investments (R$701.2 million in 2005 to R$2,535.9 million in 2006) and a lower portion from loan operations (R$5,973.1 million in 2005 to R$6,284.6 million in 2006) and securities investments. Securities investments by the end of the year recorded a balance of R$5,324.6 million, a volume 18.6% higher than the position recorded in December This amount comprises interbank investments and deducts repurchase commitments. In 2006, funding increased 16.1% and credit 5.2%, and the additional volume was directed to securities portfolio. The growth of interbank investments was mainly due to increase in money market investments in LFTs (Treasury Bills) own portfolio position (R$545.7 million in 2005 to R$1,747.5 million in 2006) and a lower portion in the third-party portfolio position (R$0 in 2005 and R$99.8 million in 2006). Investments in interbank deposits did not show relevant changes, amounting to R$54.5 million in 2006 (R$52.1 million in 2005). At the end of 2006, total credit portfolio recorded a balance of R$6,284.6 million, a 5.2% increase in relation to R$5,973.1 million recorded in The operations targeted at individuals were up by 15.3%, amounting to R$2,135.2 million, pointing out payroll-deductible loan operations. The production of this mode increased 16.6% in relation to 2005, amounting to R$1,154.1 million in (average of almost R$100 million/month), approximately 75% for civil servants (municipal, state and federal), 15% for private companies employees and 10% for retirees and pensioners of INSS (National Institute of Social Security). Corporate loan operations amounted to R$1,940.1 million, recording a hike of 0.9% in relation to R$1,922 million recorded in 2005, and a decrease in relation to R$2,094.1 million recorded at the end of 1 st half of In addition to commercial portfolio, Banrisul, pursuant to its Bylaws, holds specific portfolios, which were maintained under levels to comply with requirements. The rural credit porftolio recorded a balance of R$579.1 million, 11% higher than the previous year (R$521.4 million recorded in 2005), and a reduction of 2.8% in relation to the balance of R$595.8 million recorded at the end of 1 st half of The mortgage loan portfolio remained stable and development portfolio decreased. The former ended the year recording a balance of R$796.7 million (R$793.6 million in June/06 and R$790.7 million in 2005) and the latter amounted to R$434.6 million at the end of 2006 (R$475.7 million in June/06 and R$475.3 million at the end of 2005).

9 Thus, the composition of the portfolio kept changing in view of the higher representativeness of individuals segment from 31% in 2005 to 32% in June/06 and 34% in December/06. The higher participation of this segment is compatible with the guidelines ruling the strategy of higher dilution of portfolio and to reduce the exposure in segments deemed as weaker. The volume of securities investments decreased from R$5,587.1 million in 2005 to R$4,427.1 million in In addition to reduced volume and change in the portfolio in terms of accounting of the following categories: held to maturity (62.6% in December/05 and 87% in December/06), available for sale (8.5% in December/05 and 11% in December/06) and trading securities (28.9% in December/05 and 2.0% in December/06), a significant increase of long-term securities occurred (16.5% in 2005 and 99% in 2006), the predominance of LFTs being maintained. The higher participation of securities with maturity exceeding 1 year directly impacted the current ratio, which was 103.1% in 2005 decreasing to 74% in The increase of assets, liabilities was basically offset by higher volume of funding amounting to R$14,368.3 million at the end of 2006 compared to R$12,376.6 million at the end of Total deposits maintained their growth trend, ending 2006 with R$10,482.9 million related to expansion and 16.6% when compared to December 2005, accounting for 73% of total funding. Time deposits recorded a balance of R$5,108.4 million, a 23% increase in relation to the balance recorded at the end of Demand deposits were up by 26.3% in relation to Savings deposits recorded R$3,820.2 million at the end of 2006, a 7.5% hike when compared to Domestic onlendings amounted to R$ million (R$455.3 million in 2005). Domestic onlending, basically comprised funding from official institutions (BNDES National Economic and Social Development Bank, FINAME National Equipment Financing Authority and Caixa Econômica Federal Federal Savings and Loan Bank). Foreign onlending amounted to R$153 million (R$151.2 million in 2005) and refer to funds raised with banks overseas aiming foreign exchange operations. Shareholders equity increased from R$1,143.2 million in 2005 to R$1,295.1 million in 2006 and Basel ratio during same period jumped from 18.2% to 20.2%. The Extraordinary General Meeting held on April 6, 2006, approved capital increase by means of utilization of Profit Reserves, R$10 million for Legal Reserve, R$60 million for Expansion Reserve and R$66.7 million for Statutory Reserves (Special Reserve), amounting to R$136.7 million, without issue of new shares. Shareholders equity of investment funds managed by Banrisul reached in December/06, a total of R$3,885.4 million compared to R$3,390.6 million recorded at the end of previous year. The growth practically occurred in all open funds managed by the Bank, including credit rights investment fund with shareholders equity of R$115.1 million recorded at the end of March.

10 Results Growth of 7.3% in financial income (R$3,301.8 million in 2006 compared to R$3,078.1 million in 2005) was mainly triggered by higher income from compulsory investments (R$240.6 million in 2005 and R$406.2 million in 2006) foreign exchange income (R$358.8 million in 2005 and R$425.6 million in 2006), and the latter partially stimulated by income from foreign exchange variations, and its contra account recorded in other operating expenses. Income from loan operations amounted to R$1,618.3 million, very close to R$1,607.6 million recorded in 2005, and income from securities, which amounted to R$828.6 million (R$828.4 million in 2005). Increase of 5.7% of financial intermediation expense was slightly lower than income, and gross income amounting to R$1,765.6 million recording a hike of 8.7% in relation to R$1,624.5 million in The increase in intermediation expense was proportional to the hike in the volume of funds raised, mainly via deposits. Allowance expenses jumped from R$163.4 million in 2005 to R$240.8 million in The increase in gross income was absorbed by the hike of administrative expenses (R$ million in 2005 to R$ million in 2006), personnel (R$671.9 million in 2005 to R$699.9 million in 2006) and tax expenses (R$160.5 million in 2005 to R$181.7 million in 2006), which were higher than growth of income from services (R$501.9 million in 2005 to R$ million in 2006). Banrisul recorded net income of R$361.6 million at the end of 2006, 2.75% higher than the net income of R$351.9 million posted in It is worth mentioning that in 2005, results had been favorable by a revenue of R$85 million deriving from tax proceedings, which was not observed in The return on final shareholders equity of 27.9% remained high, 30.8% in 2005 and 29.6% in The efficiency ratio which measures the ratio between the sum of personnel and administrative expenses in relation to the gross income from intermediation accrued of income from services remained unalterable (53.4% in 2005 and 52.8% in 2006). The Austin Rating Committee deems that this ratio must be ranked between 40% and 60% for banks with Banrisul s profile. RISK ASSESSMENT Credit Banrisul has a diluted credit portfolio and given the policy carried out by the last Bank s management of privileging the individuals and small-sized companies segment, the concentration among largest borrowers decreased. The largest 60 clients accounted for 21.49% of the portfolio in 2004, 19.61% in 2005 and 17.9% in Overall, it shows a good diversification by client, by economic sector and by product, restricting the impact of eventual default situations.

11 In December 2006, the credits rated in the levels AA to C, summed up R$5,028.8 million (R$4,651.7 million in 2005), and account for 80.4% (77.9%) of the entire portfolio. In the levels D to G, R$894.0 million are rated (R$1,022.7 million in 2005), which corresponds to 14.2% (17.1% in 2005) of total. The operations rated in level H, and which require 100% provision, amounted to R$337.8 million (R$298.8 million in 2005), accounting for 5.4% (5.0% in 2005) of total portfolio. The ratio between the total balance of provision and the credit portfolio, ended 2006 with 13.4% (13.7% in 2005), amounting to R$844.3 million (R$821.3 million in 2005), R$114.6 million (R$103.8 million in 2005), additional to the minimum required by Resolution 2,682. The lower proportion between the volume of provision and total credit is due to a better rating of loan operations in risk levels, and payments of fully accrued operations also contributing during The credit portfolio increased 5.2% in 2006 and the balance of provision climbed 2.8%, during same period. The default rate, represented by the volume of loan operations past-due over 60 days in relation to the total volume of lending operations accounted for 4.94% in 2006 compared to 4.81% in Market By the analysis of positions assumed by treasury basically composed of LFTs, even if long-term positions, and taking into account the low funding cost and less volatile scenarios and most foreseeable for the economy, the potential loss deriving from market risk is low. Securities investments, net of repurchase commitments operation amounting to R$5,324.6 million increased 18.6% in relation to the total amount recorded at the end of In addition to the increase, the portfolio became longer again, with only R$149.3 million maturing within one year. At the end of 2006, securities were mainly classified in the category held to maturity, which are not required to be marked-to-market. We believe that in view of its capital structure, Banrisul has financial ability to hold them in portfolio. The market risk is controlled by means of statistical tools, such as the Value at Risk (VaR) methodology, which at the end of 2006 amounted to R$11.2 million and the mapping of market-driven factors: risk of interest rate variation, foreign exchange and liquidity risk. The bank monitors opportunity rates in the financial market, establishing higher and lower levels agreed upon in the funding operations and use of funds, and measuring through simulations, possible losses to which Banrisul is subject. The impacts on results deriving from changes in structural economic-financial ratios, such as base interest rates, inflation, exchange rate, etc., are mapped at the end of everyday.

12 Liquidity The liquidity risk is deemed as low, in view of structure of assets and liabilities being highly distributed, with the largest portion of deposits being directly raised at the network and lower contribution from institutional investors. The 60 largest depositors accounted for 10.64% of total deposits. In addition, the bank maintains high cash in the form of interbank securities, which in December/06 corresponded to nearly 40% of total time deposits. The capillarity of service branches and the dilution of client base enable unchanged volume of funds raised, mainly time deposits, which have been showing an organic growth in their volume. It is worth mentioning that the reduction in current ratio from 103.1% at the end of 2005 to 74% at the end of 2006 derives from the increase in longer-term government bonds investment recorded in the category held to maturity, which composed the largest portion of the portfolio at the end of 2006, resulting in a decrease of volume of current assets which amounted to R$8,665 million at the end of 2006 (R$10,750 million at the end of 2005). Such trend had already been observed in the bank in previous periods, and long-term government bonds held in portfolio were held to maturity. Even if the structure of assets and liabilities represents a mismatch, Austin Rating deems very low the probability of requiring that government bonds be redeemed in advance on account of the structure of deposits, highly diluted and stable. Operational With a view to mitigating the operational risks and disseminate the best practices concerning the correct management of assets and information technology resources, information security guidelines were implemented in 2006 at the Company, to be observed by all employees, trainees, outsourced workers and collaborators. Also during 2006, the staff of auditors was enlarged with a view to improving the work of systems audit.

13 Austin Rating Risk Rating Financial Strength AAA The bank shows exceptional intrinsic financial strength. Usually, these are large institutions having safe and valued businesses, and excellent current and historic and financial condition. The business and sector environments may vary, without, however, affecting the bank s intrinsic operation conditions. The risk is nearly null. AA The bank shows excellent intrinsic financial strength. These are institutions having safe and valued businesses, good current and historic financial condition. The business and sector environments may vary without, however, affecting the bank s operation conditions. The risk is negligible. A The bank shows good intrinsic financial strength. These are institutions having safe and valued businesses and good current and historic financial condition. The business and sector environments may vary without, however, affecting the bank s operation conditions. The risk is very low. BBB The bank shows suitable intrinsic financial strength. Usually, these are institutions having covered assets. These banks show reasonable and stable financial condition. The business and sector environments may have a more accentuated variation than in the previous categories and show some risk in the bank s intrinsic operation conditions. The risk is low. BB The bank shows reasonable intrinsic financial strength. It shows suitable protection parameters, but vulnerable to economic, general and sector conditions that may affect the bank s intrinsic operation conditions. The risk is medium. B The bank shows reasonable intrinsic financial strength. It shows suitable protection parameters, but highly vulnerable to economic, general and sector conditions that may affect the bank s intrinsic operation conditions. The risk is medium. CCC The bank shows low financial strength, requiring possible external assistance, and shows very high vulnerability to the economic, general and sector conditions that may affect the bank s intrinsic operations conditions. The risk is high. CC C The bank shows low financial strength, requiring possible external assistance, and shows very high vulnerability to the economic, general and sector conditions that may affect the bank s intrinsic operation conditions. The risk is very high. The bank shows very bad financial strength, requiring possible external assistance. These institutions are limited by one or more elements: business of questionable value; deficient financial conditions, and highly unfavorable business environment. The risk is extremely high. (+) Plus and (-) minus signs are used to identify a better or worse position within a same rating scale. Rating is a risk classification with marks or symbols. It expresses the capability of issuers of negotiable or non-negotiable debt securities to honor its commitments of interest and principal amortization until final maturity. The rating may refer to the issuer, reflecting its ability of honoring any commitments in general, or a specific issuance, in which it is considered only the issuer s ability of honoring that given financial obligation. The information obtained by Austing Rating was considered suitable and reliable. The opinions and simulations showed in this report are the judgment of Austin Rating concerning the issuer; however they are not investment recommendations, for any purposes whatsoever. To know our rating scales and methodologies, please access: All rights reserved. None part of this publication may be copied or sent by any means, whether electronic or by mechanical means, including photocopy, recording or any other type of system for storage and transmission of information, without the previous and written authorization of Austin Rating Serviços Financeiros Ltda.