Real Estate The pace of sales continues to fall in the residential market. The number of launches came down, but inventories remain high.

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1 Brazil Orange Book July 2015 No signs of stabilization With information through July 06, 2015 This report, published six times per year, summarizes anecdotal information on current economic conditions received from key business contacts, economists, market experts, and other sources outside Itaú. Apart from the our view section, it is not a commentary on the views of Itaú s Macroeconomic Research team. Contents Consumption and Production of Goods and Services The weakening trend in the Brazilian economy seems to have steepened at the end of the first half. Inventories remain high in factories and with retailers. Investment Investment is being inhibited by the outlook for a longer period of low growth, increasing production costs, rising interest rates and uncertainty over the Lava-Jato operation. Labor Market, Production Costs and Prices Production costs remain under pressure, which puts a limit on profit margins and inhibits the recovery of the economy. Real Estate The pace of sales continues to fall in the residential market. The number of launches came down, but inventories remain high. Commodities Agriculture production remain solid, but lower prices have been hurting the sector's profitability. In the Steel sector, decelerating investment in infrastructure and in the production of durable consumer goods continues to hold back domestic sales. Our View Rising production costs in recent years require a decompression that happens only slowly, given the structure of the Brazilian economy. This process will likely result in low growth for a longer period. Summary The weakening trend in the Brazilian economy seems to have steepened at the end of the first half. Many sectors related to consumption report that the months of May and June were the worst of the year, and the expectation is that the third quarter will also be difficult. Inventories remain high in factories and with retailers. In the various sectors related to the production of consumer goods, there is concern about late payments along the supply chains. Investment is being inhibited by the outlook for a longer period of low growth, increasing production costs, rising interest rates and uncertainty over the Lava-Jato operation. At the same time, the ample idleness observed in many sectors reduces the urgency for capacity growth. Production costs remain under pressure, which puts a limit on profit margins and inhibits the recovery of the economy. In the Real Estate sector, the pace of sales continues to fall in the residential market. The number of launches came down, but inventories remain high. In the commercial segment, the structural imbalance between supply and demand continues. The number of vacancies remains high, especially in business offices. Please refer to the last page of this report for important disclosures, analyst and additional information. Itaú Unibanco or its subsidiaries may do or seek to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the single factor in making their investment decision.

2 For the Agriculture sector, rainfall has improved since February, mitigating the negative impact of the earlier drought on crops in southeastern Brazil. However, lower prices have been hurting the sector's profitability. In the Steel sector, decelerating investment in infrastructure and in the production of durable consumer goods continues to hold back domestic sales. In Mining, the slowdown in emerging economies, especially China, means the prospect for price and volumes is less favorable. In the Oil sector, uncertainty prevails. Our view: Recent data continue to indicate contraction in various sectors of the economy. The economic fundamentals high inventories, low confidence suggest that the negative trend will continue into the third quarter. At the same time, rising production costs in recent years require a decompression that happens only slowly, given the structure of the Brazilian economy. This process will likely result in low growth for a longer period. Consumption and Production of Goods and Services The weakening trend in the economy seems to have steepened at the end of the first half. Many sectors related to consumption report that the months of May and June were the worst of the year, and the expectation is that the third quarter will also be difficult. Disposable income continues to shrink, and the fear of unemployment has increased. Inventories remain high in factories and with retailers. The sale of durables goods, like automobiles, motorcycles, heavy appliances and electronics, remains the weakest in the Consumer segment. There are no consistent signs of stabilization despite the strong adjustments made in the first half. Suppliers for these industries, such as auto parts, wires and cables, report declining orders, supporting the view that production will probably continue to decline. In general, a more consistent recovery is expected only from 2017 onwards. In the semi- and non-durable goods segments, such as clothing, office supplies, food and cleaning supplies, the slowdown has been steepening. Most sectors report declining sales, even those with traditionally more inelastic demand, such as medicine and toiletries. Retailers from segments such as supermarkets, clothing and pharmacies have been noting a greater concentration of demand for simpler and more economical products. The slowdown has also steepened in the Service sector. Segments such as restaurants, carriers, entertainment, gyms and hotels have started to feel more clearly the drop in demand, the increase in spare capacity and pressured costs (especially electricity). In the various sectors related to the production of consumer goods, there is concern about late payments and increased defaults along the supply chains, causing liquidity problems. The more depreciated exchange rate encourages retailers to look for more local suppliers, increasing the demand for domestic production. But as demand is weak in the aggregate, rotation is slow and not enough to generate optimism. The deepening crisis also creates opportunities. More selective demand opens up opportunities for sectors focused on low-cost operations, such as e-commerce and other online services, which have been gaining market share. Services that focus on improving production costs, such as technology and systems, are also expanding. Investment Business confidence is still low. Our proprietary indicator, built on a wide customer base, recovered slightly in May and June compared with the troughs of March and April, it but remains about 20% below the level of the last quarter of 2014 and 40% lower than in June of Page 2

3 The outlook for a longer period of low growth, combined with increasing production costs, rising interest rates and uncertainty about the Lava Jato operation, inhibits investment. At the same time, the ample spare capacity in many sectors reduces the urgency for capacity growth. Demand for machinery, heavy equipment and vehicles remains depressed, with no signs of recovery. In addition to the excess sales in recent years and low confidence, tighter credit conditions are weighing on the performance of these sectors. As for the Infrastructure sector, the challenge is amplified by uncertainties over investigations into the Lava Jato operation. There is an expectation that the federal government s concession program could give a boost to the sector, but only in the medium and long term. In the short term, the prognosis is still for contraction. The perception that the government is moving in the right direction regarding its economic adjustments and its stimulus from the recent exchange-rate depreciation has keep corporate interest in Brazil (especially among multinationals) alive. There are attractive opportunities for medium- and long-term investments. However, the prolonged recession and pressured production costs induce caution in the short term. Labor Market, Production Costs and Prices Most sectors have already downsized or entered collective agreements to reduce costs, or they are planning to. Reported salary adjustments have been close to zero or negative in real terms. But given that past inflation is high, the nominal increase is significant, leading to adjustment by quantity. Companies that need to hire report greater ease in finding labor, even specialized labor. The weakening of the labor market amid high production costs creates opportunity to encourage employees to gain in productivity. Revision of contracts with outsourced labor providers continues to intensify, reflecting the new demand reality. However, the process is difficult, as suppliers also face high costs. All in all, production costs electricity, taxes, a more depreciated exchange rate, fuels, nominal wages remain under pressure, which curbs growth in the economy. Because the pass-through to the consumer is limited by weak demand, there is clear tension along the production chain to absorb the higher costs. Over time, this search for efficiency will pave the way for a resumption of growth in the Brazilian economy. But it is becoming evident that the adjustment needs more time to mature. Real Estate The sales pace continues to decline in the residential market. Low consumer confidence and more restrictive credit conditions constrain demand. In this environment, the number of launches is lower, but inventories remain high. Launch prices have been falling in the form of discounts. But as prices in the market for existing properties are resistant, discounts need not be very large, which helps maintain industry profitability. In the commercial segment, the greater structural imbalance between supply and demand persists, generated by the combination of a slowdown in economic activity and the accelerated volume of launches in recent years. The level of vacancy remains high, especially in business offices. Prices and rents have been dropping significantly since last year, which has already been seen as a cost-reduction option for companies. In the shopping mall segment, consumer traffic continues to weaken, making cost management more difficult for tenants. The vacancy rate is high, making way for discounts on rent. More mature malls have been maintaining their traffic, but new ones, on average, have been all too quiet. Page 3

4 Commodities Rainfall has improved since February, mitigating the negative impact of the earlier drought on agriculture in southeastern Brazil. The risk of delay in soybean planting, which would affect the winter corn crop ("safrinha"), has not materialized. The drop in prices, however, has been hurting the Agriculture sector's profitability. This is worrisome, especially given the relatively high debt levels in parts of this industry. Sales, in general, are lower than last year, and there is excess inventory in some crops. In sugarcane, improved rainfall since February increased the productivity of the current crop. Lower international sugar prices are being offset by higher domestic ethanol prices, spurred by the recent hike in gasoline prices and tax adjustments in the state of Minas Gerais. In this scenario, domestic ethanol production is increasing. In spite of the relatively better short-term environment, the greater structural financial difficulties remain, after years of unfavorable price policies and low investment. In the Steel sector, decelerating investment in infrastructure and in the production of durable consumer goods continues to hold back domestic sales. Foreign sales have been improving in response to the more depreciated exchange rate and the resumption of growth in the U.S. and Europe, but the process is only gradual. In Mining, the recent stability in the price of iron ore in the international markets does not alleviate the concern. The emerging economies, especially China, continue to slowdown, which makes the prospects for price and volume less favorable. In the Oil sector, uncertainties remain high. The sector is more cautious about investments in the short term. However, long-term investor interests remain, especially in light of the possibility of a better regulatory environment for the private sector. Our View Recent data continue to indicate contraction in various sectors of the economy. We expect activity to continue to contract in the third quarter. The economic fundamentals support our view that consumption will continue to weaken. Business and consumer confidence indicators for all major sectors of economic activity (industry, services, construction and trade) continue to decline. Retail sales remain low, particularly the broad retail sales (which include vehicles and construction materials). On the production side, high inventories suggest that the contraction will likely continue ahead. The rise in production costs in the past few years requires a decompression that happens only slowly, given the structure of the Brazilian economy. This process will probably result in low growth for a longer period. Macro Research Itaú Ilan Goldfajn Chief Economist Tel: Click here to visit our digital research library. Page 4

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