Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements Itaú Unibanco Banco Múltiplo S.A.

Transcription

1 Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008 Itaú Unibanco Banco Múltiplo S.A.

2

3 Summary Management Discussion and Analysis 2 Share Price and ADR Performance 12 Management Report 18 Administration and Management 26 Financial Statements 30 Notes to the Financial Statements 39 Report of Independent Auditors 122 Summary of the Audit Committee Report 123 Opinion of the Fiscal Council 126

4 Management Discussion and Analysis 2008 in Review On November 3, 2008 the controlling stockholders of Itaúsa and Unibanco Holdings announced the merger of the financial operations of Itaú and Unibanco, the result of which is Itaú Unibanco Banco Múltiplo, now the largest privatelycontrolled bank in the southern hemisphere and a milestone in the history of Brazil s financial market. At December 31, 2008 Itaú Unibanco had 108,000 employees, total assets of R$632,728 million, a credit portfolio of R$271,938 million, including endorsements and sureties, plus R$600,381 million in funds raised, all of which demonstrate the solid financial position of the new institution. During the year Itaú and Unibanco focused on growing their business areas for corporate clients, particularly small and middle market companies, which contributed significantly to increased year-on-year earnings. and Unibanco in the first nine months of For 2007 the pro forma results and statements are simply the sum of the balances and results obtained by the two banks during that period. Pro Forma Net Income (in R$ millions) 11,921 Annualized Return on Average Equity (ROAE) % 10,571 9,779 10, Consolidated Net Income Recurring Net Income Vehicle financing, property loans, insurance, pensions and capitalization (an annuity-like product unique to Brazil) also enjoyed substantial growth in 2008, thanks to platforms that provide an ideal base and ongoing support. Itaú Unibanco is also solidly positioned in credit cards as a result of efforts made by both banks over the years. 32% 26.2% 2007 ROE Recurring ROE 24.8% 23.4% 2008 Accordingly, Itaú Unibanco starts 2009 comfortably placed to take the necessary steps to integrate its operations and solidify its foundation for future expansion in Brazil and abroad. This Report also shows the pro forma non-recurring net income for 2008 and 2007, to provide a better understanding of net income sources for these periods. This new institution is ready to face the challenges of new times, combining values and attitudes that reaffirm its commitment to best corporate governance, social responsibility and ethical conduct practices, which are the essential bases for developing and supporting new business. This Management Discussion and Analysis presents the pro forma results of Itaú Unibanco in 2008 compared with its net income of the previous year. The 2008 statements reflect the consolidation of Itaú and Unibanco at December 31, while the pro forma result is derived from the sum of the consolidated fourth quarter results and the results obtained by Itaú (in R$ millions) Pro Forma Recurring Net Income 10,571 9,779 Effects related to Itaú Unibanco merger (merger of shares) 5,183 - Equalization of accounting criteria (1,414) - Provision for Itaú Unibanco merger expenses (888) - Additional provision for loan losses (3,089) (443) Effects of the adoption of Law No. 11,638 (136) Economic plans provision (174) (206) Disposal of investments 233 3,201 Goodwill amortization (223) - Other non-recurring effects (59) (408) Total of non-recurring effects (567) 2,143 Net Income 10,004 11,921 2 Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008

5 Net of non-recurring income, shown above, we posted consolidated recurring net income of R$10,571 million in 2008 against R$9,779 million in 2007, an 8.1% year-on-year rise. Consolidated stockholders equity was R$43,664 million at December 31, 2008, up 7% from 2007, while total assets rose 42.4% to reach R$632,728 million at year-end. Annualized recurring return on equity (ROE) reached 24.8% in 2008, while annualized recurring return on assets (ROA) reached 2% in the same period. We maintained our differentiated financial performance of recent years, which ensured our continuing sustained growth. Faced with a worsening global financial crisis in the final months of 2008, we increased our additional provisions (those exceeding the required minimum) for loan losses to R$7,791 million. We revised the criteria for provisioning additional reserves for credit risks to include a variable for risks associated with worst case scenarios for 2009 and 2010, which are not encompassed by the historical scenarios of recent years. The following table presents selected highlights from the period, as well as Itaú Unibanco s key information and indicators for 2008 and Highlights Net Income (in R$ millions) 10,004 11,921 Recurring Net Income (in R$ millions) 10,571 9,779 Net Income per share (1) (in R$) Recurring Net Income per share (1) (in R$) Return on Average Equity - Annualized (2) 23.4% 32.0% Recurring Return on Average Equity - Annualized (2) 24.8% 26.2% Efficiency Ratio 48.7% 49.8% Dec 31/08 Dec 31/07 Total Assets (in R$ millions) 632, ,473 Credit Operations (3) (in R$ millions) 271, ,141 Deposits + Debentures + Borrowings and Onlendings and Securities (in R$ millions) 282, ,496 Stockholders' Equity (in R$ millions) 43,664 40, Based on average number of issued and outstanding shares. 2. The return was calculated by dividing Net Income by Average Net Equity. 3. Including endorsements and sureties. 3

6 Management Discussion and Analysis Pro Forma Managerial Income Statement Our strategy for managing the foreign exchange risk on capital invested abroad is designed not to allow fluctuations in exchange rates to negatively impact our earnings. To neutralize the forex risk on our investments we utilize derivatives which are ultimately remunerated in reais (R$). Our hedging strategy also covers tax consequences: whether related to non-taxability or deductibility of exchange rate gains or losses of the real against other foreign currencies, or from the derivatives used. In periods of significant exchange rate fluctuations there can be considerable impact on various line item entries in the financial statements, particularly with financial income and expenses. As a result, we began disclosing a Managerial Income Statement which shows the impact of forex fluctuations on our capital investments abroad, and the effects of hedging these positions. The Managerial Income Statement is derived from a number of reclassifications made to the Income Statement, while the managerial financial margin incorporates two adjustments related to the financial accounting margin: (a) the total effect of the forex fluctuation on investments abroad, which is recorded in various line item entries in the financial statements; and (b) the tax consequences of hedging these investments, which are booked in the tax expense, income tax, and social contribution tax entries in the financial statements. Additionally, the managerial financial margin was broken down between the managerial financial margin of banking operations with clients and with the market. The margin on operations with clients primarily includes banking operations involving our relationship with customers through the provision of financial products and services, while the margin on operations with the market is characterized by non-personal transactions undertaken in the financial market. This latter margin was further broken down into two distinct components to offer more detailed analysis: the managerial financial margin on Treasury, and on the forex risk management of investments abroad. The table below shows the calculations of the managerial financial margin on forex risk management of investments abroad. In 2008 the real weakened against foreign currencies, contributing to a greater number of transactions than in 2007, a significant portion of which were denominated in or indexed to foreign currencies. During the year the real dropped 31.5% against the US dollar, compared to its 17.2% rise in Managerial Financial Margin of Exchange Risk on Investments Abroad Opening Balance Result Gross of Taxes Tax Result Net Opening Effects of Taxes Balance Result Gross of Taxes Tax Effects (in R$ millions) Result Net of Taxes Capital Investments Abroad (A) 14,142 11,512 Exchange Rate Variation on Investments Abroad (B) 4,874 4,874 (2,085) (2,085) Effect of exchange risk management on investments abroad (C)=(D)+(E) (7,037) 3,974 (3,063) 4,459 (1,230) 3,228 Assets Position in DI (D) 14,142 1,552 1,552 11,512 1,147 1,147 Liabilities Position in Foreign Currency (E) (23,102) (8,589) 3,974 (4,615) (18,599) 3,313 (1,230) 2,082 Managerial Financial Margin of Exchange Risk on Investments Abroad (F) = (B) + (C) (2,163) 3,974 1,810 2,374 (1,230) 1,143 Macroeconomic Indicators Dec 31/08 Dec 31/07 EMBI Brazil Risk CDI (Yearly rate) 12.4% 11.8% Dollar Exchange Rate (Yearly change) 31.9% -17.2% Dollar Exchange Rate (Quotation in R$) IGP-M (Yearly rate) 9.8% 7.8% Savings Rate (Yearly rate) 7.9% 7.7% 4 Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008

7 Pro Forma Managerial Income Statement (in R$ millions) 2008 Pro Forma Non-reccuring effects Itaú Unibanco Pro Forma Distribution of Exchange Variation Tax Effect of Hedge of Investments Abroad and Sovereign Bonds Managerial Managerial Financial Margin 31, (55) 4,698 35,990 Financial Margin with Customers 32, ,708 Financial Margin with Market (1,361) - (55) 4,698 3,282 Result from Loan Losses (14,778) 5, (9,720) Provision for Loan and Lease Losses (16,344) 5, (11,286) Recovery of Credits Written Off as Losses 1, ,566 Net Result from Financial Operations 16,490 5,087 (4) 4,698 26,270 Other Operating Income/(Expenses) (14,495) 4, (401) (9,911) Banking fees and charge revenues 14,479 - (12) - 14,467 Result from Operations of Insurance, Pension Plans and Capitalization 1, (0) - 2,216 Non-interest Expenses (30,115) 5, (24,541) Tax Expenses for ISS, PIS and Cofins (2,985) - 8 (401) (3,378) Equity in the Earnings of Associated Companies (183) Other Operating Income 1,798 (651) (16) - 1,131 Operating Income 1,995 10, ,297 16,359 Non-operating Income 300 (279) (4) - 17 Income before Tax and Profit Sharing 2,293 9, ,297 16,375 Income Tax and Social Contribution 9,603 (9,215) 9 (4,297) (3,900) Profit Sharing (1,372) (1,372) Minority Interests (522) - (11) - (533) Net Income 10, , Pro Forma Non-recurring effects Itaú Unibanco Pro Forma Distribution of Exchange Variation Tax Effect of Hedge of Investments Abroad and Sovereign Bonds Managerial Managerial Financial Margin 30, (1,093) 29,973 Financial Margin with Customers 26, ,968 Financial Margin with Market 3, (1,093) 3,006 Result from Loan Losses (7,407) 400 (13) - (7,020) Provision for Loan and Lease Losses (8,718) 400 (13) - (8,331) Recovery of Credits Written Off as Losses 1, ,311 Net Result from Financial Operations 23, (1,093) 22,954 Other Operating Income/(Expenses) (8,286) (7,592) Banking services and fees 14,217 - (1) - 14,216 Insurance, Pension Plans and Capitalization 1, ,964 Non-interest Expenses (22,301) 501 (11) - (21,813) Tax Expenses for ISS, PIS and Cofins (3,107) - (0) 153 (2,954) Equity in the Earnings of Associated Companies Other Operating Income (0) Operating Income 15,141 1, (940) 15,362 Non-operating Income 2,863 (2,877) 3 - (10) Income before Tax and Profit Sharing 18,006 (1,852) 139 (940) 15,352 Income Tax and Social Contribution (5,510) 659 (8) 940 (3,919) Profit Sharing (1,304) (1,304) Minority Interests (118) (102) (131) - (351) Non-recurring events - Unibanco 848 (848) Net Income 11,921 (2,143) - - 9,779 5

8 Management Discussion and Analysis Consolidated Pro Forma Balance Sheet (in R$ millions) Assets Variation 31-Dec Dec-07 Dec/08- Dec/07 % Current and Long-term Assets 622, , , Cash and Cash Equivalents Short-term Interbank Deposits Securities and Derivative Instruments Interbank and Interbranch Accounts (10.347) Loans. Leasing Operations and Other Credits (Allowance for Loan Losses) (19.972) (10.911) (9.062) 83.1 Other Assets Foreign Exchange Portfolio Others Permanent Assets Investments Fixed Assets Intangible (382) -9.0 Total Assets LIABILITIES AND EQUITY Variation Dec 31/08 Dec 31/07 Dec/08- Dec/07 % Current and Long-term Liabilities 586, , , Deposits 206, ,235 78, Demand Deposits 28,071 38,413 (10,342) Savings Accounts 39,296 38, Interbank Deposits 2,921 2, Time Deposits 135,901 47,561 88, Funds Received under Securities Repurchase Agreements 124,358 91,813 32, Funds from Acceptances and Issue of Securities 19,596 12,972 6, Interbank and Interbranch Accounts 3,008 2, Borrowings and Onlendings 42,636 33,137 9, Financial Instruments and Derivatives 14,807 7,778 7, Technical Provisions for Insurance, Pension Plans and Capitalization 41,574 34,888 6, Other Liabilities 134,145 89,040 45, Foreign Exchange Portfolio 50,761 21,933 28, Subordinated Debt 22,465 17,132 5, Others 60,920 49,974 10, Deferred Income Minority Interest in subsidiaries 2,519 4,054 (1,535) Stockholders' Equity of Parent Company 43,664 40,806 2, Total LIABILITIES AND EQUITY 632, , , Deposits 206, ,235 78, Assets Under Management (AUM) 258, ,399 (8,147) -3.1 Total Deposits + Assets Under Management (AUM) 464, ,634 70, Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008

9 Pro Forma Recurring Income Statement (in R$ millions) Variation % Managerial Financial Margin 35,990 29,973 6, Financial Margin with Customers 32,708 26,968 5, Financial Margin with Market 3,282 3, Result from Loan Losses (9,720) (7,020) (2,700) 38.5 Provision for Loan and Lease Losses (11,286) (8,331) (2,955) 35.5 Recovery of Credits Written Off as Losses 1,566 1, Net Result from Financial Operations 26,270 22,954 3, Other Operating Income/(Expenses) (9,911) (7,592) (2,320) 30.6 Other Operating Income/(Expenses) 14,467 14, Result from Operations of Insurance, Pension Plans and Capitalization 2,216 1, Non-interest Expenses (24,541) (21,813) (2,728) 12.5 Tax Expenses for ISS, PIS and Cofins (3,378) (2,954) (424) 14.4 Income from Associated Companies (180) Other Operating Income 1, Operating Income 16,359 15, Non-operating Income 17 (10) Income before Tax and Profit Sharing 16,375 15,352 1, Income Tax and Social Contribution (3,900) (3,918) Profit Sharing (1,372) (1,304) (68) 5.2 Minority Interests in subsidiaries (533) (351) (182) 51.8 Recurring Net Income 10,571 9, Number of shares outstanding - in thousands 4,096,634 4,096,634 Book value per share - R$ (0.21) -1.9 Net Income per share - R$

10 Management Discussion and Analysis Credit In 2008 the expansion of our loan and financing portfolio was one of the main factors responsible for the performance of our operations. Increased supply of credit to the various market segments in which we operate allowed the loan and financing portfolio, including endorsements and sureties, to reach R$271,938 million at year-end, up 34% from Within the individual client credit portfolio automobile financings rose 35.8% during the year, thanks to an ongoing emphasis on these loans, and the development of flexible customer service structures for this segment. The 19.4% y-o-y growth in credit card transactions reflects the growing popularity of credit cards as a payment and financing means. During the year Itaú Unibanco focused its efforts on expanding its corporate client base, resulting in a 41.9% increase over the previous year. This growth was due to the continual development of products and services designed to meet the specific needs of our business clients, and our focus on this relationship group will be maintained in coming years. Credit for very small, small and middle market companies rose 43.2% year-on-year, and 41.2% for large companies. The personal loan portfolio rose 8.8% from 2007, due to our adoption of more restrictive credit policies in the face of increased risk from adverse economic conditions. Mandatory loans increased 21.8% from the previous year, due primarily to a 41.2% increase in real estate loans. Finally, loans made in Argentina, Chile, Uruguay and Paraguay climbed 34.1% during 2008, underlining the exchange rate impact on the value of assets denominated in or indexed to foreign currencies, and the significant commercial opportunities in the other countries where we maintain operational units. Credit Portfolio * Includes endorsements and sureties. Dec 31/08 Dec 31/07 (in R$ millions) Dec/08 - Dec/07 Ch. % Individuals 93,173 74, Credit Card 23,638 19, Personal Loans 21,681 19, Vehicles 47,854 35, Businesses 153, , Corporate 100,849 71, Micro, small and middle market 52,616 36, Directed Loans 11,898 9, Rural Loans 5,654 5, Mortgage Loans 6,244 4, Argentina/Chile/Uruguay/Paraguay 13,402 9, Total 271, , Credit Portfolio* (in R$ billions) Foreign Currency + Foreign currency-indexed Local Currency * Includes endorsements and sureties Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008

11 Financial Margin Managerial Financial Margin (in R$ millions) Average Balance Financial Margin Spread (p.a.) % Average Balance Financial Margin Spread (p.a.) % Interest Rate-Sensitive Banking Transactions Performed with Customers (A) 40,786 5, ,836 4, Spread-Sensitive Banking Transactions Performed with Customers (B) 270,605 27, ,444 22, Margin with Customers (C = A+B) 311,392 32, ,279 26, Margin on Foreign Exchange Risk from Investments (D) 14,604 1, ,676 1, Net Interest Margin (E = C+D) 325,995 34, ,955 28, Treasury Financial Margin (F) 1,683 1,863 Financial Margin (G = E+F) 35,990 29,973 During 2008 Itaú Unibanco s managerial financial margin reached $35,990 million, up 20.1% year-on-year. The managerial financial margin from transactions with customers hit R$32,708 million, an increase of 21.3% compared with This was due primarily to an increased loan and financing portfolio for business and individual clients, in tandem with a change in the mix of products and customers, particularly for those operations capable of providing a better risk-return ratio. The annual money market interest rate reached 12.4% in 2008, against 11.8% in This increase was due to Central Bank alterations to the basic interest rate, as during the first months of the year vigorous economic activity in various sectors brought on inflation threats. However, with the worsening global economic crisis in the fourth quarter of 2008 there was a rapid change in the economic outlook, which led the way to lower interest rates. The financial margin on money market interest rates ended up increasing by 16% compared to 2007, reflecting higher interest rates and a 10.7% increase in the average balance of these transactions. The rate on transactions affected by the spread dropped from 11.5% a year in 2007 to 10.2% in 2008, principally due to the change in the credit portfolio mix and our increased liquidity. The financial margin on managing the foreign exchange risk on investments abroad which is basically the money market (CDI) rate s payment of the capital applied to these investments rose 40% year-on-year, due to higher interest rates and a 50.9% increase in investments abroad. Changes in Managerial Financial Margin (in R$ millions) 35,990 29,973 26,967 3,006 32,708 3, Financial Margin with Customers NIM vs. Selic 12.1% 12.4% 11.8% 12.2% 11.6% 10.5% Market Financial Margin Between 2008 and 2007 the average amount of these transactions grew 37.8%, driven by expanded credit operations. As a result of these factors the managerial financial margin on these transactions rose 22.3% to reach R$27,659 million in NIM CDI BM&F Fixed Rate 1 Year 9

12 Management Discussion and Analysis Based on the combination of the many factors described above, the net interest margin hit 10.5% in 2008, against 11.6% in The financial margin on Treasury dropped 9.7% from 2007, reaching R$1,683 million. Expenses on Provisions for Loan Losses Expenses related to mitigating credit risk amounted to R$9,720 million in 2008, an increase of 38.5% from Provisions for loan losses totalled R$11,286 million, up 35.5% year-on-year. Income from loans previously written off totalled R$1,566 million in 2008, up 19.4% for the year, due to increased collection efforts. The main factor for the increased reserves was a 34% increase in the loans and financing portfolio. Additionally, risk ratings for larger companies were reclassified, while the global economic slowdown affected risk in the portfolios for very small, small and middle market companies and individual clients at year-end. Our credit risk management models are under constant review, helping us achieve the strategic objectives set by senior management. Behaviour analysis of the different customer clusters has allowed us to strengthen our relationships with low risk clients, leading to considerable portfolio growth while keeping delinquency rates under control. Non-performing loans were 4.8% at December 31, 2008, compared with 5.1% a year earlier. Default Rates - Non-performing loans % 8.3% 8.1% 5.1% 4.8% 1.9% 1.7% Itaú Unibanco s reserves are in excess of the minimum required by the Central Bank, giving us the financial strength needed to absorb any increases in historic default rates in times of stress. In 2008, in light of the economic crisis and the uncertainties surrounding it, we revised the criteria for provisioning additional reserves (those exceeding the required minimum), which now includes risks relating to worst case scenarios for 2009 and 2010, which significantly exceed the historical scenarios of recent years. At year-end total provisions reached R$7,791 million, up from $2,150 million a year earlier. Coverage Ratio % The coverage ratio is calculated by dividing total loan loss provisions by the amount of loans more than 60 days in arrears. The 37% increase from 2007 is primarily due to provisioning additional loan loss reserves, which now includes risks relating to worst case scenarios for 2009 and 2010, which significantly exceed the historical scenarios of recent years. Income from Services Revenues from services and bank fees amounted to R$14,467 million in 2008, a year-on-year increase of 1.8%. The main factors behind this increase were a larger credit card base and more account holders. Income from credit cards rose 11.9% during the period due to major efforts to grow the user base and the increasing use of cards as a means of payment for business transactions. A larger number of account holders meant increased revenues from current account services, the use of the maxiconta package and from collection services. Central Bank changes in fees for essential services, introduced in May 2008, and the adoption of a customer loyalty program to ward off heavy competition were the main factors why income from services and bank fees increased less than in Income from Services (in R$ millions) Dec 31/07 Dec 31 /08 Corporate Total Individuals ,467 14, Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008

13 Non-interest Expenses In 2008 our actions were focused on the continued organic growth of our operations, principally on expanding our service network. We added 190 new bank branches, which was 5.1% more than in We also had 1.1 million new customers registered to use our Internet Banking services, thanks to increased operational activities, while 7,074 new employees joined our workforce. These factors contributed to non-interest expenses in 2008 rising 12.5% to R$24,541 million. Non-interest Expenses (in R$ millions) Efficiency Ratio ( % ) Efficiency Ratio 21,813 24, % 49.8% (in R$ millions) % Non-Interest Expenses (A) (24,541) (21,813) 12.5 Revenues (B) 50,426 43, Managerial Financial Margin 35,990 29, Banking Services and Fees 14,467 14, Insurance, Capitalization and Pension Plans 2,216 1, Tax Expenses for PIS/COFINS/ISS (3,378) (2,954) 14.4 Other Operating Income 1, Efficiency Ratio (A/B) 48.7% 49.8% 1.1 Despite this increase, our ongoing concern to maintain high productivity levels meant that our efficiency ratio reached 48.7% in 2008, a 1.1% improvement from The performance indicator ratio of non-interest expenses to total assets reached 4.6% in 2008, down from 5.4% in Tax Expenses for ISS, PIS and COFINS Expenses for ISS, PIS and COFINS taxes reached R$3,378 million in 2008, up 14.4% y-o-y, due primarily to higher PIS and COFINS-taxable interest income on own capital distributed by the group s companies, as well as higher operating income. Income Tax and Social Contribution Tax on Net Income Net income tax and social contribution tax paid reached R$3,900 million in 2008, down 0.5% from Social contribution tax payments on net income in the short-term remain net of the rate increase from 9% to 15%, thanks to the creation of a tax credit which offset this increase, as management contends the Unconstitutionality Direct Action brought on its behalf by the National Financial System Confederation (Consif ) will be successful. Tax Expenses (in R$ millions) % - PIS/Cofins (2,889) (2,495) ISS (489) (459) 6.5 Subtotal (3,378) (2,954) Income Tax (IR) and Social Contribution (CS) (3,900) (3,918) (0.5) Total (7,278) (6,872)

14 Share Price and ADR Performance Unified Trading Symbols The merger between Itaú and Unibanco was approved by shareholders at the Extraordinary Stockholders Meeting of November 28, 2008, and approved by the Central Bank of Brazil on February 18, With this, Banco Itaú Holding Financeira S.A. ceased to exist, and along with the Unibanco group, was renamed Itaú Unibanco Banco Múltiplo S.A., a Brazilian bank with the commitment, strength and financial capability to play an important role in the development of domestic companies and the country. With this merger: Share Price and ADR Performance on Stock Exchanges Itaú Unibanco shares are traded on the São Paulo (BM&FBOVESPA), New York (NYSE) and Buenos Aires (BCBA) stock exchanges. Certificates and receipts traded in New York and Buenos Aires represent preferred stock. Market capitalization, a significant increase in the liquidity of the stock and the introduction of differentiated capital markets products and services, among other initiatives, underscore our concern for creating value for our stockholders and sustainable profitability. A) On March 31, 2009, shares of Unibanco Holdings S.A. and Unibanco - União de Bancos Brasileiros S.A., were replaced by shares of Itaú Unibanco Banco Múltiplo S.A.; and B) Stockholders of Unibanco, and now stockholders of Itaú Unibanco, have been paid in accordance with the dividend policy of the new organization, or by means of dividend payments and/or monthly interest on capital and any supplementary payments to be declared by Itaú Unibanco, as of November 28, Itaú Unibanco s market value was R$107.9 billion at December 31, 2008, putting it among the world s 15 largest financial institutions and giving it the capability to compete internationally with the biggest global banks, in addition to strengthening its ability to create value for its stockholders. The market value of preferred shares (PN) at year-end was approximately 2.4 times its book value. Market Value * vs. Ibovespa Index Market Value (in R$ billions) Ibovespa (in thousands of points) * Average quote for preferred shares on final trading day of period vs. total shares issued and outstanding 12 Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008

15 Share Price Performance Despite the volatility of capital markets during 2008, Itaú Unibanco shares outperformed the leading indices of the BM&FBOVESPA. Market Indices Being included in an index is an important factor for publicly traded companies, as many fund and portfolio managers use these indicators as a benchmark when selecting stocks or investing in portfolios consisting of securities within a particular index. Itaú Unibanco shares are included in various domestic and international market indices, such as: Itaú Unibanco Indices Shares and Indices Change in 2008 % ON Common - ITAU PN Preferred - ITAU ON Common - UBBR PN Preferred - UBBR Unit - UBBR Ibovespa Ibrx ISE IGC Brazil: Ibovespa (São Paulo Stock Exchange Index, whose stocks represent 80% of the exchange s trading volume); IBX-100 (an index of the Bovespa s 100 most actively traded shares); IBX-50 (an index of the Bovespa s 50 most actively traded shares); Average Daily Value Traded (in R$ millions) * 874 IGC (the Bovespa s Corporate Governance Index); ITAG (index of Bovespa-listed companies which offer Tag-Along rights to minority stockholders); and ISE (the Bovespa s Corporate Sustainability Index). 189 Overseas: Dow Jones Sustainability World Index (index of the NYSE s most solid, ethical and sustainable companies); BNY Composite (a Bank of New York Mellon index covering all firms that trade ADRs in the United States); NYSE (*) Based on daily US$ to R$ conversion rate BM&FBOVESPA BNY Latin America 35 ADR (made up of the 35 most actively traded ADRs from Latin America-domiciled companies); BNY Latin America (index of all Latin American companies that trade ADRs in the USA); BNY Brazil (index of all Brazilian companies that trade ADRs); BNY Emerging Markets (index of all emerging marketbased public companies that trade ADRs); 13

16 Share Price and ADR Performance BNY Emerging Markets 50 (index of the 50 most actively traded emerging market-based public companies that trade ADRs); History of stock splits, consolidations and bonus issues: BNY BRIC Select (index of the most actively traded ADRs from companies based in Brazil, Russia, India and China); BNY BRIC Select Canadian (index of the most actively traded ADRs from companies based in Brazil, Russia, India and China, designed for Canadian clients and expressed in Canadian dollars); BNY International 100 (Index of the 100 largest companies that trade ADRs); S&P Latin America; Global 1200 Financial Sector; and Banco Itaú Holding Financeira S.A. Date Action Result 05/30/2008 Bonus 1 new share for every 4 shares held 09/28/2007 Split 1 new share for each share held 09/30/2005 Split 9 new shares for each old share 10/19/2004 Consolidation Every 1,000 shares become 1 share 09/14/1999 Split 9 new shares for each old share 11/03/1993 Bonus 1 new share for each share held 06/26/1989 Bonus 1 new share for every 2 shares held 12/22/1988 Bonus 1 new share for every 2 shares held 04/04/1988 Bonus 1 new share for each share held 11/30/1987 Bonus 1 new share for every 2 shares held 03/23/1987 Bonus 1 new share for every 2 shares held 10/27/1986 Bonus 1 new share for every 4 shares held 03/10/1986 Bonus 1 new share for each share held S&P ADR Index. Unibanco União de Bancos Brasileiros S.A. Date Action Result 29/06/2006 Bonus 1 new share for each share held 30/04/2004 Consolidation Each 100 shares become 1 share 30/04/1996 Split 2 new shares for each old share 10/06/1994 Split 2 new shares for each old share 22/03/1993 Bonus 1 new share for each share held 27/04/1992 Bonus 1 new share for each share held 19/04/1991 Bonus 1 new share for each share held 6/4//1988 Bonus 2 new shares for each share held 14 Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008

17 Investor Relations Policy The Investor Relations area works with the following strategic relationship groups: stockholders, investment analysts and professionals, the financial media and academics who study financial and capital markets. The main objective of Itaú Unibanco s Investor Relations area is to add value to our stockholders. Accordingly, the area develops and undertakes continual work which includes strategic planning, coordinated implementation, monitoring, evaluation and feedback. Our investor relations policy is to provide sufficient information for investors to decide for themselves on whether or not to purchase Itaú Unibanco stock, through the disclosure of timely, transparent, accessible and high quality information. We adhere at all times to ethical and legal principles as we seek to consolidate, maintain and convey Itaú Unibanco s image of leadership and innovation to the capital markets. Corporate Governance Policy On May 5, 2008 the Itaú Holding Corporate Governance Policy was approved, and later adopted by Itaú Unibanco Banco Múltiplo S.A. This Policy is designed to: use the Company s existing structures to protect the interests of stockholders and the market, which are hallmarks of its management; and rely on the Articles of Incorporation, Internal regulations of the Board and other statutory bodies and committees, the Corporate Code of Ethics and other internal regulations of Itaú Unibanco, and have independent Directors on the Board of Directors. We provide information to our strategic relationship groups through: public meetings, meetings with investor groups in Brazil and abroad, the Contact Us channel and phone and fax service, as well as our regular information channels such as Annual Reports (print and online versions), Quarterly Reports and s. Additionally our website provides news releases and material facts, media releases, the Investor Relations website, Customer Relationship Management and our quarterly newsletter sent to all stockholders and to those who request it through the Investor Relations site. In keeping with the organization s strategy and through constant contact with senior management and the various operating and business areas, Investor Relations monitors and reports the bank s main activities and the impact of domestic and international conditions on the bank s performance. 15

18 Share Price and ADR Performance APIMEC Cycle Itaú Unibanco is committed to provide clear, accurate, accessible, comprehensive, timely and fair information about the strategies, results and prospects for its operations. Since 1999 Itaú has held public meetings with Apimec (Association of Capital Market Investment Analysts and Professionals), where it presents in detail the performance of the company, its strategy to create value and outlook for the future. In 2008 Itaú held 16 Apimec meetings while Unibanco held five, demonstrating the commitment of both institutions to spreading the capital markets culture in Brazil. The first Itaú Unibanco joint meeting was held in São Paulo on December 9. The event was attended by over 640 participants and was broadcast live via the internet with simultaneous translation into English and Spanish. Information Material for Stockholders Meetings Itaú Unibanco was one of Brazil s first publicly traded companies to produce material (in Portuguese, English and Spanish) for its Stockholder Meetings. The material provides details of the issues to be discussed and Board proposals. This action is designed is to increase transparency and strengthen our relationship with stockholders, which underlines the company s voluntary commitment to this strategic group. Known as Additional Information for the Shareholders Meeting, the material is distributed ahead of time and allows Itaú Unibanco stockholders to position themselves with respect to the issues to be covered at the meeting. Shareholding Distribution (in number of shares) Common Shares 2,081,169,523 Preferred Shares 2,074,227,040 Total Shares 4,155,396,563 Common Shares (Parent Companies) 1,824,625,245 Preferred Shares (Parent Companies) 13,213,346 Total Shares held by Parent Companies / Management 1,837,838,591 Common Shares in Treasury 0 Preferred Shares in Treasury 58,763,000 Total Shares in Treasury 58,763,000 Common Shares Issued and Outstanding 256,544,278 Preferred Shares Issued and Outstanding 2,002,250,694 Total Shares Issued and Outstanding 2,258,794, Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008

19 Shareholding Structure The main objective of the management of our corporate ownership structure is to optimize the allocation of capital among the various segments that make up the group. Below is our current shareholding structure: E.S.A. Family 60.83% ON 32.45% Total Free Float 39.17% ON 82.33% PN Moreira Salles Family 50% ON 33.47% Total 50% ON 66.53% Total Itaúsa IUPAR (Itaú Unibanco Participações) 36.03% ON 18.31% Total Bank of America Free Float 51% ON 25.91% Total Itaú Unibanco Banco Múltiplo S.A. 100% Total 2.47% ON 8.5% PN 5.43% Total 95.75% Total 10.5% ON 91.5% PN Unibanco 100% Total Itaú 4.25% Total Itaú BBA 17

20 Management Report To our Stockholders: We present the Management Report and the financial statements of Itaú Unibanco Banco Múltiplo S.A. (Itaú Unibanco) and its subsidiaries for 2008, in accordance with the regulations established by the Brazilian Corporate Law, the National Monetary Council (CMN), the Central Bank of Brazil (BACEN), the Brazilian Securities and Exchange Commission (CVM), the Superintendency of Private Insurance (SUSEP) and the National Council of Private Insurance (CNSP). The Creation of Itaú Unibanco On November 3, 2008, Itaú and Unibanco signed the agreement for the merger of their financial operations. It was the formal beginning of the building of the largest conglomerate in the Southern Hemisphere, with a market value among the 20 largest financial institutions in the world. This financial institution will be fully capable of being a player in the new global competitive scenario. The result of this partnership is a bank with Brazilian capital with commitment, strength, vocation and economic capacity to become a vital partner in the development of Brazilian companies in Brazil and abroad. With a strong international presence it already has commercial bank operations in all Mercosur countries - the institution will have the required agility to increase the presence of Brazil internationally. The new bank is consolidated in a scenario in which Brazil and its financial system are in a privileged position, with strong possibilities of improving even more its relative position in the global scenario. In this phase of sustainable growth of the country, movements like this, which strengthen large domestic companies, are growing in importance, such as those which are occurring in other sectors of economy, continuously expanding their competitive capacity. After over 15 months in gestation through dialogues, Itaú Unibanco is born with a strong identity in values and a converging vision for the future. For this purpose, the controlling stockholders of Itaúsa and Unibanco decided to establish a holding company with a shared governance model. The conglomerate resulting from the merger has scale, expertise and a strong capital basis, which enable it to significantly reinforce the credit supply to the market, corresponding to the expectations of a sound and vigorous response to the demands from companies and individuals. To the effect of giving a dimension of its potential, Itaú Unibanco will be the Brazilian company with the highest market capitalization. Economic Environment and Banking Sector The global financial market is at a critical moment, of major transformation, with several implications for Brazil. The first effects were noted here in August 2008, with the beginning of a strong devaluation of the Real against the Dollar, and the continuous movement of adjustment in stock exchanges, which had already begun in the first half. The situation worsened in September, with the squeeze of the global credit market. Due to the lack of foreign credit facilities, Brazilian companies with international presence started to search for credit in the domestic market. The credit supply by the major Brazilian Banks reflected the effects of this new demand, of the sound maintenance of liquidity and predictable increase in default. The combination of different factors, mainly those originated abroad, caused a decrease in the expansion level of the Brazilian economy. The integration of Itaú s and Unibanco s operations takes place in a favorable environment, provided by the foreign crisis itself, which offers opportunities to an even stronger and more competitive Organization. The merger is in line with the global consolidation movement of financial institutions, which reflects a constant quest for operations that are sounder and able to compete, ready for competition, and better prepared to guarantee the credit supply and soundness of the system itself. In Brazil, the competitive scenario followed the same trend since the acquisition of Banco Real by Santander, in 2007, and of Nossa Caixa and Banco Votorantim by Banco do Brasil at the end of is expected to be a challenging year, due to the slowdown in the global economy, with less economic growth, increase in unemployment, reduction in the purchase power of the population and the consequent reduction of investments of companies and demand for corporate and individual credit. Brazil, however, will be less affected by the crisis than the major world economies, since the country has a sound financial system with differentiated oversight and regulation systems. This possibility alone shall offer new prospects. 18 Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008

21 Itaú Unibanco We present the main results of Itaú Unibanco for In view of the merger that created Itaú Unibanco at the end of 2008 and in order to prove a better understanding of the changes in assets, liabilities and results of the new institution, we present the main financial indicators of Itaú Unibanco Pro Forma, taking into consideration the information of Unibanco for 2008 and The information of Itaú Unibanco Pro Forma presented below does not represent what could have occurred if the merger of shares had taken place previously as well are not correspondent to the financial statements of Itaú Unibanco nor is indicative of future results Change (%) Income- R$ million (1) Gross income from financial operations 33,110 32, Expense for allowance for loan losses (11,339) (8,318) 36.3 Income from services and result from insurance, pension plan and capitalization 16,373 15, Personnel, administrative and other operating expenses (24,191) (21,271) 13.7 Recurring net income 10,571 9, Net income 10,004 11,921 (16.1) Results per share - R$ Recurring net income (2) Net income (2) (16.1) Book value (2) Interest on capital/dividends (net) Price per preferred share (PN) (3) (28.8) Market capitalization - R$ million (3) 107, ,534 (23.2) Balance sheet - R$ million Total assets 632, , Total loans (including endorsements and sureties) 271, , Free, raised and managed own assets 806, , Subordinated debt 22,465 17, Stockholders equity 43,664 40, Required Referential Equity (Financial system consolidated) 66,766 53, Financial ratios (%) Recurring return on average equity 24.8% 26.2% Return on average equity 23.4% 32.0% Return on average assets 1.9% 3.1% Efficiency ratio (4) 48.7% 49.8% Basel Ratio (Financial system consolidated) 16.1% 18.7% Fixed assets ratio (Financial system consolidated) 39.6% 23.8% 1. Excludes the non-recurring effects for each period. 2. Calculated based on the number of outstanding shares in December 2008 (4,097 million). 3. Calculated based on the average quotation of preferred shares on the last day of the period. 4. Calculated based on international criteria defined in the Management s Discussion & Analysis Report. The complete financial statements and the Management s Discussion & Analysis Report of Itaú Unibanco, which present further details on the results for the period, are available on the Itaú Unbanco website ( The financial statements as of December 31, 2008 of Itaú Unibanco take into consideration the balance sheet information and results of Unibanco as from October 1,

22 Management Report Business Performance The merger has opened up to Itaú Unibanco the possibility for gaining scale and competitiveness, increasing the capacity of granting credit, and providing an even wider range of service to customers. One of the most noticeable benefits of this partnership is the greater convenience for customers in view of the larger number of branches, service centers and ATMs at their disposal. The intricate structure of this network will provide even more comfort and practicality to the daily life of customers, performing an important role in accessibility to banking services. In order to measure the dimension of the new bank, the main results for 2008 are shown below. Consolidated assets of the new bank totaled R$ 632,728 million at December 31, 2008, the highest among the financial private conglomerates of the Southern Hemisphere. Net income for 2008 totaled R$ 10,004 million, with a return of 23.4% on average equity (32.0% in 2007). In 2008 Itaú Unibanco paid or provided for taxes and contributions in the amount of R$ 9,827 million. The Bank also withheld and passed on taxes, which were directly levied on financial operations, in the amount of R$ 8,376 million. Consolidated stockholders equity totaled R$ 43,664 million at the end of December Loan portfolio, including endorsements and sureties reached R$ 271,938 million, a 33.9% increase as compared to December 31, In Brazil, non-mandatory loans to individuals reached R$ 93,173 million. The very small, small and middle-market company segment in its turn reached R$ 52,616 million, whereas the large company segment reached R$ 100,849 million. Free, raised and managed own assets totaled R$ 806,350 million, a 25.1% increase, as compared to December 31, At the end of December, Basel Ratio stood at 16.1%, based on the financial system consolidated. Based on the prudential criteria adopted by management, additional provisions were recognized for loan operations in the amount of R$ 4,664 million for the year, considering the current economic environment and the uncertainties related thereto, and including an amount referring to risks associated with a more pessimistic scenario for 2009/2010, not yet fully covered by the history of scenarios noted in the recent past. The performance of shares was affected by the international financial crisis and the fall of Stock Exchanges all over the world. Accordingly, Itaú Holding s preferred shares fell 28.8% as compared to the quotation of December 31, Unibanco s preferred shares fell 25.5%, whereas Ibovespa index dropped by 41.3%. The market value of Itaú Unibanco at Stock Exchange was R$ 107,946 million at the end of December. Itaú Unibanco s service network maintained its organic growth in At the end of 2008, Itaú Unibanco had over 4.8 thousand branches and service centers. On January 29, 2009, the ATM network of Itaú and Unibanco was integrated, enabling the customers of both banks to use it. In the credit card segment, Itaú Unibanco holds a solid position in terms of issuance and billing, thus reflecting the growth of both institutions in this market in the last years. With the consolidation of Itaucard, Hipercard, Redecard and Unicard businesses, the credit card base reached over 47 million cards at the end of In 2008 the volume of consumer credit granted also increased by way of the operations carried out by Itaú and Unibanco s consumer credit companies. Other outstanding operations were those related to vehicles and real estate loans. In 2008 the balance of the vehicle portfolio of Itaú Unibanco in Brazil reached R$ 47,854 million. At December 31, 2008, Itaú Unibanco s now consolidated operations in the real estate market are complementary and represented a loan portfolio of R$ 6,244 million. 20 Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008

23 In 2008 Itaú Unibanco increased its capacity to operate in the insurance market, with premiums of R$ 7,110 million, and in pension plan, with contributions of R$ 7,837 million. In October Unibanco purchased the 50% interest that the American International Group (AIG) held in its insurance company for US$ 805 million, ending 11 years of one of the most successful partnership histories in the insurance market. Funding operations of capitalization plans of Itaú Unibanco reached R$ 1,700 million in In December 2008, technical provisions of insurance, pension plan and capitalization totaled R$ 41,574 million. of products and services, value the work of its employees and ensure the soundness of our financial system. Itaú Unibanco s priority effort is to consolidate the integration of its several businesses, which are in every segment of the financial activity, strengthening the presence of the new bank in the market and having a positive outlook on the business expansion. Its objective is to increase operations in Brazil, to compete in the international market, to support the growth of loan operations and achieve economy of scale in all client segments. In 2008, Itaú Unibanco s Corporate area took part in debenture and promissory note operations, which totaled R$ 20.1 billion, and in securitization operations amounting to R$ 2.0 billion. In capital markets, the bank was the coordinator and bookrunner of initial and subsequent public offerings that totaled R$ 31.8 billion. The Road to Integration Integrate to grow. With this vision, the new bank intends to provide customers with the Best Itaú and Unibanco has to offer, by adopting the outstanding practices of each institution, regardless of its origin. The proposal is to keep all existing partnerships, maintaining the same conditions currently in effect and providing even more benefits to the customers and other stakeholders. Among the benefits that will be provided after this integration, the new bank will be able to expand credit, increase its range The unification process of the institutions is led by the Superior Integration Committee, the main goals of which is to guarantee a seamless and transparent transition, to ensure the continuity of the businesses conducted by Itaú and Unibanco, and to discuss new opportunities. The Committee supervises the activities of 19 task forces, established in November 2008 to map processes and identify the best practices of each institution. The results obtained by these task forces will base the building of a new business model for each one of the several areas in which Itaú Unibanco operates. The task forces are supported by external consulting companies, which act as facilitators in this phase of transition. In December 2008, some task forces presented their initial analyses. The Committee has already identified the complementarity of some business models and new market opportunities. The full integration of all operations and business shall be completed in two or three years. 21