ITAÚ HOLDING CONFERENCE CALL November 5, 2003 3:00 p.m. (Brasília) Transcript Operator: Ladies and gentlemen, thank you for standing by. At this time all lines are in a listen-only mode. Later there will be a question and answer session and instructions will be given at that time. If you should require any kind of assistance during the call please press star, zero. As a reminder, this conference is being recorded. At this time I would like to turn the conference over to Mr. Achilles Couto from Thomson Financial. Please go ahead, sir. Mr. Achilles Couto: Good morning ladies and gentlemen and welcome to Banco Itaú Holding Financeira S.A. s conference call to discuss third quarter 2003 results. My name is Achilles Couto with Thomson Financial Investor Relations Brazil. Banco Itaú apologizes for the inconvenience caused with the time change of the conference call. Unfortunately, technical problems are outside of Banco Itaú s control. We have done everything possible to minimize the delay caused. I would like to mention that a slide presentation has also been made available on the company s website at www.itauir.com during this call. I would like to remind you of the tools that have been developed at the Itaú Holding s Investor Relations website. First, users may now send their questions in advance, prior to the conference call, or after the presentation by clicking at a specific link. Second, Itaú has developed a Presenter Controlled mechanism, which allows the speaker to move the slides automatically throughout the presentation. Also, Itaú has developed lighter Internet pages. If you want to share your opinion with us on these new tools available, please send e-mail to investor.relations@itau.com.br. Before proceeding let me mention that forward-looking statements are being made under the safe harbor of the Security Litigation Reform Act of 1996. Actual performance could differ materially from those anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors. With us today in the conference call are Mr. Alfredo Setubal, Investor Relations Director, Mr. Henri Penchas, Senior Vice-President, and Mr. Silvio de Carvalho, Executive Director. First Mr. Setubal will comment on third quarter 2003 results. Afterwards, management will be available for a Question and Answer session. It is now my pleasure to turn the call over to Mr. Setubal. Mr. Setubal, you may now begin. Mr. Alfredo Setubal: Thank you. Good morning. It s a pleasure for us again to be with you to make comments about the third quarter results that, in our view, was very good and very solid, especially if we consider that is no extraordinary result in this net income that we realized.
The first slide is small highlights about the performance in main numbers. We finalized the quarter with stockholders equity of about R$ 11.500 billion, with a growth of 6.4% if we compare with the second quarter of this year. This growth is mainly because of some gains in available for sales securities and, of course, the net income for the quarter. ROE remain very high for the quarter; above 30% and as I said at the beginning, mainly recurrent operating results. Solvency ratio, the BIS ratio - we finish the quarter with 21.5, considering tier 1 and tier 2, with an increase of 300 basis points when we compare to second quarter, what gives us a very comfortable position in terms of solvency and gives a lot of room to grow our assets, especially credit assets. Efficiency ratio, we finish the quarter with 46.8, with a very good number. Again, we are going to see this in the next slides. Going to slide number 2: Statement of Income, we finish the quarter with R$ 807 million, with a growth of 4% when we compare to the second quarter and total assets of R$ 119 billion. In this slide, I would like to comment the net interest margin - the first line, when we finish with R$ 2.7 billion, with a growth of 10.8% when we compare to the second quarter. This growth is mainly because of the mix of credits that we have, we changed, we grew in especially the middle-market companies credit portfolio during the quarter, as we are going to see some slides ahead, what give us more spread and more margins. Of course, the net interest margin was also impacted by the treasury gain, because of the reduction in interest rate during the quarter again by the Central Bank of Brazil. We had some gains in our securities portfolio, part of these gains are, as I said, available for sale securities that goes directly to the stockholders equity and part goes to the margin and also we had some trading gains in treasury that represents the gains, the total increase in the net interest margin. Going to the second line, the provision for loan and losses, we can see a huge growth when we compare to the second quarter. The second quarter, R$ 484 million, in provisions and in the third quarter R$ 659 million. This means an increase of 36%, mainly because we did a reclassification for one big client in the electrical sector that we have to increase, because of this reclassification, the level of provisions for these loans. The second reason is because we increased the exceeding provision in R$ 65 millions during the quarter to face uncertainties that we may see or not see in the future so we 2
increase, and we are going to see in the next slide, the exceeding provisions for the quarter. The administrative expenses I m going to talk a little bit later in this presentation. In the slide number 3, we can see the ROE for the last eight quarters, we can see that for the last seven quarters we have ROEs higher than 25% annualized, of course, and in the last five quarters we have ROE over 30%. So, that means that we continue to have a very good performance and returns for our shareholders. In the slide number 4 we can see a breakdown of our consolidated net income. We can see that considering banking, just Banco Itaú operations, 36% of our net income. Itaú- BBA, that is a wholesale arm of Banco Itaú, represented 23% of the total net income; credit cards operations, 18%. Insurance, Pension Plans and Capitalization, 17% and Asset Management, 6%. That shows the diversification that we have in our banking activities that represents a good diversification in terms of income sources for the bank, not depending only on credit and things related to interest rates. 3
We can see in the next slide more details of this breakdown. In this first slide related to banking of Itaú, we can see the net interest margin shows some growth quarter to quarter, mainly because of the aspect that I mentioned some slides before, especially the increase in the middle-market credits portfolio. Loan and losses remain, for Banco Itaú, mainly flat for the period. So if we consider just banking of Banco Itaú, R$ 380 million for the quarter. The next slide shows the Banco Itaú - Itaú-BBA some details that we finished with R$ 190 million for the wholesale arm of Banco Itaú Holding. Here I would like to mention again the increase from loan and losses provisions as the second quarter was R$ 34 million, we increased this level of provisions to R$ 175 million mainly because of this reclassification of this big company of the electrical sector. 4
In terms of credit cards, in the next slide, we can see that in the quarter the results in terms of credit card, the whole operation of credit cards, represented R$ 148 million with a light decrease from the R$ 166 million that we had in the second quarter and for the year, from January to September, R$ 446 millions, what shows that it continues to be a very important business for the bank. If you analyze the MD&A, you ll se that for this quarter the number of cards was almost the same when we compare to second quarter and a small reduction in terms of revenues from that business. The next slide shows the Insurance, Capitalization and Pension Plan. I would like to mention two things in this slide: first one is the net income, where we can see a growth from 106 million in the second quarter to 147 millions in the third quarter - a very good result. We are mentioning that we have been growing in terms of profitability these three businesses, especially the Pension Plans that continue to grow very fast in Brazil and we are recovering the delay that we have in this business. Another thing that I would like to mention is the combined ratio that for this quarter was a little bit better than in the second quarter, we finished with 97.6% in terms of combined ratio for the insurance business what is a very good ratio and a little bit better than the second quarter. In this next slide we can see also the growth in terms of technical provisions for these three business lines and we have been growing in a very good pace for the last five quarters. We finished with almost R$ 6.1 billion in terms of technical provisions and this number will increase after we finish the deal with AGF - we are buying the pension plan 5
business of AGF here in Brazil that represents R$ 459 million in provisions, what means that we are going to increase with the acquisition of this portfolio of clients and technical reserves about 15% of the total provisions, total technical reserves for the pension plans and we are going to increase around 8% for the total technical reserves for this business line. So we continue to pay attention, we want to increase our market share and our presence, especially in this Pension Plan business. That was the main objective of the acquisition of the portfolio of AGF in Brazil. The next slide is the portfolio management, the asset management of Banco Itaú, with a net income in the quarter of R$ 49 million; total assets under management we finished with R$ 71.8 billion. This number will increase R$ 1.2 billion with the acquisition of AGF and that is the total number for asset under management of the AGF Bank that we are also buying in this deal. The next slide is about the security portfolio. I think it s important to mention that very small part of our security portfolio continued to be classified as health to maturity and we continue to have a very good number in terms of unrealized result for this portfolio that we carry on, in the assets of Banco Itaú. About almost R$ 30 billion is the total portfolio of securities and we have an unrealized gain of R$ 1.2 billion in this portfolio, divided R$ 679 already adjusted in the stockholders equity and R$ 445 million in additional provisions for the market-to-market of the securities. So 1.2 billion is the unrealized result, compared to 1.1 billion in the end of the first semester. So we continue to have a very good gain, unrealized gain in this portfolio, especially because of the reduction in the interest rate, we continue to have the devaluation of the portfolio. 6
The next slide is about the credit operations. We can see that we had a reduction in the portfolio for this quarter again. If we go to the next slide, we can see a breakdown of the credit operations and we can see that the main reduction was in the corporate side, when we compare second quarter to third quarter. The reduction in the corporate credit portfolio was almost R$ 1.8 billion, was the main reduction in terms of portfolio. Here I would like you to see that the small and medium-size companies we increased almost R$ 300 million in the quarter in this segment and if we compare it with one year ago, by the end of September of 2002, the increase in this segment was almost R$ 800 million, what is a good increase. It is a segment that we would like to continue to grow in terms of credit operations. 7
Going to the next slide, we see the provisions for loan and losses, the total provisions in the bank, in the consolidated is R$ 3.29 billion, the minimum required by the legislation of the Central Bank is R$ 2.3 and we have an excess provision, as I said, of R$ 913 million with a increase on this line of the additional provision of 65 million in the quarter - we increased this minimum. If we see the next page, we can see the non-performing loans and the coverage ratio. The non-performing loans we can see in the orange line the non-performing ratio for individuals, that we have a reduction in the quarter to 8.25%. In terms of companies we increased, mainly because of the reclassification of this client of the electro sector to 2.53. So the final number, the compounded number is 4.71%, with a light increase when we compare with the 4.65% of the second quarter. But in our view this is a very good number and we have, as we showed in the last slide, very good level of provision for our portfolio. That also we can see this very good level of provision, the coverage ratio when we increased again to almost 190% of the portfolio, what is a very, very solid position for our credit portfolio. Banking and service fees in slide 16. We increase quarter to quarter around 6% the banking service fees, and mainly because of asset management with the money coming back to mutual funds this year and collection the first two lines of this slide. Collection also increased from R$ 77 to R$ 89 million in terms of collection was an increase for these service fees. Another point is the credit cards, that we can see some reduction in 8
terms of revenues for the quarter, as I said, the quarter was not so active in terms of credit card operations although continues to be a very, very important business for us. Going to administrative expenses, in the quarter we have a total administrative expense of R$ 1.9 billion compared to R$ 1.8 billion of the second quarter. An increase of 8%, mainly because of the Union negotiation, annual Union negotiation that was done in September with a labor agreement in a salary increase of 12.6% and a bonus for the employees. The total impact of this Union negotiation was R$ 106 million in Banco Itaú; 56 of this was the bonus and 52 were things related to vacations and 13 th salary and things like that we have already made the provision in the third quarter balance sheet. So the total impact was 106. In terms of total expenses, if didn t have acquired part of the Itaú-BBA we d have a decrease of R$ 100 million when we compare to the last year. So we continue in a big effort to control and, if possible, reduce the nominal expenses of the bank. And the efforts that we are doing we can see on page 18, in the slide about the efficiency ratio that we continue for five quarters with the efficiency ratio below 50% what it was our goal to achieve and impossible to reduce. We did that in the last five quarters and we can see also on the orange part of this graphic, 43.2% we accumulate in the last 12 months. So we continue and will continue our effort to reduce expenses to increase our net income. 9
In unrealized results, we have R$ 2.070 billion of unrealized gains in our assets, not considering the R$ 913 milloions in additional provision that we have for our credit portfolio as I mentioned some slides ago. So we have still a very good position in terms of unrealized gains in our consolidated assets, in Brazil and offshore. The next slide is the appreciation of our shares that we continue to have, due to this performance in the last years, a very good gain when we see long-term returns for shareholders above the Banking System and above the Bovespa index. To finalize this presentation, Banco Itaú will be at the Brazil Day in New York next November 17 th, we have a presentation there with other 20 Brazilian companies and we 10
have also some room for one-o-one meetings during the day of these meeting in New York. So with this, we finish the first part of this conference call and now we are able to answer your questions. Thank you. Operator: Ladies and gentlemen, we will now begin the Question and Answer session. If you have a question, please press the star key, followed by the one key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, press the pound key. Operator: Our first question comes from Mr. Jason Mollin with Bear Stearns. Mr. Jason Mollin: Hello everyone. My question is related to your financial income and what you highlighted in your presentation related to trading gains. You disclosured very clearly the gain on your trading portfolio as well as the unrealized gains of your available for sale that goes through your put value; could you tell us what the total realized trading gains were at the components of your net financial income? And I think it would be interesting to know as well how that is broken out, because you give us the breakdown between Itaú Bank as well as BBA-Itaú. How do you allocate between those two operations? Mr. Silvio de Carvalho: Hello Jason, Silvio speaking. Good afternoon. Jason. The total trading gains that we reported is about R$ 268 million in the total. Before tax, we have R$ 145 million in market-to-market during the quarter in the trading portfolio. That s the total, including Banco Itaú and Banco Itaú-BBA. Mr. Mollin: So, let me just clarify. So these R$ 268 million includes the R$ 145 of the trading, or that s separate? Mr. Carvalho: That s separate. Mr. Mollin: Ah, ok. So the total impact would be the sum of the two. Mr. Carvalho: Yes, both before tax, Jason. Mr. Mollin: Both before tax. Thank you very much. 11
Operator: Our next question comes from Mr. Mario Pierri with Deutsche IXE. Mr. Mario Pierri: Good afternoon everybody. I have a question, which regards to provision charges going forward, you did mention in your presentation that there was a significant increase this quarter. What should we expect in terms of provision charges in the next couple of quarters? Mr. Silvio de Carvalho: Mario, good afternoon. Silvio speaking. We are expecting the same level that we had in this third quarter, basically with individuals and the company. This increase in provisions that we had in the third quarter was more related with a especific customer that we mentioned, related with the electrical sector and we expect that this credit will recover. Mr. Pierri: Are you fully provisioned for this credit? Mr. Carvalho: No, we are not fully provisioned. We have 70% of this credit provided. Mr. Pierri: Ok, thank you very much. Operator: Our next question comes from Ms. Yolanda Duperrett with CoBank. Ms. Yolanda Duperrett: Yes. My question is how does Itaú define what a nonperforming loan is and is that is the same also for Itaú-BBA? Hello? Mr. Silvio de Carvalho: Hello. Yes, we define non-performing loans the loans that they are overdue of over 180 days. Oh, sorry it s 60 days that is overdue and in Itaú we consider all the total credit that the customer has in exposure with the bank. And it s becoming non-accrual. Hello? Ms. Duperrett: Ok. Yes, I could barely hear you on that last remark you made. Mr. Carvalho: Sorry? Ms. Duperrett: Ok, you ve mentioned 50 days past due and it s the total loan that becomes past due and not just the installment, correct? Mr. Carvalho: Yes. Ms. Duperrett: Ok. Thank you very much. Operator: Ladies and gentlemen, as a reminder, if you would like to pose a question, please press the star key followed by the one key on your touch-tone phone now. Operator: Our next question comes from Mr. Mario Pierri with Deutsche IXE. Mr. Mario Pierri: Hi, sorry. It s a quick follow-up now, in your capitalization ratios we saw a significant increase this quarter, your BIS ratio jumped to 21% from 5%. So first I would like to hear from you at what level would management be comfortable, implying 12
what is the minimum BIS ratio that Itaú would be comfortable with and what do you plan to do with your excess capital. Mr. Silvio de Carvalho: Mario, we consider the minimum for Itaú, a first-class banking, with 13.5%. Remember that in Brazil, the minimum is 11. We consider that we have 21.5 today and it s an excess of capital and we intend to utilize this capital to increase the loan portfolio in the future. And the second reason is that we are waiting and we are analyzing all the possibilities to make acquisitions in Brazil, even in the insurance sector or in the bank. Mr. Pierri: What about increasing dividend payments or announcing a share-by-back program? Mr. Carvalho: The back-share program is normal for the bank. Always we have a open program, that s the policy of the bank for a long time, and if we consider that we have some opportunities to create some values for our shareholders, we ll buy back shares. That s basically the problem and we don t intend to distribute in this moment other kind of dividend. Our policy is to distribute around 30% of the profit. Mr. Pierri: Ok, Silvio, thank you very much. Mr. Carvalho: Thank you. Operator: Our next question comes from Mr. Felipe Cruz with Merrill Lynch. Mr. Felipe Cruz: Hello everyone. My question is related to the COFINS. There are discussions right now in Brazil to increase the COFINS rate to 7.5%, I wanted to see if this is going to apply to the banks. I m hearing that it may not. And if so, what would be the impact for Itaú of a potential increase? Mr. Silvio de Carvalho: Felipe, Silvio speaking. These new increase impacts will not affect the bank. It is for non-financial companies. For the Itaú Group, we are forecasting that this increase in tax will affect about R$ 35 billion before tax. Mr. Cruz: Sorry, could you repeat the last part? You say it s not going to affect the banks? Mr. Carvalho: Yes, not this. Because the COFINS was increased from 3% to 4% in the middle of the September That s the increase in the tax for the bank. This new increase is for non-financial companies. Mr. Cruz: Oh, ok. Operator: Ladies and gentlemen, as a reminder, if you would like to pose a question, please press the star key followed by the one key on your touch-tone phone now. Operator: Our next question comes from Mr. Mario Pierri with Deutsche IXE. 13
Mr. Mario Pierri: Hi Silvio. If you could comment also on your expectations for loan growth next year, if you could break down by segments. That ll be very helpful, please. Mr. Silvio de Carvalho: Mario, we were expecting to grow 10% in this 4 th quarter of this year and 20% in next year in nominal terms. Basically we think that is driven by the consumer sector. Mr. Pierri: How fast? Mr. Carvalho: And the middle-market! Sorry. Mr. Pierri: And how fast do you think that the consumer can grow? Mr. Carvalho: Ah, basically the equals, that started already in Brazil to increase and we think that it depends on how fast the economy will grow. Consider that in this moment we expect that GDP start to grow, I think it will break down quarterly, according to real terms around 12% the total of the year. Mr. Pierri: OK, perfect. Thank you. Operator: Ladies and gentlemen, as a reminder, if you would like to pose a question, please press the star key followed by the one key on your touch-tone phone now. Operator: Again, to pose a question, please press star, one. Operator: This concludes today s question and answer session. Mr. Alfredo Setubal, at this time you may proceed with your closing statements. Mr. Alfredo Setubal: Thank you again for your time to be with us. Sorry again for the inconvenience of changing the schedule. I think we had, as I said, a very solid and strong result for the quarter. We continue to be very aware of the necessity of controlling expenses to maintain this level of return that we have been able to release in the last quarters and we ll continue to take all the opportunities to continue to increase shareholder s value for our shareholders and take advantage of the aspects of the Brazilian economy that we have been able to take advantage in these last quarters. We continue to be, as I mentioned during the presentation, very solid numbers in terms of provisions, both for credits and for securities. We have a very clean balance sheet in terms of assets, so we continue to be very optimist about the future and about the results of Banco Itaú. Thank you again and hope to be with you in the next conference call by the beginning of next year, when we will release the year-end results. Thank you. Operator: That does conclude our Banco Itaú s conference for today. Thank you very much for your participation. You may now disconnect. 14