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Conference Call Transcript 4Q08 Results

Banco do Brasil (BBAS3 BZ) February 20th, 2009

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Operator: Good morning, ladies and gentlemen. Thank you for standing by. We will now begin Banco do Brasil’s 4Q08 results conference call. At this time, all participants are in a listen-only mode. Later we will conduct 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 *0. As a reminder, this conference is being recorded and live broadcast with a slide presentation on the Bank’s website, at Investor Relations site, from where questions may be sent through. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco do Brasil’s management and on information currently available to the Company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they are related to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Banco do Brasil and could cause results to differ materially from those expressed in such forward-looking statements. With us today, Mr. Aldo Luiz Mendes, CFO, Mr. Nilson Martiniano Moreira, Controlling Director, Mr. Pedro Carlos de Mello, Accountant, Mr. Marco Geovanne Tobias da Silva, Head of IR, Mr. José Carlos Vaz, Agribusiness Director, Mr. René Sanda, Risk Management Director, and Mr. Luiz Gustavo Braz Lage, Credit Director. First, Mr. Aldo will comment on the Company’s 4Q08 big figures. Afterwards, Mr. Geovanne will present more details of the results. After that, the executives will be available for a question and answer session. Mr. Aldo, you may now begin. Aldo Luiz Mendes: Good morning. Welcome to our conference call to discuss Banco do Brasil’s 4Q results. Geovanne will present our performance in the period, but before that I would like to highlight some of the main events in 2008. In the year that we celebrated the 200 years of Banco do Brasil, we had a net income of R$8.8 billion, which corresponds to an ROE of 32.5% and earnings per share of R$3.43. The recurring net income reached R$6.7 billion, a 13.7% increase compared to 2007. You will see in the presentation that we accomplished the commitments we made on the roadshow during the Public Offering of 2007 and with the guidance that we published in 2008. Our assets surpassed R$520 billion at the end of the period and our loan portfolio, which grew almost 40% in 2008, amounted to more than R$224 billion, with highlight to the individuals’ portfolio, that increased more than 50% in the year, with a R$49 billion in balance. Regarding companies, our loan portfolio grew 48% in 2008, ending the year with almost R$100 billion. Regarding the financing to investments, we ended the year as the largest BNDES onlendings agent, with R$9 billion disbursed.



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I highlight that the credit growth was higher than the Brazilian Financial System and was accompanied by the maintenance of the portfolio quality. Anyway, due to the present economic scenario, we reviewed our statistic models to the loan losses of our portfolio and reinforced in R$1.6 billion the additional provision. I also remind you that, as said in the 3Q, due to Resolution 26 issued by the Brazilian Pension Plans Authority, we reviewed the calculus of our actuarial assets and liabilities, which brought a one-off gain R$2.5 billion to the 4Q08 results. Last year will be in the history of Banco do Brasil as the year when we broke an old paradigm and concluded our first acquisition. We know that 2009 presents many challenges to the financial sector worldwide. Despite that, we will work hard to transform those threats in opportunities to Banco do Brasil. Before Geovanne starts the presentation, I would like to mention that, from this quarter on, we will start to present in our MD&A some highlights of our Social Environmental Responsibility. Now, I will pass to Geovanne to proceed. Please, Geovanne. Marco Geovanne Tobias da Silva: Thank you, Aldo. Hello, everybody. As Aldo told us before, we recorded a R$8.8 billion net profit in 2008. This result represents a 74% growth over 2007 and corresponds to a 32.5% return on equity against 22.5% in the previous year, as can be seen on slide number three. The recurring net profit also grew and reached R$6.7 billion, a 13.7% increase in relation to 2007. It is also worth to highlight Banco do Brasil’s performance during the 4Q. In this period, the net profit surpassed R$2.9 billion. Without one-off items, the net profit would be R$1.6 billion, a 26.1% growth over the 4Q07 and a 20.2% decrease over the previous quarter. The recurring return on equity reached 24.5%. Moving to the next slide, number four, we can observe the 4Q08 one-off items. We recognized a R$5.3 billion one-off gain related to actuarial assets from Previ surplus, Banco do Brasil’s employees pension fund plan. On the other hand, we had some one-off expenses: R$1.3 billion liability due to actuarial losses in Cassi, Banco do Brasil’s employees healthcare plan; R$1.6 billion of additional provisions for NPL; and Income and Social Contribution Taxes and Statutory Profit that, together, amounted R$1.1 billion. We also had expenses related to economic plans of R$44 million. So, the net impact in Banco do Brasil’s result was R$1.3 billion, which led us to a R$1.6 billion recurring net profit in the 4Q08. Moving on to the next slide, it is important to mention that the 4Q08 quarter was full of challenges and opportunities. We were finally able to better identify the effects of the international financial crisis in the Brazilian banking system. With the lack of liquidity, credit restrictions, and higher risk, the Brazilian Central Bank reacted quickly and took some measures to bring some relief to the National Financial System. These measures, allied with our size and skills, made possible for Banco do Brasil to benefit from the opportunities raised by this crisis.



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Moving on to slide six, we can observe that the release of Reserve Requirements allowed Banco do Brasil to intensify the transactions with other financial institutions. The purchase of loan portfolios and interbank transactions totaled R$14 billion in the year. At the end of the period, the balance of those operations reached R$9.8 billion, from which R$3.8 billion comprised the loans that were purchased by Banco do Brasil. From this amount, R$3.1 billion corresponded to payroll loans and R$700 million to auto lendings that were purchased by Banco do Brasil. On slide seven we can observe that, despite the financial crisis, we kept our credit expansion. Our loan book had an outstanding performance. The total balance reached more than R$224 billion, a 39.9% increase in 12 months and 11.2% in the quarter. We outperformed once more the banking industry, which grew 6.5% in the quarter, and 31.1% in 12 months. The domestic portfolio also surpassed the industry; it grew 40.4% in 12 months and 10.8% in the quarter. Therefore, Banco do Brasil was able to increase its market share in the credit market to 17.1% as of December 2008. The highlights here were the individuals’ portfolio, which grew 52.5% over 2007 and 12.4% in the quarter; and the business’ portfolio, which grew 48.4% in the year and 13.9% in 4Q. On slide eight we present the breakdown of our individuals loan book. As we can see on the graph, we kept a strong growth in payroll and auto loans. The payroll deductible lending portfolio increased 48.4% in 2008 and 21.2% in the quarter, a very strong growth. In auto loans, we more than doubled the portfolio in one year, and in the last quarter we grew 19.4%. On slide nine we see that the business’ portfolio almost reached R$100 billion. The highlights here were the operations with middle and large companies, which grew 52.4% in the year and 16.8% in the quarter. This impressive performance was possible because since Brazilian companies were not able to raise funds from abroad or from the capital markets due to the credit crunch, Banco do Brasil ended up using its excess of liquidity to strengthen the relationship with business clients to meet their financial needs. Moving on to slide ten, we see that the flow of some of the main credit lines were restored to the same levels before the crisis or even higher. I would like to highlight the increase in the flow of working capital lines, which achieved R$3.8 billion in December. With regard to foreign trade finance, the volume of credit disbursed to this segment was maintained thanks to the Central Bank’s decision to start providing Brazilian banks with USD-denominated funding from the Country’s reserves. However, we can see that the volume of credit flowing into the individuals’ segment started to slow down as a consequence of the worsening scenario. Also analyzing the contracted operations, we compare, on slide 11, the disbursements in the Brazilian banking industry and those from Banco do Brasil. We can see in the graph that, after the credit retraction seen in the banking industry from mid-September on, the level of disbursements went back to its normal level in December. Moreover, given Banco do Brasil’s countercyclical behavior due to its excess liquidity, we were able to increase its market share in Brazil, especially with business operations.



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Skipping to slide 12, we have our loan portfolio performance compared to the banking industry here and to private banks, as well, in Brazil, since 2001, where it became clear that, historically, Banco do Brasil has a credit growth higher than the banking industry and its private peers. While the banking industry had a 20.3% compounded annual growth rate from 2001 to 2008, among the private banks this ratio was 19.9%, and in Banco do Brasil it was 24%. In nominal terms, it means that while Banco do Brasil increased more than 350% its loan portfolio in seven years, its private peers grew 255% in the same period, and the national financial system grew 265%. It is worth to highlight, on slide 13, that the expansion of Banco do Brasil’s business is due its strong position, specially in the funding base, with an impressive growth in funding in 2008; especially in the last quarter due to the flight to quality effect, which increased our funding but also brought an increase in the costs of funding due to a mix change. As we can see on slide 14, the strong expansion we had on credit, besides the higher funding costs, led to a strong growth in the net interest margin, especially on the 4Q when we presented an increase of 25.5% compared to the same period in the previous year and 17% compared to the previous quarter. In the year, the growth was 15.9%. Moving on to slide 15, it is important to notice that the growth of the portfolio also allowed the maintenance of Banco do Brasil’s global spread above 10%, at 7.3%, to be more accurate. That is because, besides the reduction on the spread for individuals’ portfolio, the stronger increase in business loans led by working capital lines mainly helped to sustain the spreads because loans granted during the period had shorter maturity and higher rates. I will use the next slide, slide number 16, to show that we are compensating the drop of our spread with loan growth, especially in our earning assets throughout the years. The red line of the graph shows the behavior of the spread from 2001 to 2008, when we came from 9% to 7.1%. However, if we look to the line below the spread line we will see that the pink line shows the nominal impact in the interest income due to the changes in the spread in the period, while the blue line brings us the increase in the net interest income due to the expansion in earning assets. We can also observe that in all the periods the increase of earning assets was enough to compensate the impact of the reduction of spreads in our net interest income, which once more proves the strength of Banco do Brasil’s franchise. Moving to slide 17, we see that the expenses with allowance for loan losses were in line with the credit growth, and it represented 3.6% of the average loan book. When compared to the 3Q08, the increase of 67.3% in provision expenses, which amounted to R$2.2 billion, is mainly explained by the seasonal effect of the contracts in the agribusiness portfolio, in which the allowance for loan losses totaled roughly around R$700 million. But this amount of expenses was also explained by the revision of our risk classification methodology we revised to a more conservative prospect. Moving on to slide 18, we can observe once more that the expansion of our credit book happened along with the maintenance of its quality. Past-due loans over 90 days,



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which is the yellow line on the graph, represented 2.4% at the end of 2008. This ratio is lower than the 2.7% seen at the end of 2007, and significantly lower than the 3% achieved by the National Financial System. We kept the required provisions over total book ratio at 5.4%, and together with additional provisions, the coverage ratio went up to 6.1%. On slide 19, we can observe that during the past years Banco do Brasil’s delinquency ratio is below the delinquency ratio for the banking industry and this trend is proved by the following number, whose breakdown is on graph 19. In business loans, we can see that the delinquency ratio in Banco do Brasil has a similar behavior as that of the industry. But in the individuals’ loans, we can observe that Banco do Brasil’s delinquency ratio is much better than the average delinquency in the industry. While in the 4Q past-due loans over 90 days in the individuals’ portfolio for the banking industry grew 110 b.p., coming from 13.6% to 14.7%, those from BB remained almost stable. This performance is a consequence of the mix that Banco do Brasil has in its individuals’ portfolio, with a higher concentration in payroll deductible lending. On slide 20, we show the vintage for individuals’ loan book, excluding here credit card loans, auto loans, and overdraft accounts, and considering past-due loans for more than 90 days here. As can be seen in the graph, 2005’s vintage was the riskiest one and it posted the maximum delinquency rate at 6.5%. We can conclude, looking at this graph, that Banco do Brasil’s credit concession methodologies, and also due to the mix of its book, has considerably improved the delinquency ratio for the new vintages. On slide 21, as we promised you, we brought car loan vintages. Here we are considering the operations contracted in our branches and the loans contracted with dealers. It is important to highlight that this portfolio is a brand-new one, and its delinquency ratio reflects our learning curve in this segment, making it difficult to estimate what would be the delinquency trend for this portfolio so far. Following on slide 22, we would like to share with you some information about Banco Votorantim’s loan portfolio. Votorantim is our partner in the auto financing market. The expertise of Votorantim in this segment is clear, as illustrated by the bar chart, on the left-hand side of this slide. Its delinquency ratio of 1.8% is substantially below the average industry, and if we consider this portfolio that is made up by 90% of used cards, this is a very outstanding performance. In this way, we hope to have benefits from the partnership between Banco do Brasil and Banco Votorantim, and we expect it to help us to improve the quality of our auto financing book. Moving on to slide 23, let us talk a little bit about the agribusiness sector in the present scenario. As we know, the 4Q is when the crop is contracted, which implies in a higher volume of contracts in this period, as can be seen on slide 24. Especially in the 4Q, the volume of contracts was even higher, due to the anticipation of the resources for the 2008–2009 crop that was expected to be disbursed in the 1H09.



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This anticipation was authorized by the Government to offset the impact from the lack of trading companies funding in the agribusiness sector. The increase in the disbursements to the crop resulted in higher equalization revenues, which grew 27.6% more than the previous quarter and reached R$494 million in the period. On slide 25, we bring you some information that allows us to be more confident about the future performance of the agribusiness sector. Although production costs were higher, prices are in a safe level to guarantee producers good margins. We can see in the bottom graph on the left-hand side of the slide that, even in a less favorable scenario, margins are still comfortable, above 20% in the case of corn crop, for instance. On slide 26, we present the evolution of operations contracted with risk mitigators. The share of working capital credit insured came from 42% in the 2006–2007 crop, to 69% in the 2008–2009 crop, and increase of 2,700 b.p. This increase results from the positioning of Banco do Brasil when adopting towards the agricultural sector since 2007 [unintelligible] requirements, requiring the use of higher volumes of risk mitigators in used loans. From the total of insurance contracted today, 90% is reinsured with international players. Moving on to slide 27, as Aldo mentioned in the beginning of the call, we are going to talk a little bit about the commitments we have made during the 2007 roadshow follow-on offering and from the estimates we have disclosed to the market in 2008. Slide 28 shows us the behavior of our administrative expenses. We told the market that this item should present a growth up to 10% in 2008 and, indeed, reached a 10.5% increase, perfectly in line with the top range of the guidance. However, when we set aside the 4Q08 expenses related to BESC — the State Bank of Santa Catarina that was incorporated by Banco do Brasil — administrative expenses would drop by R$80 million, reaching a 9.9% increase in 2008, completely fulfilling our guidance for administrative expenses. Concerning the 4Q alone, the increase seen comes mainly from the personnel expenses growth, which was due to the salary raise negotiated with the banking unions in September. Slide 29 brings us Banco do Brasil’s productivity ratios since 2001. Here I would like to point out the amazing improvement we promoted in our cost income ratio, which came down from 71.8% in 2001, reaching 41.9% in 2008, and in our coverage ratio that stepped up from 57.4% in 2001 to 124% in 2008. On slide 30 we make a comparison between our 2008 guidance and the performance posted by Banco do Brasil. The Bank confirmed almost all estimates released to the market, way surpassing our guidance for total deposits and loan portfolio. From the deposits’ perspective, the success of Banco do Brasil’s strategy of growing its deposits rates, together with the flight to quality movement due to the crisis, worked to increase total deposits in 44% in 2008, way above our guidance that was between 25% to 30% increase. The 40% growth of our loan book was also above our growth estimates, which were 30% to 35% increase; and it is important to highlight here that in the 4Q08 there was



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an impressive increase in our loan book. And finally, provisions for loans losses ended 2008 close to the lower range of the guidance, at 3.6% ratio. What should we expect for 2009? On slide 32 we highlight the strength of Banco do Brasil together with Nossa Caixa and Banco Votorantim. Just for administration purposes pro forma, if we sum up Banco do Brasil at the end of 2008 with Votorantim and Nossa Caixa, we would have seen an increase in our assets by more than 17%, reaching R$611 billion. We would have seen an increase in our loan book, an extra increase of 13.6%, total deposits increasing by 16%, and net income roughly going to 10%. In 2009, we expect to see even higher gains from the consolidation of our acquisitions, mainly due to the efforts we did to speed up the integration, and to start adding quickly the synergies expected from these transactions. Regarding Nossa Caixa, we expect gains from the operation acting as a financial agent of the State of São Paulo that nowadays responds for 30% of the Brazilian GDP. We also expect to profit from the lower cost of funding that comes mainly from judicial deposits, and to leverage our business with Nossa Caixa’s customers. And as a consequence, we will consolidate Banco do Brasil as the biggest bank in the State of São Paulo. From the Votorantim joint venture we expect synergies strengthening and widening our footprint in the car financing market. We expect to have a broader access to the well-developed managed alternative distribution channels that Votorantim has, and we also expect to widen our corporate segment and capital markets businesses together with Votorantim. Finally, moving to slide 33 we can observe our BIS ratio, which reached the same level as 2007, closing the year with 15.6%. In the box on the right-hand side of this slide, we show you pro forma what would be the BIS ratio of Banco do Brasil together with Votorantim and Nossa Caixa; it would be 13.5%. It is important to highlight here that we are very comfortable with this level of capital base; we do not foresee any capital constraint with regard to volume growth or even to absorb increase in delinquency. As you know, we have excess provisions, we are well covered with provisions, and we have a very sound capital base. But anyway, if in the future we believe that the level of capital we have will represent a constraint in asset growth, there are many ways of improving it that we can discuss later during the Q&A session. Coming to an end, on slide 34, I would like finally to present our 2009 guidance. It is important to mention that, besides the expected slowdown in our economy, we foresee that Banco do Brasil will be able to increase its business, and differently from many analysts that are forecasting return on equities for Banco do Brasil below 15% in 2009, we believe that we are perfectly able to deliver to our shareholders return on equity between 19% to 22%. Of course that, due to the slowdown, we expect the growth in our loan book to slow down as well, so the guidance for loan book growth in 2009 will be an increase between 13% to 17%, depending on the outforwardings of the crisis in the Brazilian economy.



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With regard to the loan book, the increase expected in the individual segment would be between 23% and 25%; in the business segment, between 16% to 19%; agribusiness, between 2% to 5%. Fee income will maintain its growth rate seen in 2008, so for 2009 we are forecasting a fee income growth between 5% to 8%; total deposits will increase less than 2008, so we are expecting total deposits to grow between 10% to 14% in 2009. The net interest margin will be practically stable, but we are adjusting the range expecting a net interest margin from 6.8% to 7.3%, depending on the performance of our loan book growth. Allowance for loan losses, given the tighter scenario, we are increasing the guidance; we expect to grow provision charges as a percentage of the average loan book, it will represent 3.8% to 4.2% of the book. And administrative expenses will grow between 9% to 12% for 2009, and finally the effective tax rate, we should expect a 26% to 29% effect in tax rate. These were the major information I would like to share with you. We can now open the floor to the Q&A session. Thank you very much. Saul Martinez, JPMorgan: Hi, everybody. I have two questions, first on asset quality: as you mentioned, Geovanne, you guys reclassified, you changed your risk methodology and reclassified some loans and obviously became more conservative and this really shows up in the increase in category D through H loans, especially in retail loan portfolio, which grows much more than your delinquency rates did in the quarter. Can you talk a little bit more about some of the assumptions underlying that change? What are you expecting? What are you assuming for the economy next year? And also importantly what segments within the retail loan book are most impacted? Is it certain products? Is it the micro and small businesses? Is it across the board? Are there some areas that you are more worried about than others? My second question is on your capital ratios. Your pro-forma BIS is 13.5%; can you break that out between Tier 1 and estimate between Tier 1 and Tier 2? And obviously my understanding is that Tier 2 cannot exceed 50% of Tier 1, and I just want to get a sense for whether on a pro-forma basis after this Votorantim and Nossa Caixa consolidated, how much capacity you would have to raise Tier 2 capital if you were to need to. Aldo Luiz Mendes: Hi, Saul. Let us start by the end of your question, and I will ask René, who is our Director for risk, the one that is in charge of risk management in Banco do Brasil, and he can explain a little about this issue of capital requirements. René Sanda: The Tier 2 capital is capped by 50% of Tier 1, and the margin that we can forecast, our best forecast after the consolidation of Nossa Caixa and Votorantim is more or less R$4 billion. But this number is subjected to many assumptions, so I would say that it is something between R$3.5 billion to R$4.5 billion.



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Saul Martinez: OK. René, I guess my question, though, is the 13.5%, do we have an estimate for what it Tier 1 and what is Tier 2? René Sanda: The Tier 1 will be 9.6%; again it is our best forecast. Saul Martinez: Sure. Marco Geovanne Tobias da Silva: OK? With regard to your first question, Saul, about delinquency, what are the macroeconomic assumptions that we have? We are forecasting and the guidance that we are giving is also considering these macroeconomic assumptions. We are expecting GDP growth close to the 3% range, we expect a price index close to 4.5%, the official IPCA index. Unemployment rate could go up to 9%, and the benchmark rate at 10% to 10.25%. These are the major macroeconomic assumptions. And what we did in order to become more conservative in our risk methodology system was, first of all, to make provisions above the minimum required by the Central Bank. And there has also been a change in the dragging effect. For those operations that were 60 days past due, we changed the dragging effect from 5% to 1%. So, we are now adding from 5% to 1% and we are dragging all loans in the individuals’ portfolio. Saul Martinez: I am sorry, I did not understand the 5% to 1% drag effect. What is that? Can you explain how that works? Marco Geovanne Tobias da Silva: The volume of credit that they have that is past due, usually we would start dragging effect when 5% of the customers’ outstanding credit became past due, 5% above that. Now, if 1% of the total credit is past due, we start the dragging effect. So, we became more conservative with the dragging effect. Saul Martinez: OK. Got it. And just one final follow up on that question: are you comfortable with your level of excess reserves? Obviously, would you use any of those excess reserves going forward? If credit quality trends continue to deteriorate, are you going to keep provisioning levels up at such a level that would maintain that sort of excess reserve, or would you be comfortable eating away at that level? Marco Geovanne Tobias da Silva: Yes. We would be comfortable eating away that level. The additional provisions were done to face this scenario that will be tougher; of course that the major impact for



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pickup in delinquency will be much more a volume growth effect, since we are expecting a huge slowdown in growth in our loan book. And with the seasoning of the loans, we are expecting delinquency to pickup as a consequence of this slowdown in the volume growth. If we need so, we will be eating away these provisions to cover this increase in delinquency. Of course that we will maintain the conservativeness in addressing provisions, but we are not so pessimistic about it, it is important to mention. So far, economic conditions here in Brazil, of course we are suffering the impact of the crisis, but in the individuals’ portfolio, for instance, given the concentration of payroll deductable lending in our book, we are very comfortable with the level of delinquency in this book. The one that should bring some burden would be definitely the corporate loan book and mainly because many corporate clients are having difficulties in raising money to roll over their debts. We expect that the decision of the Government to provide Brazilian companies with specific funding for them to roll over their debt might help improve the delinquency in this portfolio. It will depend on the unfolding of the crisis in the Brazilian economy. If it deteriorates further, probably we should expect a higher pickup in delinquency; however we are well provisioned. And if it does not, provisions will remain there as a kind of guarantee that we have to face volatilities in the delinquency. Saul Martinez: OK, great. Thank you very much. Daniel Abut, Citi: Hi, Geovanne. I wonder if you could elaborate a little bit more on your guidance for loan growth. The 13% to 17% guidance for the portfolio as a whole did not surprise me that much, I think it is pretty much in line with what we are hearing from some of the other banks in the system. I was surprised, though, about two things: when you look at different segments that you are expecting so much growth in the individuals, because if the economy is going to slowdown as much as we all expect, it seems that that could be an area of possible deterioration. Do you really feel comfortable in earning so much at the individual level in an economy that may grow 2% at most? I think that may prove a little optimistic. And second, if you could elaborate more in your agribusiness assumptions, because one of the typical pullback we get from investors when we talk about the history of Banco do Brasil, given that you are pretty much the only one lending to agribusiness, they get concerned that next year, if the scarcity of credit to that sector remains in terms of trade lines etc. then Banco do Brasil could be asked to fill the gap and lend much more. And the fact that you are predicting only 2% to 5% growth in that segment should be comforting for investors to hear, but elaborate a little bit more why do you feel comfortable that you may not be asked by the Government, given that agribusiness remains one of your core businesses, to lend much more and support that sector?



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Aldo Luiz Mendes: Regarding the expected growth for the Brazilian economic this year, we think that 2% is the minimum level. We do believe that Brazil will grow at least 2% this year. And regarding the portfolio for individuals, you cannot forget that since we have a concentration in our book in payroll loans, and we are going to be the bank of the State of São Paulo, and probably if we succeed in our negotiation with the Government here in Brasília and in the State of Espírito Santo, we are probably going to be the bank of the State of Espírito Santo and the bank of the State of Brasília. We are going to add to our book the possibility to offer or to grant payroll loans for the employees of those Governments, so we can see a growth in our portfolio, mainly in the payroll loans, and we are expecting this at least, if not optimistic, a non-pessimistic view of the Brazilian economy that will grow at least 2%. Marco Geovanne Tobias da Silva: And if I may add, Daniel, we cannot forget the salary raises that will be granted to pensioners and retirees here in Brazil, because their benefits are linked to the minimum wage and there will be an increase in minimum wage that increases the leverage for the payroll deductable lending book and also the salary raise to Government employees. Roughly 80% of our payroll deductable lending book comprises Government employees, civil servants. And we expect to step up the growth in our car lending business. We have seen a kind of reaction in the car segment here in Brazil, and we believe, since we have a very small base, that we will be able to increase further this book. And with regard to the agribusiness, first of all it is important to highlight here that we already have a mandate from the Government like the peers have. They have to comply with official rules to finance mortgage, while Banco do Brasil must comply financing agribusiness using savings account as the major funding source to finance this book. We are not the only ones that finance agribusiness, we have 60% of the market and the rest of the 40% comes from Santander, from Bradesco, and even Unibanco. All Brazilian banks do provide agribusiness loans. Of course that we are the leaders, but we are not the only ones that provide loans to them. Why are we expecting a small growth in this book? Basically because there will be a shift between loans from agro-industries to loans to agribusiness individuals. If you look at the slide seven, we give the breakdown of the agribusiness book to individuals, whose balance was R$45 billion, and to businesses, whose balance was 18.5%. We are expecting, first, a smaller growth in funding, basically savings account that is used to finance agribusiness, and second, the loans to be granted to the sector, a part of that will come from the ones that we were using to grant to agro-industries, and these agroindustries will probably get funds from traditional working capital lines in the business segment, not from the agribusiness portfolio.



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Daniel Abut: Thank you. That was very useful, Geovanne. Just a quick update on the Nossa Caixa process: do you have any idea whether on the timing in terms of when the tender offer for the rest of the minorities may occur in the closing of the transaction and when we may expect to see consolidated or combined figures when you report your numbers? Aldo Luiz Mendes: Daniel, we are expecting the approval of the Central Bank by middle of March, and we expect to consolidate both companies in one year. In one year both companies will be integrated. Marco Geovanne Tobias da Silva: But the consolidation in the books you will start seeing when we make the first payment that will occur probably in March, so the 1Q numbers will probably bring the consolidated numbers of Banco do Brasil and Nossa Caixa. And it will depend on the Central Bank’s approval. Daniel Abut: So, Central Bank approval is expected in mid-March, 1Q results will likely then be already consolidated figures and the takeout of the minorities may be more of a 2Q event? Marco Geovanne Tobias da Silva: Yes. Do you mean the tender offer of the minorities? Daniel Abut: Right. Marco Geovanne Tobias da Silva: It will probably happen during the 2Q, April or May. Daniel Abut: Thank you. Marco Geovanne Tobias da Silva: The manager responsible for the Nossa Caixa integration is here with us and he is explaining to me that we have up to 60 days after the approval of the Central Bank to make the tender offer. Daniel Abut: Thank you.



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Mario Pierry, Deutsche Bank: Hello, everybody. I have a couple of questions, as well. The first one, just to be clear, this guidance that you provided for 2009, it excludes Nossa Caixa and Votorantim, right? If you could provide us with any guidance that you or any changes in your guidance that would arise from the integration of the two banks. That is the first question. Second question is on your net interest margin outlook. You are expecting a contraction on your net interest margin, but latest data from the Central Bank we see spreads improving in the system. So, I would just be interesting in hearing the reasoning behind the margin contraction. And finally the third question is if you could comment a little bit about the appetite that the Bank still has for acquisitions. Most recently you announced that you are pursuing the acquisition of Banestes; I was wondering if you could make any more comments, if this is it or we could see more acquisitions in 2009? Thank you. Aldo Luiz Mendes: Hi, Mario. Thank you for the questions. Regarding our guidance considering Nossa Caixa e Votorantim, I think it is very hard for us to make any kind of assessment now. It is difficult to imagine what would our guidance be in terms of growth considering both banks. Frankly we are not able to do this right now, probably in the next quarter we will be able to give you some idea about this. Regarding the compression of the net interest margin, we expect this compression because, in our view, interest rates in Brazil will be falling during the year and there will be a pressure coming from the Government to all banks, let me emphasize, to all banks to contain or to compress margin and spreads. This is what we are expecting. And finally, regarding Banestes, we are just starting the valuation of Banco Espírito Santo; I think this is a process that will take at least three months, and in three months we will have our valuation and probably we are going to start negotiating. And for the incorporation, the answer we have not been thinking about additional incorporations or any other kind of acquisition because we think we have work enough with those banks that we have already bought. Marco Geovanne Tobias da Silva: And if I may add, Mario, regarding the spread, the guidance we are giving is a range between 6.8% and 7.2%. It will depend on how fast we add to our business higher spread loans, like the individual ones. So, despite the huge drop in the benchmark rate we are expecting and this definitely tends to compress margins, given the mix of loans we have nowadays, as long as we continue to grow faster our individuals’ loan book, we will be able to protect more our spreads. So, I think that maintaining an average spread close to the 7% range is a good estimate. 6.8%, which is the lower part of the range, would be in the case that one, rates drop really fast; second, I am not able to add higher spread loans to the book; and third, our spreads in the corporate book start to fall rapidly, because so far rates in the corporate segment are still high due to the crisis, and if we maintain these rates for



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the entire year, we would probably see a different perspective in terms of spreads. However, we believe that throughout the year spreads in the corporate book tend to start dropping. Mario Pierry: Let me follow up with what Aldo said about pressure from the Central Bank to reduce rates. What specifically are you seeing from the Central Bank? Because so far what we have seeing is more comments on the press, but nothing really specific; however, like in Mexico for example, we are hearing more and more the Government thinking about implementing a limit on rates that banks can charge. Do you think this is a possibility in Brazil? Aldo Luiz Mendes: No. I do not think this is a possibility, in my opinion. What I mean is Central Bank will continue this process, I think, of reducing the interest rate, because the expectation regarding the inflation will make possible to reduce the interest rate. What I mean by pressure is what we are reading in the press that the Government itself, not the Central Bank, specifically, but the Government is inviting banks, and not only public in the Brazilian system, but also private banks, to reduce the interest rate. That is, of course, a political pressure; it is not something that can be translated in a new regulation, but just a kind of psychological pressure. Mario Pierry: OK. Thank you. Victor Galliano, HSBC: Just a follow up on the questions about the agribusiness book: I saw in the 4Q, looking at your MD&A, those were very big increases in terms of new transactions originations, ending the 4Q with more than 100% increase on the previous quarter and about more than 3x what it was in the 4Q of last year. Can you confirm if this is what Geovanne was talking about earlier about the farmers and agribusiness operations generally sourcing their funding needs for the future, given the scarcity of credit going forward? Or was this due to some other factors? Marco Geovanne Tobias da Silva: Hi, Victor. If I understood your question correctly, the increase in our origination was a reflex of the crisis. Trading companies stepped out of the agribusiness sector and they needed more funding to finance the plantation season. They used a bigger part of these funds from their own capital, their own money. The 2007–2008 crop was a very good one, they were well capitalized, they were able to use their own resources to finance the plantation, and the Government in its turn allowed banks to anticipate a part of the money that would be disbursed during the beginning of 2009. And because of that, we ended up increasing the volume contracted in the 4Q, because of this funding anticipation. This is the major reason why it grew significantly.



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Victor Galliano: OK. So, that in part is baked into your very low growth for agribusiness loans in 2009, because of the anticipation. Marco Geovanne Tobias da Silva: Yes. You are right, definitely. Victor Galliano: OK. Thanks. Boris Molina, Santander: Yes, just a couple of questions, the first one in your guidance: what is the Selic target that you are forecasting, the declining rate that you are putting in your margin assumptions? Secondly, given all the discussions regarding spreads and interest rate etc., what has been so far the impact of lower reserve requirements in your margins? And could you expect or are you negotiating right now further decreases in reserve requirements in order to allow the industry to lower lending spreads going forward? What is the likelihood of seeing something on this front during the year? Thank you. Aldo Luiz Mendes: Regarding the reserve requirements, what I heard from the Central Bank is that they are not going to release any non-loan release reserve requirements in Brazil. They think what they have promoted during this period since last September was enough to help the system, and they are not thinking about it. So, because of this pronunciation of the Central Bank we will not do any kind of exercise here in order to know the impact of any release of reserve requirements in our results. Marco Geovanne Tobias da Silva: And if I may add, Boris, in the 4Q the volume of reserve requirements that was released allowed us to contract more than R$14 billion of loans, and you saw the impact of that in the increase in our net interest income. So, it definitely helped us, because we decided to act in a countercyclical way and instead of just keeping that money to protect liquidity, we decided to lend it. Since we had no liquidity issues, on the contrary, we had excess liquidity, we decided to continue in the market gaining market share and the consequences you see in the margins, it went up because of that. However, our peers, many of them, instead of maintaining the presence in the credit market, decided to retain those reserves that were released by the Central Bank to protect their liquidity, and you are not seeing the results of this major increase in their margins because of that. Boris Molina: And regarding the Selic target that you are using in your estimates?



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Marco Geovanne Tobias da Silva: 10.25%, average. Boris Molina: Average. Marco Geovanne Tobias da Silva: End of period, sorry. Of course that nowadays this does not mean too much. Boris Molina: Have you used up all the potential leverage from the lower reserve requirements or could we expect further leveraging of this? Marco Geovanne Tobias da Silva: The total volume of reserve requirements that was released to Banco do Brasil was close to R$12 billion. So, we ended up using more than that. Boris Molina: OK, wonderful. Thank you. Ian Smith, Nevsky: I have two questions actually. The first one was on agribusiness, we saw in the 3Q08 that you have quite a few loans in the rolled over portfolio you were paid back. And so we saw quite an exceptionally low provision chart in the 3Q. With the margins that you guys have given us in this presentation in soy and corn, do you think those margins are good enough so that farmers can payback again in the 3Q09? And the second question is just on margins: just in this 4Q, it is quite an exceptional quarter, and obviously we saw very large growth quarter on quarter in your net interest income. I just want to get a sense of how much of that can be extrapolated and how much of it relates to the fact that you guys had a lot of excess liquidity and sort of exploited it in what was quite a tight quarter? What kind of momentum have we got in terms of the net interest income for the 1Q and the 2Q? How much of that performance in the 4Q sort of see through? Marco Geovanne Tobias da Silva: Hi, Ian. Let me try to answer your two questions. The first one with regards to agribusiness, we are confident that the margins that we have nowadays will be enough for the farmers to payback their loans, no problem. Of course that we will face some specific problems in certain areas, but on average margins are strong enough for them to payback their loans without problems. That is why I stated during the conference call that we are very comfortable and confident that, regarding these numbers, farmers have no excuse for not paying back Banco do Brasil.



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The second question has to do with the net interest income; you are right, it had an amazing behavior in the 4Q due to this countercyclical behavior of Banco do Brasil. I do not think you could extrapolate, I think you used that word, I am not sure, that for the upcoming quarters because from the 1Q on the other banks had improved their liquidity and they started to tap the market again and started competing with us again. So, I do not think you will see such big growth momentum in the upcoming quarters from Banco do Brasil, and this is confirmed with this guidance we gave for the whole year. We are expecting the credit growth in Banco do Brasil to drop by almost 50 b.p., OK? So, I think that you cannot extrapolate this margin for the upcoming quarters. Ian Smith: Great. Thanks a lot. Daniel Abut, Citi: I just have a quick follow-up question to Aldo on this topic of the political pressure with this general increase not just to Banco do Brasil but to all banks in the system. When you guys are now gaining an ROE of 19% to 22% down from almost 25% last year, is that into the equation as well? Are there any discussions given that Banco do Brasil is a public sector bank, certainly a Government-controlled bank, that 25% is just too much in that kind of environment that you guys should be reusing your rates more rapidly and the spreads more rapidly even if that implies having an ROE that is lower than your private sector peers, so be it. Part of your function should be that for public sector banks, is that part of what drove you guys starting declining the ROE or simply that you are seeing a more challenging [unintelligible]? Aldo Luiz Mendes: There is not any kind of political pressure in terms of ROE of Banco do Brasil. The one that we established, the one that we are waiting that the guidance that we are offering to the market is the one that we think is possible to achieve in this scenario that we are foreseeing for the Brazilian economy and the market as itself. Marco Geovanne Tobias da Silva: We will account higher provisions expenses in 2009, we will have higher administrative expenses so the smaller ROE reflects this slowdown in the Brazilian economy. And it is perfectly in line, so far as we know, with our large private peers, even the large one that has already disclosed its numbers, it is expecting a drop in its ROE close to the 20% range. Daniel Abut: OK. I was just checking as far as the political pressure that was even in measures, I do not know. What I mean is that from reading the paper, some Government people saying that the public sector bank should not charge a high rate as the private sector banks and expecting this to be leading the profit in terms of lowering rates. So, I was curious to know if the same applies for the overall profitability that you report, but that was a helpful answer.



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Marco Geovanne Tobias da Silva: You should count that as political posturing, on the one hand, and newspaper gossip, on the other hand. Daniel Abut: Thank you. Operator: This concludes today’s question and answer session. Mr. Aldo, at this time you may proceed with your closing statements. Aldo Luiz Mendes: I would like to take the opportunity to invite you to our V National Meeting with Analysts and Investors, which will be held in São Paulo, on March 20th. And if you need further information about Banco do Brasil, please contact our IR team or visit our website. Thank you very much, and have a nice weekend you all. Operator: That thus concludes the Banco do Brasil’s conference for today. As a reminder, the material used in this conference call is available on the Bank’s Investor Relations website. Thank you very much for your participation. You may now disconnect. “This document is a transcript produced by MZ. MZ uses its best efforts to guarantee the quality (current, accurate and complete) of the transcript. However, it is not responsible for possible flaws, as outputs depend on the quality of the audio and on the clarity of speech of participants. Therefore, MZ is not responsible or liable, contingent or otherwise, for any injury or damages, arising in connection with the use, access, security, maintenance, distribution or transmission of this transcript. This document is a simple transcript and does not reflect any investment opinion of MZ. The entire content of this document is sole and total responsibility of the company hosting this event, which was transcribed by MZ. Please, refer to the company’s investor relations (and/or institutional) website for further specific and important terms and conditions related to the usage of this transcript.”

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