Conference Call Transcript Banco do Brasil (BBAS3 BZ ... · Conference Call Transcript 3Q11 Results Banco do Brasil (BBAS3 BZ) November 4th, 2011 1 Operator: Good morning, ladies

Conference Call Transcript 3Q11 Results

Banco do Brasil (BBAS3 BZ) November 4th, 2011

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Operator: Good morning, ladies and gentlemen. Thank you for standing by. We will now begin Banco do Brasil’s 3Q11 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 this presentation may include references and statements, planned synergies, increasing estimates, projections of results and future strategy for Banco do Brasil, its associated and affiliated companies and subsidiaries. These expectations are highly dependent on the market conditions, on Brazil’s economic and banking system of performances, as well as an international market one. Banco do Brasil is not responsible for bringing up to date any estimated information in this presentation. First, we are going to have some details of the results. At the end of the presentation, the executives will answer the questions from the participants. With us today, Mr. Ivan Monteiro, CFO, and Mr. Gilberto Lourenço, Head of IR. Mr. Gilberto, you may begin the conference call. Gilberto Lourenço da Aparecida: Thank you very much. I thank everybody to have the time to be in our conference call today about the 3Q results. Good morning. I will start our presentation on slide number three. We have the main highlights from the 3Q11. The credit portfolio still growing, the level of delinquency absolutely under control, control on expenses side, and the business diversification. From slide four on, we will see more details from the results. In the 9M11, we reached the recurring net income of R$8.7 billion, a growth of 25% in 12 months. On the following slide, number five, we show how we were able to deliver these operational results. In the revenue side, highlights to the results from the insurance operation, which in 12 months came from 3.3% to 3.9% in revenues generation. One year ago, the operating expenses were responsible for almost 51% of the total revenues of Banco do Brasil. In the 9M11, this share dropped to less than 49%. It is also worth to highlight that the loan loss provision, its share in the total revenues reduced from 21% to 20%. On slide number six, we can observe that along with the assets we kept our leadership in the main segments of the Brazilian banking industry. We are leading in everything that matters in the banking industry: in assets, loan portfolio, deposits, in assets under management.



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Moving to next slide, slide number seven, we observe that we are still the largest bank in Latin America, with assets amounting to almost R$950 billion. On the next slide, number eight, we have new information which allows us to understand the funding movements and the use of those sources. In one year, we can see an increase in the funding through letter of credit, commercial letter, commercial papers, agribusiness letter of credit, and debentures of 271%. We can also observe that the share of compulsory deposits increased 90 b.p. in one year due to changes in the rule of the Brazilian Central Bank. The reduction of 80 b.p. in the loan/deposits ratio is due to the higher increase in domestic funding. To complement the previous information on deposits, here on slide number nine we have the fund expansion, which grew more than 20% in one year. Banco do Brasil’s distribution network, once again, allowed the maintenance of our leadership in deposits. Actually, Banco do Brasil has ¼ of the total deposits in the banking industry. Facing the economic scenario and adopting a more conservative approach, Banco do Brasil prioritized the growth on time deposits. The share of time deposits in the total deposits came from 55% in September 2010 to 60% in the 3Q, while demand deposits came from 16.9% to 13.7%. As observed on slide number eight, and with more details here on slide number ten, it is clear that besides the traditional funding, Banco do Brasil is diversifying its base, mainly through agricultural and financial letters, which together grew 415% over September 2010. Banco do Brasil also had an increased access to funding sources abroad. On slide 11, we show that the amounts raised grew substantially, 35% in one year. Highlight to interbank fund, which only in September had a renovation, or a revolving ratio of 120%. On slide number 12, we released new information regarding the formation of our net interest income in the period to investigate the margin or have better idea of the margin formation. On one hand, we have loan operation margin considering the cost of opportunity in loan operation, and we have also the information related to the funding, and we have the opportunity of revenues in this kind of business. As you can see in this slide, the loan operation margin increased in the quarter 6.2% while, on the other hand, the funding margin decreased 1.3%. We have at the end of the day our net interest income increasing 0.9%, amounting R$10.7 billion. On slide 13, we have the information about the spreads. Slide 13, observe that the global spread decreased 20 b.p. quarter over quarter; this movement is essentially motivated by the increase in funding cost in comparison with Selic rate, as well when compared to the same effect in the net interest margin adjusted by risk. Here on slide 14, we have the spread by segment and the total portfolio. On the total portfolio, we observe an increase of 20 b.p. in the quarter due to good growth in the business and in agribusiness portfolio spreads. Individual portfolio, the 40 b.p. decrease is explained by the strong growth in margin operation as opposed to the drop in the share of operation with high yield such as overdraft account and consumer loan, and other consumer loans.



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On slide 15, we have the historical series of our FX exposure, which is in the reduced level, bringing no relevant impact to Banco do Brasil’s net interest income. Starting with the information about the loan portfolio, on slide 16, we have observed that Banco do Brasil kept its leadership in the credit market, about 20%; the portfolio reached R$441 billion including private securities and grant guarantees. We got a 21% growth in one year. If you take a look at the portfolio, Banco do Brasil has maintained our strategy to increase the portfolio and credit to individuals that amounts to R$125.8 billion. Slide 17 brings us the individuals’ portfolio, where once again we can see the increase in operation with lower risk profile, such as those linked to payrolls, auto loans, and mortgage. Those operations represent more than 80% of this portfolio. That is good because in those operations we have a better shape in terms of credit risk. Talking a little about our fast growing portfolio mortgage, on slide 18 we have the disbursement in contracts to individuals since the 3Q10. 3Q disbursements were 2.4x higher than those accounted in the 3Q10. Also regarding mortgage, slide 19 brings us the same information as the previous one, but to the corporate segment. As you can see, the number of contracts increased 3x in one year while disbursements grew almost 5x in the same period. Now, on slide 20 we have the evolution of the business portfolio, which grew 21.6% in 12 months; highlight to investment in secured operations that already represent almost 30% of the total portfolio to companies. Moving now to slide 21, we have the breakdown of the corporate portfolio. We can see relevant growth in operation with mid and large companies, and also on SME segment. On SME segments, we are focusing on operations collateral, as we can see on slide 22. As an example, FGO, the guarantee fund for that segment. In September 2011, there were more than 451,000 operations of this collateral, which reached the balance of R$8.3 billion. Regarding our foreign trading portfolio, we see on slide 23 that Banco do Brasil presence abroad is fundamental to support this market. BB remains leader in import and export market, and also in trading financing. Slide 24 brings us the disbursement of investment loans, which reached at R$8.6 billion in the 3Q and R$21.5 billion in the 9M11. We would like to highlight once again that the investment finance will bring great opportunities to Brazilian banks in the next years as an important cross-selling driver. And on slide 25, we present the quarterly disbursement of BNDES card, a quite leading product of Banco do Brasil, leading a wide range in terms of amounts disbursed, number of cards, and transactions. And now, in this quarter we launched our brand-new card, BNDES card, using MasterCard brand. On slide 26 and the next slide bring us some information on the agribusiness portfolio. Banco do Brasil has a market share close to 62%, being the major partner of the Brazilian agribusiness. The portfolio is increasing in a consistent way with highlight to corporate loans.



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On slide 27, we have the use of insurance and agricultural loans, 60% of the working capital lines. The 2011/2012 crop was contracted with some kind of risk mitigation. In the bottom of this slide, we have the map with distribution of this type of insurance. Moving on with the agribusiness, slide 28 shows us that the investment in agribusiness guarantees more efficiency to the production; better seeds, fertilizers, machinery have made possible the increase in productivity. Slide 29 shows us that the main cultures bring good profitability to the producers, as soybeans with 51% margin, corn with 44%, both projected to 2011/2012 crop. Finally, ending our information on agribusiness, slide 30 shows us that the share of renegotiated loans in agribusiness portfolio is decreasing quarter over quarter. In 2008, those operations represented 22.7% of the total portfolio. In September 2011 this share dropped to 6.9%. Now talking about the quality of our portfolio, slide 31 brings the credit risk. The operations with better risk, AA to C, came from 92.8% in September 2010 to 93.9% this year as a consequence of the quality of our loans origination. Slide 32 brings us the delinquency ratios and confirms the strategy of concentrating the book on lower risk operation. The NPL ratio of Banco do Brasil is quite better than the market. While the market accounts for 3.5% as of September 2011, Banco do Brasil accounted for 2.1%. Slide 33 pictures the delinquency by portfolio. Here in the quarterly comparison, a slight worsening, 20 b.p., in the individuals’ portfolio, and a slight improvement, 10 b.p., in the business portfolio, and agribusiness presents a quite good partner at 0.9% in terms of 90 days NPL. Moving to slide 34, we can see some brand-new information related to the breakdown of our provision, the outstanding provision of Banco do Brasil. As presented in this slide, as you can see, those provisions related to a regular operation have increased and those provisions related to past-due operations have decreased when compared to September 2010. Those provisions above are the Central Bank regulation, has maintain at R$1.9 million. Moving to the slide 35, we see that the coverage ratio of Banco do Brasil over the NPL 90 days is quite above the system. Banco do Brasil accounted for 220% while the market, 160%. On slide 36 we have some information about renegotiation portfolio, the restructuring portfolio. And I would like to thank everybody that gave us feedback in that regard. Because of this we are introducing this information in our presentation. As you can see, the total amount of restructured loans is R$7.7 billion, the outstanding provision related to that was R$1.8 billion, NPL 90 days is R$600 million, and the coverage ratio that we see is about 261%, so quite good numbers related to our restructured loans. Now, on slide 37 we have some information on our branch network in Brazil, such as market share and distribution per region. As you see, Banco do Brasil expands 25% of the total branch network in Brazil. I would like to call your attention for Northeast position of Banco do Brasil, with amounted 37% market share in that region, the fastest



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growing region in Brazil. And quite good provision in other region to enjoy the dynamic of our economy. On slide 38 we have the commercial revenues that comprise net interest income, fee income, and insurance income per customer that increased more than 6% in one year as a consequence of our investment and enhanced the retail segment of the Bank. Moving to slide 39, we can see that the business expansion is being followed by a strict control of expenses. The ratio of expenses/assets has decreased every quarter. As you can see on slide 40, as a consequence from the increase in fees and the expense control, Banco do Brasil cost/income ratio has gotten better. The efficiency ratio in 12 months reached 41.1%; last year this number was 44%. Here, on slide 41 we have some information about our revenue diversification. The Brazilian market is moving to a fee-based model and the market segments shown have high growth rates; highlight to insurance operational revenues, which were responsible for 4.5% from last year and 5.2% this year, considering these revenues related to insurance those in the financial revenue side. Regarding new business, on slide 42, you notice that the recent restructuring of our insurance area, including the reorganization in all our affiliated companies, is already bringing good results. The insurance results in Banco do Brasil have increased more than 28% in one year. Moving to slide 43, also regarding those new businesses, we observed that the cards billing or the cards volume has increased more than 25% in one year. In the 9M11, the market share reached 21.3%, from 20.6% last year. On slide 44, we observe the consolidation of our capital market business. Banco do Brasil in that segment has presented a quite outstanding leadership in the fixed income business. Slide 45 has more details on Banco do Brasil’s operational result, and I would like to call your attention for the reduction that we have in the revenues related to actuarial gains and the increase that we accounted in legal risk, mostly related to labor claims. On slide 46 we have BIS ratio of Banco do Brasil, which, at the end of September, reached 4.05%. That is a pro-forma number that includes some commercial papers that we are applying to the Central Bank to be considered Tier 2 capital. Moving to the next slide, wrapping up our presentation, we have the guidance granted by Banco do Brasil. I would like to call your attention by the revision we deployed this quarter, reducing our net interest income expectation from 16% to 20%, to 11% to 13%. If you take a look overall, our guidance is quite matching the expectation that we had at beginning of the year in terms of return on equity. We accounted for 22.4%, quite in the mid of the guidance. Total deposits are slightly above the guidance, as I mentioned previously in the presentation, 20.4%. Our credit portfolio increasing within the guidance, 15.6%, as planned by Banco do Brasil, more concentrated in credit to individuals that has grown 17.1%. At provision expenses credit costs below the guidance, we accounted 3% 9M11. Fee income growing pretty much close to the guidance at 11.4%, administrative expenses quite outstanding performance at 7.8% below the guidance, and tax rate at 31%.



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So, those were the words that we would like to share with you and now we are open for the Q&A session. Thank you very much. Marcelo Henriques, BTG Pactual: Good morning, guys. I have a couple of questions. The first one is on the interest income. I am having difficulty in understanding. If you look at slide 12, just to ask you guys more directly, can you give us more color on what is this other line use and why has this decreased quite substantially quarter on quarter? And then, I will ask the follow-up questions. Gilberto Lourenço da Aparecida: The idea of slide 12, Marcelo, is only to give a better color on the information of our net interest income. So we are using here some methodology, as explained in the bottom part of this slide. We have in the loan operation opportunity costs, so there is an established price as opportunity cost. The same applied also in the funding side, so we have opportunities revenues. So in the end, what explained better the behavior of the margin is the fact that we have this performance in the funding side decreasing 1.3% over the 2Q. So the rest, we have a quite good quarter in terms of credit portfolio, increasing 6.2%. And this movement in others is because this opportunity costs and opportunity revenues methodology, we cannot capture everything related to the interest rate so on and so forth. So there is no other major effect in the margin unless those related to the funding cost side. Marcelo Henriques: But when you see the increasing funding cost, but when I look at your balance sheet on the liability side, if you compare to the other banks in terms of growth in terms deposits and letras financeiras, so on and so forth, it seems pretty similar to the system and also looking at the Central Bank’s number, the one they have the registration of Central Bank’s this quarter. So I am trying to understand how structural this change is? Has your funding cost actually increased this quarter and this will maintain in the following quarters? Because also when you compare the loan operations 9M to 9M, it actually increased just 6%. So I am trying to understand how structural this change is and how do you see that on a going-forward basis? Ivan de Souza Monteiro: This is not a structural thing, as I have mentioned before. We believe that we can benefit in the 4Q. We just increased the liquidity of the Bank because what we have seen in the past about the crisis, we are pretty comfortable that we do not need to do this, then you can say that it is not a trend, and I believe that we could benefit in the 4Q because of this behavior in the 3Q.



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Marcelo Henriques: OK. So I think you have the outstanding amount enough and just for support the operations in the 4Q and increase your loans and your margins will pick up in the 4Q? Ivan de Souza Monteiro: That is the strategy. That is right. Marcelo Henriques: OK. On Banco Votorantim specifically, I saw the same behavior in terms of net interest margin, and actually also looking at the balance sheet for overall Banco Votorantim, we have available here, term deposits and demand deposits remain quite stable in the quarter. So again, it is like a huge spike in the interest expenses; it went from 10.3% to 11.3%. And this sense on Banco Votorantim, is this more structural than when compared to Banco do Brasil? Is this like this new cost of fund because of [unintelligible] in the tenor on the liability side? Is this for stay? Gilberto Lourenço da Aparecida: Banco Votorantim is different because they do not have deposits there. They rely on interbank lines and they issue PDs or CPs or things like that. It is completely different from Banco do Brasil. What we are trying to do – and since we joined the Bank, we can see that the size of the fund increased, the diversification of the fund increased, but the costs did not decrease, did not reduce in the same pace. What we are trying to do is to reduce, specially to increase the maturity of the funding because it is good to create more stability in this funding. Remember that if you do not have the branch network as we have, we have fewer alternatives to diversify our source of funding. I believe that they made a very good job. Remember that they issue a lot of bonds and got this benefit from funding in a lower price, but in my opinion we are more focused now to create more stability and to do this without distorting the cost of this fund. This is completely different from Banco do Brasil. Marcelo Henriques: Yes, but if you look at the numbers, I mean, and I am sorry to dominate the call, because I was not able to ask on Portuguese for some reason, but if you look from the 3Q10, it was 9.7% and then it increased to 10.3% in the 2Q, and now it is 11.3% in the 3Q. So, you think that this will move upwards or you think that the lengthen of the tenor is already happening and this will be the new, let us say, funding cost of Banco Votorantim or do you think there is more to come? Gilberto Lourenço da Aparecida: No, I believe that we are in a very good level, talking about the liquidity in Banco Votorantim, we are in a very good level. And the same behavior, we imagine that this



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crisis, now I believe that the European crisis is coming to an end, I do not know what kind of end, but in my opinion we do not expect to increase this. As I mentioned, changing now and talking about Banco do Brasil, we could benefit in the 4Q because of this behavior in the 3Q, but again, Banco Votorantim, if you analyze the cost of the funding, is completely different from Banco do Brasil. Marcelo Henriques: And just one last question on BIS ratio on both Banco do Brasil and Votorantim, what is the strategy? Now the Tier 1 is at 10.6% at Banco do Brasil. Tier 1 of Banco Votorantim in the 2Q was 9.7%. So, if I assume that there was a higher b.p. decline, which is in line with the BIS reduction of Banco Votorantim as a whole, it will bring your Tier 1 of Banco Votorantim to below 9%. On both banks, is there are any minimum level that raises like a yellow flag and this would make you think about a potential capitalization even before you have imagined? Ivan de Souza Monteiro: No, for Banco do Brasil, the minimum, the regulatory level is 11%; and we work always with 13%, and we try to apply the same for Banco Votorantim. Remember that in Banco Votorantim you have the alternative to sell part of our portfolio. That is different from Banco do Brasil. That is why you can use more tools there. But again, we are waiting for the public hearing about Basel III, then we can establish a correct strategy based on the measures that the regulators in Brazil will put in place to be sure that Brazil will achieve the levels that Basel III will require in the future. Marcelo Henriques: Just one last question, I am sorry, I promise. If you look at Banco Votorantim itself, the profit sharing line as a percentage of your total net profit before this distribution, is roughly 40%. It has actually been accruing in the past three quarters despite the at least disappointing results of Banco Votorantim. Is this something that you accrue quarter on quarter and then at the end of the year you see that, if it reached the results or not, and then you take it back, or is this something that is already established that it is going to be this number? Because even this quarter that was a net loss, you accumulated like R$80 million in profit sharing. Ivan de Souza Monteiro: Gilberto, could you explain this? Gilberto Lourenço da Aparecida: The remuneration of Banco Votorantim employees, part of the remunerations are variable, so we account part of these expenses in profit sharing, so even having a loss they still have protection, so that explains why we have this level of R$81 million. But it has reduced because part of this remuneration is also related to the total performance of the Bank in terms of net income. So, this R$81 million is pretty much related to protection of Banco Votorantim employees.



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Marcelo Henriques: OK. I will take that offline and then I am just concluding. OK. Thank you. Jorge Kuri, Morgan Stanley: Hi. Good morning, everyone. I have a question also on your financial margins, not looking specifically a bit quarter-on-quarter change but taking a step back and looking at the last year. If I look at your reported net interest income and subtract the FX position hedge item, your trading gains and the equalization revenues, so that I can isolate only what really is the intermediation business, I get to growth for the 9M11 of 7.5% versus 9M10. So, your financial revenues are growing at 7.5%, yet your earning assets grew 18%, including loans also around 18%, 19%; Selic rates 9M11 are higher versus the 9M10. Can you help us understand what is happening at the Bank that your financial revenues are growing much slower than your assets, even though you are seeing credit spreads go up in the system? So, just help me understand why is it that you are growing at half the rate of overall asset growth? Thank you. Gilberto Lourenço da Aparecida: If you do not mind, Ivan: Jorge, the point is, first of all, there is not only one answer for this question. First, the strategy of the Bank, when it comes to credit portfolio, has been increasing in those more collateralized. It has been for a while. If you take a look in everything that we have presented to the market, for instance the breakdown of our credit portfolio to individuals has increased in those more collateralized, I mean payroll loans, car financing, more recently mortgage. The consequence of it is that we can have a better shape in terms of credit portfolio, but on the other hand we have pressure in our margins. Talking about specifically this quarter, we have another effect that was, first, the increase in Selic rate for all kinds of floating funding that we have in our liability, and the increase of the cost of this funding also as presented on the slide where we show the cost of our deposits increasing from 64% to 67%. And another point is the fact that deposits, especially time deposits, gained participation in the total funding of the Bank. So, talking about specifically this quarter, the pressure that we have in margin is quite manageable to be better shaped in the following quarter, because next quarter we have reduction in interest rate and we have increase in non-interest bearing liabilities, like demand deposits because of liquidity in economy. So, basically it is that. So, the structural side could be the strategy of the Bank in growing in those lower-yield operations, as I mentioned, and in a more conjunction side this increase in cost that we have in the 3Q. Jorge Kuri: All right. And so going forward, should we assume this next level of evolution between earning asset growth and financial income growth? Are you still going to see significantly lower growth in your net interest income relative to the asset base?



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Gilberto Lourenço da Aparecida: Going forward we have to assume the guidance that we granted to the market. The NII growth guidance is to be 11% to 13%… Jorge Kuri: I am thinking about 2012, I mean, obviously 2011 is done, so I am thinking... Gilberto Lourenço da Aparecida: Yes, more following in the rhythm of earning assets, yes. Jorge Kuri: I am sorry. Gilberto Lourenço da Aparecida: Following the rhythm of the earning assets growth, you can assume that. Jorge Kuri: Less than earning asset growth or in line? Gilberto Lourenço da Aparecida: No, following, in the same pace. Jorge Kuri: So then, does that mean that you are going change the strategy? So, you just told me that over the last 12 months you have been focusing on more secured type of credit, therefore the mix has deteriorated towards lower NIMs; does that mean that if you are going forward that is not going to be the case that your volumes are going to grow in line with your financial income? Gilberto Lourenço da Aparecida: Yes, but we have, I am sorry to interrupt you, to bear in mind that within the earnings assets, credit portfolio, if you expect to have a better growth or credit portfolio being ahead of other assets, we can recover a little bit the return of the assets by this measure; increasing the credit portfolio in the total earnings assets. Jorge Kuri: OK, all right. So then, my second question is, so I take that at face value, you are going towards more secured products. If I then adjust that number by the provisions, I end up with a post-provision financial income growth of 9% year on year. It does not seem to be adding much to the financial income growth. Is there a time lag? I mean, are we supposed to see that paying off for you guys in terms of growing your risk-adjusted margins faster at some point or...?



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Gilberto Lourenço da Aparecida: Yeah, Jorge, we can follow up with your question, you can give me a call in that regard because you are using other methodology to access that, but what we can tell you is that our guidance related to provision is quite under control because we have accounted for 3% of the total credit portfolio, and the reduction that we have in risk-adjust margin mostly explains this phenomenon in the 3Q related to the cost of funding. So what I am trying to tell you is that in the 4Q we tend to recover the net interest income of Banco do Brasil, so it tends to have a better net interest margin in the 4Q, and as a consequent of this, recovering the adjust net interest margin because we are not seeing any deterioration in the credit risk side. Jorge Kuri: OK. Thank you. My last question is regarding Banco Postal; can you give us some color on what level of expenditures you are anticipating in order to ramp up that business? I know you are not providing guidance for 2012, but just give me a sense, because I am assuming a lot of those expenses are going to be over the next 12 months; how will expenses look 2012 versus 2011 given that you have to ramp up that quite large business? Gilberto Lourenço da Aparecida: Yea, you are right. We did not give yet any guidance related to 2012, but the business model of Banco Postal is pretty much linked to variable costs than fixed costs, because we are going to use our structure of Banco Postal to originate the business, so their personnel, their structure, their marketing, so on and so forth. The only expense that we are going to have because of the increase in that business will be those related to the variable cost, the expense related to the transactions. So, to give you an example, if they collect the deposits we have to pay a percentage of the deposits. So as long as we have business, we are going to have expenses, but of course with gain of margin. That is the rationale behind the Banco Postal model. So, the major expenses that we are going to have related to Banco Postal would be those related to the amortization of the intangible that we paid to Banco Postal, these R$2.8 billion. That is it. Jorge Kuri: All right. Thank you, Gilberto. Daniel Abut, Citi: Good morning, Gilberto. A couple of one-off questions and then one more specific question about Votorantim. A follow-up on the prior questions, you said, Gilberto, that you would expect next year to have net interest income growing more in line with asset growth. Although you are not giving guidance yet, what are you thinking in terms of loan growth for next year, at least as a soft indication?



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You started this year thinking that it was going to be 15% to 18% of your domestic portfolio. It seems you are going to end the year closer to the low end of that range, close to the 15% level. What is your current thinking in terms of volume growth for next year, at least as a soft indication? And then in expenses, it is actually quite remarkable that you are [unintelligible] performing the best in expenses this year, even though you do not have any significant mergers synergies or anything like that to obtain. What has been allowing you to grow expenses in only single-digits? Is it a cost saving coming from the Nossa Caixa, a decision that is coming even though that was not the reason why you did the transaction? What is causing it? In a year where your placements have been running close to that level that you have been growing expenses only parity with inflation, and what has this been for next year? Do you think you can repeat that performance of growing expected variable inflation, or that was something one-off this year and looks difficult to repeat next year? After you answer these two follow-up questions, I will come back with one more specific on Votorantim. Gilberto Lourenço da Aparecida: Thank you, Daniel. So talking about credit growth, the expectation, of course, as I mentioned, we did not give any guidance for 2012. But following the main driver problem is going to be having growth, repeating what we had in 2011, something close to 15%; that is our expectation. Of course, we have to wait to see what is going to be the guidance granted by the Bank at the beginning of next year. But potentially 15% tends to be a reasonable number. Expenses; the behavior that we have in expenses this year is pretty much close to our cost discipline of Banco do Brasil. There is no way out, Daniel. Margin, we have pressure in margin that over time trends for banking. So, we have to be very disciplined when it comes to costs, and we have succeeded doing so. So, part of this performance is explained by the synergy gains coming from Banco Nossa Caixa, but also by a very strict cost control that we have in Banco do Brasil, and we tend to have the same approach for next year. We do not expect anything more than to be strict in cost control throughout next year. So, we tend to follow the driver related to expense that is inflation, something like that, or so some organic growth. But in the end we tend to seek single-digit growth, maximum 10% growth for next year in expenses. Daniel Adrian Abut: Could you repeat the end? I kind of lost the number. We wait for your guidance early in the year, which you normally do. But your current thinking is another year of high single-digit expense growth? Gilberto Lourenço da Aparecida: High single digit; maximum 10% growth. That is all I can say.



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Daniel Adrian Abut: That is very useful. But quickly on Votorantim, although you have mentioned in prior questions that most of the issues related to funding there, and then in the words of the European effect start to a very rapid improve, but I also noted that a very significant increase in the NPL ratio of Votorantim in this quarter, although it was not that significant, not material for the overall NPL ratio of Banco do Brasil, it may be an issue for the business of Votorantim going forward. So, what is going on there? Is this related to the macroprudential norms that affected the auto lending business, and when do you think that situation is going to stabilize and therefore allow Votorantim to be stronger on the regulation side? Ivan de Souza Monteiro: It is linked to the macroprudential measures, but we are trying to stabilize this until the end of 2011 and we are pretty sure that we are going to do this. If you share the business in Banco Votorantim you have the quarter-to-quarter wealth and asset management business doing very well. The broker/dealer is the same, and indeed BV Financeira, you have only car finance and payroll; payroll is dong very well. The problem is only related to car finance. We took a lot of measures just to be sure that we can establish a target to start decreasing the NPL ratio overdue 90 days, and we are pretty sure that we can do this until the end of 2011. Daniel Abut: Thank you, Ivan. Carlos Macedo, Goldman Sachs: Hi, good morning, Gilberto, good morning, Ivan. I have a couple of questions. Going back to Banco Votorantim, I understand that the NPL ratios, you are looking for ways to improve them. But at the same time the loan growth and the auto line still remain fairly robust. If you include the loans that get sold in auto, probably to Banco do Brasil itself, we would see even stronger growth coming from that line. And the Bank reported an R$80 million loss and really has not had stellar performance on the ROE side since the acquisition. Is the auto book responsible for everything there, for the 13% of ROE that we have been seeing as being the most recurring ROE there? What do you expect out of Banco Votorantim? What should we expect when we look at it and analyze it as being part of Banco do Brasil? The second question is little bit more specific. Fee income growth for you guys expanded significantly in the 3Q vis-à-vis the 2Q. A lot of it seemed to be driven by an increase in other fees. I was just wondering what exactly ends up being that line that pushed your fee income higher, and should we expect that to remain at a high level in the 4Q and next year? Thanks.



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Ivan de Souza Monteiro: OK, Carlos. Talking about Banco Votorantim, the target there is to be close to the ROE of Banco do Brasil. That is what we are working to do. And the problem that we are facing on BV Financeira, as I mentioned before, we are trying to fix immediately as soon as possible. But again, if you share the Bank and you get only the wholesale, the wholesale is doing very well. But we acquired this bank focused on car finance. We did not have the technologies to originate the assets inside the dealers that we do inside the branches of Banco do Brasil; that is why we decided to acquire. And we are trying to improve just focused on next year. You are going to see a new regulatory environment, and in this new regulatory environment we want to be sure that BV Financeira is still a profitable business to run. That is why we are doing now and not waiting for the impact of this regulatory environment in 2012. And in Banco do Brasil, we have a very conservative approach talking about the provisions. We are trying to do the same in Banco Votorantim. That is why we are now trying to reduce the production in September, October, November, and December, just to be sure that we are getting the best assets, that we are originating the best assets. Just to be sure that we can reduce the delinquencies there not only now, but for the future. Carlos Macedo: And so, Ivan, if you allow me a follow-on to this, so we should expect the profitability to resume or to go back to the levels that we saw on previous quarter, around between 10% and 15%. But to get around 20%, which is where Banco do Brasil typically has been, probably something for the end of 2012, or should we expect that earlier? Ivan de Souza Monteiro: I believe by the end of 2012. Why? Because that the cost of funding there is different from Banco do Brasil. We have a very good cost of funding. That is why it is difficult. If you put the cost of funding for Votorantim and if you get the new regulatory environment for 2012, in car finance you see that there is a dramatic reduction on the ROE of this business. That is why we are taking the measures now, just to be sure that we can preserve, we can keep the profitability even with the actual costs of funding, but in an environment that is, for example, you are not able to get up front the benefit if you decided to sell part of our portfolio. We are doing now and not waiting for what we expect to be the profitability of this business in 2012. Carlos Macedo: OK. Thank you. Just on fees, then, is this something that we should expect to see going forward at this level or was there something specific to this quarter that happened?



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Gilberto Lourenço da Aparecida: What we identified was fees related to affiliated companies that accounted for R$118 million in the 3Q. So probably those were related to the insurance companies. So I would expect the same level. Carlos Macedo: OK. Thank you. Saul Martinez, JPMorgan: All right. Thanks for taking my call. I have two follow-up questions. Quickly, first, I did not understand the response to the first question on what exactly is on slide 12, in the other line. The explanation for why sequentially net interest income evolution was poor was related to funding costs, but I would think that the higher funding costs related to growth in time deposits and higher costs on time deposit would have been in the line called funding. Yet the poor NII evolution sequentially had more to do mathematically from a 44% quarter-on-quarter decline in the other line. So I just want to understand what is in there. Your release says it has more to do with treasury items. I am not sure how a higher funding cost is captured in that line. Can you just explain a little bit more in detail what is in there and why it was so poor this quarter? Secondly, on the capital issue, you mentioned the uncertainty around Basel III, the public hearing. Can you just talk a little bit about what your expectations are related to the implementation of Basel III in Brazil and whether that should be a concern in terms of capital adequacy and potentially the need to raise capital sooner than maybe the market is expecting? Thank you. Gilberto Lourenço da Aparecida: So, talking about the funding, as explained before, we have seen a decrease in the DDA deposits and increase in time deposits. And in time deposits an increase in the price of this. As I mentioned before, it is a not a trend for us and we believe that we could benefit in the 4Q because of this behavior; the majority related to the development of the European price. Talking about the Basel III, we are waiting for the public hearing just to be sure what kind of measures that we need to put in place in the Bank. But it is impossible to anticipate this without the final rules from Basel III. In Basel II, Brazil was not invited to participate in the discussion; it is completely different now in Basel III. The regulators in Brazil are following closely this issue and I believe that they will establish the same rules and in the same sets as the international rules will be disclosed by the Basel committee. Saul Martinez: OK. Let me just ask, I understand conceptually why your net interest income was sluggish. My question is why did the other line, on page 12, go from R$817 million to R$455 million?



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Gilberto Lourenço da Aparecida: Would you like to call me later? Saul Martinez: OK. Gilberto Lourenço da Aparecida: To talk about it. Thank you very much. Saul Martinez: Sure. Victor Galliano, HSBC: Hi. Thanks. Most of my questions have been answered. But if I can just focus on, again, the outlook for 2012 and focusing here on cost and in particular organic growth build out. Now you have got Banco Postal; what expectations do you have in terms of 2012 build out, if there is any, of main branches or other branches? And what sort of cost pressures could that put on? Would that threaten your, shall we say, soft early guidance of less than 10% OPEX growth? Thank you. Gilberto Lourenço da Aparecida: So, the plan that we have to open the new branches, we tend to change a little bit when it comes to the small branches, because we are going to fulfill our needs to serve our customers, especially those customers that are underserved in our customer base through Banco Postal. But other kinds of branches for high-income segment we are going to maintain the same plan. So, when talking about the cost that we are planning to have next year, something close to 10% or below 10%, we are considering everything together, we are considering the development of Banco Postal, the investment that we have to make, to fulfill other needs that we have in other segments, because the idea is the same. The idea is to maintain on track our strategy to enhance the retail segment because out there we are going to have the increase in cross selling, and more diversification revenues, talking about increasing the insurance segment business, credit card business, and other businesses that tend to be very important to compensate any other pressure that we can have in margins. So, the plan, when it comes to investment and expenses, it is the same. So, everything together we are going to stick to less than 10%, something close to 10% in expense in growth. Victor Galliano: OK. Do you have a number of branches, or an idea of the number of branches you would like to add in 2012?



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Gilberto Lourenço da Aparecida: Not yet. Victor Galliano: OK. Just one quick follow-up, if I may, on the renegotiated credits, and thank you for including that in the presentation, very helpful, I mean your disclosure. But if we look at slide 30, which has the renegotiations for the agribusiness book, are those included in the global numbers for renegotiated credit that you have, for about R$8 billion? Gilberto Lourenço da Aparecida: Yes, it is included. Victor Galliano: OK. So that R$5.9 billion, or whatever it is, R$5.8 billion, is part of that R$7.7 billion? Gilberto Lourenço da Aparecida: Yes, you are right. Victor Galliano: Perfect. Thank you. Regina Sanchez, Itaú BBA: Hello, everybody. My question is, we noticed that you have +5 premiums paid over acquired portfolios to the net interest income, and this was one of the reasons to change the guidance of net interest growth. I would like to know if you could let us know how much of this revision of guidance was related to this reclassification, and how much was related to the higher funding costs, as well as maybe lower trading results. Gilberto Lourenço da Aparecida: The results of the reclassification, the net interest income of the Bank would increase 11.5%, instead of increasing 10%, so 150 b.p. The rest is more related to the shape of the liability side, deposit growth, funding cost, so on and so forth. Regina Sanchez: OK, thanks. My other question is regarding administrative expenses. In order to achieve this guidance of growth between 9% and 12%, I think Banco do Brasil will need to post a more significant increase, maybe above 10% in our calculation, in the 4Q. If this is correct, what can have a more positive dynamics in the 4Q to maybe compensate partially these higher expenses? Is it fees, net income, or do you think these administrative expenses could be even slightly below the guidance range?



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Gilberto Lourenço da Aparecida: To be in the lower range of this net interest income we have to increase in the 4Q 4.5% to 5% over the 3Q net interest income. Fee income tends to follow the same rhythm, growing above 5%; that is our expectation. 4Q tends to be quite good for credit cards, for assets under management, so on and so forth. And we have a lot of expectations in insurance business to compensate the seasonal behavior in expenses side. Bear in mind that we have signed with the union the salary agreement, and in average we tend to have 9% to 10% in personnel expenses growth over the 3Q, and we have more activity in the 4Q that puts more pressure in other expenses. So, having 9% to 10% growth over the 3Q in expenses is quite normal, quite seasonal effect, so quite compensated by the other revenues. Marcelo Telles, Credit Suisse: Hello, everyone. I have two questions. The first one, I am sorry to insist so much on this NII question, but I think it is important for you guys to give more clarification on that. When we look in terms of Banco Votorantim, as pointed out earlier, there was a big drop in the NII quarter over quarter, about 8.5%. I was wondering, given that this also had a big impact in the overall result of Banco do Brasil, we are talking about a net decline of R$120 million. So, I was wondering if there is anything related to a treasure loss at Votorantim. And I ask that because when I look in the press release for the 2Q we can see there is actually a 200 b.p. decline in the yield curve, which actually lead Votorantim to post a loss of close to R$300 million in the quarter. And then when I look in the 3Q release we see that they will still a post a loss of R$170 million, so that means that they really have not changed the exposure in terms of interest rate cuts. They will lose money if interest rates go down. And I am talking about here the trading portfolio, the portfolio that is actually marked to market. So, given that the yield curve actually shifted downwards by 200 b.p., I would expect that Votorantim posted quite a big loss in the quarter, and I was wondering if that has something to do with the very poor performance in NII of Votorantim, given that the change in yield curve happened at the end of August and September. And the other question I have on a different subject is regarding the asset quality. If you look at the asset quality numbers, you are clearly doing very well. But we look at the NPL ratio on agricultural loans, it is pretty much at historical loans. So, going into 2012 do you expect that NPL ratio to remain at such low levels, I believe at 0.9%? Because my concern is that if that NPL ratio goes up or normalizes at least in throughout 2012, you could actually have a bigger impact in terms of the overall NPL ratio for Banco do Brasil, and that could lead you to have much higher provision expenses next year, probably growing above your loan growth. Thank you. Gilberto Lourenço da Aparecida: Ivan, could you take the Votorantim question?



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Ivan de Souza Monteiro: Votorantim is not related with treasury. It is only related with the NPL ratio and the problems that we described before in car financing. That is the only reason. As the partnership with development, we are trying to get the conservative approach that we have here in Banco do Brasil, and trying to do the same in Banco Votorantim. Why? Because we feel comfortable with is. That is why we do not expect any kind of difference related to things like treasury or to make money, trying to get the best knowledge about the trend for interest rates, for exchange rate and things like that. Gilberto, could you add, talking about the second part of the question? Gilberto Lourenço da Aparecida: Yes. The historical level, we are not in the bottom in terms of historical level, because prior to 2005, the NPL ratio of the agribusiness used to be 0.5%, 0.6%. So, part of this 0.9% is still being affected by the fact that we do have a sizeable portfolio of structural loans in agribusiness, so it decreased but it has demanded more provisions than regular, if I can say that. So, we still have some room to maintain this improvement in agribusiness because of the reduction that we tend to have in the restructured loans. And compared to historical level, this portfolio has been originated in a better shape, because now we have the use of risk mitigators, we have direct loans only for those risks being better. So, the quality origination of agribusiness is quite better than it used to be in the past, when we used to have this 0.5% NPL ratio. Marcelo Telles: So, your expectation for asset quality for next year, looking at the Bank as a whole, do you expect a stability in NPL ratio, if you compare December 2011 to December 2012, or do you think it could deteriorate a little bit? And also do you think your provision expenses can grow in line with the loan portfolio, or they tend to grow at a faster pace than your loan portfolio next year? Gilberto Lourenço da Aparecida: For the time being, the expectation is to follow the credit portfolio. According to the guidance that we granted to the market, we still expect some slight deterioration, because as we saw in our guidance the provision expenses established in the guidance are R$3.3 million to R$3.7 million, and we still accounted for 3% yet. So, if some deterioration happens, the maximum is to be at the lower end of the guidance, in terms of provision expenses. And this 2.1% increasing more 20 b.p. maximum until the end of this year; that is the expectation that we have, considering everything together, including the behavior in Banco Votorantim book. I am talking about Banco do Brasil as a whole. Marcelo Telles: But my question is more like towards 2012. Do you think that you do not see any…



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Gilberto Lourenço da Aparecida: Maintaining the number that you are going to see at the end of December. Marcelo Telles: OK, basically flat NPL ratio for 2012? Gilberto Lourenço da Aparecida: Basically flat. That is our expectation for the time being. Marcelo Telles: For the time being? Are you getting more negative on the economy, on the outlook for next year? Is the risk more on the upside or on the downside? Gilberto Lourenço da Aparecida: I believe it is neutral. Until now it is neutral, because there is no further expectation to see major deterioration in the consumer finance side, and we are talking about unemployment rate. The expectation in terms of GDP is to be at approximately 3% growth, so it is quite a reasonable level. So, for the time being, according to the variable that we have in the economy, that is our expectation. Marcelo Telles: Thank you. Operator: Thank you. This concludes today’s question and answer session. Mr. Ivan, at this time you may proceed with any closing statements. Ivan da Silva Monteiro: Thank you very much for the participation, and if you have an additional question, please call Gilberto’s team, or you can go on the IR department through the Internet. Thank you very much. Operator: That concludes our 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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Conference Call Transcript Banco do Brasil (BBAS3 BZ ... · Conference Call Transcript 3Q11 Results Banco do Brasil (BBAS3 BZ) November 4th, 2011 1 Operator: Good morning, ladies