伊塔烏聯合銀行 (ITUB) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

[Operator Instructions]

At this time, I would like to turn the conference over to Ms. Lídia Borus, of Financial Investor Relations, Brazil, which as a reminder is the successor of Thomson Financial Investor Relations, Brazil. Please go ahead.

Lídia Borus: Good morning ladies and gentlemen, and welcome to Banco Itau Holding Financeira SA Conference Call to discuss Q1 2005 results. I would like to mention that a slide presentation has also been made of the above on the Company's Investor Relations web site at http://www.itauir.com during this call. Before proceeding let me mention that forward looking statements are being made under the Safe Harbor of the Security Litigation Reform Act 1996. Actual performance could differ materially from those anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors.

With us today in this conference call in Sao Paulo is Mr. Alfredo Setubal, Investor Relations Director, Mr. Henri Penchas, Senior Vice President & CFO, Mr. Silovi de Carvallo, Executive Director of Controllership, Mr. Candido Bracher, President of Banco Itau BBA, and Mr. Marcus Anthonys, Director of Accounting.

First Mr. Alfredo Setubal will comment on Q1 2005 results. After that the management will be available for a question and answer session. It's now my pleasure to turn the call over to Mr. Alfredo Setubal. Mr. Setubal, you may now begin.

Good morning for those in the US, and good afternoon for those in Europe, and a pleasure for us to be back in our traditional conference call for the results for the quarter. It was a very good result in our view. We will start talking about slide number two for those who are following through the slide presentation through the Internet. The first highlight is the result itself, R$1.141 billion, what shows (inaudible)of 35.1% an increase when we compare to the first quarter of last year, 30% increase and almost 11% when we compare to the results of the last quarter of 2004.

The second point is the growth of the credit portfolio in the quarter was 7% mainly pushed by the personal credit at 22.2% and automobile of about 17.3%. We are going to go in more detail in the credit portfolio in the following slides. And the third point that we would like to highlight is the increase of existing provision for loan losses in the quarter, we increased R$150 million. So, the total above the minimum required by the regulations of the Central Bank of Brazil, we now have R$ (inaudible) precaution is necessary due to a possible deterioration in the credit portfolio that can happen depending on the evolution of the economic scenario.

We didn't touch the additional provision for the security's portfolio that remained R$400 million; we maintained the same level that we have in the last quarter of 2004. The fourth point is delinquency. Delinquency ratio, the non-performance ratio remained flat in the quarter in 2.9, but we expect this level to have a small deterioration in the coming quarters due to the increase in the credit portfolio in the risky business of individuals and the small and medium sized companies. So, we are not expecting this level to maintain in the coming quarters.

The fifth point is the amortization of the goodwill of the business that we announced, which in the association, which is larger -- in a new consumer credit company that we would start this year. We have amortization of R$182 million after tax effect.

And the sixth point that I would like to mention that we are going to see more details during this presentation is the disclosure of all the results from the operations of non checking account customers that is increasing very fast in our business due to the business (inaudible) our consumer credit company, the increase of participation in credit card company that we announced last year from 32% of the company to 50% and the new business with Lojas Americanas and CBG(ph in terms of consumer credit. So, from now on, we will always show this business separate from the rest of the bank.

Going to the slide number three, we see here some of the figures that we would like to point out some of them. First one is the stockholders equity, that's financially R$14.6 million and total assets of R$146.5 billion. The total assets increased R$16 billion in the quarter and the total return on assets was 3.2% and the DIS ratio is another number that I would like to show you. It is 18.3% down from 20.6% due to some credit that we provided in the first quarter to corporate clients that were paid in the second quarter. So, the level probably will increase again during the second quarter of this year.

Going to the slide number four, we can see more details about the credit portfolio. The total loans finished the quarter with R$57 billion. Of these, R$20.7 billion was to individuals and was a big increase when we compare both to the last quarter of 2004, the increase was 13.7% and when we compare to the first quarter of 2004, we can see a growth of 62.3% in line what we have been announcing and doing in the last quarter, there was a increase more actively the credit for individuals. In terms of loan for companies, we can see SNE increase of 60% when we compare to the first quarter of 2004, we finish this quarter with R$9 billion, an increase from R$8.5 billion that we finish the last quarter of 2004.

Also in line what we have been announcing and doing, there was increase in these segments. In terms of corporate business, the growth was smaller, 4.4 when we compare to the end of 2004. In terms of securities held by the bank, we can see a total securities of R$18.8 billion divided by R$7.2 billion in public securities that we continue to reduce the exposure and private securities also 11.6, there is a small reduction also from the end of last year. So, we continue to reduce the securities' portfolio to face the growth of credit of the bank.

When we see on slide number five the growth of credit portfolio, we can see that we have been growing in the last seven years and especially in the last two years we can see a more rapid growth due to the better environment synergies. Slide number six, we can see the trends of the non-performing loans ratio. As I said, the level in this quarter was flat when we compare to the last quarter of 2004 and our expectation is that we achieved the bottom in terms of non-performing loan and we expect now some deterioration in the coming quarters.

We can see here that also was flat for individuals, 5.6 and it had been better in terms of companies, 0.8%. In terms of coverage ratio, 221% continuing to be very comfortable, this cooperation. On slide number seven, we talk about Seven Seas that continue to be very important for us in terms of revenues. The total for the quarter finishing almost R$1.8 billion, increase of R$119 million when we compare to the end of the year, the last quarter and almost R$400 million when we compare to the first quarter of that year.

The increase was mainly due to the credit card business that increased R$66 million in the quarter and almost R$200 million when we compare to first quarter of last year, especially for the increase of the number of cards that we did through the Itau Card and also because the increase of participation in the credit card company that from 33% to 50% that we announced last year. Also another point is the Current Account services that increased also due to the increase of the number of client and the increase in terms of price that we did for some services in December.

Going to slide number eight, non-interest expenses, we can see that we finish this quarter with R$1.9 billion, lower than the R$2.1 billion in the fourth quarter of 2004, and in line almost the same level in the first quarter of 2004 which shows the adjusted number in line with reports that we have to maintain expenses of the control to increase efficiency of the bank. We can see for those who are following the slides an increase in personal expenses and other avenues of expense, this is mainly because of the acquisition of the participation of 100% of the company and the increase of the participation in the credit card company that the reason that they explain the increase in these two lines.

But if we adjusted all these, you can see that we are controlling very well the cost as we had announced the report and the target to remain flat or lower than inflation in terms of nominal expense. In slide number nine we can see these numbers in terms of traffic that shows the two controls that we are showing in terms of controlling our cost.

These controls of costs can be seen also in the slide number 10 when we finish the quarter with an efficiency ratio of lower than 50%, 49.4%. We have a target to have efficiency ratios should below 60% this year, we expect this number to be around 48% - 49% due to these control of expense and also because of the increase of revenues for all the business and record increase of credit that we are showing in the quarter.

In slide 11 we can realize gains that we have in our asset that is a little bit higher than the end of the year and a little bit lower when we compare to the first quarter of 2004 but these two are very important numbers of unrealized assets of R$2.1 billion. On the slide number 12 we can see we have been showing in the last conference calls and presentations the Itau Holdings managerial numbers divided into three, Itau Banco the retail bank, Itau -BBA the corporate bank and the corporation. From this quarter and on we are going to split this numbers in four we are hoping and disclosing the Itau the name that we are going to use for the non checking accounting clients business that we are increasing very fast in the last few years and we, because of these we considered that was very important to disclose its numbers separate.

So and the Itau managerial numbers, we are going to see the Banco Finance Credit Cards not especially for the cards issued by the credit card company ie that is our consumer credit company, FIC that is Itau CBD Financial Company and the business that we announced that we will start this year that is the consumer financial company with Lojas America.

So going to the slide number 13, we can see the managerial number for these four segments. The first one is Itau Banco, our main retail operation with a profit of R$767 million in the total that we release the company R$1.1. So R$767 million came from Itau Banco, we have located capital of almost R$7.6 million and what we'll give as an annualized return of equity of 47% for these retail corporation.

The credit portfolio for these operations is almost R$24 billion and total assets of almost R$120 billion. When we go to the numbers of Itau BBA we can see a net income of R$257 million and location of capital of R$3.2 billion what gives an annualized return on equity of 36%. Credit portfolio of Itau BBA R$22.5 billion and total assets of almost R$41 billion. Itau Credit, that is a new segment that we are releasing disclosing a net income of R$123 million location of 1.1 billion give us a return on lines of 52.4.

Credit portfolio 10.6 billion and total assets that includes the endorsements and ratings, and total assets of R$10.2 billion. Another corporation where we locate the excess of capital in our view, the excess of capital is R$2.7 billion that provides a negative return of 1%. So this is the way that we see the managerial numbers for the Itau Holding in these four segments. Now we can go on slide 14 and we will see more details of each of these segments.

The first one is Itau Banco with this return of net income of R$767 million, this major highlight here in this slide about the loan loses provisions, that increase from R$257 million in this next quarter to R$481 million, this is mainly these increase in the excess provisions we announced of R$150 million, of this R$150 million, R$132 million was located in this Itau Banco Pro-forma results. Going to slide 15, we can see the split in terms of business lines that we have inside Itau Bank. The main results is the banking operation R$469 million, that is a reduction when we compare to the last quarter of 2004 mainly because of this increase in excess provision that we already discussed.

Credit card business R$105 million, insurance pension plan and capitalization R$132 million and asset measurement R$61 million with the total R$767 million. Going into more detail we can see on slide 16 the credit card business R$105 million would give us a return equity with location of capital of R$457 million, a return of more than almost a 130% (inaudible).

Number of cards issued by Itau Card alone is 7.5 million and volume of transaction R$3.6 billion. And here, we can also highlight the increase in service fees due to these increase in terms of number of cards. In slide 17, insurance pension plan and capitalization, we can see that the net result was another good quarter R$132 million, this is a good impact of the combined ratio that for eight quarter in a row, reduced, we finished with 90.9% is a very good number for the insurance business and we continue to see an increase in the pension plan business here in Brazil, we expect this year also to be a very good year in terms of increase for the pension plans.

Asset management, we finished with R$105 million and of these 11.6 is technical reserve from the company's insurance pension plan and capitalization. Coming to slide 19, we can see Itau BBA pro-forma, the managerial results of R$157 million, I would like to highlight here the results from losses, is positive due to the revision of provisions from recoveries and from the provisions made last year, so the final results from losses recoveries R$67 million is positive, and we also did control internal expenses, we finished in this quarter with R$130 million lower than R$160 last quarter 2004, and lower than in the first quarter of 2004 that was R$147 million.

Of this 920 we can see these new segmentation that we are closuring, Itau Cred pro-forma, we can see the result of that R$123 million and I would like highlight also here the results from low end losses R$120 million compared to R$41 million in the fourth quarter 2004, especially because of the consolidation of credit card company that we increased the participation.

We can see more details in the results on page 21. That we can split R$74 million in terms of net results, credit card for 9000 customers, 66 million and (inaudible) is the company, the financial company that we started that we are doing the new business, opening branches and we have a lot of expenses at the beginning, it's showing R$8 million in terms of losses in the quarter, with the business of this new business.

Slide 22, we can see that Itau is the leader in terms of issuing of credit cards, Itau Cards, and includes in the credit card participation, first place would be much more consolidated when we compare to the biggest banks that we compete with us in this segments. And to finish the presentation the slide that shows that we achieved both from Moody's and from Fitch the best ratings among all the Brazilian banks due to the quality of our results, management and the solid business recurrences that we have here at Itau Holdings. So we have very important differentials among our competitors in terms of ratings and we reflect in terms of the cost of funding for the consolidated Itau Holding Financeira business.

We are now hoping for questions from you, so we can start the second part of our conference call.

Thank you, ladies and gentlemen we will now begin the question and answer session.

[Operator Instructions]

Our first question is an internet question, this will be read by Ms. Lídia Borus.

Lídia Borus: Yes, this is a question sent by e-mail from Carlos Ramos (ph) with City Group Asset Management. First question would be, BBA has very large recoveries, what would be the sustainable return with normal credit costs? Second question, we have seen your US Dollar short position increase from $872 million to $1.35 billion in one quarter, although you talk about a smaller tax adjusted position its still a big jump, at what level of the Reais would you return to your traditional long dollar position?

Good morning, Carlos thanks for your question. Here is Candido Bracher is speaking. Yes, BBA has had loss recoveries this quarter, and if we exclude them, our BBA return would have been 27%, under the present market conditions we believe this to be a sustainable rate of return on equity for the bank.

In relations with the second question Carlos, our long dollar position is totally hedge at this moment. Due to tax affects, if you have a permanent investment outside, the valuation or devaluation of our currency in comparison with the foreign currency is not taxable or tax deductible, so to have a perfect hedge you need higher short position due to the tax affects on the hedge of investments abroad, so that's why just the position without considering tax affects, it looks like if we have a short position, that position is perfectly hedged of the investments abroad, the difference is exactly the tax affects on the different currencies, and the tax on different lines in the PML statement, so but at the end the effect is zero in the net profit.

The next question from George O'Curry (ph)of Morgan Stanley.

Hi good morning, two quick questions. First one Itau-Cred represented around 10% of your net income in both the first quarter and the first quarter of last year. That does it incorporate any meaningful contribution from (inaudible) and Lojas Americanas ventures which were started. In two years from today when all of your current ventures are at full speed and we continue to see consumer credit growth, what do you think is going to be contribution of Itau-Cred to the bottom line of the consolidated numbers? And the second question is, can you share with us what is your current estimate for the (inaudible) at year end 2005, year end 2006 and what are your expectations for reserve requirement this year and next year? Thanks.

George, Henri speaking. The first question, George we are not disclosing this number at the moment, but as we disclose it during requisition, during the constitution of the new finance company with CBD and with Lojas Americanas, these two new investments are include in (inaudible) Itau Cred, the first three years, they will not be so profitable, and they are beginning to be brought up after the third year.

The consumer (inaudible) of financing is a profitable operation and it will continue and credit card for non-customers also it's continuing its growth and I believe it's easier to project. The second question, I didn't understand. The third question for the moment we don't expect any reduction in reserve requirements, George please, if you can repeat your second question?

Yes, well thank you. And just to clarifying on the first question. So, we should not anticipate Itau Credit to represent more than 10% give and take of your consolidated net income. Is that correct?

It depends on your projections of the increase of credit card for non-customers and the vehicle financing businesses that are already consolidated.

And what do you anticipate more or less? I mean, I am just trying to understand how the mix is going to change between your different businesses lines in a couple of years. I mean, will it hold credit 20% of net income, 15% -- will it roughly stay at 10%?

We believe that in the long run, this segment will increase, George. And you'll see at the end of the year the number of customers and the big expansion that we will have in this segment, mainly with the building of the franchisee (inaudible) and the building of the franchisee Lojas Americana. This segment, in three years from now, we will be very, very important. You'll be very impressed also, with the numbers at the end of this year. But the profit, the net income in these two operations is not big probably it's even a loss for this first and second year. But the traditional businesses in this, in vehicle financing and the credit card for non-customers are increasing with the market.

Thanks Henri. And then the other question was, where do you expect interest rates, (inaudible) to be at the end of 2005 and the end of 2006?

That's a very, very difficult question. We believe that, we'll be at the level of 18% at the end of the year, and for 2006, probably 14%.

And in a scenario of 14% interest rates at the end of 2006, do you still think reserve requirements are going to be at the same level where they are today?

In our budget we are considering that they will be maintained. But we have some sensitivity analysis for a reduction of 10%.

Okay, great. Thank you very much. Thank you very much Henri.

Bye, bye George.

Thank you sir for your question. The next question comes from Jason Mollen (ph)of Bear Stearns.

Good morning. My first question is related to the level of loan loss provisioning that the group reported in the first quarter. Pre-recoveries, we saw over R$750 million in loan loss provisions. You mentioned that ensuring your release that you increase what you call excess loan loss provisions by R$115 million. One, if you could comment on why you created this excess?

Is it because you are concerned about additional losses in the future that the regulations would not require you to make provisions for? Two, even excluding this R$115 million, that would be a level of about R$600 million in the quarter which is substantially higher than the R$400 million range that we have been seeing, should we expect it to continue given the high growth in your consumer segment? And the second question would be related to, I guess follow up on George O'Curry's question on the contribution of Itau Cred.

I mean, is it something that in the long term, you think that could be an equal contributor to the bank's earnings? Is that the way you look at this business that you are investing? Obviously, for the next three years, we shouldn't expect a significant contribution as you said, but in the longer term, do you see this as making up a third of the group's earnings?

Good morning, Jason. Henri speaking. Jason, your first question about the provision for loan losses, yes, the normal provision we believe that will increase this year due to the bigger increase in consumer loans. With higher spreads and higher provisions, so yes the normal provision will increase this year. But the net income will increase also because the spread is much higher to support the need of bigger provisions for loan losses.

The second part of your first question, as you know we build a lot of stress scenarios and in one of the stress scenarios being very, very conservative, we believe then it was very prudent to build an excess provision of R$115 million, at this moment having in mind the stress scenario, the worst stress scenario that we can foresee, just to keep the non-performing loans. The excess provision on performing loans are over 200%.

The second question we believe that this segment will be very, very important in the future. Your question is very, very difficult by our slide, due to the increase of the GDP of the Brazilian GDP and a lot of these customers that today -- they are not customers of the normal banking segment. With the bankarization of these people, a lot of these people will be transferred from non-customers to customers in the future. But with the growth of the GDP we believe that in the long, long run, this segment can contribute 25 to or more with the net income of the bank.

Let me just a follow-up on first question on loan loss provisions, if we were to take the R$750 million in provisions pre-recovery, excludes R$150 in excess due to some stress, that would give us about, say a run rate of R$600 million per quarter. That would be, I think R$2.4 billion for the year and for the full year 2004, we saw less than R$1.6. Now, should we estimate, you know a 50% increase in loan loss provision?

Yes, Jason.

Okay. Thank you.

Or even a little-bit more than that, but yes and that depends on the increase in the consumer loan-financing book.

Thank you very much.

Thank you for your question Mr. Mollen. The next question comes from Paulo Roberto(ph) of City Group Smith Barney.

Good morning every one. I want to follow up first with Jason's question. For the level of provisions would be targeting keeping coverage above 200, you have it 220 and that is pretty strong. Is your target to keep it above 200, or you're targeting provisions in terms of percentage of average loans, that you want to revision so you can like- forecast. Another question is regarding your fee income. It seems that service fees grew faster quarter-over-quarter than the number of cards. Do you have any pricing power now? Were you able to increase prices? In going forward, would you think you will be able to increase prices? Occasionally we see in the press here, you know, complaints from you know, Brazilian customers or Central Bank or Congress or whatever, saying that Brazilian banks are charged too much. There is not enough competition so, what are your views on that too? Thank you.

The first part for the moment, having in mind our actual stress scenario, we believe that the level of 200% is reasonable. As I explained in the Portuguese conference call, that that depends in what we foresee at the worst -- worst case in our actual portfolio. But today, yes, we believe that 200% is a reasonable level, having in mind our actual stress scenario. Over to Silvio for your second question.

The second question, we are focused to control costs, we consider that we are not increasing costs, we don't have a will to increase price in this moment, because of the competition. We suppose that we would stay in the level that we are today.

Right, thank you.

Follow the stress, that we suppose that will be maintained if there is a decrease, the real decrease of the interest rate special charge also.

That makes sense, thank you.

The next question is from Mario Perry(ph) of Deutsche Bank.

Good morning everybody, I have two questions. First is on your press release, you've mentioned that you plan on opening about 500 new (inaudible)stores, and to hire another 5000 people related with (inaudible) just trying to get a sense from you about the costs of opening up this new stores, and also the salaries of these 5000 new employees relative to the salary, you pay to your current employees right now, and then the second question has to do with the net interest margin, I was a bit surprised to see net interest margins remain flat in the quarter from the fourth quarter if we exclude the non recurring gains in the fourth quarter, especially even on improvement on your long mix, try to understand if how do you see the competitive environment and if you see a competition putting any pressure on your margins going forward, thank you.

Marrio in relation to the first quarter, we suppose that these investments will cost our -- our first estimation, we didn't open the kiosks in the Financeira, Itau, CBDS, but we suppose that the investments is not so much, is around R$40 million. In relation to this 5000 increase in employees we suppose that it is before, basically (inaudible) lower than the salary of other bankers. Suppose that you increase the same ladder of 45,000 employees that we have. In relation to your second question related to each of the net interest margin, we disclose any comments that we had in this first quarter, increase in net interest margins from R$155 million. On the other hand, we have the hedge -- explain in the first quarter, we had to do the bottom line -- operations. It means that it has created some of the activities, some (inaudible) the income statement, its happening in relation to the net interest margin, related with the (inaudible) and the treasury position, it cause decrease in the net interest margin about R$106 million but on the other hand in the bottom line in the tax income is neutralize these aspects, the contribution, the bottom line was R$10 million in the end of the quarter.

Okay, so if I can follow up, do you see increase competition though, in granting loans or how do you see that going forward, because it seems to me every bank in Brazil was trying to grow the loan portfolio 20% to 25% this year, so just trying to get an idea, how you see the competitive environments going forward and then on the salaries of the Itau employees, can you give us just an idea of that they are around 50% of what your current employees earn or how -- just trying to get an idea of the size as well?

The total cost (inaudible) of the average of the bank, is about include the average R$1,200. In relation to the first quarter, can you repeat please?

Yeah, the first question is more --

Okay. Competition, okay. In our guidance in relation to the loan growth is continue to be around 20% -- 25% this year, we consider that we are maintained this type of operations.

Okay, thank you very much.

Thank you for your question sir. The next question comes from Rafael Bale(ph) of City Group.

Hi, good morning a couple of questions. The first one is maybe you can share with us a little bit of your stress scenarios and the question is at what point do you slow down credit, is that a function of interest rate, is that a function of whether they are viable, and then the second point is regarding your excess capital, you have a pretty hefty excess capital there that is yielding nothing at best, could you give us an idea what you plan to do with that excess capital and when?

Rafael, Henry speaking. Good morning. Rafael, it's very difficult to your first question. Because we've done a lot in the last two years, a very complex model and this model they take in to consideration first of all the worst case scenario in each of the segments and in each of the loans link it with the guarantees of these loans at the banks, that the loans were granted, so we have a very complex model and in the stress scenarios do it first with the best experience in the worst case of each individual portfolio. And takes into consideration also the worst future scenario for the next two years. So that's how we built this model.

And the second question, we believe that the actual excess of capital -- and as I explained it if I'm not wrong, in the Portuguese conference call we believe that we can work within a normal course of business with an excess of 25% over the minimum capital required by central bank so the actual requirement is 11%, so we believe that with 30% to 75% in the normal course we can perform very well. As you know, we are just introducing BASEL II, we have already our first calculations, but the Central Bank and the Brazilian authorities at the moment, they have not decided all the points on how to calculate the new BASEL II. Taking into consideration the actual Brazilian requirements, we have an excess of R$2.7 billion capital, and we are managing this excess of capital for the growth of the loan book, second, we are increasing the dividend pay out, third, we are buying back shares and fourth, we are building new partnerships and spending a lot of small and medium size requisitions that are in the market in the moment, and we believe that we can perform very reasonable with an equity, even having at this moment, these excess of capital.

Okay, thank you very much.

[Operator Instructions]

This concludes today's question and answer session Mr. Alfredo Setubal, at this time you may proceed with your closing statements.

Thank you. Thank you for all you that followed this conference call. I think the results were very good, very consistent, recurrent results continue to be very strong. We continue to be confident that we are going to have a very good year again in 2005, very good returns and we hope this continues for 2006 if the environment continue to be favorable for the banking activities.

Thank you for all and we will talk again in the next conference call for the second quarter results, thank you.

That does conclude our Banco Itau Holdings Financeira Conference for today. Thank you very much for your participation, you may now disconnect your lines.