伊塔烏聯合銀行 (ITUB) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. This is Banco Itau Holding Financeira's conference call. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded.

At this time, I would like to turn the conference over to Ms. Daniela Ueda of Financial Investor Relations Brazil. Please, go ahead.

Good morning, ladies and gentlemen, and welcome to Banco Itau Holding Financeira's conference call to discuss the second quarter 2008 earnings results. I would like to remind you that this conference call is being broadcast live on Banco Itau's investor relations website, www.Itauir.com. A slide presentation is also available on that site.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from those anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks, and other factors.

With us today in this conference call in Sao Paulo are Alfredo Setubal, Itau Holding's Investor Relations Officer; Silvio de Carvalho, Itau Holding's Chief Financial Officer; Eduardo Mazzilli de Vassimon, Itau BBA's Executive Vice President; and Marco Antunes, Itau Holding's Director of Accounting.

First, Mr. Alfredo Setubal will comment on the second quarter 2008 results. Afterwards, management will be available for a question and answer session.

It is now my pleasure to turn the call over to Mr. Alfredo Setubal.

Good morning for those who are in the US. Good afternoon for those who are in Europe. We are starting our second quarter results conference call.

For those who are following through the Internet, we are starting on page two, highlights for the results. The first one is the result itself. Net income of BRL 2.41 billion, with an annualized ROE of 27.4%. That compares with the first half of the year with a net income of BRL 4.84 billion, and annualized ROE of 27.7%.

In terms of recurring net income, it is a little bit higher. We grow to BRL 2.79 billion in the current result, with an increase of 5.1% when we compare to the first quarter of 2008, and with an annualized ROE of 27.9%.

The second and impotent highlight is the growth of our credit loan portfolio. The growth was 7.5% in the quarter compared to the first quarter, and 41.3% when we compare to June, 2007. We continue to concentrate our attention and capital in this sector where we can get more margin.

Vehicles continues to be a very important part of our portfolio. And the growth in the quarter, because the market for car finance continues to be heated, the growth, it was 10.1% and 61.7% when we compare to June, 2007.

The other sector that was -- continued to be very important in our strategy is the segment of small and medium-sized companies. This sector, the position in terms of market share of Banco Itau is not the one that we would like to have. So, we continue to invest deeply in this segment, taking advantage of the better environment that we have in Brazil in terms of growth. So, the second quarter in the small and medium-sized companies, our growth was 17.9%. And in the last 12 months, 62.2%.

In terms of mortgage, the growth continued to be important, even though the second represents only 2.1% of our total credit portfolio. But, the growth was 10.6% in the quarter and 28.6% in the last 12 months. It is a factor that we continue to believe that we'll continue to show a large growth of -- growth in the coming quarters.

The third highlight is our Basel Ratio that continues to be very high, and good to take advantage of the opportunities that we have here in Brazil, especially in terms of credit growth. Our final number for the quarter was 16.4%.

The fourth highlight is banking charge. Just remember that in this quarter since May, so in the last two months, we have the new regulation of the Central Bank that puts new controls and rules in terms of banking fees that we can charge. So, we are going to give more details in the coming slide.

The fifth highlight is the income tax. In this quarter we recorded -- we have an increase approved by the Congress of Brazil of the Social Contribution rate from 9% to 15%. The Financial System is complaining in the Supreme Court about this, that we consider to be unconstitutional. So, we have tax credits because of this increase in this rate, and we compensate this quarter, we also give you more information in the coming slide.

In slide number three, we can see the difference between the net income and recurring net income, and the net income that we published. The most important differences were the sale of the shares of BCP from our subsidiary in Portugal, the BPI Bank. That shows a loss of BRL 34 million in our stake -- in the stake that we have in this bank.

We have some gains in the sale of the Visa International that we sold shares after the IPO. And we have some gains after the merger between BM&F and Bovespa, making the new company, BMF Bovespa. We received BRL 42 million in cash because of this transaction. So, our final number, a recurrent BRL 2.79 billion, and net income published, BRL 2.41 billion.

On page four, we see in our stockholders' equity that finished with BRL 30.341 billion, with growth at 3.7% in the quarter and 14.3% when we compare to June last year. Remembering that we didn't issue any shares in this period and we bought back BRL 1 billion in shares in the first semester of this year.

The efficiency ratio, 43.9% in the quarter. A little bit above the 43.3% of the year, but in good line when we compare to other quarters.

And our non-performing loans, 4.3% in line -- in the same level that we have in the first quarter of the year, but much lower of the 5.1% that we showed in the first quarter of -- or the first semester of 2007.

On slide number five, more detail of our pro forma results. We started with the managerial financial margin in the quarter, BRL 5.867 billion, with an increase when we compare with the BRL 5.535 billion in the first quarter of this year. So, we have an increase of 6% quarter-over-quarter, and 11.4% when we compare to the first semester of 2007.

This, as we traditionally show, is split in two main numbers -- financial margin with our customers, where we saw an increase of almost 2% quarter-over-quarter, and 16.2% when we compare to the first quarter of 2007.

Financial margin with the market, with (inaudible) treasury gains and our foreign exchange hedge. This quarter we were able to show a better result in treasury gains, especially with derivatives in the pre-tax position that we have in our securities portfolio. So, the gain in treasury in this quarter, BRL 423 million compared to BRL 217 million in the first quarter of this year.

But when we compare to the first half of the year, we see that in the first semester of 2007 our profits, the revenues generated from the treasury gains were BRL 939 million and BRL 640 million this semester. So, we have a huge reduction in treasury gains due to the volatility and the market conditions that we have since July of last year.

Our hedge gains were BRL 290 million compared to BRL 261 million in the first quarter of the year, in line with the valuation of the Real.

Banking fees, BRL 2.494 billion was an increase of 3.7% in a quarter-over-quarter. We have a more detailed slide coming.

In terms of results from our insurance and pension plans and capitalization -- before capitalization company, before the retained claims, increase of 4.5%, achieving BRL 738 million in the quarter, and a growth of 12.1% when we compare to the first semester of last year.

So, we finish our managerial financial margin and banking fees with an increase of 4.6% in the quarter and 8.6% when we compare to June, 2007.

The impact of these numbers. Our results from loan losses. This increased 5% in the quarter because of the growth of the credit portfolio itself. And non-interest expenses that increased 6.3% in the quarter and 5.7% semester-over-semester, in line with -- a little bit higher than inflation, showing a good number in terms of control of expenses.

On page six we can see a more detailed -- more details of our credit portfolio. We see issued BRL 148 billion with a growth of 7.5% in the first -- second quarter when we compare to the first quarter, and 41.3% when we compare 12 months.

This shows that the economy continues to be hit. We are taking advantage, especially in the sectors, as I mentioned in the beginning of the presentation, the sectors that we have more margin. So, we continue to focus on vehicles, but we can see also growth in terms of credit cards and personal loans. In terms of company loans, our focus continues to be small and medium-sized companies.

As I mentioned, we had a very strong growth in the quarter of 17.9%. But also, we can see that the big companies, the corporate segment of our clients are more active this quarter. The growth was 5.8%, and 36.4% for big companies in the last 12 months. This is mainly because companies are using more the local markets because of the international situation, and more difficulties affecting the capital markets. Our focus in terms of companies continued to be the small and medium-sized, where we can use better the capital and have more returns.

In terms of direct loans, rural growth was 4% in the quarter, and mortgage, as I mentioned, 10.6%. Our banks in Argentina, Chile and Uruguay showed a small decrease in the quarter when we see the credit portfolio because of foreign exchange situation in these countries.

On page seven we can see that our non-performing loans continued to be stable. We have a little bit better number in terms of individuals, 6.6% when we compare to 7% in non-performing in the first quarter. And a little increase in companies. That increased from 1.4% to 1.5% but, in average, lower than in the previous quarters.

Our coverage ratio in our view continued to be very comfortable, 143%, when we analyze the conditions of the economy.

On page eight, provisions for loan losses and credit portfolio. We can see that we made provisions before recoveries of BRL 1.158 billion. That compares to BRL 1.830 billion in the first quarter. And this increase quarter-over-quarter is because of the growth of our credit portfolio. When we analyze provision losses compared to the total credit portfolio, 6.2% continued to be improving in terms of the growth number.

On slide number nine, funding and managed resources from our client bases. As a total is BRL 403 billion. We continue to increase our client deposit bases, especially related to retail. We increased in the quarter almost 21%, and 56% in the last 12 months.

Debentures issued by our lease company also continued to be a good source of funding for our operations. That increased 21% also in the quarter, and 75% over 12 months.

Our institutional customers, when we analyze 12 months we see that the deposits from this segment is stable. As I said, we prefer to use more retail deposits than institutional deposits. But anyway, in the quarter we recovered the losses in terms of deposits of the last -- of the first quarter of this year.

In terms of new profiles is -- the number if quite stable because we are seeing some shift from mutual funds, especially from money market funds, to time deposits.

On page number 10 we can see a more detailed banking fees revenues and income from banking charges. The total number, BRL 2.594 billion. This shows an increase of 3.7% in the quarter, even though we can see some reductions because of the new regulation of the Central Bank, and that was -- that started in May. So, in the quarter we have two months already with the impact of the new regulations of the Central Bank. So, we can see that this impact on income from banking charge, line B in the middle of this slide for those who are following, that in the first quarter had BRL 702 million, decreased to BRL 635 million.

But anyway, we were able to compensate and show this growth of 3.7% in the total banking fees because we start new policies in terms of charging products that were not charged before that is allowed by the new regulations. And also, we compensate with more fees from investment banking in this second quarter.

On slide number 11, non-interest expenses. As I said, in our view the growth in the last 12 months of 5.7% is a good number. Just always remembering that we are opening branches. We are going to open this year 140 new branches, and we opened almost the same size, the same number in the last 12 months. So, we continue to take good control of expenses and we continue to put a lot of attention in this line because, with this market being more competitive, our control of expenses will be very important to keep profits growing.

On page 12, we see the efficiency ratio. That continues to improve when we analyze the cumulative number for the last 12 months. It finished 45.4%. So, we continue to decrease quarter by quarter this ratio, what is very good, taking advantage of more controlled expenses and taking advantage of the growth of our business in terms of credit and fees.

On page 13, we see here more details in terms of the tax credit that was created because of the increase of the social contribution from 9% to 15%. You can see here that we offset in this quarter the increase of the total increase of this new loss, but we still have BRL 771 million to use in the coming quarters to offset this increase in the social contribution. And we expect that the Supreme Court will give their opinion about our view that it is unconstitutional, this increase, in the coming quarters.

On page 14, we see the market value of our assets, the unrealized gains in a lot of assets that we have in our balance sheet. We see in this quarter we finish with BRL 6.779 billion of unrealized gains. That shows a huge growth when we compare to the June, 2007, that the number was close to BRL 2.8 billion. In the quarter we saw some reduction because of the decrease in the shares in the stock market.

On slide 15 we see the segmentation, pro forma, managerial that we have before segment as we usually show in our presentations.

On page 16 we can see these four segments in more details. And basically, we can see the second quarter compared to the first quarter of 2007 [sic - see slides]. And we show here the recurring net income for the retail bank, for the wholesale bank, for our non-checking account business, that is Itaucred, and the corporation that is where we allocate the excess of capital.

Starting from the corporation, we can see that, quarter-over-quarter, that we reduced the excess of capital because of the growth of the credit portfolio and you use -- allocate more capital to the business. So, we reduced the excess of capital allocated to corporation from 6.5% to 4.7%. So, this was good news because we are using more the excess of capital to grow the business.

We can see in the quarter that the retail operations increased the net income, the recurrent net income, from BRL 1.1 billion to BRL 1.2 billion. That shows an increase in the ROE of the other (inaudible) capital from 34% to 35%.

Our wholesale bank, Itau BBA, also increased the recurrent net income from BRL 368 million to BRL 414 million, and also increased their return.

Itaucred reduced a little bit the results. And of course, they reduced their ROE of the capital allocated from 39% to 30% in the quarter.

So anyway, it was a very good result in terms of recurrent numbers, with a very good ROE for the three business lines that we have.

We understand that we have also this excess of capital that are using and waiting for opportunities for acquisition, also. But we anyway are using this excess of capital. We bought back, as I said, BRL 1 billion in shares in the first semester and we are increasing our credit portfolio.

On slide 17, to generalize. We have the same numbers comparing the first half of 2008 with the first half of 2007.

With that, I finish the presentation and we are open to your questions that you have to us. Thank you.

Thank you. (OPERATOR INSTRUCTIONS.) Our first question comes from Jorge Kuri with Morgan Stanley. Please go ahead.

Hi. Good morning. Jorge Kuri from Morgan Stanley. A quick question. Can you share with us your outlook for the next 12 months? There's obviously been a lot of changes on the macro side with the Central Bank raising interest rates. Can you let us know what is your expectation for, first of all, the macro outlook for 2008 and 2009, and then what that means for your business in terms of the key variables, loan growth, fee growth, net interest margin and profitability? Thank you.

Hello, Jorge. This is Alfredo.

Hello, Alfredo.

Hello. Jorge, our forecast for the coming year is a little bit different from that we have today. We are expecting the economy to reduce the pace of growth. The first quarter was almost 6% in terms of GDP. We expect the interest rate to increase in the coming coupon meetings, achieving something around 15% in terms of interest rate.

Of course, this will have some impact in the growth of the economy. That is the expectation of the Central Bank, of course, to reduce inflation. So, we expect the growth for this year to be around 4.8%. So, we are going to see some reduction in the coming quarters. Next year we expect the economy to grow something between 3% and 3.5%.

Of course, with the environment will be different and the credit portfolio probably will grow less next year. But we are too positive that the numbers will be good in terms of growth for the economy when we compare to other countries, especially in the developing world. Probably Brazil will have a growth bigger than these countries. And probably -- if difficult to measure, but probably this scenario will show some increase in delinquencies in both segments, individuals and companies.

And your -- thanks, Alfredo. And your expectations on the deceleration of credit growth. I mean, what level of magnitude are we talking about? Where do you think credit world will end? I mean, you're right now at the run rate of 37% year-on-year. Where do you think that will end December, 2008 and then December, 2009?

And then I guess the other very important variable is net interest margins. How does all of this play out in terms of your expectation for margins in '08 and '09?

Jorge.

Hi, Silvio.

Silvio de Carvalho speaking. In the second semester we are expecting a reduction, at least to the first semester. For next year we are -- -- but for the year we are expecting that the credit will around 25% or 30%, near -- maybe near 30%. For next year we are expecting around 25% in loan growth.

Net interest margin, we expect it to be flat during this next quarter in relation to the second quarter of this year. But next year, we expect that will increase a little bit with the scenario that the interest rates will increase.

Okay. Thanks a lot.

Okay.

Thank you for your question, Mr. Kuri. Our next question comes from Saul Martinez from JPMorgan. Please go ahead.

Hi, guys. How are you? A couple of questions. Actually, I want to just kind of focus on asset quality. And first of all, can you give a little bit more color on the decline of 40 basis points in your NPL ratio in the individual loan segment? I was a little bit surprised by the magnitude of that. And can you give just a little bit of color as to what segments that occurred in? Was that in auto, was that in credit card, unsecured personal lending? Kind of -- if you can just give a little bit more detail on what you're seeing within the individual subsegment.

And then secondly, you gave some good disclosure about vintages. I think you mentioned that 1.3% of loans originated this quarter were past due more than 15 days, and that was less than what you've seen in the first quarter. But can you give us a sense as to how that number has looked historically? Is 1.3% a high number, is it a low number? And kind of what you'd expect -- what you expect from the evaluation of past vintages going forward.

Asset quality, in our view, is spread out to all the segments. We don't have the concentration in any segment. In our view, is a result of the credit amounts that we implemented in 2006 and 2007. And these -- we had these in our models, new variables in credit scoring and in the credit amount in general. And that's the consequence of that.

In terms of 1.3% of the vintage, that's the first time that we gave this disclosure. We don't have many historical information. 1.3%, we consider that's good, but we have to expect that other quarters to (inaudible) more deeply. In our view, 1.3%, it's a good number.

Okay. But -- so on the first question, Silvio, I mean, can you -- I mean, for the 40 basis point decline, you've seen declines in -- I mean, in the auto loan book, the credit card loan book? I mean, that was pretty -- are you seeing better asset quality across the board within your consumer -- or within your individual loan book?

It's -- (inaudible) we have more presence to our (inaudible). That is part of this ratio. But we see a little deterioration credit cards. But a little improvement in car, in car loans, and the other parts of the credit portfolio.

Okay. And then just finally, you mentioned that you expect the economy to slow down in 2008. And you said you see an expectation of an increase in delinquency in both corporate and individual loans. Can you just kind of give us a little bit more color as to kind of the order of magnitude?

And also, whether you think the 140% coverage ratio, which has declined -- you said you feel comfortable with it but it has declined quite a bit. Actually, it has declined quite a bit in recent quarters. I mean, is that what you should be seeing if you expect to see delinquency rates go up going forward? Shouldn't you have -- shouldn't you be having a higher coverage ratio as opposed to a lower coverage ratio when -- if your expectations are for increased delinquency rates?

Okay. We didn't see any sign of that deterioration yet. But the cost of interest rates is increasing our vision. We -- affect the credit quality. But we -- to work in this scenario, we become more stringent in credit analysis. Our [futures] are more stringent. And in this, we think that we will keep these ratios flat or a little bit deterioration. But not so much; very small. We consider that the level of quality ratio that Itau has in this momentum in terms of credit, it's okay. [Many] of that is related with car loans, we are very comfortable today.

Okay, great. Thank you very much.

Thank you for your question, Mr. Martinez. Our next question comes from Jason Mollin from Goldman Sachs. Please go ahead.

Hello, everyone. My question, given that the guidance, some indications on the guidance that's been given is on the SME business, the lending to small and medium-sized companies. In the presentation you talked about Itau's desire to increase its market share. If you can talk a little bit perhaps, Alfredo or Silvio, about how you quantify the market share today and any targets you may have. On my calculation you grew that book by BRL 4.5 billion in the quarter. Is that the kind of quarterly increase in the loan book that we should expect going forward?

And my second question is related to basically the increase in time deposits on the funding side. You mentioned that you saw a move from money markets to time deposits. Can you quantify some of this movement and the impact on Itau? I would imagine it means less fees, but you now have the funding on the balance sheet to support your growth in assets. Thanks.

Okay. In terms of -- our structure (inaudible) is a consequence of the acquisition related with BankBoston. BankBoston had a big -- well, actually, a big presence in the SME market. And we integrate totally BankBoston during 2007. And at the end of 2007 we are prepared to expand our operation at the mid-market.

Our market share before BankBoston was very small. I think is very difficult to quantify this market share. But according to our calculation it was around 7%. And today it's around 10%, but is our estimation where we see Itau is difficult to forget that. That's our vision and our segment, that where we are very, very focused.

In terms of fees, you know that you have this not totally -- is not totally in our book the rules that was implemented by Central Bank since May '08. But in our target into this year as it relates to fee growth, it's around 5% in 2008 in relation to 2007.

Thank you. Any specific comments on the growth rate in the SME segment, BRL 4.5 billion in the quarter in terms of increased portfolio. Is that a reasonable run rate for this year?

I think it is -- it totally is spread out of the segments. It's not in any specific segment. The reason is (inaudible) have his platforms focused in relationship with the Company. And we expect to grow SME portfolio around 35% December '08 in relation to December '07, or at most 40%.

In terms of the costs that you ask me, Jason, in reality we move money markets, some two times the cost. And this happened during this year and we expect it to continue in this direction.

Thank you very much.

Thank you for your question, Mr. Mollin. Our next question will come from Mario Pierry from Deutsche Bank. Please go ahead.

Good morning. I have two questions. The first one is related to the drop in net income that we saw at Itaucred, as you highlighted in slide 16. Net income there is down 15% in the second quarter from the first quarter. Just wanted to get some more color there, what really is impacting Itaucred.

Also, when I looked at Taii, it seems like you have reduced or closed about 100 stores from Taii when we look on a year-over-year basis. I think it's around 700 stores that you have now. So, if you could also give us some color on the strategy at Taii.

And the second question is related to expenses. As you showed, expenses have been under control. But I was wondering, out of the 140 branches that you plan to open, how many have you opened already in the first half? And what kind of collective labor agreements, what kind of salary increases are you expecting out of that? Thank you.

Mario, Silvio speaking. Let's talk about the Taii strategy. At Taii, we achieved (inaudible) in reality is profitable today. Our operation with (inaudible) and we expect it to continue to increase the (inaudible) the contribution from the results of the bank.

The operation -- the JV with (inaudible). Probably this will achieve on the end of this year or in 2009.

In our own stores, probably we have -- first, the market change. Is not the same market back when we implemented this operation. I think you have competition with the payroll loans and so the market is more difficult. And we will make some changes in these operations probably.

We didn't close exactly as the number of store related with Taii. In reality, we implement some (inaudible) branches inside the supermarkets, inside the large [Americans]. But if you see the disclosure, you will see the numbers (inaudible) point that we implemented.

The drop in net interest margin I think is more a consequence of the duration of the credit portfolio. In the past, we have in the accrual base a (inaudible) with the loans we see higher spreads. And the (inaudible) with the new ones with a little bit lower spreads. And this -- that's basically the reduction. In other words, two companies. The mix and the spreads are a little bit lower. That's the scenario.

The third question, what -- the number of branches (inaudible) are 68 branches in the first semester. And we intend to open 140 branches during this year.

In terms of expense increase, we mentioned before that the number that we are supposed to increase it was 12% of the total expense. But I think it can be lower than that. Depends on the negotiation with the union. That didn't start yet.

Have you heard any of the demands made by the union already about salary increases?

Not yet.

What -- when you gave the guidance before, of expense growth of about 12% this year, what kind of salary adjustments were you expecting in the guidance?

Just with the inflation.

Okay. Alright, Silvio. Thank you very much.

Okay. Thank you.

Thank you for your question, Mr. Pierry. Our next question comes from Daniel Abut with Citi. Please go ahead.

Good morning, Silvio and Alfredo. First, on number for next year, I think Silvio said preliminary about 25%. Given that you expect -- and Alfredo really explained that -- a much slower economic activity type of year, plus much higher rate, do you still expect auto loans and individual loans to be the key drivers of that 25% loans of next year, or will there be any change in the mix towards less risky segment?

And second, in particular to auto loans, given that you have (inaudible) so rapidly there, this quarter it was over 60% year-on-year, would you comment on -- a bit more on your strategy there? How much of this segment now represents of your growth portfolio? What type of loan-to-value ratio do you apply? You seem to be happy with the (inaudible). I think you even indicated that that was the main reason why the NPLs at the individual segment improved this quarter.

But given that this is becoming such a predominant segment within your portfolio, some people are starting to feel a bit -- well, a bit concerned, but (inaudible) about what's your strategy longer term, or whether these type of growth rates are sustainable or not.

Daniel, it's Silvio speaking. In relation to the loan growth, we expect 25% in the loan growth. Probably you have in the same segment with the more participation of the products that increase more this year. It will be a continuation in next year. More auto loans and more SMEs.

In terms of loan-to-value, we are financed around 70% of the value of the collateral.

And then we are confident that these operations will continue with good quality. Just to remember that today credit in relation to (inaudible) in Brazil is 36%. It's not very, very high level of that if you compare with other parts of the world.

So, just a follow-up, Silvio. How much of your consumer loan portfolio is coming from auto loans? And how much of that auto loan portfolio is financing of new cars versus used cars?

It's -- 40% is in new cars; 60% is pre-owned cars. We have this breakdown in slide six and you can see that the car loans is BRL 36 billion in relation to BRL 148 billion. It means that the participation of the car loans of the total portfolio is 24%.

How large do you think it's going to get? I mean, if you continue to expect this segment to be one of the drivers next year, what level do you think you can get in terms of participation? Do you anticipate going to one-third of the portfolio? I mean, how high can it go?

Yes, it will be around that.

And just a final question. You said 70% loan-to-value ratio. Is there a difference between that statistic for used cars versus new cars? Because you said 40% is new cars, 60% are pre-owned. I would imagine you use different loan-to-value ratios in the two subsegments?

In relation to the new cars is around 80%, and in terms of the pre-owned cars, it's around 65%.

Thank you, Silvio. That's very useful.

Okay.

Thank you for your question, Mr. Abut. Our next question comes from Victor Galliano from HSBC. Please go ahead.

Hi. My questions have been answered. Thank you.

(OPERATOR INSTRUCTIONS.) Our next question will come from Jason Mollin from Goldman Sachs. Please go ahead.

Hi. This is just a follow-up on the outlook for net interest margin. I believe in answering one of the questions, Silvio, you stated that you expect the margin to go up in 2009. And was it -- I think you said remain stable or flat in the second half of the year. Is that versus where we were in the second quarter or the first half?

It's really more related with the second quarter.

Okay. Thank you much.

Our next question comes from Victor Galliano from HSBC. Please go ahead.

Yes. Just on the credit cards and on the autos, I mean, are you in any way here tightening up in terms of your approval rates? Can you give us some sort of idea as to whether this has changed over the last 6 months or over the last 12 months?

It was (inaudible) of the proposals in the car loans market, we are used to approve around 50% of the proposals, then we changed it for 55%. We are rejecting 55% of the proposals.

In Taii's market we continue to reject 90% of the proposals.

Okay. So, you've actually reduced your rejection rate in cars.

No, we increased our rejection.

Sorry.

It was used to be 50%, not it's 55%.

Oh, sorry. I misheard you. I thought I heard 60. And in credit cards?

Credit cards we continue to the same path.

And what is that? What is your rejection rate there?

I don't have the figure now, Victor.

Okay. Alright. Thanks, Silvio.

Okay.

(OPERATOR INSTRUCTIONS.) We have a follow-up question from Daniel Abut with Citi. Please go ahead.

Yes. Just a quick question on your level of profitability, Silvio and Alfredo. Last year, as you remember, you were affected by the integration of BankBoston. And as you indicated and promised, this year as that was put behind, your ROE has started to rebound. We are now at 27.5% level for the first half.

As you head into next year, and given that you are already clearly, a spread that you (inaudible) complicated and tougher environment, do you think you can sustain these levels of ROE, or there may be some layers of adjustment next year?

Daniel, we don't give guidance in terms of ROE. But we see, even in this more difficult scenario that we probably will have in the coming quarters, we see a good scenario overall for the bank.

We don't see much pressure probably coming from competition in terms of spreads. We see a reduction in the level of the economy. But overall, we see a good environment for banking activities in Brazil. We continue to see growth in terms of credit, probably lower than this year, but we think important growth yet. Probably increase -- a small increase in delinquencies. But overall, the interest rate will remain high in average in the coming quarters.

So, the overall environment, in our view, will continue to be a very good one for banking. So, we expect that our current results continue to be good, even though this different environment that we are going to face in the coming quarters.

Thank you.

Again, thank you for your question, Mr. Abut. Our next question will come from Maria Laura Pessoa from Unibanco. Please go ahead.

Hi. My question is on mortgage loans. If you could detail how has growth of this select line been split between corporate and individuals? Also, if you could give what is our guidance for this product for this year. And last, how the partnership with [Lafis] has evolved? Thank you.

The (inaudible) to mortgage probably will grow around 40% in 2008. But, it's more related with companies. But we see increasing in relation to individuals as well. But no low level of credit, low level of income, but for the middle class.

Okay. Thank you.

Thank you for your question Ms. Pessoa. Our next question will come from Mario Pierry from Deutsche Bank. Please go ahead.

Yes. Hi. You mentioned during your presentation that you are very well capitalized so you may continue to repurchase shares. And also, that you could be looking at acquisitions. I think this is the same speech you have used several other times. But like, you must be keeping an eye on current valuation of some bank assets outside of Brazil. There has been a major sell-off. Are you tempted yet by these types of valuation? Are you tempted at all to move outside of Brazil more aggressively?

No, is not our intention, Mario. We see that there's a lot of alternatives outside, but we will continue to focus our efforts in Brazil. We see a lot of opportunity in Brazil in the coming years. I think the market in Brazil is very good for banking. The prospectus in terms of credit growth, (inaudible) of the population increase in income from individuals. So, we see a very good scenario for Brazil in terms of -- for banking in the coming years.

So, we will continue to keep the eyes in Brazil. It doesn't mean that we cannot have some small acquisition or a small business that we can do in countries that we already are established. But we are not planning any huge investment outside Brazil in the coming quarters, in the coming years.

Thanks.

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

Thank you for your presence today with us. As I said, I think this quarter was very good, showing a very strong recurrent result. I think we have a very good business at Itau and this quarter show how strong it is in terms of our recurrent numbers, growth of credit, growth of number of clients. So, we are in very control of the business and we expect that the coming quarters to be as strong as that.

Thank you for your time and we to talk with you again in our third quarter results coming soon. Thank you.

That does conclude our Banco Itau's second quarter 2008 earnings results conference for today. Thank you very much for your participation. You may now disconnect.