伊塔烏聯合銀行 (ITUB) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the audio conference call of Itau Unibanco Holding S.A. (Operator Instructions)

Today with us we have Mr. Pedro Moreira Salles, CEO of Unibanco, Unaio de Bancos Brasileiros S.A. and of Unibanco Holdings S.A., and Mr. Roberto Egydio Setubal, CEO of Banco Itau Holdings Financeira S.A. Also with us are Mr. Geraldo Travaglia and Mr. Alfredo Setubal, Investor Relations Officers of both companies.

I would like to mention that a slide presentation is available on the Company's Investor Relations websites at www.itau.ir.com and www.ri.unibanco.com.br during this call.

Future expectations related to this conference call shall consider the risks and uncertainties that involve any activities and transactions and that are beyond the control of the companies pertaining to both conglomerates, including but not limited to political and economic changes, volatility index change in interest rates, technological changes, inflation, financial intermediation, competitive pressure over products and prices, changes in corporate and tax regulation and also that the corporate restructuring described in this conference call is still subject to the approval of the shareholders meetings of the companies involved and also of the relevant authorities.

I would now like to turn the conference over to Mr. Pedro Moreira Salles and to Mr. Roberto Egydio Setubal. Please, you may proceed.

Good afternoon, ladies and gentlemen, this is Pedro Moreira Salles, thank you very much for coming to this conference call today. I would like to present to you the ideas that shaped this new company, which we believe will be the largest financial conglomerate in the Southern Hemisphere.

We have organized this presentation in the following way. Both Mr. Geraldo Travaglia and Mr. Alfredo Setubal will do the presentations of the quarterly results of Unibanco and Itau. And then Mr. Alfredo Setubal will do the presentation on the Itau Unibanco Holding company. And afterwards both Roberto and I are at year our disposal to answer questions. So, will now start with Mr. Alfredo Setubal who will relate to you the results of Banco Itau's third quarter results.

Good afternoon to you and good morning to those who are in the US We are starting with the results of the Banco Itau Holdings that we released today, the final numbers, just remembering that we anticipated our numbers last week. So, we have the approval of the Board of Itau yesterday and we released today the numbers.

Just to remember, the net income of the third quarter, R$1,848 million, shareholders equity of R$31,591 million. That means a recurrent ROE annualized by the average equate of 25.5%. BIS ratio at 14.7%, we released last week a BIS ratio of 14.9%, so the final number is 14.7%. Efficiency ratio 47% and non-performing loans ratios 4% of both in the quarter.

Next slide, loans by type of customer. Itau finished in total loans with R$164.5 million in credit. The main line in the quarter continues to be car finance when our growth was 9.4% in the quarter, finishing with R$39 billion in total. And small and medium size companies at 14.7% increase in the quarter, finishing with R$33 billion. Both are the lines that we have been growing more in the last quarters, so we continue in this third quarter on this trend.

Slide number five, non-performing loans, we finished the quarter with 4% in total, down from 4.3%. Both segment individuals reduced from 6.6% to 6.3% and companies from 1.5% to 1.3%. Our coverage ratio increased a little in the quarter and achieved 147%, considering R$100 million that we did of extraordinary provisions of both the regulation of the Central Bank.

Slide number six, provision for loan losses and credit portfolio, the total provision in the quarter was R$2,052 million. And we can see also the ratio of provision for loan losses and credit portfolio continues to reduce and achieve in the quarter 5.8% from 6.2% in the second quarter of 2008. Now I'll pass over to Geraldo Travaglia who will talk about Unibanco's third quarter results.

Okay, thank you very much. Well, Unibanco, on slide eight, is showing a net income of R$704 million, as released on October 24. In nine months of this year we accumulated R$2.2 billion, which represents a 5.5% growth over third quarter 2007 or 16.8% over the nine months of 2007. Our annualized ROE for the third quarter is 33.9% and accumulated annualized for nine months of 2008 is 24.4%, which is basically the same 24.5% that we had in the same period of 2007.

On slide number nine, some highlights of our financial statements. Total assets of almost R$180 billion, loans portfolio reaching R$74 billion. Other funding constituted by the deposits plus debentures reaching R$73.3 billion and earnings per share of R$0.25 of Itau.

Our loan portfolio growth has been almost 33% in a 12-month period and 7.7% on the quarter, reaching R$74.3 billion. (inaudible) of retail was 59% and wholesale 41%, which compares to 38% of June 2008, which reflects the appreciation of US dollar currency over the Brazilian Real. And the box on the bottom of the slide, you can see the figures of the Brazilian Financial System for loans and credit, and Unibanco performance were the same figures and the [percent] are quite the same.

On slide number 11 we show some portfolios of our loan book that we mentioned, auto loans that still have a very strong demand in the third quarter, reaching 10.2%, accumulating 65% growth in a 12-month period. And the large corporate loans, which showed an almost 15% growth in the quarter, which reflects the depreciation of the Brazilian Real over the US dollar.

I think another figure that is important to mention is in the payroll loans portfolio, the reduction of the acquired portfolio we were running off this type of portfolio in September 2008, which is almost an 11% drop, which means that we were at that time only growing this portfolio through our own salesforce. At the end of the slide we can see individuals growing 2.7 in the quarter and the corporate loans growing 11.1 in the quarter.

On slide 12 with regards to asset quality, the D to H portfolio, which represents the 60-day past due loans, which are 103% of coverage of provisions, which is pretty much similar to June 2008 with 102%. The participation of D to H portfolio is 4.5, which is lower than 4.7 in June '08 and even lower of September '07 with 12.9, which reflects that the quality of the portfolio is increasing in Unibanco. The non-performing loans, the coverage is still 118%, which compares with exact figures of a year ago. And the participation of non-performing loans over total loans is 3.9, 20 basis points lower than the same figures last year ago. Now I will move on again to Pedro who will cover the topics of the transaction recently released.

Thank you, Geraldo. We are going now to pass through the transaction and explain to clarify doubts that you may possibly have. So, on slide 14, three points that we giving you some attention. The restructuring will cause the migration from the current shareholders of Unibanco Holdings and Unibanco to the public listed company to be called Itau Unibanco Holding, which is currently Banco Itau Holdings Financeira, which will be made through a merger of shares.

Another point that is very important to pay attention is that Itau Banco Holding will have Itausa and the controlling shareholders of Unibanco Holdings, such control to be exerted by means of a non-financial institution to be incorporated for the purpose of this transaction. So, the control of the new bank will be 50% Itausa and 50% from the controller shareholders of Unibanco Holdings.

We can see this better if you move on to slide 15. You can see the current structure of Itau. Itausa is the holding company that has 45.5% of the total capital of Itau Holdings and the free float is 54.5. The current Unibanco structure is that the controller shareholders of Unibanco have 32.9% of Unibanco Holdings that has 58.3% of the total capital of Unibanco. And we can see that the free float of Unibanco Holdings is 57.1 and the free float of Unibanco is 41.7.

So, the new conglomerate will have a different position. Itausa Unibanco's controllers will create the IU Participation company that is a non-financial company that will hold the control of the new bank, the Itau Unibanco Holding company. This IU Participation company will have 51% of the voting shares of the new bank. The Itau Participation will have 50% of the voting shares controlled by Itausa and the controllers of Unibanco will have 50% of the IU Participation.

So, through IU Participation company the control of the new bank will be made. Itausa will remain with 36% of the voting shares of the new bank. That means 18.3% of the total capital of the new bank in hands of Itausa but the control will be made through the IU Participation shared by Itausa and the controllers of Unibanco.

Moving on to page 16, we explain here the number of shares of Unibanco and Unibanco Holdings to be exchanged for each share of the Itau Unibanco Holding. The common shares of Unibanco and Unibanco Holdings will be exchanged for both the controlling shareholders and minority shareholders in a relation of 1.1797 shares per shares of the new company.

The units, you have a little bit different ration of 1.7391. For the preferred shares, the exchange rate was calculated based on the market average price of the units. That means R$7.5460 per unit and the preferred shares of Itau is R$26.2468 in the last 45 sessions of the Brazilian Stock Exchange at the Bovespa.

So, the ratio for the exchange for the shares of Unibanco and Unibanco Holdings, 3.4782 for each shares to be exchanged to receive shares of the new company. And Unibanco shares 0.17391. So, that's the ratios that were released for the exchange. Repeating, that was the last 45 sessions in the Bovespa.

On page 17 we can see that after all these transactions the number of shares of Itau Unibanco Holding will be increased by 1,120 million shares. That's the total of shares to be issued by the company to attend the exchange ratio of shares of the shareholders of Unibanco's Group.

On page 18 we can see a little of our new corporate government. The Board of Directors have 14 members and six of them will be appointed by the controlling shareholders of Itausa and Unibanco Holding. The remaining eight will be Independent Directors. The new Chairman of this new company will be Mr. Pedro Moreira Salles and the Chief Executive Officer will be Roberto Egydio Setubal. No exchanges will happen in the operations and transactions conducted by clients, creditors and suppliers.

On slide 19, another relevant aspect of this transaction, the new company will be the largest financial conglomerate in the Southern Hemisphere. Itau Unibanco Holding will be able to offer the best products and services in the Brazilian market for their millions of corporate and individual clients. The new company will have the largest stockholders' equity in Brazil.

With this strong position we'll be able to support the growth of the credit transactions of our clients. We'll have a substantial increase in economic scale gains in all client segments. And of course we have substantial synergies in various of our business. With this position we'll be able to expand our credit offering, cooperate with the government and with other sisters like financial institutions, recognize the work and assure our financial system integrity.

On slide number 20 we can see the final numbers of the new company, considering the data numbers released on September 3. So, the total assets will be R$475 billion, total loans R$225.3 billion, deposits and debentures issued by the leading companies of both companies will achieve the total deposit and debentures of R$235 billion, assets under management R$265 billion and the stockholders' equity you achieve the end 51.7, considering the tax impact. That means that the new company will be among the 20 largest financial companies in the world and will be the fourth largest company in Latin America.

On slide 21 we give some numbers of the new institution. The total branches and customer side branches will achieve more than 4,800. That means 18% market share and the new company will have 14.5 million current account customers, also 18% of the market.

In terms of credit volume, the new company will represent 19% of the Brazilian system and in total deposits and assets under management we will achieve 21%. In terms of insurance, we will hold 17% of the market and in the case of pension plans we will have 24%.

Corporate operations will achieve 65 billion with more than 2,000 economic groups, meaning the largest companies in Brazil. Private bank business will be the largest in Latin America with around R$90 billion in assets of the clients. Credit card position will be very strong and the operations will include Itaucard, Unicard, Hipercard and Redecard.

On slide 22 we can estimate some numbers of the new company. If you take alone Itau Holding on the first part of the slide, we can see the EPS of Itau Holding of R$2.82 per share. We can see that the new company, considering the profit and the new numbers of shares of the new company, so the total net income just consolidated the Itau and Unibanco, R$8,400 million.

The number of stocks, 4.095 million. That means an EPS of R$2.79. So, the new company reduced costs and gained synergies of R$142 million, which is a very little number compared to the size of the new company. The EPS will return to the same level that Itau Holding has today. So, you can see that the scale of the new company is very important and the EPS will probably increase with some synergy gains that probably will be higher than the R$142 million.

On slide 23 we can see accounting effects that will impact the companies related to this transaction. We can see that considering the capital increase related to the merger of shares, the variation of its equity share and the accounting and tax effects, the positive net effect estimated in the results of Itau Unibanco Holding will be equivalent to R$7.9 billion and the on of Itausa will be R$2.5 billion.

The transaction with all these numbers that I appointed is expected to be accretive in 2009. The Basle Ratio, pro forma of the operation, will be approximately 15.1%. That is about the 11% required by the Central Bank as a minimum here in Brazil. Of course all these transactions will depend on the approval of the authorities, especially the Central Bank of Brazil.

On slide 24 we can see the rankings by market capitalization of the most important financial companies in the world. And we can see the new company in R$44.9 billion in the sixteenth position. In terms of Latin America it is the largest company, the largest bank in the region.

To finalize, on slide 25 we can see the numbers that we released with the material facts that were published yesterday. And to give you some more information, the total number of employees of the new company will be 108,000 employees. And the number of ATMs will be almost 30,000 to serve this large base of clients.

So, now that's the end of the presentation and now Mr. Pedro Moreira Salles and Mr. Robert Setubal are open for questions that you can have. Thank you.

(Operator Instructions) Our first question comes from Mr. Jason Mollin with Goldman Sachs.

Hello, everyone. My question is related to the synergies of the transaction. We know from your prior statements that you're not giving out exact estimates and it's too early for you to talk about specifics. But given Itau Unibanco's experience in mergers, is there a minimum amount of combined cost synergies that we should expense? I mean is it just easy? You've mentioned some areas that you could cut costs on the profits inside or IP side. Is there a minimum number that you would feel comfortable talking about?

And secondly, in your presentation you mentioned the R$7.9 billion positive impact on Itau Unibanco Holding as a result of this from goodwill and other tax implications. Can you explain how we get to this number? And lastly, if you can just comment on tag-along rights. That's something that Unibanco's shareholders hadn't had and Itau's did. So, is that something that shareholders of Itau Unibanco Holding should expect to have going forward? Thank you.

This is Roberto, let me start with the synergies. For sure we believe that there will be synergies down the road. We do not have the time to make any calculation on that. We have a strong belief that this will be the case in this transaction. Itau has a good tradition of good implementation on transactions like this one, integrating banks, and we believe that there will be a lot of synergies.

We don't have numbers, we are not really announcing numbers. I could say a number but I'd rather not mention any number at this moment because we believe that we will have better calculations maybe in two or three weeks. We might have some idea of what's possible and how the numbers can work in the future.

But I think the important point here that was mentioned in the presentation is that the transaction was done basically on market prices. So, it will be accretive next year. I think this is quite important for all the shareholders. Next question, what was that?

Jason, hi, this is Pedro.

Hi.

I think just to add to what Roberto is saying, I mean we mentioned this morning, we are not avoiding the question but basically this entire transaction was discussed among the two of us. People were not involved and these things were only brought on board on Sunday evening, as we have said.

So, really we have a lot of confidence in what we can achieve. Both Itau and Unibanco have integrated a number of banks in the past. We understand what the issues are. This is obviously something of a different size, a different nature, but at the same time it's a tremendous combination. And I think we are going to grow out of this deal, not really to look at it only as a cost-cutting (inaudible).

As for the tag-along rights that you were asking, the new company is, this Itau Unibanco, we had previously the Itau Holding Company and as you know there are tag-along rights in that company. And this is a new structure under which we, Unibanco shareholders, are moving to. So, this will be a new starting point and it is new governance of this Itau Unibanco Holding. Is it clear?

That's great. That's very helpful. And I don't know if you can make any comments on the R$7.9 billion that I'm just not sure how to get to that number that you stated in your presentation.

There's a lot of calculation, you can look Alfred (inaudible) or Geraldo and they'll give you the numbers. But basically, as you know, the transaction was on market numbers and you have a fiscal effect after the amortization of the goodwill.

So, is this an expected state, like you're going to have a tax shield from the goodwill amortization? Is that the idea behind this?

Most of this difference we are talking here, Jason, comes from the difference between market price and book value. So, this is the biggest difference. There are some fiscal effects that are minor, but still we will be able to give you the numbers that you want.

Thank you very much and congratulations.

Our next question comes from Paul Tucker with Egerton Capital.

Yes thank you very much and congratulations. My questions have all more or less been answered, actually, I just maybe could ask one other thing. To what extent have you been able to approach this with your regulators? And could you give us a sense of how you feel the regulatory environment is, particularly in light of what we've seen around the world fairly strong encouragement of strengthening of banks within countries? Do you think that gives you maybe an easier passage than you might otherwise expect?

Hi Paul, this is Pedro. Basically, we took this idea or this deal to the President of the Central Bank on Sunday morning in Brazil, both Roberto and I were there. I think he was very comfortable with the idea, the reaction was very, very positive. Obviously this is a show of confidence and of strength in the country and in what we can build.

In the afternoon, again, both Roberto and I were with President Lula in Sao Paulo and I can relay to you that he was also very, very positive on the announcement. And I think he took it very favorably. And yesterday there announcements in the press from the Finance Minister and those were also very positive.

So, we don't see any reason for the regulatory authorities not to approve this deal. Quite the contrary, I think it's a very, very positive deal for the country, particularly at this moment. And we are, I think, very comfortable that this will pass without any problems.

Thank you, Pedro. And maybe just one follow up, could you just give us a sense of what your expected time line here is for closure?

It's quite difficult to say anything because it depends basically on the authorities. But our experience, in the case of BankBoston for instance, was the last transaction that we've made, it too four months. And it was a foreign company so it was probably more difficult because of our regulations. So, I would expect that three to four months would be a reasonable time period.

Okay great, thank you very much.

Our next question comes from Mr. Daniel Abut with Citi.

Good morning, kind of a follow up to the question that Paul asked. If this may take three to four months, Roberto, then that means that the shareholder meeting will wait for that to be convened to approve it? So, you need the regulatory approval first? Or do you have a timing already for the two shareholder meetings?

It's the other way around, Daniel, this is Roberto, hello. We will have the shareholders' meeting before we apply to the Central Bank for the approval. And yesterday we had a Board meeting already and we have the approval of our Board to take it to the shareholders' meeting already.

So, the shareholder meeting will take place likely this year and the approval from the Central Bank and the other authorities will probably not take place until next year. And the company as a consolidated combined company will probably not report combined results until sometime next year. Is that fair?

Yes. Hold on a minute, Daniel. We don't have a specific date already, Daniel, but probably it will be end of November, beginning of December, something like that. So, we expect to have all this ready to Central Bank approval as soon as possible.

From the point of view of the combination, Roberto, have you given any thought, when you go line by line or business by business, in what area there may be duplications that will merit the need for some divestitures, when you look at what each of the two parties bring to the table?

Yes I will talk about that also, Daniel, but just coming back to your prior question, one thing that is very important is that our deal is already done, it's concluded. We don't have fall backs, which means that there's not anything like penalty if one of the parties should go away from the deal. It's a done deal. This is quite important to make sure that everybody understands that.

Regarding the business, first I'd like to make it very clear that we don't have plans to close down branches. We believe that we have a great network now and we will keep it. Even if -- and we will have cases where we have door-by-door probably branches, but usually today in our case it's very clear that we need more space in branches. So, we don't have ways to accommodate a large amount of clients in our current network, so probably we will really need the branches of both banks in order to serve our clients. This is very important.

We have not had a chance, really, to go business by business. We'll do this in the next two or three weeks, having presentations of both companies to me and to Pedro in all the business lines so that we can understand what it will be possible to do and what are the challenges that we have ahead of us.

But we are positive that the synergies, that we have the opportunities and that there will be a lot of things to do. We are not considering divesting anything at this point. We believe that we have great subsidiaries, great business in our conglomerate that we intend to keep. Maybe Pedro wants to talk something about AIG, which might be of your interest as well.

Hi, Daniel. In the case of the insurance company, as you know and you have seen announced, I mean we have approached the company, actually approached the company before the Tuesday when there was a decision of the US Treasury to bring resources into the company. We had made by then a proposal. This is being looked at, obviously.

At the time the exchange rate was very different than it is now and therefore there needs to be some discussion concerning the evaluation of the AIG [part these new contacts]. But I am confident that we will be moving ahead. Obviously again, it depends also on the decision-making process that is now maybe a bit more complex than it was before mid September. But we believe that this is something that will be solved in the near term.

Thank you.

Okay.

(Operator Instructions) Our next question comes from Mr. Juan Partida with UBS.

Hi, good afternoon. I have a question regarding the structure of IU Participacoes as the new holding company, particularly what pertains to the shareholders of the old Unibanco controlling group. If I do the calculation of the new shares based on the exchange ratio, I come to a share participation of around 11%. And yet the economic participation seems to be closer to 9%, around 8.7%, 8.8%. Can you explain why there is a difference? Is it because of the way this holding company is structured?

Yes. Well, first of all, as I mentioned, the shares are being exchanged on based on a 45 base median price for both companies. And then the controlling shareholders receive their shares and the second step we create is IU Participacoes Company. And in that company we had a disagreement that the exchange levels, the shares invest level was a different one selling, because of the agreement among the two controlling groups of both banks.

Juan, this is Pedro, really after the initial exchange is done there's a negotiation among the new controlling shareholders and for us in order to move into that new company and to have the voting rights of 50%. Then we agreed on this dilution for the second part and now we have a company that is exactly 50/50 among the two controlling shareholders.

And that company in itself has 51% of this new bank, which is Itau Unibanco, and where there will be tag-along rights in the future. So, this is the reason that you find the difference among the first step and the number of shares that are related to the first step. And then the second movement, which is this one when we get into the controlling company and get half the rights of that control.

That's very clear, thank you very much.

Our next question comes from Mr. Arthur Byrnes with Deltec Asset Management.

Gentlemen, I hesitate to ask this question but I'm going to any how. There has been a lot of turmoil in the financial markets and in the whole world, and certainly in Brazil as well. Rumors of corporate problems with the currencies and maybe banking problems with loans to companies that might have those problems that we don't know about yet. You've been talking about this fusion for over a year. All of a sudden it's a Monday morning announcement to the world. Can you both confirm that there are no issues on the balance sheets of either bank that are problems that we as shareholders don't know about?

Okay this is Pedro Moreira Salles. I don't think it was a surprise Monday morning announcement. Any day that this would come it would be a surprise announcement because it has been dealt with in, obviously, a very restricted environment, which means that only Roberto and I were talking about it.

And this is why there was no leak whatsoever, which I think is quite unique given the size of the Company. And the reason for that is that there were very, very few people involved and actually they were only involved when they were needed to be involved.

You are to be congratulated for that, by the way.

Thank you very much, we are very proud of this actually. And the reason that we did this deal is irrespective of the environment. Now I know that there was a lot turmoil, I think there has been a lot of noise within the system. I mean we know that there are a few companies that got over exposed in this entire derivative issue. Basically that we know of, there are two or three that may have gone too far. And this doesn't mean that they are 50 or 100 companies.

And actually, the reason that we indicated Unibanco, pre-announced our results and actually (inaudible) Itau ended up being that two or three days later, and other investment companies also did that, is basically to clear the issues and to flush out of the system any wrong information that was floating around.

And we, as you know, very positive companies, we are confident of our numbers and honestly neither Itau or Unibanco would do this deal if we didn't have a lot of confidence in each others' numbers. So, yes we can confirm to you as a shareholder that the numbers are what we have just announced. And I think this merger is a great, great story.

I appreciate that, sir, thank you very much.

Just to confirm, yes on our side we are pretty much confident there's no problem at all. And we are very, very happy to have done this deal, as Pedro described. We had a long discussion and, as you can see, there is a lot of alignment in this conversation.

Thank you, sir.

Our next question comes from Mr. Victor Galliano with HSBC.

Hi, good afternoon, just a couple of points here. When do you think we could realistically get a better picture in terms of what the synergic gains might be and what you might be doing in terms of any changes to branch network or potential divestitures?

I know at this point you say you don't look at any divestitures, but in that point specifically is there any area in which your market share is maybe seen as potentially too high by the regulatory authorities, maybe for example in credit cards or somewhere like that, where clearly Unibanco is very strong but also Itau is?

And just one final question which is about, are there any potential issues with regard to systems or IT, you think, with respect to the merger? Or do you have pretty compatible systems in both banks?

Synergies, as we have been talking, we don't have a clear ideas of numbers that we can realistically talk about today. We believe that there will be a lot of synergies, both on revenues and also on (inaudible), but we really don't have anything today to give you.

Probably in three or four weeks we might start having some idea of what will be possible, but we know, given the experience that we have in other situations, that we will know the final number only a long way down the road when everything is really implemented and done. And usually this will take, in this kind of transaction, given the size of this one, basically I would say that we only will have a clear idea in two or three years of the synergies that have been possible.

But I think the good news is that, given the fact that the merger was done based market prices, the (inaudible) will be shareholding will be accretive starting next few years. So, this is very good news.

Talking about problems on technology, I don't think that there will be these things in the future. We believe that we can deal with all the challenges that we have ahead in technology. This is something that both companies are very strong and we can deal with the challenges that lie ahead. In terms of market share, we believe that the numbers that we have, like around 20%, our number is quite reasonable for the authorities and we do not expect any problems coming from that side.

Okay thank you.

Our next question comes from Miss Claudia Castro with Oppenheimer firm.

Yes thank you, good afternoon and congratulations and much success on the operation. My question refers to your perspective on credit growth next year. The respective directors of both companies, speaking for each separate company, had commented last week that credit growth was to be expected around 10% for next year, while this contract with your earlier commentary of a central scenario growth in the order of 15% to 20%, corresponding to your current GDP estimate of 3% growth. . So, to clarify, is the 15% or 20% credit growth that you were referring earlier today, expected for the combined Company or were you referring this estimate to the financial system as a whole? Or, put it another way, is the difference with the 10% estimate for each of the Itau Unibanco Companies that was talked about last week, having to do with the combined company now?

So, basically I'm trying to understand what -- any changes to your central scenario for credit extension might have happened due to the combined company or is it simply a difference with the estimate referring to different things, the financial system in contrast with the company; since you represent, the new company is supposed to represent 20% of the, almost 20% of the financial system? Thank you.

Okay, well the previous numbers that you mentioned, the numbers that were mentioned on an individual situation, in other words, we have got all those numbers from -- each one of the companies have talked about those numbers and you're right, the numbers are somehow different. But basically the idea is we beleive the market will depend a lot on the situation in the US and Europe. In a reasonable situation I would expect that we have -- the markets here will grow like something like 15% to 20% if, and this is if; this if is quite important, if US situation goes okay and we have a reasonable year next year.

If things get worse internationally this growth might come down a lot, maybe 10% would be a [far] number, but again, this will depend a lot on the situation of the US which I personally believe could be quite reasonable.

So, you're talking about your combined company now or the financial system, the macro number?

The macro number.

So, this 15%, 20% you mentioned is the macro number?

Yes. It depends on again, just to be clear, it depends on a lot on what will go on with the US this year.

But what kind of sheltering, you think you can -- we think of Brazil being a large domestic economy and you having those kinds of results and market share with individuals in Brazil, and growing market share?

Well, we have to make a more deep analysis in each one of the markets. We don't have a clear answer for you at this moment, like we have been listening. This deal was something that has been carried on (inaudible) and only on this weekend we have involved other people. We don't have deep analysis on numbers and things like that. But I think that we, probably we still have a lot of potential to grow on middle market. On Insurance we have we have those two markets that neither one of the companies are really big on those in terms of market share. Those are very clear numbers that we are quite strong on. We don't have a clear analysis on that.

That's fine. Thank you. Just to -- sorry, to -- so for now you would maintain the individual company's assessment of 10% credit growth for next year?

Come again?

So, not the macro number but the statement regarding individual companies, 10%, about 10% credit growth expected for Itau loan and Unibanco loan was being -- we were told last week. So, for now you would maintain that number of 10%, not the financial system but the Itau, Unibanco Company as a whole, for next year?

Well, yes we would expect that we -- I mean, again, the number that was mentioned was between 10% and 15%. Unibanco mentioned that number and Itau mentioned something like 15% to 20% giving those differences on perspective that time on the situation, the international situation.

I mean those numbers have to be redecided, but I beleive that we probably will follow the market next year, which I would say that 15% is probably a very reasonable number for next year.

Our next question comes from Mr. Ian Smith with Nevsky Capital.

Hi, good afternoon and congratulations. I have three questions if that's all right. The first one is on, whether you're aware of any significant contracts that might be impacted by the merger, for example, any change of control clauses or contradicting exclusivity agreements, whether there's any big contracts out there that might get affected?

The second question is just a follow up on the goodwill creation, and it's just an accounting question, whether that's likely to need to be amortized? And also, whether that's, the creation of the goodwill is what is effectively leading to that 15.1% combined capital adequacy ratio?

And then just the final question, we saw today from Itau's results that there was a huge growth in timed deposits. I think particularly quite long date time deposits, sort of a year plus. I think time deposits grew about 75% q-on-q if I'm not mistaken. That would suggest that the company was creating a huge buffer of liquidity for the year ahead. Can you shed any light on the background for that and what your views are on system liquidity and how that liquidity on the balance sheet would likely to be deployed going forward?

Well, our numbers shows a big increase, you are right, a big increase in deposits, time deposits. That also shows some reduction or a much lower growth on other types of products that we use to fund the bank. We are using in a much lower level, the repos type of instrument at this moment. But basically we have not done anything different from the price in terms of the overall funding process of the Bank, basically. We have a large cushion on liquidity, as we always have had which is enough to operate the Bank.

And there is no anything special at this moment and basically we have been using different instruments giving some changes in regulation, and tax aspect of the instrument we use. But there is nothing special on that.

This Pedro, I mean as for the initial question regarding any major joint venture or contract that could be affected . First of all, there is no change of control, there is no clause that could trigger -- there is no event that would trigger such a clause. On top of that as far as we know and we have looked at this, there are no major contracts or joint ventures that is impacted by the creation of this new -- for this new holding company, of this new Itau and Banco Holding.

Thanks. And by any chance, can you give me a view on the goodwill that's created, whether there is amortization on that and whether that's what's leading to the capital adequacy ratio?

Yes, you are right. The other transaction was done on the basis of market prices. So, there is a difference between market price and book value. The amortization of that is creating the fiscal effect and basically all this together makes the increase in the equity which increases our DIS ratio as you mentioned.

Right. ANd is that likely to be amortized sort of over a five year period?

No, no, we will amortize our stock.

Okay. Thank you very much.

Thank you.

Ladies and gentlement, excuse me, we only have time for two more questions. Thank you.

Our next question comes from Mr. Saul Martinez of J.P. Morgan.

Hi, good afternoon everybody. I just wanted to follow up. I have a couple of questions, the first one is just a big picture question and more of a follow up to Arthur Burns' question. For Unibanco and obviously your stock has been trading at fairly depressed valuations. Is there anything about the current market conditions that made you feel like this is the right time to do the transaction?

I know, Pedro, you said that you would do this irrespective of the environment, and that you think it made sense to do it irrespective of the environment but is there anything about what's going on today that made you think that this was the right time to sort of pull the trigger and do the deal?

And I guess just secondly, can you talk a little bit more about the strategic side of the transaction and more -- obviously there is a lot of overlap in a lot of your businesses. YOu guys are in a lot of the same businesses but is -- can you talk a little bit about the complimentary nature of some of your business whether it be retail banking on the corporate side, credit card, can you just talk about how your operations may fit well or not fit so well together?

Okay, Saul, how are you.

I'm very good. Thank you.

First of all, when you look at the price of our shares, yes, they are depressed. They were depressed, they've been going up for the past two or three days. But I think this was the same for Itau, (inaudible) Bradesco, Brazil. If you compare the evolution of the share price, you do it 12 months, you do it from the beginning of the year, if you do it six months. I don't think there is -- obviously you can chose a base, but I don't think there is a lot of fluctuation in terms of what happened percentage wise to all of the financial companies in Brazil.

As a reflection of what happened abroad. Obviously in the case of Unibanco because we are more widely held abroad than Brazil and there is no float, as long as there was deleveraging happening outside of Brazil people were running for the door and they were selling whatever shares that were most liquid and in that sense we may have paid a little bit more of the price. But then again, when we did the deal that was the value at which the Company was traded at and there's not much we can do about it. If we had done the deal four or five months ago I don't think there would be a huge difference in the actual share transactions that we are announcing.

So, once Alberto and I were ready, and we had gone through all of the points that separated us from the start, once we had figured out that okay, we were comfortable, then that was the moment to go ahead. And this happened to be now. It could be next week, could be three weeks ago, it depend on the moment.

When you talk about the strategic bid I think it's a huge strategic bid, first of all because the cultures match. And I think this is probably the single most important issue when you are tlaking really about a merger and not about an acquisition. And the fact that we would both be discussing what we want from this company and what we intend to do with it and what are the people that we have and the talent that we have. ANd actually one of the interesting points I think, from this transaction is the amount of talent that this company is going to have. And the surprising factor I think from the Brazilian point of view, is that this is such an evolved industry in Brazil with so much talent and there is really no Brazilian financial multi-national and we intend to create one.

And I think this was one of the drivers when we sat down and began this discussion 15 months ago. The fact that we needed to be bigger, we needed to be more global, we needed to have a really -- the size in our local markets that would allow us really to look beyond our borders and I think now we are ready to do it. I think this combination of Itua and Unibanco is a very, very unique combination. Starting out of the number 16 and number 16 somewher around that number, in terms of the world ranking and being a Brazilian company and controled by Brazilians, I think is a great start. And I think it's very exciting what we can do ahead.

And then when you look at the business lines per se, obviously there are overlaps, I mean any two large banks in one market have overlaps. We don't have the geographic differences that US banks have so we are both national in scale, Itau being larger obviously than we are. But we don't think that there is a problem with having 4,000 branches, more than 4,000 branches, actually we think that it is great that we are going to be close to 5,000 branches at this point.

The credit card, we both run very good credit card operation. I think we will run an even better credit card operation going forward. We are very large in customer finance, and think here Unibanco maybe started earlier in this -- down this road, but Itau has done also a fair amount in that area and again, joining forces we are going to be a more relevant player.

So, going down all the lines I think this adds up and where there are obvious overlaps we will look at it and do what needs to be done but I think this much more a deal than looking at expansion than really looking at cost cutting or synergies. I think it's really an expansionary mode, even though the market right now imposes more restriction for that than it had been done maybe 18 months ago. But I think it's great that it's been done now because we will advance maybe even more prudence and that's always good when you are tlaking about banks.

Okay. thank you for that. Just one quick follow up to an earlier question. I think an earlier question asked about or tried to get you to talk about numbers related to cost savings and you mentioned I think, if I'm not mistaken that you might have a better view of that in two to three weeks. Will you announce it to the market when you have a better view for what those cost savings ,or what the synergies in general might be?

We dont' have a plan for that, but all I'm saying is that in a few weeks we might have a better idea of what we have in hand. And in conference calls and places that we would (inaudible) listen investors, in the future we might, as we have mostly this idea we will make this public in the future.

Okay. Fair enough, understood. thank you very much and good luck.

Our last question comes from Mr. Marcelo Telles with Credit Suisse.

Hi, good afternoon gentlemen. I have two questions. The first one is in the contract, of this transction is there any provision that prohibits any sort of [congregate] in this transaction?

And the second one question is a follow up on my question this morning, regarding the acquisition of Itau's of part of the stake, of majority shareholder in Itau, the [100] million shares. I just want to understand better what was the price paid and how this is going to be paid? I wasn't (inaudible)? Thank you.

So, let me answer the first part of the question, I'm not sure I really understood the second part of the question. YOu asked if there is any clause in the agreement that would prevent us from an external bid?

Well, actually never thought of that because basically the two banks are controlling shareholders and both banks have agreed, both controlling shareholders have agreed that this is a deal that they want to do. And there is no bid that can come from east, south, north or west that would change the decision that has been made so this is really a merger and this is what we are going to go with and actually I mean it's an intersting question, it never crossed my mind. And I think, I hope it never crossed Alberto's mind as well.

Yes, I confirm it was as Pedro mentioned. It has to be undertstand of a deal done. There is no way out, okay, it's a done deal.

This concludes today's question-and-answer session. I would like to invite Mr. Pedro Moreira Salles and Mr.Roberto Egydio Setubal to proceed with their closing statements. Please go ahead sirs.

Well thank you very much for coming to this conference call today. I hope that you (inaudible) really got a clear view of what we intend to do going forward and what are the reasons for this merger. I just want to reiterate from an investment point of view the excitement that we have just as we were able to conclude the transaction and how positive we are on the path of this company going forward.

So, I hope to be able to get in contact with you in the next conference call and discuss some of the powerful consequences of the deal that we are announcing today. Thank you very much.

This is Roberto, thank you all of you that have attended this conference call as well and we are really very very enthusiastic about it. We believe that there is a lot of room to grow, a lot of room to do good things in Brazil. We are very positive in Brazil and this will be a -- it is already a great company and we will be able to take advantage of having this position to be able to take advantage of all of the potential growth in Brazil. We have a large market with a lot of potential to be developed in the financial services so we are very, very excited with the future of this company in Brazil. And also with the potential that we have to go internationally, to go to other markets in order to have other perspectives in terms of growth. Thank you all and see you next time.

That does conclude Unibanco's (inaudible) Banco Itau Holdings Financeira S.A. audio conference for today. Thank you very much for your pariticpation and have a good day and thank you for using Chorus Call Brazil.