BRAZIL

A different perspective on
industrial group ownership of
leading private sector banks.
 Brazil
Financial Industrial Groups
Brazils leading private sector banks are owned
by industrial groups.
In a volatile operating environment, these have
proved to be the most stable banks.
Although foreign banks are buying into the
market, these FIG owned banks are maintaining
their market position and financial strength.
Different perception of FIG ownership than is
experienced on other continents.
Why does this structure work in Brazil?
Will it continue to work?
 Brazil Bank Categories I
Federally Owned Banks
Banco do Brasil
Caixa Economica Federal
State Owned Banks
Each state owned its own bank.
Now being privatised.
Largest was Banespa.
Was owned by So Paulo state.
Sold to Spains BSCH in 2000.
 Brazil Bank Categories II
Domestically Owned Private Banks
Banco Bradesco
Banco Ita
Unibanco
Banorte
Foreign Banks
ABN Amro, Bank of America (via BankBoston
branches), BSCH, Citibank, HSBC.
Brazil Bradesco Ownership I
Total stockholding suggests a bank with majority (57.03%)
ownership by market
 Brazil Bradesco Ownership II

Summary of Bradesco Ownership: Voting Stock versus Total Stock

Voting Stock Total Stock
Bradesco Insiders
Bradesco Foundation 39.40% 24.99%
Aguiar Family 10.90% 5.50%
Elo Participacoes (Group of 200 Senior Managers) 11.45% 2.78%
Total Bradesco Insiders 61.76% 33.27%
Other
Banco Espirito Santo 6.63% 3.39%
BBVA 5.01% 5.00%
UFJ Bank 1.22% 1.22%
Market (Includes ADRs traded on the NYSE) 25.38% 57.12%
Total 100.00% 100.00%

Reality is that voting shares are controlled by Bradesco insiders

 Brazil Itau Ownership
Summary of Itau Ownership: Voting Stock versus Total Stock
Voting Stock Total Stock
Controlling Shareholders
E.S.A. Family 54.03% 16.45%
Other
Float (direct in Banco Itau) 10.18% 50.03%
Others (indirect via Itausa) 35.79% 33.52%
Total 100.00% 100.00%
March 31, 2005

Although Egydio de Souza Aranha family own a minority of total

equity, it controls the bank.
The Egydio de Souza Aranha family hold most of their interests via
the intermediate Itausa investment holding company. Aside from
banking, it has interests in building materials, electronics, chemicals
and real estate.
 Brazil Unibanco Ownership
Summary of Unibanco Ownership: Voting Stock versus Total Stock
Voting Stock Total Stock
Controlling Shareholders
Moreira Selles Group 75.95% 17.32%
Strategic Shareholders
Caixa Brasil 11.87% 12.12%
Other
Float 0.03% 63.07%
Others 12.16% 5.73%
Treasury Stock 0.00% 1.77%
Total 100.00% 100.00%
March 31, 2005

Although Moreira Selles Group own a minority of total equity, it

controls the bank.
Moreira Selles Group also controls a holding company with interests
in niobium (alloying element), other mining, agribusiness, tourism,
real estate and retail.
 FIGs The Brazilian Paradox
Private investors and strategic bank
investors are willing to invest in non-voting
preference shares, leaving control with the
main FIG/family group.
Why do the existence of minority
controlling shareholders not pose the
same corporate governance questions in
Brazil as in other countries?
 Brazil Selected 2004 Financials
- - - - - - - Private - - - - - - -
- - State (Federal) - -
Caixa
Economic
Banco do a
End 2004 Bradesco Itau Unibanco Brasil Federal

Fitch Individual Rating C B/C C C/D n.a.

Total Assets (US$ millions) 69,482.05 44,522.62 25,584.18 89,804.25 55,527.54
Profit (US$ millions) 1,149.78 902.45 482.14 1,136.20 533.46
RoAE 21.3% 31.2% 16.8% 23.0% 22.8%
Equity/Assets 8.2% 7.0% 10.2% 5.9% 4.5%
Loans/Total Assets 19.1% 25.6% 29.9% 29.2% 7.3%
LLP/Gross Loans 7.1% 9.0% 5.2% 6.8% 10.8%

Strong Consistent Return on Equity

has been a strong incentive for the
market to invest in these banks
 Stability of Earnings
Return On Average Assets %

60

40

20

0
1996 1997 1998 1999 2000 2001 2002 2003
-20

Banco Bradesco SA
-40 Banco do Brasil S.A.
Banco Itau SA
-60 Caixa Economica Federal
Uniao de Bancos Brasileiros UNIBANCO

-80

-100

-120

-140

-160
 Stability of Capital
Capital Adequacy %

30

25

20

Banco Bradesco SA
Banco do Brasil S.A.
15
Banco Itau SA
Uniao de Bancos Brasileiros UNIBANCO

10

0
1996 1997 1998 1999 2000 2001 2002
 Systems & Controls
These leading Brazilian private banks have strong IT
systems and relatively developed internal procedures.
Many of these systems have been designed to mimic
best practice in US banks.
The banks have a long history, during which system and
controls have been steadily developed.
Bradesco founded 1943.
Itau founded 1945.
Unibanco founded 1909, converted to bank 1924.
The corporate culture of the banks is also long
established.
Bradesco most conservative, Itau in the middle and Unibanco
the most aggressive.
 Staffing/Management
All three banks are managed & staffed by
professional bankers.
Senior managers often have 20+ years experience
within the bank.
Senior management is independent of controlling
shareholders.
Where family members work in management, they
are all experienced bankers with relevant training.
Management are not expected to approve soft loans
to other group companies.
 Relationship with International
Lenders
International lenders are usually comfortable
with Brazils FIG owned banks.
Continued access to international syndications;
Access to international securitization market
(sometimes to guarantee by AAA bond insurer or
Political Risk Insurer).
The banks have a long track record of repaying their
international obligations.
International lenders usually more worried about
impact of sovereign risk on the Brazilian banking
system than issues linked to the individual private
sector bank.
 Issue for Future
The problem facing Brazils FIG owned banks is:
As more capital is needed to support the growing
businesses, will the market continue to supply this
without seeking a change in control.
As long as profitability remains strong, the banks can
probably succeed in finding new equity. However,
Competition from foreign banks has pushed these banks into
higher risk retail/consumer finance business, so the volatility
of earnings could become more significant in the future.
Related party lending is expected to continue to be of
minor relevance.