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Brazilian Banks’ Roadmap Medium-Term Perspectives
New York, March 08, 2010M. Celina Vansetti-Hutchins, SENIOR VICE PRESIDENT
2
March, 2010
Agenda
Returning to a stable banking credit outlook
The near-term dynamics
Medium-term perspectives for the Brazilian banking system
3
March, 2010
Returning to a Stable Banking Credit Outlook
Economic risks are declining: upcoming favorable credit cycle
Liquidity restored; still incorporates support measures
High credit demand: bank’s growth guidance recently revised upwards
Balance sheets proven resilient to deteriorating asset quality and lower profits
Moody’s rating actions have been limited for Brazilian banks
4
March, 2010
Economic Conditions Support RecoveryStrong Corporate Demand
Industrial Production Index (YoY growth)
-20
-15
-10
-5
0
5
10
15
20
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
Source: IBGE / PIM-PF
Capacity Utilization (seasonally adj.) - CNI
76
78
80
82
84
86
88
Nov-07 May-08 Nov-08 May-09 Nov-09
%
Source: CNI
BNDES's monthly disbursements - excl. Petro
02,0004,0006,0008,000
10,00012,00014,000
Nov
-01
May
-02
Nov
-02
May
-03
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
in R
$ bi
llion
Source: BCB
5
March, 2010
Supportive Labor Market Lifts Loan Growth and Uncertainty on Consumer Credit
Unemployment Rates
6
7
8
9
10
11
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
%
Source: IBGE
2007
2008
2009
Consumer Confidence Index - ICC
110
120
130
140
150
160
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Source: ACSP - Fecomércio
Labor income
100%
105%
110%
115%
120%
125%
130%
Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09
Mar
200
6 =
100
Source: PME / IBGE
6
March, 2010
Liquidity and Funding Back to NormalcyLocal Currency Funding Will Continue to Support GrowthDomestic Investors Seeking High Yield: New Alternative PotentialsA Function of Government’s Stimulus Measures
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Feb
-06
Apr
-06
Jun-
06
Aug
-06
Oct
-06
Dec
-06
Feb
-07
Apr
-07
Jun-
07
Aug
-07
Oct
-07
Dec
-07
Feb
-08
Apr
-08
Jun-
08
Aug
-08
Oct
-08
Dec
-08
Feb
-09
Apr
-09
Jun-
09
Aug
-09
p.d
%
-400
-200
0
200
400
600
800
bp
s
ACC daily interest rate (p.d%) 90 d USD X DI swap / 3m Libor spread (bps)
Source: Bloomberg
Term Deposit (CDB) / Pre-DI Swap Spread
-10
-8
-6
-4
-2
0
2
4
6
8
Jun-
06
Aug
-06
Oct
-06
Dec
-06
Feb
-07
Apr
-07
Jun-
07
Aug
-07
Oct
-07
Dec
-07
Feb
-08
Apr
-08
Jun-
08
Aug
-08
Oct
-08
Dec
-08
Feb
-09
Apr
-09
Jun-
09
Aug
-09
Oct
-09
1m 3m 12m
Source: Bloomberg
Funding Alternatives
1,455
499
743
300
0
200
400
600
800
1,000
1,200
1,400
1,600
Managed Funds*Pension Funds*Time DepositsSavings Accounts
in R
$ bi
llion
Source: BCB, Anbid, ABRAPP * ~55% of Pension Funds' Assets are invested in mutual funds
7
March, 2010
Liquidity and Funding Back to NormalcyInternational Capital Markets: Strong Demand for Brazil Risk
Issue Date Issuer Amount USD Tenor Coupon
29-mai-09 BES Invest. Brasil 150 3 years 5.750%
17-set-09 Cruzeiro do Sul 60 2 years 9.000%
10-jun-09 BNDES 1,000 10 years 6.500%
17-set-09 Cruzeiro do Sul 175 3 years 8.000%
29-set-09 Bradesco (sub) 750 10 years 6.750%
20-out-09 Banco do Brasil Perp (sub) 1,500 Perpetual 8.500%
26-out-09 Bco Panamericano 200 3 years 7.000%
5-nov-09 BMG (sub) 300 10 years 9.950%
6-nov-09 Fibra (sub) 110 7 years 8.500%
23-dez-09 Parana Banco 100 3 years 7.375%
TOTAL 2009 4,345
12-jan-10 BNDES 1,000 10 years 5.500%
20-jan-10 Banco Votorantim 750 10 years 7.375%
20-jan-10 Bicbanco 275 3 years 6.250%
22-jan-10 Banco do Brasil 500 5 years 4.500%
22-jan-10 Banco do Brasil 500 10 years 6.000%
8-fev-10 Banco Pine 125 7 years 8.750%
11-fev-10 Banco Votorantim 500 3 years 4.250%
22-fev-10 Cruzeiro do Sul 250 5 years 8.500%
TOTAL 2010 3,900
TOTAL 2009 & 2010 8,245
Source: Valor Econômico, Moody’s
8
March, 2010
Strong Credit Demand Raises Growth Guidance
Total Loans in the Financial System
0
200
400
600
800
1,000
1,200
1,400
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
in R
$ bi
llion
Corporate Consumer Channeled
Source: BCB
Origination (3 month moving avg)
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Yo
Y g
row
th
Total Loans Corporate Consumer
Source: BCB
Brazilian Banks - Loan Growth (YoY)
-10%
0%
10%
20%
30%
40%
50%
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Individuals Corporates Mortgages Rural
Source: BCB
9
March, 2010
Good Prospects for Credit Quality • Peak NPLs 90d + at 4.5% in September 2009 vs. 4.4% in December 2009• Leveling off Credit Costs
Reserves and NPLs Evolution
0
20
40
60
80
100
120
Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09
Minimum Required Excess NPLs
Source: Moody's
Brazilian Banks: Deliquency Growth (YoY)
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
in %
Vehicles Total Corporates IndividualsSource: BCB
Overdue Loans - Corporate
0.0
1.0
2.0
3.0
4.0
5.0
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
as %
of c
orpo
rate
loan
s 15-60 > 90d
Source: BCB
Overdue Loans - Consumer
0.0
2.0
4.0
6.0
8.0
10.0
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
as %
of c
onsu
mer
loan
s 15-60 > 90d
Source: BCB
10
March, 2010
Asset Quality at Regional Level
Asset Quality
0%
1%
2%
3%
4%
5%
6%
Dec-05 Dec-06 Dec-07 Dec-08 Jun-09 Sept-09
Argentina Chile Mexico Brasil Peru Colombia
Source: BCB, Moody's
Country Comparison: Consumer Loan Type
3013.3
43.4
65.5
37.2
43.7
31.5
14.8
29.4
37.416.3
26.3
13.634.8
5
22.225.27 3.2
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Argentina Brazil Mexico Chile Peru
Mortgage Personal Payroll Credit Card Auto
Source: Moody's
11
March, 2010
Capital Could Be Rapidly Consumed by Growth Moody’s Rated Banks’ Capital Composition
Quality of Capital - as of June 2009
13.3%
14.1%
12.5%
14.2%
19.4%
16.0%
15.6%
0% 5% 10% 15% 20%
B-
C-
D
E+ / E
TCE Tier 1 BIS
* Adjusted Ratios (medians)Source: Moody's
12
March, 2010
Moody’s Scenario Analysis: Expected Losses Can Be Absorbed Within Capital and Earnings
Stress Testing Capital
TCE
Reserves
Profits
0
100
200
300
400
Anticipated Losses Stressed Losses 2Q09
in R
$ bl
n
Source: BCB, Moody's
13
March, 2010
Banking Systems Address Future Losses
US Spain UK BrazilCoverage Ratio: Reserves % Estimated Losses
42.2% 47.2% 39.0% 143.3%
Moody's Estimated Losses vs. Bank's Reserves
Est
Lo
sses
at
YE
200
8
NCOs
2Q09
Res
erve
s
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
US Spain UK Brazil
in U
S b
illion
s
Source: Moody's
Additional Provisions
14
March, 2010
Moody’s Bank Ratings Little Changed Since Mid-2008
BFSR Distribution - Brazil
-2
0
2
4
6
8
10
B- C+ C C- D+ D D- E+ E
# o
f b
anks
Jun-08 Feb-10
Source: Moody's
15
March, 2010
Moody’s Bank Ratings Little Changed Since Mid-2008
Deposit Ratings Distribution - Brazil
-10
12
34
56
78
9A
1
A2
A3
Ba
a1
Ba
a2
Ba
a3
Ba
1
Ba
2
Ba
3
B1
B2
B3
Ca
a1
Ca
a2
# o
f b
anks
Jun-08 Feb-10
16
March, 2010
The Near-Term Dynamics
Loan growth for 2010 should pick up beyond public banks’ origination
Funding replenishment supports asset growth
Credit costs likely to decline following stabilizing NPLs by 4Q09, thus also benefiting profitability
Managing government’s exit strategy – fiscal, non-fiscal, and sheer presence in the economy
17
March, 2010
Profitability
• Diversified • Scale and business penetration in client base • Margins trending down
Brazilian Banks: Interest Rates and Spreads
5.95.26.97.78.07.37.2
0
10
20
30
40
50
60
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
in %
NIM Lending Rate Funding Rate SpreadSource: BCB
Brazilian Banks - Average Bank Spread
0
5
10
15
20
25
30
35
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
in %
0
10
20
30
40
50
60
70
in %
Total ( L ) Corporates ( L ) Individuals ( R )Source: BCB
18
March, 2010
Resilient Profitability at Regional Levels
Net Interest Margins
0%
2%
4%
6%
8%
10%
12%
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Jun-09 Sept-09
Argentina Chile Mexico Brasil Peru Colombia
Source: BCB, Moody's
5.5%
6.4%6.0%
7.6%7.1%
6.3%
4.4%
7.0%6.6%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2002 2003 2004 2005 2006 2007 2008 Jun2009
Sept2009
Source: BCB, Moody's
Brazilian Banks: Preprovision Profit % Risk Weighted Assets
19
March, 2010
Medium-Term Perspectives
Transitioning from exotic to mainstream implies permanence of stability and growth prospects; stable rules of the game
Long-term trend of interest rate points to a shift in asset and liability dynamics
Capital needs will be sourced on internal replenishment and by capital market alternatives
Improving financial architecture should boost competition
Prudential regulations will continue to bolster system's discipline: Brazil is not Eastern Europe
20
March, 2010
More Favorable Funding Dynamics
Attraction of longer-term funding may imply lower cost and less structural tenor mismatches
Diversification of investment instruments away from government securities
Increasing role of capital markets in support of new credit cycle – recent fundraising initiatives have been encouraging
Migration of assets under management to banks’ balance sheets
Brazilian Banks: Funding Evolution
0
500
1,000
1,500
2,000
2,500
3,000
Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Sep 09
in R
$ bi
llion
Demand Savings Time Open Market Issuance Borrow ings Equity
Source: BCB, Moody's
Real Interest Rates
3
5
7
9
11
13
15
17
Dec
-00
Jun-
01
Dec
-01
Jun-
02
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
% p
.a.
Source: BCB
21
March, 2010
Excessive Leverage is an Ongoing Concern
22
March, 2010
Increasing Size of Market
Total Loans & Top 10 Banks
64%14%
22%
Top 10 BNDES Other Banks
Source: Top 50 BCB
2003R$ 403 billion
69%
11%
20%
2005R$ 569 billion
72%
9%
19%
2007R$ 865 billion
73%
12%
15%
2009R$ 1,236 billion
23
March, 2010
Public Sector Banks: Narrowing the Gaps
Credit Loans by origin of capital
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Dec-9
5
Dec-9
6
Dec-9
7
Dec-9
8
Dec-9
9
Dec-0
0
Dec-0
1
Dec-0
2
Dec-0
3
Dec-0
4
Dec-0
5
Dec-0
6
Dec-0
7
Dec-0
8
Dec-0
9
as %
of t
otal
loan
s in
the
syst
em
Public Banks Private Banks Foreign Banks
41.4
40.4
18.227.4
39.1
55.0
32.8
Source: BCB
Loan Growth Rates (YoY)
-40
-20
0
20
40
60
80
Dec-9
5
Dec-9
6
Dec-9
7
Dec-9
8
Dec-9
9
Dec-0
0
Dec-0
1
Dec-0
2
Dec-0
3
Dec-0
4
Dec-0
5
Dec-0
6
Dec-0
7
Dec-0
8
Dec-0
9
in %
p.a
.
Public Private Foreign
Source: BCB
24
March, 2010
Moody’s Rated Banks: Brazilian Banks with Resilient FSRs
Performance of Brazil's Rated Banks vs. Moody's Rated Banks
Franchise Value
Risk Positioning
Profitability
LiquidityCapital Adequacy
Efficiency
Asset Quality
Brazil Global
A
B
C
D
E
Source: Moody's 3-yr-avg as of December 2008.
25
March, 2010
© 2009 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling.
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