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Banco Itaú Holding Financeira S.A. (ITU)

Q2 2007 Earnings Call

August 8, 2007, 9:00 AM ET

Executives

Daniela Ueda - Financial IR Brasil

Alfredo Egydio Setubal - IR Director

Silvio de Carvalho - Executive Director of Controllership

Eduardo Mazzilli Vassimon - Executive Vice-President of Banco Itaú BBA

Analysts

Mario Pierry - Deutsche Bank

Daniel A. Abut - Citigroup

Victor Galliano - HSBC

Maria Laura Pessoa - Banco Fator

Saul Martinez - Bear Stearns

Juan Partida - J.P. Morgan Securities Inc.

Carlos Macedo - Unibanco Corretora

Presentation

Operator

Ladies and gentlemen, thank you for standing by. At this time all lines are in a listen-only mode. Later, there will be a question and answer session. Instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Ms. Daniela Ueda of

Financial Investor Relations Brasil. Please go ahead.

Daniela Ueda - Financial Investor Relations Brasil

Good morning ladies and gentlemen and welcome to Banco Itaú Holding Financeira's Conference Call to discuss the Second Quarter 2007 Earnings Results. I would like to mention that a slide presentation is available on the company's Investor Relations website at www.itauir.com during this call.

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, Investor Relations Director of Itaú Holding; Henri Penchas, Senior Vice-President and CFO of Itaú Holding; Silvio de Carvalho, Executive Director of Controllership of Itaú Holding; Eduardo Mazzilli de Vassimon, Executive Vice-President of Itaú BBA and Marco Antunes, Director of Accounting of Itaú Holding. First, Mr. Alfredo Setubal will comment on the second quarter 2007 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.

Alfredo Egydio Setubal - Investor Relations Director

Good morning for those who are in the United States, good afternoon for those who are following us in Europe. Thank you for being here with us to listen to our comments on our second quarter results.

For those who are following through the Internet we are going to start in the slide number 2, highlights for the second quarter. The first is the result, the recurrent result of the bank. 1.9 billion reais with a increase of 0.9% over the first quarter of the year with annualized return on equity of 29.8%. That represents 30.5% when we consider the results for the first semester, in line with the results that we have been showing in the last year in the last quarters and we are very confident about the future results of the bank. The second is the result without considering the non-recurrent numbers that have influenced the result of the bank. The number that we published for the second quarter was 2.1 billion reais.

The second highlight is the growth of the loan portfolio. The growth was 3.7% in this quarter and 40.2 when we consider the last 12 months. This of course, because of the growth of the economy, that is higher than we saw in the last years. Probably the economy this year will grow something between 4.5% and 5% a year, and this means that the portfolio, credit portfolio will grow much faster.

In the quarter, we continue to see, like in the other quarters, strong demand for credit for individuals. Personal loans growth in the quarter was 1.8% and 11.3% when we consider the last 12 months. Vehicles continue to be a very important point of the growth of our portfolio and we believe that this trend will continue in the coming quarters. The growth of this quarter was 12.4% and 58.6% in the last 12 months. Another segment that is continuing to grow is small and mid-sized companies. The growth in the quarter was 5.4% and in the last 12 months almost 60%. We continue to focus, like in the other quarters, in these three segments that we believe will continue to push the growth of our credit portfolio in the coming quarters like we have been seeing in the last years.

The third highlight is related to the 400 million reais increase in the excess provisions for loan losses in this quarter. With this 400 million, we achieved 2.1 billion reais in excess provisions in our view in excess of the requirements of the regulations of the Central Bank of Brazil. We had much more a conservative stress scenarios were used to determine the extent of the excess provisions in this quarter. We reanalyzed and we put more conservative numbers in these stress scenarios, so these required more provisions for our credit portfolio.

With the major growth in the vehicle finance portfolio, like I mentioned in the second highlight, one minute ago, the levels of arrears are constantly higher. Although the absolute amount of arrears has increased, this, in our view, does not mean losses because these segments, especially the segment that we are talking about now is vehicles finance. In this segment, the low... we have a very low loss given defaults [ph]. So we recover a lot of the provisions that we usually make. Anyway, this is the model, the internal model that we have to determine the volume of provisions that is required. As I mentioned, changes in the stress scenarios, the model required more provisions. This what we did in this second quarter. The second point in the non-recurrent event that we would like to mention is public because we publish a statement of our dent is because we sold 22.3% of our participation in Serasa in the IPO and these represented 485 million reais in income after tax, always remembering that we keep 10.9% in participation still in Serasa and we have participation and a Board member indicated by us.

The fourth highlights for the quarter is the nonperforming loans ratio that remains almost stable, 5.1% in the quarter.

The fifth is the BIS ratio that remained in 17.6, very high, but if we consider the new regulations of the Central Bank of Brazil that started in the begging of July, these new regulations will bring our solvency ratio to 16%, still a very high but lower than in the quarters and years before.

The slide number 3, we show in more details the non-recurrent effects in our demonstration of results. The second quarter result 2.1 billion reais, we had... we sold part of the Serasa participation with impact of 485 million reais always net loss taxes. The provision of 400 million means 264 net of taxes. Escrow account of Itaú BBA, according to our contract, when we brought the participation in BBA, the escrow account that we had with the former controllers of BBA, 82 million reais. We sold the headquarters, the building of BankBoston in Brazil in Sao Paulo. This had a net impact of 75 million reais. Amortization of goodwill 19. So the total non-recurrent effects on 196 million reais would bring the recurrent net income to 1.9 billion in the second quarter with a growth of 0.9%, in our view, is a very good result for the quarter.

On the slide number 4, other highlights. Here I would mention the stockholders equity that finished in June with 26.5 billion reais with a growth of 6.3% and our efficiency ratio of 45.8%, a little bit higher in relation to the first quarter, and I will detail a little bit more in terms of expenses in the next slide.

On slide number 5, we have the Itaú Holding pro forma, the managerial result. We can see that the net financial margin increased 5.3% in the quarter, finishing with 5.250 billion reais. Here we can see small growth in banking operations. We have a good result in terms of treasury, taking advantage of the better results in the market and the huge reduction in the currency risk that make appreciation in our portfolios, our security portfolio. Our results in terms of the hedge that we have for the position... for the capital that we have abroad, 262 million reais. Banking fees increased 5.3% in the quarter, in line with what we have been saying that these fees will continue to grow through the year. Result of loan losses 1.2 billion reais which is more a decrease when we compare to the first quarter and non-interest expenses 3.5 billion reais with some growth when we compare to the first quarter that we will analyze in more details in coming slides.

When we see in the slide number 6 the loans by type of customers, as I said, we continue to focus in individuals, personal credit and vehicles and small and medium-sized companies continue to be our focus. When we see here in this chart the corporate numbers, we see a reduction in the quarter when we compare to the first quarter, 3.1%, and also when we compare to December 2006, 4.4% reduction. This is due to the policy of Itaú BBA to be selective because the spread in corporate business have been very tight and Itaú BBA has been very active in terms of capital markets, continues to be the biggest Brazilian bank in terms of offers, IPOs, both for equities and corporate bonds in the local and offshore markets, compensating these revenues that is becoming very important this year as part of the reduction of the loan portfolio of Itaú BBA. Mandatory credit continued to grow, especially when we saw the numbers for mortgage, but the numbers are still... is small when we compare to the total credit portfolio of Itaú Holding. We open here in a line different from other quarters the loan portfolio that we have in Argentina, Chile and Uruguay, countries where Itaú Holding have retail operations. You can see here that we have 7.2 billion reais in loans in these three countries with the total loans of 104, almost 105 billion reais.

We can see in this next slide the change that has been happening in the last quarters with the increase of individuals and decrease in large companies and the increase that we have now in our international operations in term of credit portfolio, that now represents almost 7% of the total credit portfolio of the bank.

On the slide number 8, we can see the nonperforming loans and coverage ratio. As I said, when we compare to the other quarters, the consolidated number for nonperformance, 5.1, is almost stable when we see the last quarter and the other quarters, the other four quarters. We see a better result for individuals that reduced from 7.8% to 7.5%, remembering that almost all over the year 2006 these numbers were close or above 8%. In terms of loans [ph] of companies, we see more provisions for small and medium-sized company, so the number increased to 2.1% to 2.3%. The number is higher than in the other quarters. Anyway, the coverage ratio is very comfortable, yet we continue to be very confident these numbers are very good in terms of coverage especially considering the excess provisions that we have and, as I mentioned, especially we increased especially because of vehicles finance.

On slide number 9, we can see nonperforming loans in more detail by segment. We can see here the increase in terms of vehicles, both compared to the end of 2006 and the end of first quarter in March, reaching 5.4%. Still, our numbers very comfortable, but increased a little through the year.

On slide number 10, the funding of the bank, both through deposits and asset management. We can see that we continue to grow the liquidity of the bank. We increased in this quarter because of the growth of the credit portfolio that we believe that will continue and also to make face to the even more volatility of the market that we have been seeing since May, we decided to increase liquidity of the bank to be more present in terms of liquidity to face the volatility and the growth of the credit portfolio.

On slide number 11, we can see the banking fees that increased 5.3%, 17 when we compare 12 months. We continue to be very confident that the numbers that we announced will be in line with the growth of 15% this year. We can see here that we are in line with these numbers and of course this has influenced by the growth of the credit portfolio that continue to be important.

Non interest expenses. We show this quarter an increase of 7.5 when we compare to the first quarter of 2007 that was a very good quarter in terms of expenses, especially because of provisions for vacations for the employee as we mentioned at that time in the last conference call. This number in the quarter has three big impacts. The first one is donation that the bank made for the Itaú Social Foundation to face our sustainability [ph] policy and that these foundation do in terms of social activities here in Brazil. So we did... we made a donation of 50 million reais. The second impact is increase in the publicity. It increased to almost 30 million this quarter, and also because of the consolidation of the numbers of the acquisition of our operations of private banking in Miami both for BankBoston International and also to ABN Amro, the Latin American private bank that we bought and was approved by the Federal Reserve and Central... and the authorities of Portugal and Bahamas in May. So this also was consolidated in the quarter.

This increase in expenses, as I mentioned, have a small deterioration in our efficiency ratio, but we believe that we will be able to be around this 45% through the year of 2007.

In terms of segmentation on slide number 15, we can go straight to the slide 15 open in pro forma in managerial results, our recurrent results, only the recurrent results here, we can see a total recurring result of 1.9 billion reais for the quarter. This is splitted through the segments. We can see Banco Itaú with 1.2 billion reais, with a ROE of 40.8%; Itaú BBA 302 million reais in net income, with ROE of 24% almost; Itaucred, where we consolidated our non-client, non-checking account clients, financing Taií operation and a non-credit card for non-checking account clients, 310 million with ROE of almost 40% and Corporation, where we allocated excess of capital with a result of 52 million. So we can see that all the segments had very, very good recurrent result for the quarter.

Here we can see our increase in the earning per share in the quarter.

And to finalize my presentation and to open to questions, we announced a stock split to increase the liquidity of the shares, especially for individuals in line with the recommendations of Bovespa that want shares with smaller price, nominal price to give chance for more individuals to buy and sell the stocks at Bovespa. So we were the fifth share in terms of nominal price. So we now, with this split, will give chance to increase liquidity especially through the participation of individuals and the split also will be affecting our ADRs in New York and our CEDEARs in Argentina.

With that, I finish the presentation and we are open for questions that we'll probably have about our second quarter results. Thank you.

Question And Answer

Operator

Thank you. Ladies and gentlemen, we now begin the question and answer session. [Operator Instructions]. Our first question is from Mario Pierry, Deutsche Bank.

Mario Pierry - Deutsche Bank

Good morning. I have two questions. First one is with relation to your level of delinquency. When we look at the nonperforming loan ratio, we actually deteriorated 10 basis points this quarter. Do you still expect to see a modest improvement in delinquency for the rest of the year and if you do, can you just tell us if you were surprised by the deterioration in asset quality this quarter, because in the previous quarter we had seen 30 basis points improvement? So I just wanted to get a feel from you if you still expect delinquency to improve. And then the second question has to do with your costs. It seems like costs were higher than expected. I was wondering if you have already been able to realize any cost synergies related to BankBoston and what is your outlook for costs going forward. Thank you.

Silvio de Carvalho - Executive Director of Controllership

Silvio speaking. In relation to delinquency, we are forecast that the level we will keep [ph] is 5.1 during the second semester. They are a little bit lower than that. That is how you see the market. Remember that when you discover the break down of the delinquency, you can see improvement related with the individuals. In realty, this level was a little bit higher than the first quarter because of the small and middle companies. That we increase our [indiscernible] about 60% in the year. That's the reason because we see this... a real increase, and we are supposed that we will keep this level during the second semester. In relation to the synergy of cost of BankBoston, the integration is finished already, even though we are supposed to keep the guidance about 180 million reais during the second semester. That's our guidance in relation to that. This... with all the branches, other people are here in the bank and we sold the building that had the main offices of BankBoston, that's it.

Mario Pierry - Deutsche Bank

If you will... so just to be clear, the synergies of 180 million with BankBoston, none of that has been realized yet right? And also, is that all going to come in the form of costs or we also going to see synergies with revenues and this 180 million includes revenues and costs?

Silvio de Carvalho - Executive Director of Controllership

The synergies [ph] is not included in this figure. We talk about costs. A portion of that is already happened. But the most important part we view is start in July and we suppose that in the third quarter it's possible to have a portion of that. In reality, we manage 180 million reais per semester, 360 million reais per year. But it will be difficult to show this figure because the bank is totally integrated. They have been used is corporate [ph] where all the operations is up here and we are doing business with the companies and with the customers.

Mario Pierry - Deutsche Bank

Okay, thank you.

Operator

Sir, are you ready for your next question? Pardon me, Mr. Setubal, are you ready for your next question?

Alfredo Egydio Setubal - Investor Relations Director

Go ahead.

Operator

Our next question is from Daniel Abut from Citibank.

Daniel A. Abut - Citigroup

Good morning gentleman. I wanted to ask you, if I recall correctly, as the end of May, you announced that you have renegotiated a contract for the payroll with the State of Rio de Janeiro, implying an additional payment of 750 million reais. I wanted to ask you if that payment had already been made, therefore if it has already been reflected in the numbers as of the second quarter. And in that case, if it hasn't yet, in what line of your balance sheet do we see the asset that was created, then amortized over time and how much of that amortization was already charged to the P&L of this quarter and in what line of the income statement will we find it?

Silvio de Carvalho - Executive Director of Controllership

Silvio speaking. We finished with the contract with the Rio de Janeiro government. We are considering expenses according to the duration of the contract in reality is accrual based and it's up here included in the other administrative expense.

Daniel A. Abut - Citigroup

How much did you charge within the other admin expense this quarter Silvio related to this contract this quarter?

Silvio de Carvalho - Executive Director of Controllership

Just a moment please. Daniel, I will send you this information later. I don't have the information here on my hand.

Daniel A. Abut - Citigroup

So two things if you can say what we have [ph], one is how much was charged this quarter already as part of other admin expenses and second, how much will you be charging on an ongoing basis every quarter, which may be a different amount given that this being the first quarter there may have been an irregular period not indicative of the regular charge that you will be charging in third quarter, fourth quarter etcetera? And second, where in the asset side, on what line of the asset side do we see the asset that was created to be amortized over time?

Silvio de Carvalho - Executive Director of Controllership

All this information I will provide to you later, Daniel.

Daniel A. Abut - Citigroup

Thank you, Silvio.

Operator

Our next question is from Victor Galliano, HSBC.

Victor Galliano - HSBC

Yes, hi. I was wondering if you could just recap in terms of your guidance for the full year, looking at the main figures, namely loan portfolio growth, fee income growth and maybe if you can also give us in terms of specifically looking at Itaú BBA, would it be fair to say that there is more potential in Q3 for a better return to come from this business as we saw quite a lot of capital markets activity in July, which clearly Itaú BBA should be benefited from?

Silvio de Carvalho - Executive Director of Controllership

The guidance in relation to such fees that we are not changing in relation to the last one that to talk with the market. In reality, we have forecast that such fees will grow 2007 in relation to 2006 15%.

Victor Galliano - HSBC

And loans?

Silvio de Carvalho - Executive Director of Controllership

The loans will grow 20%, 25% in the year.

Victor Galliano - HSBC

Okay.

Silvio de Carvalho - Executive Director of Controllership

Much more related with the vehicles and SME. We are not expecting to grow so much with the corporate companies. Basically, we are forecast that the corporate loans will grow 5%.

Victor Galliano - HSBC

Okay. So basically, you are not changing any of your guidance?

Silvio de Carvalho - Executive Director of Controllership

No, we are keeping the guidance.

Victor Galliano - HSBC

Okay, thank you. And on Itaú BBA?

Eduardo Mazzilli Vassimon - Executive Vice-President of Banco Itaú BBA

Good morning. This is Vassimon speaking. As to Itaú BBA capital markets activity in the third quarter, you are right, I mean July was a good month with more activity. The highlight was the hedge [ph] transaction. It's too early to say if the whole quarter, we will be better because of the recent turbulence in the market, but July was a good month.

Victor Galliano - HSBC

Thank you.

Operator

Our next question comes from Mr. Jason Mollin [ph] with Goldman Sachs.

Unidentified Analyst

Yes, hello everyone. My question is related to the loan growth and market share of Itaú that we saw in the second quarter, particularly in the personal loan segment and the corporate loan segment. I don't have the data for the whole system yet, but versus some of your larger peers or competitors, we saw Itaú lose some share and frankly the 11% year-on-year growth in personal loans, less than 2% quarter-on-quarter growth in that segment and the decline in corporate loans. If you can give us some color of what you are seeing in those segments, it would be interesting to hear. And then as a follow up on the expense side, because there have been some questions I guess related given the 7.5% quarter-on-quarter growth in expenses and what Alfredo mentioned was the advertising, the donations, the training was referenced in your press release costs. Is that something that we should see as ongoing and is this level of expenses in the second quarter a good run rate that we should be looking for, particularly maybe even more if you are continuing to grow?

Silvio de Carvalho - Executive Director of Controllership

Silvio speaking. In terms of our loan growth, we are expecting to grow with the more individual like I mentioned. The main driver is related with car loans that we expect it to grow around 40% in this year, 45, and the credit card about 25, SME around 30. That is the main guidance. Mr. Vassimon, you talk about corporate loan.

Unidentified Analyst

Silvio, but in the quarter itself, was there something driving the performance that we saw in the second quarter, meaning is it that this is a conscious effort not to grow rapidly in the personal loan segment and focus only on auto or credit cards or is this a demand issue? And the same in the corporate because we did see actually your book decline, and it's only one quarter, but we saw some of your competitors grow that segment.

Silvio de Carvalho - Executive Director of Controllership

I think it is a question of the market. You know that we are more focusing on cards, but this is a question of the market. But we are not changing basically our guidance. Just to complement in relation to expense that we will transfer to Mr. Vassimon. In terms of the expenses, I think the first quarter, the expenses is just too lower. In reality, the lag of the second quarter is more really what we expect for the year. Consider that in the September, we have the negotiation with the union that will happen in September in the third quarter. But we expect that the expenses we will grow around the 9%; it was 8%, 9% that in total expenses in relation to 2006. Consider BankBoston in apples with apples. I will transfer to Mr. Vassimon.

Eduardo Mazzilli Vassimon - Executive Vice-President of Banco Itaú BBA

In relation to the corporate loan portfolio, as Alfredo Setubal mentioned in his presentation, spreads are under pressure and we are being quite selective in which type of assets and which credits we want to hold in our balance sheet. I would say that the trend would be more in terms of we originating and distributing assets and credits rather than keeping them in our books. We are being quite active in capital markets. We are the leading bank in local fixed income markets. So I don't expect our growth in the corporate loan portfolio this year. I think the best estimate would be a flat number, but there have been again very active in distributing loans both to capital markets and in the banking segment through syndicated loans.

Unidentified Analyst

Thank you very much.

Operator

Our next question comes from Maria Laura Pessoa with Fator Corretora.

Maria Laura Pessoa - Banco Fator

Good morning. I have some questions regarding Taii's operation. When we look at the improvement in NPL for this book, basically, it was conducted by the higher sale of loans growth in the period than the other products then. So I wonder if was there any change in approval rates for this... for the risk product. And also if you could give some hints on what it would be a feasible NPL considering that the base today is it longer [indiscernible], but the feasible NPL for these operation, what would be at least an idea? And last, if you could comment a bit about how well are doing the balance sheet realized MPDG [ph], because my impression is that you are being a bit more aggressive in credit cards and home branded credit cards. And I wonder if you have some sort of guidance related to the kind of issues with relation to these partnerships. Thank you

Silvio de Carvalho - Executive Director of Controllership

The operation of Taii, the delinquency rate we are supposed to pay around 50%. That's the deal [ph] of Taii. I don't think so you have a big improvement. When you look at the operations of Taii stores, they would drive with CBD with Lojas Americanas. The delinquency is higher than 50%. If these because we grow this figure at the consign... the payroll operations that we have included in this segment. Basically, the NPLs of Taii is around 20%. And we continue to see that it will be possible to achieve that we have given in the fourth quarter.

Maria Laura Pessoa - Banco Fator

And what about the strategy in credit cards from this financial versus retail?

Silvio de Carvalho - Executive Director of Controllership

The question related with credit card, we continue and our challenge is to keep our market share that we have today. Our market share is around 23%, and we are very, very focused to keep at this level of market share. We have made some effort to penetrate in lower segments offering credit card to keep the level of delinquencies under the product. Just to come back to the question of Taii, our approval rate is 10%. We didn't change our policy.

Maria Laura Pessoa - Banco Fator

Thank you.

Operator

Our next question is from Saul Martinez, Bear Stearns.

Saul Martinez - Bear Stearns

Hey everybody. I have a question on asset quality as well, and specifically what exactly are your internal models telling you that make you feel like you needed to boost your excess provisions given that you already had so much, a fair level of excess provisions to begin with and that your NPL ratio, at least over the last couple of quarters, has been showing a positive trend? Is it just conservatism on your part or are you seeing something that worries in your loan book?

Silvio de Carvalho - Executive Director of Controllership

Silvio speaking. Our internal model, first, we have to see in our portfolio a big change that happened in the last couple of years. We are much more present in car loans. In this quarter, we decided to analyze some semi stress scenario. In this scenario, it shows that we would increase our position in that conservative way related with the total portfolio.

Saul Martinez - Bear Stearns

Is it relegated than specifically to the mix shift and the greater proportion in auto loans? In a stress scenario, you would have greater losses in that segment than you would realize... than you had thought previously?

Silvio de Carvalho - Executive Director of Controllership

Yes, exactly. We'd probably take... car, the level that delinquencies is flat for a long time.

Saul Martinez - Bear Stearns

Okay, great. Thanks a lot.

Operator

Our next question is from Daniel Abut, Citibank.

Daniel A. Abut - Citigroup

Good morning. Just a follow-up question. I think Alfredo, you said in your remarks that one of the highlights of the quarter in slide 4 was a significant increase in shareholders equity. And you are absolutely right, if you look on year-on-year, if you recognize that the equity has expanded more than 50%. And in that context, sustaining an ROE of 30%, 31%, as you have been showing over the last quarter is no small achievement. The question is is there any room for you to consider managing your capital more efficiently in order to improve [ph] your ROE? For example, increasing the payout ratio in terms of dividend and dividends as a percentage of your income. Given that you have been realizing a lot of nonrecurring gains that nobody considers in their analysis, but they are still [ph] there as part of your book value.

Silvio de Carvalho - Executive Director of Controllership

We are keeping our policy in terms of dividend. Our policy today around 30% of the net income and we maintain that. Today we mentioned that to have BIS ratio above 17.6% and consider the new regulations that would be implemented in the beginning of July, our BIS will decrease from 17.6 to 16. And today we know that will have excess cash flow, but you know as well that we always analyze opportunities that creates value for our shareholders. We maintain this policy.

Daniel A. Abut - Citigroup

So you anticipate a ratio at around 30%?

Silvio de Carvalho - Executive Director of Controllership

Yes, 30%.

Daniel A. Abut - Citigroup

Thank you, Silvio.

Silvio de Carvalho - Executive Director of Controllership

Okay.

Operator

Our next question is from Juan Partida, J.P Morgan.

Juan Partida - J.P. Morgan Securities Inc.

Hi, good morning. My question is related to the net interest margin. I understand your guidance was not changing. It's still a compression of 50 basis points year-on-year versus last year for 2007. But I was wondering if you could deeper at... tell us what your expectation is just for the net interest... the interest margin excluding any trading and hedge gains because I think we saw some compression of 20, 30 basis points this quarter? Should we expect more compression going forward? Thank you.

Silvio de Carvalho - Executive Director of Controllership

We are maintaining our guidance in terms of... when you talk about the core business of the bank, in this case when you consider just the... that the last was a normal liquidity of the bank because we mentioned that we increased the liquidity in the second quarter. But if you make the adjustment in this level of liquidity, the net interest margin will drop to just 30 basis points. We had disclosed this information in the page 50 of our MD&A. We've made specific figures to show that that we are keeping our guidance in terms... decreasing net interest margin about 60 basis points.

Juan Partida - J.P. Morgan Securities Inc.

Thank you very much.

Operator

Our next question comes from Mr. Carlos Macedo with Unibanco Corretora.

Carlos Macedo - Unibanco Corretora

Good morning gentlemen. Just a question, yesterday you announced that the earnings that you are going to have on the sale of the shares of Redecard amount of around 1 billion reais. I was just wondering how you are going to use those earnings. Are you going to reinforce the provisions? Are you going to invest in the business, maybe open more branches and what can we expect from the use of these gains in the sale of the shares over the next couple of quarters?

Silvio de Carvalho - Executive Director of Controllership

Carlos, in relation to your question, we didn't decide what to do yet. This will happen in this next month. But remember that we are a supposed [ph] the market Redecard to create additional provision credit like I mentioned before.

Carlos Macedo - Unibanco Corretora

Okay. Okay, thank you.

Operator

[Operator Instructions]. This concludes today's question and answer session. Mr. Setubal, at this time you may proceed with your closing statement.

Alfredo Egydio Setubal - Investor Relations Director

Thank you for all who were with us in this conference call. As I said and I think all the participants show in the answers of the questions, I think the result was very good. We are very confident with the recurring results of the bank are very solid. We continue to believe that the credit portfolio will continue to grow as the economy continues to grow and we think that our prospectives are very good for the coming quarters. I thank you for your time and we'll go back... we will come back for the third quarter results. Thank you for your time.

Operator

That does conclude our Banco Itaú second quarter 2007 results conference for today. Thank you very much for your participation. You may now disconnect.

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Source: Banco Itau Holding Financeira Q2 2007 Earnings Call Transcript
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