Banco Itau Holding Financeira S.A. Q3 2007 Earnings Call Transcript

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 |  About: Banco Itau Holding Financeira S.A. (ITU)
by: SA Transcripts

Banco Itau Holding Financeira S.A. (ITU) Q3 2007 Earnings Call November 7, 2007 9:00 AM ET

Executives

Daniela Ueda - Financial IR

Henri Penchas - Senior Vice-President and CFO

Silvio de Carvalho - Executive Director of Controllership

Analysts

Jorge Kuri - Morgan Stanley

Saul Martinez - Bear Stearns

Daniel Abut - Citigroup

Mario Pierry - Deutsche Bank

Maria Laura Pessoa - Fator Corretora

Operator

Ladies and gentlemen, thank you for standing by. At this time all lines are in 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 conference over to Ms. Daniela Ueda of Financial Investor Relations Brasil. Please go ahead.

Daniela Ueda - Financial Investor Relations

Good morning ladies and gentlemen and welcome to Banco Itau Holding Financeira's Conference Call to discuss the Third 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 performances 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 S„o Paulo are Henri Penchas, Senior Vice-President of Itau Holding; Silvio de Carvalho, Executive Director of Controllership of Itau Holding; Eduardo Mazzilli de Vassimon, Executive Vice-President of Itau BBA; and Marco Antunes, Director of Accounting of Itau Holding.

First Mr. Henri Penchas will comment on the third 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. Henri Penchas.

Henri Penchas - Senior Vice-President and Chief Financial Officer

Good morning for you in the United States. Good afternoon for the people in Europe. It is a pleasure to be again with you to speak about the results of the third quarter of 2007 of Banco Itau Holding Financeira.

Let's move to slide number 2 where we had the highlights of the quarter with the net income of R$2.4 billion with an increase of almost 15% in comparison with the second quarter with a return on equity of 35.6%, and for the nine month for the net income of R$6.4 billion with an annualized return on equity of 33.3%.

The recurring net income of the quarter was of R$1.6 billion with an 18.2% decrease in comparison with the second quarter of 2007. We will speak little bit later about that when we will examine the net income of the quarter. The loan portfolio had a very strong growth in the quarter of 8.8% with a growth of 26.9%, the last 12 months. Vehicles grew by 14.7% in the quarter and 62% on an annual term.

Small and mid-sized companies 9.8% and 26.4% and credit card loans 6.8% in the third quarter. The treasury performance was not very good in this quarter due to the turbulence in the financial markets due to the subprime loans and the liquidity affected all the markets overall and we lost R$64 million before taxes in the quarter, even not having loans or securities for the subprime sector but just futures of interest [ph].

Our nonperforming loans ratio had a strong reduction, now it is just 4.7% of the portfolio and the BIS ratio we closed at the quarter was 15.3%, and we have a new relation of Central Bank of Brazil, which increased the number to 18.5% that will be reflected in this quarter of 2007.

Let's move to slide number 3. That's a new slide where we are showing the open not demand deposits account. As you can see just in the month of September, we opened almost 181,000 demands for the second half. If we look at the year of 2006 and of 2005 and 2006, you will see that the number of spread is stable, and now with the accounts increased this number now that we opened 169,000 in July, 157,000. That's due mainly to the focus of growth of the bank now that we have completely the great BankBoston [ph]. The year of 2006 and beginning of 2007, we had to work hard means a great BankBoston and now that that's finished, we are growing again.

We are very aggressive to open demand for this account. We've reduced the fees for our individuals in the first quarter. We are reducing now in the first quarter for companies and we are drawing the number of branches. This year, we drew 88 branches the total number of the branches as a result. This shows we can see very clearly how we are growing the number of customers.

The next slide, slide number 4 just for reconciliation for the net income of R$2.4 billion to the recurring net income of R$1.6 billion. The mean effects is the non-operating results of R$1.5 billion before taxes due to the IPO for Redecard where we've had 32% to 33% of the company, and now we have 24% of the company. That's one of the main reasons for the non-recurring net income.

And next page slide number 5, you can see the main numbers like 15 points the market value of the bank of R$111 billion, the PIS ratio of 15.3, the efficiency of 47.1 and the non-performing of 4.7%, now with the huge reduction from the 5.1% in the second quarter of this year.

Slide number 6 is the comparison of the net income from the third and the second quarter where we can see very clearly the reduction in the income of the treasury from an income of R$571 million in the second quarter to a loss of R$64 million in the fourth quarter. The bank service fees, we will speak a little bit later and the reconciliation R$1.3 million for recurring net income in the third quarter.

Next slide, slide number 7, the net interest margin with this table as the overall increased 11.4% even with the decrease of the interest rate from 12% to 11.3%, we certainly had to grow soft volumes in the third quarter.

Next slide, the growth of the loan an 8.8% growth in the quarter in the first quarter basically with 9.2% growth in the loans for individuals with a strong growth included in the 9.2% or 14.7% in vehicles. Company loans of 8.5%, corporate 7.8%, and medium and small 9.8% and Argentina, Chile and Uruguay was 13.8% growth even with a small portfolio R$8 million only for that.

Slide number 9. We have compound annual growth of the loan for individuals and for companies, which tend to increase in December 2003. Non-performing loans and corporate ratio non-performing for individuals, reduction from 7.5% to 7.3%; company 2.3% to 1.7% and the total 5.1% to 4.7% and the coverage ratio at the same level of the second quarter of 2007 at 161%.

That's the breakdown of the non-performing loan and price segments where you can see a reduction for Itaubanco as a reduction price. That will give you a small increase for results [ph] from 6.4% in the second quarter to 6.5%, and in the third quarter you see from 5.1% to 4.7%.

Now the funding; growth of 5.3% in the quarter with 2.9% growth with customers, 39% growth in the market, and I think that that's also 5.3%. If we look in comparison with September 2006, the total growth was 5.7 and 28.1 for... 22.5% with capital markets and 74% from the market. The next slide, the growth of the funding with customers and with the markets and with the markets.

The next slide, the bank service fee, here I want to lose a little bit of time to explain this slide. In the third quarter, we reduced the dollar fixations at Serasa and that was consolidated but with our original [ph], it's not consolidated. So just derived that we expect of the other was of R$42 million in the second quarter and now we recognize that the equity assets of other. Redecard that they have an ATO [ph] in the third quarter, we reduced the loan operation from 33% to 24% just that reduction, the participation represents R$35 million increase in the second quarter, so for [indiscernible] the banking service fees with a tax of the reduction of our Redecard and the non-consolidation Serasa represents the growth of 2.3% in the fees from 2.5%... R$2.472 billion to R$2.539 billion.

Next slide page 15, the non interest expenses, you can see the strong control the management has of the non-interest expenses. These are considering that we had increases of salary for the employees in banks now in the third quarter. The total is represented a reduction of 2.2% of the total expense, non interest expenses in the third quarter in comparison with the second quarter.

Slide, page 16, the fair market value of financial instruments, you can see a huge increase in the realized gains from R$2.7 billion to R$8.3 billion from the second quarter to the first quarter, due mainly for the leasing of Redecard where we have R$5.2 billion of difference between market value and the book value of the shares we do have. Serasa, with a difference of R$352 million between accounts and then the market value of the shares that we have.

Next slide of fragmentation between the four segments that we have; Itaubanco, Itau BBA, Itaucred and the Corporation where we carried the excess of capitals. Slide 18, we can see the recurring net income of this segment and return on adjusted capital for each segment. Itaubanco that's just for the management for discussion on earnings with a recurring net income of 833 and a RAROC of 25.1%. Itaucred or corporate in banks, a recurring net income of 321 and RAROC of 21.6% [indiscernible] customer Redecard against house of finance [ph] with recurring net income of 333 and already work of 40.2% and of course of recurring for the quarter of 1.6 billion with a RAROC of 23%. The page 19, just the chart and seeing the third quarter of 2005 of the net income and the recurring net income of this quarter.

Next page, page 19, just reminder that we'll have a meeting with the analysts on December 5 at the Buffet Rosa Rosarum in the morning from... beginning at 11 AM. We'll begin with the presentation of Itausa [indiscernible] and in the afternoon the presentation of Banco Itau Holding Financeira. I have finished this part of the presentation and I, myself and my colleagues we are open now to the questions you may have. Thank you.

Question And Answer

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Jorge Kuri of Morgan Stanley. Please go ahead.

Jorge Kuri - Morgan Stanley

Hi. Good morning everyone. I have two questions. The first one is can you tell us what the nature of the trading losses was? We did see several of your peers that third quarter numbers did not show any trading losses, so what exactly happened to these fixed income losses, equity losses. Can you provide any detail, I mean, was this just mark-to-market and now that the market have turned around, do you expect to see a turnaround in that fourth quarter.

Henri Penchas - Senior Vice-President and Chief Financial Officer

John, this is Henri speaking. It is mark-to-market of interest rates.

Jorge Kuri - Morgan Stanley

Okay. And the expectation for the fourth quarter, so those are now being now wiped out, I am assuming?

Henri Penchas - Senior Vice-President and Chief Financial Officer

We don't have expectation for the quarter, but probably it will be a normal quarter without surprises until now 7th November.

Jorge Kuri - Morgan Stanley

Thanks Henri. And then the second question is can you provide some color on 2008 what's kind of like your preliminary view on credit growth expenses, net income, ROE?

Silvio de Carvalho - Executive Director of Controllership

Jorge, Silvio speaking.

Jorge Kuri - Morgan Stanley

Hi Silvio.

Silvio de Carvalho - Executive Director of Controllership

Yes. We are expected to grow at 25% for next year. Normally, we don't give any guidance about ROE. We can give you some guidance in terms of expenses and in terms of efficiency ratio. In terms of expenses, we intend to continue to expand the bank in Brazil probably we opened more branches. We didn't finish the plan yet, but our guidance to expense that you will be a little bit higher than the inflation but lower than the hedge. That's basically the guidance.

Jorge Kuri - Morgan Stanley

And on net interest margin, what's the expectation for '08?

Silvio de Carvalho - Executive Director of Controllership

Net interest margin I think you'll see a little bit coming down, because of the market amount that have forecast. We've posted the in directory rate [ph] we will see 10% in the end of 2008 and today is 11.25%.

Jorge Kuri - Morgan Stanley

And okay, thanks.

Operator

Thank you for your question, Mr. Kuri. Our next question comes from Saul Martinez of Bear Stearns.

Saul Martinez - Bear Stearns

Hi, good morning gentlemen. I have a couple of questions. First, can you give us an update on your capital strategy, your BIS ratio using the capital calculation you'll adopt in the fourth quarter, is over 18%. You have the lowest dividend payout ratio of the major banks and a higher ROE on a recurring basis. Under what circumstances would you return more capital to shareholders? And my second question is a related question and it's what are you seeing in the M&A market and are you still constructive that you can do attractive deals?

Henri Penchas - Senior Vice-President and Chief Financial Officer

Well, good morning Sau. Henri speaking.

Saul Martinez - Bear Stearns

Good morning, Henri.

Henri Penchas - Senior Vice-President and Chief Financial Officer

As you know we always managed our capital buying back shares and increasing dividends, our interest on capital. Until now we were able to perform pretty well with that using higher return on equity. We are still acting like that or we have opportunities to grow, we will increase share, the buyback of share or increase a little bit the dividend. We'll manage that as we are managing in the past. Opportunities, we are always open to opportunities. We are spending a lot of thing initiative in the external slide also because we are still small in Argentina, we are small in Chile, and we are small in Uruguay. So we are open to study to see what increases the market value of the bank.

Saul Martinez - Bear Stearns

Okay. Any update on BMG. I think the right of first refusal expires in early December. Is there anything you can... you'd be willing to say about your talks or past talks with them?

Silvio de Carvalho - Executive Director of Controllership

Okay, Silvio speaking. In relation to this BMG, we have a contract with this bank that this contract is to provide funding for the credit to [indiscernible]. This contract will... on December 8th. That's the operation. We have talked with them but it is the initiative [ph] and it's being above the expenses contract. Well, in this contract we have one call that may show [ph]. If the family decides to sell the bank, Itau has the rights to refuse

Saul Martinez - Bear Stearns

And that's first refusal in acquisition will increase... or in that position has BMG also to expire in early December, is that correct?

Silvio de Carvalho - Executive Director of Controllership

Yes.

Saul Martinez - Bear Stearns

Okay, thanks a lot.

Operator

Thank you for your question Mr. Martinez. Our next comes from Daniel Abut of Citi. Please go ahead.

Daniel Abut - Citigroup

Good morning gentlemen. Two questions. One is a follow-up on a prior question related to the operations. Just to make sure I understood response [ph] correctly, most of the losses you said where mark-to-market of interest rate certainly the position therefore we should understand and I can realize losses at good potential reverse depended on market condition, is that right?

Henri Penchas - Senior Vice-President and Chief Financial Officer

Yes.

Daniel Abut - Citigroup

Second, in you presentation, I noticed in the press release you talked about an analysis there in order to give a better impression of what happened to your cost income ratio that is a more normal type of environment, it is basically have to reduce about 200 million of gains then the cost income ratio would have been much better. When you said early in your remark as you... what you know already, November 6, you have taken more normal environment. Is that what you are thinking? Is that a reasonable target [indiscernible] 200 million gains by your operations?

Henri Penchas - Senior Vice-President and Chief Financial Officer

Excuse me, Daniel, I don't know if I understood your question. The 20 million is just an average of the last eight quarters of the gains in treasury because as you can see in the presentation, the gains of the second quarter were of R$570 million, but that's an average of eight quarters after-tax, the gain was up $200 million, so that's a number we consider recurring.

Daniel Abut - Citigroup

Understood that but I'm trying to put some numbers on your earlier remarks that you would expect the fourth quarter to be a more normal type of directory operation environment and therefore you expect a more normal to have R$1 million give or take a good proxy to use for preliminary or not?

Henri Penchas - Senior Vice-President and Chief Financial Officer

Yes.

Daniel Abut - Citigroup

Finally on the gain, we do have disclosed early on how much you are going to book in terms of the recurring in the fourth quarter. There remaining position you have, is it going to be mark-to-market or is it going to kept at acquisition goals and only realize whether these acquisitions get closed?

Henri Penchas - Senior Vice-President and Chief Financial Officer

It will be considered... the gain would be of R$250 million and the remaining provision we have a gain of almost R$1 billion that will be considered only when we arrive as Redecard and Serasa.

Daniel Abut - Citigroup

If we go back to that page that you showed us, I think its page 16, we could add another R$1 billion more coming from the unrealized gains from the Serasa position.

Henri Penchas - Senior Vice-President and Chief Financial Officer

Yes. And a number that I don't... I do not know, that's the number of the IPO of BMS, Daniel, that probably will have the IPO this month.

Daniel Abut - Citigroup

Okay. Thank you very much.

Operator

Thank you for your question, Mr. Abut. Our next question comes from Paul Tucker of Egarts & Capital [ph]. Please go ahead.

Unidentified Analyst

Yes. Thank you very much. I just had two questions, if I may. The first one was just with regards what you have done on banking fees, I wonder if you could give us a sense of what has been the competitive response to that in price leadership if you like amongst the other Brazilian banks? And secondly just on the operating expenses, you show in the slide number 15 pretty strong quarter-on-quarter variance down 2.2%. I just wonder whether you have run that number also on a like-for-like basis removing from the base Redecard and Serasa?

Silvio de Carvalho - Executive Director of Controllership

Silvio speaking. In relation to the competition, we are not as difficult to measure the impact that our fees reduction provoked. We didn't see clear movement. But this subject is in discussion with Feboraban [ph] that the Brazilian Bank Association, some thing probably will happen next couple of months related to this subject. In relation to the cost that we have with Redecard if you are R$15 million in relation to Serasa, it was R$28 million. This happened in the second quarter.

Unidentified Analyst

I'm sorry, so Redecard was R$15 million, Serasa was R$28 million. Those were the numbers from Q2?

Silvio de Carvalho - Executive Director of Controllership

Yes.

Unidentified Analyst

Okay.

Silvio de Carvalho - Executive Director of Controllership

R$105 million in Redecard, R$28 million in Serasa.

Unidentified Analyst

Okay. That's great. So we can work out the numbers. I mean just maybe, just a follow-up on the first question in a more general sense; I mean have you seen a particularly aggressive debate going on at Sebraban [ph] amongst other bank management teams that you think will result in them also reducing fees as we go into Q4 and into 2008?

Henri Penchas - Senior Vice-President and Chief Financial Officer

I think the environment is more competitive today, Paul. There are some I think... the competition has increased basically in credit card and vehicles. That's the scenario probably for 2008.

Unidentified Analyst

Great. Thank you very much.

Operator

Thank you for your question, Mr. Tucker. Our next question comes from Mario Pierry of Deutsche Bank. Please go ahead. Pardon me Mr. Pierry, do you have your line on mute?

Mario Pierry - Deutsche Bank

Hello, can you hear me?

Operator

Yes, sir.

Mario Pierry - Deutsche Bank

Okay, I am sorry. On the costs, you showed various types of cost control this quarter. I was wondering if it already reflects some of the synergies that you were able to realize from the BankBoston acquisition or we could still see more synergies from BankBoston on the cost side coming through in the next couple of quarters. And second question is related to Itau, I think Itau lost about R$18 million again this quarter, if you expect Itau to breakeven by at the end of the year? Thank you.

Henri Penchas - Senior Vice-President and Chief Financial Officer

In terms of cost, this third quarter reflects back on the synergies related to BankBoston. I think it's almost done. But probably we had an additional synergy cost in the fourth quarter, but very, very small. In relation to Itau, what we at this movement is possible to see that... we had many operations with Itau; basically three operations related to financial consumers. First, this is our own spot that we are supposed to achieve in the fourth quarter. We have considered that bill [ph] of Itau will take three years to achieve the breakeven. The second operation is the JV with CPT [ph] as far as we have to put that to achieve the breakeven as well in the fourth quarter. In relation to the JV with the larger Americas [ph], we have to pull them up to achieve the breakeven. Probably we've achieved the breakeven in 2008. But these are very, very small figures, probably around R$5 million involved in the quarter.

Mario Pierry - Deutsche Bank

Okay. Second, I ask another question also in regards to your loan grow. As we've seen your loan went up almost 30% this year and if I recall, at the beginning of the year, we were talking about loan growth as maybe 20%. So what has been the surprise? Is it that the banks now... that the banks are feeling more comfortable and willing to lend again, or is the operating or the macroeconomic environment in Brazil that much better that there is a lot more demand than you expected at the beginning of the year?

Unidentified Company Representative

[Indiscernible] gave the guidance in the beginning of the year, we mentioned 20%-25%. That's our guidance into this quarter. The environment in Brazil improved. We have perhaps delinquency, the GDP growth... the situation become more confident. That is actually could be the good message that we took throughout this year. The market is... we are more getting corrected. That's basically the reason because we increase.

Mario Pierry - Deutsche Bank

Okay. Thank you very much.

Operator

Out next question comes from Maria Laura with Fator Corretora. Please go ahead.

Maria Laura Pessoa - Fator Corretora

Hi, good morning. I have a question regarding fee income evolution. As part of the drop was due to the absence of... regarding Serasa contribution as you already answered. But if we look to fiscal '07, the comp fees they have dropped 8.4% and you actually explained as this being part of the campaign launch, which reduced even as [indiscernible] client fee charges, so I wonder... on the back of these fee income to be phased in the in the next quarter, if you are having sort of guidance for 2008 income growth? And especially for the fourth quarter, if we probably see current account fees also dropping? Thank you.

Henri Penchas - Senior Vice-President and Chief Financial Officer

Maria Laura, we announced this will be [indiscernible] we had really implement investing the fees. This happened last September. There is a part of the [indiscernible] are diminished. We've proposed that the impact of this policies will reduce fees, so we will be R$5 million per month. The AUBs will reappear totally in next year if you compare 2008 with 2007. But again you have to compete there that we are increasing the customer base according to second is right on the presentation, we show increasing number of checking accounts. That's the scenario that you're seeing for 2008.

Maria Laura Pessoa - Fator Corretora

Okay, perfect. Thank you.

Operator

Thank you. Our next question comes from Daniel Abut of Citi. Please go ahead.

Daniel Abut - Citigroup

Just to follow-up on the prior question, in prior quarters have given the guidance of about 15% year-on-year fee income growth, which as you explained in page 14, if you account for the Serasa and Redecard effect, you both are there in the nine months of the year. Heading to 2008 and giving your change in fees, for taking account which you will barely compensate with higher number of accounts, what's your best guess in terms of guidance for fee income growth for 2008?

Henri Penchas - Senior Vice-President and Chief Financial Officer

Daniel, I don't have the last directory for May, above that at this moment. We are in this moment to discuss the budget. We don't have the budget yet, but in my view I think the guidance escalation subsea growth will be around 12% next year. But there are growth guidance, probably we will review that when you... in the beginning of next year in the conference call of the results of the --

Operator

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

Henri Penchas - Senior Vice-President and Chief Financial Officer

Thank you for the people that are with us. I, myself and my colleagues we are always open if you have further questions or otherwise we will see you at the analyst presentation on December 5 or in the presentation of the fourth quarter of this year. Thank you very much for being with us. Bye-bye.

Operator

That does conclude our Banco Itau's third quarter 2007 results conference for today. Thank you very much for your participation. You may now disconnect.

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