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União de Bancos Brasileiros SA (UBB)

Q3 2007 Earnings Call

November 9, 2007, 9:00 AM ET

Executives

Geraldo Travaglia Filho - CFO and VP of Operations and IT

Analysts

Daniel Abut - Citi

Saul Martinez - Bear Stearns

Juan Partida - JP Morgan

Presentation

Operator

Gentleman, thank you for joining Unibanco's Conference Call. Our presentation today will cover the earnings results for the third quarter of 2007. Today, we have a simultaneous webcast with slide presentation on the Internet that can be accessed at the site www.ir.unibanco.com. There will be a replay facility for this call on the website. We inform you that all participants will be able to listen to the conference during the Company's presentation. After the Company's remarks, there will be a question-and-answer section. At that time, further instructions will be given. [Operator Instructions].

Unibanco reminds you that the following presentation contains forward-looking statements regarding Unibanco, its subsidiaries and affiliates, anticipated synergies, growth plans, future results and strategies that although reflecting the management's belief are subject to uncertainties and risks that may cause outcomes materially different from the expectations herein. Those risks include, but are not limited to our ability to realize the amount of the projected synergies and the timetable projected as well as economic, competitive, governmental and technological factors affecting Unibanco's operations, markets, products and prices.

Participants are urged to read carefully Unibanco's relevant filings with the Securities and Exchange Commission in assessing the forward-looking statements contained herein. Unibanco undertakes no duty to update any of the projections contained herein.

At this time, I would like to turn the call over today's speaker, Mr. Geraldo Travaglia, Chief Financial Officer of Unibanco. Sir, you may begin your conference.

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Okay. Good morning. It's a pleasure to see you in the third quarter conference of Unibanco. As usual, I will turn to slides here and I would ask you to do the same [indiscernible]. Beginning first slide number 2, our net income in the third quarter was 1.199 billion reais, nine months is 2.6 billion reais. We have reported status of some non-recurring events of 532 million reais in the third quarter totaling 736 million reais in nine months.

Excluding this non-recurring events from net income, we reached reporting net income of 667 million reais for the quarter, 1.885 million reais for nine months of 2007. ROE of 50% in the quarter, 26.5 with non-recurring events, 33.7 in nine months, 24.5 the ROE is for non-recurring events in nine months.

Slide number 3 is a big summary of our income statement. Our gross margin reached 2.6 billion reais in the third quarter, almost 7.7 billion reais in nine months, representing an increase of 6.2% to compare with nine months 2006. Provision for loan losses were 1.6 billion reais in nine months of 2007, almost 1.9 billion reais in the same period of previous year, representing a decrease of almost of 14% in the year, thus resulting in the net financial margin of 2.1 billion reais in the quarter, almost 6.1 billion reais in nine months, representing a growth of more than 13% nine months to nine months.

Fees from services increased at 4% either the quarter or nine months period and is affected by the consolidation line-by-line of Redecard and Seraso in which we reduced our participation after selling some of our stake in this companies and we will speak briefly in this line in some slides ahead. Personnel and administrative expenses reduced in the quarter, 1.4% compared to the same quarter 2006 or increased 2.6% nine months '07, nine months '06, the same statement that I mentioned to the fees is applicable here for expenses in which we have impact of selling the stake in Serasa and Redecard even though the performance of expresses was pretty much in good shape and we will talk about some slides ahead.

Other operating income and expenses increasing almost 20% into the quarter or in a year basis, thus represent an increase in some provisions on labor and civil litigations. And coming to the effective tax rate of almost 22%, pretty much in line with previous periods and then confirming that our effective tax rate is located in the bracket of 20 to 25%.

Coming to the net income before non-recurring events of 667 million reais or 1.885 billion reais in nine months; representing an increase of 17.8% in the quarter, 16.5% nine months period. Excluding the non-recurring events, resulted in a net income of 1.199 billion reais in the quarter, that be compared with 106 million reais in the third quarter '06. It is important to remember that at that time we had the amortization charge, amortization of goodwill so it's not quite comparable in quarterly basis with third quarter '06 with the negative non- recurring to the third quarter '07 with a positive non-recurring.

Coming to slide number 4, the explanation of non-recurring events, we put it together two columns of the third quarter and second quarter totaling the nine months. In the third quarter, we had a gain on Redecard's IPO of 680 million reais. A part of this gain have been reflected in the second quarter with the participation of an external shareholder on UPS, that at that time has the position on Redecard, stake in Redecard in which we recognize it, realize it the equity pick up of the goodwill that this external shareholder invested in the company. So our total Redecard IPO must be seen in two columns, one in the second quarter, 679 million reais and the second of third quarter, 680 million reais and we use it a part of the external extraordinary results in the third quarter to increase basically receivable provisions due to the protection against some economic trends in the past and that we are experiencing increasing demands and litigations to reviving this tax economic terms and all these issues that came along in the decision and things like this. Then we head to the net of results for non-recurring events of 532 million reais in the quarter or 736 million reais in nine months.

Slide number 5, our ratios of ROE in the quarter 26.5%. That be compared with 24.8 previous year and 23.3 in 2005 or in a cumulative terms nine months, 24.5 this year, 23.1 the previous year and 21.3 in 2005.

From now on, I will discuss only with the results without the effect of non-recurring events.

Slide number 6, loan portfolio, some highlights of the total portfolio rose 29% year-on-year, 31.2 in the quarter, a 152% year-on-year in payroll loans, auto loan here the massive 70% growth year-on-year, 24.6% quarter-on-quarter and has an increase of robust 37% year-on-year growth.

Asset quality improvement almost 14% reduction in the provisions for losses, the enhancement of D to H ratios regarding the coverage and regarding participation in the total portfolio, better ratio of non-accrual portfolio and an increase in excess provisions over past due loans increasing to 118%.

Operational efficiency of total 1.4 reduction in personnel expenses when we consider the consolidatiive expenses are a 1% variation in the quarter or 1.6 variation in nine months if we consider only the company's management through Unibanco and the better cost to assets ratio is 4.4% in the third quarter coming from almost 6% in the third quarter of next year.

Our stocks average daily trading volume increases by 211%, reaching almost 470 million reais and we add together Bovespa and NYSE. Our market's cap due to the crisis of November 6 almost 38 billion reais.

The slide number seven, some highlights using nine months of '06, September '06 as 100 basis, loan portfolio increasing 29%, core deposits increasing 22%, provisions for losses reducing 14%, personnel and administrative expenses increasing 2% and operating income increasing 14%, reaching the net income increasing 15%.

The slide number eight, some financial indicators, assets reaching ahead 24 billion reais, loan portfolio 56 billion reais, net profits from financial intermediation to net margin, 2.1 billion reais, earnings per share is $0.24.

The slide number nine, I think of course it is important to show these figures in a very high volatile quarter in Brazil. The treasury gains, they have the first line in the financial margins due to treasuries, the line A. We had 154 billion reais in the third quarter or 452 million reais in nine amounts of 2007. Then we have two lines, the gross margin before losses provision for credit and the net margin line C after provisions for credit. [indiscernible] ratios A over B or A over C and you see that our ratios are quite stable as preferred compared A over B once the more comparable figure once the treasury business has provisions for loan losses so we compare gross margin, the gross margins having apples-to-apples will have almost 6% in the third quarter of '07 pretty much in line with 6.6% in the second quarter of course there is a reduction into the volatility that we experienced in Brazil and in the market as a whole in July and August.

When we compare the nine months of '06 with nine months of '07, there is increase of almost 150 basis points and this loss in the ratio and this represents the increase in the cash that is spend in the organization due to the profits that we are increasing the profit of the company and the result and the proceeds of the sales that we had in Redecard and Serasa and more recently from both external parties were increase, the billing money and that we had in treasury towards this.

Slide number 10; moving to loan portfolio, we increased by 29% the book in one year or 8.2% in the quarter, reaching 55 almost 56 billion reais being of that 61% of retail, 39% in wholesale and is it part to compare to September '06 in which we have 56% on retail and 44% on wholesale and as time goes by, we forget the best. It is important to mention that about four years ago, the ration was 30% on retail, 70% on wholesale and we are certainly changing sloping this proportion in the next months.

Slide number 11 shows our performance the time is [indiscernible] credit and we compare to the market. Transforming September '06 a 100 basis, we were pretty much in line until the month of June. In June we started to get a little more credit than the market, and in September we reached a 29% loan growth and the total system showed a 25% growth rate.

In slide number 12, some highlights of our loan portfolio. I would point to payroll own portfolio, that's we were 36% yearly basis coming to 1.5 billion reais from 1.1 billion reais and of course the acquired portfolio that we keep, that we made understand or see this as business opportunities, not as a sales for us ForEx increasing enormously 312 and 19% in 12 months that we really celebrate here, the 36% increase in the payroll loans that we could win due to our own sales force.

Car loans, a robust growth of 70% in the year, 25 in the quarter. SMEs 37% in the year. This is also flat [indiscernible] due to the steps that we adopted through our strength in the credit cards or debit cards world that transformed Unibanco into bank of commerce in Brazil. Consumer financial companies started to grow again, 9.7% in the quarter and this certainly is a seasonal effect due to the end of the year and increased the end year sales and distorts. And credit cards, the average its normal 30% year growth that we have experienced in the last two years at least and adding together, individuals coming to 43% yearly basis and corporate 21% roughly yearly basis.

In slide number 13, [indiscernible] auto finance. I think the important issue and this slide is the participation in new vehicles or first time vehicles in the total is almost 70% of the total, thus representing a very well oriented risk management approach, reducing risk granting financing to new cars through where auto dealers that reduces a lot of the risk in this operation.

Credit cards is slide number 14, increasing almost 38% and the billions reaching 6.4 billion reais and the total cards reaching the amount of 33 million cards issued and below 13% with the highlight of credit cards increasing 25% in the year to 24.3 million cards and more specifically Hipercard that increases to 43.6% in the year reaching almost 8 million reais that we compare to the 2.6 million cards issued in the year that we bought this company 2004.

The slide number 15, financial margin, very sharp movements in this issue. We must point that the Selic rate reduced to 300 bps in this periods but the gross margin reducing only 210 bps from 12.6 to 8.5% per year and the risk management and the reduction on plant [ph] losses acted like a cushion for this reduction in the gross financial margin coming from 8.1 September '06 and 6.7 September '07. Of course this reduction in margin is reflected not only by reduction in Selic rate, I will say that is less affected by reduction in Selic rate than the change in the mix of product that customers are using in the bank moving towards less risky...less risky products, which is good for us but less spread bearing products as well. So this certainly explains the increasing volumes that we are trying to get in well secured portfolios up to the extend, we are trying to reach the growth in all portfolios but mainly in this well secured portfolios to offset somehow the reduction in Selic rate and I think we have been able so far.

And... at the right end of this slide, that shows the more important ratio when we compare margin to losses is the ratio that we compare what we loose with what we get from the gross financial margin and in December '05 when we started to reduce granting credit and increase the delinquency practice in Brazil, we were losing almost a third of our gross revenues, about 29% and now about almost two years after this decision, we have reduced it by about 800 bps this ratio, reflecting the effectiveness in the correction of our strategy regarding credit risks.

Slide number 16, some asset quality ratio is the coverage of D to H portfolios are loans pass due over 60 days and our coverage is simple and quite profitable, about 100% of everything that is pass due over 60 days is put back in our balance. The D to H portfolios are our loans pass due over 60 days represent a 6.7% of total book in September '06 and now represents little bit less than 5% September '07.

Non-accrual portfolios have an excess coverage of 18% is doubled the excess coverage from 9% to 18% in a year. And the participation of the non-accrual portfolio pass due and outstanding change from 5.4% in September '06 to 4.1% in September '07.

Slide number 17 shows our funding and assets under management figures. And I think important ratios here is the reducing of demand deposits year-to-date basis of 6.9% and the increasing of saving deposits 68.9%, but getting to a quite robust growth in the quarter of 22.5% coming to 17.9 billion reais in September '07 from 14.7 billion reais September '06. And of course other funding of 57.9% increase reaching 41.5% represent external and internal all adding up together to total funding reached 89 billion reais that represented a growth of 27% over September '06 and 70.1 billion reais and this 27% growth is pretty much in line with 29% increase in the assets booked.

Slide number 18, the expenses and now I am talking about only the companies under Unibanco's direct management excluding those companies that we consolidate but we don't have the management of them. The increase in a quarterly basis was 1% in the year, 2.7% in the quarter. Most important, the increase in nine months period '06 to '07 only 1.6% including this ratio, [indiscernible] in Brazil and all the salaries increases in the 2006 and the 2007 recently negotiated as well.

Slide number 19, shows the fees from service rendered. We added a total year in because Redecard and Serasa we just consolidated line-by-line in this item. Shows the effects of the reduction of our participation due to the sales of a portion of our stake in these companies. So line-by-line consolidation, we have a negative impact of Serasa and Redecard add to subtotal of 2.1270 billion reais is showing increase of 8.8% and we compared to nine months of 2006 or if you wish, 881 million reais in the third quarter 2007 that represents an 11% growth for the third quarter of 2006. that

Slide number 20 we are having said about revenues and expenses, the efficiency ratios coming to 47% in the third quarter, coming along fast from the third quarter 2004 at 61% and now we are introducing the cost to office ratio that reaches 4.4% in this quarter coming from 6.5% is an impressive improvement but faraway from the best in class that you see in more developed markets that you see ratios coming to 1.52% and these reflects the amounts of leverage that banks in Brazil must accomplish to get this more non-performing cost to assets ratio.

In slide number 21, insurance and pension plan of Unibanco. When we get to the financial and equity result I think is the worst part of this month because when we go to additional [ph] results, business [indiscernible] and [indiscernible] we have very robust growth of about 30%, 33% and operating income and also financial and equity result we have a reduction of 23% severely affected by receptions for the [indiscernible] in to [indiscernible] results and FX rate or foreign exchange rates that affects severely this company in the last 12 months was the company has is the leader of corporate list in Brazil to get part of them in the state of risk terminated in U.S dollars and of course the company has to make us Unibanco groups some years before as [indiscernible] has to protect the portfolio insurance company now is protected against these FX variation and we should see no more this effects hurting the [indiscernible] operational results of the company.

The slide number 22, our stocks performance in Brazil. The stocks appreciated 57% when we compare to September '06, any nice distorted performance 78% over September '06. There is a sharp in the high tensed in the bottom of the slide that these are our participation in [indiscernible] and Ibovespa, the interest in Ibovespa in May 2005, is less than 1% and now the unit UBBR11 represents 2.3% of Ibovespa using increase of 131% in this last two years, represent a reflection [indiscernible] robustness of our trading volume in Brazil.

That shows in slide 23, this trading volume now reaches 466 million reais, we are splitting 114 unit in Bovespa and 362 on NYSE. On NYSE, our increase was being 42% in the unit and [indiscernible] recently issued a release that puts us in the top 10 average daily trading volumes each managing the full [indiscernible] ant this reflects the effectiveness of Unibanco in the markets.

Slide number 24, Moody's recently upgraded our perpetual bonds, rated now as investment grade is very important for us.

Slide number 25, some... we should say that Unibanco is being recognized by resources, what we are talking about people want to work in Brazil for external sources independent issues of this researches. We adopted the Japan Bank for International Population, the first agreement between Brazil and Japan to Clean Development Mechanisms projects, and in September '07 due to our Bandeirantes Thermoelectric Plant, Unibanco's project has been able to make the first auction of carbon credit in the world and this is important to say that this power plant today is responsible for supplying electro power for all administrative dealings including Unibanco [ph] in Brazil.

There is a subsequent event in slide number 26. This relates to Bovespa's IPO. We sold 23.3 million shares, the totality of our shares in Bovespa at the price per shares of 23 reais per share representing the value of 536 million reais and the proceeds and the results now reporting, will be posted in the fourth quarter 2007.

And finally we have still to look for meetings between investors. The first one in Porto Alegre on November 22 and the national one would be held in São Paulo on December 3 and on December 11 we will be celebrating in New York Stock Exchange ten years listing the pioneer ADF program of a Brazilian bank in New York. So is now that we have for the first part of this presentation and now I am available for your questions

Question And Answer

Operator

Thank you. [Operator Instructions] Our first question is coming from Holly Hequidi [ph] with Morgan Stanley. Please go ahead

Unidentified Analyst

Hi good morning everyone. This is Holly Hequidi [ph], congratulations on the result. Geraldo, a quick question. Your consumer loans grew 43% year-on-year. That was two times the average growth rate at which we've seen over the last couple of years. Is this the new level that we should expect to see for the coming say, four quarters and also I was under the impression that one of the reasons Unibanco was able to weather better their non-performing problems that other banks face but because you were much more cautious on growth actually growing at a much smaller pace than your peers. It seems that now its exactly the opposite you are going much faster. What change in the environment out there that gave you a comfort level to do this and what's are going to be the consequences on provisioning going forward of this new face of consumer lending? Thank you.

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Okay George [ph] Good morning. Well on the consumer finance group, although it is an impressive growth, bank with 4% in deposits or 14% for the year, we were growing from a very low levels regarding the volumes that these companies have kind of past, so any activity here simply we will express in the beginning some major impressive type ratios that is felt, is the increase has been all in 300 million reais in the quarter of 400 billion reais yearly basis. But okay, there is an increase in demand and this company's yes and this is seasonal because we are talking about fourth quarter of course there is more demand on this type of loans.

I don't think we will increase at these ratios of 10% quarterly basis in the consumer finance comforts, sentiment as we increased the fourth quarter and that there is a reduction again in the beginning months of the 2008. Without the non-performing loans, well, in the fourth quarter of 2005 we experienced in this bank normal increase in delinquency, major on [indiscernible] West and other prime REIT portfolios and we decided and we stated this at the time that we would reduce granting credits and we reduced the approval rate from 14% if I don't fail my memory here, from 14% to almost 10% the approval rate in this type of loans. What happened from that time to now I think are two effects. We have to absorb losses on to invest some another non-risky portfolios. I think you can remember that we had a lot of loans ranking on [indiscernible] what was [indiscernible] and really good business. We have to accept a lot of losses in this business and we changed our models and we were aiming to ramp our loans in last [indiscernible] points. This is and this has been a very hectic coincidence that we were doing this, but the economy increased as a whole and trust in us we being able to pledge for more or less risky loans as well. So the loss of second movement here customers that probably with us we see before, they were not able to pledge for better loan, they became then eligible to pledge for less risky loans and if you look for where we are increasing their... our loan growth is exactly on high loans, on signature credit and loans in which the spreads is lower than the other ones and the risk is pretty much lower. I think this explains I think in briefly what happened in the loan portfolio on Unibanco and the effect of the non-performing portfolios. And even when you go to the total loan as I think, those impressive turnaround business in the last two years I think in the bank, even in the term loans we are practicing in the due course over 7% of portfolio a much more well organized market with official dealers distribution network without basic customers, of course it has spread of wealth as well for that basic customers. So in this type of business, we want to be and we want to manage risk, we always have and we will not swap short-term revenues by increased portfolios to long-term safety management without risk portfolio.

Unidentified Analyst

Thanks Geraldo, thank you very much.

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Sure.

Operator

Thank you. Our next question is coming from Alexander Centallini [ph] with Merrill Lynch. Please go ahead.

Unidentified Analyst

Well, good morning Geraldo, good morning everyone and congratulations on the third quarter results. I have questions on credit growth and good loan amortization. My first question on loan growth UniBanco had shown solid loan portfolio being with improving asset quality. I would like to know what is expected going forward. Do you forecast similar growth rates in the coming quarters and with respect to vehicle loans, new vehicle loans actually what kind of spreads do you foresee given the increasing competition in the segment? Question two, just would like to know what should we expect on the goodwill amortization front going forward? Thank you.

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Okay Alexander, does [indiscernible] of course we are working our best by the way. We are in the budget season, but we... we do not have any major driver of the economy that gets change, but the clearly what we saw in this year in Brazil economy, we really expect to staying low and growth of economy as a whole, economy is growing probably central banking four, five year and something like 30% of loan growth for 2007 and there is nothing so far that can affect our judgment to change this 30% for 2008. This is the first view that we can have, but of course after our budgetary exercise, I said that we will have more appeal [ph] to this strategy. About the spread, the new car loans we have a spread of 12% a month and this is the range of tens of fourteen and the average of throughout a year, and these are very competitive margins. So this is not a matter of spread roll but is a matter of service because you are servicing, dealers customers, not our customer, dealers customer so you must have very good products for him to do [indiscernible] rather than the other things from him. So this is market, this is competition and who has the best product will move on. We are trying to be aggressive, if these products, good operation system, in these markets. And the other one about goodwill from, goodwill are technical issue, we only [indiscernible], we never more expensed goodwill in our region, wanted to probably have a proper amortization. As far as if we don't have the external profit, the [indiscernible] and explain the market, [indiscernible] of this structured 100% always. So we have a initial here, we have in the previous years. We accelerated from 10 to 5 years and there is not of course an issue on any thing so far with this issue have a technical one okay.

Unidentified Analyst

Okay. Thank you very much.

Operator

Thank you. Our next question is coming from Daniel Abut with Citi. Please go ahead.

Daniel Abut - Citi

Good morning Geraldo. I wanted to go back to the fee income issue. I think in page 19 you explained very well that part of what was going on here has to do with the non-comparability even the Redecard and Serasa issue, but you are not accounting for that? You look at the nine months accumulated this year, compared to a nine months of whole fixed and you're seeing fee income growth of about 8.8% and that's well below the type of fee income growth that we have seen as well of your competitors in which also adjusted for the same affect we are seeing growth more in the 15% level and one, which is leading fee growth is actually over 20%. This is not a new thing for Unibanco, your fee income growth has been consequently below some of your peers for a while, could you talk about it? I mean if there is anything that can be done, or you are thinking about doing that eventually will close this gap in total the only single line in which you are lagging behind then or the way we should look the fee income as a flip side of a coin in terms of control which is in Unibanco and therefore it will always be much lower than some of your peers. Could you elaborate on that please.

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Okay, Daniel good morning. Well, Unibanco normally shows fees lower than the peers and in this looking at this size we can say that Unibanco normally like the peers, their regarding fees. But Unibanco had been for a while, a bank more focused on wholesale and from two or three years from now its probably on retail. And to have this focus on retail we are increasing this participation in retail to basically control 2 products, two lines of products, it is the payroll on one side and the cards on the other side, credit cards or private label card or credit card and payroll by definition, Unibanco sees and the cards today we are probably the strength of issue of cards in Brazil is one among the strategies to increase the participation and the press cards that we just launched really to charge lower fees or even not to charge fees at all. Some cards some products, and of course this does reflect in the total fees that we can charge and by the time I think fees we have increased, that customer even for payroll with start to use other products from the bank and they will use from other service that it may use. But today I think we are still in the growth strategy, that with the most sincere and [indiscernible] given that.

Daniel Abut - Citi

Okay Geraldo, thank you. I would like to follow up just on expenses in which in my opinion continue to be one of most impressive features of what you are reporting because it was available easier to see how could you control expense so much when you are not growing your volume that much about a year or year and half ago, but you are growing volumes that you already explained even more on your then the system than many of your peers and yet expenses are now growing. Do you think that's sustainable when we look at expense growth area into 2008, 2009 or at some point its already catch up effect where that type of volume growth you said growth of 30% year-on-year now is going to require some expenses in terms of the investments on the lines that they should be some catch up effect?.

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Yes okay. As far as going, as far as some expenses done, you must be efficient here and if we are if we have a model that gives us a little bit less evidence than the others, we certainly must have a much more discipline and aggressive post [indiscernible] that's why I think you can expect year-over-year good performance from the expense side. So I think we can and we will keep the expenses within the control, okay.

Daniel Abut - Citi

Thank you, Geraldo.

Operator

Thank you. Our next question is coming from Mathias [ph] with Bear Sterns. Please go ahead.

Saul Martinez - Bear Stearns

Hi good morning this is Saul Martinez. Can you hear me?

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Yes, we can hear you.

Saul Martinez - Bear Stearns

Okay how are you? I have a couple of questions; first, can you comment on your capital strategy especially in light of large gains from the sales of non-core assets that you had in recent quarters, what do you intend to do with the proceeds and also on a related question what are you seeing in the M&A market? Are you more or less constructive about possible deals than you were say, six months ago and you sounded pretty cautious about valuation levels?

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

I think the first part of your question is tied to the second part of your question. First, the proceeds of the Redecard, Serasa and Bovespa, its kind of things in the operation, other things in operation. You are putting all together we are not may be any, an allocation of new steps or rather than transaction, normal transaction of the bank, we are not foreseeing any major investments ahead, and regarding M&A we are not looking for anything at this time, so I think shareholders they stay very confident that management, we will not make anything that puts little slow down on the growth rate of Unibanco and on the value of stock as a whole. So other things that we will do here will be afflictive to the actual ROE rates not we think to the actual ROE rates.

Saul Martinez - Bear Stearns

Okay, great. And just on, that's great. One follow up question, you said more of a clarification, you said your approval rates have been investor are currently 10%, is that correct?

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Yes correct.

Saul Martinez - Bear Stearns

Okay and they were 40% to...

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

40%

Saul Martinez - Bear Stearns

Okay, okay thanks a lot.

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Okay.

Operator

Thank you. [Operator Instructions]. Our next question is coming from Frederick Myers [ph] with J.P. Morgan. Please go ahead.

Juan Partida - JP Morgan

Hi this is Juan Partida from J.P. Morgan. I have a very specific question regarding the default grade or the NPL ratio at your... on your outstanding loan portfolio, I know have that information available?

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Yes please go ahead. Juan?

Juan Partida - JP Morgan

Hello?

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Hello Juan? Can you conclude your question please.

Juan Partida - JP Morgan

Hello.

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

What do you specifically want to know?

Juan Partida - JP Morgan

I want to know the default rate on your car portfolio on your auto loan portfolio?

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Give me a second, I don't give this information [indiscernible], so our data, delinquency rate is about 2.7% okay.

Juan Partida - JP Morgan

Perfect, thank you very much.

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Okay.

Operator

Thank you. Our next question is coming from Ian Smith with Nesbitt [ph] Please go ahead.

Unidentified Analyst

Hi couple of questions. First one, on other operating expenses, we've seen that quite high for several quarters. I was wondering if you could sort of elaborate on your position in with regard to several loan provision, whether you saw you are comfortable that those costs won't need to increase going forward or in fact we could see some easing of those costs going forward. Secondly, we saw slight change in the funding structures in the quarter. We saw quite a lot of sub debt being brought on balance sheet. Well, you could elaborate on how that's impacted on your cost of funding or whether it might do so going forward?

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Okay. Well, yeah. Let's talk about expenses, the first part of your question. We made, we have seen two types of growth in expenses; in the recurring and the non-recurring events and both sides we have growth. But talk about non-recurring and why they are non-recurring and why we posted them as non-recurring expenses.

On the labor side, there is an ample of specialty in Brazil about whose responsible, who's the successor of the labor litigation of the applied banks so there is a one by one case of discussion here and we decided that the proceeds of it make a one-off provision here to have discussion at risk and in [indiscernible] terms over a period of bank. At the single side, they never equaled regressed economic plans of the past, as a lot of discussions people there has a curiosity and as far as our plans, we think of the coverage to [indiscernible] accelerator there is no new currency, they are all older pressures, the new one if I had the old ones to you I would have more in the new one than I have before, all this comes at discussion and we saw an increase of 1000 of demands against banks, of course as if the first case these are demands that should be addressed against to avoid this government of the state out of patronizing whole really was the main driver of this economic trend of the banks.

Once again a small level of course may assume some decisions that certainly will be discussed in high level courts in Brazil. We decided to make a provisional coverage, more than 100 billion reais, almost 150 million reais to protect against these demands in economic plan and as these were events from the past, these either has longer term but in the present and the prudence of some wants to go, banks those are to follow consumers law general among Brazil to choose its right general line in Brazil. And these increases heavily the litigation... the civil litigations on the banks by minor issues like these like direction, like checks has been not delivered so and so forth, chain issues that customer now because they are supported by the new consumer law, they are able to pledge litigation against there and this reflects increase in the expenses. We are going to have a catch up at some point in time not having Brazil expensed, I don't know probably the labor side I think we are getting close to have the core of expenses in normal trend. I think that in the receivable side, I think you may experience some growth and I think this is linked to the quiet boards as well because once you have, the freezing unit of front [indiscernible] you have as a future while the units of collection of the spreads, probably you have the future of all, just as we will claim and collection to make against them so I think on the civil side maybe we don't have a experimental level yet.

Regarding the funding of costs, there is a pressure on funding. We saw movement swapped with trend, the demand of costs and saving accounts, saving deposits, it is okay this is two three customer in the movement of [indiscernible] made because saving account characteristic they affect the competitive advantage so exchange was a natural change. But you see some pressure on the funds market or the mutual we must fund our assets through the new money and close to the bank we really, we want to surprise them from the asset. We swapped time to pass to the ventures. Because the ventures [indiscernible] it is pretty exciting for long-term leaving loans and we have to fill our leaving relations and vehicles reducing... further increasing the ventures. But the loan rate was low it was so robust that other parts of funding has to be used in this and some external lines all landing external and internal the 30-70 funding external lines of funds for corporate customers, funding in terms for retail customers of course there is a pressure for funding in Brazil now its affect the decreasing loans, will drive an increase in funds and certainly will be an important issue in Brazil in the next months, okay.

Unidentified Analyst

Thank you, thank you very much.

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Okay. Now I will hit the question that came from the Internet of the web. Alejandro from Klaus Capital [ph]. He is asking, looking five years ahead Brazil having become investment grade, how do you foresee Unibanco's ROE or Unibanco's PIS one in two ratios assuming the possibility of regulator change towards international levels except it to change? Well, I don't know [indiscernible] broke them all. But I can tell you that if Brazil reaches the investment grade level, certainly PIS will be a adjuvant to BIS and other investment grade countries and if this happens, it should affect this country like Brazil extending investments I certainly will have the least PIS ratio might you may have [ph]. It will be eight, I really will have to be because in this day we want everyone to make money on credit part of carrier. So there is no other question, I will ask the operator to see if there is any otherwise we will conclude the meeting.

Operator

[Operator Instructions]. At this time, I will turn the call over to Mr. Geraldo Travaglia for his closing remark

Geraldo Travaglia Filho - Chief Financial Officer and Vice President of Operations and IT

Okay, thank you very much for your attendance here and we hope to see you soon in the next conference call. Good bye.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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