Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008
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Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008 Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008 Itaú Unibanco Banco Múltiplo S.A. Summary Management Discussion and Analysis 2 Share Price and ADR Performance 12 Management Report 18 Administration and Management 26 Financial Statements 30 Notes to the Financial Statements 39 Report of Independent Auditors 122 Summary of the Audit Committee Report 123 Opinion of the Fiscal Council 126 Management Discussion and Analysis 2008 in Review On November 3, 2008 the controlling stockholders of Itaúsa and Unibanco in the first nine months of 2008. For 2007 and Unibanco Holdings announced the merger of the the pro forma results and statements are simply the sum financial operations of Itaú and Unibanco, the result of which of the balances and results obtained by the two banks is Itaú Unibanco Banco Múltiplo, now the largest privately- during that period. controlled bank in the southern hemisphere and a milestone in the history of Brazil’s financial market. Pro Forma Net Income At December 31, 2008 Itaú Unibanco had 108,000 (in R$ millions) employees, total assets of R$632,728 million, a credit 11,921 portfolio of R$271,938 million, including endorsements 10,571 and sureties, plus R$600,381 million in funds raised, all of 9,779 10,004 which demonstrate the solid financial position of the new 2007 2008 institution. Consolidated Net Income Recurring Net Income During the year Itaú and Unibanco focused on growing their business areas for corporate clients, particularly small and middle market companies, which contributed significantly to Annualized Return on Average Equity (ROAE) % increased year-on-year earnings. 32% Vehicle financing, property loans, insurance, pensions and capitalization (an annuity-like product unique to Brazil) also 24.8% 26.2% enjoyed substantial growth in 2008, thanks to platforms that 23.4% provide an ideal base and ongoing support. Itaú Unibanco is 2007 2008 also solidly positioned in credit cards as a result of efforts ROE Recurring ROE made by both banks over the years. Accordingly, Itaú Unibanco starts 2009 comfortably placed to This Report also shows the pro forma non-recurring net take the necessary steps to integrate its operations and income for 2008 and 2007, to provide a better solidify its foundation for future expansion in Brazil and understanding of net income sources for these periods. abroad. This new institution is ready to face the challenges of new (in R$ millions) times, combining values and attitudes that reaffirm its 2008 2007 commitment to best corporate governance, social Pro Forma Recurring Net Income 10,571 9,779 Effects related to Itaú Unibanco merger (merger of shares) 5,183 - responsibility and ethical conduct practices, which are the Equalization of accounting criteria (1,414) - essential bases for developing and supporting new Provision for Itaú Unibanco merger expenses (888) - business. Additional provision for loan losses (3,089) (443) Effects of the adoption of Law No. 11,638 (136) Economic plans provision (174) (206) This Management Discussion and Analysis presents Disposal of investments 233 3,201 the pro forma results of Itaú Unibanco in 2008 Goodwill amortization (223) - Other non-recurring effects (59) (408) compared with its net income of the previous year. Total of non-recurring effects (567) 2,143 The 2008 statements reflect the consolidation of Itaú Net Income 10,004 11,921 and Unibanco at December 31, while the pro forma result is derived from the sum of the consolidated fourth quarter results and the results obtained by Itaú 2 Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008 Net of non-recurring income, shown above, we posted Faced with a worsening global financial crisis in the final consolidated recurring net income of R$10,571 million in months of 2008, we increased our additional provisions (those 2008 against R$9,779 million in 2007, an 8.1% year-on-year exceeding the required minimum) for loan losses to R$7,791 rise. Consolidated stockholders’ equity was R$43,664 million at million. We revised the criteria for provisioning additional December 31, 2008, up 7% from 2007, while total assets rose reserves for credit risks to include a variable for risks associated 42.4% to reach R$632,728 million at year-end. with worst case scenarios for 2009 and 2010, which are not encompassed by the historical scenarios of recent years. Annualized recurring return on equity (ROE) reached 24.8% in 2008, while annualized recurring return on assets (ROA) The following table presents selected highlights from the reached 2% in the same period. We maintained our period, as well as Itaú Unibanco’s key information and differentiated financial performance of recent years, which indicators for 2008 and 2007. ensured our continuing sustained growth. Highlights 2008 2007 Net Income (in R$ millions) 10,004 11,921 Recurring Net Income (in R$ millions) 10,571 9,779 Net Income per share (1) (in R$) 2.44 2.91 Recurring Net Income per share (1) (in R$) 2.58 2.39 Return on Average Equity - Annualized (2) 23.4% 32.0% Recurring Return on Average Equity - Annualized (2) 24.8% 26.2% Efficiency Ratio 48.7% 49.8% Dec 31/08 Dec 31/07 Total Assets (in R$ millions) 632,728 444,473 Credit Operations (3) (in R$ millions) 271,938 203,141 Deposits + Debentures + Borrowings and Onlendings and Securities (in R$ millions) 282,708 188,496 Stockholders' Equity (in R$ millions) 43,664 40,806 1. Based on average number of issued and outstanding shares. 2. The return was calculated by dividing Net Income by Average Net Equity. 3. Including endorsements and sureties. 3 Management Discussion and Analysis Pro Forma Managerial Income entries in the financial statements; and (b) the tax Statement consequences of hedging these investments, which are booked in the tax expense, income tax, and social contribution Our strategy for managing the foreign exchange risk on capital tax entries in the financial statements. invested abroad is designed not to allow fluctuations in exchange rates to negatively impact our earnings. To neutralize Additionally, the managerial financial margin was broken down the forex risk on our investments we utilize derivatives which between the managerial financial margin of banking operations are ultimately remunerated in reais (R$). Our hedging strategy with clients and with the market. The margin on operations with also covers tax consequences: whether related to non-taxability clients primarily includes banking operations involving our or deductibility of exchange rate gains or losses of the real relationship with customers through the provision of financial against other foreign currencies, or from the derivatives used. products and services, while the margin on operations with the market is characterized by non-personal transactions undertaken In periods of significant exchange rate fluctuations there can in the financial market. This latter margin was further broken be considerable impact on various line item entries in the down into two distinct components to offer more detailed financial statements, particularly with financial income and analysis: the managerial financial margin on Treasury, and on the expenses. As a result, we began disclosing a Managerial forex risk management of investments abroad. The table below Income Statement which shows the impact of forex shows the calculations of the managerial financial margin on fluctuations on our capital investments abroad, and the forex risk management of investments abroad. effects of hedging these positions. The Managerial Income Statement is derived from a number of reclassifications made In 2008 the real weakened against foreign currencies, to the Income Statement, while the managerial financial contributing to a greater number of transactions than in 2007, a margin incorporates two adjustments related to the financial significant portion of which were denominated in or indexed to accounting margin: (a) the total effect of the forex fluctuation foreign currencies. During the year the real dropped 31.5% on investments abroad, which is recorded in various line item against the US dollar, compared to its 17.2% rise in 2007. Managerial Financial Margin of Exchange Risk on Investments Abroad (in R$ millions) 2008 2007 Opening Result Tax Result Net Opening Result Tax Result Net Balance Gross of Effects of Taxes Balance Gross of Effects of Taxes Taxes Taxes Capital Investments Abroad (A) 14,142 11,512 Exchange Rate Variation on Investments Abroad (B) 4,874 4,874 (2,085) (2,085) Effect of exchange risk management on investments abroad (C)=(D)+(E) (7,037) 3,974 (3,063) 4,459 (1,230) 3,228 Assets Position in DI (D) 14,142 1,552 1,552 11,512 1,147 1,147 Liabilities Position in Foreign Currency (E) (23,102) (8,589) 3,974 (4,615) (18,599) 3,313 (1,230) 2,082 Managerial Financial Margin of Exchange Risk on Investments Abroad (F) = (B) + (C) (2,163) 3,974 1,810 2,374 (1,230) 1,143 Macroeconomic Indicators Dec 31/08 Dec 31/07 EMBI Brazil Risk 429 233 CDI (Yearly rate) 12.4% 11.8% Dollar Exchange Rate (Yearly change) 31.9% -17.2% Dollar Exchange Rate (Quotation in R$) 2.3370 1.7713 IGP-M (Yearly rate) 9.8% 7.8% Savings Rate (Yearly rate) 7.9% 7.7% 4 Management Discussion and Analysis, Share Price and ADR Performance and Financial Statements 2008 Pro Forma Managerial Income Statement (in R$ millions) Itaú Unibanco Pro Forma Tax Effect of Hedge 2008 Distribution of