The information in this Report refers to all the operations and results in 2005 for Banco Itaú Holding Financeira S.A., - PDF

Annual Report 2005 Highlights Risk rating agencies Moody s upgraded its Financial Strength rating for Itaú, while Fitch Ratings followed suit for its Individual rating, reflecting the strong performance

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Annual Report 2005 Highlights Risk rating agencies Moody s upgraded its Financial Strength rating for Itaú, while Fitch Ratings followed suit for its Individual rating, reflecting the strong performance associated with our consistent profitability and gains in operational efficiency. Under these classifications, Itaú is rated as Brazil s best bank. Itaú was also selected as Brazil s best bank by Euromoney and Global Finance magazines, and as the most ethical and best managed of Latin America s largest banks by Latin Finance magazine. For the fourth consecutive time, the Itaú brand was selected as the most valuable brand name in Brazil, valued at US$1.342 billion by English consulting firm Interbrand. For the sixth consecutive time, Itaú was chosen to be part of the select group of companies which make up the Dow Jones Sustainability World Index (DJSWI). It is the only Latin American bank on the index, which features 312 companies from 24 countries, chosen from the 2,500 largest companies by market value on the Dow Jones Global Index, which itself represents 60 industrial sectors. Our inclusion in the DJSWI takes into account financial performance and, principally, the quality of company management transparency, corporate governance and socio-environmental responsibility. Itaú also joined the São Paulo Stock Exchange (Bovespa) Corporate Sustainability Index (ISE), which began in 2005 and is made up of 28 Bovespa-listed companies which demonstrate best practices in keeping with sustainable development. Itaú created an Executive Committee for Socio-Environmental Responsibility and a Socio- Environmental Responsibility Commission, both of which are responsible for establishing and implementing the Bank s Socio-Environmental Responsibility Policy. Through a public bidding process, Banco Itaú won the payroll contract for the City of São Paulo s 210,000 employees, and the management of its financial assets. In November, Itaú BBA opened a representative office in China, broadening its capacity to serve Brazilian companies seeking access to the Chinese market. On December 29, we signed a Termination Agreement ending Itaú s strategic alliance with America Online Latin America, releasing the two parties from the obligations contained in the June 12, 2000 Strategic Interactive Services and Marketing Agreement, and from any respective amendments and other contracts (see details in Explanatory Note 20 in the Financial Statements which accompany this Annual Report). Introduction The Itaú Annual Report has been published since 1966, and represents an important reference source for the Bank s growth over the past four decades. Countless changes have been systematically introduced to improve transparency and inform readers on our corporate social responsibility and business sustainability. In 1999, we published our first Social Report, which followed guidelines set up by the Ethos Institute, and included a Social Statement recommended by the Brazilian Institute of Social and Economic Analyses (Ibase). Previously, our Reports had contained a specific section on our social and cultural activities. In keeping with the latest international standards for presenting accounts, in 2004 Itaú began publishing a cross-referenced index based on Global Reporting Initiative (GRI) guidelines, which shows the location of economic, environmental and social information in the Annual Report, Financial Statements and Social Report. Only a little over 700 companies worldwide follow the GRI guidelines, which seek to standardize and promote comparisons with companies everywhere. The information in this Report refers to all the operations and results in 2005 for Banco Itaú Holding Financeira S.A., which is generally referred to as Itaú or the Bank. However, the Report also includes discussions of Banco Itaú S.A. and Banco Itaú BBA S.A. activities in Brazil and abroad. Our Annual and Quarterly Reports, in addition to providing the most updated information about the Bank, are also available on the Itaú website at the Report, readers can access the internet using the Learn More feature to get additional information about the many topics we cover. If you have any questions, comments or suggestions, or would like more copies of the Report, please our Investor Relations area at Happy reading! Primary Indicators and Highlights Change (%) Earnings in R$ millions (1) 2001 (04/05) Gross Income from Financial Operations 11,157 10,200 9,224 7,250 5, Income from Services, Insurance, Pensions and Annuities 14,417 12,398 10,129 7,777 6, Non-Interest Expenses (2) 10,428 9,015 8,770 8,425 7, Operating Income 8,183 7,342 5,714 4,255 3, Consolidated Recurring Net Income 5,443 4,870 3,717 3,080 2, Consolidated Net Income 5,251 3,776 3,152 2,377 2, Earnings per Share in 2004 and 2005 (in R$) (other years: per 1,000 shares) Consolidated Net Income Book Value Interest on Own Capital Preferred Share (PN) Price (3) Market Capitalization (in R$ millions) (4) 62,980 44,092 30,453 17,743 19, Balance Sheet (in R$ millions) Total Assets 151, , , ,141 81, Total Loans (including endorsements and sureties) 67,756 53,275 44,581 45,414 34, Non-earmarked, Raised and Managed Own Resources 248, , , , , Subordinated Debt 4,584 4,765 4,814 5,707 1,433 (3.8) Consolidated Stockholders Equity 15,560 13,971 11,879 9,036 7, Reference Equity (5) 20,644 19,806 17,185 16,573 10, Financial Ratios (%) Average Return on Equity Recurring Average Return on Equity Average Return on Assets Efficiency Ratio (6) Solvency (Basel) Ratio (7) Fixed Assets Ratio (7) Selected Measures Assets under Administration (in R$ millions) 120,287 99,753 81,102 59,167 55, Number of Employees 51,036 45,316 42,450 43,215 45, Number of Branches 2,391 2,282 2,321 2,314 2, Number of PABs (banking services outlets) (1.0) Number of ATMs 22,023 21,150 20,021 17,926 13, (1) The consolidation of Banco Itaú BBA appears only on the Balance Sheet, and does not affect results.(2) Includes staff expenses, other administrative expenses, CPMF and other tax expenses, and other operating expenses. (3) Based on the average price for December. (4) Calculated based on the average price of Itaú preferred shares in December. (5) Capital base, calculated in compliance with Central Bank of Brazil Resolution 2.837, dated May 30, 2001, based on consolidated economic-financial data. (6) Since 2004, calculated in compliance with international criteria as described in the Management Analysis of Operations. (7) As of December 31. Annual Report 2005 Principal Indicators and Highlights (inside front cover) Chairman s Message 2 The Economy in Review and 2005 Results Banco Itaú 60 Profile 62 Banking 63 Banco Itaú BBA 78 Profile 80 Investment Banking 80 International Presence 84 Banco Itaú Europa 86 Banco Itaú Buen Ayre 88 Message from the President 6 Outlook for 2006 Banco Itaú Holding Financeira Profile 10 Financial Sector Analysis 12 Results 14 Management s Discussion and Analysis of Financial Condition and Results of Operations 14 Share Price and ADR Performance 36 Ratings and Recognition 38 Credit Portfolio 40 Consumer Clients 63 Retail Itaú Personnalité Itaú Private Bank Commercial Clients 65 Micro Companies Small Companies Middle Market Companies Institutional Clients Public Sector 66 Home Loans 67 Credit Cards Account Holders 68 Insurance, Pensions and Annuities 70 Corporate Banking 81 Selected Highlights for Senior Management and Directors 90 Corporate Information 94 Financial Statements 97 Glossary 182 Management 44 Corporate Governance 46 Risk Management 52 Cost Management 54 Brand Management 56 Business Performance 58 Fund and Portfolio Management 71 Itaú Corretora de Valores 72 Capital Markets Services 73 Itaucred Operations 74 Automobiles 74 Credit Cards Non-account holders 75 Taií Consumer Finance 76 1 Chairman s Message Itaú has built up its sustainability over 60 years through a corporate culture founded on ethics and quality service. Today, these same attributes are shared by our 51,000 employees, who serve over 16 million clients. The Economy in Review After 60 years in the industry, Itaú is fully prepared to continue its uninterrupted, sustained growth. Steady results throughout the institution s history, seen yet again in 2005, reflect its unceasing efforts to ensure our practices maintain their capacity to create value for everyone with whom we do business, independent of macroeconomic conditions. In 2005, for example, growth of the Brazilian economy was less robust than in 2004, with GDP finishing lower.this slowdown was most evident in the third quarter of the year, with a contraction of 1.2% against the previous quarter. As a result, this economic situation impacted investments and the demand for durable consumer goods, which also posted lower growth rates. On the other hand, inflation remained close to the 5.1% ceiling established by the Central Bank: the IPCA broad-based consumer price index hit a high of 5.7% for the year, which represented a better control over prices in comparison to 7.6% in 2004.These results augur well for consolidating the economic stability process and attaining the 4.5% goal set for Banco Itaú Holding Financeira S.A. Annual Report 2005 Despite higher interest rates in 2005, total credit with non-earmarked resources rose 18.8% over 2004, due primarily to the 29.7% rise in consumer client credit, while commercial loans grew 11.1%. The Brazilian real also continued to strengthen against the US dollar in In spite of this, domestic exports grew 22% year-on-year, thanks to higher prices of exported goods and a stronger global economy. Another reason for optimism comes from Brazil s reduction of its foreign debt from US$220 billion in 2004 to approximately US$186 billion at year-end. Contributions came from the private sector and the public sector, in addition to an early repayment of part of its debt with the International Monetary Fund. 3 Chairman s Message Responsible management and operational excellence have placed Itaú in the Dow Jones and São Paulo Stock Exchange sustainability indices.we earned Moody s highest rating for financial strength in Brazil, and the highest individual rating in Brazil from Fitch Ratings. Apprehensive economic growth led to maintaining the Public Debt-GDP ratio at 51%, halting the declining rates of previous years. In 2006, there will be room for economic expansion, supported by fiscal adjustment and inflationary target policies.this should bring about a positive impact on the performance of the financial sector, which has long displayed a robust character and high level of competitiveness, as Brazil remains the only country in Latin America whose leading financial institutions are locally controlled Results Unrivaled Performance An invaluable gauge to ensure sustainability, Itaú s consolidated earnings continued their growth of previous years, rising to R$5,251 million in 2005 and generating an average return of 35.3%. Total assets reached R$151,241 million, up 16.0% from This performance was driven by growth in consumer loans and the acquisition of goods, specifically in credit cards and automobile financing. As a result, the credit portfolio climbed 27.2% to reach R$67,756 million at year-end. Itaú s preferred shares ended the period up 46.5%, while common shares finished 47.0% higher. These increases extended to one of the Bank s principal intangible assets: the Itaú brand, which once again was considered the most valuable in Brazil. Clear evidence of the value of our brand comes from the shared values and strength of Itaú s performance culture as demonstrated by our almost 51,000 employees, who constantly seek a better relationship with the Bank s 16 million-plus clients. 4 Banco Itaú Holding Financeira S.A. Annual Report 2005 These results, which are due to our recognized operational excellence and responsible conduct, have allowed the Bank to be part of the Dow Jones and São Paulo Stock Exchange corporate sustainability indices, while our consistent performance over many years allowed Moody's and Fitch Ratings to upgrade Itaú s ratings. Based on these evaluations, we are now known as Brazil s best financial institution. The segmentation strategy we adopted some years ago years has been accompanied by a series of acquisitions and partnerships, and sticking with this business model has led to growth in markets such as Consumer Credit, Insurance and Pensions. Our international presence also expanded with the 2005 opening of a Banco Itaú BBA representative office in China, which is designed to handle Brazilian corporations with commercial interests in this increasingly important market. Economic stability and increased investment capacity allow the Bank to create new avenues for growth, but any actions we take will always be in keeping with the ethical values that underline the 60 years of Itaú s history. These are the foundations that ensure the creation of value for our shareholders, help us overcome social challenges, let us respect our natural resources, and give us the incentive for economic development. Thank you to everyone who shares Itaú s vision. Cordially, Olavo Egydio Setubal Chairman of the Board of Directors 46.5% was how much Itaú preferred shares rose in value in Message from the President In 2005, Itaú strengthened its position in the Consumer Credit segment through strategic focus and an eye to the future, which are fundamental characteristics of every Itaú operation in Brazil and overseas. Valuing a legacy and culture developed over 60 years. Staying connected with the present and being alert to future trends, while always seeking superior results. This is how Itaú has built on its performance each year and consolidated its leadership among private sector banks in Latin America. In 2005, it was no different. Our credit portfolio grew 27%, particularly in consumer finance, which led to greater overall earnings and a larger client base. The consumer finance segment has consolidated itself after the first wave of expansion, begun in 2004, making Itaú a leading competitor in this market. Our Taií financing arm increased its loans to lower income clients, adding 1.5 million new non-account holder customers to the Bank s portfolio, through strategically located points of sale in the states of São Paulo and Rio de Janeiro. Part of this presence was via the Companhia Brasileira de Distribuição (CBD Paõ de Açucar) supermarket chain, which maintained Financeira Itaú-CBD s (FIC) expansion policy. In the same area, our partnership with Lojas Americanas S.A. (LASA), through Financeira Americanas Itaú S.A. (FAI), allowed products and financial services to be offered exclusively to LASA outlet customers in Brazil. Among the larger growth segments was automobile financing, which rose 80.1% from 2004 and ended the year with a total portfolio of R$11.2 billion, thanks to the efficient exploitation of expansion opportunities. 6 Banco Itaú Holding Financeira S.A. Annual Report 2005 This same strategy was successfully adopted for credit cards, whereby Itaú became the sector leader with a 21.7% market share in 2005, due to a new management agreement with Credicard which helped segregate the 7.6 million cards managed between Itaú and its partner, Citibank. This measure benefited all new clients through the Bank s technology, quality and wide range of products and services, in addition to leveraging the client base to 12.2 million card holders. Itaú also won the right to manage the financial assets and employee payroll of the City of São Paulo. This brings us a further 200,000 accounts, which should generate an additional 3% to 4% in earnings from retail operations. All our business activities arise from the ongoing effort to anticipate changing conditions, plus having a clear strategic focus and solid ethical base, all of which guide Itaú s initiatives. This direction led to the reworking of our Vision in 2005, as well as the creation of the new Code of Ethics, which relied on the participation of representatives from various areas and levels of the Organization. Amongst the primary actions designed to ensure Sustainability was the creation of our Executive Committee for Socio-environmental Responsibility and the Socio-environmental Responsibility Commission, which will ensure that all our businesses comply with the policies these two bodies establish and implement. One example is Itaú s analysis of socio-environmental impacts when granting credit, a result of our adoption of the Equator Principles, which establish criteria for project financing in excess of US$50 million. Using the same criteria, Itaú has developed a methodology to evaluate investments of lesser value for middle market companies. 7 Message from the President Other areas of attention in 2006 will be the investment banking and credit cards segments, in addition to insurance, pensions and annuities, which have considerable growth potential for the coming years. Increasing the number of areas and ways where we interact with the public is also an Itaú hallmark. In 2005, we launched the Itaú Ombudsman's Office (Ouvidoria Corporativa Itaú) which is an additional forum for dialogue within the Itaú customer support system, which has been in operation since We also introduced the Itaú Wants to Hear You campaign to encourage and publicize the use of our customer communication channels. Such initiatives strengthen our commitment to ongoing improvement, and employ the knowledge gained through customer opinions and suggestions to create valuable ways to improve our products and services. Outlook for 2006 The expansion of the credit portfolio and merging of the synergies arising from our strategic alliances and partnerships will be an important challenge in The consolidation of the market, combined with reduced chances of growth through acquisitions, outline the conditions where by Itaú will employ the best methods to attain suitable gains in scale in its operations. Among the strategies to be implemented is increasing Itaú s geographic coverage in segments where the demand for credit tends to be greater, due to Brazil s prevailing economic conditions. We therefore expect an increased number of business units geared to servicing small companies, and expanded automobile financing activities. In the area of consumer finance, the Taií financing arm hopes to have 300 outlets open by year-end through a nationwide expansion, particularly in Brazil s northeast and south. We will also seek to offer our clients an even wider variety of financial products through efforts based on high sales productivity and a focus on earnings, the result of our cost and risk 8 Banco Itaú Holding Financeira S.A. Annual Report 2005 management strategies. We also plan to introduce co-branded and private label credit cards through Lojas Americanas S.A. and grow our client base through an increased presence of Financeira Itaú CBD in the Companhia Brasileira de Distribuição supermarket chains. In the credit cards market, the integration of Itaucard s operations with those of Credicard should bring about synergies in several areas, including the ability to generate credit card sales among non-account holder customers, the management of partnerships, more focused activities in the Corporate Business segment, and the diversity of Itaú s distribution channels. On the other hand, the acquisition of Orbitall Brazil s leader in the credit card processing market added significant benefits and should provide increased efficiency thanks to the possible synergies with Itaú s existing infrastructure. These efforts are all designed to maintain the Bank s market leadership by optimizing its results. Banco Itaú will also be dedicated to increasing its market share in Insurance, Pensions and Annuities, which are sectors offering considerable growth potential in Brazil in the coming years. Another ke
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