Financial Statements

Index

 
 
Economic Scenario Financial Report Results
Stockholders'Equity Funding and Resouces Under Manegement Assets and Loans
Provisioning Policy Risk Management Liquidity Management
Strategies Products and Services Conveniences and Customer Services
Banco Francês e Brasileiro Itaú Bankers Trust Banco Itaú Argentina
Banco Itaú Europa Human Resouces Social and Cultural Activies
Community Services Social Welfare Condolences
Acknowledgments    

 

To our Stockholders:

We hereby submit the financial statements of Banco Itaú S.A. and its subsidiary companies for fiscal 1996. Presentation of this report complies with provisions established by the Brazilian Central Bank/BACEN and the Brazilian Securities and Exchange Commission/CVM.

Economic Scenario

The success of the Real Plan was consolidated in 1996, when most price indexes indicated that inflation levels had dropped to less than 10%. The economy began showing signs of recovery in the year's second half and GDP had grown by approximately 3% at year's end. According to operating concepts, the public sector's operating deficit remained high in 1996, practically on the same level as the 1995 deficit.

Monetary policy, although still tight, was somewhat slackened in 1996. Interest rates were continually reduced throughout the year and accumulated at 27% (SELIC - Federal Bills Custody System) in 1996, far below the accumulated 53% rate in 1995. Foreign exchange devaluation stayed at 6.9%. Companies continued implementing restructuring measures, thus increasing their capacity to face competition from abroad.

The trade deficit grew from US$3.2 billion in 1995 to US$5.5 billion in 1996. The current account deficit went up to US$23.9 billion, and accounted for 3.2% of GDP. The US$32.2 billion foreign capital entry raised Brazil's foreign reserves by US$8.3 billion. The country's foreign reserves stayed at a record US$60.1 billion. The inflow of direct investments also hit record highs: US$9.2 billion entered in 1996, covering 38% of the current account deficit. This flow of capital evidenced the international community's increasing confidence in Brazil.

The government sped up the pace of its privatization program. It is worth mentioning the privatization of Light (R$2.3 billion (US$ 2.2 billion) and CRT (R$681 million (US$ 655 million). Constitutional reforms , however, moved at a much slower pace.

The constitutional amendment allowing for a second presidential term in office is expected to obtain Congressional approval in 1997. Therefore, hopes are high as to the approval of administrative and social security reforms, as well as to a faster tempo of the privatization program, especially in regard to the electric power, port, highway and cellular telephone sectors.

Financial Report

Results

The Itaú Group's consolidated net income for the year, including minority interests in consolidated subsidiaries, amounted to R$602 million (US$ 579 million), corresponding to an annual 15.0% return on equity. The Bank's (parent company) net income amounted to R$592 million (US$ 570 million) for the year, a 15.4% return on equity. For comparative purposes with prior fiscal years, it should be clarified that this return, re-calculated by the method that prevailed up to December 31, 1995, recognizing the inflationary effects would amount to R$ 535 million (US$ 515 million), corresponding to 13.3% of the R$4,028 million (US$ 3,876 million) adjusted stockholders' equity.

Net income per lot of thousand shares of Banco Itaú S.A. stock was R$49.45 (US$47.58) while book value came to R$320.91 (US$308.75). Dividends for the year totaled R$148 million (US$ 142 million), representing R$12.35 (US$11.88) per lot of thousand shares. Banco Itaú stocks were traded on all São Paulo Stock Exchange/BOVESPA sessions. The stock rose by 66.1% in the year.

The increase in profitability in 1996 resulted from a 9.7% growth in the financial margin (adding up to R$3,027 million (US$2,912 million)) and a 65.6% increase in revenues from fund management services and banking service fees (totaling R$1,419 million (US$ 1,365 million)). The positive growth of these revenues allowed the bank to apportion R$1,031 million (US$ 992 million) as provision for doubtful accounts. After write-off, the respective balance went up to R$1,108 million (US$ 1,066 million). Such a hefty provision will safely allow for the absorption of eventual loan portfolio losses. Loan portfolios were still adversely affected by the high number of defaults resulting from past inflation-curtailing measures, although this number has declined. Consolidated costs added up to R$2,913 million (US$2,803 million). The negative Extraordinary Adjustment R$ 18 million (US$17 million) resulted from non-recurring events during fiscal 1996, among which some were: the recovery of the credits from the FCVS (Salary Variations Compensation Fund), amounting to R$ 497 million (US$478 million); the R$243 million (US$234 million) full amortization of goodwill; the additional depreciation amounting to R$44 million (US$42 million); and extraordinary provisions of R$127 million (US$122 million) (see Note 12 to the Financial Statements).

In fiscal 1996, R$892 million (US$858 million) was allotted by Banco Itaú and its subsidiaries for payment of or provisions for taxes and contributions.

Stockholders'Equity

By year's end, consolidated stockholders' equity grew to R$4,020 million (US$3,868 million) (R$ 3,842 million (US$3,697 million for the parent company)), corresponding to an 11.7% increase over December 1995. The group's own working capital added up to R$1,691 million (US$1,627 million). Own capital invested in foreign branches, subsidiaries and other collateral institutions amounted to US$1,186 million.

Itaú's sound consolidated financial structure is evidenced by its 20.9% risk-based capital ratio, a rate far above the minimum 8% recommended by the Basel Committee. Risk-based capital ratio for Itaú's units abroad stands at 36.3%.

Banco Itaú was rated AAA by IBCA London, the largest rating agency located out of the U.S., the highest-quality investment rate under the Domestic Rating concept. This classification is an acknowledgment of the Bank's high-quality financial structure and management procedures, and places Itaú among a select and prestigious worldwide group of companies.

Funding and Resources Under Management

Itaú's own free resources added to those raised from the public or managed by Itaú amounted to a consolidated R$40,450 million (US$38,916 million) at the end of the fiscal year.

The consolidated volume of local currency funds raised or managed added up to R$33,066 million (US$31,813 million), a 36.2% increase over December 1995.

CONSOLIDATED RESOURCES IN BRAZILIAN CURRENCY

 

1996

1995

Variation in Reais (%)

R$ million

US$ million

R$ million

US$ million

Demand deposits

1,460

1,405

1,605

1,650

(9.0)

Savings accounts

8,378

8,060

6,882

7,076

21.7

Technical provisions (capitalization)

1,399

1,346

672

691

108.3

Technical provisions (social security contributions)


46


45


0


0


0

Time deposits

1,332

1,282

1,509

1,552

(11.7)

BNDES onlending

976

939

955

983

2.1

Other resources raised (1)

4,561

4,388

1,974

2,030

131.0

Fixed-Income Financial Investment Funds

10,323

9,931

7,409

7,618

39.3

Stock and Other Financial Investment Funds

1,127

1,084

820

843

37.4

Portfolio Management - Customers

1,001

963

817

840

22.5

Portfolio Management - Itaú Group

1,698

1,634

1,305

1,342

30.1

Own Working Capital

765

736

330

340

131.6

TOTAL

33,066

31,813

24,278

24,965

36.2

(1) Includes: Interbank Deposits; Money Market Repurchase Commitments, Acceptances and Debentures, Collection of receivables and taxes, Borrowings and Foreign Exchange Portfolio.

 

Itaú Savings Account grew by 21.7% in 1996, and reached 13.6% of the market share (data from the Brazilian Savings and Loan System/ SBPE ). The total volume of investment funds managed by Itaú increased by 39.1% in the year, and obtained a 9.8% market share. Itaú Capitalização, in turn, maintained the leadership as regards total technical provisions, accounting for 28.5% (November/96) of the market . There were over 1.5 million active capitalization plans in December/96.

Foreign currency funding came to US$5,583 million. Once again, an impressive contribution to this result was made by Itaú's subsidiaries and affiliates: Banco Francês e Brasileiro (BFB), Banco Itaú Europa (BIE) and Banco Itaú Argentina (BIA).

(US$ million)

CONSOLIDATED RESOURCES AND CREDIT LINES IN FOREIGN CURRENCY

1996

1995

Variation (%)

Trade and Money Market Lines

2,741

1,970

39.1

Special structures for trade

494

315

56.8

Domestic Interbank funding for Res. 63 onlending

235

293

(19.8)

International capital market funding

1,222

889

37.5

Own Working Capital

891

770

15.7

TOTAL

5,583

4,237

31.8

 

In 1996, Itaú carried out seven public placements on the international market for onlending purposes under Resolutions 2148 and 2312. Such issues amounted to US$397 million.

Assets and Loans

Itaú's consolidated assets reached R$32,038 million (US$30,823 million) at the end of fiscal 1996 - a 31.1% increase over December 1995.

The consolidated portfolio of loans, leasing operations and advances in domestic currency totaled R$7,970 million (US$7,667 million), a 0.7% drop resulting from more selective credit operations.

In 1996, Itaú maintained permanently open real estate credit lines and financed 8,312 housing units in the amount of R$423 million (US$407 million). This amount accounts for approximately 30% of the entire amount financed by the Brazilian Savings and Loan System/ SBPE.

Investments in interbank deposits, money market and federal securities came to R$9,441 million (US$9,083 million), corresponding to a 162.7% growth in the year, and reflecting higher availability of resources.

 

CONSOLIDATED CREDITS AND GUARANTEES IN BRAZILIAN CURRENCY

 

1996

1995

Variation

R$ million

US$ million

R$ million

US$ million

in Reais (%)

Loans/Financing

5,709

5,492

5,544

5,700

3.0

Leasing Operations

1,294

1,245

1,549

1,593

(16.5)

BNDES Onlending

967

930

931

957

3.9

Other receivables

614

591

927

953

(33.8)

Investments in interbank deposits

333

320

986

1,014

(66.2)

Federal securities and money market

9,108

8,763

2,608

2,681

249.3

Guarantees and sureties

617

594

857

882

(28.0)

TOTAL

18,642

17,935

13,402

13,780

39.1

Consolidated operations in foreign currency came to US$5,802 million, a 38.2% increase over December 1995.

(US$ million)

CONSOLIDATED CREDITS AND GUARANTEES IN FOREIGN CURRENCY

1996

1995

Variation (%)

Foreign trade financing and guarantees

3,718

2,668

39.4

Resolutions 63/2148/2312 onlending

1,145

733

56.2

Deposits in OECD Banks and OECD Securities

658

591

11.3

Brady Bonds (DCBs, EIBs and IDUs)

268

202

32.7

Short-term investments

13

3

333.3

TOTAL

5,802

4,197

38.2

To be highlighted are the consolidated foreign exchange contracts carried out by Banco Itaú and BFB, which came to US$141.2 billion, and ranked Itaú in third place in the foreign exchange market.

Provisioning Policy

Banco Itaú managed to maintain the asset quality and liquidity of its loan portfolio, as evidenced by the percentage of overdue credits - 11 to 30 days in arrears - , in relation to the total amount of receivables in the period. On December 31, 1995, such percentage corresponded to 3.7% of the loan portfolio. On December 31, 1996, this figure dropped to 2.4%, coming close to historical levels.

Overdue Credits on the consolidated balance sheet amounted to zero. The total amount of credits with improved guarantees came to only R$243 million (US$234 million), of which R$ 207 million (US$199 million) was in domestic currency. None of the unpaid loans had been converted into equity or debentures.

The consolidated balance sheet shows that "Loan Loss Provisions" came to R$1,108 million (US$1,066 million), corresponding to 8.6% of loan operations. This amount is R$514 million (US$ 494 million) (R$408 million (US$ 419 million) on December 31, 1995)) higher than the amount shown under "Overdue Credits" .

All credits receivable from customers which have fallen due and are unpaid, in whole or in part, for more than 60 days, of whatever origin and regardless of the nature of their guarantees, whether granted in Brazil or abroad, to either a public or private entity, were either written off or classified as Overdue Credits.

Risk Management

Credit risk management at Itaú is carried out through consolidated credit management and takes into account Banco Itaú's own exposures and the ones undertaken for Banco Francês e Brasileiro (BFB), Banco Itaú Europa (BIE), Banco Itaú Argentina (BIA) and Itaú Bankers Trust (IBT) customers. Credit risk classification systems were developed and implemented in 1996 , thereby allowing for improved management of the consolidated portfolio, as well as for adoption of standard procedures by the various entities, according to the customer's risk classification. The system classified 9,238 companies, corresponding to 58% of the customer risk to be classified. Of these companies, 94.4% obtained a satisfactory classification. The remaining 5.6% were entirely provisioned for.

Itaú maintained its risk-diversification policy and essentially did not extend credit to the public sector. In regard to securities and interbank deposit portfolios, Itaú has continued its liquidity-focused policy by concentrating on high-quality banks and federal securities. Itaú applies the same credit analysis criterion when selecting securities for investment funds and managed portfolios. Credit-scoring and behavior scoring systems were improved upon and adapted to individuals. Such systems are now being tested for small-sized companies.

In 1996, Itaú and its subsidiaries carried out conservative arbitrage transactions involving currency positions and swaps. Concurrently, a major effort is being made to develop management systems for such kinds of risks.

Liquidity Management

At year's end, the consolidated balance of interbank deposits, Central Bank deposits, and investments in the money market and in federal securities added up to R$11,901 million (US$11,450 million) (at the parent company this amount came to R$8,262 million (US$7,949 million)). Deposits and securities altogether accounted for 37.1% of the consolidated assets. Funds raised in the financial market were well below Itaú's potential.

Because of the growing demand for foreign currency loans, Itaú began actively exploring its significant funding potential through issues in the international capital markets. Diversified trade credit lines kept growing consistently and maintaining a stable funding source. The strong equity positions of the group's overseas operations, their asset quality and the policy of maintaining a positive gap in regard to assets/ liabilities management have afforded Itaú an impressive liquidity position in foreign currency as well.

Strategies

In 1996, Itaú implemented a more aggressive strategy to increase the number of customers. This has led the customer base to grow from 3.6 million to 3.9 million customers, a 9.4% increase. Relationship with customers grew by 14.5% in the same period as measured by the cross-selling rate. This is evidence that Itaú has significant endogenous growth potential, at a time when the entire Brazilian banking system is undergoing major restructuring.

Itaú firmly believes in the quality of its services and in the market's development. To this effect, it has always stressed its position concerning total transparency when announcing its banking service fees. In addition, Itaú has openly encouraged customers to call "Disque Itaú" consumer services to clarify information and register consumer complaints.

In order to reinforce the bank's activities in the private pension plan segment, the bank's private pension plan unit - Itauprevidência - , was integrated into Banco Itaú. In this regard, Banco Itaú increased its ownership interest in Itauprevidência to 80% . This has led to improved synergy and heightened efficiency.

Corporate activities in the fiscal year focused on the strategic and operating restructuring of Itaú's subsidiaries and affiliates, with the objective of integrating better the operations carried out by Banco Itaú, Banco Francês e Brasileiro (BFB), Itaú Bankers Trust (IBT), Banco Itaú Argentina (BIA) and Banco Itaú Europa (BIE).

Products and Services

In 1996, Itaú was awarded the ISO 9002 certification for its collection services. This certification guarantees top-quality services to its clients . Thus, clients are ensured that their instructions will be entirely complied with when resorting to such services in the course of their daily activities.

To be highlighted is the launching of two new credit cards: Itaucard MasterCard and Itaucard Visa. More than 180,000 new Itaucard MasterCard accounts and approximately 112,000 new Itaucard Visa accounts were opened up in the period. The number of credit-card holders in Itaú's credit card portfolio increased to 1,261,000.

Another important event was the introduction of the "MaxiConta Itaú" account, whereby the customer contracts a service package designed according to his specific current account turnover needs and for which he pays a monthly fee. Over 180,000 new accounts were opened up within a two-month period.

In regard to investment funds, the launching of "Top Renda", "Multicarteira Itaú", and "Itaú Índice Ações" funds are worth mentioning. These funds are composed of risk portfolios, which attempt to offer higher profitability levels than most traditional fixed-income investment funds. These funds were widely accepted and raised R$135 million (US$130 million).

In the area of foreign exchange, swap and currency futures operations amounted to US$1.8 billion.

Thanks to the slackening of consumer credit restrictions, Itaú was able to give additional impulse to its automobile financing sector, by offering extended payment terms of up to 36 months. Itaú's automobile financing and leasing portfolios now include 25,000 customers.

In 1996, Itaú launched Carta de Crédito Itaú Mercosul, as part of its integration policy with Mercosul markets. This product allows the importer (from Brazil) and the exporter (from Argentina) to be treated on equal terms in Argentina and Brazil respectively, at lower cost, higher quality and improved efficiency.

Itaú implemented a new service by interconnecting Itaú's ATM network in Brazil with that of Red Link Argentina. This service allows Itaú customers in both countries to carry out cash withdrawals in local currency while traveling.

In December, Itauprevidência introduced Flexprev Itaú - a new private pension plan designed as a resource-accumulating fund, with various plan options and additional benefits, and tailor-made to individual customer needs and conditions. 28,319 plans were sold, which raised the number of purchased plans to 41,704, a 227% increase over December 1995.

Itaú's market excellence was acknowledged when Itaú was given the "Marketing Best" prize, awarded by Fundação Getúlio Vargas, Editora Referência and Madia e Associados for its Itaú Bankline campaign. The bank's "Itaú 50 Anos Pronto para o Futuro" campaign was awarded the "Top de Marketing" prize, given by the marketing industry association Associação dos Dirigentes de Vendas e Marketing do Brasil/ADVB. Itaú was also given the "Prêmio Colunistas" prize, awarded by the trade association Associação Brasileira dos Colunistas em Marketing e Propaganda/Abracomp.

The film on the launching of Banco Itaú Argentina was awarded the FELABAN (Latin American Banks Federation) GRAND PRIZE, for the best advertising film made in Latin America in 1996.

Conveniences and Customer Services

Banco Itaú is maintaining on-going investments in automation and telecommunications, with the objective of increasing self-service quality and capacity. The chart below shows how Itaú-provided self-services are being increasingly used by bank customers. Self-servicing now account for 57.1% of total bank transactions.

(in millions)

 

1996

Variation 95/96 (in %)

ATMs (number of units) (1)

7,714

3.5

ATM transactions

526.4

6.8

Telephone transactions (Bankfone and Itaufone)

128.9

7.3

Fax transactions (Itaufax)

14.5

3.5

Computer transactions (Bankline)

41.2

(3.0)

POS transactions

7.1

148.6

Automated Programmed Debit

97.8

26.2

Total number of self-service transactions

815.9

8.8

Total number of teller transactions

613.1

0.8

Total number of transactions

1,429.0

5.2

Self-service transactions/ total transactions

57.1%

3.4

(1) It is worth mentioning that the number of outside ATMs doubled in the year (from 549 to 1,097)

Itaú launched "Itaú Bankexpress" to further improve its customer convenience services. This is a 24-hour, 7 days a week (including weekends and holidays) courier service available in the city of São Paulo. It provides for the delivery and collection of deposits, payments, cash and check books.

Banco Francês e Brasileiro

Restructuring of BFB was concluded in 1996, when BFB's management divisions were integrated into Itaú, professional executives were hired and work teams were assembled, with the objective of adequately integrating both institutions' human and technological resources. Implementation of Itaú's major operating systems into BFB, nearly concluded in the year, allowed for simplified operating procedures, productivity gains and BFB customer access to a wide range of products and services.

After re-defining its activity focus, and following the transfer of its 12 branches and 6,897 customers to Itaú management, BFB is now beginning to implement its new strategic policy. Its business volume has grown, and assets have amounted to R$3,515 million (US$ 3,381 million), a 15.3% increase.

Itaú Bankers Trust

This new investment bank, a joint venture between Itaú and Bankers Trust New York Corp. started its operations in May. IBT's capital stands at R$51 million (US$ 49 million). The bank's core business focuses on such capital market activities as corporate finance, underwriting, derivatives, risk products management , fund portfolio management, and consulting services on mergers and acquisitions.

In regard to the domestic market, IBT was chiefly engaged in the coordination of some of the year's most important transactions, among which were the Elevadores Atlas capital opening and the issue of Acesita stocks and debentures. Such transactions, involving 10 operations, amounted to R$ 1.7 billion (US$ 1.7 billion).

IBT Corporate Finance and its partner ,Bankers Trust, provided customers with access to overseas capital market financing , which added up to 23 transactions in the amount of US$1.6 billion.

Banco Itaú Argentina

Banco Itaú Argentina continued expanding in Buenos Aires by increasing the number of branches from 6 to 18. Further expansion is planned with the opening of another 13 branches in 1997. The bank's global planning strategy includes a total of 35 Itaú branches in Argentina.

Itaú has had favorable market acceptance in Argentina. 31,000 accounts were opened up and 7,500 credit cards were issued in 1996.

In regard to foreign trade, Itaú Argentina financed US$232 million worth of export operations and US$65 million worth of import operations. Total assets came to US$218 million at year's end.

BAnco Itaú Europa

Banco Itaú Europa is headquartered in Lisbon, under the supervision of the Portuguese authorities. Shareholding control is held by Itaúsa, the holding company of the entire Itaú's conglomerate. At the end of the fiscal year, the bank's total assets amounted to US$629 million, total resources to US$513 million and shareholders' equity to US$116 million. The bank consolidated its mission of supporting foreign trade and Brazilian companies located in Europe. The bank's Luxembourg branch started operating in 1996.

Human Resouces

At the end of 1996, Banco Itaú and consolidated companies employed 31,368 people. Wages totaled R$1,426 million (US$1,372 million). Of this amount, R$ 99 million (US$95 million) was allocated for the benefits paid to the company's employee benefit program which includes the Complementary Pension Plan.

The bank invested R$15.1 million (US$14.6 million) in personnel training and programs to develop employees in order to prepare them for the ongoing challenges brought about by technological evolution and growing competition.

Social and Cultural Activies

Community Services

Itaú's nationwide branch network services are available to approximately 2 million people every day, as evidenced by the figures in the chart below:

 

 

(in millions of entries )

1996

Variation 95/96 (in %)

Receipts

187.9

8.8

Taxes and contributions

28.8

15.7

Payment of public utility services

56.1

(1.3)

Securities

103.0

13.3

Payments

51.1

58.7

Salaries and pensions

51.1

58.7


Social Welfare

In 1996, Itaú's community-oriented program Programa de Apoio Comunitário/PROAC continued projects to improve the quality of public elementary education. The "Raízes e Asas " Project, developed together with Unicef and Cenpec/Centro de Pesquisas para Educação e Cultura, a cultural and educational research center, consolidated its broad community acceptance with the distribution of over 30,000 kits. A number of Municipal and State Secretariats of Education have adopted the program. Itaú also launched "Raízes e Asas no Video". The video was aired on TV Escola and on TV Educativa, a project developed by the Ministry of Education and the Ministry of Sports, and made available to more than 50,000 schools nationwide.

PROAC sponsored over 50 projects throughout the year. Among these were the "Encontros Regionais de Capacitação para Educadores", a number of regional meetings for educators, held in Belém, Salvador and São Paulo. PROAC also continued its support of the "Programa de Ações Complementares à Escola" program for schools; it sponsored classrooms and reading rooms, research and training programs, computerized libraries, hospitals and health care entities.

In regard to culture, the Instituto Cultural Itaú (ICI) stands out for its promotion of cultural activities in the last seven years. The center divulges important aspects of Brazilian art, culture and history in Brazil and abroad. It has edited 49 publications and distributed over 200,000 copies. It has produced 39 films and videos and distributed 19,000 VHS video films to 4,700 institutions. It has organized 150 exhibitions. Eighty thousand students from 1,800 educational institutions have been serviced by the center. The cultural center's library has over 10,000 books on art, history and culture.

Condolences

We are very sorry to announce the death of Mr. Alberto Coimbra Vieira, Managing Director of Banco Itaú's Corporate Area, caused by an accident on October 31, 1996. The Board of Directors deeply mourns the loss of their colleague, whose loyalty and professionalism they were privileged to share throughout the years.

Acknowledgments

We would like to express our gratitude to our stockholders for the confidence and support extended to us. We would also like to thank our colleagues and employees for their efforts and dedication.

(Approved at the Board of Directors' Meeting held on February 17, 1997)

 

© 1996 Banco Itaú S.A.